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The
FairTax Scam
The FairTax proposal HR25 in the US House of
Representatives(S.296 in the Senate)calls for the replacement of all current taxes (income
tax, Social Security, Medicare, corporate income taxes, excise and
estate tax) with a 30% national sales tax. They bill it as a 23%
inclusive tax. But, a $1 item will be assessed $.30 in sales tax
(.30/1.30 =.23). FairTax would
provide a "prebate" to all households based on the tax on poverty level income. The
Treasury Department's cost estimate for the prebate was $780 billion
annually.
The FairTax would apply to food, services, houses,
medicine, automobiles, and virtually everything else. However, the FairTax would
not apply to used items. Collector items such as antique automobiles,
diamonds, and expensive paintings would not be taxed. A new and an existing house of the same $200,000 value would
cost $260,000
(new) and $200,000 (existing) - sending the home construction industry
into depression. They also say that local,
state, and federal governments will be charged the tax for purchases.
I present two independent analyses here -
my own independent study and
the analysis of
2005
bipartisan panel appointed by President G W Bush .
Both come to the same general conclusions:
- FairTax is highly regressive, transferring
much more of the tax burden from the wealthy to the middle class. It
would remove a large amount of money from the retail market
damaging business, costing jobs and putting the economy on a
downward spiral.
- While FairTax proponents claim it is revenue
neutral (producing the same amount of revenue as current taxes), it
is far from that. The Treasury Department determined that a 34% tax
would be required to replace the income tax (54% of federal
revenue) alone if there is low
evasion (15%). To replace all taxes (93% of
federal revenue), as proposed with FairTax, would require
a 58% sales tax (34%x.93/.54) under low evasion conditions and up to 84% with more
realistic evasion (30%). My own analysis predicted that FairTax at the
23/30%
rate would result in $1 trillion additional annual deficit - a
similar conclusion. FairTax
people surely know this. Their plan is undoubtedly to create a
massive deficit and cure it by cancelling "entitlements" starting
with Social Security. In his 1986 book, David Stockman, architect
of Reagonomics, said that was the plan with the Reagan tax breaks for the
rich (70%->28%). He was upset that they didn't follow through
with cutting Social Security.
- The FairTax proponents count on no tax
evasion while evasion under the current income tax is 25%. The
Treasury Department says low evasion is experienced when there are
two independent entities reporting the same income as when the
individual and the employer report the income
of the individual. Higher evasion rates result when there is
only one report (such as tips to a waiter) and the reporter benefits
from under reporting. With FairTax, most reports will be from
retail sales companies which pay the tax to the government and which
will benefit from under reporting. Small retail operations
would be less likely to fully report sales. Thus, it is likely that
evasion rates will be higher with the FairTax than with the current
income tax. The 2005 bipartisan panel uses 15% for the low evasion
rate and 30% for the higher evasion rate.
- The FairTax pitch is replete with many
unsubstantiated claims. All are designed to convince people that
there will be a free lunch. They claim that 22% of hidden taxes
would disappear from the cost of goods with FairTax, making the tax
almost free. They
identify those hidden taxes as the employer part of the payroll tax
(7.65%) and the corporate income tax (23%). The payroll tax
would typically apply to half of the cost of producing goods for
3-4%. Corporate income tax is on corporate profit, not gross
sales. If corporate profit is four to five percent of sales
,
the
corporate income tax part of sales would be about 1%. This
would peg the typical hidden tax savings at 4 - 5%.
(And, if one could believe the 22% figure, they are saying that
virtually all of the 23/30% sales tax is needed to cover the
elimination of the corporate income tax and the employer part of the
payroll tax. That would leave the personal income tax,
employee part of the the payroll tax, excise taxes, and estate taxes
uncovered by FairTax.)
They claim that FairTax will rejuvenate the
economy when it will actually draw substantial money from the
retail market hurting business sales. That will cost jobs
further hurting sales and losing more jobs, starting
a downward economic spiral.
FairTax.org presents a study (for which they
say they spent $22 million) to substantiate the 23/30% tax figure as
replacing all of the taxes. It is a convoluted mess of
intended complexity and contradictions. It has the
governments, local, state and federal, paying the tax and counts
that as revenue. But, it doesn't include those taxes in
government costs. This study deteriorates into a mass of
inscrutably complex contrived equations. Using rough,
largely unsubstantiated estimates for input into their pseudo analysis, their conclusion from
all of this is that the 23/30% tax would fail to cover the current
revenues by just a little bit, requiring precisely a 2.73% reduction of "non Social Security" expenditures.
See that study.
FairTax proponents claim that there would be
substantial savings with the elimination of the IRS. The
Treasury Department says that a larger organization would be
required to track the sales tax and to administer the prebate. And,
since
most states have an income tax (which depends on IRS return
processing), the IRS would have to be recreated
at the state level or state sales taxes would have to double. A much better way to
reduce the size of the IRS would be to simplify the calculation of the taxable income income. The 25,000 pages
of personal income tax code should be reduced to 100 or less -
more on this.
FairTax proponents claim that their program
is nonpartisan when it is thoroughly right wing Republican.
The idea originated with Hoover Secretary of the Treasury, Andrew
Mellon, who said that the wealthy are the productive class and
should not pay taxes; taxes should be collected from consumers.
The current FairTax group was created by Tom Delay (recently sent to
prison for election fraud) and is funded by
wealthy Texas businessmen. Sponsors in the House (HR 25) include 65
Republicans and one Blue Dog. The Senate bill (S.296) is
sponsored by 5 right wing southerners (Burr [NC], Coburn[OK],
Coryn[OK], DeMint [SC], and Isakson[GA]). More moderate
Republicans (including Hobson) have opposed it.
Austria supports it but is not a sponsor.
The one area which gets some nods from
economists is that consumption taxes encourage savings/growth.
That is, high sales taxes will discourage spending and encourage
saving. But, at the same time, it decreases the retail market
for business, causing the lower-sales-lost-jobs-lower-sales downward
economic cycle. The better course is to bring more money into
the the retail market by higher progressive income tax rates (taxing
the wealthy), infrastructure spending with resulting jobs, and
encouraging saving by IRAs and Keoghs. The higher progressive
personal income tax
rates will encourage the growth of small businesses because the owners can avoid personal income tax by keeping
that money in the business and promoting long term business growth. The
larger picture is then that, with the current income tax system and
higher progressive rates, money which would have largely stayed on the
sidelines or have been diverted to foreign investment is invested in
American infrastructure, jobs, business growth leading to more jobs. With
a FairTax system, money will be taken from the retail market causing
a downward economic spiral and more money will be diverted to the
sidelines in the hands of the wealthy.
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