The following is a commentary from a FairTax Volunteer on an article in the Business & Media Institute . It gives a really good comparison of the FairTax and the Flat Tax.
Excerpts:
Mitchell: "One of the problems is that advocates of tax reform are divided. This split is particularly frustrating since the flat tax and sales tax are virtually identical. Both would junk the current system. Both would restore fairness by taxing at one low rate. Both would eliminate all forms of double taxation, and both would wipe out special-interest loopholes."
FairTaxer: Identical? Ridiculous; one is an income tax similar to the Reagan 1986 reform and ripe for Congressional meddling to the max. The flat(income)tax continues the payroll tax and taxing corporations, which only pass those costs to people, usually the customer in the form of higher prices. It will NOT get rid of the IRS primarily because figuring out what "income" is happens to be at the heart of the IRS problem. More could be said about "identical".
Mitchell: "Yet this would require repeal of the 16th Amendment. Would it be possible to obtain the required two-thirds vote in both houses of Congress and ratification from 38 state legislatures? Unlikely."
FairTaxer: Yes, indeed, "unlikely". Just like the last 27 Amendments to the Constitution. Indeed, it's unlikely that we'll ever get women the right to vote! Oh! We did that! Well, we'll never prohibit alcohol sales in the US! Oh, we did that?! Well if we prohibit alcohol, we'll never go back to allowing it again! Oh! We did that, too?! He has a low opinion of the American people.
FairTaxer contd.: Both wipe out double taxation? Ridiculous again; the corporate tax of the flat(income)tax, along with the employer's portion of the payroll tax, will be folded into prices and the person with after tax income will be paying the "embedded" taxes on those products when making a purchase of US made products and services (double taxation). In addition, the latter flaws make the flat (income) tax identical to the present incometax in making US products and services more expensive than countries with no embedded taxes and who use a VAT.
Fairtaxer contd.: "Both wipe out special interest loopholes"? Perhaps on day one of the flat(income)tax, but on day two, the tax lobbyists in Washington D.C. will be out in droves to manipulate the corporate portion of the code, just like they do now while spraying campaign contributions to the four winds.
Mitchell: "Not so much for policy reasons, but rather because of practical concerns. Simply stated, the flat tax and sales tax are both theoretically attractive, but only the flat tax seems to be politically feasible."
FairTaxer: True only if you concede that the inferior flat (income) tax is more amenable to Congress people who see the opportunity for manipulating the corporate portion of the code in order to raise campaign funds. False if you believe that a proper airing of the features of both tax proposals will result in the American people demanding the FairTax.
Mitchell: "Moreover, advocates of the sales tax correctly insist that it must be accompanied by complete, irreversible abolition of the income tax in order to prevent politicians from pulling a bait-and-switch and trying to impose both a sales tax and an income tax."
FairTaxer: He's right that some misguided FairTax advocates have mistakenly said that repeal of the 16th Amendment must accompany, precede, or closely follow enactment of the FairTax in order to avoid having both a sales tax and an income tax. But he's totally in error in many ways here: TODAY, we have both an income tax AND a national sales tax in effect!
The income tax is obvious, but the sales tax is the "embedded" taxes in the prices of all US made goods and services (but not foreign made). We want to get rid of one of them. Furthermore, enactment of the FairTax, by law, eliminates the income tax and the IRS. The 16th Amendment merely ALLOWS an income tax, not requires it. Once the FairTax is enacted, we will proceed with steps to repeal the 16th. If it is not repealed, the Congress would have to start all over from scratch to enact an additional income tax.
If they try it, they will all get thrown out of office. If Congress succeeds in that diabolical endeavor, we will be back to today with an income tax and a sales tax. If they pass a flat(income)tax, we will have both an income tax and, with the embedded taxes, a sales tax, as well. Furthermore, the FaiTax has about 72 co-sponsors in the House and five in Senate. The flat(income) tax isn't even up to bat yet.
Go FairTax; get it right the first time.
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Bruce Bartlett, FairTax naysayer, advocates a "flat" tax. Here's Dan Mastromarco's rebuttal of his plan:
(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - FairTax.org) to:
"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999
Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.
For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method"[ H-R ] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that its DNA characterizes it as being.
Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.
An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.
While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.
Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have much material with which to honestly do so:
• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”
FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.
Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!
Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.
( Source - Addit'l at FairTax.org Whitepaper - May republish in whole or part. - Ian)
Bobbie,
I recently wrote an article detailing why I support the Fair Tax.
I'd like to send you the link but I can't find your email. Could you email me at kevin@changeyourtree.com so I can get this to you?
Thanks.
Here is one very large segement of the economy that will -- by definition - get an exemption from those high sales taxes.
ON page 148 of the FT book, "the government itself would be a major taxpayer." This response was suppose to assure the reader that no one would get exemptions -- cause even the GOVERNMENT would pay the tax "on all purchases"
Oh, really? Lets say the military would pay 10 million dollar sales tax on a jet fighter. And a 100 million sales tax on a submarine.
The military would have to RAISE their dollar request to PAY those taxes. That means all military budgets have to be redone, and increased dramatically, and the money to pay that is increased.
More than likely, however, the Pentagon will just request, and immediately get, exemption for military spending. This is rather obvious.
But EITHER WAY - exemption, or raise the revenue to pay the taxes - its a defacto exemption. The government is NOT going to gain 100 million tax on that submarine. It might seem like "its a wash" cause the government is paying itself.
But the wash is in the tax receipts side. The government will NOT gain a net 100 million from that sale.
Rather than prove NO one will possibly get an exemption -- this fallacy shows exemptions are inevitable. There is just no question about it. ANd, most of the exmptions would be valid - such as nursing homes, new homes, cancer hospitals.
Of course, they cant be revenue nuetral on this. The money they pay themselves in taxes, sure doesnt create a net increase in tax receipts. There is just NO way to tax the military a high sales tax in a way that creates the tax receipts. IF that could be done, we could just tax military 50%, or 80%, or ANY percent, and create huge wealth.
What Does the Fair Tax Really Do for You?
The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:
Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.
Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).
Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.
Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.
Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.
Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.
The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.
(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.
There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.
Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.
The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.
Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.
Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.
(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.
While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc. which currently help eligible people, substantially. I have seen no comparison as to which program (current IRS or prebates) offers the most dollars to assist low income individuals and families.
(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.
The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.
The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.
Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.
With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.
(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.
Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.
(5) WILL INDIVIDUALS PAY MORE TAXES? The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.
Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.
(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.
Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.
Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.
If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.
CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.
Note: Many smaller businesses will like not paying Federal business taxes and FICA but will conclude making monthly payments to a combination of State and Federal bureaucracies may prove more onerous than the current reporting requirements.
In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.
Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.
In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.
I am also concerned about the high potential for rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.
Yes - good article -- you said a lot, and you are right.
But Fairtax would HAVE to be at least 57%, just cause of MATH. Good old MATH.
And 57% sales tax on new homes would destroy that market.
57% sales tax on new cars -- destroys that market.
57% sales tax on cancer surgery, nursing home, heart by pass surgery, doesnt destroy THAT market, cause people HAVE to stay alive if they can. But people can NOT pay huge sales tax on their health care cost.
SO every market you destroy -- and every tax you can't collect, like health care -- means the tax rate goes up. And the economy suffers.
Its not an opinion -- its a mathematical FACT that if they passed the fairtax as it, the fairtax rate would have to be over 80%, probaly over 100%. And of course anything over 30% would be impossible, and result in rescinding the tax.
The "Fair Tax" will only rename the IRS, not eliminate it cuz the national sales tax will still need to be policed & administered. The "Fair Tax" will become rife with exemptions engendered by lobbyists. This could also be true if the Flat Tax law is written to allow same. I, for 1, am tired of being required to turn into an accountant every year. A tax form on a postcard? Oh hell yes!!!
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