The New Flat Tax—Easy as One, Two, Three
The Heritage Foundation has released a new Flat Tax plan.
Purple Tax Plan
Laurence J. Kotlikoff, a Boston University economist who is a columnist for Bloomberg View and previously endorsed the FairTax, now proposes what he calls the Purple Tax (a blend of red and blue), a consumption levy that he says cleans up some problems with the FairTax. It taxes the benefits that homeowners get from living in their own homes. That catches people who would shelter income by buying big houses. It also attempts to tax Americans’ consumption abroad. And it would tax inheritances and feature a payroll tax that, in a nod to liberals, exempts the first $40,000 of income and has no ceiling.
From the Purple Tax Plan:
The Purple Tax Plan replaces the federal personal and corporate income taxes as well as the estate and gift tax with a broad-based, low-rate, progressive consumption tax and a low-rate, progressive inheritance tax. It also makes the highly regressive FICA payroll tax highly progressive. The plan eliminates the need for households to file tax returns and enormously simplifies business tax compliance.
In considering the Purple Tax Plan, please bear in mind that we can have a highly progressive tax system without high marginal tax rates. The Purple Tax Plan features lower marginal tax rates than the current system, yet achieves a much more progressive distribution of tax burdens. It should also generate substantially more revenue. This is due not to “trickle down” or the Purple Tax Plan’s very likely strongly positive growth effects, but simply the fact that consumption is a very broad tax base.
We certainly need more revenue. Based on the Congressional Budget Office’s long-term forecast of June 22, 2011, our nation’s fiscal gap – the difference measured in the present (the present value) of all future projected spending, including servicing the existing debt, and all future taxes is $211 trillion! The fiscal gap represents, in effect, the nation’s credit card bill. Unfortunately, we’re not even paying interest on this liability, which helps explain its $6 trillion growth over the past year. The Purple Tax Plan would shave roughly $36 trillion off our fiscal gap.
Many people view consumption taxation, imposed as a fixed-rate retail sales tax, as regressive and the taxation of wealth, in addition to wages, at a fixed rate as progressive. Since doing one is mathematically and functionally equivalent to doing the other, both views can’t be correct. In fact, both are wrong.
Taxing consumption or, equivalently, the resources used to pay for consumption at a fixed rate is neither progressive nor regressive, but proportional. I.e., if you double economic resources (current wealth plus current and future wages), you double the consumption that those resources will finance, when both quantities are properly measured as present values. Hence, with a fixed consumption tax rate, doubling economic resources will double consumption and double the associated taxes. This is why economist say a consumption tax is proportional.
To make the Purple Tax Plan’s consumption tax truly progressive, the plan includes a monthly payment (demogrant), which ensures that those living at or below the poverty line pay no tax, on net, on their consumption.
9-9-9 Plan
Herman Cain 9-9-9 plan… what do you think?
- Current circumstances call for bolder action.
- The Phase 1 Enhanced Plan incorporates the features of Phase One and gets us a step closer to Phase two.
- I call on the Super Committee to pass the Phase 1 Enhanced Plan along with their spending cut package.
- The Phase 1 Enhanced Plan unites Flat Tax supporters with Fair tax supporters.
- Achieves the broadest possible tax base along with the lowest possible rate of 9%.
- It ends the Payroll Tax completely – a permanent holiday!
- Zero capital gains tax
- Ends the Death Tax.
- Eliminates double taxation of dividends
- Business Flat Tax – 9%
- Gross income less all investments, all purchases from other businesses and all dividends paid to shareholders.
- Empowerment Zones will offer additional deductions for payroll employed in the zone.
- Individual Flat Tax – 9%.
- Gross income less charitable deductions.
- Empowerment Zones will offer additional deductions for those living and/or working in the zone.
- National Sales Tax – 9%.
- This gets the Fair Tax off the sidelines and into the game.
Compliance Costs
Request for comment from Hank
To Everyone,
This blog used to be a place where Fairtax supporters and critics could exchange views in an orderly, polite way. Of late, the blog has been very quiet. On July 26th, the House W&M Committee held a hearing to examine both the Fairtax and a VAT. That was a first for the Fairtax, and reviews of the hearing have certainly been mixed.
Go to this link to watch the hearing: http://waysandmeans.edgeboss.net/wmedia/waysandmeans/wamr/wamr_49file.wvx.
Go here to read the AFFT submittal for the record: http://www.fairtax.org/PDF/WaysAndMeansFairTaxHearingTestimony.pdf
After reading Dr Walby’s submittal, I wrote her the following email:
“Dear Dr. Walby,
I have read and reread your ten page Fairtax testimony you provided to the House W&M Committee on July 26th. I have three concerns that I’d like to tell you about, and ask you to comment prior to my sending them off to the Committee staff.
(1) On page 1, you state that the “prebate” is not an entitlement, but is a rebate (in advance) of sales taxes paid. I believe that no matter what you choose to call it, the Family Consumption Allowance is clearly a cash grant entitlement program costing some $600 billion annually. The WIKI definition of an entitlement is: “An entitlement is a guarantee of access to benefits based on established rights or by legislation.” HR25 does exactly that. The 2005 Presidential Tax Reform Commission concluded that: “A cash grant program to make the tax appropriately progressive would cost at least $600 billion per year—which would make it America’s largest entitlement program.” The FCA is certainly not discretionary spending, so it has to be an entitlement.
A simple test to resolve this matter would be to look in your checkbook. An entitlement adds to everyone’s gross income, while a tax rebate does not. The prebate is an entitlement on all counts. While your marketing papers say that the prebate is intended to offset the sales tax up to the poverty level, it actually is an income supplement that can be spent and taxed on anything, or saved as conditions allow. I would be just as accurate if I thought of the prebate as an alimony offset. Isn’t it time to call the FCA by its proper name? It is an entitlement, and the CBO will score it as an entitlement!
(2) On page 2, you discuss why failure to tax all government agencies consumption would lead to greater incentive to consume government provided goods and services, rather than from the private sector. While true, HR25, Sec. 704 took care of that problem by treating government agencies at any level that sell at least $2500 per quarter of goods or services as Government Enterprises. All Government Enterprises must collect and remit the 23% sales tax. There was no need to tax all government consumption. The playing field with the private sector was already level.
Furthermore, federal taxation of State and Local government consumption is unconstitutional. Sovereign powers do not tax each other, and the Supreme Court will throw out this feature under the long held doctrine of “intergovernmental tax immunity.” Your precedent for such taxation was also incorrect. The Supreme Court approved the Social Security plan because it allowed State and Local government employees a choice of whether or not to join the federal Social Security system. Many S/L government agencies decided to set up their own plan. HR25 wisely gives States a choice as to whether or not to act as the federal tax collector. A constitutional issue was thereby avoided. No such choice exists regarding the taxation of S/L government consumption.
(3) Finally, on page 4, you discuss the compliance costs of the income tax. But, your data is obsolete and terribly overblown. Prior to 2006, compliance cost estimates used a form by form approach, assumed a stubby pencil technique, a $39/hour labor cost, and badly overstated actual compliance cost estimates. In 2006, the IRS adopted a new IBM estimating model which greatly reduced compliance cost estimates. Over the last five years, you have continued to quote the old Tax Foundation estimates, even when the Tax Foundation wrote that they would continue to update the old model only so they could determine trends. Your out year compliance cost estimates are inappropriate and totally inaccurate.
For instance, using the tables on page 95 of the 2010 1040 Instructions, the average dollar cost for all individual taxpayers is listed as $240. Assuming 140 million returns, the total individual compliance cost burden would be $33.6 billion, a far cry from your $110 billion 2005 estimate or the $150 billion 2010 estimate found in the old discarded study. Similar overstatements can be found for the estimates of Corporate compliance costs. There is no longer a current Tax Foundation study that would support the compliance cost numbers still claimed by AFFT. Isn’t it time you overhauled your compliance cost estimates using the new model?
I look forward to any comments you may have.”
Dr Walby may or may not respond, but I would appreciate any comments anyone may have. I remember discussing all three criticisms on this blog, but a fresh look might be instructive.
Thanks
Hank Van Gieson
SOTU, Testimony, S.13, and other news
The State of the Union speech included an issue dear to our hearts – real and dramatic tax reform.
Even President Obama finally acknowledged what everyone knows – the tax code is a destructive mess and it’s hurting the country.
“…so tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.” – President Barack Obama
Here is a copy of the written AFFT testimony submitted to the House Ways and Means Committee, for the 1-20-11 hearing on tax reform.
Phil Hinson comments,
Excellent written testimony – every FairTax supporter should take the time to read this. I especially liked this statement:
“Our failure to counteract these border-adjusted taxes explicitly encourages consumption of foreign, rather than American, goods. And it converts many of our nation’s retailers into what are effectively tax-free trade zones for foreign produced goods”.
This is a very powerful way to make the case for a border adjustment mechanism in our tax system.
Other quotes were brought to mind while reading this testimony:
“If the U. S. truly repealed its corporate income tax and replaced it with what is essentially a border adjustable consumption tax, the U. S. would be one heck of an attractive place to invest. In fact, the U. S. would be the world’s largest tax haven. We would be better than Ireland. Any foreign company could come here and manufacture and there would be no income tax. Remember that I said that 120 countries in the world had VATs? None of them repealed their corporate income tax. This would get rid of the corporate income tax and put in place this consumption tax, so you can imagine that this would make the U. S. a very, very attractive place to invest and it would undoubtedly lead to international repercussions that would be quite interesting. I think other countries would probably copy.”
Dr. Peter R. Merrill
Director, National Economic Consulting Group
PricewaterhouseCoopers
Former Chief Economist, Joint Committee on Taxation
In other news…
- The FairTax bill was introduced into the Senate as S 13. The Senate Sponsor of the FairTax bill, Sen. Saxby Chambliss [GA], was joined by 5 cosponsors.
- AFFT asks us to “Bomb The Tax” – Sure the media will be all over this “angry rhetoric” that would supposedly have crazies attacking the IRS.
- After many years debating online, Hayden and Morphh finally got together in Atlanta for a couple beers and friendly conversation.
Woodall introduces FairTax bill on day one with record number of original co-sponsors
I haven’t had time to follow the FairTax situation closely in recent months, but this caught my eye:
WOODALL INTRODUCES FAIRTAX BILL ON DAY ONE WITH
RECORD NUMBER OF ORIGINAL CO-SPONSORS
Washington, DC—On Wednesday, January 5, 2011, Congressman Rob Woodall (GA-07) introduced H.R. 25, the FairTax. The FairTax legislation eliminates the current income tax paradigm and replaces it with a system of taxation based on consumption. The bill was introduced on Wednesday with 47 original co-sponsors—the most original co-sponsors the bill has ever had for its initial introduction.
“I committed to the Seventh District of Georgia that my efforts in Congress would focus on reclaiming freedom for theAmerican people. It is for that reason that I am proud to make the FairTax—the only bill that restores transparency and simplicity to our tax code—my very first action in Congress. I have said since its inception that the FairTax is not a tax bill; it is a freedom bill,” Woodall said.
Woodall, who was sworn-in to Congress earlier in the day, played an integral role in crafting the original text of the FairTax as former Congressman John Linder’s Chief of Staff when the bill was originally introduced in 1999.
“Our current tax system is a bloated, convoluted mess that gives government power over Americans’ pockets. With 47Members of Congress and counting signing their names to the FairTax, we are closer than ever before to voting on legislation that eliminates the frustrating mess that is the IRS.”
Although the FairTax was introduced with 47 original co-sponsors, Woodall anticipates adding many more Members of Congress to the bill. Once the FairTax is introduced with the original co-sponsors, Members are able to sign on to the bill as co-sponsors throughout the 112th Congress.
“The number of signatures on the FairTax this time around is a testament to the will of the people. It is clear that Americans do not want to have their hard-earned money taken away and they want to reclaim the freedom to spend their money how they choose and when they choose.”
The list of original co-sponsors is as follows:
1) Tom Price (GA)
2) Brian Bilbray (CA)
3 ) John Carter (TX)
4 ) Michael Conaway (TX)
5 ) John Duncan (TN)
6) Virginia Foxx (NC)
7) Steve King (IA)
8 ) Michael McCaul (TX)
9) Pete Olson (TX)
10 ) John Sullivan (OK)
11 ) Mac Thornberry (TX)
12) Phil Gingrey (GA)
13) Roscoe Bartlett (MD)
14) Don Young (AK)
15) Ander Crenshaw (FL)
16) Todd Akin (MO)
17) Lynn Westmoreland (GA)
18) Tom Graves (GA)
19) Gus Bilirakis (FL)
20) Ted Poe (TX)
21) Randy Neugebauer (TX)
22) Jeff Miller (FL)
23) Robert Wittman (VA)
24) Jack Kingston (GA)
25) Marlin Stutzman (IN)
26) Jeff Flake (AZ)
27) Billy Long (MO)
28) Cliff Stearns (FL)
29) Tim Walberg (MI)
30) Dennis Ross (FL)
31) Dan Boren (OK)
32) Mo Brooks (AL)
33) Darrell Issa (CA)
34) Richard Nugent (FL)
35) Tim Scott (SC)
36) Blake Farenthold (TX)
37) Jeff Duncan (SC)
38) Rob Bishop (UT)
39) Mike Pence (IN)
40) Sandy Adams (FL)
41) John Mica (FL)
42) Sue Wilkins Myrick (NC)
43) Dan Burton (IN)
44) John Culberson (TX)
45) James Lankford (OK)
46) Mike Pompeo (KS)
47) Gary Miller (CA)###
Jennifer Drogus
Communications Director Congressman-elect Rob Woodall
Seventh District of Georgia202.225.4272 | jennifer.drogus@mail.house.gov
Install Disqus commenting system?
Would you guys like threaded comments? If so, I can install the Disqus commenting system, as I’ve done at Mudita Journal. (You won’t see many threaded comments there yet, since most of the comments are imported from the old commenting system. But any of the new comments on the right sidebar had the option of being threaded.)
Let me know, below, in the comments.
Replacing the Income Tax Part II
Nothing new to add, but the discussion thread for Replacing the Income Tax has reached close to 700. So I thought I would start a new thread of discussion where you can continue without having to load and wade through all the prior content. Such a long thread can cause issues on some browsers and most mobile devices when presented as a single page as we have on this blog. Please try to use this new thread and just refer back to the number of the old thread (if need be) if you’re replying to an older point of discussion.
Debt Free America Act
This financial transactions bill H.R. 4646 Debt Free America Act has been introduced to the 111th Congress, referred to committees, and is scheduled to be voted on in late November before the new congress takes a seat in January. It is designed to eliminate the federal income tax within 7 years. Maybe it would be a good way to change the way we pay taxes to our government but, then again, maybe not. Unlike the FairTax proposal H.R. 25, we may not be given much time to evaluate it for ourselves.
Debt Free America Act – States as purposes of this Act the raising of sufficient revenue from a fee on transactions to eliminate the national debt within seven years and the phasing out of the individual income tax.
- Amends the Internal Revenue Code to impose a 1% fee, offset by a corresponding nonrefundable income tax credit, on transactions that use a payment instrument, including any check, cash, credit card, transfer of stock, bonds, or other financial instrument, the only exception being transactions involving the purchase or sale of stock. Defines “transaction” to include retail and wholesale sales, purchases of intermediate goods, and financial and intangible transactions.
- Establishes in the legislative branch the Bipartisan Task Force for Responsible Fiscal Action to review the fiscal imbalance of the federal government and make recommendations to improve such imbalance. Provides for expedited consideration by Congress of Task Force recommendations.
- Repeals after 2017 the individual income tax, refundable and nonrefundable personal tax credits, and the alternative minimum tax (AMT) on individuals.
- Directs the Secretary of the Treasury to: (1) prioritize the repayment of the national debt to protect the fiscal stability of the United States; and (2) study and report to Congress on the implementation of this Act.
Theoretically, everyone would pay one cent on the dollar for every such transaction in America every day — whether $3 million on a $300 million business acquisition, $300 on the purchase of a $30,000 car, or $5 on a $500 ATM withdrawal.
To reduce the impact of such a flat tax on the poor, Fattah’s bill provides for a 1 percent tax credit for couples earning $250,000 or less ($125,000 or less for individuals) and discretion by the Treasury Department to exempt certain transactions on which lower-income people disproportionately rely. Another idea would be to amend his bill to exempt all transactions below $500.
Using 2008 numbers as an example: There was $755 trillion in total transactions that year. If you deduct the exempted $312 million in stock transactions, that leaves $443 trillion as the tax base, minus the cost of the tax credit and other possible measures to soften the impact on the poor.
Roadmap for America
With the recent election shift, we’re looking at John Boehner as the Speaker of the House and Eric Cantor becoming Majority Leader. Boehner never let the FairTax out of committee when he was House Majority Leader in 2006. So, what will happen with the FairTax? FairTax is a big issue with the Tea Party so perhaps we’ll see some movement this year, certainly more sponsorship. Eric Cantor is a staunch supporter of Paul Ryan’s Roadmap for America. What do you think of this overall plan and its hybrid income tax/vat proposal?
Here are the principal elements:
• Health Care. The plan ensures universal access to affordable health insurance by restructuring the tax code, allowing all Americans to secure an affordable health plan that best suits their needs, and shifting the control and ownership of health coverage away from the government and employers to individuals.
It provides a refundable tax credit—$2,300 for individuals and $5,700 for families—to purchase coverage (from another state if they so choose) and keep it with them if they move or change jobs. It establishes transparency in health-care price and quality data, so this critical information is readily available before someone needs health services.
State-based high risk pools will make affordable care available to those with pre-existing conditions. In addition to the tax credit, Medicaid will provide supplemental payments to low-income recipients so they too can obtain the health coverage of their choice and no longer be consigned to the stigmatized, sclerotic care that Medicaid has come to represent.
• Medicare. The Road Map secures Medicare for current beneficiaries, while making common-sense reforms to save this critical program. It preserves the existing Medicare program for Americans currently 55 or older so they can receive the benefits they planned for throughout their working lives.
For those under 55—as they become Medicare-eligible—it creates a Medicare payment, initially averaging $11,000, to be used to purchase a Medicare certified plan. The payment is adjusted to reflect medical inflation, and pegged to income, with low-income individuals receiving greater support. The plan also provides risk adjustment, so those with greater medical needs receive a higher payment.
The proposal also fully funds Medical Savings Accounts (MSAs) for low-income beneficiaries, while continuing to allow all beneficiaries, regardless of income, to set up tax-free MSAs. Enacted together, these reforms will help keep Medicare solvent for generations to come.
• Social Security. The Road Map preserves the existing Social Security program for those 55 or older. For those under 55, the plan offers the option of investing over one-third of their current Social Security taxes into personal retirement accounts, similar to the Thrift Savings Plan available to federal employees. This proposal includes a property right, so those who own these accounts can pass on the assets to their heirs. The plan also guarantees that individuals will not lose a dollar they contribute to their accounts, even after inflation.
The plan also makes the program permanently solvent by combining a modest adjustment in the growth of initial Social Security’s benefits for higher-income individuals, with a gradual, modest increase in the retirement age.
• Tax Reform. The Road Map offers an alternative to today’s needlessly complex and unfair tax code, providing the option of a simplified system that promotes work, saving and investment.
This highly simplified code fits on a postcard. It has just two rates: 10% on income up to $100,000 for joint filers and $50,000 for single filers, and 25% on taxable income above these amounts. It also includes a generous standard deduction and personal exemption (totaling $39,000 for a family of four), and no tax loopholes, deductions, credits or exclusions (except the health-care tax credit).
The proposal eliminates the alternative minimum tax. It promotes saving by eliminating taxes on interest, capital gains, and dividends. It eliminates the death tax. It replaces the corporate income tax—currently the second highest in the industrialized world—with a business consumption tax of 8.5%. This new rate is roughly half the average in the industrialized world and will put American companies and workers in a stronger position to compete in a global economy.
Read more about the Roadmap for America at Paul Ryan’s site.
Boortz: “When Democrats attack the FairTax!”
Agree or disagree with the FairTax, this campaign season has seen a wave of false advertising around the FairTax in a desperate attempt to maintain seats. FackCheck has written several times about the misleading ads as have other publications, but they still keep coming. Time for Boortz to get into the ring…
Incumbent Democratic Senator Blanche Lincoln .. struggling for her political life in Arkansas.. runs an ad saying that her opponent, Republican John Boozaman, is “excited about putting a 23 percent national sales tax on everything you buy.” In the Colorado Senatorial race polls show Democrat Michael Bennet trailing Republican Ken Buck by as much as five percent, Bennet is running ads saying that under Buck’s tax reform plan a bag of groceries could cost $11 more and your prescription drugs could cost over a hundred dollars more.
In North Carolina’s 8h Congressional District Republican Harold Johnson is hoping to oust Democrat Larry Kissell. There we have the NEA (National Education Association) Fund for Children and Public Education running an ad replete with the sounds of a crowd attending a college football game (note the appeal to sports fans) and an announcer saying “It’s Harold Johnson Tax Day at the game, where every fan pays a 23% national sales tax.” The ad goes on to say the tax would be added to tickets, hot dogs, groceries and gas.”
That’s all rather frightening, isn’t it? After all, who would want to see their grocery, gas, food, prescription drug – or any other bill, for that matter – increased by 23%? Answer: Not a soul. So what sane candidate would ever propose such a tax increase? Answer: No sane candidate would.
So … where are these ads coming from? Even the most baseless of attack ads must have a grain truth to hold on to, if for no other reason than to avoid generating nothing other than ridicule and laughter.
Read the full article on his site
Tax Reform Panel Déjà Vu
WebCPA writes, It’s been five years since former Senator Connie Mack, then chairman of the President’s Advisory Panel on Federal Tax Reform, said the panel would “take a fresh look at the existing Tax Code and will formulate options for making the tax system simple, fair and productive.” Last Friday, the President’s Economic Recovery Advisory Board delivered its report on tax reform options “to achieve three broad goals: simplifying the tax system, improving taxpayer compliance with existing tax laws, and reforming the corporate tax system.”
According to the PERAB press release, the report is meant to be informative rather than prescriptive. Its intention is to aid discussion about the wide variety of tax reform ideas in these areas. The report will also be submitted to the bipartisan National Commission on Fiscal Responsibility and Reform as they continue to consider ways to address our nation’s middle and long-term fiscal challenges and to achieve fiscal sustainability. The Tax Reform Subcommittee of the PERAB received more than 600 serious submissions of tax reform ideas from the public both in person and in writing or electronically during their deliberations. They considered as many of these suggestions as possible.
The report states that the Board was not asked to recommend a major overarching tax reform, such as the 1986 tax reform, the tax plans proposed by the 2005 Tax Reform Panel, or proposals for introducing a value-added tax in addition to or in lieu of the current income tax system. They received many suggestions for broad tax reform, and some members of the PERAB believe that such reform will be an essential component of a strategy to reduce the long-term deficit of the federal government. But consistent with their limited mandate, they did not evaluate competing proposals for overarching tax reform in this report.
The Fair Tax Blog is working again!
Sorry for the technical difficulties over the past week or two.
I had to upgrade our server on September 24 for security reasons, and for some reason the upgrade torched this blog.
A normal re-installation of WordPress didn’t work, so I had to wipe the account and start over. I didn’t have time to do that until today.
I think I have everything working again now. If you notice any problems, please let me know! You can reach me at webstuff at zader dot com.
Replacing the Income Tax
Stephen Eldridge has taken a detailed look at the FairTax and written a critical paper of the tax plan. While I do not share Mr. Eldridge’s conclusions or agree with many of his arguments, he has put together a well documented paper worth reading and discussing.
Stephen writes:
After much study and analysis, I believe that the H.R. 25 sales pitch is full of superficial arguments and hidden truths aimed at a public which does not have the interest, time or training to dig under the surface to understand how H.R. 25 really works and how it affects our economy and lives. Upon further research, additional negatives emerged.
and quips
It is a deadly prescription for curing our existing Internal Revenue Code malady. If it is ever enacted, H.R. 25 will surely kill the patient. We must look for a cure that makes us healthy.
While covering a great range of topic points including reviewing other tax plans and suggesting a solution, he focuses on several main points with H.R. 25.
- Wealth Redistribution, Progressivism, Class Warfare is expanded
- The Sales Tax Base is far broader than any tax system in the world
- The Sales Tax Rate may be very high – the “sticker shock” will destroy our economy
- The States are affected negatively
- The “IRS” grows worse than ever
- America’s Home Buyers and Builders will suffer greatly – Banks will not lend on the sales tax
I think by far, Stephen’s best argument is on wealth redistribution, progressivism, and class warfare. I’m not sure if his final solution presented in the paper would ever be viable for the American people, but I respect his effort and applaud his goals.
Here it is for your pleasure and discussion (also added to the research section of the blog). “Replacing the Income Tax“
FairTax 30min TV special
Kill the VAT?
As Washington is discussing a VAT, most of us would oppose adding such a tax on top of our existing income tax system. In fact, a Rasmussen Reports national telephone survey found that 68% oppose such a tax. So I can understand when FairTax.org sends out messages to Kill the VAT! The critical points on adding a VAT, like in Europe, are valid and I agree, would be devastating. However, Hoagland goes on to suggest other downsides to a VAT style tax, which I question. He writes:
Why is the VAT Tax the Worst Possible Kind of Tax?
Here is how a Value-Added Tax works for the politicians and powerful special interests and against American Taxpayers:
- A tax is added to the cost of every product made in America, as it is produced, at every level of production. So in making a car, the iron ore has a VAT tax added, the steel mill adds a VAT tax. Then the car company adds a VAT tax. And finally the dealer adds a VAT tax and all of this is added to price you pay for your car!
- Now here is the part the politicians really like: you do not see the value added tax! The VAT tax is the perfect politicians tax. Every time the politicians want to spend, and spend and spend some more, they increase the hidden VAT tax “just a little.” You would never have any idea how much the VAT tax adds to your cost of living!
The first point seems to suggest that the cascading cost of a VAT is bad. However, percentages don’t cascade. A 10% VAT is equal to a 10% FairTax, no matter how many levels of production. How is this exclamation much different than the FairTax?
The second point I believe is incorrect. As I understand it, a VAT is not a hidden tax. It’s presented on the sales receipt just the same as the FairTax and should contain the full percentage and cost. Any change in the tax rate would be equally reflected on the sales receipt. Again, what’s the difference?
A VAT tax has almost identical economic properties to a sales tax. We’ve discussed it on this blog in the past – “What’s wrong with a VAT?” A VAT would have a higher administrative cost, and possibly open up more areas for loopholes and exemptions, but on the other side, a VAT could have less evasion (though more collection points). I prefer a sales tax, but is there really a cause to demonize the VAT, an almost identical consumption tax?
So folks… Am I way off or is Hoagland blowing smoke on these points?
The cost of compliance
With April 15th almost here, people need to be reminded what the cost of doing nothing is. What the federal tax system is costing the average taxpayer in addition to his taxes is unbelievable.
Dr Karen Walby has updated the paper on compliance costs.
Some of the points:
- Complying with the federal income tax code amounts to imposing a 22.2-cent tax compliance surcharge for every dollar the income tax system collects.
- The average taxpayer paid $3,112 more in taxes to subsidize the unwillingness or inability of some taxpayers to pay their fair share.
- In other words, if everyone paid the taxes they owed, average individual income taxes paid per taxpayer could have been 38.7% percent less.
- Compliance costs are found to be highly regressive.
- Corporations with assets of $1 million or less (more than 90 percent of all corporations) paid a minimum of $382 in compliance costs for every $100 they paid in income taxes
- Projections show that by 2015 compliance costs will grow to $482.7 billion.
And possibly most sobering:
“A compliance burden of 6 billion hours per year represents a work force of over 2,884,000 people: Larger than the populations of Dallas (1,210,393), Detroit (900,198), and Washington, D.C. (553,523) combined; and more people than work in the auto, computer manufacturing, airline manufacturing, and steel industries combined.â€
Read the full paper: “What the federal tax system is costing you besides your taxes“
Federal Taxation of State/Local Government consumption
On another blog, Jim Bennett and Hank Van Gieson had a discussion about the Constitutionality of the Fairtax plan to tax government consumption.
Hank writes in and requests a discussion:
My arguments now draw on what is called “the rule of law” which uses the Constitution and the Federalist papers to determine original intent. Clearly the framers never would have agreed to allow the federal government to tax state/local government operations. And, when Justice Marshall wrote “the power to tax is the power to destroy”, any constitutional arguments should have ended.
Jim, on the other hand, uses 220 years of Supreme Court decisions as a basis for claiming that the Fairtax is constitutional. This is known as “the rule of man”. Many years ago, the Court came up with the doctrine of intergovernmental tax immunity and have been chipping away ever since. Jim quotes many decisions that weaken that tax immunity doctrine in support of his claim that taxing governments is OK.
Clearly, we can never agree on the constitutional issue, so I suggested to Jim that we move to fairtaxblog and examine the basic AFFT rationale for taxing governments in the first place.
The only AFFT rationale I have ever found for federal taxation of State and Local governments was to prevent unfair government competition with the private sector. But, Section 704 of HR25 clearly states that any government agency at any level that sells more than $2500 in goods or services per quarter would be classified as a “government enterprise” and would be required to collect and remit the 23% Fairtax. The playing field would be level and there was no need to tax the over $2 trillion in government consumption in order to prevent unfair competition. So, what was the real point of government taxation?
Unless someone can provide a better rationale for this potentially unconstitutional proposal, it seems most likely that the Houston tax lawyers who created the Fairtax plan simply wanted to keep the tax rate as low as possible. By adopting the rather unusual inclusive definition of the sales tax and adding over $ 2 trillion in government consumption to the Fairtax base, the rate came to just over 23%. Had they not taxed governments, and had they expressed the rate in the normal exclusive terms, the rate would have been over 43%. When added to the average State and Local sales taxes, it’s clear that sales tax rates over 50% would have been required. Was the real reason for taxing governments simply to cover up the real sales tax rate by forcing the States to pay part of the needed federal tax revenue by raising all their rates?
Any comments would be appreciated.
The Idiot’s Guide to the Fairtax
Hank Van Gieson reviews “The Idiot’s Guide to the Fairtax”
“The Idiot’s Guide to the Fairtax” was released in 2010, and for those of you that haven’t yet spent ten dollars on this pocket guide, here is my take on the content.
After reading it through for the first time, it wasn’t clear to me if the term “Idiot” was aimed at the intended readers or the author? Ken Clark is a well known financial advisor, but he made a huge error early on in his book. On a subject we are all familiar with, Ken wrote that everyone would get all their pay and retail prices would remain about the same. That is the long discredited “free lunch” myth. He did reference the “Dan Jorgenson” (?) study, but he might have been better off reading it himself. He wrote that the only way retail prices might increase would be if there was no competition, no availability of substitute items or no lack of collusion between sellers. He overlooked the single most likely cause of price increases which is that payroll costs won’t go down.
I realize that there is some disagreement on this blog about whether we will get our gross or net pay under the Fairtax, but there is no disagreement that if we get our gross, retail prices will rise.
After reading the book several times, Mr Clark does make many accurate points, but on balance, his book is badly flawed.
I would recommend that everyone keep their ten dollars and invest it in Ken Hoagland’s Fairtax Solution book which is due to be released this Thursday. I suspect that there will be a lively discussion of Hoagies book. Stay tuned!
The Next American Tax Rebellion Has Begun
My father, Ronald Reagan, battled successfully to simplify the tax code but his work has been largely undone. The arrogance of those who use the tax code to manipulate citizen behavior and Congressional ambitions for personal advancement have again corrupted the already destructive income tax system. It will fall to the American people to once again reject unfair taxation that favors the mighty at the expense of the public.
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My father said, “Our federal tax system is, in short, utterly impossible, utterly unjust and completely counterproductive, it reeks with injustice and is fundamentally un-American… it has earned a rebellion and it’s time we rebelled.†That second great tax rebellion is now underway at www.onlinetaxrevolt.com.
Tea Party patriots, FairTaxers, Flat Taxers, and most Americans of every political persuasion understand that the federal tax system fuels unchecked government spending, hides the cost of government from the American taxpayer and has become corrupted into indecipherability by Congressional profits and power. Citizens are coming together from across the political spectrum and across the nation to wake Washington up to the voice of the American people.
