The FairTax: Answering a Critic
[This post was originally a comment response to Cheryl on Frank Hill’s post HERE. As it turned out longer than expected, I figured I’d bring the discussion to the forefront. I co-own the site and can do that. 🙂 ]
Cheryl,
Thanks for your patience. This took longer than expected to pen. (Well, type. Technicalities!)
Before I enter into a point/counterpoint with you based on your previous commentary, I figured it would be beneficial to first lay out exactly what the plan is that I support so we have a baseline for discussion.
Here is the FairTax in a nutshell.
The FairTax is currently a bill before Congress (House Resolution 25) that enjoys the support of some 63 co-sponsors along with primary sponsor John Linder of Georgia. While primarily supported by Republicans, it does enjoy bi-partisan support…as well it should.
The FairTax calls for the elimination of the personal and corporate income tax, the payroll tax, capital gains and dividend taxes, the gift tax, the estate tax, the self-employment tax, and the alternative minimum tax. It basically takes Title 26 of the US Code, the Income Tax, throws it out the window, and makes all of our lives remarkably easier.
It replaces all of these taxes with a simple, flat, one rate inclusive consumption tax on the retail purchase of all new goods and services. Businesses to business transactions are not taxed. The current estimated rate for this new tax is 23%. That means if the sticker on a store shelf says $100, $23 will be sent to the collection authority (most likely the current state sales tax agency) by the retailer.
One of primary principles of the FairTax is that all Americans should not have to pay taxes up to the poverty level of spending. Therefore, the money needed to pay for the taxes at that rate of spending is rebated to each legal American household at the beginning of each month.
Let’s quickly now eliminate some casual misconceptions of what the FairTax is.
The FairTax has nothing to do with state and local taxes. It is a Federal revenue collection bill.
It does not eliminate wasteful spending at the Federal level. It is a revenue collection bill, not a spending bill.
The FairTax as written is revenue neutral to the Federal Government. It is not a tax cut bill.
It does not cut through a lead pipe and then effortlessly slice a tomato.
There is no perfect tax system.
With that said, let’s take a look at a few of your concerns.
Lobbyists will see to it that the products you buy will be taxed on the basis of the latest pet agenda, currently the Climate Change scam. So that weed-eater would be taxed at a rate much higher than the battery driven car you purchase.
This is a common attempt to change the parameters of the FairTax and thus turn it into something to oppose. The FairTax, as written, does not tax different things at different rates. If it did, I would no longer support the bill. This discussion actually needs to remain focused on what is actually being called for.
To your point though, of course, the possibility exists with ANY tax system for lobbyists to get in the way and muddy things up. They certainly do that now! Of course now they are helped in their dirty work with a tax code consisting of over 60,000 pages of special interest loopholes and such cryptic scribblings that not even IRS agents can consistently answer the same question the same way. It’s easy to sneak in a tax or benefit when each change individually has a marginal impact on the entire beast. People just aren’t paying attention to what affect exempting offshore fisherman from tax X has on their own bottom line.
The current tax code is a breeding ground for lobbyist and special interest manipulation.
And what makes anyone think that the 20% rate today would not be increased to 30% next year…or 40% the year after that.
This is not an argument against the FairTax. It is an argument against every possible tax system! It is an argument against politicians with no backbone. It is an argument against run away spending. We the people must remain vigilant in opposing the out of control spending that would call for such tax increases regardless of what the revenue collection system is.
Your plan doesn’t really address the other LOCAL taxes people pay already in sales taxes, property taxes, state income taxes, etc.
You are correct. The FairTax is a federal revenue collection bill. You want state tax reform? Elect good Governors and state legislators. You want property tax reform? Elect good Mayors, city council members, and county commissioners.
The only way to tax people fairly is a FLAT tax. And even then we would have to baby-sit congress to keep them from incrementally increasing it as time goes by.
So there we are. We have an agreement now that it doesn’t matter what tax system you go to, we the people must “baby-sit” (as you say) Congress to keep taxes low.
I like the idea of the Flat Tax, and it is an improvement over what we have now. I don’t mean to totally discount it. The Flat Tax and the FairTax actually share some important similarities. They are both flat-rate taxes that are neutral with respect to savings and investment, for example.
The Flat Tax, however, retains the invasive income tax administration apparatus and can easily revert to a graduated, convoluted mess, as it has many times over many years. It still requires individuals to file their income with the Federal government, a responsibility eliminated by the FairTax. It also retains much of the cumbersome rules of the current tax code in order to determine what “income” actually is.
Furthermore, the Flat Tax eliminates neither payroll taxes nor business taxes, thus retaining a level of complexity as well as the hidden cost of business taxes in the prices of the products we buy. Remember, businesses don’t pay taxes; they simply transfer taxes from the final customer to the government.
Respectfully, the Flat Tax had a chance, but has both a track record of not remaining flat and it has no real grassroots movement to support its implementation. The current flat tax proposal before congress, HR 1040, has eight cosponsors, six of whom also cosponsor the FairTax.
How do you plan to address services? Add 20% to your next haircut or dry cleaning bill? Add 20% to the price of excavating a tract of land?
The FairTax replaces the income tax. Service providers currently pay income tax, and thus should not be exempt from the FairTax. Neither the consumption of services nor the consumption of goods should be tax preferred.
This segues to another lesson.
It is estimated that 22% of the cost of every product or service is simply the hidden taxes and compliance costs of the current tax code. Because this cost of the current tax code will be removed under the FairTax, prices will drop as a result of competition. Adding the FairTax back on top of this new, lower price will not yield a final price that is 23% higher than the current cost of that product.
This is true for both goods and services.
By the way, in your excavating example, because land excavation is more than likely a business to business transaction (clearing company to homebuilder), that does not represent a taxable transaction under the FairTax.
My opinion of the so called “Fair Tax” is that it is just another way to tax the rich….and disenfranchise the lower income population in our midst.
Quite the contrary. Under the FairTax, because of the rebate I mentioned earlier, the marginal tax rate paid by those at poverty level is zero. Those spending at twice the poverty level pay an effective tax of only 11.5 percent — a rate much lower than the income and payroll tax burden they bear today.
As for the “rich”, their level of taxation is dependent solely on the amount of spending they engage in. The money they don’t spend, they save by investing in stocks and bonds or putting into banks, which benefit from the increased assets and make capital more readily available to loan to new endeavors. Capital also comes flooding back to this country rather than wasting away in Switzerland or the Bahamas because there is no longer a tax liability for savings and investment in this country.
The “Fair Tax” eliminates the interest deduction on mortgages. Take that away and then add this 20% to the price of a house and what have you got? A lot of people who can no longer afford a house.
Yes, the mortgage interest deduction goes away, but who cares? All that does is allow the interest to be paid with pretax dollars. Under the FairTax, all purchases are paid with pretax dollars!
Furthermore, an existing house is considered a used good. The FairTax is not charged on the sale of pre-existing houses. As for new construction, the elimination of the chain of taxation currently built into the price of a house will yield a significantly lower construction cost, and thus a lower pre FairTax sale price. The addition of the tax will simply bring the price back up to current market value…give or take a little.
The wholesalers have to pay employment taxes, yes. If you are going to pay for Social Security, Medicare, and unemployment insurance with a “Fair Tax” can you honestly say those costs are not going to go up?
Social Security is anything but secure. The current system has failed and is nearly bankrupt. Major changes in the form of lower payouts or higher taxes are required to continue the programs solvency. That is a whole other debate.
As for the FairTax, it funds Social Security from a broad sales tax, rather than a narrow, regressive payroll tax. Remember, the FairTax is revenue neutral to the Federal Government. The system is still screwed up, but the FairTax does not make the problem any worse than it already is. Actually, it could be argued that in an environment where fewer workers are paying payroll taxes for an ever-increasing retirement population, collecting that money from a broader source, including visitors to this country (both legal and illegal) will help in solving the funding problem.
Shoot me if you want to…I cannot see how replacing X taxes with Y taxes changes anything for the better, lowers the impact to the consumers, keeps corruption out of the system, or makes life any easier for us.
There are a plethora of reasons why the FairTax is a significant improvement over the current scheme. It would take another post of nearly this length just to go over the benefits.
Just a few include:
- The elimination of the individual responsibility to file any type of income statement with the Federal Government.
- Savings of an estimated $482.7 billion each year in compliance costs alone.
- No more complicated and convoluted tax code that rewards governments chosen winners and losers.
- Visitors to this country, both legal and illegal, will contribute to our tax base when they make purchases.
- The elimination of embedded taxes in the price of American goods makes our exports more price competitive overseas.
- The elimination of business taxes and compliance costs make the United States the “go to” country for business development in the world. Many Fortune 500 companies, when asked about the FairTax, have said that if it passes their next plant will be built in the US.
- No more deductions from your paycheck. What you earn, you keep. You decide when to spend it and when to be taxed.
I could go on and on.
Please refer to FairTax.org to get an even better outline of the FairTax and it’s benefits.
It took me a little while to come around when I first heard of the plan back in 2004, but once it “clicked”, I haven’t been able to turn back. I have yet to find an argument against it that can’t be answered.
Thanks for reading this, I hope I answered some questions and perhaps sparked some others. I promise to be less verbose in future discussion. 🙂
We need your help! If you like PunditHouse, please consider donating to us. Even $5 a month can make a difference!
Short URL: https://pundithouse.com/?p=3059
