AFFT CEO Leo Linbeck on the FairTax in the WSJ
Thanks to Hayden for pointing out this one:
FairTax Facts
By LEO LINBECK
December 26, 2007; Page A10Much has been written lately about the FairTax, the proposal to replace the current federal income tax with a national retail sales tax. Unfortunately, much of it is wrong.
This country needs a spirited and wide-ranging debate about fundamental tax reform. But that debate is not advanced by misimpressions and distortions of the FairTax. Let us then clear up a few.
One assertion about the FairTax is that it began as a project of the Church of Scientology at a time when it was seeking tax-exempt status. This is false. The FairTax actually comes to us from market research conducted more than a decade ago by a handful of business leaders. Their goal was to determine what type of tax system would be most acceptable to the American public. The studies they paid for cost millions of dollars, included hard economic research by respected scholars, and were subjected to critical peer review. The result is a proposal, since introduced as legislation in Congress, now known as the FairTax.
What emerged from this research is that a national retail sales tax is a preferred method of taxation among most Americans surveyed. Another is that the tax would have significant benefits for the nation’s economy.
Why? Because it eliminates income taxes and payroll taxes (for Social Security and Medicare), which are costly to collect and end up as “embedded” in the price of everything we buy. Along with getting rid of the Internal Revenue Service and the complexities of the income tax code, the FairTax would eliminate the distorting effect that income and payroll taxes have on the economy.
Research on the price of consumer goods reveals that up to 20% of all prices today represent hidden income taxes and payroll taxes. Once these taxes are repealed and replaced with the FairTax, it is likely that market pressure would force retail prices to fall.Eliminating embedded taxes will also do something else — it will remove significant price disadvantages suffered by American producers competing with tax-free imports. Eliminating corporate income taxes and capital gains taxes, which the FairTax would do, would likely make the American economy the most desirable place in the world to do business.
Another benefit of the FairTax is that, unlike other sales taxes, it would not hit the poorest Americans the hardest. The FairTax proposal calls for sending every American a “prebate” check to offset the cost of the national sales taxes paid by those living in poverty. This feature would effectively exempt those living below the poverty line from paying taxes to the federal government, and provide all taxpayers with a reimbursement of a portion of taxes paid.
The FairTax rate is 23% on retail sales when calculated “inclusively,” as are income tax rates. It will, in a fairer, more transparent and less-expensive way, raise the same amount of money the federal government now collects through the income and payroll taxes. Because it would be levied on consumption at the final point of sale, instead of on earnings, it would dramatically expand the tax base. The FairTax would collect revenue from the underground economy. Even illegal immigrants and the 40 million foreign tourists who visit the U.S. each year would pay it.
The distributional effects of the FairTax have been extensively studied, and although the proposal has distinct advantages for investors and wealth creation across the income spectrum, the greatest benefit of the FairTax is to low- and moderate-income Americans. The effect of eliminating regressive payroll taxes is commonly overlooked when analyzing the FairTax, but it would have a very significant impact, as these taxes represent the single largest tax burden on these income earners.
Significantly, the FairTax eliminates all loopholes, gimmicks, exemptions and deductions from the federal tax system. Under the FairTax, Congress would no longer be able to reward friends, punish enemies or manipulate behavior through the tax code. The FairTax would also eliminate the lucrative tax lobbying practices that represent more than 50% of all lobby dollars spent annually in Washington.
It’s no surprise, then, to see that vested interests have argued against the FairTax and in favor of keeping the mortgage interest deduction. But wouldn’t it be better for everyone to stop the IRS from withholding from paychecks; to see the price of new homes — and all other goods — drop by removing embedded costs; and to have interest rates fall as the savings rate increases? Is it really in everyone’s interests to keep the income-tax system so that one-third of taxpayers can go on deducting a portion of their mortgage interest from their federal taxes?
There have been many tax reform proposals over the years, but most of them simply call for reforming around the margins of the existing tax system. The President’s Advisory Panel on Tax Reform was assembled by the Bush administration and concluded its work a few years ago. Instead of seriously looking at the FairTax, the panel looked at a very different type of consumption tax, riddled with exemptions, and then declared that it would be too expensive and that the rate would have to be far higher than the FairTax rate.
Politically, the FairTax will only become law once enough citizens demand that it be enacted, overcoming the self-interest that members of Congress and others have in holding onto the current system. It is debatable whether a modern, citizen-led tax revolution is possible. But the growing popularity (even among presidential candidates) of the FairTax suggests that another Boston Tea Party may be at hand.
Mr. Linbeck is CEO and cofounder of Americans for Fair Taxation.
Joshua,
Here is an email I sent to the AFFT Director of Comminications.
Ken,
The Chairman’s WSJ piece makes many excellent points, but I was very disappointed that the Chairman would lend his authority to what I believe to be a fallacious claim that retail prices might fall under the Fairtax.
He wrote: “Research on the price of consumer goods reveals that up to 20% of all prices today represent hidden income taxes and payroll taxes. Once these taxes are repealed and replaced with the FairTax, it is likely that market pressure would force retail prices to fall.”
Ken, the only price study I am aware of is the 1997 Jorgenson paper done under contract to AFFT. Although no one outside of AFFT has seen a copy of the report, it supposedly makes the case that the embedded costs of the income tax system make up 22% of producer prices, excluding compliance costs. Two thirds of Jorgenson’s embedded costs consist of employee income and payroll tax costs. There is a growing consensus that the employee tax withholding belongs to the employee, and will not be available for business cost reductions. Under the Fairtax, employees will take home their full gross pay.
If that is the case, then the best we can hope for in reduced business costs would be around 10%, including compliance costs, and after tax prices must increase by 17% at the cash register. (1.00 x .9 x 1.3 = 1.17). Retail prices cannot fall!
As for the Chairman’s comments about the prebate, it does indeed relieve any tax burden from those families at or below the poverty level. But, as I have pointed out in previous correspondence, including payroll taxes in the list of taxes to be eliminated, coupled with the prebate, will create a class of approximately 30 million workers that may never pay anything in net federal taxes, yet will still qualify for full pension and health care benefits. Is that really good for the country?
Finally, I wonder if the Fairtax is really so simple and transparent when over 20% of the cost to fund the federal government is hidden in higher state and local taxes, along with the dubious notion of the federal government taxing itself into prosperity.
Ken, if AFFT has any price studies that support the Chairman’s claims that after tax prices may decline, than it seems to me that you need to produce such data for public review. In the interim, I will continue to make the case that prices will rise, not fall, that the prebate has some very unattractive unintended consequences, and that higher state and local taxes are the price for the 23% revenue neutral rate.
Sincerely,
...the only price study I am aware of is the 1997 Jorgenson paper done under contract to AFFT...it supposedly makes the case that the embedded costs of the income tax system make up 22% of producer prices, excluding compliance costs.
I’ll offer my study, Hank: Take the amount of taxes eliminated by the FairTax - that is the amount of cost you are taking out of production. Now divide that by all the stuff sold - that is the amount that prices can drop before they hit the same level of returns attracting investors that they did before.
With a sudden increase in return (because of substantial cost reduction), producers will continually undercut each other’s pricing to increase their own volume until they get back to the old returns at which point investors will provide upward pressure to maintain prices.
Two thirds of Jorgenson’s embedded costs consist of employee income and payroll tax costs. There is a growing consensus that the employee tax withholding belongs to the employee...
Fortunately, a consensus does not guide market forces when there are a throng of rabid purchasers at the counter bidding down the price.
Nothing “belongs” to anyone. Employees will compete on wages in the same way that producers will compete on pricing.
[employee tax withholding]...will not be available for business cost reductions. Under the FairTax, employees will take home their full gross pay.
As long as businesses are free to write their pay checks, any opportunity to reduce markup to increase volume over your competitor is going to be “available for business cost reductions”.
...then the best we can hope for in reduced business costs would be around 10%, including compliance costs, and after tax prices must increase by 17% at the cash register. (1.00 x .9 x 1.3 = 1.17). Retail prices cannot fall!
Hank, you seem to have very little faith in competition and the market. But it doesn’t matter. At any point during the transition or after it reaches equilibrium again, every percentage point that prices don’t fall is a percentage point more that consumers have in buying power from their increased take home pay. So you can theorize forever on half of the equation to make a point, but whatever you come up with you ultimately have to also consider the equal and opposite force on the other side.
...I have pointed out in previous correspondence, including payroll taxes in the list of taxes to be eliminated, coupled with the prebate, will create a class of approximately 30 million workers that may never pay anything in net federal taxes, yet will still qualify for full pension and health care benefits. Is that really good for the country?
Well, if that is the case, it certainly undermines the argument from those that insist that it is a regressive tax. In 2005, out of 135 million individual tax returns, 45 million did not pay any tax. Sounds to me like the FairTax is an improvement over the existing system while maintaining a nod to the progressives. Brilliant!
Mark — I’m not sure you understand Hank’s point.
It is mathematically impossible for (a) employees to keep “100%” of their (current) paychecks, (b) us to all get “free” money in the form of the prebates, and (c) producer prices to fall anywhere near the so-called 22% “embedded taxes.”
The only way for producer prices to fall that much is if they slashed the pay of their employees. According to John Linder, the principle sponsor of the FairTax in the House, employees pay — on average — 35% of their wages in federal taxes of one form or another. If so, that means that employers would need to cut their employees wages by an average of 35% for the entire “embedded taxes” to be removed.
No economist believes that would happen. Even Kotlikoff and Beacon Hill acknolwledge in their studies that the most likely outcome is that employee’s gross wages will remain the same and prices will need to rise by the tax-EXCLUSIVE rate of the FairTax. (I.e., 30% under their proposal).
(I don’t agree with Hank and Morph that producer prices will drop by even 10% under the FairTax, but I’m not going to argue that point here.)
Hank’s point is that for AFT to continue to imply that we’ll somehow keep 100% of our paychecks, but producer prices will fall by 20% or more, is inconsistent with their own studies. (Now, Linbeck did not explictly say in his article that workers will keep 100% of their paychecks, but that’s what Linder and Boortz say all the time and clearly what most people believe when they hear about the FairTax.)
Also, Hank makes the point that Linbeck and AFT often refer to their “$20 million in studies” without always disclosing those studies to the public. For example, Dr. Jorgenson does not support the FairTax and has been critical of it, yet Linbeck (and Linder/Boorts) continue to refer to a decade-old study done by Jorgenson that AFT won’t release.
Mark,
Last things first. You are quite correct that at least 45 million tax filers didn’t pay any income tax. But you seem to have missed my point that all workers pay the 7.65% payroll tax. Those contributions, although mandatory, can be viewed as payments on a long term annuity which will provide income and medical assistance in the retirement years. (no need to argue if that’s good or bad—FDR was laid to rest long ago)
By including payroll taxes in the list of taxes to be eliminated, and then adding in a prebate, I estimate that approximately 30 million workers will pay no NET tax to the federal government under the Fairtax, yet will still receive all the retirement benefits. Compare that to current tax law, where less than 1 million workers can reduce their income tax burden to near zero through deductions, exemptions and other credits, and then by using the REFUNDABLE EITC and the REFUNDABLE Additional Child Care credits, completely offset their payroll tax amount for a relatively short number of years. I believe the Fairtax creates some very unwise, unintended consequences!
As for the remainder of your post, I certainly agree that I have told only half of the story. That is because AFFT is only telling half, and I believe it’s the wrong half. You are absolutely right that whether prices go up but income also goes up or if income goes down and prices go down, or if the result is a mix of the two, it doesn’t really matter. My point all along has been that “real prices” for individuals probably won’t change much. Your standard of living is safe.
However, the choice made by AFFT leads down the path of most resistance. By claiming that embedded costs will be eliminated (read employee gross pay is reduced to current net), and prices will remain the same, AFFT is basically saying that all employment contracts are null and void, and that workers and pensioners will suffer the pay cut in the hopes that businesses will in turn lower prices. Talk about alienating the unions? And what about minimum wage? Would such a paycut violate current laws? And how about the fact that workers will see larger pay cuts than pensioners, who no longer pay payroll taxes? Do you want to be the one to inform our soldiers in Iraq that their pay has been reduced by 20%? And finally, don’t get caught up in the rush to refile W-4’s if the Fairtax appears to be heading for implementation. Everyone will try to game the system, and protect as much of their pay/pension as possible by reducing withholding. All in all, a very unwise and unnecessary choice.
By agreeing that prices will rise but take home pay will also rise, plus adding in the prebate, there can be no argument from unions, workers, etc. about employment contracts, and the subject of prices will be strictly up to the businesses and the competitive market place. The public won’t have to worry about where the money went.
Mark, there are two ways to present the issue of prices, and, based on wording in the Chairmans letter to the WSJ, I believe that AFFT has made a very bad choice.
Good points Hank.. The one on payroll taxes is one I hadn’t thought of. 30 million freeloaders... no soup for you.
Hank,
How sad to think that those 30 million souls of which you speak will never know the absence of poverty in their lives. Should we punish them? Would waterboarding be OK? Just kidding.
I think you are a little wrong in your base assertion. While it may be true that in any given year there are 30 million who will pay no tax, I don’t believe it will always be the same 30 million people. There have been three years in my adult life where my income has dropped to a point that I paid no income tax and very little payroll tax. There have been some years where I have paid more in taxes than I earned in each of those three.
My point is that it is fluid and “the poor” will usually be a different subset each year. My support for the FairTax is based in my hope for every American the opportunity to escape poverty at some point in his life. Your statistic proves that there will be someone to take his place in the soup line when he does.
David Nelson-VanDette
David,
You are right, I should have written “30 million workers MAY etc., not 30 million workers WILL. etc. I also expect that many of those workers will, through continuing education, experience, and job changes, move out of the class of ” net non-contributers” to the federal coffers.
However, for those workers that are accustomed to simply receiving a cost of living pay increase each year, they will never pay any net tax. The prebate is also adjusted for annual inflation.
I think my main point is that, no matter how many workers eventually move out of the non contributer group, it seems to me that getting rid of payroll taxes, combined with the prebate, has a serious down side. People complain about the EITC–wait til they understand these unintended consequences of the Fairtax. It sounds good to say that the prebate will completely untax the less fortunate. But when you figure out just how many workers you are talking about, and compare that to what happens under current tax law, the estimated 30 -1 disparity in yearly results are disturbing, at least to me.
If I understand your point, you are saying to completely untax so many who benefit from our system of governance would be an unintended consequence. I would agree if by that assertion you are saying that it would reward underachievers. I don’t know if there are any who would intend for that to be the consequence of the prebate. I am in this fight to reestablish the possibility of upward mobility, not to reward laziness.
Perhaps you have already quoted where you got the 30 million figure, but it seems drastically high to me. Can you please cite your source again? The data at Census dot gov show 20.2 working age Americans are at or below poverty level.
I admit I am a FairTaxer who leans a bit left. Indeed, the very thought that so many (20 million or 30 million) could be living under the poverty level in the second wealthiest country in the world is disturbing to me.
In his 1907 state of the union address, Teddy Roosevelt advocated adoption of the income tax, yet warned, “I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man.”
The current system has become easy to manipulate by dishonest people and the EITC is only one part of the problem. Only the poor who know how to work the system are able to abuse the EITC. In my opinion, the difference between the EITC and the prebate is stark. It takes only a little bit of forethought and paperwork for a dishonest filer to get quite a windfall under the EITC and there is never any time when that person feels like he or she is contributing into the system. Under the FairTax, everyone—even those who actually pay no net taxes because of the prebate—will have the impression every day when they spend money on new goods and services that they are contributing to the financial maintenance of our country.
One of the reasons I like the FairTax is because I believe it will have the opposite consequence from what you assert. I think it will have the affect of making more people “feel” ownership in the taxation system and therefore have an understanding that adding services or abusing the system will add to the tax rate for everyone.
David,
My statistics came from the 2004 IRS filing data. I admit that it was very difficult to weed out retirees from workers in the data base I used, and my 30 million was just a rough estimate. I’d be pleased to look at your 20 million figure and would appreciate a link to the Census data?
This may be too arcane a discussion for most, but now that we are into a poverty level issue, I also want to point out that there may be a major disconnect between the number of people at the official poverty level and the number that pay no net taxes under the Fairtax. Using the 2006 Poverty Level Guidelines, it appears that the poverty level for a family of one is $10,210, family of two is $13,690, and family of four is $20,650. How then to explain that the prebate, which was advertised by AFFT as being an amount which would untax the less fortunate on consumption up to the poverty level, doubles for the two person family and goes up another 50% for the family of four? When I did my study on the number of workers that would pay no net tax, I used the Fairtax plan, and got a very different result as to the number of people that would pay no net tax. For instance, a family of four would pay no tax with income of $30,000. Could it be that it really isn’t correct to say that the prebate untaxes consumption up to the poverty level?
What am I missing?
As for your last paragraph, you take an admirable but indefensible position imho. I’m a history major, and would like to remind you that, under our Articles of Confederation, our government came very close to failing for taking the philosophy that you put forward. Following the Revolutionary War, the thinking was that public virtue would always trump private interests. Our country could be run by a very small federal government and the states would work for the public good. By 1787, eleven years later, on the verge of failure, our founders met in Philadelphia, and completely changed their philosophy. They saw that the states were feuding with each other, making deals with foreign governments, taxing each others products to death, and generally looking after their self interest, damn the public good. The Constitution we live under still today is based on the realization that private interests will always trump public virtue, and is written in recognition of that thought. Lots of people don’t understand that in our unique form of democracy, the majority does not rule. The founders made it very difficult for anyone to implement change without getting consensus. Many people believe the government is disfunctional today and they want to change the system. I believe that the system is working just the way the founders envisioned–dissent within consensus.
You are welcome to keep on hoping that people will view their taxes as contributing to the common good, but I don’t share that view. Nor did our founding fathers.
For better or worse, Huckabee’s surge has put the spotlight on the FairTax. (There’s another front page article on it in todays Washington Post.) As I predicted would occur, once more groups started taking a hard look at the FairTax, virtually all of the latest reviews have been negative.
These negative reviews, studies and reports have come from both the left and the right, as well as more centerist groups. Here’s a partial list I’ve complied of negative reviews over the last few years, including the most recent ones. It’s really a pretty remarkable list.
William Gale — Brookings Institution (center/left)
Joint Committee on Taxation (under Republican Congress)
President’s Tax Reform Commission (bi-partisan)
Institute for Tax and Economic Policy (far left)
Wall Stree Journal Editorial Page (far right)
Washington Post (center/left)
National Review (right)
Bruce Bartlett (center/right)
Los Angeles Times (center/left)
Factcheck.org (non-partisan)
American Spectator? (far right) (note — I haven’t seen this one)
Have I left any out?
Can anyone compile a list of folks/entities NOT affiliated with Boortz/Linder/AFFT who have written anything favorable about it?
Here’s a partial list:
Laurence Kotlikoff (center/left) (I understand receives some form of compensation from AFFT — doesn’t mean he’s wrong or unetical, just disclosing a connection)
Beacon Hill Institute (right) (also believed to receive compensation from AFFT)
Cato Institute ? (libertarian) — I thought they did a favorable analysis many, many years ago, but I haven’t seen anything since
Laffer,Moore, et al (right/libertarian) — Of Laffer curve fame (or infamy, depending on your point of view) (don’t know whether they were paid by AFFT)
Anything else?
Hayden,
Pretty good list. I might add that I subscribe to the Google search service, and receive daily every article and blog comment that has the words “Fairtax” or Fair Tax in it. It seems to me that the majority of comments of late are very negative. Except for Ian from Michigan and his lengthy responses. Got to give him credit–he’s a good supporter, if a little verbose.
Hayden, my understanding is that the Laffer study was funded by the AFT. I believe Karen Walby stated this on the Phil Hinson show at one time. And the Cato studies I have read on a NRST were by David Burton and Dan Mastromarco, the authors of the FairTax bill for the AFT.
Thanks, Fred.
As Sergeant Shultz would have said, “Veerrry Interestink!”
(And I’m amazed that there is another FairTax geek out there that actually listens to the Phil Hinson show! Some of us, especially me, really need to get a life.)
Best,
Hayden
Hayden,
I’m confused. After your appearance on the Phil Hinson show, I was going to check in with him and see if we could have another telephone debate on the Fairtax. But, I thought I read a post on a Florida blog that he was discontinuing his show? Have you or Fred heard him lately?? What is going on? Thanks!
Hank Van Gieson is spot on. Of course its impossible for everyone to have 100% of their pay, AND the prices all go down magically by 22%.
Plus, just consider FORD motors. Supposedly, they will have 22% cost savings and will automatically pass those savings on, and will automatically lower their prices. The only thing automatic here would be a 4000 increase in the price of their average car.
Where are the embedded cost Ford saved? They pay no corp taxes — they lost 12.7 billion. They dont pay corp taxes. Yes, they would have FICA savings - and thats GREAT. But thats about 300 dollars a car. But you are going to add 4000 cost. SO thats 3700 bucks you add to their price.
But they COMPETE on price. And Toyota’s FICA cost is just 250 dollars per car. And they DO pay corp taxes, which they WONT pay then. THey will SAVE about 2500 a car.
You make them BOTH add 3700 price — and remember, FORD isnt making any profit ANYWAY. Will they lower their prices and lose even MORE?
They CANT. They cant lower them more. They are losing NOW. Toyota could absorb it. Ford could not.
SO you destroy Ford Motors. And GM isnt far behind.
This tax has huge unintended consequences, that no one researched at all. I think these issues have to be addressed.
Now, many people just will avoid buying new cars, Ford and Toyota. Yes, some people will have an extra money from now payroll tax deductions. But a lot of people WONT. Especially if they didnt pay much income tax.
Overall, car sales will GO DOWN. For one thing, banks arent going to want to loan 130% the value of a car. The moment a lot of people drive off the lot, the car depreciates 15%. The first 4 months, it depreciates 20%. The banks will restrict loans more, and people will be reluctant to go into that much debt. And if they DO get financing and buy — they wont be ABLE to trade that car off for a longer period of time.
Its hard to imagine a tax plan that could single handedly injure the Amerian consumer market as much as this could.
I dont see how this following statement can be true..
Significantly, the FairTax eliminates all loopholes, gimmicks, exemptions and deductions from the federal tax system. Under the FairTax, Congress would no longer be able to reward friends, punish enemies or manipulate behavior through the tax code.
What is FT - an amendment? To stop congress from passing any exemptions, for example, it would have to be an amendment that said that.
Seems to me, Fair Tax would have to grant exemptions — defacto anyway. For example, to military purchases. How can the Navy pay 1 billion dollar sales tax on submarine — crazy as it sounds, thats the plan , all gov spending.
There will have to be exemptions -even worthwhile ones. How you can say Congress CANT - Im really confused, what mechanism prevents them?
Mark,
Welcome to the learning process about the FairTax.
I was skeptical at first, in fact, I blew it off for months after hearing the 23% rate. I only came back to researching it when I happen to catch Neal Boortz say that prices are predicted to fall by the amount of the tax. This is currently in a debate which I’m participating.
The FairTax itself is not an amendment to the constitution. As it is, the bill will completely dismantle the IRS and does not require an amendment. However, in the next session of congress Rep. John Linder plans to add a section requiring the 16th amendment, which gave congress the right to tax our incomes, to be repealed within 5 years or the FairTax becomes unlawful.
There are no exemptions. Education expenses, however, are considered an investment so are not taxed.
Government taxing its own consumption has been debated here as well. I think the government taxing itself is necessary so it doesn’t have an unfair competitive advantage which would discourage the use of private contractors and for other reasons like government employees scamming the system.
Also the FairTax is collected monthly so as long as prices don’t rise above the amount of the FairTax the government will get the tax right back next month.
Keep reading and good luck.
Dculling –
A couple of comments on your post.
1. There are exemptions to the Fairtax, other than educational expenses, only they are not called exemptions:
Examples:
1. Existing Homes
2. Used goods
3. Purchases abroad
4. Purchases for business or investment purposes
5. Raw land (including farms, ranches, etc.)
Clearly, many of us will try to manipulate our purposes as much as possible to lessen our tax obligations. (Just as we try to take as many deductions as possible under the current income tax code.) When one really considers how easy it will be for certain segments of socieity, in particularly the wealthy, to avoid paying the FairTax on very large purchases, one has to wonder just how fair the FairTax really would be.
Examples of tax free purchases under the FairTax:
1. Ted Turner buys another ranch for $100 million.
2. Paris Hilton decides to split her time between Paris, France and the French Riviera.
3. A doctor buys a brand new ski lodge in Colorado which he’ll use one week a year and rent out the rest of the time. (If it’s an existing lodge, of course, there’s no tax regardless of whether he rents it out.)
4. A multi-milliionaire buys a brand new yahct in the Bahamas, and buys a brand new villa to go with it.
5. Malcolm Forbes throws himslef a multi-million dollar birthday bash in Morocco. (which actually happened).
6. George W. Bush sends his daughters to expensive private schools and Yale University.
7. A lawyer eats at the most expensive restaurants in town, makes sure he mentions his firm’s name so the meals will be tax free as business expenses.
This isn’t meant as “bashing the rich,” just examples of very expensive purchases that can and will be made tax free under the FairTax. Contrast that with the following:
1. A moderate-income family rents an apartment. Pays FairTax on each rent payment.
2. He buys a used car (tax free), but is taxed for all service, maintenance, gas, and car insurance.)
3. Must buy his own health insurance (since his employer will no longer get a tax-brack for providing insurance.) He must pay the FairTax on all premiums, co-payments, and uninsured medical care.
4. He takes his family to Florida for vacation. Pays FairTax on air fare, car rental, motels, Disney tickets, etc. (Paris Hilton, remember, is traveling the world tax-free.)
5. He and his family eat at home to save money, but need to pay the FairTax on the food. If they eat out, they are taxed on the restaurant tab since they can’t claim it as a business expense.
I could go on and on. But the point is that this is EXACTLY what will occur under the FairTax. Not only will this lead to a substantial reduction in expected revenues, but the shift of the tax burden on the middle class will be tremendous. And, the obvious unfairness of this system will cause a revolt.
You know, this is all so obvious to me, I am always surprised that other folks who have spent more than five minutes examining the FairTax don’t see the same thing. What am I missing?
However, in the next session of congress Rep. John Linder plans to add a section requiring the 16th amendment, which gave congress the right to tax our incomes, to be repealed within 5 years or the FairTax becomes unlawful.
What? So if the 16th Amendment isn’t repealed within 5 years, we scrap the FairTax and reimplement the income tax? That would compound the already troublesome transitional issues. Just when the economy is getting over the shock switch to the FairTax - BAMM! - let’s go back to the income tax. Are we going to rehire all those fired IRS employees? And all the resources the states allocated to collect the FairTax are wasted? Sorry, but this sounds like a remarkably bad idea.
[BTW, taxing income was legal before the 16th Amendment.]
Hayden Kepner said in post #18:
——–
• Dculling –
A couple of comments on your post.
1. There are exemptions to the Fairtax, other than educational expenses, only they are not called exemptions:
Examples:
1. Existing Homes
2. Used goods
3. Purchases abroad
4. Purchases for business or investment purposes
5. Raw land (including farms, ranches, etc.)
———
You are correct that I was too brief in my reply to Mark. I was replying in an overall kind of way suggested by his comments about loopholes, gimmicks, exemptions and deductions which I took as an overall view of the current code.
———
Clearly, many of us will try to manipulate our purposes as much as possible to lessen our tax obligations. (Just as we try to take as many deductions as possible under the current income tax code.) When one really considers how easy it will be for certain segments of socieity, in particularly the wealthy, to avoid paying the FairTax on very large purchases, one has to wonder just how fair the FairTax really would be.
Examples of tax free purchases under the FairTax:
1. Ted Turner buys another ranch for $100 million.
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And whoever he bought it from may spend the proceeds either in consumption or investment paying the FairTax either in the immediate present or in the future.
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2. Paris Hilton decides to split her time between Paris, France and the French Riviera.
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She will pay France’s VAT plus embedded income taxes and some of her money will go to some French businesses. Whoever she helps make a profit may notice the real decrease in price of American products and choose to buy American. While she there she notices interest in her by the French so she decides to start an American business to produce and export to France her new HeiressSlut line of fashions since American produced exports have a better competitive edge.
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3. A doctor buys a brand new ski lodge in Colorado which he’ll use one week a year and rent out the rest of the time. (If it’s an existing lodge, of course, there’s no tax regardless of whether he rents it out.)
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For 51 weeks of the year taxes will have to be paid on the rent. I’m not sure about his 1 week. 10 years later he decides to sell it to private individual and has to pay the tax on its then current value.
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4. A multi-milliionaire buys a brand new yahct in the Bahamas, and buys a brand new villa to go with it.
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Not sure why he would want to buy a yacht made in the Bahamas. The former bean counters in America that wasted 6.5 billion hours a year doing nothing productive are now employed helping businesses make better business decisions especially cost and quality control. American made yachts thus have become a far better value.
However, assume he does purchase the shoddy Bahamian yacht and the villa. People in the Bahamas then make a profit and seeing the tax free investment opportunities in the US decide to invest in the most robust economy in the world.
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5. Malcolm Forbes throws himslef a multi-million dollar birthday bash in Morocco. (which actually happened).
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Just fine and the Morocans who make the profit are looking pretty hard at the products and investment opportunities of America.
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6. George W. Bush sends his daughters to expensive private schools and Yale University.
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George W. Bush invests, at lower costs, in the education of his daughters who eventually graduate and start earning, consuming and saving at a rate worthy of Yale graduates.
More importantly since education is significantly less expensive more total Americans graduate from good colleges and start earning, consuming and saving at rates not possible without an education. Many of them also go to work in the rapidly growing businesses improving output, quality and efficiency, lowing costs and pollution and generally helping US products to be even more competitive and attractive in world markets.
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7. A lawyer eats at the most expensive restaurants in town, makes sure he mentions his firm’s name so the meals will be tax free as business expenses.
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I not sure if business meals are considered a business to business transaction under the FairTax. Sounds like one of the many loopholes of the current system to me that the FairTax will probably close.
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This isn’t meant as “bashing the rich,” just examples of very expensive purchases that can and will be made tax free under the FairTax. Contrast that with the following:
1. A moderate-income family rents an apartment. Pays FairTax on each rent payment.
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The apartment owner who was in the highest income tax bracket of 52% (exclusive) realizes in order to fill all his apartments he must compete with other apartment owners and lowers his rent prices at least the amount of the FairTax if not more so.
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2. He buys a used car (tax free), but is taxed for all service, maintenance, gas, and car insurance.)
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The service center, gas station and insurance company all lower their prices in order to compete since they are no longer paying all the embedded taxes and compliance costs.
Since small businesses used to pay far more in compliance costs as a percentage of total taxes paid than large companies did, the barriers to entry for starting a business are greatly lessened for entrepreneurs. Joe Stickshift, the neighborhood gearhead, starts an automotive service business working part-time out of his garage. The quality of his work and low prices quickly spreads by word of month. Soon Joe quits his other job to spend 14+ hours a day trying to meet the demand.
Since America is now the tax free haven of the world, money floods into the local bank from offshore accounts and foreign investors. Joe finds he can easily expand and hire his gearhead friends by borrowing from the bank that now has plenty of money to lend at low interest rates. Joe lives the American dream and the family gets high quality service for their car for less than before the FairTax.
The insurance company finds many new high growth companies to invest the premiums in due to the growth of the economy. Greater returns on those investments allow the insurance company to try to gain market share by lowing their premiums. Little Lizard insurance now costs the family less than before the FairTax.
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3. Must buy his own health insurance (since his employer will no longer get a tax-brack for providing insurance.) He must pay the FairTax on all premiums, co-payments, and uninsured medical care.
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The employer is tickled to death that he longer needs a tax break because he no longer pays taxes and decides to cover the entire cost of his employees’ health insurance premiums. Since health care used to have some of the highest embedded taxes and compliance costs the premiums go down to reflect this.
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4. He takes his family to Florida for vacation. Pays FairTax on air fare, car rental, motels, Disney tickets, etc. (Paris Hilton, remember, is traveling the world tax-free.)
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Remember, all prices lower because of the elimination of all the embedded costs. Paris, however, is paying the excessive embedded VAT and income tax and compliance costs for 2 tax systems everywhere she goes in Europe.
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5. He and his family eat at home to save money, but need to pay the FairTax on the food. If they eat out, they are taxed on the restaurant tab since they can’t claim it as a business expense.
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Since there are many different suppliers of food and many substitutions (many brands and many kinds of bread for instance) prices dropped almost instantly at least the amount of the tax after the passage of the FairTax on most food items. The drop in food prices are reflected in the drop of restaurant prices. Since small businesses can now compete on a level playing field with national chains more mom and pop type restaurants open up.
The family is quite happy to find out they can afford to eat out more often and with greater variety available than before the FairTax.
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I could go on and on. But the point is that this is EXACTLY what will occur under the FairTax. Not only will this lead to a substantial reduction in expected revenues, but the shift of the tax burden on the middle class will be tremendous. And, the obvious unfairness of this system will cause a revolt.
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I could go on and on as well. The point is what you think will happen is based entirely on pessimism and an apparent lack of understanding and belief in the free market. It is realistic to believe in the extensive work of the AFFT which I’ve pointed out in other posts have intentionally underestimated many of the positive effects of the FairTax, chief among them the more than doubling of today’s economic growth.
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You know, this is all so obvious to me, I am always surprised that other folks who have spent more than five minutes examining the FairTax don’t see the same thing. What am I missing?
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The promise and possibilities of the FairTax are just as obvious to me even after spending hundreds of hours researching the details. An example of this is finding out Dr. Jorgenson did not include compliance costs savings in his work that shows producer prices will drop on average 22%; a significantly underestimated promise.
I would suggest what you’re missing is an understanding of the basic concepts and beliefs held by our founding fathers that they forged into the most important documents in human history, the Declaration of Independence and the Constitution of the United States. To boil those down to the most important point is easy for me; Freedom!
The antithesis of freedom is tyranny. History shows one of the most tyrannical forms of government is communism. It is not coincidental that in the Communist Manifesto it lists the second plank as “a heavy progressive or graduated income tax” because that’s where our progressives got the idea.
That so few, apparently, in this country understand basic economics, history and the adamant belief of our founding fathers in freedom is not surprising at all when one learns that part of the 10th plank is “free education for all children in public schools.” Basically, State run schools will teach the children to believe in and be obedient to the State above all else.
I see the income tax as a tool of oppressive governments to manipulate and control their citizens. The FairTax, on the other hand, promotes freedom far better than any other tax system or reform proposal I’ve seen.
Never underestimate the power of freedom.
Hayden,
I have some issues with your examples.
1. Unless he’s in a state without property tax (do they exist), he’ll have to pay something. Also, if he wants to live on the land (build a house, buy a tent), he’ll have to pay the fair tax on those items.
2. I agree. This would be a huge loss to America.
3. He has to pay at least some tax on the rent.
4. Under the fair tax, 22% embedded cost removed on the yacht and 23% sales tax added back in. If buying in the Bahamas under the fair tax is a wise decision, it is a wise decision under the current tax regime.
5. Besides the fact that this happens anyway, see item 4 for price comparison.
6. I’m not sure what the point is here. The private schools and Yale will be cheaper for Bush and everyone else because embedded costs are removed, but no fair tax is applied.
7. Yes lawyers do this kind of thing (present company excluded I’m sure). However, they do it under the current tax system.
Now the other points:
1. Yes, but presumably rents will be cheaper.
2. Actually, the cost of the used car will be affected by the fair tax (since used items will be in more demand). See the first item 4 for everything else.
3. I was actually going to propose a new thread for this very topic a couple of days ago. This is a huge positive side effect of the fair tax. The great idea of giving an incentive to employers to insure the health of their employees has failed miserably. It has added greatly to the exploding cost of health care by propagating the third party payer system (which leads to over consumption, distorted market forces, etc). But that’s for another thread, maybe another blog.
4. See the first item 4.
5. See the first item 4.
As you can see, most of my problems with your examples have to do with the fact that prices (relative to purchasing power) will remain the same.
Dculling and Andrew –
Thanks for your well-thought-out replies. But, unless I’m mistaken, most of your responses seem to be premised on the belief that pre-tax prices will drop due to the elimination of the “embedded taxes.”
As I thought had already been thoroughly discussed elsewhere on this blog, nobody who has studied the FairTax actually believes this to be the case. Neither Jorgenson, Gale, Kotlikoff, the Beacon Hill Institute, Bartlett, Poterba nor any other economist who has weighed in on this thing believes that pre-tax prices will go down under the FairTax (which would require a dramatic reduction in wages and salaries.) Instead, they all seem to believe that wages and salaries will remain the same, and that prices for goods and services will need to increase by the tax-exclusive rate of the FairTax.
In addition, your responses also seem premised on the belief that the FairTax rate will only be 30% (tax-exclusive). As has been argued over and over again, that premise is debatable, to put it charitably.
However, I will conceded that IF the embedded taxes were to actually disappear under the FairTax and IF the FairTax rate is only 30%, then many of the ills I outlined would not be that bad.
And, Andrew, I agree with you that our current employer-provided health system is generally bad, and that it would probably be a benefit to the economy if people bought their own insurance (as they would need to under the FairTax). However, that is not one of the “benefits” that the most vocal FairTax advocates say much about.
Most of the handwaving over a retail employer’s tax burden and the claim that it can’t add up to 22% or 23% of retail pricing especially when netting back the full gross pay of employees, most of those trying to make points with such arithmetic are not taking into account the federal burden embedded in a retailer’s overhead and cost of goods sold (COGS).
In order to get a strong estimate of the overall federal tax burden embedded in the price of retail goods and services, the entire supply chain network must be analyzed. The chain’s contributions to retail pricing including the federal taxes passed on to the retailer are found in overhead and COGS.
Almost every type of retail business starts with estimates of 11% to 16% of its pricing attributed to federal taxation applied directly on its operations. For example, a low end estimate of 3.85% SS/MC employer contribution on 50% labor, 5% tax on EBIT from profits of 15%, 2.5% compliance cost yields 11.35%. A high end estimate example would have a form such as 2.5%SS/MC on 33% labor, 10% tax on EBIT from profits of 30% and 3.5% direct compliance cost to yield 16%. And these estimates do not disturb an employee’s gross pay.
Bringing in the upstream supply chain passed on taxes easily contributes another 6% to 10% to final pricing. Supply and production chains can be surprisingly wide and deep.
Averaging over a universe of business models yields a robust and uniform estimate of 22% to the retail customer. The reason it is so robust and uniform is because the three income statement components of COGS, Overhead and Profits interplay and offset one another. If one should be low, another will be high. The only notable exception is where a company reserves profit for next year’s capital expenditures, but then that translates to economic growth which means more revenue for federal government.