From inbox:
We're surprised Sean could even read the ballot well enough to vote for Obama
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.
Jim,
ReplyDeleteSimply stated, you distor most every point to try to support your view.
1) "Aside from the incredible complexity and intrusiveness of tracking every American's monthly income"
Income is not tracked under the FairTax. The prebate is based on on the SIZE of your family. You must be a legal resident with a valid SS # to get it and it is voluntary.
2) "Since sales taxes are regressive--taking more in percentage terms from the incomes of the poor and middle class than the rich"
Compared to what, the current system? Bill Gates pays almost Zero taxes today. Why? His EARNED income is almost nothing. Most all of his income is from investments which are taxed at a maximun 15% only when sold. In fact, he could literally earn nothing on his net assets ($58 billion), spend $200 million a year in principal and still have $57 billion left after 50 years. Any taxes he would pay are offset by his deductions for contributions to HIS OWN foundation.
Ross Perot's investments are mostly muni bonds. He pays zero taxes on the earnings.
Teresa Heinz Kerry's tax return in 2003 showed an average tax rate of 5%.
Even Warren Buffett has stated he pays taxes at a lower rate than his secretary.
The point is, the current system is NOT as progressive as the FairTax.
The poor will pay no net taxes under the FairTax...including payroll taxes. All families will be completely untaxed up to the poverty level. Income is not taxed to accomplish that. It is based on the size of the family and the poverty rate determined by DHHS. The tax is progressive above that rate because of the impact of the prebate. For example, a family or four spending $54,000 (twice the poverty level) on TAXABLE consumption will have an average effective tax rate of 11.5%. YES, I stated that inclusively to COMPARE ACCURATELY WITH THE CURRENT SYSTEM.
3) "Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services."
This fact was included in generating the rate. The FairTax maintains the Government's real purchasing power with a 23.82% inclusive tax rate. Go to: http://tinyurl.com/2lbzwv to see the math and explanations.
You can can call it 30% if you want. It is the same dollars. Keep in mind too, the government TAXES ITSELF today. It pays payroll taxes to itself on its employees wages, raising the amount of taxes it must collect (to cover what it just spent on taxes). The income tax applied to its workers wages is also a tax paid to itself since it raises the wages it must pay to remain competitive. When it contracts with other companies, the payment by government must be higher to cover the taxes those companies must pay. These might be indirect, but it has the same effect. Wouldn't it be better for government employees wages to simply be lower yet untaxed. Wouldn't it be better for the Government to simply give social security benefits to workers without paying into the system? Wouldn't it be better for the value of all contracts between government and other enterprises to simply be tax free? All of these raise the cost of government while increasing its revenue. Bascially, movement of money from one pocket to another. Why do it? Because without it, private business could not compete with government for contracts or employees. That is the same reason it is done under the FairTax.
4) "State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles."
Here you are shifting from federal taxes to state taxes. The current federal tax system DOES tax services because it taxes the company that provices those services AND it taxes the income Americans use to purchase them without allowing a deduction in most cases. Whether I tax your income before you buy a good or services, or I tax your spending as you purchase it, the effect is the same. I only moved the point of taxation from one that is not visible and you have little control over to one that is visible and you control by your choices.
State sales taxes are a different animal. States will be free to continue not taxing services. That has nothing to do with the FairTax. It is not difficult to tax services at all. The value of the intanigle is basically the cost of purchasing it at retail.
5) "Consumers would also find themselves taxed on newly constructed homes."
Again, ALL HOME SALES ARE TAXED TODAY!!! You make your payment with aftertax, non-deductible dollars. Taxing your income used to make that purchase is no different than taxing those same dollars AS you make the purchase. Only the point of taxation has changed. The current system taxes principal payments on ALL homes, whether new or used. The FairTax will only tax them once, when new.
Only interest is deductible today and even then, only for those who itemize. This is almost NEVER the poor and usally not even the middle class. EVen for those who itemize, they only get a partial deduction, because they still pay payroll taxes on that income and they must give up a $10,700 standard deduction to itemize.
Under the FairTax, interest is simply TAX_FREE for 100% of Americans. You don't give up anything to get that treatment and it isn't subject to payroll taxes either. Another reason the poor and middle class come out ahead.
You see, the FairTax is acutally a WEALTH tax. It rewards hard work and savings, but taxes wealth as it is spent. ALL wealth is spent evnetually and until it is spent it is available to all Americans to back loans and provide capital to expand the economy.
6) "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"
Rubbish! The prebate replaces the current system's "tax expenditures". (Google it if you don't have a clue what that is.) The tax expenitures it replaces cost the government $975 billion a year. The cost of the prebate was included in the calculation of the rate. Again, see the study I linked above.
The $600 billion figure you use comes from a study that raised the rate of the FairTax to provide other exemptions (changed the FairTax base). Guess what? Once you do that, it is no longer the FairTax. The prebate cost of the FairTax as written is about $450 billion. That is less than half of the cost of the "tax expenditures" it replaces.
Jim -- Thanks for the honest assessment of the flaws of the FairTax.
ReplyDeleteThe anonymous poster makes only one valid point -- which is that incomes will not need to be tracked to send out the prebate, but virtually everything else you said is accurate, which is why the FairTax people spend so much time trying to hide and obfuscate the truth.
If Warren Buffet pays a low tax rate today, just imagine how little he's be paying under the FairTax. Let's pretend that his income is $1 billion per year and he pays currently taxes at the capital gains rate of 15%. That means he pays $150 million per year in taxes. However, he lives relatively frugally, probably spending less than $1 million per year on what would be taxable under the FairTax. So, at a 23% tax-inclusive rate, his taxes would drop to $230,000 per year. Same thing with Bill Gates. Now -- just who do the FairTax supporters think is going to pick up the tab for the difference?