FAIR TAX MISNOMER + MORE THOUGHTS ON IT

Hi all.  I never dreamed this Fair Tax movement had so many people jumping onto it like lemmings off the cliff.  What I am hearing is screaming vitriol against the income tax.  O.K. fine.  I get it that our income tax system is rife with problems, loopholes, and favortism.  I get it that people resent that.  What I don't get is why intelligent people are so desperate to grab onto another faulty, complicated scheme amounting to as many or more problems as the existing system we have now.   I know you all are not stupid, so take a deep breath and step back a bit to analyze this thing with open eyes.... and try to keep history in your mind while you do.

(Caveats here:  I am an artist by trade and this discussion is annoying me because I should be painting.  I know I'll get some really nasty comments on that revelation.  But, to raise my credentials here, my Dad owned a retail business all of his career and I owned a wholesale business for ten years. Because of those circumstances, I have had experiences in both areas.  I know the impact of taxes on consumers and on businesses having been on all sides of the spectrum. That being said, I am not an economist with ideas on social engineering / central planning a tax code. For this conversation, I am relying on my own experiences and research on the web.) 

Because I should be painting and have many other obligations today,  I am going to refer my readers here to the websites I found to be the most credible opposition to the Fair Tax.  This is assuming anyone will take the time to read some clear opposition and give it more thought.  

Jews for the Preservation of Firearms Ownership  Strange connection here, but their arguments against the Fair Tax make sense to me.
An answer to John who commented on my previous post from the JPFO.org site:
"We're likely to end up with both a national sales tax and an income tax. Even if legislation required abolition of the income tax (as HR 25 does), a “national crisis” would soon cause the income tax to be “temporarily re-instated” and the Internal Revenue Service would remain in our lives on an “emergency basis” that never ended.
Likelihood: High probability."

 
 My argument regarding manipulation by the bureaucrats is supported also by JFPO.org:
"The national sales tax is subject to manipulation in even more direct ways than the income tax has been. Let's say that Congress or some powerful regulatory agency decides that fatty foods or sugar or potato chips are bad for you – wham! Suddenly there might a 200 percent tax on those items.
Government won't have to ban firearms; they'll just place a 500 percent sales tax on them. Or a 1,000 percent sales tax on ammunition. Cigarettes? Imported clothing? “Gas-guzzling” SUVs? Given the wonders of the computer age, the eternal greed of government, and the unquenchable meddling of social engineers, we'll soon have custom tax levels for them all, constantly calculated and adjusted by computer.
FairTaxers talk about the tax being self-limiting; when it gets too high, people stop buying. While they praise the limiting effect that might have on government, they ignore the damage that a too-high tax might have on the unfortunate industries or individuals that get hit with it – a problem that's built into the tax even in its initial form, and which becomes Draconian once politicians realize they can use the sales tax as a club or a threat.
Likelihood: Probable." 

 
 Another article from 2007 which Unspins the Fair Tax is here: Fact Check.org

Earlier I said the Fair Tax is good for the rich and bad for the poor.  Fact Check.org finds that the Fair Tax is good for the rich and bad for the middle class.  If the poor come out better, then someone has to pay the difference.  According to the Fair Tax Chart and the Treasury Dept. Chart, it is the middle class who get hit. The explanation is shown here below:

The FairTax: Is It Regressive?

Sometimes sales taxes are called regressive, meaning that the poorest pay higher rates than the wealthy. Strictly speaking, sales taxes are flat, since everyone pays the same rate. But because the poor tend to spend a high percentage of their income on basic consumer goods such as food and clothing, sales taxes do require the poor to pay a higher percentage of their income in taxes.

The FairTax plan, however, helps to alleviate this difficulty by exempting sales taxes on all income up to the poverty level. Taxpayers would receive a "prebate," which Edwards calculates to be about $5,600 annually. The Treasury Department estimates that the prebate program would cost between $600 billion and $700 billion annually, making it the largest category of federal spending. Americans for Fair Taxation disputes the Treasury Department numbers, claiming that the actual cost would be closer to $485 billion per year. The Treasury Department has so far refused to release its methodology, making it difficult to determine whose estimate is correct.

Who Really Pays?

With the prebate program in effect, those earning less than $15,000 per year would see their share of the federal tax burden drop from -0.7 percent to -6.3 percent. Of course, if the poorest Americans are paying less under the FairTax plan, then someone else pays more. As it turns out, according to the Treasury Department, “someone else” is everybody earning between $15,000 and $200,000 per year. The chart below compares the share of the federal tax burden for different income groups under the current system and under the FairTax. Those in the highest and the lowest brackets will see their share decrease, while everyone else will see their share of taxes increase.

Americans for Fair Taxation rejects the Treasury Department analysis, objecting that Treasury considers only the income tax. By leaving out payroll taxes (which are actually regressive) Treasury’s chart makes the FairTax look worse by comparison. We found that including all the taxes that the FairTax would replace (income, payroll, corporate and estate taxes), those earning less than $24,156 per year would benefit. AFT’s Burton agreed that those earning more than $200,000 would see their share of the overall tax burden decrease, admitting that “probably those earning between $40[thousand] and $100,000” would see their percentage of the tax burden rise.

My take on the "prebate" idea.  The Fair Tax folks claim that the reporting burdens on the public will be alleviated by getting rid of the income tax.  However, under the Fair Tax, applications must be made to qualify and receive the prebate.  This amounts to at least as much reporting or more, so filing income tax forms may turn out to be a nostalgic dream after we get through figuring out the prebate forms.  The Fair Tax prebate is supposedly going to be handed out to every household in the U.S.  In effect, this puts every single household into a government entitlement program.  For those of you who are sick of "big government" and entitlement programs, welcome to hell.  We will all instantly be stuck into a dependency entitlement program.  I don't want government money.  I don't apply for grants.  I didn't go for the minority SBA loan when I owned my business.  You say....but wait, it is your money they are giving you back.   Since when does money laundering by the government work out for the taxpayers?  This does not take into account the administrative costs.  So if you get rid of the IRS, you immediately replace it with tax enforcers in just another bureaucracy to implement the Fair Tax.  All pain, no gain.

Those two sites are only two of many I found that counter the Fair Tax suppositions.  I urge you all to take the time to research this further and then decide if you still think the Fair Tax is all it is cracked up to be.  I have concluded it is not even close to the propaganda.

There are many ponderables and unintended consequences in the Fair Tax.  While proponents insist the Fair Tax covers all contingencies, I maintain it does not.  The biggest argument I am having with proponents is this:  They believe the Fair Tax cannot be manipulated or abused by consumers or by politicians.  I think this is a very naive perspective.  Any tax code implemented by government bureaucracies and politicians is going to be manipulated and abused. We have to have some way to fund the Federal government.  The question remains, what is the most efficient way to fund our government in the most equal way for all citizens?  The Fair Tax does not fit that need.

Get your noodles working and look beyond the sales pitch.  Don't take Neal Boortz at face value.  He has a dog in the fight.  Because he is in the upper wealth tier he stands to gain from the Fair Tax.  Frankly, I find him to be arrogant and condescending, but that is my personal take on him.

I hope this Fair Tax never happens.  And I hope you realize, after researching it, that what you want in tax reform is not in the Fair Tax.   We will find a better way. 

A FEW MORE THOUGHTS ON THE FAIR TAX

When things get really really bad, people are likely to start grasping at straws to fix what is wrong.  The people of the United States are fed up with the Feds.  We are watching elite politicians throw our country down the tubes, spending borrowed money on pay-back schemes, and turning the good people into a debtor nation on a scale unheard of in America.  We're sick of it.  We're mad.  We've had it.  And we have few options to stop this insanity.

So one of the floating ideas is that it must be the tax system that is at fault.  It follows that Congress has too much power to manipulate current tax policies to suit their own power and political agendas, thereby leaving the burden on the backs of the public.  This is true.  But do you fix that with another grand sweeping tax scheme?  If you use the "bad husband" analogy, as someone recently did while rebutting me, I do not recommend replacing a bad husband with a worse husband....or even an equally bad husband. 

Along comes the Fair Tax idea.  This is a worse or equally bad husband wanting to take advantage of an abused wife who is desperate to get out of the marriage to the first bad husband.  Be careful what you wish for, comes to mind. Wikipedia Fair Tax Explanation Here Per this article here is the tax rate described in the Fair Tax Bill:

Tax rate

The sales tax rate, as defined in the legislation for the first year, is 23 percent of the total payment including the tax ($23 of every $100 spent in total—calculated similar to income taxes). This would be equivalent to a 30 percent traditional U.S. sales tax ($23 on top of every $77 spent—$100 total, or $30 on top of every $100 spent—$130 total).^[5] After the first year of implementation, this rate is automatically adjusted annually using a predefined formula reflecting actual federal receipts in the previous fiscal year.

The effective tax rate for any household would be variable due to the fixed monthly tax rebates that are used to "untax" purchases up to the poverty level.^[4] The tax would be levied on all U.S. retail sales for personal consumption on new goods and services. Critics argue that the sales tax rate defined in the legislation would not be revenue neutral (that is, it would collect less for the government than the current tax system), and thus would increase the budget deficit, unless government spending were equally reduced.^[5]

^{Notice that "after the first year of implementation, this rate is automatically adjusted annually using a predefined formula reflecting actual federal receipts in the previous fiscal year."} 

^{So if you think that after passing the Fair Tax Bill you can breathe a sigh of relief that the rates are set in stone and all will be well in the world, realize that the beginning rate is what sales people call a "loss leader."  They get you in the door and then the other shoe drops with higher costs.  It's a "come on."  A "teaser" rate.  And notice that the ACTUAL rate is 30%, not 23%.  The bill is written and supported by politicians, so what would make anyone think this is more "fair" to the tax payers?}  

^{In all likelihood, as critics point out, the first year receipts from this plan will create deficits.  When that happens, what do you think will happen to the rate of taxation?  The Fair Tax Bill calls for annual assessments of the rates, opening the door to increasing the rates to meet the Federal spending sprees.  That 30% will be 50% before you can blink your eyes.  Do you suppose the Federal government will suddenly shrink to fit the receipts?  And if you think that, you must immediately go to have your head examined.  Post haste!}

^{Also in the article is this:} 

Personal services such as health care, legal services, financial services, haircuts, and auto repairs would be subject to the FairTax, as would renting apartments and other real property.^[5] In comparison, the current system taxes income prior to purchasing such personal services. State sales taxes generally exempt certain goods and services in an effort to reduce the tax burden on low-income families. The FairTax would use a monthly "prebate" system instead of the common state exclusions. The FairTax would apply to Internet purchases and would tax retail international purchases (such as a boat or car) that are imported to the United States (collected by the U.S. Customs and Border Protection).^[33]

 ^{So the Fair Tax will open internet sales to a Federal sales tax.  Which, using court precedents, will automatically open the door for State sales taxes on internet sales.  Another consequence of this so-called Fair Tax.}

^{The proponents of the Fair Tax say that their scheme will save us from the horrible ramifications we have been suffering under the income tax system.  They say that the income tax system will be eliminated and that will make you so rich that you will gladly pay all of these sales taxes. Since it is the rich who pay the bulk of the income taxes, who do you think will reap the most benefits from the Fair Tax.  If you said the rich, go to the head of the line.  Of course the Fair Tax people say they can fix that with a "prebate" program by sending rebate checks to every household in America.  This creates yet another entitlement program, in fact the largest in American history which includes the entire population.  Dependency anyone?}  

^{Replacing the income tax with a sales tax on everything you buy is their idea of 'freeing the people' from oppressive taxation.  They say the Fair Tax is just a voluntary tax, that if you don't want to pay the sales taxes you can just not buy anything.  Hmmmm....how does that work for a young family starting out who needs housing and goods for their growing families? By all means, let's punish those who are trying to buy a house, baby clothes, cribs and strollers, etc.  Make them pay more.}   

^{Another fall-out discussed on some sites is the pain the Fair Tax creates for retirees.  Sure those folks aren't buying as much, but if and when they do, they will be paying twice the taxes.  How?  Their incomes were already taxed under the current system.  Then they will be taxed again by paying the Fair Tax sales taxes if they purchase a new retirement home, or anything else.  Whammo....}

^{And, (if I am repeating myself forgive me) the worst part of all of this that I can envision is the Federal government tracking every purchase anyone makes in the United States.  When the Federal government decided last year that all of our health information is to be tracked in a Federal data base, where was the outrage?  Now people are saying let's go with this Fair Tax which wants to track every single purchase you make in your life.  Where is the outrage?  How many weapons are you going to give the government to manipulate you and control your life?} 

^{Bottom line:  The Fair Tax is anything but fair.  It is another convoluted boondoggle created by politicians and egghead economists who are just trying to squeeze more money for the government out of the American public and set up a power structure that Americans cannot over-come.  Why?  Because they can.  This Fair Tax is no better than Obamacare.  It is a misrepresented scheme brought to you by politicians who do not have the interest of the American people at heart....rather they are lying to get their hands on control over the American people.  They would say it is voluntary.  Just like Obama said you could keep your insurance policy.  The lies just keep coming....from BOTH sides of the aisle.}

^{What I purchase is no damn business of the Federal government.  What I buy to eat is no damn business of the Federal government.  What doctor I choose is no damn business of the Federal government.  What I do with my money is no damn business of the Federal government.  If  you want to know where we are headed, watch a movie called "Enemy of the State."}   

^{If you believe in freedom, do not swallow the propaganda of the Fair Tax.  If you want to have your entire life tracked by a Federal data base, you are not an American.}

IS THE "FAIR TAX" ALL IT'S CRACKED UP TO BE?

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.