Kill the VAT?
As Washington is discussing a VAT, most of us would oppose adding such a tax on top of our existing income tax system. In fact, a Rasmussen Reports national telephone survey found that 68% oppose such a tax. So I can understand when FairTax.org sends out messages to Kill the VAT! The critical points on adding a VAT, like in Europe, are valid and I agree, would be devastating. However, Hoagland goes on to suggest other downsides to a VAT style tax, which I question. He writes:
Why is the VAT Tax the Worst Possible Kind of Tax?
Here is how a Value-Added Tax works for the politicians and powerful special interests and against American Taxpayers:
- A tax is added to the cost of every product made in America, as it is produced, at every level of production. So in making a car, the iron ore has a VAT tax added, the steel mill adds a VAT tax. Then the car company adds a VAT tax. And finally the dealer adds a VAT tax and all of this is added to price you pay for your car!
- Now here is the part the politicians really like: you do not see the value added tax! The VAT tax is the perfect politicians tax. Every time the politicians want to spend, and spend and spend some more, they increase the hidden VAT tax “just a little.” You would never have any idea how much the VAT tax adds to your cost of living!
The first point seems to suggest that the cascading cost of a VAT is bad. However, percentages don’t cascade. A 10% VAT is equal to a 10% FairTax, no matter how many levels of production. How is this exclamation much different than the FairTax?
The second point I believe is incorrect. As I understand it, a VAT is not a hidden tax. It’s presented on the sales receipt just the same as the FairTax and should contain the full percentage and cost. Any change in the tax rate would be equally reflected on the sales receipt. Again, what’s the difference?
A VAT tax has almost identical economic properties to a sales tax. We’ve discussed it on this blog in the past – “What’s wrong with a VAT?” A VAT would have a higher administrative cost, and possibly open up more areas for loopholes and exemptions, but on the other side, a VAT could have less evasion (though more collection points). I prefer a sales tax, but is there really a cause to demonize the VAT, an almost identical consumption tax?
So folks… Am I way off or is Hoagland blowing smoke on these points?
The big benefit of VAT over a regular consumption tax is greatly improved compliance. Each entity in line from the raw material importer, to the manufacturer, to the assembler, to the retailer is responsible for collecting VAT from their customer based on and submitting it to the government. If any entity decides not to charge their customers the VAT, they eat the cost of it because their upstream supplier has charged them for part of it already. They also cannot charge their customers the VAT and pocket it, because their downstream customers will report that tax paid so that they only have to submit the value-added portion of the tax.
An example: A lumber mill sells some wood to a door manufacturer for $10. At a 10% VAT, they collect an additional $1 from their customer as VAT and hand it to the government.
The door manufacturer makes the door and sells it to a retailer for $20. They collect from their customer 10%, or $2, as VAT, and submit to the government $1 along with a report indicating that they paid $1 in VAT to the lumber mill already.
The retailer sells the door to an end customer for $30. They collect 10%, or $3, as VAT, and submit $1 to the government along with a report indicating that they paid $2 in VAT to the door manufacturer already.
So, the customer only pays the levied VAT rate of 10%, or $3 on a $30 door. It’s just that the government collects part of that $3 at several points along the way, based on the value added at each stage.
In this sense, the plain vanilla consumption tax of the FairTax could easily be replaced with a VAT. Collection costs might be higher, but because of the reporting and the financial incentives incorporated into the VAT, compliance is higher as well.
So, no, there’s no reason to demonize the VAT over a regular consumption tax.
Morphh,
Ken is blowing so much smoke that we all are in danger of contracting lung cancer!!!
Barry has it just right, the VAT is just like a sales tax except it is collected in small pieces as a product moves through the production chain, whereas a sales tax is collected one time at the retail cash register. And that is precisely why a VAT can have higher rates, yet lower evasion. It is self policing in that producers will quickly drop suppliers that don’t pay the VAT.
You are also correct that there is nothing hidden about a VAT, although even George Will has made that erroneous claim? A 23% VAT collects the same amount of revenue as a 23% Fairtax. Once the government decides on the VAT rate, it can appear on the final retail sales receipt, just the same way as HR25 mandates the Fairtax receipt. Even better because the Fairtax receipt never shows that the retail merchant actually added 30% to costs in order to arrive at a 23% tax inclusive price.
I have no idea what the Obama Commission will come up with next December, but all signs point to a VAT in our future. Perhaps coupled with eliminating the income tax for all but the wealthy? And a
VAT tax exclusion for the poor for essentials?
Stay tuned!
I’ve lived in countries with a Value Added Tax. I suppose different countries might do it differently, but I recall the VAT being clearly labled on the receipt, just as a sales tax is.
That is, if the VAT was at 10%, the receipt would say (for example):
Cost of item : $100
VAT : $ 10
________________
Total : $110
Some countries might include the VAT in the price of the good without listing it separately on the receipt , but there’s certainly no requirement to do so. This is just another red herring.
The real question is this: If the FairTax could replace our current federal tax structure at a tax-exclusive rate of 30%, why couldn’t a VAT do the same thing? And, if so, why are Ken Hoagland and Neal Boortz spending so much time and effort demagoging the VAT?
Although Morph will disagree with me on this, the answer is that neither the FairTax nor a VAT could replace our tax system at that level. And if people actually stopped and thought about it for a minute, they would figure that out for themselves.
I have several thoughts on this. The first of which is taking a shot at why the aggressive demonization of the VAT. It seems to me that the adoption of a different consumption based tax threatens the likelihood of adoption of the FairTax. Assuming the VAT were passed, I imagine that a significant amount of support of the FairTax would dwindle since the argument could then be made that we now have a consumption based tax in place. Another thing here is that the VAT is a much easier hurdle to clear since it can easily be a partial and incremental replacement of the income tax where the FairTax is designed as a wholesale replacement.
Now, as to the differences between the VAT and the FairTax… I know that the three posters so far are at least as familiar with the FairTax as I am so this should all be simple review. Whether you agree with these assumptions or not, this is simply my impression of the perceived advantages of the FairTax over the proposed VAT. First of all, adoption of a VAT violates one of the driving principles of the FairTax and that is complete elimination of the income tax. The VAT would leave us with both the income tax as well as a new consumption tax. Next would be the fact that a blanket VAT tax would be very regressive where FairTax proponents will argue that the “prebate” helps to make the FairTax a much more “fair/progressive” system. I suppose my final point here is that the implementation of a VAT would most likely not be a straight across the board tax, you would have exemptions for food, and who knows what else. This obviously opens the door for Congress to yet again leverage this for political purposes, which to me is probably the worst part of this.
Unfortunately, this VAT system would translate directly into a tax increase for ALL Americans. So much for the Obama “promise” of no middle class tax increase. Additionally, this give the government yet another revenue stream with which to continue the current trend of runaway spending. If however, the VAT were adopted as a means of replacing the income tax and offset the VAT increase with a comparable income tax reduction this might not be so bad. It seems to me that it would be more stimulative to move to a consumption based system as the perception of having more money to spend would lead to more actual spending. This is however a double edged sword in that the consumer really doesn’t have any more real purchasing power since prices will have risen to accommodate the VAT. It could however be stimulative in the short term and this could be enough to give the economy the kick in the pants is could so desperately use.
Scott,
Good thinking, and I don’t necessarily disagree with your assumption that a VAT would destroy the Fairtax for the reasons you gave. And, that’s not a bad thing!
However, your defense of the Fairtax has a lot of holes, imho. Yes, a VAT could be on top of some level of income tax, but I need you to explain just what the angst over having multiple tax collection systems is all about. States have income taxes, sales taxes, property taxes and a bunch of other revenue raisers. Why is it so bad for the federal government to have both an income tax and a sales tax or VAT? I honestly don’t get it! My grandmother always warned against “putting all your eggs in one basket”. Was she wrong?
Next, any consumption tax is by definition regressive, including the Fairtax. The prebate does not make the Fairtax progressive by the formal business definition. It simply moves the point of regressivity from zero to the poverty level as defined by AFFT.
Finally, I believe the Fairtax authors made a significant mistake by exempting education tuition. The camels nose is already under the tent flap, and what is to prevent some Senator from proposing to exempt health care, home ownership, or whatever he might believe is just as important as education?
We will all have to wait for the Obama Commission to report next December, but all signals point to a VAT coupled with limiting the income tax to only the very wealthy.
Stay tuned!
You ask why it’s so bad to have an income tax and a VAT? You make the comment about putting your eggs all in one basket… Well, the country seemed to do pretty well for about 150 years before we ever had an income tax. I don’t view a consumption tax as putting all your eggs in one basket any more than breathing oxygen is a necessity for life. A consumption tax of any kind will have literally thousands of sources, similar to oxygen. I have very serious doubts that people are going to simply stop consuming so much so that the government can function. Besides, just look at Congress today, not having money has absolutely no bearing on what they are spending.
My biggest problem with the income tax is the intrusiveness of the entire system. I don’t feel that the government really has any business in knowing how much money I make. A consumption tax would remove the need for the government to need this information. The FairTax, as proposed,also treats ALL consumption (minus education and I agree with your point here) the same. As proposed, the FairTax removes the power from Congress to pick winners and losers thereby distorting the market. I’m not saying that the some aspects of the market don’t need regulation, but I think much of what Congress does in manipulating the tax code should be criminal.
Anyway, I think that anything that moves our tax system away from an income based system and to a consumption based system is a good thing. However, I still believe that the FairTax, as proposed, is a better solution than a VAT. That said, I do agree that the VAT has one significant advantage and that is using the profit motive to help ensure compliance. Since various levels of production are all reporting taxes paid there is quite a paper trail to try and avoid. Unfortunately, it seems that this does necessitate a larger staff to collect, and audit.
Only time will tell. Hopefully though, the Dems will take a serious beating in November and restore some kind of balance to Washington.
Scott — Your post repeats a point that Linder and other FairTax proponents often make, that under the FairTax the government would no longer know how much money you make. Unfortunately, I don’t think that’s quite true, for two reasons:
1. Social security payments are based on one’s income during one’s working years. Thus, unless social security is radically reformed, your employer is still going to need to report your income to the government every year in order to calculate your social security payments.
2. More problematic, however, is that under the FairTax, business expenditures are not taxed. Thus, we will all be encouraged to set up individual LLC’s through which to funnell as much of our spending as possible in order to take advantage of tax-free business spending. Pretty soon, everything we buy will be for a “business purpose.”
To combat fraud, the government will need to be able to audit all such tax-free expenditures to determine that they are for legitimate “business purposes.” The determination of a legitimate “business purpose” will be by the government, which will include a determination that the LLC is actually making (of has a reasonable chance of making) a profit. This will in turn require detailed records of all income and expenditures of the LLC to determine it profit-making potential and business use of the tax-free purchases Otherwise, we could all buy new cars every year, claim they are for “network marketing” businesses, and never pay the FairTax on any of those purchases. All of our dining and entertainment expenses would similarly be for tax-free “business purposes.”
As just one example of how intrusive this record-keeping requirement would be, if I were to purchase a brand new vacation home for my own use, I would need to pay the FairTax on the purchase of the home, all utilities and other expenses, and driving, food and entertainment expenses in visiting my vacation home. If I were to rent out the vacation home, however, all of those expenses (including the cost of the home) would be tax free. Thus, I would have a tremendous incentive to rent out the vacation home. If I were to use the home part of the time for personal use, and rent it out the rest of the time, I would need to allocate all of the expenses between personal and business usage, and pay taxes accordingly. In order to prove I rent it out for as much as I claim, I will need to be able to produce rental contracts and receipts for the rentals. I’d also need to tell the government just how much of the time I spent at my own vacation home. (Just as we do today.) Moreover, if I read the FairTax statute correctly, I’d need to keep records for thirty years with respect to the original purchase of the vacation home.
Ths point is that the record keeping requirement, including evidence of income, will be substantially more burdensome than most FairTax supporters tend to believe it to be. Of course, if you don’t want to keep records, you can always gut-it-up and pay taxes on everything you buy, whether for business use or otherwise. But, for that matter, if you don’t want to keep records today you don’t generally need to do so if you don’t take any tax deductions.
Hayden,
I’ll actually concede your first point, but honestly do you really think that Social Security is going to be around in another 20 or 40 years? The FairTax, or a similar system that doesn’t require the government to know everyone’s income, is a step in the direction of getting the government out of our bank accounts (figuratively speaking of course). Personally, this is a privacy issue to me. I really don’t feel that the federal government should have this information.
I’m not sure if your second point is in support of the FairTax or against it? You begin by talking about however everyone will simply setup an LLC to avoid paying the FairTax, and then you go on to describe exactly why this would be a huge hassle for most people. The situation that you describe concerning the renting of a vacation home and the documentation in support of that income in no way seems excessive or inappropriate to me. Honestly, wouldn’t you need to maintain most if not all of this information for insurance and liability purposes anyway?
Of course there will be evasion, and that is true for absolutely any tax system devised. This is true today, and has been true throughout history so I see no reason to assume it wouldn’t be true under the FairTax. However, I think you adequately described exactly how burdensome this becomes under the FairTax. Once you tack on fines and possible criminal prosecution I really doubt you are going to see the kind of evasion you describe on a large scale. The elimination of deductions and exemptions make auditing a much simpler process which further discourages evasion.
Finally, I’ll grant you that the FairTax crowd is oversimplifying/overstating the record keeping benefits. However, elimination of the federal income tax and conforming to corporate income tax codes should more than offset any increases in transaction record maintenance.
Scott,
Social security has been around for almost 80 years, and Medicare for 45 years. Unfortunately, it’s easier to tweak those programs than it is to get rid of them. Frankly, I am convinced that both programs were unconstitutional, but that is looking up a dead horses tail.
One of my major criticisms of the Fairtax is that retirees get screwed during transition. Having paid in to the Trust Funds for 45 years or so, retirees would be forced to resume paying for their benefits with their sales tax dollars. For the life of me, I can’t come up with a workable solution to that issue. And, everyone who has put one dime in the programs is impacted to some extent. (My other favorite transition is the double taxation of savings, but we have discussed that one).
A recent Senate report showed that raising the SS premium from 6.2 to 7.3% immediately would restore solvency to the program for another 75 years. Unless the country goes bankrupt, Social Security will be around for the foreseeable future, imho.
Hank,
Unfortunately, the double taxation during transition is probably a necessary evil, but this is a temporary situation. I think once we pay the price on this, we come out the other side in a better situation and if we can also get congress to exercise even a little fiscal discipline I think that better situation becomes exponentially better. Yes it would be wonderful if there were a way to exempt 401k and SS benefits from the FairTax, but this would be a seriously complicated situation and one that would persist for decades to come.
I suppose that the most practical idea would be to make SS benefits payable via a SS debit card. Any purchases made on that SS debit card would be exempt, but I think this is only a portion of your beef. Another serious consideration is how much impact does this have on the collected revenue by exempting all of this expenditure? How much would the FT rate need to be increased to accommodate this exemption?
Also, don’t forget that under our current system, if you are collecting SS benefits and still drawing income from other sources you may still be paying income tax on those benefits. This is effectively the same kind of double taxation that you have a problem with, is it not?
Scott –
Regarding my first point in Post No. 7, I would assume that if we were to adopt the FairTax and Social Security withholding was no longer tied to wages, then eventually Social Security payments would eventually be the same for everyone (which, frankly, would probably be fairer and simpler than our current system). So I don’t really see that as a big deal.
Regarding my second point, however, although people complain about the burdensome natue of record keeping for the income tax, it’s really not burdensome at all for most individuals. For the vast majority of folks, they get their W-2′s in the mail, maybe a 1099 from a bank, fill out the 1040A or 1040EZ form, send it in and that’s it. Record keeping for the income tax only becomes burdensome when one has a small business, self-empoyment income or rental property. And the reason it is burdentsome is because those folks need to document expenses to off-set their incomes. My point was that those same people are going to be burdened with similar record-keeping under the FairTax, so the alleged simplicity and non-instrusiveness of the FairTax will prove illusory.
Regarding tax evasion, you say that “[o]nce you tack on fines and possible criminal prosecution I really doubt you are going to see the kind of tax evasion you describe on a large scale.” Yet we have fines and criminal prosecurtion today for tax evasion, so why would we have less tax evasion under the FairTax? Jane Gravelle of the Congressional Research Service found a number of studies of non-compliance under various levels of sales taxes and VAT rates, and found that even at relatively low sales tax rates, non-compliance easily exceeds 10%. Under a best-case scenario for the FairTax, the combined tax-exclusive state/federal sales tax rate would be at least 37% (assuming a 30% federal rate and 7% sales tax rate), thus it follows that non-compliance would be extremely high.
Even if we were to assume that (illegal) tax evasion would be less under the FairTax than under our current system, it is hard to imagine that (legal) tax avoidance would not skyrocket under the FairTax. After all, people could legally avoid paying the FairTax by simply buying used cars, existing homes, vacationing or retiring abroad, or shifting more of their personal consumption to “business” consumption. When you open up legal avenues to avoid paying taxes, people are naturally going to take advantage of them as much as possible.
Thus, when you add (illegal) tax evasion and (legal) tax avoidance under the FairTax, I would suspect that you would get AT LEAST the same 15% non-compliance rate we currently have with the income tax system (though I would argue that the rate would probably be much higher). One of the many problems with the FairTax is that the proponents assumed 100% compliance when they calculated the rate. If you assume a 15% non-compliance rate, the necessary FairTax rate goes up dramatically, which, of course, would just encourage more non-compliance.
I’ve made these arguments numerous times before, so I apologize if I’m getting repetitive, but it’s one of the many achilles heels of the FairTax. Once you add the state and federal tax rates together and see how high the conbined tax rate would need to be, you can see the tremendous incentive to avoid buying taxable goods and services. And once you factor in just a minimal amount of non-compliance, you see just how high the combined taxes would really need to be.
That’s why at the end of the day we’d be better off with a simplified income tax system with reduced rates, combined with a modest VAT. But, of course, that’s just my opinion.
Well, it sounds at least like we are in agreement that the system is in desperate need of an overhaul. Personally, I do see some advantages to the VAT, and it would be a much easier hill to climb than a wholesale change of the current system. In regards to the original topic of demonizing the VAT, I don’t think it’s a fair thing. I think the hardcore FairTax proponents are going overboard here.
With regards to your compliance argument, I thought that the FairTax assumed a 90% compliance, not 100% compliance. The non-compliance may well indeed be greater than 10% under the FairTax, but that 10% would make a huge difference in your argument (that is if I’m correct). I think I remember reading this in one of the books or articles on the FairTax, but I could be wrong.
Scott — Yes. We are in 100% agreement (as is everyone else on this board) that we need a comprehensive overhaul to our tax system. The level of non-compliance incorporated in the various studies has been debated endlessly on this board, so I won’t rehash everything.
If you are truly interested, you might look at the various studies referenced under “FairTax Research” at the top right of the page. The most recent study (2008) of the FairTax was done by Diamond and Zodrow. Zodrow was (and still might be) a supporter of the FairTax, but under his study he found that the tax-exclusive rate would need to be 39%, even assuming 100% compliance.
I enjoy your thoughtful posts.
In response to the posts regarding people shifting personal consumption to business consumption to avoid the FairTax, this is an incorrect assumption. Under the Fairtax everything that is purchased is subject to the tax. If you purchase an item for resale, you must collect the tax and submit it to the government. If you buy something and do not sell it (IE, use it in your business) it is still subject to the tax. For example, a business purchases 12 office chairs, sells 10 in the retail space, and uses 2 in the back office. At the end of the month, taxes will have to be paid on all 12 chairs. The business would collect the tax from the 10 customers out front, and pay their own tax on the two in the back. So using this knowledge an individual who set up an LLC to fraudulently avoid paying taxes would avoid them on the initial purchase of the items, but would still have to remit those taxes at the end of the month.
Daniel,
I don’t think you are correct. The tax avoidance scheme being talked about is when an individual applies for and gets a business license, and all purchases for that business are then untaxed. Business to business purchases are not taxed. Your claim that everything is taxed isn’t true, imho.
Of course, if the business is a scam just to avoid the sales tax, the chances are pretty good that you will eventually be caught by the IRS/Sales tax auditors.
Check it out–where in HR25 can you find support for your position?
As Hank stated, the purchased for legit business purposes are tax free. The 2 chairs used for business purpose would not be taxed as this would be embedding a tax cost into their product. You wouldn’t see the tax on those two chairs as a consumer, thus it would be hidden in higher prices for the 10 other chairs. Thus, the FairTax considers “personal” consumption of retail products and services in the U.S. as taxable (as well as imports, since exports are tax free). If they are sold at a later time, the value would be depreciated and the tax collected on that, since “used” defined in the FairTax does not necessarily mean previously owned, but more accurately previously sold under the FairTax.
As with most debates, it is generally a matter of what “isn’t” said rather than what is said.
1.
As for the Fair Tax vs VAT tax or any other for that matter…..most all proponents of the Fair Tax favor it only WITH a REPEAL of the 16th (ELIMINATION of all Fed personal & corp incomes taxes, etc.).
2.
A VAT Tax is a further burden or cost on our businesses therefore it is passed on in the form of higher prices. A CONSUMER-based tax such as the FAIR TAX shifts the cost to a much wider, broader-based population INCLUDING illegal aliens, criminals, visitors, and all previously non-paying TAX DODGERS (which is where most of the oppostion of this Bill lies).
3.
A reduced cost burden on businesses will translate to improved competition & lower prices both nationally and overseas; thus encouraging re-investment in U.S. manufacturing; thus MORE JOBS !!
All 3 points above will greatly improve the economy, and help reduce the national deficit.
The other side of the equation: Reduced SPENDING will only come from elimination of the career politicians, lobbying and pork barrel legislation.
Hank
Your comment in #9, that you “paid in to the Trust Funds for 45 years or so” is simply not true. You never paid one cent into a trust fund. You paid a tax, no different than any other federal tax.
There were nor are any trust funds whatsoever. All money you paid was simply a tax into the general treasury. Any money you now receive comes form the general treasury. You can verify this by looking at the pie charts of federal expenditures and receipts. Why do SS tax and payments appear there if there is a separate “trust fund?”
There is no connection whatever between the tax and the payments, and the preposterous SS system was held unconstitutional until FDR’s packed Supreme Court ruled in favor of the government’s position that “. . . the tax moneys are not earmarked, and that Congress is at liberty to spend them as it will.” This was the principal reason that the bogus system was constitutional. (Helvering v.Davis, 301 US 619, 1937.)
The SS system we have is simply a welfare program to old people financed by taking money by force from our children It is as evil as anything a society has ever done.
There is no trust fund, period, because if there were, the SS system would have been unconstitutional.
Hank, a couple more points on your #9 post above:
When liabilities exceed assets, a state of bankruptcy exists.
The country IS bankrupt. We just haven’t declared it.
SS is even more bankrupt, and no amount of tax increases can make it solvent. Your reference to “raising the SS premium from 6.2 to 7.3% immediately would restore solvency to the program for another 75 years” is self contradictory in that the system was never solvent, and solvency would not exist if its date of insolvency is specifically stated. It is just the government’s euphemistic way of saying SS will be totally insolvent in 76 years.
No system that takes out more than is put in can ever have a positive balance sheet. SS has been bankrupt since its flawed inception. How much of your children’s money do you want to steal? Even if we stole it all, the SS system will collapse. The present system CANNOT be saved!
Phelbers,
Your comments in #18 and #19 confirm my long held belief that “youth is wasted on the young”! It certainly must be news to the Social Security Trust fund trustees that they don’t exist and there is no trust fund to manage. Your view about SS is not consistent with the facts. I will grant you that the Trust Fund is simply a holding place for excess funds when revenue exceeds expenses. Periodically, the Trust Fund excess is invested in federal government securities. The cash is spent by the government and the treasury notes remain in the trust fund. When expenses exceed revenue, the T-bills are sold to finance the ongoing SS operation. So, if you want to insist that my FICA payments went to the general fund, that is OK. But that is a distinction without a difference. Who cares?
Supreme Court decisions aside, I still maintain that my FICA payments were really insurance premiums. After all, FICA does stand for Federal Insurance Contribution Act, doesn’t it? Over the last 75 years, the plan has been adjusted a couple of times in order to better reflect demographics. And it will be adjusted again in the next ten years or so. You may believe that the plan is bankrupt and can’t be made solvent, but you are in the minority, imho.
Please don’t misunderstand, I do believe that the SS plan of FDR was unconstitutional. The same way that Medicare under LBJ was unconstitutional, and the same as the Fairtax proposal that the federal government tax State and Local government consumption. It shouldn’t pass, but based on the SS/Medicare history, there is no telling what the nine black robes will do! Stay tuned!
Hank,
The SS system IS constitutional, but ONLY because there is no trust fund. If you read the cases leading to the Supreme Court case, you can see that the scheme was held unconstitutional since a group (Old people) were beneficiaries of a general tax upon the young. Calling a non-existant fund a trust fund does not make it one, and calling a group of federal appointees trustees does not make them trustees. Keep an open mind and read the history.
If you would actually read the SS act, or at this website , second bulleted case, you can see that the Supreme Court disagrees with you. I am in the minority, perhaps, but in good company (I use the term ‘good’ tongue-in-cheek) – the Supreme Court. THERE IS NO TRUST FUND!
IT is not a distinction without a difference, and we must all care if we want something other than bankruptcy for our children. I have children, and I care. I will not steal from them.
I, too, was fooled and duped by the false rhetoric from Congress, government, and the press – until I read Helvering, and Seward. Even though the majority believed the earth was once flat, facts proved otherwise. So too do the facts prove there is no trust fund, even though the majority may assert otherwise.
Surely you read the regular reports of Congress threatening to earmark the payroll tax for SS only. Why do they, if, as you assert, it is already so? No true trust fund could be looted or borrowed from for use by its trustees for uses other than those specified by the trust – they would be arrested for fraud and jailed. Nothing is more clear and certain than the facts that there is no trust fund and no trustees, other than in name only.
Calling a tax ‘insurance’ does not make it so, either. Title C of the Internal Revenue Code establishes the payroll TAX, a tax PERIOD. Calling a tax ‘contributions” does not make them such. Since when are ‘contributions’ mandatory?
Incidentally, HR25, as written, would actually make the SS system unconstitutional, as it does indeed earmark a portion of the general sales tax for an actual separate fund – the very action that would violate Helvering, and the very reason the original SS scheme was held constitutional – because there was no trust fund, only a tax for the general treasury.
SS will have to remain just another welfare program, funded from the general treasury (or additional debt) each year like any other welfare program.
Keep an open mind! I do, and change it when shown facts contradicting my beliefs.
I favor the Fair Tax, not HR25. I agree with all your objections to HR25. Don’t equate the two! And, don’t throw out the Fair Tax baby with the HR 25 bathwater. We need to fix your objections.
If there was no double taxation on savings, a Fair Tax exemption in the form of an added prebate for SS payment money, etc., each easily doable, then the Fair Tax would be far superior to the income taxes.
Thanks
Phelbers,
Your claim that SS is constitutional because there is no Trust Fund is very difficult to defend successfully, imho. The flip side of your position is that SS is unconstitutional and there certainly is a Trust Fund, and that is what I believe.
Under the Rule of Law, i.e the Constitution, a government funded insurance program as proposed by FDR was clearly unconstitutional. Show me where a federal insurance plan is one of the enumerated powers of the federal government. Under the Rule of Man, i.e the nine black robes, a compromise for SS was cooked up, whereby the payments were called a tax, not a premium, and the federal government was allowed to spend the SS revenue as they saw fit. No Trust Fund needed?
As I understand it, SS revenue goes through the SSA, and only surplus funds are then invested in “Special Issue Treasury Securities”. The remainder is used to pay current claims. The Trust Fund currently has $2.5 trillion in T-bill assets earning just under 5% annually. The Fund has 6-7 Trustees including the Secretaries of Treasury, HHS, and Labor plus Michael J. Astrue, Commissioner of SS and Trustee. Two other Trustee nominations are about to be approved by the Congress.
If there is no Trust Fund, why do we care if it is solvent or not? If there is no Trust Fund, how do we know there is $2.4 trillion in assets? If there is no Trust Fund, what the hell is Mr Astrue doing to earn his pay? If there is no Trust Fund, why bother printing an annual report? It seems to me that your claim that there is no Trust Fund flies in the face of the facts.
Constitutionality aside, I still believe that in fact FICA contributions support a federal insurance plan, my contributions paid for my benefits, and it would be very unfair to force me to resume paying for those benefits with my sales tax dollars as proposed under the Fairtax. In addition, by including FICA on the list of taxes to be replaced, 30 million working families would pay no net federal tax due to the prebate. The obvious solution to these two transition issues is to leave FICA alone, make any adjustments needed for solvency as was done in 1983, and get on with replacing the dreaded income tax.
Hank
There is no trust fund in the normal, lawful, actuarial money sense of the true meaning of ‘trust fund’.
Calling an Enron, Arthur Anderson, phony accounting scheme a trust fund does not make the figures of the SSA a trust fund.
To answer your specific questions:
“If there is no Trust Fund, why do we care if it is solvent or not?” Solvency is irrelevant with respect to SS since there is no real trust fund whatsoever.
“If there is no Trust Fund, how do we know there is $2.4 trillion in assets?”
There are no assets whatsoever – only false statements that there are assets.
“If there is no Trust Fund, what the hell is Mr Astrue doing to earn his pay?” He oversees all the people at SSA who make charts and tables – all make believe – and gives speeches that pretend to give SS the appearance of a real system.
“If there is no Trust Fund, why bother printing an annual report?” It gives the appearance that SS is real, and helps convince people who are on SS, most of whom HAVE NOT AND REFUSE TO READ the Supreme Court decision upholding SS only BECAUSE THERE IS NO TRUST FUND, that the system is real.
“It seems to me that your claim that there is no Trust Fund flies in the face of the facts.” Hank, the facts are the Supreme Court holding that THERE CANNOT AND WILL NOT BE A TRUST FUND. Why not read the real facts instead of the false facts put out by the SSA and the rest of government (except Governor Perry of Texas)?
Thanks, Phelbers
Hank
The greatest proof that there is no trust fund is that President stated that unless the Debt Ceiling is raised, “checks may not go out” on August 3rd.”
If there were a trust fund, fully cash-laden as you insist (against all legal evidence, Supreme Court decisions, and official government admissions to the absolute contrary), why does the federal government have to be able to borrow additional trillions to pay checks from this fully funded trust?
Thanks,
Phelbers
Phelbers,
The only thing that statement is proof of is that the President is either an idiot, or a scare monger. The Trust Fund has around $2.5 trillion in government special bonds as a result to running surpluses for a number of years. I think the Treasury would have been better advised to put those dollars in negotiable securities, but the fear of tilting the markets made them decide on the special Treasury bond scam.
There is no way the government could have defaulted on SS checks. Imagine having credits of $2.5 trillion and being told your check isn’t coming. If that fool didn’t get lynched, he certainly would have been impeached! Social Security has nothing to do with the Debt/Deficit problem. It has paid it’s way plus, and with minor changes, will continue to pay it’s way for another 75 years or so. Over time, the demographics should allow costs to come down as the boomer bow wave subsides.
Sorry I didn’t get back to you sooner, but I had assumed that this blog was dead. That is a shame in view of the renewed interest recently by the W&M Committee and others. There are still a bunch of Fairtax myths floating around on other blogs that keep me busy.
Cheers!
Hank
That 2.5 trillion is as you say in”special bonds”, not in any way cash or accessible as funding to pay SS checks.
those “special bonds” are no different than any other worthless federal IOU. They can only be “redeemed” to pay SS benefits by borrowing from the Chinese or by further QE borrowing from the FED.
All the SS taxation used to “buy these phony IOUs has been long ago spent on debt interest or other wasteful federal spending.
I, the OMB, and all rational people, stand by the fact that there is no trust fund whatsoever, only make believe “bonds” that can only be repaid by raising taxes ore further borrowing.
Too bad you cannot accept this simple truth – hope you didn’t lose too much in Bernie’s investment plan – he modeled it on SS, and SS will mirror it.
Thanks, Phelbers
Phelbers,
So tell me, my friend, what would you have done with the SS surpluses that accumulated over the last 10-20 years? And while you are at it, please explain why you think a federal IOU is worthless. That is an attack on my country that I certainly don’t agree with.
Your claim that the SS Trust Funds are just like the Maddoff scam is idiotic. SS will be placed on a firm footing for another 75 years by making a few realistic changes that reflect current demographics.
Hank
“…what would you have done with the SS surpluses that accumulated over the last 10-20 years?”
I would have returned them to those from whom they were stolen, with a federal mandate that they buy commercial paper, bonds or stocks, AAA rated, something with real value, which would be placed into their personal retirement accounts. These of course will fluctuate with the market in the short term, but always rise over time, but are rated higher than any US Government instruments. Government might only step in with minimal guarantees when needed.
“…please explain why you think a federal IOU is worthless”
Federal IOUs (the so called ‘trust fund’ IOUs) are worthless in the sense that they only represent a promise to tax others to pay the intended recipients. There is no cash, no securities of real value in productive economic terms associated with these IOUs. This is not an attack on my country – simply reality.
“Your claim that the SS Trust Funds are just like the Maddoff scam is idiotic.”
With one exception, the SS ‘trust funds’ are EXACTLY like the Madoff fund. They function EXACTLY like the Madoff scam. SS money is taken from workers to pay non-workers from whom money was taken previously while they worked. The only difference is that SS compels participation – Madoff participants joined of their own free will. In both scams, money taken out of the system comes only from that being put in. There is no trust fund, or cash reserve in either.
You fully acknowledge and demonstrate the true bogusness of SS in your last paragraph. “SS will be placed on a firm footing for another 75 years” simply says SS will be broke in 76 years. It cannot be salvaged, just as the federal debt cannot be eliminated by borrowing more money.
Sorry you won’t see the truth of SS – it’s over. As the late Senator Proxmire said in the 1975 SS reform hearings, “Seniors will get their money. It may not be worth anything when they get it, but they will get it.”
I for one do not like having the IRS steal from my children and grandchildren to pay me SS money. Most seniors are very happy to do so, though.
I want a real system, one actuarially sound, with the money forced into savings owned by the participants so that society will benefit economically form the funds being productively used, not having it spent by government on pork, and to line the pockets of the Congress and lobbyists.
Thanks, Phelbers
Amen, Phelbars!
Those comments coincide with my comments about Social Security on the other thread – the New Flat Tax Plan. Social Security was never set up on an actuarial basis. Look to Chile for an example of how to do old-age security properly. The FairTax will make that possible.
~Jim
The VAT requires many filings and audit levels throughout the production cycle.
It is a big government lovers dream. Hank, for example wants the present IT and A VAT, justifying it on the basis that 20+ countries now have both.
For that reason alone, it is repulsive to a free society.
it is always assumed here by big government proponents that compliance would be zero or nearly so with a legitimate NRST. No evidence is given, other than citing a Montreal sports bar 16% ‘zapper’ evasion rate.
We could take all the unemployed IRS agents, and put them in enforcement to go after evaders, if evasion rates were as high as the FT/NRST naysayers assert.
But even present IT evasion is at the 17% rate.but these same ‘zero FT compliance’ do not call for immediate abandonment of the IT. Why not? – isn’t it unworkable due to lack of compliance?
A true Fair Tax, with seller liability, collected from the ultimate consumer (which would work like the present gasoline excise tax), and good-for-the-tax-only credit for already taxed savings and Hank’s precious SS checks, would certainly be worth trying.
Thanks, Phelbers
Phelbers,
“The VAT requires many filings and audit levels throughout the production cycle.”
Turns out that isn’t true. The total number of businesses with employees in the production cycle was only slightly greater than the number of retail businesses in 2009. By exempting the 21.7 businesses that have no employees, the federal government would only lose 3.4% of the sales base under a VAT. 96.6% of all sales are done by 6 million businesses, versus sales by the 5.7 million retail businesses. The VAT paperwork and audits would be quite similar to a retail sales tax. Even less audits for a VAT due to the self enforcement mechanisms of the VAT. Most economic experts believe that a retail sales tax over 10% would be unworkable, whereas many nations successfully use a VAT with rates over 20% today.
“It is a big government lovers dream. Hank, for example wants the present IT and A VAT, justifying it on the basis that 20+ countries now have both.”
That certainly isn’t what Hank wants. I want a simplified income tax plus a VAT. The justification is the 120 nations that use a VAT. Only six have even tried a broad based sales tax and all of them rapidly switched to a VAT.
“For that reason alone, it is repulsive to a free society.”
It may be repulsive to you, but are you claiming that none of the 120 nations that use a VAT aren’t free societies? What is your definition of a free society?
And, while you are on this subject, please explain just why having two or more federal revenue plans is such a bad idea. Every State has at least two, why not the federal government? None of you on this blog have ever provided any good rationale for your negative knee jerk reaction to the very subject of a VAT!
Hank
The VAT has multiple levels of payment, collection, and record-keeping, admirable to big government advocates, unattractive to the good government maxim “that which governs best governs least”.
The VAT is ultimately paid by the final consumer, exactly as would be a legitimate FairTax. The general thought is that it is easier to for the government to collect because no upstream buyer would dare deal with someone who could not prove that they had paid their portion of the VAT from their added value to the product. This same principle can apply to a legitimate FT.
In essence, the VAT overcomplicates the excise tax principle of indirect taxation. Again, the gasoline tax is the best example of these taxes. The tax is levied, and made liable to the refiner or wholesaler at an early place in the life of the product. The tax is then passed along to the ultimate consumer, you and I, when we fill our tanks.
The same manifold documentation that certify the repeated VAT payments can as readily certify a legitimate Fair Tax payment just once an an early stage. This would require only a few thousand such verifications in our economy, rather than 200 million such audits for every product sale upon the ultimate buyers legally and lawfully liable until proving FT payment with a receipt.
With regard to multiple tax schemes, these again multiply the size and need for far greater numbers of government tax agents.
The degree of liberty and the size of government, and its need to interfere with our lives, are inversely proportional, particularly with respect to taxation.
Simply because so many nations use the VAT – always in addition to income, and usually many other tax plans – does not mean having multiple taxing schemes is a wonderful goal (except to those in or associated with government desiring maximum expansion of governmental power and authority).
Keeping it simple is what we ought to try.
Thanks, Phelbers
Hank
Just a note on what a free society means to me.
It means to me what it meant to the Framers, a government of limited powers, “few and defined”, as James Madison said in the Federalist.
Further, it means no income tax period. The Fifth Amendment clearly and unquestionably says: Nor shall any person be compelled by government to be a witness against himself in any criminal case. To allow the IT, this absolute prohibition against government was trampled upon, falsely and unconstitutionally, by the Supreme Court.
The income tax requires the federal government to compel testimony (a tax return is the written testimony of the filer) that it can, and regularly and routinely does use against the filer in any criminal case, both tax and non-tax cases. This alone destroys liberty by giving unlimited power to the government.
There is no simplified IT, and no constitutional government so long as compelled testimony of the tax return is required.
Thanks, Phelbers