Tag Archives: FAIRTAX

The Flat Tax fantasy

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In the wake of the recent IRS scandal, some well-intentioned but badly misguided people have begun touting the flat income tax (called the flat tax for shorthand) as a replacement for the current tax code. They claim it would be an antidote to the IRS’s abuses and curb that agency’s powers while also supercharging America’s economy.

But they are dead wrong. The flat tax is no solution at all. It would not solve any of the problems with the current tax code and the IRS, and it could be replaced with a progressive income tax by the next Congress anyway.

Here’s why the flat tax would utterly fail to solve the problem, and why the FairTax – a flat 23% consumption tax designed to replace all federal internal taxes (income, payroll, excise, gift, death, etc.) is the solution:

  • The flat tax would still be an income tax, and as such, would still punish hard work, wealth creation, productivity, and savings, taking away from people what they have earned. Making an income tax flat does not change the fact that it is still a punitive tax on INCOME. By contrast, the FairTax, as a consumption tax, would be levied only on retail sales, not on income, inheritance, or the sales of raw materials or unfinished products.
  • With the flat [income] tax, you would still have to file tax returns every year by April 15th, and be liable for any mistakes you make therein. With the FairTax, there would be no such problems.
  • Administering the flat [income] tax would still require having a large IRS with dozens of thousands of staff to receive and review tax returns, audit people and organizations, and punish cheaters, and the IRS would, of course, retail ALL of the awesome powers it currently has, all of its staff, and all of its budget – and would still retain all your financial records. By contrast, with the FairTax, the IRS would be abolished PERMANENTLY, and under the FairTax bill (H.R. 25), all IRS records would have to be destroyed within 2 years of the FairTax being enacted – the sole exception being records related to Social Security, but these would be turned over to the Social Security Administration, not retained by the Treasury.
  • Unlike the flat [income] tax, the FairTax would be administered by the states, who would then send the revenue (minus their costs of administering the FairTax) to the federal government. Thus, it would dramatically shift the balance of power in the US in favor of the states and against the federal government. There would only be a federal Sales Tax Bureau with 51 personnel to audit the states in rare cases of state malfeasance.
  • The flat [income] tax would keep the current tax code, although it would be somewhat slimmed down from today’s 70,000 pages. The FairTax would abolish the federal tax code completely and replace it with the simple 123-page FairTax Act.
  • The FairTax would provide sufficient revenue for Social Security, though not for the entire federal Leviathan that exists in Washington today.
  • The FairTax would be completely transparent – you would know how much you pay in taxes everytime you make a retail purchase. By contrast, even under the flat tax, you would not know how much you really pay in taxes.
  • The flat [income] tax would keep the 16th Amendment. The FairTax Act would jumpstart the process of REPEALING the 16th Amendment forever, and would sunset (i.e. expire) automatically 7 years after its enactment if the 16th Amendment is not repealed within that time. But once Congress passed a resolution repealing the 16th Amendment, the states would be eager to ratify such resolution, as it would shift the balance of power in their favor.
  • The flat [income] tax would keep tax exemptions and thus allow the IRS to decide who deserves them and who doesn’t. Conservative groups applying for such exemptions would still face IRS audits.
  • And last but not least, the flat [income] tax would not remain flat for long. The next Congress could repeal it and replace it with a progressive one. The evidence? The current monstrosity of a tax code started in 1913 as a flat income tax at a 4% rate. But just 4 years later, in 1917, it was a heavily progressive income tax, with a maximum 77% rate. Although the maximum rate was later cut under the Coolidge Administration to 24%, it was still a progressive income tax – and 24% was still a rate that not even the most fervent advocate of the income tax had hoped for in 1913. Similarly, when President Reagan and the Congress enacted the 1986 tax reform bill, creating only two low rates, it took the Congress and Reagan’s successor, George “Read My Lips” H. W. Bush, only 4 years to add two new, higher rates, and thousands of pages, gimmicks, exemptions, and loopholes, thus essentially undoing President Reagan’s tax reform in just 4 years.

The flat [income] tax is not a solution. It would not solve ANY of the problems with the current tax code, the IRS, the 16th Amendment, the income tax itself, or the US political system. Only the FairTax would do that – by doing away with the income tax, the IRS, and the 16th Amendment PERMANENTLY.

It is no coincidence that the FairTax bill now has over 70 sponsors and cosponsors in both houses of Congress (including such conservative stars as Sen. Ted Cruz and Congressman Tom Price), while the flat tax bill has only one sponsor in the Senate and no companion bill in the House.

The flat tax is not a solution to anything and should not even be considered.

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Out of the Mouths of (Political) Babes

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Parenting is hard. Good parenting, even harder. But there are moments during the decades we commit to our children that we see real return on that investment. This past week, while discussing the election and events in Benghazi with my 10 year old daughter, I have experienced countless numbers of those moments. She is finally getting it.

If you’ve read any of my work before, you already know that I take seriously my responsibility to raise thinking, active, contributing citizens of this world. I have no trouble towing my kids around to political functions or rallies with me. My daughter, in particular, has worked on several campaigns already in her short 10 years. By the time she was 6, she had traveled to three states for political purposes and attended half a dozen FairTax rallies (even making up a fun chant to say while waving her sign: “We don’t want the income tax! We want the FairTax!”).

She’s informed on the issues. She begs to watch the debates. She wants to go with me to vote…no, she wants to vote! So this year, feeling the most engaged she has been yet and still frustrated that she hadn’t found a way to turn that passion into power, she took it upon herself to begin talking with her peers about politics. And then she wielded the power of the pen and wrote about it.

The most rewarding part about reading this for me as a mother was that she did it entirely on her own initiative. When she finished the first draft, she wanted to revise (an additional reward for this mother, who is also an English teacher). Then she asked me if I would help her find a place to publish it. I suggested the school newspaper, but she said her target audience was parents, so I decided to take advantage of this forum and share it with you.

I’m sure you could find all kinds of flaws in this mini-essay (she is only in the 5th grade), but the message should be one that resonates with all of us. Our children are interested in more than just sports, video games and fashion. They do care about their future, they are willing to work hard, and they are fully capable of articulating their thoughts in conversations with their peers. All we need to do is consistently teach messages of individual liberty and responsibility, and in doing so, we are taking critical steps to help ensure the future of this great nation.

The FairTax Series: America's Road To Prosperity Part 5

In this final installment of the FAIRTAX series I want to review the content of the series and give a few personal thoughts on our country, our system, and how I see the FAIRTAX being an integral part of the solution to our debt issue, though not the only aspect, and of how we get the United States back on steady financial ground.

As I write this series, our nation owes more than $14 trillion to other nations, mostly Communist China. Our debt ceiling has just been raised to about $17 trillion, money that will surely be spent as fast as government presses can print it. Our overall unfunded liabilities, including Social Security, Medicare, Medicaid, and all of the other unfunded promises run in the neighborhood of $130 trillion depending on which numbers you believe. From watching our esteemed federal government the last 40 years, I tend to lean towards believing the higher numbers, with no foreseeable end in sight to the irresponsible activities of those elected to “govern” us.

It is apparent to me that cutting taxes, changing the tax structure, or confiscating every dollar of We the People will not do all that is necessary to solve our financial woes. We face basically two major problems. One is government spending, a matter I will delve into later. The other problem is taxation. The FAIRTAX is designed to be revenue neutral, which means it won’t destroy government funding as some alarmists would have you believe. On the other hand, the FAIRTAX will not raise the cost of everything you buy by the 30% that the alarmists would also have you believe.

I would much prefer to receive the entire paycheck and decide for myself how it is used. The studies that have been done to show why companies locate overseas have been overwhelming to me. The cost of labor is being driven ever higher by the tax structure, which is a never ending catch-22 situation. The more taxes paid by those doing the hiring the less there is for them to pay We the People for work. The more I have to pay in taxes the more money I need to combat inflation. Every penny collected in taxes makes it more difficult to survive and prosper. Every job shipped overseas due to the tax structure, prohibitive regulation, and government “oversight” makes our nation that much less prosperous and safe.

Those who say “tax the rich more” don’t realize, or don’t care, that the money paid in taxes does not benefit the overall financial situation of the nation. Higher taxes on the “rich” doesn’t make the poor any wealthier, as a matter of fact, it has the opposite effect. A poor person never provided me with any income. If the reverse was true Communism would not fail everywhere it is tried.

I see that out of 500 company CEO’s surveyed, 80% said that under the FAIRTAX they would build their next production facility in the United States, and the other 20% would move their entire operation here. That causes me to believe that those jobs that have gone overseas would be right back here and we would find ourselves in the position of having more jobs than applicants, a good position for the working class people as that would cause wages to rise. This in turn adds to the taxable income available. More jobs mean a broader tax base, more income for the government coffers, and more prosperity for more people.

Under our current system, those who produce legally pay the taxes. Under the FAIRTAX everyone would contribute. Those here illegally and working under the table for cash would contribute. Drug dealers, prostitutes, and tourists would also contribute to the tax structure where they don’t do so now. I can’t find any reason to not like the FAIRTAX system.

The Pre-bate is designed to take into account the cost of taxes on the basic necessities of life. I like the idea of food, medicine, utility costs, and other necessities being tax free, up to the poverty line. Every penny I don’t have to pay to the government in some form of tax is another penny I can spend on my family to make our quality of life better. This part of the FAIRTAX will benefit those at the lower end of the financial spectrum greatly as more money would be available to improve the quality of life for those with less to start with. If I choose to save money instead of spend it I can benefit where under the current system I can only save after the greedy politicians have taken their cut from my hard earned wages.

Today, we find about 45% or so pay no income or employment taxes at all and many of these complain that the 55% who do pay income and employment taxes aren’t paying their “fair share”. I find this rather ironic. Someone who pays nothing complains about someone else is not paying enough, not paying their “fair share”. I wonder how much the “fair share” of those not paying anything would be if the playing field was level. I believe that everyone should pay at least some taxes. We all have a stake in the safety and prosperity of the United States, not just the “rich”. This issue has been used by politicians for my entire life to divide and conquer for their own benefit, not for the benefit of We the People.

Remember, government does not produce wealth; they only take the production of others, filter it through their pockets, and then give it to those they deem deserving, mostly those who are too lazy to work for their keep and know how to game the system for their own benefit. Politicians use tax rates to buy votes. The latest figure I have seen, as of 2009, say that 28 cents of every welfare dollar actually goes to help recipients. The other 72 cents goes to “administrative costs”. I fail to understand how the current system “helps” anyone at all. I would think that a job paying money directly to a wage earner would be a much more efficient way of providing sustenance for people.

As any other decent American, I believe that taking care of those who cannot take care of themselves is the responsibility of all able bodied people. Paying women to have baby after baby to be able to stay on welfare rolls, those faking injuries to draw SSI, and those who are drug addicts and use that as a “disability” to draw SSI are all problems that are not “fair” to those of us working for a living. The FAIRTAX, or any other tax system, will not solve these problems.

I have seen various arguments made against the FAIRTAX. I don’t have the time or space to answer every argument made against this plan but I can say that I have not seen a better plan come out with the specificity of the FAIRTAX. Most of the arguments made at the various places I have posted this series are debunked in the book this series is based on, FAIRTAX: The Truth. The authors devote an entire chapter to covering the misunderstandings, the lies, and the disinformation that has been passed out to defeat this plan.

My intent in this series is to give an overview of the book, and a basic understanding of the plan, not rewrite it here. I can say that 86,000 pages of tax rules and regulations are a bit excessive and should be eliminated. The FAIRTAX does exactly that, and more.

The legislation is H.R. 25 and can be found at the Thomas Congressional Library website. You can look it up by bill number or by name as you wish. I also encourage you to buy the book and get a more in-depth understanding than I can give you. After reading the initial article a friend decided to buy the book and get more details. He e-mailed me that the book, FAIRTAX: The Truth, can be bought on Amazon.com for $3.95. This is the Cliff notes version and is designed to give you as broad and as fair a description as possible with the hopes that all who read my articles will look further and get a more complete understanding of the FAIRTAX and how it is designed to improve the lot of all Americans.

I understand that the FAIRTAX is not the only answer to our nation’s financial ills. Spending by politicians bent on preserving their power and prestige is a huge issue that must be addressed if we are to ultimately solve our nation’s financial problems. A large part of the spending problems stem from the fact that politicians of both parties can demagogue the tax issue, using class warfare to pit one American against another for the benefit of themselves, the political ruling class. The FAIRTAX goes a long way towards ending this practice.

I can assure you that if the FAIRTAX was of great benefit to the ruling class we would already have it in place, not just being bandied about, or more precisely, ignored by the ruling class. The more politicians oppose the plan the more I like it. Many economists and others have spent months coming up with this plan and I believe it is a much better system than we currently use. Nothing will ever be perfect but this comes as close as anything I have heard or read about. It gives We the People more say in how our wages are used.
Tax and spend politicians need to be sent home and people with common sense, and the safety and prosperity of all as their first priority elected to do the job they swear to do when they take office. The self-interest of politicians and the corruption they participate in every day needs to be stopped if we are to survive.

I have read the FAIRTAX book very carefully twice and parts of it more than that. Many people take a quick look at the plan and begin to berate it without truly understanding what it means and how it works. At one time I also looked at the FAIRTAX and thought “so what”!! I began to hear more about this plan, and as I took the time and effort to look into it a little more thoroughly I began to change my opinion about the FAIRTAX. I am convinced that this plan will make great strides in helping our nation come out of the financial doldrums and put us back on the road to prosperity in a hurry. All we have to do is convince the ruling class to put it to work. We do that by letting them know of our support for this plan and our insistence that they act soon.

You are welcome, and encouraged, to share any of these articles with anyone you would like to share with. Information is power and I write these to inform, educate, and motivate people. I hope everyone you know sees these articles.

Again, the legislation is H.R. 25 and can be found at the Thomas Congressional Library web site . The bill is very short and very simple to read. It is up to We the People to make the changes necessary to promote prosperity, not wait on self-serving politicians to do what is best for us. The bill can also be found at this link.

I submit this in the name of the Most Holy Trinity, in faith, with the responsibility given to me by Almighty God to honor His work and not let it die from neglect.

Bob Russell
Claremore, Oklahoma
December 27, 2011

The FairTax Series: America's Road To Prosperity Part 2

In this installment of the FairTax series I want to cover the cost of compliance and enforcement with today’s tax codes. Before I go into the complexities of compliance and enforcement I want to spend a few minutes dispelling the favorite myth of the anti-FairTax crowd. One of the things that put me off the FairTax at first was the pooh-poohing of the plan by those who don’t want to see it implemented. I bought into the lies and distortions because I did not have enough knowledge of the FairTax to dispel these negative stories. This part of the issue is covered a little further into the book but I want to get this cleared up before I go any farther. I want you to understand the plan clearly, without the distortions thrown at me early in my exposure to the FairTax.

There have been some in Congress, along with the “tax the rich more” crowd, who have suggested a Value Added Tax or VAT. This would be a national sales tax added on to the cost of everything we buy today. This tax, proposed to begin at about 2%, would eventually be up in the 16% or higher range as it is now in some European countries. THE FAIRTAX IS NOT THE SAME PLAN. Those who do not want to see the FairTax implemented deliberately confuse the two plans to scare people like me, and you, away from the FairTax. This worked for quite some time as I was not knowledgeable enough to discern the difference. Be assured that when you hear VAT used in the same sentence as the FairTax it is a red herring designed to put you off the most intelligent proposal I have heard in my 61 years, The FairTax.
Now to the costs associated with our current system. In the debate about income and employment taxes we seldom hear of the costs involved. I am a simple man with a high school education so it doesn’t take very long for the tax structure to get the best of me. I haven’t been able to find any concrete numbers but the federal income tax code has somewhere between 67,000 pages, as stated in the 2nd FairTax book published in 2008, and 86,000 that I heard a politician mention a little while back. I can’t remember which politician or exactly when he gave that number but I do remember 86,000 pages being mentioned. I really don’t care which number is right, both are absurd. My wife has a college degree in accounting in which she achieved a 4.0 grade point average. She is a very smart lady and extremely good with accounting but even she can’t keep up with yearly changes and the odd nuances of the ever changing tax codes. As a result we have our taxes done by a local Certified Public Accountant who is very good and keeps up with all of the changes from year to year.Let me describe the differences very simply here before I go on to the main subject of this article. The FairTax is instead of, not in addition to, income taxes, employment (Social Security/Medicare) taxes, inheritance (death) taxes, gift taxes, etc. The Value Added Tax (VAT) is in addition to, not instead of, these other taxes. This is a huge difference when it comes to deciding whether to support the FairTax or not. Once I understood the difference in the two plans I could plainly see that the FairTax is a plan that is in my best financial interest.

This year, 2011, the IRS has a $12.633 billion budget. That is $12,633,000,000 of our money going to an agency to insure that everyone, well almost everyone, complies with the tax codes. Even with that amount of money being spent they won’t get all of the money “due” to the government in taxes. The IRS is not the most efficient tax collection system. They can find me if I don’t pay but they have a hard time finding out if members of Congress, congressional staff members, and even the head man at the Treasury Department, Timothy Geithner paid their taxes as they should. As I mentioned in the first segment, they won’t collect these taxes from the local drug dealer, prostitute, illegal alien, or anyone else who gets paid under the table for work.
Now let’s talk about the cost to We the People directly. The last figures I could find on the cost to prepare income taxes were from 2005. That year the U. S. General Accountability Office reported that taxpayers paid between $240 billion and $600 billion to prepare and file their tax forms. That is for 2005, 6 years ago. My costs have almost doubled since then to the $315 my wife and I paid to have our taxes prepared in 2010.

So, let’s take a quick look at what we have for the cost of compliance. The IRS alone will spend $12.633 billion in 2011, at least, to insure that some of us pay our taxes. Those of us who pay our taxes spend as much as $600 billion, at least as of 2005, to have those forms prepared. The GAO also stated that taxpayers can expect to pay as much as 20% of the cost of their taxes to have the forms prepared by professional tax preparers. That is another 20% in addition to the amount of the taxes owed (ours isn’t that high). The figures in this paragraph come from the IRS site itself, not the FairTax book. I guess these numbers are great if you are a CPA or tax lawyer but not so great for those of us who have to spend that money.

For those who say “so what, I don’t pay much in taxes and the rich can afford to pay more” I have a new perspective for you. Every dollar that is spent to prepare tax forms or taken by government is a dollar that those “rich people” can’t use to provide jobs for working class people like myself, or you. Also look at the downstream effects. Corporations and the “rich” who own businesses factor their tax liability into the prices they charge for their products and the wages they pay their employees. One way or the other we all pay for the taxes that are heaped upon those we consider “rich”, and those “evil corporations”. People who own businesses own them to make money for themselves to support their families primarily. They are going to make money regardless of how much they are taxed, or they are going to go out of business and let their employees fend for themselves in the employment lines. When they pass those expenses on to the customer it comes to the point that customers pay the taxes in the end through the cost of the product. The bottom line is that corporations don’t pay taxes, the customer pays the taxes. The corporation just becomes the tax collector for the federal government because that money goes straight to bureaucrats and politicians.

The economists who have studied the tax structure and developed the Fair Tax plan have determined that there is a 22% tax liability built into everything you purchase, above and beyond state and local sales taxes. This is where things get a bit complicated and are difficult to comprehend. For example, let me use the wagon we bought for one of our grandchildren last fall. We paid $99, not including sales taxes, for a small wagon with wood sides. These wood sides were barely stronger than balsa wood, not the hardiest or strongest of woods. That may or may not sound like a lot of money but let me delve into how the price of that wagon was arrived at.

The wagon is made of metal, with rubber tires and wood siding. Each of these materials has a manufacturing process. The ore for the metal has to be mined, processed into steel, stamped into shape, painted, packaged, and shipped to its final destination, the store where we purchased the product. The wood for the sides and the rubber for the tires go through this same process. At each step of the process taxes are assessed for the materials and labor needed to complete the process and those costs are included in the final price of the product. By the time we purchased that wagon, $22 of the cost were the built-in taxes added to the cost of producing that product. This includes evaluating the tax costs of those who provide the machinery that makes the wagon. So I pay roughly 32% of my income to the government and then pay another 22% in federal taxes, not counting state and local sales taxes, to purchase the wagon for my granddaughter. So we have a wagon I could have bought for $77 now costing $99.

Take out your latest pay stub and look at it. Look at the Gross Pay box, and then look at the Net Pay box. Now go back and look at the various deductions, federal income tax, social security/Medicare tax, miscellaneous federal taxes, and see how much they take from your paycheck each time you get paid. Quite an amount going to Congress to waste on themselves isn’t it? (The FairTax stops the 32% I pay on my income but doesn’t raise the 22% I pay for the wagon.)

If you will stop and think about it for a moment the current system is a can of worms that is so ungainly and complicated even those who write the tax codes can’t comply. Don’t believe me? Do some research on Rep. Charles Rangel (D- NY), the former chairman of the Ways and Means Committee in the House of Representatives. They write the tax laws and he just got pinched, or hand slapped to be more accurate, for evading millions in taxes. He claims he didn’t understand the laws and made a simple error, to the tune of several million dollars. He had the nerve to stand on the floor of the House of Representatives and complain about how complicated the tax codes are. Rangel writes those tax codes. You try to make that excuse fly and see if you find yourself with a finger wagged in your face or you join Wesley Snipes in prison for tax evasion.

The FairTax puts a stop to all of this nonsense. No need for the IRS, no need for complicated forms and CPA’s or tax lawyers, and a full paycheck coming to you every payday. How much would it help if the drug dealers were paying a consumption tax on their fancy cars, boats, airplanes, etc? What about the millions of tourists who visit the United States every year? Under the FairTax plan they would be helping pay the taxes that support Social Security, Medicare, Medicaid, and social welfare systems. Right now almost 50% of American citizens do not pay any income tax at all, not to mention the illegal aliens who use an overly large portion of our “free” services. What if John Kerry had to pay taxes on the $7 million boat I mentioned in the introduction to the series!!!!!!!!

How would you like to get a gross pay check instead of a net pay check? How far would that money go to help you provide for your family? You are paying a 22% tax on everything you buy, food, clothes, a bicycle for your child, a car to get to work in, shoes for your feet, light bulbs, toilet paper, food, everything. Imagine not having to pay the income tax on top of these embedded taxes. And a bonus is that it wouldn’t hurt the “poor” people in our society. Even those paying no income and social security taxes are paying the embedded taxes.
So let me review what we have learned in this installment. We the People are paying millions to have our taxes prepared by professionals because the tax codes are too complicated for us to do it on our own. The IRS will spend billions on auditing and compliance, for those of us who they audit. Those who engage in illegal activity do not pay income and social security taxes while those of us who are honest hard working folks pay through the nose. The “poor” aren’t going to be hurt by this. And best of all, We the People can be rid of the IRS, and take the favoritism and vote buying out of the hands of the politicians. Those who use taxes to increase their power, wealth, and prestige through taxation lose a great deal of that power and give it back to We the People where it belongs in the first place.

In the next installment I will delve into the business and financial aspects of the FairTax, how it would help in bringing business and manufacturing back to our shores from other countries, and why the money being hidden in offshore accounts would be brought back to provide jobs and increased opportunity for American citizens.
I submit this in the name of the Most Holy Trinity, in faith, with the responsibility given to me by Almighty God to honor His work and not let it die from neglect.

Bob Russell
Claremore, Oklahoma
November 25, 2011

Rejecting FairTax Part Three: The Flat Income Tax

In Part One, I’ll cover the dangers of taxing consumption as a major source of government revenue, both to the individual and to the economy.

Part Two will cover the little-known problems in the FairTax proposal- the “fine print” FairTax advocates won’t tell you about (or don’t know themselves); I’ll also refute some of the inconsistencies and rhetoric used by FairTax advocates.

Part Three will introduce the reader to the benefits of flat income taxation- why it’s superior to consumption tax, and the economic benefits of flattening the tax code.

Part Four will introduce the reader to the Negative Income Tax Credit- an ideal solution to the the problems of our massive welfare state, which can only be implemented in conjunction with an income tax system.

Part Three: The Flat Income Tax

I can’t think of a better introduction to the Flat Tax than the one given by Steve Forbes:

The flat tax would be simple. You could fill it out on a postcard. It would be honest. It would eliminate the principal source of political corruption in Washington. It would be fair. There would be no tax on Social Security. No tax on pensions. No tax on personal savings. It would zero out capital gains taxes. It would set off a boom by letting people keep more of what they earn and by lowering barriers to risk taking.

For a more-complete introduction, I highly recommend “The Flat Tax” (which can be bought in e-book format from that link for $6.72), written by the originators of the modern flat income tax concept, Robert Hall and Alvin Rabushka.

Let’s tick through each of Steve’s points:

The flat tax would be simple. One thing which is not generally understood about our tax code: The majority of its 70,000+ pages are devoted to defining what “income” is, and in what manner said income is taxed. This is also the source of many “loopholes” in the tax code. Treating all income identically for tax purposes would eliminate the bulk of the tax code, making it simple enough that a tax return would be the size of a postcard.

It would eliminate the principal source of political corruption in Washington. Indeed, Forbes is right- the principal source of corruption in Washington is from tax lobbyists. It is they who are responsible for the extent of our tax code, and the special “carve-outs” given to selected businesses and industries. The ability to undo decades of their influence with a single pen stroke- to make the tax code both honest and fair- is highly attractive.

There would be no tax on Social Security. No tax on pensions. This is a major selling point for the flat income tax over consumption taxes. As I illustrated in Part One, a national consumption tax would eliminate the tax privilege for retirees’ Social Security and/or personal retirement savings. Flat income tax would retain this tax-privileged status.

No tax on personal savings. It would zero out capital gains taxes. One of the few substantive selling points of FairTax is the fact that a consumption tax wouldn’t tax investment and savings. However, this effect can be duplicated in a flat income tax by simply eliminating the capital gains tax and granting a deduction for personal savings, without exposing taxpayers to the negative consequences of a consumption tax. In the link above, Forbes mentions “pushing millions of people out of the tax system”- this is a reference to the elimination of capital gains tax.

It would set off a boom by letting people keep more of what they earn and by lowering barriers to risk taking. As I illustrated in Part One, consumption taxes are regressive- they keep poor people poor. Consumption taxes also favor already-established large businesses over new, small businesses. A flat income tax, on the other hand, is non-regressive and non-favoritist. It promotes economic competition rather than stifling it. All business pay the same rate on their profits, and all individuals pay the same rate on their incomes.

I’ll add another point: It would eliminate the corporate income tax. Corporate income tax, like capital gains tax, is a “double-tax”: Corporations are bodies of people (shareholders), and the profits after business expenses belong to them. This means the same money is taxed twice- once under corporate income tax, and then again under personal income tax (when they sell their shares) or capital gains tax (when their shares grow in value). In fact, in most cases it’s a “triple-tax”, since the shares were initially purchased with money on which personal income tax had already been paid. This tax is also crippling: our corporate rate is the second-highest in the world (35%), yet it only accounts for 9% of total federal revenues.

As for eliminating deductions: While most deductions can be safely eliminated without great controversy, there is one which must be specifically addressed: Charitable contributions.

Naturally, the public at large believe that this deduction promotes altruistic contributions from “the wealthy” to legitimate charities. In fact, the reality of this deduction is somewhat different: Much of the money claimed in this deduction is donated to non-charitable organizations (political and quasi-political organizations, for example). Indeed, Robert Hall and Alvin Rabushka point out the following in their book (above):

There is little merit in public subsidy for organizations whose success in raising funds depends on tax deductibility rather than the intrinsic merits of their activities.

While it would be preferable to eliminate it entirely, for the reasons stated above, an acceptable compromise would to do what Hong Kong has done: Cap charitable contributions at a percentage of a person’s taxable income.

On the other hand, a deduction which must be preserved is the deduction for business expenses- a very necessary deduction, since (as stated previously) taxing business expenses would create a barrier to entering self-employment, and would disproportionally burden small businesses in comparison to large businesses. Note that there are differing opinions on this deduction amongst flat tax advocates.

One more benefit of flat income tax over FairTax: Predictability. We have had, in this country, a federal income tax for nearly a century. Our economy, and individual taxpayers, are already accustomed to income taxation. Business tax compliance measures, individual and group retirement investments, financial planning services, and many aspects of long-term business decision-making (just to name a few things) are already oriented toward income taxation, and are ready to acclimate to flattening the tax code. Eliminating the income tax in favor of a brand new- and totally unproven- consumption tax system would generate a minefield of unforseeable and unintended consequences (in addition to the known consequences covered in Parts One and Two).

In sum: In comparison to consumptions taxes, flat income tax is simpler, fairer, more transparent, and decidedly less risky. Flat income tax is also a tried-and-true system: Unlike major consumption taxes, which have been a failure in countries which have adopted them, flat income tax has been a rousing success in those countries which have instituted it.

Rejecting FairTax Part Two: What You Don't Know About FairTax

In Part One, I’ll cover the dangers of taxing consumption as a major source of government revenue, both to the individual and to the economy.

Part Two will cover the little-known problems in the FairTax proposal- the “fine print” FairTax advocates won’t tell you about (or don’t know themselves); I’ll also refute some of the inconsistencies and rhetoric used by FairTax advocates.

Part Three will introduce the reader to the benefits of flat income taxation- why it’s superior to consumption tax, and the economic benefits of flattening the tax code.

Part Four will introduce the reader to the Negative Income Tax Credit- an ideal solution to the the problems of our massive welfare state, which can only be implemented in conjunction with an income tax system.

Part Two: What You Don’t Know About FairTax

In the last segment, I illustrated the problems inherent in consumption taxes generally; in this part, I’ll address the issues with Fair Tax specifically.

First: FairTax is a hidden tax. In order to avoid the offensiveness of instituting a high sales tax, a part-and-parcel component of the FairTax legislation is to make it an “inclusive” tax, one which is built into the sticker price of goods and services, as opposed to the “exclusive” sales taxes we are already familiar with, where the tax is added on when we get to the cash register.

Inclusiveness conceals the real rate of taxation. To illustrate this, I’ll use a simple example:

FairTax, as proposed, would be levied at an “inclusive” rate of 23%. This means 23% of the sale price is remitted to the government by the seller. If the seller wants to sell an item and make $1.00 from the sale, he must sell the item for $1.30, because 30 cents is 23% of $1.30.

In other words, a 23% “inclusive” rate is actually a tax rate of 30%.

This disparity between actual rate and inclusive rate grows as the tax grows: At a 33% “inclusive” rate, the actual rate would be 50% (33% of $1.50= 50 cents).

Consider this point: FairTax advocates propose FairTax as a replacement for federal income tax (up to 35%), FICA (15.3%, for both “halves”), and several other taxes. Considering this, does it seem unreasonable to believe that these taxes would be replaced by a “33%”, rather than a “23%”, tax?

In fact, the “23%” rate is only guaranteed in the FairTax legislation for two years- after which, a formula is used to calculate a new, higher rate, defined in the FairTax bill (see link at bottom) as “the general revenue rate, old-age, survivors, and disability insurance rate, and the hospital insurance rate”.

Second, unlike current sales taxes, FairTax is not just a tax on goods. FairTax, if instituted, would apply to services as well. Stated another way, this means a 30% markup your phone bill, your car insurance bill, your cable bill, your garbage removal bill, etc.; a 30% markup on your grocery, fuel, medication, and clothing purchases; a 30% markup on the purchase of a home or a car. If your washing machine or central air conditioning breaks down, the cost of parts and the bill for labor from the appliance repair service will include a 30% markup. This “30% markup”, of course, assumes a FairTax rate of 23% (see above).

FairTax advocates frequently argue that this markup wouldn’t occur, because other taxes embedded in products would be eliminated, so the price of goods would remain about the same. Hank Adler makes an excellent case to defeat this assumption, in reference to the sales tax component of Herman Cain’s 9-9-9 plan:

One need only look to the annual report of Safeway to understand the impact of 999 on grocery prices. Because the grocery business is incredibly efficient and there is significant competition, there are very, very low margins in the industry. The pretax profit in good years for Safeway is only about 2% of sales and the Federal income taxes therefore are less than 1/2% of sales. After making a reasonable guess based on other information in the Safeway annual report, the total Federal income tax plus Safeway’s portion of their employees’ payroll taxes is less than 2% of sales. Assuming that would all be passed through to the customer in the way of price reductions, the price of food must increase by about 7%.

This is, of course, in reference to the effect of a 9% tax. Consider this effect with a 30% tax!

Third: FairTax doesn’t eliminate payroll taxes. It doubles them. Another inclusion stated in the FairTax legislation (see link at bottom), is the requirement that businesses pay the 30% markup on wages and salaries if the employee’s services constitute a “taxable service”, defined as:

A taxable service is used to produce, provide, render, or sell a taxable property or service if such property or service is purchased by a person engaged in a trade or business for the purpose of employing or using such taxable property or service in the production, provision, rendering, or sale of other taxable property or services in the ordinary course of that trade or business.

This definition is extended to also include “research, experimentation, testing, and development”.

Translation: Since virtually every employee (other than a personal employee such as a maid or chauffeur) meets this definition, every employer will be required to pay a 30% tax on wages and salaries.

If this doesn’t make you, the reader, jump away from FairTax right now, I don’t know what will.

Fourth, this 30% markup on everything extends to purchases by state and local governments. Yes, you read that correctly: State and local governments will have to pay taxes to the federal government. This means two things to you: 1) Your state and local taxes will go up; 2) State and local governments will be in continuous debt to the federal government.

This brings us to the Fifth point: The claim made by FairTax advocates that FairTax would eliminate the Internal Revenue Service. This is false.  As you can see in the FairTax bill (see link at bottom), the IRS would merely be renamed as two new agencies: The “Excise Tax Bureau” and the “Sales Tax Bureau” of the Department of Treasury. Some personnel would be transferred to the Social Security Administration to administer the prebate program (see “Eighth”, below).

However, the responsibility of collecting the tax would be transferred to state tax departments. In other words, not only would state and local government be constantly indebted to the federal government, but would also be required to perform work for the federal government.

This bizarre arrangement has another implication: It paves the way for further federal intrusion into state affairs. Instead of Congress debating over ways to fund new mandates on the states, Congress will simply be able to place mandates on the states in exchange for a tax credit. Cash-strapped states (i.e. every state, currently) will accept these opportunities to lower their tax burden to the federal government.

Stated differently: You can kiss the Tenth Amendment goodbye.

Sixth: On the subject of Constitutional amendments, we encounter another problem with FairTax: The Sixteenth Amendment, which authorized the federal income tax. Adding a constitutional amendment is extremely difficult; it’s even more difficult to repeal one. In the case of FairTax, in order to be constitutional, both would have to happen: The Sixteenth Amendment would have to be repealed, in order to prevent Congress from taxing both incomes and sales (and you and I both know Congress would do that if given a chance), and to authorize a federal sales tax. FairTax advocates believe the Constitution already permits a national sales tax. I disagree. The Constitution authorizes taxes which are limited in scope- excise taxes, which are currently applied to a specific category of goods- but does not authorize a universal tax on the sale of all goods and services. We already have enough problems with Congress assuming powers not expressly granted in the Constitution, without handing them another one.

Seventh: On the subject of federal power grabs, let’s consider an implication of any (and every) sales tax. Governments use sales taxes to manipulate purchasing habits by exempting certain products from taxation. The states are limited in their ability to do this, however, since a price difference of 5-8% generally isn’t enough incentive to change the buyer’s mind about a purchase. The federal government’s ability to manipulate purchasing habits is also currently limited to income tax credits, which can be claimed at the end of the year to partially offset the cost of a major purchase such as a hybrid car or a new home, months after the purchase is made. The ability to immediately alter the shelf price of items by 30% or more would give the federal government an unprecedented ability to centrally plan and manipulate the economy.

Eighth and last is the “Prebate”. As shown in Part One, consumption taxes are highly regressive. In an attempt to offset this regressiveness, the FairTax proposal includes a “prebate”, a check issued to every household in the United States, every month, to offset the amount of sales tax paid up to the poverty line.

This, of course, presents two significant issues:

1) Any argument that FairTax would reduce federal bureaucracy is patently absurd, given that this proposal means the federal government would now have to issue more than a billion ‘prebate’ checks every year;

2) The next time our government experiences a budget crisis (as we’re experiencing now), there will no doubt be an effort to “means-test” the prebate- just as there are now proposals to means-test Social Security and Medicare. A “means-tested” prebate would amount to yet another welfare grant. Instead of working to reduce the cost and scope of the welfare system, this would only add to it.

In sum: In addition to all the problems with consumption taxes generally, FairTax would give us a stealth tax, embedded in the cost of goods and services, which uses ‘fuzzy math’ to conceal the true rate of taxation; FairTax would present insurmountable Constitutional issues; it would give the federal government unprecedent power to manipulate both the economy and state governments; and would pave the way for a costly new welfare benefit.

Folks, don’t be hoodwinked by slick FairTax salesmen. Don’t make the mistake of assuming (as many FairTaxers do) that anyone opposed to FairTax is a “closet liberal”, or “opposed to change”. And don’t blindly accept any change just for change’s sake.

You can read the full text of the FairTax bill presented to Congress (the most recent version) here.

The FairTax Series: America's Road To Prosperity, Part 1

This is the first of a 5 part series I am writing based on the book “The FAIRTAX: The Truth”. In the series I take a 300+ page book and condense it down to a virtual “cliff notes” version designed for the novice political reader. I designed the series for those who are not very knowledgeable about politics or the tax structure and how it affects all Americans. I encourage eveyone reading the series to buy the book and get the full effect of the policies in place today and see how the FAIRTAX will change the dynamics of government financing.

A couple of years ago I began hearing about a new concept in taxation. This new concept is called The FairTax. I didn’t pay much attention because I thought “how is any tax fair?”, when some pay and  some don’t. At first I dismissed it as another scam to throw me off the track of an out of control government looking for another way to hoodwink me into paying more of my hard earned money into their grand spending plans.

I have long since grown tired of paying so much of my money into ever growing but useless government programs that pay people to sit on their butts and spend my money. Welfare expenses keep going up as more and more people find ways to game the system by having babies, faking injuries, working for cash under the table, etc. The ultra-rich hide their money in “foundations” or overseas to avoid the taxes I have been paying for 45 years. All of them, rich and poor are getting over on the other working stiffs who are too stupid, too honest, or unwilling, to do these things. These money pits keep growing as the amount of available income to tax drops.

One of my pet peeves with income tax is those who don’t pay any. While I was paying 32% in my working years the local drug dealer was paying nothing. The local prostitutes who hang out on street corners in the bigger cities or work out of high priced hotels were paying nothing. The welfare cheats who sit around finding ways to game the system for their own benefit have no intention of doing anything to benefit society, or themselves for that matter. The illegal aliens who were working for cash were paying nothing. I had noticed the illegal aliens especially. They were everywhere and driving much nicer vehicles than I was, or am now driving (I don’t hang out where the hookers hang out). I was paying a 25% income tax, a 7.5% social security/Medicare tax, plus state taxes, and being told the government couldn’t afford for me to retire while those not paying taxes lived the good life. I struggled, they flourished. That is when The FairTax began to make sense to me.

I heard Neal Boortz one day talking about this new plan on his radio show. I listened with interest and thought it sounded good but never really did any more to learn about The FairTax. In the last election cycle, the 2010 mid-terms, I kept bumping into Carol Chouinard and she kept handing me literature about The Fair Tax. I took the information and looked it over without really spending a lot of time educating myself on this new concept. Interesting but, ehhhh!!!!

One day I was going through a stack of papers that had accumulated over a few months, actually several months, and found the literature Carol had given me. As I read through the brochures and leaflets I began to realize that this was not the run of the mill scam to get more of my money. This was an idea that made sense to me once I really looked at it.

Carol is the local guru on The FairTax. She lives in Rogers County, 2nd Congressional District, State of Oklahoma. She travels throughout Eastern Oklahoma, or anywhere else for that matter, presenting The FairTax to any group or person who will give her a chance to enlighten them. I ran into her again the other night and we got to talking about political issues and The FairTax came up. Well, I was complaining about the current debt ceiling debacle and how to deal with it. Carol began to explain some more about how The FairTax was the answer to much of the problem.

As I listened to her a light bulb came on in my head, and the squirrel began to spin the cylinder. The things I had read came back to me and began to make sense. I began to remember about the way our tax system keeps hard working honest people in bondage while those who don’t mind cheating skate by without paying anything, only taking from those of us who do things the right way. Carol gave me a book about The FairTax. It is the second book called FairTax: The Truth. The first book, The FairTax, came out in 2005. This book was published in 2008 so is 3 years old as I start this article. Much of the information I will include in future articles about The FairTax will come from updates from the FairTax web site as I want to give you the most up-to-date information and statistics available.

One solution I see to our fiscal problems in this plan is the title, The FairTax. From everything I have read and the research I am doing, this plan solves many of the financial problems we face as a nation, the issue of money paid in taxes. I find that this plan is aptly named. I often hear Democrat and sometimes Republican politicians, especially those in Washington, cry about how “the rich” get over by not paying enough taxes. Yeah, like the politicians pay “their fair share”. Remember the hullaballoo a few months ago about Senator John Kerry, the one who parked his multi-million dollar yacht, $7 million yacht to be exact, on the far side of the bay because the state taxes on that yacht were cheaper there than on his side of the inlet? $500,000 per year cheaper to be exact. So much for Washington’s multi-millionaire insiders being concerned about paying their fair share of taxes. Hmm, I wonder where I am going to park my $7 million yacht. Oh, never mind, I don’t have one.

I also hear many “poor” people make the same statements, “the rich need to pay more taxes”. The problem with the “poor” complainers is that most of the ones I know don’t pay any taxes at all either. Most of the “the rich need to pay more taxes” crowd, at least the ones I know personally, are on the dole. They are drawing welfare, food stamps, social security disability, state aid, etc. Many of them either don’t work at all or work part time. They pay nothing and spend much of their time complaining that they don’t “get enough help from the government”. They have cell phones for themselves and their children, several have big flat screen HD televisions, complete with the latest game consoles, cable TV service, cigarettes, and are usually well stocked with beer in the fridge. Actually, I need the “rich” people to continue to be “rich”. They are the ones who will hire me, hopefully, so I can make a little money. Poor people never seem to hire me for anything.

In the spirit of “transparency”, my wife and I both have cell phones, we have cable TV service, and one 37 inch flat screen HD television set. Before you say “AHAH!!!” let me offer a caveat to this. We don’t get any help from the government and are not exactly in the “rich folks” category. I am retired but not old enough to draw social security, my wife works a full time job, and we have a small Mom & Pop business that gives me a little work and usually provides us very little in the way of profit. As a matter of fact, if the business doesn’t make a profit in 2011 we are going to have to shut it down. I work part time for a friend when he needs help on a project but the rest of the time I spend working on and around the house. We have a 1976 Chevy pickup that my father-in-law gave to us when he became unable to drive. We have a 1995 Ford Escort that my mother-in-law gave to us when she became unable to drive. We also have a 2004 Dodge PT Cruiser with over 100,000 miles on it (it was a demonstrator model). We don’t owe any money on our cars, and live in a 101 year old house with a $60,000 mortgage. Not exactly Beverly Hills here, closer to Green Acres, but we don’t get any government assistance either.

To get back to the point of this article, our nation cannot keep going the way it is financially. We cannot continue to borrow and spend, drive businesses out of the country, and raise taxes on the “rich”, those making $250,000 per year or so, the small to medium businessman/family who provide the bulk of the jobs in this nation. We have to do something to bring the jobs back to the United States. We need to make it feasible for those who hide their money to use that money to provide jobs so those who desire to work but can’t find a decent job can get back to work. Giving people unlimited unemployment pay is not the answer to prosperity, it is a handout not a hand up. Many of those drawing that unemployment would work if they could find a job. Some of them are lazy bums that are looking for a handout but most, and I do mean MOST, are honest hard working people who just want to provide for their families.

The FairTax is a method to accomplish this task of financial recovery and prosperity. In the next installment of this series I intend to delve into how our current tax structure is designed to inhibit rather than enhance prosperity. I will cover the costs of enforcing and complying with the current tax code and how it affects every person in America, tax payer and non-taxpayer. The FairTax books are a treasure trove of information about how our financial system works, or doesn’t work, and what We the People can do if we will stand up and demand that the politicians change the way they do things. Other installments will cover more aspects of The FairTax plan and how we go about getting it implemented by politicians that are more concerned about themselves than We the People. Elections are only 11 months away, so let’s get to work changing our future. God Bless America!

I submit this in the name of the Most Holy Trinity, in faith, with the responsibility given to me by Almighty God to honor His work and not let it die from neglect.

Bob Russell
Claremore, Oklahoma
November 25, 2011