I apologize for my abysmal performance in (not) getting these records up. For this entry, I’ll be availing myself of my right, in the name of expediency, to summarize (rather than transcribe) a meeting’s contents. The topic: the Fair Tax.
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VR began by explaining the Fair Tax as “a piece of legislation drafted by Congressman John Linder and promoted by conservative-libertarian talk show host Neal Boortz. The meat of the Fairtax is:
- Repeal the 16th Amendment to the Constitution, the right to tax income.
- Replace it with a 23% national sales tax. The rate is actually a 30% surcharge on the price of a good, but the because the tax is reported as inclusive, it is touted as 23%. (1.00 + 0.30 = 1.30 => 0.30/1.30 = 0.23). Supporters claim that because many “embedded taxes” are removed, the actual prices of goods and services will generally remain unchanged.
- Mail a rebate check worth 0.23 times the federal poverty rate to every American. Thus, families in poverty pay no taxes, even if they spend every dime of income they make.”
Some people, led in voice by JG, seemed to see the Fair Tax as a pipe dream. Sure, they said, in a utopia taxes would work like this, but it will never happen.
Some worried it would lead to a black market of sorts, in which people consume off the record so as to avoid paying taxes, as well as a flourishing of organized crime. Still others disagreed, saying it would diminish black markets, since any major purchase a gang leader could hope to make would be subject to taxation, regardless of where the money came from and whether he chose to claim the income. Cigarettes and the selling thereof out of the backs of trucks were the example of choice.
Some people thought a Fair Tax would have been tried already if it were truly a feasible alternative. VR suggested that it has been tried, and successfully, in Florida. Of course, in rebuttal, contrasts between national and state governments were only too easy to make.
BL wondered how they would assess who gets the refund. Would it be means tested? He was okay with that idea, so long as the filing was voluntary. SS and others felt this would mostly defeat the purpose, as a bureaucratic apparatus for dealing with the question of who qualifies would then be necessary.
An additional question arose here: If it’s each household that receives a check, and not each individual, is that going to lead to crazy things like people choosing to live alone and families splitting up into multiple homes?
There was some discussion of whether or not the implementation of a Fair Tax would actually require the repeal of the 16th Amendment. Some felt such an action would never pass in the Senate, but that it was unnecessary anyway. Congress could choose not to collect income taxes even while retaining the “right” to do so. Others didn’t think Fair Tax proponents trust the federal government enough to leave them with that option.
An interesting point was that, according to estimates, and contrary to many people’s intuition, the price of goods supposedly would not increase with a Fair Tax. This is because of the charges that suppliers “imbed” in goods already to compensate for their having to pay income tax.
Some people were concerned that this scheme was still regressive. BL and others were not bothered by this. Food prices, he noted, have plummeted over the last century. The lower quartiles are far better off today than they were in the past.
BL commented that a Fair Tax system could become just as complicated as our current scheme. What makes the tax code so complex are all of the exemptions. Certain individuals responded that there should be no exemptions whatsoever for income taxes, and that this, and not a Fair Tax, is the better solution. Most people thought even that was a bit drastic. Exemptions, they reminded us, give the government a market-based, built-in incentive structure for influencing behavior, while allowing us to help families in need.
Lots of people felt we should just start with a blank slate as far as exemptions go, and tweak the code based on who deserves aid. Others seemed to realize that the problem lies with special interests. SS added that reforming the current system in such a way would amount to a gigantic tax increase and would be politically unsalable.
But by this time, there appeared to be a weak concensus that the Fair Tax was simply not a workable solution.
The discussion then turned inexplicably to military spending. Some said our policies allow other countries to depend on us for protection while doing whatever they like. Some countries don’t even have troops of their own! Others disagreed. We, and only we, have a truly free international policy, they said. We put troops in other countries for our own sake, not theirs.
And right around here the discussion fizzled out (or perhaps I just lost track of it).
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“That’s fine, but the President’s gonna … say that economists were put on this planet to make astrologers look good!” Leo McGarry, The West Wing
Hello.
It seems that some of your group have done their homework and seem have a little to do. The discussion sounds very well thought out.
If I may, I’d like to address a few of the points you mentioned. In the interests of full disclosure, I am an unpaid volunteer for Americans For Fair Taxation, the organization which financed (through private donations) $22 million in independent research by respected economists who then outlined the FairTax.
The “23% or 30%?”, as you’ve stated, is a question of semantics, since the amount paid at the cash register is exactly the same. I’ve been asked on radio appearances if it was a tactical error to present it as a 23% tax, since it has allowed for a broadside against the plan. I think it was written as 23% simply to further illustrate that income and payroll tax withholding now are calculated inclusively, as are the embedded taxes in every product and service we purchase now. The biggest point of the FairTax is that so much of the average American’s tax burden is hidden from them now, versus the FairTax, which will be prominently displayed on the receipt. Transparency we don’t have now.
On the topic of evasion: cheating on our taxes has become a national pasttime. People cheat now. Will they cheat under the FairTax? Most assuredly. Will it be as easy? Don’t bet on it. First, the penalties will be severe for retailers who attempt to keep the FairTax proceeds and I don’t know any who would be willing to risk it just so I can save 23 cents. Second, it only takes one person to cheat on their taxes now (adding an extra zero on your long form in the privacy of your own home), versus willful collusion between the buyer and seller under the FairTax. Effective tax collection we don’t have now.
The refund (what the FairTax authors refer to as a “pre-bate,” since it would arrive at the beginning of the month in anticipation of that month’s tax burden on basic necessities) would not have to have much oversight. The only info the government would need is valid Social Security numbers for everyone in the household. This tells them how many people are in the household, and they can then click a mouse and transfer the funds electronically to a bank account or even a debit card. Some credit card companies have stated their interest in handling the “pre-bate” transactions on behalf of the government and even paying the government for the privilege of doing so.
Every household gets the prebate, the only exception being households without valid Social Security numbers. Fairness we don’t have now.
Just think, the Federal government will not have (or need to have) information on how much money you make or spend, or even what you spend it on. You choose when and how much tax you pay by how you choose to budget and spend. Freedom and simplicity we don’t have now.
As Congressman John Linder has pointed out, when the government knows how much you make, they can tax a percentage of it, which will only happen for as long as it takes for them to figure out a way to tax the rest.
For fear of overstaying my welcome here, I’ll stop there, but I’d encourage you and anyone in your group to read The FairTax Book, visit FairTax.org, or, if you’d like to ask me a question, go to the “Q&A” section of FairTaxVA.com and post away.
Thanks for the time and space here, and I hope your discussions of important topics continue.
Brad
Mr. Rees is a very articulate advocate of the Fairtax, but, as an unpaid volunteer opponent of the Fairtax scheme, I believe that your group needs to read “the rest of the story”!
The inclusive/exclusive depiction of the Fairtax rate is not just semantics. It is a good example of where “truth in advertising” may be seriously lacking. The argument that we have to reeducate 300 million Americans that sales taxes are inclusive, not exclusive, fails when we try to compare the sales tax to the income tax. There is no comparable percentage to compare the Fairtax 23% to. Only by calculating one’s effective tax rate can you tell which is better economically. Furthermore, 25 million retailers have absolutely no use for an inclusive percentage. They simply need to know what percent to tack on to their costs plus profit in order to set the retail price, and that percentage is 30%. We will never know for sure, but it’s hard not to conclude that the inclusive percentage was chosen simply because it looks better.
As for transparency, just how transparent is the Fairtax when 12% of the revenue needed to fund the federal government is hidden in higher state and local taxes. That is neither simple nor transparent!
The “prebate” or rebate” is neither. It is a cash grant entitlement which does not depend on how much anyone purchases or pays in sales taxes. This entitlement is strictly a function of family size and the monthly poverty level as published by HHS. The Fairtax entitlement is estimated to cost $600 billion annually, and is being proposed at a time when entitlements are rapidly squeezing out discretionary spending including national Defense. There is a federal budgetary train wreck coming and the Fairtax will only accelerate the arrival date.
It is an oversimplification to say that all the federal government needs is a SSN. Not true! Your income will still be reported to the SS agency in order to determine SS benefits. And the “prebate” annual application form must indicate the names and SSN’s of all family members, the address, who gets the check, and three signed certifications: (1) all are lawful residents; (2) all family members living at the address are listed; and, (3) no one is in jail. It is true that in subsequent years, the government will generate a new application form, including any reported changes, which can be signed and returned.
The notion that we will be able to choose how much tax to pay has severe limitations. Services, which make up roughly half of the family budget, will all be taxed. There are no used groceries, no used restaurant meals, no used rental housing, no used gasolene, nothing used at Wal-Mart, etc. etc. Look at your annual budget and try to find somw purchases of used goods?
In closing, while Mr. Rees didn’t address prices or embedded taxes, this is a very misunderstood area. There is no such thing as an embedded tax, only the embedded costs of the income tax system. Not one dime in federal tax is directly generated by a retail sale of goods and services today. Back in 1997, Dr. Dale Jorgenson completed a study for the Fairtax group which found that there is an average of 22% in embedded costs across many industry segments due to the income/payroll tax. Two thirds of those costs are attributed to employee payroll and income tax withholding. So, unless all workers and pensioners are willing to take a gross pay cut down to their current net pay, only business costs can be used to reduce prices. The best we can hope for is a 10% reduction in business costs, including tax compliance costs, and a 17% increase in retail prices. (1.00 x .9 x 1.3 = 1.17) But, takehome pay will increase with the recovery of the withholding amount, and we will also get the cash grant. Real prices will remain about the same, and your standard of living may be relatively unchanged. But, don’t expect to use some imaginary windfall to increase your savings account. Can’t happen!
There are many other issues to discuss, but this post is too long already. If you have any senior citizen retirees in your group, ask them how they feel about resuming paying for their own retirement through their sales tax dollars. Very unfair IMHO!
I am also a unpaid supporter of the FT and the AFFT and often speak on the FT in Central Florida. I think all the conversation here is excellent and welcome in all circles, as we all seem to feel change needs to be made. It sounds that wherever this meeting was held the audience was mostly anti-FairTax and that is fine. I would suggest reading the new book, “FairTax the Truth”, which just debuted as number 4 on the NY Times best seller list.
It does answer all the objections mentioned here by this group. I am sorry the people who spoke up for the FT could not speak so well for the FT, perhaps a quick read of the book would sway a few minds to the FT.
Thank you for continuing this valuable discussion of the current tax code, it can only help matters and strengthen our argument against it.
To Hank: your point about the calculation needed for retailers is well taken. Still, I think this is rather a small hang-up on which to base a movement against tax code simplification. The fact remains that the merits of taxing consumption versus income are enormous, because consumption is much more stable than income and the tax base is much broader. As far as the reasoning behind using the 23% inclusive versus 30% exclusive calculation, according to the economists who developed the FairTax, it is simply so that an apples to apples comparison can be made. The FairTax is supposed to replace the income tax and the payroll tax, both of which are calculated inclusively. It doesn’t make sense, therefore, to quote the relacement tax system on a conflicting basis (the goal here is transparency and simplification, after all).
Could you clarify your point on the federal government being funded by state and local taxes? I’m not sure I follow that. In my state, local taxes are used in those localities and state taxes are used for the state government.
The looming federal budgetary train wreck you allude to is a valid point, and the FairTax is not the “FairSpend,” meaning it has no implications toward federal spending and was not designed to. Eternal vigilance is the price of liberty, and all that. To that point, though, I think the FairTax would have a positive impact, because of the transparency of being able to see how much of every dollar you spend goes to fund the federal government right on your receipt. Now, under this ill-conceived income tax code, the average 22% embedded cost of the tax system is hidden in retail purchases.
The prebate is what it is. The HHS, coordinated with data from the Census Bureau, sets yearly poverty statistics. If it is determined that a single-person family requires $17,500 per anum to subsist, how is it an “entitlement” to make sure that those monies are not taxed? It is the height of arrogance for any politican, pundit, or pollster to say that the federal government should have first claim on the wages you work for. If I’m the one doing the work to provide for my family, the first portion of that money should go to that purpose, if we are to claim to live in a moral society.
Out of time for now, but I will address your other points as time permits.
Brad
Brad,
Let me assure you that I am very much in favor of replacing the income tax with a consumption tax of some sort. I just do not believe that the Fairtax scheme is the way to get there. Here is an extract from a letter I sent to the AFFT Chairman some time ago:
“Mr. Chairman, let me assure you that I also believe that adopting a national consumption tax would be preferable to the current income tax. There are many compelling arguments to do so. I simply don’t agree that the Fairtax plan and HR25 are the way to get there. To help make my point, let me close by discussing what I call “Fairtax-Lite”.
In my opinion, your group that put HR25 together badly overreached. You taxed governments at all levels in order to reduce the sales tax rate and reduce government competition with the private sector, but incurred the strong possibility that that portion of the legislation will be found to be unconstitutional under the doctrine of intergovernmental tax immunity. State and local taxes will have to be increased significantly in order to pay the federal sales tax. You added payroll taxes to the mix and created a large class of an estimated 30 million Social Security net non-contributers, all of whom will still qualify for full pension and health care benefits. You treated all current retirees very unfairly by forcing them to resume paying into the trust funds with their sales tax dollars. You completely untaxed businesses, a major political mistake even though quite sensible. You added gift and death taxes to the mix, and left yourself open to political criticisms that you are unfairly reducing the tax burden on the wealthy. You adopted a prebate, the largest cash grant entitlement in the history of the country at a time when entitlements are squeezing out discretionary spending, including critical Defense spending. You adopted an inventory tax credit which will contribute $600 billion to a very large federal budget deficit in the first year of Fairtax implementation. You excluded education tuition, thus allowing the “camel’s nose under the tent flap”. That precedent would certainly encourage future politicians to try to exclude such things as medical expenses, home ownership or anything else they might consider equally important to education tuition. And finally, you chose a “cold turkey” implementation schedule. The Congress is basically conservative and far prefers evolutionary change to revolutions such as the Fairtax.
Fairtax-Lite is a broad based 14% national sales tax with (1) no exclusions, (2) a targeted prebate costing $59 billion, (3) no federal taxation of itself or other levels of government, (4) leaves payroll taxes and gift/estate taxes alone, (5) no inventory tax credits, and (6) implements the plan over five to ten years. If you are really serious about getting rid of the income tax and the IRS, I suggest that Fairtax-Lite has a far better chance of gaining Congressional approval than does HR25.
Best Regards,”
As for my statement about 12% of the cost to fund the federal government being hidden in higher state and local taxes, it’s simple math. According to the Kotlikoff/BHI 2005 study on the Fairtax base/rate, state and local consumption adds $1.1 trillion to the taxable consumption base for a total of $9355 trillion. So, taxing state and local governments effectively hides 12% (1100/9355 = 11.8%) of the cost to run the federal government. This is neither simple nor transparent. In order for the states to pay the federal tax tab on their purchases, taxes will have to go up or services will have to be curtailed. I might repeat that I believe that this part of HR25 will be found to be unconstitutional under the doctrine of intergovernmental tax immunity. In which case, the Fairtax rate will have to go up in order to be revenue neutral.
Hank
Hank, while I am not an expert on constitutional law by any stretch of the imagination, I would point out that state and local governments pay their employees out of their own coffers, yet those employees are subject to federal income and payroll tax withholding under our current tax code. This amounts to state and local governments having to pay taxes to the federal government, which, if I understand your logic correctly, amounts to the same as your FairTax objection. I can’t think of anyone who has challenged this current practice as unconstitutional under intergovernmental tax immunity statutes. Let us not forget that, with the FairTax, those withholding obligations go away and are replaced by the FairTax and, further, that state governments will retain .25% of their FairTax collections to make up for administrative and collection/enforcement costs. I would further point out that this will have serious implications regarding states’ rights as well, since the state is the final arbiter of what proceeds from the FairTax get sent to D.C. If some beltway politician proposes sending billions to Alaska for a bridge, the state of Minnesota, for example, with serious infrastructure budgetary needs of its own, can choose to withhold those FairTax monies from the federal government in the interest of fixing their own transportation issues first, with revenue generated in their own state. One final note on this topic, in $20 million of research conducted by respected economists, I find it hard to believe that a figure as large as 1.1 trillion dollars was simply overlooked, rendering the FairTax rate calculation inoperable. Many economists may be scatterbrained, but I find it a little hard to swallow that a mistake that large would go unnoticed.
To your other points, then. 30 million Social Security net non-contributors eligible for pension and health care benefits already exist. They are called the “working poor.” There are also several million very rich people who pay no payroll taxes, yet will qualify for SS and Medicare payments. This problem already exists. Current retirees are already paying 22% in embedded taxes on every purchase. Isn’t it better for the longevity of Social Security and Medicare programs if everyone pays a portion into them? (We can debate all day long regarding the merits and pitfalls of these programs, buy they are in place, the promises have been made and should be kept in the interests of those who have paid so much into them.) The prebate, as I’ve stated before, is not an entitlement. It is the absolute height of arrogance for any politician or pundit to say that the federal government has a right to lay claim to the fruits of my labor even before I provide for the needs of my family. The prebate simply ensures that you are able to take care of your family’s basic needs before you begin funding a bloated government that is addicted to the proceeds of your sweat. The inventory tax credit affects government revenue to the tune of zero dollars in the first year of the FairTax. Why? Embedded taxes. The tax component of that existing inventory has already been remitted to the federal government and the key element of fairness in the FairTax is making sure items are taxed only once.
Your other arguments are based not on attacking the soundness of the policy behind the FairTax, but rather the political feasability of the FairTax minutiae. I would respond by saying that if America were to determine its course of action based on political expediency or socio-economic ease of implementation, it would be a hell of a time to initiate that practice. I would venture to say that, if this were the yardstick by which to measure public policy, then the end of slavery, prohibition, the repeal of prohibition, women’s suffrage, World War II, and the Civil Rights Act would never have happened in the first place. The resolve would not have been there even to undertake something as suicidal as launching an offensive against the crown in the 18th century colonies. Americans have always found a way to forge ahead into new frontiers, regardless of the naysayers, and we have become such a superpower so rapidly as a direct result of undertaking tasks that were not politically expedient.
As far as the FairTax Lite plan, Friedman, Greenspan, Kotlikoff, and Jorgenson are all brilliant economic minds and I seriously doubt that your concerns escaped their analysis. Scenarios and data were run for years through supercomputers that could calculate the height in centimeters and weight in micrograms of every carbon-based life-form that has ever walked or will ever walk the Earth, all in a matter of seconds. I would submit, then, that if your plan were the best solution, it would be the result of this $20 million-plus in research. But, with all due respect, it’s not. The FairTax is.
Hope I’ve alleviated some of your concerns and, if any of this commentary seemed harsh, I assure you it was unintentional. I’m trying to win you over to the FairTax, not make an enemy.
Best regards,
Brad
Brad,
Don’t know if you are still there, but I want to comment on a couple of your statements, namely the constitutional issue and the prebate.
I’m not a constitutional expert either, but my position was developed last year with the assistance of several Yale constitutional scholars and tax experts. I’ve read countless Supreme Court decisions on the subject of intergovernmental tax immunity, and I believe the issue with the Fairtax is quite real. There is a whale of a difference between a state paying the employer share of Social Security for their employees into the trust funds, and the federal government taxing all state and local purchases of new goods and all services. I did an impact study some time ago which I’d be happy to send you upon request to: vanlinda@comcast.net.
You wrongly insist that the prepate is not an entitlement. Perhaps you don’t really understand how the federal budget is structured. There are really only three buckets involved: discretionary spending, sometimes split between Defense discretionary and all other discretionary spending; entitlements; and interest on the national debt. Only discretionary spending is debated and voted on each year by Congress. Entitlements, once they become law, are basically on auto pilot, and continue year after year without any furthur Congressional action unless changes are desired.
The prebate is a cash grant entitlement, and will be scored as such by OMB. I’m certain you think of the prebate as a tax rebate, but it really isn’t. The prebate is not based on sales taxes paid, only family size and the HHS poverty level. The prebate is income which will be spent and taxed just like your regular pay or pension. Think about it–if it was a tax rebate, it wouldn’t be additive to your gross pay/pension. But the prebate will arrive each month and be deposited into your account, and it will add to the money you can spend or save.
I think of the prebate as an income supplement, not a tax refund. You can think of it as anything you want, but it is still an entitlement. And it comes at a time when entitlements are squeezing out discretionary spending in the federal budget.
By the way, if you are exchanging emails with me in the hopes that I will support the Fairtax, don’t waste any more of your time. I’ve been at this for four years, basically spending 6 hours daily reading everything written about the Fairtax, and participating on various blogs. I have gone from being a raving supporter to a firm opponent. And I’ve done enough studies to back up my positions.
Best regards,
Hank
Hank, after just a cursory Google search, I turned up this text, lifted verbatim from answers.com- “Much later, in South Carolina v. Baker (1988), the Supreme Court upheld federal taxation of interest on unregistered state bonds in an opinion that rejected constitutional immunity for state bondholders. Justice William J. Brennan in Baker summarized what was left of the doctrine of intergovernmental immunities: “the States can never tax the United States directly but can tax any private parties with whom it does business … as long as the tax does not discriminate against the United States or those with whom it deals” (p. 523). The opinion indicated that “some nondiscriminatory federal taxes can be collected directly from the States, even though a parallel state tax could not be collected directly from the Federal Government” (p. 523), reiterating the asymmetry of the doctrine.” I would think that a retail sales tax with the same rate on a nationwide basis would fall under the guidelines of “nondiscriminatory federal taxes” which would be collected directly from the states. If the Supreme Court has already set the precedent that such a tax would not interfere with this doctrine which has, in recent decades, grown much narrower in scope, then I’d like to see some evidence that the FairTax would be any different.
If the Office of Management and Budget will score the prebate as an entitlement, then so be it. I’d rather have this as an entitlement than some portion of wealth confiscated from others and distributed disproportionately to undeserving government teat-sucklers. As I said, the prebate simply allows a worker to provide for the needs of their family before the whims of their government, which is not only fair, but moral.
And, to reiterate, how long would it take for the federal budget and its devastating fiscal irresponsibility to come under heavy scrutiny once every single Joe-Sixpack in America sees the full burden of this runaway spending printed on their receipt as the FairTax. 23 cents out of every candy bar or roll of toilet paper will open a lot of eyes and focus them, for the first time since withholding took root, directly on the House and its reckless ways and means. Any tinkering with the tax rate would be immediately visible and affect every single entity in the same way. How can this spotlight shining on the federal government’s lust for almost a quarter of every dollar spent possibly be a bad thing, if fiscal responsibility is the overall goal?
I’d like to see the impact study you alluded to. I can be reached at FairTaxWriter@yahoo.com.
Brad