Tuesday, August 24, 2010


I'm happy to be having a discussion over at PUNDIT HOUSE about the Fair Tax currently being promoted around the country by Neal Boortz and others.  I do not have a Fair Tax book, but have listened to the sales pitches and read enough about it to know that I would not support it.  

A note to Frank, who wrote the original article.  This is not about going home to the same abusive drunk.  This is whether or not the replacement husband is any better than the first.  

My discussion is with Christian Hine who co-owns PUNDIT HOUSE who is a proponent of the Fair Tax.  He has given the Fair Tax Bill a great deal of study and thought.

Thank you Christian for your detailed reply.  I really do appreciate the time you took to answer the questions I posed and my skepticism.  So here we go with my counterpoints:

Christian: "The Flat Tax, however, retains the invasive income tax administration apparatus and can easily revert to a graduated, convoluted mess, as it has many times over many years.  It still requires individuals to file their income with the Federal government, a responsibility eliminated by the FairTax.  It also retains much of the cumbersome rules of the current tax code in order to determine what “income” actually is."  
Cheryl: You say there is "no perfect tax system."  I say there is.  Or at least close to perfect.  And that is a Flat Tax that is based on tithing.  If you want people to pay for the privilege of being a U.S. citizen, then 10% of each person's income would address that.  No matter what the income is, $3000.00 per year or $300,000.00 per year, each person would contribute their 10%.  Now that is what I would call "simple."  Using this Flat Tax, I would eliminate payroll taxes, business taxes, etal.  The Flat Tax would take the place of all other Federal taxes, as you say the Fair Tax would. 

Christian: "Furthermore, the Flat Tax eliminates neither payroll taxes nor business taxes, thus retaining a level of complexity as well as the hidden cost of business taxes in the prices of the products we buy.  Remember, businesses don’t pay taxes; they simply transfer taxes from the final customer to the government."
Cheryl: If I were queen,  would have eliminated the payroll and business taxes with the Flat Tax.  LOL

The points being sold by the Fair Tax people sound so great on the surface.  As usual with such a large and complicated tax system, the devil is in the details.  It is touted as "simple."  So simple that we will no longer have to go through the complicated federal tax forms and will no longer have to file income taxes. Yet, with the Fair Tax, every single purchase transaction in the U.S. would have to be tracked. (This is a bastard kin to every person's health information tracked by the Federal government.)  Every loaf of bread, every gallon of milk, every candy bar, every shirt, every shoe, every bottle of aspirin, every, every, everything would be tracked by the Feds.  Every cash register in the U.S. will be tied into a Federal data bank.  Every business bank account will be tracked to prove the reporting.  The Feds will not be content to have just businesses taking on this tracking responsibility.  When discrepancies occur in reporting, who is going to be held responsible?  The consumer.  In order to prove who bought what and where, the next obvious step is ID buying cards.  So while Sam's or your local grocery now keeps track of what you buy, with the Fair Tax, the Feds will track what you buy.  Now you can say...oh, that is not in the Fair Tax Bill.  But you have to look at how this is going to be implemented.

Christian: "You are correct.  The FairTax is a federal revenue collection bill.  You want state tax reform?  Elect good Governors and state legislators.  You want property tax reform?  Elect good Mayors, city council members, and county commissioners." 
Cheryl: My point there is that the Fair Tax is not lessening the tax burden on people, but rather just another way of collecting burdensome taxes in addition to all of the other taxes we are paying to States and localitites. In other words, it is not helping the over-taxed situation we have.  It is just shifting from income to consumption and handing the Federal government either the same amount or more. You point out that it is not a "tax cut" bill.  So IF the reasoning to change the tax system is to slow the growth of the Federal government, or to starve the beast, this bill doesn't get there.  The Fair Tax Bill just rearranges the source of revenue from income to consumption. 

Christian: "Yes, the mortgage interest deduction goes away, but who cares?  All that does is allow the interest to be paid with pretax dollars.  Under the FairTax, all purchases are paid with pretax dollars!"
Cheryl:  My view on the mortgage interest deduction is that it assists more people with property investment for the primary home.  When you say "who cares," I am hearing you say you think that "pretax" dollars saves so much money for people that this is at least a wash and maybe a boon to the home owner.  But as I stated before, the dollars we have are still taxed, just on consumption not on income.  So eliminating the mortgage interest deduction doesn't help anyone who has a mortgage with interest.  I am saying, there are no "pretax" dollars in the Fair Tax Bill unless you stick your money under a mattress somewhere and purchase nothing for the rest of your life.  Money is still taxed, just in a different way.

More on the subject of housing: The idea that only new home purchases will be taxed while "used" homes will not be subject to the Fair Tax will throw the new home housing industry into a collapse.  (All of the articles I've read on critiquing the Fair Tax say the sales tax number is more in the 30% range rather than the 20% or 23% touted by the proponents, but for our purposes we'll use the 23%. )

Here is one reason why I think this turns into a nightmare:  Lets say a builder wants to put a house on the market for $250,000.00.   Now the builder is selling a new house, so he has to charge sales tax on that house, so add another 23% to the purchase price.  We are now up to $$307,500.  That house sits next to a "used" house.  The "used" house which was built before all of this added tax is priced at $250,000.00.  Next comes the realtor who gets 6% commission on the sales.  But under the Fair Tax, the realtor's 6% commission is now subject to the Fair Tax and that is 23% of the 6%.  6% of $307,500.00 is $18,450.00.  But add 23% onto the 6% and you have a commission + taxes that is now $22963.50.  Add that to the $307,500.00 sales price and you now have a house price of $330,193.50.  The builder doesn't pay income tax.  The realtor doesn't pay income tax.  But the home buyer just got soaked.  A previously priced $250,000.00 home is now $330,193.50 with no negotiating or wiggle room.  The so-called Fair Tax  is $62,013.50that just went to the Federal government on the sale of one house. Why do we want to give the Federal government $62,013.50 on the sale of a house?  Unless of course the builder and realtor drop their prices to compete with the "used" houses, they have no negotiating room.  Do they lower their standard of living so they can sell a new house?  I could use cars as another example of the same scenario.  New cars and new homes will necessarily be out of reach for more people.  Plus, unless you are paying for a home outright, the mortgage you apply for will include interest on taxes you are paying to the Federal government.  How does that make things better for you?  Same applies if you are borrowing to buy a car.  As for rich people being the only ones buying new cars and new houses because they can afford to hand over this much more to the government, that remains to be seen.  Rich people I know are rich because they have been frugal and wise with their money.  I think the demand for "used" will go up which will cause the prices of "used" to go up...as in supply and demand.  

How about renovations.  You want a new faucet, pay the government 23% more for it.  You want a new roof, pay the government 23% more for it.  You need a new water heater?  I can see the greedy little politicians rubbing their hands together with glee.  You say this will be covered by not paying income taxes.  I think if you add 23% to everything you do in your life, you will be paying a heck of a lot more than the income taxes you were paying.  Add 23% to a plane trip, a cab ride, a night in a hotel, a meal at a restaurant, on and on and on.

Christian:"Quite the contrary.  Under the FairTax, because of the rebate I mentioned earlier, the marginal tax rate paid by those at poverty level is zero.  Those spending at twice the poverty level pay an effective tax of only 11.5 percent — a rate much lower than the income and payroll tax burden they bear today." 
Cheryl: I stick to my guns on this.  Good for the rich, bad for the poor.  Also, creating class differences in the tax system, which we have now...just another twist on it.  I'm referring to answers on this one from another site: Article on the Fair Tax

Instead of simply not taxing staple items like food, health care, transportation, or clothing, they want the federal government to send each of us a check every single month. Think of the dependence this would create. It's very hard to imagine a “limited government” -- which many of the FairTaxers say they want – buying the loyalty of every American household with a monthly government payment of $478.83 – or any other substantial amount.
The purpose of the rebate is to make essential consumption (as measured by spending up to the poverty level) exempt from the tax. We do not want to tax the poor. This is similar to the earned income credit (in the income tax) that doesn't tax income below a certain level. Only the poor will not have to pay a tax preparer to fill out a complicated form in order to qualify for it. many have paid $200 to file that return.
But the “rebate” isn't similar to the earned income tax credit because it's intended to go, month after month, to every American household. If the intent was really to avoid taxing essential spending to place less burden on the poor, one could simply not levy the sales tax on stable items like food, medicine, school supplies, or clothing. 

Finally, Christian....this is a shell game where you throw money into the Federal government and after they spend it on God knows what else it will turn into yet another ponzi scheme, just like we have now.  I trust it about as far as I can throw a 350lb. linebacker.....NOT.  I cannot see anything better and I can see a whole lot worse with the Fair Tax.  There are as many or more complications in the Fair Tax as there are in the current income tax policies we have today.

As you say, there a many facets of the Fair Tax  that would take days to go through. That is one of the reasons I say it is NOT simple and it is going to be yet another convoluted failed tax scheme that needs to go into the dumpster.  My opinion, Christian.  No offense intended toward you.  There are a lot of people jumping onto this bandwagon.  I'm just not one of them.

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