Review of FairTax Book in NY Post
From “Tax Reform Do’s and Don’ts,” published in the NY Post two days ago by William Ahern and Andrew Chamberlain:
TO rally Americans for a radical new tax system, radio host Neil Boortz and Rep. John Linder have written a New York Times bestseller called “The FairTax Book.” It’s more of a campaign document than a tax book, and an ambitious campaign it is: To abolish the IRS and enact a national sales tax to replace income taxes.
So who would collect the taxes if the IRS’s 100,000 employees were suddenly looking for work? The authors envision state tax collectors doing the heavy lifting, collecting the national sales tax along with their own state-level sales — for a piece of the action, of course.
Actually it’s not just the individual income tax that Boortz and Linder would banish but also the corporate income tax, the estate tax and even payroll taxes — both Social Security and Medicare.
They are right on target in their scathing critique of our inefficient income and payroll taxes. Economists of all political stripes make the same charge, accusing our tax system of costing us far more than the money collected — in wasted administrative costs and so-called opportunity costs, the value of all the better mousetraps we’d invent if we weren’t inventing tax shelters. (Full disclosure: the FairTax estimates of tax compliance costs come largely from Tax Foundation, my employer.)
So what about the rate? How high would the FairTax have to be to pay all the same bills we’re currently paying?
There’s the rub.
Boortz and Linder predict that when income taxes are abolished, the price of everything will drop about 22 percent, so it would be fair to replace that revenue with a national sales tax. Prices of most things would allegedly stay about the same.
President Bush’s Federal Tax Reform Panel is about to throw some cold water on that calculation by announcing that the rate would have to be three or four times higher. (The panel’s final report is due Nov. 1.) Since President Bush and several other prominent Republicans have said nice things about the concept, the report will be a bitter pill.
But “The FairTax Book” is prepared for every betrayal. The typically militant member of the FairTax movement (www.fairtax.org) will assail the panel members for being creatures of Washington, who are incapable of thinking and acting radically for the good of the country.
“Three for four times higher.” Let’s get real. Four times higher would be a 92% inclusive tax. That would be an 1150% exclusive tax rate!
HR25/S25 is designed to be revenue neutral. So, it does not matter what the tax rate is going to be – because we are already paying the tax one way or another. Yes there will be a lot of discussion in congress about what the actual rate should be. But, a lot of research has already been done and the expected rate is 23%. OK it may be 3 or 4% one way or the other – but it will not be 3 or 4 times higher! The expected rate (proposed rate based on research) is 23%.
This article is simply irresponsible. While the article was well written (correct English), maybe the Post needs to hire a mathematician or two.
I agree with Bill Rook, that the NY Post writer needs to “get real.” But I’ve got a different beef from him. The income tax might be bad, but not as bad as the writer says below:
Economists of all political stripes make the same charge, accusing our tax system of costing us far more than the money collected — in wasted administrative costs and so-called opportunity costs, the value of all the better mousetraps we’d invent if we weren’t inventing tax shelters.
I’ve never heard any economist of any political stripe say that our tax system costs us more than the money collected. As to the money chasing tax shelters — believe me, I wish I could find some to chase. Unfortunately, they all got shut down in the tax reform of the 80’s.
Having said all that, I’m so mad at what I see from the Tax Reform Commission that I would almost — but only almost — consider the FairTax as an alternative.
Thanks for the support Hayden, but I have to agree with the Economists on this one. While there is a lot of controversy regarding the actual amount of compliance and lost opportunity costs, it is a lot of time/money. To an employer, time and money is the same thing—to hire the time of a tax accountant, it costs money.
The cited statement says “…our tax system is costing us far more than the money collected …” Now this can be understood as “the value of compliance and lost opportunity costs are more than the values of actual taxes collected” or as “the value of compliance and lost opportunity cost are significant additions on top of just the money collected.” I think the latter interpretation is more accurate than the former.
Now that we have the semantics taken care of –let’s take a look at the crux of the issue. The current tax system is not efficient. In order to collect the tax, companies and individuals are presented with a myriad of opportunities to modify their financial behavior in the interest of reducing their tax bill. This goes far beyond the tax-shelters. A business may be looking at two locations to build a plant. They have to consider all the associated costs, from labor and productivity to supply chain and taxes. Before considering taxes, the higher cost of labor could be offset by the high levels of productivity in the US and our excellent transportation system over an offshore location. However, once taxes are added to the equation, the offshore location is better.
This is not just an onshore offshore issue. Let’s look at a company considering two projects. Project A is a long term project that will make a company more money over the long run than the competing short term Project B. The company only has enough resources to do one project. Both projects cost the same money today to get started. The investment must be depreciated over 20 years for Project A and 3 years for Project B. If the company spends $1,000,000 today on Project A and $1,000,000 of income is generated over the first three years, we would consider that a break even point after three years. However, the company must claim the full $1,000,000 as income but can only claim $125,000 in depreciation expenses. The resulting $875,000 “profit” is hit with $306,250 in taxes. The company is still down $306,250 after three years. Project B would allow the full depreciation of the entire investment during the three years because the project is complete. Now this was calculated using straight line depreciation. The company does have some other options for accelerated depreciation, but that would take more time to explain. We can also talk about FIFO and LIFO methods of inventory calculations and their effect on “reported profits.”
The tax code not only increases the complexity of company decision making process, it also increases the complexity of reporting to the extent that a company can report almost anything it desires—Enron for example.
Hold on one minute! Do you think that I am so bold as to blame Enron on the current tax system? Great, I am saying just that. The complexity of the tax code and multiple options for calculating profits under GAAP allows a company to allocate, reallocate, and just plan hide profits or liabilities to make the income statement say anything they want it to say. That is what Enron did. The tax code helped them do it. We need a new tax code.
I would love to see the tax reform panel come back with a high rate (let’s say 50% at the counter).
Since the FairTax is designed to be revenue neutral, they would be openly admitting, then, that we are _already_ being taxed at this rate. Correct?
I’d like to see the quote: “President’s own tax reform panel shows we’re already paying a 50% tax at the counter” on a few headlines.
I agree with Bill Rook that the existing tax code distorts - invokes distortion - of economic activity for the purpose of optimizing taxes at the expense of common sense and the bottom line. I have personally experienced the temptation to engage in this distortion even though my options in this area are quite limited. (And it’s quite possible that I have subtly and subconsciously altered my behavior to some extent.) Enron is perhaps the best and most understandable example of this.
Simply put, many people will do wrong or inefficient things to avoid taxes. Robert Kiyosaki (Rich Dad, Poor Dad author) advises readers to make investments (and economic decisions generally) only if they make sense at the bottom line, and not for the specific purpose of tax avoidance when the bottom line is adversely affected.
For example, some people might make suboptimal replacement investments to take advantage of deferral of capital gain taxes under Section 1031 under the time constraints for making such tax-preferenced investments. There really is entirely too much time and effort and economic inefficiency surrounding the tax code.
I couldn’t understand some parts of this article of FairTax Book in NY Post :: The Fair Tax Blog, but I guess I just need to check some more resources regarding this, because it sounds interesting.