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So you think you know about the Fair Tax. 30 December, 2007

Posted by David Anderson in Fair Tax.
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I have long been a skeptic of a national sales tax.  I tended to favor the flat tax. There are many advantages to a national sales tax.  It would encourage investment and savings.  It would be simple and fair and it would eliminate government manipulation of our lives by the tax code.  The disadvantages are that sales taxes are regressive and tend to dampen consumption.   

The Fair Tax eliminates the negatives while keeping the positives.  Every negative evaluation done has been of other proposals of the National Sales tax.  The positive evaluations are of the Fair Tax in HB 25.  Toss out what you think you know.

Let’s start from the beginning.

Imagine a tax system that:
• Allows you to keep 100 percent of your paycheck, pension, and Social Security payments.
• Frees up the time wasted on filling out cumbersome IRS forms.
• Wipes out the income tax code and shuts down the IRS.
• Makes taxation of income unconstitutional by repealing the 16th Amendment.
• Exempts all taxpayers from federal taxation up to the poverty level, through a monthly rebate.
• Ensures that all Americans pay their fair share of taxes.
• Dramatically lowers tax rates for low-income and middle-income Americans.
• Makes taxes visible by eliminating hidden income and payroll taxes in consumer prices.
• Enables families to save more for home ownership, education, and retirement.
• Protects and ensures the funding of Social Security and Medicare.
• Leaves unchanged the amount of money raised by the federal government.
• Makes American products more competitive overseas.
These are the features of the FAIR Tax.  This tax system is the most researched, and I think, the best tax reform plan.

The Fair Tax rate would be 23% or so.  It would feature a monthly prebate of around $500 to eliminate all consumption up to around $24,000 from the tax.  This makes the Fair tax progressive.  It would be like a monthly earned income tax credit. It would also encourage savings by allowing all savings and investment to be tax free.  It would encourage education by not taxing education.  It also stops penalizing domestic corporations and production and taxes imports at the same rate to produce a level playing field

Why do we need to change? The problem is the current income tax code.  The tax code is the main source of the power of the K Street elite. Earmark spending and a Byzantine tax code have given the K Street elite the power to reward or punish potential clients.  They are the twin pillars of corruption in the American system. 

Quoting the Fair Tax website.

The current tax code is unfair, costly, and unreasonably confusing.
• Because the tax code is so complex and easy to evade, many of us pay more in taxes per year than we should! The IRS estimates that over 40 percent of Americans are out of compliance with the current tax code! This makes the rest of us pay about 30 percent more in taxes.
• Over half of American taxpayers seek professional help simply to prepare their returns. And according to Money magazine, chances are 99 percent that you will pay someone to file an incorrect return!
• Compliance with the tax code is not only very difficult and complicated, consuming a total of 6 billion hours, but unreasonably expensive as well. It is estimated that it costs taxpayers $265.1 billion for tax filing, tax record keeping, and tax reduction advice. That’s just shy of $900 for every man, woman, and child in America! We have taxation without comprehension!

Now let’s deal with the critics.  It is often said that the Fair Tax rate would need to be 30% not 23%.  This is false because this analysis is based upon post tax dollars not what you actually earned.  It is not how taxes are currently figured.  If you earn $1250 and $250 is the income tax you pay, you have a 20% rate not a 25% rate.   Since the other taxes would be eliminated, you would not be spending current after tax dollars, but pre-tax dollars.  This 2006 Treasury department “error” has been widely denounced and disproven, but it still lives. 

And most important of all, The Beacon Hill Institute at Suffolk University and Laurence Kotlikoff, Professor of Economics at Boston University, have teamed up to provide a sound methodology for estimating the FairTax base and computing the FairTax rate.4 Their paper demonstrates that the 23 percent rate specified by the Fair Tax Act (HR 25) is eminently feasible and suggests what led Gale5 and the President’s Advisory Panel on Federal Tax Reform6 to reach the opposite – and incorrect – conclusion. (Paper available at http://www.fairtax.org/PDF/TaxingSalesUnderFairTax.pdf.) Beacon Hill Institute and Dr. Kotlikoff estimate the FairTax base for 2007 to be $11,244 billion. Implementing the FairTax rate of 23 percent on this base would generate federal tax revenues of $2,586 billion – $358 billion more than the $2,228 billion in tax revenues generated by the taxes it repeals. Because the FairTax prebate makes spending up to the poverty level tax free, the FairTax base needs to be adjusted for this. Likewise the FairTax base must be adjusted for the administrative credit paid to states and businesses collecting the FairTax. These adjustments to the base total $1,889 billion, resulting in a net FairTax base of $9,355 billion.In 2007, spending at current levels is projected to be $3,285 billion. Revenues from the FairTax at a 23 percent tax rate ($2,586 billion), plus other federal revenues not repealed by the FairTax, are estimated to yield $3,209 billion – an amount $76 billion less than the current CBO…. (http://www.fairtax.org/PDF/Excerpts_from_response_to_tax_panel-103006.pdf)

Its benefits are as follows: (from Ian of https://stoptaxing.wordpress.com)

FOR INDIVIDUALS:
• No more tax on income – make as much as you wish
• You receive your full paycheck – no more deductions
• You pay the tax when you buy “at retail” – not “used”
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of “pre-FairTaxed” retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or “pre-bate”
• “Prebate” is “advance payback” for monthly consumption to poverty level
• FairTax’s “prebate” ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of “parasitic” Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates

FOR BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at “cash register”
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition – not tax policy – drives prices
• Off-shore “tax haven” headquarters can now return to U.S
• No more “favors” from politicians at expense of taxpayers
• Resources go to R&D and study of competition – not taxes
• Marketplace distortions eliminated for fair competition
• US exports increase their share of foreign markets

FOR THE COUNTRY:
• 7% – 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations “set up shop” in the U.S.
• Tax system trends are corrected to “enlarge the pie”
• Larger economic “pie,” means thinner tax rate “slices”
• Initial 23% portion of price is pressured downward as “pie”
increases
• No more “closed door” tax deals by politicians and business

It is time for a revolution of thought in this nation.  The current tax system would put our founders in revolt.  It gives breaks to moving jobs and investment overseas.  It manges every detail of our lives.  It violates our privacy.  It sets government up as an oppressive intruder breaking down doors and selling off our property. It punishes success and holds down the middle class.  It exempts illegal aliens and the underground while burdening our own law abiding people.

 The income tax system we have is unbelievablely complicated because it was not designed based upon an economic vision, but based upon 70 years of piecemeal dealmaking by the special interests.  It has gotten to the point where we can no longer afford it in a global economy.

Fundamental tax reform may be the most important economic issue of our time.  Let us sieze the day and build a sound legacy of prosperity for our children

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Comments»

1. Bruce Barnes - 31 December, 2007

How about a flat tax on net worth? Say 6% on all businesses?

2. Andrew - 1 January, 2008

I was unable to find contact information on your blog, so I am passing this on to you here:

http://huckabeemomentum.com/

Please contact us if you want to be involved.

3. Alan Lidstone - 2 January, 2008

As the rhetoric around our upcoming Presidential primaries heats up, it is important to pay close attention when candidates start talking about the Fair Tax proposal. While the simplification of the tax laws is very beguiling, there are major shortcomings in the Fair Tax proposal that can affect anyone nearing retirement, or currently retired.

Those nearing or enjoying retirement will find that the Fair Tax proposal implements a Federal sales tax of approximately 30% sales tax on the purchase of any new home, utilities, insurance, rent, medical expenses and more.

What is the Fair Tax? – The Fair Tax would replace all Federal income taxes related to corporate, business, estate, gift, and personal income, and the Payroll Tax (Medicare and Social Security) with a Federal retail sales tax of 30% on the sale of all services and new goods to provide the funding to run the US Government. Businesses do not pay the 30% Federal sales tax, but Federal, State, and local governments will have to pay the tax.

The proponents say the cost of new products and services in the US has embedded costs totaling approximately 23% of the sales price for administering and paying the appropriate business income taxes and employee payroll taxes, .i.e. a product selling for $100 has $23 of embedded costs.

In addition, they assume that businesses will reduce the prices of goods and services by the amount of their embedded taxes (up to 23%); substantially offsetting the 30% Federal sales tax applied to new purchases and all services, and may provide salary increases to their employees.

Unfortunately, the providers of goods and services will have no legal requirement to reduce prices and there are no procedures to determine what, if any, reductions are actually made.

It is also very difficult to arrive at the embedded costs for many products and businesses will be quick to say their pricing and costing process is a trade secret. Many items, such as oil, are substantially extracted or manufactured, and processed outside the United States with minimal distribution costs subject to the Fair Tax in the US.

To help offset the impact of the 30% Federal sales tax for low income families, the program will offer a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67). The Fair Tax will also eliminate all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc..

Will the Fair Tax Result in Reduced Prices for Products and Services? – The track record for reduced prices brought about by substantive changes in tax policy, free trade policies, technology, manufacturing, productivity improvements, and the global economy is a mixed record.

Pharmaceuticals -The US pharmaceutical industry has manufacturing facilities around the world, including Europe, Ireland, India, and China. Federal law prohibits Americans from purchasing those same prescription medications made by US corporations in foreign countries from the foreign country that ships them back to the US pharmaceutical companies, providing substantial protection from foreign pharmaceutical distributors.

The result of this “free trade” and “global economy” experiment, along with a healthy dose of Federal protection, has given Americans the highest prescription drug costs in the world and made the US pharmaceutical industry spectacularly profitable.

Technology Products and Jobs – The savings and increased profits gained from moving millions of manufacturing, service, and technical jobs that began in the early 1990s to low-cost sweat shops in Asia, China, India, and Mexico, cutting millions of US jobs, and dropping Federal Corporate taxes on overseas entities to 5% to bring back money deliberately left offshore went directly to the executives and investors and no one else.

When US technology corporations need more technology personnel, including engineering and IT professionals in US locations, they tell the US Government that they can’t find the skills in the US labor force and petition and receive H-1B visas to bring in computer technology and engineering specialists from foreign countries (primarily India and China).

The offshore employees are given temporary work visas, and paid less than comparable US employees (employees unhappy with their salary are well aware that they can be easily be replaced if they should ask a salary deemed inappropriate by the employer).

Health Care – The (free market) Medicare Advantage HMOs convinced the Government to give them approximately 12% (at a cost to Medicare of $7 – $9 Billion dollars) more per beneficiary) than Medicare spends on beneficiaries who opted for standard Medicare Part A and Part B coverage. The excess funding goes to marketing costs, administrative overhead, executive perks, bonuses, and retirement for the HMO executives, such as the $620 Million Dollars in various perks taken by the CEO of UnitedHealth on his retirement.

It appears to be intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors, not the customers or employees.

Impact on Retirees – The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees now beginning to retire.

The Fair Tax elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable cost-efficient system used to report earnings to calculate Social Security benefit and provides no way to conduct of audits of businesses or individuals that are violating the Fair Tax policies.

The Fair Tax requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax, to pay a sales tax of 30% on all their purchases of services and new products on all retirement income, including pensions, IRAs, 401-k, Social Security income (see note below), and Roth-IRA (currently tax free).

Note: Social Security is currently tax free for many retired individuals and couples, and only partially taxed for the rest.

Since the Fair Tax replaces the payroll tax and all Federal income taxes (corporate, personal, business, estate, etc.), the Fair Tax proponents will tell us that with Social Security and Medicare being paid out of the General Revenues from the Fair Tax collections, the Social Security Trust Fund with $1.8 Trillion Dollars of US Government bonds is no longer required. I doubt that they have plans to return of the Trillions of Dollars borrowed over the last twenty years and spent on non-Medicare expenses from the working Americans who provided the funds via the payroll taxes they paid.

Observations -The Fair Tax program is in essence a reverse “Robin Hood scheme”. It shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans to the Middle Class and retirees. All Americans (children, working, and retired) will be paying a 30% tax rate on services and new products from the hospital bill from their birth to their casket when they die.

Do you really want to pay a 30% sales tax on your next new car, house or boat, or your insurance expenses? Do you think the cost of utilities, heating oil, or fuel (or anything) will go down by 23% of the current costs for these items? How will you or your family handle a 30% sales tax on all dental care, medical care and health insurance? How will you feel about selling a house, car, RV, or boat you purchased new and were advised that the resale value did not include the 30% Federal sales tax you paid?

Do you really think the large US and International corporations will be willing to reduce their prices by the amount of savings incurred by eliminating their (23%) embedded costs? These are the same corporations that threaten to move the corporate headquarters and tax home to Bermuda, Dubai, or the Cayman Islands when too many questions are asked.

The business community is very excited about the implementation of the Fair Tax because of the savings and increased profit they see coming that will be passed directly to executives, investors, and the bottom line. They support the Fair Tax because they expect not paying any business-related Federal Sales Taxes along with the elimination of payroll tax and corporate and business income taxes to provide a significant increase in profits that will not be shared with consumers via lower prices or employees via pay increases.

Far too many Members of Congress, the White House, and global corporations headquartered in the United States have watched and encouraged the transfer of millions of US jobs to Mexico, India, and Asia, participated in the decimation of defined benefit pension plans and retiree health plans, and ignored the increase in the Federal deficit from approximately 5 $Trillion Dollars to well over 9 $Trillion Dollars in the name of Fair Trade and the Global Economy. They are now looking to the Fair Tax proposal as a way to extricate themselves (but not us) from this mess and tax people from cradle to grave.

We recommend all Americans carefully listen to what all Presidential candidates say about where tax revenues will come from and how they propose to protect the integrity and security of all jobs and retirement income sources (Social Security, private and public pension plans, 401-k, and IRAs) to determine just who the candidate will actually representing and if they will represent your needs.

Jeffrey Liakos - 14 August, 2017

The crap about the Fair Tax benefiting only the rich is absurd.

4. The Georgia Republican - 7 January, 2008

Hey Huckabee supporters! Please take a minute to check this post out from the GA Republican. If you live in America and support Mike and the Fair Tax this is for you, especially those in SC. Thanks!

Read the Post Here

5. Andy - 1 November, 2008

“Alan Lidstone – 2 January, 2008
As the rhetoric around our upcoming Presidential primaries heats up…”

Whew… there was a lot of wasted time spent on that propaganda. The answer to most of Alan’s questions is “competition.” He seems to have forgotten that little part of the equation. Also many of the items listed in his diatribe are just plain false.

Everyone, please read about the FairTax… it doesn’t take long… and it would be the best thing to happen to our country

http://www.fairtax.org

6. porchpoliticians - 10 April, 2009

The faster the FairTax is implemented the faster the government starts working for the people again. Check us out at http://porchpoliticians.com

7. Don - 30 May, 2009

Please consider my tax concept before you make up your mind on the Fair Tax

8. Don - 2 June, 2009

David, Just a little food for thought, maybe we can get a debate going?

“Life without Income Tax” will:

1. Reduce individual income tax to Zero.
2. Lower employment taxes to 2%.
3. Give retirees more money each month than Social Security.
4. Allow “stay at home moms” to have a retirement account.
5. Raise the minimum wage.
6. Lower the trade deficit.
7. Strengthen the family.
8. Simplify the IRS tax code.
9. Lower the cost of goods and services.
10. Provide money to:
Pay for health care.
Buy a home.
Send our children to college.

This is how it works:

1. Individuals would save 5% of their income each year in their own retirement account.
2. At retirement, the assets in the account will pay interest only payments each month. The principal is never spent and is left in the account until death. After death the assets in the account are converted to cash and paid to the U.S. Treasury.
3. After 40 years, with all Americans participating, this concept would generate more income to the U.S. Treasury than the present income tax system.

Thanks, Niftytax….Needs of Individuals First Then You TAX

9. Jeffrey Liakos - 23 June, 2017

People who claim that the Fair Tax is only benefiting the rich are idiots.


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