Posted on 12/05/2005 2:36:33 PM PST by Eaglewatcher
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 America’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 “shadow economy accounts for more than 10 percent if America's GDP. . .†(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? “[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 15†(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 “about making April 15 just another beautiful spring day. . .†(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.
* “Friedrich Schneider and Dominik H. Enste, “Shadow Economies: Size, Causes, and Consequences,†Journal of Economic Literature, 38 (March 2000), pp. 77-114.†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.
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You are dreaming up a nightmare that does not exist. Those who have a negative tax rate under the prebate will certainly have a difficult and sparse existence. Check out the figures for yourself and judge where you think suvbsistence might be. Most low income earners will undoubtedly spend more than they receive as a prebate.
It isn't welfare and there is no intent that it represent a subsistence dole (unlike some of the present welfare program). It is simply refunding your tax paid. Is someone spends less that the prebate one year, they would very likely spend more that the prebate in other years. It is not welfare, And it IS optional.
The illegal economy which almost completely escapes taxation today WILL be tax at 23% on taxable expenditures. This is in no way "silly" but quite logical and will contribute heavily to tax revenues - wheras now you and I make up for that shortfall from those folks since they are largely not taxed. There will be very little in the way of a "black market" and no one has been able to show how there can be but only to generate the fearmongering of saying it'll be "massive". Let me tell you, the illegal economy we have now is what is massive and a black market in every sense of the word. The FairTax will be a breath of fresh air compared to the present widespread evasion.
Read the bill - it is the states that will be collecting and managing the FairTax (not the Feds) and they are paid to do so.
Shirt: $20.00
Total: $20.00
FairTax @ 23% $4.60
Yes, the price of the shirt is tax inclusive.
Nope, Looey, you're wrong - once again, the FairTax doesn't tax the state tax.
You've been told that probably tens if not hundreds of times.
and later:
"The FairTax is neither a tax cut nor a tax hike, but an alternative method of gathering revenue for the Federal Government"
That's a contradiction right there. If it's "revenue neutral" then trillions of dollars will NOT be added back to the American economy. It will go where it goes before the fair tax.
"Those who have a negative tax rate under the prebate will certainly have a difficult and sparse existence. "
agreed.
"The illegal economy which almost completely escapes taxation today WILL be tax at 23% on taxable expenditures"
so all criminal will now be shopping for their goods at the local Best Buy. uh sure, ok. Maybe it will hit them on their food bill at the local Kroger but beyond that, yes, i still think it is wishful thinking. i agree the current black market is massive, and it ain't going way - just changing forms.
What if they decide not to pay anything, like they did under the Articles of Confederation or under the Confederate Constitution?
Look at some of the other examples on the FairTax site. The one you chose is someone making a low wage and spending it all.
The 3,101 is the amount they are paying due to the hidden taxes which I mentioned (they are not a "trickle down" at all but both cascade and embed into the different levels as I pointed out. And that is a real cost under the income tax system. It is also a hidden cost as I explained. You apparently choose to disbelieve that it exists but it certainly does. As I said I don't know whether the figure should be 15, 20, or 25% of the expenditure, but it is definitely there and reduces your purchasing power under the income tax but it is nOT there under the FairTax and that's why is is show in the way it is.
The tables are not misleading as you state. You merely seem to not understand what they show. Take a bit more time and think about them.
That's one of the things that led to our first income tax in 1863.
There's an old saying ... apportionment sucks!!!
And later:
The pressure will be on local and state sales tax authorities to simplfy their tax, removing exempted items and thereby (perhaps)lowering the effective rate.
It seems to me that the pressure of having tattooed "Fat Tony" type thugs coming in to "rattle their cage" would pressure locals to ADD exempted items since everyone would want to buy and sell exempted items and keep more money for themselves rather than remitting it to the feds.
That said, they are still useful because they keep the thread bumped to the top.
i 100% belive the 'hidden taxes' exist in today's system.
that does not make that table any less misleading.
what that table says is that on the day fairtax is implemented the employer of the person who is currently earning $10k will be given by the employer a 30% raise. that is the ONLY way those numbers work (equal spending power).
"The one you chose is someone making a low wage and spending it all."
i'm pretty sure someone making that wage will be spending it all. a large portion of it on non-preused-food.
Most in the illegal economy will be buying at retail from normal, law-abiding retailers. they'll also be buying their $500,000 cars from the local Ferrair (or oher) dealer and pay a tax on it. Ditto on new homes. Sure, food, too and XBox360 with games. All at retailers that will be charging taxes.
The amount of bleck market goods beyond that will pale into insignificance compared to the present almost 100% evasion of the income tax by these folks. To pretend otherwise marks you as foolish indeed.
sorry i messed up the wording.
what that table says is that on the day fairtax is implemented the employer of the person who is currently earning $10k will give the employee a 30% raise.
I think the "trillions" of dollars is in reference to Part ! of the article where the author is talking about the trillions of dollars that are now sent offshore to escape the income tax and will come back into the U.S. economy after the FairTax is implemented.
i'll agree to share my foolishness equally with those who think that these people buy (or will continue to for those that do) most of their goods legally at retail.
what happens why i buy that $500,000 car 'used' from canada? assuming that situation is covered (it must be, these people aren't stupid) that does not negate the numerous ways of obtaining good untaxed.
yes, i agree fairtax is better than the current system in regards to evasion - does it come close to eliminating it, no way. in reality i really doubt it would make a noticable economic impact.
No, it really does not. It says the person is making the same gross wages but now (under the FairTax) gets to keep it all. In addition, he gets the $3,701 prebate from the FairTax (assuming he wishes to get it) and that gives him a spendable amount of $14,413.
In other words, he no longer has income/payroll taxes taken from him but receives the full amount and also the prebate amount. This actually understantes the case, since he is also better off because prices of goods will have dropped due to the removal of the hidden business income taxes and compliance costs that had raised prices under the income tax. His employer will not have given him a raise at all - the money from the present tax system goes to his benefit now including the hidden taxes.
As I recall the figure was $11 trillion.
I agree with you on those points.
Take the two possible extremes on my conversion from the current income tax to the Fair Tax:
1. Businesses reduce their pretax prices by the entire 22% embedded tax amount which is increased back to current price levels by the sales tax, but businesses reduce payrolls so employee's new full paycheck is equal to their old net. As an employee, I will continue to take home my current net pay and spend the same amount on goods and services. I end up about the same as now. I can buy just as much stuff with the sales tax as I could with the income tax.
2. Businesses continue pay employees their full gross, but cannot reduce prices significantly. Prices - after the addition of the 23% (inclusive) sales tax - will go up. I get more pay, but I have to spend more money for the same goods and services. I end up about the same as now. I can buy just as much stuff with the sales tax as I could with the income tax.
You could pick other cases in between those two extremes if you want a small decrease in gross pay and a small increase in after-tax prices.
There is no option 3 where I take home my current gross paycheck, but prices after the sales tax remain at their current levels. If that were true, I would be able to buy about 25% more goods and services than now. If everyone could do that, that would imply an immediate increase of the real GDP of 25%. That's not going to happen in a year because of changing the method of collecting the same amount of tax.
Getting rid of the IRS, the progressive tax code, all of the social engineering, all of the bribes to Congressmen, all of the accounting and all of the inefficient actions by companies and people who are trying to avoid income taxes would be a help to the economy. It would boost the economy tremendously. Even a 1% per year increase in the GDP would be huge. Just don't tell me I get my entire current gross paycheck and current prices remain the same with the Fair Tax. That's just a lie.
If the thing purchassed is "used" (which is defind as something on which tax has been paid) it is not taxable even if purchased in the US so he needn't go to Canada.
Trying to think up millions of hyoptheticals isn't gointg to prove your point since most in the illegal economy are fairly normal people economically and buy groceries, medical services, homes, clothes, etc just as you or I might - at retail such as Wal-Mart or any of the millions of other good sized retailers who do most of the retailing and have no interest in putting their business in danger to allow you to NOT opay tax and thereby assume the obligation to do so themselves. That make no sense at all.
And don't forget if the $500,000 is new and brought from Canada there is a customs duty and various licensing restrictions to catch it. the "massive black market" is what we now have with the illegal economy rather that what we will have under the FairTax. There will always be some trying to evade under any tax system. but there's actually less motivation under the FairTax than under the present tax system due to the higher marginal rates of the present system.
Oh, but ther IS an option 3 (at least) which is the worker retaining his gross pay and prices declining (before the FairTax) due to the removal of the hidden tax costs embedded into prices. these are the parts of the business income tax and the compliance costs that cascade and are embedded into the price structure as an item moves through the different production/distribution levels.
The only question is how much will they decline (and then be boosted back up by the FairTax)? I believe the figure will fall somewhere in the 15, 20, or 25% price reduction range (perhaps more, but I'll stick with this range) but there will have to be further economic studies to know for sure. It certainly will not be zero percent as many of the income tax defenders either imply or actually state.
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