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The Fair Tax

Wednesday, December 28, 2005

How much did you pay in taxes last year? If you think you got a rebate, you are way off! One of the premises of The FairTax Book is that the current tax system is so confusing and counterproductive that we don't even know what we pay in taxes and that, frankly, the system is broken.

I recently read The FairTax Book (a New York Times best seller) by Congressman John Linder and Radio personality (that is being generous) Neal Boortz.

I will preface this by saying that I have little like for Neal Boortz. I had not heard of him until I moved down here to Salisbury and found out that he is on the local talk station starting at 3:00 p.m. Since this falls in the time frame when I am in the car picking up my children from school (if I am the one getting them on a particular day), I have heard enough of his rudeness and ignorance to not be too impressed. He is unwilling to discuss issues like Abortion and he wrongly believes that Evolution is a Fact. Besides that, he just comes across like a real jerk to me with the way he treats callers and the purposely rude and obnoxious way he tries to make some of his points.

Having said that, I actually found the concept behind The FairTax Book to be something worth considering. The book is a simple and short read, but it basically boils down to replacing the income tax with a consumption tax. Now, before you think "I have heard that before" or before you jump to conclusions, there are some important things to consider regarding this plan, which I will get to momentarily.

For those of you who haven't read the book, a quick overview may be helpful here. The book consists of 16 small chapters (180 pages) and is written on a very simple level. They have a web-site which pre-dates the book and whose goal it is to get the Fair Tax initiated as law.

The Chapter titles give a good summary of what to expect as you read the book.

1 - The History of Our Income Tax
2 - ... Then Came Withholding
3 - The Myth of Corporate Taxes
4 - Our Current Tax Code - The Cost of Compliance
5 - The Embedded Costs of Our Tax Code
6 - Bringing American Business Back Home
7 - The Birth of the FairTax
8 - The FairTax Explained
9 - The FairTax Prebate: The Key to Fairness
10 - Underground and Offshore Economy ... Taxed at Last
11 - So We've Done It. What Happens to Our Economy?
12 - The Opposition - Where Will It Come From?
13 - Social Security and Medicare Under the FairTax
14 - Income Tax Outrages
15 - Questions and Objections
16 - Okay. Great Idea. So What Do We Do Now?

The first six chapters essentially set the table by discussing the current tax code and the problems of the current system. Particularly significant in this section is 1) a reminder of the subtle effect of withholding - it causes the typical taxpayer to be unaware of how much we are actually being taxed, 2) a reminder of the truth about corporate taxes - corporations don't really pay taxes, they just pass on the cost of the taxes to the consumers and 3) the high cost of compliance with the current system - an estimated $194 Billion in 2002.

The FairTax itself is then introduced, which is basically a straight consumption tax of 23% on all retail goods and services. There are a couple of key things that must be understood about this, however.

1. The book suggests that retail prices would essentially be remaining about the same once the FairTax is instituted since we currently are paying about 22% in embedded taxes for goods and 25% in embedded taxes for services already. In other words, we eliminate all the corporate taxes and taxes along the way to reaching a retail sale and the cost of the product is 22% less. Then we add the 23% onto it with a pretty close to zero-sum difference in cost we are paying.

2. We would have more money to pay with, since none of our earnings is taxed, only our consumption. Buy more things, pay more in taxes.

3. The fact that this tax is applied to retail purchases means that everything is only taxed once. No tax is paid on used items, etc.

4. Without the heavy corporate tax liability, there is no tax-advantage for U.S. companies to move off shore, keeping jobs at home.

5. This is just a change in the tax system, not in the amount of tax revenue. The rate has been determined by calculating in order to recieve the same amount of tax revenue as currently generated. The battle over how much is paid in taxes is a separate battle.

Now, you ask, WHAT ABOUT THE POOR? For any discussion that deals with taxes must come down to that. Well, the FairTax people have actually thought of that issue and have an answer for it - the FairTax Prebate. Essentially they take the figures that the government already figures to determine poverty levels, etc. and give everybody in America a check each month in the amount to cover what they should pay in taxes if they are going to buy enough to live during that month. So, for example, according to 2005 poverty figures, a married couple without children would receive a prebate for 366.83 a month - 1,595 x .23 - that would pay for their taxes on their basic living expenses each month.

Overall, I think the idea is a pretty good idea. While there are some similarities between this idea and the VAT of Europe, they are not the same (the VAT is added at various steps, the FairTax is only added at the retail level). I am not an economist (and I don't even play one on TV), but I think the idea is at least worth pursuing and refining as necessary.

Do I have any concerns? Yes.

1. The book paints a picture of all these American business coming back. Will that really happen? While some may be encouraged to come back, I don't think that taxes are the only thing that is driving business off shore. Eliminating the corporate taxes will place American made products on a better footing for sure, but less regulation, less litigation, and a cheap and eager work force also contribute to companies moving and these are not addressed by the plan.

2. After talking about the way in which we don't realize how much we pay in taxes because of withholding, it seems inconsistent to then place this tax imbedded into the retail price. In other words, if a newspaper actually only cost $0.77, the price would be listed as $1.00 with the 23 cents included before you see the price (state sales tax, etc. would then be added on as done currently in most states). Why not show the price as 77 cents and make people more aware of the 23 cents that represents the tax (and thus, hopefully, encourage fiscal restraint and an eventual lowering of the rate).

I am sure there are more, but those are two of the top of my head.

Just my thoughts,


File under Culture_War


Andy Efting said...


I agree with you about Neal Boortz. His show originates from WSB here in Atlanta. I can't stand listening to him but his blog is normally worth reading.

Aaron S said...

Well, if you support the FairTax, tell your rep to get on HR 25 as a co-sponsor!

me again said...

Also, check out the FairTax treatment of churches:

Don said...

Hi Frank

If you really want to get people riled up, then this is the tax for you. While economists insist that a tax on consumption is the best sort of tax, the fact is that an in your face tax on goods and services would quickly become the most hated government initiative of all time.

In Canada, we have this tax. The government that put it in place was obliterated in the next election. The tax, however, remains. (Of course, our government put the tax on without eliminating the income taxes, so it isn't the idea fully implemented.) The fact remains, though, that every time I buy something, I am reminded of the government sticking its hand in my pocket. We have the federal GST at 7% and provincial sales tax at 7%, so anything we buy you add 14% on the top. This is not hidden in the price of most items and it is the most galling outrage in the minds of our people.

If your income is low enough, you do get GST "rebate" cheques in the mail. These are just calculated on a fixed rate, not on your actual spending. They hardly put a dent in the pain. Furthermore, the cost of administering the rebates is another factor.

Personally, I would favor a flat income tax after a certain tax free personal exemption. Business expenses should also be deductible, but most other deductions should be eliminated. While the sales tax thing pleases some economists, it is politically galling and places too big a burden on those least able to bear it, the poor.

I've had more than enough of it up here. I think it would be a huge mistake for the US, not to mention political suicide.

Don Johnson
Jer 33.3

Frank Sansone said...

Wow, Don. Thanks for the feedback. It is good to hear of your perspective on this. As I said, I have not called for its full implementation, yet, but I did say "I think the idea is at least worth pursuing and refining as necessary" and did list a couple of concerns, but I am pretty sure it is not the same thing as what you guys got stuck with up there.

I returned the book to the library earlier today (yes, I am that cheap) so I don't still have it on hand. I do know, however, that they made a major point about the fact that this is not the same thing that you guys got up there north of the border and not the VAT of Europe.

One of the major things that is different, which you already alluded to, is that this bill/tax plan requires the abolition of the income tax as part of the process. They are trying to be careful that they don't end up with the same mistake - a consumption tax AND an income tax.

A second thing that is different (I think - I don't know enough about Canadian taxes to be sure of this) is that this tax is only applied at the RETAIL end of things and that there is no corporate taxes. This brings down the cost of goods and services by getting rid of the internal taxes and tax expenses that we are already paying (including the compliance costs of the current system).

Ironically, I like the fact time that "every time I buy something, I am reminded of the government sticking its hand in my pocket." In fact, that is, in part, the reasoning of my second concern. When the process of collecting taxes is hidden and relatively painless (like the current U.S. system), it is easier to ignore what the government is doing with our money. When we are constantly reminded, I would hope that it would motivate people to say, "Hey, don't waste our money like that."

As far as the cost of administrating the "prebate" checkes, the book points out that the U.S. government is already very involved in the check-writing business (with S.S., etc.) and claims that the overall cost of this part would not be that big of a deal (again, I don't have the book or figures with me anymore).

I am not opposed to the concept of a flat tax, btw, although I think there are issues there as well.

I agree with you, btw, that this is a politically dangerous position. Knowing the way that certain groups like to use the tax code for demogoguery and to punish and reward groups, the political fall-out could be interesting.


Don said...

Hi Frank

The application only at the retail end of the product stream is the way the GST works here. The theory suggests that this will reduce the cost of goods sold, but in fact, the practice does nothing to achieve that end in my opinion. At each step in the process, corporations have to keep track of GST paid out on any item (because who knows whether something is an end product or part of a product?). For example, I am making widgets out of copper, zinc, and balsa wood. I buy my copper from a supplier, he charges me GST. Perhaps I'm an end user, so he has to charge me GST. The same for my zinc and balsa wood. So I keep track of my GST on each "input" product, then I charge GST to my wholesaler of widgets. I send in a form to the government claiming my inputs and declaring my outputs, along with a cheque (note Cdn spelling!!!) for the difference. My wholesaler does the same, charging GST to the retailer, claiming inputs, and forwarding taxes for the balance of the outputs. And the same thing happens to the retailer.

Now think about the cost of each entity in the chain keeping track of inputs and outputs and remitting the balance. Does this look like something that will reduce the cost of goods sold? Not likely!

In addition, there is a drag on the economy for the government bureaucracy in place to keep track of all these GST returns.

I agree that a GST only and no income tax system might be a better system over all, but it is so unlikely that it could be implemented politically that I don't support it. I support real reform of the income tax system and of course fiscally conservative government administration to hopefully stem the spending bloat.

Don Johnson
Jer 33.3

Frank Sansone said...


I think you have definitely brought up a weakness here - namely, what constitutes retail and how do we know that a particular level is really the retail level.

For instance, if I am making some type of toy that I decide will be sold with the batteries included, how does the battery seller know that I am not purchasing the batteries as a retail product rather than as something to be included in a retail product.

Aaron S., if you are still around here, do you know the answer for this question? The book paints this as a pretty painless process, but what Don has brought up makes it look not quite so painless.