I’m a long-time proponent of the flat tax for three simple reasons.
1. It replaces the discriminatory “progressive” tax with a single tax rate at the lowest possible level, thus reducing the tax penalty on productive behavior.
2. It gets rid of all forms of double taxation, such as the death tax and capital gains tax, meaning economic activity is never taxed more than one time.
3. Other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.
Some people say that these are also three reasons to favor a national sales tax.
My response is that they’re correct. In simple terms, a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point.
If you want more details, I often explain the two plans are different sides of the same coin. The only difference is that the flat tax takes of slice of your income as you earn it and the sales tax takes a slice of your income as you spend it. But neither plan has any double taxation of income that is saved and invested. And neither plan has loopholes to lure people into making economically irrational decisions.
Instead of class warfare and/or social engineering, both plans are designed to raise money is the least-damaging fashion possible.
So even though I’m mostly known for being an advocate of the flat tax, I have no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.
With this bit of background, you can understand why it caught my attention that an economics professor at the University of Georgia (Go Dawgs!) wrote a column for Forbes with the provocative title of “I Will Support The Fair Tax When Its Backers Tell The Truth”.
Professor Dorfman writes that “such a consumption tax has much to recommend it from an economic point of view” but then warns that he “cannot support the Fair Tax as long as its backers continue to make implausible claims for their proposed reform.”
So what are the implausible claims? Let’s check them out and see if his friendly criticism is warranted.
He first expresses skepticism about the claim that take-home pay will rise to the level of gross pay under a Fair Tax, particularly given the assertion that prices won’t rise.
…the odds are that your gross pay will shrink over time under the Fair Tax. …employers can offer workers lower pay because of the lower cost of living (same prices, but higher take home pay). Because workers evaluate pay offers based on the purchasing power of that pay, the same competitive forces that will lower prices after the removal of business taxes, will lead to lower pay for employees in the long run as the labor market adjusts.
I suspect Professor Dorfman’s critique is correct, but I don’t think it matters. Workers understandably care first and foremost about the purchasing power of their paycheck, and that won’t be negatively impacted.
The Professor than looks at whether the Fair Tax gets taxes the underground economy.
…let’s tackle the claim that the Fair tax will do a better job of collecting taxes on criminals, the underground economy, and those who underreport their income. The idea is that people may hide some of their income or that drug dealers and others in the underground economy do not report their income, but that everyone spends money so the Fair Tax will tax everyone. Unfortunately, this claim is not true… Retailers are just as capable of underreporting revenue and not sending in the corresponding Fair Tax as people are of underreporting their income. …The incentive to avoid such consumption taxes will only increase when the rate is four or five times what it is now. If you don’t believe consumption taxes suffer from collection problems, go ask Greece.
And he looks specifically at taxing criminal activity.
Another reason that the Fair Tax will not capture extra revenue from illegal activities is that it only switches which side of the transaction is missed by the tax system. Currently, while drug dealers may not report their income, the people who buy drugs are paying with after-tax income. Under the Fair Tax, the drug dealers will pay tax when they spend their drug profits. However, unless the drug dealer sends in the Fair Tax on their sales, the drug buyers will now avoid tax on their purchases. Under either tax system, one side of the underground transactions will be paying taxes and one will not.
I think Professor Dorfman is correct, particularly in his explanation that drug dealers and other criminals will not collect sales tax when they peddle their illicit goods.
And he’s also correct when he says that the Fair Tax won’t collect all taxes on legal products.
But that doesn’t mean the Fair Tax is somehow flawed. Indeed, it’s quite likely that the underground economy will shrink under a national sales tax since the incentive to evade tax (on legal products) is a function of the tax rate. So if we replace the punitive high-rate internal revenue code with a low-rate Fair Tax, there will be a higher level of compliance.
But not zero evasion, so Fair Tax supporters exaggerate if they make that claim.
The next point of contention is whether the IRS can be repealed under a Fair Tax.
…some agency needs to collect all the sales taxes, ensure retailers are sending in the full amount, and handle all the mechanics of the prebate. The prebate requires this federal agency to know everyone’s family size and have a bank account or other method of sending out the prebate each month. So while individuals will have less interaction with the federal tax agency, there will still be some. For retail businesses, their interactions with federal tax officials will be at least as much as now, if not more.
The Professor is right, though this may be a matter of semantics. Fair Tax people acknowledge there will be a tax collector (the legislation creates an incentive for states to be in charge of collecting the tax), but they say that the tax authority under their system will be completely different than the abusive IRS we have today.
Last but not least is the controversy over whether everyone benefits under a Fair Tax.
…while Fair Tax proponents often act like nobody loses under the Fair Tax that is simply not possible. If the Fair Tax is implemented in a revenue neutral manner (collecting the same amount of total revenue as all the taxes it replaces), and some people win then other people must lose. Poor people pay roughly no tax either way, so the Fair tax would be neutral for them. The very rich will assumedly pay less since they spend a lower percentage of their income and spend more overseas. Thus, the suspicion is that the middle class will be paying more. One other group pretty sure to pay more is the elderly. The elderly have paid income tax while earning income, and under the Fair Tax would suddenly pay high consumption taxes right when their income drops and their spending increases. In the long run, this is not a problem, but early in a Fair Tax regime, the elderly definitely are losers.
Once again, Professor Dorfman is making a good point (and others have made the same point about the flat tax).
My response, for what it’s worth, is that supporters of both the flat tax and national sales tax should not be bound by revenue neutrality. Especially if the revenue-estimating system is rigged to produce bad numbers. Instead, they should set the rate sufficiently low that the overwhelming majority of taxpayers are net winners.
And in the long run, everyone can be a net winner if the economy grows faster.
And that, as Professor Dorfman agrees, is the main reason for tax reform.
The Fair Tax really has much to recommend it. It is simpler than the current system. It causes fewer distortions in the daily economic decisions that people make. The main distortion it does introduce is positive: to encourage saving and discourage consumption which would make the country wealthier in the long run.
Though I would quibble with the wording of this last excerpt. I don’t think the Fair Tax creates a pro-savings distortion. Instead, it removes an anti-savings bias. Just like the flat tax.
Now let me add a friendly criticism that Professor Dorfman didn’t address.
Advocates of the Fair Tax correctly say that their proposal shouldn’t be implemented until and unless the income tax is fully repealed. But as I explain in this video, that may be an impossible undertaking.
To be blunt, I don’t trust politicians. I fear that they would gladly adopt some form of consumption tax while secretly scheming to keep the income tax.
P.S. Actually, what I really want is a very small federal government, which presumably could be financed without any broad-based tax. Our nation enjoyed strong growth before that dark day in 1913 when the income tax was imposed, so why concede that politicians today should have either a flat tax or Fair Tax? But that’s an issue for another day.
[…] many sympathizers openly admit that the Fair Tax has […]
[…] A Fair Tax (or any form of national sales tax) will reduce the underground economy, but not by a greater amount than the flat […]
[…] tax, proponents of a national sales tax support full repeal of the income tax. I don’t think that’s realistic since it’s so difficult to amend the Constitution, but their hearts are in the right […]
[…] played fast and loose with the truth. That plan would have required the government to send “prebate” checks to households to partly compensate people for the new tax, yet supporters would argue that this […]
[…] I’ve also pointed out that other tax reform plans have similar attributes. Here’s what I wrote, for instance, when comparing the flat tax and national sales […]
Nedlandp, I actually have. An inflation bump of 24.8%-that is patently absurd. My stated point about criticisms of the Fair Tax being short-sighted was designed to illustrate the fact that many people who oppose the plan parrot over and over false claims that it helps the wealthy and screws low and middle income families. Insanity is said to do the same thing over and over with the expectation of a different result each time. Even though it is supposed to be non-partisan, liberals are more critical of the plan than conservatives and libertarians. Stephen Eldridge and Hank Van Gleason, I think everyone who works for a living should keep most of what they earn or all of it.
Jeff:
Please read my comments above, before you call criticism of the FairTax short-sighted.
Do you realize that the FairTax envisions a one time inflation bump of 24.8%?
As Yogi said: “In theory, theory and practice are the same. In practice, they’re not.” The FairTax is great, in theory.
The Fair Tax Act’s critics have a tendency to display short-sighted thinking with their opinions Just my thoughts.
[…] of the Heritage Foundation, now of the Cato Institute, who blogs at International Liberty. He is “a long-time proponent of the flat tax.” One reason is because “other than a family-based allowance, it gets rid of all loopholes, […]
[…] Koskinen is right. So long as the federal government intends to extract more than $3 trillion from taxpayers, there will be a tax-collection agency. That’s true even if you have a flat tax or a national sales tax. […]
[…] of the Heritage Foundation, now of the Cato Institute, who blogs at International Liberty. He is “a long-time proponent of the flat tax.” One reason Mitchell supports the flat tax is “other than a family-based allowance, it gets […]
My friend Hank,
What is sad is that you are in denial. Our friend the CPA admitted there was the legal potential for consumer audits, i.e.. that Sec 101(d) gives the STAA, a legal basis for doing so. He differs with me on the probability that STAA would in fact do so (which differs from the lega possibility, which any lawyer would fix).
The fact that AFFT would never admit to that legal potential (and fail to fix the statute, which would be laughable anyway) would be very telling. It would say theyWANT the STAA to be able to audit consumers, or they just realize that it would be laughable to try to prevent that.
Your state of denial is such that you just cannot accept what I have laid out for you, i.e., that Scalia reads the clear verbiage of the statute – he does not look for some general purpose and “overarching goal of the FairTax , freedom and simplicity”. That is just not the way he reads statutes – even though that is the way YOU would like him to read them. Your avoiding reality is not a good sign.
I do not know where you get your ideas from.The STAA would not need to bring a lawsuit – it would simply begin conducting audits of consumers, by mailing out thousands/millions of my “Pre-Audit Questionnaires”.
Yes, I have a LOT of doubt that would happen – I certainly do not accept YOUR vision of reality.
Notwithstanding that STAA has sufficient legal basis to conduct consumer audits, I must confess to you that I have one major concern about whether STAA will in fact conduct consumer audits, as I have outlined. That is, they may not do so (at first) because Congresss wants to use the inevitable large shortfall in tax revenues as an excuse to 1) repeal the Sunset Clause, and 2) enact a NEW Income Tax.
What is really absurd is that you continue to flog this dead horse. Move on, my friend! Neither AFFT nor myself would ever admit there is even a remote possibility of consumer audits. And your fellow CPA you mentioned only believed that consumers might get involved during a business audit, but did not agree with your consumer audit proposal.
The general language of HR25 would make it clear to Scalia and the other eight justices that the overarching goal of the Fairtax , freedom and simplicity, would prevail over your audit scheme. I’m not sure just what your “unwanted conflict” consists of, but if you are thinking that the STAA Administrator would bring suit to commence consumer audits, then that is really laughable. Why not accept the clear fact that business audits will be the initial tool to reduce evasion, and if the system fails, then a decision can be made to cancel the Fairtax or adopt consumer audits. Is there any doubt that the first choice wins hands down?
Hank,
IMHO, It is poatently absurd that the consumer must RECIVE a receipt butnot have to be able to prove that to STAA.
Again, the retailer is already required by Sec 509 to give the consumer that receipt so that 101(d) would be duplicative – an intrepretive non-no.
I have explained an extremely simple, effective method of conducting such audits – sending out loads of Pre-Audit Questionnaires as outlined above which alone will bring in a lot of revenue.
You still miss the bottom line. Even if if AFFT does not share my level of concern, they (you) must admit that there is the possiblity of such audits (as another CPA that you and I discussed this point with agreed to). Even as you say, a court SHOULD reach your conclusion from the general language of the FairTax which per se is NOT perfectly clear. It would be malpractice NOT to make it perfectly clear in the statute and avoid ANY potential for an unwanted conflict. AFFT’s failure to do so is very telling (even though that would be laughable).
AFFT will not change HR25 because they do not share your concerns. We all agree that the consumer gets a receipt, but only you make the jump of possibly faulty logic that, therefore, the consumer has to show the receipt to someone. Nothing in the law requires consumers to do anything with that receipt–just your imaginative conclusion. The alternative possibility which you refuse to entertain is that if the consumer gets a receipt, then the retailer must have prepared it and that is one objective of 101d.. The primary source of evasion will be at the business level, not the consumer level. Getting the consumer involved should reduce the possibility of business evasion, coupled with the cash reward offered to consumers if they report illegal business activity. If the retailer writes receipts, then the AFFT auditors can successfully audit the business in short order. And, if AFFT does audit businesses, evasion may decline to acceptable levels. If not, scrap the Fairtax as at least six other nations have done.
There is no way that AFFT would ever contemplate auditing 150 million family units and require that each family collect, retain and tote up annually thousands of sales receipts in order to determine the actual Fairtax paid. Intrusive, complicated and un-American in the extreme. It isn’t going to happen, my friend.
Hank,
I have not yet seen from you a rational explanation of why AFFT would fail to make changes to the statute in order to make it perfectly clear and rule out any possible argument that STAA MIGHT make to justify auditing consumers.
Even if they think a court should reach your conclusion, it would be malpractice NOT to change those words (but laughable).
There is no rational reason NOT to fix the statute.
Hank,
I know that you are not receptive on this point, but having 2 taxes allows Congress to make 2 smaller tax increases, rather than one simple. clear tax system with e.g. my 10% rate with peope watching carefully.
Now, you switch away from the evils of the FairTax and divert to my Flat Tax.
Based on calculations offered by a couple of AFFT oppenents, my 10% Flat tax is revenue neutral. If for any reason, JCT says it needs to be higher, I would agree to that – I put in a provision that requires that any “excess” collections (which I fully expect) must be used to reduce the tax rate.
Exactly why is that disingenuous for me to connect to H.R. 1040 – it IS in fact based on that, albeit with modifications.
Ben Carson supports my tax so “No one would ever support your flat tax war on the poor, IMHO”, is YOUR opinion. From my exprience, a lot of people I speak with love that idea.
In fact, I do use the fact that changes must be evolutionary (Flat Tax) rather than revolutionary (FairTax). I know that you are not suggesting that we enact the FairTax because you are just as much against it as I am.
I understand the difficulty of getteing the cowards in Congress to increase taxes jn the poor.I propose an ideal Flat Tax. Perhaps Congress will get somewhat closer to mine than to H.R. 1040. I will have to live with that, but there is nothing wrong with setting forth an ideal (and don’t be so sure that the taxpayers would not support my Flat Tax which does make the poor pay taxes).
Having read your post, I am no wiser as to why two sources of revenue are such a bad idea? And, your 10% flat tax can’t even begin to replace just the income tax as I think you know. It is disingenuous of you to claim that the Eldridge flat tax is somehow connected to the Burgess flat tax legislation. No one would ever support your flat tax war on the poor, imho. You could have headed off a lot of valid criticisms if you had tried to walk before running. You have written about the value of evolutionary changes rather than revolutionary. Yet you propose a total revolution with your version of a flat tax that can go nowhere. Sad!!!
Hank,
I am sure that your sainted grandmother was a wise woman, but her advice was good with respect to your invested assets – it’s not so good for us chickens (federal taxpayers) to give Congressional rascals multiple tools to extract our wealth fromus.
States are much closer to the people that the fed govt and are far more sensitive to raising taxes than is the fed govt. I (and apparenbtly Dan Mitchell) are loathe to give the rascals in Congress yet another tool which which to squeeze more money from us.
Have you any doubt that Congress consists of a bunch of spendthrift, spending addicts who are terrified to CUT spending and to REDUCE their own power?
I can only warn and impart wisdom, I cannot force the reader to adopt it.
If we get Congress to anact a simple 10% Flat Tax, they will be cautious in trying to monkey with it.
As I told you offline, I don’t agree with you, Dan Mitchell and a host of others that set their hair on fire when the subject of two types of national taxes is raised. Most of the States have at least two sources of revenue and they tend to complement each other depending on economic conditions. No one has ever explained exactly what all the angst is about. My sainted grandmother always said that it was unwise to put all your eggs in one basket. Was she wrong???
It turns out that a 10% flat tax and a 10% VAT could replace the income tax and create enough revenue to balance the federal budget and begin reducing our national debt. Leave payroll taxes alone, adopt exclusions and deductions that would protect the poor and the non working poor, and we might succeed in saving our Republic! Stay tuned!
Reply to Ned Wiliams,
My friend chooses to get into this important point of whether consumers are able to be audited. However, it is not as important as the extremely important issue that follows it, which is that the FairTax is a Trojan Horse that hides a NEW Income Tax, IN ADDITION – a strong warning Dan Mitchell makes, see, A Primer on the Flat Tax and Fundamental Tax Reform, August 11, 2012 by Dan Mitchell, Senior Fellow, Cato Institute
IMHO, it is very important for readers to understand these hidden risks in the FairTax and to begin to understand the deceptions contained in FairTax propaganda which also exists in many more aspects of the FairTax.
We are not trying to merely tweak the FairTax – it cannot be tweaked or saved. In the words of an economist hired by AFFT (Harvard Prof. Dale S. Jorgenson), the FairTax takes on far too large a burden for it to carry in trying to replace all 3 taxes.
This is a tax law and thus the devil is in the details. See my website: http://sceldridge.wix.com/sceldridge
Bottom Line: my friend HVG and I agree FULLY that the FairTax would be a disaster.
What you say has the ring of rationality to it, but IMHO, that falls apart when you consider the following. If you had a combo Income Tax, plus Sales tax, you thereby give the rascals in Congress BOTH tools which they can maniplulate and with which they can torture us.
IIMHO, it is far wiser to move to a very flat income tax and not allow Congress to slip us that national sales tax for the very first time.
This discussion has gotten way too wonky and I think you’re missing the point, which is: What is the best replacement for the current tax code?
We are not in the tweaking phase, but rather the initial design phase. It makes sense to first consider all options with an open mind.
For example, taking the best aspects of the FairFax and a Flat Tax certainly should be considered, even if it’s called a Hybrid Flat Tax.
Since this new code must interact or replace current welfare and entitlement programs, shouldn’t we build in features that will enhance the entire package, especially if such considerations could make it politically feasible?
I (and Justice Scalia) do not NEED nor would we consider the current verbal input of the drafters. All we can look to to interpret Sec. 101(d) is its precise VERBIAGE. I (we) can read the plain words of the statute – the consumer is liable unless he paid and received a receipt and common sense should tell you that the STAA must be able to audit those statotory requirements.
It appears that you cannot get past your inaccurate belief in that “what the authors INTENDED” would control in a court’s interpretation of the statute. You apparently cannot accept what Justice Scalia is telling us. Forget what they had in mind – the only thing that counts is the expressed verbiage that was voted on by Congress.
Again, if they want to insure the result that you claim, then they should fix the statute BEFORE it is enacted which is not at all difficult to fix. What would possibly be their reason for NOT fixing the words of the statute to insure their (and your) claim (except that it would embarrass them).
Your comment on the reason for a receipt is confusing to me. You appear to claim that such receipt is needed in B-2-B transactions. I believe you to be INCORRECT because another section (I believe it is Sec 102(a)(1)), says that B-2-B transactions are EXEMPT from FairTax so that no such receipt is necessary, which make your argument invalid, IMHO. Sec. 101(d) refers tom the consumer, not to a business and requires consumers to pay the tax and receive a receipt – why does a business need a receipt for payment of a tax for which that buiness is EXEMPT?
Sec. 508 refers to ALL parties liable to REMIT (not “collect and remit”) tax, which includes all businesses, all non-business individuals who are also liable to remit tax. It is clearly, IMHO, broad enough to cover an individual consumers who evades paying the tax – this is entirely consistent with my view, so thank you for pointing this out to me. Even if this Section referred only to those required to “collect and remit”, that would not be inconsistent with my interpretation of Sec. 101)(d) – i.e., reading 101(d) my way does not undermine the operation of Sec 508.
While Sec 103 explains that retailers and certain non-retailers are laible to pay the tax, Sec 101(d) acts in the nature of S/L USE taxes that supplement their state taxes. If fixes the statutory hole in Sec 103 that does not need to say also that “Everyone who does not pay the tax in a legal transaction is also laible to remit the tax” (which is almost silly to have to say expresly because any Judge should assume that to be the case and would interpret it so). Sec 101(d) provides that specific language which is all STAA needs to audit consumers.
Please feel free to show this to whomever it was that you asked.
I strongly believe that this (AND the far more important issue of winding uo with BOTH the Fairtax AND a NEW Income Tax of which Dan Mitchel warns emphatically) are very important points to expose the AFFT’s superficial false propaganda campaign.
Stephen,
And the precise verbiage does not make the consumer auditable except only through your eyes. I suggest you contact Dan Mastromarco or his fellow drafter of HR25 and lay your scenario on them for a reaction. I have contacted other well qualified Fairtax observers and here is one excerpt:
“Section 101d has to be taken in context for all of Chapter 1 and the rest of the bill (particularly Chapter 2, 5, 6, 7). Based on my discussions regarding those concerns and review of the bill, the language of the receipt in Sec 101d is primarily stated for B2B transactions and imports, as such would need a receipt in a business audit, which is described in the bill. Note section 508 regarding receipts and those “liable to remit taxes”. The consumer is not liable to remit taxes, they’re liable to pay the tax – the business is liable to remit taxes as described in Sec 103(a) with the exception of 103(b). So, is the STAA going to audit you for thousands of receipts a year? Absolutely not!”
I will be happy to stick to all relevant issues provided you end your strategy of surrounding the real factual issues with irrelevant distractions!
To HVG,
Yes, a mere 4-5 years ago I was just beginning to learn about the fatal flaws of FairTax with much help from you, and I remain grateful to you for that.
With my professional background which contains much that relates to sales taxes (statutory construction, auditing concepts, taxpayer reactions. etc), – with all due respect, your excellent background of economics education and internal lobbyist experience does not provide you with any more pertinent background than mine.
I draw my conclusions based on STARK REALITY, not on FANTASY.
The FACTS speak for themselves and tell they story.
The FACT is that is that they wrote Sec. 101(d), which in FACT makes the consumer liable and auditable.
The FACT is that they have NOT written more explicit language that would preclude consumer audits (which would be laughable).
From these FACTS, one can draw the clear inference that they INTEND for consumers to be audited.
I have no direct knowledge of what they thought when they wrote the statute,
I do know exactly WHAT they wrote and and I know that they have failed to try to “correct” to try to avoid any possible potential threat of consumer audit (which would be laughable). From that I can logicalli infer their intent.
What they intended is not really relevant, but is only possibly interesting. What IS relevant is the precise verbiage that they put into the statute.
And please, stick to the relevant issues.
Reply to Stephen Eldridge
You wrote: “They created Sec 101(d) specifically for the purpose of giving the STAA the legal basis to audit consumers – that is, they expect to protect the revenue by having consumers audited…”
Your statement only reflects your paranoid mistrust of all things AFFT, and has absolutely zero merit. For someone who only learned to spell Fairtax four years ago, claiming to understand what motivated the authors 15-20 years ago lacks credibility. When HR25 was written, one thing known about consumption taxes was that consumer audits had never been employed. The founders entire focus was on the process needed to audit businesses in order to protect the revenue. You can’t honestly believe that Dan Mastromarco and company gave customer audits a moments thought! And it would be somewhat foolish to attribute your devious motives to the founders. Consumer audits have never been tried by any State and would be totally inconsistent with the whole Fairtax theme–freedom and simplicity. Consumer audits and annual financial reports are more intrusive than the income tax reports and your audit scheme is far from simple. Does anyone else believe that 150 million families will faithfully collect and tabulate the thousands of receipts generated every year? And the dog never ate any of them?? The market for counterfeit receipts at years end could be huge as all accounts are closed out.
Stephen, your massive income tax experience about which you write so extensively does you little good here. I’m sure that income tax audits are well known to you, but no one has any experience with consumption tax audits. I firmly believe that if business audits fail to control revenue loss, the best thing to do would be to find another tax reform plan.
Mark,
If AFFT was smart and truly intended to secure that consumers would not be audited they would insert even clearer language in the statute in order to wisely avoid ANY POTENTIAL POSSIBILITY of that happening – a good lawyer PREVENTS the other side from creating opportunities for future conflict that would need to be defended.
Doing that would cost them NOTHING to do – it would give their suppoirters even more comfort and aid them in convincing other unsuspecting victims (even though, as I said, that provision would be laughable).
Reply to Mark,
AFFT knows me and has heard this for 4 years,
A good lawyer at AFFT does not need a chorus of people telling him there is a problem, to know that legal wisodom says that you should avoid any such conflct by performing a no cost fix to the statute, IF you really don’t want consumers to be audited (but again, they must know that would be laughable)..
The reason that I believe that they have not done so is obvious,. They created Sec 101(d) specifically for the purpose of giving the STAA the legal basis to audit consumers – that is, they expect to protect the revenue by having consumers audited (they just do not want to be obvious about it and hope you won’t see the truth).
So Mark, IMHO, your comment has no merit.
I can easily explain why Fair Tax supporters have not “fixed the verbiage of the statute to prohibit consumer audits”. It’s because, of all the hundreds of articles I have read for and against the Fair Tax, you are the only person I have ever heard suggest that this is an issue. No one is discussing a solution because no one else sees a problem.
Further to my reply to HAG & Mark
While I an unable to copy sections of Justice Scalia’s book, I did locate an online Table of Contents and retyped the last section entitled,
“Thirteen Falsities Exposed.
66. The FALSE notion that committee reports and floor speeches are worthwhile aids in statutory constructions
67. The FALSE notion that the purpose of interpretation is to discover intent.”
Thus, IMHO, any lawyer who told you that getting that colloquy was all you needed to do and that you did not need to reword the statute to insure that you got exactly what you wanted, was giving you very bad advice (perhaps that was the best he could accomplish under the circumstances, but it was NOT a truly effective answer).
You STILL have not been able to explain why the AFFT has not fixed the verbiage of the statute to prohibit consumer audits (which I believe would be laughable). After all, the bill is not about to be enacted any time soon and they have a chance to do so every 2 years. There is absolutely no reason for them NOT to put that prohibition in the statute precisely and clearly, other than the embarrassment factor (to which and they appear to be impervious).
Reply to HVG,
Old friend, exactly what is the point of your receiving a receipt, as you admit (in your 1, above), “to absolve your liabilityfrom the tax” if you DO NOT HAVE TO SHOW IT TO ANYONE?????? Exactly FROM WHOM and HOW do you seek such absolution.
Your 2, above REMAINS fully duplicative of Sec 509’s requirement that the merchant provide that receipt (a legal construction no-no). Adding that the customer must INSIST he do that (but without any way of proving that the customet RECEIVED that receipt IMHO is a very long stretch and.a meaningless provision (another legal construction non-no) The only meaningful import I can see is that the consumer must be able to establish TO THE STAA that he RECEIVED a receipt by the STAA’s being able to ask the consumer to PRODUCE it upon audit.
Later, after I complete several imposrtant missions that my commanding officer has ordered, I shall have to find that setion of Scalia’s “Reading Law” in which he denigrates such colloquy in no uncertain terms. I uderstand yiur writing such colloquy (a poor 2nd choicev to writing the stature more clearly)because it may not hurt (and some judges, as Scalia laments, do make the mistake of looking to such colloquy – and there was a period that was in vogue, but it is receding.
Reply to Stephen Eldridge,
You wrote- “AND here is the flaw in YOUR argument. What in the world is the point of the consumer INSISTING AND RECEIVING that receipt, IF HE DOES NOT HAVE TO SHOW IT TO STAA (according to you)?????”
The point is two fold! (1) As a consumer, I need a receipt to absolve my liability per HR25; and (2) When consumers insist on a receipt, retail merchants will produce one. The combination of the legal requirement that merchants have to produce a receipt and the consumer insisting that it happen should ensure that business audits will be effective. If, as you suggest, both retailer and consumer agree to ignore the law, then it is the retailer that runs the risk of going to the slammer when a clever business auditor figures it out.
Judge Scalia aside, in the event of ambiguous or confusing language in legislation, the search for Congressional intent is certainly not irrelevant. Here is the definition of a colloquy:
“Colloquy
Discussion between members during floor proceedings, generally to put on the record a mutual understanding about the intent of a provision or amendment. The discussion is usually scripted in advance.”
Having spent ten years on Capitol Hill, and having drafted a number of colloquies, I seriously doubt it was all “irrelevant”. But this whole discussion may be irrelevant in that the Court may never get involved. The real issue is whether or not the Administrator of the STAA would ever file suit to try and overturn the clear intent of HR25 as recorded in the colloquy. The likelihood of that happening is zero until or unless it becomes clear that business audits are ineffective and revenue generation is unacceptable. At that time, in a choice between auditing consumers and replacing the Fairtax, I firmly believe the Fairtax would be doomed to the dustbin of history. Such an outcome can easily be predicted based on the fact that six nations have already tried a broad based national consumption tax similar to the Fairtax and failed. Evasion in the service sector, over half of the economy, is the real potential cause for failure.
Addendum to my reply to Mark & HVG,
H.R. 25 has been around for 15 years (I have been exposing it for 4+ years).
Why hasn’t the AFFT “clarified” (rewritten the verbiage of) H.R. 25 for this and for other criticisms that I and others have made? Hank, please recall my pointing out that the FairTax could easily be read as cascading on top of S/L sales taxes, thus imposing an extra FTi.e., on S/L sales taxes.
I think even Congress might be too embarrased to to write a bill that says that consumers could not be audited, although Congress seems to have no sense of embarrassment.
MY reply to Mark,
IMHO, It is naive to think that any tax law would tie its own hands and prevent such audits. Even if one stretches the imagination and “assumes arguendo” that the bill passed with such language, IMHO, it is naive to think that prohibition would survive in the face of massive evasion and resulting tax revenue shortfall,
You admit the obvious – that IRS can and does audit individuals.
Retailers TODAY risk penalties when they evade sales taxes that are ONLY 5-10%. Do you really believe that they will stop doing that when sales taxes are a combined 40-70%??????? IMHO (and that of other financial professionals) is that tax evasion would skyrocket.
The merchant not only helps the consumer save the tax, but thereby makes sales that he would otherwise nit be able to make, thereby earning a profit on the goods he sells.
You can convince yourself that retailers (and consumers) won’t risk cheating, but IMHO and that of other financial professionals, there would be a frenzy of evasion.
Reply to HVG;
My dear friend. you continue to miss the fact that, the statute does not have to expressley provide that STAA can audit consumers. It is sufficient that Sec 101(d) creates a liability for the CONSUMER to pay the tax, a liability of which the consumer is absolved ONLY if he pays the tax and RECEIVES a receipt therefore. This alone enables the STAA to audit the consumer and see to it that the consumer can prove that he paid the tax on all his purchases.
While it makes more sense to you that Sec. 101(d) makes consumers INSIST on getting a receipt, IMHO, SCOTUS Justice Scalia would reject that premise as entirely duplicative (an interpretive non-no) because Sec. 509 ALREADY commmands the retailer to provide that receipt. While I have not gone back to look, retailer audits and interest and penalties are sufficient to threaten retailers.
AND here is the flaw in YOUR argument. What in the world is the point of the consumer INSISTING AND RECEIVING that receipt, IF HE DOES NOT HAVE TO SHOW IT TO STAA (according to you)?????
If I agree to cooperate with a retailer who will cheat, I will NOT be INSISTING on a receipt (that I don’t have to show to STAA, according to you). This makes absolutely NO sense to me.
Hank, I would not like to see any discomfort befall you. If you said that about “floor colloquey” to SCOTUS Justice Antonin Scalia, he would immediately have you physically ejected from the courtroom. He rails against that specific (and similar) argument (s). Please read his book, Reading Law. He would read Sec 101(d) as I have and say that the STAA has the legal basis in the law to audit consumetrs
While my comments deal with the FairTax, they are comments on the rules of statutory construction, and tax statutes, and the practicalities of auditing – all of which are directly within the scope of my lifetime of professional experience.
Fine then. If a Fair Tax ever gets close to passing, I hope you or somebody brings up this danger of a clause in the bill having the potential to be interpreted to authorize consumer audits. I’m sure the supporters of the bill would then promptly amend it to explicitly rule out such audits, and that would be the end of the subject. Because supporters of the Fair Tax have made very clear that a major goal is to eliminate individual income tax returns. If there are enough votes to pass a Fair Tax, there are enough votes to pass such an amendment. This is a total red herring and a non-issue.
RE impossible to enforce the Fair Tax without consumer audits of the sort you describe: By the same reasoning, it is impossible to enforce the present income tax without requiring every tax payer to attach a copy of every paycheck and every deposit slip to his tax return. But the IRS has never demanded that. Rather, they rely on employers to accurately report employee’s income on their W-2’s. Why is that? Probably because it’s a lot easier to audit the relatively small number of businesses than the large number of taxpayers. The same thing applies to the Fair Tax. A business owner is unlikely to understate an employee’s income to help that employee defraud the government. Why should the business owner risk going to jail to help save the employee a few bucks? Likewise, under the Fair Tax a business would have little incentive to not collect the tax, and thus risk the owner going to jail to save the customer money. Of course a business might collect the tax and then falsify records to the government and not submit the full amount collected. But under an income tax a business could collect income taxes and then falsify records and not submit the full amount collected to the government. That is presumably what the government would be auditing.
While I can agree with the Scalia position that the language of a statute controls, your dilemma is that there is no language in HR25 allowing consumer audits. You refuse to consider an alternate reason for Sec 101d which makes much more sense to me than your interpretation. Elsewhere in the legislation, retailers are required to provide a sales receipt. 101d simply makes consumers also insist that they be given a receipt in order to eliminate their liability. Along with the cash rewards offered for information on business cheats, ensuring that retailers maintain a proper receipt book seems to be most important to support future business audits. There will be no consumer audits!
If there is any doubt about the intent of the ambiguities in 101d, a two minute colloquy on either floor of Congress will make it clear that the STAA can not audit consumers, an intrusive and unnecessary proposal entirely out of step with the very purpose of HR25.
I suggest that your lifetime of experience with the income tax in no way makes you any more informed than anyone else regarding a national consumption tax. No one has any experience with the proposal contained in HR25. You are welcome to your opinions, and civil debate on your more radical proposals should be of benefit to all advocates and critics alike.
Yes, you and I have been down this road many times, but I do not know what else to do to explain it to you.My comments proceed from a lifetime of tax practice – all I can do is tell you what my professional experience tells me.
The fact that you feel that auditing consumers “flies in the face of the very reason to switch to the Fairtax–freedom from government interference and simplicity” is irrelevant to the legaluties of the verbiage of the FT statute.Such vague “intent” is ignored and only the erods of the statute as eneacted by Congress are relevant (SCOTUS Justice Antonin Scalia).
Sec, 101(d) provides STAA with the clear legal basis for assesing the FT against the consumer. It also provides STAA with the basis for demanding that
the consumer produce evidence that he in fact “received” a receipt. Otherwixse the statute’s requirement has absolutely no meaning, if STAA cannot determine if the consumer in fact ever RECEIVED that receipt.
Your explanation is duplicative (a legal istatutory interpretation prohiition) in that another section specifically requires that the merchant provide a receipt to the consumer.
Also, your explanation ignores the reality that consumers and merchants together will ignoe those requirements knowingly.
STAA may not be able to require the filing of an ‘Annual FT Summary” all on its own – it may need a lille help from Treasury or Congress.Again, it gets clear support for demanding that consumers produce that receipt from Sec. 101(d)’s provision that the consumer satisfies his liablility by RECEIVING a receipt.
The “money” is in the 320MM American consumers. If they know they will be audited or have to file my “Annual FT Summary”, THAT is where the big money will come from. Auditing businesses only will NOT protect the revenue.
As I have explained to you, it is totally IRRELEVANT that you believe that consumer audits would be intrusive and require you to hire an accountant (it won’t because it is a ver simple process) – the STAA has the legal authority to conduct such audits and must do so in order to protect the revenue.
Even if the language of the FT were clarified, I would be very skeptical about what Congress would do with that because it makes absolutely no sense to me that the STAA would not be able to effectively protect the revenue. One thought does come to mind. Perhaps under your view, the FT is set up to fail (i.e., be terribly short of meeting its revenue neutral target), thus paving the way for an emergency NEW Income Tax.
There has not been the need or political will for States to audit consumers, because sales tax revenues are relatuvely less important. However, when the FT is 7/8 of total federal revenues, and S/L sales tax revenues are a much larger portion of S/L revenues (i.e., if they fold other S/L taxes into their Sales Taxes), the level of important rises geometrically.
I believe that the high risk of such audits/annual filing must be exposed. It exposes a major fraud of the FT. Yes, there are a host of other fatal flaws in the FT, but bringing out as many as possible (especially important ones) will help people understand that the FT would be an absolute disaster.
Reply to Stephen Eldridge re: consumer audits
We have been down this road many times but I still maintain that the STAA will not attempt consumer audits for a number of reasons. First of all, such an action flies in the face of the very reason to switch to the Fairtax–freedom from government interference and simplicity. HR25,sec101d requires the consumer to pay the sales tax and receive a receipt. In so doing, the likelihood of business cheating is severely reduced, aided by the reward for individuals turning in known business evaders.Where you go off the rails is assuming that the STAA has some right to demand consumers produce the receipt, thus leading to your proposed annual Fairtax reports. They are extremely intrusive and likely cannot be accomplished without the aid of a tax professional. If you don’t believe me, just try doing one yourself!
As Willie Sutton famously said, “I rob banks because that is where the money is”! As the STAA Director, I would say that I audit businesses because that is where the money is! There is no sense in auditing 150 million families when auditing 20 million businesses will adequately protect the government revenue.
As some readers have noted, if there is any doubt about the intent of HR25, consumer audits can be ruled out with minor language changes, Consumer audits have never been tried by any State and will not be done under the Fairtax. Find some other reason to criticize HR25. There are plenty available without needing any such speculation!
Reply to Mark re consumer audits II,
No Mark, you are not understanding how to read statutes AND NO CHANGE in the FT is necessary for STAA do audit consumers as I have outlined.
Sec, 101(d) of the FT statute make the CONSUMER liable to pay the tax. It does not need to spell out that STAA can audit consumers and ask them to report their purchases or to produce their FT receipts (it is sufficient that Sec. 101(d) absolves consumers IF the paid the tax and RECEIVED a receipt (how will SAA know if the consumer RECEIVED a receipt unless they ask him to PRODUCE it?)..
It procides the STAA with sufficient legal basis to do what i outlined. What FT merchants claim is “not intended” or what they contemplate is irrelevant. The only thing that is relevant is the verbiage of the Statute (SCOTUS Justice Scalia).
The statute gives STAA sufficient legal grounds to do what I have outlined, without a change in the law..
Reply to Mark re Evasion,
Yes, I agree that the BHI economics research paper that explaines that there was a ZERO allowance for evasion and for legal avoidance is PTEPOSTEROUS.
The issue is NOT the RELATIVE evasion, even though I believe that the FT’s evasion/avoidance would be far greater than today’s Income Tax. The issue IS the fact that the FT’s targeted revenue neutrality ims to collect the amount of today’s tax revenue which is AFTER todays evason. This ANY evasion/avlidance results in a shortfall from that revenue neutral target,
No-one can accurately predict the amount of FT evasion/avoidance, due in part to the fcat that 40% sales tax rates are unprecedented.
There will be more ways of illegally evading (and legally avoiding) the tax. For one there will be a huge illegal marketplace – think of Tony Sopranso selling stolen goods from the back of a truck.
Saying that a consumer is “liable to pay the tax” and “is required to report all his purchases and taxes paid” are two very different things. If you can show me someplace in any of the current Fair Tax proposals where it says that consumers would be required to file tax returns, well, that’s just contrary to the whole idea.
Again, you’re saying that Congress or bureaucrats could totally change the law from any current proposal and turn it into something that is practically the opposite of the current intent. I guess that’s possible, but by that kind of thinking I don’t see how you could possibly support ANY law. Maybe Congress will decide that a Flat Tax bill should be amended to authorize the FBI to torture people into confessing that they have failed to report their entire income. After all, I’m sure there’s some clause in any Flat Tax proposal that authorizes the IRS to verify that incomes are accurately reported. What more justification do they need?
RE criminals evading the Fair Tax: OF COURSE if someone says there will be 0% tax evasion under a Fair Tax, that’s absurd. But there is evasion under current law, too. The question is how they would compare.
I found the PDF file someone mentioned that claims that evasion would be higher under a Fair Tax. Maybe there’s a more complete paper somewhere, but what I found is just bullet points. It claims evasion would be higher but gives no analysis to back this up beyond listing ways someone could evade the tax.
Basically these evasion methods boil down to understanding sales or claiming that taxable sales are tax-exempt. That’s quite true and I’m sure that some businesses would do that. But here’s the point: Businesses can evade taxes in exactly the same way today. Businesses today can also evade taxes by claiming phony deductions or overstating deductions. There are many more kinds of deductions than there are sales, and the rules for deductions are much more complex than the rules for sales. There are all sorts of complex rules for what is deductible, when you can claim the deduction for an expense, depreciation rules, etc etc. So the potential for tax avoidance is much less under a Fair Tax in the sense that there are fewer things that you can lie about, fewer ways you can manipulate the numbers, etc. It would be harder to get away with fraud because the rules are dramatically simpler. There are no new opportunities for fraud. It is difficult to see how this could lead to MORE fraud.
Despite the claim of this report and an earlier poster, I stand by my position that criminals would have a harder time avoiding taxes. Say you are a drug dealer. Presumably you do not report your drug income on your income tax. The people buying from you aren’t filing 1099’s with the government, so the feds would have a very hard time discovering this income. You don’t file income tax returns and you pay zero income tax.
Under the Fair Tax, most of your money is spent on legitimate products. You buy a house and a car and food and TVs and computers and furniture and vacations in the Bahamas, etc. Most of the people you buy from are legitimate businesses. They are going to charge you Fair Tax. They will not say, “Oh, you earned this income illegally? Oh well in that case of course we won’t charge you tax on it.” They’ll charge the same tax they charge anyone else. Sure, you’re not going to pay tax when you buy drugs from your suppliers or buy illegal guns or whatever. (But hey, these are business expenses and would be non-taxable anyway, right?) But you will pay taxes on your purchases of legitimate goods. You’ll pay a lot more tax than you do now.
I suppose a gangster might set up a front business to buy goods for his personal consumption while claiming that these are non-taxable business purchases. But then he’s getting into another whole area of criminal activity, increasing his exposure to getting caught. If his business is going to pretend to be legitimate, he will have to register to pay taxes, and he will be liable to be audited. I’m sure some would do it and get away with it, but it would be hard.
No doubt smart criminals would figure out other ways to evade taxes. But they do that now.
My bottom line is: It makes it harder to get away with evading taxes. Does it make it impossible? Of course not. But harder. The really smart criminals might still figure out ways, but most will not, and so they will pay at least some taxes.
Reply to Mark re; Retired people’s IRA’s
I am confident that many seniors have after-tax savings outside of their IRAs-401Ks. Thereare limits on the amounts one can put into those accounts and prudent people have saved additional amounts. The FT would punish them witgh a 2nd-3rd tax.
Seniors would effectively begin paying for mSS/Medicate again bevause the Ft now funds those programs.
HVG’s wife ran a series of calculations (using very conservative assumptions) that middle income marreod seniors ($30,000-$110,000) would pay more in FT than they would pay in income tax. (Single $30,000-$60,000).
Reply to Mark re audits of consumers,
Mark, please read FT Sec. 101(d). It makes CONSUMERS liable to pay FT, (just like any S/L USE tax). That is all the legal authority the STAA needs to audit consumers.
As a former tax practitioner, I put myself in the shoes of the Comm’r of STAA and asked myself, what would I do to protect the revenue if I were the Comm’r.. The Pre-Aidit Questionnare that I noted is a very simple, efficient, effective way to hold down evasion (I would later morph that nto a required filing of an “Annual FT Summary”).
STAA has the legal power to make consumers prove how much they spent and ask them to prove how much FT they paid. I know this is not what the FT merchants are telling the public, and is disturbing for you to hear, but I feel it is important for me to expose the realities.
STAA may decide NOT to do this, but I think they will have to do so in order to protect the revenue. Forewarned is forearmed.
I’m not particularly an advocate of the Fair Tax, but I seem to be the only person on here pointing out it’s positives, so …
The claim that the Fair Tax would hurt the elderly by taxing their savings a second time is mostly a red herring. The bulk of the savings of old people is in IRAs and 401k’s, which were not taxed at the time they received the income. I just did a quick search for statistics, and using numbers from two different studies — ad admittedly unreliable thing, but I’m just chatting, not preparing a doctoral thesis — the average American has $91,000 in IRAs and $3,500 in checking and savings accounts. People who are retired presumably have more in IRAs than the average, as the idea is that these accounts grow throughout your life.
So yeah, someone who has all his retirement money in a regular taxable account will get hurt badly. But that would be a very foolish thing to do and I doubt that many do it. More relevantly, people with significant money in a Roth IRA would be hurt. In my humble opinion, if a Fair Tax was passed they should give people a refund on taxes paid on money that went into a Roth.
Reply to Mark.
I agree that requests to start tinkering with the FairTax would occur starting immediatelyafter enactment. The very first industry will be the homebuilders who will experience an immediate loss of sales when lenders refuse to lend on the 40% sales tax (i.e., 30%FT + e.g. 10% S/L) and buyers must come up with 20% of the base price + 100% of the 40% sales tax. Banks cannot afford to take one of 3 future tax risks that would put that mortgage “under water” – the buyer, after putting up all that money would be left with those 3 future tax risks, that would reduce the value of the home.
Congress would not be as concerned about enacting a NEW Income Tax. We have been used to an Income Tax for over 100 years. Congress would “declare an emergency” resulting from a huge shortfall in FairTax revenues (the FairTax “assumes” that there would be ZERO tax evasion and legal avoidance). The NEW Incime Tax would be sold just like the last one was – it would only apply to the very rich (at first) and relatively quickly it would be raised (the public will not notice the water is getting hot until it starts to boil and then it would be too late.
These are my words, but I believe that this is what Dan Mitchell is trying to warn about, as well.
“Mark completely ignores the likelihood of the STAA conducting audits of CONSUMERS (see Sec. 101(d) and my Pre-Audit Questionnaire, below, which will later morph into a required filing of an “Annual FairTax Summary”);L. 1 Total spending, including FairTax (attach schedules)
L. 2 Exemptions
L. 3 Taxable spending (l. 1 – L.2)
L. 4 Total tax due (L.3 x 23%
L. 5 Total FairTax shown on ATTACHED receipts
L. 6 Net tax due (we will bill you for interest & penalties)”
Under the Fair Tax as currently proposed, the only legal consumer audit questions are how many people are in your family and what their social security numbers are. There would be no reason for the IRS to ask consumers what their taxable spending, etc, is, because it is not collected directly from the consumer, it is collected through the retailer. This is one of the key points of the Fair Tax, that it eliminates all reporting of income and spending by the consumer. An audit like you describe would be pointless and worthless. A consumer could easily include receipts only for those transactions on which he paid the tax.
I suppose you could speculate that Congress would change the Fair Tax from current proposals before passing it, but a change like this that completely undoes half the reason for passing the law in the first place would surely cause it to lose the support of all the people who signed up for the original idea. This is not minor tinkering, it’s totally gutting the whole idea of the law.
Saying that a proposed law is a bad idea because, if it was totally changed into something that has almost no resemblance to the original idea, it would have these bad consequences … one can only say, So what?
RE Congress re-enacting the income tax: There is nothing that stops Congress from imposing 100 different taxes today — and they do. There is individual income tax, corporate income tax, social security tax, medicare tax, gasoline excise tax, import tariffs, etc etc. If Congress with much fanfare abolished the income tax and replaced it with a national sales tax, it seems pretty unlikely that just a year or two later they would re-enact the income tax on top of the new tax. Surely that would lead to way too big a backslash. I think the much more realistic fear is that they would tinker with the sales tax, like start giving exemptions to politically powerful groups and impose higher rates on disfavored groups — I can almost guarantee that there would be a bill on the floor within a year to make solar power exempt from the sales tax, to charge a higher rate for fast food, and of course to give breaks to companies owned by major campaign contributors with some justification or other.
Presten,
Here is the link to Dan Mitchell’s article in which he warns emphatically of the dangers of us winding up with BOTH a consumption tax and an Income Tax
Reply to Presten Witherspoon,
Forgive me but your comment is rather naive.
Do you recall the Sherriff in Blazing Saddles who puts a gun to his head and threatens to shoot if the crowd does not get back? When he reaches the safety of the jail, he sighjs, “Boy, are they STUPID?”.
Congress will surely repeal that Sunset Clause and, while the 16th is still firmly in place, it would enact a NEW Income Tax, as Dan Mitchell emphatically alludes to in a video embedded in another of his article which is linked-to in this article.
Reply to HVG;
The FairTax increases tax welfare first, in the broadest sense by placing far too many Americans on the federal dole – receiving a sizable ,monthly check from Uncle Sam than can easily be increased and manipulated.
It clearly expands the classes of people who receive tax welfare in that the non-working poor are added as a class of tax welfare recipients.
Lastly, you cannot accurately make your point (which you inexplicably, incorrectly INSIST is the limited point that I am purportedly making), because neither of us has sufficient current info, and we can only guess at the total dollar amount by which the Prebate would overpay any FairTax paid. Your back-of-the- envelope calculation is overly simplistic and grossly underestimates the number of people who would receive such “excess” payments and the proper comparative numbers.
My response to comments made by Mark;
Criminals (tourists, illegals, etc.) paying FairTax:
2 UT economists have commented that criminals, etc., will pay no more in FairTax than they would pay in today’s “embedded taxes”. see, Fox, William F.; Murray, Matthew N. (May 13, 2005). “A National Retail Sales Tax: Consequences for the States” (PDF). Symposium on State Tax Implications of Federal Tax Reform.
Presumably, Mark implies that the evil rich (who pay a very high percentage of the total tax, but earn only half that percentage of total income) don’t pay enough – this is the typical Progressive-Socialist class warfare.
IMHO, the FairTax will destroy our retail-sales-sensitive economy via its in-your-face 40-70% sales tax (40% = 30% FairTax + plus e.g. 10% S/L and 70% is the rate needed at a sample 30% evasion/avoidance rate – the FairTax “assumes” ZERO).
Among other things, Mark completely ignores the likelihood of the STAA conducting audits of CONSUMERS (see Sec. 101(d) and my Pre-Audit Questionnaire, below, which will later morph into a required filing of an “Annual FairTax Summary”);
L. 1 Total spending, including FairTax (attach schedules)
L. 2 Exemptions
L. 3 Taxable spending (l. 1 – L.2)
L. 4 Total tax due (L.3 x 23%
L. 5 Total FairTax shown on ATTACHED receipts
L. 6 Net tax due (we will bill you for interest & penalties)
[‘Mr Mitchell makes a few comments on the Fairtax which need clarification. First, the Fairtax does get rid of double taxation, but not for 20-40 years of transition. Retirees after tax savings will be double taxed when spent until those savings are gone. Second, purchasing power for most Americans will not be impacted as Mr. Mitchell wrote, but the purchasing power of middle class retirees is severely impacted. In effect, seniors in the middle class get thrown under the bus by the Fairtax. Not only are their savings double taxed and their purchasing power reduced, but in the ultimate betrayal, all senior retirees would have to resume paying for their Social Security benefits with their sales tax dollars. Hardly a fair proposal!!
As for the role of the States, I find it puzzling that it doesn’t seem that any one ever asked the States to even comment on the Fairtax scheme. What is known is that all 50 State Executives, through the National Governors Association, are opposed to any kind of a national consumption tax! I find it highly unlikely that the states will volunteer to become the federal tax collector and the federal tax enforcer.
As for the comments above made by Steve, I generally agree although his claim that the Fairtax increases welfare does not pass the laugh test. Current tax welfare payments amount to around $100 billion annually. The “overpayment” to the poor from the Fairtax prebate, if that is to be considered tax welfare, can be estimated at $50 billion, a significant reduction in welfare costs. While it is true that the poor will receive more in prebate payments then they spend on the sales tax on goods and services, it is clear that AFFT chose this method in lieu of a system that would repay only the actual taxes spent, a bookkeeping nightmare.
The Fairtax is a very bad tax reform scheme with a nice sounding name. It tries to do too much, too quickly. Replacing just the income tax might have a better chance of success if one prefers a consumption tax.
With much respect for Mr. Mitchell, I offer several comments on points made in this article.
Price Reductions:
First, the point of reducing prices is made on behalf of the FairTax and is somewhat mirrored by Mr. Mitchell. I would point out that Harvard Professor Dale S. Jorgenson (who was consulted by AFFT) clarified that prices would come down by (a maximum of) only 7% (before adding 30% FairTax).
That 7% decline “assumes” that 100% of the 7% will reduce prices. About 4% of that 7% is the employers’ share of SS/Medi taxes and economists suggest (I agree) that employers tend to view that as a cost of labor and thus, one way or another, those savings would be used to fund employee raises and thus would not be available to reduce prices.
The remaining (about) 3% is business income taxes and compliance savings. It is rational to assume at some of that will be reinvested in the business and thus not passed on to customers, leaving perhaps only 1-2% available for price reductions.
Current AFFT Chief Economist Karen Walby claims that prices will come down by 12.5% before adding 30% FairTax. However, she revealed that 7.9% of that 12.5% represents business income Taxes – while there is a little softness in the detail that I have seen, I can see no more than about 2.5%. When corrected, her figures are in line with Prof. Jorgenson’s 7% (maximum).
Prof. Jorgenson said that the FairTax takes on too heavy a burden for it to carry, in replacing all 3 taxes.
CRIMINALS:
2 UT economists have commented that criminals, etc., will pay no more in FairTax than they would pay in today’s “embedded taxes”. see, Fox, William F.; Murray, Matthew N. (May 13, 2005). “A National Retail Sales Tax: Consequences for the States” (PDF). Symposium on State Tax Implications of Federal Tax Reform.
The POOR:
Mr. Mitchell states that the poor pay no tax either way. Under the FairTax, not only do the poor pay no FairTax for general government services, but the working (and more non-working) poor pay nothing for their personal SS/Medi benefits and ALSO they take home a large tax welfare check. See FairTax Increases Tax Welfare http://media.wix.com /ugd/acdb03_c09d69364d4147af82d113eaccf9f1de.pdf
Thus, the FairTax redistributes even more wealth to the poor and leaves many Americans dependent upon the federal govt for a monthly check that represents a substantial portion of their incomes – a very dangerous condition.
Dr. Ben Carson and I agree on a 10% Flat Income tax rate and zero exemptions/deductions.
SAVINGS:
I believe it more accurate to say that the FairTax PUNISHES spending in order to produce savings – I object to that method.
A Flat Income Tax could properly encourage savings by eliminating any taxation thereon.
See more at http://sceldridge.wix.com/sceldridge
In SUM:
The FairTax advances the welfare state and is a financial house of cards – it would be a disastrous “fix” to our tax system. A very Flat Income Tax would be a most beneficial change that would stimulate oyr economy and is the least difficult to achieve.
My reply to Ned’s comments (other than his own new ideas);
Price increases will be 28%-30% – see my 1st comment to Dan Mitchell.
Seniors who have paid Income Tax will spend those after-income-taxed earnings and pay tax a second (third) time.
Because the FairTax rate includes paying SS/Medi taxes, seniors start to pay those taxes all over again.
We have run a series of calculations which demonstrate that middle class (Married $30,000- $110,000 income) seniors will pay MORE in FairTax than they would pay in Income Tax.
Are you suggesting that every employee gets his old gross pay, PLUS a raise for FairTax. That is preposterous. Employees will get their old gross pay but prices go up by 28-30%.
Hybrid – You are handing Congress both taxes – most dangerous tools in the hands of spendthrifts.
My reply to FTWarrior;
Congress wants BOTH taxes and NOTHING can absolutely insure that Congress won’t get there. However, strategically, we are in a better position if we stay with an Income Tax, because it would remain politically difficult for Congress to inflict a consumption tax for the very first time.
However, once we have the FairTax, Congress would surely repeal the laughable “Sunset Clause” and the 16th Amendment will not likely be repealed any time soon. Congress could easily rationalize an “emergency” because FairTax revenues will be terribly short of target because of evasion/avoidance (the FairTax “assumes” ZERO).
The NEW Income Tax would then be more easily swallowed by the public because they were used to an income tax for over 100 years and the NEW tax would be sold just like the original, i.e., only a tax on those evil rich people that would not (immediately) affect the middle class.
The NEW IRS (i.e., the STAA) is able to audit CONSUMERS (see Sec. 101(d)), and in my opinion will have to do so in order to hold down evasion.While some States will conduct the auditing, they would be agents of the federal govt – FairTax is a federal (not State) law. The federal govt is fully in charge of writing all of the rules and overseeing audits done by the States.
By far the most important point worth repeating here is that the FairTax is a Trojan Horse for a NEW Income Tax. That is, Congress would surely repeal the FairTax’s laughable “Sunset Clause” and with the 16th Amendment not repealed any time soon, Congress will enact a NEW Income Tax (perhaps as rationalized by the dramatic shortfall in FairTax revenues, which assume ZERO evasion/avoidance).
[…] Heritage Foundation, now of the Cato Institute, who blogs at International Liberty. He is “a long-time proponent of the flat tax.” One reason is because “other than a family-based allowance, it gets rid of all […]
I am against the fair tax and in favor of a real flat tax. under the fair tax, just like the present system, individuals take a bigger hit than “families” or “dependent groups”.
sorry but that is still a form of governmental sanctioned discrimination against the individual. I have a right to keep as much of my earnings as anybody else. The best way to do that is a flat tax without any credits, deductions or exemptions.
In the above to Andrew: $200 billion $1 thousand.
Dan:
Sorry to hog the blog, but this subject was right in my wheelhouse.
Assuming we provide a prebate to everyone that is equal to 100% of the poverty line, all means-tested programs would be reduced by an equivalent amount for no net change, assuming the state picks up the difference.
This would also be true of Social Security recipients, who would receive two checks rather than one, totaling to the current amount of Social Security. This opens the way to transition to individual retirement savings accounts since approximately 1/3 of current Social Security plus Medicare would come in the form of the guaranteed prebate, thereby reducing strain on the Ponzi Trusts.
Since FICA would no longer be paid, current retirees would be fully “vested”. Those no longer paying would be only partially vested. We could push back their “retirement” age by 1/3 of a month for every month they didn’t pay FICA, based on the current retirement age of 66. Every year the Entitlement burden would be reduced. In 30 years, only those over 76 would receive benefits.
“Retirement” is a dated concept. We would like everyone who can contribute to the economy to continue to do so. Benefits should be paid, regardless of work status. The flat tax on earnings will reduce that additional burden.
Andrew:
Under my proposal, every citizen would receive the identical amount, so the audit would be very straight forward. For simplicity sake assume the monthly payment was $1,000. If there were 200,000,001 eligible adult citizens, the monthly cost would be $200 billion, $10 thousand. If it was off by any dollar amount, either the number of citizens is off or there is fraud. I doubt anyone who is eligible would not bother receiving their monthly payment.
So with prebate cash distribution, no fraud, no waste. How does this compare to our means-tested programs?
My take on winners and losers under the FairTax is those who wish to live a lavish lifestyle will be losers while those who decide to live a modest lifestyle will be winners.
For my video on taxes, watch:
One final note on a flat tax:
The core idea of a flat tax is that no one pays a higher marginal tax rate than the flat rate. However, under the current code who pays {or might pay} the highest marginal rate? It is anyone on Medicaid or Disability.
My brilliant nephew currently receives $50-60K annually for life saving medical support. However, if he were to earn a dollar more than $14,133 [may be an old number] he loses that support. I’d say that earning a dollar and receiving a death sentence is a pretty severe marginal rate.
Second in line is a single woman with kids, above certain earnings levels she loses: healthcare, food stamps, housing, etc.
When a flat tax is instituted, doesn’t it make sense to also have a marginal rate on their earnings?
This could be done at the federal level, using a expanded “prebate” [100% of poverty level would eliminated poverty for all US citizens] that never disappears. States and charities would be free to do their own thing, but at least the federal government should set up the incentives correctly as part of a conversion to a flat tax and get out of the welfare business.
There are still problems:
Both the Flat Tax and FairTax are more income neutral than the current tax code. {These may be old numbers.} The top 5% earns 32% of the income but pays 59% of the tax revenues. There is no way the bottom 95% will vote to pick up more of the tax tab, especially since investment revenue will no longer be taxed, primarily benefiting the top 5%.
The FairTax solution to the problem is the prebate. This is an excellent solution in that the prebate can be severed from the collection process. That means no tax filing for those who are not running a business.
However, the prebate as envisioned is not large enough and it is based on the rather amorphous “families”. Instead, it should be based on individuals, adult and child. This should also apply to US citizens and legal immigrants.
Let’s see how a prebate would replace the “Tax Form” in Dan’s column:
An every adult [21+] would receive $2,227 [$13,100 * 17%] and every child $901 annually. The employer would collect 17% of all gross wages. No need to file anything.
It is estimated by Steve Forbes that it takes 7.5 billion man hours to file taxes. That translates to 3.75 million man years. If 1.65 million man years could be converted to productive time, it would be the equivalent of 1% increase in the productive workforce. While this would not show up in GDP statistics, because of the loss of jobs for tax accountants, tax lawyers, estate planners, and IRS agents, the US would have real economic benefit of 1% annually.
Speaking of those lost, these people are some of our best and brightest. Doesn’t it make sense to stop wasting their efforts on zero sum tax reporting, avoidance, compliance? The money currently spent on their salaries would then be available to hire their services in the private sector.
What’s the answer?
Both flat tax forms have their advantages. I particularly like the prebate idea, but more on that in a minute. How about a hybrid approach?
Salaries could be taxed on a Flat Tax basis. Sales could be taxed on a FairTax basis, minus gross salaries. [There would still be some tax cascading issues regarding components and black markets, but this is not the forum for a more involved discussion.]
One of the advantages of this approach is that everyone would be aware of the flat rate at which salaries are taxed, and there would be constant pressure to bring that rate down. [Both Flat Tax and FairTax rates would be the same.]
A hybrid approach would bring both camps together on the form of flat tax.
HOWEVER, as Keynes pointed out, life does not operate in the long run.
The first day of enactment, companies would pay the same gross wages, but would have to add the FairTax on top of that.
[See the footnote on “FairTax the Truth” on page, 143 which states that prices would go up by 24.6%. (this is from memory, so I may be off a little)]
If salaries could be reduced to current take-home, there would be no difference.
Because of the tax cascade of taxing what used to be the tax portion of gross salaries [income and FICA taxes] total tax is compounded. [The boost in prices probably be higher than 25%.] In the “long run” salaries are sticky downward, contracts will have to be broken, and it will be impossible to negotiate lower salaries with cost push inflation jumping up.
Since inflation is monetary, competition for sales will eventually drive prices down, but in the process jobs will be lost to automation and cost cutting. Obviously when salaries are artificially raised, that’s the first place to cut.
Let’s get one huge mistake (by Dan and some of the above) out of the way:
If a long term FairTax solution results in the same price as a Flat Tax solution (at the same flat rate); there is no shift in who ultimately pays the tax, it is the consumer!
As Dan points out, in both cases taxes are collected before purchase. In the Flat Tax case tax comes out of gross wages and gross profits, so tax is embedded in the final price. In the FairTax case, the tax is collected before sale from the vendor. If rates are set to be revenue neutral, there is no change in total tax paid, so the underground economy pays no additional tax and retirees are unaffected.
To Andrew_M_Garland
The prebate is given to every household, not just those with a low income. There is your progressivity. Income is not relevant.
We are entering a period where large numbers of baby-boomers will be spending their savings on their retirement. These savings were already taxed. The Fair Tax gives them the opportunity to have their savings and investments taxed again at a 15%-20% rate in addition to any state sales tax, as they finally use their savings for consumption.
I’m cynical. I think the push for a Fair Tax is a crafty way to again tax savings, especially as the flow of savings is going to increase as socialist production (current income) slows or even decreases.
Actually, everyone’s savings have already been taxed. How would this be accounted in the Fair Tax?
To make the Fair Tax progressive, people will still need to file tax returns to determine the tax rate they pay as a “sales tax”. The progressives will definitely want the Fair Tax to be progressive.
The “pre-bate” is a government check handed out to everyone claiming a low income. How will the government prevent fraud in this massive handout?
In a “Flat Tax”, Dividends and Capital Gains should be taxed at lower rate because investments are funded with savings which have already been taxed. In principle, dividends and capital gains should be free of additional tax.
EasyOpinions.blogspot.com
Regarding keeping the income tax and fairtax, the FairTax actually has wording in its last section to rescind itself if the 16th amendment remains in place 7 years after its enactment. So some action would have to be taken to remove the 16th amendment, or the FairTax would go away.
“To be blunt, I don’t trust politicians. I fear that they would gladly adopt some form of consumption tax while secretly scheming to keep the income tax.”
You trust them enough to keep a flat income tax flat, though, right?
The fear of an income tax being implemented on top of The FairTax is baseless. First, The FairTax bill abolishes the federal income tax code, so it’s unlikely that Congress would in one measure abolish it, then reinstate in another without political backlash. Second, if Congress was inclined to tax income and consumption, then a flat income tax doesn’t prevent them from doing that any more than The FairTax does. “Our flat income tax isn’t generating the revenue we predicted. We will now implement a low 2% national sales tax, and we cross our hearts and promise we won’t raise that rate.” Third, there’s nothing stopping Congress from sticking us with both right now. Since they have not, we must assume that while they may be stupid, they’re not THAT stupid. Not yet anyway.
Sure, under the Fair Tax the IRS would not cease to exist. Or if technically the existing organization was abolished, there would have to be some new organization created to replace it. But the relationship between the IRS and citizens would radically change. Under the Fair Tax the only possible tax evasion for a person who does not own a retail store would be to falsely claim non-existent family members. An IRS audit would simply consist of verifying the number of family members. There’d be no question of whether deductions are legitimate or even if income was under-reported, because there would be no deductions or income to report. I think many taxpayers are like me in that I worry every year that I have made some honest mistake on my tax return that an IRS auditor will find and that I could end up having to pay thousands of dollars in penalties, maybe even go to jail if the tax man doesn’t believe me when I say it was an honest mistake. Under the Fair Tax, as long as you don’t lie about the number of members in your family, you’re almost 100% safe. Okay, I suppose there could be some technicalities about who you’re allowed to include that could catch some people, but that’s a whole different league from present law.
Yes, retailers would still have to file tax returns. But the complexity of those returns would be dramatically reduced. Retailers already have to report their total sales, and they would continue to have to report that. But the other 95% of what they report would cease to be necessary. There are no deductions, no depreciation, no employment taxes. Yes, retailers would still have to worry about being audited. A retailer could commit tax fraud by understating his sales, and so presumably they would be subject to audits to verify that they are reporting sales accurately. But even for them, audits would be greatly simplified. They wouldn’t have to justify deductions because there are no deductions. All they have to document and prove is how much they sold, and which sales were to consumers versus to other businesses. They have to do that now, so there’s no new compliance requirement. There’s considerably less.
I would certainly agree that such a drastic change in tax laws is going to result in some number of people paying higher taxes. People who presently benefit from the biggest tax breaks would likely end up being losers. But it doesn’t follow that there will be just as many losers as winners, because this is not a zero-sum game. The whole point of the Fair Tax is supposed to be that it makes the tax system more efficient. If the cost of collecting taxes goes down, then there can be more winners than losers. If the Fair Tax reduces the distortion on economic decision-making, it could increase economic growth, and almost everyone could end up a winner. I suppose it’s unlikely that there would literally be absolute zero people who end up worse off. But then, most of those would probably be people who arguably are getting an unfairly easy ride under current laws, people who have paid off politicians to get themselves special tax breaks not available to anyone else. It’s not at all clear why such people “deserve” to keep their special breaks just because they have them now.
I think you and the good professor are missing the point on the point about taxing the underground economy. OF COURSE drug dealers aren’t going to send in sales tax on drug sales. I hope no proponent of the Fair Tax seriously suggests that they will. But under an income tax, presumably drug dealers do not report their drug sales on their income tax forms and so are paying 0% income tax. But under a Fair Tax, when the drug dealer goes to spend that money, he is going to pay sales tax. If he goes to Wal-Mart and buys a toaster, they’re not going to ask, “Did you earn this money from a legal job or from your drug sales? Because if you’re buying this toaster with drug money, of course we’re not going to collect sales tax and we’ll falsify our tax returns so you can make this purchase tax free.” No, he’s going to pay sales tax on everything he buys. Well, okay, I suppose some of his drug income will go to buying illegal weapons and paying bribes to police officers, etc, and presumably the corrupt policeman does not collect sales tax on the bribe and send that in. But MOST of what he buys with his illegal income will be legal products — groceries and electronics and cars and so on — and he’ll pay sales tax on all that. So under the Fair Tax, he’d still pay tax on most of his income, while under an income tax he does not.