I've never really posted a real diary here before, but after being confronted by a waiter the other night at Outback Steakhouse - literally, in the middle of my dinner - about how America's tax code is broken and the Fair Tax is the only solution, I figured I finally had something to write about. I live in GA-07 and am unfortunately represented in Congress by John Linder, the man who's been pimping H.R. 25
(also known as the FairTax Act) on the floor of the House since 1999, so this is not the first time I've encountered an ardent supporter of the FairTax. When confronted by this garrulous garçon, however, I felt woefully ill-prepared to counter his fantastical claims that the FairTax Bill was a taxation panacea. I knew on some level that he was probably being misled, but it took a great deal of research for me to discover just how misled, and just how full of crap those pushing this bill on the floor of Congress truly are.
Although I'm sure many are aware of the specifics of the act, it never hurts to review! H.R. 25
, the FairTax Act, is a proposal that would eliminate every federal tax currently levied (income, capital gains, FICA, corporate, estate, payroll, etc.) and replace them with a flat, national, 23% sales tax on the total transactional value of all new retail goods and services. "All new retail goods and services" means precisely that - food, clothing, medicine, rent, utilities, health care, legal services, gas, everything. It is designed to be revenue-neutral; that is, if it were enacted today, the total revenues brought in from federal taxation would supposedly
remain constant. Additionally, the FairTax also calls for households to receive a monthly tax rebate
, equal to 23% of poverty level spending; this "prebate," as it is referred to by proponents, is designed to effectively eliminate taxation on bare necessities. Necessary corollaries to the adoption of the FairTax act would include the abolition of the IRS and the repeal of the 16th amendment
. Proponents also argue that the plan would increase tax burden visibility, U.S. economic growth, and U.S.-international competitiveness, broaden the tax base, decrease tax compliance costs and the complexity of the tax code, be progressive in its structure and the manner in which it taxes wealth, and perhaps most importantly abolish the filing of tax returns (praise the Lord!). Doesn't this sound like the most fabulous idea you've ever heard? How can any red-blooded American be against economic growth, a progressive taxation system, tax-free basic necessities, and a relief from the dreadfully oppressive burden of April 15th!? To quote the August 2006 Congressional Update that I just received from my esteemed Congressperson, don't we "deserve a code that is easy to understand, treats all of us the same, eliminates all exemptions, exclusions and advantages for certain individuals over others, and energizes the economy"? I wish it were that simple, Congressman. Unfortunately, it's not.
First, let's sift through some of the deceptive bullshit that's in the actual bill itself. What exactly does a "23% federal retail sales tax on the total transactional value of new retail goods and services" really mean? When I first read that, I reasonably assumed that it meant that the plan would result in a 23% national sales tax rate. A little research, however, shows that the implicit flat sales tax rate would actually be approximately 30% of the pre-tax price of a good. Although consumers would pay the government 23 dollars on every one-hundred dollar spent ($23 in tax/$100 leaving my wallet = 23% tax-inclusive rate), you would actually be paying the government 23 dollars for a 77 dollar pre-tax good or service, for a total transactional value of 100 dollars ($23 in tax/$77 good = 29.8% tax-exclusive rate). Although American income taxes have traditionally been expressed in a tax-inclusive manner, sales taxes have always been expressed tax-exclusively (i.e., living in a state with a 7% sales tax means you pay $1.07 for every refrigerator magnet you buy at the Dollar General). So what though? 23 cents on the dollar, 30 cents on the dollar, what does it matter if the result is an "energized economy" and a tax code that "treats all of us the same?" Too bad the problems are just beginning.
What about the claim that the FairTax is revenue neutral? With annual budget deficits in excess of $300 billion and a total U.S. public debt that's nearly to $9 trillion dollars, revenue neutrality is an absolute necessity for any tax code reform. Unfortunately for fair tax proponents, the majority of studies done by non-partisan economic think tanks show that, in its current form, the FairTax is anything but revenue neutral. For example, economist William Gale of the Brookings Institute (a non-partisan Washington think tank that has received $500,000+ donations from such ideological dipoles as Senator Dianne Feinstein and the Claude R. Lambe Charitable Foundation, funded by Cato Institute-founder and conservative movement-man Fred C. Koch) estimates that the revenue-neutral rate is more likely around 31%, assuming full tax payer compliance; again, this is a tax-inclusive rate, meaning that if you went and bought $100 worth of widgets, you'd really end up spending $145 (as the tax-exclusive rate would be $31/($100-$31) = 44.9%).
Other studies by non-partisan panels and groups such as the President's Advisory Panel for Federal Tax Reform and the Treasury Department take beef with the laughable assumption of 100% tax payer compliance. It's practically common sense that tax compliance is going to decrease drastically below the already pedantic current level when taxed entities are given the responsibility of self-reporting. The same William Gale mentioned above estimates that a reasonable evasion rate of around 20% would necessitate a sales tax rate of 39% (again, that's a traditional sales tax rate of an astounding 64%!) to be truly revenue neutral with regards only to corrected for increased tax evasion. How do proponents of the FlatTax suggest we enforce the collection of this tax without the IRS? Why, the same way right-wingers suggest everything in government operate - by incentives! You see, under the current bill, the federal government would allow "administering states" that use existing state sales tax administrations to collect the FairTax to keep 0.25% of the revenue collected for enforcement and administrative purposes. Therefore, if a state is having a tough time collecting taxes due to a burgeoning black market or whatnot, it only makes sense that they should be punished by having their tax-enforcement budget reduced. We've seen the wonderful benefits that the incentive-based system has bestowed upon public education in America thanks to the No Child Left Behind Act - it only makes sense that we should support a bill that expands this ill-conceived notion to keeping our military running and roads paved. The FairTax bill also fails to take into account taxes that the government would pay to itself as revenue without similarly increasing the amount of government expenditures to pay these taxes. For example, if a retail sales tax imposed a 65% tax-exclusive rate on a good required for national defense, say the $7 million steel holding cells at Camp X-Ray at Guantanamo Bay built by Halliburton back in 2002, the government would either a) be required to pay the tax, increasing the cost of maintaining the current level of national defense spending, or b) if the government were exempt from the tax, the estimate for the revenue raised by the FairTax would not include the tax from government purchases. The rate calculated by the current bill completely ignores this effect, a fairly significant problem considering that 18% of goods consumption in America is the result of federal government purchases. Taking into account everything that the proponents of the FairTax have failed to, the American people would be left with the necessity of a national sales tax fast approaching 100% in order to maintain critical revenue neutrality. And that's with annual budget deficits of $300+ billion dollars. Yikes.
What about the "prebate" program? Surely it's a good idea to make the basic necessities of life tax free? For families that make below $30,000 annually, the average effective tax rate under the current tax code is essentially 0%. This would also be the case under the FairTax Act, except that the poorest families among us would become dependent on monthly checks from the government for a sizable fraction of their basic needs. So it's a wash, right? Not quite. Because the program would send checks to every American family, regardless of disposable income, the prebate program would cost over $600 billion in 2006 alone, exceeding the size of Social Security, Medicare, and Medicaid. Put another way, this program, which would send $3,400 a year to Bill Gates and Warren Buffet to help offset the cost of butter and bananas, would cost more than all the budgeted spending in 2006 on the Departments of Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Housing and Urban Development, and the Interior, combined.
What about the U.S. economy? Proponents of the FairTax cite research by the National Bureau of Economic Research (NBER) and Americans for Fair Taxation that claim that in the year after the FairTax goes into effect, the GDP would increase by 10.5%, the incentive to work would increase by 20%, and the economy's capital stock, labor supply, output, and real wage level would skyrocket. Other studies indicate that implementation of the FairTax proposal will bring long-term interest rates down, that lower prices will increase exports by as much as 26% annually, and that revenues to Social Security and Medicare would double as the size of the economy doubles within fifteen years. This seems almost too good to be true. Oh wait - it is. To say nothing for the content of the paper, I'm not sure I trust the NBER, an organization that has released studies showing that tax cuts really do pay for themselves (bonddad recently showed this claim not to have much merit), and that the repeal of the Davis-Bacon Act, requiring the payment of prevailing wages on all public works project, would somehow increase the wages earned by black construction workers. A much more reliable study put out by the National Retail Federation (NRF) in 2000 found that a national sales tax would actually result in a three year decline in the economy, a four year decline in employment, and a disastrous eight year decline in consumer spending. In light of comments made by former Fed Chair Alan Greenspan in support of a national sales tax program similar to the FairTax, NRF Senior Vice President for Government Relations Steve Pfister released a statement explaining that "[u]nder the proposed national sales tax rate of 30 percent at the cash register, consumers would simply stop spending on anything but the barest necessities for a prolonged period of time . . . [t]his would have a ripple effect throughout the economy with an impact far beyond the retail industry. Even at lower rates, the psychological effect on consumer spending would be profound . . . [t]he price is too great to pay for any modest growth that might come in the long-term. Many retailers and the companies behind the products they sell -- especially the small businesses of America already struggling to succeed -- would be out of business before they could benefit from that growth." Makes sense to me.
And the claim that the FairTax is really progressive in nature, alleviating the tax burden of the poor and shifting it to the wealthy? Wrong again. Again, the President's Advisory Panel for Federal Tax Reform final report showed that, with the prebates, the overall tax burden on middle-class Americans would increase. I'll give you one guess as to who gets the complimentary decrease in tax burden. That's right - the super wealthy. The overall federal effective tax rate paid by those earning between $15,000 and $50,000 per annum would increase from 3.6 to 6.7 percent, while the overall federal effective tax rate paid by those earning greater than $200,000 annually would drop from 53.5 to 45.9 percent. That's an 86% increase in the effective tax rate on middle Americans, and a 14% drop for the richest among us. William Gale gives it to us in terms of something we're familiar with - he estimates that while "taxes would rise for households in the bottom 90% of the income distribution . . . households in the top 1% would receive an average tax cut of over $75,000."
So what have are we left with? A tax plan that will levy a 60 to 70 percent national sales tax on all goods and services or else risk higher and higher deficits and debt? A rebate program that will cost the government $600 billion so that the richest of the richest can have an extra something in their stocking at Christmas and the neediest among us can come out exactly where they started? A drag on the U.S. economy that would result in disasterous decreases in consumer spending and employment? All this, so that we can in essence give the rich another tax break at the expense of the lower and middle classes? Oh wait - we wouldn't have to file our returns on April 15th! I think I speak for many here, though, when I say that it's a small price to pay if it means avoiding this claptrap of a proposal. I hope this helps a few of you out there counter the bogus claims made by the advocates of an idea which is unfortunately gaining ground.