Fair Tax Scheme

The Fair Tax-- the really big issue.

The most important issue facing Americans today is not the Iraq war, or even the tragedy of New Orleans, as significant and important as both of those are. It is the current tax system and what it is doing to the economic and political life of our country. The current system, as organized and managed by the Internal Revenue Code is, in fact, adding unecessarily to the complexity and confusion of our individual lives, obscures the activities of the federal government bureaucracies, and in general frustrates just about all taxpayers. The worst aspect of the code, the automatic payroll deduction, first imposed in the 1940's to provide funds for waging WWII, and which for most is extracted from each paycheck every two weeks, acts as a stealth removal of a percentage of each individual's earnings, is given no real thought by its victims, mostly just accepted as a cost of being employed. Want to know why the size and bloat of government grows at a compound rate year in year out? Want to know why we run huge deficits year in year out? Want to know why so many Americans feel alienated from the political system? Want a shot at stopping the drift towards a European malaise of socialism with attendant high cost of living, high unemployment, and negative population growth? Look no further than the insidious influence of the perverse IRS code and its enabling of excessive government spending and a political class who wants to think and do for the rest of us without accountability. John Lindner, a US Representative from Georgia, and a man with a career (dentist, businessman) before politics, understands all of this and has been on the case of eliminating the IRS for a number of years now. Lindner started an organization to promote this cause some years ago (I have made modest contributions to it over the years) and has seen the idea and organization grow in influence to the point that Tom DeLay, leader of the House of Representatives, now supports the fair tax proposal. George Will, noted columnist, has also embraced the fair tax cause, as have numerous other serious thinkers on the subject. We've all heard of the flat tax, espoused by Malcolm Forbes in his primary campaigns for the presidency during the '90's, and by Dick Armey from Texas, former minority Leader of the HR. While the flat tax proposals have received the most press coverage over the past few years, the Fair Tax is by far a more promising solution to the nightmare of our current system. In a nutshell, the Fair Tax is a national sales tax (of estimated 25%) on all new products sold, administered in conjuction with state sales taxes to eliminate the need for any new bureaucracy to collect and channel the funds. The Fair Tax proposal provides revenue neutrality to the current system, so all the silly government programs can remain in place (yuk), provides for tax relief for all Americans on foodstuffs and certain other essentials and best of all, eliminates the IRS completely. Why is this crucial? Because 7 billion hours per year are devoted by Americans and corporations to complying with the thousands upon thousands of pages of the IRS code, which in all its complexities not even employees of the IRS understand -- the reason we have a busy tax court! And even more so because it is estimated that embedded in the retail cost of all products sold by American businesses is an IRS compliance factor of over 20% of the product's value. Thus, due to the dynamics of free markets and the concommitant elixer of competition, the retail cost of new products, while rising by 25% initially to cover the new national sales tax, will soon after drop by virtually the same amount and voila, we have taken over 20% out of the cost of living by merely eliminating the IRS. We have also allowed individuals to determine how much they want to spend and save without consideration of tax deductions and all the other foolishness of the code. We have eliminated the noxious influence of the rich, the big and the powerful to lobby for tax relief at the expense of consumers. And we have freed up all those fabulous legal and accounting minds now devising ways around, over and through the code to more productive work in the economy. Does this all sound like a case of everyone wins? It is. But it will be fought tooth and nail by entrenched interests, lawyers, accountants and most especially politicians who like the lack of transparency and accountability of the present money machine which affords them access to perqs and power. Why would the Flat Tax not work? Because it leaves the IRS intact and one has to ask how long would it take, given the machinery remained in place, for the flat tax to morph once again into the outrage that now terrorizes us all on April 15 each and every year. I encourage you to read this and buy Boortz and Lindner's book. Then sell the concept to all your friends. For a full understanding of the issues involved in the Fair Tax proposals, read also the following, as collected over time from several sources:


Tax Reform--Fair Tax from Federalist


All of our Founders were rightly concerned about this power -- indeed, our nation was born out of revolution to unjust taxation. No sooner was our Constitution ratified than Madison challenged his colleagues to refrain from extra-Constitutional expenditures: "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents...."

Of the "General Welfare," Benjamin Franklin observed, "I am for doing good to the poor, but...I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed...that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."

As for the effect of excessive taxation on the economy, Alexander Hamilton wrote, "If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds." Apparently Hamilton, et al., understood supply-side economics.

It was clear to our Founders, as it is today, that congressional power to levy taxes is directly proportional to the authority of the central government, and there has been little restraint in last century when it comes to increasing taxation in order to expand central-government power.

In 1819, John Marshall observed, "An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation." Congressional tax levies have been testing that limit since passage of the 16th Amendment and implementation of a direct income tax. By the end of the 20th century, only one president had forthrightly lobbied for limited taxation -- and that was Ronald Reagan.

Enter George W. Bush.

"No one in America should have to pay a third of their income to the federal government," then-Governor Bush protested during his first presidential campaign. Upon his election, the President began cutting taxes, with Congress passing most of his first-term tax-reduction proposals. These included an average tax decrease of $1,586 per income-tax payer; marriage penalty reductions for low- and moderate-income taxpayers averaging $2,602; a doubling of the child tax credit; and phasing out the death tax. Congress also approved tax relief to millions of small business owners.

Upon his re-election last month, President Bush declared, "Because we have done the hard work, we are entering a season of hope. We'll continue our economic progress. We'll reform our outdated tax code." There is much debate, however, about how bold the President will or should be in reforming, if not replacing, the current revenue system.

With productivity increases hinging on U.S. fiscal policy, this isn't much ado about nothing. At a recent gathering of conservative leaders, House Majority Leader Tom DeLay committed himself to the prospect of crafting and passing real reform of the tax code within the upcoming congressional session. Explaining that we're not just talking about cutting taxes here or protecting deductions there, DeLay detailed specific plans for drawing up a comprehensive proposal. This proposal requires the replacement of income and payroll taxes with a progressive national retail-sales tax, the use of a rebate to protect low- and fixed-income Americans, and the repeal of the 16th Amendment. In other words, scrapping the current income tax system -- and the IRS -- as we know it.

Here, the seriousness of the Bush administration and the Republican-controlled Congress brings to the fore the decade-old debate among conservatives as to which system would best replace the current tax code -- both in terms of constitutionality and in maintaining current federal tax revenues. While leaders in the conservative movement have argued the merits of both a "flat tax" and a "fair tax," many have tabbed the flat-rate system envisioned by former Texas congressman and House Majority Leader Dick Armey as the best alternative to our current code.

A flat income tax would set a national percentage rate at which all Americans, except those under the poverty level, would pay their fair share. This means that whether you make $1 million or $30,000 per year, you'll hand over the same percentage of those earnings to the government. The current wisdom places this flat rate somewhere between 13 and 15 percent.

Armey's initial flat-tax legislation would have eliminated the payroll deduction -- that insidious tax involuntarily taken directly from our paychecks. This would have placed the responsibility of saving for, filing, and paying taxes fully in the hands of the taxpayers. And this, of course, would have tended to make those taxpayers much more likely to keep a watchful eye on the Congress's penchant for tax hikes and indiscriminate spending. Unfortunately, Leader Armey bowed to heavy lobbying pressure and reinstated payroll withholding early in his fight for the flat tax.

To be sure, Armey's Flat Tax presents some serious drawbacks. First, any flat tax system would leave the IRS intact. A perennial thorn in so many Americans' sides, the IRS has been criticized -- and rightly so -- for egregious counts of abuse, political targeting, and corruption from top to bottom.

A second and equally important drawback is that although the rate for every taxpayer would remain equal, Congress would be left with the power and propensity to raise the rate. Suppose the system institutes a 15 percent rate. What's to stop the serial spenders in Washington from running up a deficit "requiring" a rate increase to 18 or even 25 percent? Some counter this argument by insisting that the new system will hold Congress more accountable to the taxpayers and will thus force them to act more responsibly. Tell that to the wealthiest one-percenters among the "Greatest Generation" who watched their tax rates skyrocket from a mere one percent to 50 percent or more. So much for FDR's seven-percent-ceiling guarantee.

A third omission of the flat tax proposal is its failure to address legal loopholes and income-tax evasion. This system would further encourage those that engage in illegal off-shore shelters and tax evasion, enabling them to report income levels lower than actual and thereby pay a smaller percentage of their income.

Last, the flat tax does not address the core issue: the constitutionality of an income tax. Honest argument can be made on either side of this question, but to the constitutionalist, certainly, the flat tax's legitimacy is at least questionable.

In contrast, Tom Delay's FairTax proposal offers many benefits.

Rather than create an entirely new tax system, the FairTax would simply piggyback on the current sales tax systems already in place in the states. The states' current infrastructure could be used to collect the tax with no new agency needed. Nine states, including Florida, Texas, Washington and Tennessee, already operate without state income taxes and provide great models for the efficacy of a sales-tax-based revenue system.

The conservative economist will note that generating federal revenues from sales taxes instead of withholding part of taxpayers' income will actually generate more tax revenue. As supply-side economics dictates, when people have more of their own money in their pockets, they spend it. With the FairTax in place, revenues would likely surge, new investments would be spurred, and a general economic boom would occur. With Social Security's collapse looming in the not-so-distant future, this proposal is highly palatable.

Current proposals require, conservatively, that a rate of 23 percent be implemented to maintain current levels of federal revenue, in order to compensate for the income and payroll taxes that would no longer be withheld. Critics charge that this would in fact have the opposite effect on consumer spending and that sticker shock would drive wallets back into pockets and purses. Further analysis, however, suggests that sticker shock shouldn't occur, as prices will probably remain at current levels. A great deal of federal-tax revenues are generated from corporate levies and Social Security matching, which average around 25 percent. These are costs, along with the cost of compliance in collecting payroll taxes, that weigh heavily on the income of corporations. Corporations, with the bottom line always the top priority, merely pass these costs on to consumers in the form of higher prices. With the income tax eliminated, corporate taxes and compliance costs vanish. Free market principles then take effect, causing a race to the finish with retailers dropping their prices to gain new customers -- while generating the same profit margins. Since the FairTax is revenue-neutral, raising no more tax than the current system, prices would remain at their current levels. Furthermore, consumers would be more conscious of tax increases, as they'll be evident on the shelf at the grocery store.

An additional benefit of the sales-tax system would be the potentially huge reduction in tax fraud. With the income tax gone, loopholes and tax evasion would be virtually non-existent. That criminals and tax evaders alike still frequent the mall, buy cars and houses, and generally behave like consumers will raise revenues significantly from this largely untaxed segment of our economy. This is new tax revenue, and it will be supplemented by the funds the federal government doesn't have to spend to find and prosecute these hooligans.

A second criticism many have with a national sales tax is that it eliminates the credit given to those under the poverty line and in effect taxes the poor. This may be true for national retail-sales taxes, but it is simply not true of the FairTax. Current proposals set aside a market-basket value of goods -- including food, medicine, and other basic commodities -- that is rebated to all Americans. The bottom-line benefit of the FairTax: If you can't afford to pay taxes, you don't have to.

Last, and certainly of the greatest benefit of the FairTax proposal, is the elimination of the federal income-tax system and the IRS, leaving the constitutionality question moot. As Ben Franklin noted, "A penny saved is a penny earned." With billions spent per year on staffing the IRS and enforcing the current tax code, the revenue saved would certainly decrease the burden on the American taxpayer both in terms of how much he must pay and how much stress he has to endure every year on and around April 15th.

Flat or fair, with a second Bush term secured, the time to begin serious debate of tax reform is now, not later. Along with border security and the nomination of constructionist judges to federal courts, the issue of taxation -- an issue debated in this country even prior to our nation's inception -- deserves top billing once again.


A national sales tax
George Will (back to web version) | Send

March 31, 2005

WASHINGTON -- The power to tax involves, as Chief Justice John Marshall said, the power to destroy. So does the power of tax reform, which is one reason why Rep. John Linder, a Georgia Republican, has a 133-page bill to replace 55,000 pages of tax rules.

His bill would abolish the IRS and the many billions of tax forms it sends out and receives. He would erase the federal income tax system -- personal and corporate income taxes, the regressive payroll tax and self-employment tax, capital gains, gift and estate taxes, the alternative minimum tax and the earned income tax credit -- and replace all that with a 23 percent national sales tax on personal consumption. That would not only sensitize consumers to the cost of government with every purchase, it would destroy K Street.

``K Street'' is shorthand for Washington's lawyer-lobbyist complex. It exists to continually complicate and defend the tax code, which is a cornucopia from which the political class pours benefits on constituencies. By replacing the income tax -- Linder had better repeal the 16th Amendment, to make sure the income tax stays gone -- everyone and all businesses would pay their taxes through economic choices, and K Street's intellectual capital, which consists of knowing how to game the tax code, would be radically depreciated.

Under his bill, he says, all goods, imported and domestic, would be treated equally at the checkout counter, and all taxpayers -- including upward of 50 million foreign visitors annually -- would pay ``as much as they choose, when they choose, by how they choose to spend.'' And his bill untaxes the poor by including an advanced monthly rebate, for every household, equal to the sales tax on consumption of essential goods and services, as calculated by the government, up to the annually adjusted poverty level.

Today the percentage of taxpayers who rely on professional tax preparers is at an all-time high. The 67 percent of tax filers who do not itemize may think they avoid compliance costs, which include nagging uncertainty about whether one has properly complied with a tax code about the meaning of which experts differ. But everyone pays the cost of the tax system's vast drag on the economy.

Linder says Americans spend 7 billion hours a year filling out IRS forms and at least that much calculating the tax implications of business decisions. Economic growth suffers because corporate boards waste huge amounts of time on such calculations rather than making economically rational allocations of resources. Money saved on compliance costs would fund job creation.

Corporations do not pay payroll and income taxes and compliance costs, they collect them from consumers through prices. So the 23 percent consumption tax would allow taxpayers to stop paying the huge embedded cost of corporate taxation. Linder says the director of the Congressional Budget Office told him it costs individuals and businesses about $500 billion to remit $2 trillion to Washington. And studies show that it costs the average small business $724 to collect and remit $100.

In 1945, corporations paid more than one-third of the government's revenues. Now they pay only 11 percent because corporations, especially multinationals, are voluntary taxpayers. In a world increasingly without borders that block capital movements, corporations pay where the burden is lowest. Linder says $6 trillion in offshore accounts would have an incentive to come home under his plan.

Furthermore, by ending payroll and corporate taxes, America would become the only nation selling goods with no tax component -- such as Europe's value added tax -- in their prices. With no taxes on capital and labor, multinationals would, Linder thinks, stampede to locate here, which would be an incentive for other nations to emulate America. ``This,'' Linder says, ``would unleash freedom around the globe.''

Critics argue that ending the income tax, with its deductibility of charitable contributions, would depress giving. Linder says: Piffle. In 1980, when the top personal income tax rate was 70 percent, a huge incentive for giving, individual charitable contributions were $40.7 billion. In 1986 the top rate was reduced to 28 percent, and by 1988 charitable giving was $86.7 billion. The lesson, says Linder, is that we give more money when we have more money.

When Speaker Dennis Hastert published a book last year, he was startled that interviewers were most interested in talking about Linder's bill, which then had 54 co-sponsors. This year Hastert added Linder to the Ways and Means Committee. Linder cheerfully says his bill would reduce Ways and Means to ``a B committee'' by ending the political fun of making the tax code ever more baroque for the benefit of K Street's clients. Bliss.
by Sarge 9/8/05

And now we have a rebuttal from Bruce Bartlett, a former Treaswury department official here
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