Recently our local DFW FairTax group received a letter from one of our Congressman. It was in response to a visit we made to his office to discuss H.R. 25. He was very gracious with his time and even more so to send us a follow up letter to inform us as to his position on the bill. Unfortunately he has decided to not become a cosponsor. In his letter he specified six reasons that he felt that he could not support the FairTax. This week we will delve into these issues to show how some misunderstandings and unwarranted fears are keeping good people from supporting a very worthy cause.
The first on his list and probably the most widely circulated misstatement is that the 23% tax the bill calls for is actually a 30% tax that the FairTax movement is somehow trying to obfuscate or hide. The difference is really far more mundane than it looks originally. The difference between 23% and 30% is nothing more than numerical semantics. The 23% rate is calculated exactly like the tax it replaces, the income tax, which is to say a tax-inclusive rate. The 30%, which is how other state taxes are calculated, is a tax-exclusive rate. As I do not work in finance I find it easier to understand with an illustration, the one used by fairtax.org. Take a hypothetical taxpayer, Joe that earns $125 a year, and a hypothetical government that requires $25 in taxes. If the taxes are removed from Joe’s income he has $100 left of his paycheck to do with as he pleases. If the tax is taken as the money is spent Joe has $125 to spend and the $25 is taken at the point of sale. A tax-inclusive rate is reported as $25/$125= 20%. A tax-exclusive rate is reported as $25/$100= 25%. The terms inclusive and exclusive rates derive their name from whether or not the tax is included in the base. Both rates deal with the same information and calculate the same numbers. When the FairTax correctly uses the 23% number it is decried as being dishonest, if the 30% number were used then there would be accusations of overtaxing. This is frustratingly the most widely used argument against the FairTax. It is a facetious argument mostly used by those already predisposed against the idea and when studied is a smokescreen to distract from the positive aspects of the plan.
The second objection raised against the bill was that it would tax home purchases and health care. The third complaint about the plan was that it would also tax government spending, everything from pencils for kindergarteners to body armor for troops. These two concerns go hand-in-hand because they both ignore perhaps the most egregious aspect to our current system. The embedded taxes. Home purchases and health care are already taxed. The government is already paying taxes for pencils and body armor. As we have already covered, we have the highest corporate tax rate in the world; this cost is passed down to the consumer, or government, at every level so that companies can still make a profit. Also, by lowering the effective tax rate for all Americans, they will have more money in their pockets for bigger purchases. Since the FairTax also removes the penalties for investment Americans also have easier access to their money without the unnecessary cost of a capital gains tax. The greater purchasing power given to every American family and the removal of any and all embedded taxes should not make home ownership and health care more difficult to purchase, all studies have shown quite the contrary. The government benefits from this fact just as much as the everyday citizen. On the point of the equality between the government and citizen, this aspect is met with far more favor outside of the beltway than within it. The idea that government should not be exempt from the same rules that we are forced to follow is a paradigm shift in the right direction.
The fourth criticism brought to us by the congressman was that the FairTax would be easier to evade than our current system. The term “relatively easy” was used to describe the ease in which someone could evade the FairTax. This complaint is easily the most head-scratching. With all due respect, if the future Treasury secretary can cheat on his income taxes while using a tax facilitator program, like Turbo Tax for example, than there is no plan that is “relatively easy” to evade. Under our current system it only takes one person to cheat at filing their statements. This often happens by accident. In fact we regularly hire outside help in the form of experts to make sure we do not accidently cheat. We go out of our way to accommodate a senselessly complex tax code. For the FairTax cheating would require an agreement between two parties to cheat the government out of its tax money. It would require one person to be relieved of the cost of only the sales tax of a particular good or service and the other party would get nothing out of the deal. The incentive for cheating falls even further when it is realized that cheating the government is a federal crime. It should also be noted that both Texas and Florida have largely sales tax run governments and still do not have as much of a tax evasion issue as most of the proposed Cabinet leaders only three years ago.
The fifth concern surrounded the creation of the Sales Tax Bureau. It is folly and irresponsible to pretend that a new federal tax system would come without a form of oversight. It is the complexity of our current code that limits our ability to oversee it completely. The Sales Tax Bureau however is a blessing compared to the IRS which it would be completely replacing. The Sales Tax Bureau would not have the power or authority to audit American citizens. It would not have the authority to dictate to our pulpits what they can preach. The bureau would only collect its money from the states and have oversight on businesses which is substantially less than 311 million American citizens. Also, in connection with the previous point, the larger ticket items would be far easier to track and also pose a larger risk for fraud. Since the size and scope of this bureau would be very limited policing would be more effective and successful.
The sixth concern assumed that the FairTax would be unfair to elderly Americans who have already paid income taxes their whole life and are now being taxed on what they spend. Sadly this describes the system that we currently endure. Under the FairTax all taxes on Social Security income is erased, it also repeals the capital gains tax allowing those who have made long term investments to access their money which has already paid income and payroll taxes. In addition to ease the tax burden on the elderly, along with every other American, the FairTax requires no tax record keeping and tax filing. This is a weight lifted off of all of our shoulders. Furthermore, the FairTax removes the tax on used items and the addition of the prebate will help ease the tax burden on the elderly far more than anything this current system could offer.
The congressman stated in his letter that he felt the FairTax was not “the right alternative” to our current code. When one takes a step back to see that our current tax code: has an income tax rate ceiling of 35%, in addition to payroll taxes, and the highest corporate tax rate in the world, makes any purchase more difficult by hiding the largesse within the price of every good and service, can easily be evaded even by those trying to comply, has an over-reaching IRS that can look into the pocket book of every citizen, and re-taxes the money we earn through Social Security income taxes, the capital gains tax, any tax on used goods, and a widely criticized death tax. The FairTax is not only the right alternative, it is the only alternative.