Required Reading for the Tax Revolution

FRee Market Project ^ | August 1, 2005 | Free Market Project

[phil_will1]

FairTax would free markets, individuals from income tax.

In “The FairTax Book,” Rep. John Linder (R-Ga.) and libertarian talk radio host Neal Boortz offer a witty and straightforward explanation of the political and economic consequences of making April 15 “just another day.” Published by Regan Books, it hits bookstores this week. And if tax reform is not a “hot” topic now, then give this book a month on the New York Times bestseller list for things to change.

The FairTax is a bold idea to replace the income tax with a national sales tax. What’s so bold about it? Not only would the FairTax get the IRS off the nation’s back, but it would unshackle the economy to grow free of an achievement-punishing income tax.

The FairTax is a 23 percent sales tax designed to be revenue-neutral, meaning the tax would generate the same amount of revenue as the old system. Why 23 percent? Because once the cost of the income tax was phased out, prices on consumer goods would drop by that amount.

The Free Market Project is pleased to present the following excerpts from “The FairTax Book.” by Neal Boortz and John Linder. All rights reserved. No part of this book may be used or reproduced without written permission from HarperCollins Publishers, 10 East 53rd Street, New York, NY, 10022.

[phil_will1]

"So my business does 200,000 in sales but I spend 100,000 in inventory, I can't deduct the 100,000 I have to spend to make the 200,000? LOL, no thank you."

Under the FairTax, there is nothing to deduct the $100,000 FROM. Corporate income and payroll taxes are eliminated. It is a National Retail Sales Tax - paid on items purchased for personal consumption only.

[rwrcpa1]

Deduct it from what? Under the fair tax business don't pay taxes!

[MichiganCheese]

I agree with you except for the 15%. Cap the sales tax at 10%. Why should I have to give more to the government than to my church and other charities?

[rwrcpa1]

My bad. I thought you were talking about the Fair Tax.

[rwrcpa1]

Horrible idea.

[Archon of the East]

The key to all tax systems and lowering the burden falls absolutely on downsizing Government. Federal Income tax, payroll taxes are all IMO unconstitutional. There is NO tax system that will be perfect so if perfection is what you are looking for take a look at the Dewey DUmmies and see how well their concepts in perfecting human nature has worked out. My thought is that until we have some direct tax that forces people to understand how much of our money is stolen for absolutely ridiculous causes then we will continue to look at our paycheck and simply say oh well. Any tax system that doesn't directly tax consumption will lead to Teraaza the Ginny paying about 1% while schmucks like the rest of us pay for the government study of prune juice causes cancer.

If the Fair tax is indeed 30% and not 23% to make it revenue neutral then that only reflects how out of control our Govt. is......All IMHO

[ancient_geezer]

A link to a full FR debate regarding the pro's and cons of the APT.

http://www.freerepublic.com/focus/bloggers/1295188/posts

If you like the Tobin tax and hidden taxes, you will love the APT.

[phil_will1]

"My bad. I thought you were talking about the Fair Tax."

So did I. That is why I try to make it a practice to copy and paste the passage that I am commenting on into my post.

[phil_will1]

"If the Fair tax is indeed 30% and not 23% to make it revenue neutral then that only reflects how out of control our Govt. is......All IMHO"

Very well stated ... and very similar to Congressman Linder's statement before a Ways and Means subcommittee last week.

[rwrcpa1]

The Fair tax is 23% of the total amount you spent. It is 30% of the amount you spent without the tax included. That's how it works out mathematically (rounded off).

[Always Right]

We're not going to have to have the tax exclusive vs. tax inclusive lesson again, are we? Haven't you learned anything, yet?

I am fully aware of it. But when you present a sales tax rate as 23% without identifying it as a tax inclusive rate, you are lying. Plain and simple. No one uses a tax inclusive rate, so you are intentionally misleading people.

[rwrcpa1]

Oh, so instead of me saying that I'm in the marginal 25% income tax bracket I should really say I'm in the 33.33% bracket, right? Does that make me a liar, too?

[Always Right]

Oh, so instead of me saying that I'm in the marginal 25% income tax bracket I should really say I'm in the 33.33% bracket, right? Does that make me a liar, too?

No, because that it not how people use ,arginal tax bracket. When you use a term in a way that is different than what 99.999% of the people understand it, you should identify it as such.

[ancient_geezer]

The Fair tax is 23% of the total amount you spent. It is 30% of the amount you spent without the tax included. That's how it works out mathematically (rounded off).

Some background on why a tax inclusive form best reflects the burden of taxes in regards to one's expenditures and is most appropriate to use when comparisons are made between the income tax system and the FairTax legsislaion which replaces it:

 

The Wrong Camera: The Denominator of the
Tax Incidence Equation.
Dan R. Mastromarco; LLM, Argus Group, Washington D.C.
Tax Analysts Document Number: Doc 1999-32575
Citations: (October 8, 1999)

---

B. Use a Consistent Size Screen to Portray It.

[118] When considering the rate of a national sales tax, or any tax for that matter, one must always decide which of two distinct means of portraying this rate -- the "tax-inclusive rate" or "tax- exclusive rate" -- best expresses the tax burden. Which one we employ changes absolutely nothing in terms of the taxes that are actually raised or paid by the taxpayer under the taxing regime examined, in the same way that measuring a journey in inches or meters does not change the distance. However, how the rate is presented changes how the relative tax burden is perceived by those who wish to compare the merits of competing tax proposals. Confusion results when we compare alternatives under different measuring scales.

[119] The sales tax is particularly susceptible to this confusion because state sales taxes are normally expressed on a tax- exclusive basis, while income, estate, and payroll taxes, as well as the Flat Tax and other VATs, are normally expressed on a tax- inclusive basis. If we were to express a sales tax rate as a percent of the product price as is done in the states, we would be unfairly overstating the burden of the tax when we compare it to what it is meant to replace at the national level. Or conversely, we would be greatly understating the relative burden of the federal income and payroll taxes for those who don't have time to learn the different measuring systems.

[120] Presentation of a rate of tax on a tax-exclusive basis simply means that the rate of the tax is expressed as the tax paid over a base determined after the tax was already imposed (for example, taxable income under our personal income tax system that is net of the tax). In other words, a tax-exclusive rate would be defined as:

$ tax paid
-------------------------------------------------------------------
($ base on which the tax was imposed)-($ tax paid)

[121] The rate therefore reflects the ratio of taxes paid to what is left in the base, such as net of tax income.

[122] On the other hand, defining the rate of tax on a tax- inclusive basis simply means that the rate of the tax is expressed as the tax paid over the base before the tax has been imposed. In other words, a tax-inclusive rate would be defined as:

$ tax paid
-------------------------------------------------------
$ base on which the tax is to be imposed

[123] Since the base of the tax before the tax is imposed is always more than the base after tax (the denominator is greater), expressing the tax in a tax-exclusive way will always yield a higher rate. In other words, it will express the tax as having a higher burden. /56/

[124] Let us take the following example.

Example: An individual earns $1,000 and pays $200 in taxes
(under either a VAT, income tax, or sales tax) but spends the
remaining $800 on a stereo. Although the taxpayer will pay the
same amount of taxes ($200) out of the same amount of pretaxed
income ($1,000) a question arises as to how the rate should best
be expressed? Is the tax rate 20 percent or 25 percent?

[125] Clearly, one might say that the income or Flat Tax rate is the lower rate, 20 percent, since the taxpayer paid $200 on $1,000 of pretaxed income. That is because the income tax and VATs are normally looked at (unquestionably looked on) on a tax-inclusive basis. However, when we view traditional state sales taxes we might say that the state sales tax rate needed to raise $200 of revenues is 25 percent, even though the sales tax rate raises the same amount of revenue as a 20 percent tax-inclusive income or Flat Tax rate. The taxpayer would be considered to have paid the tax at a 25 percent rate since the taxpayer paid $200 of tax on $800 worth of goods exclusive of tax. That is because the state sales taxes are normally looked on on an after-tax or tax-exclusive basis. To use our formula for tax-exclusive representation:

$ tax paid
--------------------------------------------------------------
(base on which the tax was imposed)-(tax paid)

or,

$200/$800 or, 25 percent.

[126] Which is the correct way of expressing this rate? To the casual observer, it is obvious which tax to prefer. All else being equal, one would prefer a 20 percent rate over a 25 percent rate. But that same person may be surprised to find out that they are saying the same thing, and paying the same tax.

[127] The problem with using a tax-exclusive basis for determining the rate of a national sales tax and a tax-inclusive base to portray the income tax is that it can be very misleading. Let us look at a taxpayer who is at the top marginal rate under each taxing scheme. The tax-inclusive and tax-exclusive rates would be compared as shown in the charts just above and just below.

[128] In the tax-inclusive chart, we see comparisons that we are used to seeing. This chart reflects the maximum marginal rate of the current personal income tax system as 43.3 percent. /57/ Here the sales tax rate is 23 percent and the Flat Tax rate is 32.3 percent, reflecting the combined payroll and Flat Tax burdens. /58/ But the tax-exclusive chart indicates that the income tax with the payroll tax bears a maximum marginal rate that is 75.8 percent of the tax- exclusive base. Even the federal individual income tax alone reflects a maximum marginal tax-exclusive base of 43.3 percent. According to the chart above, the Flat Tax bears a maximum marginal rate of 47.7. The FairTax plan bears a maximum marginal rate of 29.9 percent. In this chart, the taxes paid are calculated as a percentage of what remains after tax.

[129] In making comparisons between alternative taxing systems it is important to ensure therefore that these comparisons are consistent, fair in terms of expectations, and are well explained. Fair comparisons eliminate and do not exacerbate confusion over a relatively critical point as the means of expressing the tax rate. The only means to do so is to ensure that a tax-inclusive rate is compared with a tax-inclusive rate.

Footnotes:

/56/ When calculating the tax-inclusive sales tax base, two algebraically equivalent methods may be used. The tax-exclusive rate may be converted into a tax-inclusive rate by dividing the tax- exclusive rate by one plus the tax-exclusive rate: ti = te / (1+ te). Conversely, a tax-inclusive rate may be converted into a tax- exclusive rate by dividing the tax-inclusive rate by one minus the tax-inclusive rate: te = ti / (1-ti). Alternatively, the tax- inclusive sales tax rate may be calculated by adding the repealed income tax revenue back into the tax base (consumers, after all, would have that money to spend), whereas one would not do so when calculating the tax-exclusive base (consumers would be spending that amount on tax and it would not be appropriation to include it in the calculation of a tax-exclusive base).

/57/ The maximum marginal payroll rate is 15.3 percent, but this rate applies regressively between $0 and $72,600 for 1999. When this rate attaches, it is possible for a tax to apply at a maximum marginal rate of 43.3 percent (28 percent individual income tax rate plus 15.3 percent payroll tax rate).

/58/ While it is beyond the scope of this article, it is important to understand that the Flat Tax rate of 17 percent assumes a substantial reduction in government revenues.

[groanup]

Hannity just gave the fair tax a HUGE plug on his show. He spent about a minute going over the parts of the plan which he especially likes. He explained that he hadn't taken up the banner to this point because he thought it didn't have traction but thinks that is changing.

[rwrcpa1]

I heard it too. Very good interview with Boortz.

[ancient_geezer]

I heard a part of it, unfortunately the signal on the only station I find carrying Hannity's program here is lousey in the mountains.

Ohhh well, can't get em all ;O)

[Archon of the East]

Yea , I missed the point of the 23% to 30 % tax which was clarified nicely by yourself and ancient geezer. I was however only making the point that regardless of what % it takes to have a revenue neutral tax, that tax reflects the actual burden on the taxpayer for Government. If people keep that in mind maybe by changing our unconstitutional system for one that that is constitutional and makes the individual understand and feel the true burden on them , we may be able to limit an out of control Government.

[groanup]

This was about 1/2 hour before Boortz came on. Big plug on a personal basis.

[ancient_geezer]

If people keep that in mind maybe by changing our unconstitutional system for one that that is constitutional and makes the individual understand and feel the true burden on them , we may be able to limit an out of control Government.

On that point one could look at what it would nominally take to fund those functions clearly authorized under Article I Section 8 of the Constitution in 2002 dollars:

http://w3.access.gpo.gov/usbudget/fy2001/guide02.html#Spending

• $334 Billion --- Defense & Military related expenditure
• $ 31 Billion ---- Administration of Justice
• $ 16 Billion ---- General Government
• $199 Billion ---- Interest on the Debt
  =========================
  $580 Billion ---- Total

Institute an across the board, Flat rate, single stage National Retail Sales Tax, which taxes all imports and domestic products with the same rate.

Replacing all current federal tax law with a retail sales tax would be 23% on new goods and services paid and receipted at the retail register. No hidden tax, no exceptions, exemptions everyone participates.

Such a tax acts in a natural manner to encourage the elimination of excess government functions through visibility of burden among all constituencies of the electorate.

The total federal government budget would move from $2,000 billions towards something less than $580 billions calculated.

The across the board federal tax rate on new goods and services would decline towards less than 6.7%.

As tax rate on sales decreases the economic burden on retail items, the sales volumes and growth in the economy would be tremendous allowing even further reductions in tax rates below that less than 7% theoretical level.

That is what I perceive as the ultimate achievements possible under a National Retail Sales Tax structured in the manner of the revenue bill H.R.25. Simple common sense applied to the principal of TANSTAAFEL,( no free lunch, everyone participates in paying their way in proportion to the benefit the extract from their consumption.) encourages the natural change in attitudes required of the electorate as regards the burden of government largess in their lives.

Thomas Hobbes from Leviathan

• It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income

Hmmmmmm....... It's do able, with time and effort, once the blinders are removed from the electorate.