Taxing of State and Local consumption and non-education salaries is approximately 9% of the FairTax base, but is it proper and constitutional? Jim Bennett and Hank Van Gieson go for Round 2 in the debate (see Round 1 from 2010). On this topic, AFFT’s Karen Walby submitted this to the Congressional record:
Public finance economists realize that the current system imposes taxes on government, albeit indirectly through the higher wages government must pay its employees, the payroll taxes it must pay, and the higher payments it makes to government contractors, than would otherwise be the case if there were no federal income tax system. They further realize that when you shift from an income tax to a consumption tax you must maintain the same “tax wedge” in government. Not doing so would distort the private marketplace, creating an incentive to consume through the medium of government. Federal taxation of units of government has already been upheld by the Supreme Court when it affirmed that the federal government could require all units of government to pay payroll taxes on wages paid to its employees.
FairTax.org acknowledges that increased revenue from taxing federal government consumption is exactly canceled by increased costs in the federal budget (as pointed out by the tax panel). What the tax panel neglected to point out is that this accounting method is used today by the Office of Management and Budget and Congressional Budget Office.
The FairTax taxes all consumption, including government consumption, once. Today, the income tax and payroll tax are imposed on government consumption by taxing government employees and government contractors, making government pay more than it would in the absence of these taxes. This tax revenue appears in the receipts column in the federal budget, and the added expense is counted in the federal budget as spending (exactly canceling each other out). Fortunately, at least in this respect, the federal budget is honestly presented.
This tax revenue currently “paid” by the federal government is part of the tax revenue that the FairTax replaces. The federal government could artificially reduce both spending and tax revenues by exempting its workers and contractors from both income and payroll taxes and lowering wages paid to employees and amounts paid to contractors accordingly. Similarly, the FairTax taxes government consumption and, like today, the expense and revenue would be reflected on the federal budget as such. If the FairTax were to exempt government from tax and if federal spending were held constant, then the purchasing power and size of the federal government as a share of the economy would be dramatically increased. Further, not taxing government consumption would artificially make government consumption appear cheaper and promote increased consumption via government. So, though a wash, there would be negative economic consequences if the FairTax did not continue the practice of taxing government consumption.
Hank has argued that taxing consumption is unnecessary to prevent government competition with the private sector due to Sec 704 and questions the constitutionality of it.
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.
Does Sec 704 make it unnecessary? What about the tax wedge? Should state and local government reflect the comparable costs of private providers, even if they’re not directly competing (applicable for outsourcing)? Would shifting that cost away from the state present a more accurate picture of state / local cost vs federal cost, or a less accurate one? No ear biting - Ding Ding Ding… Fight!
It’s been a long time since I posted anything. I read this today and thought it might be of interest. A dozen House lawmakers and Sen. Mike Lee (R) of Utah – backed by swarms of activists affiliated with the group FreedomWorks – are offering up a package of about a dozen proposals that they’re calling The New Fair Deal. The tax portion is described this way:
No more pitting us against each other. Today’s hopelessly complicated tax structure unfairly pits one American against another. Marriage penalties, arbitrary annual extenders, and special-interest tax breaks typify a massively complex and inefficient tax code-and needlessly divide us.
Why not sweep all that away and replace it with a system that’s simple and fair to all? Under the New Fair Deal, distorting “credits” and deductions will be eliminated, today’s seven brackets will be reduced to just two, and taxation will be much more simple and efficient for everyone.
It then goes on to list some basics of the plan:
- Replaces today’s hopelessly complicated income tax code with a simple, two-rate flat tax system.
- A 1% “skin-in-the-game” contribution, so everyone pays something.
- Eliminates most credits, deductions, and exemptions, but retain a generous standard deduction and deductions for charitable donations and mortgage interest.
- Eliminates the marriage penalty through doubling.
- Repeals the Death Tax and the Alternative Minimum Tax.
So what do you think?
Hank has asked that we provide some critical input on the attached study prior to taking on Rob Woodall and Leo Linbeck.
The September 2006 Fairtax Rate study concluded that an inclusive sales tax rate of 23.82% would be revenue neutral. The study is fatally flawed for two reasons. (1) Including Government consumption in the base is inappropriate under our constitutional republic form of government, and (2) The failure to properly account for legal tax avoidance and illegal tax evasion. The following discussion explores both criticisms and addresses several related issues along the way that bear on my conclusion.
Give it a read and provide Hank some feedback.
[Author's note: The following is an article that originally appeared on CNBC.com]:
The U.S. economy needs a simplified and more “progressive” tax code that would abolish income and corporate taxes, while bringing in enough revenues to pay for the government’s obligations, former Treasury Secretary Paul O’Neill told CNBC’s “Squawk Box” on Friday.
“Our tax code proves we are not an intelligent people because no intelligent people would have invented this thing,” said O’Neill, who called the current tax system, often criticized as bloated and cumbersome, a “monstrosity.”
In the context of the overall debate about fiscal reform, O’Neill called for a “progressive…value-added tax” that could help boost economic activity by substituting for corporate, payroll, and individual income taxes.
O’Neill, who was unceremoniously drummed out of his job as Treasury Secretary under former president George W. Bush, described himself as unenthusiastic about either of the major contenders for the presidency.
The former head of Alcoa said he would “like to” support the budget proposals of either President Barack Obama or his Republican challenger, Mitt Romney.
However, he said that “none of the plans on the table would get us a balanced budget again until 2040. I would like there to be a balanced budget in my lifetime.”
In this unforgettable video saga, we chronicle how the Federal income tax system has eroded the American economy and outline a brilliant, yet simple plan for total tax replacement.
I’ve just moved the FairTax blog to a new server. If you notice any broken links, etc. Please let me know!
Here is Mitt’s Plan – What do you think?
Romney -> Issues -> Tax
Reducing and stabilizing federal spending is essential, but breathing life into the present anemic recovery will also require fixing the nation’s tax code to focus on jobs and growth. To repair the nation’s tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government. The principle of fairness must be preserved in federal tax and spending policy.
America’s individual tax code applies relatively high marginal tax rates on a narrow tax base. Those high rates discourage work and entrepreneurship, as well as savings and investment. With 54 percent of private sector workers employed outside of corporations, individual rates also define the incentives for job-creating businesses. Lower marginal tax rates secure for all Americans the economic gains from tax reform.
- Make permanent, across-the-board 20 percent cut in marginal rates
- Maintain current tax rates on interest, dividends, and capital gains
- Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
- Eliminate the Death Tax
- Repeal the Alternative Minimum Tax (AMT)
The U.S. economy’s 35 percent corporate tax rate is among the highest in the industrial world, reducing the ability of our nation’s businesses to compete in the global economy and to invest and create jobs at home. By limiting investment and growth, the high rate of corporate tax also hurts U.S. wages.
- Cut the corporate rate to 25 percent
- Strengthen and make permanent the R&D tax credit
- Switch to a territorial tax system
- Repeal the corporate Alternative Minimum Tax (AMT)
FairTaxer @ WordPress has an interesting post regarding Romney’s comment on the FairTax discussing a paper “A Comparison Of Governor Romney’s Middle-Income Tax Proposals Vs. The FairTax Legislation”. Hank asked us to post it for discussion.
During the 12 September 2011, Republican Presidential debate, Governor Romney made the following statements in response to a question about the FairTax.
“But the way the fair tax has been structured it has a real problem and that is it lowers the burden on the very highest income folks and the very lowest and raises it on middle income people. And the people who have been hurt most by the economy are the middle class. And so my plan is for middle income Americans, no tax on interest, dividends or capital gains. Let people save their money as the way they think is best. We’re taxing too much, we’re spending too much and middle income Americans need a break and I’ll give it to them.”
The claim made by Governor Romney, that the FairTax would lower the tax burden on the lowest and highest incomes while raising it on the middle-income wage earner (current tax code implied), is inconsistent with the preponderance of information that may be accessed from multiple sources comparing the FairTax with the current tax code. That being so, I will refrain from further comment on this point made by the Governor and defer to the reader to present argument to the contrary. As to the Governor’s implication that his tax proposals will be less of a burden on the middle-income earner than that anticipated with the FairTax legislation, I have not, as of this writing, discovered a study that would either directly support or discredit the Governor’s claim. Therefore, it will be the intent of this document to present the specifics of the Governor’s proposals with that of the FairTax legislation for the purpose of conducting a comparative analysis that will either substantiate or refute the Governor’s claim.
A friend asks on Facebook:
Question for econo-geeks. Is the VAT (value added tax) a force behind corporatism?
Here’s the argument.
I assume the VAT is not collected at each stage of value added within a firm, but only when a firm transfers a good (with its value added) to another firm in the production process. Like a sales tax but between businesses.
Therefore the VAT works to the advantage of large multinationals who do a lot of processing internally, and to the disadvantage of decentralized industries where many separate, specialized firms play a part in ‘adding value’ each step of the way.
This also leads to economies of scale (?) in internalizing steps in the production process (making firms larger) because one can charge a lower price on the final product by not having to mark-up each step of the way to pay for the VAT. Presumably a firm that could do the whole process in-house would only pay one VAT mark-up at the end.
Or does it not matter, since the value added by the firm will be factored into the percentage of the tax regardless of how many times it is applied in a process?
Anyone have insights?
Topic we’re familiar with…
Apple made an aggressive pitch for a corporate tax holiday Monday, stressing that it plans to keep more than $60 billion parked offshore until Congress makes it easier for companies to bring those profits home.
The warning from the nation’s most valuable company came as Apple announced it would pay a dividend to shareholders and buy back stock, moves that will cost about $45 billion over three years.
But Apple — which, like several other Silicon Valley titans, has spent months lobbying for more flexibility to repatriate offshore profits — said it will rely exclusively on domestic cash reserves for the transactions and will not touch the billions in profits held abroad.
“Repatriating the cash from offshore would result in significant tax consequences under current U.S. law,” Apple Chief Financial Officer Peter Oppenheimer said on a conference call.
Apple and other backers of a repatriation holiday — including Oracle, Cisco, Microsoft and Google — threw their support last year behind the WIN America Campaign, a lobbying coalition that urged Congress to temporarily reduce the tax rate that U.S. multinationals have to pay on offshore profits.