Rebuttals to Mises Institute Fair Tax Review

The author Laurence Vance gives a lengthy critic of Neal Boortz's and John Linder's book The Fair Tax Book. In Short, he misunderstands and misquotes (as many critics do) the actual workings of the Fair Tax.

Once you read his entire article you realize his real objection is not with the Fair Tax but with any Federal Taxation at all.

His Anarchist approach to no taxation in which he hates all forms of taxation is found at: http://www.mises.org/story/1975

The National Tax Payer's Union (NTU), Americans for Fair Taxation(AFFT), American Farm Bureau Federation (AFBF), and many more support the Fair Tax HR25/S25. The Fair Tax is much more than just a book by a radio talk show host.

The Fair Tax is a well thought out and extensively researched Legislative package that takes a responsible approach to replacing the current archaic income and payroll tax system with a revenue neutral National Sales Tax system.

Unlike the Laurence Vance Article, the Fair Tax gives an alternative to the Income tax, Vance arguments are against all federal taxation whether it is Income tax or the Fair Tax.

I started to read your review of the FairTax book and had to stop. I finished by skimming it. I realized what this was, a publish or parish review. Your review of the FairTax was so superficial that your review lacks any real weight or thought. You didn't understand that the 23% tax and the 30% tax reflected the same real amount. Simpler still you didn't even grasp that prices on the shelf would be represented in a tax inclusive form so that the consumer would more easily calculate the amount they are intending to spend but that at the moment of purchase the price of the product and the tax would be separated so the consumer could see their true tax burden. You made so many lazy and misleading arguments that this review will lacks substance to your peers. You needed to get your name on a published article as prerequisite to applying for jobs at a 4 year business school. If any of those schools read this article they will not be pleased with the quality of your work. I am sorry you wasted your time to write the review and I am sorry I wasted mine to read it.

From the Fair Tax Blog Bill Rook Posts: http://www.fairtaxblog.com/20051213/liars-use-double-talk/

Ludwig von Mises Institute: Laurence Vance's December 12, 2005 "There is No Such Thing as a Fair Tax" review of The FairTax Book asserts three lies found in the book and asserts 17 problems with the Fair Tax. For brevity, this article shall only address the three lies. A follow-up article will debunk the perceived problems.

Lie #1: taxes would be voluntary under the FairTax. First we must realize that all of our actions have consequences. If an individual chooses to buy a new luxury car, he/she would have to pay federal sales tax. When the individual chooses to buy the new car, he/she is also choosing to pay federal sales tax. Section 505 of H.R.25, entitled PENALTIES details the civil and criminal penalties for non-compliance.

Under the Fair Tax, the federal sales tax would be reimbursed up to poverty level spending via the Family Consumption Allowance (FCA). An individual could purchase new food and services and still survive at poverty level spending. After the FCA, the net tax payments would be $0. The individual could spend significant additional sums of money on used items tax free. The individual could work and earn as much money as he/she possibly could--untaxed. If the individual chooses to purchase a standard of living above the meek poverty level, then net sales taxes would be due.

Under the current tax system, an individual, without dependents, is taxed from the first dollar earned at the FICA/Medicare rate of 7.65%. As annual earnings increase, additional progressive income taxes are due. Under the current system, the only option to not pay any federal income tax is to not work. That is not a valid option.

Given the above two alternatives, the Fair Tax provides the only valid choice. Although the qualifying "Tax Free" situation is narrow in scope, it is possible. When an individual chooses to purchase a standard of living above the poverty level, he/she is choosing to pay the federal sales tax. Therefore, the tax is voluntary. The assertion that item #1 is a Lie is false.

Lie #2: the FairTax rate would be 23 percent. We are talking apples and oranges here. Anyone who claims that both are just fruit is attempting to mislead and misinform the public. The Fair Tax is presented to replace the income tax. The income tax is an inclusive tax. The appropriate Fair Tax percentage for an inclusive comparison is 23%. Recognizing that some comparisons could benefit from an exclusive tax analysis, the following conversion table is provided.

When making comparisons, the appropriate inclusive/exclusive percentage must be used. Either column can be used, but a comparison of taxes between columns is wrong. Only apples to apples or oranges to oranges comparisons are valid. While we are at the comparison game, the following table provides sales verses income tax percentages with the average state sales and income taxes included.

Any argument quoting a combined Fair Tax and state sales tax rate above 36% exclusive is only valid when it is compared to a 94% exclusive combined state and federal income tax rate. However, as a business person filling out the national sales tax form, under the line that says "Gross retail sales of new goods and services," I'm going to put down the 23% inclusive rate. The assertion that item #2 is a Lie is false.

Lie #3: the Fair Tax would abolish the IRS. Laurence Vance debunks this one himself. "The Fair Tax will abolish the IRS in the same way that it will abolish the income tax--by replacing it with something else." The assertion that item #3 is a Lie is false.

The Fair Tax Act of 2005 does not call for a total closure of the federal government--not even a modest 1% cut in spending. In fact, Boortz and Linder promote the Fair Tax as revenue neutral. What does this have to do with abolishing the IRS? Nothing! Just as Vance's accusations have nothing to do with tax reform.

When Boortz talks about abolishing the IRS, he is referring to abolishing the intrusive nature of government inquisition into our personal and business finances. He is referring to eliminating a tax system where the government gets paid as a result of our individual and business efforts before we do. Income and payroll taxes are deducted from our pay before we see the first dime. Businesses must pay matching payroll taxes while the manufactured goods sit in the warehouse.

Will there still be inquisition into our personal finances? Sure, some. Employers will still report gross earnings to the Social Security Administration for calculation of retirement benefits. If a family wants to receive the FCA, they must file with the appropriate agency. The employer will file one form, and the head of household will file the other. Compare this to the current 1040 with the associated schedules A, B, C, SE, and so on. The inquisition will hardly be intrusive.

What about businesses, will their books be scrutinized? Again, yes, of course. Under Fair Tax, the burden of the tax collection process and paperwork will be shifted to businesses. However, this new responsibility for the collection process and paperwork will be significantly less cumbersome and intrusive than the current system. Let's look at a business situation, a Motion Picture Business. A big star with a lot of clout will demand a percentage of gross sales. Gross sales are easy to calculate. Just add up all sales and calculate the split. The Fair Tax is similar to this example. Businesses must track and total gross consumer sales, an easy number. Twenty-three percent of that tally is consumption tax. Send it in.

Applying this analogy with the current tax system, the actor would demand a cut of net profits. What are net profits? Bingo. They have to be defined. What are the valid expenses? Can the "Making of Footage" for the DVD's be counted as a legitimate expense? What about product placement fees? Does that income count when calculating net profits? The actor's agent and lawyer will lobby one way on an issue and the movie company's lawyer will lobby the other way. A lot of time and effort will be spent on details as each side lobbies for a better deal. Under the current tax system, the IRS will audit a business and demand justifications for every expense. Collecting, maintaining, and defending such justifications becomes a dauntingly expensive task, just to comply with the tax code.

The market (buyers and sellers) determines the prices of goods and services. Under the Fair Tax, businesses will be taxed 23% of the gross sales--an easy calculation. Businesses must operate within the means provided by their remaining 77% share of the gross sale. Alternately, a business could determine the pretax market price for their goods and services and keep 100%. They would then add an additional 29.9% at the till for sales tax--again, easy calculations. Both methods result in the same dollar amount of taxes; it really is just a matter of semantics. If the wrong semantics (math equations) are used, however, the numbers will not work out.

We must look beyond the rhetoric for or against the Fair Tax. We must develop an understanding of how Fair Tax changes will impact our individual lives. We must look through the rhetoric and determine the motives of the activists that lobby for or against the Fair Tax and then make our own decisions. Regardless of choosing 23% or 30%, the dollars involved are the same when used in the proper equations. The Fair Tax is revenue neutral. The IRS will be replaced by another agency that has a less intrusive reach into our personal and business lives. This change will save individuals time and stress. The change will save businesses time and money. The vast majority of the people will benefit, only a small number of accountants, tax lawyers, and bookkeeping professors making their livelihood off the current inefficient system will suffer.

References: http://taxes.yahoo.com/rates.html, http://thestc.com/STrates.stm, http://www.nber.org/~taxsim/state-marginal/, Fair Tax Act of 2005

Re: 30% vs. 23%, I side with Mises.org. The smaller number was clearly chosen to make the tax look smaller, and was not an honest choice given that people are accustomed to reckoning their sales tax after the sticker price. I.e., for them to compare shopping before and after the "FairTax", they would need to realize that items in the dollar store will be costing $1.30, not $1.06 as they're used to today.

The reason that it is stated as 23% instead of 30% is because it is a tax INCLUSIVE rate.

Um, it was clear that I understood that, right? The point is that sales tax today is calculated using an exclusive rate. If you say, "replace the income tax with a 23% sales tax," any normal person would conclude that the proposed sales tax would have an exclusive rate of 23%. If you said instead, "...with a 30% sales tax," folks would correctly understand the proposal with no further explanation.

So why is the clear and simple statement passed up in favor of the confusing statement? Because the smaller number sells better. IOW, they are intentionally playing on the confusion at work here.

Interested to read the detailed follow up...this thing is like a defiant campfire, you stomp it out, and it reignites somewhere else, disprove half the points, the nabobs take up the other half mistruths, disprove all of them, and tommorow they'll have posted a persuasive essay by Johnny Lobbykinder, Mrs. Kaminsky's 5th Grade Class.

A Taxreform bump for you all.

If anyone would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Refer for additional information:

search: "national sales tax" OR "national retail sales tax" OR "fairtax"

It's good to see that others outside of FR have spottted the hitpiece that is so lie-laden.

That of course won't alter the pose of the Status Quo Lovers who have their "little niche" all carved out with the present system. They also will be as willing to lie as ever.

People understand and readily use inclusive and exclusive figures without confusion.

Ask any person what percentage of their income they paid in federal tax and they will give you the tax inclusive percentage. Ask a person how much of their income went to paying taxes under the FairTax and they will give you the tax inclusive percentage.

Ask a person how much tax they paid on the shirt they bought and they will give you the tax exclusive percentage.

Because the smaller number sells better

This is a common objection among the naysayers. The explanation is clearly laid out on the fair tax website. No on is trying to be deceitful. Believe me, some of the anti's I've had discussions with on this board would have attacked the fair tax plan if it DIDN'T present the tax in that way.

Then join up and help us repeal the 16th Amendment as we pass the Fair Tax. Those are our intentions, but it won't happen with any supporter sitting back and watching.

So why is the clear and simple statement passed up in favor of the confusing statement? Because the smaller number sells better. IOW, they are intentionally playing on the confusion at work here.

The end result would be the same whether considering the inclusive or exclusive rate because you will pay the same amount of tax. I suggest you read the very simple and clear explanation at I know the FairTax rate is 23 percent when compared to current income taxes. What will the rate of the sales tax be at the retail counter? 30 percent before you make anymore statements regarding the rate. No one is trying to confuse anybody. That would defeat the purpose of getting people to support the Fair Tax.

the following conversion table is provided. Apples Oranges

Tax (inclusive) (exclusive)
Fair Tax 23% ....29.9%
Payroll: FICA 6.2%.... N/A
Payroll: Medicare 1.45% ....N/A
Income Tax 10%-35% ...N/A
The reason the exclusive rate is N/A is because those taxes can only be inclusive. Those taxes are a percentage OF your income not a percentage ON your income..If those taxes are exclusive (of income) where does the money come from to pay them?

As much as you'd like to make everyone who doesn't understand (including yourself) there is no tax rate for already taxed income...

Ask any person what percentage of their income they paid in federal tax and they will give you the tax inclusive percentage.

Most people can't tell you the answer to that question. Of those that would answer the question, most will give you their marginal rate. Anyone who actually knows his average tax rate will, I agree, give you the inclusive percentage.

But nobody calculates sales tax that way.

The end result would be the same whether considering the inclusive or exclusive rate because you will pay the same amount of tax.

I know that. But there's a reason they state it the way they do: to make the tax sound smaller.

I suggest you read the very simple and clear explanation...

I've explained it before to my students taking business math, thanks.

Regardless of what anyone says in support of the so-called "Fair Tax," one of Vance's criticisms stands: "The FairTax does not repeal the Sixteenth Amendment." Sure, the proposed legislation calls for the repeal of certain sections of the IRS code dealing with income, but the 16th Amemdment would still be there, and Congress would be able to start taxing income again whenever it wanted.

Vance's criticism falls short because he doesn't mention Fair Tax supporters would push to repeal the 16th amendment concurrently with the income tax. It would be possible but highly improbable for Congress to enact an income and consumption tax. Passing an amendment to repeal the 16th Amendment and the income tax would make it as difficult if not more so for Congress to repeal an amendment taxing only consumption as it is to repeal the 16th Amendment. I suggest you read Could we end up with both the FairTax and an income tax? and Why is it necessary to have a constitutional amendment? at the American For Fair Taxation website before you make anymore assumptions.

The market (buyers and sellers) determines the prices of goods and services. Under the Fair Tax, businesses will be taxed 23% of the gross sales--an easy calculation. Businesses must operate within the means provided by their remaining 77% share of the gross sale. Alternately, a business could determine the pretax market price for their goods and services and keep 100%.
HUH?

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