Imagine receiving 100% of your paycheck!

Two weeks ago a man stood up at a George Bush campaign appearance in Florida to ask about a piece of legislation known as HR25. Many, including myself, were pleased to hear Bush respond with some positive thoughts about the Fair Tax plan, a movement to replace the federal income tax with a national retail sales tax.

Washington is a city of inertia, and right now the inertia belongs to our present method of funding the operations of our government, the income tax. Politicians will not easily surrender a funding mechanism that lends itself so well to political demagoguery and which can be used to reward political allies and punish enemies.

The Fair Tax plan deserves a thorough public examination and debate. John Kerry seems dedicated to making sure this doesn’t happen. Soon after Bush cited the national retail sales tax as something worthy of further exploration, Kerry stepped forward with the typical class warfare rhetoric of the left. Acting as if he actually knew what was he was talking about (he didn’t), Kerry announced that the Fair Tax would amount to the largest increase in the tax burden on poor and middle income Americans in our history.

John Kerry was wrong. He was either speaking out of ignorance, or he was deliberately lying about the Fair Tax proposal in order to gain a political advantage. A politician lying in order to gain political advantage --- imagine that.

This column is lengthier than the norm, but I promise you that if you will invest the time it takes to read it you will be well on your way to becoming yet another rabid supporter of the Fair Tax plan. You will know that the poor and middle income Americans would be the prime beneficiaries of the proposal. You may even organize your own neighborhood march on Washington to demand that HR25 receive a fair hearing. In the next two minutes I’m going to turn you into a HR25 Fair Tax zealot. Read on:

First … the briefest of overviews: Simply put, HR25 would provide for the repeal of the 16th Amendment (the income tax amendment) and the dismantling of the IRS. All personal and corporate income taxes would end, as would all payroll taxes. There would not be one cent of federal taxes of any nature taken out of your paychecks. No more Social Security taxes. No more Medicare taxes. You earn $2,000 a payday; you get $2,000 a payday. The federal government would be funded through a national sales tax on goods and services sold at the retail level. No taxes on investments. No taxes on savings. You only get taxed on what you spend at the retail level. Store your earnings in a shoebox if you wish. They won’t be taxed.

When originally proposed, calculations showed that the sales tax would have to be in the area of 23%. A complete economic study is now being completed that is expected to bring that total to under 20%. For the purposes of this column, we’ll stick with the 23% figure.

OK … let’s put on our sensitivity hats for a few minutes here and think of the consequences of the Fair Tax Act on our nation’s poor, poor, pitiful poor. After all, they can hardly afford a 23% sales tax when they’re living paycheck-to-paycheck in the first place, right?

Bear in mind that for the most part those whom we define as “poor” aren’t paying any income tax anyway. In fact, many of them are getting checks from the government; a form of outright income redistribution. The absurdly named Earned Income Tax Credit, for example. How can these people survive going from a no-tax situation to paying a 24% sales tax on all their retail purchases?

The implementation of the Fair Tax would fail in short order if, as the question presupposes, nothing were to change except that all of us would be paying today’s prices for a gallon of milk or a loaf of bread, plus a 23% sales tax. But … that’s would be far from the reality under the Fair Tax. Under the Fair Tax the poor won’t only survive, they’ll positively thrive! The Fair Tax could turn out to be the best poverty-fighting tool devised in this country since the concept of hard work.

First, remember, please, that the poor, along with everybody else, will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For the poor this means an immediate 12 to 15% increase in their earnings.

Second. Don’t forget the 22% in imbedded taxes. These embedded taxes exist in virtually everything poor Americans or any other Americans have to buy. These embedded taxes represent all of the corporate and business income taxes and payroll taxes that the companies involved in the production, manufacture, marketing, distribution and sale of the goods and services must pay in the course of business. As soon as these taxes are gone, and after the competitive forces of the free market work their magic consumers, including the poor, will be paying at least 20% less for virtually everything they buy. This includes such basics as food, clothing, shelter and transportation. Yes... they’ll have to pay the new national sales tax, but when you factor in the lower prices caused by the disappearance of the embedded taxes you’ll see that the total price paid for consumer goods in terms of real dollars will fall or will remain very nearly the same.

So … just considering these factors, the Fair Tax delivers a winning hand to people living in or near to what we call poverty. They get every penny they earn on payday, amounting to a 12 to 15% pay raise, and when you factor in the Fair Tax and the lower prices, they’re actually end up spending less of their money for a retail purchase than before. What John Kerry calls the greatest increase in the tax burden on the poor in the history of our country is, in reality, their greatest tax reduction.

You need a clearer picture? Pull out your calculator. Let’s say that a single mother with two children spends $45 a week on groceries. The removal of the 22% embedded tax would bring the price of those groceries down to $35.10. The sales tax at 23% would be $8.07. This brings the total price to $43.17. That’s less than would have paid under today’s tax system. This single mother, whom we’ll consider “poor,” has just received a 12% to 15% increase in her weekly paychecks, and she’s paying less at the grocery story for her basic necessities.

So far, so good. At this point you should be thoroughly convinced that the Fair Tax would actually benefit, rather than harm the poor. But, then again, maybe not. Here’s the convincer. Brace yourself for the knockout punch.

Under the Fair Tax plan every consumer, rich and poor alike, will receive a check or an electronic credit to their bank account from the federal government every single month equal to the sales tax that person or that family would be expected to pay on the purchase of the basic necessities of life for that month. The size of the monthly payment will be based on the government’s published poverty levels for various sized households.

Let’s say you’re a married couple with two children. The Fair Tax Act sets forth a formula for computing the poverty level, based on government figures, which negates any marriage penalty. If the Fair Tax Act had been law in 2003 you would have been granted an annual consumption allowance of $24,240. This is what the government would assume you would have had to spend during that one year to buy the basic necessities of life for your family. The sales tax on this amount would equal $5,575. The government would have rebated this amount to you in 12 equal monthly installments of $465. What about a single woman with one child? Her monthly rebate in 2003 would have been $232. The lowest payment would be to a single person with no dependents. That person would have received $172 per month.

Now … bear in mind, this rebate isn’t only paid to the poor. It is paid to everyone, rich and poor alike. The purpose here is to make sure that no American has to pay the Fair Tax sales tax on the basic necessities of life. Unlike the present income tax system, the Fair Tax treats each and every person in this country exactly the same. This, of course, presents somewhat of a problem to politicians who like to use the tax code to foment class distrust or outright warfare.

1. They get their entire paycheck. 2. Even with the sales tax, and considering the drop in prices, they’ll be paying essentially the same or less for everything they buy. 3. They get a check from the federal government every month to rebate any sales taxes they had to pay on life’s basic necessities.

Are you beginning to see just how far off-base John Kerry was with his intemperate criticisms?

Though most of the poor don’t have what we would call complex tax returns, let’s also include the time these they (all of us, really) will save by not having to keep tax records or file tax returns.

If you’re looking for some reason to oppose the Fair Tax plan, you’re going to have to find a better excuse than its effect on the poor. John Kerry might find it politically expedient to demagogue the issue for votes, but now you know enough to know what he’s up to.

For more comprehensive information on The Fair Tax you can visit http://www.fairtax.org.

The elimination of taxes and tax costs represent a reduction in costs of around 20-25%. That figure can be argued obviously ...

And shouldn't it be? Your entire package relies on nothing more than that single projection!
As I've said before, I certainly don't want to bet the entire US economy on such a flimsily established point.

Tax-a-phrenic: Paying $4 interest to a banker to avoid paying $1 tax to the IRS, so the banker can pay the IRS a $1 for you.

The NRST proposed in HR25 relies on much more fundmental ground than mere worry over how the same amount of federal tax burden on the nation changes the economy just because you change the mode of taxation from income/payroll taxes to a retail sales tax perceptible to the entire electorate.

They who would give up an essential liberty for temporary security, deserve neither liberty or security.
Benjamin Franklin.

Patrick Henry, Virginia Ratifying Convention June 12, 1788:

"the oppression arising from taxation, is not from the amount but, from the mode "

Taxes & Government Spending:

"The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

"Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accepts it.

Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power.

Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.

Alan Keyes 1999

Look up "incidence of corporate taxes" on Google. It's not hogwash.

Your right, you can find something on Google:

Econonomic Report of the President, 2004
5.4Mb PDF:
http://a257.g.akamaitech.net/7/257/2422/09feb20040900/www.gpoaccess.gov/usbudget/fy05/pdf/2004_erp.pdf

Chapter 4, page 106-

Theory of Tax Incidence

One crucial finding in the study of tax incidence is that the economic incidence of a tax (the identity of the person who bears the burden of the tax) can be completely different from its statutory or legal incidence (the identity of the person upon whom the law officially imposes the tax). In other words, the person who is legally responsible for paying the tax may not be the one who actually bears the burden of the tax. As explained below, the incidence of a tax depends upon the law of supply and demand, not the laws of Congress.

Another crucial principle is that only people can pay taxes. Businesses and other artificial entities cannot pay taxes. Although the corporate income tax is legally imposed on firms that are organized as corporations, the actual burden of the tax can fall only on people—perhaps the firm’s owners, or its employees, or its customers—but certainly not on a legal artifact such as a corporation. Similarly, although the estate tax is legally imposed on the estate, the burden of the tax can fall only on people—perhaps the decedent who left the estate, perhaps the heirs, perhaps other people—but not the estate, which is merely a legal construct established to sort through the ownership of the decedent’s assets.

It is simplest to first discuss the incidence of a simple excise tax, a tax levied on a specific good or service. As explained below, the key insights from this analysis can be extended to apply to other types of taxes.

Incidence of an Excise Tax

Consider a tax on apples. Suppose that when there is no tax, the price of apples is $1. Now, suppose that the government imposes a 10-cent excise tax on apples and that the producers are legally responsible for paying this tax. Do producers actually bear the economic burden of the tax?
The answer depends on what happens to the price of apples. If the price remains unchanged, producers bear the economic burden (the economic incidence of the tax is the same as the legal incidence). Consumers pay $1, the same as before, and suffer no burden. Producers, after collecting $1 from the consumers, must pay 10 cents to the government, so they clear only 90 cents. Alternatively, if the price rises by the amount of the tax, from $1 to $1.10, consumers bear the burden. Although they do not send any money to the government, they pay 10 cents more per apple than they did without the tax. The producers bear no economic burden, even though they are legally responsible for paying the tax. After collecting $1.10 from consumers and sending 10 cents to the government, they still clear $1, as they did without the tax. In this case, economists say that the producers shift the burden of the tax to consumers. To consider another possibility, if the price of apples rises by 5 cents, to $1.05, consumers and producers share the burden equally. Consumers bear a 5-cent burden because they pay $1.05 for each apple, compared to the $1 that they paid without the tax. Producers bear a 5-cent burden because they clear only 95 cents per apple, compared to the $1 they cleared without the tax: they collect $1.05 from consumers, but send 10 cents to the government.
As these examples show, the division of the tax burden between consumers and producers depends on what happens to the price of apples. When prices are free to adjust, they are likely to be determined by the law of supply and demand. If the price of apples was $1 with no tax, then the number of apples consumers wanted to buy at that price must have equaled the number of apples that producers wanted to sell at that price.
What happens when the 10-cent excise tax is imposed? It depends on how responsive consumers and producers are to changes in the prices they pay or receive. The relevant questions are: How many fewer apples do producers sell if the amount they clear per apple declines? How many fewer apples do consumers buy if the amount they pay per apple rises?
For example, suppose that producers are four times more responsive to price changes than consumers. Then, producers face a price change that is one-fourth as large as that faced by consumers. The 10-cent tax causes the price to rise from $1 to $1.08, putting an 8-cent burden on consumers and a 2-cent burden on producers. At that price, the number of apples consumers want to buy falls by the same amount as the number that producers want to sell. Alternatively, if consumers were four times more responsive than producers, then producers would bear 8 cents of the burden and consumers would bear only 2 cents.
The group that is less responsive bears more of the burden of the tax. The group that is more responsive escapes much of the burden because it responds to the tax, abandoning the taxed activity when threatened with a tax burden. The price-responsiveness of each group depends upon its flexibility. Do producers have good alternatives (in the form of other industries in which they can produce)? Do consumers have good alternatives (in the form of other products they can buy)?
The answers vary across products, types of producers (such as workers and owners of capital), and time frames. If the excise tax applied only to Granny Smith apples, consumers could switch to other, untaxed, kinds of apples. If it applied to all apples, consumers would have somewhat less flexibility. Some workers may have skills specific to the apple industry. Other workers may be more flexible because their skills are more general; they could avoid bearing the tax burden by finding a job in another industry. The owners of capital employed in a taxed industry may bear a significant short-run burden because the buildings and equipment in the industry may be designed specifically for its use and the owners may have little ability to move those resources elsewhere. In the long run, though, capital can leave the taxed industry: as buildings and equipment depreciate in the taxed industry, new buildings and equipment are constructed in other industries.
A similar logic applies if the product is subsidized rather than taxed. The group that is more responsive receives the smaller benefit because the subsidy prompts new members of that group to enter the market and compete away the benefits of the subsidy. Conversely, the group that is less responsive receives the greater benefit from the subsidy because little entry occurs.
Because the incidence of an excise tax depends upon the relative flexibility of consumers and producers, the burden may not always fall where the Congress intends. When the Congress imposed a “luxury” tax on yachts in 1991, for example, it intended the wealthy purchasers of yachts to bear the burden. Such purchasers, however, may be quite responsive to price because there are many alternative goods that they can purchase (expensive cars and jewelry, for example). If this is so, then a significant part of the burden of a yacht tax may fall on workers in the industry, who may be less well-off than owners of yachts. Indeed, after the tax was introduced, production and employment in the boat industry fell, leading some observers to claim that workers were bearing much of the burden of the tax. Although the validity of this claim cannot be conclusively determined (the industry’s decline may have been caused by the 1990-1991 recession rather than the tax), the Congress responded to these concerns by repealing the tax in 1993.

Legal Incidence Is Unimportant

As long as prices can freely adjust, the economic incidence of a tax does not depend on the legal incidence. Suppose that, in the above example, the government imposes the 10-cent excise tax on apple consumers rather than apple producers. Consumers then must make the tax payment to the government, in addition to the price they pay to producers.
Because producers are four times more price-responsive than consumers, the price received by producers must still fall by 2 cents and the price paid by consumers must still rise by 8 cents. Despite the legislative change, that is still the only outcome that keeps the number of apples producers want to sell equal to the number that consumers want to buy. If the tax is legally imposed on producers, they shift 8 cents of the burden to consumers. If it is legally imposed on consumers, they shift 2 cents of the burden to producers.
Given that the price can freely adjust, it should not be surprising that the final outcome is unchanged. It is irrelevant whether the tax collector stands next to consumers and takes 10 cents from them when they buy an apple or stands next to producers and takes 10 cents from them when they sell an apple. It does not matter whether the consumer puts a dime in a bowl marked “taxes” or hands the dime to the producer who puts it in the same bowl.

Applied Distributional Analysis of Excise Taxes and Subsidies

The legal incidence of Federal excise taxes is sometimes placed on consumers, sometimes on manufacturers, and sometimes on other producers or importers. In most cases, this legal incidence rightly receives little attention. In accordance with the economic theory of tax incidence, the JCT and Treasury economists preparing distributional tables uniformly ignore the legal incidence of conventional excise taxes. The JCT generally allocates excise tax burdens to consumers. Treasury follows a similar, but more elaborate, approach.
These approaches are reasonable, since consumers are likely to bear much of the long-run burden of most excise taxes. In the long run, most producers are flexible, or price-responsive, because they can switch to other industries. Consumers are likely to have less flexibility, except in special cases where there are good substitutes for the product being taxed.
The theory of incidence also applies to more-subtle excise subsidies, such as those included within the individual income tax. The income tax law grants tax reductions for purchasers of various products—for example, an itemized deduction for medical expenses, a credit for electric cars, and the Hope and Lifetime Learning credits for the costs of higher education. The economic benefits of these provisions are likely to be divided between consumers and producers, with the greater benefit going to the group that is less price-responsive. The long-run benefits are likely to go largely to consumers, because they are likely to be less price-responsive than producers. Official distributional analyses generally allocate these income tax reduc-tions to the consumers.
The basic insight that tax burdens fall more heavily on groups that are less flexible can be applied to a wide range of taxes. The remainder of this chapter applies this framework to payroll taxes, taxes on capital, and estate and gift taxes.

I guess you missed this part on page 103:

Not at all for that is what can happen with a tax that burdens industry too much. Business tends to go belly up for lack of ability to make a profit if it can't compete it lays off workers exchanging them for lower paid new hires or worse collapses into bankruptcy when everyone looses.

Has happened to me, can happen again. You go on and get another job, and build your wage/salary up again or start your own business and see if you can do better.

Thomas Hobbes, Leviathan it is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.

They who would give up an essential liberty for temporary security, deserve neither liberty or security.
Benjamin Franklin.

The fundament issue is not how much but killing the income tax is the dominant basis for me:

Patrick Henry, Virginia Ratifying Convention June 12, 1788:

"the oppression arising from taxation, is not from the amount but, from the mode

"As a matter of fact, what the income tax does — and this is the debate that I think we always try to get into in order to let you and him fight, see — and the people of this country are led down a path where the actual control of their resources, which in the end is the control over their will, is handed off to the government."

. . .

"The government then manipulates that will in order to destroy the freedom of our electoral system through the income tax structure, and we call the resulting slavery a free system."

"In point of fact, it is not as the founders understood, and the only way to restore real freedom is to give people back control over the income that they earn so that they won‘t, at the voting booth and in other phony issues, be subject to that manipulation."

- KEYES TRANSCRIPT (01/28/02)

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