The FairTax -- The Truth By Neal Boortz

Townhall.com ^ | November 27, 2007 | Neal Boortz

[K-oneTexas]

The FairTax -- The Truth By Neal Boortz Tuesday, November 27, 2007

Last Thursday Townhall contributor Hank Adler published a column on this website entitled “A Hard Look At The Fair Tax (sic)”. Almost immediately the emails started pouring into my show – literally by the hundreds – urging me to post a response to Adler’s rather stinging critique of the FairTax.

Since Congressman John Linder, the author of H.R. 25, The FairTax Act, and I wrote “The FairTax Book” in 2005 we’ve seen an unprecedented and ever-growing nationwide interest in this tax reform idea. Let’s face it, you have to be doing something to capture the imagination of the American people to have a book on taxes debut No. 1 on The New York Times Bestsellers List. There are some, though not in what we call the mainstream media, who think that Governor Mike Huckabee’s embrace of The FairTax is an important element to his rise in the GOP presidential sweepstakes.

Now to make this column worth reading for those of you who are not familiar with the FairTax, a very quick introduction is in order.

The FairTax eliminates all corporate, business and personal federal income taxes, all payroll taxes, capital gains taxes, dividend taxes and estate taxes, and replaces them all with one embedded sales tax on the sale of all goods and services at the retail level. Tens of millions of dollars in research show that the corporate and personal income and payroll taxes that will be eliminated by the FairTax end up being paid by consumers at the retail level. The average amount of embedded taxes in the cost of everything we buy at retail is approximately 22 percent. This would mean that we are replacing the embedded cost of our present tax system (22 percent) with the embedded FairTax (23 percent).

Every household in America will receive a check or a credit to an account at the beginning of every month equal to the amount of FairTax that household would be expected to pay during that month on the basic necessities of life. Poverty figures for various family sizes from the Commerce Department will be used to calculate the size of this “prebate.” This guarantees that nobody will have to pay the FairTax on the basic necessities.

There is so much more to this proposal, but to learn more you really need to devour the FairTax website (http://www.fairtax.org) or order a copy of The FairTax Book online.

OK .. there’s your briefest of introductions. Let’s move on to the reason for this column.

Congressman Linder and I are no strangers to dealing with out-of-left-field attacks on the FairTax. When it comes to criticisms, it’s somewhat safe to say that we’ve heard it all. We’re both such strong believers in the FairTax and the massive transformation it would bring about, not only in our daily lives, but in the nature of our governance and our economy, that neither of us minds responding to substantive and well thought out critiques. We have, in fact, written a follow-up book entitled “FairTax, The Truth” that will be published by Harper Collins in February of next year.

Linder and I do, however, confess to a certain level of exasperation at having to spend the time responding to critiques proffered by those with a limited understanding of the FairTax, those who have chosen to ignore the basics of the FairTax, or those who just outright misrepresent the plan, in order, we suppose, to give support to a more damming criticism.

Helooooooooooo Hank Adler!

Adler’s column wanders (somewhat aimlessly) over 25 pages. With “FairTax, The Truth” hitting the book stores in less than three months there is no real need to use quite so much of your precious toner or ink cartridge in our response.

If someone criticized your purchase of a four-cylinder one-ton pickup truck on the basis that four cylinders simply can’t provide the power necessary to get any serious work done – and if the reality was that you were actually purchasing a hefty V-8 – you might be predisposed to ignore any other criticisms of your new truck on the basis that the critic simply doesn’t know what he’s talking about. That is the case with Adler’s FairTax essay.

At various points in Adler’s screed he exhibits a complete lack of understanding – even an awareness -- of the concept of embedded taxes. Suspecting that there is a slight chance that some of you who are devouring every word of this column share Adler’s lack of awareness of embedded taxes, a short explanation is due.

Simply put … every person, business or other entity that has any involvement at all in bringing any product or service to the retail marketplace incurs a tax cost arising from that involvement; and every one of these entities will incorporate that tax cost into whatever they charge for their labor, ideas or material goods. All of those tax costs come home to roost in the final retail cost of that product or service, to the average tune of 22 percent. Again, simply put, the FairTax removes those embedded tax costs from the price of all goods and services at the retail level and replaces them with the embedded 23 percent FairTax.

This is where you find the fatal flaw in Adler’s critique of the FairTax. Amazingly, not once in his entire 25-page essay does Adler mention the concept of embedded taxes in the price of everything we buy, or the fact that those embedded taxes will be removed by the FairTax. Not only does he not mention the embedded taxes, he doesn’t even give the vaguest of hints that he even knows they exist! To fail to understand, or to gloss over or simply ignore this crucial concept in a discussion of the FairTax is to render your entire argument lacking in credibility and barely worthy of response. But, being the argumentative type, I’m going to continue laying waste to at least some of Adler’s arguments.

Adler’s essay does not exactly flow effortlessly from point to point. So, in the name of brevity and out of a certain sense of mercy, I’ll just take aim at a few targets of opportunity here.

First of all we have this silly insistence on quoting the FairTax rate as 30 percent rather than 23 percent. This childish exercise is the favorite of people who either have a vested interest in preserving our present tax system, or who feel the need to criticize but lack the ability to make their criticism meaningful.

The FairTax is embedded in the price of everything you buy at the retail level. If you buy a $100 griddle, the price tag for the griddle will say $100. When you get a receipt for your purchase that receipt will itemized to show that $77 of the total cost will be retained by the retailer and $23 will be sent to the federal government as the FairTax. The total is $100, just as the price tag says. In most government schools across the country they will teach that the $23 going to the government is 23 percent of $100 you paid for the griddle. That, my friends, is why the FairTax is quoted as 23 percent; because it is embedded into not added onto the price of your purchase.

Another reason to quote the FairTax as an embedded tax is because it will essentially be replacing the 22 percent embedded tax already present in the price of everything you buy, as covered above.

Wait! There’s more!

• The FairTax is designed to replace the federal income tax. The federal income tax is quoted as an embedded tax. If you were to quote the income tax as an excusive tax the 25 percent bracket would be quoted as 33.3 percent, and the top bracket would be quoted as 54 percent.

• The FairTax will replace all payroll taxes. Payroll taxes are quoted as embedded taxes. If you were to quote your entire Social Security tax bill (and that includes your employer’s so-called “contribution,”) as an exclusive tax the rate would be 20.5 percent.

I don’t know, maybe it’s just me, but it seems to me that if people like Adler are so hell-bent on quoting the FairTax as an exclusive tax, why not quote the income tax and the payroll taxes the same way? Doesn’t that seem fair to you?

In case Mr. Adler is reading this … one more time. We’re replacing embedded taxes with embedded taxes. Apples to apples, you know.

Now let’s get on to addressing some of the specific points in Adler’s column. To make things easy, I’m simply going to put his quotes in a nifty little boxes, followed by my response.

Here we go:

H.R. 25 would result in an immediate reduction in purchasing power upon implementation for existing savings which have previously been subject to U.S. income taxes (double taxation).

Here Adler once again ignores the role of embedded taxes. The price of consumer goods in this country would remain essentially the same. The embedded taxes are merely replaced by the FairTax. How, then, does anyone suffer a decrease in purchasing power?

H.R. 25 would result in an on-going and significant reduction in purchasing power for many social security recipients with other sources of income or savings.

This is already getting monotonous. How does your purchasing power go down when you have the same amount of money in your pocket, perhaps more with the prebate, and the things you are buying cost pretty much the same?

H.R. 25 would result in the elimination of the safety net provided by the Internal Revenue Code in reducing Federal taxes for victims of disease and disaster, the elimination of incentives to save through pension plans or investment retirement, and the elimination of credits and deductions for child care.

What? These incentives Adler is talking about are tax deductions or credits. Of what possible value is a tax deduction or credit to someone who pays no income taxes? The income tax is gone under the fair tax; and Adler is going to sit around bemoaning the loss of tax deductions? This is like complaining that your 20% off coupons for bread are rendered worthless when the bakery starts giving bread away for free.

There are conflicting studies projecting the necessary tax rate required to achieve neutral tax revenues under H.R. 25.

Every one of these “conflicting studies” first changes the terms of H.R. 25 before they reveal that the tax rate might not necessarily be 23 percent. When the FairTax is scored as written economists agree on the proposed tax rate.

With every major conceptual change, there will be thousands of different interpretations of the rules. It would take years to sort these interpretations out. During that period, Treasury would issue volumes of rules and regulations.

Different interpretations of the rule! Oh, the humanity! And we all know that there are no differing interpretations of the rules under our present tax code, don’t we? Even the IRS can’t accurately calculate a taxpayer’s tax liability fifty percent of the time. Oh … and that part about the Treasury issuing volumes of rules and regulations. The current tax code takes tens of thousands of pages. H.R. 25 is 133 pages long.

H.R. 25 proposes a 23% “tax inclusive” sales tax rate. Sales taxes are not traditionally described in a “tax inclusive” manner. Sales taxes are traditionally described in a “tax exclusive” manner.

The FairTax is not a “traditional” sales tax. Consumer prices are traditionally quoted without the sales tax. Prices under the FairTax are quoted with the sales tax included. If Adler is so concerned about tradition, then let him sit on the sidelines while others with a view to the future get some things done.

At implementation, existing savings will have diminished purchasing power of 30%.

There’s that 30 percent silliness again .. and once again Adler completely ignores (if he’s aware of it at all) the fact that prices do not go up when the FairTax is implemented. The embedded taxes from our present tax system are removed, the FairTax is added … and we’re pretty much right back where we started. When you take money out of your savings account under our current tax scheme, and when you spend that money, you’re paying the 22 percent embedded tax. After implementation you’ll be paying the 23 percent embedded FairTax instead. Wrong, Mr. Adler. Flat out wrong.

At implementation, all of the social and business incentives, benefits and disincentives included in the Internal Revenue Code disappear:

A tax code should exist to procure the funds necessary for the operation of government, not to manipulate human or business behavior. Besides, the form of these “social and business incentives, benefits and disincentives” consist basically of tax credits or deductions. Credits and deductions are meaningless when there is no longer an income tax.

Among the “incentives” and “benefits” that Adler says will disappear we find references to the following:

Home interest deduction – encouraging home ownership

Contribution deductions - encouraging contributions to charity

Lower tax rate on capital gains - encouraging investment

Lower tax rate on dividends - encouraging investment

Come on, my friends. Are you beginning to see for yourselves how absurd these arguments are? Point by point:

• The home mortgage interest deduction is of no value whatsoever to someone who does not pay income taxes.

• People don’t contribute to charity in order to get a tax deduction. Who would give away $1000 just to save $350 on their taxes? Somehow that doesn’t seem to be a good trade to me.

• If lower tax rates on capital gains encourage investment … think what NO taxes on capital gains would do. That’s life under the FairTax.

• Ditto for dividends.

Look … I could go on and on picking apart Adler’s FairTax critique. You can see how easy this is. It’s like hunting over a baited field.

Truth is, Hank Adler certainly isn’t alone in his faulty interpretation and understanding of the FairTax. I actually took the time to read some of the comments to his essay posted on Townhall.com and came up with this incredible beauty:

23% on profits, not costs...

This is often mentioned by Fair Tax proponents (who should know better), but I don't think it carries any water. They claim corporations pay 23% (or whatever number) in taxes, and if removed, they could lower the cost of their goods by 23%.

Problem is, that is 23% on their PROFITS, not their COSTS. Most company's taxable profits rarely exceed 15% (most are under 10%, some even lose money over the course of a year).

Now please excuse my Norwegian .. but what in the wide, wide world of sports is this character talking about? A 23% tax on profits? Now we can really be charitable here and suppose that this character is referring to the average 22 percent embedded taxes in every product and service we buy … but by what incredible twist of logic can some (presumably) government-educated person even bring themselves to put that thought process on paper?

Implementation of the FairTax would constitute the biggest transfer of power from the government to the people in the history of this Republic. Perhaps that is what frightens Mr. Adler the most.

Neal Boortz is a talk show host and columnist for Townhall.com as well as co-author of The FairTax Book .

Be the first to read Neal Boortz's column. Sign up today and receive Townhall.com delivered each morning to your inbox.

Copyright © 2006 Salem Web Network. All Rights Reserved.

[Your Nightmare]

Notice how practically everyone of Boortz’s rebuttals is based on these mythical “embedded taxes.” He’s basing this all on one study by Dale Jorgenson. Don’t you think if these “embedded taxes” really existed there would have been much more study on the issue? I don’t know about you, but I’m not ready to risk the economic future of this country based on one theoretical study from one economist.

[Filo]

We have to get rid of the prebates.

And the unfair double-taxation on pre-taxed money.

[K-oneTexas]

 [Actually wrote this for another post Fred Thompson Plan for Tax Relief and New Economic Growth ) but the data we use will be factual)



Actually  let's use the official documents to make this calculation.

 

2007 HHS Poverty Guidelines

Persons in Family or Household	48 Contiguous States and D.C.	Alaska	Hawaii
1	$10,210	$12,770	$11,750
2	13,690	17,120	15,750
3	17,170	21,470	19,750
4	20,650	25,820	23,750
5	24,130	30,170	27,750
6	27,610	34,520	31,750
7	31,090	38,870	35,750
8	34,570	43,220	39,750
For each additional person, add	3,480	4,350	4,000

SOURCE:  Federal Register, Vol. 72, No. 15, January 24, 2007, pp. 3147–3148

 
Also, the Prebate is a portion annually, Therefore if 2007 has a prebate it would be:

Source: Frequently Asked Questions - Answers - How does the prebate work?

Please use these table, official tables from HHS and The FairTax. org to apply tour calculation. As I see the tables, if 2007 were an actual year under the FairTax:

per HHS - 2 person household Poverty Level $13, 690. Based on number of persons in a household ... husband & wife, parent & child - two people.

per FairTax consumption allowance for 2 adult household is $20,420. A 2 adult household would be a husband & wife or a couple. However there is a 1 adult household and 1 child that is not a couple.

I believe you have used incorrect calculation to show a marriage penalty that does not exist in fact. There is no exemptions in a consumption tax as there is for an income tax. If you want to compare the exemption that was under an income tax you would have to compare it to the consumption allowance under a consumption tax. As you see you see there is no such penalty as the prebate for a 2 adult household is exactly twice that of a 1 adult household.  Therefore 'No Penalty'.

You can not compare apples to oranges ... you are mixing tax types (income and consumption). There is no penalty when you are not paying tax based on that figure, an income tax. If you want to compare a marriage penalty then you'll need to compare it to the Flat Income Tax Proposal also before Congress. You need to re-think tax when moving between kinds of tax, the terminology of one does not fit the terminology of the other.

Let's get one thing straight here, as I said (just in the paragraph above) when talking about an Income Tax or a Consumption Tax we should not mix terminology ... and you are doing just that. Some givens, some fact(s):

1. Income Tax (and VAT) rates are inclusive ... meaning they are removed from the amount, in this case income.
   
2. Consumption (or Sales) Tax rates are exclusive ...  meaning they are added to the amount, in this case sales price.
   
3. Income Taxes (and VAT) can and usually do have multiple rates ... Consumption (Sales) Taxes are a flat rate.
   

By their very being thay are different. Lets talk apples to apples. Get off the inclusive and exclusive. Don't mix termonology. Do you do it on your yob? Does your a mechanic, talk like a nuclear physist.? Does a structural engineer talk like a oil well roustabout? How many mix differnt industries jargon on a regular basis. Why here? Do you go around every day and purchase an item pay its cost and the added sales tax at the store and talk/compare of it it some way to the income tax you pay every April?

Approximate all you want inclusive to exclusive but remember it does one thing for people ... confuses them. Thirty years a a tax collector and tax auditor have proven this to me ... you must be honest when talking with people regarding their tax and how it effects them. You can make the comparison but at the end of the day a sales tax is a sales tax and can never be an income tax. 

Thoughts: Are we better off with all the exemptions in an income tax, various stratafacations of rates, government receiving its 'share' before you receive yours, large bureacracy, massive convoluted tax code ... or ... no exemptions, everyone taxed at same rate, government not getting its 'share' until you decide to consume goods or services, smaller bureacracy, simpler tax code.

[manic4organic]

Anything that abolishes the IRS is good for this country. If the Fair Tax does that, I’m all for it. The CPAs, attorneys and everyone at the IRS can find other employment. I doubt it can actually come to pass but I can dream.

[Hostage]

They are rebates, not prebates.

And no we don’t.

[untrained skeptic]

The Fair Tax does not reduce taxes, it shifts them. It even tries to make it so that most people pay about the same in taxes as they do now.

It's advocates talk about how there are already embedded taxes that we all pay that show up as a portion of the price we pay for items. That's fine. Then they try and say that because the taxes are being paid at the point of sale, businesses will earn more. The businesses won't pay as many taxes directly, but their customers are still paying the taxes, so that money is still being siphoned out of the economy by our government.

They make comments about the destruction of the IRS that get a lot of people worked up because everyone hates the IRS, but taxes are still being collected by other means, that the government still pays for, so the actual cost savings are tiny at best.

So why are people that really understand the Fair Tax pushing for it? The only reason I can see is protectionism.

You see with all the tax burden being placed on domestic sales, exported items don't get taxed, which acts as a huge export subsidy.

Since the sales taxes are on all domestic sales, imported goods bear an equal tax burden in the US as domestic goods, as well as any embedded taxes they face in their home countries. This acts just like a huge tariff on imported goods.

The other thing that gets left out is what happens to when we switch to a sales tax from an income tax? Well, we get a lot bigger paycheck, but it is evened out by what items cost. Your purchasing power on your income stays pretty much the same (due to higher take home pay), but now each dollar buys less.

Anyone who has been following the effects of the sliding dollar should have some idea of what that might cause.

Anyone want to guess what all of our creditors that have lent our government money would think of getting paid back in US dollars that are now worth 20% less? How do you think that would effect our continued ability to continue to finance our current massive national debt? A large portion of that debt isn't long term debt. It is short term debt that we continuously refinance.

If we are unable to continue to refinance that debt at low interest rates, we will have to pay higher rates, and the national debt will soar even if our government was able to exhibit fiscal responsibility.

Who is going to lend us money at a few percentage points when we showed a willingness to drop the value of our currency by 20+% which means we effectively defaulted on 20+% of that debt?

The Fair Tax is really a protectionist tax. It doesn't cut taxes, and it doesn't simplify taxes any more than a flat tax would.

Implementing it also has a serious detrimental effect on people's cash savings, and on our nation's ability to continue to finance our debt that we have foolishly accumulated.

So if they aren't trying to get the US to effectively declare bankruptcy and start over with a more protectionist economy, what are they trying to do with the Fair Tax?

[Hostage]

Your comments show you have no understanding of the FairTax.

The IRS will be dissolved and they will not be mailing rebates. The SSA will mail them.

The rest of your comments have holes big enough to drive a Semi through.

Do yourself a favor and read the legislation and the website before appearing as a yammering mollusk with an IQ of Zero.

[Your Nightmare]

Thanks for the info - this shows my point. The "annual consumption allowance" for a couple with 2 children is shown as $27,380. The FairTax on $27,380 worth of consumption would be $27,380 x 29.87% (the exclusive rate), or $8,178. But the prebate for this family would only be $6,297. Why? Because the FairTax calculates the "prebate" by multiplying the "annual consumption allowance" by the inclusive rate, $27,380 x 23% = $6,297.

Under the FairTax this family could not consume $27,380 worth of goods and services without paying net FairTax.

[Your Nightmare]

They are rebates, not prebates.

Tell it to the Americans for Fair Taxation. They seem to think they are "prebates."

[Hostage]

Your commentary wanders to the weakness of the dollar.

The current weakness in the dollar is caused by a difference in interest rates. People are dumping dollars for Euros and other currencies that have higher yields on deposits. This has been explained ad nauseum in the financial press.

But now Airbus and other Euro concerns are crying foul to the weak dollar, stating that the weak dollar threatens their very existence. Eurozone economic growth is slowing thereby applying pressure for Eurozone banks to cut interest rates. Thus, the dollar will bottom and then rise to a new equilibrium as interest rates stabilize.

The bottom-line is this has little to do with the Income tax or the FairTax. Interest rates and inflation are monetary in nature, and are connected with taxes only insofar that taxes are used to pay interest on national debt and thus take dollars out of circulation.

Simply put, your wandering to a discussion of the dollar is irrelevant.

Your other remarks are shallow and lack depth of understanding. For example, the FairTax will task the States to collect the NRST and deposit it in a federal account. For those states that do not wish to collect or who have trouble collecting in the manner prescribed, the FairTax has a backup collection provision.

The fact that there are vastly fewer points for collection under the FairTax, and the fact that the collection is almost entirely computerized, and the fact that 3,000 large retailers will be collecting more than 50% of federal government revenues leads to an enormous savings in processing revenue collections and in compliance.

[Your Nightmare]

Anyone want to guess what all of our creditors that have lent our government money would think of getting paid back in US dollars that are now worth 20% less? How do you think that would effect our continued ability to continue to finance our current massive national debt? A large portion of that debt isn't long term debt. It is short term debt that we continuously refinance.

In Kotlikoff's "Taxing Sales under the FairTax: What Rate Works?," he calculates that this debt would lose $1 trillion of it's real value (assuming, and he says it's likely, that the Federal Reserve fully accommodates the introduction of the FairTax and permits consumer prices to rise by roughly 30%). I think the holders of this debt might have something to say if it's value is going to be reduced by $1 trillion.

[Hostage]

Read the legislation and think for yourself.

[Your Nightmare]

Simply put, your wandering to a discussion of the dollar is irrelevant.

He wasn't discussing the current value of a dollar - he was discussing the value of a dollar pre-FairTax compared to the value of a dollar after the FairTax and it's very relevant. If a dollar bought a dollar's worth of goods before the FairTax, it would only buy $0.77 worth after. Likewise, a dollar's worth of debt would only be worth $0.77 in real terms after the FairTax.

As I mentioned above, Kotlikoff estimates the government would see a one-time $1 trillion windfall in real terms due to price changes. Their windfall would be the debt holder's loss.

[Your Nightmare]

Read the legislation and think for yourself.

Who do you think wrote the legislation? Read a dictionary and think for yourself.

[camle]

so the IRS wopn’t be mailing the ‘prebates’, eh? the SSA will do it. OH THEY have that kind of resources? It doesn’t matter which beauracracy grows to handel this, only that it will MORE than offset the loss of the IRS, which contacts us once a year.

the prebate is lunacy - you’re returning taxes BEFORE they’re paid?

your position shows that you have no understanding of how government works. The government WILL fix this so that they get MORE revenue. otherwise there would be little reason (to them) to make such a sweeping change.

and your plan favors the super rich. the little guy will get screwed.

how about proving me false before name calling, or do you like being sophmoric? (I’d match IQ’s against you any day, buster)

[Hostage]

Total complete BS so deep that this response is an act of charity.

On average, a dollar has the same purchasing power pre and post FairTax.

As far as your references to Kotlikoff, you and I know you have been discredited with your interpretations of those references numerous times on FR. Your only purpose to again quote deceptively is to attempt to dupe someone new to learning about the FairTax that hasn’t seen your previous folly.

For newcomers, here’s a link to the actual Kotlikoff study group where you can digest and form your own perspective:

http://www.fairtaxblog.com/20061002/kotlikoff-study-23-fairtax-revenue-neutral/

[Hostage]

You got called on your crap and told to sit in it.

And close the door where you sit because it stinks!

[Hostage]

The legislation call for REBATES not prebates.

Read it!

[Hostage]

Trying your best this morning to cause confusion?

While you are sitting at your altar of the Income tax at work realize this:

“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”
— Abraham Lincoln

Today’s 22% federal EMBEDDED taxes in each product and service purchased is INCLUSIVE. The FairTax replaces these INCLUSIVE EMBEDDED federal taxes. Therefore, the consumption allowance is treated inclusively!

Keep trying to stir up confusion!

And keep failing!

[Your Nightmare]

On average, a dollar has the same purchasing power pre and post FairTax.

The post-FairTax value of a pre-FairTax dollar depends what the Fed does. Kotlikoff say it "seems likely" that "the Federal Reserve fully accommodates the introduction of the FairTax and permits consumer prices to rise by roughly 30%." If consumer prices rise by 30%, then a pre-FairTax dollar would be worth $0.77 post-FairTax.

As far as your references to Kotlikoff, you and I know you have been discredited with your interpretations of those references numerous times on FR.

This is where I ask for links to the "numerous times on FR" where I "have been discredited with [my] interpretations of those references" and you refuse to produce them. It's an old and tired FairTaxer game.

For newcomers, here’s a link to the actual Kotlikoff study group where you can digest and form your own perspective: http://www.fairtaxblog.com/20061002/kotlikoff-study-23-fairtax-revenue-neutral/

For newcomers, this is a link to a blog, not "the actual Kotlikoff study group." This blog entry simply discusses and links to the exact paper I referenced.