Rarely does one read something and think that if we as a country follow the plan outlined that life really could change for the better and for everyone.
I am grateful to have been alerted to this book, 'The FairTax Book: Saying Goodbye to the Income Tax and the IRS' by Neal Boortz and Congressman John Linder:
http://www.amazon.com/FairTax-Book-Neal-Boortz/dp/0060875410/ref=sr_1_1?ie=UTF8&qid=1248633491&sr=8-1
The book is simply a must read for every American, supporter of personal freedom, denouncer of inefficient bureaucracy and loather of political manipulation and special interest power. Read this book and you will have a new view on how we as a people are taxed and controlled.
The authors did a good job of keeping the book easy to understand and quick to read, just like the FairTax Bill they support before congress (HR 25 before the House). I literally could not put the book down.
Prior to reading this book my general view on taxation was that I would gladly "pay my share" to support the government that takes up for the underprivileged and supplies the goods and services that private enterprise never would (parks, clean drinking water, etc.). Upon reflection though, and the book provides a great brief history of our withholding tax system, our current system and how every one of us who pays tax is manipulated by that system is abominable.
Simply put I do not believe that our current withholding system is the best revenue collection mechanism for our country. It has the unintended consequence of increasing the price of American goods and making those goods and services less competitive with lower tax nations. The current system breeds inefficiency everywhere. There are trillions held offshore just to avoid tax. There are further billions spent on avoiding paying tax. Yet for those of us who do actually pay into the system, the government can increase the rate whenever they cannot figure out how to efficiently solve for the monetary requirement of our ever-growing government programs. It is not fair and our current system is not "progressive". It progressively taxes the middle class more!
The guys on the high end can hide their money. The withholding system hurts people like me, people who are in the middle class and end up paying the difference in what the government needs and what the high end people can afford to avoid and the low end people do not provide.
This post does not need to be a place to rehash all the mechanisms of the FairTax. Here are a couple of good sites in terms of background and explanation: www.fairtax.org and http://en.wikipedia.org/wiki/FairTax. I would prefer 2outof 4 to be a discussion and question forum to hash out the positives and negatives of the FairTax.
In short though, the FairTax repeals all Federal payroll, income, social security, medicare, dividend, capital gains, interest, and inheritance tax. It replaces these taxes (which are mostly withheld from gross earned income in your paycheck) with a consumption tax of 23% on all goods and services at the retail level. The proponents contend that the FairTax will be "revenue neutral" for the government. However the book suggests that 15 of the last 16 quarters (at the time of writing) would have produced more revenue under the FairTax than under the current system.
There is also a monthly "prebate" paid to each household based on national poverty line standards in order for every household to pay for its basic necessities without paying the 23% tax. So this eliminates the argument that this is a regressive tax.
No tax on labor or capital should lead to businesses relocating factories to America. As a positive externality of this kind of relocation of capital back to our shores, proponents of the FairTax suggest GDP will double in 15 years. That implies the tax base will also grow.
It is difficult to succinctly say what I want to say about the FairTax. From 2outof4's perspective, the point that speaks most loudly is that with the FairTax comes the repeal of the "political class's" ability to control mine and your hard earned income.
The FairTax is fair. It does not try to pick winners and losers among industries. The way government can pick winners and losers is through the current banal tax code by various incentives and breaks. I believe in fair playing field and letting the best enterprise win. Our current tax code panders to people who know how to manipulate the system and the code.
My reading of The FairTax Book is that not only will we become more efficient and productive as a society we will all be able to build wealth faster under the FairTax. We will all keep more of our pay checks and then not be taxed on the growth of any of those dollars put toward investments.
Greater employment, more money, less power in the hands of special interests and politicians. What more can we ask for from our tax code?
I've prattled on enough here, but open it up to you for questions and comments. I also ask that you explore the FairTax further, as I will. I know that one of the fears of such radical change is the possible unintended consequences of the FairTax. Let's hear what some of those might be, and see if we can find a way to deal with them.
Please read this book. I believe that the politician or party that decides to take the FairTax to the next level will be the leaders of a potentially great American Revolution - a real revolution. Regardless, getting out from under the oppression of the current withholding system is a necessity for continued prosperity!
-2outof4
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Reading two marketing comic books written by a radio talk jock and an obscure Georgia Congressman gives you only half of the story. There is a lot of research available from both pro and con Fairtax experts that also needs reading. Try fairtaxblog.com for a good reference source.
ReplyDeleteThe Fairtax isn't fair. I'm retired and living on two SS pensions plus around $6000 in interest income from my "nest egg". I pay zero income tax and, of course, pay no FICA. Why on earth would I trade that status for one where everything I purchase would have a 30% exclusive tax added to the cost of almost everything? And why should I be forced to resume paying for my pensions with my sales tax dollars? Very unfair!
The Fairtax proposes to tax State and Local government consumption which is inappropriate, if not unconstitutional, under our republican form of government. Stand by for higher rates as the base shrinks under Supreme Court guidance.
Sales taxes are regressive and the Fairtax "prebate" simply moves the point of regressivity from zero to the poverty level. It is still regressive for most of us!
Why on earth would US or foreign firms move to the USA? Read section 905 and learn about the 23% tax on income earned in the US by foreign owners.
Read Section 801-806 and learn about the implicit tax on both investment and debt instruments. That VISA/MC monthly bill is going up!
The Fairtax is a bad idea whose time has passed with the 2008 Huckabee disaster. The bill will not budge out of the House W&M Revenue subcommittee while the D's are in control. Count on it!
This is a great response - a little angry, but great nonetheless. Thanks for offering an important view into the debate/research. If you are not a regular reader, you may not know that 2outof4 does not purport to know any more than to make us dangerous on several topics, which you so adroitly point out.
ReplyDeleteThe purpose of the blog is just this, to promote conversation, research, knowledge, and solutions. (Note: I do find it funny that the FairTax book specifically addresses the “obscurity” of Congressman Linder.)
Now, let’s address your main point, the fact that the FairTax would negatively affect you more than unretired folks – the reason being that you have already paid tax on your income and with the FairTax you will pay additional tax in the form of the Federal Sales Tax. If it is accurate that you pay no tax on your SS benefits, many people do, then there is not much to say. The only savings you would see is on the interest income from your nest egg. The main point though is that in terms of out of pocket expenditure the FairTax would likely only increase that payment slightly. If the calculations are accurate, then the enactment of a FairTax will save us all the embedded 22% in price increases of goods from the current tax system. So, I fail to see the logic that you will be severely hurt.
I also opened the blog with my original stance on tax, that I was willing to pay to help the underprivileged and for common goods. If this system could free America of inefficient and unproductive controls by politicians and political interests, wouldn’t you give up a couple of percentage points of your retirement income? I would like to think that I would if I were in your position.
In terms of the remarks on the FairTax being a 30% exclusive tax instead of a 23% inclusive tax. I must say that this portion of the FairTax Book seemed needlessly confusing and an argument in semantics. In the book the authors make the point that a coat would cost $100 and $23 of that price would be the tax. It went into inclusive tax versus exclusive tax, but frankly I think of that as a 30% tax as you do. So, let’s just be open and say the FairTax is probably more like 30% than 23% given the description by Messer’s Boortz and Linder.
(Continued below due to length constraints...)
The unconstitutional argument seems dull to me. We added an amendment to facilitate Withholding, it can be done again if the FairTax is better for America. Furthermore, the regressive argument is also framed with our current withholding system in mind. The tax base would indisputably increase with the enactment of the FairTax. The burden would be lifted in part from the honest, taxpaying middle class and shifted to everyone consuming in America. Rich people will spend more, so they will be taxed more, unlike today when tax havens in the form of LLC, et al can be setup and these people avoid paying income tax altogether. How is this regressive?
ReplyDeleteYou made a great catch with Section 905. Honestly, I think that was disingenuous, to say the least, for the authors not to have mentioned the income tax of 23% on Foreign Corporations based in the US. I think proponents of the FairTax would say that the companies would still relocate to America because they will receive the cost savings from lower costs throughout their supply chain and therefore the ability to produce in America at less cost than today while having the proximity and lower shipping costs to the world’s largest consumer market. However, for me to fully support the FairTax, I would want to see no discrepancy between natural and foreign corporations. Again, great catch!
The legalese of Section 801-806 was excruciating, but yes all goods and services will be taxed at the FairTax rate. Similar to your concern over losing purchasing power, hopefully the fees on these types of services are counter balanced through lower interest rates because the embedded costs of income and payroll taxes no longer exist.
On the whole, assuming the studies on revenue neutrality are accurate, the FairTax still seems like a greater long-term solution than the current Withholding system. To the poster, imagine yourself 20 or 30 years younger. Do you believe that the Withholding system is the most efficient and productive way to tax our citizens? I appreciate speaking from your heart and personal perspective, but is that the same perspective when you think of your kids and grandkids?
-2outof4
Very good response! I always appreciate civil discussions as opposed to attacking the messenger as is frequently done by the Fairtax cult!
ReplyDeleteLet's start with the 22% embedded costs which are frequently used and abused by Fairtaxers. The 22% was derived by Progessor Dale Jorgenson from Harvard back in 1998. The study was paid for by AFFT and his conclusion was that, across 35 industry segments, the income and payroll taxes amounted to an average of 22% of costs/sales. Jorgenson didn't include compliance costs in his study. However, what most Fairtaxers don't know or aren't willing to admit, Jorgenson assumed that employees would take a gross pay cut in the amount of their current income tax and payroll contributions. That isn't going to happen for contractual and fairness reasons which we can go into in more detail if you wish. Bottom line is that Fairtaxers can't claim on the one hand that everyone will get all their pay, and on the other claim that the 23% tax is offset by the 22% embedded cost savings so retail prices remain about the same. There is no free lunch!!!
Much more likely is that businesses will be able to drive 10% out of their costs, and after adding the 30% sales tax, prices will rise by 17% on average. (1.00 x .9 x 1.30 = 1.17) Simple math!
The 10% of sales consists of 4.5% payroll contributions, 3% corporate income taxes, and 2.5% compliance costs, all based on actual tax revenue details from 2007. More details if necessary? So, not only would I give up my current tax free budget, but I'd have to pay 17% higher retail prices at the cash register. Not fair!
Your position on the 23/30% issue is a good one. Why try to reeducate 300 million Americans that sales taxes are inclusive, not exclusive. Fairtaxers should just tell the truth in terms that everyone can understand!
More discussion to follow----
Two more issues to discuss.
ReplyDeleteThe "constitutional argument is actually quite important. Sometimes we tend to forget that we have a republican form of government, two sovereign powers, Federal and State, each operating on the same citizens but with different responsibilities. One of the oldest issues the Supreme Court has had to deal with is the issue of intergovernmental tax immunity. As Justice Marshall once wrote-"the power to tax is the power to destroy" I believe that the Court will throw out Federal taxation of State and Local government consumption. The sales tax rate will have to rise from 30% to 37% due to the reduced base. And, as a footnote, if you really expect to repeal the 16th Amendment, (which has to be accomplished within seven years of implementing the Fairtax or the income tax returns),then kicking sand in the face of the 50 State Governors seems counter productive. You should know that all 50 Governors are currently opposed to any type of national sales tax. Google the National Governors Association and locate their 2009 tax policy paper.
A word about Section 801-806. It isn't a tax on goods and services exactly, but a tax on investment and debt instruments. For instance, assume a maxed out MC/VISA debt of $10,000 which is charging 18% interest. At the current Treasury rate of 4%, the calculation would be the debt amount times the rate differential times the 23% inclusive tax rate divided by 12 to get a monthly charge. ($10,000 x 14% x .23% /12= $26.80) That is a pretty hefty service charge which is in addition to the normal explicit service charges, if any. The same process works for investments except the calculation is based on the amount the Treasury rate exceeds the investment interest rate being paid as compared to the amount the debt interest rate exceeds the Treasury rate. Confusing? Takes some getting used to, and I think the whole implicit tax thing should be eliminated. And the banks and credit card companies probably concur with my views! Too large an administrative burden?
In closing, I would support a national sales tax to replace the income tax, but I don't support the Fairtax scheme. Too many moving parts for me. How about 12% national sales tax with no exemptions, no prebate but retain the EITC at one tenth the Fairtax cost, no inventory tax credits, retain the payroll and gift/estate taxes, no taxation of governments, and phased in over five years or so? I call it Fairtax-Lite, and if you really want to get rid of the IRS, my simpler plan may have a better chance of Congressional approval?
Cheers!
All the objections to Fairtax mentioned above have flaws in the information that is percieved. Fairtax is the MOST researched bill to ever come before congress. It is a great plan originated by three business men who spent their own money trying to get it implemented and it has been endorsed by Many many economists. Most of the objections (including the fact that business is all treated equally) that people find are discussed here;
ReplyDeletehttp://www.fairtax.org/site/PageServer?pagename=about_main
First my question is, Why are the ones objecting to Fairtax afraid to use any names in the posts? Can't tell if one person objecting or several.
ReplyDeleteFor the gentle man living on SS and interest who says he pays no income tax... He is most definitely confused by the same system that the US Secretary of the treasury is confused by. In HR 25, the law proposed in congress, I can find no section 905 or 80 what ever. But I can tell you that with the Fairtax there is NO.... tax on interest! His interest is subject to tax now or he doesn't make the poverty level with the combined income he has now or he is illegally not filing his taxes. Also, every item made in the US is subject to income and corporate taxes that the Fairtax eliminates, which reduces the cost of the items made. Every worker along the route to the cash register pays income tax and that adds to the cost of any item made in the US now. We currently have a tax that punishes production, plain and simple. Fairtax eliminates all Federal Payroll tax, corporate tax and FICA. NO Federal payroll tax. Tax is instead on consumption(not interest) The 22% 30% argument gets Very old. Currently the IRS claims that the average taxpayer pays 25% (inclusive). But figure it Exclusive and it turns into more than 31% and that doesn't include figuring the above mentioned hidden taxes or the prebate that eliminates tax up to the poverty level. Fairtax is designed to maitain the same tax rate as now. price of goods go down and sales tax is added. Imagine if WE the people actually get Fairtax passed. We the people will feel empowered to then get the tax rate decreased. Lets make improvements one step at a time. There is NO argument that you can make that "Truthfully" says the Fairtax is not an improvement, over all, to what we have now. Read the site I posted first and you will find, the more you learn about Fairtax the more you will like it. Although their second book address most of the critics, Neil Boortz and John Linder wrote guides, not the Fairtax. Look up the Fairtax in congress. H.R. 25 / 2009 for details or the site I mention above in layman's terms. As for Cheers, That s what you should do when it passes.
(This is in response to Anonymous...)
ReplyDeleteLet’s just say that I wish I was retired right now. Unfortunately, I have to be productive at work and cannot guarantee this continued level of engagement, despite finding it interesting.
We have tackled a couple of the less discussed portions of the FairTax. So to recount, there should not be a separate income tax levied on foreign companies in the States and as presented the tax is more like a 30% tax than a 23% tax. In addition, it seems like the inventory point is indeed unfair to our formerly hardworking retirees out there. The Bill says that any corporate inventory on the books at 12/31 prior to enactment of the FairTax on 1/1 can be used to offset that amount of sales by the company during the first year of the FairTax. The logic is that since the embedded taxes are already in the price of that inventory, that the consumer should not have to pay the sales tax too on it as well. Retirees face the same dilemma too and I thought the FairTax was not picking favorites. Eliminating the inventory rule seems like it would be in keeping with the spirit of the FairTax.
2outof4 will make an attempt to go through the Jorgensen paper as well as a Boston University prof’s paper, as I have seen both commonly quoted. In my conceptualization of the FairTax workers would not take lower wages. What is the reasoning behind that? I would also like to understand how you derived the 10% figure that businesses would be able take out through savings. But it is actually quite interesting how your math came out because guess what my Federal, Social Security and Medicare taxes came to on my last paystub as a percentage of gross earned income? You guessed it, 18.0%. Your math seems pretty fair to me!
But you have hit on the greater social question here and the one that in my opinion needs targeting more so than the mechanics of how we peel back Withholding. Every person wants all that he or she can get from the government, and because people in your demo have great voting clout, the politicians keep promising the world without the funding. That kind of “budgeting” is a recipe for financial disaster, whether on a personal level or a governmental level.
I do not mean to be harsh or offensive with the following comments as I realize that 17% is a serious chunk of change to someone on a set budget, but don’t you think that the tax savings as well as the ability to grow capital in an untaxed manner for someone my age (30+ years until retirement) is a far more productive use of capital than what you will do with your capital during retirement? Take the amount over time and velocity of my future capital versus your retirement capital, and on net I should be able to grow my capital and spend it on consumerables that add to the tax base, far more than you, who have stopped the growth phase and should be focused on maintenance.
(Continued below...)
At some point real social change has to have a beginning and at that beginning there is going to be some “breakage”. It is undeniable and I get why you are so fired up about this – your demo is the breakage. But also bear in mind that my generation is (or should be) effectively planning to live without Social Security – the basis of most of your retirement! So there is give and take here, there is no doubt about it. I have contributed for X number of years to your retirement and will likely not see the benefit of any of my contribution. But like I would ask you to accept the 17%, I would accept no future SS if the FairTax set America on a course to greater productivity and growth.
ReplyDeleteLet’s not leave compliance costs out of the equation either because at an estimated $400-$500 billion annually, the IRS’s withholding system is just a monster. It is difficult to be convinced that a tax system needs to be so complex other than to maintain some interests’ power. Do you think otherwise? I completely agree with Justice Marshall. 2outof4 is firmly against this inside of the box thinking and bending to special interests to the longer-term detriment of the country. The FairTax in its current form may not be the precise answer, but steadily creeping marginal tax rates are not the long-term term answer either.
I appreciate that math on Section 801-806. Are you suggesting that in its current form the FairTax does actually tax investment interest? If accurate, I believe that goes against the spirit of what The FairTax Book authors put forth. I understand that tax on interest charged to companies because that is their “service”. How else would you tax the service they provide? However, interest income earned should not be touched.
FairTax-Lite seems like you are willing to get there despite that painful hit to your personal cash flow. However, I think the tax code could still be a lot clearer and more straightforward. The things we’ve mentioned should be addressed and clarified. For example, I like the EITC as opposed to the pre-bate for all. The constitutional side of things is an interesting question mark. I will continue to look at that as well.
Cheers!
-2outof4
One more item. The Governors were saying they do not want a sales tax added to what we have now. FAirtax is not a sales tax, it is not a VAT it does have a consumption tax as a component, but it is much more. It is a complete system that will bring the business' that left when NAFTA was enacted back home, among many other benefits. It is truly the Stimulus package that Will benefit the US. We can not Spend our way to prosperity. Only an ignorant person would think that borrowing and spending more money than they make in a year will bring prosperity. It is called Keynesian economics and it has NEVER worked in any place it has been tried. Oh, the reason it doesn't work is the money wasn't spent at the right time, or not ENOUGH money was spent. I just wish it wasn't mine and my grand-kids money being spent.
ReplyDeletexraydid,
ReplyDeleteMy anonymous tag was the only profile that google would let me post with. Don't know why, but usually I am Dutchman3 or vanlinda@comcast.net.
I'm an MIT alum, 20 year Air Force officer and pilot, 20 years Director of Government Affairs for a major Aerospace firm, and have spent the last 5 years deeply involved with the Fairtax. I would venture to guess that I have forgotten more about the Fairtax than most people will ever know!
As an AARP volunteer tax preparer, let me assure you that the SS plus interest on investments in my example is not taxed because it amounts to less than $32,000.
You really need to read HR25, Section 801-806 and learn about the implicit tax on investment and debt instruments. It just isn't true that interest on an investment isn't taxed. More detail on request if you can't figure it out.
I certainly agree with you that the dollar costs of federal taxes cascade upward through the various levels of production. But you need to understand that the percentage cost savings do not cascade or accumulate. The simple reason is that cost savings at each level can only apply to the value added at that level. A company at the middle of the production chain can make no difference in the costs from previous levels. It doesn't make any difference if there is one level or ten, the average percentage cost savings remains the same. And that average cost savings is 10%. Here is why.
Using 2007 tax revenue data, when measured against retail sales of $9.5 trillion, business income taxes were $291 billion or 3% of sales, business share of FICA was $435 billion or 4.5% of sales, and business compliance costs in 2007 were $265 billion or 2.5%. Add them up and federal tax costs for those three items were 10% of sales. Remove 10% from costs and add the 30% sales tax and prices will have to rise by 17%.
Finally, it is quite idiotic to claim that the Fairtax isn't a sales tax. Where on earth did you come up with that one?
2outof4,
ReplyDeleteAFFT experts, most economists, and many others just don't believe that business owners would try to reduce gross pay in the amount of current withholding. Think of the contractual problems that would create. The unions would go crazy, and only legalman would get rich. What would happen to the minimum wage? would it be reduced by the amount of FICA withholding? There is no way that money belongs to the business owner and it won't be used to reduce costs, imho. As I explained to xray, that means that on average across all businesses, costs can be reduced a max of 10% and prices will rise 17%. But fear not, by taking home all your pay and getting a government welfare check each month known as the prebate, you should be able to pay the higher prices without lowering your standard of living. Not as true for lower income retirees because they won't get that payraisedue to not paying FICA and income taxes as I explained.
I certainly don't share your pessimistic views on Social Security. You can count on getting your SS pension and health care when eligible. You may have to retire at a later age, or pay higher rates on more of your income, but there is no way the Congress is going to renig on that program. Rather than think of it as a federal tax, you might understand that FICA stands for "Federal Insurance Contribution Act". It is more like an insurance policy than most folks realize. Pay your premiums each month and get your benefits. It will work for you!
Keep on asking questions time permitting. There is much to learn about the Fairtax. Good luck!
It is fairly apparent that Dutchman3 has quite a depth of knowledge regarding the FairTax, and that the FairTax is indeed a sales tax.
ReplyDeleteThe description on the limitation on production chain cost savings passes the intuition test, but again, one needs to go through the available studies. As I demonstrated with DM3’s figures, the FairTax still seems fair to me, and has the greater benefit of doing away with Withholding.
And just as an aside, it was glaringly obvious, even prior to the CV, that DM3 was not sitting around in his retirement years. May I suggest making up the potential 17% COLA by substituting in a Civics classroom?
-2outof4
2outof4,
ReplyDeleteI'm surprised that you intuitively understand that percentage cost savings do not cascade. Most Fairtaxers I have confronted seem to believe otherwise. Perhaps government schools aren't all bad?
I know you are busy, but if you have time, here is a short "true/false" quiz that will measure just how much you really know about the Fairtax and HR25. If nothing else, my quiz tends to stimulate good discussions.
The following are some Fairtax statements I have heard or read over the last five years. You are probably familiar with most of them already. Please read each of them and consider whether they are true or false.
(1) HR25 abolishes the IRS and the IRC.
(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.
(3) A sales tax inclusive rate of 23% would be revenue neutral.
(4) The after tax price of retail purchases will be about the same.
(5) The “prebate” is a tax refund paid in advance.
(6) Your dollars will purchase more under the Fairtax.
(7) You choose when and how much tax to pay.
(8) Everyone will be economically better off under the Fairtax.
(9) Interest bearing investment and debt instruments are not taxed.
(10) There is $10-$15 trillion of US owned assets in offshore accounts.
(11) Buying “used” goods, (tax previously paid), eliminates the tax costs from the sales price.
(12) A national sales tax would have no impact on State and Local governments.
(13) FICA payroll deductions are a tax.
(14) The Fairtax will save Social Security.
(15) The Fairtax is progressive.
Good luck!
It doesn't matter if you approach social security as a "tax" or as "insurance," semantics don't change reality. The fact remains that I (we) have no control over how much money they take, where they put it, what the return on my investment is, what my investment vehicle is, or how and/or when I can get access to my money (which we seem to have forgotten is my property). Add this to the fact that social security guarantees that you will not see the same return on investment as you could see with prudent investing, and it is difficult for me to see it as much less than theft. You can choose to accept this for your property, but it certainly seems morally rehensible for you to suggest that it is acceptable for mine as well.
ReplyDelete