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.
November 25, 2011
But Uncle Bob, Canada has a VAT and the rate there is only 5%, in fact it started out at 7% and went down. Why would the great USA have a rate that starts LOW and goes so HIGH? The USA isn’t like Europe Bob, its much more like Canada (only colder). Since Canada appears to have a sound monetary system and has zero bank failures, provides health care to all, has the same % level of home ownership as the US (withouth any mortgage deduction) and not to mention that Canada has a corporate tax rate (15%) that is less than half the US CT rate (35%), what makes you “think” that a VAT rate in the US would need to be so high? Honestly, the VAT which is not a European tax, but rather a global tax (there are only 5 regions in the world without a VAT), can’t be all that bad, if the rest of the world has adopted the tax why would it not work here in the USA (btw, the rest of North America also has the VAT).
First, a word or two on the VAT. The only difference between a VAT and the Fairtax is that the VAT collects the revenue at each stage of production while the Fairtax collects the revenue at the retail cash register. Both collect exactly the same amount of revenue at the same rate. It is disingenuous to suggest that a VAT isn’t a replacement tax. A VAT can certainly replace all the same taxes as the Fairtax. A VAT can also appear on the retail sales receipt in exactly the same fashion as the Fairtax receipt mandated in HR25. It has always puzzled me as to why the US is the last country to fail to implement a VAT as did 130 other modern nations. By the way, a VAT would have significantly less illegal evasion as well as legal tax avoidance due to the self policing nature of the VAT collection process. Check it out!
Now, you should also know that the income tax code can fit on 6430 pages, not 67,000 or 83,000 as you suggested. Remember, the Fairtax is only replacing four titles of the 11 titles in the current tax code. The entire code plus all the associated regulations plus any Supreme Court tax decisions did add up to over 65,000 pages in 2005. But, the Fairtax is only replacing 29,000 of those pages including the Regs. You might also be interested in the fact that the original 1909 income tax legislation was 36 pages long, while HR25 has something like 135 pages. Comparing HR25 to the entire tax code is just plain sneaky. The only accurate comparison would be the number of pages in the original implementing legislation.
Compliance costs have been grossly exaggerated by AFFT ever since 2005. Please go to this link to understand what the 2005 Tax Foundation claimed, and pay close attention to page 16, where the old compliance cost model was scrapped and a new IBM cost model implemented. https://www.taxfoundation.org/files/sr138.pdf If you then check out page 95 in your 2010 1040 Instruction booklet, you will see that individual tax compliance costs dropped from $110 billion in 2005 to $36 billion in 2010, assuming 150 million individual returns at $240 each. Compliance costs have always been grossly exaggerated prior to 2005, and AFFT made no corrections to reflect the important change to the IBM model. Shame on them.
Finally, about embedded tax costs. Dr Dale Jorgenson, economist (singular), did the only embedded tax cost study I am aware of in 1997 for AFFT. He concluded that tax costs averaged 22% of all costs across 35 industries, but he assumed that businesses would get to keep employee tax withholding amounts in order to achieve the most cost reductions. If we all get 100% of our pay/pensions, then the best businesses can do is to reduce their costs by 10% on average. Reduce costs 10% and add the 30% sales tax and retail prices will rise by 17% on average. AFFT, (Dr Walby, Director of Research) believes the 10% is really 12%, but the difference can be attributed to the fact that Walby used 2001 data, while I used 2007 data. Some difference should not surprise anyone. A retail price rise of 15-17% means that workers are going to need their increased take home pay plus the prebate to break even. And, retirees who pay no income tax or make no payroll contributions, will see no income increase except for the prebate, and will be hurt badly by the Fairtax.
It is also incorrect to claim that anyone “pays the embedded tax”. Embedded taxes impact only one thing and that is retail prices. Individual tax burdens are not impacted by one thin dime. If you want to add the word “indirectly”, it would be more accurate, imho.
Excellent segment, Bob. Well written. Regardless of what Mr. V says, you and I both know the FairTax is the best plan out there. We need good people like us to continually educate others about the FairTax.
Keep up the great work!