The Fair Tax Act, Part XLVI
April 5, 2007 · Filed under: Education
Section 703 strictly details that governments are taxed under the FairTax (an issue beaten to death, but here we go again I suppose):
`SEC. 703. GOVERNMENT PURCHASES.
`(a) Government Purchases-
`(1) PURCHASES BY THE FEDERAL GOVERNMENT- Purchases by the Federal Government of taxable property and services shall be subject to the tax imposed by section 101.
`(2) PURCHASE BY STATE GOVERNMENTS AND THEIR POLITICAL SUBDIVISIONS- Purchases by State governments and their political subdivisions of taxable property and services shall be subject to the tax imposed by section 101.
`(b) Cross References- For purchases by government enterprises see section 704.
11 Responses to “The Fair Tax Act, Part XLVI”
Wouldn’t want to disappoint you so here is a summary of what we agree on and perhaps don’t agree on.
First, we agree that gross wages won’t change, so take home pay will increase when the income tax and payroll withholding is removed.
Next, we agree that prices will initially rise 10-15%.
We also agree that the reason to tax governments is to prevent unfair competition with the private sector.
Using the Kotlikoff/BHI study report data, it is a fairly simple matter to calculate the added government costs for the consumption/purchase of goods and services. Without repeating the details, I estimate that the Fairtax will add $200 billion annually to federal costs, and $300 billion to state/local costs. In the case of the federal government, I submit that it makes no sense for the Treasury Secretary to pay the tax with one hand and put the tax revenue back in the Treasury with the other hand. I believe it is simply a shell game aimed at increasing the consumption base and decreasing the overall sales tax rate by a few percentage points. You believe that it is a necessary action to prevent competition. Keeping the federal government out of private sector enterprises might also be handled legislatively, but I don’t expect you to agree.
In the case of the $300 billion added cost to state/local governments, that is a real cost and will require state and local taxes of all types to be raised accordingly. If state/local taxes average 10% today, they would have to be raised to over 13% to deal with the added costs of the Fairtax. The so called revenue neutral Fairtax is only revenue neutral by shifting taxes to the state and local level. Is that really fair?
One aspect that I’m pretty sure we don’t agree on is my contention that for the federal government to tax state and local governments could be unconstitutional under our republican form of government. There are numerous Supreme Court decisions on this subject, and some quotes from my friendly tax lawyer might add something to the debate
“McCulloch set up the notion of mutually exclusive sovereignty and when you add Farrington v. Tenn. to the recipe I cannot see any other conclusion. Since sovereignty is the measure of taxing authority (coextensive), then the same mutually exclusive taxing authority would preclude either from taxing the other.
As an additional argument to that effect, McCulloch defined the scope of sovereignty as those subjects which exist by its authority or are introduced by its permission. The federal government fits both, having been created by the States and having come into existence by virtue of their consent. If the creator cannot tax its creature (McCulloch) then it would be asinine to suggest that the creature could tax its creator.”
This issue obviously can’t be resolved in advance, but I sincerely wish that taxing governments had not been included in HR25 although the sales tax rate would have had to be 4-5% higher.
Welp, we shall see. Intergovernmental tax immunity is simply a doctrine of law interpretation and as such, has been handled in several ways. For example, state government officials and enterprises are not immune to Federal taxes (on gas, income, etc), nor do the Feds get away from most state excise taxes, either (again on gas, and the like). Essentially my argument is that if they are really tax-immune to each other, this immunity is incomplete or not implemented completely, whichever you prefer.
We’ll see on that point how it goes. Certainly some states have no objections, but others may. I have yet to hear of any. I believe in the end the majority opinion of states will win the day on whether or not state/local gov’t has to pay taxes or not.
I would point out again though, that if governments are allowed to skate completely tax-free, they will all gain the 10-15% decrease in costs for goods/services before tax increases and this will extend to all their endeavors where they compete with the private sector. With that kind of price difference, we will more than likely see growth of government services and programs at all levels (not the outcome I wish for).
James, I’m baffled by your position. What you just wrote is that you would rather increase the annual cost of governments at all levels by 25% ( $500 billion increase on $2 trillion consumption) in order to ensure that governments don’t compete with the private sector, as opposed to treating governments as businesses and leaving them tax free. If governments aren’t taxed, why would they have any greater advantage over private sector businesses that also aren’t taxed? What is the “price difference” you wrote about? Why would you support a tax increase on all of us when it isn’t obvious that there would be any more government competition than exists today? And I’ll repeat, if the government tries to get into more business enterprises than they are in today, legislative remedies are certainly available.
I’d also like you to comment on the absolute absurdity of the Federal government taxing itself. I maintain that it’s a shell game intended only to raise the taxable consumption base and lower the sales tax rate. How on earth can it ever make any sense for a government to try to tax itself into prosperity?
By the way, in the event you or anyone else have doubts about my $500 billion figure, I’d be happy to post the three page analysis that is the basis for my position.
I have been digging around on Findlaw for Supreme Court cases on this kind of thing and found this footnote in South Carolina v. Baker, 485 U.S. 505 (1988):
Footnote 11: (ruling by JUSTICE BRENNAN)
“The sources of the state and federal immunities are, of course, different: the state immunity arises from the constitutional structure and a concern for protecting state sovereignty whereas the federal immunity arises from the Supremacy Clause. The immunities have also differed somewhat in their underlying political theory and in their doctrinal contours. Many of this Court’s opinions have suggested that the Constitution should be interpreted [485 U.S. 505, 519] to confer a greater tax immunity on the Federal Government than on States because all the people of the States are represented in the Federal Government whereas all the people of the Federal Government are not represented in individual States. Helvering v. Gerhardt, 304 U.S. 405, 412 (1938); McCulloch v. Maryland, 4 Wheat. 316, 435-436 (1819); New York v. United States, 326 U.S. 572, 577 , and n. 3 (1946) (opinion of Frankfurter, J.). In fact, the federal tax immunity has always been greater than the States’ immunity. The Federal Government, for example, possesses the power to enact statutes immunizing those with whom it deals from state taxation even if intergovernmental tax immunity doctrine would not otherwise confer an immunity. See, e. g., Graves v. New York ex rel. O’Keefe, 306 U.S. 466, 478 (1939). The States lack any such power. Also, although the Federal Government has always enjoyed blanket immunity from any state tax considered to be “on” the Government under the prevailing methodology, the States have never enjoyed immunity from all federal taxes considered to be “on” a State. See infra, at 523, and n. 14. To some, Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985), may suggest further limitations on state tax immunity. We need not, however, decide here the extent to which the scope of the federal and state immunities differ or the extent, if any, to which States are currently immune from direct nondiscriminatory federal taxation. It is enough for our purposes that federal and state tax immunity cases have always shared the identical methodology for determining whether a tax is “on” a government, and that this identity has persisted even though the methodology for both federal and state immunities has changed as intergovernmental tax immunity doctrine shifted into the modern era. See Graves, supra, at 485.”
It seems to be suggested by more recent SCOTUS decisions that the State immunity from Federal taxation is somewhat limited, though to what extent I am as yet unsure. The Feds seem able to be as immune as they choose to pursue under the Supremacy clause. Interesting... there is clearly a trend towards a stronger Federal government at the expense of the States over the past century, which many Justices don’t agree with, but clearly seem unable to stop. Many of these decisions are 5-4 kinds of things, although the above one is 7-1. Oddly enough, Sandra Day O’Connor, generally known as a moderate, has been the biggest advocate of state sovereignty throughout all the cases I have read so far (about 4). She wrote very long dissenting opinions on these cases.
I just want to discourage government from growing. Making things pricier for them helps. In addition, government enjoys something that no business can enjoy... free capital. Government need not turn profit nor be efficient so long as they can convince us their services are necessary.
Also, the Federal government is not really attempting to tax itself (as you and I have discussed). It is instead just keeping the bill uniform to avoid extra measures to try and exempt government taxation via credits or further certificates. It seems like it would be cheaper in the long run to avoid another level of regulation in this proposal since the Fed tax ‘burden’ is no burden at all.
I have agreed with you on the point that local/state government expenses will increase (I would expect by some amount between 15 and 25%, depending on state) by the amount of their effective tax burden. As I have said before I believe this is basically still in the citizen’s interest as the amount of local/state increase is more than offset by their effective tax decrease on the Federal level in virtually every scenario I have done.
So I think this little bit of the law is kind of a preference issue. Do you favor your state government over the Fed for this or not? I don’t particularly care, as I live in a tax-me state (Nebraska) that is much more into Farm subsidies than anything else so far as I can tell. I used to live in Louisiana, which taxed a bit less, but was so useless in their ability to spend money on anything useful, that I doubt this proposal would make any difference.
ALL THAT SAID, this is one of those things you should watch if this bill actually gets out of Ways & Means. This is on the top 3 list of things I think will likely get changed by the legislative process.
James, good research job. Your observation on the evolving trend towards less and less State immunity from Federal taxation is right on the mark. It seems to me that the Supreme Court has been chipping away at State tax immunity, generally using the reasoning that as more and more functions and responsibilities are shifted from the States to the Federal government, then the means to pay for those functions must go along. And, as you noted, that means that the federal government continues to expand—and become more costly.
Associate Justice O’Connor was indeed a champion of state sovereignty, and I wrote her a letter last year, asking for her opinion about the notion of the federal government taxing state and local government operations. Not surprisingly, I never got a response.
The bottom line in my opinion is that no one can say with any certainty how the Court might rule if the Fairtax law was challenged. The Houston writers of the draft of HR25 carefully avoided any appearance of the Feds “commandeering” the States to act as tax collectors. (It’s a voluntary assignment and the States get some payment for doing it.) And, in HR25 Section 1(b)(7) you will note that the issue of intergovernmental tax immunity is mentioned in passing.
While not germane to this discussion, most Fairtax advocates tend to ignore or put off to “Phase 2″ the subject of how to reduce the size of the Federal government. There seems to be a hope that somehow a receipt showing a 23% inclusive tax might eventually put pressure on the Congress to reduce that tax rate. My view is that if the Fairtax produces the expected economic boom, and the tax revenue floods into the nations capitol, Congress will find a way to spend it! There are some good ideas floating around, most recently a comment by the Fed Chairman that what we need is a federal commission similar to the BRAC. Charge the commission with coming up with recommendations to reduce the size and cost of the federal government by 10% for openers, and put it to the Congress for an up or down vote. Left to their own devices, I just don’t see Congress having the guts to do the job.
Stay tuned.
P.S. Returning to the subject of the tightening of state tax immunity, I forgot to mention that the 1913 income tax law exempted from federal taxation all interest on State obligations, compensation of the President, judges of the supreme and inferior courts, and compensation of all officers and employees of a State or any political subdivision thereof. Clearly, this is quite different from the IRC language in effect today.
And for what it’s worth, despite all the rantings of Aaron Russo about “show me the law”, the Congress did indeed pass a law in 1913 reinstating the income tax. It’s not online as far as I can determine, but can be found at most Federal government document depositories. The text is located in the US Statutes at Large, 63rd Congress, Session 1, Vol. 38, Part 1, Chapter 16, Section II, pp166-181. The cite for this volume is 38 Stat 116. Try www.gpoaccess.gov/libraries.html. for the library nearest to you. I used the Gainseville library and they were very helpful!
James, you wrote:
“ALL THAT SAID, this is one of those things you should watch if this bill actually gets out of Ways & Means. This is on the top 3 list of things I think will likely get changed by the legislative process.”
Even suggesting that HR25 will be changed during the legislative process can get you tarred and feathered on certain Florida Fairtax web sites. I’m a little exasperated at continuing to read that “the Fairtax should be passed as is” or “passed with no changes”. These blindingly ignorant statements don’t seem to take into account the give and take of the democratic legislative process. All legislation is a result of compromises, and legislators don’t expect to get everything they might wish in a bill. I’m no big fan of Chris Matthews of “Hardball” fame, but he wrote a good book a number of years ago (when he was the AA to a noted Mass. congressman) entitled “The Dance of Legislation”. Ought to be required reading for every Fairtax advocate.
Having said all that, here is my top three list of changes that will/should be made in the Revenue subcommittee. (1) Change the inclusive terminology to exclusive. This is a sales tax bill. (2) Treat governments at all levels as businesses rather than as consumers. (3) Eliminate that portion of section 801-806 that deals with implicit taxes.
Well I personally don’t want the bill to be changed substantially (using language about what the exclusive rate is makes no material difference, so I don’t care about that, but exempting state governments from tax DOES make a material difference and I don’t want that). But I know that the House will likely make a couple of small changes and the House & Senate will likely hammer out changes between them UNLESS the bill garners a lot of support ‘as-is’ before it gets to a vote.
So here’s hoping they don’t massacre the thing!
Hank — What is the implict taxes issue? I’m not aware of that one.
I think he’s referring to something in taxes on financial intermediation services, but I am not sure why he calls it ‘implicit taxes.’