The Fair Tax Fraud

The Ludwig von Mises Institute ^ | 18 May 2005 | Laurence Vance

[balrog666]

The Fair Tax Fraud

by Laurence Vance

Since my recent article on the evils of the withholding tax, I have been inundated with e-mails by supporters of the " FairTax," including a request that I endorse "The Fair Tax Act of 2005" currently pending in the Congress. But like the calls for "fair trade" instead of "free trade," the FairTax is a fraud because it is based on the fallacy that government theft (taxation) should be done in a "fair" manner instead of eliminated altogether.

FairTax proponents are correct in their assessment of the Internal Revenue Code:

The current U.S. income tax code is widely regarded by just about everyone as unfair, complex, wasteful, confusing, and costly. Businesses and other organizations spend more than six billion hours each year complying with the federal tax code. Estimated compliance costs conservatively top $225 billion annually—costs that are ultimately embedded in retail prices paid by consumers.

The Internal Revenue Code cannot simply be "fixed," which is amply demonstrated by more than 35 years of attempted tax code reform, each round resulting in yet more complexity and unrelenting, page-after-page, mind-numbing verbiage (now exceeding 54,000 pages containing more than 2.8 million words).

But could the cure they offer be worse than the disease?

The FairTax is a consumption tax in the form of a national retail sales tax on new goods and services. It is designed to replace "federal income taxes including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes." The FairTax would also abolish the IRS and repeal the 16th Amendment.

The elimination of the 16th Amendment, the IRS, and all those taxes sounds like a great idea that all free market economists and advocates of liberty could agree with. So if the FairTax is such a great thing, why would anyone in their right mind oppose it?

That is exactly what I have been hearing:

* "What could you possibly have against the FairTax?" * "The FairTax is the only way to go." * "I find it weird that you would oppose the concept of the Fair Tax." * "The choice boils down to the Fair Tax (H.R. 25) or the current 'system.'"

Even Ludwig von Mises, I was told, "would approve the Fair Tax idea, as do dozens & dozens of rational economists."

Various consumption tax proposals were recently critiqued on this site in an article by Murray Rothbard. So rather than just repeat them and apply them to the current FairTax scheme, I will focus instead on problems with the FairTax proposal itself.

The Fair Tax Act of 2005 is H.R. 25 in the House (introduced on January 4) and the identical S. 25 in the Senate (introduced on January 24). FairTax proponents who complain about the complexity of the Internal Revenue Code are going to have a hard time convincing those of us who have actually read this bill (it came to 59 pages when I printed it out from my computer) that it will simplify the tax code when it contains language exactly like that which appears in the tax code:

(b) Rebate Defined- For purposes of subsection (a) (2), the term 'rebate' means so much of an abatement, credit, refund, or other payment, as was made on the ground that the tax imposed by chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.'.

Strangely absent from the list of co-sponsors of H.R. 25 is Congressman Ron Paul(R-TX). Representative Paul has consistently been named the "taxpayers' friend." If the FairTax proposal was as friendly to taxpayers as its proponents say it is, I would expect Congressman Paul's name to be first on the list of co-sponsors. FairTax advocates claim that their plan would repeal of the 16th Amendment. However, all H.R. 25 does is repeal Subtitle A of the Internal Revenue Code of 1986 that relates to income taxes and self-employment taxes and Subtitle C that relates to payroll taxes and the withholding of income taxes. The only mention of the 16th Amendment in H.R. 25 is when it says: "Congress further finds that the 16th amendment to the United States Constitution should be repealed." To repeal the 16th Amendment would require a constitutional amendment. Can Congress be relied on to pass a constitutional amendment that repeals the 16th amendment after a national sales tax has already been enacted? And even if Congress passed a constitutional amendment, it would still have to be approved by three-fourths of the states. Without the repeal of the 16th Amendment, what is to prevent an income tax from being imposed again after a national sales tax has been enacted?

Although the FairTax would eliminate the filing of all individual tax returns, the FairTax turns every business into a tax collector. Every small service business and every Internet business that does not currently collect state sales taxes will have to collect taxes for the federal government. Every doctor will now have to charge sales tax on his services. Where will this end? Will the neighborhood boy who mows lawns have to begin collecting federal sales tax on each lawn mowed? Will the neighborhood girl who baby sits have to do likewise?

The national retail sales tax rate under the FairTax plan is 23 percent. That is on top of state sales taxes that are currently collected by forty-five states. That is on top of the sales tax that many cities and counties also collect. That is on top of the special taxes that exist on hotel rooms in most areas of the country. I suppose that a national retail sales tax would also apply to gasoline. There is no mention of the federal gas tax anywhere in the Fair Tax Act of 2005. No list of taxes that are supposed to be eliminated under the FairTax includes the federal gas tax. Does this mean that there will be an additional 23 percent tax on each gallon of gasoline?

The FairTax will make it easier for Congress to raise taxes. The initial rate of 23 percent is supposed to begin in 2007. For years after 2007, "the rate of tax is the combined Federal tax rate percentage." This combined percentage is the total of three things: the general revenue rate (stated to be 14.91 percent); the old-age, survivors and disability insurance rate; and the hospital insurance rate. This is all but saying that the rate will be adjusted every year. And it will be very easy for Congress to do so. To raise several billion dollars of additional revenue, all that will be necessary is for Congress to raise the tax rate by one percentage point by small adjustments in one or more of the three items that make up the combined percentage rate. It will be sold to the American people as "a penny for progress," or some other deceitful scheme.

Under the FairTax system, there are no longer any Social Security and Medicare taxes. However, this does not mean that Social Security and Medicare will be eliminated. The inclusion in the combined percentage of the old-age, survivors and disability insurance and the hospital insurance rates means that the Ponzi scheme known as Social Security will continue as is—only the way it is funded will change.

The "underground economy" that income tax advocates complain about will certainly increase under the FairTax system. Even if the highly dubious claim that there will be an "average producer price reduction of 22 percent for goods and services in just the first year after the adoption of the FairTax" is true, not having to pay a 23 percent tax on an item is a tremendous incentive to make a purchase in the "underground economy."

The claim that the IRS will be eliminated under the FairTax is bogus. Although the national sales tax will be collected by the states from retailers, it is still a national sales tax, and as such, its collection will have to be overseen by some agency of the federal government. Just because the bureaucracy will no longer be called the IRS doesn't mean that it will be eliminated. According to The Fair Tax Act of 2005:

There shall be in the Department of the Treasury a Sales Tax Bureau to administer the national sales tax in those States where it is required pursuant to section 404, and to discharge other Federal duties and powers relating to the national sales tax (including those required by sections 402, 403, and 405). The Office of Revenue Allocation shall be within the Sales Tax Bureau.

Title II, chapter six, section 603 of The Fair Tax Act sets up the Problem Resolution Office and authorizes "problem resolution officers." There will still be tax courts according to title II, chapter six, section 602 and chapter nine, section 7451. Changing the phrase "Internal Revenue Service" to "Department of the Treasury" and "Commissioner of Internal Revenue" to "Secretary" doesn't eliminate the federal bureaucracy.

With the FairTax, the federal government will also be a tax collector in a new way: at the post office. There is no exemption of postal goods and services mentioned anywhere in the Fair Tax Act of 2005. I suppose this means that stamps, P.O. Box rental services, and package mailing services will be subject to the new 23 percent tax.

The FairTax is progressive. What could possibly be fair about a progressive tax where some people have to pay a higher percentage than others merely because they are deemed to be "rich"? How is the FairTax progressive? I thought it was a flat 23 percent on all new goods and services? It is and it isn't. Under the FairTax plan, everyone pays the 23 percent tax on everything, but "every household receives a rebate that is equal to the FairTax paid on essential goods and services." The rebate is given out each month, and is based on family size and the poverty level. But like the current tax code, the FairTax can also function as a tool for income redistribution because "the poor [will] actually pay less than zero-percent retail sales tax on their spending. Much like with the earned income tax credit of today, the rebate may give them more money than they actually spend on retail taxes."

The real problem with the FairTax is threefold. In " An Open Letter to the President, the Congress, and the American People Concerning Reform of the Federal Tax Code," which is posted on the FairTax website along with the endorsement of seventy-five "professional and university economists," we can see the trouble with the FairTax immediately:

We are not calling for elimination of federal taxation, which would be irresponsible and undesirable. Nor does our endorsement call for reduced federal spending. The tax reform plan we endorse is revenue neutral, collecting as much federal tax revenue as the current income tax code, including payroll withholding taxes.

There is only one word to describe the fact that the federal government now spends almost $3 trillion a year: obscene. At least 90 percent of what the federal government spends is unconstitutional, wasteful, or against the limited-government principles of the Founders. The only thing the FairTax does is change the way the state confiscates the wealth of its citizens. As Congressman Ron Paul says: "The real issue is total spending by government, not tax reform."

Because the FairTax is a consumption tax, Murray Rothbard's conclusion about consumption taxes is apropos:

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.

The FairTax does nothing to tame the federal leviathan. The solution is nothing less than a drastic reduction or wholesale elimination of its revenue source. What is fair about allowing the government to confiscate 23 percent of the value of every new good and service? FairTax proponents may call it necessary legislation, but I call it highway robbery.

————————

Laurence M. Vance is a freelance writer and an adjunct instructor in accounting and economics at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Vancepub@juno.com.

[balrog666]

A realistic perspective on the so-called FairTax.

[balrog666]

Ping time.

[CorbyCard]

Not likely realistic to me. It seems the Mises folks are determined to have an ideal world. Guess what? That won't happen. The Fair Tax is the most any of us could hope for. To try to fight it out on the right is a big mistake.

And I disagree with the idea that it will be easy to raise the tax. We'll all pay this every day. Any tax increase will be pretty damn obvious.

[fooman]

Yes and it should be passed CONTIGENT on the repeal of the 16th amendment.

[Mr. Jeeves]

The thrust of his argument is that the FairTax makes life a bit easier for employees at great overhead cost to small businesses and independent contractors, especailly in states that currently have no state income tax.

I'd prefer a flat tax and tax code simplification first. Then, once the DC Spending Beast is tamed, we can look at substituting a form of consumption-based taxation.

[Terpfen]

Ping.

[ARCADIA]

A realistic perspective on the so-called FairTax.

These are all issues that we have raised on this board before.

[ClaireSolt]

I think the government should have to pay businesses for collecting and remitting taxes, and even if they did I do not think tax collection should be the sine qua non to be a business in a free enterprise system. In effect the IRS has the power to license and destroy any business.

[balrog666]

I'd prefer a flat tax and tax code simplification first. Then, once the DC Spending Beast is tamed, we can look at substituting a form of consumption-based taxation.

If you tame the DC Spending Beast, you don't need tax simplification.

[lewislynn]

The FairTax would also abolish the IRS and repeal the 16th Amendment.

It doesn't repeal the 16th amendment

not having to pay a 23 percent tax on an item is a tremendous incentive to make a purchase in the "underground economy."

It's even worse that that. The tax ON a purchase would be 30%...not 23%. If they're lying about the "sales tax" rate itself, what else are they lying about?...Plenty.

This combined percentage is the total of three things: the general revenue rate (stated to be 14.91 percent); the old-age, survivors and disability insurance rate; and the hospital insurance rate. This is all but saying that the rate will be adjusted every year. And it will be very easy for Congress to do so.

It's even worse than that. The law allows unelected bureaucrats at Social Security (not Congress) to raise the rates every year...Without so much as a vote from Congress or even a signature from the President.

Even if the highly dubious claim that there will be an "average producer price reduction of 22 percent for goods and services in just the first year after the adoption of the FairTax" is true

Even if everything was manufactured in this country (only the fairtaxers don't know everything isn't) It's not only "dubious", without reductions in wage compensation, it's mathematically impossible....

[ARCADIA]

That is why the economy is in full meltdown.

The closest thing we have had to this so called "fairtax" was an import duty; but, at least that was alot easier to managed.

[CorbyCard]

Yes you need tax simplification. Let me know when you finish the 2.8 million words of IRS code. (And the numbers I've seen have it closer to 9 million, but I used the Mises numbers.)

[stitches1951]

I agree with flat tax but never want to see consumption tax. The idea of people needing a mortgage to pay a tax is very odious. 30% of $200,000 home? Of $35,000 automobile? How many middle-class workers can afford that cash lay-out, even with the lack of payroll deductions?

[groanup]

bump

This article is BS. The guy doesn't address the fair tax in a fair way. He is making a lot of his assumptions up. What a load.

[ancient_geezer]

FairTax is a fraud because it is based on the fallacy that government theft (taxation) should be done in a "fair" manner instead of eliminated altogether.

Starts with an invalid premise and goes down hill from there.

Seems the author fails to note a very disconcerting fact.

Taxation is the method of choice mandated in the Constitution of the United states for paying the primary bills.

 

Constitution for the United States of America:

• Article VI: "This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding."

• Article I Section 8: "The Congress shall have power to lay and collect taxes, duties, imposts and excises,
  to pay the debts and provide for the common defense and general welfare of the United States;
  but all duties, imposts and excises shall be uniform throughout the United States; "

• Article I Section 8: "To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof."

Hmmm, bit of a problem, there is no enumerated authority to pay the debts, provide for the common defense and general welfare of the United States by any other means than taxation.

Time to crank up Article V of the Constitution, for those figuring on financing the government in any other manner.

The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress;

 

Time to pick yer poison. Taxation, of one form or another, or convincing the current political powers to amend the constitution to do it some other way.

 

---

 

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25), offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:

• http://www.fairtax.org,
• http://www.myfairtax.org/,
• http://www.salestax.org,
• http://www.geocities.com/cmcofer/ftax.html

[Paul C. Jesup]

the FairTax is a fraud because it is based on the fallacy that government theft (taxation) should be done in a "fair" manner instead of eliminated altogether.

*snip*

A realistic perspective on the so-called FairTax.

You think it is more realistic to eliminated taxes altogether than to pass the FairTax.

Dude, what are you smoking, because I want some of it. ;D

[expatpat]

That is bluster, not criticism. Surely you can do better than that.

[ancient_geezer]

Even Ludwig von Mises, I was told, "would approve the Fair Tax idea, as do dozens & dozens of rational economists."

Interesting that should be mentioned.

 

Ludwig von Mises as Policy Analyst: Monetary Reform, Fiscal Policy, and Foreign Exchange Controls by Richard M. Ebeling
Heritage Lecture #754
http://www.heritage.org/Research/PoliticalPhilosophy/hl754.cfm#pgfId-1023417

"Austria, Mises said, would be a poor country. The destruction of war, the consumption and misuse of capital, the destruction of a large portion of the Austrian entrepreneurial class due to the expelling or murder of so many Jewish businessmen and financiers, and the debilitation of the labor force from death and permanent injury in battle would require Austria to turn its back on its socialist, interventionist, and welfare-statist past. Only economic freedom and hard work could restore Austria from a condition that we might nowadays loosely refer to as "third world" status.

Fiscal policy, therefore, would have to be designed to do everything possible to unleash private sector incentives and opportunities for investment, capital formation, and entrepreneurship. Virtually all taxes, Mises suggested, should be skewed toward consumption and away from production. What type of broadly based consumption taxes? He proposed:

• (1) excise taxes on alcoholic beverages, tobacco, and related tobacco products;
• (2) a sales tax exclusively on the sale of goods and services to the final consumer; there should be no explicit or hidden value added taxes;
• (3) a progressive consumption tax based on housing expenditures, but with an exemption for housing expenditures for those in the lower income brackets;
• (4) a tax on luxury automobiles for private or personal use;
• (5) a tax on lottery winnings;
• (6) a stamp tax on playing cards;
• (7) administrative fees for certain government services, such as issuing patent rights, brand name registrations, determination of weights and measures, and "official stamps" to cover the cost of providing various types of documentation;
• (8) a wage tax paid by employers that was not deducted from the employee's salary to fund existing social insurance programs; and
• (9) a moderate net profits tax on shareholders and limited liability partnerships when annual disbursements exceeded 6 percent of the enterprise's capital assets; retained earnings by the enterprise would be exempt from taxes so as not to discourage capital formation.

Except for the net profits tax and the wage tax for social insurance costs, all income and business earnings would be completely tax-exempt. And a perusal of Mises' proposed list of taxes clearly shows that he thought that, besides the general sales tax, the fiscal burden should primarily be in the form of what nowadays would be classified as "sin taxes" and a narrow selection of "luxury" expenditures. Mises' long recognized advocacy of "laissez-faire" did not mean a hands-off indifference to the path taken by the market economy. What would be produced, where and how goods would be produced, and for which segments of the consuming public would be determined by the pattern of market demand and the profit-driven entrepreneurs. As Mises expressed it in the early 1940s, "If there is any hope for an new [economic] upswing [at the end of the war] it rests with the initiative of individuals. The entrepreneurs will have to rebuild what the governments and politicians have destroyed."

***

It should be mentioned that Mises' apparent concession to the welfare state in his listing among his fiscal suggestions of an employer's tax for social insurance expenditures did not mean his belief in their desirability or necessity. This was clearly an admission that, given the political currents, not everything could be reformed at once. For example, in 1942 Mises was invited to lecture in Mexico for six weeks during which he had the opportunity to studying the economic conditions in the country. The following year, in 1943, he prepared a lengthy monograph for an association of Mexican businessmen on "Mexico's Economic Problems." His recommendation was to not establish social insurance programs in the first place. If part of the cost of such social insurance schemes falls on the shoulders of the employers, it would only succeed in raising the cost of employing workers, with the negative effect of pricing some members of the work force out of the job market. At the same time, such government-mandated insurance policies restricted the freedom of the employee to weigh the opportunity costs of allocating his income in various ways more reflective of his own preferences and that of his family.

[Terpfen]

Hey, I'm on your side--and ping list too. =)

[ancient_geezer]

Yep, and you make a grand place to launch the taxreform pinger from as well ;O)

Seen any incoming rounds yet?