Imagine receiving 100% of your paycheck!

townhall.com ^ | August 27, 2004 | Neal Boortz

[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

[phil_will1]

"True, but if you can sell an item for $20, it really doesn't matter whether it cost $0.02 or $.25. Or $5.00."

How many businesses do you know that enjoy those kinds of overall profit margins? I was in technolgy for a number of years and my experience was that, IF you were quite fortunate and had a proprietary product with a significant advantage over its competition, you might be able to enjoy 50 - 60% gross margins for some time until the competition caught up. However, those were gross margins and, unless you could generate huge volumes, your before tax income was nowhere near 50%.

If there were any businesses out there recording those kind of enormous OVERALL margins, capital would be flocking to invest in them.

[ancient_geezer]

AG, the link to the Jorgenson/Wilcox paper didn't work for me.

Hmmm, interesting. I don't have any problem loading it at all though is a good size file to load on a telephone link.

This is the URL.

http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf

Might try pasting it to the address line instead of clicking on it, or clearing you internet cache and try again.

Note it is a PDF file and you may need the adobe reader to read it.

Though not having it would just send you to a download prompt instead.

[phil_will1]

"So, yeah, a cumulative record is gonna get bigger."

It isn't just getting bigger, YN. The rate of growth is ACCELERATING. At its most recent rate of growth, it is doubling every 8 years.

"And CCH isn't the 'tax system.' It's a company that publishes a cumulative record of everything having to do with taxes (legislation, rulings, hearings, etc.) going back to 1913! Including CCH's comments!"

If I understand your position, the tax system isn't cumulative? IOW, there is a statute of limitations that applies to the tax code, IRS regs, treasury dept rulings and court cases? Do you have a link to back that assertion up?

BTW, if you have a problem with how CCH defines the "tax system", may I suggest that you take it up with them? As for me, I consider them a more authoritative source for this information than you.

[Your Nightmare]

It isn't just getting bigger, YN. The rate of growth is ACCELERATING. At its most recent rate of growth, it is doubling every 8 years.

I'm not disagreeing that the code is too complex. But the CCH Federal Tax Register is not the federal tax system. It's a cumulative history (everything that's ever been part of the tax record) including CCH's own commentary on all this. It also includes tax court cases which do increase every year because the population increases every year. So the tax code is not 60,000 pages!

Again, I think the code is too complicated. If you want a summary of how it grown, there is a report here. It includes this graph:

[phil_will1]

The tax SYSTEM consists of far more than the IRC. If you don't believe that, try to defend yourself in tax court by saying that you followed the IRC strictly, but ignored treasury dept rulings and IRS regs. It won't wash. Anyone who does fairly sophisticated tax returns will tell you that they have to reference more than just the IRC to make sure that they are in compliance.

If you want to quibble over whether CCH's commentaries should be included or not, I don't have strong feelings either way. My guess is that they comprise a small part of the 60,000 pps that they calculate anyway. It really isn't worth taking the time to research to me.

The point of all this is that the rapid growth in complexity, which is getting worse as the years go by, is strong evidence that the notion of defining taxable income in a stable and consistent manner, which is what the change to an income tax was based on in 1913, is simply not achievable. The longer we wait to acknowledge the obvious, the more difficult the adjustment is going to be.

[Your Nightmare]

Standard Federal Tax Reporter includes the following looseleaf binders:

• Index - includes "About this Publication;" Topical Index; and miscellaneous practice aids.
• Internal Revenue Code (2 volumes) - includes "How to Use the Code Volumes;" Code Topical Index; Source Notes--Finding List; Code Table of Contents; full text of current code and amendment notes; and Related Statutes.
• Compilations (18 volumes) - include full text of Internal Revenue Code sections; regulations and proposed regulations; excerpts of committee reports; CCH explanations; and annotations of cases and rulings beginning in 1913.
• Volume 19 includes Topical Index to 2002 Developments; Cumulative Index to 2002 Developments; 2002 Finding Lists; 2002 Case Tables; Supreme Court docket; 2002 Legislation; Regulations Status Tables; full text of 2002 Rulings; 2002 Treasury Decision Preambles; digests of selected IRS Letter Rulings; digests of 2002 Tax Court Decisions; CCH Comments; and CCH Tax Focus and Features.
• Citator (2 volumes) - includes "How to Use this Citator;" Current Citator Table; main citator; and Finding Lists. U.S. Tax Cases--Advance Sheets - includes Proposed Regulations; Digests Last 2001 Court Decisions, not received in time to be included in the compilations; and 2002 U.S. Tax Cases

[Your Nightmare]

I don't have any I can find on the web.

I've seen this method used on the web before. I've updated it with correct numbers.

Embedded Tax Calclulation

• Total revenues collected by Feds in '03 = $1,782 billion (17.71% of prices)

Those tax components which will not change prices as a consequence of enactment of HR25

• Individual Income Tax (Labor) = $793.70 billion
• Employee half of Social Insurance = $674.98/2 = $337.49 billion
• Excises = $67.52 billion
• Customs Duties = $19.86 Billion
• Miscellaneous = $34.42 Billion

============================

• Total constant price factors = $1252.99 billion
• Remainder federal tax components affecting price = ($1,782-$1,252.99) = $529.01 billion

Adjust for a conservative $343.85 billion cost of tax compliance, (The Flat Tax; Hall & Rabushka, '95, What the Income Tax Costs the American People: quoting James L. Payne estimates 65 cents for each dollar of revenue collected).

• Total tax related factors affecting consumption price = ($343.85 + $529.01) = $872.86 billion

Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:

17.71%*($872.86/$1,782) = 8.67% reduction in consumption prices

[Chilldoubt]

got adobe 6.0?

[Chilldoubt]

mark for later

[ancient_geezer]

You're getting ahead of yourself YN.

Your numbers are inconsistent with the conditions under which the NRST of HR25 were set, and your estimate of compliance costs are far too low. Business portion of the compliance burden is a substantially greater portion of the total economic burden than the portion non-profits and individuals. That is why the compliance costs are roughly $800 billion for companies and the remainder of $500 billion split between individuals and non-profit organization.

The rebuttal of your attempt to change data invalidly is going forward here:

==> http://www.freerepublic.com/focus/f-news/1196095/posts?page=233#233

We reset back to the valid data set and conditions under which the NR25 NRST rate was established, pre Bush Tax Cuts.

Any calculations that need to be updated after the new studies under the congressional research staff at the Library of Congress, will be I assure you. But until then one should restrict themselves to the period and conditions which are valid for the bill, 1997-2000. Subsequent period looks to be coming in much lower with 18-20% range on the new NRST rate current economic conditions.

Reset:

I refer you to the section of the following article about the Income/Payroll tax system and its impact on our economy "A. Hidden Upstream Taxes. " paragraph 39.

"[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent."

Looking at the accompanying chart, the range of values from industry to industry appears to be about 12-25%.

Economists Gary and Aldonna Robbins of the Texas-based Institute for Public Policy examined the case of dry cleaning a shirt, with a particular eye toward uncovering the hidden costs of taxes in price.

The Robbin's attributed over 33.6% of "consumer prices" to be due to federal taxation passed on to the customer.

http://fms.treas.gov/mts/mts0901.pdf

• Total revenues collected by Feds in '00 = $2,025 billion
  (33.6% of consumer price [per Robbin's 1999 federal tax contribution to prices] )

Those tax components which will not change prices as a consequence of enactment of HR2525

• Individual Income Tax (Labor) = $1,004.5 billions,
• Employee half of Social Insurance = 648/2 = 324.0 billions,
• Excises = $68.9 billion
• Customs Duties = $19.9 Billion
• Miscellaneous = $42.7 Billion
  ============================

• Total constant price factors = $1,460 billion
• Remainder federal tax components affecting price = (2,025 - 1,460) = $565 billions

Adjust for a conservative $800 billion cost of tax compliance,
    (The Flat Tax; Hall & Rabushka, '95,What the Income Tax Costs the American People: quoting James L. Payne estimates 65cents for each dollar of revenue collected)

• Total tax related factors affecting consumption price = (800 + 565) = $1365 billions

Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:

33.6*(1,365/2,025) = 22.64% reduction in consumption prices

Which more than verifies the Jorgenson empirical study of a 22% fall in producer prices

The two sources are in reasonable agreement, Just using static analysis taking the repeal of SS/Medicare taxes as well as income taxes into account for HR25.

I see 20-25% a reasonable value to expect retail prices to fall, not only for customers here in the United States, but in our exports as well making them far more competitive on international markets.

 

Accounting for productivity enhancements and other economic growth factors would add to the potential for decline in consumer prices as can be determined from Jorgenson's studies! But would be beyond the scope of this validation.

[Your Nightmare]

You continue to post numbers that have been conclusively shown not to be accurate. Why?

[Your Nightmare]

Total revenues collected by Feds in '00 = $2,025 billion

(33.6% of consumer price [per Robbin's 1999 federal tax contribution to prices] )

If this were accurate the total prices of goods and services in 2000 would have been ~$6,075 billion. It wasn't. It was much higher. The 33.6% is flat out wrong. You can't even describe the method they used to determine that number. It's completely arbitrary!

[ancient_geezer]

You can't even describe the method they used to determine that number. It's completely arbitrary!

Your repeating yourself, answer already provided to you here:

http://www.freerepublic.com/focus/f-news/1196095/posts?page=248#248

As far as a ballpark verification of the value goto 1998, GDP/NIPA, that was undoubtedly the essential source from which the percentage would have been extracted. Think real hard on it.

[Your Nightmare]

Your repeating yourself, answer already provided to you here:

I'm repeating myself because you keep posting the same number that you can't explain the methods used to derive it. The answer certainly isn't where you pointed me to.

[Your Nightmare]

As far as a ballpark verification of the value goto 1998, GDP/NIPA, that was undoubtedly the essential source from which the percentage would have been extracted.

Well you're applying it to 2000. In 2000 expenditures and exports were $9,556 billion! But even still, 1998 prices were $8,352 billion! Much higher than your number using 2000 tax revenues.

The 33.6% number is wrong. You can't tell me how it was determine. You can't defend it.

[Chilldoubt]

just because ancient geezer doesn't explain it doesn't mean we can discount its validity. i am still reading on some links so i'm unprepared to jump in yet, but i'd like to see an explanaiton of why you take the position that the 33.6% is wrong. again, not explaining it or not defending it is not a valid reason to discount it. he did provide a link to the dry cleaning example - what is wrong with it - other than ancient hasn't explained or defended it?

also i noticed the cost of comliance was too low in your example - and to be clear are you using tax inclusive or tax exclusive rates?

[ancient_geezer]

The 33.6% number is wrong. You can't tell me how it was determine. You can't defend it.

http://www.freerepublic.com/focus/f-news/1196095/posts?page=248#248