The FairTax and it's Implications for the U.S. Economy (Part II of Income Tax)

Imagine if all of these trillions of dollars were added back to the American economy. On top of that, imagine saving the $500 billion compliance costs every year. These two things would give a huge boost to the American economy. Fortunately, there is a plan to make this happen, a plan sponsored by Georgia Representative John Linder. The plan is called The FairTax, or H.R. 25. Part II of this paper will describe The FairTax.

Officially called the FairTax Act of 2005, the FairTax would do many things to simplify the way Americans pay taxes, including completely abolishing the Internal Revenue Service. The FairTax would replace many of the taxes Americans pay, including the individual income tax, the alternative minimum tax (AMT), corporate and business income taxes, capital gains taxes, Social Security taxes, Medicare taxes, the self-employment tax, estate taxes, and gift taxes (Boortz 74-5). The elimination of all of these taxes would allow workers to take home all of their paychecks. No withholding and no income taxes. That's right, people would get to choose when they had to pay money to the Federal Government, and that would be at the retail counter. Their money would not be forcibly taken from them.

Notice the word replace in the paragraph above. Many politicians tried using scare tactics in the 2004 election, telling the people that their opponents who supported the FairTax would be adding the FairTax on top of all those other taxes. This is simply not true (81-2). The FairTax would replace all of those taxes. The FairTax is neither a tax cut nor a tax hike, but an alternative method of gathering revenue for the Federal Government (75). Remember the 22-cents-out-of-every-dollar embedded taxes described in Part I of this paper? Take all of those taxes out, and institute a 23-cents-of-every-dollar consumption tax, and the prices of goods and services haven't changed much.

What is the FairTax? The FairTax is a proposed national consumption tax on new goods and services at the retail level. Only new goods are included for two reasons: First, goods should only be taxed once, not every time they change hands and second, taxing only new goods keeps things simple. Imagine the bureaucracy that would be needed for all people to keep track and correctly file their taxes whenever they sold their car, etc. We are trying to move away from all of that complexity!

In Part I of this paper, I mentioned the IRS tax code and how it exceeds 54,000 pages and 2.8 million words (Americans for Fair Taxation). Ordinary Americans do not have the time to interpret this abomination called the tax code. We have to pay others called CPAs (Certified Public Accountants) to do it for us. Think about this: we have to pay people money in order to pay the government money. How ridiculous! With the FairTax, businesses would just collect the consumption tax at the time of purchase, much like they already do in states where there is a sales tax. This saves time, and money. Americans will be paying the same amount of taxes, while not having to pay CPAs. More money in the pockets of Americans (generated by not having to waste time and money with CPAs) means that Americans will have more money to spend on consumer items, and thus will be creating even more tax revenue! Additionally, those 5.8 billion hours (Boortz 43) that I mentioned earlier will be spent on producing. When Americans as an aggregate spend 5.8 billion hours trying to pay the Federal Government money, they are not at their jobs or at home doing anything truly meaningful. They are, in essence, wasting time. With the FairTax, and without the IRS, those 5.8 billion hours would add to the economy, generating more income for people to spend, which would then generate more revenue for the government. Those hours would also allow for more quality of life, giving parents more time to spend with their kids, etc.

While companies are forced to make tax-decisions they are hindered in making economic and capitalistic decisions. Eliminating the income taxes, both personal and corporate, and instituting the FairTax would help businesses. This is especially true of small businesses.

"President Bush recognizes that supporting Americaâ€™s small businesses is critical to ensuring continued job creation. Small businesses create two-thirds of new private sector jobs in America, employ more than half of all workers, and account for more than half of the output of our economy." (The White House)

Small businesses employ more than half of all workers and generate more than half of our economy. Wouldn't it make sense to help small business owners? Help them out, and what do you get? More employment and an extended production possibilities curve. What kinds of things hinder small businesses? Taxes, and more specifically, personal income taxes and self-employment taxes. Because small businesses are small, the owners typically pay taxes on the personal level or as small corporations. Because they are small, these taxes hit them much harder than they would a larger corporation. Eliminating these costs would allow all businesses, small and large, to focus their attention on producing goods and services, generating wealth for themselves and taxes for the government.

More people would be subject to this tax as well, thus generating more revenue for the government (I keep mentioning more revenue for the government; I know that the government needs to greatly reduce its spending, but that's another argument for another time). Who else would be paying into our tax system? Illegal immigrants and tourists. Think about it, under the current system, neither pay income taxes or Social Security taxes anyway, because illegals don't want to get caught, and tourists don't work here. With the FairTax, they would pay into the system with every purchase they made at the retail level. Some people dislike the idea that foreigners should pay into out system, but I don't and here's why: if they want the privilege of being in this country (whether working illegally or visiting legally), then they should contribute. Don't think for a minute that Americans don't pay Germany their Value Added Tax (VAT) when we buy their products.

The FairTax would also tap the large shadow economy of the United States. Whenever you buy the services of a landscaper, maid, house painter, or hot dog vendor, and you pay them in cash, it is not likely that they are reporting most if not all of that income, and this is known as the shadow economy. That income escapes the clutches of the Federal Government, but is that really fair? If you have to pay taxes on your income as a college professor, but I don't pay taxes on my income as a theoretical house painter, is that fair? The answer is no. Under the FairTax, we both keep all of our income, and pay taxes at the cash register. In his book, which I have cited often in this paper, Neal Boortz cites a 2000 survey claiming that the â€œshadow economy accounts for more than 10 percent if America's GDP. . .â€ (93 *). Maybe that kid who mows your grass doesn't pay an income tax on the money earned by his services, but he'll pay the consumption tax when he buys a new video game at Blockbuster.

Many jobs are sent overseas when American companies take their corporate headquarters and manufacturing plants there. Why would they move away? Under the current tax system, businesses are burdened by the regulations and costs associated with compliance. How much money is overseas? â€œ[T]he 2000 Merrill Lynch & Gemini Consulting study World Wealth Report estimates that one third of he wealth of the world's high-net-worth individuals is held offshore. How much would that be? Try $11 trillion - $11 trillion sucked out of the American economy, all of it immune to the tax obligations you suffer every April 15â€ (Boortz 97). Think about the size of that number. $11 trillion is enough to give 11 million people a million dollars each. This $11 trillion is not in the American economy. This $11 trillion is not producing jobs in this country, nor is it investing in capital or technology in this country.

Let's start putting all of this together, assuming that the IRS has been abolished, and the 16th Amendment has been repealed. People get to take home their whole paycheck every week or two. Their employers can hire more people because they have more money and a higher production possibilities curve. The cost of goods and services stays about the same as before because the 23% consumption tax is about the same as the previous 22% embedded tax (that most people don't even know they were paying). The shadow economy is drastically reduced. Additionally, businesses from overseas begin to come home to this relatively tax-friendly environment, bringing with them even more jobs and capital. Sounding pretty good so far, right? Now for the Grand Finale: The Prebate.

Lyndon B. Johnson launched his War on Poverty in the mid-1960s, and so far, not much has happened. Let's try a new War on Poverty: The FairTax. With this newly implemented FairTax, lower-income workers are already getting to keep their whole paycheck. Most of them never paid any appreciable amount of income taxes, but now they are not having to pay withholding taxes either. They have more money in their pockets. Goods and services cost about the same as before, so already these lower-income workers are doing better than before the FairTax. Let's help them out even further. H.R. 25, or the FairTax, provides for a prebate on the basic necessities of life. A prebate would be a check from the government given monthly to all working Americans to cover their costs of taxes on essential goods and services at the poverty line. That's right, the government would give Americans, and we'll focus on lower income Americans, a check to cover the taxes needed to pay for food and shelter up to the poverty line (Boortz 85).

Think about this for another minute, not only would lower-income Americans have more money in their pockets, but the cost of taxes on goods and services (the bare essentials) up to the poverty line would be eliminated by this prebate. This would essentially lower the prices of these goods needed by lower-income workers. Here's how this all flows out: 22% embedded taxes are eliminated, 23% sales tax is implemented, all Americans receive checks to cover this 23% up to their determined poverty line, lowering the costs yet again. The combination of more income and lower costs would greatly increase the purchasing power of lower-income workers, and would do wonders for the anti-poverty movement.

The FairTax would allow all Americans to keep their whole paycheck, while cutting taxes on goods and services up to the poverty level. The FairTax would eliminate $500 billion of waste every year, putting 5.8 billion hours to better use. The FairTax would tap the purchasing power of both illegal workers as well as perfectly legal tourists. The FairTax would greatly reduce the shadow economy in our country. The FairTax would bring back $11 trillion to our country. The FairTax would utilize all of this to generate more money for the Federal Government. The FairTax would grow the economy and help lower-income Americans. The FairTax is â€œabout making April 15 just another beautiful spring day. . .â€ (Boortz XV). The FairTax Book by Neal Boortz and Congressman John Linder is a must-read, both informative and entertaining.

Bibliography Boortz, Neal & John Linder. The FairTax Book. New York: HarperCollins Publishers, 2005.

* â€œFriedrich Schneider and Dominik H. Enste, â€œShadow Economies: Size, Causes, and Consequences,â€ Journal of Economic Literature, 38 (March 2000), pp. 77-114.â€ Cited in Boortz' The FairTax Book, page 93.

McConnell, Campbell R. & Stanley L. Brue. Economics: Principles, Problems, and Policies. 16th ed. McGraw-Hill/Irwin, 2005. Online. Americans for Fair Taxation. . Online. Tax Foundation. . Online. The White House: President George W. Bush.

"If anything, your repositioning of the hidden tax figure of $3,101 implies that somehow the taxpayer could spend the $14,097"

yes, but does the right hand not do the same thing with the 14,413? it makes the same implication by excluding the federal sales tax.

i really do think i equalled them out. in both cases you have $14k "to spend" and in both cases there are taxes involved, in one they are hidden, in the other they are in the form of a sales tax.

thus the total "purchasing powers" is reduced on both sides, yet the amount of "spending money" you have is accurately displayed.

the next argument may be "well, they don't have to spend all the money" -- but (a) that is true for both columns, and (b) the chart on fairtax's website states that spending 100% is assumed.

feel free to correct my percentages for me. i did it based on 3101/14097 for the 14.9 and 3101/10996 for the 28.2.

I know the poster to whom you refer and have discussed this particular point with him (plus another which we do not agree on) and we certainly do not agre on these two points but both support the FirTax despite the two disaagreements.

The point of my telling you that is that your assumption of why he disclosed that to you was not the "adamantly opposed" apellation at all. That is merely one other error on your part. It is because of a laundry list of points of opposition that you respond with that you have earned the name - many of which laundry list are routine (and repeated) themes of admitted opponents to the FairTax.

So you're quite wrong about all FairTax swupporters being universally in lockstep. It is not true - there is no such "problem". However when you clearly misstate things as you have done on this thread you will certainly be receiving comments to the contrary. Perhaps you cant't take that.

"So you're quite wrong about all FairTax swupporters being universally in lockstep."

then why the attacks

"However when you clearly misstate things as you have done on this thread you will certainly be receiving comments to the contrary. Perhaps you cant't take that."

point me to where i've contraticted myself? or where i haven't gone indepth to try and explain what you call "clearly misstate things"?

i'm really trying to understand. i'm going to defend my opinion, and i believe i've done so w/o labeling, name calling, or attacking. i hold certain beliefs as to what "sales tax" means to people, to how hidden taxes should not be display as being removed from income when comparing systems, to whether or not prebate is a conservative or liberal mechanism, etc., etc. my opinions are considered misstatements.

i give up, concede. you win. i must be against fair taxation.

well then i contradicted myself in the first quote itself,

Exactly. And in that quote -- reposted below -- you stood on it being an invasion of privacy. You used it as an example of invasion of privacy. You didn't stand on the fact that the prebate is voluntary.

fairtax requires me to register with them and provide dependency info if i want my 'refund' (prebate), yet another invasion of privacy. 335

In your 344 post to pigdog you quoted yourself from post 335: "i said "requires...if you want your prebate" --- don't accuse me of not being able to read!"

In post 344 you claim that in 335 you knew the prebate was voluntary, denoted by the words if you want. If you have it both ways -- stand on voluntary and stand on invasion of privacy -- then you knew that you were contradicting your self when you wrote post 335. I don't think you knew you were contradicting yourself. It does call into question why you would tell pigdog that you didn't mean it as an invasion of privacy, but rather, a voluntary action.

You're right, the comment I made about spending and the $14K makes little sense assuming the worker pays no income tax since the same numbers are in both tabels. But rearranging them accomplishes nothing productive either that I can see except to allow you to include your desired wording along with the odd comment about the rate calculations (and glad to see you fixed the error) which really adds nothing worthwhile.

I don't see that there is any "compromise" necessary since the purchasing power is identical. The fact that the FairTax table doesn't specifically have a line that says "spendable income" before it removes the $3,101 hidden tax seems to be the burr under your saddle. If so, that's silly since it is clearly included that way in their calculation. It is a matter of form, not substance.

The next observation is NOT that "... they don't have to spend all the money ..." as you suppose since that is, by definition, the case for both sides of the table. The difference really is, however, that the one on the FairTax side needn't spend it all for taxable things, thereby actually having greater purchasing power than the income tax slave. The income tax side has no such options as all that he buys will pay the hidden tax and his payroll taxes are not optional. In addition, I think that the income tax side is being shorted on the amount of tax he pays since, in effect, he also is paying the other half of the 819 payroll tax - not out of his stated wage, but out of the wage he did not receive from the employer who had to use it to pay the government for his services.

In addition, with the FairTax situation, the taxpayer gets to control not only the choices of the things he buys, but the timing of those purchases whereas the income tax person has no such ability.

So, if anything, I think the FarirTax table actually understates the case to the benefit of the income tax side of things.

but nearly all of your statements apply to the original table too, so they are not points againts my table.

in my table i was just correcting to properly COMPARE TAXES ON PURCHASES which is what the hidden tax applies to.

the hidden tax on purchases does not come off of the income until after making purchases.

to compare the two methodologies (sales tax vs hidden tax) it makes no sense to me to take the hidden tax out of the person's income (which the original table does)

and that is full circle back to my original statement 10+4=14, not 11. (10.7-.8+4.2 really but i was trying to simplify)

it also makes perfect sense to explicitly express the 22% -- that is the percentage used to estimate what the hidden tax is on purchased goods, the other 28% is usable too - for comparing against the proposed sales tax.

the numbers end the same which i never argued against.

my only complaint was that if someone has 14k in their pocket under the current system and they have 14k in their pocket under the fairtax system -- they are equal at that point.

no federal sales taxes have been paid out of that money and no hidden taxes have been paid out of that money -- both of those things happen when the money is spent.

You ask "...then why the attacks ..."? Firstly they aren't really attacks at all but attempts to not let you continually misstate things as you have done on this thread. You should review your own posts on this thread to see the "odd" statements you're put forth that are merely inviting responses - and assuming that was your intennt, that is what you received.

For example, in #11 you (presumably) do not know what hidden taxes are (when in later posts it is apparent that indeed you DO know what they are).

In #12, you propose apportionment as a tax system that would be preferable to a sales tax. This despite the fact that apportionment of that sort has never worked well or for very long and is one of the reasons we got our very first income tax as a "benefit". You also make the claim that would make the 17th amendment disappear when clearly there is no connection of it with apportionment of taxes.

When the fallacies of these two posts was pointed out, you attempted, in #52, to alter the meanings of what you posted by changing what you in fact posted. These are bad signs very early on and indicate a willingness to twist meanings from what clearly was said (i.e., to lie) and are often the hallmarks of FairTax opponents. In that very post you misstate the basis of the FairTax - another danger sign. Presumably for someone who later claimed such affinity for the FairTax (and a good amount of knowledge about it) these are very worrisome indeed.

Next, in #54, you launch into the FairTax being anti-large-family which is the exact opposite of the truth. More worrisone babbling from someone claiming "knowledge".

Again, In #57, you once more attempt to modify what you said earlier. More oddity for someone knowledgeable.

In #61 you attempt to justify your anti-large-family position (and fail to do so, apparently mistaking the prebate for an entitlement system (which it is not) as though it needed to be larger for large families to cover their expenses. You also carp about the hidden tax pretending it is, somehow, mysterious when - after all - you claim to be a follower and almost supporter just about "On board" with the FairTax not long before. It is becoming patently obvious that there's something rotten in Denmark by about this time if not before. In the same post you go on to carp about the name of the FaitrTax as being "doublespeak" (must've missed the explanation of that which is on the FairTax website while you were "almost on board"). And in this same post you offer the assertion that you just get a hypothetical response of 'trust me' - when that has never been a response offered anyone under such circumstances.

In #68, you launch unwarranted (and unprovoked) attacks by calling the prebate "welfare" when it clearly is not and comparing it to the EIC which clearly IS welfare. You then next call the prebate a 'liberal's dream' when it is the opposite of that. You then continue on about completely unspecific "loopholes" and "black markets" - all without foundation and things that are some of the part and parcel of the SQLers handbook ... not to mention the big, bad bogeyman of "evasion" (also, of course, undefined).

All in all, kpp_kpp, in less than 100 posts on this thread you have clearly established yourself all right - but not as what you'd like us to believe in your posturing. Instead you have all of the earmarks, attitudes, and subject matter of any other Squirrel trying a sneak attack on the FairTax and supporters while pretending otherwise. You're far from the first to try this taxtic.

I'll not waste more time going through this thread to cite instances (and there are many more) since I know you'll never admit to them, but it is nice of you in your last sentence in #368 to finally admit the true situation.

As I said, the order of calculation is not particularly material in the two tables since the bottom line number is the same. Nor is the inclusion of the percentages that you feel somehow compelled to offer.

And I notice you completely ignored the other points in my post about the FairTax taxpayer being better off with his purchasing power since all things are not taxed and that he has the power not only to decide what to buy but when to buy it. That's important since under the income tax the taxpayer has no control over a good chunk of his tax expenditures and everything he buys is taxed with no possibility of NOT being taxed on things he buys.

Furthermore, many economists will hold that the emploiyer's half of payroll taxes properly should be considered as belonging to the employee. If that's the case, that would in effect raise his taxes even more.

In short, you aren't looking at the whole picture but just the little bit you prefer to see through the keyhole.

re 11: no, it was explained that the hidden taxes meant purely hidden in purchased goods and not hidden as in payroll taxes.

re 12: i discuss for the sake of discussion. that is what i do in my job -- problem solving, brainstorming, analysis. in that it is critical to be open, not judge input, not attack viewpoint or opinions...

for example the connection to the 17th amendment, for the sake of discussion, is, i think, states themselves would want a larger direct say in how the government was run if some form of apportionment were in place --- and all i meant by my statements is that it is probably no accident that the 16th and 17th amendments come in that order and are right next to each other. ("states will want their vote back once they are getting the bill") it all has to do with power.

this is consistent with my post in 52.

re 54: as a middle class family w/3 kids, mortgage, charitable giving, etc. my contribution to the federal government would go up under fairtax. so, the current tax system is considered somewhat unfair because of all the exemptions and social engineering it performs. i.e. it "subsidizes" families (the larger the family the more the subsidy) through all kinds of breaks. larger families have large expenses (food, medical, etc.) so they will have a larger burden to bear under fairtax -- yes the prebate helps, if you're willing to give up your privacy.

i just think the social engineering perspectives of tax system by governments are open for discussion. fairtax claims not to do social engineering -- but that can't be entirely true. neutral social engineering is a form of social engineering. even something as simple as the prebate you still have to define a dependent.

re 57: so i don't state everything clearly in type, and i make typos -- it was a correction. hold it against me if you wish.

re 61: yes a continuation from 54. here i also hint at something i discuss in some of my later posts: the prebate is either welfare or privacy invation -- calling it a rebate gives me some kind of right to it but to get it my privacy has to be invaded, something fairtax claims to not do. ("oh, but it's voluntary" well, then it's not a rebate.)

and yes, i think giving something/anything the label "fair", regardless of the original intent, is doublespeak IN A WAY -- because to be opposed to it you are opposed to "fair"ness. IMO, it's a silly name. so, i don't like the name, oh well.

re 68: in complete consistency with my opinion throughout the entire discussion, i believe that the prebate is a liberal aspect to the fairtax system, i also believe it is there to get liberal support, i also believe that if the EIC did not exist it would not be needed. fairtax.org's charts show that -- the chart we've been going back and forth on -- if EIC wasn't a part of it the prebate wouldn't need to be given for the taxpayer to end up with equal purchasing power.

the other half of 68-- do i believe fairtax's claims that we're all of a sudden going to be able to capture this huge amount of illicit/criminal money? no. it is mostly just trading one type of black market for another. back to that same chart we've been discussing: if product purchases today have a 22% embedded/hidden tax that means we're already collecting on illicit/criminal money when they buy food, medicine, houses, and cars. it is a weak argument for fairtax in the end.

thank you for analyzing my posts. i could also go on as well and defend my consistency throughout but i appreciate the effort.

like i stated in 54, i'd like to discuss it from a technical perspective but it doesn't seem possible here. if people on fr can't even agree that getting nearly everyone in the country signed up with the federal government for a monthly check has a liberal/socialist taste to it then i must be WAY off the charts.

and you must be kidding about 368 -- if you can't tell that is a joke, that makes it all clear and proves the accuracy of my disliking the name itself.

"And I notice you completely ignored the other points in my post about the FairTax taxpayer being better off with his purchasing power since all things are not taxed and that he has the power not only to decide what to buy but when to buy it. That's important since under the income tax the taxpayer has no control over a good chunk of his tax expenditures and everything he buys is taxed with no possibility of NOT being taxed on things he buys."

i didn't touch it for two reason (sorry for not being thorough in the response)

1) the original chart didn't touch it either -- i should have copied over the disclaimers. it is based on the assumption that all money is spent, so i was too -- i wanted to show that i wasn't fooling with the numbers.

2) with 14k of spending money and two kids a large chunk is most likely food and rent, both of which are taxed (if i'm mistaken about the rent being taxed please point me in the right direction for that info). add to that some medical expenses and their isn't much, if any, money left. (and note, none of the items i just mentioned can be obtained tax free)

hey, lets get off to a better start.

seeing you both seem genuine in wanting to help me see the light on fairtax maybe you could help me clarify what i'm missing in the following situation:

setup: let's say i'm a real estate investor (this isn't entirely made up, some of the numbers are based on a real situation - no necessary my own). the time is now, i.e. before fairtax is implemented. i purchase a small apartment complex and take out a mortgage of $600,000 on it. it is a relatively low income area and there are 20 units generating 450/mo income each. it is an commercial venture so the interest rate on the mortgage isn't that great -- a payment of $4500/mo and i'm pulling in about $8100 in rent with a 90% fill rate. obviously i've got property tax, maintenance, insurance, paying someone to manage it, etc. i consider it successful to net 5-10k/yr.

now fairtax is implemented and rent is suddenly taxed at 30%. what happens? i see one of two things:

a) the rent payments go up from 450/mo to 585/mo, granted nearly everyone's rent payment in the area goes up 30% but still these are low income rentors -- they can't absorb that as they didn't get a 30% pay raise, and thus abandon my complex. okay, maybe not all of them - but my profitability is based around a 85-90% fill rate.

b) i should reduce my rent payments by about 23% to 350 so with tax the rent stays almost the same (455). now i'm only pulling in 6300/mo and i still have a 4500/mo mortage due plus property taxes, grounds keeping, paying the manager, maintenance etc. my mortgage isn't going down, my property taxes aren't going down, i'm expected not to drop the salary of the manager, my insurance isn't going down -- so now i'm in the whole every month.

c) even if i were to try and compromise between a) and b) the only cost of mine that may be going down is maintenance and some other minor fees (garbage, etc.). so even if b) is seen as extreme, i really don't have much flexibility to drop the rent price enough to make much of a dent in the 30% tax.

so, now i'm left with an investment that was sufficiently profitable and is now a loss for me.

again, i'm fully open minded to the possibility that i'm missing out on some formula or option here. please help.

thank you.

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