Tax Reform Panel Picks Apart FairTax Proposal

Tax Analyists ^ | 5/12/2005

[Your Nightmare]

Members of the President's Advisory Panel on Federal Tax Reform on May 11 expressed concerns over the FairTax national retail sales tax, a plan that has emerged as an alternative with a major grass-roots push.

Panel chair Connie Mack, vice chair John B. Breaux, and other members worried the plan would be difficult to enforce, would be regressive, and would require a high rate in order to take in enough money to fund the government.

Breaux raised concerns that the proposed 23 percent (tax-inclusive) rate would not be sufficient to raise the revenue necessary to fund the government. The Joint Committee on Taxation estimated that it would take as much as a 57 percent (tax-exclusive) rate to be revenue-neutral. Further, Breaux said he thought exemptions that would be carved out to make the sales tax progressive would also complicate it.

Mack, who raised concerns similar to his fellow panelists', said he was "intrigued" by the plan. "But if it's such a great idea, why haven't other political entities around the world pursued it?" he asked.

Americans for Fair Taxation Executive Director Tom Wright emphasized that the plan emerged after "thorough academic research" and "thorough polling" The strong grass-roots push has resulted in some of the group's 600,000 members appearing at each of the panel's hearings and has inspired a large comment-writing campaign to the panel in support of the plan.

Sales tax advocates were among the 20 witnesses who gathered before the panel for a full day of testimony on tax reform proposals. Although the group has held several other hearings in Washington and around the country, the May 11 meeting was its first hearing on specific reform plans since Bush appointed the panel in January. The panel has been charged with identifying tax reform proposals that are progressive, encourage charitable giving and home purchases, and are revenue-neutral. The proposals are due by July 31.

Among the tax replacement and reform plans presented to the panel were the value added tax, consumption-based tax, and the flat tax, as well as proposals that would use the current income tax as the foundation.

Witnesses generally claimed that theirs was the fairest, simplest, most flexible, most transparent revenue-neutral proposal that would improve economic growth and savings while meeting the president's criteria of encouraging charitable giving and home buying. Witnesses presenting consumption-based plans praised their overhaul as taking millions of low-income taxpayers off the rolls, being easy to transition to on a worldwide basis, and including safeguards to prevent new loopholes that would result in increased complexity down the road.

Tax reform panel members, who agree the current tax system needs to be fixed, grilled witnesses without revealing whether they will ultimately endorse a consumption- or income-based tax or a different mixture of the two.

[phil_will1]

"I think you miss the point here pigdog. Always Right is pointing out that the so called 'underground economy' will always be untaxed. Your flawed logic doesn't change that."

And I believe that you miss the point as it relates to illegal labor. There is a huge and growing sector of our economy in this category. According to a recent Bear Stearns report, the illegal immigrant population may be double previous estimates of 10 million. Many of these people pay no withholding, Social Security or other types of income based taxes. Under the FairTax, they would pay at the cash register, but would not get the rebate. They would therefore be paying taxes at a rate that is disproportionate to the rest of us.

Under the current system, the only taxes they pay are the indirect ones imbedded in their consumption items. However, legal residents pay those, also. Illegals therefore, in many cases, pay disproportionately LESS that their legal counterparts do.

[Always Right]

No - it's your reasoning that's fraudulent. She isn't taxed under the FairTax until she consumes at the retail end consumption level

OK, so technically it is the John who consumes and avoids the sales tax. Either way, there was a service provided and sales tax was not collected. The underground economy remains untaxed.

[pigdog]

The logic is anything but flawed since it was precisely the hooker that was the subject discussed; not the John. The discussion was not about taxing the illegal activities themselves. You are merely attempting to change the argument by changing the parameters now that you see you've lost it. The only guys who have ever claimed the FairTax would tax illegal activities has been the SQL crowd as another strawman argument.

In fact, it may be that BOTH the John and the hooker are breaking the law under the sales tax. Most likely both are by collusion but I'm not enough of a lawyer to tell from the language of the bill. But then, aren't they both breaking the IT law, too, similarly, or did the John furnish a 1099? And who knows if the John's income represented has been reported as income? Or if any funds changed hands at all - perhaps it's a barter situation, eh? We really don't know and to posit that we do is merely guessing. And keep in mind that at least one of the parties (if not both) would be outside the law in either case.

In any event the FairTax captures tax revenue from he underground economy even if it gets it only from the hooker and not the John. Half a loaf you know. That's better than nothing as at present. In addition the unreported income from illegal aliens (unless you'd like to make the strech again that all the money they take in had income tax paid on it and will not have a sales tax paid) will now be taxed as will money from foreign tourists.

Once again, these sources will be subject to some capture of tax revenue where they are not at present. The SQL crown should stop trying to put the words in the mouths of the FairTax supporters that were never there. These are not exaggerated advantages, they are real ones. And they are not matched by any similar advantages in other tax systems.

[pigdog]

A lot of very good points.

In your paragraph starting "First of all ...", I'll have to advise that there is one of the SQL posters (which one should be fairly obvious if you've read the threads) that claims he can do all that stuff on his fingers with one hand tied behind his back - and blindfolded. It's just you Boomers (or is it you GenXers; I forget which) who are trying to rob him that can't handle that beautiful simplicity of the present IT.

You should see his response before too long ... perhaps even with expletives deleted.

[cc2k]

phil_will1 wrote:

---

And I believe that you miss the point as it relates to illegal labor. There is a huge and growing sector of our economy in this category. According to a recent Bear Stearns report, the illegal immigrant population may be double previous estimates of 10 million. Many of these people pay no withholding, Social Security or other types of income based taxes. Under the FairTax, they would pay at the cash register, but would not get the rebate. They would therefore be paying taxes at a rate that is disproportionate to the rest of us.

Under the current system, the only taxes they pay are the indirect ones imbedded in their consumption items. However, legal residents pay those, also. Illegals therefore, in many cases, pay disproportionately LESS that their legal counterparts do.

---

Are you talking about illegal aliens who operate as independent contractors and don't pay income taxes or self employment taxes?

I'm sure when the alleged "fair tax" becomes law, these illegals will go right out and apply for a taxpayer ID so they can collect sales tax on the taxable services they sell and remit the sales tax on those sales to the state. Or they could just continue to operate illegally and not report their sales of taxable services and evade the alleged "fair tax" just like they evade the income tax today.

Isn't it far more likely that the same income that evades taxation now will be for taxable services that won't be reported or taxed under the fair tax?

I'm also highly skeptical of your claim that they won't get rebate checks.

pigdog wrote:

---

In any event the FairTax captures tax revenue from he underground economy even if it gets it only from the hooker and not the John. Half a loaf you know.

---

Isn't that the same half loaf that gets collected now through hidden taxes embedded in the price of everything the hooker buys?

By definition, the "underground economy" doesn't pay taxes. It doesn't pay income taxes, and it won't pay any "fair tax" under your proposed system. The alleged "fair tax" changes who is breaking the tax law and who the evader(s) are. It also changes who is paying actual taxes on each side of the illegal transaction. But, it doesn't eliminate the tax evasion. And it won't collect significantly more revenue from the "underground economy" than the current system.

Your arguments are just exaggerations and made to play to people's jealosy and/or disdain for current tax evaders. You conveniently leave out the new tax evaders in the "fair tax" environment. That's hurts your credibity. It's either ignorance or a deliberate attempt to mislead (and it's been pointed out enough times over the years that I doubt it's ignorance).

[phil_will1]

"....one of the SQL posters (which one should be fairly obvious if you've read the threads) that claims he can do all that stuff on his fingers with one hand tied behind his back - and blindfolded."

I know, but as far as I am concerned, that argument has been put to bed by the President's Panel's preliminary report (dated April 13, if memory serves). If any of the SQL posters want to continue to defend the current system, they do so at the risk of their own credibility.

The SQL posters just loved the headline of the article by the tax research group: "Tax Panel picks apart FairTax proposal"

However, if that same group had written an article about the tax panel's report, it would have been something like this
"Tax Panel Issues mid-term report: Scathing indictment of Current System"

Of course, the tax research organization would never have covered the report that candidly and if they had, the SQLs would have been less than thrilled.

[phil_will1]

"I'm sure when the alleged 'fair tax' becomes law, these illegals will go right out and apply for a taxpayer ID so they can collect sales tax on the taxable services they sell and remit the sales tax on those sales to the state. Or they could just continue to operate illegally and not report their sales of taxable services and evade the alleged 'fair tax' just like they evade the income tax today."

I think that you are missing a very critical factor in evaluating rates of compliance. The FairTax represents an enormous simplification, as measured by the number of pages in the two systems, as well as the number of points of collection/enforcement. The increased efficiency will be enormous. Therefore, if we have to allocate some resources to minimize the types of abuses that concern you so much, that will be quite possible.

No matter how you slice and dice it, it will be inevitable that we will get much higher compliance with a much lower level of resources allocated to enforcement. It isn't even close.

[Always Right]

The logic is anything but flawed since it was precisely the hooker that was the subject discussed; not the John. The discussion was not about taxing the illegal activities themselves.

The discussion was about taxing the underground economy, so yes it is exactly what we are talking about. You are merely attempting to change the argument by changing the parameters now that you see you've lost it.

The arguement has not been lost, you just fail to understand the facts.

In any event the FairTax captures tax revenue from he underground economy even if it gets it only from the hooker and not the John

Again, this is no different then the current system. When the money is spent on a legal transaction today, it creates income for the retailer which flows down the entire supply chain and even back to the producer. You claim there is 20-30% embedded taxes in consumer goods today. If that is the case, then what's the difference? Legal transactions taxed, illegal transaction illegally avoid taxes. If there is a $1 Trillion underground economy, both systems are missing out of collecting a lot of owed taxes. Certainly that most of that money flows into legal transactions, but no system captures the taxes that are legally due from underground transactions. Taxes are avoided.

[pigdog]

You should read the bill re prebate checks where it says:

"`(2) IDENTIFICATION REQUIREMENTS- In order for a person to be counted as a member of the family for purposes of determining the size of the qualified family, such person must--

`(A) have a bona fide Social Security number; and

`(B) be a lawful resident of the United States."

What portion would you think would qualify? Or all they all just going to fake it and fool old Uncle???

And, no, the amount paid in IT now would be a good bit less that the sales tax. And, to repeat, the statement is NOT that the FairTax eliminates tax evasion but that if DOES collect tax revenues from many who are now not paying. Significantly more??? It will pick up 23% of each retail sale to end consumers on taxable items whether they are illegal aliens, drug dealers, or foreign tourists - not many of whom are impacted with IT now. Clearly very significant I think.

I suppose I should point out the obvious that, since it is not yet he law, there are no tax evaders yet under the FairTax - nor have I said there would not be. Certainly there are provisions in the bill to address some of the evaders/non-compliers.

[e_castillo]

"The fairtax crowd silence is deafening on this thread."

Hey, I'm for it!

The big problem I see with any tax of this type is that it would make it to obvious for people to see how much money they really pay in taxes.

[pigdog]

I'd have to observe that the John spending money on the hooker (which may be a transaction but I'd not call it a legal one) is certainly not going to cause her to report that as income. The only tax revenue revenue derived from this downstream side of the transaction is the small amount that represents the profit on the portion of her retailer's costs (and thereby her price) that have been inflated by embedded tax effects.

The difference is that the IT captures money from the underground economy only indirectly by the retailer's portion of increased IT due to the embedded tax effects - however much those are - and not at all directly.

With the FairTax, the taxable transaction captures 23% of the sale as sales tax - a greatly larger sum not adressed by the present system.

And I repeat again (since you seem to have missed it and offer that erroneous refrain again) - no one is saying that the illegal transactions themselves are taxed but that the FairTax picks up far more in tax revenue than the present system.

[pigdog]

Absolutely ... and that's one it the beauties of it. It should help to bring heat on Congress to reform their act and have people pay more attention on their actual taxburden - so long as the system is fair AND simple so it can be understood which qualifies the FairTax on both counts.

[cc2k]

pigdog wrote:

---

I'd have to observe that the John spending money on the hooker (which may be a transaction but I'd not call it a legal one) is certainly not going to cause her to report that as income. The only tax revenue revenue derived from this downstream side of the transaction is the small amount that represents the profit on the portion of her retailer's costs (and thereby her price) that have been inflated by embedded tax effects.

---

First, I think you underestimate the total tax revenue downstream. Most of the price of anything the hooker purchases is ultimately reported as income by someone. Let's say the hooker gets a really nice hair styling with part of her ill gotten gains. It's true that the owner of the salon only reports a small marginal profit on the transaction and only pays income taxes on a small portion of the total. But, if you look a little further, you'll find that many of the "cost of operation" expenses that the salon owner doesn't pay taxes on are reported as income further downstream. The salary/wages of the employees that perform the shampooing, hair cutting and styling are reported as income and taxed. The same for the cleaning service that cleans the salon every night. The owner of the building reports the rent as income and pays taxes on it. The electric company and phone company report the utility bills as income and pay taxes on that. There's not much in the price of anything you buy that isn't ultimately reported as income by someone and taxed. That's why the "embedded taxes" in the cost of things is in the 20-30 percent range. Because the typical tax rate is in that range and virtually every penny of the price of anything you buy is ultimately reported as income by someone.

pigdog wrote:

---

The difference is that the IT captures money from the underground economy only indirectly by the retailer's portion of increased IT due to the embedded tax effects - however much those are - and not at all directly.

---

And, conversely, under the alleged "fair tax" only captures money on the upstream side indirectly due to the fact that the buyer's income was derived at some point from the sale of taxable goods and services. In most cases, under the alleged "fair tax," the john got to keep all of his paycheck and pays no taxes on the money he used to pay the prostitute. So, if you only look that far, the alleged "fair tax" misses a lot of revenue on the upstream side.

I'll admit that if you only look slightly downstream, the alleged "fair tax" looks a little better. But if you only look slightly upstream, the alleged "fair tax" isn't as good. Because most people earn their money from jobs that pay wages or salaries. In the income tax system, the john is likely to be paying her with dollars that were reported as income and taxed. Under the alleged "fair tax," he probably pays no taxes at all on the dollars he used to pay the prostitute.

Again, if you dig deeper, you'll find that the money the john used to pay the prostitute ultimately originates in the sale of taxable goods and services, and there is revenue collected on the upstream side. But it's from "embedded sales" and "embedded taxes" within the john's income stream rather than from the john paying the taxes directly.

The bottom line is, if you look at the overall economy in it's entirety, both the income tax and the alleged "fair tax" fail to tax the "underground economy." The difference is in how they fail and which side of the illegal or tax evading transaction has the most missed tax revenues. With the income tax, the upstream side has more visible tax compliance and greater visible tax revenues. With the alleged "fair tax", the downstream side has more visible tax compliance and greater visible tax revenues. But if you dig deeper, the tax revenues are actually collected on both sides of the illicit transaction. Under the income tax system, the virtually all of the money spent by the prostitute is ulitmately income to someone. Under the alleged "fair tax," virtually all of the money earned by the john originated from the retail sale of something(s).

Focusing only on one side of the transaction and saying one system is better than the other at taxing the "underground economy" is either ignorant or intentionally misleading. If alleged "fair tax" supporters are that ignorant about the underground economy, it makes me wonder what else they've overlooked. If they have to mislead people about the advantages of their system, it also makes me wonder why that system is better.

[lewislynn]

Hard to see what busineses you might be referring to.

Particularly when you don't understand what you're reading. I was referring to businesses who are now taxpaying businesses but would be exempt from the fairtax system of collecting taxes (I thought the fairtax didn't like exemptions).

It is the buyers who pay taxes; the businesses merely forward it to the state

If a business makes a mistake and forgets to collect the tax on a transaction does that mean there's no tax due?...I didn't think so.

[balrog666]

Bullcrap, you guys say that on every thread. You tell us that prices will come down 30% but you haven't one f-ing clue how. Your numbers don't add up to anywhere near 30%. You guys are so f-ing clueless and so f-ing dumb it is beyond pointless to explain anything to you.

That's it, in a nutshell - none of them are business owners.

As I have stated before, the Fairtax would reduce my current costs by about 4% and that is without considering any additional taxes imposed on my overhead costs including rent, advertising, utilities, fuel, and capital equipment. And without adding the NRST back on top of my prices.

[balrog666]

NIPA tells you consumption spending is slightly over $8 Trillion.

IRS statistics tell us Business Taxes are under $200 Billion and 1/2 of SS Tax is about $350 Billion. Nobody disputes this, so I can only find about 6.8% of taxes which are hard costs. I try and try and try to discover where the remaining $1.85 Trillion of savings are so business can keep prices the same, but they refuse. The only thing I haven't accounted for is compliance costs, which will only be a small fraction of that. If they can't come up with the rest of the savings, the only conclusion has to be prices will go up substantially under the Fair Tax (which any honest person already knows).

Worth repeating.

[lewislynn]

IRS statistics tell us Business Taxes are under $200 Billion and 1/2 of SS Tax is about $350 Billion.

-----

The only thing I haven't accounted for is compliance costs, which will only be a small fraction of that.

That 550 billion doesn't just vaporize, it's replacement is included in the projected tax on sales at current, not reduced prices.

"Compliance costs" Have to be someone elses business income which would have to be included in the $200 billion business taxes and the $350 Billion SS tax.

If half of the entire $200 billion business tax was on compliance business's profit it still wouldn't calculate.

Over 90% of compliance would be accounting and there would still be laws to comply with. Does the Fairtax eliminate accounting AND compliance with any laws?

[pigdog]

It's good to see one on the SQL side finally admitting that 20 - 30% embedded cost figure. There are some other things that you say that have merit such as:

"Most of the price of anything the hooker purchases is ultimately reported as income by someone. Let's say the hooker gets a really nice hair styling with part of her ill gotten gains. It's true that the owner of the salon only reports a small marginal profit on the transaction and only pays income taxes on a small portion of the total."

The first sentence must be suspect under our present tax system which is so complex that no one can make such a statement intended as having general applicability. (That complexity is part of the problem the FairTax overcomes.) In addition many -if not most - cases of the type you talk about here (again, the complexty issue prevents us from knowing) present taxes that are levied against profits, not income.

Your observations, though, about the lessening effect of income taxes as one moves down the production chain is quite true - in is the converse of the 20 - 30% cost embedding but it DECREASES as you go down the chain lessening the income tax portion with each level. It's sort of like the poem which, paraphrased, is something like:

"Fleas have little fleas
On their backs to bite 'em
Abnd little fleas have litler fleas
And so on, ad infinitum."

This means the tax revenue paid dwindles each level that is traversed, getting smaller and smaller. With the FairTax, the tax applied on taxable items is always the same rate (where even the rate may change in your general example or disappear completely given the present tax complexity).

Certainly its true that the FairTax captures the tax only a single time ... that's what it's designed to do as anyone who reads the bill can see. It is also designed to be revenue neutral which means that it captures those tax revenues you allude to - but in a different manner that is far simpler and much easier to understand. This means that he amount paid by drug dealers, hookers, etc. when purchasing other items presently is still recaptured by the FairTax - it does not disappear, In addition, though, additional funds will be subject to the sales tax from those now outside the tax system on funds that now are not directly subject to taxation - not just drug dealers and the hookers but also the millions and millions of illegal aliens in the cash economy (who only pay the small portion of the tax burden you refer to with the hooker ... and that only indirectly) as well as the many millions of foreign tourists who come here to enjoy, among other things, our tax-supported national parks, etc.

Clearly the IT does not and cannot tax the underground economy except via the dwindling and indirect mechanism you mention for the hooker and her purchases. That is both indirect and nebulous (the tax complexity issue again). The FairTax, OTOH, is revenue neutral to start with and will actually bring the money from the underground activities into the mainstream tax hopper when used for retail purchases. This may very well INCREASE tax revenues since no one knows with any certitude how large this segment really is. An increase in revenues would mean that we could rev up the hue and cry to cut the sales tax rate which is quite possibly in the cards anyway as the economy improves under the FairTax.

Also, you may have said something unintended when you offered:

"Again, if you dig deeper, you'll find that the money the john used to pay the prostitute ultimately originates in the sale of taxable goods and services, and there is revenue collected on the upstream side. But it's from "embedded sales" and "embedded taxes" within the john's income stream rather than from the john paying the taxes directly."

This would mean that his income originated from a source already paying the sales tax so his money had paid the full 23% at that point and not just some part attributable to the embedded cost portion.

There is no "misleading" as you state.

[pigdog]

In fact, looey, what that business is doing is STEALING from the government, not "forgetting" - though he might so argue to try to escape penalties.

Read the bill.

[pigdog]

Better touch base with the poster in #833 (who also is in the SQL, or Status Quo Lover, mode) as he accepts that the increase is rational.

I presume by all the posting of the "f-ing" comments that those refer to "FairTaxing", do they not? And don't disabuse yourself of reality - several FairTax supporters are business owners and in general those supporters cover a wide spectrum of Americana.

The FairTax - as has been shown - is not "on top of" your current prices, either.