The FairTax Fantasy
April 24, 2009 · Filed under: Criticisms
Hugh Hewitt’s New Hit Piece on The FairTax
Here is his pitch....
If you think what the FairTax folks are selling sounds good, then you haven’t studied the fine print. Do yourself and your country a favor and get informed about this FairTax Fantasy today. And the next time a FairTax proponent asks “Have your read the book?” as they are fond of doing, reply, “Yes we have. Have you?”
83 Responses to “The FairTax Fantasy”
I can’t stand Hugh Hewitt, but it will be interesting to see what his new book — FairTax Fantasy — adds to the debate. (Probably nothing more than is regularly discussed on this blog, but he’s got millions of listeners and we’ve just got us.)
I am happy about the new Hugh Hewitt book The FairTax Fantasy.
Besides being a right-wing talk-show host, Hewitt is a lawyer and constitutional law professor. His co-author Hank Adler, is a reitred partner with a national accounting firm and currently a professor of accountancy and/or finance. So they have some intellectual firepower between them and the skills necessary to evaluate tax proposals.
Here’s a transcript of their announcement/introduction of their book on Hugh Hewitt’s radio show.
I’ve been corresponding with Adler over the last couple of days. They have studied the same research we’ve discussed here and analyse the research in their book. Hewitt and Adler have standing offers to debate any FairTax proponents anytime, anywhere. In particular, Hewitt has offered to debate Boortz both on Boortz’s show and Hewitt’s show. So far, no takers. (Of course, their book has only been out for a week, but Boortz probably did thirty interviews during the first week his book was out.)
It will be very, very interesting to see if Boortz, Cain, Huckabee, anyone from AFFT, or (my preference) Larry Kotlikoff take them up on their offer. I note that Boortz has not said a word about the FairTax Fantasy Book on his website.
Maybe Morph can get one of them to blog some on this board!
I got this in an e-mail, figured I would post it in here. So these are not my words... but I thought it would add to the discussion.
Hey Morph — Even though I disagree with your comments above, I’m glad to see you put the link up for the FairTax Fantasy book.
Once again it shows that you (and Joshua) are fair in discussing the pros and cons of the FairTax, which, alas, most people are not.
Now if I could just get some sense into your thick heads . . .
Fairtax would work fantastic — if we cut spending 80%.
Most of the revenue Fairtax would collect would come FROM the government. In Fairtax Book, page 148, Boortz said “The federa government ITSELLF will become a MAJOR taxpayer.”
Not just the federal government. Every city, town, villiage, county, and state, would be paying this “sales” tax on all their spending — including spending on salaries (typically the biggest expense). See Fairtax Answers, page 138-142.
What happend to Fairtax statement that “Only people pay taxes?”
In fact, if the Fairtax worked this way - we would not need to tax people at all. Just tax the government.
It’s increasingly hard to believe that Fairtax leaders themselves don’t realize the farsical nature of this pretense to get most of government revenue FROM the government.
Hayden, those were not my comments (I just copied them from an e-mail). I’m going to reserve judgment until I read the book. Thanks for the complement (I think.. haha).
Mark, the federal government paying taxes does not increase or decrease tax revenue. This is shown in the studies produced on the rate. You’re cherry picking a statement from one talk show host and applying to the plan in general. The Federal Government is already a major tax payer. The government employees pay income and payroll taxes, which the government pays and then collects. Left hand / right hand - same thing..
The intent of applying the sales tax to government is to keep a level playing field between government and the private section. It does not increase or decrease the overall burden - it’s a mechanism to prevent tax free government competition with the private sector. The FairTax is not intended to be an increase or decrease in revenue, so any additional taxes that state or local government might incur above the current system is relative to the windfall gain of the people. Boortz also states there is no free lunch here. The FairTax does not work the way you suggest - there is no pretense to get most of government revenue FROM the government.
Hugh Hewitt wrote a book called “Painting the Map Red” about Republican ascendancy and gaining tons of seats...In the following election, Republicans lost both houses of Congress and numeroous governorships, state legislative seats, etc.
Hugh Hewitt wrote about called “A Mormon in the White House” making the case for Mitt Romney to be President. Mitt Romney lost in Iowa, New Hampshire, and eventually lost the Republican nomination, having only won one competitive primary.
And now Hugh has written a book trashing the fair tax. This is the surest sign I have it’s going to pass.
FairTax Fantasy is published by Townhall Press... is that a self publication (like AuthorHouse)? I can’t find anything on this publisher. Is this some branch of Townhall Magazine?
I remember when Harriett Meyers was nominated by Bush for the Supreme Court. Everybody was freaking out over Bush’s obvious mistake, except for Hugh Hewitt, who’s said something to the effect of, “that’s my president’s nomination, and I will stand by it”. HAHAH!
I also remember when Florida won it’s first basketball title in 2006. Hugh Hewitt was convinced UCLA would win the title because they’d been to the finals several times in team history. WRONG AGAIN HUGH!
Hayden,
Was thinking about buying the book to see if there was some new insight that may be gleened from it until I read the transcript. Sounds like Bruce Bartlett would be proud of this book because it’s the same lame arguments that he’s been repeating since the Boston Globe article was published in 2005. We have heard all this garbage before, it wasn’t accurate before and it’s not now. When I got to the Software issue, I had to stop. If these guys are really as educated as advertised then they are just plain lying about not understanding ad valorum taxing. I work for a POS software company. Ad Valorum tax is already used in every POS system that I have seen. If you buy a drink at a bar the tax is worked into the price of the drink, the sales tax is ad valorum. I just don’t understand how anyone can fall for this obvious attempt to dumb down the argument.
Once again it shows that you (and Joshua) are fair in discussing the pros and cons of the FairTax, which, alas, most people are not.
Of course, he did call it a “hit piece” in the original post.
Morph — For what it’s worth, Herman Cain and I are scheduled to be on CNN tomorrow (Monday) afternoon around 12:10 p.m. on CNN Newsroom discussing the pros and cons of the FairTax with anchor Tony Harris.
You can guess who the “con” is going to be. We’ll only get around 4 minutes total, so - alas — we won’t be able to get into any depth. And the producer let me know that we might get bumped for more swine flu coverage.
I don’t think it will be on the internet unless someone YouTubes it for some reason. I have no idea how to do any of that.
I’m hoping that someone can clear up something that is currently being thrown around. I have seen arguments similar to the following pop up a couple of times in the last few weeks. ‘Not just the federal government. Every city, town, villiage, county, and state, would be paying this “sales” tax on all their spending — including spending on salaries (typically the biggest expense).’
Isn’t one of the biggest arguments for the FairTax that you reduce the business expenses, thus unleashing the power of the free market to drive the economy? Eliminating the payroll tax, which I think is the largest tax portion that the employer pays (~7.5%, right) and replacing this with a 23/30% tax on the provided “service” of labor would absolutely kill business, right? Can someone please confirm that this is a massive misstatement by those who have started putting forth this argument, or confirm this for me such that I can reverse my position on the FairTax? Thanks.
Morph — Alas, I’ve been bumped by the Swine Flu, which CNN will be covering all day! How ignoble.
Scott, the argument is referring to government (federal, state, and local), not private business. The reason the bill taxes government is to maintain a level playing field with private business. They don’t want the government to have a huge tax advantage in providing services and taking business away from the private sector. Today, government employees are taxed similar to private industry, higher wages are required to offset taxes paid. Government doesn’t usually issue a retail charge to it’s citizens for services, so if government were treated like business under the FairTax, there would be no tax cost - they would be tax free, while private industry would have to charge tax at retail.
If government was tax free, than we would have a bad situation where it would be beneficial to transfer services over to a government monopoly. So what the FairTax does is they tax the government on their spending and they’re considered a taxable employer and must pay the tax on their wage expenses. This attempts to balance a similar cost of service, where private business would apply the FairTax for final retail consumption. That way the cost for government providing a service is similar to private industry providing that same service after taxes. Both the income and expense of the federal government is included in the tax rate (as is the expense under the current system for revenue), although there is debate on what the proper rate is for revenue neutrality and expense to state and local government.
Sorry to hear you got bumped Hayden. Let us know if they air it at another time. If it makes it online, let me know and I’ll post it as a new thread.
Scott,
Morphh did his usual excellent job of explaining why the Fairtax plans to tax government consumption at all levels. I would argue that by untaxing all businesses, the playing field is already level, and taxing governments is overkill? The pendulum has swung too far, imho. Debatable, it seems to me.
Much more important is the key point Morphh left out. Working with several Yale constitutional experts, I am convinced that it would be inappropriate, if not unconstitutional, for the federal government to tax State and Local government consumption. One of the oldest and most difficult jobs of the Supreme Court has been to keep Federal and State governments in their proper role. The doctrine of intergovernmental tax immunity has evolved over the years, and seems to make the Fairtax proposal inappropriate.
Should the SC rule against the provisions of HR25, the Fairtax rate would rise to 40% exclusive, but at least the Fairtax claim about transparency would then be correct. As HR25 is currently written, 15% of the revenue needed to fund the federal government would be hidden in higher State and Local taxes of all kinds. That isn’t very transparent, imho!
With all due respect to Morph, I think the explanation of why governments are taxed is somewhat disingenous. (Not on Morph’s part, but on the part of the AFFT and Linder.)
For example, why tax government spending on defense and law enforcement? Is that so the government canno compete with private protection firms? Come on? Why tax health care spending on the indigent? Why tax road construction? None of this stuff competes with the private sector.
The REAL reason government spending is taxed under the FairTax is to disguise it’s true cost. The FairTax will necessarily drive up the cost of state and local governments, forcing them to raise taxes on their citizens. These increased state and local taxes are a direct result of the FairTax, but the FairTax proponents can say “Hey, the FairTax is a federal tax; what states do is their own business.”
By the way, I have thought of a way to explain the “tax inclusive” rate. It’s like when you go into a restaurant and they “include” the tip in the bill. They add the tip first, then it gets included with the bill, but it still raises the price of the total tab by the amount of the tip. If the meal cost $100, and the tip is $18, the tip would be 18%. (i.e., 18/100If you calculated the tip as the FairTax people do, the tax would be only 15%. (i.e. 18/118).
But if the restaurant claimed that the tip was only 15% when calculated on a “tip-inclusive” basis, their patrons would riot because they’d realize they’ve been scammed.
Similarly, the FairTax is added to the purchase price of an item before it is “included” in the sales receipt. It staill raises the price by the tax-exclusive rate. Calculating it at a tax-inclusive rate would be just as much of a scam as calculating a tip on a “tip inclusive” basis.
I let you know how that analogy works if and when I ever get the chance to try it out.
Hank, I don’t understand how you could see that untaxing government would be an equal playing field - the difference is the tax. The FairTax, while untaxing B2B, still has the business applying the FairTax to the final retail price, which the government would not do. So for the same good / service, the government with no retail transaction to apply the tax, would have a lower cost of doing business. It would be equal to a business that did not have to charge the FairTax at retail.
If the fed decided to enact the FairTax, with people pushing for repeal of the 16th Amendment, I think the States would sign the required paperwork like they have done with the payroll tax.
As for transparency, I think it is appropriate that we see the true cost of State/Local government as it would apply to a comparable private business. If we are to judge our local government’s cost effectiveness, we need to have a comparable cost of business, which requires an inclusion of tax cost. Otherwise, I think we would have the opposite problem, where the cost of our state / local government is hidden in our federal tax burden. This is already true to some degree already with transportation and education. No need to make it worse.
Hayden, all federal spending (military, etc.) is a moot point as it doesn’t effect it one way or another. As for State / Local, there are areas that compete for such business. Private roads seem to be gaining interest in some places. Where do you draw the lines.. water, electric, trash pickup, wifi. Government and private industry clash on many areas depending on where you are. So you want to make a global tax free advantage to whatever some politicain thinks is a “government service”. There are some... but I don’t see the point in adding a bunch of exemptions for this and that.
I rather keep it simple and fair to private business... whatever that business may be in the future. Government should not have a defined tax advantage, IMO. Also, your not changing the tax burden by untaxing some state or local government function, your just transferring it to the fed. So perhaps to your reverse point, maybe it’s just a ploy to transfer some of the fed cost to the state/local level (which is also done today under the current system)... but I still rather have it that way functionally.
You must tax state/local governments. If not, there would be a gigantic incentive to transfer all things private to the state/local governments. You would in essence be getting a 23% discount on everything you transferred to the public sector. Build a $1B baseball stadium privately? Why do that when you could do it for $770M (not that they don’t use public funds anyway)?
Dear Mr. Hewitt,
I was disappointed with the content of your radio interview with your fellow Chapman University Professor, Hank Adler, on April 21, 2009 about the FairTax. I read the transcript. If your interview is indicative of the content of your book, both contain numerous straw men and material omissions, the effect of which is to mislead the audience.
I have replied previously to a piece by Mr. Adler. You can read my November 26, 2007 piece, “A Harder Look at the Fair Tax,” at http://jbennettatty.blogtownhall.com/2007/11/26/a_harder_look_at_the_fair_tax3.thtml . My piece was in reply Adler’s November 22, 2007 blog, “A Hard Look at the Fair Tax.”
I will not reply to your interview point-by-point here. But if you send me a copy of your book at no charge, I will be glad to read and critique it for you.
Very truly yours,
~Jim Bennett
Morphh/Andrew,
I stand by my comment that untaxing businesses creates a level playing field with government. I agree that under today’s tax situation, businesses are at a disadvantage with government agencies due to having to pay income taxes, which governments do not. Take away the business income tax and the playing field is level.
Your concern about governments getting into the retail business unless we tax government consumption ignores Section 704 of HR25, Government Enterprises. As I read it, if a government entity sells a certain amount of goods or services at retail, then they become a government enterprise, and must charge the 23% sales tax. What is the problem??
Federal taxation of State and Local consumption is inappropriate under our republican/federal form of government. Your using Social Security as a precedent ignores the fact that the States had to be given an option to joining the Federal SS program, else the SS program would have been found to be unconstitutional. That is why many State/Local employees are not a part of SS, but have their own program.
Overall, I think it is nuts to add almost $1 trillion in tax costs to the federal government budget alone, let alone huge increased tax costs at the State and Local level, all in the name of a “level playing field”?
What am I missing?
Hank, your missing several things. You don’t take away the income tax from business and replace it with nothing; you replace it with the FairTax, which adds to the cost of business. You’re one of the most vocal posters here about the price level increases due to the tax. If the government has no tax cost, and private business has a price level increase due to the tax, how is this equal?
The vast majority of government is not government enterprise (i.e. Post Office). Government enterprise does not receive budget from the tax dole, but acts like a business charging citizens for its services. Most government operations take their income from tax revenue, and charge no retail cost to its citizens.
For example, I moved recently and my trash pickup is included in my county taxes. I’m not charged by the county every month like a business for pickup services as would a Government Enterprise. In my last home, I paid a company BFI to pick up my trash. At one time, I became upset with BFI and had the option to move to Allied Waste - free market competition. If government has no tax cost, BFI and Allied Waste would be out of business to a government monopoly.
There is no adding of almost $1 trillion in tax costs to the federal budget or an increased burden by taxing the state/local. You’re transferring it from left hand to right hand in the case of the fed. In the case of state / local, your transferring the perception of burden from state / local to the fed. In both cases, your paying the same amount of tax - the burden is the same.
Morphh,
Come on, the Fairtax does not add one dime to the cost of business. It is an add on to business costs that impacts only prices. No business cost replaces business income taxes. That is the point of the Fairtax, untax businesses!
Let me stress what you seem to be missing. Section 704 places the sales tax on almost all government retail sales. Under the Fairtax, the federal government has no advantage over private retailers as I see it. That’s why I still maintain that by eliminating business income taxes, the playing field is level. And you surely believe that private enterprises will beat the tar out of government enterprises given a level playing field?
Hank, were talking about price. The price to the citizen or consumer. The final cost to the consumer from a private business includes the FairTax on prices, but would not if it were a government entity.
Section 704 only applies to a very very small amount of government, so your point is moot. These government business are treated just like a private business, they don’t have the tax on wages or consumption that other government entities have. For all intensive purposes, they are a private business. That is not the group we’re discussing here.
As far as government beating private industry on a level playing field, they very well may beat them... they don’t have to turn a profit after all, but that’s not the point.
I thought an example might help.
Let’s say we have a service that costs $300 materials and $700 labor.
Now an example if we were to untax government.
Government, without taxing materials and wages, would cost $300 less in this example than providing the same service by private industry. To create equality under the FairTax, the government is taxed on its materials and wages, which brings it in line with private industry (and the similar government enterprise). Note that this does not include state and local taxes, which private industry would pay but government is likely exempt from (giving government a tax advantage at the state/local level).
Morphh,
In language only Hayden could love, here is the pertinent wording from HR25 defining a government enterprise.
“`(b) Government Enterprise- Any entity owned or operated by a Federal, State, or local governmental unit or political subdivision that receives gross payments from private persons is a government enterprise, except that a government-owned entity shall not become a government enterprise for purposes of this section unless in any quarter it has revenues from selling taxable property or services that exceed $2,500.”
I don’t think my point is moot at all. Turns out that any government entity, federal, state, or local, with retail sales of $2500 per quarter is defined as a government enterprise and therefore must collect the 23% sales tax. I understand that there are only a dozen or so government enterprises at the moment, but this language seems to me could create additional government enterprises should the Fairtax become law. That is, if government wants to get into the (laundry or whatever) retail business. I think that your concerns about moving all private business to government agencies based on your taxation argument is unfounded!
So, in your fine examples provided above, just what the heck is a “Non-government Enterprise (without taxation)? Should we all be concerned about a government entity with annual retail sales of $10,000 or less that seems to fit your definition per HR25, Sec 704?
The Non-government Enterprise (without taxation) example above is what I believe you are suggesting - untaxing Government. I wrote that section to show how this suggestion would be unequal to private business (by $300 in that example). I now see how the wording could be confusing so I edited it to say “Government Non-Enterprise (if government were untaxed)”, which I hope is clearer. I don’t know why your focused on a government enterprise - they’re treated like a normal business (as shown in my example). As stated in the bill “from selling taxable property or services“. This pretty much excludes most government, as they don’t sell anything - it’s “free”. They collect tax or a fee for such service, not a retail sale.
Government enterprise doesn’t seem to be at issue. I think we both agree that they are treated equally to private business. What it seems we disagree on is how government non-enterprise (the majority of government) should be treated. The FairTax taxes this form of government on purchases and wages, which makes it equal to private business as shown in the example. Government enterprise is already equal to private business as it has to charge the FairTax just like a private business and thus doesn’t have to pay tax on purchases and wages.
If government wanted to get into the laundry business, they would likely just tax you (lets say $1,000,000) and set up shops - offering it as “free” laundry service with no retail sale. Thus the FairTax requirement that they pay on wages and material purchases to compete fairly. If they do it as a unsubsidized government enterprise charging the FairTax on a sale like a business, than I agree that they’re fine, and will compete fairly under the tax.
Morphh,
OK, this has been very instructional, at least for me, so let’s summarize what I think we agree on and how we got there?
My original contention was that by eliminating business taxes, the playing field would be level with government entities, and that taxing government consumption was overkill.
You (and Andrew) responded that businesses still had to add the sales tax to retail sales, while government entities would not have to add the tax, thus the need to tax government consumption?
My response was to point out that any government entity which engages in retail sales greater than $10,000 per year would have to add the sales tax per HR25, Sec. 704.
Your final post expressed concern over a government entity providing a free good or service which would unfairly compete with the private sector. I agree that using taxpayer funds to set up free outlets for goods and services would be a gross misinterpretation of the “general welfare” clause in the Constitution. But, is taxing government consumption the way to head off unfair government competition? After all, if government entities decided to provide free services, what difference would having to pay the sales tax on their consumption make?
Underlying all of this chatter is the potential problem with “intergovernmental tax immunity”. It is highly likely that the SC will rule against the federal government taxing State and Local government consumption. In which case, the Fairtax exclusive rate would rise to 37% (using the Kotlikoff/BHI data base).
Good summarization Hank. I also agree that there could be a potential problem with intergovernmental tax immunity. I’ll have to try and find more information on this particular argument and the response when I have time.
I agree that such government business would be a misinterpretation of the general welfare clause, but I believe quite a bit of government is a misinterpretation of the general welfare clause. It seems now pretty much a blanket term that allows the government to do whatever they want to do. There are bills that would strictly prohibit such competition, which would seem extremely difficult, but would be a fine replacement.
As far as perception to the people, perhaps your right and it wouldn’t make a difference. It’s clear in many cases that government services cost the citizens more than if they were to go through a private business, but they still consider it “free”. But at least the cost to provide that service would be equal - no need to further our march toward socialism by giving government a large financial advantage. It doesn’t cost us any more to put this control measure in place, if it is accepted as constitutional.
Aside from the constitutional argument, what advantage is there in not taxing this form of government? It would just shift the tax to the fed, giving a false view of what it cost to run a state or local government service as compared to a private business. You make the statement that it would raise the FairTax rate, but are not the rates of the current income tax system also decreased due to state and local government employees paying income and payroll taxes? While I agree that part of the FairTax burden is placed on the state and local government, it is also in part replacing a current burden of our income tax system. If you took the entire burden and placed it on the fed as described, state and local taxes would decrease. However, we all know they wouldn’t likely lower taxes, they would just end up with more real revenue (via decreased costs and increased purchasing power) and we’d be paying a higher overall tax burden.
OK. This brings me back full circle to my original concern. Someone mentioned that ‘Every city, town, villiage, county, and state, would be paying this “sales” tax on all their spending — including spending on salaries (typically the biggest expense)’.
This is really a patently false statement is it not? Most of the government provided services like roads, police, fire department, and the salaries of government employees would not be subject to this FairTax on salaries, correct? These are not “retail” services. There is not a price paid for an specific service here. You don’t for instance get a bill for fire department services monthly, or after your home burns down.
Morph/Hank,
Even the part about taxing gross payments recieved from private parties would be inadequate for those very products/services. Why? Because those products/services can still be subsidized from general government expenditures. For example, it may cost the government $100 to produce a service, but they could charge the private person $10. So the $10 would be taxed, but the other $90 would not be.
Scott,
I believe that everything you mentioned above WILL be taxed. This is actually a good thing. If you exempted government salaries, then the administration staff it takes for public garbage collection would have an advantage over private administration. Why? Because the cost of the private administrative salaries will be in the price of the private service and therefore be subject to the fairtax.
The reason all government salaries and purchases need to be taxed is because the end user (citizenry) does pay directly for the services/products. In fact, maybe taxing direct payments to the government by private citizens will actually be double taxation (since salaries and purchases are already taxed). I’ll have to think about that a little more.
Scott, I believe most of these would be considered taxable employers, meaning that the government would pay a tax on accumulated wages and purchases. It’s not a tax on the individual, its a tax on the government employer. So yes, it seems accurate enough. Although, every city, town, villiage, county, and state, pays an income / payroll tax on all their employees today. If government does sell a retail service, they are considered a government enterprise and charge the FairTax (i.e. Post Office, Amtrak), like a business (but don’t have to tax their spending and wages). However, what was incorrect in that post was the notion that the FairTax pays for itself by taxing itself. This is completely false. Taxing government does not change the tax burden.
Andrew, if a government entity is considered a government enterprise, keeping separate books and collecting the FairTax on gross payments, it is my understanding that they do not have to pay the tax on spending and wages. It’s an either / or situation that covers both possibilities. I don’t think you could have a subsidized government enterprise, they have to have separate books from the tax dole. So some hybrid could sell stuff, but they would still fall under normal government, and would not have to charge the FairTax (they would be taxed on purchases and wages).
Morph,
I guess I was saying that the gross payments don’t need to necessarily cover the true cost of providing the service. Where a private business would cease to exist if this went on too long, government enterprises can go on indefinitely as long as they can be subsidized by borrowing and taxing.
One example of this today occurs when discussing the administrative costs of medicare vs. private healthcare. Medicare is lower, but they don’t include the cost of land (it’s government owned) among other things.
I guess you’re saying that if, for instance, the post office charges the fairtax on sales of a stamp, they won’t pay fairtax on the salesman’s salary. This sounds reasonable unless stamp sales don’t cover the cost of the salary. Then that portion of the salesman’s salary is untaxed. Is there some sort of mechanism for addressing costs that exceed revenue? If not, it seems like governments would have an incentive to create products/services subject to the fairtax, just to allocate their labor/retail needs to. Of course, this would be irrelevant at the federal level.
Andrew, Dan Mastromarco (one of the authors of the bill) describes government enterprise like this (bold added by me):
The books for the government enterprise must apply the FairTax to retail sales, and any non-enterprise government accounts follow the rules of a ‘taxable employer’ and ‘taxable service’. The definitions of taxable employer and taxable service have the effect of taxing government consumption. Since non-enterprise government generally provides services “free” to the public (via taxation), the value of the consumption is the value of the services used to provide services to the public, i.e., the services of labor or wages paid. You may have an government operation that could have government enterprise books and government non-enterprise books. I guess your point is that the government enterprise could take a loss without issue, but I don’t think it could subsidize the enterprise without the taxable employer penalty. I’ll have to think on that one... interesting point.
Scott,
I sense you are still having a hard time believing that all government consumption will be taxed, including the services of government employees as represented by their salaries and wages. Believe it, that is the intent of HR25. Hire a soldier, pay the tax. Hire a cop, pay the tax. Etc, etc.
There is an interesting side issue related to the definition of “salaries and wages”, that no one seems to have resolved. If you read the definition in HR25, Sec. 2(a)(17), you will discover that salaries and wages are really the burdened amount, not just gross pay. All sorts of benefits are included, including pensions, four types of employer provided insurance, plus the fair market value of any other consideration paid for services rendered.
I have been unable to get an estimate of the percentage value of burdened payroll, so have used 50% as an average. I’ve found numbers ranging from 20% to 80%. I also have no idea how a business would compute the burdened amount on a monthly basis in order to pay the tax? I also don’t think any rate studies have incorporated a burdened amount in their base, but if they had, the Fairtax rate might be significantly lower?
Any one with a handle on the burdened payroll issue might want to comment?
Hank, while your statement was intended to sound bad “Hire a soldier, pay the tax. Hire a cop, pay the tax. Etc, etc.” - we do this today. They all pay income and payroll taxes. Sounds good though - nice spin. It’s also null in many cases - like paying yourself $10 (wish I could get rich doing that).
Morphh,
Are you suggesting that the Fairtax simply replaces the cop’s withholding for income and payroll taxes? If so, that would seem to mean that you expect the cop to take a reduction in take home pay to the tune of his present withholding? I believe the officer will receive his gross pay and the sales tax paid by the government entity would be additive. It won’t be a wash, imho!
Scott doesn’t want to believe that his home town would have to pay the Fairtax on the cop’s pay. I was simply trying to assure him that the tax will be applied and that State and Local budgets are going to have to be increased, or services reduced. Take your pick!
More importantly, I would really like someone to respond to the burdened payroll cost issue.
And, by the way, if you want to set up a new thread, I have quite a bit of info regarding the “intergovernmental tax immunity” issue. How would you like to proceed?
Hank — Please email me the references you cited in trying to find the “trillions” abroad. Thanks.
Scott,
Actually what will happen is the police officers current net will remain about the same (once transition to equilibrium is complete). His current income/payroll taxes will be replaced by the fairtax. If the police officer makes less than about $100k, about 15% payroll tax will no longer be paid. That means the officer paying about 8% in income tax would be the break even point for the fairtax to be a wash.
Hank, that is not the statement that you nor I made. You stated that the FairTax wants you to pay a tax on each government employee. I stated that the current tax system does so as well. Now it seems your saying that the current system and the FairTax are not a wash, meaning that the burden to the state is not relatively equal. Ok, I’ll bite. I believe the burden to the state is fairly similar - on one side you have the FairTax on purchases and wages at a comparable 23% (plus you have an possible increase in purchasing power and payment from the fed to the states for tax administration) - on the other you have 15% payroll tax and up to 35% income taxes (plus compliance costs).
Ah, but wait, that wasn’t your point. You consider the accommodation with the state having to pay higher net wages. This is not an increase in the federal tax burden to the State (the Fed doesn’t get this additional income), so the federal tax burden is still relatively equal to what it was (thus reaffirming my first point). What does happen is the citizens get a windfall (government employees get gross wages). But, the state has to raise additional income to pay these wages - thus higher taxes! Right? Not really... All the rate studies state that accommodation does not result in an increased tax rate. This is not just a federal phenomenon - we’re talking about inflation. Why doesn’t it largely effect the rates? Because the citizens have increased incomes, which result in increased tax revenues. You have effects of increases in purchasing power and changes in the real value of the government revenue and expenses. The state may have to raise their tax rate (depending on their tax structure) - it may not be a complete wash, but I don’t think it’s close to what your suggesting.
You’ve stated that if you untaxed state and local, the Fairtax exclusive rate would rise to 37%. This may be true, but I don’t think it is a fair comparison to the current system. What your doing is shifting the burden that is currently on the state (lowering federal income tax rates) and moving it to the fed under the FairTax (raising the rate). State and local tax burdens would not stay the same in this case, but decrease, offsetting the federal rate increase and resulting in no change in tax burden but an increased competitive advantage to state and local government.
Just got this in my e-mail 30mins ago. Perfect example of the exact thing we’re discussing here.
AFP - Action Needed: No Taxes for City-run Cable/Broadband
Snip:
The FairTax would apply a similar cost to both, so that local businesses like this are not disadvantaged. If bills similar to NC House Bill 1252 were enacted, then these types of things would be required to fall under a government enterprise. The FairTax covers both possibilities.
Morphh,
#42. My mind is turning to mush over this exchange, so let’s try to keep it simple. Under current law, the cop pays income tax and his share of FICA. The State pays their share of FICA.
Under tha Fairtax, I believe that the cop will keep his withholding amounts, and the State will save 7.65% in FICA costs. However, the State will now have to pay a 23% sales tax on the services of our cop-. Looks like a 16% increase in State costs which will require higher taxes or reduced services. Offsetting the potentially higher taxes is the fact that the cop now has more cash to spend, and his increased spending will generate increased tax revenue for the State. So, it could be a wash? Have I got it???
Yes, but just to clarify, not just the cop’s spending, but all citizens in the state would have higher income and increased spending based on the accommodation. The increase in State cost is relative to the inflation and increase in citizen’s revenue. The state needs to maintain the same level of taxation in real terms, which may require an adjustment depending on their tax system, but they’re still collecting approximately the same amount of real revenue. It’s not a tax increase. If you untaxed government, it would be a huge tax cut at the state and local level. On the purchasing side, you also have a change in purchasing power (due to lower business costs - corporate tax and their half of payroll), so the 23% on spending is a similar 14.5% - 16% increase (again reflective of the partial accommodation). This has been an interesting discussion. Sorry I’ve been relatively quite for a while, I’ve been pretty tied up at work and home.
Did I miss something? Where does it say that all employees are independent contractors and our labor was taxable under the Fair Tax? I thought is was only labor sold as a retail item like when you go to the mechanic and they charge parts and labor. Was I wrong?
RMForbes, I’m not following... it doesn’t say anything like that if I’m understanding your question. From the private business side, like a mechanic, you are correct. You’re also correct if it is a government enterprise, like the Post Office or Amtrak. Normal government, however, is slightly different - they are considered a taxable employer as they don’t sell anything to tax, which is defined in Sec 2(12)(A)(ii). I think post #27 gives a good example.
I still am having a problem following the jest of this argument. Are you saying that a postal worker or the engineer on an Amtrak train is different than a private sector employee? And their labor is taxable under the Fair Tax?
RMForbes - No, the postal worker and Amtrak engineer are just like a private sector employee. The Post Office and Amtrak will have to charge the FairTax on their services, just like a competing private company like UPS and FedEx. The Post Office is considered a government enterprise. They do not have to pay a tax on purchases or accumulated employee wages - it’s treated just like a business.
The local government that employs a DMV attendant would pay taxes on the accumulated wages of their employees, as they don’t charge you any FairTax for their services. The DMV service is paid for through taxation, not retail sales. Since this form of government has no retail sale (resulting in a tax advantage over private industry), the FairTax taxes it through consumption of material and personnel. This puts private industry on equal ground when competing with government services. See #43 as an example of such government encroachment and #27 on how the FairTax addresses it.
I see, that makes more sense. Of course this would only apply to government enterprises and would not effect not for profit organizations (NGO’s), even if they compete with private industry, like a hospital?
A Not-For-Profit Organization is tax free, and donations are tax free, but Sec 706 does state that if a qualified not-for-profit organization provides taxable property or services in connection with contributions, dues, or similar payments to the organization, then it shall be required to treat the provision of said taxable property or services as a purchase taxable pursuant to this subtitle at the fair market value of said taxable property or services.
I’m not sure about the specific instance of a hospital. The bill lists these as qualified not-for-profit orgs:
One item that was brought up in the show transcript that I think is valid and I’m less than thrilled about is the investment property issue. Let’s say for instance that I can afford to spend $300k on a new home. I have found the perfect community and they are closing out that community and have one “spec” home left that I simply love. They have a pre-FairTax price tag on the house for $250k which once you add the FairTax would be $325k after you apply the FairTax. I tell the builder that I can only afford $300k and we “wheel and deal” to get the price down to $230k which puts me in my $300k budget after the FairTax.
Now for the problem... During our conversation there is an investor standing in the wings. He hears the gist of our conversation and walks up to the builder and offers him to buy the house for the listed $250k, since he knows he won’t have to pay 30% on top of that. The builder however is a really honorable guy and tells the investor, “Sorry, but we have already agreed on a price”. The investor counters by offering the builder another $10k, and then $20k. Well, at this point since I have nothing in writing with the builder he tells me that he’s sorry but he simply can’t pass up making an extra $40k on the house.
This “investment” property exclusion sure doesn’t seem real fair to me. This is definitely giving investors a HUGE advantage in the housing market. Personally, I think this was about the only argument in the transcript that was worth anything. Almost half of the transcript was simply arguing the inclusive/exclusive issue, and this is just not an issue in my mind. Anyway, does anyone else feel that the example above on investment property is cause for concern?
Scott, while an investor could purchase the house without paying the tax immediately (which would normally get spread out in the 30 mortgage), he must pay the FairTax on any rental of that home. So a similar monthly payment, likely higher. If he sells it or converts it to personal use, he has to pay the FairTax on the home value as defined in Section 103 part C. So if the investor pays more for the home, it’s just that... he’s paying more for the home. He’s not out of a tax liability unless he just sits on it, paying for an unoccupied home until he sells it to another investor. If at any point it is rented, used for personal use, or sold for personal use, it is taxed.
Regarding Scott’s question, their are a number of loopholes involving real property. The most obvious (at least to me) would be second homes.
If you buy a (brand new) second home on a lake or in the mountains for your own use, you would need to pay the FairTax. If, on the other hand, you buy it with the intent to rent it out to vacationers, it would be tax free.
Now, many people currently rent out their vacation homes part of the time and stay in them other times. Under the FairTax, every year they are supposed to calculete the percentage of time they use their vacation home for their personal use versus the time they rent it out, and then pay a pro rata share of FairTax on the percentage of time they use the home for their personal use. (This would get enormously complicated, becasue they would also need to allocate taxes on furniture, utilities, insurance, transportation expenses, and everything else connected with that vacation home.)
As a practical matter, people would just “forget” about the time they use their vacation home for personal use, and claim the whole thing as tax free rental property. (Yes, people can do that today, but — believe me — you don’t get much of a tax break, if any, for renting out a vacation home under our current tax laws and the paper-work is a total pain.)
The end result is that almost no FairTax will ever be paid on the purchase of second homes, because almost all would be purchased tax-free under the rental property exception. (Of course, if they are existing homes, as opposed to brand new homes, they wouldn’t be taxed anyway.)
The other huge real estate exception is for farms and ranches. Ted Turner could buy a billion dollar ranch tax free since farms and ranches are considered “businesses.” For that matter, he could buy a multi-million dollar chateau in France or a multi-million dollar existing mansion in the Hamptons, both tax free.
But a poor working family renting a dumpy apartment needs to pay the FairTax on each monthly rent payment.
Yeah, yeah, I know: “But they get the prebate!” Let’s face it, that’s never going to fly.
Hayden,
I agree, the main issue I have with the Fair Tax is they try to include everything. But this could be fixed with a comprimise version of the Fair Tax that keeps the capital gains tax to handle this inequitity and lower the rates on consumption as well.
RM — Or, as Kotlikoff suggested to me one time, taxing the “imputed rental value” of homes, ranchs, yachts, etc., regardless of where in the world those assets are owned or whether they were bought used.
That would make it far more egalitarian (and fair), but, as I believed I mentioned before, the suggestions that you and I make are NOT the ones that the folks pushing the FairTax would ever accept.
I’d probably agree to that concession.
Probably not but if the Fair Tax does come to pass it will be something closer to what we are talking about rather than it’s current incarnation.
Hank, just thought of something else for the interstate tax immunity thread...
The FairTax bill states in the definition section:
So does the FairTax apply to Guam, Northern Mariana Islands (commonwealth), Puerto Rico (commonwealth), United States Virgin Islands, Palmyra Atoll, transactions in U.S. coastal waters, etc? As far as I know, they don’t pay federal income tax today. Would probably add about 15 billion to the FairTax take.
Hayden, I would also support some kind of modification that helps to alleviate some of the issues discussed pertaining to property. This would help to make the FairTax more “fair”. The one drawback to this approach is the added complexity. I think one big draw for the FairTax is the relative simplicity of the entire system. Unfortunately, I think the truth of the matter is even if the FairTax were passed in it’s current form, it would only be a matter of time before it gets modified anyway.
Personally, I would love to see some enhancement to the purchase of property. For instance, an exemption for the first $100k on the purchase of a primary residence. This would only be applicable assuming that this would not be a second residential property. Any additional residential properties, new or used, are taxed at the full FairTax rate from the first dollar. Rather than this really offsetting the current calculated rate of 23/30, I would like to see rent/mortgage interest be exempted entirely from the FairTax. I don’t like the idea of paying 23/30% when I buy my new home, and then also paying the tax again on some portion of my payment on that home for the next 30 years.
I think I could even agree with maintaining a cap gains tax, but that should definitely be kept very low to help stimulate investment. I would additionally propose that their be an exemption for the first $100k or something similar. This would allow middle class investors to reap the full benefit of their investments, but help to make the FairTax more progressive on the upper end of the wealth spectrum.
Read the transcript. Looks like the same topics we have been talking about for years here. Still, it’s nice to see some of the very same arguments we have been arguing in a book. Has anyone read the book and can offer a review? I checked out the reviews on amazon: http://www.amazon.com/FAIRTAX-FANTASY-Hugh-Hewitt/product-reviews/1607913046
Only a few reviews so far. For some of them, it appears they have not even read the book! Just using the review section as a forum for attacking or promoting their agenda. Sad to see that some fairtax proponents still think they can get 100% of their paycheck and see prices fall 22%. *sigh* when is this nonsense going to finally be dispelled?
The transcript mentioned there is no customs exemption for fairtax. Isn’t there a $400 yearly exemption on imported goods for fairtax? And the current customs exemption is $400 per trip? So if you only take 1 vacation per year, you could still claim the same $400 exemption? Only if you took many trips per year and brought a lot through customs would this come back to bite you. Still, how are they going to track that? Maintain a national database of who brought what through customs? Seems unlikely given that the fairtax is suppose to streamline taxes not complicate them.
Anyone know what is going on with http://fairtaxgroups.com/ ? It says the maintenance was only supposed to last a few days but I have not been able to get to that site for some time.
Kublikhan — I have read the book and it does repeat most of the things we’ve said on this board for years. But it is refreshing to have a law professor and an accounting professor review the research, do the analysis, and come to many of the same conclusions that other of us critics arrived at a long time ago.
Having said that, Hewitt has done an abysmal job of promoting his book. Other than the first night it came out, he’s barely mentioned it on his own show. (Not that I listen to him that much, but it sure doesn’t seem that he has.)
I’ve been in communication with his co-author, Hank Adler, who is frustrated that nobody has taken them up on their offer to debate the merits of the FairTax, anytime, anyplace.
For the FairTax supporters out there, what do you think it says about Boortz, Linder, Cain, Hannity, the folks at AFFT, etc., who will spend endless hours promoting the FairTax at rallys (where no questions are taken) or on talk radio (where the pro-FairTax host controls the show), complain endlessly about how the FairTax does not get a fair hearing in Congress or the mainstream media, yet refuse to debate another talk radio show host?
Something about lacking confidence in their convictions, perhaps?
Hayden,
Can you be more specific on what this has to offer. In reading the transcript I did not find any compelling arguments. It looked like Rush Limbaugh type logic to me.
RMF — Alas, I’ve loaned out my copy, so I’ll need to go by memory as to some of the points of the FairTax Fantasy:
1. They make the obvious point that a 23% “tax-inclusive rate,” means that you first need to add 30% to the price of a good, then divide it by the higher price. So it’s phony number. The real tax rate, based on AFFT’s figures is 30%. (Obviously, this point has been debated to death on this board.)
2. The FairTax rate would be in addition to state and local sales taxes, which would need to increase due to the fact that the FairTax taxes state and local government spending.
3. States would face enormous pressure to shift to their own versions of the FairTax, which would push the combined tax rate even higher.
4. So, even assuming the AFFT numbers are correct, the combined sales tax rate would need to be at least 40%.
5. The “studies” showing the FairTax rate at 30% do not take into account tax avoidance, so the real tax rate would need to be higher still.
6. In contrast, most independent studies have concluded that the FairTax rate will need to be 50% or higher (in addition to state and local taxes.) These studies are ignored by the FairTax advocates.
7. Even if you use the AFFT numbers, prices will not drop if people are to get 100% of their paychecks. In fact, prices will rise by about the tax-exclusive rate.
8. If the US tried to export goods tax free, but added the FairTax to imported goods, our trading partners would see that as unfair trading practices and would retaliate by imposing high tariffs on US products.
9. The wealthy in the US could easily avoid paying the FairTax on certain high-dollar items (such as yachts, luxery vacation homes, jewelry etc.) by simply purchasing them overseas.
10. The pre-bate would not be enough to cover taxes on “the basic necessities of life.”
11. Taxing state and local spending would be unconstitutional.
They make some other points and arguments that I don’t necessarily agree with. For example, they say the increased prices under the FairTax would be unfair to illegal aliens living on the edge of poverty. That argument ain’t gonna fly. A better argument would have been that most purchaases by illegal aliens would not even be subject to the FairTax and the revenue raised from illegal aliens would be minimal, at best.
In addition, they do some analysis on the effects on prices of imports, exports, houses that I did not necesarily follow or think was particularly important.
All in all, not the greatest book. Nothing that we haven’t discussed here. But valid points that the Boortz’s of the world should be willing to debate if they really believed in their arguments.
#1-4 doesn’t change the current burden of taxation - just seems to be an argument to make it appear that way. Like suggesting the FairTax is an additional tax, not a replacement. So I scratch all of them to worthless semantics.
#5 is good if they have something to back it as a large overall loss to projected consumption, which I haven’t seen.
#6 is dubious as we would have that existing burden today - which is doubtful.
#7 is inaccurate as 100% of the paycheck is only a partial accommodation, not full accommodation which would be required to raise the price by the exclusive rate. 100% of the paycheck would only likely result in a 17% (exclusive) increase in prices.
#8 is interesting... other countries do this today with their VAT.. wouldn’t a tariff retaliation be against the OECD rules?
#9 seems partly inaccurate, as such things would be taxed by U.S. Customs.
#10 ... by what measure and so what..
#11 is something we intend to create a new thread on (awaiting Hank to e-mail me the thead lead).
Hayden,
These guys are professionals? They don’t understand ad valorum taxes? If they think the rates will be to high why don’t they suggest ways to improve the Fair Tax instead of calling it the ruin of the American economy. To me this is only an attack on the Fair Tax to maintain the advantage they are receiving from the current system. I have to call into question their modivation for even writing this book.
Morphh,
Sorry about the delay on the thread intro about “intergovernmental tax immunity”. Moved lock, stock and barrel from Fl to NC, and I’m still unpacking the last of the 150 boxes. I hope this is our last move!!
Maybe next week I’ll find time to address the issue? And I would stress in advance that federal taxation of State and local consumption isn’t “unconstitutional”, but could very well be “inappropriate”?
Stay tuned!
Morph —
We (on this blog) might be familar with these issues about the FairTax, but I guarantee 90% of the folks who have heard of the FairTax think the 23% is a tax-exclusive rate, that they’ll keep 100% of their paychecks, and that prices will stay the same.
The Boortz’s and Linders (and AFFT, for that matter) know that, which is why they are so reluctant to engage in public debates or discussions with opponents.
I live in Atlanta, where Boortz is based in and the FairTax is popular. Occassionally I’ll be in a restaurant or public place and hear people talking about the FairTax. Inevitably they think the 23% rate is tax exclusive. Many times, they think the 23% rate replaces even the state sales tax. That will be their basis for wondering how anyone could possibly oppose such a birlliant idea.
It’s amazing the power of talk radio (which is one reason I’m sympathetic to a return of something like the Fairness Doctrine). When you can say literally anything you want on the air, with no accountability other than ratings, and no obligation for balance, you can get people to believe anything you want.
Hayden,
Agreed the Fair Tax hard core are just as guilty as the Bruce Bartlett’s in their attempt to dumb down the argument rather than engaging in real meaningful debate. But you haven’t proven that your “experts” are not doing the same. I’m still not convinced.
Hayden,
Let me start by saying one reason I enjoy this forum is that most opponents here are well educated on this topic and not those I’m referring to below.
My first exposure to the Fair Tax issue was listening to Boortz’ program several years ago. My initial impression was the Fair Tax allowed me to keep 100% of my paycheck without an increase in the price of goods. That’s how it was presented at that time. But Boortz did come out and restate more accurately on many occasions on his show. He didn’t spend a great deal of time on it, but did clearly state that the end prices would be driven by competition and while possibly not everyone would not keep his/her pre-Fair Tax gross, they would get a paycheck with no money withheld.
That being said, I have never had the impression from reading any Fair Tax literature or hearing any Fair Tax advocate that the rate would be 23% tax-exclusive. As a matter of fact, it seems to me that both of the Fair Tax books by Linder and Boortz have spent a fair amount of ink and air time explaining the difference between inclusive and exclusive rates and why it’s quoted at 23% inclusive. To suggest that the Fair Tax advocates are trying to pull the wool over anyone’s eyes about the exclusivity/inclusivity issue is certainly not what I’ve been exposed to.
I think the rationale (because income tax rates are quoted inclusively) stated for using the lower rate (23% inclusive instead of 30% exclusive) is not a lie, but they also quote the lower rate for marketing reasons (23 sells better than 30). But what’s wrong with that. Every lobbyist, congress person (oh how I hate that phrase), sales person around does it. They what to sell something. Just as most opponents don’t give any credit to the fact that 23% is on an inclusive basis, not exclusive. Nor do many of them talk about all the taxes that will go away (income, SS, etc.). Nor do they point out you won’t have taxes taken out of your paycheck. I believe most supporters agree, on average, society will either get 100% of your gross paycheck with cost of new goods/services rising approx 15% (or so) or, if on average, society gets less than 100% of their gross, prices will rise less. While no one really knows for sure how it will fall out, it seems what I hear most opponents say washes over the fact that people will have more take home pay and just claim that prices will rise 30%. Sounds equally misleading (or worse).
As to people misunderstanding the rate issue in Atlanta. I don’t see how that can be blamed on Boortz (or any other advocate I’ve heard or read). There’s plenty of literature and has been plenty of talk that explains how the rate is computed. Do you think those people in the restaurant heard about the fair tax from CNN or other news shows? Maybe, maybe not. Considering the location most likely, they got it from Boortz’s program. While I can’t listen everyday, anytime I’ve heard the topic come up, he has explained the difference. Most politicians exploit the ignorant for their own political gain. This is not really any different, except I don’t see how Linder allowing (if he even does) people to think the rate is 23% exclusive (and covers state sales tax, too) gives him more power. If the Fair Tax passes, it most likely will limit the power of Congress, which in my mind is a good thing. So I would much rather see a congress man ... opps, I mean congress person allow ignorance in this instance. If one is opposed to every deception regarding lawmaking, then one has a long list of violators to be upset with and bigger issues than the Fair Tax....like how we ended up with the tax situation we have now....or what taxation is going to be like in the future do to recent government actions.
As to the fairness doctrine, are you serious? What form of the Fairness Doctrine do you have in mind? No one is forcing people to listen to Boortz or Rush or any talk show for the matter. What business is it of the government to force stations to air shows no one is interested in watching? The Fairness Doctrine would open the door to much more government intervention in people’s lives where it has to business. I would be more in favor of a “Truth Doctrine”, instead. Think about what the administration is forcing down our throats now with no discussion and virtually no debate. It has a much larger affect on all of us than some misrepresentation by Boortz or Rush on a given topic. Look at public education...how about fairness there? Is it fair that public schools get an unfair advantage in being funded by taxpayers, but private schools don’t? Consumers don’t have much of a choice about where to educate their kids unless they want to pay out of their pocket.
John
John — Welcome aboard. It’s nice to see a reasoned, non-polemic post. (Some of us get a little carried away at times, and I’m the worst offender.)
On one level, I agree with you about the inclusive/exclusive issue. Boortz and AFFT do try to explain it. Although, in my opinion, they did so only because so many folks (including myself) kept pointing out that their 23% “includive” actually equals a 30% sales-tax rate. Until enough people started raising a stnk about it, they certainly did not go out of their way to point out the distinction.
And, yes, the 23% rate is merely a marketing ploy. The FairTax folks like to claim that the tax was devised by interviews with ordinary folks. What they leave out is that AFFT tested the idea on focus groups, with the results coming back that the public would not accept a sales tax higher than the mid-twenty percentile. That’s why they came up with the “tax-inclusive” number, simply to bring the “rate” down to something that would be acceptable.
In other words, the 23% tax-inclusive rate had nothing to do with comparing the FairTax rate with the income tax rate. (That’s just comparing apples to oranges.) It was solely for marketing purposes.
And, they NEVER admit that in order to come up with the 23% tax-inclusive rate, you first need to add a 30% tax to the cost of a good. They will simply claim that the price of the good will not rise, and the so-called 22% embedded tax will be replaced with the 23% FairTax. The fact that so many people are totally confused by this, and simply assume that the 23% rate is an ordinary sales tax rate is merely icing on the cake for them.
Regarding the “keeping 100% of your paycheck,” as you point out, they have backed off this claim in their latest book. (But only because so many people pointed out that Dr. Jorgenson, who’s work they cited for the 22% embedded taxes, started pointing out that the embedded taxes would only go away if paychecks were reduced.) Yet, as you know, most people still believe the original claims of “keeping 100% of your paycheck” and the Boortz’s of the world don’t exactly go out of their way to clear up this misconception. In fact, their “clarification” is so obtuse that one could claim it is intentionally confusing. If they wanted to be honest, they’d simply say, “You might keep 100% of your paycheck under the FairTax, but your paycheck will be a lot smaller.”)
In fact, at the “debate” on CNN last fall, Linder claimed that people’s take-home pay would rise by 50% under the FairTax (since they’ll no longer have taxes withheld), yet prices would not rise because the embedded taxes would be removed. In other words, he simply lied. Boortz was there with him and certainly did not bother to point out this claim is totally inconsistent with their own book! The point is, they will claim that they “clarified” the “urban myth” (that they themselves created) about keeping 100% of your paycheck, and yet still continue perpetrating that myth
Remember in the Senate campaign in Georgia last fall, when Jim Martin ran ads attacking Saxby Chambliss’s support of the FairTax claiming that a 23% tax would be added to the price of goods? Boortz and AFFT viciously attacked Martin as being a liar. In reality, Martin underestimated the amount that would be added to the price of goods. You could say that Martin’s ads were not entirely accurate in that they did not point out that the FairTax would eliminate income taxes, but you can only say so much in a 30 second ad, and in attacking Martin the Boortz’s of the world did not point out that prices would not increase only if paychecks are reduced.
The point of my rant is that the most vocal FairTax proponents (not those on this board), take great liberties with the truth (to put it mildly), and will only correct the record when and if enough people point out the dishonesty of their claims. Then, if they do “correct the record,” they do so very quietly so that their original claims are the ones that most people believe. (There’s an only truism in Washington when you attack an opponent. Everyone remembers the original charge, nobody remembers the explanation. It’s the same thing with the FairTax. Almost everyone remembers the original claims that were made over and over again by Boortz. Very few people remember, or even know about, the “clarifications.”)
Finally, on the Fairness Doctrine. I agree with you that what we really need is a Truthness Doctrine. Most news organizations, however, are very cognizant of the need to get their facts right. They issue clarifications if they get their facts wrong, and discipline and even fire reporters who don’t get the facts right. (Remember Dan Rather.) And they take great pains in having both Republicans and Democrats to discuss controversial issues to make sure both sides are aired.
Talk radio hosts, however, do not have any professional or ethical obligation to “get the facts right” or to point out dissenting opinions Thus, they can and do create and perpetuate myths that support their view of the world. (The FairTax is a great example. Just imagine how little support the FairTax would have if the opponents of the measure could appear on Boortz show to simply point out the many studies disputing Boortz’s claims.) I realize there are both practical and Constitutional problems with implementing either a Fairness Doctrine or a Truthness Doctrine, and maybe with watchdog sites such as MediaMatters, the need for a Truthness Doctrine in less needed, but still it would be nice.
One final note. As one who has been repeatedly slammed by Boortz on his show, and yet not allowed on his show to defend myself, I can tell you from personal experience that since the Fairness Doctrine was repealed you simply have no effective avenue to respond if you are slammed by a talk radio host. (Under the Fairness Doctrine, the station was required to let a private citizen on the air to respond if he or she was personally attacked on the air. No longer.) If you think about the implications of that, it is a bit scary.
John and Hayden,
I live in New Jersey, where we are untainted by the Boortz broadcasts. I do understand, second-hand of course, that Boortz was continuing to make the 22% embedded tax-cost savings claim for a time, even after his clarification in his second book. Let me know if these claims have tapered off.
I educate untainted New Jerseyans properly from the beginning when I talk about the FairTax. I use a 10% figure. Even Hank Van Gieson agrees with that number.
Let me comment now on the tax-inclusive method of expressing the FairTax rate. Yes, it is a lower-sounding rate, but it is the same basis as we quote income taxes, payroll taxes and estate, gift and genaration-skipping taxes - which the FairTax replaces. Therefore it is not a disingenuous way to express the rate.
~Jim
Jim,
I not only agree with the 10% average business cost reduction, I believe that I showed you all how to derive that percentage using two different approaches. The first starts with the 1998 Jorgenson study which resulted in the 22% number which has been used and abused ever since, and the second uses actual revenue created by business taxes per the 2006 Kotlikoff/BHI base/rate study. Both wind up supporting the 10% estimate. Glad you are not one of the Fairtax leaders who frequently write that 22% embedded taxes come out and 23% sales taxes are added, resulting in lower prices. Garbage!!!
Having just been banned from another blog for trying to make the case that government employee’s wages and salaries will be taxed (unless education related), I’m quite frustrated at the lack of interest in the facts by such groups. Seems that creating groups that can communicate with each other is more important than getting the group educated on the details of HR25. Anyone here that doesn’t believe that government employee wages will be taxed and the tax paid by the government should raise their voices now??
And, Jim, setting out to educate 300 million Americans that sales taxes are inclusive seems to me to be a fools errand. The justification that sales taxes should be couched in the same terms as income taxes for comparison purposes is nonsense. No one can compare these two tax systems without first figuring their effective tax rate under either. May not be disingenuous, but it’s a close second.
Hank, I agree that employee wages will be taxed, but as I’ve debated here (and I think I demonstrated the point), the tax paid by the government should not increase in real terms. Perhaps I misunderstood your speak now sentence, as I thought we had understood this.
I think the inclusive / exclusive thing has been debated to death here, but I agree with using the inclusive figure. While I use both rates, if I had to choose, I think it is more important to give a relative replacement comparison up front. The first thing someone does is roughly compare it to their current burden, which they are unlikely to equate using exclusive terms. The FairTax rate is already at a disadvantage as people compare it to stepped marginal rates, where the FairTax only has one marginal rate (the top rate).
I expect those that present it as a 30% sales tax leave out that the tax would be applied inclusively at retail. So you should still have to explain how the 30% tax would show 23% on the receipt. It’s not your daddy’s sales tax. Perhaps we should give it a new name altogether to distinguish it from a traditional sales tax (and thus the math used). There are several types of “sales tax” with different methods of implementation - Goods and Services Tax (GST), Value Added Tax (VAT), Gross Receipts Tax (GRT), Consumer Excise Tax, Turnover tax, Use tax. The FairTax should be a new type of “sales tax”. Making stuff up here... they should call it a “Personal Consumption Tax” (PCT) to avoid future confusion.
It’s always scary when I find myself agreeing with Hayden.
I have to agree that I would really, really love to see a real debate between a Linder/Boortz proponent and a Hayden/Hewitt opponent. I am incredibly disappointed in Boortz/Linder for not committing to an open debate on this topic. Personally, I think that the debate will favor the FairTax much more than hurt it. This to me would be the best thing on television in months if not year (tells you about what I think of television, huh). This said, I would really like this kind of debate to have strict timelines related to the 23/30% debate. I agree with Morphh that this is purely semantics and I would hate to see a real debate devolve into 30 minutes of arguing about numbers that are in actuality the same thing.
I am quite opposed to the Fairness Doctrine, or anything that is going to dictate free speech in our country. I honestly can’t see how it was upheld in the past, and that scares me that it will be upheld in the future if it is passed into law again. This seems so much like a direct violation of the Constitution... Anyway, the one point that Hayden made regarding this that I would agree to is about allowing a person to defend themselves if singled out on a show. For instance, if Hannity spent 10 minutes abusing Hayden on his radio show, I think that Hayden should be allowed 10 minutes on Hannity’s show to refute the content of the tirade.
One other thought... I love that argument that the rich will simply go buy their vacation homes in Monaco rather than Cape Cod. This is the most ridiculous argument I have ever heard. Maybe once I have 8 or 9 figures in the bank my opinion on this will change, but for me a vacation or vacation home would be about the destination. If I really want a vacation home on Cape Cod, that’s where I’m going to buy it. I’m not going to buy my vacation home 4000 miles away just to avoid paying some taxes on it. If I’m that damn rich, I’m going to buy my vacation home exactly WHERE I want it.
Morphh,
You are correct–we discussed the impact of taxing state consumption, although I don’t recall agreeing to your claim that in real terms, States would be unaffected? Using our cop as an example, the state will save on FICA taxes but State nominal costs will rise after adding the 30% sales tax. As I understand your position, the cop will have more income to spend and therefore, sales tax revenue will increase. But doesn’t that raise a couple of “800 pound gorilla” issues?
First, if you look at the sales tax receipt, the cost is listed. Isn’t that cost what the State is expected by AFFT to lay their tax on? Otherwise, the State will be “taxing the tax”, which violates one of the key goals of the Fairtax–namely to prevent double or cascading taxation? In effect, isn’t the State going to pay a net 22.35% (30 - 7.65) tax on our cop’s wages, but receive much less from his spending due to taxing only consumption costs which we agree will be reduced by 10% on average? How is it a wash?
Another issue is the prebate. If it really is an income supplement, could the States with income taxes tax the prebate? If not, why not?
As for the inclusive/exclusive issue, tell you what–You tell me just what income tax number I can compare the 23% Fairtax to and I’ll take that issue off my list. What do you mean by “relative replacement comparison”, and what numbers apply”?
I didn’t state that States would be unaffected - they may have to make adjustments in their tax structure to maintain the same real revenues. The state has choices depending on how the accommodation effects them based on their existing tax system (for example, reassessments of land value due to inflation). They may choose to lay their sales tax on top of the FairTax, lay it under the FairTax with a higher rate, adopt the FairTax model, adjust income taxes, absorb a loss of real revenue, etc. It’s the state’s choice on how they want to deal with it. Point is that the real cost of the government is not changing much, but they may have to adjust their tax system due to the monetary accommodation. They need to collect the same real revenue from their citizens.
As for double taxation or cascading taxation, this is the state’s issue. We’re talking about the Fed, which has little control on how the state chooses to tax their citizens. The state can do what it wants... it’s not some flaw in the FairTax methodology. If the state adopts the FairTax, it will follow the same methodology, if they choose otherwise, that’s their business. The FairTax goals are Federal goals and would only apply to the state if the state were to adopt the FairTax. Prebate... I guess the state could tax it.. that’s up to the state and their citizens. Taxing it would end up lowering the cost of other taxes in the state, and thus likely equal out in some way... to do so would also likely be a politically unwise... but that’s up to the state.
I agree with you regarding comparing real burdens and purchasing power. That is the true measure, but that takes time and calculations (including an inclusive conversion if you present an effective rate), which many people have little idea how to perform. We’re talking about a base math calculation for a rate, which has to use the same conversion to provide a meaningful comparison. If I just said a 25% income tax and 30% FairTax, there is no meaningful comparison for the rate. Unless you already understood the difference, you wouldn’t know that 25% is more than 30%. They both have to use the same math for the rate comparison - this has less to do with implementation and may not represent what the ultimate tax burden is under each system. Each has progressivity offsets and adjustments to consider. But if your just comparing marginal rates (the first thing people likely do), using 30% is dubious and just plain mathematically wrong. If your discussing implementation, then it’s correct as a comparison to existing sales taxes, but becomes less accurate when discussing the actual retail presentation of the plan.
Oh... forgot to address the cop. No Hank, I think this is incorrect.. I believe you’re mixing up the inclusive / exclusive. You can’t subtract an inclusive 7.65 from the exclusive 30. You have to convert 30 to the inclusive 23. This goes back to my point above regarding confusion by using different bases of math when comparing (and subtracting in this case). It works out to (23 - 7.65) 15.35% inclusive or 18.13% exclusive, not 22.35% exclusive. 18% is representative of the overall accommodation, which would increase prices by approximately that same amount (we estimated 17% exclusive, which includes the removal of some additional business taxes). Any additional deficit which is adjusted by the state on this difference is a direct offset of a reduced federal burden on the citizens.
To add a bit into the State discussion, I’ll take it in an additional direction. When quoting higher revenue neutrality studies by Gale or Diamond & Zodrow, it’s often left out that much of the difference can be attributed to reduced taxation on state education ($300 billion). So while the FairTax rate is higher in these studies, it directly results in a decreased state and local burden. Again, it doesn’t change the overall burden on citizens, it just shifts it from one government to the other. In this case, they inflate the fed cost and reduce the state cost on federal taxes by about 30% (a cost they currently incur). Something you don’t hear the opponents mention when they quote these other studies (in addition to the inappropriate retention of the Earned Income Credit and the Child and Dependent Care Credit at $50 billion).
Morph
It’s been a while since I looked at BHI/Kotlikoff. Do I understand correctly that their assumption of $371.4 billion reduction for state and local spending represent teachers’ and professors’ wages and salaries at public schools and institutions? I.e., not just tuition for private institutions? If so, I think that would support an argument that state costs will not rise significantly under the FairTax. (I think the cost of borrowing for state and local governments also would drop in real terms.) In addition to not paying for education costs, which is a major segment of state and local budgets, state and local governments would pocket 7.24% tax-exclusive, 6.75% tax-inclusive, tax for Social Security and Medicare, and that savings would be across the board, i.e., not just for education.
Furthermore, citizens would have more money in their pockets to afford any increase, in nominal dollars, in the cost of state government. This is assuming a static model, i.e., no accommodation from the Fed.
~Jim Bennett
Yes Jim, I think you’re correct. The rate study by BHI/Kotlikoff (as well as Gale and D&Z) reduce the state and local government tax base by $371.4 billion by untaxing government education spending on wages and salaries. This is a tax burden the state and local government currently incur on their employees. This appears to represents almost 30% of the state and local burden for federal taxation. Gale and D&Z further reduce the base by another $302 billion, reducing the combine real cost of federal taxation on state and local government by over 50%.
The accommodation is a separate consideration but would not change these gains. Accommodation would result in increased nominal costs for the state, but would be offset by the revenues gained from the corresponding increase in personal income. Accommodation would have little effect on the real cost of government. So regardless of the accommodation, once the education gains mentioned above are included, I believe the real cost of government at the state and local level will decrease.
Hayden, that truly blows about Boortz slamming you on his show and does not even give you the opportunity to defend yourself. And how he lied at the CNN debate. If I were a fairtax supporter and showed up to a debate on fairtax, the first thing I would do is tell Boortz to shut up and let me do all of the talking :/
Scott, you can check out this link for a video debate on the fairtax. It’s over 2 years old at this point, but I have not found a better link yet:
http://www.aei.org/video/100694
Morphh, you mentioned many people have little idea how to perform inclusive/exclusive conversions, as applied to income vs consumption tax conversions. And you suggested that the first thing most people would do is compare the marginal rates of their income tax and the fairtax. That has not been my experience. In my experience, the first thing people do is compare it to existing sales tax, then imagine adding 30% to that rate. In my view it is the 23% figure that is deceptive.
As to your suggestion that using the 30% figure is deceptive when comparing income and sales tax, these are apples and oranges to begin with. You have to do much more than do an inclusive/exclusive conversion if you want to calculate if you are saving money under fairtax or not. After you gather all of the information needed for such a comparison and doing all of the necessary calculations, doing an exclusive to inclusive conversion of the fairtax rate is trivial by comparison.
I’m a huge supporter of the FairTax because of one reason; The 16th Amendment was never properly ratified in 1913, and our tax code is a demon child from the womb of this mafia we call the IRS that feeds the hunger of this cartel we call the Federal Reserve. But I don’t have a one track mind, I do have another proposal apart from the FairTax.
*Abolish the IRS, the Federal Reserve and the IRC, and replace it with soveriegn tax systems for each state.
What do I mean “Sovereign tax system”? I mean that we should go back to the U.S. Constitution and study what taxes SHOULD be collected in the first place. Allow states to create their own FairTax or tax system, and compete with neighboring states based on their tax rates. Ex. I live in Taxaxhusetts, hate their tax system, but I love New Hampshire’s, so I move my family or business to NH, same as Texas vs. NM, Cali vs. Nevada, or Georgia vs. Florida. Why? Look and compare: (BS=Bull****)
BS: Federal income taxes pays for education via federal Dept. of Education.
Fact: Your property taxes pay for your local school district and other projects, your federal income taxes is currently used to payoff Federal Reserve Bank, Inc. shareholders, Unconstitutional!
BS: Federal Income taxes pay for roads and interstate.
Fact: Your states mandated gas tax pay for your local roads.
BS: Federal income taxes pay for national defenses:
Fact: Corporations pays for defense, if the 16th Amendment was a real law.
BS: The IRS will put you in jail for not paying taxes.
Fact: They just try, you ask the jury, the IRS and the judge one question, “show me the law!” They got a loud bark through intimidation, but they ain’t got bite!
BS: The wealthy should pay their “fair-share”.
Fact: There isn’t a such thing as “fair share” under this tax regime. Get rid of it, then we can talk about “fair”.
BS: Crackdown on tax havens.
Fact: What! Ok, people, small business owners will crackdown on Wal-Mart because they offer lower prices on their goods. We don’t want people shooping around looking for bargains. Hey, it’s free enterprise, it gives consumers power, that’s why Toyota Camry’s been a best selling sedan in America, not because it’s Japanese, but because consumers got more for their dollar. Same as tax havens, businesses go somewhere where their hard earned wealth is protected. Let’s join that market. America can be a tax haven. And we’ll compete against Cayman Islands, Switzerland, Lechtenstein, and Caicos Islands, come on, free market enterprise is awesome!
My point is, if we don’t pass the FairTax, let’s give each state their 10th Amendment rights to declare their own tax system without interference with the feds.