Why Republicans Should Support the FairTax

Feb. 11, 2004 | Wm. Donald Tabor Jr., DDS

[phil_will1]

It would be a lot easier to get support from Republicans if it were called the ClearTax or the TrueTax, since 'fairness', in the political arena, has become a synonym for redistribution of wealth. But the FairTax is the road out of this class warfare mess that paralyzes the country and prevents the Congress and President from attending to the country's business.

Populists pander to their constituencies by manipulating a complex illusion, a fraud upon the public, we call the Income Tax. We waste our time and energies fighting over changes in that system, but the truth is that no one, neither corporation, nor individual, really pays income taxes, or FICA taxes either, for that matter. For all the fighting and demagoguery over every change in the tax code, those complex schemes are no more than changing assignments over who will be required to COLLECT a hidden sales tax from consumers.

Economists have long been aware that corporations don't pay taxes, they only pass them along to their customers, but the same is really true for all of us. We trade our labor for what we take home, not for what our employer forwards to the government in our names. Few people are even aware of the gross amount of their pay. We pass our perceived income taxes and FICA taxes along to our employers, as a cost of the 'business' of being employed. Employers then regard our withheld taxes as just another cost of doing business, like their own taxes. And like every other cost of doing business those taxes become a part of the price of whatever goods or services we produce.

The simple truth is that ALL taxes are passed along like this and eventually paid by the consumer, as a hidden sales tax buried in the cost of those goods and services. The average portion of the price of everything, from a loaf of bread to brain surgery, that is really someone else's Federal Income, FICA, or corporate tax is about 22% of the price of everything you buy. And since everyone buys products and services, rich or poor, no one escapes that taxation. The real impact of taxation is not on our Form 1040, but at the grocery store and the doctor's office.

Imagine the change in the political landscape if that truth suddenly became clear to every American.

It really doesn't matter if we shift the total income tax burden to the top 10% of tax payers or if everyone pays the same percentage from bottom to top, NONE of that is real. Varied income tax rates only change the relative prices of the things we buy. Healthcare costs more because the income tax system makes doctors collect a lot of tax to earn their after tax incomes. The only REAL tax is that hidden sales tax, because that is the only one that cannot be passed along to someone else down the line. The FairTax simply makes this hidden sales tax visible.

Under the FairTax plan, (www.FairTax.org) the IRS and FICA are gone. You get your whole paycheck with no Federal deductions. There would instead be a 28% Federal sales tax. This would be revenue neutral to the government, and cost neutral to us, since the increases in our paychecks and the fall in prices would exactly cancel out the new sales tax. It would have to be that way if you think about it, as all we really would be doing, in the short term, is to replace the existing hidden sales tax with a visible sales tax of the same size. So why do it?

The answer is CLARITY, and that is what changes everything.

No more could the populists pander to the voters with promises to tax someone else for their goodies. Everyone would know exactly what government costs them, it would be on every receipt they get for a hamburger or a new house. And they would know that the burden falls proportionately on all, as it always has, even though they do not know it now.

Any major new program would have to be accompanied by a raise in the sales tax, with no illusion that the cost could be shifted to someone else. Every cut in the size of government would be visible money in the pocket of every American.

Class Warfare would be DEAD forever and we could at last go about the business of the country and set our priorities based on an honest understanding of the costs. And that is how we can bring this country together to face the real threats to our liberty and prosperity.

[kevkrom]

First of all, watch your language -- next time I will report you for abuse. Stick with the content.

Secondly, it has pointed out -- multiple times -- on this thread that fees associated with investments are taxable services.

[painter]

"The NRST would level that playing field. Domestic goods could cost 20% less and still keep their same profit margins against foreign goods. The same holds true for exports -- US goods would leave the country 20% cheaper than before, either providing a higher profit margin or larger market share in foreign markets."

I was wondering when this would be brought up.Because NRST would be a boon to the jobs market.Foreign companys would have to manufacture their products here to be able to compete.

[phil_will1]

"That's the attraction of the Value Added Tax over the a pure sales and use tax." (In response to LowCountryJoe)

I'm not sure what attraction you were referring to, since LCJ has posted several times on this thread.

However, the major disadvantage of a VAT is that it is not highly visible, as is a sales tax. In fact, one of Dick Armey's favorite criticisms of our proposal is that sales taxes always turn into VATs. If that were true, then most of the states would have VATs and to date none do.

We believe that a sales tax, because of its visibility, would serve to exert downward pressure on the rate, especially if we resisted the tendency to allow special interests to put all sorts of special interest preferences into what is, at this point, a very clean and simple proposal.

[phil_will1]

"Because NRST would be a boon to the jobs market."

Exactly! Can you imagine what a 15 - 30% price reduction would do to the demand for US products in other markets? On the other hand, adding a 23% (tax inclusive) tax on top of imports, while domestically produced products would stay approximately the same price they are now, would significantly impact the demand for our own products here.

In fact, the FairTax would work like an import tariff, in the sense that it would raise the after-tax prices of imports. In that sense, it would accomplish both of the primary objectives of tariffs (1) would shift demand toward domestic products because of the price differential, and (2) raise revenues to the government. However, unlike tariffs, the FairTax would NOT precipitate retaliation and a trade war, since we could point out that we are taxing the imports in a manner identical to our own production.

IOW, the current system is biased IN FAVOR of foreign producers at the expense of our own domestic producers. The FairTax would simply level the playing field. Those who are concerned about the loss of jobs - especially manufacturing - should demand that their representatives support the FairTax.

[Texas Federalist]

What programs would you like to get rid of so the tax rate can be that low?

I would get rid of them all.

[kevkrom]

I know you're right, but how can you possibly explain it to economic illiterates, who, alas, constitute a majority of voters in our fair land?

One person at a time, if we have to. Just on this thread, we appear to have a few new supporters. If each of those would go out and convince a few others, and so on, we can get enough public support.

[Dementon]

Just on this thread, we appear to have a few new supporters. If each of those would go out and convince a few others, and so on, we can get enough public support.

I've become convinced from reading these threads and have been evangelizing to my friends and coworkers. Most of them seem to think it is a very good idea.

[labard1]

"Unfortunately, your next burden is how to sell your basic point to a public that lacks economic sophistication. They really believe half the social security taxes are borne by the employer. That's why Bush gave his dividend tax break (15% rate) to shareholders, rather than giving a deduction to corporations, which would be a more sensible regime under the current tax code. I know you're right, but how can you possibly explain it to economic illiterates, who, alas, constitute a majority of voters in our fair land?"

What I was saying in #92 was that you're right that the intermediary (employer, business) passes along any tax it collects, so that it's really borne by the ultimate consumer/employee. I wasn't signing on for full agreement with the proposal. (Not that my personal view matters that much anyway, except to me.)

Thinking a little more about the transition, one solution to arguments about unfairness (to the retiree with a pile of dollar bills) is to allow some period (a year?) after enactment, but before the new system comes into force. That way anyone believing himself prejudiced by the new system has an opportunity to change his position (here, to buy stuff).

[ancient_geezer]

NRST would be a boon to the jobs market.Foreign companys would have to manufacture their products here to be able to compete.

Not only that, because of the advantages of an NRST to business, they would be lining up at the door looking to move in:

Rep. Bill Archer, Chairman, House Ways and Means Committee:

• "A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."

[ancient_geezer]

What programs would you like to get rid of so the tax rate can be that low?

I would get rid of them all.

I suspect more people than ever will feel the same once they become aware of the real burden that government programs place on them.

The problem under the current income tax system is:

Walter Williams, World Net Daily, 10-25-2000

So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?

The NRST goes along way to taking the blinders off of the electorate's eyes.

[ancient_geezer]

Thinking a little more about the transition, one solution to arguments about unfairness (to the retiree with a pile of dollar bills) is to allow some period (a year?) after enactment, but before the new system comes into force.

Usually done in default anyway, most enacted tax bills do not become effective until the year following enactment. May not always be a full year in that, but certainly a transition time does take place in that sense.

Though I doubt it would make make much difference one way or the other, as there will be substantial downward pressure on prices, sufficient to nearly, if not completely, compensate for the imposition of the NRST on new products.

Alternative are open in anycase, the purchase of older homes & residential properties or even new homes as investements is NRST free. By any used goods (antiques?), etc. In fact one of the tranistion rules that is explicitly in place in the legislation is the grandfathering of all goods and residential properties owned prior to passage so they are free of NRST. On the rationale that they have already been paid for out of taxed dollars.

[painter]

"(2) raise revenues to the government. However, unlike tariffs, the FairTax would NOT precipitate retaliation and a trade war, since we could point out that we are taxing the imports in a manner identical to our own production."

I didn't think about that.The gov would get %23 increase in taxes from foreign companies that NEVER paid US taxes.That could amount to 100's of billions of dollars!!!

[Gorjus]

There is a lot of conflicting information in this thread. Some people, for example, were talking about $40k income exclusions, etc. I'll accept, of course, whatever you define that you are talking about - but that doesn't mean I agree. Basically, if you switch to a strictly retail sales tax, then you shift the burden a great deal toward those who do not have the money to invest, to those who can't get a lot of their personal items wholesale or company paid ('company car'), etc. The obvious consequence of this - when the 'sales' tax is on the order of 28% - will be a massive black market, or the equivalent. People will "invest" in "farmer's cooperatives" where they share in "profits" in the form of meat and vegetables, and in "energy cooperatives" where the dividends are in the form of gallons of gasoline. Companies will include a company car (purchased wholesale as part of a fleet buy) as compensation to keep employees from needing to buy one retail. And so on.

For that reason, and of course I accept that you have represented HR25 correctly, I think it's a bad idea. If every transaction - whether it's that I sell an hour of my time or buy a candy bar - is taxed exactly the same, then there is no incentive to play games with what the transaction is labeled.

As I've said, I think income taxes are the worst way to raise revenue. I think the burden of taxes is dangerously loaded toward the most productive members of society and is likely to kill that productivity so shifting the burden toward something that many would consider more regressive is just fine with me. And I think the best answer of all is to reduce government spending. But for the purposes of discussion, if we are looking for revenue-neutral taxing schemes, it's at least reasonable to look out for ways to abuse a proposed system - and piling all the taxes on one segment of transactions is just asking for games to be played.

My compensation for the games that would be played with a retail-only sales tax is to use that in conjunction with a net-wealth tax. That way, things called "investments" are taxed as well (based on their net value), and it becomes a matter of mathematics to keep particular games from being productive. (If one "invests" in an "energy cooperative", as I outlined above, then the value of that investment gets taxed at a rate that makes it essentially equivalent to obtaining that same gasoline through a retail sale.)

I'd like to exclude sale of labor from any tax at all, but then what do we do with grocery stores that give away food for free if you'll pay someone $20/sack to carry it to your car (and coincidentally, the groceries are packed with, oh, $20 of food in each one)? It's not hard to play games when there are untaxed parts of the economy.

[LowCountryJoe]

...We believe that a sales tax, because of its visibility, would serve to exert downward pressure on the rate...

Damn straight it would! Unless I've totally underestimated the stupidity of the constituency.

Now, what would individual states likely do to get their cut of tax revenue? Tack on addition percentages in addition to the NATIONAL sales tax, only tax income - through withholdings & returns, or some combination of these two just as it is done now?

[phil_will1]

"Now, what would individual states likely do to get their cut of tax revenue?"

States would, in all likelihood, "harmonize" their tax systems voluntarily to the new federal sales tax. There are several reasons for that, not the least of which is that with no federal 1040 to piggy-back on, any state wishing to continue taxing income would have to develop their own income tax system from the ground up - a daunting task.

The most significant change for most states (in addition to abandoning their income tax) is that they would begin charging a sales tax on services (personal only) for the first time. This would roughly double the sales tax base. In many states, it is believed that this expansion of the sales tax base would be enough to
(1) offset the loss of income tax revenues
(2) lower the sales tax rate
(3) address other state and local revenue problems, such as property taxes.

[LowCountryJoe]

You know, either you Fair Tax advocates are well rehearsed in answering questions about the ins and outs of the Fair Tax proposal or you an I have actually corresponded with each other by e-mail.

Are you a volunteer out of Atlanta?

[kevkrom]

You know, either you Fair Tax advocates are well rehearsed in answering questions about the ins and outs of the Fair Tax proposal or you an I have actually corresponded with each other by e-mail.

We get lots of practice. :)

Variations of the same questions come up often enough (on different threads as the concept is exposed to new audiences) that many of us resort to copying each other's previous statements from time to time...

[kevkrom]

You still haven't explained how you plan to deal with the political ramifications of sending checks to everyone every month. You haven't even acknowledged that you understand the fundamental problem with this.

Because I don't have any fundamental problems with this.

For many families, that check is going to be a significant portion of their monthly budget. The pressure from "progressive" politicians to deliver more dollars to "working families" and to screw "the rich" will be applied to those checks.

Ah... but who are the rich and who are the poor? Without people filing 1040s on themselves, how's the government going to tell one from the other? While wage information is reported for Soical Security benefits, who's to say the person making $10,000 a year in wages isn't getting much, much more from non-wage income (property rentals, investment income, self-employment, etc.) -- there's no workable way to "screw the rich" and give to the poor without the IRS, which goes away.

Increasing the size of the checks would do two things: 1) raise the at-the-register (marginal) rate on everybody, rich and poor alike, and 2) increase the poverty line, which would give political opponents the opportunity to point out that the number of people in poverty increased under so-and-so's watch.

[phil_will1]

"Perhaps it's time to pass the entire 1986 tax simplification act again, this time with a committment to holding the system stable like that for at least 5 to 10 years."

If you were to catalogue all the problems and inequities of the current system, or the 86 version of that system, it would be longer than War and Peace. I will give you 2 brief examples.

The AMT is considered by knowledgeable tax people to be a ticking time bomb that is going to bite middle-class America in the you-know-what later in this decade. Even liberal Congressman Neal (D/MA) has been railing about it. I am not certain, but I believe the AMT was passed prior to 86 and would therefore be perpetuated by your suggestion.

Here's another problem

Dear WSJ,

Discussing "comparative advantage" is useful, but where is the discussion of "comparative TAX advantage", which is a reasonable name for what the 120 Value Added Tax (VAT)countries have over the USA.

That differential is 15 to 25% in the European Union. In short, they add their VAT to our products when our products arrive on their shores, despite all the embedded taxes in US products (20-35% according to Dr. Dale Jorgenson of Harvard). Thus, we aren't competitive in Europe, or other VAT country. (TAX advantage)!

When they ship their products to the USA, they strip out those VAT taxes and, essentially, sell their stuff tax free in competition with our products, on our own shores, which are loaded with payroll, profits, and other taxes. (Thus, TAX advantage!)

I await your discussion.

William D. Spillane

We are losing jobs in this country right now because of our tax system. Tell those who are un or under employed that we should wait 5 to 10 years to implement a tax system that puts US producers on an even footing with their international counterparts.

In addition, the 86 TRA is blamed by many for the Real Estate recession and consequent S&L problems that we experienced in the late 1980s. Are you sure you want to revisit that?

The problem is the whole concept of taxing income, which is a 90 year failed experiment. The longer we wait to acknowledge that error, the more pain it will exact on this nation. Your proposal to return to the 86 act and freeze it for some period of time is simply delaying the inevitable.

[phil_will1]

" ...one solution to arguments about unfairness (to the retiree with a pile of dollar bills) is to allow some period (a year?) after enactment, but before the new system comes into force."

That is how the proposal would be implemented. It is my understanding that Chairman Greenspan, when consulted on the proposal, requested a minimum of 6 months between passage and implementation to give the capital markets a chance to adjust.

BTW, Chairman Greenspan also recently disagreed with Willie Green, by saying that businesses don't pay taxes, only consumers do.