Could a "Fair Tax" Help Fix the Budget Mess?

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Earlier in the budget debate, I asked what sort of tax policy would be best for the United States. I admit that's a bit broad, so let's take a look at one tax plan that seems to be gaining support: the so-called "Fair Tax".

The idea, which has supporters in the House and in the Senate, is to repeal several taxes, most notably income tax, and replace that revenue with a universal sales tax. (The Fair Tax Blog asks: should you be paying income tax at all?) The proposal calls for a 23 percent tax on all goods and services -- although some have argued that in practice, it would be closer to 30 percent -- and businesses would keep one quarter of one percent of the tax revenue they bring in as payment for serving as a tax collector.

The Fair Tax plan purports to keep government spending the same, changing only the way in which revenue is collected. But will the Fair Tax really be able to match income tax revenue? (Chris Fonzone at TPM Cafe says no.) If reducing the budget deficit is the goal, the only way the Fair Tax can help is by stimulating economic growth.

However, one troubling aspect of the Fair Tax is that even with more money in workers' pockets thanks to the elimination of income taxes, seeing a 23 percent (or more) tax tacked onto absolutely everything could cause consumers to rein in their spending. Housing could be hit especially hard -- can you imagine a home costing 23 percent more than it does now? On top of that sticker shock, presumably the helpful deductions for homeowners would be wiped out with the implementation of this Fair Tax. Tax opponents also warn of the danger of an income tax creeping back in future years, on top of the sales tax, if the 16th Amendment isn't repealed.

One cool thing about the Fair Tax is that it offers a rebate to every household to cover tax paid on basic expenses, like food and shelter. (The rebate might seem an unwieldy proposition, but it's probably better than the Australian GST, which draws such fine distinctions that a fresh chicken is tax-free, but a cooked chicken carries a 10 percent tax.)

While the rebate would ensure that the Fair Tax wasn't regressive, I remain skeptical. I fully admit my background in finance is limited, but economic stagnation appears to be a distinct possibility with this Fair Tax in place. With substantial budget shortfalls even now, consider what could happen to the budget deficit if the income tax was abolished but the Fair Tax revenue failed to live up to expectations.

By Emily Messner |  December 21, 2005; 11:14 PM ET  | Category:  Beltway Perspectives
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Yes, it is time for the United States to drastically shift its tax policy. Progressive taxation over the last 6 decades has failed to establish the United States' economic hegemony in the world. I certainly see the value of change.

As Daniel Mitchell so elegantly pointed out, we need only to look so far as the global economic powerhouse that is Eastern Europe for tax reform policy. Russia, Latvia, Estonia... these are the future super-economies because of their aggressive taxation reforms. Move over EU, America, and Japan, here comes Lithuania.

What started this entire debate? When did people decide the American tax system was broken? Did I miss something?

Posted by: Will | December 22, 2005 11:01 AM

Please stop posting this useless ranting.

This Blog stinks!!!!!

Posted by: The Lonemule | December 22, 2005 03:51 PM

An essential point of debate with respect to this "Fair Tax", which is just one of a number of proposals to shift our system to a consumption tax rather than an income tax, is how the tax burden would be distributed. In one sense, a consumption tax is more fair than our current graduated system because everyone would pay the same tax on everything they buy, and you could control your tax burden regulating how much you choose to buy. Spenders and wasters would pay more, and savers would pay less, thereby creating an incentive to save and hopefully solving some of our future retirement issues. Under the current system, income tax rates rise with higher incomes, so that not only do those with higher incomes pay more total taxes, but they pay at higher rates than do those with less income. Whether or not this is fair is really unanswerable, and depends on whether you think the rich have an obligation to help subsidize the poor by shouldering more of the country's revenue needs. What needs to be pointed out is that a shift from the current graduated, or "progressive" rate, system of income tax to a consumption tax is that the effect is going very far in the opposite direction. A flat income tax would tax all income at one rate, so that the rich pay more total tax, but they would pay the same total percentage of their income in taxes as would the very poor. Under a consumption tax, the poor would pay a much higher percentage of their income in taxes than would the rich. Even with an exemption/rebate for true necessities, the poor will necessarily spend a larger portion of their income on "non-essential necessities" such as moderate entertainment expenses, gifts, travel, etc, than would the rich. Someone making $500,000 might spend $25,000 a year on travel and lavish gifts for family, while someone making $20,000 might need to spend $2000 on a trip to a relative's funeral and birthday gifts for a large family. The rich person has spent and been taxed on 5% of his income while the poor person has spent and been taxed on 10% of his, receiving much less in return. Emily's comment about a consumption tax being regressive is on the money, and even with the rebate, while it wouldn't be literally regressive from an effective rate point of view, in terms of the marginal utility of the taxed money, the poor would carry a much higher burden than they do currently. I think most people would agree that if the tax burden has to be skewed one way or the other, it is better for the country to skew it towards the rich. However, a more fair system would be something along the lines of a flat income tax, which would tax more income, with fewer deductions and other special provisions, at a lower but uniform rate.

Tax policy is a serious issue that I don't think we pay enough attention to. Saying we want lower taxes, or need to raise taxes to pay for the programs we want, is missing the point; those are revenue questions. We need to improve the way the revenue is raised from both a fairness and an efficiency standpoint. And we need to pay what we owe--the link above to whether we need to pay at all points a ridiculous argument, which unfortunately, some people are willing to believe, probably because they would prefer to. I also think we should feelsome civic duty to pay what we legally owe to keep our country running--I know way too many otherwise honest people who seem to feel absolutely fine about cheating a little on their taxes. Doing so is stealing from the honest people who then have to pay more, through the higher rates needed to raise the necessary revenue. I'm not sure why this is, but somewhere along the way we are failing to educate and remind people that taxes are an obligation and one of the costs of living in our wonderful society. We talk about patriotism and the importance of voting and other civic duties--I can't think of anything more essentially a civic duty than paying our fair share for our government. It doesn't mean they should be higher, it just means we should all pay what we really owe--if we all did that, everyone would have to pay less.

Sorry for the long rant, but taxes always get me going!

Posted by: | December 22, 2005 04:40 PM

Man, the brilliance of some of the above posters.

Will - you are absolutely correct sir. What is the point in U.S. citizens debating the government's tax policy? Foolishness really! Is your point that it is perfection and above comment and criticism, and heaven forfend debate? Have we distracted the public discourse away from Jessica Simpson and Angelina Jolie for too many precious seconds?

Lonemule. Really, Lonemule? Amazing powers of analysis and debate there. You, my good friend, have convinced me of the error of my ways in reading this blog.

(Not really.)

Posted by: benny | December 22, 2005 05:25 PM

It seems to me that taxation policy should be equitable in the sense that people with 1% of the wealth should pay 1% of the taxes, and so on and so forth. However, for a variety of reasons this has never been a simple thing to do, so instead we have things like progressive income taxation (which is not the same thing as wealth taxation).

Taxes like the estate tax, capital gains taxes, etc., are attempts to move towards an equitable system of wealth taxation but it seems like we are a long way from it-- and, thanks to current Republican policy, moving further away by the week.

It seems as though a "fair tax" (which is a nice example of branding but doesn't really capture the goal of the tax) would be yet another step away from not simply progressive taxation but equitable taxation as well.

I would welcome hearing an argument for why corporations and people should not pay taxes in proportion to their wealth (again, as opposed to their income). My belief in this principle is mostly based on my attempt at a common-sense philosophy.

Posted by: Patience | December 22, 2005 05:42 PM

benny-

Absolutely not, benny. I think a fair discussion of taxation is utterly vital. My sarcasm should be interpreted as a historical inquiry as to where this tax debate started. I was not under the impression that progressive income taxation was so broken. When was it deemed broken and by whom? Is this not a fair question? Fair taxes and Flat taxes are not minor changes to the tax code... they are radical ones. Are the problems facing income taxes radical enough to warrant radical solutions? Is that also not a fair inquiry?

Maybe I am unusually resistent to change, but I have to assume that the people producing fair tax and flat tax plans have agendas of their own. Isn't a frank discussion about those agendas as important as the discussion of changes to the tax code? The above fair tax plan is regressive. Since regressive taxes burden the poor dispraportionately more than the rich, isn't it fair to ask why someone would be interested in a regressive tax?

Maybe my first post was too cynical. I apologize.

Posted by: Will | December 22, 2005 05:53 PM

That was a great reply Will and I also apologize for the harshness of my initial criticism.

Even the author of the blog admits to reservations with the Fair Tax proposal (which I would sum up with one word: dumb). However, there are several interesting points (and entertaining ones, like the history of dissent regarding the federal income tax).

Even if one agrees that a regressive tax is the way to go (and few don't think that), can there be more tweaking of the system? Where should it occur - on the private or corporate level? What about state (county and even municipal) taxes? Are they fairly and equitably levied?

It's all debatable.

Posted by: benny | December 22, 2005 06:23 PM


Here is a short defense of the Fair Tax which is useful for thinking about the debate (I am no expert, so I am using another's argument here):

Right now, people say we have a progressive income tax, that the rich people pay more. But in reality the working stiffs of America end up bearing the brunt of taxation. Most of the money collected in the income tax comes from brackets $50,000 & below, from working people My proposal gives them back control of their money. Until they decide how to spend it, the government doesn't get to tax it, and if they spend it on the basic necessities of life, people who are poor wouldn't have to pay taxes.

Other people who are maybe saving for the down payment on their house would be able to give themselves tax cuts just by controlling the pattern of their consumption. So, it puts everyone-poor and working people-back in control of their own economic life.

Posted by: Gideon | December 22, 2005 08:11 PM

A 'fair tax' will never see the light of day, at least not any time soon. Not because it wrong, right, or anything in-between, but because it is progressive and different, requiring REAL change.
Real change and progress are not at all popular in America. The political class and the rich want to preserve the status quo, and the electorate is too complacent and inert to differ from what the political class wants.
It would be great to have a real debate about a fair tax, but, since a fair tax just isn't going to be enacted in our lifetimes (if ever), I kind of wonder what the point of debating it is... perhaps to give us some false sense about Americans somehow being progressive-minded? Sorry, but the fact of the matter is that Americans blindly cling to tradition and won't abandon such until their entire world comes crashing down around them. Since a fair tax ISN'T tradition, the idea of it will be ignored by the vast majority of American citizens.

Posted by: ErrinF | December 22, 2005 08:52 PM

If such a tax were passed, I would imagine that the busses bringing shoppers from Canada to the border area malls in Michigan would start delivering shoppers in the other direction.

Posted by: Kevin McKague | December 22, 2005 09:42 PM

ErrinF describes this tax as progressive, when it seems to me it is fully regressive. We're going to not tax stock dividends and instead raise the tax people are paying at Wal-Mart. Any economist can tell you that something called an "Engel Curve" shows that the share of income dedicated to consumption declines as one's income increases. Calling this a "Fair Tax" is like Bush's "Clear Skies" legislation: it's fully bogus naming. This scam is nothing but another way for the rich (who generally claim a larger share of government revenues) to take more out of the pockets of the poor.

Posted by: James | December 22, 2005 10:02 PM

Hi. Merry Christmas, posters. Interesting topic...I agree with ErrinF that it`s unlikely we will see the " Fair Tax " in our lifetime, hyperbole aside. According to 2003 figures,(the the most recent available from I.R.S. data) the current system is congenitally unfair but manages to akwardly flop along its way. Check these tables out at the Tax Foundation web site.
http://www.taxfoundation.org/taxdata/show/250.html


The top 1 percent earners paid over 1/3 of total income tax revenues in 2003 with an average tax rate of 24 percent.

The top 25 percent of earners paid about 84 percent of total income tax with an average personal tax rate of a bit over 15%.

The top 50 percent of wage earners (including that top 1%) paid 96 percent of income tax collected.

The bottom 50 percent earners paid about 1/25th of the burden with a tax rate of around 3 percent.

I also found it interesting that of 132 million tax returns filed, 42 million people got every dime they paid in 2003 income taxes back - and over half of those folks got a check from the gov`t on top of that.

Posted by: | December 22, 2005 10:24 PM

Uh, that comment wasn`t meant to be anonymous. Posted by bender.

Posted by: bender | December 22, 2005 10:31 PM

Posted by: bender | December 22, 2005 10:49 PM

Pretty good article Emily and mostly fair but you missed one vital point when you wrote, "Housing could be hit especially hard -- can you imagine a home costing 23 percent more than it does now?" Because everything is taxed already, there is approximately 23% EMBEDDED taxes in the cost of the materials used in building houses so homes would NOT cost 23% more but approximately the same. This applies across the board. And for all those naysayers who claim it will never come up, you can count on this being a big debate before the 2006 elections and lawmakers should educate themselves before that time or they will be made to look ignorant and will pay the price at the polls. The "Fair Tax" gets rid of the IRS, taxes the $550 Billion underground economy (which pays no taxes now) and saves companys another $500 Billion no needed to track withholding and income tax reporting. 45 States already have the mechanism for collecting sales tax in place. It's a wonderful idea whose time has come.

Posted by: Clay Willis | December 23, 2005 07:12 AM

Emily,
You seem to have an especially poor understanding of the "Fair Tax." Might I suggest you actually read the book, rather than some slanted "Cliff Notes" version that you are obviously using. If that proves too much a burden, might I suggest you contact the authors for a tutorial, or let them make their case in an article. Your inaccurate description of the proposal does little more than muddy the water in this debate.

Posted by: ibcracker | December 23, 2005 08:42 AM

Remember the law of unintended consequences when trying and entirely different taxation system. Omit words like 'fair' and 'equitable' as these words have different meaning to different people. Ask instead who the winners and losers will be, and is that what we want? Ask what will people do in response to the tax changes, and see if that is the desired outcome. Lastly, what is the probability of success in getting the revenue that the government needs.

Posted by: Jake | December 23, 2005 08:54 AM

There is no such thing as a fair tax. Under present conditions no one with a business pays adequate taxes, there are just too many dodges, both legal and semi-legal. Very few really wealthy people pay a fair share of taxes. And what is a fair share? The same % for everyone? A graduated tax?

And what about those who disagree with the way taxes are spent? Should they have exemptions?

Taxation is by nature unfair. It would be better to keep what we have -- knowing it is unfair -- than to innovate and get something even less likely to be fair.

Posted by: candide | December 23, 2005 10:00 AM

VAT has been used in Europe for years. There are some major problems with it including lots of cheating. Also, what will probably happen is that we get a VAT and in a few years the income tax returns (small at first) and we still have the VAT.

Posted by: TonyK | December 23, 2005 10:40 AM

Perhaps we could implement the concept of taxing consumption incrementally by imposing greater taxes on certain items. For example, we could impose an import duty on imports of oil from OPEC countries sufficient in order to pay for the military used to patrol and protect oil producing those countries. That would make those who depend upon oil from those countries pay the cost of safeguarding and stimulate North American production of oil and/or alternatives. If we need more resources at the border to protect against terrorists slipping in nukes, then charge an additional inspection fee per container to pay for it rather than either dipping into the general Treasury or letting the job slide. Charge a withholding tax on commercial intellectual property profits, such as trademark royalties, franchise fees, and copyrights on music, fiction, drama or anything non-technical that does not advance "knowledge or the useful arts" (the constitutional standard): After all those are government created monopoly rights, why shouldn't the government get a cut.

Posted by: Deal | December 23, 2005 11:12 AM

The best fix is a variable national sales tax. However, for now, a big fix would be extending the payroll tax to all earned income to infinity, since even the very wealthy seem to want to collect social security in their senior years.

It is important to realize that the 23% figure is really just 7.7% since they are removing the 15.3% payroll tax in their plan. (7.65% each for both employee and employer)

Posted by: Ron Owen Bartels | December 23, 2005 11:16 AM

Any change that would eliminate the need for an accountant to prepare a return for an average person would be a good change. A person who doesn't even declare exemptions. Or whose only exemption is a mortgage. An elderly lady who lives on social security and some saved money shouldn't have to pay someone to fill out the form. That is what a friend of mine has to do.

Posted by: JEAN | December 23, 2005 11:18 AM

The above comment about "embedded taxes" comes close to the biggest error the "Fair Tax" writers make--a form of double counting.

The price of a good currently includes things like the income taxes and payroll taxes paid by the workers. There are two possible things that could happen under a consumption tax system:

(1) Wages stay the same, people see more money on their paychecks, pre-tax costs/prices of goods and services stay the same, and actual point-of-purchase prices go up by the amount of the tax, or

(2) Wages go down so take-home pay remains the same, pre-tax costs/prices go down because wages go down, and actual point-of-purchase prices stay about the same.

The authors of the book double-count by using argument (1) with respect to income (your new salary will be your current salary without the government bite taken out of it) and argument (2) with respect to prices (reduced taxes reduce the cost of production, so no increase in point-of-purchase prices).

And, like any tax system, there will be complicated questions of what is taxed. (Real estate? Shares of stock? Services? Is a consumption tax charged when you put a buck into a slot machine?) I mean, even the "income tax on a postcard" proponents skip over the much more complicated question of what gets added in to the number called "income".

Posted by: DirtyDavey | December 23, 2005 11:51 AM

The headline of this piece is about the Fair tax fixing the budget mess.

The budget Mess is a much if not more about the spending in congress as the collectoin of revenues.

If there is to be a "Fair Tax" then all taxes should be on the table. Income Tax, Social Security Taxes, Telephone Taxes, Gas Taxes yada yada yada.

All of the statistics on who paid what on income tax might be more relevant if you included Social Security. This is another tax on income that has been financing the defeceit for a long time.

The reality of the income tax mess is that congress loves to use special provisions for both individuals and companies to buy votes. The recent defeceit reduction (ie budget Cuts) was more than offset by Tax cuts.

How is the Fair Tax going to change this behavior?

If change is to be in the offing then it probably should include the mechanisms of spending as well as all taxation. The goal at the start might be for a balanced budget. Opps we had that when The republicans controlled congress and the Democrats the White House. I hope the republicans might listen more to Mr. Gingrich and his Contract with America.

May all have a Merry Christmas and a Happy New Year

Posted by: Hal Thresher | December 23, 2005 11:58 AM

What is the goal of taxation? Is it to pay for essential services? Social services? Reallocation of wealth? Protective? (tarrif) Persuasive? ("sin tax") These questions need to be answered before you set tax policy. The answer to these questions will tell you if you feel the VAT, flat tax, progressive tax or what have you will be a fair tax.

We also need to address with any reform, particularly one that will eliminate or simplify income tax, the impact on philanthropy. To what extent will donors donate if they do not get the tax advantage?

Having said that our tax policy has to address the ability to pay as a part of the equation. A flat tax or value added tax is regressive in any form you put forward regardless of the exemptions for necessities.

Posted by: Greg | December 23, 2005 11:59 AM

I think someone needs to explain who the winners and losers are in a frank way that the rest of us non-tax experts can understand.

Somehow, the above responses indicate that the fair tax is both better for the poor and worse for the poor. It cannot be both.

Either the poor are asked to shoulder more of the tax burden, or they are not. When Gideon says:

"But in reality the working stiffs of America end up bearing the brunt of taxation. Most of the money collected in the income tax comes from brackets $50,000 & below, from working people My proposal gives them back control of their money."

How can this be true AND it is true that the richest 50% of America pays 96% of the income tax? Presumably most of the country does not make $50,000.

Does a fair tax shift the tax burden to the poorer or the richer? This is a simple question with a simple answer that would be very telling to both the motives of fair taxers and to the future action of voters who support/fight the fair tax plan.

The majority of Americans are not wealthy. If you sneak a plan by them using rhetoric like "fairness" and "put their tax decisions back in their hands" and "simplify taxation", without explicitly admitting that all these measures require they pay more of the income tax burden, is immoral.

Similarily if the purpose of the fair tax is to shift the burden more towards the rich, than say so. But be explicit and describe why. Tax systems will have winners and losers, and a change in our tax system is going to shift the burden one way or the other. Which is it? I'd like to know and I can't make an informed decision about the fair tax without that information.

Posted by: Will | December 23, 2005 12:13 PM

All federal taxes on income, including payroll taxes, should be eliminated. They generated $1,803.6 billion in 2004--almost 17.6% of the same year's National Income. A superior tax base exists in debits to demand deposits at commercial banks. These debits were $452.5 trillion in August 1996, when the Federal Reserve ceased reporting them. In the unimaginable event that debits to all institutional depository accounts (securities and commodities brokers, mutual funds, and savings banks) were no greater than they were in 1996 at commercial banks alone, a debit tax rate of four tenths of one percent (0.4%) would have sufficed to replace the $1,803.6 billion that would have been lost from the elimination of taxes on all income in 2004. Households disbursing $50,000 from a bank account would pay a debit tax of $200 and no income or payroll taxes. Financial institutions would collect debit taxes and remit them directly to the U.S. Treasury. The debit tax would end the filing of income tax returns and the IRS.
Read the details at: http://www.americancrisis.com/

Posted by: John P. Rice | December 23, 2005 12:22 PM

Interesting paper. It'd have some good points (easier for individuals, increased savings) and some bad points (see below). It'd get rid of a progressive income tax and a regressive payroll tax to produce a slightly progressive sales tax.

But this would kill the economy short term. The psychological affect of seeing a 23% tax on every purchase would cause a slow down in spending...even if the initial price was reduced because the intermediary hidden taxes were removed.

Long term, the reduced tax on the top 1% (reduced income and estate taxes) would just speed up the entrenchment of a national aristocracy.

Another issue is that this does have the appearance of a giant tax break to non-individuals (e.g. corporations). Lavish, Dennis Kozlowski-esque corporate parties would be untaxed while a family buying a loaf of bread would be taxed. Imagine the news reports! One suggestion I would make to rectify this inequality is that, to be fair, corporate rights (and the rights of any non-individual organization (unions, etc.) should be reduced (no longer covered under the equal protection clause, no political contributions allowed, etc.) It'd require a constitutional change but since we'd need to get rid of the 16th amendment to make this palatable anyway...

Posted by: Alan | December 23, 2005 12:24 PM

Yes, a universal excise tax on the retail sale and disposition of goods and services is the best methodology for taxation as it allows for the manufacture and creation of such goods and services absent the burden of cost accounting for taxation in their manufacture and disposition to the public, and corporate and individual income taxes could then be repealed entirely. In order to work however, the universal excise tax would have to be imposed at a 25% rate or higher; and if one wanted to also repeal the burden of employment taxes on business (which would be beneficial to stimulate hiring), the tax rate would have to be at least 30%: Both income and employment tax ought then to be immediately repealed once an universal excise tax has been enacted.
Excise taxes are the only tax methodology that makes any sense economically as such taxes don't interfere at all with actual process of manufacturing and delivering of goods and services to the general public.

Posted by: William O'Connor | December 23, 2005 12:28 PM

Someone asked "who started this whole debate?" That would be the Bush administration, which appointed a group of far-right folks to "fix" the tax system by simplifying it. Legislation has been introduced (see S-25 and HF-25). The panel can be found at www.taxreformpanel.gov and their more rabid supporters at www.fairtax.org.

For the truth about how the national sales tax would HURT everyone but the very rich, see a September 2004 report by the Institute of Taxation and Economic Policy called "The Effects of Replacing Most Federal Taxes with a National Sales Tax: A State-by-State Distributional Analysis" at www.itepnet.org or www.ctj.org. To quote from the report "...on average the 80 percent of Americans in the middle- and lower-income ranges would pay 51 percent more in sales taxes than they now pay in the federal taxes that the proposed national sales tax plan would replace. In contract, the best-off one percent of all taxpayers nationwide would get average tax reductions of about $225,000 each per year." Bye bye progressive taxation; hello two-tiered have/have-not society.

The IRS would be abolished, as would corporate, social security and Medicare tax collections. The retail industry would become the government's tax collection agency. Only new goods would be taxed, so if you bought a used home, for instance, it would not be subject to the tax. (See any harm here to new home construction?)

This idea is another attempt at shifting virtually the entire tax burden to those least able to pay, the same folks who are and will be hurt by further efforts to reduce the deficit by cutting funding for social programs and education.

Posted by: Bernice | December 23, 2005 12:43 PM

John P. Rice-

I am intrigued by this http://www.americancrisis.com/Social%20Security%20and%20Tax%20Reform.html

Can an informed non-advocate tell me why this doesn't make sense?

Posted by: Will | December 23, 2005 12:58 PM

While I did not have time to read all of the above, those that I reviewed overlooked the two greatest advantages of the "fair tax".

First, the tax would be far less regressive than reported. The elimination of corporate income tax, income tax on schedule C proprietors and the elimination of employer's payroll taxes would vastly reduce the costs of bringing products to market. The reduction in market price would nearly offset the sales tax charged.
Some would argur that businesses would not pass the savings on in lower prices, that greed would cause entrepeneurs to keep additinal profits for themselves. At first blush some might be so inclined, bur my experience with big business indicates that the greatest greed is manifested in gaining market share through lower prices. The pressure of this form of greed would offset the former.

The second point often overlooked is the posture of America in the world marketplace. We presently import far more than we export. The reduction in market price of American produced goods would aid in making us more competitive in the world economy. By the same token, the sales tax added to the price of imported goods would make them less attractive in the american economy. This would facilitate us in bring jobs back to our country.

Posted by: Jim O'Donnell | December 23, 2005 01:16 PM

Here's a link worth reading someone mentioned above. I you support the fair tax plan you are going to have to address the conclusions in the following link:

http://www.itepnet.org/sale0904.pdf

Posted by: Will | December 23, 2005 01:24 PM

the consumption tax idea does not take into account the double taxation created when an individual spends money that has been already taxed in the current system as income, saved, then spent. this could have a terrible effect on after tax retirement savings that would be spent years later and subject to taxation a second time when the savings are drawn out to spend in retirement.

Posted by: mike | December 23, 2005 01:33 PM

Wow, some really interesting comments here today. I empathize with both taxpayers who are employees and those who are business owners, since I belong to both groups. The current tax maze we wander through took a long time to develope, and I doubt anyone can say for sure what the result of taking a chain saw to the labyrinth would be. It`s fun to debate, though. What is certain? Division of opinion will remain regardless, and Americans will survive and thrive.

Posted by: bender | December 23, 2005 01:54 PM

Forgive my lack of knowledge, but wouldn't this have an effect much like that of the VAT many European countries use: economic stagnation. Of course, I could be wrong. I'm no economist.

Posted by: lone wolf | December 23, 2005 01:54 PM

I do not believe that a tax based on what one spends is fair. Unless one were to tax purchases of stocks, bonds, and other investments. Why not tax everyone the same rate on what they earn. Earnings should be defined as ANY income or money recieved, period.

Posted by: lonesomepine | December 23, 2005 02:12 PM


Will, and Others,

I should have posted the link from which I took the quote promoting sales tax as a replacement for income tax. The author is Alan Keyes, and the site is here:

http://www.issues2000.org/Celeb/Alan_Keyes_Tax_Reform.htm

Again, I'm no tax expert, but I find Keyes's perspective useful for thinking about the arguments on the side of the sales tax.

Here's another useful site for that position:

http://speakout.com/activism/issues_budget/

Posted by: Gideon | December 23, 2005 02:24 PM

Good link, Gideon. Keyes entertains some wild concepts. I like this one.

"For a certain length of time - a generation or two - [the Roman Empire] exempted the damaged city from taxation. One possible plan for reparations might be to exempt African-Americans of slave heritage from paying federal income tax since slavery resulted from "an egregious failure on the part of the federal establishment."

Lol. Isn`t that the same now-defunct empire that fed slaves to lions? I like these, too.


"But in reality the working stiffs of America end up bearing the brunt of taxation."

Duh! Who else will pay our taxes? Unemployed Ukranians?

"Most of the money collected in the income tax comes from brackets $50,000 & below, from working people"

Easily disproven and patently false.

Posted by: | December 23, 2005 02:52 PM

is there anybody out there that would like to be in the bottom 50% rather than be in the top 1% and pay a disproportionate share of the income tax as a memebr of the top 1%? i rather doubt it.

Posted by: Mike | December 23, 2005 02:53 PM

Gideon-

Thank you for the link, it is an interesting perspective that requires rebuttal. Here is what I have to say to Keyes:

"The income tax is a twentieth-century socialist experiment that has failed. Before the income tax was imposed on us just 80 years ago, government had no claim to our income. Only sales, excise, and tariff taxes were allowed."

I would point out to Mr. Keyes that in those 80 years of progressive redistribution the United States, under a Keynsian demand-side economic model, has risen as the unquestionable economic global hegemon.

His assertion that sales tax would be more progressive than income tax, which you directly quoted without specifically attributing it to anyone, is just a bold faced lie. Currently the poorest 50% of the nation pays less than 4% of taxes. Intuitively his math just doesn't add up.

Fortunately we need not depend on my intuitive hope. Here is the competing claim from http://www.itepnet.org/sale0904.pdf

While I do not expect you to read the entire thing (which you should, because it is far more specific than Mr. Keyes often times vague and unscientific pronouncements) just scroll down to Central Findings:

"In virtually every state in the union, the bottom 80 percent of taxpayers would face much higher taxes under a sales tax. Nationwide, these tax increases would average about $3,200 a year."

"[On] average the 80 percent of Americans in the middle- and lower-income ranges would pay 51 percent more in sales taxes than they now pay in federal taxes that the proposed national sales tax would replace."

"[The] best-off one percent of all taxpayers nationwide would get average tax reductions of about $225,000 each year."

If Mr. Keyes thinks this is what progressive taxatin means, than he is not an authority on the matter.

Alan Keyes: "Abolish the income tax and spend money responsibly" another misleading statement, as if the two are only possible in conjunction. Couldn't we maintain the current tax code and spend more responsibly? He fails to offer any substantive reason why changing the tax code would necessitate more responsible spending. I quote Keyes:

"Q: What would you do about taxes?
A: If you need a tax cut today, all you'll need to do is change your habits of consumption. You'll be back in control of your own destiny. That is the tax approach that I recommend. Radically different from what they're all talking about. They want to remain the gate keepers of your money. I want to put you back in charge of that money. Abolish the income tax."

It seems the claim he is making is this: If we are taxed on what we spend we have control over how we are taxed, namely, we can choose to purchase or not-purchase goods at our leisure. While this no doubt will affect government REVENUE, it's unclear why it would make a particular individual any more empowered over the national BUDGET which is decided by politicians, not Americans buying loaves of bread.

He closes his argument with a bunch of non-substantive rhetoric. The government are "gate keepers" who have control of your money only because income tax prevents Keyes from putting YOU in charge of your destiny. Bla bla bla...

I appreciate that you've offered a link with a differing view, but frankly I find it lacking in substance and overcome with rhetoric. He repeats the same banal defenses of sales tax; somehow it empowers the individual over the government, it forces government's to spend responsibly (how?), "Income tax is a failed socialist experiment", ad nauseum.

Just my humble opinion. I urge everyone else to check the Keyes links and draw their own conclusions. I think differing opinions are important, but Keyes stifles thought with trite slogans and vagueness.

Posted by: Will | December 23, 2005 03:05 PM

Hey, hey now....what is wrong with trite slogans and vagueness? They spark debate...they invite thoughtful retorts.

"If it doesn`t fit, you must aquit!"
-Johnny Cochran...classic.

"Read my lips. No new taxes!"
-Pres. Bush Sr.

"Bring it on!"
-John Kerry

"Humpty Dumpty was pushed!"
-Author unknown

Posted by: bender | December 23, 2005 03:33 PM

ibcracker
Why should you carry on with your obnoxious remarks on Emily's knowledge of "fair tax"? if you happen to disagree with her then please debate! why not stating your opinions on this subect and tell us a little about what you know. Im terribly interested since im a seventeen year old female wanting to learn from a highly obstinate commentor. Because right now- Emily has a debate blog with her name, picture, and everything... I do believe sir that you have a problem with females who hold a higher level of importance. Wouldn't you say so? oh and while your soaking up knowledge from your "book" of which you read, why not sending her a copy so maybe her knowledge will equal to yours and note the increase with which her salary has already peaked by posting this debate. Merry Christmas!

Posted by: kathernmarie | December 23, 2005 03:36 PM

I believe a fair tax is which every one
pays the same amount on their true gross
income. No deductions , No special exemptions. A person or persons in need of
a helping hand would be assisted by their
local governments through their hard times
and never have people become dependent on
permanent welfare.

Posted by: Clyde Preston | December 23, 2005 04:50 PM

good comment 17 y/o female. real good comment.

Posted by: | December 23, 2005 09:08 PM

I am sorry to use algebra, but I am a mathematician and that is the way I think. Pick any year among the last 50 (you may need to restrict this to 40). Call it A. Pick a latter year. Call that B. Pick a small percentage like 10%, or 1% or .1%. Call that R% for rich. Pick a large percent like 90%. Call that P%. For year A compute the percent of the wealth of the country owned by the upper R%. Call that RA%. Similarly let PA% be the percent of the wealth of the country owned by the bottom P%. Define RB% and PB% similarly. For almost every choice of A,B,R%, and P%, you will have RB%>RA% and PB%

Posted by: lench | December 23, 2005 11:30 PM

My last post got truncated somehow. Let me try again.

I am sorry to use algebra, but I am a mathematician and that is the way
I think. Pick any year among the last 50 (you may need to restrict
this to 40). Call it A. Pick a latter year. Call that B. Pick a small
percentage like 10%, or 1% or .1%. Call that R% for rich. Pick a large
percent like 90%. Call that P%. For year A compute the percent of the
wealth of the country owned by the upper R%. Call that RA%. Similarly
let PA% be the percent of the wealth of the country owned by the
bottom P%. Define RB% and PB% similarly. For almost every choice of A,
B,R%, and P%, you will have RB%>RA% and PB%

Posted by: lench | December 23, 2005 11:33 PM

Can't understand why my post keeps losing words. Must be that the blog hates math.In the unlikely event that anyone cares here's are the corrected lines:

For almost every choice of A,B,R%, and P%, you will have RB%>RA% and PB%

Posted by: lench | December 23, 2005 11:39 PM

Damm it! It is still cutting the line off.

...and PB%

Posted by: lench | December 23, 2005 11:42 PM

Will,

Thanks for your point by point response to the position of Keyes. I've read your response and the report you cite. To repeat my other posts, I am far from an expert on this subject, so I won't attempt a serious debate. But thanks.

Posted by: Gideon | December 24, 2005 12:17 AM

If you want to look at it from a pure equity standpoint consider this. First don't look only at income tax,because the bottom half of the country pays almost no income tax but pay a huge percentage of their income in all other taxes and fees, including payroll and state taxes. So we should look at all tax revenue.
In Clinton's last year under the tax code the top either 20 or 25% (I can't remember which) accounted for about 77% of all taxes paid. They also accounted for about 75% of all income. That seems pretty fair, they earned about 3/4 of the money and paid about 3/4 of the federal taxes. Once you add in all the other taxes like state which are regressive the rich probably ended up paying their fair share of taxes. Now with Bushes cap gains, dividend, and tax rate cuts, my guess is that the rich are now paying less than their fair share compared to the income they earned. The right will tell you that the rich are actually paying a higher percentage of income tax than they did under Clinton, and they'd be right, but only because they ignore all the other taxes paid by people in particular payroll taxes. Someone making 25 grand a year would be paying a higher tax rate than someone making millions that was getting most of their income via investments. That is the goal of the right wing. to tax income received by doing labor and getting rid of taxes from investments.

Posted by: PEN | December 24, 2005 03:52 AM

One thing that the Flat taxers and the consumption taxers always ignore is the effect such a new system would have on housing prices. Without the mortgage deduction in place, home values would immediately fall by 10 percent or more. This would kill the middle class, since most of their houses are their main investment vehicle.
The fair tax people talk about the rebate for poor people. The truth is a preponderance of poor folk are poor from a lack of education. How many won't get the rebate because they don't know how to file for it? Also, you'll have to prove that you qualify. It seems silly that the only people that would have to file tax returns would be the poorest.
Also, a flat tax would hurt the economy. Consider how nay high paying jobs depend on the tax system. From tax accountants, to H.&R. Block, to the software developer that writes, and updates things like turbo-tax. These are good high paying jobs that we as Americans don't need to lose. Likewise, getting rid of the estate tax will eliminate a niche industry that provides good jobs and gets rich people to spend money. There are many many consequences that both a flat tax and this fair tax will have that its supporters ignore.
The truth is that the rich (people that start and run their own businesses that actually employ people are not included) are really bad for the economy from an efficiency standpoint. Our economy is consumer driven, and although the rich may be extravagant at times, they spend very little in proportion to their income when compared to evryone else. What happens to the extra income? The right contends that the rich invest it creating economic growth. The reality is that the richer you get the more conservative your investment portfolio becomes. Rich people invest in blue chip companies and utilities, and other companies that provide stable stock prices, and good dividends. The problem with such companies is that they don't grow. Instead, they do things like merge, or buy other companies. Then, after those actions, they actually cut jobs to reduce redundancies. So the rich don't spend enough, and invest in things that don't help the economy as much.
If the goal is a simpler tax system, that would be easy to do. Set 3 or 4 tax brackets, the first being zero for say the first 20 grand of income, and ending with around 30 percent for the top. Make sure nobody pays more than 35 % of their income on taxes, this includes payroll taxes. Give tax deductions for mortgages (with a cap on the total dollar amount, college tuition, again with a cap per child, and on charitable giving. Also, eliminate the fake charitable deductions like giving a museum a piece of art or jewelry etc. (because those are total scams) Finally exempt any cap gains from selling your house as long as you buy another house within a year. This can only be done on your primary dwelling. Everything except cash from lawsuits, and child support, is considered income. How much simpler do you need? The only reason that taxes are complicated is that rich folks keep lobbying for more deductions. If those deuctions are eliminated, then calculating what your taxable income is would be simple, and having multiple tax brackets would not be even a little confusing.

Posted by: PEN | December 24, 2005 04:51 AM

I'm a little late to this but looks interesting.

Patience ----- The estate tax is a form of wealth tax; but applied only on the occasion of the death of the wealth owner. Capital gains are a transaction tax on the net income from a property exchange, a form of income tax. The so-called "Fair Tax" would presumably replace it with a tax on the transaction value, a sales tax.

Why not a wealth tax? Let me count the ways.........
Is your "wealth" the value of your assets or is it the value of your assets net of your liabilities (i.e. the value of your home or just your equity in it)?
Who assesses the value of your wealth, by what method, and how often?
How about the cash you keep under the mattress, is that part of your wealth?
How about the land you own in Argentina? That too?
Do we really want the government keeping track of everything we own? Wouldn't that be even more intrusive than the IRS?
What about the poor farmer who just wants to farm and not sell his land for a fortune to a developer? Are you going to tax him out of business?
How do you measure a corporation's wealth? The value of its physical assets? How about the value of its brand, of its intellectual property, its royalty rights, its contracts? Net or gross? Or maybe you just use its market capitalization? Having taxed the corporation, are then going to tax the holders of its stock? That is hitting the same wealth twice.

And so on.

I like your characterization of "Fair Tax" as a brand. It reminds me of the Fox "Fair and Balanced" BS. It is just incessant marketing.


Lench --------- Thank God for mathematicians! I do think these various proposals would be more enlightening if we could see them in mathematical form applied to real actual data taken over say, the last 10 years.
As to your point about wealth distribution, I would argue that the richer folk benefit disproportionately from a strong nation, from the security, both external and internal, it affords them. Clearly, they have far more to lose from either an external or internal breakdown. The rich need stability even more than the poor, in order to stay rich. From that point of view it is not unreasonable that the richer folk should bear a larger relative share than the poorer folk of the cost of maintaining that condition. As a practical matter progressive rates become necessary to achieve that imbalance when net income is used as target to which the tax is applied; in no small measure because the wealthy are so very skilled at minimizing or otherwise sheltering their taxable net income. As you point out, graphs of the relations you defined for wealth would take a similar form if applied to income. So if we were to replace income with wealth as the tax target, it is most likely that we would have to have progressive rates for that as well. It would be like going from the frying pan to the fire. For a lot of practical measurement reasons, wealth is an even tougher beast to target than income. Among other things, our entire national administrative system, records, bookkeeping, accounting, reporting, etc. is all geared towards tracking and calculating income, not wealth.

The fundamental problem with a sales tax is that it is usually limited to the sales of "consumables". The richer folk consume a lot less consumables proportionate to their income or wealth than the poorer folk; that is one reason why they get richer faster. So unless your going to define "sales" such that it includes the purchases of things like securities and land and so forth which taps the kind of buying and selling that the rich actually do, a sales tax is inevitably regressive in nature, and as you point out, goes in the wrong direction in terms of wealth and income distribution. Now putting a tax on what are really capital flow transactions has some nasty economic effects and consequences so I'm not a big fan of it. But a progressive sales tax is inconceivable as a practical matter so I just can't see how you make it work without exacerbating the disparity in the distribution of wealth and income.

So I think we are practically stuck with the income tax whether we like it or not, and I don't. My problem with it is not its basic nature, but its complexity. The complexity in personal income taxes comes from using it to achieve unrelated social goals or unrelated economic goals, often very narrow ones at that. It really could be a whole lot simpler and still achieve its basic purpose, so to me it's a matter of reform and restructuring this and social security because the latter is such a huge unfunded liability.

1. Take the ceiling off of SS earnings ........ That will hit everyone, including the rich, with the same payroll taxes. This alone is equivalent to an 8% rise in income taxes on the salary income of the richer folk.
2. Get rid of the mish mash of credits, earned income, Hope, Lifetime education, child credit, whatever.
3. Get rid of itemized deductions, all of them.
4. Tax net long-term capital gains as income, but index the cost basis for inflation, and if you want to favor it by taxing only one quarter, or one half, or two thirds, or whatever of it OK, but not a special tax rate.
5. Tax all dividends as ordinary income.
6. Tax all interest as income, all of it including municipal bonds and other favored scams.
7. Get rid of the esoteric kinds of income shelters dreamed up by the Big 5 (or is it now 4) accounting firms and clever tax lawyers.
8. Create Roth type education accounts for child education funding.
9. Reset the standard deduction structure, indexed for inflation, to a higher value commensurate with covering revenue loss from the median or average tax benefit of current itemized deductions and the child credit. That gets the government out of the business of subsidizing mortgages for the rich folk.
10. Reset the tax rates and associated income levels to produce roughly the same level of revenue we get now over the current income spectrum, and maybe enough more out of the top 50% to repay the money we borrowed from the social security trust fund in order to pretend the deficit was smaller than it actually was.

This would actually have substantive short term and long-term effects. Long term, it would tend to disadvantage excessive home mortgage debt and force municipalities and similar public or semi-public entities to bear the real cost of their financings. You would have to grandfather existing tax advantaged debt securities to avoid a collapse in that market of course. Short term, it would depress the marginal value of work to the working poor, have some negative influence on charitable contributions, and apply a downward pressure on housing prices, especially towards the higher end.

I don't have the real data, so I don't know what the actual answers would be in terms of a rate/income structure, i.e. how progressive it would be but I would not be surprised if the effect of expanding the income subject to tax at the higher end of the spectrum allowed for a lower top tax rate than the current one.

Then there are corporate income taxes, but that is an even bigger mess. It is enough to note that the relative income tax contribution from corporations has been in decline for years even as their income has climbed. This part of the code has long been overdue for feeding to the shredder and starting over.

Sorry not to have any grand schemes, I would be happy if Congress could just keep from fiddling with it to satisfy every passing political fancy or satisfy every special interest group bearing campaign help or cash for the next election.

Posted by: Cayambe | December 24, 2005 06:26 AM

An interesting discussion here.

1. Tinkering with who gets taxed will not "fix the budget mess". Only matching tax revenue to spending (and interest payments) will fix the budget mess.

2. Income taxes are easy for most "ordinary" people except for small business owners and people who want to save every nickel.

3. The key goal of the Republican tax agenda is to shift more of the burden of taxes from capital to labor, i.e., to tax wealth less and tax work more (and/or borrow the money and make our unborn grandchildren pay our taxes for us). Everything else is just noise.

4. Labor bears a disturbingly high share of the tax burden today, when all taxes are considered. In particular, working people are taxed about $500M per day in surplus FICA taxes, which the government "borrows" to paper over shortfalls in income tax collection: that is the debt that Bush calls "paper IOUs". We run a regressive tax system (worker pays more) all while telling people it is for their own good (the money is waiting for you in the 'social security trust fund').

- Sales taxes are great when you want to discourage consumption. They are great for energy, for example.

My two cents: keep the income tax as it is, roll back the tax cuts, and phase in a $20 per barrel tax on oil to raise $200 billion per year in new revenue. Since the energy tax is regressive, balance things out by increasing rates in the higher brackets and expanding EITC. The new revenue should be enough to pay the $300B per year in interest on the massive debt we have run up over 23 years of Republican politics. And maybe even enough to start paying it down at $100B per year so that we can get this debt burden off our backs in, say, a century. Also, we will need to pay it off: we must cover our debt to the SS trust fund, since our workers are depending on it for their retirement, as promised. That is a $1.7 trillion dollar debt that must be paid as a solemn moral obligation.

Paying down the debt is the only way to fix the budget mess: the interest payments are killing us. That means taxing more. The decisions have already been made: we no longer have a choice.

We will still have to fix our medical/medicare system, but that is a different debate.

Posted by: liberal shmiberal | December 24, 2005 09:15 AM

Kathernmarie,
My comments were in no way sexist, nor do I have a problem with "females who hold a higher level of importance," although I would argue whether having "a debate blog with her name, picture, and everything" qualifies for "importance." My problem with Emily's entry was that it mischaracterized the whole "Fair Tax" proposal on which she was commenting. If it is her job to make commentary on issues, a professional, regardless of sex, would do a better job researching it prior to commenting. Just as, I am sure, your teachers now and professors in the future will expect at least that basic level of academic rigor from you when you advance a thesis. Thank you for the comment nonetheless, and may you, Emily and all the world have a very Merry Chrismas and a blessed and Happy New Year!

Posted by: ibcracker | December 24, 2005 10:50 AM


The so-called Fair Tax is extremely regressive and the poor and middle class would end up paying much higher tax rates on their income than the rich. The poor, and even the middle class spend almost all their income, and so they would end up in a 23 percent tax rate. The rich do not spend almost all their income and many would end up on considerably lower rates of tax.

The income tax is a good method. The problem with it is not that it is progressive, but that over the especially the last thirty years it has become less progressive.

But to get back to the the so-called Fair Tax. If we were to have the bulk of our tax derive from a sales tax, here's what I suggest.

No sales tax on food. To keep it simple, (though it is really not all the complicated to tax, say soda, and not fruit juice) we could simply make eliminate taxes on any food.

No sales tax on clothing.

A moderate sales tax on moderately priced housing.

A higher sales tax as the price of the house goes up, so that the rich are paying a hundred times more in taxes than they are for the price of their monstrous mansions.

Double the sales tax on second homes.

Ten time the sales tax on third homes.

A moderate sales tax on a small boat, the kind a person with a moderate income could afford.

A very stiff sales tax on yachts.

A ten million percent sales tax on the super yachts made.

Posted by: Robert Watson | December 24, 2005 11:50 AM

ibcracker

Merry Christmas and happy new year to you as well.

Posted by: kathernmarie | December 24, 2005 12:37 PM

Here's our review of the "FairTax" book from a few weeks ago:

http://www.taxfoundation.org/commentary/show/1131.html
Bottom line: The tax rate required to make up for tax avoidance is likely much higher than FairTax advocates predict.

Posted by: Andrew | December 26, 2005 02:24 AM

Hi Everyone,

I would like to question one of the assumptions of this discussion that the rich should pay higher taxes.

In this regard, Cayambe made a comment and I quote her, "As to your point about wealth distribution, I would argue that the richer folk benefit...maintaining that condition."

The argument makes sense but only for those who are in very high income brackets such as Bill Gates, etc. How about families in the bracket of say $50,000-$200,000 (semi-rich range), why should they pay higher than that paid by those earning less than $50,000.

Families belonging to the semi-rich range could have sacrifised many other comforts in order to groom themselves and move into such a range as compared to their poorer counter-parts, like working their way through college, etc. and should infact be rewarded by the system.

As an example, lets consider Emily, she worked hard, surely did good at school, went to college and as Kathernmarie rightfully pointed out, must be drawing a good salary. I fail to understand why she should pay more taxes than say Bob, who had a tough time graduating, and is working odd jobs, makes less than $50,000.

Am I the only one who thinks that we are unfairly penalising acheivers ?

Thanks a lot.
SandS.

Posted by: SandS | December 26, 2005 04:48 AM

Many of you need to read the Boortz/Linder book "The Fair Tax", which offers answers to many of the questions raised in this blog. Many of you are operating without true knowledge of Mr. Linder's proposed changes to the law in Congress and making statements that are completely false. You can get this book from most public libraries and you really should read it so that you don't show your ignorance when commenting on the national retail sales tax. The bottom line is that the proposal is "revenue neutral" -- it keeps the tax revenues approximately the same as they are now -- it eliminates the $550 billion spent anually by businesses having to track withholding etc. -- it gets rid of the IRS, the most un-American of all institutions in the Federal government -- it taxes the underground economy -- and it removes all those below the poverty level completely from tax rolls including the extremely regressive social security and Medicare taxes and it gets rid of all the lobbying in Congress where businesses and people vie for special tax breaks in the present system (sometimes by bribing legislators). I strongly urge all of you naysayers to get on the ball and truly understand the "fair tax" before blowing it off. Do you really want to be in the position of defending the status quo? Of defending the IRS? Of defending all the special breaks given to connected people under the present tax system?

Posted by: Clay Willis | December 26, 2005 08:01 AM

Clay Willis-

Since you've read the book I will ask you a fair question. If the proposed changes under a Fair Tax are revenue neutral, meaning (I think) that if we abolished income and other taxes and replaced them with a sales tax government revenue would remain the same. Stop me if I have this wrong.

If not, please explain who will pay more taxes as a result? Obviously someone's boat will be rocked (because if the new tax system was revenue neutral and distributed the tax burden identically to our current tax, why change?) and I am interested in who that might be. Is it the poor? Is it the rich? Is it the middle class? This is an important question, Thanks.

SandS-

It seems like you are suggesting that a person who makes $45,000 a year benefits the same from society than someone making $200,000 a year. This is demonstrably false.

"Families belonging to the semi-rich range could have sacrifised many other comforts in order to groom themselves and move into such a range as compared to their poorer counter-parts, like working their way through college, etc. and should infact be rewarded by the system."

And these upwardly mobile people did so with a progressive tax system in place which should be very revealing. It tells us, for example, that the weepy wealthy who complain about taxes would still rather pay 35% income on their 1,000,000 income than pay 15% on their 30,000. I wonder why that is?

"As an example, lets consider Emily, she worked hard, surely did good at school, went to college and as Kathernmarie rightfully pointed out, must be drawing a good salary. I fail to understand why she should pay more taxes than say Bob, who had a tough time graduating, and is working odd jobs, makes less than $50,000."

1) Because she can. 2) As was said before she enjoys the benefits of a functioning society more than Bob, and thus has more invested in it, more to lose from its demise, and thus more responsibility to uphold it. 3) Finally, because the Bobs of this country vastly outnumber the Emily's of this country, and we live in a Democracy where (presumably) it's one person one vote. If you continually endorse economic and political policies, no matter how "fair", that overwhelmingly favor the rich and hurt the poor, than at some point those poor people are going to ask: "What gives?"

When they wise up I'll let you tell them to eat cake.

Posted by: Will | December 27, 2005 10:28 AM

Ahhh the nobility of the "working man". Who can argue that a personal injury lawyer with a Jaguar and a coke habit isn't more valuable to society than a wheelchair bound loser who volunteers her time at a rec center? Our economy doesn't need blind or infirmed people. And while we're at it ... lets just summarily execute anyone on welfare for more than 3 years ... or those with an IQ below 90 ... just to keep the gene pool strong? Thats "fair" isn't it.

Now that I have dispensed an adequate amount of sarcasm ... here's a thought.

Our tax system is complex for a reason. Ever heard of "no taxation without representation"? Why do you think that was a big deal for the founding fathers? They understood that taxation is an important tool for shaping society. Our tax codes are the knobs and levers that get pulled by our representatives to accomplish the greater goals of society. The goals we the people set out.

To think that mere simplification of our tax codes is a useful goal of our society is laughable. Lets not put the cart before the horse.

Posted by: Nik E Poo | December 27, 2005 02:35 PM

Will -- You wrote
"Since you've read the book I will ask you a fair question. If the proposed changes under a Fair Tax are revenue neutral, meaning (I think) that if we abolished income and other taxes and replaced them with a sales tax government revenue would remain the same. Stop me if I have this wrong."

That is the meaning of "Revenue neutral".

Will wrote, "If not, please explain who will pay more taxes as a result? Obviously someone's boat will be rocked (because if the new tax system was revenue neutral and distributed the tax burden identically to our current tax, why change?) and I am interested in who that might be. Is it the poor? Is it the rich? Is it the middle class? This is an important question, Thanks."

Will, the only income strata that would immediately be affected directly would be those working people at or near the "povertly level" who would see an immediate increase in "take home" pay as they no longer would have 10% income tax, 7.5% social security and the 2 - 4% Medicare tax deducted from their paychecks.
High income people would still pay the preponderance of taxes as they, by definition, are going to have more money to spend.
Also your neighborhood drug dealer, prostitutes and all others participating in illegal activity would immediately start paying taxes. They pay none now, since (by definition) they can't report their income.
Businesses would save $550 Billion annually by not having to track withholding taxes as well as corporate income taxes.

The average person would find that over a short period, probably a few months, the embedded taxes no longer levied would cause retail prices to fall making the 23% national retail sales tax revenue neutral. Free market economics dictate that prices must fall under these circumstances but most will not see a drastic increase in income immediately although this would be the biggest boost to the economy imagineable.
And we will be rid of the IRS!!

Think man! If you read the Communist Manifesto, one of the first things needed to institute socialism is a progressive income tax like ours. Free markets are the opposite of communism.

All of your esoteric comments about "benefits from society" are the result of the socialist BS that's been taught in our economics classes for the past 70 years.

You really should read the Fair Tax book because our educational system has been greatly remiss in covering the ill effects of a graduated income tax, not to mention the repressive and regressive Social Security and Medicare taxes which take up such a large percentage of lower income wages.

Posted by: Clay Willis | December 27, 2005 09:50 PM

Nik - e - Poo
Our present graduated income tax system has been bought and paid for by various intest groups vieing for tax breaks for them or their "clients".

It is a fact that an "income tax" is expressly forbidden in the U. S. Constititution and that's why the IRS openly admits that it is a "voluntary" tax. Voluntary but enforced by the IRS and backed by the U. S. Court system but still unconstitutional.

The Fair Tax is not Republican nor Democrat -- not liberal or conservative or moderate. It is common sense as you would find out very clearly if you would read the Fair Tax book or wade through some of the stuff you can find with an Internet search engine.

Nailing the underground economy for $500+ billion annually -- which by definition pays no taxes now -- and freeing up another $500+ billion burden on businesses now having to track withholding and payroll and getting rid of the IRS. It's all part of the NRST program.

You might lighten up on the sarcasm and try educating yourself on the first really new idea to come along in a century or so.

Posted by: Clay Willis | December 27, 2005 09:58 PM

Clay -

I see nothing inherent to a use tax that will magically remove tax fraud. Right now ... today ... there are plenty of ways to collect from corporations and wealthy individuals who dodge their taxes ... and all will work under our existing tax structure. It simply requires the will to do so. The reason corporations and wealthy individuals don't pay their fair share ... is because they weild a disproportionate amount of political power. Besides, if you implemented this new tax law at high noon tommorrow, by 12:15, tax evaders would have discovered and deployed their new tax evasion techniques. The way to fight tax fraud ... is to audit and arrest tax evaders. If you want poor people to pay more taxes ... just raise their taxes. If you want people off welfare ... stop paying them.

Use tax is not original and its certainly no silver bullet. Its just a neat simple little package for people to latch on to when they want to oversimplify the world we live in.

And get rid of the IRS? are you nuts? Who would prevent fraud then? Retail merchants?? I think not. Bureaucracies are slow and inefficient and certainly the IRS is unpopular. The one thing bureaucracies have going for them ... is that they are fair. They treat everyone the same. Fill out the form and submit. They do whatever the representatives mandate ... and hey ... thats where the whole representation thing comes in.

Posted by: Nik E Poo | December 27, 2005 11:06 PM

Nik E Poo

Obviously you know very little about how taxation works and that has led you to several erroneous conclusions.

The "Fair Tax" -- a national retail sales tax (not a "use tax") -- is not intended to eliminate fraud from the tax system. That will never happen because human nature remains the same no matter what the government does. 45 of the 50 states already have sales tax collection and enforcement systems in place and they are fairly efficient. About 95% of all people pay their taxes with at least some ethical consideration though the present system with all its complexities encourages cheating and fraud.

Without all the "deductions" and "loopholes" built in to a graduated income tax system, the NRST will be much easier to enforce though it will not and does not claim to ELIMINATE fraud.

Now about those "evil" corporations that don't pay their "fair share" of taxes -- Corporations don't pay taxes at all -- they collect taxes from their customers (in the long run that's you and me and everyone who buys their products and sevices). The cost of corporate income tax is built into every product or service they provide. These are called "embedded taxes" and over the whole economic system, they amount to more than 20% of the cost of every good and service in the marketplace. If you don't understand this, let me know, as I am the tax manager for a small one of those "evil" corporations.

Blaming the corporations is a red herring generated by socialists and/or politicians who use class envy to enhance whatever program they're trying to install and it is repeated by ignorant people who have not taken the time to investigate how these things work.

Certainly the NRST will have people who find ingenuous ways to dodge paying taxes -- human nature never changes -- but it will likely be somewhat less than the fraud now in place in the current system since NRST contains no deductions and no exceptions and will therefore be easier to enforce.

I cannot believe anyone in this country would defend the IRS -- that most un-American of all government institutions, with the regulatory ability to confiscate the property of any citizen and hold it until the citizen proves their innocence and with no compensation for the damage done. Add in a bit of internal fraud (human nature, remember?) and the urgings of unethical politicians and you have a system ripe for many violations of civil rights of Americans and a system that is tremendously inefficient.

The sales tax collection system of 45 of the states is already in place and they already have the tools needed to enforce collections and with a little help from Federal law enforcment (not the IRS) they can catch and punish the conspiracy schemes that will arise, just as they do now. The smaller violators will still get away with some just as they do now.

Since a retailer can lose his business license for tax fraud, there will be little cheating on the part of most legitimate businesses, large and small.

Another thing -- the first priority for any bureaucracy is to enlarge its power and financial base. Their very nature makes them corrupt and if you think the federal bureaucracies associated with tax collection are fair and "treat everyone the same", you are either ignorant (not stupid but lacking knowledge) or are incredible naive.

Again, because it is the simplest and most complete form of the information available on the subject, I urge you to read the Boortz-Linder "Fair Tax Book". Your local public library has a copy so it will cost you nothing but your time and I promise you it will be worth it.

Posted by: Clay Willis | December 28, 2005 09:57 AM

Clay Wills-

I am not educated in economics. I ask questions because I want information, not to challenge your authority on the matter. I appreciate your input.

You said-

"Will, the only income strata that would immediately be affected directly would be those working people at or near the "povertly level" who would see an immediate increase in "take home" pay as they no longer would have 10% income tax, 7.5% social security and the 2 - 4% Medicare tax deducted from their paychecks.
High income people would still pay the preponderance of taxes as they, by definition, are going to have more money to spend.
Also your neighborhood drug dealer, prostitutes and all others participating in illegal activity would immediately start paying taxes. They pay none now, since (by definition) they can't report their income.
Businesses would save $550 Billion annually by not having to track withholding taxes as well as corporate income taxes."

Immediately only the poor would benefit? Why is this? Though their take home pay might increase (as would everyone else's no?) won't the price of goods be 23% higher than it was before? If their take home pay was increased less than 23% (you listed 21.5% in taxes they pay) than wouldn't more of their income be taxable since the very poor must spend virtually 100% of their income?

I'm not sure if making prostitutes and drug dealers pay taxes is an important milestone of any tax reform since I tend to hope that law enforcement deals with these people.

Who do businesses pay 500 billion a year to?

If corporate taxes are only raising the price of goods 20%, why should we expect its abolishen to lower the price of goods more than 23%?

I would greatly appreciate if you would check out http://www.itepnet.org/sale0904.pdf to validate their claims. It is a relatively short report that I cannot verify because I am not an economist. It argues that 23% is far too low to generate enough revenue. Can you explain why they might be wrong?

Again, I appreciate your input because I need someone informed to tell me about this matter because I am not informed. I do not have time to go to the library and read the book now, though I will in the future. I have read reports from people who at least claim to have read the book but disagree with its premises.

I think it is poor form to call my "benefits" issue esoteric bullshit. There is nothing dogmatic about recognizing that the very rich are much happier than the very poor, and thus have more to lose from societal collapse and consequently more responsibility to insure that society does not do so. If you disagree, fine, but offer something more substantive than calling me a socialist.

Posted by: Will | December 28, 2005 01:06 PM

Will,
I'm not claiming any "authority" so you have nothing to challenge. I have long experience in the tax system and will be glad to attempt to answer any questions you ask.

You wrote, "Immediately only the poor would benefit? Why is this? Though their take home pay might increase (as would everyone else's no?) won't the price of goods be 23% higher than it was before? If their take home pay was increased less than 23% (you listed 21.5% in taxes they pay) than wouldn't more of their income be taxable since the very poor must spend virtually 100% of their income?"

The Fair Tax legislation is set up so that every household in America would receive monthly a "rebate" equal to the amount of sales tax at the poverty level, i.e., one-twelfth of 23% times $17,500.00 or about $335.00 at today's level. So the low income people would not be paying any Federal sales tax either besides not paying income, Social Security and Medicare taxes.

Will wrote, "I'm not sure if making prostitutes and drug dealers pay taxes is an important milestone of any tax reform since I tend to hope that law enforcement deals with these people."

Law enforcement dealing with these people on a criminal basis has nothing to do with taxes.

There is an underground economy, drugs, prostitution, illegal gambling and many other areas, that earns about $550 billion a year. They pay no income tax because if they reported that income, they would be arrested. They do however purchase all the necessities of life like all of us and they also spend a lot of that $550 billion purchasing things and they would pay 23% Federal sales tax on all those purchases. This would be a huge increase in the amount of Federal taxes collected.

Businesses pay $500+ billion annually to handle payroll and to track all their transactions related to corporate taxes etc. Under the fair tax, the corporate accounts payable department would simply write a $1,000.00 check to an employee who made $1,000.00 per week, period rather than sub-letting the payroll to a payroll service and paying an outside accounting firm to keep track of all their tax liabilities. Trust me, it is an enormous cost to ever relatively small companies.

Will wrote, "If corporate taxes are only raising the price of goods 20%, why should we expect its abolishen to lower the price of goods more than 23%?"

Don't get caught up in the small stuff -- the 20 percent was written with a "plus" sign because that figure of the embedded taxes is not exact but is more than 20%. What drives the prices down? To put it simply, competition. If they kept their prices at the same level, added on the 23% NRST, some competitor would lower their prices and their sales would drop off until they matched or beat their competitor's prices. It's the free market working.

Will wrote, "I would greatly appreciate if you would check out http://www.itepnet.org/sale0904.pdf to validate their claims. It is a relatively short report that I cannot verify because I am not an economist. It argues that 23% is far too low to generate enough revenue. Can you explain why they might be wrong?"

I have been studying this idea for more than 20 years and I can tell you that all those naysayers are wrong. The Boortz-Linder book explains it in detail and answers all the critics with irrefutable logic. If you'd care to take a specific instance I'll try to deal with that but I would be bored reading the claims these people who don't understand the NRST put forth. I've seen most of them and I've never seen one that was real.

People who are a lot smarter than me have been likewise studying the problem for even longer than I have and the 23% is their benchmark and I see nothing wrong with their mathematics and projections.

The Fair Tax is AT LEAST revenue neutral but I believe it would actually increase Federal Revenues enough that the tax rate could be lowered to about 15% within 10 years and still pay for all existing Federla programs and perhaps getting rid of most of the national debt.

Will wrote, "I think it is poor form to call my "benefits" issue esoteric bullshit. There is nothing dogmatic about recognizing that the very rich are much happier than the very poor, and thus have more to lose from societal collapse and consequently more responsibility to insure that society does not do so. If you disagree, fine, but offer something more substantive than calling me a socialist."

I disagree with your premise that "the very rich are much happier than the very poor" in that you are equating money with happiness, when it has very little to do with happiness. Look at what happens to the great majority of lottery winners -- most of them are miserable and broke again within a few years.

Happiness comes from having a system of ethics and morals that one lives by including finding something that is truly interesting or at least tolerable to do for a living and then working hard, doing one's very best, at that while establishing a family and taking care of them and helping as many other people around you achieve their potential also. All else is empty an vain -- as the great, wise king Solomon wrote, "It is a chasing after the wind."

Our happiness is not dependent on government or society and only those with socialist leanings think so.

Posted by: Clay Willis | December 28, 2005 06:23 PM

This character Willis above is being totally dishonest. There's not a single professional economist in the world of tax policy who believes a 23-percent retail sales tax could possibly be administered. Rates that high are almost unprecedented around the world for retail-level taxes, because it's just too easy not to pay them. The enforcement buraucracy that would be required to collect the fair tax would turn the U.S. into a highly un-free police state.

Fair-tax advocates seem to realize that high excise taxes on goods like cigarettes and alcohol lead to widespread tax evasion, smuggling and black markets. Why are they so dishonest in admitting that a high-rate retail sales tax would suffer the same evasion problems?

Even smart conservatives dismiss fair tax advocates as quasi-religious zealots. The fact that it has attracted such wide support it pretty damning evidence about the low levels of economic literacy in the U.S.

Posted by: Dre | January 13, 2006 07:09 AM

Giving people a financial incentive NOT to spend money seems like a perfect was to stimulate economic growth. Ya.

Posted by: Darcyman | January 13, 2006 10:47 AM

10,000,000 % sales tax on yachts?

Been there, done that. That was tried by Democrats desperate to soak the rich 15 years ago.

Net effect was to throw tens of thousands of people out of work who built ships and to collect nearly zero tax dollars.

Oops.

Posted by: Imploded Ed | January 13, 2006 10:52 AM

> Take the ceiling off of SS earnings ........ That will hit everyone, including the rich, with the same payroll taxes. This alone is equivalent to an 8% rise in income taxes on the salary income of the richer folk.

SS's problem is that its payout as a function of payin is a money loser, so increasing the dollars in only makes things worse. (If you're losing money on every sale, volume doesn't help.)

The only way to avoid that is to cap payouts and not cap payins, and that will erode support. (Right now, the rich can afford to ignore SS. Uncaping the payroll tax will make them pay attention and if they're not getting proportional payouts, they'll go after it.)

Posted by: Andy Freeman | January 13, 2006 10:58 AM

Quick little notes on some apparent confusions here.

1) The 23% number is the fair tax as scored as an income tax; the 30% is if it the fair tax is scored as a sales tax.

For example suppose I buy a $1.00 item and then add 30 cents to it. Then I've spent a total of $1.30 of my income where 23% of my income (0.30/1.30) has gone in taxes.

The income based number is emphasized because we're talking about replacing a taxation system based on income so an apples-to-apples number can be compared.

2) Above there was speculation as to where the extra sources of revenue were going to come from. One such source was cited (taxing the underground economy), another is wealth.

Many people love the idea of a wealth tax yet detest the Fair Tax. I guess this is because they haven't thought it through. When a trust fund baby actually spends their wealth now, there is no tax (other than state and local on the sale). But under the Fair Tax, that wealth would finally be taxed.

If you actually want to tax wealth, then an income tax is not the way to go - a sales tax is. Wealth is of little value if you're not spending it...

A third source of added income is from international tourists, who will still be buying things in the US. Before, they weren't significantly contributing to the tax base of the US (other than hotel taxes and state and local taxes), but now every US purchase would capture a portion of tax revenue. As I believe the US is a net beneficiary of tourism, this should also have a positive effect.

3) I count myself as a smart conservative, Dre. Please tamp down on the irrelevant ad hominens if you could...

Posted by: Jody | January 13, 2006 11:02 AM

Some interesting comments.First,to quote Heilein,there is no objective symbol (see Boolean logic) for the term "fair".Secondly,I worry les about the rich not paying enough than about pople in 30 K levels paying nothing.That' an unstable situation,where someone can vote themselves a raise at someone else's expense.
Dre,some smart conservatives,who are Nobel Prize winners,are in favor of "Flat Taxes".Actually,this was the hit shot on Steve Forbes which,famously,lead to Bernard Goldberg getting off the reservation and becoming rich and famous.
But to be fair,you find your sources and I'll document mine.

Posted by: corwin | January 13, 2006 11:31 AM

It's funny how people think they can do economics better than economists. Maybe it would be better to learn first, then speculate.

Posted by: Josh | January 13, 2006 11:48 AM

A poor thief remains a thief. As most of our lower income citizens (many of whom pay no income taxes) have regularly voted to loot the rich, defined as anyone who makes more money than they do, such citizens deserve to pay a larger percentage of their income in taxes. Actually, they deserve incarceration, but I'll accept the first solution.

Posted by: Brett | January 13, 2006 12:13 PM

A note about home purchases - this tax would only apply to new goods, so buying a previously owned home (or car, or guitar, etc.) would not have the tax applied (it would have been collected at the point of original purchase.

We won't be responsible for collecting the taxes on things we sell to each other, and that is what a previously-owned home is.

Posted by: Jason | January 13, 2006 12:17 PM

I like the way a national sales tax allows illegal immigrants to pay taxes.

Posted by: Jan 13 | January 13, 2006 12:18 PM

FYI... I have computed effective tax rate tables comparing the fairtax to the most optimistic (for the poor) possible taxing under the current system. I have also demostrated revenue neutrality.

http://fairtaxblog.blogspot.com/

Posted by: quadrupole | January 13, 2006 12:28 PM

The folks that claim 30% (23/80 or 28,75%) use the exclusive calculation
which would make the current 28% tax bracket 38.88%. This is pure distortion
and not a factor. The current tax laws are inclusive. Don't switch
one and not the other. This article was ill prepared because it allowed this bogus
claim to be included.

Tax tacked on is not a market place reality. When producers and manufacturers pay 23% less that will reduce the end item cost and the public will wait to see
same when and if the Fair Tax is adopted. Bottom line is the product price will barley change.

Cris

Posted by: | January 13, 2006 12:43 PM

Consumption does not drive the economy. Savings do. If people spend less, which they might under a sales tax, they will save their money or invest it. Which would generate higher economic growth, and in the long run higher incomes than under the current system. It would also help address the nation's savings rate and balance of payments.

Posted by: Econ 101 | January 13, 2006 01:11 PM

The National Retail Sales Tax is the only taxation method currently proposed that would continue to accelerate our economy. Only those who are afraid of the U.S. being a superpower are concerned with our economic success. And for those liberals who rail against the U.S., take heart. China is on its way to being the next economic superpower. We can either compete and get Americans off the government dole, or we can fade into European-like obscurity. The current tax system failed long ago, just as the rest of the tenets of the Communist Manifesto have failed (e.g., government schools). What are you afraid of? Success? Has your indoctrination been so successful and complete that you can only despise yourselves and the land of your birth?
It's time for this change. It's time for government corruption and big spending to stop. Only the proplsed Fair Tax does these.

Posted by: David | January 13, 2006 01:21 PM

Repeal of the 16th ammendment will not eliminate the income tax. The ammendment only prohibited the judiciary from declaring the income tax has a direct tax which must be proportionate to the population of each state. The IRS incorrect claims the 16th provides a direct tax on income; it only keeps the tax in the realm of indirect taxes where it belongs. Read Brushaber v Union Pacific Railroad and pay attention to the comment about "the following erroneous conclusions"

Posted by: Steve | January 13, 2006 01:31 PM

One surprising effect of a consumption tax instead of income based taxes is an improvement in the rlative cost of american made manufactured goods. Manufacturers and their employees paying income taxesmust build that in to their priceng but foreign imports don't paythese american income taxes on their workers wages. a consumption tax would fall equally on imports and would not violate fairtrade principles by being discrimanatory. we would no longer be subsidizing foreign manufacture with our tax policy

Posted by: bruce | January 13, 2006 01:34 PM

I'm sorry but the Fair Tax is an almost insane idea. Please, don't get it confused with a VAT. It isn't the same thing at all. VATs are imposed (and credited back) at every stage of the production process. Here in the EU they are generally around the 20% level in total, adding up each and every stage of the system. And we have a large amount of fraud and avoidance of this tax.
The Fair Tax says that the full 23% is collected from the final consumer by that final retailer. Can you imagine what an incentive that would be to play the system? I can think of half a dozen ways to make millions out of it. I mean, you do have people in the US who are willing to cheat on taxes don't you? Criminals and such?

So, set up a shop. Buy in your goods (without the tax because you are not the final consumer). Sell them a little cheaper than everyone else. Skip before tax payment time, having collected 23% in tax. Repeat as necessary.

Think it won't happen? Try it and see!

Think through it for a moment. Each and every retail transaction has a 23% tax on it. Presumably you need a licence, there will be inspectors, audits and so on. So every stall at every Farmer's Market in the country will obey these rules? Every roadside stall selling melons? A kid's lemonade stand?

Posted by: Tim Worstall | January 13, 2006 01:41 PM

Built into the cost of everything you buy is not just the taxes that businesses pay, but the costs those businesses must pay to collect and calculate their taxes. I've seen estimates that this combined burding ranges from 20% to 40%, depending on your assumptions and the type of business. So while the fair tax will raise the price of things purchased by 23%, it will at the same time reduce the cost of those same things by a similar amount.

Posted by: Mark | January 13, 2006 01:44 PM

The writer made the same mistakes many make when they say the 23% tax is too high to purchase a house. The price of the house ans wellas everything else would be reduced by 23% when the new tax is enacted because of competition. Therefore the house and all other items would cost the same as before.

Posted by: Mark | January 13, 2006 01:44 PM

As was pointed out before: businesses don't pay taxes-their customers pay them. We should have a business tax rate of zero. Talk about incentive for major corporations worldwide to move their offices, manufacturing plants and the like to the U.S.! Think of the HIGH PAYING jobs that would come with! All goods and services exported pay an effective tax rate of zero and there goes our trillion dollar annual trade deficit. Plenty of capital, positive trade balance translates into low as dirt interest rates here and buying power abroad with the dollar.

While the organized crime aspect of the underground economy has been mentioned there is a very substantial "on the side" component as well. Show me a worker "in the trades" and I'll show you an unreported income somewhere in between a few thousand to tens of thousands tax free.

There is incredible fraud with the EITC. Somewhere in the neighborhood of two in ten I believe. I support the concept of a negative income tax like EITC but from personal observation I can tell you that there are an awful lot of people out there that are driving to the welfare office in a Cadillac and buying steak and shrimp with foodstamps while whipping out a stack of cash to buy their booze and cigs.

For all of you who seem to be so thrilled by a progressive income tax it amazes me just how freely you like to spend other people's money. It ain't yours. You want to help the poor? Great! Open up your own checkbook. The Kennedys moved their ill-gotten fortune off shore to avoid taxes. Go after those scumbags. Higher taxes were made optional in Massachusetts for all of the self-proclaimed "do-gooders". Kerry and the rest of the hypocrites didn't pay the higher rate. What a surprise!

Make the tax system simple and people won't cheat(not nearly as much anyway). Make the tax system the same for everyone and people will pay it because they are not getting screwed...they are in the same boat as everyone else. The next thing that happens is all of those dollars floating towards the Congressional campaigns dry up. Congress tries to stick their finger into every pie and people/businesses have to donate big dollars to keep from getting hosed. No more! Now that's Campaign Finance Reform!

The only problem I see with a National Sale Tax (once the 16th Amendment is repealed of course) is for the Hollyweird folks and others jetting overseas with their untaxed dollars and avoiding taxes by buying abroad and bringing the goods back or setting up dual (or more) households here and abroad. Solve that problem and the Sales Tax is a winner for everyone.

Posted by: rjsasko | January 13, 2006 01:55 PM

To: Tim Wortsall

You have it wrong. You would have to pay the taxes on the good you purchase to sell.

Posted by: Mark (GA) | January 13, 2006 02:07 PM

Someone posted a comment about the psychological impact of seeing a 23% sales tax (or 30% if you want to calculated it differently and be argumentative). I have to disagree. Here's why: the tax won't be added on like sales tax is now. The posted price would include the tax. I went to London a month ago and when I bought a bottle of juice that was priced at 2.00 (pounds), I actually handed the person 2.00 pounds. I loved it. I didn't have a ton of change floating around and it was much easier to pick up a few items for lunch and know if I would exceed the 5 bucks (pounds) that I had in my pocket. I didn't care if the gov't took some of that from the store or not, because it made my shopping much easier and more pleasant.

This, of course, relies on the argument that the posted price wouldn't change much, so a shirt still costs what a shirt costs today, etc. I find the embedded tax argument and the power of competition fairly convincing that this would be close to what happens.

Posted by: TheElJefe | January 13, 2006 02:12 PM

A different way of analyzing proposals:
Black box this thing and ignore all the sniveling details that people simply disagree on. Here are some high level facts that are easily agreed on:

1) Whatever the government spends comes from taxes, so if it spends $1 trillion, we tax the people $1 trillion. (ignoring stuff that basically amounts to rounding error)

2) Based on the above, the only thing a tax system can change is WHO pays that $1 trillion. This is where the "it will hurt the poor" argument comes in. It's so easy to argue one way or the other about this that you can't make progress. So instead of silly examples, consider these undeniable facts:
a) The rich will always pay substantially more than the poor, because the poor by definition don't have that much money. If we taxed the poor at 50% or 75% it wouldn't really raise all that much money.
b) The more loopholes in the tax code (see our current code as exhibit A), the more it favors people with the knowledge and skills to exploit those loopholes -- poor people don't use accountants and don't have complicated income, so they can't hide any of their income (waitresses, waiters and under-the-table workers not withstanding)

3) So based on that, we have a fixed amount coming from the people and it coming from predominantly the rich. Those things will never change under any system. It's just not possible. So the one main thing the Fair Tax does is that it changes the collection method. This essentially creates money, because it saves the government the cost of the IRS and the tax code and it saves people (and companies) the cost of reading the zillion-pages of tax code (which they pay accountants to do). That cost reduction can be spent on sending minorities to college or feeding the poor or ski lodges for Senators or whatever.

4) Although people still argue whether the poor will pay a tiny amount of the tax revenue or a minisculely larger amount, when comparing the current tax code to the Fair Tax plan, the biggest difference is not in who pays (always the rich, because that's who has the money), it's in the number and complexity of the rules. The purpose of the rules is to be changed annually by members of congress to curry favor with their constituents. They don't really shift the burden from rich to poor, but between different rich people. So one congressman gives money to industry X in the form of a specially written tax break on page 40,034 of the tax code and gets a huge campaign contribution. Another gives company Y a tax break with some other silly rule and buys some more votes. Eliminating the current tax code takes corrupt vote buying power out of the hands of congress. It won't eliminate corruption, but it does make taxation more fair. Not more fair for "the poor" or "the rich" but more fair across the board because you can't as easily bribe your way out of paying taxes.

Posted by: TheElJefe | January 13, 2006 02:28 PM

Response to: "the Hollyweird folks and others jetting overseas with their untaxed dollars and avoiding taxes by buying abroad and bringing the goods back "
That problem exists today in avoiding customs duties and we have laws and mechanisms in place for preventing it.It happens, but won't have a huge impact on revenue from a national sales tax. Small impact in border towns, but not a lot.

Posted by: TheElJefe | January 13, 2006 02:31 PM

This has become an increadibly long tail, it's hard to believe that anyone is still reading it but I just have one point to make that I think has not been given adaquate emphasis.

Our current tax system is unbelievably complicated and getting more so every year. Just as an example take the whole idea of "withholding". Are you kidding me. I get to send the goverment money that I don't even owe them and have to ask for them to send it back? Not to mention the fact that employers are going to do all the work required for withholding and not get paid anything for doing it.

Fair Tax is so much simpler. Grocery stores, car dealers, hardware stores, resturants, clothing stores, etc. will all find this tax easy to calculate and they will have the added bonus of totally eliminating all the other crap they have to keep track of now. On top of that they are going to get paid to administer this tax unlike the current tax system.

Posted by: Keeper | January 13, 2006 02:34 PM

No Tax system is fair not the one we have now or any other system mentioned in the above blogs unless those responsible for the accounting, administration and spending of the collected tax are held to specific standards on how the funds can be spent. Since the inception of the United States Income Tax collection politicians have contiuously misused and abused the taxes that Americans have paid. No tax system will ever be fair as long as ridiculous pork barrel spending is allowed to be tacked on to legitemate bills.
The first step is controlled responsible spending combined with a line item veto.

Posted by: Archer | January 13, 2006 02:40 PM

The proposal is called the Fair Tax for a reason. And it's a proposal that liberals *ought* to love, which has unfortunately fallen prey to partisan politics and the Abramoff crowd on K Street, who would be hurt by it.

First and foremost, the Fair Tax proposal is the friend of the working class. Income tax tends not to really soak the rich, because they have loopholes, while at the same time, it beats the hell out of the working-class man who gets some overtime work in so that he can help his family. Similar for the Payroll Tax, which is as cruel as it gets. The Fair Tax Amendment would actually let workers keep their pay, when they need it. The working poor are very badly served by the income tax. When you make $8 an hour, you don't need three-fourths of your paycheck plus a refund in April: you need $320 on Friday. This Friday, when rent is due.

And if you take that $320 and pay the bills you need to survive with it, you don't get the bejeezus taxed out of you. If you go blow eighty bucks of it on new shoes, you do get taxed. And so will all those fat cats who are currently hiding from paying their fair share because they've got more money than the Sahara has sand, but technically have no "income, as legally defined by the most crooked lobbyists they can hire on K Street."

That the Fair Tax mostly has champions among the Republicans is a rich irony, because it is by far the most liberal tax policy initiative that has ever been written.

Posted by: Russ | January 13, 2006 02:59 PM

To Econ 101, re: "Consumption does not drive the economy."

What planet are you on? The savings rate in the US is less than 1% and we don't hear much about it. (although we should) But tiny moves in the consumer confidence index and tiny changes in same-store sales numbers make constant headlines. It's a complicated picture, for sure, but clearly consumption drives the economy. If every citizen invested a ton of money in Ford and GM, but no one bought cars, the economy would not do too well.

Criminy.

Posted by: TheElJefe | January 13, 2006 03:12 PM

Wow. How this author can get paid to write articles about subjects about which she knows so little is beyond me.

All of her "sticker-shock" comments are ludicrous. Remember, everyone gets to take home THEIR ENTIRE PAYCHECK. No taxes taken out for income, social security, medicare. No employer matching for those either, so your boss (you know, the evil guy who has all that money to pay you every week) doesn't have to waste all that money on Uncle Sam, either.

People who actually PAY taxes now will have all of that money freed to place into tax-free investments (since the capital gains tax will vanish). That alone would be worth the implementation of the Fairtax, never mind the resulting beneficial economic explosion as the USA becomes the greatest tax sheltered business environment in the world.

Posted by: W. Rast | January 13, 2006 03:18 PM

No major tax-overhaul, be it the "Fair Tax" or the "Flat Tax" will get any traction unless it can solve the Gordian Knot of homeownership and home-affordability. This is most families' major purchase and primary capital-investment; and home-construction and renovation is a major-portion of the US workforce and domestic-product. If you can not explain BOTH the fairness of the system as-impemented...and the fairness of the transition-period...clearly to the understanding of the electorate, the reform is politically-dead.

Posted by: Ted B. (Charging Rhino) | January 13, 2006 03:20 PM

"The only problem I see with a National Sale Tax (once the 16th Amendment is repealed of course) is for the Hollyweird folks and others jetting overseas with their untaxed dollars and avoiding taxes by buying abroad and bringing the goods back or setting up dual (or more) households here and abroad. Solve that problem and the Sales Tax is a winner for everyone."

Make everyone pay taxes on items brought into the country that were purchased outside of the country.

One of the real benefits of the Fair Tax is to level the playing field in a global economy. When our companies export goods they still have to get enough money to cover the cost of manufacturing, wages, taxes, etc. By incorporating the Fair Tax the 'tax portion' would be removed along with the cost of 'managing payroll for the government'. Since this would lower the cost of our items they would be much more competitive in the global market. Other countries subsidize their country's exports by rebating their tax rate back to them which really tilt the field in their favor.

I can't see a downside to this, I've read the book and it makes perfect sense, which is why it will never happen.... it would remove too much power from Washington DC and too much money from the politicians for it to ever be put in place. The only way that this would come about is for the people to start petitions and force it onto the ballot to be voted on. Just think if it was passed, there wouldn't be any need for the Jack Abramoffs in the world.

Somebody made a comment about not thinking that the underworld taxes being that big of deal.... do you realize how much money taxes on 500 billion is???

The rich will still pay more in taxes, while I buy a $20,000 toyota they will be buying the $250,000 Lamborgini... I'll have a $150,000 house they will buy the $10,000,000 house, my coach seat $180.00 their first class seat $2000.00, my slacks 19.99 their slacks $200.00.

Plus, the Fair tax doesn't 'punish' people for making good decisions in their life... it promotes savings (which is great for retirements).

In reading some of the comments it appears that there are some envious and bitter people that insist anybody that has any 'capital gains' or invests are rich... think retirement funds - these are investments, and most of us have started one of those. I don't consider myself rich, but I have investments because of my 401K and because of some stocks that I purchased a little at a time.

I really don't understand the reasoning that a person that makes 100,000 to 200,000 a year benefitting from a stable country more than someone that makes 50,000 a year does. If our economy were to collapse tomorrow - who do you think would fare the worst??? Do you really think that Bill Gates would be the worst off?? Donald Trump?? No, it would be the poor that would lose their jobs, and their property because it would be foreclosed on (they couldn't afford to purchase it outright) etc. Maybe I'm missing your point?

Posted by: | January 13, 2006 03:29 PM

The Fair Tax instantly confiscates 25% of your savings.

You can't move the point of tax collection later in the earn-save-spend cycle without hitting people twice on the same money.

You've already paid income tax on your savings, and then you'd have to pay in effect income tax again when you spend it.

But for that, it's a nice idea. Retirees would get screwed over, and people about to retire most of all, so it's not likely to be popular.

The flat tax would be better since the time of collection doesn't move. (We already have a flat tax ! FICA. Just expand it and eliminate the cap.)

Posted by: Ron Hardin | January 13, 2006 03:38 PM

I would like to first say kudos' and 150% agreement from me on the post by TheElJefe and Clay Willis. Great job and I can tell that both of you actually know have read, and understand the Fair Tax.

I would like to make one point to Archer. I will agree that there is corruption, to much big government, and pork barrel spending, but the Fair Tax just changes how the taxes are collected. The fight for slowing/cutting spending must be fought, but that is another battle for another day. The Fair Tax (Although I hate to say I probably will never live to see it enacted) is by far the fairest way to collect taxes needed to run the government.

One more thing. It really bugs me how so many people want to be concerned about what happens to "the poor" in this country. I, by no means am rich, in fact as of this very moment I am completely strapped, but when is this country going to get back to taking personal responsibility for their choices, actions, and decisions made in life and quit using excuses on how we need to look after a class of people that won't look after themselves. (I'm sure that got someone fired up).. Bottom line, being "Poor" is a choice in most cases baring tragic life events, or illnesses.. I could very easily be categorized as very poor myself, if I hadn't taken it upon myself to work during the days, go back to school at night, and make something of a life for myself and my family.

But I digress..

I'm in full support of the Fair Tax, (yes, read the bill and the book) and my representatives are sick of reading my letters to them about it, but I refuse to stop pushing for it.

-Rob

Posted by: Rob Jankus | January 13, 2006 03:40 PM

I want to address a few things I've read in these postings. First, someone asked why rich corporations should not pay more. Corporate taxes should be abolished no matter what else we do with the tax code! Who do you think pays corporate taxes? The corporation? The shareholders? Not a chance. The consumer pays all corporate taxes. Not only that, the consumer pays a significant portion of the income taxes of a company's employees, since the company must increase compensation to cover the taxes.

Second, you should not think of this as adding a 23% increase onto everything we buy. Prices will almost certainly drop, because of what I said above. The cost of goods and services includes a total of about 23% imbedded taxes. (employee income, corporate income, etc.) If those go away, as they would under the proposed Fair Tax, market forces would quickly drive prices down to take account of the reduced cost. Therefore, the "sticker shock" discussed above won't happen. Those buses bringing Canadian shoppers will still come. The best news is, in the newly friendly tax environment, many of those jobs that moved offshore will come back.

Third, the 30% vs 23% figure comes from perspective--is that tax rate computed internally or externally. If you wish to compare the Fair Tax with sales taxes, then you would compute it externally, and the COMPUTED rate would be 30%. However, since this tax is proposed as an alternative to taxes that are usually computed internally, it is only just that we compute the Fair Tax rate internally, which gives the rate of 23%. Those who claim it must be 30% because 23% won't be high enough are either misinformed, or being disengenuous because of their agenda.

Those with doubts, I strongly recommend you read the book, "The Fair Tax" by Neal Boortz and Congressman John Linder. A paperback version will be out this spring, with new material to answer some of the questions that were not dealt with completely in the original.

This would be good for America. That said, I don't care that it would be better for those richer than I am. Do you really want to shoot yourself in the foot just because, although you would benefit, someone else might benefit more? That's just idiotic.

Finally, the current method of taxation requires a government agency (the IRS) have way too much intrusion into the private lives of citizens. the absolute BEST reason for adopting the Fair Tax is that it would probably lead to the abolishing of the IRS. It would certainly lead to a reduction in the power of the IRS, and I regard that as a GREAT thing.

Posted by: hammi | January 13, 2006 04:27 PM

A fair tax is that which charges the taxpayer only the value of services received, and which allows the taxpayer to choose which services they receive.

Anyone who proposes that someone else should pay higher taxes should be barred from the discussion of taxes. How extremely rude!

Those who get government services should pay for them - that is how supply and demand are balanced. When health care is "free" people are in the doctor's office every day. That which costs nothing has no value.

The "rich" use far less government service than the poor. There is nothing more regressive than the current system of increasing rates at higher income levels.

Liberals need to be taught that companies never pay tax. They only collect it for the government. Raising corporate taxes therefore only raises your own taxes.

This is all academic. Congress will never simplify taxation. Their rich supporters will always have loopholes to avoid tax. The middle class will always pay the greatest burden. Corporations will always pass along any taxes as a business expense to the consumer. Liberals will always agitate for higher taxes until 100% of the fruits of labor and all wealth are owned by them, with the government as their collection agent. And they won't stop at 100%. They will wan't more.

Posted by: doctorfixit | January 13, 2006 04:35 PM

I can tell from reading this that most have not bothered to read the Fair Tax book, or they would not say some of the rediculous things that they do.

Posted by: poponmpr | January 13, 2006 04:57 PM

Patience;

Taxing wealth ? what are you talikng about ! That would mean paying taxes on the same property each year. it would take away the incentive to own anything. People would rent housing, cars, TV's you name it.

unless you would eliminate the income tax FOREVER !! I can't see it working.

How about a retired autoworker living on a pension and 401k? These are assets and would be taxable, or would you only tax property above a certain level ?

By the way if you own property, stocks or a business, youhave already paid taxes on the property. You had topay income taxes on your gross income and then buy the property out of your net income.

"Taxes like the estate tax, capital gains taxes, etc., are attempts to move towards an equitable system of wealth taxation ".. no they are not, they are attempts to get mote money to fund government programs, with out directly impacting the poor or midle class. Unfortunately these taxes do hurt the poor and working classes, see the post above regarding the tax on yachts that was tried in the earlier 90's.

just as water will find it's own level, you cant attempt to raise tax money from just one part of the economy without having an effect elsewhere.

If you raise the Cap Gains Tax, then investors will need a higher rate of return to justify the investment. Since a company cant control income like it can expenses, real wages and benefits are reduced for the workers to give the investors (workers who have saved part of their income) their dividend or bond payment.

Taxing property is a bad idea as is taxing investment. Taxing consumption is one alternative that should be looked at. By the way almost every misses the point that under the Fair Tax theory, since business aren't paying taxes they will lower the cost of their product/service by the amount of the taxes they pay. thus there would be a commensurate decline in the retail price of goods/service by the 23%. you would pay the same amount at the store, only the taxed would be gathered differently.

Posted by: Captaink59 | January 13, 2006 05:28 PM

The only reason to change the current tax system would be to close the loop holes that allow some people to pay 5% instead of 30% + . Still the "Fair Tax" idea would never work for the lower middle class and poor. The idea that you would get a rebate implies that you would need to have your receipts, which seems unlikely to happen within those groups. This would just limit there purchasing power and possibly lead to a considerable black market for many common goods. However having people who have money pay a 23-30% tax on everything might show a considerable increase in collected taxes. The only way any 'Flat Tax" or " Fair Tax" system would work is with a redefining of "Staples". A certain amount per year for your housing, food, car etc...

Posted by: Domas | January 13, 2006 05:36 PM

Understanding the Fari Tax Bill as it is written in HR 25 requires understanding three things:

1. It requires the 16th Amendement to be repealed prior to implementation, so we will never be double taxed.

2. Businesses don't pay tax, they collect taxes (ask any mom & pop store owner, they'll tell you) so eliminating corporate taxes will only help consumers by lowering overhead and prices.

3. With no corporate taxes businesses will flock to the US instead of from the US. Imagine the job and stock market boom!

Posted by: TheAce | January 13, 2006 05:43 PM

Right now, everything you buy has embedded taxes. These are the taxes paid by every person who has anything to do with getting goods on the shelf. Eliminate THOSE taxes, and the 23% national sales tax might raise the price of goods and services 1%. Without having to pay income taxes, the $11 TRILLION dollars held offshore would come home. Now wouldn't THAT be a kickoff for the economy?
Scrap Iron

Posted by: Glenn "Scrap Iron" Shapiro | January 13, 2006 05:46 PM

What ever happened to journalists actually researching a topic before starting a debate? Wouldn't it be refreshing if we could start a real debate with from a factual base and build from there? www.fairtax.org They have nothing to hide.

Posted by: K. Landry | January 13, 2006 05:57 PM

To Domas,

Read the book! (The Fair Tax) The "rebate" you describe is actually a "prebate" and is based on family size and the official poverty level. You will not be saving receipts and filing for anything. You will simply get a check from the government every month.

Almost everyone criticizing this proposal in this blog is making some fundamental errors in how the proposal works. Please, people, read the book before you embarrass yourselves further!

Posted by: hammi | January 13, 2006 06:20 PM

First let me say, read the book.
You made an error in your debate against the FairTax Plan. Your argument is incorrect. If you have read the book you would know that the 23% national sales tax would be an inclusive tax not an exclusive tax like the current sales tax. That mean means the 23% tax would already be included in the price of an item. Most items already have approximately 22% imbedded taxes built into the cost of bring that item from the ground to the consumer. By only collecting taxes at the end under the FairTax plan it will be cheaper for the businesses involved in bringing that product to market. Also, because employers would not have to collect (and match) taxes from their employees, these same employees would have more money to spend. You also forgot to mention that savings and investments would not be taxed. YOU ARE ONLY TAXED WHEN YOU SPEND YOUR MONEY. So this plan will not benefit the wealthy and more than it would the poor. In fact, the 'prebate' would be for each household and would be equal to the amount the could be expected to pay for the basic essentials of life. This would be upto the poverty level, so households making less than the poverty would in essence pay no taxes. And it would be applied equally. A poor family of four would receive the same 'prebate' check as a wealthy family of four.
Under the current sales tax system an item you buy for $100 would be $100 PLUS the sales tax rate depending on where you live. I live in FL and we have 7% in Jax. So I would end up paying $107 for the item. Under the FairTax Plan and its 23%INCLUSIVE tax I would pay the same $100, that's it. The price tag of $100 would already include the tax. What you also failed to mention is that under the FairTax Plan there would only be a tax on NEW GOODS AND SERVICES ONLY. If you buy a new house for (ex. only) $100,000, 23% of that price is taxes. If you buy a used house for $100,000 there would be no sales tax because the tax on that house has already been paid.
Also, the whole idea of the FairTax plan is to repeal the 16th (and never properly ratified and therefore illegal) amendment. So you would not have the income tax creeping back.
You think sending out the "prebate" check would be an unwieldy proposition? Would it be any more difficult than sending out all the welfare checks that the government sends out now?
How can you become economically stagnant if you make it cheaper to do business in the US rather than overseas? Companies would return jobs to the US rather than having them overseas. More jobs means more people making money means more people spending money means more money for the government to try and spend wisely to reduce the federal defeceit (sp?)
I was skeptical at first when I heard of the FairTax plan. Once I read the book I was convinced that is it the best plan for ALL AMERICANS.

Posted by: Chris | January 13, 2006 06:21 PM

TheAce,

H.R. 25 does not require the 16th to be repealed, it only recommends that it is.

It also leaves in excise taxes among other things so the people who say it will remove all hidden taxes are wrong. A good amount of the tax code is still left in place, including some income taxes.

http://www.notfitforhumans.com/index.php/weblog/comments/ill_pass_on_the_fair_tax/

Posted by: mt | January 13, 2006 06:29 PM

To DOMAS,
If everyone is only taxed when they spend money how can the FairTax plan be unfavorable for the lower middle-class or poor people? You will only be taxed on what you spend. So if you can't spend alot you aren't taxed alot. But you are taxed equally. The book also addresses the legal loopholes that the wealthy folks use to lower their tax burden. The loopholes would be closed because you are taxed as you spend. No way to avoid the taxes that way.
How would you lower a persons spending power by puuting more money in their pocket? That coupled with the fact that they get a 'prebate' check at the beginning of each month increases their spending power because they will end up paying a lower % of taxes overall.
Another thing that you forgot about is that under the current system foreign visitor do not pay income tax, most probably only sales tax on what they buy while visiting here, which is a lot less that what we pay in taxes. Under the FairTax plan they would pay the same as we would for the same goods and services. that means there would be more money into the coffers of the US government. And that can't be a bad thing can it?
Please read the book and I am sure you will be convinced.

Posted by: Chris | January 13, 2006 06:36 PM

I would like to address some of the points in the original post:

Businesses pay taxes on what they purchase to make their product or deliver their services. Those tax expenditures are factored into the prices of products, which inflate the price by 15%-26% or more, according to Dale Jorgensen of the Harvard Economics Dept. Consumers pay these taxes, which serve no purpose other than to reimburse the company that made the product. When these production taxes are eliminated, they will drop from the price as a result of market competition.
When these taxes are replaced with the 23% revenue neutral FairTax, the consumer will have something to show when he pays those taxes: he will be funding the government (the reason for taxation). In exchange, all income and related taxes will disappear. Prices will change little under the FairTax plan.
The Americans for Fair Taxation grassroots group has two goals: enact the FairTax, and repeal the 16th amendment, which makes income tax possible. HR25 (the FairTax) and House Joint Resolution 16 (repeal the 16th amendment) are both in congress awaiting debate. Once the FairTax is established, any effort to bring the income tax back with another amendment will be all but impossible. It would have practically no support.
Economists predict that the GDP will grow by 10-13% during the first year of enactment.
Taxing income is complex, easy to evade, easy to manipulate, expensive, inefficient, invasive, predicated on lies and deceit, punishes productivity and hobbles our efforts to compete in the global economy. It contradicts the wishes of the founders of our country. It places an unfair burden on the middle and lower classes. After 90 years, it's time to discard it completely. The FairTax is ready and waiting to replace it.

Posted by: Chad Sargent | January 13, 2006 06:38 PM

Let's just end the direct taxation of the people by the federal government altogether. We could raise the same amount of revenue by taxing the 50 states and eliminating every other tax the federal government now puts on the individual. Each state could raise the money for their assessment any way they wanted, be it a state income tax, sales tax, etc. This would also result in the states demanding back much of the power the federal government has taken from them over the last several decades. Once the states had collected the revenue from their residents they would be very reluctant to pass it on to a wasteful federal government, and our Representatives and Senators would decide in short order that their own states could spend that revenue more efficiently on the same programs.

Posted by: Tim | January 13, 2006 06:52 PM

The big problem is spending, not taxes. Cut gov't spending and "who has to pay" becomes a less important question.

Kyoto should have been about what percentage of gov't revenue will be from gas/ carbon taxes -- then any and all who favor Kyoto, or reducing pollution, would favor higher gas taxes. It's not too late.

There should be a 1% national land tax, paid monthly, with a 20 year * avg income deduction (about 800 000 right now; to rise with avg income). Owners who don't want to pay, should sell.

There should be flat rate income tax of 15%.

There should be a special gov't program for homebuyers, with a lifetime limit of 10 * avg income (about 400 000 now) of help/ reduced taxes.

Posted by: Tom Grey - Liberty Dad | January 13, 2006 07:31 PM

I would think there would be more support for the FairTax given the latest scandals involving lobbyists.

I personally supported the Flat Tax 10 years ago. I will not support it now given the opportunity to make the income tax, all corporate taxes, capital gains taxes, alternative minimum taxes, gift taxes, and estate taxes all go away with the IRS.

Just eliminating the nations compliance cost of the IRS will have a net savings of 125 billion dollars a year, that is not the case with the flat tax.

Posted by: keith | January 13, 2006 08:14 PM

The biggest blunder opponents make about the fairtax is they quote the Fair Tax rate exclusively, while quoting the income tax rate inclusively. The two must be calculated by the same standard.

If you calculate them inclusively (tax is included in the price), the average tax payer pays income tax of about 33% and would pay the Fair Tax at about 23%.

Calculated exclusively, the average income tax bill is closer to 49% while the Fair Tax is 30%.

Posted by: Richard | January 13, 2006 08:37 PM

Again the media agencies have reported the fair tax in a negative light, and reported the facts of the fair tax proposal wrongly. The fair tax does not tack on an extra tax. The 23% tax is inclusive, meaning that you do not add an extra 23% onto the price of an item. The tax is included in the price. The price on the shelf is what you pay for that item. Also if you take all of the taxes payed into the system away, I.E. income taxes payed by the company, the taxes payed to maintain that business, and add that amout up from raw material to retail then add the 23% back to it the price of the item actualy drops about 2 cents on the dollar. It's a wash, add to that the prebate check, wich you covieniently forgot to mention, it completely takes the tax burdon from low income families. It also frees up about five hundred billion dollars to go to other projects, by completely iradicating the IRS. All in all, it is a win win situation for the people, busines, and the government. So, What's the problem?

Posted by: Brian Triplett | January 13, 2006 09:19 PM

I'm sure all the drug dealers and prostitutes and others engaged in illegal activities will be happy to collect fair tax from their customers, but will they give it to the government. Ha, dont make me laugh. This proposal will be unable to tax the underground economy. what they're doing is already illegal. Hi I'm a drug dealer and here's my tax.

Posted by: dave | January 13, 2006 09:27 PM

"underground economy" ??? You fool! The Fair Tax is the only way to collect money from them!!!! In our current tax system, they pay no tax, but when you put this in place drug dealers pay a 23% tax whenever they spend their money. AND WE KNOW THEY LOVE TO SPEND THEIR MONEY!

Posted by: Mark M | January 13, 2006 09:41 PM

This initial posting totally ignores the concept of embedded taxes, which means after the fait tax, the prices of things would be essentially unchanged. It also ignores the prebate aspect of the plan.

You should read the Fair Tax book by Neal Boortz and Congressman John Linder. It will explain the idea much better.

Posted by: Daniel H | January 13, 2006 10:15 PM

Will wrote:

" I would greatly appreciate if you would check out http://www.itepnet.org/sale0904.pdf to validate their claims. It is a relatively short report that I cannot verify because I am not an economist. It argues that 23% is far too low to generate enough revenue. Can you explain why they might be wrong?"

It's not tough to explain why they are wrong, and there are several reasons. The best way to see and understand the problems is to review the rebuttal that Fair Tax put together.

It's at http://www.fairtaxvolunteer.org/smart/ITEPRebuttal.pdf

Here's an excerpt:

"What is wrong with the findings of the ITEP study? The "study" is full of blatant errors of fact and misrepresentation. The most fundamental of these is when the study states specifically that it "looked at" HR 25/S 1493 and goes on to describe some features of the legislation with accuracy. However, it is immediately clear that ITEP modeled its version of the FairTax rather than the FairTax as written. Most obviously, ITEP substituted its rate, rather than the rate in the legislation. To add to this confusion, ITEP does not tell us exactly what rate it did use, while mentioning several possibilities. In short, ITEP did not model the FairTax at all, but a tax of its own design."

Based on my reading, major factors for their errors are:

1. The ITEP didn't model the Fair Tax plan as written... they modelled their own version of the plan and used their own rates.

2. The ITEP didn't disclose how they actually made many of their calculations... they just provide "black box" figures and expect people to trust them.

3. The ITEP neglected to include in their calculations that government spending on goods and services is also taxed under the plan (which is roughly 18% of the total consumption base).

It's not hard to see why there's a political motivation to distort the truth about the plan... all you have to do is look at who makes up and support the ITEP, and it becomes clear. You can find that info in the rebuttal, too.

Of course, it's hard to error-check the work of a group who won't actually *show* how their calculations are made, but instead asks you to just trust their conclusions and assume that they were honest.

Posted by: Barry Kearns | January 13, 2006 10:28 PM

How dare you dignify this slipshod idea, the Fairtax, while ignoring other efforts to reform the tax code.

You say it has supporters in the House, but its only real supporter is John Linder. His arguments in are pure fiction - - he frequently invents facts, but few politicians have the stomach to challenge him, because he's telling people what they want to hear, i.e. that drug dealers and blue light districts will fund the federal deficit and lower your tax bill. Yea, right.

Posted by: Michael N | January 13, 2006 11:29 PM

The fairtax is a great idea, I fully support this tax proposal.
Skeptics say this would not increase funding for the government.

When ileagal aliens,criminals,foriegn visitors purchase items;they will fund our government with a federal consumption tax.

As long the American people get a rebate check every month,that only leads to more extra spending,which means the American people will use their rebate checks to spend more and fund our government.

The best part is we never have to report on what we earn,and face possible imprisonment.

Posted by: David Stokes | January 14, 2006 01:05 AM

The most important issue before us, next to terrorism, is taxation. To say it's not appropriate to discuss taxation is comparable to saying it was inappropriate to discuss the Cold War in 1980s or giving women the vote in the 1900s, or whether 18-year-olds going to war should vote in the 1960s.

The FairTax is the only tax program, including our present income tax, that was developed over more than a decade of studies by some of the world's most capable economists at Harvard, MIT, Stanford, Rice and several other respected institutions. Input from taxpayers was included and it was tested thoroughly.

The FairTax is not imposed on top of prices we now pay, it replaces the income and other Federal taxes we now pay, and comes out even. I.e. with the income taxes, FICA, social security taxes, etc. no longer removed from your pay- or pension check, new goods and services (and ONLY new ones) will cost no more than they do now, and you'll have all of your paycheck to spend.

If you decide to cut your tax bill by buying a year old, pre-owned car, you'll save money but you won't hurt the economy because it's being funded by income from people who have evaded taxes before, foreign tourist who have never paid before, and criminal industries. Since many people will be saving instead of spending and businesses aren't taxed on expenditures, the economy will grow like it did after WWII and everyone will benefit.

I think it's noble of the opposition to want to continue paying into the old system but frankly, as a retiree who needs all her hard-earned "benefits," I can't afford NOT to have the FairTax in place.

Posted by: Ms. Sunnye | January 14, 2006 07:38 AM

In regard to all the comments above opposing the Fair Tax...you do not really understand the proposal nor its results.

The working poor would be far better off, because they are presently paying the 7.8% payroll tax on every penney they earn, plus the 22% to 23% IMBEDDED COST of the present system. That amounts to the bottom economic rungs paying an effective rate of 30% +/- under the present system. With the Fair Tax prebate system, their effective tax rate would approach 0%.

Another important result would be the explosion in capital investment. Leading economist project a boom in investment, and therefore jobs and salaries under the Fair Tax because 1) American manufacturers would be better able to compete abroad once their costs are reduced by the embedded costs of the present system; 2) Capital which long ago fled our nation because of the present system would be repatriated...it would be more profitable to invest and spend it here; and 3) Foreign manufacturers would have to open plants in the U.S. in order to regain equal footing with our manufactures.

One final point. Most of the negative comments above are little more than class envy. Corporations never pay taxes...consumers do. Study economics 101 for crying out loud. And wealth does no one any good until they spend it! While it is theoretically possible that Bill Gates could spend the rest of his life living on only $5000 a year and thus not pay a consumption tax, I somehow doubt that that will occur.

In summary...the Fair Tax is MORE PROGRESSIVE than our present system, advances liberty by getting the government out of our financial dealings, and will lead to an economic expansion like no other than has ever occurred.

But don't take my word for it. Go to www.fairtax.org and read the research, learn how the tax would really be applied and when, become familiar with how it would actually "untax" the poor, and then you will be able to make a rational decision. Think about the possibilities, don't dwell on preconceptions.

Posted by: John Shuey | January 14, 2006 11:13 AM


The debate should not be about 23% vs 30%. It should be about a simple consumption tax that:
1. Eliminates the ability of politicians to engage in favor-granting through the tax code,
2. Eliminates the ability of politicians to engage in behavior-modification through the tax code,
3. Eliminates the ability of politicians to engage in vote-buying through the tax code,
4. Provides an immediate boost to the competitive position of domestic producers in the international markets, and
5. Eliminates a $200 billion compliance drag on the entire economy.

If the percentage needs to be changed after the first year, it can be changed.

Posted by: Mike Lowry | January 14, 2006 12:25 PM

Businesses can't pay taxes, only people can pay taxes. When a business pays a tax, the cost is past on to customers for the products, or the shareholders of a company. Not to mention making that company less compatitive with companies (overseas) that pay a lower tax rate. This kills US jobs. It's simple.

Posted by: | January 14, 2006 05:41 PM

Businesses can't pay taxes, only people can pay taxes. When a business pays a tax, the cost is past on to customers for the products, or the shareholders of a company. Not to mention making that company less compatitive with companies (overseas) that pay a lower tax rate. This kills US jobs. It's simple.

Posted by: | January 14, 2006 05:42 PM

After reading the negative comments about the FairTax, I come to the conclusion that there are just a few groups that oppose it.
1. Those that fear change. Either the FairTax is just another way to screw us out of our money or they can't imagine a world without an IRS.

2. This is just an academic exercise in fault finding.

3. Those who have something to lose: Politicians who see their "vote for me and I will get you a tax break" and/or give me a campaign contribution - ditto.
Lobbyists whose clients pay them to get tax breaks.
People who refuse to see the 1 trillion dollars (thats $23 billion in FairTax income)in untaxed income from drug dealers, prostitutes, people getting paid "under the table", pornographers and laundered money. They also can't imagine all those offshore and overseas American companies coming back to the U.S. because our company has become the tax haven of the world. That increase in the economy alone will make the FairTax pay for itself.
4. Liberals that just can't stand the idea of President Bush getting credit for making the IRS go away and creating a skyrocketing economy.

That's why there is a grassroots movement (see Boston Harbor tea party) to get it done. There is considerable inertia and political mileage to be overcome.

Posted by: Keith Ritzler | January 14, 2006 06:24 PM

The most fundemental idea behind the fair tax is that the cost to the consumer at the check out will not increase. All corporate and manufacturing taxes will be eliminated (which is about 23% of the cost of an item). This would allow companies to sell their goods for 23% less the 23% would be collected at the register plus any state sales tax due. This would leave the cost of an item at about the same you are paying now and we are still keeping 100% of our income. This transition is supposed to take only weeks to come to pass. Compitition in the market place will make it so.

Posted by: Steve | January 15, 2006 06:47 AM

I must say that of those I have met who support the FairTax tend to be a smarter than those I have met against the FairTax.

A personal goal of mine is to tell at least 2 people everyday about the FairTax. Their first experience will surely be a positive one. And the people against it aren't doing anything. That's right, the word is spreading like wildfire. I know I am doing my part; I made a forum website to help organize the FairTax community. Please join www.FairTaxGroups.com

Posted by: Jessie_For_FairTax | January 15, 2006 10:46 AM

Let's do the math on what is currently a $100 purchase:

$100 cost x
1.07, which adds in 7% sales tax =
107.00 paid at the cash register.

Under the Fair Tax:
$100 current cost -
23% embedded cost =
$77 for the item.
$77 x
1.23 to add in the Fair Tax =
$94.71.
Add the result of 77.00 x .07 (state sales tax) or $5.39 to the 94.71 and the total cost is $100.10.

And you just paid your taxes without filing a form, tracking receipts, using a calculator, sharpening a pencil or wondering if you just broke the law.

If you are a poor person, whatever that is these days, you received a prebate equal to the amount the government currently considers appropriate for somebody at your level of income. In other words, before you ever go to the store, you have had your income supplemented by an amount calculated to cover the cost of essentials. You pay for your beer, cigarettes and cable TV out of your own pocket. You probably come out ahead because, unlike a more affluent person, your income is significantly enhanced by the prebate. If you believe in soaking the rich, consider that that prebate comes from bigger spenders and is distributed to lesser spenders. If a rich guy buys a yacht for one million smackers, he pays $230K in taxes. $230K is then redistributed to less affluent people according to their need. In other words, it goes "from those according to their ability to those according to their needs." It's positively Marxist!

If you are Paris Hilton, living off a trust fund, every time you spend money on something useless and frivolous, like a jacket for your chihuahua, you pay taxes to the general treasury.

If you have a lot of money invested overseas, you can now bring it home without fear of 23 percent of it being confiscated just for the privilege of being under US rule. If you have one million dollars that you bring back, that is $230,000 you can repatriate without fear of loss. It can be spent here, invested here, donated here or simply kept. If you have money, isn't it a fundamental right to do with it as you please?

If the tax rate is set at 23%, I would enjoy the spectacle of a politician standing up and saying "I propose a new tax rate of 24%." He'd be gone in a New York minute. One who proposes a tax rate of 22% would be a hero. It simplifies things and makes it easy for Joe Six-Pack to understand what is being done with his money.

No more IRS. That can only be a good thing.

Look, as with any big change the law of unintended consequences will be active. The current tax code is entirely a product of that law. It is riddled with complexity, pitfalls and unfair exceptions generally available only to those with enough resources to hire experts to exploit it. Make it easy on all of us to understand our taxes and how to control our payment of them and help get the Fair Tax enacted.

Posted by: Davey | January 15, 2006 11:53 AM

One other point in this discussion that I have only ever heard Congressman Linder point out is this: The current system taxes the income-based economy. The Fair Tax taxes the consumer economy and is roughly three times the size of the income economy. In other words, the tax base of the Fair Tax is much broader and more spread out than the current system.

You know, the real discussion here is that the proposed rate is 23 damned percent. Doesn't that strike anybody else as being absurdly high? Isn't it a crime that under the current system we are paying, apparently, 23% of our income to fund federal government? We allow credit card companies to charge that much, yet we understand that it is far too much. Why is it OK to allow government to charge that much? C'mon, people, get pissed off about that! If that's not Boston Tea Party stuff, I don't know what is.

Posted by: Davey | January 15, 2006 12:37 PM

Fair Tax is great for Middle Class Families. Most Middle Class Families are in a 25% Income Tax Bracket and in addition pay 7.65% in Payroll taxes for a total Tax Bite of 32.65%(Inclusive rate).

Fair Tax is much easier to administer and only cost the Middle Class family 23%(Inclusive) rate.

Alan Greenspan likes the Consumption tax idea and only advised that if the Congress were to enact a replacement of the income tax system with a consumption tax system that they give a 6 month delay in implementation to allow a transition to the new system.

See Link on Greenspan at :
http://fairtaxreform.blogspot.com/2005_03_01_fairtaxreform_archive.html

Or read how 75 other National Economists and Economic Professors sent an Open Letter to Congress in favor of the Fair Tax last Spring.

Link: http://fairtaxreform.blogspot.com/2005_04_01_fairtaxreform_archive.html

Get the Facts:

Fair Tax Top Ten Economic Benefits:
http://fairtaxreform.blogspot.com/2006/01/top-ten-economic-benefits-of-fair-tax.html

Those That Know the Facts, Love the Fair Tax.

Posted by: Merrill | January 15, 2006 02:00 PM

Patience,

You stated: "I would welcome hearing an argument for why corporations and people should not pay taxes in proportion to their wealth (again, as opposed to their income). My belief in this principle is mostly based on my attempt at a common-sense philosophy."

I highly recommend that you go purchase a copy of "The Fairtax Book" by Neal Boortz and Congressman John Linder. It will answer all of your questions, and I feel will turn you into a supporter of the Fairtax. You can also go to www.fairtax.org for answers/arguments for why corporations shouldn't pay taxes in proportion to their wealth.

Posted by: Drew | January 15, 2006 02:15 PM

Corporations do not pay taxes, consumers of their products do.

The cost of the taxes paid and the high cost of accountants, and tax attorneys is all figured into the price of everything we buy. It is passed down through the supply chain to every citizen.

When you buy a car its embedded in the price; When you buy a loaf of bread it is embedded in the price.

The only advantage of keeping an archaic income and payroll tax system is it gives "K" Street lobbyists, tax attorneys and big coroporations something to lobby about with Congressamn for special exemptions or tax write offs that only Wealthy individuals and wealthy Cororations can take advantage of.

The Fair Tax makes it simple and transparent with no write offs or exemptions. That is better for government and oversight by the American people.

Posted by: Merrill | January 15, 2006 02:30 PM

Emily, how can you BE so wrong?

The Fair Tax isn't 23% on top of the current price. It's 23% INSTEAD of the already enormous, yet hidden taxes, that are embedded in the existing price.

Second, the "goal" of the Fair Tax is NOT "reducing the budget deficit" which is a laudable goal. It would have that effect, however, because it would cause untold economic prosperity which would in turn raise more revenue.

In case you went to government school, the purpose of collecting taxes is to raise the most revenue so as to support necessary government expenses. It is NOT to raise tax rates, depress the economy, encourage capital and investment to flee overseas, discourage small business from forming or expanding, and LOWER total revenues. That's what our current tax system does.

Also consider all the additional taxpayers who would then be paying their fair share for, like drug dealers, illegal aliens, and other denizens fo the underground "cash economy." Increased total tax revenue means we could have an even LOWER tax rate, which would in turn produce even HIGHER tax revenues. Never learned that in a government school, did you?

Even if the Fair Tax was a total wash with no decrease in my total taxes, no increase in total tax revenues, no boost in the economy - just the effect of removing the financial and logistic burden that small businesses and individuals have for complying with tax laws would be well worth it. It may be pocket change to big business, but the cost for accountants and payroll tax compliance and other such nonsense for the little guy is crippling.

One further advantage - no more reason for the big guys to pay bribe money to Jack Abrahmoff for special treatment from corrupt, elected officials. This in itself is another legitimate "goal" of the Fair Tax.

There's more.

If you REALLY want to opine on this subject, perhaps you should do your research first by reading the plan or visiting the Fair Tax website. I've heard enough from those who (themselves being uninformed) quote others who are equally uninformed or "raise the questions" (without answering them) that have the answer staring them in the face already.

If you want what is best for everybody in the United States, you want the Fair Tax.

Posted by: Rex | January 15, 2006 05:11 PM

Before you condemn the Fair Tax, READ IT !!

Most of the comments against the Fair Tax show that the authors either,never read it or they all went to schools were understanding the words wasn't taught.

Posted by: Greetings B. | January 15, 2006 10:50 PM

Just out of curiosity, what do we do with all those unemployed IRS employees, tax accountants and tax preparation specialists? What does the unemployment rate jump to? After all, those who propose the flat tax say they are going to eliminate $550 billion from the IRS and another $550 billion from corporate costs. I'm assuming much of those cuts will come in the form of layoffs.

I am only curious, and I don't have time to read Boortz' book.

Posted by: AWS | January 15, 2006 11:52 PM

AWS -
They would get retrained and do other jobs. Where are all of the typewriter repair personnel from just 20 years ago? Accountants do more than just calculate tax returns/implications.

Posted by: Big Lou | January 16, 2006 07:34 AM

Why is it people feel that should pay taxes according to their ability to produce wealth? Our country was founded on the idea of freedom. So long as you did not interfere with your neighbors freedom you can do as you wish. This included the realm of business. Free enterprise made this country what it is today. But all these "scholars" that don't have a clue as to how the fair tax works can throw this idea under the bus. Our forefathers came from a land of suppressive tax and government with a clear vision of what freedom is. The founded this country on principles that were fair to both the prince and the pauper. Yet we have regressed in 200 years to the point that we think we can solve societys problems through government. If we continue to find it politically correct to tax the wealthy and support the poor on the goverments dollar then there is no incentive to produce. The poor will far outweigh the wealthy and America will become a modern day Soviet Union. Regressing through communism into a poor center of economic ruin. We will be right where the people that founded this country intended to keep us away from. The fair tax is a gigantic step toward progress of a society of economic and social liberty for ALL. This strips the power of K Street and capitol hill to use our tax system as a base of power for their coruption.

Posted by: Easy | January 16, 2006 07:38 AM

Davey,
Excellent point. You should also re-point out that there are many more consumers than income earners due to the hidden economy, tax evaders, and travelers.

Posted by: Big Lou | January 16, 2006 07:39 AM

The above arguments only reinforce my belief that the Fair Tax is the second best alternative to the current tax structure, and taxing the states instead of the people is still the best alternative. While the Fair Tax would be more equitable to the people, and would have some impact on spending, it does nothing to diminish the power wielded by those who are elected to national office. And the amount of power wielded by the federal governmnet is at the core of the problem. As Walter Williams once pointed out, if the the people in Washington stayed within in their Constitutional boundaries it really wouldn't matter what tax system was in place. And I believe that as long as they don't stay within their Constitutional boundaries it ultimately doesn't matter either, as they will find a way to use their power to get what they want one way or another.

Consider the following.

Lobbying: Taxing the states instead of the people would diffuse the issue as lobbyists would be forced to work on a state by state basis. It's a lot more difficult to visit 50 state capitols and thousands of local and county elected officials to exert influence than to visit 535 offices in the same building.

Government Power: As I stated previously, if the states were responsible for collecting and paying a state assessment instead of the individual they would be far more reluctant to pass that money on to a wasteful federal government. The states would realize that they could spend the money more efficiently than the federal government and would kill off the bulk of programs now administered at the federal level and run them at the state level.

People Power: Instead of voting for the politician who brings back the most pork to the district and state, the people would vote for the politician who keeps the most revenue in the state where it was generated. Laws would also be more reflective of the people's will, and not the will of national lawmakers who position themselves for the next election.

Posted by: tim | January 16, 2006 03:04 PM

Tim, the FairTax is not designed to answer the problems of political corruption or runaway government spending. It is designed however, to give back our economic freedom. And I believe that is the most important first step in beginning to take back our federal government.

If, as you state, the FairTax will be more equitable for the people, then why aren't you on board yet?

Posted by: Benj | January 16, 2006 07:43 PM

AWS -
They would get retrained and do other jobs. Where are all of the typewriter repair personnel from just 20 years ago? Accountants do more than just calculate tax returns/implications.

That's a very simplistic reply. I'd venture to say that the number of typewriter repair personnel was minimal 20 years ago compared to the enormous amount of tax-related personnel involved in all phases of the collection and distribution of taxes.

Who's going to retrain them? What about unemployment benefits? What happens if they don't then have the income to put back into the economy, but instead become a drain on the economy. I'm not just talking about the accountants here, but all of the assorted support personnel as well. One doesn't just shut down $1 trillion worth of the economy and say "oh, well, they'll just be retrained." How long will that take? How long does it take the economy to recover from removing those positions?

Again, I'm not arguing against this tax, just curious.

Posted by: AWS | January 16, 2006 10:32 PM

As others have commented, much of the criticism of the FairTax on this blog is uninformed. I was particualry struck by the comment that the ongoing increase in support is testament to economic ignorance. Apparently that blogger does not realize that the FairTax has been endorsed by more than 75 professional economists, one of whom is a Nobel lauriate.

When Congressman Linder visited with Chairman Greenspan a couple of years ago, he started the meeting out by going over the design of the proposal. Greenspan interrupted him: "oh, you don't have to explain it; I've studied your plan and I don't think you will find a serious economist anywhere who will disagree".

Apparently the chairman didn't check out anonymous bloggers before rendering that verdict.

Posted by: phil_will1 | January 17, 2006 08:46 AM

For those of you who have drank the Kool-Aid and actually believe all the propoganda spewed out by the FairTax proponents, please consider the following (which I gurantee you will never hear from Neal Boortz, John Linder or AFFT):

1. Numerous independent studies have concluded that in order to be revenue neutral, the tax rate for the FairTax would need to be at least 44%-60%. The most detailed of these studies was prepared by William Gale and published in the May 10, 2005 edition of Tax Notes (i.e., three months before The FairTax Book was published.) Although fairtax.org publishes so-called "rebuttals" of critism of the magical 23% tax rate, it somehow has been unable to rebut this study. Boortz, on the other hand, just lies about it and hangs up on listeners who bring it up.

2. Other studies have reached similar conclusions, the most recent being the President's Tax Reform Commission, which had a whole chapter on the FairTax in it's report last fall. It concluded that in order to replace ONLY THE INCOME TAX (i.e., not the Social Security Tax, Medicare tax or Estate tax)would require a tax rate of AT LEAST 34%, and probably much higher (i.e., 49%) when tax evasion was factored in. In 2000, the Congressional Joint Committee on Taxation reached a similar result. There are plenty of other reports and studies out there as well that came to similar conclusions.

3. In stark contrast, despite claiming to have spent "over twenty million dollars" in research developing their plan, the FairTax proponents are apparently unable to produce a single independent study that supports the magical 23% rate. I, for one, would love to see one made public if for no other reason so that those studies could be examined by folks like William Gale and we could have a real debate about what the true rate would likely need to be.

4. Boortz and AFFT will regularly claim that the magical 23% tax rate was "produced" or "confirmed" by economists at Harvard and MIT, but it turns out the economists they are talking about do NOT support the FairTax and do NOT believe that a 23% rate would be anywhere near revenue neutral. For example, Jim Poterba of MIT was a member of the Tax Reform Commission that concluded that the FairTax rate would need to be much higher than that proposed by the FairTax folks.

5. Regarding the so-called "embedded taxes", it is a theoretical proposition at best that prices will drop by the supposed 22% embedded taxes if the FairTax system is implemented. At worst, it's wishful thinking.

For those who believe that prices will automatically drop by the amount of the "embedded taxes" if our current tax system is replaced with the FairTax, here are a few questions to ponder. Did credit card compaines reduce the interest rates they charged when their cost of borrowing dropped over the last several years? Why would the price of imported goods drop 22% just because the US tax system was scrapped? Did those imported goods somehow contain an "embedded tax" as well? Why would companies like Microsoft that have virtual monopolies reduce their prices just becase their tax costs were reduced? They can effectively charge what the market will bear.

FairTax proponents ignore all of this and simply repeately chant the mantra: Prices will drop under the FairTax because embedded taxes will be eliminated. But what if they're wrong?

And one last question: Do you realize that the "embedded taxes" include taxes you pay as an individual? Thus, for prices to drop by the amount of the "embedded taxes", then your salary will also need to drop by the amount of taxes you currently pay. In other words, you might keep your entire paycheck on payday, but your paycheck would just be a lot smaller. Dale Jorgenson of Harvard (who the FairTax proponents cite as the guru of embedded taxes), has made this point quite clear lately, much to the chagrin of Boortz and Linder who misrepresented his work in their book.

6. Under the FairTax plan, tax avoidance will become a national past-time, not just for the rich, but for all of us. Think about it for a second, if new goods and services are taxed at a rate of 30%-60%, but used goods are not taxed at all, many of us will choose to buy a used car tax-free instead of buying a new car and paying the tax. What about homes? Jewelery? Furniture? Children's clothes? You name it. Ebay and garage sales might benefit for the explosion of purchases of used goods, but I think home builders, manufacturers and retailers might suffer just a tad. And how many of us will choose to vacation in Mexico and Canada instead of Florida and Colorado in order to avoid paying the FairTax on our hotel bills, car rental, food, lift tickets and entertainment? Well, lots of us will do just that in order to avoid paying the FairTax. After all, nobody likes paying taxes.

And when enough people change their purchase patterns in order to avoid paying the FairTax, then the tax rate will need to increased even further in order to make up for the lost revenue (which will just increase people's incentive to alter their purchase patterns to avoid the tax.)

7. Tax evasion will also be a big problem. Under the FairTax plan, purchases for business and investment purposes will not be taxed. Thus, people will have an incentive to set up bogus business (think network marketing) and call everything they buy a "business expense" in order to avoid paying taxes. Similarly, people who buy vacation homes will claim they are for rental or investment purposes in order to avoid paying the FairTax on those purchases. Boortz claims that such behavior would be "wrong" and illegal under the FairTax statute. Well, no kidding, but without an IRS looking over our shoulders, the temptation to cheat would be enormous. While Boortz and AFFT acknowledge that there would be "some" tax evasion under the FairTax, they make no provision of it in their magical 23% rate.

8. What about the "underground economy?" A common argument is that the FairTax will tax drug dealers, who currently aren't paying income taxes on their illegal activities. But why would drug dealers suddenly start collecting and paying the FairTax on their illegal activities? The answer is: they won't. But won't they pay the FairTax when they go out and purchase their Mercedez Benzes? Yes, but the car dealer current pays an income tax on that sale, which will be eliminated under the FairTax system, so the tax ramifications will be a wash. Besides, according to Boortz and Linder, the Mercedez Benz currently has a 22% "embedded tax" built into the purchase price, so the drug dealer is already paying taxes everytime he makes a purchase.

9. Just who's taxes will go UP under the FairTax system? Well, Boortz, et. al claim that the poor will see their taxes eliminated (because of the "pre-bates." The rich would see their taxes drop substantially because they tend to spend a smaller proportion of their incomes on goods and services than to the rest of the country (plus, the estate tax would be eliminated), so they'd make out pretty well. So, let's see, who would be left to make up the difference in the tax revenue lost from the poor and the rich? Oh, yeah. The middle class. Gee! Shafted again! Who's a thunk it?

10. Retired folks would really get shafted. They've already paid taxes from a life-time of work, now they'll be taxed again everytime they make a purchase. I guess that's just the price they have to pay for being old.

11. One last question. Why is it you never see the FairTax proponents actually DEBATE their proposal in public with critics who actually know something about the plan? Boortz, for example, has turned down numerous offers from critics to debate the FairTax, and he conveniently breaks to a commercial whenever one of his callers actually starts asking tough questions. But he loves showing up a campaign-style rallies (to sell his book) where no real questions are allowed.

If the FairTax plan is really so great, don't you at least wonder why Boortz, Linder and the AFFT folks so afraid to actually debate it?

Posted by: Hayden Kepner | January 17, 2006 07:59 PM

Benj,

I'm on board with the Fair Tax to the extent I'll ride a bus that gets me the closest to my destination before I have to change to another bus. That's why I said it was the second best tax plan. As Walter Williams once pointed out, if the government operated the way it should the tax plan used wouldn't really matter. I believe the reverse of that is true, as well: No matter what tax plan we have, the federal government can find a way around it if they want to abuse their power. That's my problem with the Fair Tax plan; while it does provide a good measure of fairness to the tax payer, it can still be modified and abused by Congress. If it were codified in a Constitutional Amendment it might be different, but as a mere law it is subject to modification. Congress can raise or lower the tax rate at their whim. That's why I prefer an assessment levied on the states instead of the people--I have far more control over who my state senators and representatives are than I do at the national level. Not being from New York I have zero input into the process that sticks us with a Schumer, Clinton and Nadler. If I don't like the way my state elected officials are collecting, or even tolerating our assessment I have a much greater chance of electing someone I prefer. That said, the Fair Tax is still a lot better than what we currently have, and I support it's passage. But as I said previusly, it the second best plan. A state assessment accomplishes what the Fair Tax plan does, and also functions as an impediment to unchecked federal power.

Posted by: Tim | January 18, 2006 12:43 PM

Dear Hayden Kepner:

Personally, I haven't seen a study on either side of the issue that clearly shows the math on which rate would be appropriate. 23% of consumption sounds about right because consumption is about 84% of GDP, and federal spending is about 20% of GDP. This is pretty close to 23% * 84% = 19.32%, but this is only and estimate...

Where are the hard numbers that detail how these studies work? Please show me a study one way or another...

jacobfink@yahoo.com

Posted by: Jacob Fink | January 21, 2006 02:34 PM

why dont we take the gov. seized homes and cars and get the katrina victims out of the hoels and on their feet???

Posted by: bennett keith | January 24, 2006 12:29 PM

I think what you failed to realize and/or mention is that even though the 23% inclusive or 30% exclusive sales tax rate is paid from the total cost product, whether a loaf of bread or a house. The cost will not increase as you think. It is not the same as state sales tax where they add the cost on top of the purchase price. The sales tax replaces the corporate income taxes the affiliated corporations have to pay from the manufacturer to the retailer. Another point is that this tax only applies to new items, not used items such as a house that has been sold more than once. I realize many oppose this bill, but why? Do you like having to declare your income every year? Do you like spending time figuring out how to save every penny possible from being taken by the federal government rather than using that time for personal leisure, not to mention the costs involved? The real opponents are those who have everything to lose if the present income tax system were replaced with something they cannot manipulate, and those people are tax lobbyists. I am in the middle income bracket, and even I recognize the enormous benefit of having this FairTax in place. No more H&R Block every year taking $70+ to file a return where I have to pay more money in federal income taxes because I did not withhold enough money throughout the tax year. The income tax is exactly what Karl Marx described as a heavy and progressive income tax, and before John F. Kennedy made a major change, the highest tax rate was near or above 90%. I thought we were fighting communism rather than trying to replicate it.

Posted by: Eddie G | January 26, 2006 08:02 PM

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