Good article on why "Fair" Tax sucks

[Lyion]

http://www.opinionjournal.com/extra/?id ... =frontpage

Fair Tax, Flawed Tax

Does adding 30% to the price of every house sold sound like a good idea to you?

BY BRUCE BARTLETT
Sunday, August 26, 2007 12:01 a.m.

Former Arkansas Gov. Mike Huckabee's unexpectedly strong second-place showing in the recent Iowa Republican straw poll is widely attributed to his support for the FairTax.

For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS.

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other (This is called the tax-exclusive rate.)

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

This legerdemain is done solely to make revenues under the FairTax seem larger than they really are, so that its supporters can claim that it is revenue-neutral. But for the government to afford to purchase the same goods and services, it would have to raise spending by the amount of the tax it pays to itself. The FairTax rate, however, is not high enough to finance the higher spending it imposes. Therefore the proposal only works if federal purchases are cut by 30%, close to $300 billion--the increased cost imposed by the FairTax.

Similarly, state and local governments would have to pay the FairTax on most of their purchases. This means that it is partly financed by higher state and local taxes. It's also worth remembering that state sales taxes now average 6%, which means that the total tax rate will be 36% on retail sales.

State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles. But the FairTax would apply to 100% of services, including medical care, thus increasing their cost by 30%. No state comes close to taxing services so broadly.

Consumers would also find themselves taxed on newly constructed homes. Imagine paying 30% to the federal government on top of the purchase price of your next house.

Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich--some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income.

Aside from the incredible complexity and intrusiveness of tracking every American's monthly income--and creating a de facto national welfare program--the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be five percentage points higher than advertised.

Rejecting all the tricks of FairTax supporters and calculating the tax rate honestly--by including the higher spending that it mandates and by being realistic about what could actually be taxed--professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.

A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).

I've emphasized problems with the FairTax rate because public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%. But there are also massive technical and administrative problems with collecting all federal taxes at the checkout counter and relying entirely on state governments to collect the federal government's revenue.

Among the problems: What possible incentive would the states have to be vigorous in their federal tax collections? What is to stop them from slacking off and giving their citizens a tax cut at federal expense? What about states with no sales taxes? What's to stop people from bypassing retail outlets and buying their goods from producers or at wholesale, tax-free?

Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal.

Yet all but six states now have state income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

[Tikker]

what do you guys pay for income tax now?

is it more/less/about the same as income tax?

for people who buy a ton of shit it'll cost more, but that's kinda the way the tax system should work imo

[Lyion]

Right now we pay income tax based on yearly salary, after dependents.

This is the current rate:

http://www.irs.gov/formspubs/article/0, ... 56,00.html

Poor people pay nothing. Most middle class pay 25 to 28%. Upper Middle Class and the wealthy pay 35%+

Right now, we can write off interest for home ownership, medical costs above 10% base income, and a few other things.

The goal of flat tax is to replace that with a sales tax on anything and everything, which is what this article addresses.

This will end up costing the Middle Class a lot more than they currently pay, which is most of the US tax base.

The only thing we should be changing in our tax law is the idiotic alternative minimum tax which hits most families in the middle class.

[Martrae]

The FairTax Rate: a 23% tomato or a 30% tomato?

05/31/2007

As the FairTax gains more national attention, questions have again arisen about whether the FairTax rate is 23 percent or 30 percent. In the toxic environment that often accompanies public policy debates, FairTax.org has even been accused by some of misleading the public, even though full descriptions of "tax-inclusive" and "tax-exclusive" calculations abound on our Web site. We hope the following explanation puts all such questions to rest -- at last.

Let’s use an example to illustrate the difference between tax-inclusive and tax-exclusive tax rates.

Assume there is a worker named Joe who earns $125 and spends all of his earnings. Let’s further assume that the government requires him to pay $25 in taxes.

If the government put a tax on Joe’s income, he would earn $125 before tax and would have $100 after tax to spend at the General Store. Thus, Joe has to earn $125 to have $100 to spend. Joe would also have to file an income tax return.

If the government put a tax on what Joe spends, he would earn $125 and would have $125 to spend at the store. Of the $125 paid by Joe to the storekeeper, $100 would be for the goods he bought at the store and $25 would be taxes that the storekeeper would send to the government. Joe would not have to file a tax return, as the storekeeper sends the tax in to the government.

Either way, Joe pays $25 in taxes and the government gets $25 in taxes. With a tax on income, Joe pays the $25 directly to the government, and with the tax on spending (sales tax), he pays the $25 in taxes indirectly when he buys something from the General Store. The General Store sends the tax that Joe paid to the government.



We may report the tax rate as $25/$125 = 20 percent, which is the tax-inclusive rate (meaning that the tax is included in the base). Alternately, we may think of the tax rate as $25/$100 = 25 percent, which is the tax-exclusive rate (meaning the tax is excluded from the base). The 23 percent FairTax rate set out in HR 25/S 1025 is a tax-inclusive rate, as is the current personal income tax, whereas most state-level sales taxes are quoted on a tax-exclusive basis. For ease of comparison, FairTax.org gives the tax rate both ways. Both rates are relevant, since the FairTax is replacing an income tax system, and 23 percent correctly represents the tax burden compared to the current system.

[Lyion]

The problem is it is a shoddy and equally imbalanced replacement.

First, tax collection would fall to the states. This would be a disaster.

Second, you'd tap a 30% tax on new housing. This would destroy that market.

Third, it'd create an even bigger black market for goods and lessen the desire for local communities to report things, since they wouldn't be needed for income anymore.

Finally, this system is grossly weighted against people who are working, and in favor of the wealthy. Those who already own their real estate, houses, cars, and other things and make huge amounts of cash can bank that cash now. Those who rent and need more items, but make less are S.O.L.

That's really just the tip of the iceberg.

It is a bad income tax replacement being championed by the wealthy with silly reasonings that should make the average middle class American shudder, but due to the rhetoric and half truths it is gaining momentum. Hopefully, it'll die in the near future.

[Arlos]

I've said before, and I'll say again: I'm for a flat tax, but not for a national sales tax. I prefer a flat tax on all income, regardless of source, with the sole gradations going to the poor.

Right now, for example, someone who makes 10 mil a year from dividend income pays no taxes whatsoever, just for being rich enough to have so much stock.

-Arlos

[Phlegm]

Right now, for example, someone who makes 10 mil a year from dividend income pays no taxes whatsoever, just for being rich enough to have so much stock.

-Arlos

Yeah but that person pays over 1.5 million dollars in dividend tax.

[Tikker]

no, they probably have enough paper "losses" that they end up not paying anything in tax

I still don't understand Lyion's assertion that replacing a ~30% tax with a different ~30% tax ends up being any different?

sure individual items cost more, but you're take home pay is that much higher

[Arlos]

No, actually, Phlegm. That was one of Bush's tax cuts: the complete removal of taxes on dividend income.

-Arlos

[Phlegm]

No, actually, Phlegm. That was one of Bush's tax cuts: the complete removal of taxes on dividend income.

-Arlos

Nope, Bush eliminate the inheritance tax not dividend tax. Dividend tax was lower to 15% if you own the asset for more than 1 year.

[Phlegm]

no, they probably have enough paper "losses" that they end up not paying anything in tax

You pay dividend tax regardless. Paper "losses" apply to capital gain, a totally different type of income.

[Arlos]

I remember reading that he got rid of the dividend tax as well, I would swear I saw that. I'll have to go look it up when I have time.

-Arlos

[Yamori]

Third, it'd create an even bigger black market for goods and lessen the desire for local communities to report things, since they wouldn't be needed for income anymore.

It always bugs me when people say something along these lines.

Right now under the income tax system, illegal immigrants, those working in the criminal market, people dodging taxes through various means, people working under the table, ect ect all don't pay any taxes.

To say that people skimping on federal sales taxes would be a significant problem is ignoring all of the aforementioned people who WOULD finally be forced to pay into the system, since all of these people buy material goods with their money.

-

Any errors or problems that could arise from sales tax PALE vastly to the invasiveness and unreliability of the income tax. And most of those errors could be addressed through specific exemptions on the tax - like no taxes on certain high end government expenditures (such as the million dollar tank example) and no taxes on basic food/clothing/necessities items under a certain dollar amount.

[Menlaan]

I remember reading that he got rid of the dividend tax as well, I would swear I saw that. I'll have to go look it up when I have time.

-Arlos

Phlegm is right. I can attest to this personally.

[Eziekial]

I'm always amazed at the vitriol thrown at any attempt to reform long standing policy. You would think two parties that are so at odds with one another would find it easy to garner support for a radical change in existing policy especially after "failed" ones like our foreign, health insurance, tax, or education. But sure enough, post any type of reform proposal on these "sacred cows" and people start coming out of the woodwork to lambaste you. It's no wonder we as a nation are now doomed to fail.

[Diekan]

Does adding 30% to the price of every house sold sound like a good idea to you?

Actually, it does. When you consider that we're damn near paying close to 50% of our income in taxes and deductions now.

The Fair Tax has its share of political enemies, of course. Not because, mind you, that it’s a bad idea, or that it’s unlikely to work, but because it takes away power from the government.

We are a country of consumers and spenders – there’s no danger of the government not having enough “income” to run or carry out its various agendas. People spend, and spend a lot. I would much rather get a much larger portion of the money I earned and pay my share of taxes on the things I buy, than to allow the government to just take what they want. Then fuck me in the ass come tax season with demanding even more of MY money.

You know what our corrupt and out of control government is doing to people now? Let me fill you in on something that’s going on that you may not know about. With the housing market crashing down a lot of banks are facing losing a lot of money. Money being lost on loans who are unable to make the mortgage payments. So, many banks are repoing the houses and outright forgiving the loans for many people. This means the bank gets the house, and the people who had the loan are in the free in clear. But, oh guess what Uncle Sam is doing? Even though they don’t owe another dime on the mortgage, the IRS is sending them +$30,000 tax bills because they see the forgiven loan as a profit. Yep, profit.

We do need a new system, badly. Hell we practically need a complete overhaul of our entire federal system.

[Lyion]

We need a Flat Tax. Not a Fair Tax.

[Ginzburgh]

I guess keeping it to one paragraph is out of the question.