My income tax season has begun. Fair Tax hearing needed!!

I have to apologize to the owner of this blog for the length of this post, but it seemed necessary to include the whole comment as well as my reply. Jim Bennett and I have a long association on other blogs. I even have a $10 bet with him that the number of House cosponsors in the 111th Congress (presently 59) would not exceed those in the 110th.(72). He recently suggested that we change the time frame to include the 112th Congress. Perhaps he believes that GOOOH and the Tea Party folks will somehow get some more Fairtax supporters elected? Stay tuned. So, here we go.
This is one of the more disingenuous pieces I have seen from this author. His individual observations, standing alone, may be at times correct but, taken as a whole, this piece is constructed and designed to cast the FairTax in its most pejorative possible light. Most blatantly, the author mischaracterizes the review by the Bush Advisory Panel on Federal Tax Reform as fair. It was anything but. Notably, this panel falsely criticized the adequacy of the rate by understating the base. Further, this panel falsely criticized the fairness of the FairTax by disregarding the fact that Medicare, Social Security and Federal Unemployment Taxes disappear with the FairTax. Those facts are known to this author.
Sorry, Jim, but anyone reading Chapter 9 of the 2005 Tax Reform Commission report would understand that the Commission started with the Fairtax as proposed by AFFT, adjusted the base by removing government taxation ( inappropriate under our federal form of government), and further adjusted the base to account for evasion. Clearly the rate had to rise. There is nothing unfair about the Commission report, only a difference of opinion about what works and what doesn’t.
I object to your characterizing my criticisms as casting the Fairtax in the worst possible light. My effort was aimed at pointing out all the downside issues which AFFT never mentions. As usual, the truth may lie somewhere between my dismal view of the Fairtax and the wildly optimistic marketing literature provided by AFFT. It certainly wasn’t my job to gloss over any and all problems with the Fairtax as written in HR25. Everyone has to decide for themselves based on the whole picture, not just the one side presented by AFFT and the two “comic books” written by a radio talk show host and an obscure Georgia Congressman.
Taking the further points in order:
(1) This comment makes as much sense as arguing the FairTax is opaque because one doesn’t see how much tax one’s neighbor is paying. The FairTax is transparent because everyone pays the same and sees it on the retail sales slip. Government is like any other consumer.
Nonsense, Jim. I defy you to look at your sales receipt and tell me how much of the State/Local sales tax amount is in actuality going to the Federal
Treasury. Hiding approximately 12% of needed federal revenue in higher S/L sales taxes isn’t transparent. Let the Feds charge the correct rate (27% inclusive), but don’t force the States to choose between higher taxes, reduced services, or even “taxing the tax”.
Treating the government as a consumer prevents a flight away from privatization. Just as an example, your town could choose to run its own garbage collection or hire a private hauler. If your town were relieved from paying tax on employee wages, and paying tax on the garbage trucks it purchases, and private garbage haulers would become extinct.
You haven’t been paying attention. Section 704 mandates that any government agency that sells more than $2500 per quarter will be treated as a government enterprise and required to collect and remit the sales tax. There is no competitive advantage for government agencies.
The author would penalize government-owned or government-run enterprises to the benefit of those that are privately owned. A government enterprise, such as the Postal Service or Amtrak, that receives gross payments from consumers, is treated the same as any other business. The Postal Service charges tax on its sale of stamps, but does not pay tax on employee wages or truck purchases.
The author doesn’t “penalize government enterprises”, Section 704 does! Read it!
(2) Retirees pay income tax on the yields of their hard-earned pensions today, as well as embedded taxes. There are four more points to be made here. First, exempting pensions today from again paying tax is unsustainable. It is delusional to think it will continue. It did not continue when Congress first promised there would be no taxes on Social Security benefits. Second, high-net worth seniors pay today tax on their wealth again when they die. Under the FairTax, the estate and gift tax are eliminated. Third, most seniors have made their major purchases, and the FairTax effectively exempts consumption up to $40-80,000. For these seniors, consumption above that level is truly discretionary spending. Fourth, seniors who have put away investments will see them grow faster under the FairTax and compensate for any incremental increase in the cost of living. The FairTax makes this complaint a non-issue.
Nice try, Jim, but you missed my whole point. My criticism was that after paying into the Trust Funds for 45 years or so, under the Fairtax, I would be forced to resume paying for my pension and health care benefits with my sales tax dollars. How is that fair? Even it all the nice things you listed were applicable, (which they aren’t), the fact remains that I’m paying six percentage points more in sales taxes than I should since I already “gave at the office”!
(3) See (2).
Same problem, Jim. You seem to believe that I’m being disingenuous by not pointing out all the positive stuff. Tell you what, Jim, when I see Ken Hoagland and the AFFT crowd point out the negatives in all their propaganda articles, maybe I’d reconsider. Why am I disingenuous and they aren’t? It cuts both ways, and unfortunately, AFFT has resisted any kind of fair and unbiased public debate.
(4) There may actually be an argument for not having a “pre-bate,” but the D’s will not support the FairTax without one. The pre-bate actually does help make the FairTax progressive – more progressive than today’s income tax when scored using tax concentration coefficients. Economists measure resources over a lifetime, not on year-to-year windows. It has been said that 70% of American households receive some benefit from the federal government already. This particular expansion of government would have relatively little impact. Finally, illegal aliens to not qualify for the pre-bate. They go from being tax-preferenced today to being tax-disadvantaged under the FairTax
Are you kidding me? The prebate would be the largest single cash grant entitlement ever, and you believe it would have very little impact. Tell you what, Jim. The timing of the economic train wreck brought on by entitlements squeezing out discretionary spending would be advanced to where even this old man would see that sorry day!
(5) This FairTax-er will never be heard to make the claim that there will be embedded tax-cost savings of 22%. Neither does FairTax national in Houston. The claim is unnecessary. The combined effect of removing the income and payroll tax and removing embedded tax costs of ca. 10% gives the average American 9% more purchasing power than he or she has today. The author is attempting to tar all FairTax-ers with the mistake of one radio talk-show host.
Not really, Jim. I’m trying to ensure that Fairtaxers understand that all that additional take home pay isn’t some cash bonanza which can be used to pay the mortgage, increase savings, and other nonsense put forward by AFFT. Most of that increased take home pay will be needed to offset the 17% higher prices. And, not everyone would see a 9% increase in purchasing power. (I’d be interested in seeing how you came up with that figure? It’s never too late to learn!)
(6) The author here is telling only part of the story. Financial intermediation services, to which he is referring without naming the feature, are designed to capture explicit or implicit fees for services that are components of intangibles that otherwise escape tax. Interest, for example, may be viewed as having five components: (1) return on capital, (2) the compensation to the lender for the expected loss in purchasing power (inflation) caused by excess money and credit creation, (3) the premium paid for the risk that the capital will not be repaid, (4) the compensation to the lender for taxes due on the interest, and (5) the payment for financial intermediation services – the servicing of the loan or deposit. The FairTax does tax the last component (5) of interest which is the implicit payment for financial intermediation services.
Come on, Jim. You don’t seem to understand the implicit tax feature set out in Section 801-806. It is in addition to normal services-your #5. The fact is that any interest bearing investment and all debt instruments will be taxed depending on the appropriate Treasury rate when compared to the investment or debt instrument interest rate. For instance, how many of our readers have a maxed out credit card with a balance of $10,000 and charging 18%. With today’s mid term Treasury rate of 4%, the implicit charge would be $10,000 x .14 x .23/12 or $27 per month in addition to the normal service charges. Or consider a $50,000 CD paying 2% when the long term Treasury rate is 4%. The implicit tax would be $50,000 x .02 x .23 or $230 per year which reduces your investment income by 23%.
(7) The author admits here that the inventory credit would only last the first year. The purpose of the inventory credit is to smooth the transition. The author overlooked the Social Security indexation, which would also add to any deficit but is important to seniors in the transition and particularly relevant to point (1). The author also overlooks any favorable economic effect of the FairTax and chooses to view it statically.
Quite right, Jim. I don’t have access to some high tech model such as the ESP model used by Larry Kotlikoff, so static estimates are the best I can do. And I did indeed overlook any estimated long term favorable outcomes, but I also overlooked the impact of illegal evasion and legal tax avoidance. The fact remains that there is no offset to cover the $600 billion inventory tax credit, although I have to admit that $600 billion doesn’t look quite as large today as it did when I first prepared these criticisms.
(8) “Cold Turkey” is the best path away from addiction – in this case – Congress’ addiction to the income tax. If the transition runs too long, Congress will find a way to “fix” the tax. 45 states charge sales tax today. The infrastructure is in place.
What on earth makes you believe that the States will roll over and become the federal tax collector? We have had an income tax for almost 100 years, what is wrong with taking five more to get rid of it?
(9) I think Greenspan agreed with the claim that trillions would repatriate to the US. Whatever the number, it would be significant because there would no longer be a tax reason to have money offshore.
I don’t really care what Greenspan said or wrote, the international group that tries to keep track of offshore holdings doesn’t agree with him. I’ve indicated my source, where is yours?
(10) The author is indulging himself in a purely semantic argument with no substantive significance. The tax-inclusive method of expressing the 23% rate facilitates a comparison to the taxes being replaced, such as the income tax that tops out at 35%, the corporate income tax of 35% (one of the world’s highest), the combined employment tax of 15.3%, and the estate tax that tops out at 50%.
The substantive difference is that you and your AFFT friends are torn between arguing that the sales tax will be clearly shown on the receipt and a strong desire to keep the rate as low as possible. The fact remains that the retail merchant has to add 30% to his costs in order to arrive at a 23% inclusive tax, and that 30% appears no where on the receipt. Talk about disingenuous!
And while the corporate rate tops out at 35%, the average income tax paid by corporations in 2007 was 3% of sales.
I would be quite willing to bet that the first thing the Revenue subcommittee of the House W&M Committee changes, should HR25 ever be considered, would be the inclusive rate. Tax legislation is not the place to be doing marketing comparisons. In terms all Americans understand, the sales tax rate is 30%. (or higher?).
(11) The tax to which the author refers is an incentive for foreign countries to enter into treaties with the US. Foreign countries give their residents credit for taxes paid here, so the United States is merely capturing tax that the foreign county would otherwise collect. The author overlooks the fact that money kept here would grow tax free.
Color it any way you wish, it is still a 23% tax on income generated within the US by foreign owned corporations and individuals. And, you forgot about the implicit tax provisions when you claim that investments would grow tax free.
(12) The author does not want you to know the context under which the governors oppose a national sales tax and juxtaposes that point with the repeal of the 15th Amendment. No governor would support the sales tax as an add-on. A December 2009 Rasmussen poll bears this out. Most Americans oppose a national sales tax as an add-on. A plurality, however, support a national sales tax as a replacement.
I thought I made it quite clear that I was quoting from the National Governors Association tax policy paper. Here is the exact wording:
“9.2 National Sales or Value-Added Tax
The nation’s Governors oppose a national sales or transactional value-added tax. Such taxes would intrude into a tax area that has traditionally been reserved for and relied on by state and local governments. If enacted, either of these taxes would seriously threaten the ability of state and local governments to maintain their tax base.”
(13) The author should let consumers decide for themselves the true value of used property. The principle here is that, once property pays tax, it does not pay tax again.
And, once property pays the tax, some portion of that tax cost will be included in the pricing when sold used. Think about it as the embedded cost of the Fairtax.
(14) If there are 30 million people who are un-taxed through the pre-bate, they would still see the cost of goods on the sales slips. When they improve themselves economically, that number will go down.
Very true, Jim, and we all hope that workers will move out of lower income paying jobs. But anyone who is working at or below the AFFT adjusted poverty level and is accustomed to getting only a cost of living increase annually, will never make a net contribution to the federal coffers.
I know this author through correspondence. He is not against consumption taxes but wants to means-test the prebate, take Social Security and Medicare off the table and phase the new tax in. Those changes would benefit a small special interest of people who accumulate substantial after-tax wealth. Means-testing the prebate, however, keeps the government in the income-measuring business. Taking Social Security and Medicare off the table places these two unsustainable programs in further jeopardy. Phasing the FairTax in risks stalling and eviscerating the entire program.
Obviously I disagree, but every one has to make up their own mind. Here is an alternative to the Fairtax I call Fairtax-Lite. Fairtax-Lite is a 12% revenue neutral consumption tax which replaces just the income tax, has no exemptions, no inventory tax credits, does not tax governments, provides a targeted prebate to offset the regressive effects of the sales tax for the poor, retains the payroll tax and the estate/gift taxes, and phases in over five years. If we really want to get rid of the IRS, this may be a better way to go.