FairTax: Is it really that fair?
I will begin by admitting ignorance on this issue. There is a movement afoot to replace the federal taxation system with a national sales tax. It has been floated around for years, but it apparently has been introduced by a bill in Congress. While I am not coming out against it just yet, I am also very hesitant to endorse it.
I will try to include links as I find them. I think this is worthy of investigation, and we should be fully aware of the ramifications before accepting such a drastic overhaul.
Here are a few I have found so far:
Off the Fence (Plain Language Explanation)
FairTax.org (frequently asked questions)
I have a few concerns:
1. It may not be as fair as it sounds. As members of the Mormon church, we pay a tithe of 10%. Having had good years and poor years, I can confidently attest to the fact that 10% becomes more of a sacrifice the lower one's income falls. To give you an example, someone making $300 per week (approximately $15,000 annually) will pay $30 in tithing. Doesn't sound like much, until you look at everything else that has to come out of the leftovers. Just to pay rent will likely consume almost two weeks' income. And that is for basic comforts. Contrast that with the person making $1500 per week ($approx $76,000 annually). He will pay $150 per week, but the $1350 remaining will go a lot further. He can likely pay his mortgage in one week, and his house will be one of choice, rather than necessity. He will then have more discretionary income left over the rest of the month.
This is not an attempt at class warfare. I have no problem with successful people. It usually denotes people who have made better decisions, or taken advantage of opportunities. But, in the current tax situation, the first fellow, if he has a family, will likely have no federal taxes taken out of his check. Thus, he is living mostly free of federal taxation. Under the FairTax plan, he will receive a prebate, based on, presumably, what he would be expected to purchase. But does this take into account that he was already living on moneys not already taxed? On that income, every dollar has more value to the wage-earner.
2. The presumption seems to be that companies, relieved of corporate taxes, will magically reflect this relief in their pricing structures. I can't buy into this. I am not saying that business execs are evil, any more than politicians. But the maxim would seem to hold that once assessed, taxes seldom are revoked. Thus, while those who are taxed in their paychecks might see more money on the front end, those who had enjoyed the lower withholding (and have adapted their budget to survive at that level) will now be faced with disproportionately higher retail prices (at least until the markets supposedly adjust, as it is presumed the free market will cause to happen).
3. How will this affect charity? Do corporations really donate to charities out of the goodness of their hearts?
4. Will this new plan help us to live more free from government entanglement? Or will it exacerbate the situation?
Just a few concerns... What do you think?
12 comments:
I jumped on the FairTax bandwagon enthusiastically when I first heard of it but in the past few years I've read stuff that has made me more cautious but it probably won't happen anyway.
1. You wrote: “…(I)n the current tax situation, the first fellow, if he has a family, will likely have no federal taxes taken out of his check.”
Remember that under the current system of taxation the first portion taken out of every check is payroll taxes of 7.65%, so even if nothing is withheld for Federal taxes, the payroll tax starts on the first dollar earned. Their gross pay is about $1250, so take home would be around $1154 left to spend.
Your sample family (I’m assuming wife and one kid) making and spending $15,000 are $8900 below the poverty level of $23,900 for that size family. They, like every other American family of three will receive a monthly prebate check of $458, which is the tax rate of 23% times the poverty rate of $23,900 divided into12 months. They now have $1708 to spend ($1250 income plus prebate) each month. As they spend that amount, about $393 of it will be taxes and $1315 of it will be “stuff”. This family will be better off by about $161/month. If they do any shopping at Goodwill or yard sales, buy a used car, take a college class at night, or make a mortgage payment on a house someone else previously owned, they will pay even less in taxes because none of those things are taxable under the FairTax.
Family B gets tougher to figure under the current system; I have to go to turbo tax. If gross is 75K, he will pay 5814 in payroll taxes and 6932 in federal taxes if he files a 1040 EZ with no other deductions (please don’t make me have to figure it with itemizing). His take home is 62,254 annually or 5188 per month with which to buy stuff under the current system. Under the FairTax He takes home 6250 per month. He gets the same prebate which puts his total spendable dollars at $6708. If he spends every dime of it on new goods and services, he will pay $1543 in taxes and get 5165 in “stuff”. Family B is better off by $23 per month. Likewise if he buys used stuff, saves, or pays tuition, he will be able to decrease his taxes even further.
Your point that Family B has more discretionary income is absolutely correct, but you can see by the numbers that the FairTax increases the purchasing power of both families, and does so for Family A to a greater degree.
2. As noted above, even if prices don’t drop, both of the above families have slightly more purchasing power. There is also what we FairTaxers call “embedded taxes”. Every item a person buys has a significant amount built into its costs that are a direct result of the current taxation system. Economists estimate that amount to be between 11% and 30% of the cost of the item and the assumption the study starts with. So under the current system, somewhere between 18% and 37% of everything he has to spend is either direct or indirect taxes. You say you can’t buy into that. First off, what stops a bicycle salesman today from arbitrarily raising the price of his bikes? Competition. If there is no competition in a town, a bike shop owner could get away with doing that for a while, but that would create an opportunity for someone to come in and undercut him. The transition allows for retailers to keep exactly the same price on the day the FairTax goes into effect by not requiring them to add the tax to existing inventory. There will be some extra paperwork to take advantage of this, but they will have a couple years notice that it is coming. Therefore, all prices will not be going up all of a sudden. Shops that carry a heavy inventory will take longer to raise those prices and will be at a competitive advantage briefly to the one who has to charge the tax immediately. The result will likely be that the more efficient shop will have to do his recalculating very quickly to see how much he is saving on producing or marketing the bikes and see how low he can sell them to compete with the shop who had more inventory. This should hasten the speed with which the embedded costs drop out of products. This is explained better somewhere on the FairTax site, but I couldn’t find it and it is almost 2:00 am as I type this.
3. Charitable giving is discussed thoroughly here: http://www.fairtax.org/site/PageServer?pagename=about_research_charity.
4. And I don’t understand your fourth question? It seems so obvious to me that of course it will, that I may be missing something of what you’re asking.
DavidN@TampaBayFairTax.org
Wow! Thanks for the analysis. Sorry to keep you up so late. While this gives me something to chew on, I'm still with the Redneck, however, in my skepticism.
I would like to hear a few of his concerns.
By my last question, it just seems that there is some strangeness in a government that sends us a check in the mail every month. Almost a welfare state type of thing.
The one thing that I do like about the concept of this tax is its transparency. It has been said somewhere (don't ask me to say where, I'm sure David knows) that revolutions start when the tax burden rises above some 26% (or thereabouts). By taking it out a little at a time in the paycheck, and dividing it up by purpose and taxing body, and then adding more on the purchase, it made it very translucent, and allowed a little here and a little there.
There's still some flat tax plans out there as well. I haven't investigated those yet.
It would be nice to see some drastic changes to the tax structure. It is just something we need to approach with caution, and make sure we can still accomplish those functions which we have come to expect of our government. What those expectations are the subject for discussion elsewhere.
There is too much that is not known. My main fear would be that it would be in addition to income tax rather than replacing it. The government has never really reduced its gluttony for our dollars.
http://www.fairtax.org/site/PageServer?pagename=about_beyond
Update:
There are allegedly 63 congressmen signed on to this. If I remember correctly, Fred Thompson and Huckabee both endorse it, but Romney doesn't.
I'd like to look further into why Romney doesn't endorse it. Of all the candidates, he is the one whose opinion I would respect the most when it concerns situations financial.
Romney claims to not support it because it will do damage to the home construction industry, but he is being disingenuous. He knows better, but knows that sounds plausible. The real reason he is against it is because his family's income is almost entirely taxed at the much lower capital gains rate than that of working Americans and he is comfortable paying people who know how to game the current system to minimize his tax obligation legally.
Besides that, he has a over $350 million dollars he expects to spend some day.
Think about it.
David
Actually, David, you're a bit disingenuous, yourself. You're earlier arguments confined themselves mostly to factual conjectures. However, Romney has not come out against the FairTax, only has declined to support it at this point. His reasons were simply that your plan has drawn a lot of criticism from retailers and those in the home sales industry, so it would need to be studied more.
(http://www.goupstate.com/article/
20070816/NEWS/70816002/1051/NEWS01)
Just because a person is wealthy does not mean that they are disingenuous in their intentions concerning tax reform. I would speculate that many wealthy understand that if this nation is to survive financially, it will be in large part on their own backs.
Now, if Romney has stated anywhere that he his family's survival depends upon the lower capital gains tax, then by all means, provide the source. Otherwise, please realize that many ideas, regardless of their merits, fail in the court of public opinion due to overzealous promotion. If it sounds too good to be true...
Thanks for the post - this is something I've thought about a lot. I have a hard time with this concept too, and I think it all comes down to this: We live in a very complicated world, and it doesn't seem as if a very simply tax code will be able to cover everything. I know that isn't a well-though out argument, and I'm not even saying that I'm against the Fair Tax. I'm just saying that it makes me nervous.
And I too am not in love with the idea of the government sending me money in a check every month. I'm not on welfare and I never will be on welfare, and that just screams welfare to me. It's a hard thing to swallow.
I think Mitt is one of the most intelligent politicians we have, especially when it comes to money and business. This is a guy who has walked the walk and talked the talk. I completely trust his judgment when it comes to this kind of thing. I wish he would have the time to study this issue in-depth and then release his thoughts on it, because I would love to see what he comes up with. Anyone who can manage to offer health insurance to every person in a state without raising taxes or putting them on government health care, is a guy who can figure out taxes.
My two cents,
Havs
www.votemittforpresident.com
Naysayers against the FairTax are, ipso facto, defenders of "business as usual." Apparently, they have not learned that politicians simply can't be trusted to act in the interest of the working man and women "at-large," without connection to influencing said untrustworthy politicians.
Prof. Larry Kotlikoff believes that the current tax system IS bringing the country to nothing less than an "economic meltdown" by virtue of the invisibility of actual taxes paid (primary benefit of FairTax - eliminating the "straw man" business income tax - which WE actually pay in higher prices, lost dividends, and/or lost jobs when businesses close due to competitive pressures from foreign companies). If Americans do not understand the true cost of their government, they're unlikely to hold Congress accountable - thus the enabling mechanism to continued profligate spending.
Even with the foregoing notwithstanding, do FairTax naysayers really believe:
• Workers love having their pay confiscated, hourly, through gov't withholding and don't mind getting their money back by involuntary servitude - to the tune of 50 hours/year (on average) - preparing an annual tax return?
• That certifying the number of persons in your family (annually, and, ancillarily, upon change in household) is an abrogation of our freedom - more intrusive and complex than filing a tax return every year subject to threats and intimidation by theIRS.
• It's better to have theIRS fishing through citizens' income transactions (complete with audits, interest, penalties, and threats against individuals, families, businesses as well as confiscation of their homes, property, and bank accounts) rather than - Gawd forbid - issuing a gov't check to an individual (while pretending that Social Security payments disbursement logistics really can't work for "prebates")?
• That an monthly advance tax rebate is the same thing as "being on the dole" ? (Only lobbyists, special interests, and business deserve "handouts" ? - the politician gets a payoff from a lobbyist, the lobbyist gets a payoff from its client, and the citizen gets higher taxes and/or prices that pay for it all.)
• "Hidden taxes" in higher prices are fine because they're not "taxes," per se? (Hey, forget that families are really paying business's costs for complying with a business income tax code - staff, consultants, submittals, etc.)
• It's far better to have a gargantuan tax collection "service" in Washington, than to have 50 decentralized, smaller, leaner state collection agencies collecting taxes from fewer sources?
• That the work by notable economists (paid tens of millions of $'s by Americans for Fair Taxation) doesn't carry weight because it was paid for by private funds instead of some gov't / quasi-gov't enterprise?
• That FairTax's backing by many economists doesn't carry any weight because (the Brookings') Wm Gale's testimony before the President's Commission on Tax Reform is - somehow - above all that?!
(NOTE: The Commission/Gale made up their own "consumption tax" requirements, as if that constituted a legitimate rebuke of the FairTax plan. Dr. Kotlikoff has requested - but never received - Gale's technical "modus operandi" which would definitively explain just how Gale's conclusions can be reconciled with Kotlikoff's well-documented technical work.
The trouble with FAIRTAX is not the Plan, it's lazy people who want to sit around worrying about change instead of proactively threatening the careers of those politicians who grab the "fruit of their labor" from paychecks, putting big-spending government boondoggles BEFORE the well-being of America's working families.
Let's get busy to end the enslavement of the Tax Code and to restore Liberty to America's working families. America's working families are paid because the companies they work for sell goods and services. It's time pay for government the way America's families are paid - when something is sold.
Ian,
I tried to tell David, and I'll tell you now, that overzealousness and attacks on the arguer are not a very healthy way to sell your plan. Just because we are not buying your plan does not mean that we are against it. And when you post a standard looking cut-paste comment, regardless the information, it is in danger of being revoked by the owner of that post. I will leave it this time, because my guess is that it will most likely just get overlooked. And if not, then it will probably be seen for what it is, a partisan-style attempt to persuade by division. As tempting as it is to address your points, I will refuse at this time.
Post a Comment