Dialog with Americans for Fair Taxation

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P.O. Box 270143
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Phone (800) 869-1884
Fax (425) 451-3959


Dialog with Americans for Fair Taxation

Following is the full email exchange we had with Dr. Karen Walby of Americans for Fair Taxation. These questions were part of the research performed for our article, "The FairTax: A Trojan Horse for America?" In the original email, Dr. Walby's answers are in CAPS.

-----Original Message-----


From: Claire Wolfe
Sent: Wednesday, September 22, 2004 12:52 PM
To: info@fairtax.org
Subject: Questions on the FairTax for an article

Hello.

I'm working on an article about the FairTax, and I'm hoping you'll help
me with my fact checking. The article is due for release early next week.
My questions follow:

1. Is it true that, if the base retail cost of an item is $1.00, the
amount of the tax is $.30?

YES

2. Is it true that if the base retail cost of an item is $1.00, and the
state imposes a 7 percent sales tax, then the total amount to purchase the
item under the FairTax would be $1.39 ($1.00 + $.07 + $.32)?

NO, THE FAIRTAX IS LEVIED ON THE BASE PRICE AS IN QUESTION 1. IF THE ITEM
COST $1.00 THEN THE FAIRTAX WOULD BE .30 AND THE SALES TAX WOULD BE .07 FOR
A TOTAL PAID BY THE CONSUMER OF $1.37. THE FAIRTAX DOES NOT LEVY A TAX UPON
A TAX.


3. I've read your explanations of why you call a 30 percent tax a 23
percent tax. But since every state sales tax I know of is calculated as I
mentioned in question 2 (e.g. a $.07 tax added to a $1.00 item is called a 7
percent tax), how would you answer a critic who said the 23 percent claim is

inherently deceptive?

THE FAIRTAX IS A REPLACEMENT FOR THE CURRENT TAX SYSTEM AND IS OFTEN
COMPARED TO THE FLAT TAX. THE CURRENT TAX SYSTEM AND THE FLAT TAX ARE
IMPOSED ON A TAX BASE BEFORE PAYROLL TAXES AND BEFORE FEDERAL INCOME TAXES
ARE DEDUCTED. THEY ARE THEREFORE TAX INCLUSIVE. TYPICALLY, STATE SALES
TAXES ARE IMPOSED ON A TAX EXCLUSIVE BASIS.

TO COMPARE APPLES TO APPLES THE FAIRTAX IS, UNLIKE MOST STATE SALES TAXES,
IMPOSED ON A TAX INCLUSIVE BASIS. ON A TAX EXCLUSIVE BASIS, IT WOULD BE A
29.9 PERCENT TAX. BUT ON THAT BASIS, THE CURRENT TAX SYSTEM IMPOSES TAX
RATES ON MIDDLE CLASS TAXPAYERS OF 55 PERCENT (76 PERCENT IF YOU TAKE INTO
ACCOUNT THE HIDDEN EMPLOYER PAYROLL TAX THAT MOST ECONOMISTS BELIEVE IS
BORNE BY WORKERS). IT WOULD BE WRONG AND MISLEADING TO COMPARE APPLES TO
ORANGES.

TWO EXAMPLES CLARIFY THIS POINT.

FIRST EXAMPLE: INCOME TAX RATE VIEWPOINT
ASSUME A WORKER EARNS $100 AND USES THE ENTIRE AMOUNT TO PAY FOR A CD PLAYER
AT WAL-MART. UNDER THE INCOME TAX, A WORKER/CONSUMER WOULD EARN $100, PAY
$20 DOLLARS IN INCOME TAX, AND HAVE $80 LEFT OVER TO BUY THE CD PLAYER. THE
TAX RATE IS $20 DIVIDED BY $100 OR 20 PERCENT.

AGAIN ASSUME A WORKER EARNED $100, PAID $80 FOR THE CD PLAYER AND PAID $20
IN SALES TAX. THE TAX RATE IS $20 DIVIDED BY $80 RESULTING IN A RATE OF 25
PERCENT.

USING THIS METHOD, IT APPEARS THAT THE SALES TAX RATE IS HIGHER THAN THE
INCOME TAX RATE, EVEN THOUGH THE TAX PAID ARE EXACTLY THE SAME IN BOTH
CASES. THIS IS MISLEADING. THUS, THE FAIRTAX USES THE SAME METHOD OF
STATING ITS RATE (THE TAX INCLUSIVE RATE) AS THE CURRENT INCOME TAX SYSTEM
IT IS DESIGNED TO REPLACE.

SECOND EXAMPLE: SALES TAX RATE VIEWPOINT
THE WAY OF LOOKING AT THE INCOME TAX FROM A SALES TAX POINT OF VIEW IS TO
ASK HOW MUCH A WORKER MUST EARN IN ORDER TO HAVE $100 LEFT TO SPEND. TODAY,
A WORKER IN THE 28 PERCENT INCOME TAX BRACKET (WHO MUST ALSO PAY 7.65
PERCENT IN PAYROLL TAXES) MUST EARN $155 TO PAY FOR $100 CD PLAYER.

INCOME
TAX BRACKET
28% 15%

GROSS EARNINGS $155.40 $129.22
INCOME TAX 43.51 19.35
EMPLOYEE PORTION PAYROLL TAX (7.65%) $ 11.89 9.87
REMAINING TO SPEND $100.00 $100.00

IF THE EMPLOYER SHARE OF THE PAYROLL TAX IS CONSIDERED, THIS WORKER MUST
EARN $176 TO SPEND $100.

A TAXPAYER IN THE 15 PERCENT INCOME TAX BRACKET MUST EARN $129 TO SPEND
$100. THIS FIGURE WOULD BE $143 IF THE EMPLOYER SHARE OF PAYROLL TAXES IS
TAKEN INTO ACCOUNT.

BOTTOM LINE - WHETHER THAT TAX RATE IS DESCRIBED AS TAX-EXCLUSIVE OR
TAX-INCLUSIVE HAS NO BEARING ON THE ULTIMATE TAX PAID - THE SAME AS WHETHER
THE DISTANCE TO THE CORNER STORE IS MEASURED AS 100 YARDS OR 300 FEET DOES
NOT CHANGE THE LENGTH OF THE WALK.

4. HR 25 gives every household a flat-amount government check each
month, based on the number of social security number holders in a household.
I've read your reasoning for why this is preferable to simply exempting
food,medicine, and other necessities from the tax. But don't you fear that
These rebates will function as a type of dole that makes Americans more
Dependent on big government?

THE PURPOSE OF THE REBATE IS TO MAKE ESSENTIAL CONSUMPTION (AS MEASURED BY
SPENDING UP TO THE POVERTY LEVEL) EXEMPT FROM THE TAX. WE DO NOT WANT TO
TAX THE POOR.

THIS IS SIMILAR TO THE EARNED INCOME CREDIT (IN THE INCOME TAX) THAT DOESN'T
TAX INCOME BELOW A CERTAIN LEVEL. ONLY THE POOR WILL NOT HAVE TO PAY A TAX
PREPARER TO FILL OUT A COMPLICATED FORM IN ORDER TO QUALIFY FOR IT. MANY
HAVE PAID $200 TO FILE THAT RETURN.

5. Some U.S. citizens have no social security numbers because of
religious objections or other philosophical objections. There is no legal
requirement for any individual actually to possess an SSN, although of
course most do. Since the rebate goes only to SSN holders, how does your
proposal prevent these people from being penalized for their beliefs?

THERE IS NO REQUIREMENT THAT ANY INDIVIDUAL APPLY FOR THE REBATE.

6. Your projections appear to be based on the most positive scenarios
(e.g. there would be no black markets or other forms of tax evasion; the
Government would never use the tax for social engineering (for instance, by
placing higher taxes on cigarettes, fatty foods, guns, etc.); and the rate
of the tax would never soar out of control as government grew). Given the
lessons of history, and given Lyndon Johnson's admonishment that we should
always consider the *worst* thing that could be done with a law, rather than
the best thing that could be done with it, how can you be so sure the tax
would never be manipulated and misused as I've just described?

FIRST OF ALL, THE FAIRTAX SINCE IT IS A TAX ON CONSUMPTION, WILL MAKE THE
UNDERGROUND ECONOMY WHICH IS NOT PAYING ANY INCOME TAX, SUBJECT TO TAXATION.
WHEN THOSE WHO EARN INCOME FROM THESE ILLEGAL ACTIVITIES (SALES OF ILLEGAL
DRUGS, FOR EXAMPLE) SPEND THEIR UNREPORTED EARNINGS THEY WILL HAVE TO PAY
THE FAIRTAX ON THEIR PURCHASES JUST LIKE ANYONE ELSE. THE SAME HOLDS TRUE
FOR ILLEGAL ALIENS WORKING IN THIS COUNTRY.

THE FAIRTAX IS HIGHLY VISIBLE AND SIMPLE. EVERYONE WILL BE ABLE TO
UNDERSTAND IT AND JUST LIKE A POSTAGE STAMP INCREASE THEY WILL KNOW THAT THE
GOVERNMENT IS RAISING THEIR TAXES.

ALSO, CONSUMPTION TAXES ARE SELF-LIMITING. AS ALEXANDER HAMILTON SAID IN
FEDERALIST PAPER NO 21, TWO AND TWO DO NOT ALWAYS EQUAL FOUR. IF YOU RAISE
THE TAX OVER WHAT PEOPLE THINK IS REASONABLE, THEY CAN REDUCE THEIR
CONSUMPTION (I.E. THE TAX BASE) AND THE INCREASE IN THE TAX RATE COULD END
UP RAISING LESS REVENUE THAN A LOWER RATE.

THE CURRENT INCOME CODE IS EXTREMELY COMPLEX AND IT IS EASY TO OBFUSCATE TAX
INCREASES. ALSO, IT PROMOTES THE ILLUSION THAT OTHER PEOPLE CAN BE TAXED
BUT NOT "ME". FOR EXAMPLE, SAYING CORPORATIONS AREN'T PAYING THEIR FAIR
SHARE. CORPORATIONS ARE LEGAL FICTIONS AND DO NOT PAY TAXES, ONLY
INDIVIDUALS DO. WHEN YOU INCREASE THE TAX ON CORPORATIONS THEY PASS THE
TAXES ALONG IN HIGHER PRICES TO THE CONSUMER, LOWER WAGES TO THEIR WORKERS,
OR LOWER DIVIDENDS TO THEIR SHAREHOLDERS.

7. Getting rid of the IRS seems a worthy goal -- and a huge selling
point for your proposal. But given that HR 25 calls for a considerable new
bureaucracy and heavy enforcement, what guarantee can you give that the new
sales tax administration would be any more reasonable than the old income
tax administration?

HR 25 DOES NOT CALL FOR A NEW BUREAUCRACY. THE FAIRTAX WILL BE COLLECTED BY
BUSINESSES FROM CONSUMERS WHEN THEY SELL THEM SOMETHING. THEN, AS THEY DO
NOW, THEY WILL SEND A MONTHLY REPORT AND CHECK TO THE STATE SALES TAX
COLLECTION AGENCY IN THE AMOUNT OF THE FAIRTAXES THEY COLLECTED THAT MONTH.
THE STATE WILL PROCESS THE RETURNS AND SEND THE FAIRTAX TO THE US TREASURY.

STATE SALES TAX AGENCIES HAVE A GREAT DEAL OF EXPERIENCE IN THE
ADMINISTRATION AND ENFORCEMENT OF SALES TAXES.

THE FAIRTAX WILL ALLOW BOTH THE BUSINESSES WHO COLLECT THE TAX FROM THE
CONSUMER AND THE STATE SALES TAX AUTHORITIES TO KEEP 1/4 OF A PERCENT OF THE
TAXES THEY RECEIVE TO HELP DEFRAY THE COST OF COLLECTING THE TAX.

8. You state that ordinary Americans would not have to do the cumbersome
record-keeping now required by the IRS -- another huge plus! Yet HR 25
clearly states that the individual buyer is the party responsible for
paying the sales tax. The only exception is if the buyer gets a receipt from
the store or service provider, demonstrating that he paid the tax.

Given this, and given the proclivities of government, I can easily envision
people being forced to pay the tax all over again (and penalties!) if they
lose receipts. It's easy to envision a variety of crimes and punishments
that could arise out of making "unpapered" transactions. In the worst case a
person could, for instance, lose his legally purchased computer, simply
because he lost his receipt. Or could be accused of money laundering or
racketeering for being unable to prove the legality of his purchases. (I
find this absurd, but the federal government already brings similar charges
for equally flimsy reasons.) What is to prevent the government from cracking
down on innocent individuals who simply lose receipts? What is to prevent
the receipt requirement from becoming a record-keeping nightmare for
individuals?

THE FAIRTAX IS A TAX ON FINAL CONSUMPTION. THAT MEANS THAT THE CONSUMER IS
RESPONSIBLE FOR PAYING THE TAX. THE EFFECT OF LANGUAGE IN THE BILL YOU
REFER TO IN QUESTION 8 IS TO CLARIFY THAT THE TAX IS IMPOSED ON THE FINAL
CONSUMER AND NOT ON THE BUSINESS. THE BUSINESS SELLING THE ITEM MERELY
SERVES AS A COLLECTION AGENT. HE COLLECTS THE TAX FROM THE CONSUMER AND
REMITS IT TO THE STATE TAXING AUTHORITY WHO SENDS IT TO THE FEDERAL
GOVERNMENT.

THE EXCEPTION MEANS THAT IF THE RETAILER GIVES YOU A RECEIPT SHOWING THAT
YOU PAID THE TAX, THEN THE CONSUMER HAS MET THEIR OBLIGATION. THE BUSINESS
IS NOW RESPONSIBLE FOR SENDING IT TO THE GOVERNMENT. THE CONSUMER DOES NOT
HAVE TO KEEP RECEIPTS IN ORDER TO PROVE THAT THEY HAVE PAID THE TAX. THE
BUSINESS WILL BE THE ONE WHO IS AUDITED, ON OCCASION, TO MAKE SURE THAT HE
HAS REPORTED ALL HIS SALES, AND SENT IN ALL THE TAXES THAT HE COLLECTED FROM
CONSUMERS.

NOW IF YOU BOUGHT SOMETHING FROM A BUSINESS WHO DOES NOT CHARGE YOU THE TAX,
YOU ARE STILL LIABLE FOR IT. THAT BUSINESS WOULD BE BREAKING THE LAW WHICH
STATES THAT THE TAX MUST BE SEPARATELY STATED ON THE RECEIPT. WHEN THIS GUY
GETS AUDITED THEY WILL EXAMINE HIS RECORDS AND FIGURE OUT WHAT HIS SALES
WERE AND THEN ASSESS HIM IN THE AMOUNT OF THE TAXES THAT HE HE SHOULD HAVE
COLLECTED FROM HIS CUSTOMERS. HE WILL ALSO GET CHARGED INTEREST AND
PENALTIES ON THE AMOUNT OF TAX THAT HE SHOULD HAVE SENT IT BUT DIDN'T.

9. You state that the tax is fair to Baby Boomers. How do you answer a
critic who points out that a Boomer has already paid income tax on a
lifetime of savings, then will be forced to pay a large sales tax any time
he uses *those same after-income-tax funds*?

FIRST, PRICES WILL DECLINE ONCE THE 22% IMBEDDED TAXES ARE REPEALED.
SECOND, THEY WILL GET THE REBATE TO PAY THE TAXES UP TO THE POVERTY LEVEL.
IF THEY HAVE AN IRA OR 401K OR PENSION PLAN IN WHICH THEY MADE DEPOSITS WITH
PRE-TAX DOLLARS, WITH THE IDEA BEING THAT THEY WOULD PAY TAXES ON IT WHEN
THEY DREW IT OUT, THEY WILL BE BETTER OFF. WITH THE FAIRTAX THERE WILL BE
NO TAXES TO PAY WHEN THEY TAKE THEIR MONEY OUT. SO THESE INCOME TAXES SAVED
HAVE TO BE CREDITED BACK AGAINST THE TAXES YOU SAID THEY PAID UNDER THE
INCOME TAX SYSTEM. I AM A BABY BOOMER AND I STILL WORK (57 YEARS OLD). I
AM LOOKING FORWARD TO GETTING TO KEEP 100% OF MY PAYCHECK.

10. You state that the prices of goods and services would immediately
drop by 20 to 25 percent. Yet even if this were true of American goods and
services (which remains an unknown), the prices of imported goods would
remain high (since they wouldn't benefit from removal of the income tax). No
doubt some people would consider that a good thing. But what would you say
to a woman who goes to Wal-Mart to buy school clothes for her three
children, only to discover that those clothes have now been priced out of
her reach?

FIRST A WOMEN WITH THREE CHILDREN WILL GET A REBATE $4336 OR $361 PER MONTH
TO PAY THE FAIRTAXES ON BASIC CONSUMPTION (NECESSITIES). YOUR POINT DOES
NOT TAKE INTO ACCOUNT THAT SHE WILL ALSO GET TO KEEP 100% OF HER PAYCHECK.
THE GOVERNMENT WILL NO LONGER BE TAKING 20% OF HER INCOME DIRECTLY OUT OF
HER POCKET. ALL INCOME AND PAYROLL TAXES ARE REPEALED. IN MOST CASES THAT
WOULD BE A 20% TO 30% INCREASE IN HER TAKE HOME PAY.

SECOND, THE REASON BEHIND WAL-MART'S SUCCESS IS THAT THEY ADVERTISE THEY
HAVE THE LOWEST PRICES. THAT IS THEIR HALLMARK. THEY ARE GOING TO DO
EVERYTHING TO MAINTAIN THEIR MARKET SHARE. THEY WILL REDUCE THEIR PRICES.
PLUS WAL-MART IS KNOWNED FOR GETTING THE LOWEST PRICES FROM THEIR SUPPLIERS.


THE AMERICAN RETAIL INDUSTRY IS VERY COMPETITIVE, AND THEY WILL BRING THEIR
PRICES DOWN. PART OF THE PRICE DECLINE WILL BE THAT WAL-MART WILL LONGER
HAVE TO PAY CORPORATE INCOME AND PAYROLL TAXES.

ALSO, NO TAX WILL BE CHARGED ON ANYTHING THAT IS USED -- CARS, APPLIANCES,
CLOTHING, ETC.

DON'T YOU THINK IT WOULD BE A GOOD THING FOR RETAILERS IN THIS COUNTRY TO
BUY AMERICAN MADE GOODS? YOU CAN'T COMPLAIN ABOUT ALL THE JOBS GOING OVER
SEAS AND AT THE SAME TIME BUY ALL YOUR GOODS FROM OVERSEAS.

SINCE THE FAIRTAX EXEMPTS EXPORTS IT WILL MAKE AMERICAN MANUFACTURING (AND
FARMING) MUCH MORE COMPETITIVE WITH OTHER COUNTRIES. THIS WILL ATTRACT JOBS
BACK TO THE US. THE ECONOMY WILL EXPERIENCE FROM 7 TO 14 PERCENT GROWTH
WHICH WILL HAVE POSITIVE BENEFITS FOR ALL AMERICANS.

11. Some prices are set by government (e.g. utilities) or supported by
government (e.g. sugar -- for which Americans already pay 3x the world
rate). These prices don't drop due to market forces. What does your
organization project will happen to the prices of these items under a
national sales tax.

WHEN I WORKED IN THE GOVERNOR'S BUDGET OFFICE IN FLORIDA, WE WOULD GET
INVOLVED WITH UTILITY PRICE INCREASES. THE PUBLIC SERVICE COMMISSION
REGULATES THE PRICES THAT UTILITIES CAN CHARGE. IN RATE HEARINGS, THE
UTILITY COMPANY HAS TO PROVIDE DETAILED DATA ON ALL THEIR COSTS OF DOING
BUSINESS. THEN THEY ARE ALLOW TO CHARGE PRICES HIGH ENOUGH TO GIVE THEM A
CERTAIN RATE OF RETURN. WITH THE FAIRTAX, THE PUBLIC SERVICE COMMISSION
WOULD REQUIRE THEM TO RESUBMIT ALL OF THE COSTS (WHICH WOULD HAVE DECREASED
BY 22%) AND THEY WOULD LOWER THE PRICE THAT THE UTILITY COULD CHARGE,
ACCORDINGLY.

WHY DO PRICE SUPPORTS EXIST IN THE FIRST PLACE? BECAUSE THE COST OF DOING
BUSINESS IS TOO HIGH. THE AMERICAN FARM BUREAU HAS INCLUDED THE FAIRTAX IN
THEIR POLICY BOOK AS A POLICY TO THAT WOULD IMPROVE FARMERS ABILITY TO
COMPETE. UNDER THE FAIRTAX, FARMERS (OR ANY BUSINESS) WOULD NOT PAY ANY TAX
ON THEIR BUSINESS INPUTS. THE PRICES OF THEIR INPUTS WOULD ALSO GO DOWN
BECAUSE THE IMBEDDED INCOME TAXES AND PAYROLL TAXES WOULD BE TAKEN OUT OF
THEIR SUPPLIERS PRICES AS WELL. AMERICAN AGRICULTURAL PRODUCTS WOULD BECOME
VERY COMPETITIVE AND NO LONGER NEED PRICE SUPPORTS.

12. HR 25 abolishes the income tax. What happens if, six months after
passage of HR 25, Congress reinstates the income tax and retains the IRS
"due to a temporary national emergency" -- which of course would not be
temporary?

HR 25 ABOLISHES THE IRS THREE YEARS AFTER THE PASSAGE OF THE FAIRTAX. IT IS
NECESSARY TO HAVE THE IRS STAY IN PLACE TO FINISH PROCESSING AND AUDITING
THE INCOME TAX RETURNS FROM THE LAST YEAR THE INCOME TAX WAS IN EFFECT. THE
FAIRTAX SAYS THAT NO APPROPRIATIONS CAN BE MADE TO THE IRS AFTER THAT 3 YEAR
PERIOD.

THE INCOME TAX CODE WOULD BE ABOLISHED. NOT IN MY WILDEST DREAMS CAN I SEE
THE MEMBERS OF CONGRESS BEING ABLE TO AGREE ON A NEW INCOME TAX CODE. THE
CURRENT INTERNAL REVENUE CODE, REGULATIONS, AND IRS RULINGS AMOUNT TO 60,000
PAGES. NOT ONE PERSON IN THIS COUNTRY UNDERSTANDS ALL OF IT. (I HAVE
ATTACHED SOME DATA ON THE COST OF COMPLIANCE OF THE INCOME TAX. DID YOU
KNOW THAT PERSONS MAKING UNDER $20,000 PER YEAR PAY 4.53% OF THE INCOME ON
COMPLIANCE COSTS - INDEPENDENT STUDY BY TAX FOUNDATION).

Thank you for considering these questions. I look forward to receiving
your
answers.

Claire Wolfe

------------------------

Subject: RE: Questions on the FairTax for an article
Date: Thu, 23 Sep 2004 12:12:02 -0400
From: "Karen Walby, Ph.D."
To: Claire Wolfe

Claire,

I have also attached a chart that compares federal income taxes to the
FairTax for persons at different income levels. (effective tax rate) and a
pdf file showing the amount of FairTaxes and the amount of taxes they pay
under the current system for persons in various economic circumstances.

I would be glad to answer any questions.

Sincerely,

Karen Walby, Ph.D.
Director of Research
Americans For Fair Taxation
Karen.Walby@fairtax.org
850-223-3402 Office

Click here for Excel chart
Click here for PDF


Copyright Aaron Zelman 2004. Permission is granted to distribute this article in its entirety, so long as full copyright information and full contact information is given for JPFO.

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Phone (800) 869-1884
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