Wednesday, November 28, 2007

The FairTax -- The Truth

Neal Boortz - November 27th, 2007 - Townhall.com

Last week Townhall published an article that opposed the "Fair Tax" bill H.R. 25. You can read that article
here.

This is a response by one of the two authors of a book on the"Fair Tax", which specifically addresses the criticisms. This is an important issue as it attempts to stop the damaging excess taxing of our nation.

Since Congressman John Linder, the author of H.R. 25, The FairTax Act, and I wrote “The FairTax Book” in 2005 we’ve seen an unprecedented and ever-growing nationwide interest in this tax reform idea. Let’s face it, you have to be doing something to capture the imagination of the American people to have a book on taxes debut No. 1 on The New York Times Bestsellers List. There are some, though not in what we call the mainstream media, who think that Governor Mike Huckabee’s embrace of The FairTax is an important element to his rise in the GOP presidential sweepstakes.

At least one thing has become clear, the fair tax (flat tax) proponents are being more honest and consistent with their comparison. The idea of a rate must be consistently applied. Ian, who commented on the earlier article, gave an excellent explanation of the difference between an add-on (sales tax) rate and an embedded (income tax) rate. Whichever you use you need to be consistent to compare apples to apples.

For example, if you make $100, and the Feds take take 28%, or $28, that leaves $72 net. Thus, calculating the income tax rate as a "sales tax" rate (or add-on), you'd take the $28 in tax - we'll call it the "sales tax," and divide it by the $72, which is the net - which we'll call "price" for this example. $28/$72 equals a "sales tax" (or add-on) of 39% (which, of course, is more than the 30% FairTax).
Anyone who compares a sales tax (add-on) rate with an income tax (embedded) rate is clearly showing a bias against the flat tax. I don't like people who are being that duplicitous. That alone is starting to convince me the flat tax people are on to something. When the flat tax opponents resort to misleading comparisons, you have to assume they know they are losing the argument. This article by Neal Boortz has some excellent points in favor of the flat tax.


1 Comments:

At 2:05 PM, Blogger Ian said...

Prices after FairTax would look similar to prices before FairTax - not 30% higher. This is because FairTax removes the cost of business income and payroll taxes currently embedded in prices. Economist Dale Jorgensen, Harvard University, was commissioned to find out what portion of prices were represented by costs for complying with the federal tax code. The figure he came up with, on average, was 22% at the retail level - essentially, a hidden consumption tax," on top of income tax and FICA.

The FairTax rate on new items would be 29.9% on prices - declining 20% to 30% - or 23% of the tax-inclusive price tag (comparable to how income tax is figured, i.e., parts of a total dollar earned). Eliminating income and payroll taxes on business, as FairTax does, reduces the cost of doing business and attracts competition to the market space - driving out excess profit.

In order to make FairTax a progressive consumption tax (such as that called for, recently, by Warren Buffett), a citizen family is simply sent a monthly consumption [tax] allowance, called a "prebate." This prebate is intended to reimburse taxes on necessities without need for record-keeping or reporting. Moreover, the direct payment bypasses the creation of a tax code specifying exempted products and services around which a lobbyist industry could grow. The amount is variable, based on family size, and is equal to the FairTax rate on poverty-level spending, as defined by the Dept. of Commerce. At present, a family of one would receive ~$200/month, a family of four, ~$500/month. Thus, the effective FairTax rate, paid by citizens, will never equal the full 23%. Of course, U.S. visitors (legal, and illegal) will pay the full FairTax when they purchase anything new, at retail (used goods do not carry the tax). Under FairTax, working families will have their whole paychecks (minus any state or local income tax withholding) plus their monthly family prebate.

Additionally, citizens will no longer have to spend the average 50 hours per year preparing their federal tax returns. They will tend to use credit less, and they'll save more. Saving more will make it easier to purchase a home, at a lower interest rate and monthly payment. (Thus, mortgage deductions will no longer be applicable, because income will no longer be the basis for taxation.)

But is the FairTax fairer? To provide substantive answers, Prof.'s Kotlikoff and Rapson (10/06) have concluded,

"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."

Further, per Jokischa and Kotlikoff (circa 2006? ),

"...once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent."

The current income-based tax system is also more expensive to run, because of the manner in which the tax code is gamed by politicians and lobbyists. Politicians realize great power, and attract constituencies for support, by granting tax favors (i.e., credits, deductions, exemptions) through lobbyists. Fully, fifty-three percent (that's 53%!) of Washington lobbyists are there because of the tax code! The tax code is continually changing, making it more complex and more difficult to understand. And, the salaries and costs of tax lawyers and lobbyists end up in the prices of the products and services we buy. Additionally, the time and money required to keep records, file returns, report for audits, retain accounting and legal help, pay IRS penalties and interest, is time and money lost for other productive, or recreational, activities. Depriving us of the use of withheld wages increases our expenses through zero-interest withholding, inflation, return preparation time, and interest paid on credit cards and loans that would not have been necessary without withholding. Summed up, the cost of tax compliance, nationally, has been estimated to range anywhere from $265 billion to twice that amount, depending on the extent to which tax-avoidance consultation is sought and utilized. These expenses constitute a substantial hidden tax which is incomprehensible to the average working American. And the FairTax gets rid of all of it for most Americans, and most of it for business owners.

It is our belief that government should serve We, the People, with a fair tax system that will not enable politicians to pit poor against rich (creating barriers to achieve wealth, adding tax penalty to the sacrifices made for personal success). Nor do we want politicians to continue using business as a tool to hide taxes from consumers, often villifying business, which discourages entrepreneuship, personal achievement, economic growth. Liberty and happiness depends on restoring the fruits of labor to those who produce them. We believe that the tax function should align with economic growth, not against it, that government should be paid for in the same manner as working Americans - when, and because, something is sold.

As things stand at present, Americans labor under nothing less than tax slavery, having our wages confiscated every working hour, as reflected in our paychecks every two weeks.

Many of us have joined FairTax.org in order to build a national movement to free ourselves, our family pocketbooks, and our businesses from confiscation of income, and punishment of productivity. And this we say to our federal representatives, "Either scrap the code and enact the FairTax, or we intend on replacing you with someone who will."

(Permission is granted to reproduce in whole or part. - Ian)

 

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