Posts Tagged ‘The FairTax’

FairTax Questions Answered

Wednesday, February 27th, 2008

Commenter Dan1 had some good questions/ critiques regarding my earlier post about The FairTax plan. I started to write out a long, involved response in comments, and decided it was worthy of a post of its own. Quoting Dan, with my responses interspersed:

If the cost of the good comes down to 78 cents and the Fair Tax generates .22 or 23 cents in revenues, then great.

Quick distinction — this price drop should happen behind the scenes. That is, an item that used to cost a dollar will still have a dollar price tag on it. The difference is with the seller, who will pocket 77 cents and send the 23 to the state — rather than the current plan where he pockets the dollar but later pays income tax on it. Specifically, this is called an “inclusive tax” as opposed to an “exclusive tax” such as most state sales taxes. Why make it an inclusive tax? Because the existing income tax it’s replacing is inclusive, and frankly because of the perception of price.

This is important in a moment….

The point is if you start taxing purchases, then you cause everyday people to defer purchases, which signals a decrease in tax revenue.

People also say that lowering income taxes will reduce revenues, but every time we do it, revenues paradoxically go up.

You are correct in the effect, but not the result. People may very well defer purchases. What the tax would do is strongly encourage savings, as you only pay taxes when you spend money. Most economists agree that a high savings rate is good for an economy. Why?

Because people aren’t using that extra cash to stuff their mattresses; they’re investing it. (Or perhaps they’re merely putting it into the bank, and the bank is investing it.) High levels of investment in companies makes an economy grow. A lot. More investment means more jobs, means more competition for labor, means higher wages, means higher… spending.

It also means more kewl American products for people in other countries to drool over and buy.

Purchases that can be made outside of the new tax zone (i.e. the entire US) will be made outside the US. And since most of those nations don?t have large sales taxes, the consumer benefits, the other nation benefits, and the US loses out on tax dollars. That means less federal funding.

Why would Americans buy more outside the U.S. if prices haven’t changed here? Here’s where my earlier point of the tax being “behind the scenes” comes into play. Something that used to cost a dollar will still cost a dollar (or maybe $1.01). Even if that perception is not there, I can spend a dollar there, or 78-cents-plus-23-cents here. Hmmmm…

In fact, there will be an opposite effect. If the cost of making a product actually drops 22% as predicted, exports will BOOM, because they’ll be 22% cheaper. People in other countries will be able to buy the same American products much more cheaply.

At the same time, Americans will buy more American goods, and fewer foreign goods, because both with have the FairTax added, but the American goods will be much cheaper. That is, the American product will be 78 cents plus the tax. The same product (but foreign manufacture) will be a dollar plus the tax.

Why the difference? Because we’ve removed all the cost that embedded taxes adds to the cost of a product. (multiple levels of income tax, payroll tax, etc. etc.). The foreign country (until they too decide they like the FairTax) will have all that extra cost in their prices.

That actually is a very important point. The FairTax will be massive… for the first country that implements it!. If it works as expected, other countries will quickly pick up on it. We Americans are used to being trendsetters though, having been the first in modern times to try that crazy “all men are equal” idea that many people at the time thought would never work.

To recapture the lost revenue new taxes or tweaks would occur or the Fair Tax percentage would have to rise until it was generating the same level of revenue.

Lowering income tax rates raises revenue because it make total income go way up, and the smaller percentage of the higher income equals a higher tax revenue. This is not theory, it’s historical fact. It has worked every time we’ve done it.

So… if lowering income tax rates raises total income, what will happen when we lower it to zero? For a number of reasons, including those outlined above, total income should go up. Way up. The overall economy will grow. As it grows, spending will ultimately grow as well.

If sales tax is higher in the US it will affect the cost of travel and vacations. Tourism will suffer. If hotel rooms and a plane tickets are taxed at 22%, then foreigners as well as US citizens will take their vacation dollars outside the US and all of the tax revenue is lost forever, but a tweak to the tax code can increase the tax on international travel to recoup some of the lost revenue.

Again, the end prices will change very little. Tourism will not suffer, because prices won’t change. In fact, tourists will increase the tax rolls because part of what they spend here will go to taxes.

Ditto “underground” economies such as drug dealers. I might make big bucks selling cocaine, but when I turn around and buy that flashy car I’m going to be paying taxes on it.

LOL. Inventories being exempt means that the government loses out on even more revenue. GDP is between 13 and 14 trillion and the annual US budget is about 2.5 trillion dollars. How much of that 13 trillion could be said to be stored in inventories? Whatever it is 22% of it is a hell of a lot of money and a considerable portion of the budget.

Yes, but most of the taxes on that inventory has already been paid. How do you “lose” revenue you’ve already taken in?

There would certainly be some flux in the short term if this became law. But hell, the government spends far more than it takes in anyway, so they should be able to weather a short term fall in revenue — especially if it results in a significantly strong economy down the road. Even so, hold on one more minute. I’ll get back to this.

There is a new book out on the FairTax, called FairTax: The Truth: Answering The Critics. It just came out, and I’ve been marking notable passages as I read it. Here are a couple that I thought were very telling…

From page 30:

When Bill Archer (R-Tex) was chairman of the House Ways and Means Committee, he routinely quoted an informal survey of five hundred international companies located in Europe and Japan. These companies were asked, “What would you do in your long-term planning if the United States eliminated all taxes on capital and labor and taxed only personal consumption?” Eighty percent–that’s four hundred out of five hundred–said they would build their next plant in America. The remaining 20 percent–the other hundred companies–said they would relocate their business to America altogether.

Four hundred new plants and a hundred new companies (and thousands of new jobs). Just for starters.

That was the foreigners; let’s look at Americans. Page 41:

[W]e have more than $12 trillion sitting in offshore accounts…. Don’t misunderstand. Most of the money sitting offshore has been earned in a perfectly legal manner. …[Companies] just haven’t yet decided to repatriate these funds. Why? Taxes….

In a FairTax conversation with former Federal Reserve chairman Alan Greenspan, the chairman was asked if he thought this offshore money would in fact come back into American markets in a FairTax world. Well, he said, a small portion might remain offshore for other good business reasons–but the remainder would certainly come home.

How long would it take for that to happen? he was asked. Years? Decades?

“Months,” the chairman responded.

Months. Remember that bit about exempting existing inventory and how the government would take a big hit? Now what do you think pouring twelve trillion dollars worth of investment might do to government revenues? What would it do to job creation and wages?

To be honest with you Dan-o, the more I read about the FairTax, the more I like it. The relative ease by which I’ve been able to answer fairly challenging questions is surprising to me. It’s a strong plan, and it’s been very well thought out. Read the book. (The new book is better than the original because it was written with many of the common criticisms and challenges in mind — the first book explains it, the second book does that and responds to many of the “buts”….)

Beyond all that, I think the biggest reason for passing it is this: it would represent the largest transfer of power from American government to We The People since the country was founded. The federal government has been growing virtually unchecked for over 200 years. It’s time for the people to reclaim their full measure of freedom from those who think they know best what’s good for us.

1: Not to be confused with Farmer Bob.

Unfair to FairTax

Thursday, December 20th, 2007

Pundit Jay Bookman, writing for The Atlanta Journal-Constitution, has penned an article entitled Huckabee’s fantasy FairTax feeds on workers’ frustration. I should note that his column is named, simply, “My Opinion”. That name, at least, is honesty in journalism; as the article is heavy on opinion, and sadly short on facts.

You know what? This calls for a good hard fisking!

There is indeed a cult member among the frontrunners for the GOP presidential nomination. But it isn’t Mitt Romney, the Mormon from Massachusetts, despite what some in the evangelical community might tell you.

Ooh, hey! Nice twofer there. Let’s start in with the name calling while simultaneously name calling by proxy1 a different Republican candidate. Is every group you don’t like a “cult”?

It’s Mike Huckabee, the Baptist preacher, former Arkansas governor and fervent believer in the cult of the FairTax.

“Cult” Counter: 2

For those unfamiliar with the FairTax creed, it goes something like this: Let us go forth and abolish the federal income tax, the estate tax, corporate taxes, capital gains taxes and payroll taxes, as well as the IRS. Let us then replace all those taxes with a 30 percent national sales tax collected on all services and goods, from a new house to chemotherapy treatments to a gallon of milk.

If we do that, economic heaven is within our reach.

“Creed”? “Go forth”? “Heaven”? You, Sir, are mixing your metaphors. Is it a cult or a religion? (Or are those the same thing to you?)

Beyond that, we also have our first factual inaccuracies: “…a 30 percent national sales tax collected on all services and goods…” First, as this is a replacement for the Income Tax, which is measured as an inclusive, not exclusive, tax, the only fair “apples to apples” comparison is to also measure the FairTax as an inclusive tax. As such it is 23%, not 30%.

That is: If I earn $100,000, and pay 25% income tax, the government takes $25,000 and I keep $75,000. $25,000 is 25% of $100,000 (inclusive tax), but 33% of $75,000 (exclusive tax). The FairTax works like this: if I spend $100,000 for something, the government takes $23,000 in taxes, and the retail seller keeps $77,000. Measured in the same way as today’s existing income tax, $23,000 is 23% of $100,000. Apples to apples, the FairTax is a 23% inclusive tax. Calling it a 30% tax is a distortion of the plan, and just a way to spread some FUD.

Second, it is not a tax on “all services and goods”, but all new, retail goods and services. Used or resale goods (from clothing to houses) are not taxed. Environmentalists should love this plan, as there is a strong incentive to buy (and thus re-use) used goods.

Or, as Huckabee says, “when the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness.”

That does sound wonderful. Don’t we all want to be released from pain and unfairness? Don’t we all yearn for a magic wand that would bring such a glorious day to pass?

Sadly, though, there’s this little matter of reality. Reality says taxes are going to hurt, and no magic wand will ever change that. For time immemorial, taxes have been perceived as unjust, and nothing will change that either.

So… what, your “reality based” outlook insists that taxes must remain as painful as possible, or they’re no good? You’re right — there’s no such thing as “no taxes” if you’re going to have any government at all, but there is a lot of room for a lower tax burden. A huge part of the current tax burden is the cost of simply figuring out how much you owe. Billions of dollars are lost to the sheer bureaucracy of the IRS and it’s 100,000-plus page long tax code.

According to Huckabee and other proponents, the FairTax will raise just as much revenue as the current system. They also believe that, somehow, almost everyone will pay less in taxes.

At the least, they will not have to pay those aforementioned billions of dollars in compliance costs. Retail businesses will be the only ones filling out federal income tax returns.

They believe that under the FairTax, the economy will grow at double-digit rates, interest rates will fall, exports will boom and the Falcons will win the Super Bowl.

OK, they don’t really mention the Falcons. Even the FairTax magic wand has its limitations.

Yes, Yes, Yes, and… Hey Look! A monkey!

In effect, the FairTax is the tax equivalent of those automobile engines designed to run on water. It sounds great, but it doesn’t have a chance of working.

“Don’t sell the bike shop, Orville! It’ll never work!”

The proposed 30 percent sales tax, for example, wouldn’t come close to being revenue neutral. A tax commission convened by the Bush administration found that eliminating just the federal income tax ? leaving all other federal taxes intact ? would require a sales tax of at least 34 percent, a finding backed by other economists.

Here’s I’ll just quote Neal Boortz, who (literally) wrote the book on the FairTax:

What Bookman either doesn’t realize, or doesn’t want you to know, is that the president’s tax reform commission was not permitted to consider the FairTax as it was written. They first were compelled by their own rules to rewrite H.R. 25, and then they considered the idea as reformulated by them!

Back to Bookman’s article:

To a cult, of course

“Cult” Counter: 3

the scorn of nonbelievers is transformed into proof that their cause is righteous; likewise, outside criticism is typically dismissed as the work of conspiracy. In this case, the FairTax cultists

“Cult” Counter: 4

dismiss the findings of the Bush tax panel on grounds that it was stacked with liberals.

Uh huh.

See above. If you’re going to examine a plan, don’t change the plan first. Study it as written.

The FairTax cult also boasts its own holy manuscript, in this case “The FairTax Book: Saying Goodbye to the Income Tax and the IRS,” by radio talk show host Neal Boortz and his congressional sidekick, U.S. Rep. John Linder (R-Ga.). Cultists

“Cult” Counter: 5

insist that the book, like the Bible, is inerrant and answers all doubts, and that all who read it will earn enlightenment.

I don’t think the book is infallible, but I do advise actually reading it before writing at great length about how the author doesn’t know what the hell he’s talking about.

The fantasy nature of the FairTax is perhaps most glaring in its approach to enforcement. Advocates believe that under their system, tax fraud would essentially cease to be a problem and that the new system would almost enforce itself, allowing the IRS to fade away.

Again, did you read the book? Tax fraud would not disappear, but it is a lot easier to police several thousand retail businesses than three hundred million individuals. Also, the IRS becomes obsolete not because enforcement is unnecessary, but because the states would be doing the enforcement.

But we all know human nature. Ask yourself how many people would be lured into the black-market economy to avoid paying a sales tax of 30, 40, 50 or even 60 percent on expensive items? The FairTax cult says very few ? maybe they’re counting on that magic wand again.

The fiipside of that is that drug dealers and foreign visitors would enter the tax system. When a drug dealer buys a fancy new car, he pays taxes on it. When a Japanese tourist buys a camcorder in New York, he pays taxes on it. Currently, neither of these people pay into the income tax system.

As for black market sellers, well… you’re right. There will always be people trying to buck the system. But again it is a lot easier to police retailers than individuals. Police will somewhere along the line notice that so-and-so is buying a bunch of wholesale goods and never officially selling them. This kind of market already exists on products with prohibitively high sales taxes.

By comparison, do you, Mr. Bookman, believe that nobody cheats on their income taxes?

The grassroots fervor for the FairTax is fed by a growing and all-too-legitimate frustration among working-class and middle-class Americans, a sense that they’re working harder than ever yet losing ground every year.

You forgot to mention upper-class Americans, who are most certainly frustrated with taxes. Lessee… “working” (i.e. “lower”) class, middle class, and upper class. That would be “All Americans” are frustrated with the current system… and rightly so.

Huckabee isn’t shy about appealing to that frustration, not just with the FairTax but with other rhetoric as well.

Oh my God! A politician who promises to do what people want! The Horror! My Eyes!

However, under the FairTax, those folks would end up paying significantly more in taxes, while the tax burden for the wealthy would fall dramatically. It would victimize the very people who look to it for salvation.

People at or below the poverty line would pay nothing under the FairTax. You conveniently forgot to mention the prebate, did you? Simply put: every single American citizen (and legal alien) would receive a rebate once a month for the amount of taxes on spending at the poverty level. Thus poor people pay nothing. Don’t worry, those eeeevil rich people will still pay the FairTax every time they buy caviar or a new yacht. They’ll get the prebate too, but it will be pocket change compared to a yacht! Heck, they spend that much in a week lighting their cigars with hundred-dollar bills.

Let us not forget that the removal of multiple layers of embedded taxes (that is, layers of income tax that hit at all levels of manufacture and distribution of goods) will lower prices, as, again, the FairTax only applies at the retail level, on new goods and services. Price drops will effectively balance out the increase caused by the tax itself. Thus prices will remain much the same as they are, but everyone’s buying power will increase because we’ll all be taking home our entire paycheck.

The real reason leftists don’t like this plan is because it would represent the single biggest return of power from the Federal Government to The People since the Declaration of Independence. Lack of government power means it’s harder to institute socialist schemes. When the country’s citizens no longer have to submit detailed financial information to the government, that makes it a lot harder for politicians to engineer their multitude of social experiments in the form of social programs. When the IRS and its thousands of exceptions and loopholes are eliminated, it’s far more difficult for politicians to buy votes by passing new loopholes that even further complicated the current bloated system.

The FairTax, like other cults, plays its followers for suckers.

You’re projecting, man. It is you playing your readers for suckers.

Power to the People!

[Update: Missed it at the end there… Cult Counter: 6]

1: “name calling by proxy”: v. the act of indirectly voicing a negative statement about another person (name calling), generally while feigning that you are not doing so, by referring pointedly to name calling by others. Ex: “Some people say he’s a criminal.” The “playing innocent” aspect of this is often enhanced by an explicit statement that you are not name calling, but simply pointing out that of others. This can be detected when there is no reason to mention the negative portrayal in the first place, except for the sake of it being mentioned. Ex: “I don’t actually know, but many people say that my opponent is a drunk.”