Posted on 05/05/2006 1:35:32 PM PDT by RobFromGa
In my letter to Rep. Linder and Mr. Boortz of August 24, 2005, I pointed out a number of what I called “serious misrepresentations” of the Fair Tax plan contained in “The FairTax Book”. I specifically named many of these by page #.
Now that the revised second issue is out, let’s see what they did to these passages in the book:
First edition page 55, you go on to explain that these embedded taxes are “in addition to the money taken out of your check in income and payroll taxes.”
Second edition- this line was eliminated. This means that they are acknowledging that the 22% embedded taxes INCLUDE the income and payroll taxes which was one of my points all along.
First edition page 59, “Once the FairTax takes effect, you’ll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social security taxes, or Medicare taxes and you’ll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.”
Second edition- “Once the FairTax takes effect, you’ll be in complete control of your paycheck as nothing will be withheld and your purchasing power for t-shirts and all other goods and services will be almost exactly what it was before the FairTax.”
This means that they are acknowledging that “purchasing power” will remain the same, not a big increase in purchasing power as they previously asserted with their larger paychecks/same prices verbiage. They eliminated the “100% of paycheck” wording.
First edition page 83: “Remember that the poor, along with everyone else—will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.”
Second edition- “Remember that the poor, along with everyone else—will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. If employers leave this money in paychecks instead of taking it out of price, most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.”
Of course, this acknowledges that the employer has a choice to make—to pay the worker his current paycheck and not reduce prices (meaning prices with FairTax added go up 30%) or to cut paychecks to present takehome levels. They cannot both give workers more takehome pay and reduce prices. The Free Lunch described in the first edition is eliminated.
First edition, page 84, you make it clear though that even though the workers will keep all of their paychecks for a big raise, you still believe that because of “the disappearance of the embedded taxes, the total price paid for consumer goods will remain very nearly the same”.
Second edition—“when you factor in the combined lower prices/higher takehome pay caused by the disappearance of the embedded taxes” prices will remain about the same.
This again acknowledges that they money currently deducted as taxes can either be used to increase take-home pay or reduce prices but not both at the same time. If they were being more honest here, they would have referred to purchasing power remaining the same rather than prices, but they are trying to put the best possible spin on this major admission.
First edition page 111, you tie it all together with a Quick Review in which you erroneously assert that “Here’s what happens when we pass and implement the FairTax plan:
“We start collecting 100 percent of our earnings on our paycheck.
“We all get virtual raises, since payroll taxes are no longer siphoned from our checks.
“The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.”
Second edition:
“We start controlling our earnings in every paycheck” (whatever that means)
“100% earnings” line is eliminated from the second edition. "virtual raises" is likewise eliminated.
“Our purchasing power for buying consumer goods and services remains essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.”
This is a MAJOR difference in the Quick Review! In the first edition, they promised larger paychecks and prices remianign the same—which means a major increase in purchasing power. Of course this was a ridiculous promise. In the second edition, they say our purchasing power will be about the same.
They still left a lot of wrong and misleading verbiage throughout the book, but they addressed most of the concerns that I sent to them and removed those claims in the second book.
If you are too self-involved to see the difference between an hourly laborer getting every penny he earns before the federal government get's involved and the gov't letting you have what it wants, there is no hope for you.
The federal government gets their cut. If you really think it is a major difference whether they take their money coming in or going out there is no hope for you.
Sorry if I offended you. I thanked you in an earlier post for your work. I will read your links and try to learn more about it.
It can't be answered "head on". In theory, yes, should every provision of TFT get implemented. but That will never happen, no the truthful answer is no.
If you are too self-involved to see the difference between an hourly laborer getting every penny he earns before the federal government get's involved and the gov't letting you have what it wants, there is no hope for you.Let's see, I can make a buck and pay $0.23 in income taxes or I can make a buck and pay $0.23 in sales tax. Either way I have $0.77 worth of stuff.
"Always Right wrote:
The federal government gets their cut. If you really think it is a major difference whether they take their money coming in or going out there is no hope for you."
If you work for me, and I don't pay you what I say I will pay you but make numerous exclusions from you check, then I have power over you. Maybe next month I'll withhold it all. It is NOT RIGHT, and it NEEDS TO BE FIXED.
FairTax does eliminate corporate income taxes which are approximately 1-2% on average of the selling price of goods and services.
There are no exclusions for large ticket items like realestate. The only exclusion is purchases made by a business as a business expense, including travel expenses etc.
They add the 30% tax onto all government payments including salaries and everything they buy, so the cost of government spending will go up substantially, although their revenue neutral calculation assumes the cost of things that the government spends money on will stay the same.
Not offended, just setting the recor straight.
With the FairTax you'd get to pay 23% of everything you've saved after-tax again. What a deal for anyone with after-tax savings (such as real estate)
1. No INCOME Tax. 2. A SALES Tax on everything BUT: a. Raw food b. prescription medicine. 3. The sales tax rate to slide downward (or exempt) for LARGE purchases like realestate.
The Corporate tax should remain, as corporations exist at the will of the gov't. Also so as to NOT unemploy professional tax accountants.
The INCOME TAX was passed in 1913 (almost 100 years ago) as a
You are not allowed to change or call into question any aspect of the FairTax plan-- it is gospel. Your talk of exempting raw food and prescription drugs is heresy. Corporations don't pay taxes, their customers do. I am in favor of getting rid of all corporate taxes.
go back to post #192 - you make my point exactly.
Good luck on getting a Real Worldsm answer from any of the fairy taxers.
Yes. You have pinpointed the only real reason that some politicians would support the FairTax - pushing dealing with the third rail out to past their incumbency.
Your post is partially right, the 30% FairTax would tend to dampen consumption, but people only need money to eventually spend-- there is no other purpose. I suspect that they will find ways to spend it without paying the tax-- black market, "business use" purchases, barter, etc. The incentive to cheat will be great.
Our economy is based on consumption and people buy things they want, not just what they need. Anything that would depress consumption such as raising prices significantly is difficult to predict what the macroeconomic impacts would be.
If you get a chance, post a link to one of your earliest posts on this subject way back when...
The "complicated" Flat Tax accounting:
The number of lines in the report card is a poor indicator of the complexity of determining just what is to be placed on that form.
Apparently you chose not to pay much attention to the excellent opportunities for the growth of business for professional tax preparer where the Flat Tax is concerned.
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Flat Tax as Seen by a Tax Preparer Vern Hoven Tax Seminars
Flat Tax: After debating Congressman Richard Armey on his flat tax proposal (shown on KDTB-PBS Channel 2 Television on May 14 in Dallas), I was informed by one of his supporters that I better look for a new profession -- as tax preparers will become superfluous. This analysis, prepared for that debate, attempts to gaze into the crystal ball and surmises how the flat tax, promising low rates and simple tax returns, will change business behavior by those initially hurt under this proposal. Be it flat tax, value added tax, or national sales tax, any economic tax proposal is sold more on its promised benefits than with its perceived defects. Why Tax Reform Is Needed: After teaching nationally to thousands of tax practitioners annually over the last seven years, it is apparent to me that both taxpayers and tax preparers have lost faith in the fairness of the Internal Revenue Code, and therefore, the Government implementing that code. This is especially true for the lower and middle income taxpayer, both businesses and individuals. These inequities in our voluntary tax system are generally perpetuated because of Congress's tendency to enact legislation that is burdensome, unfair and economically unsound. Will flat tax, principally written by economists and politicians, not business taxpayers or tax preparers, continue these inequities? We don't know, but, along with everyone else, almost all tax preparers and IRS auditors want tax simplification. We hope that Congress, in its future tax-reform quest for fairness, growth and simplicity, will remember the philosophy:
How Flat Tax Works: House Majority Leader Richard Armey's 17 percent flat-tax/post-card tax return (to see the form, click on the hyperlink) is cosmetically good looking - proving that tax law in any package turns ugly after the first shave. After analyzing Congressman Armey's tax proposal (H.R. 1040), with its 20 percent transition rate, and the 19 percent The Flat Tax proposal it is based on, (by Hall and Rabushka; Hoover Institute Press, 145 pages; $14.95; 1-800-935-2882), I am afraid that Mr. Armey's plan will bring back a rush of creative tax shelters and inventive tax preparers wishing to help the winners and the losers enumerated below. First, here is how Congressman Armey's flat tax proposal works. Roger is a CPA making $100,000, net, with essentially no capital purchases (buy an adding machine and you too can become a tax preparer). He would pay $17,000 of flat tax plus approximately $10,518 of Social Security tax. Over ten years, Roger would pay $170,000 of flat tax and over $105,000 of Social Security tax on gross income of $1,000,000. Roger's client, Wayne, is a farmer who annually sells $100,000 of grain, net, starting the first year after purchasing a $1,000,000 farm. For ten years, Wayne would pay ZERO tax on gross income of $1,000,000 as the land is expensed against the grain income. What are the odds Farmer Wayne will buy another farm in year 10 and continue on the pay-no-tax path? Good you say? What happens if he does not have enough money or credit to continue purchasing capital assets? Farmer Wayne would have to start paying taxes! What a strange paradox; this system may force businesses who don't have the cash for expansion to start paying taxes! Question: if Farmer Wayne owes zero income tax, would he also owe zero Social Security tax...for ten years? (We thought the Social Security system was in trouble before tax reform!) As all tax reform proposals do, flat tax shifts the tax burden among income groups. To whom? Taxes for wealthy individuals will decrease. Hall and Rabushka announce, "Tax reform will be a tremendous boon to the economic elite from the start. After all, those with high salaries will benefit directly and immediately from the reduction in the tax rate from 39.6-percent to (17-percent or) 19-percent." "For earnings of more than $100,000, the flat tax is lower because the current income tax has higher tax brackets that take effect in those income ranges." "Why do we advocate such a generous break for people who are well off? Incentives are the answer." Is this trickle-down economics? Someone has to pay taxes! As illustrated previously, flat tax seems to be very beneficial for the capital-intensive businesses (such as the manufacturing industry) and detrimental to the service industry (e.g, professionals). Can we afford to financially pit the capital-intensive industry against the service industry? According to Hall and Rabushka, the "business tax" portion of the flat tax will greatly increase as entities such as partnerships and S corporations become taxpaying businesses that cannot pass through their income to the owners. In actuality, the most common way business flat tax is increased is by the denying of common business deductions, such as interest, property tax, depreciation and employee fringe benefits. A nondeductible expense does not reduce gross revenues, thereby creating a "phantom" profit taxed at 17-percent or 19-percent. For example: Farmer Wayne purchased his farm prior to the passage of flat tax. He sells $100,000 of grain, net, before paying his farm interest payment to the Federal Land Bank and his federal income tax to the I.R.S. After paying $80,000 of interest, leaving him $20,000 cash, Farmer Wayne prepares his tax return. As interest and previously purchased capital assets are not deductible under flat tax, (unless Congress provides a transition rule) he would report $100,000 of taxable income, not $20,000, owing $17,000 of federal income tax. He has just paid taxes on $80,000 of "phantom" income. His effective tax bracket is 85% on his available cash! Flat tax proponents have forgotten that taxes can only be paid in cash. A denial of a legitimate deduction is the same thing as a tax rate increase! The Good, the Bad and the Ugly: The good news is that filling out the postcard Federal income tax form becomes simpler, vastly simpler for certain taxpayers. It removes layers of burdensome requirements for all taxpayers. The bad news is that the accounting records necessary to fill in the postcard are still required, in some cases more burdensome than under present law. The actual placing of numbers on a tax return is a minor part of the tax preparation process. Changes in the present tax system are needed as the current tax law requires the taxpayer to perform extensive recordkeeping, thereby making businesses less efficient and competitive. Additionally, many present tax code provisions are too difficult for the taxpayer to properly implement. In spite of claims by proponents, flat tax only sporadically makes the underlining documentation for tax preparation substantially easier. The Winners and the Losers: The winners under flat tax will be (1) the wealthy, (2) investors living on interest and dividends, (3) owners of stock who have large potential capital gain profits, (4) fast-growing, capital-intensive businesses that use equipment, buildings and land to make their profit, (5) owners of recreational rental property, (6) sellers of owner-occupied houses, (7) tax planners, and (8) business return tax preparers. The losers under flat tax will be (1) most businesses, especially in the service sector (e.g., professionals and consultants), (2) highly-leveraged businesses (any interest paid on existing debt would not be deductible), (3) oil companies using depletion allowances and credits, (4) businesses with large unused depreciation allowances on their books (creating more phantom income), (5) homeowners who have large mortgage and real estate tax payments, (6) homebuilders and real estate agents who sell leveraged homes or homes in high property tax locations, (7) individual taxpayers using losses from passthrough entities, (8) partnerships and S corporations, (9) middle-class taxpayers, (10) municipal-bond holders with instruments paying less than T-bills, (11) individuals with large deductions, such as alimony, charitable contributions, or state income taxes, and (12) individual return tax preparers (e.g., H & R Block). In spite of claims by proponents to the contrary , flat tax will require an expansion of the IRS audit division, as tax preparers will be driving trucks through this five-page replacement of the present 1,378 pages of tax code. Repeal is not reform! With less information on the tax return to perform computer and office audits, the IRS will need more field auditors to determine if business taxpayers are reporting all income or overstating expenses. Hall and Rabushka think the underreporting of income ("over half of all business income never shows up in anyone's adjusted gross income") is the major problem with the present tax system. [I.R.S. statistics show a "tax gap" closer to 18-percent.] Why then would they propose doing away with the Form 1099 information schedule, which will result in more underreporting? The 17-percent to 19-percent Flat Tax Rate: As low as the proposed flat rates sound, taxes will increase for many taxpayers. According to Hall and Rabushka, about one-third of the taxpayers in the 15 percent tax bracket "would face a slight increase" to 17-percent or 19-percent. Additionally, taxpayers in the current income range of $30,000 to $90,000 will find "the flat tax is a little higher". At previously illustrated, the flat tax rates of 17-percent or 19-percent do not include the required contributions to the Social Security system, either for the employee or for the self-employed. As most taxpayer's look at Social Security as just another tax, they will quickly realize that the employee's effective federal tax rate is almost 25-percent to 27-percent on the first $61,200 of income, not 17-percent to 19-percent. For the individual self-employed businessperson, the addition of Social Security tax yields an effective federal tax rate of almost 33-percent to 35-percent on the first $61,200 of income, not 17-percent to 19-percent! Additionally, the employer's 7.65-percent matching Social Security contribution is not deductible as Hall and Rabushka determine it to be a "fringe benefit", even though the employer must mandatorily pay this amount. Should involuntary payments be classified as fringe benefits? Armey's Flat Tax Returns: All income taxes would be filed on two ten-line or twelve-line postcards, they being: 1. Form 1: Wage income (total of individual's wages, salary, and pensions); and Under flat tax, many families will file two separate returns, e.g., one individual and one business return. Combining of wages and business income is not allowed. Present law is simpler in that it permits both to be reported on one Form 1040. As the business return contains no personal or dependent allowances (e.g., the family of four is allowed a tax-free allowance of $31,400 under Mr. Armey's plan), this may force businesses to annually pay income, to the extent of the maximum personal allowances, to the owner if they wish to minimize their two potential tax bills. This seems to force money out of a business for tax purposes only, creating an anti-savings philosophy. Tax planners will enjoy this complification! Items Not Taxable under Flat Tax Include: 1. Assets transferred at death, i.e., estate tax (therefore, no step-up in basis) Some wealthy taxpayers living on interest income, dividend income and Social Security would pay no tax. Flat tax eliminates the present 50-percent/85-percent Social Security inclusion amount for higher income beneficiaries. It is understandable that Hall and Rabushka question the fairness of this result and alert us to the need to think "about the taxes they would pay under the flat business tax!" In this case, flat tax is simple, but may not be perceived as fair by other taxpayers. With capital gains becoming tax-free, personal investments such as stocks, bonds, and the sale of personal residences would no longer be taxable. Congressman Armey would make all capital gains nontaxable; Hall and Rabushka would include in taxable income capital gain on rental property, plant and equipment and not include capital gain on stocks, bonds and other financial instruments. Post Card Individual Tax Return - for Wages and Pensions. Taxpayer's compensation would be reported on a 12-line simplified form. Interestingly, many taxpayers with only wages are presently filing Form 1040-EZ, which is very similar to the flat tax postcard! Tax preparation would only be slightly reduced for these taxpayers. Compensation means all cash amounts paid by an employer or received by an employee, including: 1. Wages, pensions, bonuses, prizes, and awards, Compensation does not include business expenses reimbursements to employees by employers, fringe benefits, including but not limited to medical benefits, insurance, meals, housing, recreational facilities, and other fringe benefits (even though all fringe benefits are tax-free to employees, they are not deductible by the business paying the fringe benefits), and wages, salaries, and other payments for services performed outside the United States. Large personal exemption allowances will be permitted for married taxpayers filing joint, single taxpayers, and single head of household taxpayers, in addition to exemptions for their dependents. All taxpayers would be entitled to claim dependency exemptions, if more than half the total support is provided. This means that a child over 13 would be able to use his or her own personal allowance (e.g., $10,700 under the Armey plan) and their parents could claim a dependency exemption for the child on their return (e.g., another $5,000), a tax planner's delight. Armey proposes a new "kiddy tax" requiring that all income of a dependent child under 13 must be included on the parents tax returns. The extra exemptions for the blind and the elderly would be repealed. Following is a comparison of the alternative personal exemption allowances with present law.
# Standard Deduction All deductions vanish such as charitable contributions, property taxes and mortgage interest deductions. An analysis by the economic consulting firm DRI/McGraw-Hill estimate that the market value of all homes could drop by up to 24% (a $150,000 home would decline to $113,500) if flat tax is enacted with no phase-in period. Hall and Rabushka reluctantly suggest a transition rule allowing a 90-percent interest deduction if the interest becomes taxable income to the lending institution. No retirement plan deductions would be available. When the accounts begin to pay retirement benefits, those benefits would be taxed as compensation. Is this double taxation? Alimony would not be deductible by the payor-spouse, or taxable to the recipient, creating havoc with many previously ordered divorce decrees. Unreimbursed employee business expenses and moving expenses would be nondeductible. On the other hand, reimbursed employee business expenses paid under a qualified reimbursement plan would be deductible by the employer and not taxable to the employee. All credits would be eliminated, e.g., low-income housing credits, rehabilitation credits, and child care credits. The Post-Card Business Tax Return - Form 2: Business entities that would be required to report flat tax income includes: 1. Corporate income (old Form 1120 and/or 1120-S), Hall and Rabushka require that "any organization or individual not specifically exempt..., with business receipts" must file a business, not individual, tax return. This simple sentence completely changes the way taxpayers will conduct business under flat tax, to the delight of tax planners. For example, if a taxpayer has a hobby business with any gross income, flat tax will allow more hobby businesses, (not less as Hall and Rabushka predict), to be combined with active business in the future! Passive activity businesses would be combined with active activity businesses. Other potential winning and losing ideas follow. Partnerships and S corporations become taxpaying entities under flat tax, having to pay taxes on their net income before distributions. For example, Clint, a married lawyer, operates through an S corporation that earns $100,000 net before paying the lawyer a $21,400 salary and the rest ($78,600) as dividends. As dividends aren't taxed, and the first $21,400 of salary would be tax-free by the personal exemption, does the lawyer pay zero tax that year? Yes, but his S corporation would have to pay tax on the $78,600, as dividends are not deductible to the S corporation and the S corporation is no longer a passthrough tax entity! A business may file any number of business tax returns for its various subsidiaries or other units, provided that all business receipts are reported in the aggregate and provided that each expenditure is reported on no more than one return. A wage-earner owning a rental would be required to separately file both the individual and business flat tax returns, as would a farmer who works part-time as an employee for another business. Hall and Rabushka state that "all self-employed individuals will file Form 2, the business tax form, where they can deduct travel and other business expenses. To take advantage of the personal allowance, you will want to pay yourself a salary of at least (the personal allowance amount) if you are married." You, the taxpayer, "will need to keep records to document your income and expenses." Under flat tax, how will businesses determine if a worker is an employee or an independent contractor? As unreimbursed employee expenses are not deductible and the self-employed individual can deduct those same expenses, workers with any expenses will want to characterize themselves as independent contractors! Flat tax will create a war between the business community and the I.R.S. in the employee vs. independent contractor controversy. Statutory employees (e.g., commission-drivers, traveling salespeople, life insurance agents, and homeworkers), will lose their ability to deduct their expenses (e.g. traveling costs). Under present law, a statutory employee who receives a wage statement is allowed to deduct his or her travel expenses on Schedule C. Hall and Rabushka clarify that "renting is definitely a business activity and would require a business tax form. Rental receipts are taxed as business income, but the purchase of rental property qualifies for a first-year write-off." For example: Bill, an Enrolled Agent, buys a Lake Tahoe condo for $200,000 and rents it out. Bill can deduct the $200,000 loss, resulting from the right to expense the purchase price of the condo, against his professional tax preparation income in year one. (This should substantially increase value of rental real estate!) Question: Jill buys a Lake Tahoe condo for $200,000 and rents it out until she eats up the net operating loss carryforward. Can Jill then convert the real estate into a personal-use condo and pay no taxes on a later sale? (Tax planners, what can we do with this loophole?) Additionally, Hall and Rabushka suggest this tax planning: "if rental income is your only source of income, you should pay yourself a salary from rental income and fill out the wage form to take advantage of the generous personal allowance enjoyed by every taxpayer." This may be a very insidious suggestion and puts tax planners in a quandary! Under current law, real estate rental income is not subject to Social Security. It doesn't make sense to convert rental income to salary income, thereby subjecting it to the burdens of 15.3-percent payroll taxes and payroll reports. On the other side, it may be prudent for the taxpayer to pay himself or herself a salary (up to the maximum personal exemption allowance not being offset by other wages), create a rental loss with this tax-free income, and have an artificial carryforward loss to deduct against future income or the gain at time of sale. A businessperson, but not an employee, would be able to offset his or her rental loss against current business income. The current "reasonable compensation" standards do not exist under flat tax. Even if property is rented under a net lease with the use of an independent property manager (i.e., owner not participating in management), it would seem the taxpayer could pay a $21,400 salary to himself or herself to take advantage of the maximum married-filing-joint personal allowance. Banks and insurance companies would find their interest income taxable under an interesting concept. Hall and Rabushka state: "the solution is to require that banks report the price of the services they provide to depositors. The price is easy to measure - it is the difference between the market interest rate and the lower rate that the bank pays on accounts that have bundled services." Taxable Business Income: Business taxable income reportable on Form 2 is simply: Business receipts (Line 1 on Form 2) Gross revenue - "Line 1". Hall and Rabushka state that "business receipts are the receipts of a business from the sale or exchange of products or services produced in or passing through the United States." Business receipts include: fees, commissions, rents, and royalties . Additionally, it includes gross receipts from the sale of plant, equipment, and land previously deducted.
Gross revenue also includes the market value of goods, services, plant, equipment, or land provided to its owners or employees, and delivered from the United States to points outside the United States, if not included in sales.
Deductible Business Expenses are Limited to the Purchases of: 1. Goods, services and materials (a.k.a. business inputs), Deducting purchases of goods, services and materials - "Line 2a." According to the Hall and Rabushka plan, "the firm can deduct the cost of all the goods, materials, and services it purchases (whether or not resold during the year) to make the product it sells" or resells as "the tax has already been paid on those items because the seller also has to pay the business tax." Additionally, it includes "[t]he market value of goods, services and materials (business inputs) brought into the United States, and the actual cost, if reasonable, of travel and entertainment expenses (and business meals) for business purposes." Only 50 percent of business meals and entertainment is currently deductible. Under flat tax a business would eliminate the cost-of-goods-sold calculation as they could deduct the inventory when purchased, not when the inventory is subsequently sold. It would seem that a business would no longer have to decide the proper method of accounting, e.g., cash accounting vs. accrual accounting. This is a huge incentive for businesses to purchase excess inventory on December 31 of each year simply to reduce taxes! In my opinion, the income tax code must, as one of its basic concepts, follow economically sound accounting guidelines, such as the matching of income and expenses. Additionally GAAP (Generally Accepted Accounting Principals) won't allow the deduction at purchase time. This dichotomy requires a business to continue maintaining two sets of books. Hall and Rabushka would allow a taxpayer to "deduct (as capital equipment) the full cost of a car she bought for business use." Question: Would this include a full deduction of the attorney's Mercedes Benz? How much would be deductible if the car was used partly for personal use? What would happen if the attorney bought a car on December 15, used it 100% for business until December 31, deducted it, and converted it to personal use the next year? Hall and Rabushka solve this dilemma by including in the business gross receipts "the market value of goods, services, plant, equipment, or land provided to its owners or employees." This fancy recapture rule will create immense valuation problems as most taxpayers will deduct cost and recapture the lowest fair market value possible. Another complification. Deducting wages, salaries and pensions - "Line 2b." As permitted by Hall and Rabushka, a business "can deduct its (actual cash) wages, salaries, and pensions, for, under our wage tax, the taxes on those will be paid by the workers receiving them" on Form 1 wage-tax returns. Businesses could pay owners a wage to take advantage of the personal exemption on the individual form. It would seem they also could make their children over 13 non-working owners, and thereby pay them a deductible $10,700 annual tax-free salary (assuming it is the maximum single personal allowance under flat tax). Tax planners rejoice! Deducting capital equipment, structures, and land - "Line 2c." The business can deduct all its outlays for both new and used buildings, plant, equipment, and land in the year of purchase. Why? Hall and Rabushka feel that flat "tax reform would improve the productivity of capital by directing investment to the most productive uses." The expensing of inventory, plant, equipment and land is likely to result in massive acquisitions on December 31 of each tax year for the sole purpose of reducing business tax to zero. For example, successful businesses will start to speculate in farm land for expensing purposes, thereby driving land prices up. This means that tax law is driving economic decisions which often creates more inefficient uses of these expenditures. Additionally, it is a violation of the matching of income and expense accounting concept. Hall and Rabushka defend the expensing of land for the following reason: "Land transactions are included in the flat tax because it is difficult to separate the value of land from the value of the buildings on it." Why is this any more difficult than trying to determine the fair market value of fringe benefits or foreign purchases from a related corporation? An appraisal will give the taxpayer this information. Non-deductible business expenses: The current tax system allows small businesses to deduct most expenses when paid. Hall and Rabushka raise havoc with the deduct-when-paid-in-cash concept by proposing that "many deductions allowed to businesses under current laws are eliminated in our plan," including interest payments, fringe benefits, property tax, and owner pensions, (or any other type of payment to the owners). This creates "phantom" taxable income. Hall and Rabushka repeal all tax credits and state "Like all the credits in the existing tax system, such as the jobs credit for business employers who hire members of special targeted groups, credit for alcohol used as fuel, credit for increasing research activities, disabled access credit, enhanced oil recovery credit, renewable electricity production credit, and qualified electric vehicle credit, the low-income housing credit would disappear with the advent of the flat tax. All these credits distort the economy and narrow the tax base, thereby raising rates for everybody else." This would also include the tax incentives now offered for preserving historic structures. "The tax system is not the proper place to undertake social engineering." My question is, if flat tax gives taxpayers an incentive to purchase capital equipment, structures and land, why are these other tax incentives suddenly unacceptable? Additionally, would this include the AMT credit carryforward? As mentioned previously, flat tax doesn't tax fringe benefits (e.g., employer-provided health insurance and employer contributions to retirement plans) received by employees, but it also doesn't permit the employer to deduct the costs of those fringe benefits. (Phantom income strikes again!) But employees need not worry, as Hall and Rabushka say "Today, fringe benefits are an extremely important part of any compensation package, and your employer will not cut your benefits without compensating you in some other way." The problem with this statement is: a before-tax benefit isn't enough money to buy the after-tax insurance policy. Not permitting a business to deduct employee parking, a fringe benefit, is more complicated then under present law. What happens if a business buys a parking lot for their employees. Would a normally deductible item, land, become non-deductible because it becomes a "fringe benefit?" Would fringe benefit costs include military food and housing allowances? According to Hall and Rabushka, governmental agencies and non-profit organizations would be required to pay taxes on the fringe benefits paid to their employees. How silly does it sound when the government is required to pay money to itself! Strangely enough, certain currently non-deductible fringe benefits become deductible, according to Hall and Rabushka, such as "tickets for box seats at baseball stadiums, and club memberships." Hall and Rabushka must feel that Social Security is an abusive tax shelter as "the employer's (Social Security) contribution would be treated like other fringe benefits - it would not be deductible from the business tax." This will create large phantom income for the labor-intensive employer! Under flat tax, losses, which will be much more prevalent with the expensing of buildings and land, can only be carried forward. Present law allows the taxpayer to carry back losses three years, reducing the excess tax paid in prior years! Why won't flat tax allow this fair result? Example: if a C corporation has $100,000 net income and pays the sole shareholder no wages in 1995, the C corporation would pay taxes on $100,000 (e.g., $100,000 x 19% = $19,000). What happens if in 1996, the C corporation gives the sole shareholder the $100,000 as a bonus at the beginning of the year but tragically has no corporate income that year. The sole shareholder has individual wage income of $100,000 on the same income that was already taxed on the business return. Flat tax does not allow a net operating loss carryback for the C corporation. Tax planning would suggest that the corporation should have paid the sole shareholder the $100,000 as a tax-free dividend, not taxable wages. I know this will happen often! Hall and Rabushka would allow carryforward losses to be purchased. "A bankrupt company could be acquired by another firm, which would assume the tax loss." Didn't we get rid of this huge abusive tax shelter area? Even better, Hall and Rabushka will have the IRS paying interest (6 percent in 1995) to the taxpayer on annual tax loss. Moreover, balances carried forward will earn the market rate of interest . Line 6 through 10 on the Business Form show the mechanics of the carry-forward process. The government would pay interest to an incompetent business person who is losing money; also to big businesses who are having business swings. Welfare for the business community? Tax planning: If total profit is less than the maximum personal exemption amount, the taxpayer should pay themselves the full exemption amount, use their personal exemption to create no taxable income on the individual return, creating a business loss that earns interest income paid by the Government! In conclusion, it is apparent Armey's flat tax economic theory hasn't been thought through to implementation; the sizzle, not the steak, is being sold to the unwary public. Alarmingly, current political wisdom makes flat tax the economic tax proposal most likely to pass! This is in spite of the fact that most economists have determined that a 22-percent to 24-percent flat tax rate, not the proposed 17-percent, is required to make it revenue neutral. Additionally, because of the massive shifting of the tax burden among income groups, losers outnumber winners, and many provisions entice citizens into becoming tax cheats! There is no such thing as a simple solution in a complex society if you wish to be fair. |
Who are you and what planet are you from?
The income tax is a fundamental plank in the Communist Manifesto.
The Ten Planks of the Communist Manifesto
1. Abolition of private property and the application of all rent to public purpose.
2. A progressive or graduated income tax.
3. Abolition of all rights of inheritance
4. Confiscation of the property of all emigrants and rebels
5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly.
6. Centralization of the means of communication and transportation in the hands of the State
7. Extension of factories and instruments of production owned by the State, the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan.
8. Equal liablity of all to labor. Establishment of Industrial armies, especially for agriculture.
9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country by a more equable distribution of the population over the country.
10. Free education for all children in government schools. Abolition of children's factory labor. Combination of education with industrial production, etc. etc.
We have had, and should have, a different standard in America.
Indirect, or consumption taxes, were the American standard spelled out by Alexander Hamilton in Federalist #21:
The wealth of nations depends upon an infinite variety of causes. Situation, soil, climate, the nature of the productions, the nature of the government, the genius of the citizens, the degree of information they possess, the state of commerce, of arts, of industry, these circumstances and many more, too complex, minute, or adventitious to admit of a particular specification, occasion differences hardly conceivable in the relative opulence and riches of different countries. The consequence clearly is that there can be no common measure of national wealth, and, of course, no general or stationary rule by which the ability of a state to pay taxes can be determined. The attempt, therefore, to regulate the contributions of the members of a confederacy by any such rule, cannot fail to be productive of glaring inequality and extreme oppression.
This inequality would of itself be sufficient in America to work the eventual destruction of the Union, if any mode of enforcing a compliance with its requisitions could be devised. The suffering States would not long consent to remain associated upon a principle which distributes the public burdens with so unequal a hand, and which was calculated to impoverish and oppress the citizens of some States, while those of others would scarcely be conscious of the small proportion of the weight they were required to sustain. This, however, is an evil inseparable from the principle of quotas and requisitions.
There is no method of steering clear of this inconvenience, but by authorizing the national government to raise its own revenues in its own way. Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. If inequalities should arise in some States from duties on particular objects, these will, in all probability, be counterbalanced by proportional inequalities in other States, from the duties on other objects. In the course of time and things, an equilibrium, as far as it is attainable in so complicated a subject, will be established everywhere. Or, if inequalities should still exist, they would neither be so great in their degree, so uniform in their operation, nor so odious in their appearance, as those which would necessarily spring from quotas, upon any scale that can possibly be devised.
It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ``in political arithmetic, two and two do not always make four.
If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
In conclusion, it is apparent AFT's FairTax economic theory hasn't been thought through to implementation; the sizzle, not the steak, is being sold to the unwary public. Alarmingly, current political wisdom makes the FairTax the economic tax proposal most popular! This is in spite of the fact that most economists have determined that a 40-percent to 50-percent inclusive (inclulding state and local tax increases) tax rate, not the proposed 23-percent, is required to make it revenue neutral. Additionally, because of the massive shifting of the tax burden among income groups, losers outnumber winners, and many provisions entice citizens into becoming tax cheats! There is no such thing as a simple solution in a complex society if you wish to be fair despite the name "FairTax".Thought you'd like to know ;-)
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