FAIRTAX, FLAWED TAX?

Evidently the FairTax is making some people nervous. The attacks are increasing, and there's a striking similarity in the fabrications being offered by columnists and pundits from coast to coast.

The heaviest, and possibly the strangest, attack over the weekend came from Wall Street Journal columnist Bruce Bartlett. Bartlett's column was titled "Fair Tax, Flawed Tax," and by Sunday morning it had generated hundreds of emails. When I finally read Bartlett's column I was completely stunned. I've referred to his commentary dozens of times in the last few years on the show, so for him to be so far off – so bizarrely wrong – about the FairTax was stunning.

OK ... by now you've probably read the column, so let's deal first with what I feel to be Bartlett's libelous assertion that the FairTax was " ...originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service,"

This assertion – that the FairTax was developed by the Church of Scientology – is flat-out false. I suspect that Bartlett allowed someone else to do his research for him on this issue; someone with an agenda. Perhaps he blindly accepted some information from a Washington insider, perhaps a K Street denizen who fears the loss of power and income should the FairTax become law.

What Bartlett did was very simple, and astonishingly careless. He mistook a group called Citizens for an Alternative Tax System (CATS) for the people who developed the FairTax.

Now CATS did have a plan for a national retail sales tax, but it was in no way connected with Americans for Fair Taxation (AFFT) and the FairTax.

I was familiar with the CATS program. I had them on my radio repeatedly. As I've told you, I've been interested in this idea of replacing the income tax with the sales tax for some time.

The CATS idea was simply to do away with income taxes and replace them with a 17% sales tax. Payroll taxes would stay with you, as would many other federal tax levies. As you can see, this is substantially different from the program offered by the FairTax.

I'm going to lead you to several articles here. The first link will take you a document detailing the history of CATS.

If you read this carefully you will see absolutely no reference to the FairTax. There is no reference to Congressman John Linder or H.R. 25, the FairTax Act. All of the references are to CATS and their own idea of a national retail sales tax.

Moving right along here, next you have a list of articles detailing the connection between CATS and Scientology.

http://www.google.com/search?hl=en&q=%22Citizens+for+an+Alternative+Tax+System%22%2BScientology&btnG=Google+Search

That's right. It was CATS, not Americans for Fair Taxation with the strong connection to Scientology. In fact, here's another link setting for Scientology front groups.

http://www.google.com/search?hl=en&q=%22Citizens+for+an+Alternative+Tax+System%22%2BScientology&btnG=Google+Search

Scroll down the list a bit and you'll see CATS! You will not see AFFT or the FairTax mentioned.

The people responsible for creating AFFT and the Fair Tax are Houston Businessmen Leo Linbek and Robert McNair. Neither one of these people are Scientologists.

These men and their associates raised over $20 million for a study on finding an alternative to the federal income tax. That research was conducted by a coalition of market and academic experts from places such as MIT and Harvard, none of whom were associated in any way with Scientology. From that research came the FairTax.

Just an interesting historical note: When the research for a new tax system was commissioned with the $20 million raised by Linbeck, McNair and their associates, they made a commitment to accept whatever findings the research developed, strongly suspecting that their efforts were going to lead to the endorsement of some sort of a flat tax. The market and academic researchers came forth with an idea for a national retail sales tax instead, and the FairTax was born.

Bruce Bartlett owes Leo Linbeck, Robert McNair and the hundreds of thousands of FairTax volunteers across an America an apology. I suspect that apology will be forthcoming before too many days pass.

There were many other inaccuracies in Bartlett's column. As you know Congressman Linder and I, with the help of a brilliant analyst named Rob Woodall, are busy writing another FairTax book that will address virtually every meaningful criticism you may have heard or read. In Reader's Digest form, here are some quick response to other charges by Bartlett:

Bartlett jumps right into the middle of this nonsense over what the real tax rate is; 23 percent or 30 percent. He correctly points out that we don't quote the FairTax rate the way conventional sales taxes are quoted. The reason is simple; the FairTax will replace the embedded taxes and already exist in every item or service we purchase; and secondly, the FairTax will replace the income tax. Both the embedded taxes in the prices of what we buy now and the income taxes we pay now are inclusive taxes. We're replacing inclusive taxes with inclusive taxes.

It's so very simple: When you see a lamp on the shelf marked $100, you will pay $100 for that lamp when you get to the checkout. You will receive a receipt which shows that $23 of the $100 you have paid represents the FairTax. You do the math for yourself, but every time I work it out it comes to 23%

Bartlett also joins other critics in another blatant falsehood about the FairTax. Here's a sentence from his column: "If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%." In another paragraph Bartlett also says "Imagine paying 30 percent to the federal government on top of the purchase price of your next house."

Wrong, wrong, wrong. If a product costs $1 at retail .... It costs $1, with the FairTax already included. This is so easy to understand, you almost get the idea that people are intentionally trying to confuse the facts here. That $1 item Bartlett is referring to costs $1 at retail today! But instead of including the FairTax in that price, all of the embedded taxes from every business and individual involved in bringing that item to the marketplace are included. You remove one, you add the other. And that bit about 30 percent to the federal government on top of the purchase price of your new home?

Another lie. The embedded taxes are so high on the price of a new home today that when they are removed and the FairTax added, that home could be a percent or two cheaper! Come on, Bruce. This really isn't that hard. Let's try to spell this out plainly for everyone:

In another astonishing falsehood Bartlett says that the cost of providing the prebate to every household in America is not factored into the FairTax rate. He says it would cost at least $600 billion the first year. Again, Bartlett is just flat wrong. The cost of the rebate most certainly was included in the 23 percent rate. Congressman Linder tells me that if the rebate had not been included the FairTax rate could have been lowered to 18 percent.

The fact is that the rebate is projected to cost 5 percent, and that 5 percent is most certainly included in the rate.

Bartlett makes another huge mistake(?) regarding the prebate. He says that the FairTax sends monthly checks to every household based on income. Then he speaks of the "complexity and intrusiveness of tracking every American's monthly income .." Wrong ... completely and absolutely wrong. As anyone who has read the book knows, the prebate is not based on income, it's based on family size. There is no need to track anyone's monthly income. The only thing the government needs is a valid Social Security number and the number of people in the household.

Then, of course, Bartlett gets into the question of whether or not you can fund the federal government at present levels with a 23 percent inclusive sales tax rate. He cites numerous sources that say the tax rate would have to be much higher than 23 percent.

Know this ... in every case where some individual or organization has come forward to say that the tax rate would have to be higher than 23 percent, they have first changed the terms of the FairTax. That is, they have created exemptions. For instance, they assume that congress would never agree to tax food and medicines, therefore the tax would have to be XX percent, or that congress wouldn't tax transportation and housing, therefore the tax would have to be XX percent. Again .. the fact that the taxes are already there in the form of embedded taxes – embedded taxes to be replaced by the fair tax – is ignored.

Instead of me arguing about the sufficiency of the 23 percent rate, perhaps you would like to read it for yourself. Here's a link to a study by several economists titled "Taxing Sales under the FairTax: What Rate Works?"

http://people.bu.edu/kotlikof/Taxing%20Sales%20under%20the%20FairTax,%20What%20Rate%20Works,%20October%206,%202006.pdf

Don't take my word for it. I'm just a second-tier talk show host. See what several renowned economists have to say in a 34-page report.

"Candidate Smith wants to add 30 percent to the price of everything you buy."
"Candidate Jones wants to add 23 percent to the price of your new home"

Can you imagine some uninformed voter (remember, most voters are government educated) hearing something like that? You just know how they're going to vote, don't you?

Is it possible that some of these irresponsible attacks are being mounted right now to prevent a new candidate, Fred Thompson, for instance, from running on this issue? Is a shot being fired across some political bows?

It also enables American manufacturing to be more competitive overseas where there is no NRST.

Even if that were true, do you really think them overseas governments would never figure out our secret economic weapon and retaliate?

The cost of labor in the manufacture of stuffed animals for Fisher Price is $1 in China and $8 in the US. The FairTax ain't gonna equalize that.

The “Fair Tax” would be a worst case scenerio for my wife and I. We have both been working very hard full-time for about 25 years (in our late 40’s) paying an average of 38% in combined taxes per year, living frugally and saving as much as possible. In about a year, we plan on selling our California home, moving into an existing mobile home on my parents property, and helping them out in their old age for about 6 months of the year, and living off the interest on our savings (interest should come to about $25K/year...little or no income tax, due to “progressive” Calif./Fed tax rates). For the other 6 months we plan to buy a truck/RV combo ($50K or so) and travel the country until we get to be about 60-67 years old (our 401K’s, pension, Social Security?? kick in then). We then take our savings and build a new home for our later years. So for us under a “Fair-Tax”, the double-taxation would begin immediately, starting with the truck/RV $50K purchase, and then later on with the site-built home??? Not sure if “Fair-Tax” sales taxes would apply to building a new home on property you own. Fortunately I think the chances of the “Fair-Tax” passing in anything near it’s current form are low, maybe 1 in 1000 or less.

That's not relevant to the conversation but other than (everybody knows by now) there wouldn't be an IRS, but instead 50 seperate tax collection agencies with 50 different interpretations of the law. The rest is baseless speculation. Businesses will still have "paperwork" and to say there'd be fewer audits of sales under a sales tax trying to collect 23% of business gross income is really out there...

What do you think all those 50 new collection offices (not counting the satellite offices) would be doing? Sitting around twittling their thumbs?

Actually you and your wife would be a lot better off if the Fairtax were in place under the scenario you lay out. First, you would receive any interest you earn completely free of taxation. Secondly, you would not pay ANY tax at all on your spending up to the current poverty level. And thirdly, all those pretax investments (401ks etc.) would enjoy a HUGE windfall in that there would now be no tax due when you withdraw the funds.

OH! One more thing!

That truck/RV combo would likely not cost you any more under the Fairtax, with the tax included, than it would under the income tax as both of those items require very long supply chains for their manufacture. All of the taxes, and all of the costs associated with filing those returns, winds up in the price of every part going into both items. All of that would disappear with the fairtax in place.

...50 seperate tax collection agencies with 50 different interpretations of the law.

Or NRST will nudge the states into conformity with the FairTax.

From

A National Retail Sales Tax: Consequences for the States

While many desirable macroeconomic consequences would follow from adoption of a national retail sales tax, there would also be serious effects on state and local government finances. Absent the IRS, it would be more difficult to maintain viable income tax systems. And the costs of financing state and local government services would rise sharply. State and local tax bases would be substantially broadened if they conform to the NRST base; nonetheless, higher rates would be necessary to replace existing revenues and to finance costs of paying the federal tax on state and local government service delivery. Together there seems to be little in a national sales tax that states and localities would find palatable.

For the founding fathers, a balance between federal government and state rights was an issue and the Constitution is a result of the compromise reached. I doubt they would have accepted a federal tax system that reached into the states and taxed every single sale of goods and services conducted (with the exception of business to business, of course) whether between individuals, individuals and business, government and business, government and individuals.

While the FairTaxers promise more freedom from government with their scheme, it looks like the NRST puts the federal government smack dab in the middle of the day to day economic life of Americans in an unprecedented way.

Good lord, that comment is ignorant. By that argument there would never be ANY price competition. And yet it happens ALL THE TIME. Therefore your argument is false.

By your argument prices would continually be going down. And yet prices, in general, rise ALL THE TIME. Therefore your argument is false. Pricing isn't a race to the bottom.

Too bad you didn't bother to read my argument. Nowhere did I claim that prices would be continually going down. I said there was price competition. And I reiterate my statement that anyone who doesn't understand this concept is too ignorant to be involved in serious discussions involving economics.

To help, though, I'll give you a tiny primer. When an expense (e.g. taxes) involved in creating a service or commodity goes down, the developer of that commodity has several options: they can pocket the increased revenues (e.g. increase profits, invest in infrastructure, raise wages, etc.), lower prices, or both. Companies that engage in competition (non-monopolies) many times choose to lower prices in order to increase market share thereby increasing their total revenues. Competitors will frequently lower their own prices in order to avoid losing market share.

Attempts by an industry to avoid this competition(collusion, price fixing, etc.) are illegal though most of the time the laws are unnecessary in any commoditized market.

I hope this has relieved some ignorance. You may have to use a dictionary for the more technical terms.

In the staffing business, if our workers comp went down, we didn’t give anything back to the customers, who were already willing to pay that price. Plese tell me who would want to be first.

We all know gas prices go up because of the Dick Cheney-led conspiracy controlling prices.

But did you ever wonder what causes them to go back down?

It's because of the competitive pressure created when margins are excessive.

If worker's comp rates go down for all staffing services, Kelly and Snelling will both have their costs decrease by the same percentage. Since both companies have a high fixed cost of being in business, a slight increase in sales translates to a highly disproportionate increase in profits.

In my own business, for instance, with admittedly very high fixed costs, $1000 in increased sales translates to well over $500 in net profit.

Both Snelling and Kelly can make a lot of money by stealing business from the other. Each is under intense price pressure from their customers, who often price shop the competition, and who may very well be aware of the drop in costs.

The only way prices don't come down is if the staffing businesses conspire to keep them up, which is illegal and seldom works very well anyway. The conspiracy gets set up because the conspirators are greedy and unscrupulous; and these are the people you expect to keep their word to the other conspirators and not cut prices to make more money for themselves?

Besides, what is to stop Joe Smith, manager of the local Kelly, from quitting his job and starting his own service, with lower rates used as a way to get business quickly?

The higher the excess profit margin, the more incentive there is for others to enter the field and grab some of that gravy.

You really ought to be aware this is all Free Market 101 and was covered in detail by Adam Smith in 1776.

You omit a few things. Not all workers comp goes up the same. There are “frictions” to entrance into a market or industry, such as availability of capital, availability of labor, industry-specific knowledge, legal restraints such as non-compete agreements. Gas prices jump up and drift down. No one wants to be first. Most businesses don’t face a store on every corner. Sometimes a billion dollars or more is required to begin an enterprise, and what if the market conditions change in the meantime?
Competition by price is for fools and losers. Perhaps we learned this in a higher level course, or by the hardest experience.

You’re right. The free market is messy and sloppy. But as a pricing mechanism it works, most of the time pretty well and all of the time to some extent, unlike any alternative that has ever been implemented or even proposed.

Only an idiot who has never operated a business would claim that price competition doesn’t exist and isn’t a key factor, often the key factor, in how a business prices its goods or services.

For that matter, there is downward pressure on prices even in the absence of a competitor who will do the job cheaper. In my own business, I can often get another project by reducing my price slightly. Let’s see, would I rather have $900 or not have $1000? If my costs have gone down recently, am I not more likely to go for the $900?

I probably used the term “excess profits” inaccurately. My knowledge of economics is largely practical rather than theoretical.

When I said “excess profits” I meant the high profit levels, a result of demand exceeding supply (Point A), that induces competitors to expand their capacity and new competitors to enter the field. As others have pointed out, the expanded capacity eventually catches up with demand and exceeds it (Point B), resulting in price competition that eventually forces less-efficient competitors out and the stabilizing of prices at a level that provides more “normal” profit levels (Point C).

You really don’t want to argue this point with me, as I’ve spent the last five years riding this roller-coaster, with Point C reached in the last year.

I find it extremely bizarre that anyone on a “conservative” forum would argue against the most basic principles of free market economics.

The black market,drug dealers and all underground types paid the same tax when they purchased goods prior to the Fairtax as they will after the Fairtax

A $1000 watch before the FT incured the 23% embedded tax that was paid by the retailer.

With the FT the 23% embedded tax is paid by the buyer with no change in the total price,still $1000

Complete fallacy that these people types will now pay more taxes under the FT plan

No,thats not what Boortz says-the 23% embedded tax on new purchases now paid by the retailer will be offset by the the buyer WITH NO CHANGE IN TOTAL PRICE

Their claim is under the Fair Tax Plan is these people will now pay more taxes

How could they pay more in taxes if they believe the 23% is a fraction of the 23% enbedded tax

If they believe it will be more than 23% than all taxes will move up to that level and everyone will be paying more,not just the underworld.

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