The Truth About The Fair Tax

The Flat Tax Is Not Flat and the FairTax Is Not Fair

This talk was given at the 2009 Austrian Scholars Conference at the Mises Institute. It is available as an MP3 audio download.

Our current income tax system, inaugurated in 1913 with the adoption of the 16th Amendment, began with a 1 percent tax on taxable income above $3,000 ($4,000 for married couples). A series of surcharges of up to 6 percent were applied to higher incomes, with the maximum rate being 7 percent on taxable income over $500,000. Less than 0.5 percent of the population ended up paying income tax.
From these humble beginnings, the income tax soon blossomed, thanks to World War I, into a tax with a minimum rate that doubled and a maximum rate that reached 77 percent on income of over $1 million. The rates did not fall significantly until 1925. In the middle of the Great Depression, the top rate rose to 79 percent. During World War II, the tax rate for those in the highest income bracket reached an astounding 94 percent. The Internal Revenue Code of 1954 resulted in 24 brackets with rates ranging from 20 to 91 percent. The top rate remained at 91 percent until 1964. Under the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986, the top marginal tax rates were lowered to 50 and 28 percent respectively. The Economic Growth and Tax Relief Reconciliation Act of 2001 established the current tax brackets of 10, 15, 25, 28, 33, and 35 percent.

There is no question that the federal tax code is too long, too complex, too intrusive, too confusing, and too inequitable. The members of Congress responsible for the tax code would not even disagree. As a consequence, cries for tax reform can always be heard from every quarter – and especially around election time. There are even organizations dedicated solely to tax reform, such as Americans for Tax Reform, Reform AMT, Citizens for Tax Justice, and Americans for Fair Taxation. Since the federal government is always looking to increase its revenue while at the same time making Americans feel better about paying their taxes, it has also climbed aboard the tax-reform bus, most recently in 2005 when President Bush formed the President’s Advisory Panel on Federal Tax Reform.
I am sorry to say that principled libertarians who welcome gradualism toward the goal of substantially reducing or abolishing the income tax while at the same time shunning any compromise of the principle that taxation is theft – like those friends and supporters of the Mises Institute – are in the minority.
Left-liberals, who want to use the tax code for their social engineering and income redistribution schemes, are not opposed to taxes on principle. Barack Obama ran campaign commercials openly boasting that no taxes would be raised on any American making under $250,000. This, of course, means that he intends to fleece any American making over this amount.
Conservatives are not generally opposed to taxes on principle either. They have no problem taxing the American people to fund bloated defense budgets, US military adventures around the world, the CIA, FBI, and anything related to law enforcement or homeland security, faith-based welfare programs, educational vouchers, abstinence-education programs, the war on drugs, and various conservative pork projects.
But what’s up with libertarians?
Brink Lindsey, of the Cato Institute, supposedly a libertarian think tank, wrote in an online article for the New Republic that also appeared on the Cato website:

Tax reform also offers the possibility of win-win bargains. The basic idea is simple: Shift taxes away from things we want more of and onto things we want less of. Specifically, cut taxes on savings and investment, cut payroll taxes on labor, and make up the shortfall with increased taxation of consumption. Go ahead, tax the rich, but don’t do it when they’re being productive. Tax them instead when they’re splurging – by capping the deductibility of home-mortgage interest and tax incentives for purchasing health insurance. And tax everybody’s energy consumption. All taxes impose costs on the economy, but at least energy taxes carry the silver lining of encouraging conservation – plus, because such taxes exert downward pressure on world oil prices, foreign oil monopolies would wind up getting stuck with part of the bill.

Shift taxes? Increase taxes? Tax the rich? Impose new taxes? Use the tax code to influence public policy? What kind of libertarian tax reform plan is this? How about reduce, cut, eliminate, and abolish taxes? Not deductions, not exemptions, not credits, not shelters, not loopholes – taxes.
Two specific tax reform plans that some libertarians have fallen for are the Flat Tax and the FairTax. Both plans promise to invigorate the economy, increase employment, and raise everyone’s standard of living. Neither one is true to its name; neither one is an incremental step toward overall lower taxes. Both are fraught with problems and contradictions; both are revenue-neutral plans that would fund the federal government at the same obscene level that it is now.
The Flat Tax is an income tax. It is the tax-reform idea that has been around the longest. First proposed by economist Milton Friedman in 1962, the flat tax entered the mainstream through a 1981 Wall Street Journal article by Hoover Institution economists Robert Hall and Alvin Rabushka called “A Proposal to Simplify Our Tax System.” This article grew into a 1985 book published by the Hoover Institution Press called The Flat Tax. A second edition was published in 1995, and an “updated revised edition” in 2007 that can hardly be called either. Aside from this book, the Flat Tax gained national prominence when House Majority Leader Dick Armey (R-TX) pushed the idea of a Flat Tax after the Republicans gained control of Congress during the Clinton administration. A few bills based on the Hall-Rabushka plan were then introduced in Congress, but came to nothing. Other incarnations of the Flat Tax were pushed by both Democrats and Republicans. Another incarnation of the Flat Tax is that of former Republican presidential candidate Steve Forbes. His 2005 book is called Flat Tax Revolution.
Under a Flat Tax, everyone’s income is taxed at the same rate (Forbes says 17 percent; Hall and Rabushka say 19 percent). And not only are there no tax brackets, there are generally no tax deductions other than personal and dependent allowances. Social Security and Medicare taxes would remain as they are now. The appeal of the Flat Tax is simplicity. You can do your taxes on a postcard-sized form says Forbes. Goodbye compliance costs.
The problem with the Flat Tax is a simple one: the Flat Tax is not flat. And furthermore, no one actually pays 17 or 19 percent. In fact, taxpayers don’t even pay the same percentage. The Flat Tax is actually a highly progressive tax. It is more progressive than our current system, and effectively has more tax brackets. Who said progressivity requires graduated tax rates? Under the Forbes plan, a family of four would pay no federal income tax on its first $46,165 of income; a family of six would owe nothing until its income exceeded $65,930. And those figures are sure to have increased since they were first proposed back in 2005. But not only would many families pay no income tax, they still might get a refund anyway because the Forbes plan includes a refundable child credit and earned-income credit.
If you want an example of a real flat tax, look no further than the 2.9 percent Medicare tax. Everyone pays 2.9 percent (split between employer and employee), on every dollar earned, no matter one’s marital status, number of dependents, or income level. I am in favor of neither the tax nor Medicare, but if you are looking for a genuine flat tax, then the Medicare tax is your tax.
The FairTax is a consumption tax. It is the most radical tax reform plan, bar none. It also has the most vocal and intolerant proponents. The FairTax is the brainchild of three businessmen concerned about the crippling effects on the economy of the current federal tax code. After adopting the name “FairTax” for their tax-reform plan, they formed Americans for Fair Taxation in 1997 and enlisted Representative John Linder (R-GA) to introduce FairTax legislation in Congress. Linder first sponsored the “Fair Tax Act” in the House in July of 1999, and has reintroduced a FairTax bill at the beginning of every term of Congress since then, including the current one.
Although Linder’s FairTax bill languishes in the House Committee on Ways and Means each time it is introduced, it has always had a number of cosponsors, including Tom Tancredo and Duncan Hunter – but not Ron Paul, the acknowledged taxpayers’ best friend. It also has its share of supporters outside of Congress, including Mike Huckabee and Neal Boortz. The latter is the author, with Congressman Linder, of The FairTax Book, published in 2005. A paperback version of The FairTax Book was issued in 2006 with some notable changes to correct false statements made in the original hardcover release of the book. Boortz and Linder also published a sequel, FairTax: The Truth, Answering the Critics, just last year.
I am getting weary of writing about the FairTax. Every time I think I’ve written my last article on the subject, some new opportunity presents itself and I take the bait, as I am doing right now. I don’t consider myself to be an expert on the FairTax. Although the idea of the FairTax has been around since 1997, I had never even heard of the FairTax until I wrote an article for the Mises Institute in 2005 on the evils of the withholding tax. It was only after my inbox was bombarded with mail from FairTaxers trying to sell me on the FairTax that I looked into it. If you have read any of my articles on the subject you know that I didn’t like what I saw.
The FairTax is a national retail sales tax of 30 percent on the final sale of all new goods and services. All new goods – from cars and houses to prescription drugs and food; and all services – from operations and funerals to rent and haircuts. Because it would replace the personal income tax, there would also no longer be withholding tax, capital-gains tax, the alternative-minimum tax, or taxes on interest and dividends. Even your gambling winnings would no longer be taxed. Of course, there would be no tax deductions either. The FairTax would likewise eliminate corporate income tax, estate tax, gift tax, unemployment tax, Social Security tax, and Medicare tax. The appeal is obvious: no more complex tax code, no more taxes withheld from paychecks, no more 1040 forms, no more record keeping, no more compliance costs, no more IRS audits. And if that weren’t enough, the FairTax also includes a monthly rebate to offset the taxes paid on basic necessities.
But for a plan that promises such a utopia, the problems with the FairTax are legion. The stated rate of the FairTax is too low to achieve the promised revenue neutrality. The amount by which it is claimed that prices would fall under a FairTax system has been grossly exaggerated. There is nothing to prevent an income tax from being reinstituted, giving us a two-headed hydra of an income tax and a consumption tax. And not only would state and local governments have to pay a national sales tax to the federal government, the federal government would have to pay sales taxes to itself on all its new purchases. Since I have already written extensively about the problems with the FairTax, I will stop with its problems here and focus on why the FairTax, like the Flat Tax, is not true to its name.
So why is the FairTax not fair? Well, first of all, what’s fair about a consumption tax? Why is it that people who rightly criticize the income tax are so quick to accept a national sales tax on consumption? The FairTax perpetuates the fallacy that the government has a right to confiscate a percentage of the value of each new good sold and every service rendered. This is no different than claiming that the government has a right to the portion of each American’s income. As Murray Rothbard explained,

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.

The FairTax is also not fair because of the rate. What is fair about the government taking a 30 percent cut on every transaction? I know the FairTaxers claim that the rate is only 23 percent, but when I buy an item for $1.00 and end up paying $1.30, the basic math I learned in elementary school tells me that I paid a tax rate of 30 percent. But regardless of whether the rate is 23 or 30 percent, why should the bloated, pork-laden leviathan we call the US government get anywhere near this much of our income?
And finally, maintaining that the FairTax is a “fair” tax system, or one that is “fairer” than our current system, is highly subjective. Boortz himself even acknowledges this in his newest book on the FairTax: “Whether a tax system is ‘fair’ is a complicated economic and philosophical question, one that inevitably involves oversimplification and subjective judgment.”
If you want an example of a real fair tax, then consider the equal tax. I first saw this proposed by Joe Sobran. Let every American pay the same amount – no deductions, no exemptions, and no exceptions. Sobran reasons,

The billionaire doesn’t use the police or the streets any more than the pauper. Maybe less, since he presumably hires private guards to protect him and has less need of the police, and he is less likely to drive long distances than to fly.

Now, I wouldn’t like paying this tax any more than I like paying income tax, but it is certainly a fair tax.
But not only is the Flat Tax not flat and the FairTax not fair, the Flat Tax is not fair and the FairTax is not flat. Let me repeat that: not only is the Flat Tax not flat and the FairTax not fair, the Flat Tax is not fair and the FairTax is not flat.
According to Hall and Rabushka, the flat-tax system they propose is both “fair and progressive – the poor pay no tax, and the amount that a family pays rises with income.” They say their Flat Tax is fair because it is based on the principle that “income should be taxed exactly once, as close as possible to its source.”
But how can a system that punishes success and fosters class envy be considered “fair”? And why should it be considered “fair” that income is taxed “exactly once, as close as possible to its source”? Just because every American would pay the same rate under the Flat Tax doesn’t necessarily make it a fair tax. Making the tax code less progressive is not enough. As Rothbard again explains,

The flat-tax movement is part of a process by which the government and its allies have been able to split and deflect the tax protest movement from trying to lower the taxes of everyone, into trying to force everyone into paying some arbitrarily defined “fair share.”

It is no consolation to a wealthy person who is stripped of his money by the federal government that a poorer person is likewise relieved of his money by the same percentage.
One of the reasons FairTax supporters claim that their tax is fair is that it has a flat rate that everyone would pay. But the FairTax is about as flat as it is fair. I already mentioned that the FairTax includes a monthly rebate to offset the taxes paid on basic necessities. This “prebate” is based on the government poverty level and family size. Thus, although everyone would pay the same rate under the FairTax, the end result would be that some Americans would pay no taxes at all, some would have most of their taxes offset, and some would get more money back than they paid in taxes. This makes the FairTax an income redistribution scheme under the guise of tax reform.
Neither the Flat Tax nor the FairTax is a step toward the libertarian goal of substantially reducing or abolishing the income tax; neither tax-reform plan is an incremental step toward lower overall taxes. They could be, however, if their promoters recognized that the problem is taxation itself, not the tax code. All they have done is shift the debate from how much of the wealth of the American people the federal government confiscates to the manner in which the wealth is confiscated.
We don’t need compassionate tax reform that makes people feel better about paying their taxes; we need radical tax reform that reduces, cuts, eliminates, and abolishes taxes without replacing them with other taxes. As I have quoted Congressman Ron Paul on many occasions, “The real issue is total spending by government, not tax reform.”
With the federal budget fast approaching $4 trillion, I can’t think of anything that is more of a waste of time than quibbling about how the government can make the tax rates flatter or fairer while it robs us of trillions of dollars. The only fair tax is a tax low enough to flatten skyrocketing congressional spending. Like educational vouchers and the privatization of Social Security, the Flat Tax and the FairTax are gimmicks that libertarians should avoid.
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24 thoughts on “The Truth About The Fair Tax

  1. I would like nothing more than for there to suddenly be no more federal taxes of any kind; which Laurence Vance believes is the only solution to tax reform. I agree, no more taxes would be the fairest tax of all. But, since this is not realistic and will never happen, what would be the fairest tax for all; fair meaning everyone being treated equally. A progressive income tax is by far the most unfair of all. What if instead of being charged on how much electricity you used your bill was based on your income; and what if the greater your income the more you would pay per kilowatt hour? Doesn’t it make more sense to pay for what you use? Why should our tax system be any different? Since there is no way to eliminate all taxes, the FairTax is the fairest of all. You pay a tax on what you use. Everyone pays the same and the more use the more you pay.

    One other thing, I like the transparency of the FairTax. If it takes a tax rate of 30%, or 50% to be revenue neutral, we will see just how much the Federal government costs us.
    This transparency will put more pressure on the reduction of government spending.

  2. Thanks for the comment Steve. I agree with you that compared to our current progressive income based tax the FairTax is better. If I had to choose between the Fairtax and what we have today I would choose FairTax all day long.

    Although for me, I will spend my energy trying to wake people up about the immorality of taxation and the reckless spending of the behemoth known as the US Federal Government.

  3. I need Steve to explain just what is so transparent about the Fairtax, when 15% of the needed federal revenue would be hidden in higher State and Local government taxes? And I would argue that under current tax law, I know how much federal tax I paid each year just by reading my tax return. How on earth will I ever know what my sales taxes paid were in a given year? I’m just not anal enough to keep shoe boxes of receipts, receipts which don’t even show the actual sales tax rate added by retail businesses!!!

    As for the fairness arguments, what is fair about the federal government taxing my hard earned nest egg when spent? What is fair about creating the largest cash grant entitlement plan which Fairtax advocates call a prebate? We sure can’t afford to put another $600 billion on autopilot. Entitlements are already squeezing out discretionary spending, including Defense discretionary.

    Federal taxation of State and Local government consumption will likely be found to be unconstitutional under the long held Supreme Court doctrine of intergovernmental tax immunity. Stand by for a higher revenue neutral rate.

    There is much else wrong with the Fairtax scheme, but fortunately, HR25 is going nowhere for the forseeable future, imho!

  4. Utchman3 states ~ “I need Steve to explain just what is so transparent about the Fairtax.”

    What makes the FairTax transparent is the fact that for every dollar I spend 23-cents goes to the government. How can it be anymore transparent than that? My 7-year old granddaughter can figure that one out.

    Utchman3 states ~ “And I would argue that under current tax law, I know how much federal tax I paid each year just by reading my tax return.”

    What about all the income, payroll, and corporate taxes that are passed on in everything you buy?

    Utchman3 states ~ “How on earth will I ever know what my sales taxes paid were in a given year? I’m just not anal enough to keep shoe boxes of receipts, receipts which don’t even show the actual sales tax rate added by retail businesses!!!”

    Unlike our current system, there will no longer be a need to keep boxes of receipts. If you have read the bill, you would know that every sales slip will show the consumption tax amount. Besides if the rate is 23%, why would you need to see that rate on your bill? If you really need to know what your annual tax amount is, you can take the total of your savings, cash and checking account at the beginning of the year, add your income for the year, deduct your prebate for the year, deduct your savings, cash and checking account at the end of the year and multiply that by 23%. That will be easier than most current tax returns. But OH! Guess what? No more tax returns.

    Utchman3 states ~ “As for the fairness arguments, what is fair about the federal government taxing my hard earned nest egg when spent?”

    I am 65 years old and yes, I will be paying tax on what I spend of my already taxed nest egg; a nest egg that shouldn’t have been taxed in the first place and would not have been taxed under the FairTax. But I am more concerned for my children and grandchildren’s nest eggs. With the elimination of income and capital gains tax, they will be able to invest whatever way they wish with before tax dollars. Under our current system, your save with after tax dollars, and you only receive tax brakes with certain types of investment. Tell me which is the fairest way to treat your savings and investments?

    Utchman3 states ~ “What is fair about creating the largest cash grant entitlement plan which Fairtax advocates call a prebate? We sure can’t afford to put another $600 billion on autopilot. Entitlements are already squeezing out discretionary spending, including Defense discretionary.”

    The FairTax is designed to be revenue neutral, so there will not be entitlements of an additional $600 billion. The prebate is a simple way to eliminate the tax on necessity items. Only US citizens will receive the prebate. This will force illegals to pay a tax on every new purchase, even necessity items.

    Utchman3 states ~ “There is much else wrong with the Fairtax scheme, but fortunately, HR25 is going nowhere for the forseeable future, imho!”

    Let’s pray you are wrong. Our country can’t survive much longer under our old broken down 60,000 pages of garbage.

  5. Steve,

    One comment in reply- it’s late. You have obviously been sucked in by the Fairtax propaganda that the prebate is simply a tax refund paid in advance. Nonsense!!! It is only a tax refund if you choose to think about it that way. In fact, it is a cash grant entitlement no different from any other federal welfare payment, and will be scored that way by OMB. I’m amazed that Libertarians would support such a welfare scheme. As proof, a tax refund doesn’t increase your gross income by one thin dime. The prebate increases your monthly income, and can be spent and taxed, or saved as your circumstances dictate. Calling the prebate a tax refund is probably one of the most disingenuous claims by Fairtax advocates, and it is just not true! Don’t believe me?–just look in your checkbook each month. And a $600 billion annual entitlement is just what our federal budget doesn’t need at this time.

  6. A couple comments to Laurence M. Vance’s analysis of the FairTax.

    First, the current system is not progressive by any stretch of the imagination. All the payroll-related taxes are taxed on a poor person’s first dollar. When that person gets another job to help make ends meet, he is taxed again. It is the prebate of the FairTax that eliminates this phenomenon. It totally un-taxes not only the poor but EVERYONE up to the poverty level (fair), actually helping them to rise up the socioeconomic ladder and realize the American dream. What makes the FairTax a truly progressive tax is that the more one spends, like on yachts and private jets, the more ‘taxes’ will be paid.

    Also, and this is consequence is often overlooked, EVERYONE who is in this country enjoying what there is to enjoy about it, WILL CONTRIBUTE to funding the government when they buy anything new or purchase a service. This includes foreign tourists, the foreign diplomats in the UN and elsewhere, and all who are in the country illegally. Including those in the underground economy. The tax base is greatly expanded and is not limited to just legal citizens that legitimately work. (fair) Conversely, if you don’t want to pay any tax, simply don’t buy anything new. Under the FairTax, the people have control over what, how, and when they will pay their taxes, not the social engineers in Washington. Transparency in taxation will return. The amount you pay will be on your receipt instead of being stuffed into ‘deductions’ on your paycheck as it is now.

    The question of the ethics of making people pay taxes is a philosophical one, but in reality, and as corrupt as it is, it does take money to fund the government to do what is necessary to keep us safe and sound. It is up to us to keep Washington in check on how they spend that money. The FairTax does not have any bearing on how the tax revenue is spent. It is strictly a plan to fund the federal government. And instead of punishing success, it actually rewards it. The FairTax is fundamentally, economically, stimulative. The term ‘take-home pay,’ coined by the creation of the current taxing system, becomes history. Under the FairTax, your gross pay is your take-home pay. YOU get what YOU make, and YOU spend it as YOU see fit. (fair)

  7. Other consequences of the FairTax which are also overlooked, is the effect it would have on the estimated $13 trillion in business, each year, that has fled this country to escape the tax code. That business would come back. That would not happen under a flat tax. By the elimination of all the taxes on business and employment that you accurately list above, the US would become a tax haven to the world. And foreign business that don’t have a business unit in this country would have a powerful incentive to come. And 90% of those surveyed on that proposition say they would setup a business unit in the US if the FairTax was in place. The job creation and economic development that would result would go a long way toward bringing the country back towards economic solvency, all without any borrowing from China or anyone else.

    Also, the ‘two-headed hydra’ that you mention will not happen under the FairTax. That’s because it calls for the repeal of the 16th Amendment so the political class will not be allowed to double dip. Were that to be the case, the FairTax would expire and we would return to the same abortion of a tax code that we have now.

    There are no exemptions for government under the FairTax. They operate the same as everyone else and the same as every other business. There are no taxes on business-to-business transactions. That applies to government business the same as it applies to normal capitalistic businesses. (fair)

    Lastly, and this is no small point, the research that went into the FairTax came up with a 23% tax that would be revenue neutral, not 30%, and it is inclusive, not exclusive like in your example. Here’s where it gets confusing and, easily demagogued. To be factually accurate, you have to know the difference. Otherwise you’ll be comparing apples to oranges.

    The inclusive vs exclusive debate becomes easier to understand when you realize that companies do not pay taxes. The ultimate consumer is the one that pays the taxes. We currently pay all the taxes that producers must pay in terms of all the taxes that would be eliminated under the FairTax that you correctly listed above. The over $20 million of research that went into developing an alternative federal revenue generating system determined that, on average, all of those above-mentioned taxes amount to 22% of the price of the goods and services we buy. Those are embedded taxes, inclusive. Under the FairTax, those taxes go away. If nothing else happens, the prices would drop by (on average) 22%. Under the FairTax, those are replaced by a 23% tax, which would be inclusive to the price of the item. Not added to it as though the 22% embedded tax was still there, ie. exclusive. Competition in the free market would ensure that this would be the end result.

  8. Dutchman3,

    If the prebate were just another welfare scheme, only the poor would receive the prebate. The fact that every legal citizen will receive the same prebate eliminates this theory. By eliminating the prebate you could lower the tax rate or you could eliminate the tax on necessity items. Since illegals spend most of their income on necessity items, they would come out ahead with either scenario. I like the fact that the prebate makes it tougher on them.

  9. Steve,

    Perhaps welfare was a poor choice of words, but I don’t know what else to call a federal government monthly check? Where is it written on the clay tablets that everyone, rich or poor, should not have to pay a sales tax on spending up to the AFFT defined poverty level? ( Are you aware that the prebate is not based on the HHS official poverty level as claimed by Fairtaxers, but is based on an AFFT variation that eliminates the so called “marriage penalty? For instance, the HHS poverty level for a family of four is around $22,000, while the AFFT poverty level for the same family is over $28,000. That simply means that the cost of the prebate is 25% higher than it needs to be. What’s going on there?)

    OMB will score the prebate as an entitlement, period. There are only three major buckets in the federal government budget: entitlements, interest on the federal debt, and discretionary spending. Only discretionary spending gets considered each year by Congress. Entitlements are basically on auto pilot and also include an automatic COLA. There is a budgetary train wreck approaching where entitlements and interest on the debt will totally squeeze out any discretionary spending including Defense discretionary. Adding a $600 billion Fairtax entitlement will greatly accelerate the date of the train wreck. Stay tuned!

    After working on Capitol Hill for ten years, I would suggest that the prebate would be one of the first features to be eliminated should the Revenue Subcommittee ever take up HR25. Protection from what is clearly a regressive sales tax could be provided for the poor by using a targeted prebate or just retaining the EITC, a highly popular program. Either would cost only 10% of the $600 billion Fairtax prebate.

  10. Ross,

    (1) Choosing how much tax to pay is harder than you think! There are no used services which make up roughly 50% of the typical family budget. There are no used groceries, no used restaurant meals, no used gas or heating oil, nothing used at Wal-Mart, etc. etc. Buying used stuff would be quite limited. More importantly, buying used will not save any more dollars than buying used today. Think about it as the “embedded cost of the Fairtax”. Buying a car that costs the dealer $30,000 would mean the drive out price would be $39,000. Do you really think that new car buyers are going to just forget about the embedded Fairtax of $9,000 when they resell the car? All subsequent buyers of a good will share in the original tax cost. If you don’t buy used stuff today, there would be no reason to buy used stuff under the Fairtax unless you hate the federal government so much you would be willing to reduce your standard of living just to avoid payin into the federal treasury. You are welcome to buy your underwear at Goodwill, but that isn’t going to happen very frequently.

    (2) There is not one shred of data to support your claim of $13 trillion in US owned assets located offshore to avoid federal taxes. The best I can come up with is a 2005 Tax Justice Network white paper entitled “The Price of Offshore”, which indicates that there is indeed $11.5 trillion in offshore assets, but they are owned by high net worth individuals from all over the world. There is $1.6 trillion in offshore assets owned by wealthy North Americans, but there are 23 sovereign nations in North America. My best guess is that US owned offshore assets amount to way less that $700 billion. And, in 2004, Congress granted amnesty to American owners of offshore holdings if they would return the assets to the US. Anyone who wanted to come back home probably already did. Where is the amnesty feature in HR25?

    For foreign businesses, it isn’t likely that they would move to the US either. Check out HR25, Section 905 which lays on a 23% tax (or whatever trade treaties allow) on revenue generated in the US by foreign owned businesses.

    (3) HR25 does absolutely nothing to repeal the 16th Amendment. And, are you aware that the nations Governors, through the National Governors Association, are all opposed to any kind of national sales tax? Repeal of the 16th Amendment will prove very difficult if not impossible!

    (4) I agree that there is no difference in the 23/30% revenue collected. But, dom you know that all retail merchants will have to add 30% to their costs in order to arrive at a 23% inclusive rate? Simple math would show you that adding 23% to costs would result in a 19% inclusive rate, not 23%. The second thing to be changed in HR25 by the Revenue Subcommittee staff would be to describe the sales tax in exclusive terms. That is what sales taxes generally are, and legislation is not the place for confusing marketing ploys. In sales tax terms that all Americans understand, the rate is 30%.

    (5) The embedded cost claims are among the most misunderstood Fairtax claims. Dr Dale Jorgenson did the embedded cost study for AFFT back in 1998, and he concluded that the embedded costs of the income tax system average 22% across 35 industry segments. But he subsequently confirmed that he assumed that workers would be paid only their current net after taxes in order for businesses to achieve the 22% cost reductions. That isn’t going to happen for fairness and contractual reasons. Based on the 2007 CBO revenue report to Congress, with retail sales of $9.5 trillion retail businesses paid $291 billion in income taxes or 3% of sales, businesses share of FICA was $435 billion or 4.5%, and business compliance costs were $265 billion or 2.5% of sales. The best we can expect from business cost reductions by eliminating business taxes would be 10%, and retail prices will rise by 17%. (1.00 x .9 x 1.30 = 1.17)

  11. You can call the prebate an entitlement or whatever you wish but the bottom line it doesen’t cost the government one dime. You state that you worked on capital hill for 10-years; if you are the typical hill topper, I can see why Washington can never get anything accomplished. Come on, “targeted prebates”! Right away you are trying to complicate things. That is the problem with our current system, every year hill toppers come up with more targeted rules which has resulted in a 60,000 page mess. And as for the EITC this means filling another form and it is based on income. Most poor families don’t even know what the EITC is. The prebate treats everyone the same the EITC does not.

  12. What if the FairTax was our current tax system and there was a bill that would replace the FairTax with a complicated system incorporating an income tax, a payroll tax, a corporate tax, a capital gains tax, a gift tax and an estate tax? Do you believe there would be a grassroots effort to push for this change?

    Would you be in favor of this bill if:

    (1) On April 15th of each year, you will be required to file a complicated income tax return. A watch dog organization known as the IRS will be formed to audit these returns. If you fail to file a return or fail to include all income or include fraudulent deduction, you may be subject to fines, interest or even imprisonment. To support your figures, you will now be required to keep records of all your financial transactions.

    (2) There will be many deductions that only certain people will be able to take advantage of and there will be loopholes which will protect mainly wealthy Americans. Taxpayers who aren’t able to take advantage of these loopholes will be required to make up the difference in lost revenue.

    (3) The new tax code will consist of thousands of pages of rules. Most people will need to hire an advisor who probably will not completely understand this new code.

    (4)You will no longer receive 100% of your paycheck. The government will keep their share before you have a chance to spend it. The government will be in control of your earnings not you!!!!!!!!!!!!

    (5) You will now be penalized for productivity; if you need to take on a second job to fill your family needs, the government will keep a larger up-front percentage.

    (6) You will no longer receive your monthly prebate check, and your take-home income will be reduced by at least 7.65%. The 7.65% will support Medicare and Social Security.
    This means if you are a family of four with a poverty level household income, your take home income will be reduced from $35,842 per year to at least $26,911 per year.

    (7) Under the new bill there will be corporate taxes, capital gains taxes, and a 15.3% payroll tax. You will have 7.65% ducted from your paycheck and the company you work for must match this amount. For corporations to maintain there current profit margins, these taxes need to be added to the cost of goods and services. Compliance cost involved in maintaining records and hiring expert advisers will also be added to the cost of goods and services. Retail prices could increase as much as 22% as the result of these taxes and compliance costs

    (8) No longer will the earnings from your savings and investments be free from tax.

    (9) No longer will the money you spend on education be tax free. You will be using after tax dollars to pay for tuition.

    (10) Since there will now be corporate taxes, capital gains taxes and payroll taxes, trillions of dollars will leave the American economy to work in foreign markets. There will be fewer jobs but you will be able to save money by purchasing Chinese products.

    (11) The new tax bill would give more power back to government where it belongs. Congressmen will now be able to receive favors from lobbyists when they support tax reform that will benefit these lobbyists special interest.

    (12) Taxes are too transparent under the FairTax. The new bill will allow the Federal Government to raise taxes by manipulate the code without you realizing it. This is good; you shouldn’t have the privilege of knowing how much of your total income is being spent by the government.

    (13) And here is the best part of the new tax proposal; illegal aliens, drug dealers and tourists will no longer be paying taxes. You will be required to make up this lost revenue.

  13. I haven’t read through all of the above comments, but I will chime in with my opinion.

    The main problem with anything in America today is we have ZERO political representation in Washington. Look at the bailouts, 90% of the population where adamantly against them but they bailed out their Wall Street cohorts and told mainstreet to piss off.

    You could have 90% of the entire US writing their Congressman daily about the FairTax or No Income Tax, or whatever you prefer and they wouldn’t give a damn. That is the problem and I think our efforts and the considerable amount of energy we spend convincing one another of our viewpoints should be spent trying to oust these bureaucratic assholes.

    Until we get a government that represents its constituents we are spinning our wheels.

  14. Steve,

    “Doesn’t cost the federal government a dime”??? Using the 2007 BHI/Kotlikoff study data, the prebate was estimated to cost $485 billion at that time. But we both know that governments don’t pay taxes, people pay taxes. So, the revenue neutral amount including the prebate required a sales tax rate of 23.8% according to the study. Reduce that prebate cost to $59 billion in order to cover just the families at or below the poverty level and the Fairtax rate would have been 19.9%.

    Please tell me why it isn’t total idiocy to make me pay an additional 4% sales tax on every new good and all services I purchase just so Bill and Melinda Gates can receive a $6,000 annual prebate from the federal Treasury. You have got to be kidding!!!

    The EITC is one of the most popular programs aimed at offsetting the FICA payroll deductions for the working poor. Contrary to your claim, I guarantee you that the majority of the poor families are quite aware of the EITC.

  15. Thomas Paine,

    I tend to agree with you that we are tilting with a Fairtax windmill. I’d much rather work on term limits, a balanced federal budget amendment, or even just supporting a “10th Amendment Commission” with the assigned task of reducing the size and cost of the Federal government by 10% or more. But that doesn’t seem to be of any interest, so we joust about the blasted IRS.

    You sound like you believe that all Congressman are crooks and thieves except the one you voted for?? You should be a major player in Tim Cox’s GOOOOH effort. Perhaps you already are?
    I’m sure our founding fathers never envisioned professional politicians running the country-and running rough shod over States rights? Electing Senators by popular vote was a major mistake, imho, and probably doomed our republican form of government. Stay tuned!

  16. Dutchman3

    The prebate is built into the percentage needed to keep the FairTax a revenue neutral program. So yes, it is not an additional cost. If I need to sell my widgets for $10.00 but I charge $12.00 and rebate $2.00; I suppose you would say the $2.00 is an extra expense.

    I agree the EITC is a good program under our current tax system. But, since there is no need to offset payroll taxes under the FairTax, it makes no sense. Besides the EITC only offsets payroll taxes for certain individuals under certain conditions. The prebate offsets 23% up to the poverty level and goes to everyone as it should. I would ten times rather give Bill Gates a prebate than limit his social security contribution to 6.2% of his income up to a max of $6621.60.

  17. @Dutchman3

    I was unaware of GOOOH until your comment. I briefly checked out their website and it is something I will look into further.

    I do think all of our “representatives” are crooks. Just look at their track record, collectively they have run the best and strongest Nation on earth off of a cliff in the span of a century.

    If you had employees that constantly screwed up and did piss poor work and ran your company into the ground you would fire them ASAP which is the only logical thing to do.

    Americans though are either to stupid, apathetic or live by the “devil you know” mantra to do anything about it.

    I do enjoy a good debate on a variety of subjects but I think liberal conservative we need to join together and kick these bureaucrats out and get representatives that actually SERVE the people in action not just word.

  18. Thomas Paine,


    Steve, I don’t understand your logic. Yes, the prebate is built in to the Fairtax rate, but then you say that it isn’t an extra cost? Nonsense, if we were just trying to be revenue neutral and there was no prebate feature, the Fairtax rate would be 19%. Seems to me the prebate is certainly an “extra”. What am I missing?

  19. Another thing that I think needs to be understood is the government can’t be trusted. I’m sure the creators of the FairTax don’t have it in their heads to screw us over but as the article pointed out the original income tax was only supposed to affect the top .5 of income earners and look at it now.

    I forsee if the fairtax was implemented eventual reductions in the prebate, and increases in the 26% tax rate. Which over time would make it suck just as bad as our current tax code.

    I think we can all agree we need radical changes in Washington, and until we get a government that fears the populace we will continue down the path of tyranny.

  20. Thomas Paine,

    I must agree with you; most representatives are crooks. Most of our congressmen are in it for the prestige and perks of the job. Take away their perks, paid health care, and pay them per diem for each day they are in session and you will end up with statesmen instead of stuff shirt leaches. Our founding fathers were paid this way and they came up with the Declaration of Independence which, by the way, did not include an income tax.

    All congress does is bicker and waste time. The Joe Wilson case is an example. With all the important issues facing congress they waste time and money to vote on whether or not to slap Joe Wilson’s hand. He should not have said what he did. He apologized to the president. The president accepted his apology; done deal get back to work.

    Since congress listens to special interest instead of the American people, we need to take back control of our country. As voters we need to make more of the important decisions. We need to vote on health care and tax reform. If the FairTax were put to a vote, it would pass by a margin of 2 to 1 or better. The American people are supposed to be in control of our country not Washington bureaucrats.

    Did you know there are currently 3578 bills in the house and 1663 in the Senate; 99% of which are a waste of time? Since congress likes to waste time, lets let them take their time on the 99% and let the American people decide on the important 1%.

  21. Dutchman3,

    Let me try one more time. I need to sell my widgets for $10.00 each to create my desired profit, but I sell them for $12.00 and rebate $2.00. I could have sold them for $10.00 with no rebate and created the same desired bottom line. My financial statement would show the rebate as an expense, but in reality it is just a redistribution of cash and does not affect my bottom line. If it doesn’t affect my bottom line it theoretically it can not be considered it an expense.

  22. Steve,

    If you are trying to make the case that the prebate is just a tax refund/rebate, you are mistaken. The prebate is an expense which required a $2 trillion consumption base set aside to pay for it. Just look at the Kotlikoff/BHI Fairtax rate study for confirmation. I’ll say again, a tax rebate/refund does not increase your gross pay one dime. The prebate increases your gross pay, and can be spent and taxed or saved as circumstances dictate. Check your checkbook!!!

  23. Dutchman3,

    Who cares if a rebate doesn’t add to your gross pay and a prebate does. Bottom line, the prebate is just a simplest and best way to offset the tax on necessity items. It also makes it easier for the one collecting the tax; no rules as to what is taxable and what is nontaxable. Sales tax returns will be very simple; gross sales times 23% equals tax to be paid.

    I give up; you probable would like to convince me that water runs up-hill.

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