Posted on 08/26/2004 11:05:33 PM PDT by n-tres-ted
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.
Let’s begin by considering two realities.
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.
The Rebate
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.
Here’s an example of how the rebate payments would have worked in 2003.
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.
OK … let’s add it up for America’s lower income citizens:
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.
Neal Boortz is a lawyer and nationally syndicated radio talk show host.
©2004 Neal Boortz
Retailers would actually be reimbursed their costs of compliance under the Fair Tax. A world of difference between costs to undergo an IRS audit in that circumstance as compared to an income tax audit today.
I ignore nothing when I make my prognostications. The great and all knowing OZ takes all things into concideration when speculating about future events.
For starters, the consensus to my knowledge of economic analysts is that the average small business spends $700 in compliance costs for every $100 of federal income tax paid(Tax Foundation says $724 per $100:Small business, not business. In 2002 the Tax Foundation stated compliance costs businesses $102 billion.
Prota,
I need that prediction, so I'll purchase your service. Do you plan to pay your income tax on that $100 of income, or will you avoid paying the tax? So, I will be paying you $100 but you will really only make $77. Now, suppose the NRST is passed and you no longer pay income tax on the $100 service you provide. You have a choice, you can reduce your price per super bowl prognostication to $77, or you can keep it at the $100 range.
Now, assume you keep it at $100. Principled comes along and offers me the same service for $77 because he realizes he can still make a profit and cover his costs. Which service provider do you think I would chose? Now, the true cost to me for your service is $123, but the cost to me for Principled's service is $95. How many of your previous customers will pay the penalty of $28 to remain loyal to your service?
The dynamics of the free market will force your SB Prognasitication service fee to go down after the NRST is passed, or your SBProg Inc. will die from being uncompetitive.
I bury my money in the back yard when I know the thieves are coming.
Email me for the address, when I receive the dough, cash please, I'll let you know the name of the team.
I tend to think that individuals spend their own money more wisely than "the government" spends it. The Fair Tax would achieve that approach to a much greater extent than our present tax system, which picks favored parties and expenditures in many cases. Your comments primarily describe situations that would occur only if people do not change their attitudes in light of changed circumstances. Prices will change and people will change their conduct based on this radically improved tax system, and we will all be better off for it.
Now, assume you keep it at $100. Principled comes along and offers me the same service for $77 because he realizes he can still make a profit and cover his costs. Which service provider do you think I would chose? Now, the true cost to me for your service is $123, but the cost to me for Principled's service is $95. How many of your previous customers will pay the penalty of $28 to remain loyal to your service?How has the cost of prognostication gone down 22%? Is Principled going to pay his prognosticators 22% less?
ALL of the ones who get the correct answer.
There are many different possible scenarios, none of which lead to a long-term decrease in purchasing power for individuals.
In both competitive and non-competitive markets, you will see price adjustments -- basic economic principles show that this is inevitable -- it is only the amount of the price adjustment that is in question. In a competitive market, companies cannot simply take the tax savings as extra profit: too high of a profit margin allows existing competitors to increase market share by undercuting you in price and/or encourages new competitrs to enter the market. In a non-competitive market, the price is set to maximize the sales vs. profit/unit curve -- if the addition of taxes affects sales, prices will be modified to restablish that optimal point.
So my concern is not the affect of taxes on prices -- prices will, in general, drop by close to the amount of the embedded taxes across the board. My concern is what individuals will do with their extra purchasing power -- if they choose to spend more on goods or limited services, we could see an inflation problem, as demand increases on a relatively fixed supply. (Of course, additional investment to grow those businesses could offset the supply issue and drive prices back down.) On the other hand, whole new classes of services could spring up to take advantage of that extra "pocket money", which would be inflation-neutral. It is even possible that individuals actually demonstrate fiscal restraint and responsibility, and invest the extra money, which increases the pool of goods manufactured and services available and should exert downward pressure on prices. In practice, it will probably be a healthy mix of all the above.
In any case, I don't see things getting worse for the consumer -- even in the worst, degenerate case of massive extra consumption, purchasing power looks to be stable. Now of course, all of this is still prognostication, but it is based on sound reasoning and economics.
Here are answers to many common questions about the Fair Tax:
http://www.fairtaxvolunteer.org/smart/faq-main.html#38
The fee of $100 included the cost of income tax compliance. Since the new competition realizes the actual costs (minus income tax compliance) and profit is stable, he offers it for $77.
In this example, I considered Prota and Principled to be self employed prognosticators. Neither one has employees to pay, they just rely on their own prognositication accuracy.
You poor guys are laboring under the impression that the government will ever give up it's biggest source of power. Or that the millions upon millions of citizens who have become dependant on the continuation of the system will not join them in opposing it. You poor guys actually think that someone wants to do the right thing.
And that is the scenerio you should focus on.
The feds' interest in controlling the borders are going to be controlled by political interests, primarily those involved in attracting votes. At least the Fair Tax would put US manufacturing on a level playing field with other countries, including those to the south. Maybe this would finally persuade Mexico to reform its own socialist tax policies so its own economy could prosper. That would do more to relieve the immigration concerns than border guards or the INS will do.
What are you smoking' these days? (And where can I get some?)
We are in a major inflationary bubble right now thanks to the Federal Reserve. How will the NRST "adjust" for that except by raising the rate and making it even worse?
In both competitive and non-competitive markets, you will see price adjustments -- basic economic principles show that this is inevitable -- it is only the amount of the price adjustment that is in question. In a competitive market, companies cannot simply take the tax savings as extra profit: too high of a profit margin allows existing competitors to increase market share by undercuting you in price and/or encourages new competitrs to enter the market. In a non-competitive market, the price is set to maximize the sales vs. profit/unit curve -- if the addition of taxes affects sales, prices will be modified to restablish that optimal point.The inverse of this is competition would have precluded businesses from putting the tax in prices to begin with, they would have taken less profits instead (the capital holders pay the tax). Who bears the incidence of corporate taxes is a matter of much debate.
Whether prices increase is not relevant to the point. If I pay $1.00, nad a new tax of 23% is added, I pay $1.00 for the item and $0.23 in tax, for a total of $1.23. (DUH)
So whip out the old Visa card and charge $1.23. The feds get their $0.23, I make the minimum payment, and pay interest on the tax until I die.
Their biggest source of power is the votes that keep them in office. The tax code and the money spent are a power base only in how they affects those votes. If enough of the voters stand up and make their Congresscritters accountable on this, it will be done.
When President Bush is re-elected, and the GOP retains the House, we will see action on tax reform in the next Congress. It won't happen overnight, and there will be competing plans, but for the first time ever, a serious attempt (driven by no less than the Speaker of the House) will be made at overhauling the tax system. I'll freely admit the Senate will have to be dragged kicking and screaming to the table, but hey, without a challenge, what fun would it be?
If you've got what you think is a better idea than the NRST, get it put down on paper and get it on Congress' agenda for other alternatives to consider. Because tax reform is already a major legislative priority for the 2005-2006 Congress.
Whether prices increase is not relevant to the point. If I pay $1.00, nad a new tax of 23% is added, I pay $1.00 for the item and $0.23 in tax, for a total of $1.23. (DUH)Actually, you would pay $1.29%. The "tax exclusive" rate is 29.87%. The 23% is the "tax inclusive" rate (29 is 23% of 1.29). Cute, huh?
So whip out the old Visa card and charge $1.23. The feds get their $0.23, I make the minimum payment, and pay interest on the tax until I die.,/I>You also pay sales tax on some of the interest (interest is payment for a service).
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