Working with Democrats to pass the FairTax
Jessica Wexler, who worked the Obama campaign, posted her speech from the Mid America FairTax Rally on FairTax Nation. I have copied and posted the speech below.
Hello, I am Jessica Wexler. I am a strong supporter of the FairTax. I have volunteered with FairTax KC for the past year and written an organizing manual to be used by Fair tax supporters across the country. So there is no confusion, I am a Democrat. I have worked 20 hour days, 7 days a week, for months at a time. I have slept on office floors with blankets pulled from the trunk of volunteers’ cars. During Senator McCaskill’s campaign, I learned the benefit of a union hall with showers, even if they were behind a door marked Men’s. On Novemeber 4th while polls were closing and parties were starting. I was still at President Obama’s Raytown office, working to insure every vote was counted. I have organized teachers in New Orleans and registered voters through Rock the Vote. I have been in favor of the FairTax for several years. Ever since my uncle, for those of you who don’t know him, he is the FairTax KC Geezer, gave me a small paperback book to read. My uncle and I disagree on all the major hot button issues from abortion to gun rights, social security to the death penalty. To sum it up we disagree on how the government should spend our tax dollars. We are in complete agreement on how the government should collect those tax dollars. The FairTax!
I am here to speak about why I, a democrat, support the FairTax. Why other Democrats must support the FairTax. And why it is crucial that the FairTax is a nonpartisan issue both on a local and national scale.
My top 3 reasons for supporting the FairTax are it will increase jobs, widen our tax base, and gives me control over the money I earn.The FairTax increases jobs by eliminating some of the major reasons, such as the capital gains and corporate income taxes, that caused and continue to cause U.S. companies to leave the U.S.
The FairTax widens our current tax base. Under the FairTax; People making money from criminal activity such as drugs pay taxes. Illegal Immigrants pay taxes. People being paid under the table pay taxes. People who once used accountants, attorneys, and financial advisors to find loopholes in our current system pay taxes. Everyone in the U.S. who buys anything new will pay taxes.
With the FairTax; I will finally have control over my money. Managing a nonprofit in Kansas City earning $30,000 a year I was bringing home $418 a week. With the FairTax in place I would be brining home my entire pay check of $576 a week. That’s an increase of $632 per month, totaling $8,216 for the year. A college graduate with $21,000 in student loans would be able to pay off the loans within 3 years using only the increase in salary. I will no longer have to wait a year to receive a refund on the money I earned that the government borrowed interest free; my money will be there every payday.
Fellow Democrats must support the FairTax because it simplifies our tax system, boosts our economy, and is far more Progressive than our current tax system.
We all agree that our current tax system is complex and hard to understand with over 70,000 pages of tax code. According to Money magazine, 99% of us will pay a tax professional to file an incorrect tax return! Democrats want a simplified tax system. The Fair Tax is the simplified tax system! Pay a tax once on new items purchased and that’s it. Buy anything used clothing, books, house, car there is NO Federal tax.
The FairTax will boost our economy in a number of ways. The most important way due to our current unemployment is it will creat jobs. There is over 13 trillion dollars in offshore accounts. The FairTax will bring back an estimated 2-3 trillion dollars in the first year alone to be invested here at home.
The third reason Democrats must support the FairTax is that it is far more Progressive than our current system. Under the FairTax Low-income households experience five times the benefit increase as compared to high-income households. This gives us a greater opportunity to move up the economic ladder and achieve the American Dream.
It is crucial that the FairTax has nonpartisan support. On the National level the FairTax cannot pass without bipartisan support. Our current Senate is made up of 57 democrats, 2 independents, and 40 republicans the House of Representatives is made up of 256 democrats and 178 republicans. We must persuade those on both sides of the aisle to gain passage of the FairTax.
I can not stress enough the importance of nonpartisan support at the local level. Imagine if my uncle never gave me the book, or if I was close minded and unwilling to learn about the FairTax because of all the issues we disagree on. There are entire families of strong Democrats that don’t have an Uncle to persuade them to take the time and learn about the FairTax. If we supporters of the FairTax dismiss the Democrats, we lose 50% of our potential supporters. Everyone must decide if the FairTax is their number 1 issue above all other issues, that is the only way the FairTax can succeed. Most Democrats don’t realize they have a vested interest in the FairTax. Simply because they are unaware of the facts and have been convinced that the FairTax is a Republican issue. We must show them that the FairTax is an American Issue. We have to be welcoming and inclusive of all people willing to listen.
I discovered at my first FairTax meeting that if my uncle was not there I as a liberal democrat would have ran away and never come back. To look at the crowd before me today, it is safe to assume that the majority of you are not Democrats. Democrats are not here for the same reasons I was ready to runaway. At the meeting volunteers were discussing inviting Sarah Palin to speak at an event, and pro-McCarthyism to name a couple of the topics that made me uncomfortable. I was thinking to myself. “What on earth am I doing attending an event with right wing republicans? I need to re-evaluate the FairTax, if this is an example of other supporters.” I am happy to say, I now have great relationships with everyone at FairTax KC. I talk to Earl and John at least once a week. Never would have guessed how well we get along and how many things we are in agreement on. Thankfully, I was able to explain how isolating their unconscious actions were to an outsider.
Now we remind each other that all social issues are left at the door. If you want to discuss the War in Iraq go right ahead, just NOT at a FairTax meeting or FairTax event. All of FairTax KC pamphlets, emails, and speeches are examined to insure that they are inclusive of all people. We have formed a strong grass root organization that thrives on diversity and stays focused on what matters: the FairTax. A year ago, we had 200 email addresses after reevaluating and marketing our ideas to be inclusive of all political parties and organizations we now have over 4,000 email addresses. We have to take the time and make the effort to be inclusive, Not exclusive. I am standing here today as evidence that a staunch liberal democrat does support the fairtax without compromising my liberal views on social issues. Thank you!
What’s wrong with a VAT?
Hayden has the following inquiry:
It seems that every country in the rest of the world utilizes some form of Value Added Tax. In a previous life, I owned a small bar/restaurant in Guatemala and had to pay a VAT on my purchases, which I, in turn, charged my customers. (If I didn’t charge my customers, I would have had to absorb the VAT I had already paid. Thus, unlike the FairTax, there was no incentive for me to cheat by underreporting my cash sales.)
Anyway, it seems that the VAT has been thoroughly researched, tried, and perfected over decades. It seems to work pretty well. In The FairTax: The Truth, even Boortz and Linder admit that it would be more efficient than the FairTax. Yet, the VAT is rarely, if ever, discussed in this country (though the idea is being floated around to pay for health care reform.)
So, my question is, why are FairTaxers so wedded to the idea of the FairTax? What’s wrong with a VAT?
Fairtax As Is Versus Current Income Tax As Is
This is really a question for opponents of the fairtax. Opponents talk alot about the negatives of the fairtax. A lot of those exist in the current system and would really be part of any tax system. Some admit weaknesses in the current income tax system. Some even highlight those issues. So my question to opponents of the fairtax is this: Would you prefer taking the fairtax as is or our current income tax system as is? In other words, is the monstrosity of the current income tax system (with its loopholes, political payoffs, distortions, complications) superior to the fairtax is in its yet to be distorted state?
The Cost on State and Local Government
Sometimes we discuss the debating point that a portion of the federal revenue is supposedly hidden in higher State and Local taxes. As we know, tax rates and even nominal dollars can be misleading. The true measure of a tax burden is the effect on your standard of living — the transfer of purchasing power from the individual to the government. I’ll argue here that State and Local governments will see little change in their real cost, making it no more hidden than today. Let’s go over some definitions first:
Real versus nominal value - In economics, nominal value refers to any price or value expressed in money of the day, as opposed to real value, which adjusts for the effect of inflation. Real values convert the nominal values as if prices were constant in each year. Any differences in real values are then attributed to the differences in the amount of goods that the money could buy in each year. Thus, the real values index the purchasing power of the money for each year.
Example (not compounded for simplicity and brevity):
Government collects $100 from a citizen earning $1000, taking 10%.
Now let’s consider 3 years of inflation at 3% a year, 9% total.
Government collects $109 from a citizen earning $1090, taking 10%.The nominal cost increase was $9, while the real cost increase was $0.
The real cost is $0 because the burden has remained consistent — no additional loss of purchasing power has occurred to the citizen and no gain in purchasing power has occurred to the government. Revenue was consistent with inflation and the real cost of government was unchanged. The government can’t buy more goods with the extra $9, and the citizen can’t buy less because he paid it — the inflation leaves both parties whole.
Income and sales taxes usually require no change to maintain real value as the tax base adjusts with the inflationary effects. However, some taxes do require periodic adjustment, such as land taxes. In that case, either the tax base is increased (reassessment of land value) or the tax rate is increased. Under a FairTax implementation, the States would need to do a one time readjustment of their tax base(s) or tax rate(s), convert to the FairTax system, or otherwise adjust their tax system in order to maintain the same real revenues (and real burden) due to the inflation (from accommodation).
FairTax - Now let’s consider putting the FairTax into effect with a partial accommodation model assuming employees get gross pay and the rest is used for a 10% reduction in product cost, leaving a 17% exclusive price increase. The FairTax, like the current system, imposes a tax cost on government, which it does by taxing government purchases and payroll. Using the data from the BHI / Kotlikoff study, State and Local government consumption and investment is $1,659 billion. They also state that taxable spending is broken down to 59% for nonwages and 41% for wages. Given 17% inflation, $1,941 billion would maintain the same state and local burden on the citizens and collect the same real revenue. Less than $1,941 billion is a shift of purchasing power to the people (tax cut), more is a shift of purchasing power to the state (tax increase). The nominal increase of $282 billion would result in no change in real cost.
- $1,659 - $403 (tax free wages and salaries on education) is $1,256
- $403 * .9235 (-7.65% employer payroll) is $372 (tax free wages)
- $1,256 - $163 (capital) is $1,093, leaving $163 (tax free capital)
- $1,093 * .59 (nonwages) is $645 , with the remaining 41% (wages) being $448
- $645 * 1.17 (17% price increase) is $755 (taxed nonwage consumption)
- $448 * .9235 (-7.65% employer payroll) is $414
- $414 * 1.3 (30% on gross wages) is $538 (taxed wages)
- $4 * 1.17 (17% price increase) is $5 (administration fee reduction)
- $372 + $163 + $755 + $538 - $5 = $1,823 billion
The real cost has decreased by $118 billion (6%) of almost 1.95 trillion, making the State and Local burden less than before.
This does not necessarily mean that the combined burden on the citizen is less — purchasing power changes should equal out under revenue neutrality. The offset would be reflected in the federal burden. Rate studies by William Gale and Diamond & Zodrow reflect this as they reduce the tax base on state and local education by an additional $300 billion, creating a higher FairTax rate and further reducing the real State and Local burden by $51 billion to $169 billion (8.7%).
So what does that mean for State and Local taxes?
The main tax bases used by State and Local government will not factor the inflationary effects from accommodation, resulting in a loss equal to the nominal cost increase - thus shifting purchasing power to the people from state and local government. In order to maintain real revenues, the state and local government will have to make adjustments to their tax system. State income taxes are applied on gross wages, which will not change. State sales taxes are applied on pre-tax retail prices, which will decrease by 10%. Unlike normal inflation, states and local governments will have to make a one time adjustment to their systems for the accommodation, which may include: raising tax rates, modifying the tax base, taxing the FairTax, conforming to the FairTax, land value reassessment, accepting some loss of real revenue, etc.
When the real value of the tax based is decrease by inflation, an adjustment needs to be made to collect the same real revenue in order to maintain the purchasing power of both the government and the citizen. The rate may be higher, the base broader, or the system changed altogether, but it comes down to the simple question of whether you have more, less, or the same dollar value in your pocket and the impact on your family. The state and local government should continue to impose approximately the same burden on you before and after the FairTax.
A more detailed economic analysis can be found in the BHI/Kotlikoff rate study. Section V discusses the State and Local government and the need to maintain real revenues.
U.S. Sales Tax Gets Fresh Look
The Washington Post reports that in an effort to raise additional revenue, policymakers are discussing a VAT.
With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.
A recent Rassmussen report did a poll on the idea and stated that:
To raise additional money for the government, just 18% of Americans nationwide favor a national sales tax. The latest Rasmussen Reports national telephone survey found that 68% oppose such a tax. There is more support for the concept if sales tax revenue is used to provide health insurance for all Americans. In that scenario, 40% favor a national sales tax and 49% are opposed.
The report went on to ask additional questions that reflect the FairTax system.
A plurality of Americans would support a national sales tax if it meant getting rid of the federal income tax: 43% favor that trade-off, but 38% are opposed. Pluralities of Republicans and unaffiliateds like the idea, while a plurality of Democrats are against it.
Forty-eight percent (48%) say a national sales tax is fairer than an income tax while 26% hold the opposite view. The sales tax is viewed as fairer by 52% of Republicans, 44% of Democrats and 49% of unaffiliateds.
FairTax Nation - A center for grassroots action
I’ve long felt that FairTax.org was missing something in organizing grassroots members and maintaining their participation. I’ve spoken in the past with AFFT representatives on the need for district level communication and a website where organization and focus was on social networks at the local level. I thought that this was the type of structure that was needed to address state representatives as a unified and educated group.
Many states have their own website and Yahoo has state groups, we’ve got Myspace groups and Facebook groups, but I never felt I could connect easily with people in my area. FairTax.org had planned to launch such a site.. groups or clubs.. something - but I think its just turned into another state area to post stuff with little organization and inter-communication. In any event, I don’t think it took off.
To the rescue... Marilyn Rickert has put together an excellent site called FairTax Nation that I think will accomplish many of these goals. You can subscribe to state and district level groups, blog, upload pics, and communicate with people in your area. A social network site for the FairTax with a grassroots focus, which I hope will be very successful in organizing supporters.
Could Missouri be the first FairTax State?
Missouri House gives final approval to FairTax amendment
The Missouri House gave final approval to a proposed constitutional amendment to abolish the state income tax and replace it with a FairTax system.
The proposal would raise the state sales tax from 4.225 percent to 5.11 percent and eliminate the 6 percent personal income tax and 6.25 percent corporate income tax on business earnings. Accompanying the sales tax rate hike would be a substantially broadened sales tax base that would include all purchases. Estate taxes would remain on the books.
The proposal would create the distribution of a monthly tax rebate check to cover the cost of any taxes incurred up to the federal poverty level, which is $26,000 for a family of four.
If the Missouri Senate approves it, the measure will be submitted to Missouri voters in November 2010 without need for consideration by the governor. If approved by the voters, the measure would take effect on Jan. 1, 2012, and Missouri would become the first in the United States to test the macro-economic benefits of the fair tax, according to the release.
NFIB vs. NSBA - Which is Stronger on FairTax?
From the mailbag, a reader wrote in regarding small business associations...
The NFIB has taken no real position on overhaul of the tax system. In their page on “Tax Gap and Tax Simplification”, they have deferred to a shell organization called “The Coalition for Fairness in Tax Compliance”. This “coalition” is doing nothing I can see to serve as a voice for tax reform - either the fair tax, the flax tax or any other major reform. I wrote to NFIB 2 months ago to determine their position on tax reform before signing up as a member - I have not received a response. Here’s their link.
The NSBA has adopted the FairTax as a priority issue and stands ready to address this within Washington D.C. I see their approach as uncommon, but very admirable. One of the lobbyists key functions has to continuously navigate Washington to seek “improvements” to the tax code for the folks who fund their existence. NBSA appears to be ready to break that cycle. Here is their link.
As small business owners or folks with family who run small business, I believe we really need to rally behind one of these groups to press that it’s a priority for us as well and that NOW is the time. In considering which to join, I am now a strong advocate of NSBA and feel they are the best vehicle based on what I’ve read. NFIB has not taken a position and I’m sure they’ve received plenty of cajoling. Would like to know your observations as well.
The FairTax Fantasy
Hugh Hewitt’s New Hit Piece on The FairTax
Here is his pitch....
If you think what the FairTax folks are selling sounds good, then you haven’t studied the fine print. Do yourself and your country a favor and get informed about this FairTax Fantasy today. And the next time a FairTax proponent asks “Have your read the book?” as they are fond of doing, reply, “Yes we have. Have you?”
My FAIRTAX Story - Paul Wizikowski
What does the FairTax mean to you? To Paul Wizikowski it means potential restored and ambition rewarded.
Another great video from FairTaxHub
FairTax Rally and Economic Ads
Some AFFT updates...
FairTax.org is asking you to join thousands of your fellow FairTax supporters as they rally for Tax Day 2009. They have two April events planned: Jacksonville, FL (4/11) and Columbia, SC (4/15).
| A number of FairTax All-Stars are scheduled for one or both rallies including: |  Former Gov. and Presidential Candidate, Mike Huckabee |
 Syndicated radio host and FairTax book author, Neal Boortz |
 FairTax bill Lead-Sponsor, Rep. John Linder (GA-7) |
 FairTax bill co-sponsor, Rep. Steve King (IA-5) |
 Business entrepreneur and radio host, Herman Cain |
 Ga. Insurance and Safety Fire Commissioner, John Oxendine |
 National Communications Director for AFFT, Ken Hoagland |
Also, FairTax.org has placed full-page ads promoting the FairTax as a REAL economic stimulus package.
They recently purchased full-page ads in Investor’s Business Daily, the Los Angeles Times, Chicago Tribune and Tulsa World. They are asking for help to run more ads to reach fellow citizens, policy makers, and elected officials during this critical time for our economy. (See the latest full-page Investor’s Business Daily ad here).
Joe the Plumber: Plunge the IRS for good
Campaign icon’s website urges America to switch to FairTax
“Are you sick and tired of being forced to file a tax return every year?” asks Wurzelbacher on his IRSvote.com website. “I’m here to ask my fellow Americans to join me to me to make this the last year we ever have to file a tax return. I’m going to give the American people the opportunity to vote the IRS out.”
State Budget Shortfalls Present a Tax Reform Opportunity
Key Findings
• Forty-five states face budget shortfalls of varying degrees, totaling approximately $132 billion through fiscal year 2010. However, every state but one expects revenues in 2010 to be higher than in 2006, and all but nine states have seen revenues grow faster than inflation from fiscal years 2006 to 2009.
• States hit hardest are those that relied most heavily on growth in unstable revenue sources like taxes on capital gains, high-income earners, and corporate profits.
• Punitive taxes on unpopular groups, such as smokers, drinkers, or high-income earners, are poor tax policy and a source of instability because they force a small group of people to pay for government services broadly available to all citizens. Shifting the burden of paying for these programs away from most taxpayers can result in demands for more government than people are actually willing to pay for.
• State and local officials are more frequently using the “Washington Monument” ploy-threatening to cut politically popular services to create pressure for tax increases.
• Broadening tax bases, lowering rates, and eliminating targeted tax credits can generate extra revenue without unduly harming a state’s economic performance.
Time To Fix the Trade Deficit
Peter Morici writes in an article “Time To Fix The Trade Deficit“:
Trade deficits and shoddy banking practices pushed the economy into recession, and until both trade and the banks are fixed, sustained economic growth cannot be accomplished. The trade deficit will rise again as the effects of the stimulus package are felt, but if its underlying causes are not addressed, the trade deficit will drag the economy back down into a double dip recession.
Pushed up by the surge in oil prices and the ballooning trade gap with China, the trade deficit is reducing U.S. GDP by $400 billion, annually, and significantly adding to the pain imposed by the unfolding recession. The negative effects of the trade deficit on GDP and employment overwhelm the potential positive effects of President Obama’s proposed stimulus spending.
The United States is the only one of 30 OECD countries with no border adjustment element in its tax system. FairTax.org states that because the FairTax would automatically be border adjustable, the 17% competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home. Leo Linbeck, chairman of FairTax.org, has stated that U.S. manufacturers and sellers can not compete successfully with foreign producers because of U.S. tax policy.
The Ways and Means Committee is tasked with writing the taxation laws that raise revenues for the nation but the fact that foreign nations routinely tax U.S. products upon entry and that these nations forgo national taxes on exports to the United States is a Ways and Means blind spot that has all but killed the ‘Made in America’ label.
Under the FairTax, American companies doing business internationally would be able to sell their goods at lower prices but at similar margins, and this would bring jobs to America. In addition, U.S. companies with investments or plants abroad would bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment. This would result in imports and domestic production competing on a level playing field.
New FairTax Web Commercials
Here are some new commercials from FairTaxHub.
Lunch&Taxes: Less
Lunch&Taxes: Collected
Lunch&Taxes: Her
Lunch&Taxes: How it Works
Lunch&Taxes: How Much
The embedded cost of taxes
It is stated that retail prices are inflated due to taxes and compliance costs that become embedded into the product and passed to the consumer by producers and suppliers. We’ve tried on this blog to understand the cost associated with federal taxes embedded into the prices of goods and services; and more directly, how much of this cost can be removed with a transition to the FairTax. John Linder states the FairTax would eliminate almost all federal taxation costs from the supply chain, which could lower production costs by up to 30%. Americans For Fair Taxation has stated that the production cost of domestic goods and services could decrease by approximately 22% on average under a non-accommodation model after income taxes are removed.
The 22% figure is based on a study conducted by Dr. Dale Jorgenson, who found that producer prices would drop between 15% and 26% (depending on the type of good/service) after the switch to a consumption based tax. Jorgenson’s research included all income and payroll taxes regardless of whether they were paid by employees or employers in the estimation. It is also important to note that the Jorgenson model did not capture any reduction in the cost of compliance associated with changing from a complex income tax system to a simpler consumption tax. If businesses provided employees with their gross pay (including income tax withholding and the employee share of payroll taxes) and used the remaining to decrease costs, Arduin, Laffer & Moore Econometrics estimated production costs would decrease by a minimum of 11.55%.
So, how does this break down? Does the FairTax rate (be it higher than current legislation for revenue neutrality) have a relational tie to the taxes replaced (windfall gains to income or price offsets). Let’s discuss
The FairTax is alive in the 111th Congress
A message from John Linder
Friends,
I am extremely happy to tell you that HR 25, the FairTax, has been reintroduced and is alive and well in the 111th Congress. Not only that, the FairTax has been dropped with more original co-sponsors than it has ever had. This is an incredible accomplishment, and it has everything to do with you and the immense passion and work you have put into it.
As a citizen co-sponsor of the FairTax you have played an active role in illustrating to other Members of Congress that the FairTax is important to you and is the right step for America to once again regain her prominence. Thank you for that.
Our citizen co-sponsor effort has become a powerful tool, as I hoped it would. This means we need to work together to enhance and strengthen it. Our goal in Congress is to reach 100 co-sponsors on the bill, and our goal for the citizen co-sponsors is to reach 100,000. I truly believe that if our citizen co-sponsors can achieve that goal, then that will be the catalyst for HR 25 crossing that 100 co-sponsor threshold. So now is the time, if you haven’t gotten a friend to join the fight, do it today by sending them to www.johnlinder.com. If you already have, thank you; now go try and find ten more.
The success of the FairTax to date has been tremendous, and it is all a result of your hard work. It is incumbent upon all of us that we step up our efforts to ensure that the FairTax has not yet reached its peak, but is still climbing.
Thank you again for all you do,
John
Just What This Downturn Demands: A Consumption Tax
Just What This Downturn Demands: A Consumption Tax
From the New York Times, November 9, 2008
The country is now in the midst of the deepest economic crisis since the Great Depression. But as a new administration prepares to enter the White House, the crisis could end up being a potent ally for change. Without it, political resistance to the steps needed to address our most acute and longstanding economic problems would be almost insurmountable.
Despite broad agreement that the nation needs to increase spending in many domains — including infrastructure, health care, scientific research and clean energy development — no one has forged a legislative coalition capable of raising the necessary tax revenue. But with the country sliding into what promises to be a sharp and protracted economic downturn, it is imperative to increase spending over the short run, regardless of how we pay for it.
Even stalwart conservatives concede the point. For example, Martin Feldstein, the Harvard economist who was an adviser to the campaign of Senator John McCain, recently wrote in The Washington Post, “The only way to prevent a deepening recession will be a temporary program of increased government spending.” Mr. Feldstein suggested that government might need to offset a shortfall of some $300 billion in household spending.
In the long run, though, it will be necessary to raise enough tax revenue to balance the budget. One of the most effective ways to do that is by changing what we tax. Most federal revenue now comes from the income tax. Because a family’s annual income equals the amount it spends each year plus the amount it saves, we are effectively taxing savings. And savings rates have fallen precipitously, often dipping into negative territory as families have used home equity loans and credit card debt to spend more than they earned. Because the country needs to save more, taxing savings makes no sense.
The first reform that Barack Obama should consider is replacing the progressive income tax with a progressive tax on consumption. A family would report its income to the Internal Revenue Service as it does now, and also its savings, as it now reports contributions to retirement accounts. Annual consumption would then be calculated as the family’s income minus its savings. Its taxable consumption would be that amount minus a large standard deduction — say, $30,000 for a family of four.
A family that earned $60,000 and saved $10,000, for example, would have taxable consumption of $20,000. Initial tax rates on consumption would be low, and would then rise steadily with consumption, topping out at higher levels than the current top rates on income.
Such a tax could raise more revenue than the current system, yet would be far less burdensome for families at nearly all income levels. Because of the large standard deduction, middle-income families would pay less than they did before, and high-income consumers could limit their tax increases by saving more.
How painful would that be? Some wealthy families now spend millions of dollars on coming-of-age parties for their children. A steeply progressive consumption tax would encourage them to spend less, which would not be much of a sacrifice, since the main effect would be to lower the bar that defines an acceptable coming-of-age party for people in their tax bracket.
Other changes in what we tax could further reduce the revenue shortfall while producing positive side effects. Energy and climate specialists, for example, have long advocated taxes on carbon. The burden of these levies would be lessened by the resulting reductions in pollution and congestion.
Imposing new taxes is never easy. But recent research suggests innovative ways of making it more palatable. Behavioral economists have shown that the pain caused by a loss is far greater than the pleasure caused by a gain of the same magnitude. This asymmetry, called loss aversion, helps explain why it is so hard to pay higher taxes. Doing so means reducing consumption now — a loss that is immediately painful.
To overcome this hurdle, Congress could vote to increase future taxes — a strategy that happily coincides with current fiscal imperatives. Tax increases are never a good idea when the economy is in the doldrums, but the current downturn will not be permanent. Higher taxes could be phased in gradually, after income growth resumes. As long as each year’s tax increase is smaller than the corresponding growth in income, painful reductions in consumption will not be necessary.
Evidence supporting this strategy comes from “Save More Tomorrow,” a payroll savings program designed by the economists Richard H. Thaler and Shlomo Benartzi. Under this program, workers can allocate a portion of future salary increases to retirement savings accounts. Hundreds of corporations report that their employees began saving at sharply higher rates after the introduction of this program.
It would be quixotic to imagine that losses from the current economic meltdown won’t be painful. But the crisis also opens new doors to policymakers — providing them with options that would have seemed unthinkable just a few months ago.
IRS issued $1B in bad refunds
Report: IRS issued $1B in bad refunds in 2007
The government sent out more than $1 billion in fraudulent refunds last year
WASHINGTON — The government sent out more than $1 billion in fraudulent refunds last year and offered this explanation Thursday for the bad checks in the mail: The Internal Revenue Service has too few resources to pursue every tax fraud case.
IRS investigators never even looked at an estimated $742 million in fraudulent refunds, according to a report by the Treasury Department office that monitors the agency. When they did identify an additional $264 million in bad refunds, it was too late to stop them from being issued.
The report noted that the IRS must divide its limited resources among numerous areas of compliance. “However, this is a significant revenue loss to the federal government and that must be addressed,” said J. Russell George, the Treasury’s inspector general for tax administration.
The number of improper refunds filed appears to be growing rapidly, the report said. “The problem is becoming unmanageable, and the IRS cannot afford to continue handling it in the same manner as in the past,” according to the report. It urged the tax agency to make the refund screening program — known as the Questionable Refund Program — a priority.
The IRS has estimated that the tax gap — the difference between taxes owed and taxes actually paid — at about $290 billion a year. Of that, about 57 percent comes from individuals understating incomes or overstating deductions and exemptions.
IRS spokesman Terry Lemons said the agency has made significant improvements over the past two years. “We stop the vast majority of fraudulent refunds and we prosecute people who try to cheat the system,” Lemons said.
George’s report recommended the IRS divert resources to go after such fraud cases. But Lemons said that could hurt other operations and mean fewer dollars from enforcement activities.
Lemons said the agency issued more than $470 billion in refunds in 2006 and 2007.
The report said the IRS fraud detection centers stopped more than $1.2 billion in fraudulent refunds in 2007, compared with $412 million in 2005, the last year the detection system fully functioned.
Because the system picks up only those refunds with higher dollar values, about 500,000 potentially fraudulent refunds did not enter the centers’ screening process. Had those refunds been included, the centers would have identified an additional $742 million in fraud, the report estimated.
In 2006, because of a technical problem in the fraud detection system, the IRS succeeded in identifying and stopping only $189 million in fraudulent refunds while paying out an estimated $894 million, the report said.
The Treasury’s inspector general, in a separate report Thursday, lauded the IRS for what it said was a “generally successful” 2008 filing season during which returns and refunds were processed in a timely fashion.
This report said the IRS did a good job in overcoming several obstacles, including changes involving the alternative minimum tax. The agency was also responsible for sending out checks to more than 130 million people as part of the economic aid plan signed into law in February.
Do the Right Thing
No national politician has worked harder to put the FairTax on the media and public radar than Mike Huckabee. As a former Arkansas governor and 2008 presidential candidate, Huckabee used the state primaries to promote the FairTax, providing major exposure–and building great grassroots support–all over the country. And he’s not done yet.
Now he’s back as host of a new show (”Huckabee“) on Fox News and doing commentary for ABC Radio. He is also starting a national tour now to promote his new book, Do the Right Thing: Inside the Movement That’s Bringing Common Sense Back to America. Governor Huckabee’s book covers the FairTax at length, clearly stating that, “It’s been my position that a responsible tax structure should be flat, fair, finite, and family friendly. The FairTax covers all those criteria.”
