Tuesday, June 17, 2008

The Problems With the "Fair" Tax

Anyone who is familiar with Mike Huckabee's 2008 campaign can probably remember his call for the elimination of the IRS in favor of a simpler, fair tax. It is the same plan championed in Neal Boortz's, The Fair Tax Book and Fairtax.org. I can assure you that anything designed by rich people and incorporates the term "fair", is going to be about as far from fair as the camera's on the New England Patriots sideline. Such as with the Estate Tax, the Fair Tax is a cause rich people have somehow convinced poor people to fight for on behalf of rich people. The Fair Tax claims it will initiate a 23% flat tax on consumption, eliminate the IRS and all federal income taxes, social security, gift, Medicare, capital gains, estate, payroll and corporate taxes; the last three I mentioned generate around two and a half trillion dollars every year. The Fair Tax claims it will only tax consumption (items sold) and not production and will generate as much revenue as is currently generated under the current tax system, lower prices and simplify the tax system whilst collecting taxes on illegal immigrants and illegal activity....but not really.

First off, it's not nor would it be 23%; that's a simple sales trick like making you think 9.99 is 9 dollars as opposed to 10 dollars or when gas is 4.40 9/10 your brain thinks you are paying $4.40 when you are really paying $4.41. The real tax exclusive rate is 30%. They tell you its 23% because the $30 is 23% $130 when really you are paying $30 extra in taxes on a $100 item. What they are doing is making the retailer add the $30 on top of their usually $100 item, which by the way is 30%. If the Fair Tax was 23% the $100 item would cost you $123 but any Fair Tax advocate will tell you that a $100 item will cost you $130. They call it 23% tax inclusive but normal people call it 30% tax exclusive. Even on the Fair Tax website they describe the sales receipt retailers must provide consumers and it shows the original price without the tax, the 30% fair tax and then the tax inclusive rate. This to me almost sounds like they are admitting that items aren't really being sold at a tax inclusive rate and I don't think there are any provisions stating that a retailer couldn't break all of that down on their price tags. That's problem number one with their fuzzy math. Another problem with the concept and fuzzy math itself is that George Bush's bi-partisan Tax Reform Advisory Panel concluded that in "balancing our budget" the included the income that the federal government would collect on its own purchases but left out the tax the Federal Government would have to pay on its purchases. It doesn't stop there, the Brookings Institute estimates for a fair tax to work; it would really need to be more like 44%, not accounting for tax evasion and the black market. Currently the IRS estimates about a 13% tax evasion rate of legal incomes which is about 300 billion dollars.

The way it would work is that yes, they would eliminate an entity titled the IRS and replace it with The Office of Revenue which is like robbing Peter to pay Paul. And in practice everyone would only pay a set rate of taxes on what they purchase and not what they earn. These taxes are on retail items and services any individual, corporation or the government (education spending would be exempt) would buy including your doctor bill, co pays, new automobiles, porn, legal fees, credit card interest, home purchases, utilities, bread, diapers, etc. Companies would pay tax on their freight bills, janitorial services, legal counsel, accountants, utilities, insurance premiums, etc. but would apparently not pay taxes on raw materials and of course their payroll and income taxes would be eliminated. Although, I suppose one could argue over the definition of a raw material. Every company which sold goods or services would now be responsible for collecting taxes for the federal government. They would have to hire someone to file monthly taxes and credits with the federal government. Clearly illegal underground items such as drugs would still evade taxation.

Obviously poor people spend a greater portion of their income on general living expenses and typically poor people spend every penny they make as opposed to rich people who only spend a portion of their incomes. With that being said, the Fair Tax would essentially be a regressive tax. The fair tax people, to be fair to not only poor people but to everyone, wants to fix that by having the government issue monthly living expense prebate checks to cover the cost of everyone’s everyday items on which the poor spend a high percentage of their income. This prebate check would cover the taxes paid to retailers for essentials such as bread, milk, diapers etc., that every one needs in order to survive. But not only the poor would get this check, multi-billionaires would get the same amount as someone who makes $15,000 per year. And what's even crazier is that for some reason, a married couple with no children would get a bigger prebate check than a single mom with two kids. Aside from Alaska and Hawaii, there is no adjustment for the cost of living for people living in New York as opposed to Mississippi. This prebate would become one of the biggest federal expenditures at about 500 Billion annually. This would bring a whole new meaning to income redistribution and welfare handouts as the more kids you have, the bigger your prebate check would be. This isn't exactly small government we are talking about.

I can assure you that with his two airplanes, his winter home in Naples, FL and his radio talk show with 3.75 million listeners a week, Neal Boortz is a rich guy who would benefit, along with anyone else making over $200,000 per year, by having a national flat tax. He wouldn't be writing books about it and preaching it on his radio show if it didn't benefit him and other rich people like him. Otherwise, It would be like a cop arguing that cops should have to buy their own patrol cars. In the Fair Tax scheme, what would happen is that poor people who make under $15,000 per year would pay no taxes, the rich people, since they don't spend all their income would pay fewer taxes, the middle class would bear the largest burden and the United States would go bankrupt... I mean, even more bankrupt than we are now.

Let's look at a few of the most obvious points:

A. we would all still pay the same in taxes. By their own claim, they say their plan is revenue neutral and the federal government would still collect the same amount which means we would pay the same amount. If "we" still have to pay the same amount of Federal Taxes, why would he go through the trouble of writing a book and promoting the flat tax? It seems like a lot of work for nothing until you see who would benefit; the rich and the dirt poor. They claim that due to the hidden costs businesses incur such as payroll and income taxes being eliminated that they no longer have to pass those costs on to us when we buy their products. You can say that all businesses pass all those costs on to the consumer or you can say those costs are divided up between the consumer but also the employees of that company in the form of lower wages, the profits and the shareholders so it's hard to say for sure how much the consumer will save especially since he is paying an extra 30% for that item. Of course they don't tell you that the cost of insurance premiums, accounting and all other services the business pays for just went up 30% under the fair tax. If the fair tax is revenue neutral, which it isn't, those taxes are still going to come from somewhere. Sure, businesses may pay less in taxes but middle class individuals would pick up that tab, assuming they have to buy shoes, cleaning products, etc. Would you rather pay those taxes or would you rather have Nike and their shareholders pay those taxes? I know which side of that fence I am on.

B. The government would no longer be able to encourage certain activities and stimulate job growth, specific technologies, business investment, home ownership, hybrids, children, etc. Investment tax credits which are a dollar for dollar tax credit on business expansions and business investments such as new machinery which are used to stimulate the economy and encourage employment would be a think of the past. The depreciation write off of machinery a company purchased, which stimulates the economy, as well as business expense write offs would also be a thing of the past. The interest deduction write off on your home mortgage gone as well. Libertarians, who want a smaller government, say its a good thing that the government would lose the power to help manipulate the economy but forgive me for thinking that perhaps Greenspan knows a little more about how the economy works than Neal Boortz.

C. Not only do you not get the write off for your home, but your home would now come with a 30% sales tax. So not only do you not get any tax incentives to buy a home but your home would now cost over 30% more. For someone like myself, I would pay 3 times the amount in taxes the day I bought a house than I would have paid in an entire year under our current system. Your $16,000 surgery would now cost $20,800, your $20,000 car would now cost $26,000 plus local tax which in my case the $20,000 car would cost $28,275 since my county tax is based on the price tag which would be tax inclusive. The government would also lose the ability to tax things such as gas guzzler vehicles and tobacco which raise the prices of health care and gasoline for the rest of the country.

D. Mike Huckabee claimed you could eliminate illegal alien and black market tax evasion by implementing a fair tax as drug dealers who typically don't report their drug profits would now be paying their taxes when they buy their baking soda, vinegar, baggies and Sudafed. While that is true, the sale of those drugs would still not be taxed. It's not like a drug dealer is going to charge a 30% sales tax on his eight ball and then forward that on to the government. In fact, I think you create a completely new black market, one not of illegal items but legal items that people are willing to steal or willing to sell out the back door. How many people would be willing to save 30% on a $3000 wedding ring by buying it on the black market? The demand for hijacked loads of liquor, cigarettes and electronics would increase and when there is a demand, someone will figure out a way to fill that demand. Look at Chicago and the liquor trade during prohibition. So, I think the taxes you would collect on the illegal aliens and drug dealers would be nullified by the people selling stolen goods on street corners. Let's be realistic, illegal aliens and drug dealers are already breaking the law; do you really think they are now going to obey our tax laws?

I also wonder how we would collect taxes on companies who outsource their work and set up factories in Mexico for instance. If we are no longer taxing their profits then wouldn't they have a bigger incentive to move their manufacturing facilities to other countries where they could buy local raw materials which didn't come with a "fair tax"? Do we really need to give more incentives for companies to outsource and export jobs? They have shown they are willing to sell out American jobs to avoid local tax laws, health insurance benefits required by most American workers, safety laws, environmental laws, labor laws and most importantly, fair wages so now we are going to give them yet another reason to circumvent the system and send jobs overseas.

Let's face it, taxes and taxation is why The Colonies declared independence from Great Britain so it is a big issue. Specifically, taxation without representation is what pushed us over the edge. Who knows, if we had representation in British Parliament would we have ever rebelled? I guess the Whiskey rebellion would tell us the answer may be yes but probably in much smaller numbers and without the same conviction we had in rebelling against the stamp and tea taxes. In the past, America supported itself on excise taxes and the sale of land. In the time of war, we have always levied taxes against our citizens in one way or another. After the wars however, those taxes would typically be repealed, that is until 1913, not coincidentally, the same year as the creation of the Federal Reserve, when Congress passed the 16th Amendment. Again, with WWI, taxes increased from the original amount in 1913. Again, in 1941 taxes were increased once again due to defense spending. Even in 1990, when Iraq Invaded Kuwait and we invaded Iraq, George Bush Sr. raised the taxes he promised not to raise. In fact, Bush W is the only President to cut taxes during war time. Clearly we are not living in a time where our tax code works well for our country; I am not saying we are. I realize that even though it only taxes me fifteen minutes to file my yearly taxes that the tax code is a lot more complicated for some people and could use some simplification. I, as probably most people, am not opposed to making some changes and hopefully finding a way to lower our taxes. The problem is that people are so convinced that Republicans are going to lower our taxes and that the Democrats are tax and spend liberals who want to take your hard earned money and give it to fat black women in the projects. The reality is that when Democrats spend, they do it responsibly and keep our budget and debt in line. Republicans spend just as much but lower taxes to get your vote and then leave it for your children or to a Democrat to balance the budget which means they have to raise taxes because of the irresponsible spending of the Republicans. Democrats may end up looking like the bad guys but they merely react to situations created by Republicans. Sure, you can go with the Republican philosophy and pass your tax burden to your kids, allow the debt to get out of control, devalue the dollar, increase inflation, etc. but that isn't responsible. Do you want your children to be burdened with your debt? Maybe that's why Republicans are always opposed to the Estate Taxes; they know their children will need millions of dollars to pay off their tax bills.

One of the biggest problems with the Fair Tax is that it will still leave us with the largest budget deficit in our nations history. Why would we scrap a system which doesn't generate enough revenue and replace with one with the same shortcomings? I mean, I guess we could stop starting wars and awarding Halliburton and Blackwater no bid contracts but that means we would be putting people in office who would let gay people get married. The point is that our system isn't perfect but the "Fair Tax" is not the answer. The fair tax would only give the people waging the war on the middle class another weapon in their arsenal. The rich people would still continue to get richer, the government would still continue to spend hundreds of billions of dollars over seas every year and we would be in even greater debt than we are now and just may see a big resurgence in the Mob and other underground illegal black market activities.



Anonymous said...

I agree with Ron Paul that all federal taxes should be scrapped and replaced with nothing. But of course, that's just not practical considering all the promises the federal government has committed itself to, now and for years to come.

I agree with Bob Bar that federal spending needs to be reduced. But, I disagree that it must be done before taxes can be reformed. Income tax revenue has nothing to do with federal spending other than providing Congress with the guarenteed income collateral it needs to borrow all it wants from the Federal Reserve and the central banks of other countries. So, the first step in budget reform is tax reform.

The Fair tax is, in fact, the best tax reform plan imaginable. Here's why.

The government can only tax us in two ways, income or spending (or both, of course). The idea of taxing income in and of itself is patently unjust. It's also regressive and destructive to the economy.

Nix income taxes.

This leaves us with spending taxes. General transaction taxes, like the VAT or the APT tax, would be very difficult to enforce and would be just as regressive and destructive to the economy as income taxes. Workers end up paying all taxes anyway so, taxing businesses is neither necessary nor undesirable.

Nix business taxes.

The only thing left now is a sales tax. A sales tax would be completely transparent, it would correct the injustice of income taxes and it would leave the economy free to function at peak efficiency. The only issue is that, because sales taxes are flat, it would be regressive. The Fair tax solves this issue with a simple pre-tax rebate which completely untaxes the poor. And, since it only applies to new retail sales, it gives everyone living above the poverty level the power to control their personal federal tax liability.

-by Zod

Toad734 said...

So you didn't read my post.

Even if it's the best reform plan, it doesn't make it doable or even the best plan.

Under the Fair Tax businesses would still pay taxes, just not payroll and SS taxes. They would now pay taxes on anything they purchased such as freight, accounting services, rolls of paper / raw material etc.

Patrick M said...

Where to begin with you, Toad?

First of all, the facts on the FairTax are here. So rather than repeat everything you mischaracterize, I'll cover a few points and let your readers discover how wrong you are.

First of all, the only taxes that a business pays are on final retail products. Raw materials are not taxed. Everything sold is taxed only one time, at consumption.

Again, you assume this is a tool of "rich" people to take more money from the middle class. But to make this asinine argument, you are forced to defend a system designed to shelter the incomes of the richest among us. Tax credits, tax shelters, and tax-free things are tools to shift the burden on people who can't leverage and hide away their money.

You also seek to confuse the issue by referring to the FairTax (consumption tax) as a flat tax (an income tax).

You continue to try to address every other problem along with the FairTax. But the reasons for the FairTax include transparency. In other words, we can look at consumer spending, and through simple math, we will know how much the government is raking in. Then, we can work on the other problem, rampant spending and government growth.

Again, it would take up far to much space to correct every misperception, slant, and even every lie you have printed here. So I'll ask a simple question and not waste time trying to argue you to death.

What is the best way to fix our tax system in a way that politicians and people with the money to buy votes and tax shelters can't alter it to suit their prejudices and agendas, and so that everyone pays the same amount based on a simple formula?

Give me an answer even remotely close to what the FairTax offers, and I'll stand corrected.

Patrick M said...
This comment has been removed by the author.
Patrick M said...

While looking for something else, I came across this article from the "EEVIL, RICH" Neal Boortz. The arguments against the FairTax sound remarkably familiar, I think. So read what Boortz would say to your nonsense.

(previous deleted comment was the same as this one, except the link works)

Toad734 said...

As far as those arguments are concerned, ya they have the same gripes as I do but the rebuttals aren't exactly slam dunks. So now we pay taxes on anything we buy overseas even if we have already paid local taxes in the country I bought it from? So we have to save our invoices for everything we purchase? Are even my meals I buy in Paris taxed once I get into the united states or just things I bring with me? Thats really pretty dumb.

And how many people buy a new house? Existing homes will certainly not cost less. Houses cost what the market says they cost, it has very little to do with construction costs. If 3 bedroom house sells for 500,000 in Chicago, that same house would cost $200,000 in Indianapolis.The costs of materials may be a little higher in Chicago but not that much higher. In fact, a house in Merrilville, IN (next to Chicago) costs the same to build but you can buy it for half the price. And how will building a house cost less if they have to pay a higher tax on all their lumber, cement,drywall, etc.?Stop pretending that a tax inclusive sale price doesn't have taxes in it.

I'll have to look into their plan regarding "raw materials". I am assuming accounting services aren't "raw materials". So what you are saying is that I just need to go into the "Raw materials" business and I can avoid being taxed?? So if a paper company buys raw lumber and sells rollstock to printing companies and never sells something on a store shelf, that paper company will essentially never pay taxes??? Do I have that right? I will read that section again and see if I did indeed misinterpret that one.

Toad734 said...

Also, I am not sure I want everyone to pay the same amount of taxes, that's one of the problems I have with the fair tax.