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Abolish the IRS
The Observer Online ^ | 11/8/05 | Scott Wagner

Posted on 11/10/2005 3:18:48 AM PST by 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


TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: fairtax; incometax; irs; konstitutionparty; libertarians; taxes; taxreform
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To: pigdog
You allocate all parts of the chain to either the initial $1 cost for the item, the corporate net profit or to corporate taxes. That leaves out by far the biggest part of the economy - labor.

Your first example has aggregate after tax profit from all layers at almost 65% ($42.93 out of $66.44). Even the second one with far reduced profits has the aggregate after tax profit as 43%. Total corporate profits as a percentage of the GDP are around 10% (or maybe a little less). And I would need to check if that amount is before tax or after tax.

If you include the 80% aggregate cost of domestic labor and accumulate the employer's half of SS and Medicare on that, you'll get an embedded tax figure closer to the 8% I calculated. If you add together the employee's half of payroll taxes and the employee's income tax you'll get a figure close to Jorgenson's 22%.

41 posted on 11/10/2005 11:08:58 AM PST by KarlInOhio (We were promised someone in the Scalia/Thomas mold. Let's keep it going with future nominees.)
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To: pigdog

Good post. Thanks.


42 posted on 11/10/2005 11:13:19 AM PST by Zon (Honesty outlives the lie, spin and deception -- It always has -- It always will.)
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To: 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.

I agree. However some of the early threads on the Fair Tax combined the two. People would have gotten their current gross pay as the new net and after tax prices would have remained the same as current retail prices. You can't get both. I would love it if that were true, but you can't get the best features of both extremes.

43 posted on 11/10/2005 11:15:36 AM PST by KarlInOhio (We were promised someone in the Scalia/Thomas mold. Let's keep it going with future nominees.)
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To: Always Right; KarlInOhio

This is stream of consciousness.....pardon the rambling nature......I need to think about this some more and post a more coherent rant.....later.

I've not read the study, but as a FairTax supporter, Jorgenson's methods strike me as bizarre. Salaries and wages are set by the intersection of the supply and demand curve, not the tax bill of the employee. The tax bill of the employee is of no concern to the employer and any suggestion that the tax bill of the employee is transfered into a product cost is just, well, crap.

If the tax burden was transferred, think about what that would mean: wages and salaries would be set by the employees tax burden. Workers doing the same job would be paid different salaries, based on their associated tax burdens. Each worker on an assembly line would get a different paycheck. Clearly, that's not the case.

Here's my view: The 22% embedded tax rate is a short hand way of explaining two critical concepts simultaneously: revenue neutrality and the incidence of the corporate tax. While the standard explanation is not absolutely correct, Nominal price is a term that the majority will understand. Very few people have the background in economics or care to examine the proposal at any depth. So speaking in terms of real prices or real wages or purchasing power would just cloud the issue. Most simply want to know whether they will be better or worse off. That's why Nominal price is the best way to explain the following:

Because the FT is revenue neutral, it will extract no more from the economy than the current system, meaning the net purchasing power of the American people will remain unchanged, the tax wedge is unchanged. The incidence of the corporate tax is impossible to quantify or predict. When the corporate tax is repealed, pre-tax prices will probably drop a little, wages will probably increase a little, and stockholders return on investment will probably increase. When the personal income tax and the FICA/Medicare tax is repealed, take home pay will increase. The net effect is that when the tax is imposed on the goods, the purchasing power, or the ability to purchase a standard market basket of goods will remain unchanged. The difference is that the tax burden is fully visible.... no hidden tax component in price, no downward pressure on wages or return on investment.

Because the FairTax repeals the most regressive tax we inflict on ourselves, the Payroll tax, those at the lowest end of the earning spectrum will see an increase in purchasing power. Conversely, those at the upper end of the spectrum will effectively have all of their earnings subjected to the FICA tax. Likewise, those earning their beer money from tax free sources like Muni bonds or drugs/prostitution, will now pay their fair share of the tax burden when they spend their money. If memory serves, Ta-Ray-za Heinz Kerry Heinz paid an effective rate of 13% under the income tax scheme.....lower than my effective tax rate.

Someone has to pay the tax, but who? To the extent that individuals currently pay income tax / FICA / Medicare tax, they will pay tax when they buy goods. The nominal after-tax price of their market basket of goods will increase, but their purchasing power should keep pace. The people who will suffer a reduced purchasing power are those at the upper end of the earning spectrum. Is this clear as mud?

No system is perfect, but the FairTax is the best alternatvie I've seen.


44 posted on 11/10/2005 11:17:35 AM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: KarlInOhio

If you include the 80% aggregate cost of domestic labor and accumulate the employer's half of SS and Medicare on that, you'll get an embedded tax figure closer to the 8% I calculated. If you add together the employee's half of payroll taxes and the employee's income tax you'll get a figure close to Jorgenson's 22%.

Actually Jorgenson's remarks as regards his 1996 Ways&Means testimony, which is what this all refers to, only accounts only for a generic NRST that replaces income taxes alone, and does nothing as regards SS/Medicare taxes.

According to Jorgenson's later characterisation much of the real gain arises from efficiency gains in reducing deadweight losses that are part & parcel with the high marginal tax rates of the 1996 graduated income tax that his model implemented a NRST replacement for.

45 posted on 11/10/2005 11:19:10 AM PST by ancient_geezer (Don't reform it, Replace it!!)
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To: KarlInOhio
In simplest terms here's what the issue is. We the people want the taxpayers to feel the pain of paying taxes versus politicians want to hide the pain form you and the people so they can extract more money from you and the people.

In the final analysis the FairTaxt is a giant step towards you gaining increased freedom, financial security and privacy. 

46 posted on 11/10/2005 11:21:07 AM PST by Zon (Honesty outlives the lie, spin and deception -- It always has -- It always will.)
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To: Conservative Goddess
I've not read the study, but as a FairTax supporter, Jorgenson's methods strike me as bizarre. Salaries and wages are set by the intersection of the supply and demand curve, not the tax bill of the employee. The tax bill of the employee is of no concern to the employer and any suggestion that the tax bill of the employee is transfered into a product cost is just, well, crap.

It was not a suggestion, it was an assumption. Jorgenson made that assumption to make his modelling easier. It was the cleanest way to extract all the taxes out of the price and keep everyone's take home pay the same. If Jorgenson had to model price increases and increases in take home pay for certain people, it would have made the model more complex. He would have to model behavior of people who seen the buying power of their nest egg dwindle. The real world effects are complex as most people (workers) will probably see more buying power while business owners and retirees will probably have less buying power.

47 posted on 11/10/2005 11:31:51 AM PST by Always Right
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To: Always Right

"The real world effects are complex as most people (workers) will probably see more buying power while business owners and retirees will probably have less buying power."

Not surprisingly, I disagree. Those retirees having a substantial portion of their nesteggs in equities would do extremely well with the appreciation in the values of those equities. That is because a faster growing economy would lead to faster growth in corporate income, which is the basis for equity values. In most cases, I would expect that retirees' incremental valuation increases would be more than enough to offset what they pay for their consumption - unless they are consuming at extremely high levels far out of proportion to their means.


48 posted on 11/10/2005 12:20:11 PM PST by phil_will1 (My posts are in no way limited or restricted by previously expressed SQL opinions)
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To: KarlInOhio

For the discussion of these hidden taxes a aggregate profits is a meaningless concept. Each level is considered as an entity. You have misunderstood the example and what it represents since labor is included as part of the net profit determination and does not need to be separately presented. Remember it is not "aggregate profits" or even "aggregate taxes" we are talking about but the taxes that cascade from level to level by being embedded in the price mechanism for each level.

The term "tax cost as % of sell price" at the end of the cascaded chain is the amount that could be removed without the income tax. Note that this is an example of the mechanism involved. The numbers used are not presented as and sort of representative number. That's why I urge others to use the example with numbers they believe are valid. It is the hidden tax mechanism that is important here.

In addition, corporate taxes or profits are not being discussed as I said in the example, but business taxes or profits since there are many other business entities other than corporations. Also profits as a percentage of GDP are not meaningful to the discussion either since taxes are calculated and paid on the particular businesses profits subject to tax and the tax rate that pertains. FYI, in 2001 the average corporate major industry tax rate was 34.3% for Form 1120 filers of that category.

I think you also missed the comment in the example that payroll/withholding taxes are not included in the example (nor are compliance cocts) - only business income taxes.


49 posted on 11/10/2005 12:57:39 PM PST by pigdog
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To: Conservative Goddess

Sounds like a good explanation.


50 posted on 11/10/2005 1:04:21 PM PST by pigdog
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To: pigdog

L6 sale to consumer = sextuple taxation.


51 posted on 11/10/2005 1:08:50 PM PST by Zon (Honesty outlives the lie, spin and deception -- It always has -- It always will.)
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To: Zon

Not sure what you mean. If you studied the example you'd see that the l6 figure for "tax cost as % of sell price" was the was the amount of accumulated tax that had cascaded and embedded itself into prices at L6. It is not, however, a tax of that level (or any other) six times.

L6 is intended to be the level at which the thing is sold at retail. It is the (hidden) tax paid at that particular level expressed as a percent of the selling price and represents the potential for lowering prices by that amount. Keep in mind these numbers are merely examples and I'm not trying to say that these are any sort of definition of how much prices will be affected. My interest is in showing the mechanism.

Anyone wishing to can make his own copy of the spreadsheet and by selecting "tax rate" and "net profit %" can derive a L6 number (or even use more or fewer levels) that he believes is representative of the actual situation.

Does that clarify anything for you?


52 posted on 11/10/2005 4:45:55 PM PST by pigdog
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To: pigdog
It was all clear. My comment was tongue in cheek... sort of.

The fist business, the seed grower is taxed> the farmer that purchase the seed is paying tax on the tax the seed grower was taxed (also pays tax on his wheat harvest)> the flour mill that buys wheat from the farmer pays tax on the tax that the farmer paid on the seed growers tax. as well as paying tax an the farmers tax and also pays tax on his flour manufacturing, etc, through six levels. Basically what the spread sheet accounts for.

53 posted on 11/10/2005 4:59:46 PM PST by Zon (Honesty outlives the lie, spin and deception -- It always has -- It always will.)
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To: Zon

Yup, you've got it nailed.

Maybe I should redirect Dimples to you for an explanation since he can't understand it at all, poor thing:-)

Just kidding - I wouldn't do that except maybe to Looey.


54 posted on 11/10/2005 5:05:00 PM PST by pigdog
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To: Zon
It's sort of like:

"Great fleas have little fleas upon their backs to bite 'em,
And little fleas have lesser fleas, and so ad infinitum.
And the great fleas themselves, in turn, have greater fleas to go on;
While these again have greater still, and greater still, and so on."
----- with apologies to Jonathan Swift: Poetry, a Rhapsody

(but in reverse, mebbe???)

55 posted on 11/10/2005 5:16:40 PM PST by pigdog
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To: pigdog
Automobiles have a long list of cascading taxes embedded in the price. But that's tiny compared to this...

Paraphrasing a line from the movie Armageddon. Steve Buscemi sitting in one of the seats on the space shuttle just prior to lift of turns his head to the guy next to him and says, "How does it feel to be sitting in a rocket about to blast off into space that has 270,000 parts made by the lowest bidder?"

FairTax Sale... 
Get Two Space Shuttles For the Price of One!

56 posted on 11/10/2005 5:32:16 PM PST by Zon (Honesty outlives the lie, spin and deception -- It always has -- It always will.)
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To: Man50D
let me get this straight. someone thinks the gop controlled congress will do anything like this? ROTFLMAO
57 posted on 11/10/2005 5:37:15 PM PST by paul51 (11 September 2001 - Never forget)
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To: 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.

The Fair Tax is not a one size fits all as people would be taxed according to the amount they spend. The Flat Tax is much closer to what you describe.
58 posted on 11/10/2005 5:53:43 PM PST by Man50D
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To: Always Right

Why will business owners have less buying power? They will not pay any entity level taxes...no compliance costs....so their buying power will increase. What am I missing?


59 posted on 11/10/2005 7:30:05 PM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: Man50D
Apologies, allow me to rephrase...

If the feds tax individuals, then there will be a single policy in effect for everyone, everywhere. In general, that would be the "one-size-fits-all" perception I spoke of. It also provides a single, centralized, unmoving target for special interests to chip-away at and modify over time.

That's why I like the idea of allowing each state to decide how they are going to collect the revenue to pay a single fed tax bill based on a percentage of the state's GDP.

I like the idea of differing tax policies from state to state, because it forces a market-driven approach. Eventually, the successful model (whatever it may be) will be proven by the residents and business it attracts. The stinkers will be proven by the fleeing residents and businesses.

I realize that on the state level, there would be a "one-size-fits-all" policy, but there could be (albeit unrealistically) 50 different "one-size-fits-all" policies to choose from. Realistically, I would expect to see variants of perhaps 3 to 5 different taxing schemes.

One of the bigger downsides I see would be to a non-computerized business trying to stay on top of it from state to state.

However, I am a realist and am resigned to the fact that whatever simplified tax policy is put into effect will require convincing the powerful group of lawyers in congress to cut the throat of the powerful group of lawyers in the tax industry. The lobbying must be intense - beyond all reasonable comprehension...
60 posted on 11/11/2005 5:28:02 AM PST by jaydee770 (What can not be remedied must be endured)
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