Will state and local governments resist?
From reader Hank Van Gieson:
The fate of the Fairtax largely depends on the reaction of state and local governments. Repeal of the 16th Amendment will require 38 states to ratify any constitutional amendment. In addition, the Fairtax plan includes taxing state and local consumption which could be found to be unconstitutional if the states resist the plan.
Here is a direct extract from the 2008 National Governors Association (NGA) policy statement regarding taxes:
“Since adoption of the U.S. Constitution, Congress has generally respected state sovereignty with regard to state taxes. It is essential that the federal government not preempt, either directly or indirectly, sources of state revenues, state tax bases, or state taxation methods. Unfortunately, over the last few years, Congress has increasingly restricted the rights of states to determine their own tax structure and has not considered the significant impact that its decisions can have on state authority. Recent legislative examples include the moratorium on the taxation of charges for Internet access, prohibiting the taxation of nonresident pension income, and the accelerated elimination of the state death tax credit. Other examples include bonus depreciation that would reduce state revenues and proposals that would restrict business activity taxes.
9.2 National Sales or Value-Added Tax
The nation’s Governors oppose a national sales or transactional value-added tax. Such taxes would intrude into a tax area that has traditionally been reserved for and relied on by state and local governments. If enacted, either of these taxes would seriously threaten the ability of state and local governments to maintain their tax base.
9.3 Current Income Tax
If Congress decides to reform the current tax system, they should reduce the complexity of current income taxes; increase incentives to work, save, and invest; and increase efficiency and fairness. As part of any modification of the current income tax, the nation’s Governors support the deductibility of state income taxes, sales taxes, property taxes, and the interest on state and local bonds.
9.4 Business Activity Tax
The nation’s Governors oppose any further legislative restrictions on the ability of states to determine their own policy on business activity or corporate profits taxes. This is an issue of state sovereignty. The U.S. Constitution adequately protects the interests of both states and business.”
In my recent poll of state Treasurers, I found basically the same threads running through their replies. All of which should give pause to anyone who believes that getting approval of HR25 as written, and amending the Constitution will be a walk in the park. It is also quite clear that the Houston AFFT team that authored the Fairtax did not coordinate their plan with any state government agencies, specifically Texas. The Texas Treasurer, upon request, conducted a records check and could find no data that anyone from AFFT ever made contact with their office on the subject of the Fairtax.
Hank,
I don’t have time to reply much at the moment but I’ll point everyone to this BHI paper for additional discussion on the topic. Fiscal Federalism: The National FairTax and the States
The analysis of the constitutionality of the Fair Tax begins with Article I, Section 8, Clause 1, sic.: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”
Case law has relegated taxes to either of two classifications, capitations, which are direct, and duties, imposts and excises, which are indirect. Since the income tax is a “capitation,” it is a direct tax and was required, pre-1913, to be apportioned. That is the reason it took a constitutuional amendment to allow the enactment of the income tax.
The Fair Tax is clearly an indirect tax and therefore is permissible as long as it is uniform, which it is. While its constitutionality undoubtedly will be challenged, the constitutional probe will not go far.
The true reason for the repeal of the 16th Amendment is to assure that future congresses do not re-introduce the income tax to “supplement” the Fair Tax. I will be recommending to Congressman Linder, on his re-introduction of the Fair Tax in 2009, the insertion of a poison pill into the bill to prevent such a development. After several years of income tax freedom and economic growth, the re-introduction of the income tax will become unpopular.
~Jim Bennett
Jim,
There is no doubt that a federal sales tax on individuals is constitutional, as you write. But it is far from clear that a federal sales tax on state and local government consumption is constitutional. I have read many, many Supreme Court decisions on the subject of “intergovernmental tax immunity”, and, while decisions of late seem to be tightening the ability of the federal government to collect certain taxes, particularly as the federal government assumes what some believe to be state functions and responsibilities –and costs, there are no cases where this subject has been clearly decided. For instance, in a 1988 decision that favored the federal government, the court ruled that the IRS could tax interest on state and local bonds unless the bonds were registered. But this in no way sets a precedent for federal taxation of state purchases. And I might add that the state governors all oppose a national sales tax according to the NGA policy paper I presented elsewhere.
It is sometimes easy to forget that our republic consists of two sovereign powers, state and federal. And it was the states that established the federal government. As Justice Marshall wrote, “The power to tax is the power to destroy”. Contrary to your optimistic beliefs, the states will very likely challenge that part of HR25 that pertains to the federal government taxing state consumption, and there is certainly an excellent chance that the states will prevail.
As for your poison pill, can you clarify a question about it? Is the language I have read about going to hold off on implementing the Fairtax until the states ratify the repeal of the 16th amendment, or will the Fairtax operate while the ratification process goes on? And while you are at it, can you clearly express just why you are so opposed to having a little bit of each? I’m reminded that there is a new tax proposal called the “Competitive Tax”, which combines a VAT on large businesses with an income tax on the wealthy. I don’t see anything wrong with it, and it would eliminate the need for 100 million income tax returns–which happens to be the name of the book, as well as continue to provide a progressive tax on the wealthy.
Thanks!
Jim is correct. Hank’s assertion is incorrect that repeal of the 16th Amendment is a requirement for implementation of the FairTax. Otherwise, the taxation of the states appears to be kosher (though I’m sure it wouldn’t keep people from suing against it, as also happened with income taxes).
Some people mistakenly think of FICA taxes as being “income taxes.” Although, from the standpoint of an employee who has the FICA taxes (both Social Security and Medicare) withheld from his or her paycheck, it might be difficult to see the difference, the FICA tax is actually not an “income tax”; it’s an “employment tax” imposed under Subtitle C of the Internal Revenue Code. By contrast, “income” taxes (individual, corporate, etc.) are imposed under Subtitle A. So it would seem the federal government is already taxing state and local governments.
The estate and gift taxes are “transfer” taxes (taxes on some, but not all, transfers of ownership of property), and are imposed under Subtitle B.
Whoa up, guys,
Barry, I didn’t assert any such thing. I’m well aware that under the current Fairtax legislation, there is no requirement to repeal the 16th Amendment. My question to Jim was simply what would be his proposed language in the “poison pill”. Does the Fairtax go into effect prior to or after the repeal?
Morphh, Please elaborate on just how the federal government is “already taxing state and local governments”? And by that I mean taxing state and local government consumption, because that is the constitutional issue. For instance, if a county purchases a new fire truck, how is it currently taxed by the federal government? I think that a Fairtax on the fire truck, as proposed in HR25, would be quite different from state and local governments paying FICA taxes for their employees?
Fair Tax AND an income tax together? ABSOLUTELY NOT!
The core policy behind the Fair Tax is to remove the macroeconomic distortions created by income taxes and uncage the American economic tiger. Another Fair Tax policy is to make taxes transparent - and harder to pass and raise. Income taxes allow politicians to hide taxes too easily and raise them without popular outcry.
You who criticize the Fair Tax, and snipe at peripheral aspects of it, remember this. There is a figurative economic asteroid headed for our country due to impact in the year 2040. God willing, I shall be 92. In that year revenues will not be enough even to pay interest on the federal debt, not to mention any other function of the federal government. If we continue down our current path, economic life as we know it will cease. The politicians are doing nothing about it now because they are incapable of thinking beyond today and, perhaps, tomorrow. Those who are capable must deal with nearsighted constituents.
You who want the rich, which I am not, to pay more are not going to solve the problem. The Fair Tax is our best hope of growing the economy out of that crisis, and the sooner we start, the better.
Bringing back the income tax once we have the Fair Tax moves the country away from what economists agree is the best of all tax worlds and gives us overnight the worst of all tax worlds. Therefore, as passionately in favor of the Fair Tax as I am, I would not support it if I thought we would end up with both.
I therefore will suggest the insertion of a poison pill to Congressman Linder when he re-introduces the Fair Tax bill in 2009. The first part would provide that, if Congress should re-enact a tax like any of those repealed in Article I of the bill, the Fair Tax shall expire prospectively, and the Internal Revenue Code shall be reinstated prospectively, restoring the status quo ante. The same result shall obtain if Congress shall fail within three years after the enactment of the Fair Tax to propose the repeal of the Sixteenth Article of Amendment, and the states, within seven years of submission, shall fail to ratify it.
Normally I think there is a limit to which one can, or should, attempt to bind future Congresses. However my visit to Congressman Mike Ferguson was particularly telling. Congressman Ferguson told me and my colleagues the only reason he could not co-sponsor the Fair Tax is that he was afraid we would end up with both a sales tax and an income tax. In other words, Mike Ferguson, who is the politician’s politician, does not trust his fellow members of Congress. If he doesn’t, why should we?
One could argue that, in the case of the Bush tax cuts, the poison pill was a mistake. However in the case of the Fair Tax, where the stakes are greater, the poison pill will help to save Congress and politicians from their own folly.
~Jim Bennett
Summit, NJ
Hank,
I’m glad you brought this topic up.
One of my objections to the FairTax is that would levy not a 23% tax on most of my purchases, but a 30% tax. And before everyone jumps on me, no, I’m not talking about “inclusive” vs. “exclusive” rates. I’m talking about the fact that as a Floridian, I already pay a 7% sales tax on most purchases.
Florida derives most of its state revenue from the sales tax. Food and medicine are exempt, as are services such as doctor’s visits and lawn care.
In addition, county and city governments in Florida can, through a referendum, impose an additional half-cent or penny sales tax to fund specific projects, such as roads or schools.
Florida’s constitution prohibits a state income tax, and that’s not likely to change, so these sales taxes are going to remain the major source of revenue for our state government. For that reason, I believe Florida’s state government would definitely join a lawsuit to fight the FairTax. Whether or not they would win, of course, depends upon the courts.
My gut feeling is that the FairTax would be upheld, which is one more reason I oppose it. Passage of the FairTax will not make Florida’s sales tax go away. I don’t believe retail prices will fall by an average of even close to 22% (in fact, I don’t think they’ll fall at all) if the FairTax is passed. I know I won’t get a raise (the company I work for is one of the top 25 highest-earning companies in Florida, and I haven’t gotten a raise in two years).
So, worst case (and my experience is that the worst case is usually the best you can hope for): My income will remain the same, the prices I pay for goods will not fall by much if at all, and I’ll be paying 7% state sales tax and 23% federal sales tax on most of my purchases.
Sorry, guys, that doesn’t work for me.
I want to address a couple of Jim’s comments:
(1) I am critical of the FairTax as a whole, not just peripheral aspects of it. Yes, I have commented on problems I have with several aspects of the FairTax you might call “peripheral,” but make no mistake, I am against the whole thing. In my view, there’s no way you can make a 23 percent sales tax on every penny I spend palatable to me. It’s extremely regressive, and no amount of sugarcoating will change that.
(2) I’d like to know the source of your assertion that revenues will no longer be enough to pay the interest on the federal debt by 2040. It’s not that I don’t believe it - I do. But I would like to know the source. I will agree with you that short-sightedness on the part of our politicians has been our biggest problem. Of course, there are many ways to stave off the “economic asteroid” - cut spending, increase revenues, or pay down the national debt (I would point out that President Clinton did all three, proving it CAN be done). I don’t follow the logic that the FairTax is the only, or even best, way out of this problem. If the FairTax is mandated by law to be “revenue neutral,” the implication is that by itself, it will do nothing to increase revenue or cut spending. So how does it help?
(3) It’s not necessarily that I want the rich to pay more. I do want them to pay their fair share. And above all else, I believe taxes should be progressive, not regressive.
Source of my assertion concerning 2040:
David Walker, immediate past Comptroller General of the United States.
~Jim
Jim:
Thanks, found it.
Again, I have no argument with the number. Just with the assertion that the FairTax is the best way out.
Bill - I’m not sure why this is much different then today. You add your state sales tax to your current income tax burden. The difference and the reason which you appear to give above is that it is transparent. You actually can see how much you pay in taxes and this is upsetting... No doubt - it should be. Under the current tax system, the federal government collects revenue through a wide variety of taxes on individuals and businesses. Thus the cost of government is spread out among many different avenues and may not be fully visible to individual citizens. Reality is that you’re already paying 40% of your income at all government levels in taxes. See Your real tax rate: 40%.
You comments consistently look at the FairTax in a vacuum with no real comparison to the current system (as likewise does your bullet number 1). You comment about resisting 23 cents of everything you spend with no comment for the 30 cents taken on everything you earn. The Congressional Budget Office has stated #2. The danger is extreme and my primary reason for supporting a consumption tax as a replacement for income taxes. It is also discussed in detail in “The Coming Generational Storm: What You Need to Know about America’s Economic Future”. In bullet 3, it seems you make an assumption that savings is never spent as you likely limit a time frame to one year, which is how opponents normally come back to a regressive model. That assumption makes little sense. When expanded beyond one year, the FairTax is much less regressive and studies have even shown it to be more progressive then the current system (which when looked at as a whole is not that progressive). Many economists believe that income is not the best measure of economic well being as income is surprisingly poorly correlated with expenditure. They suggest lifetime income, expenditure, and wealth are have been shown to be better measures of the ability-to-pay. Point is, there is no black and white and we should try to consider realistic comparisons.
Jim,
You wrote: “I therefore will suggest the insertion of a poison pill to Congressman Linder when he re-introduces the Fair Tax bill in 2009. The first part would provide that, if Congress should re-enact a tax like any of those repealed in Article I of the bill, the Fair Tax shall expire prospectively, and the Internal Revenue Code shall be reinstated prospectively, restoring the status quo ante. The same result shall obtain if Congress shall fail within three years after the enactment of the Fair Tax to propose the repeal of the Sixteenth Article of Amendment, and the states, within seven years of submission, shall fail to ratify it.”
For us old and slow guys, please confirm that you are suggesting that the Fairtax be implemented upon passage, that any reenactment of the taxes replaced by the Fairtax would cause the Fairtax to expire, and if the Congress doesn’t pass a repeal of the 16th within three years, and if the States don’t ratify the Amendment within seven years, the Fairtax will expire and the income tax would be restored? Have I got it about right?
Jim — I agree with you that the country is facing a fiscal train wreck that needs to be addressed, but some of your assertions do not necessarily follow from this issue.
1. You say that a primary policy behind the FairTax is to “remove the economic distortions caused by our income tax.” I agree that we should generally strive to remove as many economic distortions in our tax system as possible. For example, lowering, streamlining or eliminating the corporate income tax would make corporations operate more efficiency. But a tax on consumption (which is the equivalent of a tax on the gross revenue of businesses that sell to the consumer) is also going to cause economic distortions.
As Ronald Reagan used to say, when you tax something, you get less of it. In the case of the FairTax, which taxes the purchase of new goods and services in the United State, we will end up having fewer new goods and services purchased in the United States. Since our economy is primarily consumer driven, that is certainly going to cause it’s own set of economic distortions.
2. The economic crisis you refer to will be caused by SPENDING on entitlement programs. The FairTax does nothing to reduce spending or reform entitlement programs. From the Beacon Hill/Kotlikoff studies, the FairTax would cause a budget deficit of $476 billion (in addition to the $600 billion tax credit given for the transition period). I’m not sure how that’s going to help solve our future fiscal mess, unless you subscribe to the same “starve the beast” theory that so many of the Bush folks believed in.
3. You say the FairTax is going to grow the economy out of the economic crisis. What makes you so sure? The US economy has been the engine of the world for the last century under an income tax system. There certainly isn’t any hard evidence that we would grow faster under the FairTax.
In fact, even those few economists who support the FairTax claim that any economic growth under the FairTax will be pretty marginal and will occur, if at all, over a long period of time. If I recall, either Beacon Hill or Kotlikoff had a paper out predicting that over the next century we should achieve 10% additional growth over current growth projections. A century is an awful long time to be making projections over. And, I believe it is pretty safe to say, they made a lot of assumptions very favorable about the FairTax that might not be true, particularly since their studies were paid for by AFFT.
4. Your claim that “economists agree [that the FairTax] is the best of all tax worlds” is not correct. SOME economists support the FairTax or, in truth, they support the CONCEPT of a consumption tax. And probably most economists, like most Americans, are very critical of the income tax. But you certainly do not see a majority of economists saying we should scrap an income tax system for a consumption tax. In fact, most economists believe we should streamline and simplify our income tax system.
Hank,
You’re not as old and slow as you think. You got the poison pill exactly right.
~Jim Bennett
I believe you are taking the same economic distortion on the supply side of the ledger and applying them to the consumption side. It doesn’t work that way.
I thought I read a letter to the congress urging them to pass the Fair Tax, it was signed by eighty top economists. I guess they aren’t the ones you are talking about.
Hank, I was referring to taxes the employer must pay based on payroll. At the least, the state employer is responsible for a matching contribution. The state is paying federal taxes. Of course this is not a consumption tax, and might likely be a different case. I’m not that familiar with the constitutional argument you’re describing. On the extreme end, I guess you could make an embedded tax argument that the incidence of income taxes falls onto the state (they pay a higher price for the new fire truck). And I’m sure one of our gold standard people here could make a good argument that the federal reserve is indirectly taxing the state through inflation. haha ok ok.. I’m grabbing at straws.. I concede.
Looking on the positive side, States just might see that the Fair Tax would be a good idea for them too. They could remove income tax, reduce sales tax and property tax rates while having a more consistant source of revenue. They could even add to the prebate to make sure that basic needs are not being taxed from the states sales tax too. Before you say they couldn’t do that, they already do, states add to SSI payments. It would not be any more difficult.
Thanks Hayden for your comments,
I agree that we need to get a handle on spending. The system of government we have, however, is biased against controlling spending because Congresspersons are rewarded for bringing home the bacon and not for spending control. Until then there’s always the Fair Tax.
I also agree that all taxes cause distortions in the macro-economy and that no tax is good. However I do believe there is a consensus among economists that consumption taxes cause the least amount of distortion.
David Walker, former head of the GAO, is the one who says we need to get our savings rate up to grow the economy.
~Jim
Actually, Morphh this is a good example of intergovernmental tax immunity. States whose employees pay Social Security taxes only do so because the states voluntarily entered into what’s call a “Section 218 Agreement” with the SSA. This was required because of the Constitutional question of the Federal government taxing the state and local governments.
Fred,
Good point, and I believe you could have added that those states that don’t agree to allowing their employees to contribute to the federal SS program generally set up their own contributory retirement plan. And as I understand it, all of those such plans are fully funded, (presumably not with special T-bills or IOU’s)?
One of Bill Bradley’s changes he recommended to fix the SS system for the next 100 years was to bring all state and local employees under the federal plan. I think the odds of that ever happening are pretty slim!!
Hank, I think the model of Galveston, TX is a prime example of one possible solution to the Social Security mess. Just imagine if an employee’s mandatory contribution (and the “employer match,” for that matter) for Medicare were to be granted an “opt-out” clause to allow workers to put that money into a long-term HSA with no rollover limitations. Yet another way to prove the utter superiority of the private sector solution over increased government regulation and control.
By the way, your post on my blog has not been deleted (or responded to) and you are in no way banned. Our debate can certainly continue after April 15th, if you so choose.
Best regards,
Brad
Morph:
Haven’t we had this discussion before?
First, regarding your estimate that my “effective tax rate” is 40% under the current system because I’m paying the cost of corporate taxes embedded in the price of everything I buy, that is - as I’ve said before - an assumption I can’t buy into. You simply can’t quantify a specific dollar figure in every single good and service on the marketplace that goes to taxes.
I would point out that corporate taxes today are at a historic low - in the 1970s, the corporate tax rate was 48 percent, compared to today’s 35 percent. And corporate profits are at their highest point as a percentage of GDP than at any time since 1929 (I’m sure there’s something significant about that year, but I can’t for the life of me remember what it is).
So we’ve got historically low corporate taxes and historically high profits. But incomes in the middle and lower classes are stagnant or falling, prices for necessities like food and gas are rising exponentially, and the economy is in the tank. Hmmm.
Then we get back into the thing about thinking of income over one’s lifetime instead of per annum, and if we do that, somehow the FairTax becomes progressive.
Let’s see. I celebrate my birthday once a year. The Super Bowl is held once a year. We all sit around and watch a ball drop in Times Square once a year and act silly when midnight comes.
Of course, we can look at income as a lifetime thing. My annual (there’s that once-a-year thing again) Social Security statement tells me how much I’ve made in my lifetime. And it’s not a bad sum. Too bad I don’t have any of it on me right now, but hey, I had to spend it all to live, which for some reason, keeps getting more expensive every year (darn, there’s that year thing again).
Okay, I’ll quit with the sarcasm. Actually, annual income IS something those of us living below, at, or slightly above the poverty line (I’m one of the lucky ones to be slightly above it) see as “expanded thinking.” We’re focused on the month-to-month picture. That’s because bills come due once a month. For the most part, I get two paychecks a month. And because I’m paid hourly, and my hours vary from week to week, life for me is a constant battle in figuring out how to stretch those paychecks to cover all my expenses for the month.
If I shared your optimism that prices will fall drastically, manufacturing jobs will come pouring into the country, raising everyone’s standard of living, and my paycheck will increase if the FairTax becomes the law of the land, I might be willing to overlook its regressivity. But I don’t share that optimism. So I’m against it. Because if those three things DON’T happen - and the history of “Trickle-Down” economic theory suggests they won’t - I and those in my situation will be hurt financially, and hurt badly. And we’re already hurting enough, thank you very much.
Bill, that is not my 40% estimate but that of the National Bureau of Economic Research. The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3%, the median tax rate is 41.8%, and the standard deviation of all of those rates is 5.3 percentage points. Basically, most of us pay about 40%, plus or minus 5.3 percentage points. The Tax Foundation has also concluded that government at all levels will collect 30.8% of the nation’s income for 2008. Both of which can be true based on what is meant by “nations income”.
As far as yearly or lifetime, it does not have to be lifetime but some form of multi-year income or expenditure and it only applies to savings. If you spend all your income for the year, then it is easy to measure it that way. Problem is you assume that nothing saved past your “year” mark is ever spent, which is ridiculous. To use your sarcasm, New years eve - I better throw away my savings.. never to be taxed again. If I earn $100,000 this year and save $25,000 - in you’re view, I’m only taxed on $75,000. This is what makes it regressive on income using a year timeline. The temporary untaxing of savings and investment, which is a huge boom to the economy. Almost every economist will tell you that doing so is a huge huge economic benefit. This is money that is put into the bank or investments to create new business, more capital, buy more homes, decrease interest rates, etc. Why in the world would you want to tax this before it is put to good use in the economy? If this is regressive, then I’m for it but that’s not the end of the taxation. When that income is finally (which may be several years later) used for personal consumption in the U.S., it is taxed plus interest. The $25,000 is not untaxed, it is tax deferred. Under the current system we tax defer some savings, yet you don’t afford the same calculation to a consumption tax. If you tax defer all savings to the year of spending (like you tax defer earned income), then the tax is no longer regressive. As for your situation, if you’re at or slightly above the poverty line you’ll make out best under the FairTax as it is the only plan that untaxes the lower-class. The plan has been criticized for being too generous to the poor.
Bill,
The historical low for corporate income tax rates in the US is zero percent, but if you’re referring to the rates established after 1909, before 1940 the rate never got above 19%. I’m not sure where you got your data for corporate profits, but if they are at a high point relative to GDP, is that a bad thing? As long as the corporation earns its money through voluntary exchanges with consumers (and not by buying special favors from the government), aren’t the corporations getting just what they deserve?
The increased demand from China is one of the main reasons for the high gas prices. And of course, high gas will always raise food prices, especially for city folk, since gas is their main source of transporting the food into the city. Not to mention the fact that food prices in the US are already a little high is US (the farm subsidies that prop up food prices that I’ve mentioned before). Plus our government’s ethanol program that has supposedly shifted so much farm production to corn that the supply of soybeans and rice (not to mention the use of corn as food for humans and animals) has gone down thus raising the cost of basic food staples for much of the world.
Can the fair tax solve this? Again, I don’t think it can directly, but maybe, just maybe, if people see the real price their forced to pay for their government, they can then ask the question “What am I paying for?”
On a side note, supply-side economics was proven to work quite well. It was socialism, collectivism, etc. that were shown to be complete failures. And, if you don’t believe prices will go down under the fair tax, can I assume that you believe the prices corporations set today are based on their altruism?
Morph:
Regarding your first point, averages are great - by arbitrarily setting a high number, you can skew them to make any point you want. The best example is the one about Bill Gates walking into a bar, thus making the average income of everyone in the bar suddenly much higher. Setting an income range with the bottom at $20,000 and the top all the way up to $500,000 skews the average tax burden of everyone upwards.
FYI, I make less than $20,000. So I decided to run my numbers. If you’re talking the burden from ALL taxes - federal, state and local - the number for 2007 was about 20% of my income. That includes my federal income tax, plus my share of Social Security and Medicare taxes (my employer doesn’t count his share of those taxes as part of my income, so neither do I); state sales tax (I can’t tell you exactly how much I spent on taxable goods in 2007, but I pegged the number at $12,000, which is probably a bit high); and my share of the local property tax which I share with my brother and my mother. Those numbers by themselves came out to a bit over 18%. Add micellaneous taxes such as auto registration renewal fees, gas taxes and the excise tax I paid on the set of tires I bought last year, and the number runs up to about 20%.
If you’re talking ONLY the federal taxes (which seems fair, since the FairTax wouldn’t replace my state and local taxes), my tax burden runs closer to 15%.
IF you add in the 22% burden of “embedded taxes” on my purchases, then you could run my total tax burden up to about 40 percent. But I’ve already rejected that as valid for two reasons I’ve repeatedly stated on this blog: (1) Then exact amount of “embedded tax” is impossible to quantify for any given individual; and (2) I don’t believe costs will come down by even an average of 22 percent if the FairTax is enacted.
Regarding your second point, savings - and the interest they earn - are part of income. Setting aside for a moment the fact that people in my position don’t HAVE any savings to speak of, there are only two numbers that matter: How much money a given person has (from all sources), and how much money that person spends. You can express those numbers in any way you want, and over any time frame. But you won’t change the basic fact that the poor spend a larger percentage of their total income than do the middle class, and the middle class spend a larger percentage of their total income than do the rich. Which is what makes consumption taxes unavoidably regressive.
I would also point out that under the income tax, savings are not taxed, only the interest they earn is taxed.
Finally, you say again that the lower class will be “untaxed” under the FairTax. And I’ll say again that is simply not true. The prebate WILL help the poor somewhat by adding to their incomes. But it will NOT exempt them from paying the tax on all their taxable purchases (in other words, everything except used goods, INCLUDING food, medicine, health care, gas, rent and the interest on debt, all of which make up a sizeable portion of the expenditures of the working poor).
Andrew:
You will note I said HISTORIC low, not ALL-TIME low. Over the 95-year history of the personal income tax, the top rate was below 35 percent for only 17 years until 2001. Over the 99-year history of the corporate tax, the top rate was below 35 percent for only 32 years. In other words, HISTORICALLY, the top rates for both taxes have usually been higher than they are now.
You cherry-picked my quote on corporate profits as a percentage of GDP to make it sound like I was saying high corporate profits were a bad thing. In the paragraph immediately after I made the point that corporate profits were higher than at any point since 1929, I said this: “But incomes in the middle and lower classes are stagnant or falling, prices for necessities like food and gas are rising exponentially, and the economy is in the tank.”
In other words, at a time when corporate profits are at a high point, one would expect incomes across the board to be rising, prices to be stable and the economy to be in good shape. But that’s not happening, and the income inequality figures I quoted earlier show why - those corporate profits are NOT being invested in new jobs, new facilities (at least not in the U.S.) or coming up with innovative new products. They’re being doled out to majority shareholders and corporate executives, who in turn use them to invest in hedge funds, more stock and tax shelters, none of which help the economy or the population in general.
Finally, regarding your belief that supply-side economics has been proven to work quite well, I don’t see how. When Ronald Reagan took office, we were the world’s largest creditor nation and our manufacturing base was unequaled in the world. Now we’re the world’s largest debtor nation, and our manufacturing base makes up less than 10 percent of our job market, incomes are stagnant or falling for all but the top 10 percent of wealth-holders, and our economy is in a shambles thanks to the de-regulation of financial markets. If this is success, I’d hate to see failure.
Note: I think something went wrong in my previous submission.
Bill,
I’ll concede the corporate rate has been higher than 35% for the majority of its existence (but not for the existence of the country).
I wasn’t trying to cherry pick. I thought you were saying corporate profits were bad. If you weren’t, I apologize and welcome to the club.
As far as supply side economics go, I don’t think pointing out events you associate with supply side economics and pointing out things you believe are wrong with our economy (some I agree with and some I don’t) really show any causation. For an example, our debt has nothing to do with supply side economics. That is completely a function of overspending. Reagan actually balanced his defense increases with non-defense decreases, but he had to work with the opposite party to get his increases. Deals had to be made.
But since this is the fair tax blog, lets talk about your issue with the manufacturing base. If we could make our manufactured goods, let’s say, 22% cheaper abroad and increase the cost of imported goods, don’t you think that would help the manufacturing base?
Bill, you should read the article before rebutting the statement. If you would have read it, you would have seen that it stated “As a consequence, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5%, while a 45-year-old couple earning $500,000 pays at 43.2%.” The standard deviation of all of those rates is 5.3 percentage points, so put you Bill Gates example away please. You do realize that you’re already paying taxes on food, medicine, health care, gas, rent and the interest on debt, since the income used to pay for these items is taxed. Being taxed on 100% of your spending is meaningless if you pay a 0% effective tax rate. If you believe you would be paying taxes and have increased income, or if it is a return of taxes paid - your purchasing power is the same, which results in an effective rate much lower then 23%. If you actually compare the two burdens fairly, you would pay less. I don’t even know where to begin as there are so many incorrect statements or perceptions that it is almost pointless.
The Competitive Tax
I had heard about the Competitive Tax before, and I strenuously oppose it. The tax is suppposedly designed to reduce our corporate income taxes, which are the world’s highest (at least among the OECD countries) and pick up the shortfall with the new VAT.
My problem with the Competitive Tax is that this tax is an add-on, not a replacement like the Fair Tax, and I do not trust it. If you need any proof of what a new tax will do, look to my New Jersey. New Jersey is the perfect example of what will happen when you add a new tax and why I do not believe corporate income taxes under the Competitive Tax will remain low after we have a VAT.
Back in 1976, when I was a 28-year old lawyer, New Jersey had no income tax at all. New Jersey had been introduced to its sales tax only ten years earlier. In 1976 the New Jersey Supreme Court decided that having the property tax as the principal source of funding for education did not meet the requirement of a “thorough and efficient” education guaranteed to all New Jerseyans by the New Jersey Constitution. That was the year the state legislature decided to add an income tax on top of existing sales taxes and property taxes.
Originally the income tax was supposed to reduce the property tax burden. In that year we started receiving property tax rebate checks from Trenton. They are means-tested, and now there is talk of cutting them.
Did our urban school districts ever improve from the more equitable school funding? Look at Newark, Camden, Trenton and Paterson. I rest my case!
Fast-forward now to 2008. New Jersey has an annual budget gap of over $3 billion and a state debt of over $30 billion. We have the country’s highest property taxes, a sales tax recently raised to 7%, AND we have a state income tax.
A recent penny increase in the sales tax was supposed to lower property taxes. I’m still waiting. I probably will never see the reduction because state aid to municipalities is being cut. (That may not bode well for Florida, but at least Florida is not proposing a NEW tax.)
Governor Corzine recently proposed “monetizing” (i.e., selling off) the New Jersey Turnpike, the Garden State Parkway and the Atlantic City Expressway. Corzine ranks as a financial wiz from Goldman Sachs. His scheme would “restructure” $30 billion to supposedly pay down the debt and repair infrastructure. When it came to suggesting structural changes in government to balance the budget and keep the debt down permanently, Corzine commented that “pigs will fly over Trenton” before we reduce the size of government. After public outcry, including a massive “flying pigs” demonstration at the State Capitol, the Governor backed off his “monetization” plan. Some cooler heads in the legislature are starting to consider ways to pare down state government. (By the way, I am a state employee.)
Meanwhile people who can flee are fleeing New Jersey in droves, leaving those of us who stay behind holding a bigger bag. It simply costs too much to live here, and taxes are a major part of the problem.
The New Jersey lesson is: the more taxes the Congress or state legislatures concoct, the more ways Congress or the legislatures can find to spend the money. Levying a new tax to reduce an old tax reduces neither. A new tax only “feeds the blob” according to talk-show host Jim Gearhardt on his morning show on NJ 101.5 FM. Only the Fair Tax can be trusted to completely eliminate other forms of taxation.
So the message to proponents of the Competitive Tax: NO, NO, and AGAIN NO! We need the Fair Tax.
~Jim Bennett
Summit, NJ