Posted on 01/22/2008 3:43:13 AM PST by xcamel
Look up the word “fair” in Webster’s dictionary and you’ll find this definition: “Free from favoritism or self-interest or bias or deception.” Ironically, the so-called “fair tax” proposal that has been getting some attention lately is fraught with favoritism, self-interest, bias and deception.
The phrase “fair tax” is a new way to refer to the old proposal to create a national retail sales tax. Such a tax would replace essentially all federal income and payroll taxes with a national sales tax levied on all purchases. So instead of having Social Security and Medicare taxes taken out paychecks and filing those April tax returns, Americans would pay a national sales tax on every purchase they make. There are four myths about this tax proposal that must be dispelled in order to have a meaningful debate about its merits.
The first such myth is that the rate would need to be set at 23% in order to raise enough money to run the federal government. Not so fast. Under the proposal if you buy a $100 item the tax would be $30. Most of us would describe that as a 30% tax. But proponents would have us believe that the tax rate should be calculated by dividing the tax amount by the total purchase price including the tax. So divide $30 by $130 by and you get 23%. That is truly fuzzy math at its finest.
The second myth that needs to be addressed is that the IRS could be abolished because the federal government would no longer collect income and payroll taxes. That might technically be true but a new massive bureaucracy would have to be created in its place. This new agency would be in charge of sending every single American an approximately $450 check at the beginning of every month that presumably reimburses them for taxes they pay on their income up to the federal poverty level. This new agency would also be charged with making sure that anyone who sells anything is collecting the tax. So the guys who live out in the country near my home who shell the pecans that grow on my trees would have to start charging me sales tax and send that money to the federal government. And for each of these types of services that aren’t taxed or retailers that aren’t discovered, the tax rate on other purchases has to be that much higher.
This brings me to the third myth – that a 30% rate would be adequate to run the federal government. There is no way that a national retail sales tax could pay for current federal programs without setting the rate at least 45%. The allegation that a 30% rate is sufficient relies on some strange assumptions such as requiring government to tax its own spending and even taxing free services like free checking accounts and free care at veterans’ hospitals. It also assumes that every single transaction is taxed, including lots of things that aren’t taxed currently. So, imagine adding $90,000 to the purchase of a $200,000 home or adding $450 to your $1,000 monthly rent. Better yet, imagine adding $4,500 for every $10,000 paid in college tuition.
Fourth, and most importantly, it is a myth that the tax is “fair.” A deeper look at the proposal clearly shows that it would raise taxes substantially on most Americans while giving the wealthy a substantial tax cut. That’s because most Americans must spend most or all of their incomes to make ends meet, while better-off people can afford to spend a much lower share of their incomes. According to the Institute on Taxation and Economic Policy, the typical middle-income North Carolinian who earns about $34,000 per year would pay an additional $3,800 in federal taxes. The state’s wealthiest 1% of taxpayers whose average income is over $700,000 would get a tax break of around $150,000 per year.
It’s not fun to be in the role of defending the current federal tax system because it is confusing and not always fair. But ideas for replacing it need to be grounded in sound tax policy principles. An idea that relies on myths and gimmicks to get attention is not one worth considering.
Elaine Mejia is the Director of the N.C. Budget and Tax Center
Might want to do something with the thread heading.
It’s a mess.
One thing the Fair Tax proponents never seem to discuss is the psychological disincentive a massive sales tax would have on the economy. Most people, intentionally, have no idea how huge the tax burden really is. The Fair Tax would certainly make the tax burden more apparent, but what impact will a 23% (most likely much greater) sales tax have on the market? I can only speak from personal experience, but I would be less inclined to spend if everything had a 23% tax on it (even if my take home pay was larger). Perceptions are important. Right now, the tax burden is hidden.
A few more to ping. Fair tax ping!
Yeah, the article did leave out that *little* fact.
Isn’t there a *Fair Tax for Dummies* book coming out soon?
That isn't the only thing that is a mess.
That dame is almost as wrong as she is funny. And she is a newspaper editor, presumably getting paid for that eroneous tripe. Hell, no self-respecting Middle School paper would let het in the office.
The so-called Fair Tax would require an agency double the size of the IRS just to monitor all the zillions of little businesses and products sold all over the country, and the world.
Would foreign products be taxed? And can we trust foreign governments to fork over 30%.
Do we add another 30% to gasoline? That sounds swell.
Under a fair tax, there would be a huge underground economy within a year.... that would put any current underground economy to shame.
I don't know about you, but I think that stinks.
thank you, for the post. More people need to wake up and smell the snake oil.
That doesn't include a word that I have ever seen you post.
truth ping
Try spending a couple of bucks and buy the book.
The $100.00 item will only cost $77 if the seller is a fool. Since most Americans don’t know what proportion of the retail purchase price of what they buy is, you won’t know what the specific embedded tax is. When you buy a snow cone from the seasonal booth, do you think his burden is the same as a big corporation with expensive tax attorneys?
A more equitable change would be to eliminate the tax on dividends and interest and institute a two tier “flatter” tax with a large exclusion and no deductions.
FLAT TAX people. It’s the only truly FAIR tax.
First, the fair tax book explains the percentage both ways. We are arguing over the same exact amount of money, so what is the difference. Secondly, if the embedded taxes are removed, the 100 dollar item will now cost 75 or whatever, then you’ll put that right back as a tax. Who do you think is paying the corporate payroll taxes now? I can promise you the stockholders arnt doing it out of the goodness of their hearts. its embedded in the budgeting for wages (making you get paid less) and in the price of the item.
Imports would pay the same tax rate as any other retail item. If their country has a bunch of taxes on their end, the import will be more expensive then an American made item. Thats my #1 reason for favoring this plan is it will give the US an edge in manufacturing to the biggest consumer, us.
Why the FAIR Tax won't work, by Bruce Bartlett
There IS one thing I'll say good about the FAIR Tax. It would likely make small government conservatives out of the yellow-dog Democrat "working" poor. They would quickly tire of watching all their income being eaten by federal sales taxes. (Hardly made up for with monthly rebate checks.) "You want to lower the tax rates? Stop voting for socialists!"
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