There Is Still No Such Thing As a Fair Tax
By Laurence M. Vance
As a critic of the national retail sales tax plan known as the FairTax, I
take Neal Boortz's new book on the FairTax very personally. The book is titled
FairTax: The Truth:
Answering the Critics. It is intended to be a sequel to The FairTax
Book, published in 2005, that offers "eye-opening new insights not covered
in the original book."
Boortz is right. There are some eye-opening new insights unique to this
sequel. Like the disclosure that you might "owe more in taxes in the first year
of a FairTax system than you do today."[1] Or the admission
that "the FairTax could be even more progressive than our current system."[2] Or the confession
that the "implementation of the FairTax doesn't mean complete annihilation of
the IRS."[3] Or
the proposal that "a procedure should be set up in the Treasury Department to
collect taxes on Internet and catalog sales, remitting the state and local
governments' share to them."[4]
As with Boortz's original work, this book is coauthored by Congressman John
Linder (R-GA). New this time, however, is the addition of "with Rob Woodall" on
the front cover and title page. But although the back cover contains brief bios
for Boortz and Linder, there is no information on Woodall, Congressman Linder's
chief of staff. As I said when I reviewed Boortz's original book on the FairTax
in "There Is No Such Thing As a Fair
Tax," since Boortz has previous writing experience, and his name appears in
larger letters on the book's cover, I will refer to him as the author.
I will be quoting Boortz extensively throughout this review since he believes
that "opponents who want to criticize the FairTax often feel compelled to
misrepresent its principles or to lie about it outright to give themselves
something to shout about."[5] No shouting on my part will be required. The deceptions,
half-truths, and lies of the FairTax will speak for themselves.
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Keeping 100 Percent of Your Paycheck
Actually, FairTax: The Truth is Boortz's second attempt at damage
control. As I pointed out in "The
Fraudulent Tax," the paperback edition of The FairTax Book,
released in 2006, contained some notable changes that had to be made to correct
false statements in the original hardcover release about everyone receiving 100
percent of their paycheck after the adoption of the FairTax. It turned out that
the portion of the worker's paycheck formerly withheld and sent to the
government as taxes that would be returned to him under a FairTax system that
eliminated those taxes, thus allowing the worker to keep 100 percent of his
paycheck, was the same portion that producers were going to pocket to help them
lower their costs. One of the main selling points of the FairTax was (and is)
that prices would fall by roughly the same amount of the new national sales tax
to be imposed on all goods and services thus making everything a wash. But in
order for employers to cut their costs enough to be able to lower prices by an
amount necessary to offset the FairTax, employees would have to settle for their
current take-home pay, not 100 percent of their paycheck.
Although Boortz did correct many of his "keep 100 percent of your paycheck"
statements in the paperback edition of The FairTax Book, I pointed out
in "The Fraudulent Tax" that his
book still made that claim in two places, the website of Congressman Linder
still made the claim, and the website of Americans for Fair Taxation (the organization
responsible for the FairTax idea) did likewise.
Well, the Americans for Fair Taxation website
still makes the claim, Congressman Linder's website
still makes the claim, the publisher's press release for Boortz's new FairTax
book maintains that "Americans would take home every penny they earn," and the
new book makes the claim twice, including a statement on the back cover that the
FairTax will enable you "to keep all the money in your paycheck."
So which is it? After the implementation of the FairTax, do workers get to
keep their whole paycheck or do they not? Well, that depends on the generosity
of their employer. Boortz devotes a whole chapter to this subject in
FairTax: The Truth. Indeed, Boortz says that "perhaps the biggest
FairTax myth concerns the cost of living and the size of your take-home pay."[6] But before
examining Boortz's treatment of that myth, we should first revisit the basics of
the FairTax and some problems we would face by adopting it.
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The FairTax Plan
The FairTax is a revenue-neutral consumption tax in the form of a national
retail sales tax on all new goods and services that is designed to replace
most federal taxes: personal income taxes, corporate income taxes,
estate taxes, gift taxes, unemployment taxes, alternative minimum taxes, capital
gains taxes, Social Security taxes, and Medicare taxes.
Although it seems like the price we would have to pay for the elimination of
these taxes is higher prices on all new goods and services because of the
imposition of a high sales tax, FairTax proponents claim that the removal of
embedded taxes the tax burdens of businesses that contribute to the overall
cost of products will result in the prices of goods and services falling by
enough to offset the amount of the FairTax imposed. In addition to this dubious
conclusion, there are some misconceptions about the FairTax that should be
pointed out.
The FairTax does not eliminate all taxes. It does not eliminate tariffs on
imported goods, federal excise taxes on products like gasoline and tobacco,
special taxes on things like telephone service and airline tickets, or any state
and local sales, gasoline, or hotel taxes.
The FairTax does not lower the overall tax burden. Since it is revenue
neutral, the total amount of taxes the federal government extracts from the
citizens of the United States would be the same as it is now.
The FairTax does not eliminate the IRS. Calling the IRS by another name, and
redirecting its mission, is hardly eliminating it. Just as the income tax would
be replaced by the FairTax, so the IRS would be replaced by the "Sales Tax
Bureau" in the Treasury Department. True, there would be no more audits, no more
tax forms, no more April 15, and no more compliance costs for
individuals, but there would be an increase in these things for
businesses.
The FairTax does not eliminate the Sixteenth Amendment. To repeal the
Sixteenth Amendment would require a constitutional amendment to that effect, as
the Twenty-First Amendment repealed the Eighteenth. Not only is there no
guarantee that Congress would propose such an amendment, it would still have to
be sent to the states and approved by three-fourths of them.
Even if the prices of goods and services fall after the change to the FairTax
system, with the sale of new homes and cars being taxed, as well as services
from heart surgeries down to haircuts, the FairTax would result in a tremendous
change in American society. Is it worth expending so much effort on changing
the way the federal government collects taxes instead of changing
the amount that the federal government collects in taxes? This is a
question that doesn't even have to be answered since the stated rate of the
FairTax is too low to achieve revenue neutrality and the amount by which prices
would fall under a FairTax system has been grossly exaggerated.
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The FairTax Tax Code
FairTax proponents are naοve about what would happen to their system once it
was adopted. What makes them think that Congress wouldn't turn the FairTax into
a monstrosity just as hideous as the current tax code?
The original tax code was, like the FairTax, short and simple. However, it
didn't take long for Congress to turn it into the lengthy, complex, unjust
system that it is today. What makes FairTax supporters think that Congress won't
begin to tweak the FairTax as soon as it goes into effect?
The rate of any of the three components of the FairTax (the general revenue
rate; the old-age, survivors and disability insurance rate; and the hospital
rate) could be raised at any time. The spiraling costs of Social Security and
Medicare, as well as the coming depletion of the "surplus" in their trust funds,
guarantees that the FairTax rate will certainly have to be raised. The
insolvency of Medicare has been compounded, of course, by one of the greatest
expansions of the welfare state since the Great Society, the Medicare
Prescription Drug and Modernization Act of 2003 which Congressman Linder voted
for.
The only things currently exempted from the FairTax are tuition and
job-related training courses. The demand to expand this exemption to food will
certainly be the first and the loudest that we hear. And since we know how
unpredictable and irrational Congress is, there is no telling what will come
next. Then it will be exemptions on certain goods and services if they
are used for certain purposes or purchased by certain types of
companies.
The FairTax system includes a monthly payment from the federal government
given to all households called a "prebate" that reimburses each household for
the national sales tax paid on basic necessities. The elimination of this
prebate for the rich and upper-income taxpayers will be one of the first changes
made to the FairTax plan. A means test will certainly follow. Since the amount
of the prebate is tied to the annually adjusted government poverty level, it
will go up every year for everyone. And we can count on pressure to raise the
prebate by a greater amount for certain income groups like seniors on fixed
incomes, the poor with low incomes, anyone receiving public assistance, anyone
making the minimum wage, or anyone who would have qualified for the earned
income credit under the old income tax system.
Additionally, what makes FairTax advocates think that we won't end up with
both a federal sales tax and a federal income tax? Most
countries with a VAT also have an income tax. Adopting the FairTax doesn't mean
that the income tax couldn't be reimposed. Congress might simply decide to
resurrect the income tax because it is not politically expedient to raise the
rate of the FairTax. This could be implemented by lowering the rate of the
FairTax, reinstituting the income tax, and then claiming that the combination of
the two was revenue neutral. And even if the Sixteenth Amendment were repealed,
there is nothing preventing Congress from implementing some form of an income
tax, as the Foundation for Economic Education's Sheldon Richman has recently
explained in great detail.
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A Personal Note
I should say here that I have nothing to gain from keeping our current tax
system. FairTax proponents often maintain that anyone who opposes the FairTax
system wants to keep the current system because he has some financial interest
in doing so. I have no vested interest in the current tax code. I do not have a
fortune tied up in the perks of the current tax code. I despise our income tax
system. I don't like its rates, its brackets, its complexity, it intrusiveness,
and its use as a mechanism for wealth confiscation and redistribution. I agree
with every negative thing that any FairTaxer has ever said about the current US
tax code. I have no financial interest in maintaining the current system. I do
not own stock in tax preparation companies. I am not threatened by tax reform.
Although I have degrees in economics and accounting, I am neither an economist
nor a CPA. And although I occasionally teach financial accounting at a local
community college, I fail to see how that predisposes me to want to stay with
the current tax system.
I have also been accused by FairTax promoters of rejecting their plan because
it is not perfect or doesn't eliminate taxes altogether. Although I believe that
taxation is theft, I am not naοve enough to think that taxes will ever be
eliminated. I would gladly support any tax reform plan as long as it
substantially lowered tax rates or the total amount of taxes collected. I am not
waiting for the perfect tax reform plan that will never come. I do not have an
"all-or-nothing" attitude when it comes to tax reform. I am in favor of working
Americans keeping as much of their money as possible out of the hands of the
federal government and in their pockets. I am not a critic of the FairTax
because it doesn't do enough; I am a critic of the FairTax because it cannot be
considered an incremental step toward lower tax rates or lower overall taxes. It
is not even a step in the right direction. The FairTax is a cure worse than our
diseased income tax system. As for a better proposal, I have given a simple one
in "Real Tax Reform" that
completely eliminates the personal income tax. Heck, I would even support a
national sales tax plan if it actually resulted in significant reductions in
tax rates or taxes collected.
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FairTax: Lies
Now we can get back to Boortz's new book: FairTax: Truth, Answering the
Critics. "If the FairTax has one shortcoming," says Boortz, "it's that it's
easy to attack."[7] Boortz makes the attack on the FairTax even easier because
of some of the outrageous things he says in the book.
First, the same grandiose claims for the FairTax are made in this sequel as
were made in Boortz's original work:
-
Interest rates could decline by as much as 24 percent with the FairTax.[8]
-
American capital stock would almost double by 2100.[9]
-
The most massive transfer of power from government to the people in the
history of our country.[10]
-
Companies would rush to our shores to build manufacturing facilities so
they too could sell in a global economy with no hidden taxes inflating their
prices.[11]
-
Revenues to Social Security and Medicare would double, as we double the
size of the economy in less than fifteen years.[12]
Will the FairTax also cure disease and usher in world peace?
Second, the FairTax turns out to be fairer to some industries than to others.
Boortz claims that "a plan like the FairTax ensures industry neutrality."[13] The FairTax
"applies to absolutely all consumer purchases, so no one industry will feel
advantaged or disadvantaged."[14] It "should not completely untax one sector, the service
sector, while taxing the other."[15] Fairness "means that all commerce is treated equally."[16] Boortz and his
coauthors feel so strongly about all this that they're "going to try to impose a
supermajority requirement before Congress can exclude or exempt any good or
service from the FairTax."[17] Yet, there are two services that are specifically
exempted from the FairTax: education and training. These are defined in the Fair
Tax Act of 2007 (H.R.
25) as "tuition for primary, secondary, or postsecondary level education,
and job-related training courses." The reasoning behind this is that education
is considered to be "investment, not consumption."[18] This brings us
to the FairTax's other exemptions: exports, business purposes, and investment
purposes. Under the FairTax, exports for use or consumption outside the United
States are not taxable.
"Business purposes" is defined in the Fair Tax Act of 2007 as "(1) for
resale, (2) to produce, provide, render, or sell taxable property or services,
or (3) in furtherance of other bona fide business purposes."
"Investment purposes" is defined as "property purchased exclusively for
purposes of appreciation or the production of income but not entailing more than
minor personal efforts." I guess the "Problem Resolution Office" set up under
the FairTax plan will have to define what "bona fide business purposes" actually
means.
Third, even though we will be forced to pay the FairTax on all new goods and
services, Boortz calls it a voluntary tax; yet, he gets upset when the
government refers to the Social Security tax withheld from our pay as a
"contribution" since "contributions are voluntary."[19] Boortz makes
the ridiculous claim that "under the FairTax, every citizen becomes a voluntary
taxpayer, paying as much as he or she chooses, when he or she chooses, and how
he or she chooses to spend."[20] But what if I volunteer not to pay the FairTax, or
choose to pay only a one percent rate, or choose to pay the tax next year, or
choose to spend my money on new items without paying the FairTax? Obviously,
this would be impossible since the FairTax is a voluntary tax only in the sense
that the income tax is a voluntary tax (if you don't earn income you don't have
to pay any income tax).
After saying that "contributions are voluntary," Boortz remarks: "Try telling
the IRS that you want to stop volunteering to pay your Social Security tax. Then
please write to let us know how that works out for you." Well, try telling the
Sales Tax Bureau (the name for the IRS under the FairTax) that you want to stop
volunteering to pay your FairTax. Then please write to let us know how that
works out for you. You will be subject to fines and imprisonment either way. How
can any FairTax advocate say with a straight face that paying the FairTax is
voluntary?
Fourth, Boortz laments that we "now work almost to May" to fulfill our tax
obligations.[21]
In a footnote he mentions that this is the Tax Foundation's "Tax Freedom Day." Yet,
since "the FairTax is simply a dollar-for-dollar replacement of our current
income-based revenue system with a consumption-based revenue system,"[22] won't people
still have to "work almost to May" to cover their taxes? The taxes might be paid
differently, but they will still be paid. If the government still gets the same
amount of tax money, someone will still be working "almost to May" to pay his
taxes. Indeed, someone might be working almost to June, for Boortz admits that
someone might "owe more in taxes in the first year of a FairTax system" than he
does today.[23]
Fifth, Boortz three times makes the claim that the current tax code contains
67,000 pages.[24] This is up from the 54,000 pages that is claimed in "An Open Letter to the
President, the Congress, and the American people" written a few years ago
and posted on the FairTax website. (The open letter is also printed in its
entirety in the new Boortz book.[25]) This figure is also higher than the 65,000 pages
claimed by Leo Linbeck, the chairman and CEO of Americans for Fair Taxation, in
a September 2007 letter to FairTax volunteers.[26] The federal
tax code is found in Title 26, "Internal Revenue," of the US Code of Federal
Regulations. My local university library has a twenty-one volume set of Title 26
of the United States Code Annotated (West Group, 2002) that contains a
total of 15,050 pages, and that includes "annotations from Federal and State
Courts." Now, that is still 15,050 pages too many, but it is certainly not
54,000 or 65,000 or 67,000 pages. But the 133-page FairTax bill doesn't replace
the complete tax code anyway. It repeals subtitle A (income tax and
self-employment taxes), subtitle B (estate and gift taxes), subtitle C (payroll
taxes and withholding of income taxes), and subtitle H (financing of
presidential elections). Then it redesignates subtitles D, E, F, G, I, J, and K
as B, C, D, E, F, G, and H. The new subtitle A is the FairTax.
Sixth, Boortz is adamant that the FairTax is revenue neutral: "The FairTax is
simply a dollar-for-dollar replacement of our current income-based revenue
system with a consumption-based revenue system."[27] The government
"would collect the same amount of tax revenue as it does today under our current
individual and corporate tax system of income taxes."[28] But if that is
true then how does the government have the money to give every household a
monthly rebate (the "prebate") for reimbursement of the national sales tax paid
on basic necessities? The prebate is not included in the federal budget right
now, yet Boortz maintains that "the cost of the rebate most certainly
is included" when figuring the necessary rate for the FairTax.[29] Boortz gives
the cost of the prebate as $489 billion.[30] This means
that whatever the federal budget is right now, it is going to have to be
increased by $489 billion to pay for the prebate. That's almost half a trillion
dollars. The FairTax may in fact raise enough money to pay for the prebate, but
it is not accurate to call it a revenue-neutral plan when it will take from the
taxpayers an additional $489 billion.
Seventh, FairTax proponents tell us over and over again that the IRS will be
eliminated under the FairTax system. The back cover of Boortz's new book repeats
this claim. Yet, buried in a footnote is Boortz's admission that "implementation
of the FairTax doesn't mean complete annihilation of the IRS."[31] Boortz wants
the IRS to continue collecting income taxes that were due before the adoption of
the FairTax since "passage of the FairTax shouldn't be viewed as an amnesty for
tax cheats."[32]
We know that will have the IRS until 2011 since the FairTax bill states that
"appropriations for any expenses of the Internal Revenue Service
for fiscal
years after fiscal year 2011 shall not be authorized." But under the FairTax,
the IRS will still be with us after 2011 it will just be called by another
name. Title III of the FairTax bill mandates the setting up of an "Excise Tax
Bureau" to administer excise taxes not administered by the BATF, and a "Sales
Tax Bureau" to administer the national sales tax implemented by the FairTax.
Eighth, Boortz condemns a progressive tax system as being Marxist,
but commends the FairTax for being a progressive tax system. He claims
to be against using the tax code "for wealth confiscation and redistribution."[33] He shows that
the rich pay the lion's share of income taxes.[34] He rightly
concludes that "hard work and productivity" are taxed under our current
system.[35] He
correctly points out that our "progressive" system comes right out of Karl
Marx's Communist Manifesto.[36] But then Boortz says that the FairTax prebate is "highly
progressive," and that the FairTax "introduces many progressive elements into
our fiscal system."[37] He even maintains that "the FairTax could be even more
progressive than our current system."[38] He then
favorably quotes economist Laurence J. Kotlikoff on just how progressive the
FairTax plan really is:
[M]y preferred reform is the FairTax, which has three highly progressive
elements. First, thanks to the [p]rebate, poor households would pay no sales
taxes in net terms. Second, the reform eliminates our highly regressive FICA
tax. Third, the sales tax will effectively tax wealth as well as wages.[39]
In light of what Boortz says about Karl Marx and progressive taxes, I guess
we can call the FairTax a Marxist plan.
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The FairTax Rate
The rate of the FairTax is about 30 percent (to be more precise, 29.87%).
However, by employing a little FairTax new math, the rate is given by FairTax
proponents as 23 percent. Sometimes the caveat is added that the rate is figured
inclusively (the tax is included in the price of the product) rather
than exclusively (the tax is added to the price of the product).
Obviously, it is much easier to sell a national sales tax if the rate is 23
percent instead of 30 percent. Boortz devotes almost eight pages of
inclusive/exclusive smoke and mirrors in the book to answering the criticism
that the FairTax rate is actually 30 percent.
He begins by correctly noting that opponents of the FairTax "have argued that
we're misleading America on the FairTax rate."[40] However, he
insists it is the critics of the FairTax that are playing a game.[41] We are
"playing on the confusion that exists between an inclusive and an exclusive
sales tax."[42]
This confusion "is exacerbated by the fact that virtually every one of the
forty-five states that collect a sales tax computes that sales tax on an
exclusive basis."[43] Boortz considers it a "mistake" to calculate the FairTax
the same way the forty-five states with a sales tax "calculate their sales tax,
by adding the tax to the price of the item at the cash register."[44] He entreats
the "folks" at the Mises Institute to "check their math" since the Institute has
"published stories citing the 30 percent argument."[45] Gee, I wonder
what "stories" that would be? Perhaps "The Fair Tax Fraud," "There Is No Such Thing As a Fair
Tax," and "The Fraudulent
Tax"?
The justification given for the sleight of hand perpetrated by promoters of
the FairTax is that since the FairTax is intended to replace the income tax,
which is figured inclusively, the FairTax rate should likewise be figured
inclusively. Boortz even implores us to "compare apples to apples."[46] If we want to
quote our "precious income tax" inclusively, then we should "do the same for the
FairTax."[47]
"Isn't it logical," asks Boortz, "not to mention honest, to quote the FairTax on
the same basis that the taxes it is designed to replace are quoted?"[48] Well, no it's
not. In fact, it would be illogical and dishonest.
Comparing the rate of an income tax with the rate of a sales tax is like
comparing apples and oranges. About all you can say is that the income tax and
the sales tax are both taxes just as apples and oranges are both fruits. Boortz
makes it seem as if one has the option of figuring a tax rate either inclusively
or exclusively. This is nonsense. Income taxes, like Social Security and
Medicare taxes, are figured inclusively because they are figured on the amount
of one's income being taxed. They would not be figured any other way. If one
were assessed a rate of 15 percent on one's taxable income, then, where
i represents taxable income and t represents the amount of tax
due:
.15i = t
Although the same result would be obtained if one figured the amount of tax
due on the same income with an exclusive rate of 17.65 percent, it
would entail this math problem:
.1765(i t) = t
.1765i - .1765t = t
.1765i = t + .1765t
.1765i = 1.1765t
.15i = t
It would be a mistake to say that the amount of tax due should be figured
inclusively because taxes are included in the dollar amount being
taxed. First, the amount of tax due is based on one's taxable income,
not total income. The taxes paid come out of one's total income, and
may not include any taxable income. And second, even if one were taxed on his
total income, the money to pay the amount of tax due might not come out of total
income at all. It might come out of a savings account or be paid with a credit
card.
Now, if one were assessed a rate of 29.87 percent on the purchase of an item,
then, where i represents the item purchased and t represents
the amount of tax due:
.2987i = t
Although the same result would be obtained if one figured the amount of tax
due on the same item with an inclusive of 23 percent, it would entail
this math problem:
.23(i + t) = t
.23i + .23t = t
.23i = t - .23t
.23i = .77t
.2987i = t
Comparing whatever the rate of the FairTax is with the rate of the income tax
bracket one is in (10, 15, 25, 28, 33, and 35 percent) is ludicrous. The only
way to truly compare the FairTax and the income tax is to figure the percentage
of one's total yearly income paid in taxes (federal, state, and local) under
each system, ceteris paribus.
The inescapable conclusion is that the 23 percent rate of the FairTax is a
ruse to sell the tax. But it gets worse. The FairTax artificially broadens the
tax base to maintain the fiction that only a 23 percent national sales tax rate
will be required to maintain current revenues by requiring governments to pay
taxes on goods purchased and salaries paid. State and local governments will pay
taxes to federal government, and the federal government will pay taxes to
itself. This will result in state and local governments having to raise their
taxes to cover the taxes they would have to pay to the federal government. But
if the FairTax is revenue neutral, where will the federal government get the
extra billions of dollars to pay the FairTax to itself? If that, like the
prebate, is already factored into the FairTax, then, once again, it is not
accurate to call the FairTax a revenue-neutral plan when it will require the
taxpayers to fork over billions more than they do now. Just who is the one
playing a game?
Whether one thinks the FairTax rate is 23 percent or 30 percent, the fact
remains that it will cost every American an extra 30 cents on the dollar to
purchase a new good or service under the proposed FairTax. And regardless of
whether the rate is 23 or 30 percent, some economists don't think either of
these rates would be high enough to achieve nirvana that is, revenue
neutrality. In fact, one
economist estimated that the rate would have to be as high as 44
percent.
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Price Deflation
As mentioned previously, Boortz believes that "perhaps the biggest FairTax
myth concerns the cost of living and the size of your take-home pay."[49] FairTax
proponents generally claim that the removal of embedded taxes will result in the
prices of goods and services falling by enough (about 22%) to offset the amount
of the FairTax imposed.
There are actually two issues here: the amount of embedded taxes and the
amount by which their removal would cause prices to fall. Advocates of the
FairTax are correct that the current price of consumer products includes
embedded taxes, but they are mistaken concerning their amount and their effect
if removed.
There are just not enough embedded taxes to be removed to offset the FairTax.
Personal income taxes, which account for almost half of all federal revenues,
are borne by consumers, not embedded in product costs. The FairTax would not
eliminate federal excise taxes on things like gasoline. It is mainly corporate
income taxes and the employer share of social insurance taxes that are embedded
taxes.
On the issue of the amount by which the removal of embedded taxes would cause
price deflation, I have already pointed out in "The Fraudulent Tax," and in great detail,
that the "Harvard study"[50] that Boortz refers to in his books talked about the fall
of producer prices, not consumer prices. I also showed that the fall in producer
prices was an estimate, as was the effect of this fall on consumer prices. We
know for certain that under the FairTax system retail prices will
increase by 30 percent; however, we don't know for sure how much they
will decrease after the embedded costs of taxes in the prices of goods
are removed.
There is also the misconception that prices of all goods and services will
fall across the board once these embedded taxes are removed. In practice,
however, wages and prices are fairly rigid. Even if it were true that prices
would fall enough to offset the imposition of a national sales tax, no one knows
for sure how long before this would happen. The result in the meantime would be
higher prices for goods and services.
But never fear, for even if prices don't fall as much as expected, everyone
will get a raise in the form of increased take-home pay and a monthly prebate
from the government to help pay the sales tax on all the new goods and services
they purchase. Says Boortz: "With the combination of higher take-home pay, lower
pretax prices, and the prebate, people will have the money to pay the tax and
they'll be willing to do it."[51]
The higher take-home pay under the FairTax would result from the elimination
of all withholding taxes. However, we have a problem. The portion of the
employee's paycheck formerly withheld and sent to the government as taxes can't
be returned to him and used by his employer to cut costs (and therefore
prices, according to FairTaxers). Boortz explains:
What we're saying here is that in any case where the employees are willing
to allow their current tax payments to be retained by and used by their
employers to lower the price of production, prices of goods and services can
fall on average by 22 percent. Conversely, in any case where products or
service prices don't fall by 22 percent, it would be because workers decide to
convert their federal tax burden into personal income thus experiencing a
sometimes substantial increase in their take-home pay.[52]
But if prices don't fall by 22 percent, then it will not be enough to offset
the amount of the FairTax imposed. Therefore, the FairTax may result in higher
prices after all. Boortz even warns us about these prices: "Reality warns us
against promising a universal 22 percent reduction in retail prices."[53]
Boortz presents us with three possible scenarios.[54] One, employers
reduce their costs by pocketing what used to be withheld from their employees'
paychecks. Two, employers increase their employees' paychecks by the amount of
taxes previously withheld. And three, employers increase their employees'
paychecks by what was withheld and an amount equal to the matching
payroll taxes that the employers previously paid.
Yet, even though Boortz says a combination of the first two scenarios is
"most likely,"[55] he still insists that "the application of the 23 percent
embedded FairTax would bring all of our purchasing power back to just about
where we are right now."[56]
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The Real Issue
As I have emphasized every time I have written about taxes, the fundamental
problem is taxation itself, not the tax code. Yes, the tax code is too complex,
too intrusive, and too long. Yes, compliance costs are too high. Yes, the tax
code punishes success. But since the FairTax is a tax reform proposal
instead of a tax reduction proposal, it merely changes the way that
taxes are collected. With the federal budget now topping $3 trillion, and the
national debt fast approaching $10 trillion, the need of the hour is clearly to
rein in government spending, not change the way the government raises its
revenue or give it more revenue as the FairTax would do. "The real issue," as
Congressman Ron Paul has so often said, "is total spending by government, not
tax reform."
Taxes should be repealed or reduced, not replaced or reformed. Advocates of
liberty and less government should focus not on fairness but on
lowness. The term fair is extremely subjective. Just what
exactly is "fair"? And who is going to decide what is "fair"? Boortz himself
acknowledges in his new book: "Whether a tax system is 'fair' is a complicated
economic and philosophical question, one that inevitably involves
oversimplification and subjective judgment."[57] But as he also
points out: "low tax rates are good tax policy,"[58] and "lower tax
rates are good for the economy."[59]
Boortz's focus in FairTax: The Truth is wrong because his whole
philosophy on taxation is wrong. He maintains that "the goal of the FairTax
movement is not to strangle the life out of government by depriving it of needed
revenue."[60]
The only problem with this is that the government now says it "needs" over $3
trillion a year at least 90 percent of which cannot be justified by the
Constitution. Boortz has a warped view of what happens when taxpayers keep more
of their money: "State governments lost about $23 billion in tax collections on
Internet sales in 2001."[61] He also argues that government handouts and tax credits
are "functionally exactly the same thing" since the government has "less in its
coffers than it otherwise would."[62] Boortz actually believes that prosperity can be spread
by the adoption of a tax plan instead of the absence of a tax
plan:
Our vision for tomorrow is an America with a tax system that can be used to
spread freedom across the world.[63]
The FairTax is a great hope for the future of the American economy.[64]
Although Boortz and company remarked in the beginning of their book: "We feel
confident that we can convert many of our critics with clear explanations of
what the FairTax really is and what it is not,"[65] after
carefully reading FairTax: The Truth, this critic remains unconverted.
There is still no such thing as a fair tax.
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_______________________________
Laurence M. Vance is a freelance writer and an adjunct instructor in
accounting at Pensacola Junior College in Pensacola, FL. See his Mises.org archive.
Send him mail. Comment on the
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Notes
[1] Neal Boortz
and John Linder with Rob Woodall, FairTax: The Truth:
Answering the Critics (New York: Harper, 2008), 183.
[2] Ibid.,
179.
[3] Ibid.,
151.
[4] Ibid.,
134.
[5] Ibid.,
6.
[6] Ibid.,
72.
[7] Ibid.,
xxvii.
[8] Ibid.,
163164.
[9] Ibid.,
184.
[10] Ibid.,
192.
[11] Ibid.,
30.
[12] Ibid.,
16.
[13]
Ibid.
[14] Ibid.,
138.
[15] Ibid.,
133.
[16] Ibid.,
135.
[17] Ibid.,
127.
[18] Ibid.,
xxiv.
[19] Ibid.,
112.
[20] Ibid.,
14.
[21] Ibid.,
19.
[22] Ibid.,
71.
[23] Ibid.,
183.
[24] Ibid.,
14, 17, 173.
[25] Ibid.,
xxi-xxvii.
[26] Ibid.,
103.
[27] Ibid.,
71.
[28] Ibid.,
118.
[29] Ibid.,
107.
[30] Ibid.,
152.
[31] Ibid.,
151.
[32]
Ibid.
[33] Ibid.,
93.
[34] Ibid.,
125126, 155156.
[35] Ibid.,
29.
[36] Ibid.,
29, 49, 107.
[37] Ibid.,
187.
[38] Ibid.,
179.
[39]
Ibid.
[40] Ibid.,
110.
[41] Ibid.,
111.
[42] Ibid.,
112.
[43] Ibid.,
112. "Virtually every one"? There is nothing virtual about it. On the next page
Boortz even says: "In every one of the forty-five states with a state sales tax
the tax is computed on an exclusive basis." The five states without an income
tax are Alaska, Delaware, Montana, New Hampshire, and Oregon.
[44] Ibid.,
115.
[45] Ibid.,
116117.
[46] Ibid.,
116.
[47]
Ibid.
[48] Ibid.,
114.
[49] Ibid.,
72.
[50] Ibid.,
29, 36.
[51] Ibid.,
124.
[52] Ibid.,
7677.
[53] Ibid.,
78.
[54] Ibid.,
7578.
[55] Ibid.,
77.
[56]
Ibid.
[57] Ibid.,
180.
[58] Ibid.,
45.
[59] Ibid.,
178.
[60] Ibid.,
47.
[61] Ibid.,
135.
[62] Ibid.,
6364.
[63] Ibid.,
218.
[64] Ibid.,
242.
[65] Ibid.,
7.
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