The so-called FairTax plan is a proposal to change the way in which federal taxes are collected. Instead of the several taxes currently collected by the IRS, including personal income taxes, social security taxes, corporate income taxes, and estate taxes, this proposal will rely on a tax on all new goods and on all services.
The primary proponents for this plan are Atlanta talk show host Neal Boortz and Congressman John Linder. They have written two books on the subject. I will refer to them these two authors and proponents as “B&L”.
Last time, I said that I would begin to look at the claims of B&L to see if they are true or at least reasonable. I chose to begin with the primary claims that are written on the outside covers of their two books. The first, which I began to examine last week, is that the so-called FairTax plan would, “eliminate federal taxes and the IRS”.
The first part of this assertion, that the plan will “eliminate federal taxes”, is not true. As I said last time, the total amount of federal taxes collected under the new plan would be exactly the same as that collected under the current system. In fact, “revenue neutrality” is a major component of the plan: B&L go to great lengths to indicated that the total taxes collected would be the same before and after implementation of the so-called FairTax.
So, this is a lie. If you don’t want to call it a “lie”, then you have to fall back on the notion that we are simply renaming the taxes. If we have taxes called “A” and we switch to collecting the same amount of taxes and call them “B”, would anybody call this the elimination of federal taxes?
Let’s look at the second part of the claim, the part that says that the so-called FairTax plan would lead to the elimination of the IRS. Why is this a good thing? Well, a lot of people don’t like the IRS. A lot of people don’t like taxes.
The Internal Revenue Service is the governmental agency in charge of collecting federal taxes. At present, it collects about $2.6 trillion. The budget of the IRS is about $11 billion. So, the cost of collection, as represented by the fraction of the total taxes collected that go to fund the IRS, is 0.42%. That is, four cents of every ten dollars collected.
If the so-called FairTax plan will lead to the elimination of the IRS, how will taxes be collected? B&L explain that this new tax on all new goods and on all services would be collected by the states. They say that 45 states already collect sales tax, so it shouldn’t be too difficult for them to collect the so-called FairTax and pass it along to the federal government. But first, businesses will have to collect the tax, as they do sales tax, and send it into the states. The states will get 0.25% of the tax collected, for providing the service. The individual businesses will also get 0.25% for their trouble.
So, the tax collectors will get 0.5% of the total tax to keep track of it and pass it along to the state and ultimately to the federal government. Now, we spend 0.42% of the total taxes collected on the IRS so that they can collect taxes. Under the so-called FairTax plan, we’ll be spending 0.50% on tax collection at the local and state level. The FairTax would cost more.
Will we need a large federal agency to monitor this whole thing? Well, surely we’ll need some kind of agency. The cost of this will be on top of the 0.50% that it is already costing us.
How is this a good thing? I’m not sure. Now, we pay about four cents for every ten dollars of total federal taxes to fund the IRS. Under the so-called FairTax plan, we would pay at least five cents, and probably a good deal more.
B&L think that eliminating the IRS is a very attractive thing. On the covers of their books, they have the bold letters “IRS” with a red circle around it and a red line through it. This has become a “logo” of the so-called FairTax plan. Apparently, they are relying on people’s displeasure with the IRS to promote their plan. They must not think that people would mind paying more (probably a good deal more) of their tax dollars for the collection of taxes, just as long as it didn’t go to something called “The IRS”.
The first claim of B&L is that the so-called FairTax plan will “eliminate federal taxes and the IRS”. The first part is not true, and the second part may be true, but their plan will wind up costing us more than the IRS costs now. So far, I don’t find anything compelling about the so-called FairTax plan. Perhaps B&L would like to explain to me how this is a good thing.
I’ll continue by examining more claims next time.
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6 comments:
Ken, Keep up the good work. The devil really is in the details of HR25! Here are some of my findings for your consideration. (1) Federal taxation of State and Local government consumption is certainly inappropriate if not unconstitutional under our republican form of government.
(2) By including the payroll contributions on the list of things to be replaced, and including the prebate, around 30 million workers would pay no net federal tax, yet would still qualify for full retirement and health care benefits. Talk about a "nanny state"!
(3) All wealth would be taxed when spent, which means after tax savings would be double taxed. Very unfair!
(4) Seniors who have paid their premiums for the federal insurance plan (FICA) would be forced to resume paying for their benefits with their sales tax dollars. Is that fair?
(5) Approximately 15% of the revenue needed to fund the federal government would be hidden in state and local taxes. Is that transparent?
(6) The prebate is really a cash grant entitlement, not a tax refund paid in advance as claimed by Fairtax advocates. The $600 billion cost of the prebate entitlement will hasten the budget train wreck which will be caused by entitlements squeezing out discretionary spending. A targeted prebate might make more sense!
Good luck!
Maybe you should read beyond the cover pages, with an open mind. You haven't even touched on the billions of dollars it costs the American taxpayer and the corporations to comply with the IRS rules and regulations. Even the people who write this gibberish can't figure out what it means.
Bobbie - Thanks for your comment. I am just beginning the process of examining this proposal. I am trying to look at the individual claims and counterclaims as carefully as possible. As you indicate, I have not looked at the "compliance costs" under the current system or the FairTax. Do you have any specific comments on what I have posted so far?
Ken,
I think the Dutchman3 is very misinformed of the proposal. The point of HR 25 and S25 the Fairtax is basically we will collect the same amount of taxes in total spread out through a larger pool of people in a much more efficient manner. Number of people paying these taxes doubles from 150ish million people and businesses to 300 million plus 30ish million visitors. This provides a more stable base and is more fair to everyone. It also promotes saving and taxes excess, as the more money you spend like on luxery items the higher the amount paid in tax. By efficient I mean the tax collection points fall from 150ish million people and businesses to only 22 million businesses. The simplicity of the format means no tax cheating/mistakes, like the recent nominees by the Prez, and enforcement will be cheaper as there are less collection points. So while it is true that taxes arent going away the system would be much more efficient. Also you mention that the .25% given to companies and the .25% given to states would cost us more then the IRS now. While on paper that may be true, if the cost to the companies and the state are less then the .25% then the state just has a little more income to use for the state and companies have a bit larger profit, so in a way its not lost and the cost may be lower then the .5% its just what is given. Also the .5% spent in cost may be outweighed by the increase in taxes collected due to efficiency, by that I mean much less tax cheats and loopholes.
Just some thoughts.
Peter, Thanks for your comment. This is a complex issue. For that reason, I am trying to first look at the major claims put forth by the major proponents to see if they are true. Then I will move on to other things. So far, I have limited my discussion to the first claim, that the proposal would "eliminate federal taxes and the IRS". I concluded that these are not valid claims. It does not eliminate federal taxes. Do you agree? Then I point out that the .5% costs of collectinng the "FairTax" is greater than the budget of the IRS, and the that cost would doubtlessly be more because we would need some kind of federal oversight. You suggest that this .5% might not actually be a cost, because the states might not have to spend that much (their .25%) to collect the tax. Can you provide any evidence of this? No state is currently set up to collect tax on services and some states don't collect any sales tax. So I wonder how much it would cost. I just don't know. But, that is really beside the point: the tax is being collected, and it doesn't make it to the federal coffers to support federal programs. Your other comments about the breadth of the pool of taxpayers and such are interesting: I will be looking at these other aspects. I hope you'll continue to read and comment. But, for now, I'd like your comments on B&L's first claim: the FairTax would eliminate federal taxes and the IRS. Do you thinnk this is a valid claim? Thanks again for your comment.
Peter, I certainly don't want to distract Ken from his search for the truth, but just what is your basis for claiming that I'm misinformed? I have provided six statements that I believe are true based on years of studying and writing about the Fairtax. I support a national sales tax which would replace the income tax. I just don't support the plan as laid out in HR25. Too many moving parts, and tries to do too much, too quickly. If Ken will permit it, please tell me why you think I am misinformed about any of the six issues I wrote about? I'd be glad to elaborate if needed.
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