Fair tax...

Long in delay and far far far from complete. But I typed up the notes I've started making as I read The Fair Tax book by Boortz/Linder. My goal once I understand the plan is to plug in the numbers to see if I would benift from this plan. But to be fair before I can do that I need to understand the purpose and point of such a dramatic change therefore I'm reading the book and then I'll read the bill.

Feel free to comment on the first section of notes... don't have time to finish typing up the rest I have written--why I need a lap-top!--so bare with me.

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Fair Tax Book -- Jim's notes

John Linder introduction:

“Adam smith said that the invisible hand of the economy creates efficient markets. That is true. It is also true that the IRS is the lead foot on the throat of our economy.”

Questions
1.Did Adam Smith really talk about the invisible hand of the economy... or the invisible hand of individuals in that economy? I dunno

2. When you look at Adam Smith entire system of though does he believe taxes are unnecessary at all–more specifically a closer reading of wealth of nations and his theory of moral sentiment would be requried for me to best answer this. As I understand Adam Smith I would say no but to be fair I have only read parts of Smith’s work... though I have learned quite quickly that most people get Smith wrong which seems to be the case here.

2. Look at the US economy as compared to more progressive tax countries... are we behind or ahead?

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Broader question 1. Why do they focus all their attacks/ire on the IRS? Is it because attacking the government would not be politically popular? Attacking programs want and need would not be politically popular?


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Boortz intro xiv “It [this book on the fair tax] is about getting 100% of your paycheck every second Friday. It about being able to save and invest, for your future and for the future of your nations economy, without worrying one momnet about the tax consequences.

Questions 1: What would be fair about that? You didn’t/don’t earn this pay on your own. It is part of a shared value which you help bring in. If you got 100% of the rewards from your work wouldn’t you be the lead foot on the economy?

Question 2: Don’t we already have people not worrying one moment about the consequences of their financial behavior. I’d say that some people with credit card debit, no saving for retirement, no health insurance that then requires government expenditures... I’d say some of them are already not thinking about their financial behaviors. That’s why for my own protection and economic viability I applaud certain government investment to protect citizens from other citizens who are either reckless or incapable of sound economic thinking that would harm themselves or the broader economy.

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Broader question 2: Why is everything in this book about “you”? Is it desirable or even rational to promote the idea that it is every man for themselves? I was raised to believe that we are all in this together and that if you see a man beaten by the side of the road you don’t walk to the other side. If you do help him and you only do it for yourself... that would still be wrong because you aren’t doing it out of compassion but of vanity.

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XV “Our current tax system–no matter how friendly it may be to the dreams of politicans–is your dire enemy if you dream of financial idependence. Our current tax system is one that punishes the behaviors Americans value and reqards the behaviors we abhor. Those in our sociey who work hard and achieve are punished with taxes that approach confiscatory levels. Eschew hard work, follow the path of least reistance...

Question 1: The conniving politician question: why do they keep attacking politicians. We live in a Republic. These politicians represent constituents. If they didn’t they would get kicked out. Money is a pretty big constituent right now–which is why I support election/campaign reform. But you also have elite opinion and the general opinion of the public at large. So politicians are evil only in the sense that the interests of their constituents are evil. Why abstract away from that... and just blame the guilty parties. Ad hominem attacks on politicians makes people more cynical about government–there by less likely to participate, there by the likelihood for corruption grows larger.

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p. xvi "You'll also learn how politicans have managed to mold our tax code into an instrument designed not so much for raising revenue to fund the legitimate operations of government..."

question: What are the legitimate operations of government? Wonder if they'll get to that one...



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Jim Nichols
A Speculative Fiction
www.JimNichols4.com

Still on my fair tax background homework...

If you haven't kept up I'm in a healthy debate on the Fair Tax in the comments section. Its giving me a chance to learn more about it and speak better to my views as they adapt to what i'm finding out... there are many different sales tax plans but there are similarities and i'm sure there are some readers who might be able to articulate them better than I can. But I'm posting this as well... to save others time if they care to venture into these area of economics.

Like I always say... do your homework... challenge presumptions, data, and findings of others--empower yourself to speak on issues that impact you life.

Anyhoo... here is something else to churn in the gears o'my brain.

Tax Follies At TNR

Robert S. McIntyre | September 18, 2005



You have to wonder. Half to three-quarters of the American public doesn't believe in evolution (depending on how you define it). One out of three Americans thinks the budget deficit can be eliminated (a) by hoping (or praying) that it goes away (8 percent) or (b) by cutting taxes even more (25 percent). Anti-scientific, un-arithmetic thinking seems to be rampant. But has The New Republic gone over to the dark side, too?
In August, a TNR cover story promoted the wacky idea that we should scrap all of the federal government's progressive taxes in favor of a national sales tax. Such an enormous shift in the tax burden away from the rich and onto the poor and the middle class is the linchpin of what authors Larry Kotlikoff and Niall Ferguson call their "holistic" approach to "Social Security reform, health-care reform, and tax reform." Their spending proposals -- which include a pernicious restructuring of Social Security benefits in favor of high earners and a goofy system of personalized health-insurance vouchers -- are hugely defective. But these half-baked schemes are mere window dressing for what they care about most: their radically unfair tax plan.

Boston University economist Kotlikoff is a longtime sales-tax advocate whose work includes a 1993 article on the topic for the libertarian Cato Institute. Scottish-born Ferguson currently teaches history at Harvard University and is a senior fellow at the conservative Hoover Institution. Despite their pedigrees, they do get one thing right: Our country needs much higher taxes to pay for public services.

Indeed, the authors imply that they want to boost federal revenues by almost half. That's quite ambitious (although given their health-insurance plan, it may not be enough). But the way they would achieve this massive tax increase is abominable.

"The federal fiscal system should be moderately progressive," they state as their first principle. By which they mean far less progressive that it is now.

To counter the well-known fact that sales taxes are inherently regressive, Kotlikoff and Ferguson brag that their proposed national sales tax would offer a universal rebate, designed to exempt everyone on their spending up to the poverty line. They fail to mention, however, that our current income tax doesn't tax families with children until they make more than twice the poverty level. So even with the rebates, replacing current federal taxes with a sales tax would add thousands of dollars a year to the taxes of all but the richest Americans. Those at the very top, on the other hand, would get hundreds of thousands of dollars each in annual tax cuts.

Beyond failing the test of fairness, the authors' fiscal arithmetic doesn't add up, either. They claim that at a 33-percent rate, their sales tax would produce revenues equal to 21 percent of the economy. (The existing federal taxes that they implicitly retain, including excise taxes, customs duties, and most of the worker side of the payroll tax, would bring their promised total up to 25 percent of the economy -- versus only 17 percent now.) This, they say, would be enough to replace personal income taxes, corporate income taxes, estate taxes, and the employer side of the payroll tax, plus leave enough to pay for universal health insurance.

But that's a pipe dream. To collect 21 percent of the economy in sales taxes would require a tax rate of about 60 percent -- assuming almost perfect compliance and a preposterously broad tax base that would include, for example, housing, education, and religious services. (Taxing health care wouldn't produce any net revenue because the federal government would be paying for it.)

In addition, state and local sales taxes probably would have to be double what they are now, as few if any states could run their corporate and personal income taxes without the federal government's help. So the total sales-tax rate would have to be close to 75 percent.

At which point, of course, cheating and tax avoidance would be rampant, as would lobbying for sales-tax exemptions. It's odd, for example, that Kotlikoff and Ferguson think it's plausible that the public would tolerate an extremely high-rate sales tax on home purchases when our current income tax actually subsidizes mortgage payments.

Kotlikoff and Ferguson maintain that their "new New Deal represents the best chance of the Democrats getting back into power." It's hard to believe that they really favor that goal. But even if they do, given how badly the national-sales-tax idea played for Republicans in the 2004 elections, their political advice is worse than their economics.

As for TNR, let's hope publishing this awful piece was only a momentary lapse.

Robert S. McIntyre is the director of Citizens for Tax Justice.

Fair Tax homework...

I'm doing some background leg work to my Fair Tax homework... will be posting them as I come to them...
There is No Such Thing as a Fair Tax

The Lies of the FairTax

In addition to the unsubstantiated claims that Boortz makes for the FairTax, there are three ridiculous lies of the FairTax Plan.

Lie #1: taxes would be voluntary under the FairTax. In his discussion of the origins of the FairTax, Boortz says that the AFFT sought "a method of taxation that would be totally voluntary, that would allow all citizens to pay what they choose, when they choose, by how they choose to spend their money." Boortz has the audacity to say that "there is nothing coercive about the FairTax." It is "a truly voluntary tax system." The government should allow you to "keep your money in an investment account of some kind, earning interest for you, until you decide to pay taxes to the federal government." The FairTax would allow people to "judge for themselves when and how they're comfortable making taxable purchases."

Well, if the FairTax system is voluntary, and allows everyone to pay what they choose and when they choose, what happens if someone decides that they don't want to pay any taxes to the federal government? The same thing that happens now: fines and imprisonment. The FairTax is not a voluntary tax at all. The whole idea is a contradiction in terms. Boortz's statement about people keeping their money until "they're comfortable making taxable purchases" is ludicrous. There is no way to avoid buying new items. One can buy a used car, a used house, and used clothes, but one cannot purchase used food. One could argue that our present tax system is also voluntary: Don't earn any income and you won't have to pay any income taxes.

Lie #2:the FairTax rate would be 23 percent. Throughout the book, Boortz gives the FairTax rate as 23 percent. It is not until near the end of the book—in the chapter, "Questions and Objections"—that he admits it is really 30 percent. But even then he still insists it is 23 percent.

Those of us who were skeptical from the beginning noticed this when we got to page 84. There Boortz used the example of a single mother with two children spending $45 a week on groceries. He claims that the removal of the taxes currently embedded in the price would lower the cost of the groceries to $35.10 (a dubious proposition). But then he says: "Add the FairTax, and the groceries would cost $45.58. I learned in the sixth grade that if an item cost $35.10, and I add to it $10.48 in sales tax, then I paid a tax rate of almost 30 percent—not 23 percent. Boortz says in the "Questions and Objections" chapter that "critics of the FairTax have a way of dwelling on this 30 percent figure." I wonder why? Although Boortz explains that he is using an exclusive rate rather than an inclusive rate to figure the percentage, his "mathematical equivalent of a game of semantics" still results in a FairTax rate of 30 percent. This is why Boortz prefers the national sales tax to be included in the price of each item—so the consumer doesn't realize that he is really paying an extra 30 percent in sales tax, not Boortz's new math amount of 23 percent.

Lie #3: the FairTax would abolish the IRS. Boortz claims that his book is about transforming the nation by sending "one of its most hated institutions," the IRS, to "that place in the government guano heap of history." The goal of the FairTax is to "eliminate the IRS." Boortz even jokes about IRS agents working at a fast food restaurant after the FairTax is implemented.

Calling the IRS by another name doesn't mean that its functions will be eliminated. Just as the income tax will be replaced by the FairTax, so the IRS will be replaced by some other federal bureaucracy to oversee the collection of the FairTax. It should not be forgotten that the FairTax is a national sales tax. According to The Fair Tax Act of 2005:

There shall be in the Department of the Treasury a Sales Tax Bureau to administer the national sales tax in those States where it is required pursuant to section 404, and to discharge other Federal duties and powers relating to the national sales tax (including those required by sections 402, 403, and 405). The Office of Revenue Allocation shall be within the Sales Tax Bureau.

The Fair Tax Act also sets up a "Problem Resolution Office" and authorizes "problem resolution officers." There will even still be tax courts. Boortz himself also states: "We envision a department of the Treasury to deal with Internet and catalog sales, with stiff penalties for those selling into our communities who do not abide by the law." The FairTax will abolish the IRS in the same way that it will abolish the income tax—by replacing it with something else.

The Problems of the FairTax

Besides the fact that it doesn't lower the amount of taxes seized from the taxpayers by the federal government and is based on unsubstantiated claims and ridiculous lies, the FairTax is fraught with other problems. In his Introduction, Boortz says that this book will explain the FairTax in detail. He will walk us "through the plan step by step, detailing both the good and the bad." Since Boortz never gets to the bad, I here present seventeen problems with the FairTax.

Problem #1:The FairTax hides the amount of sales tax being paid. Boortz explains how "the FairTax was designed as what's called an 'inclusive' tax—that is, the tax is included in the list price of the product." He reasons that "since our current income taxes are figured on an inclusive basis—that is, they are taken out of our paychecks, not added to them—it was decided to handle the sales tax in exactly the same manner." How could someone write a whole chapter on the evils of the withholding tax and then turn around and recommend a hidden tax like the FairTax? Boortz even has the audacity to claim that with the FairTax the "consumer is completely aware of what he is paying." Really? Suppose the FairTax is implemented next year. Go stand in front of a store and ask the typical American how much federal sales tax he paid on the item he just bought for $139? Give him a calculator and ask him again. Unless he is familiar with figuring percentages, the average American will not be able to tell you how much sales tax he just paid.

Problem #2:The FairTax is progressive. Boortz correctly identifies a progressive income tax with Karl Marx. Yet, because of the prebate, the FairTax sets up a progressive tax system like we have now. Millions of Americans will pay no taxes at all. Others will have some of their taxes offset by the prebate. "The rich" will still be paying the majority of the taxes—something Boortz says he considers "class warfare."

Problem #3: The FairTax is an income redistribution scheme. Boortz calls the Earned Income Tax Credit "a prime conduit for income redistribution from high-income earners to the poor and middle class." Why, then, would he promote a FairTax Plan with a prebate that in essence allows the majority of citizens to not only pay no taxes, but in many cases gives them money over and above that which they paid in sales tax? What's fair about making "the rich" subsidize the poor and the middle class? Boortz calls Social Security an "income redistribution and welfare program." But under the FairTax Plan, Social Security is even worse. At least now it is funded by payroll tax contributions that are independent of deductions for federal income tax. Thanks to the prebate, many people will receive a free retirement program via Social Security who never contributed a dime towards their retirement, or as Boortz says: "All benefit and no burden."

Problem #4:The FairTax creates new tax collectors. From doctors and lawyers to garbage collectors and tree trimmers—multitudes of individuals and businesses that never collected taxes before will be turned into tax collectors for the federal government. Will a teenage babysitter be required to collect the FairTax from her neighbors?

Problem #5:The FairTax creates new taxes. All Internet purchases will be subject to the national sales tax. So will heart surgeries, kidney transplants, and appendectomies—plus the drugs prescribed by the doctors doing the procedures. Want to attend a baseball, football, or basketball game? Better save up a little extra to take care of the FairTax that will be imposed on your tickets.

Problem #6: The FairTax creates new taxpayers. If there are no exceptions and no exemptions then churches and other non-profits will be forced to pay a national sales tax on every purchase. The FairTax will basically do away with not-for-profit entities. The FairTax would also count as taxable the purchases made by federal, state, and local governments. This means the government will be using taxpayer money to pay taxes to itself.

Problem #7: The FairTax makes it easier for the federal government to raise taxes. All Congress has to do is slightly increase the initial 23 percent rate. A penny here, a penny there; a quarter of a cent now, a half of a cent later. Just a little at a time, of course. It might be to compensate for inflation, to give seniors a cost of living raise, or to pay for some manufactured crisis like bird flu . Since the federal budget goes up every year, and the FairTax is supposed to be "revenue neutral," the FairTax rate will have to go up right along with the federal budget. You can count on an increase every year, for if government budgets are not under control now, why should we expect Congress to magically become fiscally responsible just because the FairTax is adopted?

Furthermore, since Social Security and Medicare would be funded out of general revenues the FairTax rate would also have to go up to fund the ever-increasing cost of these programs. Then there are the escalating costs of the new prescription drug plan. And if the amount of the prebate "is updated every year to keep up with inflation," the FairTax rate will have to be raised in like manner. How can Boortz recognize that "there is absolutely no limit to the government's desire for your money" and then express hope that the FairTax rate "will go down in the future" if "Congress can keep government spending down"?

Problem #8: The FairTax makes it easier for state governments to raise taxes. In the name of simplicity and efficiency, the states would be inclined to follow the lead of the federal government. States that currently have no sales tax could add one. States that have exemptions on certain items could get rid of the exemptions so as to match the federal government. States that have no sales tax on services could begin taxing services like the federal FairTax Plan would do.

Problem #9: The FairTax has unknown and potentially huge transition costs. Boortz asks a good question: "How will the switch to the FairTax be made?" But then he gives a very naïve answer: "Cold turkey!" He explains that "on January 1, we'll begin to get our gross pay with no deductions." Boortz gives one "transition rule": The value of any inventory on hand December 31 can be used as a credit against collecting taxes in the next year." This should get accountants to work figuring out how to value each company's inventory the highest. Will it be specific identification, average cost, FIFO, or LIFO? But what if a company's fiscal year does not end on December 31? This will cause massive accounting problems. And especially for the federal government since the government's fiscal year begins on October 1.

Problem #10:The FairTax makes certain exceptions while supposedly having none. After saying that there are "no exclusions or exemptions" under the FairTax, Boortz specifically mentions exemptions for Internet access services and tuition. Therefore, his complaint that "exempting certain items—such as food and prescription drugs—would again open the door to an entire battalion of lobbyists to argue that the portion of the industry that they represent is clearly an essential product" is unjustified for he has already opened the door to that very thing.

Problem #11: The FairTax has great potential for fraud. Boortz envisions the prebate amount being issued to a card "like your bank debit card." Since every head of household would have one of these cards, there would be a great chance of criminals preying on people for their cards. There is also the possibility of counterfeiting, resulting in massive theft from the taxpayers. And since the FairTax only applies to new items, there will also be a tremendous incentive for new items to be reclassified as used or previously owned. Businesses could offer a slight increase in the price of a reclassified item in exchange for not having to charge customers the 23 percent national sales tax that would be due if the item was considered new. Enforcement of the "proper" classification of items would require an army of federal bureaucrats that would rival the IRS.

Problem #12:The FairTax has the potential to turn thousands of law-abiding Americans into criminals. Since the FairTax contains no exemption for even the smallest business, anyone who does not collect the FairTax on any good he produces or services he provides is breaking the law. Mow a yard—collect the tax. Babysit—collect the tax. Repair a car—collect the tax. If you don't collect the FairTax then you are a criminal. Once again, the FairTax would have a terrible enforcement problem.

Problem #13: The FairTax does not repeal the Sixteenth Amendment. When FairTax advocates discuss their plan, they talk as though the FairTax would result in the repeal of the Sixteenth Amendment that gave us the income tax. To his credit, Boortz doesn't make that mistake, but when many people read about "saying goodbye to the income tax," that is what they think. The FairTax bill now pending in Congress ( H.R. 25 in the House and the identical S. 25 in the Senate), repeals Subtitle A of the Internal Revenue Code of 1986 that relates to income taxes and self-employment taxes and Subtitle C that relates to payroll taxes and the withholding of income taxes.

The only mention of the Sixteenth Amendment in H.R. 25 is when it reports: "Congress further finds that the 16th amendment to the United States Constitution should be repealed." But to repeal Sixteenth Amendment would require a constitutional amendment. Are we to believe that Congress would vote to repeal the Sixteenth Amendment after the passage of the FairTax? And even if Congress did so it would still have to be sent to the states for approval by three-fourths of them.

So, barring the repeal of the Sixteenth Amendment, what is there to prevent an income tax from being imposed again after a national sales tax has been enacted? And what is to prevent any of the other taxes replaced by the FairTax being re-imposed due to some unanticipated budget shortfall or "crisis"?

Is Boortz that naïve to think that Congress will be satisfied with just the FairTax? And even if the Sixteenth Amendment was repealed after the imposition of the FairTax, any previous tax not on income could be brought back. Can Congress be trusted to do anything else? I can easily envision Congress proposing to lower the rate of the national sales tax in exchange for the addition of a supplemental Social Security tax because we need more money to fund Social Security. Then, a few years later, the national sales tax rate would be right back up to where it was before the "exchange."

Problem #14: The FairTax does not eliminate all federal taxes. Although it is implied throughout the book that the FairTax will be a replacement for the various federal taxes, there are some federal taxes that will still be with us under the FairTax. Even Boortz slips up one time and says that the FairTax would "replace virtually all personal and corporate taxes." Two examples of federal taxes that will still be with us under the FairTax are the excise tax on gasoline and the various taxes that one pays when purchasing an airline ticket. There is no mention of the federal gas tax anywhere in the Fair Tax Act of 2005. No list of taxes that are supposed to be eliminated under the FairTax includes the federal gas tax, which adds 18.4 cents to the price of a gallon of gas. So under the FairTax, we would have added to each gallon of gas federal excise tax, state excise tax, and federal sales tax. This is just the minimum. The states could also begin applying their sales tax to gasoline. A recent airline ticket I purchased had added to its price a federal excise tax of $15.28, a federal segment tax of $12.80, and a September 11th security fee of $10.00. And what about federal taxes on tobacco and alcohol? The FairTax will merely replace one visible tax with another while leaving intact the invisible ones.

Problem #15: The FairTax is not at all about lowering the amount of taxes the government collects. Boortz terms the FairTax a "tax reform measure, not a government reform measure." It "changes the way revenues are raised for the legitimate operations of the federal government." But if the FairTax raises the same amount of revenue to fund the same federal programs, then what does Boortz think the federal government does that is illegitimate? Is there anything he considers to be illegitimate? If so, then why would he expend so much energy on changing the way the federal government collects taxes instead of changing the amount that the federal government collects in taxes? The fundamental problem is clearly taxation, not the tax code. What is wrong with the federal government's tax code is not that it is too complex, but that it makes possible the almost $3 trillion a year that the federal government spends. As the French laissez-faire economist Jean-Baptiste Say (1767–1832) once said: "The best tax is always the lightest." Or, as our modern-day Say in Congress, Ron Paul (R-TX), says: "The real issue is total spending by government, not tax reform."

Problem #16: The FairTax doesn't even begin to address the root of the problem. Boortz does refer to Frank Chodorov (1887–1966), reminding us that he "once observed that, by enacting the income tax, the American government was proclaiming that all wealth belonged to the government, and whatever wealth the government did not seize from the person who created it should be looked on as a concession—a gift from the government." But Boortz doesn't quote Chodorov, and he gives no source that he is referencing. He subtly seems to imply that Chodorov was opposed to the income tax because it was an income tax and that, therefore, he might be inclined to support the FairTax if he were alive. But this couldn't possibly be true because Chodorov considered taxation itself to be robbery . How is justifying the federal government spending almost $3 trillion a year of the taxpayers money, as long as it is collected "fairly," any different from the viewpoint that Chodorov condemns? While making the case for not allowing exemptions from the FairTax for food, Boortz, in using the example of a wedding reception, inadvertently shows his true colors: "Would it be fair to allow a multimillionaire to spend $20,000 on food for a large wedding reception at his estate, and not pay any sales tax on that purchase?" Why, of course it would. It would be fairer than forcing the American people to pay a 23 percent national sales tax on every good and service they purchase.

Problem #17: The FairTax makes welfare universal. Millions of people who never took a dime from other taxpayers in the form of food stamps, SSI, AFDC, Medicaid, WIC, or housing assistance will now be on the federal dole via the prebate. The FairTax is welfare for the masses. It makes us all wards of the state. Perhaps it would be best, in the interest of equity and efficiency, if all the money Americans earned was just paid to the state and then distributed to every American in a "fair" manner. The government could just keep what it needed, redistribute what's left, and do it all without the FairTax.

The FairTax is not the solution. And because it allows the federal government to confiscate the wealth of American citizens less intrusively and more efficiently, it will become part of the problem—the problem of the ever-increasing, ever-intruding, ever-destroying welfare/warfare state. The FairTax is a fraud. Yet Boortz ties rejection of the FairTax to believing that America is a great country because of its government, "as so many politicians do." Politicians who oppose the FairTax do so because they "thrive on dependency."

The Fraud of the FairTax

The antidote to the fraud of the FairTax is a good dose of the wisdom of Murray Rothbard: "There can be no such thing as 'fairness in taxation.' Taxation is nothing but organized theft, and the concept of a 'fair tax' is therefore every bit as absurd as that of 'fair theft.'"

Boortz believes that the abolition of the income tax will make the bad day of April 15 "just another beautiful spring day." With its unsubstantiated claims, ridiculous lies, and numerous problems, the FairTax will ensure that everyday is a bad day, not just April 15.