Imagine receiving 100% of your paycheck!

Two weeks ago a man stood up at a George Bush campaign appearance in Florida to ask about a piece of legislation known as HR25. Many, including myself, were pleased to hear Bush respond with some positive thoughts about the Fair Tax plan, a movement to replace the federal income tax with a national retail sales tax.

Washington is a city of inertia, and right now the inertia belongs to our present method of funding the operations of our government, the income tax. Politicians will not easily surrender a funding mechanism that lends itself so well to political demagoguery and which can be used to reward political allies and punish enemies.

The Fair Tax plan deserves a thorough public examination and debate. John Kerry seems dedicated to making sure this doesn’t happen. Soon after Bush cited the national retail sales tax as something worthy of further exploration, Kerry stepped forward with the typical class warfare rhetoric of the left. Acting as if he actually knew what was he was talking about (he didn’t), Kerry announced that the Fair Tax would amount to the largest increase in the tax burden on poor and middle income Americans in our history.

John Kerry was wrong. He was either speaking out of ignorance, or he was deliberately lying about the Fair Tax proposal in order to gain a political advantage. A politician lying in order to gain political advantage --- imagine that.

This column is lengthier than the norm, but I promise you that if you will invest the time it takes to read it you will be well on your way to becoming yet another rabid supporter of the Fair Tax plan. You will know that the poor and middle income Americans would be the prime beneficiaries of the proposal. You may even organize your own neighborhood march on Washington to demand that HR25 receive a fair hearing. In the next two minutes I’m going to turn you into a HR25 Fair Tax zealot. Read on:

First … the briefest of overviews: Simply put, HR25 would provide for the repeal of the 16th Amendment (the income tax amendment) and the dismantling of the IRS. All personal and corporate income taxes would end, as would all payroll taxes. There would not be one cent of federal taxes of any nature taken out of your paychecks. No more Social Security taxes. No more Medicare taxes. You earn $2,000 a payday; you get $2,000 a payday. The federal government would be funded through a national sales tax on goods and services sold at the retail level. No taxes on investments. No taxes on savings. You only get taxed on what you spend at the retail level. Store your earnings in a shoebox if you wish. They won’t be taxed.

When originally proposed, calculations showed that the sales tax would have to be in the area of 23%. A complete economic study is now being completed that is expected to bring that total to under 20%. For the purposes of this column, we’ll stick with the 23% figure.

OK … let’s put on our sensitivity hats for a few minutes here and think of the consequences of the Fair Tax Act on our nation’s poor, poor, pitiful poor. After all, they can hardly afford a 23% sales tax when they’re living paycheck-to-paycheck in the first place, right?

Bear in mind that for the most part those whom we define as “poor” aren’t paying any income tax anyway. In fact, many of them are getting checks from the government; a form of outright income redistribution. The absurdly named Earned Income Tax Credit, for example. How can these people survive going from a no-tax situation to paying a 24% sales tax on all their retail purchases?

The implementation of the Fair Tax would fail in short order if, as the question presupposes, nothing were to change except that all of us would be paying today’s prices for a gallon of milk or a loaf of bread, plus a 23% sales tax. But … that’s would be far from the reality under the Fair Tax. Under the Fair Tax the poor won’t only survive, they’ll positively thrive! The Fair Tax could turn out to be the best poverty-fighting tool devised in this country since the concept of hard work.

First, remember, please, that the poor, along with everybody else, will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For the poor this means an immediate 12 to 15% increase in their earnings.

Second. Don’t forget the 22% in imbedded taxes. These embedded taxes exist in virtually everything poor Americans or any other Americans have to buy. These embedded taxes represent all of the corporate and business income taxes and payroll taxes that the companies involved in the production, manufacture, marketing, distribution and sale of the goods and services must pay in the course of business. As soon as these taxes are gone, and after the competitive forces of the free market work their magic consumers, including the poor, will be paying at least 20% less for virtually everything they buy. This includes such basics as food, clothing, shelter and transportation. Yes... they’ll have to pay the new national sales tax, but when you factor in the lower prices caused by the disappearance of the embedded taxes you’ll see that the total price paid for consumer goods in terms of real dollars will fall or will remain very nearly the same.

So … just considering these factors, the Fair Tax delivers a winning hand to people living in or near to what we call poverty. They get every penny they earn on payday, amounting to a 12 to 15% pay raise, and when you factor in the Fair Tax and the lower prices, they’re actually end up spending less of their money for a retail purchase than before. What John Kerry calls the greatest increase in the tax burden on the poor in the history of our country is, in reality, their greatest tax reduction.

You need a clearer picture? Pull out your calculator. Let’s say that a single mother with two children spends $45 a week on groceries. The removal of the 22% embedded tax would bring the price of those groceries down to $35.10. The sales tax at 23% would be $8.07. This brings the total price to $43.17. That’s less than would have paid under today’s tax system. This single mother, whom we’ll consider “poor,” has just received a 12% to 15% increase in her weekly paychecks, and she’s paying less at the grocery story for her basic necessities.

So far, so good. At this point you should be thoroughly convinced that the Fair Tax would actually benefit, rather than harm the poor. But, then again, maybe not. Here’s the convincer. Brace yourself for the knockout punch.

Under the Fair Tax plan every consumer, rich and poor alike, will receive a check or an electronic credit to their bank account from the federal government every single month equal to the sales tax that person or that family would be expected to pay on the purchase of the basic necessities of life for that month. The size of the monthly payment will be based on the government’s published poverty levels for various sized households.

Let’s say you’re a married couple with two children. The Fair Tax Act sets forth a formula for computing the poverty level, based on government figures, which negates any marriage penalty. If the Fair Tax Act had been law in 2003 you would have been granted an annual consumption allowance of $24,240. This is what the government would assume you would have had to spend during that one year to buy the basic necessities of life for your family. The sales tax on this amount would equal $5,575. The government would have rebated this amount to you in 12 equal monthly installments of $465. What about a single woman with one child? Her monthly rebate in 2003 would have been $232. The lowest payment would be to a single person with no dependents. That person would have received $172 per month.

Now … bear in mind, this rebate isn’t only paid to the poor. It is paid to everyone, rich and poor alike. The purpose here is to make sure that no American has to pay the Fair Tax sales tax on the basic necessities of life. Unlike the present income tax system, the Fair Tax treats each and every person in this country exactly the same. This, of course, presents somewhat of a problem to politicians who like to use the tax code to foment class distrust or outright warfare.

1. They get their entire paycheck. 2. Even with the sales tax, and considering the drop in prices, they’ll be paying essentially the same or less for everything they buy. 3. They get a check from the federal government every month to rebate any sales taxes they had to pay on life’s basic necessities.

Are you beginning to see just how far off-base John Kerry was with his intemperate criticisms?

Though most of the poor don’t have what we would call complex tax returns, let’s also include the time these they (all of us, really) will save by not having to keep tax records or file tax returns.

If you’re looking for some reason to oppose the Fair Tax plan, you’re going to have to find a better excuse than its effect on the poor. John Kerry might find it politically expedient to demagogue the issue for votes, but now you know enough to know what he’s up to.

For more comprehensive information on The Fair Tax you can visit http://www.fairtax.org.

The truth is that 45 of the 50 states ALREADY have sales tax enforcement agencies in place which by - the - way, are invisible to 99.44% of the population.

I didn't say they didn't, but they don't collect all the federal taxes now, do they? And they do audits all the time.

Due to the broader base of the NRST vs state sales taxes, there will many businesses that don't collect sales taxes now that will have to start dealing with the state tax collectors. The Texas Comptroller estimated that the number of businesses they would have to collect from would more than double (150% increase) with a NRST!

Accually, since I know exactly how the current system works, I know the outcome with a high degree of certainty.

And I never mentioned "returns", that changes the subject. I'm not interested in changing the subject, which is, your statement that prices would go down. A preposterous thing when not identified as a projection. Crystal balls will be in short supply if this thing picks up steam. (An unlikely prospect)

"First he says no federal income tax. Then next he calls it a National tax. What's the difference?"

Ummm ..... about 59,000 pages for starters ..... or a 99+% simplification. That translates into hundreds of billions of $$$ in compliance cost savings.

For another, we would no longer be putting US producers at a disadvantage vs. their foreign counterparts with our tax system. That would have a MAJOR impact on our trade deficit - without provoking a trade war, retaliation by trading partners, or WTO sanctions.

How is that for starters?

I don't see how it could be possible though, since the very institution that does audits (the IRS) would be shut down.

Under HR25, states tax authorities would be administering the NRST in parallel with there own sales tax systems. One of the tools they use to promote compliance is to audit retail businesses for tax compliance when they have reason to suspect a business is defrauding or evading the retail sales tax system.

The effect on retail business would be no greater for having to account for there gross sales receipts under a state's current sales tax and one with the NRST along with it.

Any tax system will have the means to enforce its provisions. The key to a retail sales tax is that only those business that chose to engage in sales of new products for final consumption (as opposed to selling to other businesses or the sale used products on which the NRST has already been paid) are subject to NRST enforcement to assure that taxes are collected from the customer and once collected are indeed remitted to the state tax authority.

The states will be collecting the federal sales tax.

Ok, I agree that could be an area where things could get a little nasty (confusing, muddled, etc). I would hope and assume however that the authors of HR25 would've put in their proposal something to regulate how each state would collect the money. A standard procedure in other words.

Again though, since there wouldn't be any complicated tax laws or loopholes or deductions anymore, I don't see how an "audit" could be justified for anyone. The institution that used to perform them (the IRS) is elimated, and the reasons (as trumped up as they are in most cases) for doing them are eliminated.

I can see no reason to believe differently at this time.

Interesting, so audits would still continue. I stand corrected Your Nightmare.

However, I think the point ancient_geezer makes is a good one: Retail businesses are already affected by state sales tax audits, thus, the impact on them would probably be minimal.

And of course, as we all agree, individual audits would be eliminated, which is a good thing too.

I would hope and assume however that the authors of HR25 would've put in their proposal something to regulate how each state would collect the money. A standard procedure in other words.

Refer to the legislation:

H.R.25

Fair Tax Act of 2003 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c108:H.R.25:

`CHAPTER 4--FEDERAL AND STATE COOPERATIVE TAX ADMINISTRATION

`CHAPTER 5--OTHER ADMINISTRATIVE PROVISIONS

"I paid as much as 50% of all my pay to the government most of my working life, and now that I'm ready to retire and spend whats left, they will no longer tax earnings, but spending."

"Yeah, this thing will look real good to folks in my situation."

Two nationally known money managers told Congressman Linder that they didn't know what the Dow would be on the day the FairTax is implemented, but 24 months later, it will have doubled. If we can double the DJII in 24 months, who benefits the most from that?

Does it look any better to you now? If the value of equities doubles in 24 mos., that dwarfs the fact that you may be paying 2-3% more for US produced goods. Of course, if you choose to buy imports, you will pay more for them. That, however, is your choice.

"Retail prices always go up. People get used to valuing goods a certain way and don't flinch at slight increases. Retail prices only seem to go down for obsolete products or products on the verge of obsolescence."

Not true ..... I can't imagine where you got that idea. It certainly doesn't square with economic principles nor with my experience.

Do you recall the pricing of DVD players when they came out? MUCH higher than they are now, and I would venture a guess that today's have better features and functions. What about computers? I saw a computer advertised the other day for $500 that is a killer machine. You don't have to go back very far to remember a time when a decent computer was over a grand .. and those machines were nothing compared to today's.

Two nationally known money managers told Congressman Linder that they didn't know what the Dow would be on the day the FairTax is implemented, but 24 months later, it will have doubled. If we can double the DJII in 24 months, who benefits the most from that?

I'm a money manager.

If your money manager has a crystal ball, double what you pay him.

Projections on the stock market are a dime a dozen.

"We need tax reform, but abolishing the income tax outright is about the single most risky proposition of destoying that which most of us clearly take for granted: a stable government."

I agree that a change of this magnitude is not risk-free, but the enormous benefits would seem to make it a worthwhile endeavor.

However, it should be pointed out that staying with the current system, which is growing like a cancer, is NOT a low risk alternative. Many uninformed Americans assume that it is. According to CCH, the tax system, which was 23,000 pages when Jimmy Carter described it as a "disgrace" in 1976, is now up to app. 60,000 pps. At the rate it is growing, it will exceed 100,000 pages by 2010. Does anyone want to bet that it holds together that long? The evidence that it is buckling under its own enormous weight already are all around us.

We can either get serious about FTR now or wait until we have a huge disaster - the choice is ours.

Tell me how they would prevent tax fraud with the fair tax?

How do they prevent small businesses and selfemployed from defrauding the system now. State tax authorities would administer the law just as they do now.

One significant factor however is that the maximum marginal tax rates on the current income/payroll tax system is over 40% providing significant incentive to hide income, not file, and evade those taxes today.

Under HR25 the maximum marginal tax rate would be approximately half that.

Another is that there are fewer filers (apprx 16million) engaged in retail sales as opposed to the current 160million or so filers. Enforcement efforts would be more concentrated raising the risk of detection.

read ===> Tax Evasion: The Underground Economy

The whole nation will become a bartering nation and the level of retail purchases will fade into oblivion. Someone educate me here.

Between less incentive and higher risk of being caught, there is no reason to believe that tax evasion would be any greater than it is under the current system with its cash underground economy and illegal trade.

I have a better idea. Put the Constitutional provision, tariffs, on every good and service entering the country.

There are all kinds of taxes. Tariffs would result in higher prices to the consumer, a net wash, assuming no unintended consequenses.

I favor a sales tax for the simple reason it is visible every time you buy something. The psychological effect would be worth any inconvenience.

"Now a business will have 50 tax collection agency to deal with. The states will take over the IRS's job. 50 little IRSes, each with their own rules, regulation, procedures, etc... and business will have to file once a month to each of the states they do business in instead of once a year (or quarter) to one agency. So much for simplicity."

You are confusing state sales taxes, which are undoubtedly a mess, with the federal sales tax, which is what HR25 will bring about. Filing once a month with the states you do business in, for example, is a requirement of state sales taxes, not a federal tax.

Even on this front, however, there is good news. The FairTax will encourage states to "harmonize" their state sales taxes to the new federal NRST. There is already a movement afoot to standardize state and local sales taxes; the FairTax can realistically be expected to accelerate that trend. Most of the complexity in state sales taxes comes from differing rates and differing exemptions in different jurisdictions. Since the NRST is a single rate with no exemptions, at the very worst, we will be no worse off than we are today with respect to the complexity of collecting sales taxes, and a huge amount better off than we are with respect to income taxes.

Also, no matter how you slice and dice it, converting from the 60,000 page monstrosity that we have now to a system that is less than 1,000 pps. will result in an enormous savings in compliance costs.

Since the return is minimized as well as the risk, would not the increased risk be justified by an increased return? As it stands today, the R&D budgets are maxed at the level of the "write-off" amount, give the corporations the decision making freedom and the potential pay-off may just cause an increase.

Of course, the point made by the other poster is that the "greedy" corporations won't reduce their prices, instead they will increase profits, investment and R&D. If his statements are true, then an increase in jobs would be expected.......

If his statements are not true, then the prices would be decreased.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.