Why Republicans Should Support the FairTax

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?

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.

"What do you mean by regressive?"

A regressive tax is one in which those who are at the lower end of the scale pay higher rates than those at the high end of the scale. A perfect example is our social security tax, which is flat until you get to the maximum and then decreases as a percentage as your income level increases.

Contrast that to a progressive tax, which is what our income tax is supposed to be. The problem, however, is that all the "loopholes" and special preferences greatly distort its progressivity.

For example, here in Atlanta, the Ted Turner/Jane Fonda divorce was heavily covered in the media several years ago when it happened. One of the articles revealed that court documents indicated that Mr. Turner had taxable income of something like $125 MM for the previous year and he paid around $5 MM in taxes. That's an overall effective rate of less than 5%. How many people reading this post make far less than $125 MM and would love a tax rate of 5%?

As Ancient Geezer pointed out above, the FairTax is truly progressive, not regressive.

Anyone who today has assets left after all income and payroll taxes have been paid would be subject to the same federal sales tax as folks receiving new untaxed income. In short, this proposal would subject all current assets already taxed under current law to a brand new sales tax on all purchases. That's a pretty effective to raise significant new revenue for the government. Good for young folks with no assets. Bad for old folks with big (previously taxed) assets.

"Assets" is probably a poor chocie of words -- selling a previously taxed item, whether or not that tax was paid pre-NRST or post-NRST would not be subject to being taxed again.

Now, converting assets to cash and using that to buy new goods and services... yes, that would then be subject to the NRST. However, that is little different from today, where the income tax acts as a hidden VAT on goods and services. The only real difference is that the tax is explicit instead of implicit. The amount of the embedded tax should be roughly the same either way (probably within a few percent of each other).

I'll be the first to admit that the transition period could be a little strange, but I don't think anyone is going to be shafted as a result.

claiming 23% when the article says it's 28%

It's how you calculate it. If you use the same mechanism as calculating income taxes (in order to make a more equal comparison), you would say that on $100 total spent, 23% of that ($23) is the tax and 77% ($77) is the price without tax. This would correspond to saying that an effective income tax rate of 23% would be taking $23 out of every $100 earned.

The other way to calculate is based on how state sales taxes are usually figured. An item that is $77 before taxes would have a 29.87% (I'm not sure where the article comes up with 28%) tax of $23 added to it. It still totals the same $100.

The tax is 23% of the total, or 29.87% of the pre-tax price. Both work out exactly the same. As I said before, the first number is used to compare apples-to-apples with income taxes.

"Unfortunately, that is also a reason why the tax may not gain support in Congress."

I understand your concern. However, you forget one thing - these guys work for US. When enough Americans understand the benefits and demand it from their legislators, it will pass. I will share two experiences to support my point.

When Bill Clinton was President, congress passed welfare reform bills 3 times. The first two times, he vetoed them. The 3rd time, he signed it. What was the difference? Glad you asked. The 3rd time his pollsters told him the American people were solidly behind welfare reform and that if he continued to veto that legislation and came to be viewed as obstructing it, he would pay a political price for it. Lo and behold, a welfare reform champion was born! He even listed welfare reform as one of his administration's accomplishments during his later State of the Union addresses.

Here in Georgia, we are seeing the issue affect campaigns. Why the difference between Georgia and the other states? Glad you asked. Because Rep. John Linder and Neal Boortz have been educating about the issue for some time now. Georgians are more familiar with the proposal than any other group in the nation and are therefore more supportive. The one thing that we have found is that the more you know about the proposal, the more you support it. That is, unless you have a vested interest in perpetuating the current system because some of the billions we spend in compliance costs go into your pocket.

Anything you want to tell us about how you earn your living, Willie Green?

"It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.

-Alexander Hamilton, The Federalist Papers

This "limit" that Hamilton talks about is well below 28%. I am wholeheartedly for reform, but can you point to any examples where a sales tax as high as 28% was ever successful? I think the FairTax needs to be about 10% or 12% if it is to work. Therefore, there is an intermediate step. Before we institute a 12% sales tax we have a lot of spending to cut.

The tax is 23% of the total, or 29.87% of the pre-tax price. Both work out exactly the same.

Heck, that's exactly the same as it was 4 years ago.

Posing as "tax reform", the NRST (HR 2525) also represents a "land grab" where business interests are favored over individuals purchasing for their own use:

A family purchasing their own new home for $200,000 pays NRST at a tax-included 23% rate. This means that of the $200,000 paid, $154,000 goes to the seller, and the Gov't receives $46,000 in tax.
A landlord/investor can exploit the business exemption of NRST and purchase the same new single family dwelling tax free as a rental investment for only $154,000. Tenants pay NRST on rent and Landlords act as tax collectors for the government
The $154,000 vs. $200,000 purchase price advantage that landlord/investors enjoy over individual personal homebuyers can be expressed two ways:
- Landlord/investors enjoy a 23% discount compared to the individual personal home buyer.
- Individual personal home buyers must pay 29.87% more than landlord/investors.

This a significant inequity between individuals trying to buy their own new homes and landord/investors looking to buy the same single family dwelling as a rental investment. This disparity has long term implications affecting the distribution of private property. The American tradition favoring individual property rights is reversed. The NRST would discourage individual "consumption" of real property.

"... legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. The descent of property of every kind therefore to all the children,...
But it is not too soon to provide by every possible means that as few as possible shall be without a little portion of land. The small landholders are the most precious part of a state."
-- Thomas Jefferson to James Madison, Oct. 28, 1785 -- PROPERTY AND NATURAL RIGHT

So as you can see, I'm very familiar with the 23% vs. 29.87% disparity in how the NRST is presented to a gullible public.

The thing is, the article doesn't say 23%, and it doesn't say 29.87%
It says 28%.
28 is NOT 23 and 28 is also NOT 29.87.

So what IS the rate suppose to be nowadays anyway?
Surely you can't keep it at 23% all these years and still claim that it's "revenue neutral",
Not after all of Dubya's tax cuts...
So what happened?
Did they raise it from 23 to 28% without notifying you shills?
(Jumping the 29.87% method of calculation up to a whopping 38.88% ???)

What are the updated numbers anyway?
How're you gonna pay for Dubya's Medicare prescription drug giveaway?

"As much as I loathe an income tax, the best bet we may have for sustained reform is to push for a flat rate income tax of around 20%."

You are quite right to loathe an income tax, but dead wrong to look to a flat income tax for "sustained reform". Our history is just the opposite. The Tax Reform Act of 86 flattened the rates to 3 levels, I believe, and eliminated many of the deductions in the name of simplicity. The lobbysists thought that they had died and gone to heaven. They immediately went to work reinstating all the old preferences (and then some) and billed their clients for that time, of course. The 86 TRA should have been labelled the tax lobbyists full employment bill. The mess that we have today is the 86 TRA amended hundreds of times and it is far worse than the system before 86. The trend toward increasing complexity and spiralling compliance costs with an income tax is inescapable.

The problem is that we have been trying to define just what "taxable income" is for over 90 years now and the result is a jumbled up mess that noone - not even the professionals - understand. The income tax is a failed experiment that we should acknowledge as such - sooner rather than later.

The NRST/FairTax is indeed a sales tax -- it is imposed/collected at the point of retail sale. If you choose to save or invest part of your paycheck, you would pay no taxes on it.

Well, you're introducing information not in the original essay, as are those who introduce exclusions based on some threshold of income, but I'll accept those for continued discussion.

However, just what is being sold? If I have sold my time and expertise, then my paycheck is my sale price. Just because I choose to invest that rather than consume it doesn't change my sale price. What I do with the money makes it an income issue, not a sale issue since that sale is complete when I provide it and am paid, not when I decide what to do with the income from that sale.

Let me be clear. My problem is not with a sales tax. It can indeed be regressive, but my solution to that is not to do something as bad as penalizing those who have provided a good or service someone values enough to pay for. Get rid of all income taxes - flat or otherwise.

And for sure get rid of a threshold amount before the flat tax cuts in. That makes it even more graduated than the current system. You know the vote-buying politicians will keep upping the exclusion amount anyway. Here's the point on that: Do lower income people not get to drive on the same roads as the rest of us? Is there some threshold of income where the military starts to defend you? As long as they are getting the same service, then should pay the same price for that service (at least as a percentage of income - though the only truly fair system would be the same absolute fee in dollars). Providing an income-based exclusion for the same services of government is the logical equivalent of letting lower-income people into movies for free. They get the same service and should pay a 'fair' price for that service. Besides, many of those who have low incomes are not poor. They are retired people living on their savings, or 'rich' college students. The key factor that determines if someone is poor or rich is not income, but wealth.

A straight, honest sales tax is indeed regressive since those who are poor spend a higher proportion of their wealth on retail sales items. Many of the services that taxes provide are equivalently regressive ('poor' people ride buses more than 'rich' people), so I'm not bothered by some degree of that, but I think one could make the case that are also government services that benefit those with wealth more than those without. For example, an attack on our nation will cost rich people more than poor people, at least in material terms, and so one could make the case that the military benefits them more than the poor. So my solution for that is a direct tax on wealth in conjunction with a sales tax - scaled to be revenue-neutral overall. There would still be political argument on the right balance between sales and wealth taxes, and work to prevent loopholes like moving all your money outside the country to avoid wealth taxes (all solvable, but too much for this message). That way we achieve two key things. We tax those who have the money to spend or who are 'rich' by the definition of having wealth. And we get rid of the illogical penalites on those providing a service that is valued by someone else enough to pay for it.

Bottom line, any basis for taxes is better than income taxes - truly flat-rated, falsely flat-rated due to exclusions, or straight up progressive.

Let me clarify my comment. Hypothetically, I have worked for 40 years and built up a large pile of US dollar bills after paying all income and payroll taxes. Your new tax regime is enacted. You are a new worker, and will not be subject to any income or payroll taxes, ever. You can therefore build up a pile of US dollar bills that will not be taxed until spent.

Yet when we now buy things, our dollar bills are both subject to the same new federal sales tax. You should be happy about that. I will not be, because I have been taxed on income when I earned my dollar bills and taxed again when I spent them, whereas you have been taxed only when you spent your dollar bills.

I'm not going to like your tax plan.

The $154,000 vs. $200,000 purchase price advantage that landlord/investors enjoy over individual personal homebuyers can be expressed two ways: Landlord/investors enjoy a 23% discount compared to the individual personal home buyer. Individual personal home buyers must pay 29.87% more than landlord/investors.

But the landlord still gets no advantage, since the rent he charges is taxed -- therefore, the incentive to buy vs. rent for the personal homebuyer is no different than it is now. Since the seller gets the same amount regardless of whether the sale goes to the landlord or the personal home buyer, there's no advantage gained or lost there either.

The thing is, the article doesn't say 23%, and it doesn't say 29.87% It says 28%. 28 is NOT 23 and 28 is also NOT 29.87.

As I said, I don't know where the article gets "28%" from. Perhaps it is a typo. Who knows?

The definitive answer is in HR 25, which specifically states:

CHAPTER 1--INTERPRETATION; DEFINITIONS; IMPOSITION OF TAX; ETC. SEC. 101. IMPOSITION OF SALES TAX (b) Rate- (1) FOR 2005- In the calendar year 2005, the rate of tax is 23 percent of the gross payments for the taxable property or service.

This is the 23% rate I mentioned above. So what IS the rate suppose to be nowadays anyway? Surely you can't keep it at 23% all these years and still claim that it's "revenue neutral", Not after all of Dubya's tax cuts... So what happened?

Why not? Do you subscribe to a static model that says that tax cuts equals less revenue? Reagan completely disproved that in the 80's. The 23% figure must still be revenue-neutral within the guidelines set by the CBO or Congress would not even be considering the bill.

"Yet when we now buy things, our dollar bills are both subject to the same new federal sales tax. You should be happy about that. I will not be, because I have been taxed on income when I earned my dollar bills and taxed again when I spent them, whereas you have been taxed only when you spent your dollar bills."

Kevkrom's initial response to your concern is right on. Once competition drives out the cost of the current system, we will be paying approximately what we do now (on an after-tax basis) for our consumption (ignoring the effect of the Personal Consumption Allowance for now). The biggest difference is that, rather than being imbedded in the price, the taxes that you pay will be highly visible.

If you were going to buy a new car for, say, $25K before the FairTax were enacted and that same car costs app. $25K with the FairTax after it is implemented, are you any worse off because now you can plainly see the tax component? I think not.

When you add in the fact that you pay no taxes on a net basis up to the poverty level because of the PCA, you will then see a 15 - 30% increase in your purchasing power up to the poverty level.

You are going to LOVE the plan.

Yet when we now buy things, our dollar bills are both subject to the same new federal sales tax. You should be happy about that. I will not be, because I have been taxed on income when I earned my dollar bills and taxed again when I spent them, whereas you have been taxed only when you spent your dollar bills. I'm not going to like your tax plan.

That's too bad for you, because you would be at no disadvantage under the new plan while holding back everyone else for the future.

Think also about the advantage you would get, in addition to what the young person with no savings would have: no capital gains taxes on your long-term (or short-term, for that matter) investments, including sale of a home. Any deferred income plan would be completely free from income taxes.

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