The FairTax -- The Truth By Neal Boortz

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.

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.

• 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.

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:

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.

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:

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 .

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yep. your position doesn’t hold water, so you attack those who point the truth out. your credibility approaches that of Bill Clinton denying having extramarital sex, and you call ME a liar and/or a thief.

your whole proposal has been widely discredited by experts, yet you act like Kerry dodging a swift-boat attack.

what do you have to gain with this proposal?

there are two types of people who favor this unworkable proposal:

Idiots

sychophants

Guess which class you fall in?

it is you and people like you who remove cordial debate from issues. it is tactics like yours that makes good people turn away from you with disgust. it is schoolyard name calling and attempts at smearing opponents that stifles real debate.

but that’s your objective isn’t it? stop debate and let this bad idea progress - just like AlGore and his global warming crowd.

you can tell a lot about people by whom they emulate.

IOW the same BS as he has said before.

It is still the largest new entitlement program since the adoption of Social Security with the prebate.

it will destroy all large items which will move overseas to avoid the insane sales tax ponzi scheme. This is what happened in the 1991 luxury tax regime which killed the luxury boat and car industry.

Bortz has been called out again and again and the only thing he can do is push the same recycled BS.

Hucabee who has risen supports this BIG GOVERNMENT entitlement scam. Hucabee supports the prebate which will put the GOVERNMENT in deciding what are allowable “necessities” for the pre-bate entitlement.

the excuse of we had to include that to sell the deal is just more BS. The current system stinks and the Fair Tax SCAM is not the way to do it.

The fact he has nothing new in his denial retreads only makes him look like a zelot scientologist. (not that he is a scientologist, he vehemently denies the current SCAM has anything to do with the identical SCAM pushed by the church of scientology to abolish the IRS as pushment for not giving them tax exempt status faster. IOW they just ACT like scientologists.)

The blog contains comments and links in those comments from many studying Kotlikoff’s estimates.

It's a blog entry that basically posted the abstract from the paper I linked to. The people "studying Kotlikoff’s estimates" are just the blog's reader comments.

They are a group.

It's just a blog with comments, they aren't a group in any real sense.

They are the Kotlikoff Study Group because there is no formal group that studies Kotlikoff’s estimates.

Huh? This blog post with comments is the "Kotlikoff Study Group" because there is no formal group that studies Kotlikoff’s estimates. Are you kidding?

And linking to his paper does not make you any sort of expert.

I didn't claim it did. I linked to the paper so people could read it for themselves. You linked to a blog entry and some comments and called it "the actual Kotlikoff study group."

As has been shown before, your intepretations of his paper and other materials concerning the FairTax are deceptive.

Again, this is a really tired FairTaxer game where they claim someone's points have previously been refuted but fail to show where.

You care about only one thing, disrupting FairTax threads with points taken out of context and designed to cause confusion. Witness your lame attempt in post #28 and my response in post #39.

Uh huh. Exactly how is my post #28 out of context. Be specific.

I'll answer you inane #39 response in a separate post.

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.

Agreed.

What a revenue neutral shift from a payroll tax to a sales tax does is put more money into the hands of consumers while making goods cost correspondingly more.

You get more dollars, but each dollar buys less. Since each dollar buys less, each dollar is worse less. You get price inflation, but you don't directly get monetary inflation which is based on the money supply.

However, people are currently dumping dollars because of a decrease in yields of a half point here and there. What do you think would happen if you say you are going to decrease the buying power of the dollar by 20% or so when implementing the the Fair Tax?

Anyone with half a brain and investments in dollars is going to dump them before the Fair Tax goes into effect. That's where monetary inflation comes in, and it would make our current issues look like a tiny hiccup.

I'm not just talking about the Fair Tax. Any major shift from a payroll tax to a consumption tax would have the same effect. The only way to mitigate it would be to do it very slowly over a large number of years, and I don't think anyone trusts our government to do that.

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.

Every retailer and everyone who performs services would be a collector. For the big retailers this is a simple automated process, kind of like payroll taxes already are.

The savings for a collection standpoint are minor at best. The place where you might hope to see real savings are from a bookkeeping perspective. However, the since companies still need to track profits, inventory, and most everything they do now anyway, the savings are once again minimal. Accounting departments not only don't disappear, they don't even see much reduction in workload. They have less tax laws to learn, but complying with tax laws is far less burdensome than everything the need to report to stockholders anyway, and the government is not going to let companies be lax in their bookkeeping just because retail sales aren't involved, because they are still going to be watching for money laundering.

Any cost savings are also offset by the need to implement the prebate system.

It's also a bit disingenuous to only compare the Fair Tax to the current tax system. After all it is being sold as the best replacement. So how about comparing it to a flat personal income tax?

Simple. Easy to comply with. Far less transactions to keep track of.

I also notice how you told me that what I was saying was irrelevant and lacking in understanding, but didn't actually address any of my main points.

What is the main purpose of shifting to a consumption tax, as opposed to other simplified forms of taxation such as a flat tax, if not protectionism?

How are you also planning to avoid the price inflation spike caused by the shift from a payroll tax to a consumption tax?

Sorry I don’t have time to go through all your comments but the they seem to be your own, not linked to data and not in agreement with any published professional analysis.

Yes they are my own. I like to do this thing called thinking for myself.

However, I'm happy to explain my reasoning. I even went into several detail analysis with nice equations and numbers when I got sick of people saying that I had to point to someone else's analysis. So far no one has been able to dispute my numbers.

And how do you account for the elimination of all the current embedded federal taxes (average 22%) in the prices of retail products and services?

I'm going to answer your second question question first.

This is a perfect example of why people need to learn to think for themselves and evaluate statements.

The Fair tax proposes replacing personal and corporate income taxes with a consumption tax. When calculated as an embedded tax, the fair tax needs to be 23% of the price of items in order to be revenue neutral.

OK. So now you are saying that the Fair Tax replaces all the existing embedded taxes, which currently add up to 22% of what we pay for something.

So basically you are saying that all personal income taxes payed by everyone in the country can be replaced by a 1% sales tax?

Ya might want to think about that one a bit more and try and understand the numbers you are using a bit better.

The fair tax is supposed to be revenue equal.

People are going to be taking home 10% to 35% more in their paychecks, they aren't going to be paying taxes on capital gains any more, and they will even get prebate checks as well.

They are going to have considerable more money in their pockets. Are they going to be able to buy a lot more? Or are they just going to be paying the taxes at a different point in the process?

Since the tax is revenue equal and is supposed to tax people approximately the same as the are now as well, the only way they are going to be able to pay less overall is because of cost savings due to greater efficiencies in the system.

Well, I hate to break it to you, but the cost of collecting the income tax doesn't amount to 22% of what we pay for goods. The Fair Tax also has it's own costs to collect taxes and sent out the prebate. Even if those costs are lower than our current tax system, the difference sure isn't going to drop the price of goods by much.

Answer this please: Where do you get data or information to show that prices will go up?

I don't know. Let's see. The tax change is revenue equal. They stop taking money out of your paycheck so you have more money, but they instead take it when you buy an item.

Therefore the total cost you pay for an item goes up proportionally. It's seems pretty simple to me. I guess that algebra I took way back in junior high school 24 years ago really is useful.

-------

OK silly comments that I just couldn't bring myself to not pose aside, what causes the jump in effective prices isn't an increase in taxes, but a change in when they are collected.

The 22% figure on current embedded taxes includes all current taxes including personal income taxes as well as a number of things like excise taxes on goods that the Fair Tax does not replace, like gasoline taxes.

The Fair Tax lets you take home more money, but still collects the same amount of taxes, they just get the portion that are currently taken out of your paycheck when you buy something.

You get more money in your paycheck, but you pay more when you purchase things. It all equals out and is revenue equal. However, the effect is that each dollar actually buys less.

The effect on future earnings is neutral. However, the effect on cash savings is not.

The effect on our national debt is very significant. We basically get to pay back debt with dollars that are roughly worth 20% less. Since this is an intentional act that causes this, it is effectively the same a defaulting on 20% of our national debt. Think our creditors will care?

Got any savings bonds? Got any cash in the bank? Loan anybody any money? Then maybe you should care too. However, if you owe more than you are owed, I guess it works out pretty well for you.

If you move your cash assets into foreign currency you won't get hurt either I guess, but that means a lot of people will be dumping US dollars on the market which brings us back to that whole monetary inflation issue you mentioned earlier.

If you want professional analysis, just reread the papers advocating the Fair Tax, look at what the do say with a more critical eye, and look at what is missing.

Evaluate their comments to see if they are really justified by the facts, and don't let them get off with only comparing to the current tax system, because the current system and the Fair Tax are not our only options.

So basically you are saying that all personal income taxes payed by everyone in the country can be replaced by a 1% sales tax?

Ya might want to think about that one a bit more and try and understand the numbers you are using a bit better.

Thinking for yourself? Are you tickled that anyone would even read your posts let alone to respond to them.

Well, think for yourself. I have very little patience with people that think they know something and will tell others they know it all.

So I will leave you with this blurb from your ramblings above that caught my eye, caused my head to shake and made me think to say "don't waste any more time with this one".

Here it is:

So basically you are saying that all personal income taxes...

Did I 'basically' say that? Did I say it at all? No, I did not. And what it reveals is your lack of accuracy and precision or lack of knowledge. Because there are certainly many more taxes that the FairTax eliminates other than the 'personal' income tax.

So there you have it. You got someone to read your post and someone to respond to it. Aren't you the lucky one?

Blah, blah, blah... I answer your questions. You avoid mine.

You have a revenue neutral shift from a income tax to a consumption tax. If you put more money in people's paychecks as well as giving them a prebate, how can you not take that money back from them in a sales tax and still remain revenue neutral?

If people have more money, effectively inflating their income, and that additional money is paid at the point of sale. Does not the effective price they pay for goods increase and each dollar buy less?

If you understand how the Fair Tax works, and I'm wrong, you should be able to explain it to me.

Well, think for yourself. I have very little patience with people that think they know something and will tell others they know it all.

You mean like your comments in relation to my first post on this thread? For example:

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

and

Your other remarks are shallow and lack depth of understanding.

However, I responded rather politely, explaining that I was talking about price inflation rather than monetary inflation and gave more details about how it occurred and how it could lead to monetary inflation.

Another person also jumped in, agreed with me, and provided some supporting information.

You came back with more condensation and asked a couple questions that showed you don't know what the heck you are talking about and are just parroting things other people have said without understanding them.

Yes, at that point, I did start mocking you.

Now in this thread you still don't answer my questions, and the reason you give is to take one of my sentences out of context and that I'm not worth dealing with because I misrepresented what you said, but not how or why.

Well if I misrepresented what you said, it was because what you said wasn't very clear, or because the numbers you used didn't mean what you think they meant. However, if I'm wrong. Explain how and why I'm wrong?

You seem to be really good at telling other people they are stupid, but can take it yourself, and can't back up what you are saying either.

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