Compliance Costs

August 18, 2011  ·  Filed under: Uncategorized

Request for comment from Hank

To Everyone,

This blog used to be a place where Fairtax supporters and critics could exchange views in an orderly, polite way. Of late, the blog has been very quiet. On July 26th, the House W&M Committee held a hearing to examine both the Fairtax and a VAT. That was a first for the Fairtax, and reviews of the hearing have certainly been mixed.

Go to this link to watch the hearing:

Go here to read the AFFT submittal for the record:

After reading Dr Walby’s submittal, I wrote her the following email:

“Dear Dr. Walby,

I have read and reread your ten page Fairtax testimony you provided to the House W&M Committee on July 26th. I have three concerns that I’d like to tell you about, and ask you to comment prior to my sending them off to the Committee staff.

(1) On page 1, you state that the “prebate” is not an entitlement, but is a rebate (in advance) of sales taxes paid. I believe that no matter what you choose to call it, the Family Consumption Allowance is clearly a cash grant entitlement program costing some $600 billion annually. The WIKI definition of an entitlement is: “An entitlement is a guarantee of access to benefits based on established rights or by legislation.” HR25 does exactly that. The 2005 Presidential Tax Reform Commission concluded that: “A cash grant program to make the tax appropriately progressive would cost at least $600 billion per year—which would make it America’s largest entitlement program.” The FCA is certainly not discretionary spending, so it has to be an entitlement.

A simple test to resolve this matter would be to look in your checkbook. An entitlement adds to everyone’s gross income, while a tax rebate does not. The prebate is an entitlement on all counts. While your marketing papers say that the prebate is intended to offset the sales tax up to the poverty level, it actually is an income supplement that can be spent and taxed on anything, or saved as conditions allow. I would be just as accurate if I thought of the prebate as an alimony offset. Isn’t it time to call the FCA by its proper name? It is an entitlement, and the CBO will score it as an entitlement!

(2) On page 2, you discuss why failure to tax all government agencies consumption would lead to greater incentive to consume government provided goods and services, rather than from the private sector. While true, HR25, Sec. 704 took care of that problem by treating government agencies at any level that sell at least $2500 per quarter of goods or services as Government Enterprises. All Government Enterprises must collect and remit the 23% sales tax. There was no need to tax all government consumption. The playing field with the private sector was already level.

Furthermore, federal taxation of State and Local government consumption is unconstitutional. Sovereign powers do not tax each other, and the Supreme Court will throw out this feature under the long held doctrine of “intergovernmental tax immunity.” Your precedent for such taxation was also incorrect. The Supreme Court approved the Social Security plan because it allowed State and Local government employees a choice of whether or not to join the federal Social Security system. Many S/L government agencies decided to set up their own plan. HR25 wisely gives States a choice as to whether or not to act as the federal tax collector. A constitutional issue was thereby avoided. No such choice exists regarding the taxation of S/L government consumption.

(3) Finally, on page 4, you discuss the compliance costs of the income tax. But, your data is obsolete and terribly overblown. Prior to 2006, compliance cost estimates used a form by form approach, assumed a stubby pencil technique, a $39/hour labor cost, and badly overstated actual compliance cost estimates. In 2006, the IRS adopted a new IBM estimating model which greatly reduced compliance cost estimates. Over the last five years, you have continued to quote the old Tax Foundation estimates, even when the Tax Foundation wrote that they would continue to update the old model only so they could determine trends. Your out year compliance cost estimates are inappropriate and totally inaccurate.

For instance, using the tables on page 95 of the 2010 1040 Instructions, the average dollar cost for all individual taxpayers is listed as $240. Assuming 140 million returns, the total individual compliance cost burden would be $33.6 billion, a far cry from your $110 billion 2005 estimate or the $150 billion 2010 estimate found in the old discarded study. Similar overstatements can be found for the estimates of Corporate compliance costs. There is no longer a current Tax Foundation study that would support the compliance cost numbers still claimed by AFFT. Isn’t it time you overhauled your compliance cost estimates using the new model?

I look forward to any comments you may have.”

Dr Walby may or may not respond, but I would appreciate any comments anyone may have. I remember discussing all three criticisms on this blog, but a fresh look might be instructive.

Hank Van Gieson

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8 Responses to “Compliance Costs”
  1. Hank,

    Great post!

    You wrote “reviews of the Hearing were mixed”.

    I fail to see how anyone could watch the video and delude themselvesinto thinking the FT is still alive.

    When a leading “gimme” wealth redistributor, former W-M Chmn Rangel chokes onm the new, giant ENTITLEMENT, FT surely must be dead and buried.

    Stephen C. Eldridge  ·  Aug 23, 2011 at 9:52 am  ·  Permalink
  2. Stephen,

    You are certainly correct, but watch the various blogs try to put the best spin they can on the disappointing results. Kind of like when the Bush Commission turned thumbs down on the Fairtax due to a variety of concerns back in 2005, and the line then was that the Commission really didn’t examine the real Fairtax. It wouldn’t surprise me that the story line this time will be that the W&M Committee chose the wrong witnesses?

    The Fairtax needs to rest in peace, imho.

    Hank Van Gieson  ·  Aug 23, 2011 at 2:56 pm  ·  Permalink
  3. Until we elect a Libertarian with a sympathetic house and senate the Fair Tax won’t happen. However after the 2012 election if the Tea Party rises to power we will get a strong revision of the tax system, though the fair tax would be ideal.

    Floyd Alsbach  ·  Aug 30, 2011 at 6:25 pm  ·  Permalink
  4. Hank,

    I agree FT needs to rest in peace, but suspect that the zombies will not lie down quietly.

    It will be difficult for the FT “opinion spinners” to get around “the FT is a Fairy Tale”
    and Rangel’s gagging. The only point they can make is Dr. Price’s sales speech, but he represents the den of the FT cult and apparently feels he must do so to stay in office.

    I recently spoke with a member of the GA (FT) Speakers Bureau and find the close-mindedness absolutely stunning – and from a college professor, yet. I will add this amazing conversation to the 2012 version of my Paper.

    I thought it interesting that the W-M Comm arranged for 3 pro-FT speakers (including Huckabee a non-technical “salesman”) but only 1 anti-FT speaker.

    Stephen C. Eldridge  ·  Aug 31, 2011 at 11:06 am  ·  Permalink
  5. Stephen,

    What I found interesting was Larry Kotlikoff and his support for “Purple”, not the Fairtax. Go here to read his latest piece and some interesting comments.

    I believe that Dave Camp was simply responding to the Michigan Fairtax cult, and I doubt that he will hold any more Fairtax hearings. I think Bruce Bartlett did a good enough job of shooting down the Fairtax.

    Hank Van Gieson  ·  Aug 31, 2011 at 3:49 pm  ·  Permalink
  6. Hank,

    Larry’s purple tax is even loonier than the Fair Tax.

    He greatly redistributes wealth by retaining the Prebate, making P/R taxes much more “progressive” and keeps a smaller Estate Tax.

    I am sure that Socialist Harvard is very proud of Larry.

    Stephen C. Eldridge  ·  Sep 4, 2011 at 4:31 pm  ·  Permalink
  7. Stephen,

    Actually, he teaches at Boston University, but I don’t know if BU is any less liberal?

    I emailed Larry a lengthy critique about his Purple plan, but I guess he didn’t care for my input. Never heard from him. Anyway, you are correct. Purple is loonier than the Fairtax, and neither one is going anywhere, imho.

    Hank Van Gieson  ·  Sep 5, 2011 at 8:11 am  ·  Permalink
  8. To All,

    Well, it seems the subject of compliance costs just won’t die. In last weeks “Fairtax Friday” news letter, AFFT once again provided some disingenuous “facts” about compliance costs and, in a “Featured Paper” box, republished a 2007 compliance report done by Dr Walby, all of which you can read by going to this link:

    My major disagreement with AFFT over this subject can be stated as a question. Do any of you believe that your time spent in filling out last years income tax return should be valued at $39 per hour? Here is the way AFFT calculates compliance costs: Time value–$378 billion; Dollar outlays–$32 billion; IRS budget–$12 billion; and Tax audits–$9 billion. Total compliance costs are being presented by AFFT as $431 billion. Setting aside the IRS budget and the Audit costs, the real out of pocket compliance costs average $240 per individual. You can find that number in your 2010 1040 Instruction booklet on page 95. You see, the IRS discarded the old model that is the source of all that time expended, and went to a new IBM developed model which provides a much more realistic compliance cost estimate.

    As an aside, Laffer and company published a similar report in 2011 which once again includes the old value of time assumptions. Going forward, it seems to me that various tax software plus a growing cadre of volunteer tax preparers (free), will reduce the cost of compliance even further.

    Stay tuned!

    Hank Van Gieson  ·  Feb 8, 2012 at 3:38 pm  ·  Permalink