Abolish the IRS

The Observer Online ^ | 11/8/05 | Scott Wagner

[Man50D]

Since 1954, the size of the United States' tax code has increased by almost 500 percent. Tax regulations created by the Internal Revenue Service have increased in volume by 939 percent, and in April 2006, Americans will spend a combined total of 6.5 billion hours, at an estimated cost of close to $500 billion, in order to simply pay for the privilege of footing Washington's bill.

It is time for the FairTax.

Perhaps you have heard of the FairTax by now. It is a comprehensive plan for the dissolution of the IRS that would replace all income taxes with an embedded personal consumption tax. According to the website of Americans for Fair Taxation (www.fairtax.org), the FairTax would abolish "personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment and corporate taxes." In their stead would be a 23 percent national sales tax on all consumption goods: a simple, one-time tax that is collected at the retail level.

However, the FairTax is unlike the current sales taxes that exist in this country. These taxes are imposed on top of embedded income tax and compliance costs. In the FairTax Book, written by libertarian radio personality Neal Boortz and Congressman John Linder, a loaf of bread is used as an example to illustrate these hidden costs. For every loaf of bread, the seed producers pass tax costs onto consumers. The shipping company does too. In fact, processors, bakeries, distributors and grocery stores all pass a portion of their income tax burdens onto consumers, no matter how rich or poor they are. Eliminating these costs initially, by eliminating the income tax altogether, would reduce the market price of all products by an average of 22 percent.

Don't take my word for it, though. Take the word of the Harvard Economics Department.

So when these costs are abolished, the FairTax is added and returns the prices of consumption goods to - you guessed it - exactly where they are today. The difference is, of course, that people who are purchasing these things keep every last penny of their paychecks. For low-income families, this would mean an immediate average increase in pay of 25-30 percent.

If you are trying to think of ways in which to oppose this plan, I need to know one thing: why?

The federal government would still steal - I mean, collect - the same amount of tax revenue as it does today under the FairTax. The FairTax does not cut funding from any cherished socialist programs like welfare or Social Security. It is merely a new way for the federal government to pay for its existence.

But wait, it gets better. The FairTax Act of 2005 (yes, it has already been written and is ready to be passed) also contains mechanisms for a "prebate." Based on government figures, the federal government would calculate the "annual consumption allowance" of a household - that is, the amount of money that household can be expected to spend on the necessities of life for that year - and refunds the money. Every household in America gets a tax refund, every year.

In case you had not noticed, wealthy individuals tend to spend more money than poor individuals on consumption goods; thus, the wealthy would end up paying more in taxes than the poor. Most people seem to like this idea.

Finally, the economic impact would be astounding. Driven by the "increasing burden of taxation and Social Security payments, combined with rising state regulatory activities and labor market restrictions," American businesses have been seeking out "tax havens" in other countries with much friendlier tax structures. The media buzzword for this phenomenon is "outsourcing," and believe it or not, our government has been causing it all along.

Passing the FairTax Act would make the United States the "only nation in the world whose companies could sell into a global economy with no tax component in the price system." Companies would rush to bring jobs back to the United States, and their American workers would keep all of the money they earn.

The FairTax is a typical libertarian solution to a greater social problem. Instead of promising more regulations, like many Republicrats typically do, we reduce them. It is a novel concept, I know. The results would be revolutionary.

The FairTax is not a panacea. It does not lower taxes, and it does nothing to curb the spending orgy the Republicrats have been having in Washington. It does not stop pork barrel spending, nor does it re-evaluate how federal money is spent. The responsibility for affecting change in those areas falls squarely on us, as voters.

However, the FairTax would be an enormous stake in the heart of the monstrosity that is the IRS. The thought is enough to make any libertarian smile happily and sleep better at night.

We need the FairTax now.

Scott Wagner is the president of the College Libertarians Club. He writes political satire for the Web site The Enduring Vision and thinks you should go read it. He can be contacted at swagner1@nd.edu

[Conservomax]

I want to be pinged. :(

[Mind-numbed Robot]

Without removal of the Income tax from the constitution we WILL end up with both. Not today, not tomorrow, but eventually.

Without the removal of selfish politicians we will always have self-serving, non-responsive government.

Grab what you can while you can (the FairTax) and fight for the rest as we go,

[Mind-numbed Robot]

This is just a back door path for anarchist looking to instigate a taxpayer rebellion to crash the federal government.

That comment misses the mark as far as any I have seen. The present system IS causing a taxpayer revolt. That is what the FairTax is about, stopping the revolt by eliminating the cause.

[Mind-numbed Robot]

I see no greater issue for our country than the passage of HR 25 - it touches everyone of ours lives and the lives of generations to come and not in just the tax we pay or how we pay it.

The most important aspect of the change would be the feeling of freedom. It would smell like the fresh air after a spring rain. People would be able to actually feel the independence and self-responsibility.

[Taxman]

Imagine that!

Replace the income tax with the Fair Tax!

And,

Abolish the IRS!

Great idea!

What are we waiting for?

[FreeKeys]

One "little" problem. Dr. Jorgenson's study which calculated the 22% embedded tax included the employees' income and SS taxes (both halves) as expenses for the employers. Therefore for prices to stay the same after the Fair Tax is added, each employer will have to keep the pay the employees would have paid in for income taxes. Employees will keep their entire paychecks, but those checks will be smaller than their current ones.

This is a COMPLETE red herring. Has Dr. Jorgenson, as well respected as he is, EVER RUN A BUSINESS?

I calculate 20-30% in embedded CORPORATE INCOME AND SOCIAL SECURITY (NOT PAYROLL) TAXES in what my suppliers of parts, sub-assemblies and raw materials pay to me, and what theirs pay to them. THAT'S where the embedded taxes come from NOT from MY payroll NOR THEIRS. In fact, I plan on paying my most valuable employees, the essentially irreplaceable ones, EVERYTHING they're getting now PLUS everything the government is getting in their name, be it FICA "contributions" or withheld taxes. So this entire payroll argument is a bogus distraction from my viewpoint.

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[pigdog]

As has been shown seveal times on these threads, there is plenty of room in prices presently for a good-sized decrease due to the cascading, embedded business income taxes - not even considering compliance costs or wage/withholding taxes. This leads to the reasonable conclusion that prices will drop more than the few percent you envision evebn without the removal of the ER portion of withholding.

It's not just corporate taxes, but business taxes that embed these costs which will be removed with the elimination of the income tax. I think that prices including the FairTax will change little if any - and the workers will have a lot more in hand to pay for things.

Take a look at one of the examples and use your own numbers for tax rate and net profit rate to see the effect that income taxes have on price..

[pigdog]

Really ... one of your better ideas. Well thought out.

But I think I'd vote for keeping Congress and abolishing you:-)

[lewislynn]

I calculate 20-30% in embedded CORPORATE INCOME AND SOCIAL SECURITY (NOT PAYROLL) TAXES in what my suppliers of parts, sub-assemblies and raw materials pay to me, and what theirs pay to them.

-----

So this entire payroll argument is a bogus distraction from my viewpoint.

Jorgenson's study was the Fairtax supporters viewpoint for years. Not a thread went by without the mention of his name and study. Now that the truth is exposed, you/they're running from him and his study like scalded dogs.

An example of your calculations would be more interesting to see than YOUR viewpoint.

[pigdog]

From the FairTax website re the 16th amendment (FAQ #42):

"Why is it necessary to have a constitutional amendment? It is not the intention of this plan, or the desire of the American people, to end up with both a federal income tax and a federal sales tax. The objective is to ensure that one is replaced by the other, not added on top of the other. By repealing the 16th Amendment, we close the door on an income tax for generations to come."

[pigdog]

Actually, Looey, not true. Jorgenson's name was seldom mentioned on FR until you Squirrels made up your claims about what he believed, inserted those claims into the discussion with your own posts - and THEN accused the FairTax supporters of lying by using the claims you'd made up.

[jaydee770]

The problem I see with a federally administered "fair tax" idea is the effort to find a "one size fits all" solution. It seems every time a "one-size-fits-all" approach has been tried for any issue, we wind up with a "one-size-fits-none" solution.

Over time, as new politicos replace old, any tax system that is controlled by the Feds will be dorked with until we are (eventually) in a mess similar to what we have today.

I like the idea that the Feds don't tax individuals or businesses directly. The Feds levy a tax on the states as a percentage of the state's GDP. It is left entirely up to each state how they collect the revenue to pay the state's federal tax bill.

Each state can have their own policy (flat tax here, sales tax there, status-quo elsewhere). Within 5 to 10 years, it should be evident which states have the most desireable policies by the increase in residents and businesses.

[KarlInOhio]

I have run the numbers. When I included the corporate income tax and employer's half of SS and Medicare I only came up with around 8%. I was begging for a reason why the 8% embedded tax I calculated was so different from the 22% the Fair Tax book stated. Even adding 1-2% for direct collection costs didn't get close. It turned out the difference was Jorgenson's allocation of the employee's SS, Medicare and income taxes to the employer's embedded tax.

[Always Right]

I have run the numbers. When I included the corporate income tax and employer's half of SS and Medicare I only came up with around 8%. I was begging for a reason why the 8% embedded tax I calculated was so different from the 22% the Fair Tax book stated. Even adding 1-2% for direct collection costs didn't get close. It turned out the difference was Jorgenson's allocation of the employee's SS, Medicare and income taxes to the employer's embedded tax.

Your numbers jive with what I have been saying for years, with 8% being very generous. It is amazing that it took some work of a freeper to get Jorgenson to finally admit what his assumptions were.

[Conservative Goddess]

"The feds still extract about 20-25% and there is no way to do that painlessly."

We don't want it to be painless. We want it to be painful and fully visible because the more pain the extraction inflicts, the less likely the electorate is to call for another government program to solve the crisis du jour. It is necessary to inflict pain to control the spending.

[pigdog]

You haven't "run the numbers" that I was suggesting. Listed below is the example; put it in your own spreadsheet and use what you believe are good values for the two variables "tax rate" and "net profit %". The resulting figure at, say, level 6 of "tax cost as % of sell price" is the amount contained in prices of embedded business income taxes and includes no payroll/withholding, no compliance costs but only business income taxes.

Perhaps you're considering corporate income taxes only - that's a subset of all business income taxes.

Here's the example:

	    level	       1       2       3       4	5	6
init. cost  sell price	       $2.01	$4.05	$8.15	$16.40	$33.01	$66.44
    $1.00   cost               $1.00	$2.01	$4.05	$8.15	$16.40	$33.01
tax rate    profit before tax  $1.01	$2.04	$4.10	$8.25	$16.61	$33.43
 34.40%     tax	               $0.35	$0.70	$1.41	$2.84	$5.71	$11.50
	    net profit	       $0.66	$1.34	$2.69	$5.41	$10.90	$21.93
            net profit %       33.00%	33.00%	33.00%	33.00%	33.00%	33.00%

accumulated                    $0.35	$1.05	$2.46	$5.30	$11.01	$22.51
   tax paid
tax cost as                    17.31%	25.91%	30.18%	32.30%	33.36%	33.88%
   % of sell price

Note that in this example the intention is to get a 33% net profit and see how the "tax cost as % of sell price" builds up in only a few levels. In addition, let's say the example represents the classical "bread" example with: L1 = Farmer, L2 = Miller, L3 = Baker, L4 = Distributor, L5 = Grocer, L6 = Consumer. As can be seen, by the time we reach L6, the embedded tax ("tax cost as % of sell price")has reached 33.88%. This would mean that the consumer is paying a very healthy step-up in the price of bread due solely to embedded tax costs.

At any rate, taking the example and setting the net profit to 10% and using the very common (and perhaps even low) tax rate of 25%, you STILL end up with something like 14.4% tax costs as a % of sell price at Level 6.

	    level              1	2	3	4	5	6
init. cos   sell price	       $1.15	$1.33	$1.54	$1.77	$2.04	$2.36
    $1.00   cost	       $1.00	$1.15	$1.33	$1.54	$1.77	$2.04
tax rate    profit before tax  $0.15	$0.18	$0.20	$0.24	$0.27	$0.31
  25.00%    tax	               $0.04	$0.04	$0.05	$0.06	$0.07	$0.08
markup	    net profit	       $0.12	$0.13	$0.15	$0.18	$0.20	$0.24
  15.38%    net profit %       10.00%	10.00%	10.00%	10.00%	10.00%	10.00%

accumulated      	       $0.04	$0.08	$0.13	$0.19	$0.26	$0.34
   tax paid
tax cost as                    3.33%	6.22%	8.72%	10.89%	12.77%	14.40%
   % of sell price

To see how this works, let's look at the example with the 34.4% tax rate & 33% net profit % to see what happens to taxes as they progress through the chain of levels. In Level 1 there is $0.35 in tax paid (or accrued - either way). This $0.35 is (and must be) part of the Profit Before Tax and this entire PBT of $1.01 (which includes the $0.35 in tax) is passed on to Level 2 after it has had the L1 input of $1.00 added to it, making L2 input $2.01 (of which $0.35 is tax from L1 remember - which tax has been paid/accrued by the L1 business from the $2.01 in sales to L2). The $0.35 portion in L2 that represented tax in L1 is now boosted by the markup in L2 (a multiplying effect which multiplies the entire cost including the $0.35 from L1) and adds to the input cost of L2 to give a new tax of $0.70 which is passed along - still with what was originally a $0.35 tax from L1. The upshot of the mechanism is that the cascading taxes both multiply and add and when sold to an end consumer, say at L6, the tax cost as a % of revenue will be (in this case) 33.88% which would represent the savings from removing the business income tax.

If we take the commonly-described "bread" example you can still easily see that bread would be a good bit cheaper for the consumer - not even counting compliance savings - were it not for these caxcading, embedded taxes.

This is really what the embedded taxes discussion is all about and it has nothing at all to do with income taxes on wages. So to pretend that a single economist was making such rash conclusions or that he was the only one used for economic information by the FairTax folks is simply not true. As can be seen here, there is certainly room within the business income tax area for a good bit of price reductions particularly when compliance costs are included as well.

Let us know what values you used and how the numbers come out.

[Zon]

It's a wash. People will take home a bigger paycheck and use the "extra" dollars to pay the tax. Or workers take-home pay will be what it is now and prices will drop about 22% and when you add the 23% FairTax it brings the end price back up to where it is now.

This lends an advantage to non-unionized labor. (Easer to convince workers to keep take-home pay constant to their take-home pay under the income tax.) Especially for companies wherein a majority of its products are sold in countries other than United States.

It will take a few years for pay to normalize in each industry's labor market.

A wash, but with a monthly prebate check.

In essence the issue of prices and take-home pay is akin to stating the FairTax in inclusive or exclusive terms. Each issue has has two views or talking point to express an end result that remains constant for each issue.

[Zon]

 I don't want the government to collect taxes painlessly. 

Agree. Politicians and bureaucrats have people numbed to the abuse foisted on them. That is heinous. To intentionally deprive a person of  emotional feedback is immoral. It's fraud. Criminals commit fraud. Criminals run the government. The United States government is the largest criminal enterprise in the world. It only goes unrecognized for what it is because all other governments a smaller versions of it. The world population is manipulated and controlled by criminals that have positioned themselves as the supposed benefactors of people and society. In reality they are camouflaged criminals.

No person may initiate force, threat of force or fraud against another person. That is the underpinning principle of a self-governed person. The person that recognizes that acknowledges themselves as the highest authority. About 98% of the population abides that  principle and do not initiate force against others..

What is the alternative? That people should initiate force against others? That would be anarchy.

The criminal enterprise called government, politicians and bureaucrats that proclaim themselves the people's and society's benefactor routinely initiate force, threat of force and fraud on people.

The FairTaxis a first and necessary step to exposing government and politicians for what they truly are.  Then get on with cleaning house grounded on fully integrated honesty as the underpinning principle.

FairTax

[Zon]

I would expect total amount paid (accounting for tax) for consumption would fall 5-10%, while we receive our full checks with no withholding plus whatever FCA sales tax rebate provided for in the bill a household qualifies for. 

I concur. It will take a few years for labor prices to normalize within each industry's market.

[Zon]

The take-home pay intertwined with final-product prices is a wash as is stating the tax rate inclusive or exclusive is a "wash". Both issues find their own end result unchanged.