Tax Reform Panel Picks Apart FairTax Proposal

Members of the President's Advisory Panel on Federal Tax Reform on May 11 expressed concerns over the FairTax national retail sales tax, a plan that has emerged as an alternative with a major grass-roots push.

Panel chair Connie Mack, vice chair John B. Breaux, and other members worried the plan would be difficult to enforce, would be regressive, and would require a high rate in order to take in enough money to fund the government.

Breaux raised concerns that the proposed 23 percent (tax-inclusive) rate would not be sufficient to raise the revenue necessary to fund the government. The Joint Committee on Taxation estimated that it would take as much as a 57 percent (tax-exclusive) rate to be revenue-neutral. Further, Breaux said he thought exemptions that would be carved out to make the sales tax progressive would also complicate it.

Mack, who raised concerns similar to his fellow panelists', said he was "intrigued" by the plan. "But if it's such a great idea, why haven't other political entities around the world pursued it?" he asked.

Americans for Fair Taxation Executive Director Tom Wright emphasized that the plan emerged after "thorough academic research" and "thorough polling" The strong grass-roots push has resulted in some of the group's 600,000 members appearing at each of the panel's hearings and has inspired a large comment-writing campaign to the panel in support of the plan.

Sales tax advocates were among the 20 witnesses who gathered before the panel for a full day of testimony on tax reform proposals. Although the group has held several other hearings in Washington and around the country, the May 11 meeting was its first hearing on specific reform plans since Bush appointed the panel in January. The panel has been charged with identifying tax reform proposals that are progressive, encourage charitable giving and home purchases, and are revenue-neutral. The proposals are due by July 31.

Among the tax replacement and reform plans presented to the panel were the value added tax, consumption-based tax, and the flat tax, as well as proposals that would use the current income tax as the foundation.

Witnesses generally claimed that theirs was the fairest, simplest, most flexible, most transparent revenue-neutral proposal that would improve economic growth and savings while meeting the president's criteria of encouraging charitable giving and home buying. Witnesses presenting consumption-based plans praised their overhaul as taking millions of low-income taxpayers off the rolls, being easy to transition to on a worldwide basis, and including safeguards to prevent new loopholes that would result in increased complexity down the road.

Tax reform panel members, who agree the current tax system needs to be fixed, grilled witnesses without revealing whether they will ultimately endorse a consumption- or income-based tax or a different mixture of the two.

"The Joint Committee on Taxation estimated that it would take as much as a 57 percent (tax-exclusive) rate to be revenue-neutral."
Basically an eye-opener showing us just how bad we're taking it in the shorts through seen and 'unseen' taxes!

We are taking in the shorts that is for sure, even if the JCT that owes it very existence and purpose to that sameInternal Revenue Code that would be repealed under HR25, just adjusted their assumptions in favor of maintaining the status quo, hidden taxes and all.

==> Title 26 Internal Revenue Code Subtitle G - The Joint Committe on Taxation.

Prepared for Americans For Fair TaxationPrepared for Americans For Fair Taxation
By David Burton and Dan R. Mastromarco
The Argus Group: February 4, 1998

This report responds to Ken Kies’ letter to Chairman Archer of January 12, 1998. In his letter Mr. Kies propounds several objections to the Americans for Fair Taxation (AFFT) FairTax plan (FairTax) as raised by the Joint Committee on Taxation (JCT) staff. This memorandum addresses those objections with respect to three basic issue areas. They are:

•the revenue neutral sales tax rate,
•compliance and evasion issues, and
•the economic impact of replacing the current tax system with a sales tax.

I. The Revenue Neutral Rate

The JCT, through Mr. Kies’ letter, posits that the FairTax would be revenue neutral only at a 30 percent tax-inclusive rate and a 42 percent tax-exclusive rate, and possibly higher (if other factors are considered (see pages 1-2)).

AFFT’s analysis of the revenue neutral rate has been generally confirmed by many of the leading public finance economists in the country.

However, the JCT estimate goes against the weight of authority and is difficult to explain on analytical bases. Not only AFFT but many highly regarded researchers disagree with the JCT’s opinion. For example, Dale Jorgenson (Harvard) has found that the AFFT plan is revenue neutral at 22.9 percent.¹ Jim Poterba (MIT) has found that the AFFT plan is revenue neutral at 23.1 percent.² Laurence Kotlikoff (Boston University) found that the revenue neutral tax rate was 24 percent.³ Researchers at Stanford, the Heritage Foundation, Fiscal Associates and the Cato Institute have reached similar conclusions (22.3 percent to 24 percent).

This memorandum demonstrates why the JCT analysis is incorrect and why the Jorgenson, Poterba and AFFT analyses that the AFFT plan is revenue neutral at an approximately 23 percent tax-inclusive rate.

A. From a Macroeconomic Perspective, the JCT Calculation of the Rate Is Substantially in Error.

A comprehensive consumption tax that taxes all consumption of any type does not have a tax base equal to only 59 percent of GDP as the JCT is claiming and it certainly does not have a tax base equal to only 42 percent of GDP as the JCT is implicitly claiming in its tax-exclusive rate calculation. Given the absolute breadth of the AFFT consumption tax base (no exceptions, no exclusions, all consumption spending is taxed) such claims are patently implausible. They are particularly implausible in view of the fact that the AFFT plan taxes both private and government consumption and uses a tax prepayment approach on government investment and investment in owner-occupied housing.

One way of viewing the revenue neutral rate needed under the FairTax replacement plan is to consider the effective rate to be equivalent to the following:

Federal Taxes That Must Be Raised / GDP
Tax base / GDP

The proportion of the taxes raised under the FairTax should bear the same ratio to GDP as the taxes to be replaced by the FairTax bear to GDP.

To arrive at our numerator, the taxes to be raised are the AFFT-repealed taxes; namely, the payroll taxes, income taxes, self-employment taxes, corporate income taxes, capital gains taxes and transfer taxes (death and gift). These replaced taxes, for fiscal year 1998, account for 17.8 percent of GDP. ⁴ That is because Federal receipts, as a percentage of GDP, are approximately 19.1 percent, and the FairTax plan would repeal 93 percent of current federal taxes and fees. ⁵ As for the denominator, since investment accounts for 14.6 percent of GDP, the FairTax base can be estimated to be about 85.4 percent of GDP.⁶ 17.8 percent divided by 0.854 is 20.8 percent, the required revenue neutral AFFT tax rate (before the rebate is considered).⁷

From this aerial view, the conclusion reached by the JCT is clearly off target. In order for the JCT’s 30 percent tax-inclusive rate to be correct, the AFFT tax base would need to fall to 59 percent of GDP. In other words, the correct base would be about 31 percent less than the base we estimate. Likewise, in order for the JCT’s 42 percent tax-exclusive rate to be right, the AFFT tax base would need to fall to 42 percent of GDP.⁸

B. Detailed Analyses:

1. The JCT Estimate is Flawed Because it Fails to Add the AFFT-repealed Taxes Back Into the Economy And Assumes Inconsistently That Both the Pre-Tax Prices Will Fall but That the Purchasing Power of Gross Returns Will Remain Constant.

*** Snip ***

2. The JCT Therefore Assumes the Economy Shrinks by the Amount of the Taxes Replaced.

*** Snip ***

3. The JCT Should Have to Explain Why the Base of the FairTax is So Much Less Than the Base of the Flat Tax When the Two Bases are Theoretically Comparable

And continues for another 36 pages of detailed analysis of errors both factual and procedural of the JCT "analysis".

but I have a question...
will there be a difference for "business" purchases or will every transaction be taxed?

the wholesale chain , you know?

Purchases by businesses for the conduct of their businesses are not taxed. Only the retail level of sales is subject to collection of the NRST.

It is a National Retail Sales Tax, not a tax on business purchases that would just get passed on buried in prices.

H.R.25

Fair Tax Act of 2005 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

`SEC. 102. INTERMEDIATE AND EXPORT SALES.

`(a) In General- For purposes of this subtitle--

`(1) BUSINESS AND EXPORT PURPOSES- No tax shall be imposed under section 101 on any taxable property or service purchased for--

`(A) a business purpose in a trade or business, or
`(B) export from the United States for use or consumption outside the United States, if, the purchaser provided the seller with a registration certificate, and the seller was a wholesale seller.

`(2) INVESTMENT PURPOSE- No tax shall be imposed under section 101 on any taxable property or service purchased for an investment purpose and held exclusively for an investment purpose.
`(3) STATE GOVERNMENT FUNCTIONS- No tax shall be imposed under section 101 on State government functions that do not constitute the final consumption of property or services.

`(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business' means purchased by a person engaged in a trade or business and used in that trade or business--

`(1) for resale,
`(2) to produce, provide, render, or sell taxable property or services, or
`(3) in furtherance of other bona fide business purposes.

`(c) Investment Purposes- For purposes of this section, the term `purchased for an investment purpose' means property purchased exclusively for purposes of appreciation or the production of income but not entailing more than minor personal efforts.

Tax once but only once is the bottom line rule for the FairTax NRST:

H.R.25

Fair Tax Act of 2005 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

`SEC. 1. PRINCIPLES OF INTERPRETATION.

`(a) In General- Any court, the Secretary, and any sales tax administering authority shall consider the purposes of this subtitle (as set forth in subsection (b)) as the primary aid in statutory construction.

`(b) Purposes- The purposes of this subtitle are as follows:

`(1) To raise revenue needed by the Federal Government in a manner consistent with the other purposes of this subtitle.
`(2) To tax all consumption of goods and services in the United States once, without exception, but only once.
`(3) To prevent double, multiple, or cascading taxation.
`(4) To simplify the tax law and reduce the administration costs of, and the costs of compliance with, the tax law.
`(5) To provide for the administration of the tax law in a manner that respects privacy, due process, individual rights when interacting with the government, the presumption of innocence in criminal proceedings, and the presumption of lawful behavior in civil proceedings.
`(6) To increase the role of State governments in Federal tax administration because of State government expertise in sales tax administration.
`(7) To enhance generally cooperation and coordination among State tax administrators; and to enhance cooperation and coordination among Federal and State tax administrators, consistent with the principle of intergovernmental tax immunity.

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