Fair Tax Nation

Replace All Federal Taxes on Income with the Fair Tax Act , HR 25

Front page FairTax--Houston Chron editorial section this morning

It’s time for a second tax revolt

Dec. 12, 2009,

More than 200 years ago a new idea about the rights of individuals and the rights of government began as a tax protest in Boston Harbor.

“No taxation without representation” was the rallying cry that led to the new concept that all government power and authority should derive from the consent of those governed. Is a second American tax revolt now needed to restore that noble but increasingly tattered idea?

Somehow, these many years later a new American aristocracy made up of both parties is taxing generations of future citizens, not even yet born, in order to secure mind-numbing levels of national debt today. With government debt now totaling more than $500,000 per household, the voice and best interests of the average American seem lost. We have taken a destructive national path of spending beyond our means that retards job creation, shreds responsible fiscal policy and undermines the pursuit of happiness itself.

The second American tax revolt might very well be found in HR25, the long pending FairTax legislation that most in Washington love to hate. The FairTax replaces all federal taxes on income with a simple and transparent tax on personal retail consumption. The FairTax raises the same revenues now raised but in a way that helps the economy rather than hurting it and, most importantly, in a manner that restores the role of the American citizen.

Today our federal taxes are hidden from plain view through withheld payroll taxes and by embedding tax costs in the price of American goods and services. The relationship between personal wealth and the cost of government has been effectively hidden, making almost impossible any real check and balance on government spending and self-defeating debt. For candidates from both parties, the promise of new spending buys elections and to many citizens it is “free money” that is being thrown at real problems and needs.

The FairTax ends embedded tax costs, puts the cost of the federal government on every receipt and shifts national taxation away from what goes into the economy — work, savings and investment — to what comes out of the economy — consumption. The FairTax expands the tax base so that nearly every American sees a tax reduction. The average tax bill (adding together Social Security/Medicare and income taxes) now amounts to more than 30 percent of what is earned. The FairTax caps taxation at no more than 23 percent of what is spent. In essence, those who spend more pay higher taxes without exceptions granted by Congress to the favored few with tax lobbyists.

The FairTax protects the poor and middle class in several ways. First, a monthly “prebate” paid to every family reimburses the FairTax paid on retail spending up to the poverty level, wiping out federal taxes on those at or below the poverty line while also eliminating the highly regressive FICA payroll tax. For a middle class family of four, the prebate allows more than $28,000 of federal tax free spending a year on top of an overall tax reduction. Advanced economic modeling shows that the poor and middle class are the biggest beneficiaries of the FairTax in terms of tax reduction.

By eliminating all federal withholding and payroll taxes, the FairTax brings taxation into the open so that average Americans can fairly debate the cost/benefit of devoting personal wealth to so much government spending. It is a desperately needed awareness if we are to control our government.

At the same time, shifting away from taxing labor, manufacturing, investment and upward mobility itself will make the United States the most favorable tax environment in the world. This will bring trillions of dollars of private investment, now offshore, into our economy. Without borrowing against the future earnings of our offspring, this private investment creates jobs, better benefits and a new era of economic growth where productive American workers are again in high demand.

The FairTax doesn't pit the poor against the rich or Wall Street against Main Street. While every economic level benefits under the FairTax, the poor and middle class see the greatest immediate tax benefits. If there are losers they are congressional committees who can no longer sell pieces of the tax code, illegal immigrants and those in the $1.5 trillion a year underground economy who become taxpayers as consumers and foreign producers who now enjoy a tax advantage over American manufacturers.

But because the FairTax ends the $1.5 billion a year tax lobby business along with congressional power over the tax code, it will take another tax revolt to trump the narrow self-interests of Washington insiders. The good and bad news is that a relative few, but politically powerful and influential, Americans profit richly from the corrupted tax system. With all their profits and power, can they be bested by hometown Americans across the political spectrum? Only if we remember that the first American tax revolt gave us that right.

Hoagland is chairman of the FairTax national campaign and a long-time Houston resident. His book, “FairTax Solution,” goes on sale in March.

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Comment by Jim Tomasik on December 20, 2009 at 11:38am
Let the flat taxers "discuss" as they wish. The leader of the flat tax meme is Dick Armey and he is not even willing to bring it up. It is only a ruse to get people to follow him like the Term Limits in the "Contract For America" back in the 90's. Once the R's took over, Dick Armey is quoted as saying "Who need's Term limits? We're in power now"

That's fine with me! FairTaxers are the people getting organized on a national level and growing in numbers every day. The TEA Parties are opening a whole lot of eyes. Its time to provide them a little education leadership and something positive to get behind. Once that happens, a lot of the bad aspects of the TEA Party movement will fade away and the truely disenfranchised Americans will take the lead. They will be able to use FairTax as the best weapon against a stagnated and corrupt federal government.

It's time to let folks in DC know we regular Americans mean business.
Comment by Jim Tomasik on December 20, 2009 at 11:27am
Hey Ken,

I'm with you on this! Its' time we have another Tax Revolt at the Federal Level. I think these people will be a little suprised come April 15 next spring and all those fed up FairTax supporters show up in DC.
Comment by Ken Hoagland on December 14, 2009 at 6:49pm
One last one James--the FairTax has potential warts because it is not possible to tax people without producing distortions and unintended consequences. The real question is--does the research prudently anticipate the consequences--good and bad? In other words, knowing that it won't be perfect and that there will be problems unique to the FairTax, is it worth it?

When you consider the real damage done to the nation by the income tax system--and where we started this discussion--by hiding the cost of government from citizens and divorcing the true linkage between what we earn and what we owe our government--I believe that it is more than worth it. It is essential.

The tax system "devil we know" has allowed our government to grow beyond all reason, to invest power in Washington that no Founding Father ever envisioned and to distort the lives of average Americans and the best practices and potential of our business sector. The income tax system confounds the average person and expert alike and has been badly corrupted by Congress and an army of well-heeled favor seekers--who are the toast of the town in Washington, D.C. There is no prospect without the FairTax that will sever top. Debt has become more favorable than wealth under the tax code and every step up the ladder toward success (in the pursuit of happiness) is punished. Marriage is penalized and foreign producers see a cost advantage over the "Made in America" label because of our tax code. How many elements of what has made us a great nation are put in peril by the corruption and damage the income tax system does everyday? Personal responsibility? Risk taking? Invention and productivity? Fair play? Hard work? Each is undermined by a system that funds government coruptly without regard to limits or accountability.

Yes James, it is worth a bold step toward something better. How? The old fashioned way--the vote and political will of the American people. The ones who were originally supposed to be calling the shots when it comes to our government. If we can force enactment of the FairTax--and we will have to force it--we can win a constitutional amendment ratified by state legislators who profit nothing from the corruption of the tax writing process.

Can we do it? The difficult answer is that yes we can, when we join together with the neighbors we have been arguing with our whole lives over political differences. We have common cause with them in eclipsing the corruption and wrong thinking of the political elite. It's an "all hands on deck" moment that will determine who we are as a nation in the next hundred years. Are we to become Great Britain? Powerful and at the center of the world at the beginning of the 20th century and hardly that by the end of the century. Will we accept, for the first time in our history, that the next generation will not have as good a life or the opportunities that we had? The taxes that we are exacting from them now almost gaurantee that.

When hometown America eclipses the political class who have taken us down a road that is very good and lucrative for them and very bad and destructive for the nation, we will win the FairTax and we will restore the role of the American citizen. I believe they are both important goals to the survival of our ambitious experiment in self-rule and that work on the FairTax, by definition, achieves the restoration of the critically needed role of the citizen.

Others on this site have the knowledge and the passion to take you from here. We could use your help James--it's worth it and it will take all of us together.
Comment by James Tracy Thorleifson on December 14, 2009 at 5:23pm
Ken, I must admit that I have Neal's book. Also, you might want to steer folks to the slideshow put together by the Florida panhandle chapter (An Illustrated Guide to Understanding the Fair Tax) which I found very useful and a much shorter read.

My rhetorical questions are just that; I'm fishing for a thorough discussion. The Fair Tax has some potential warts; it's important to hammer them out. Otherwise skeptics like me are not going to get on the bus. I see a great deal of potential for abuse in the B2B exemptions and the non-retail point of sale exemptions. Examples of retail sales tax evasion abound in our existing economy. Ask an ATF agent about the black market in cigarettes in NYC - you've got usurious federal excise taxes on tobacco combined with usurious sales taxes - this black market is thriving; it's a billion dollar plus industry. People are going to go to great lengths to avoid paying that 23%. The Laffer Curve is probably every bit as applicable to the Fair Tax as it is to the income tax. Enforcement is going to be a bear. It's not 120 million tax returns you have to worry about; it's a gazillion retail transactions. I'm not sure this enforcement cost will equal the obnoxious waste of the current system, but I wouldn't bet against it.

And the whole prebate concept just makes my skin crawl, for reasons previously discussed.

I kind of led you to the point that we've made numerous runs at simplifying the existing tax code; if we can't get these half measures passed, how can we get a Flat Tax structured like my version passed? I think my version of the Flat Tax has real merit for reasons previously discussed; I'm just not sure it's possible to get there. So maybe the Fair Tax does have a better shot. Of course, repealing the 16th Amendment isn't going to be any cake walk, either.

Again, thanks for you time. If I can get past my reservations, I'll be your biggest fan. Fair winds and following seas!
Comment by Ken Hoagland on December 14, 2009 at 3:27pm
Well James, the Flat Tax never had elimination of payroll taxes (Social Security and Medicare) or income taxes as part of its design so I only ignored what does not exist. FICA taxes under the Flat Tax remain coming out of earnings and I seriously doubt anyone in Washington would approve individuals or businesses voluntarily sending in monthly income flat income tax payments. So there you go--as useful as...

As for homebuilders, no, there are no federal taxes levied under the FairTax on any business enterprise. All taxes are paid at the point of final retail sale. It is central to the idea of eliminating embedded tax costs. The tax is levied only on new goods, not used goods so the formula is pretty simple: how much did you sell and where is the 23% for federal taxes? Retailers keep a small percentage for their efforts.

No tax system can be perfect James, especially not at the federal level. Sure people will try to game it and sure, there will have to be enforcement and oversight. But remember, we're eliminating 120 million personal returns a year and remember that more than 80% of all retail sales in America now occur at the big chains. The enforcement universe will be smaller and the players less likely to try to cheat. Today it takes one to cheat the system--the filer. With the FairTax it will require two--the seller and the buyer. Will it happen? Probably. Perfection can only be found in church, not in a tax system but today we come up about $350 billion short of what is owed in income taxes. Most of it is mistakes because the code's complexity invites both mistakes and cheating. We spend a wated $300 billion a year in tax preparation costs.

James I can't take more time to sell you on this concept but others have--check out our website www.FairTax.org or buy the book--The FairTax by Neal Boortz and John Linder. You're going to find a lot of your doubts answered and be pleasantly surprised that this is the better way to go.
Comment by James Tracy Thorleifson on December 14, 2009 at 3:08pm
Ken, I think you might have missed (or are willfully ignoring) a couple of key points with regard to my vision of a Flat Tax that make it every bit as visible as the Fair Tax, and in my mind, more of a pain in the patooty to pay. (And maybe it's only my vision; it's certainly more extreme than what Forbes has proposed.) I have repeatedly stated the assumption that withholding is eliminated, along with the various payroll, excise and corporate taxes. Without these measures any version of a Flat Tax is about as worthless as teats on boar hog (much like the tax simplification code of 1986). To not acknowledge these points in your rebuttal is to give short shrift to the conversation. (If, on the other hand, your opinion is that it will be impossible to eliminate withholding or payroll taxes as long as any form of the income tax is retained, and can produce cogent arguments to that effect, that's another matter.)

I'm still stuck on this notion you have that a retail consumption tax is somehow better than an income tax; maybe I'm missing something. Returning to the example of home construction, while current house prices include embedded costs for all the income and payroll taxes on the whole value chain to build the house, won't the same be true for the Fair Tax? Isn't the builder going to pay the fair tax on the materials purchased to build the house, and so on with other suppliers on back up the value chain? And if not, then does not this constitute exempting certain classes of sales transactions from fair taxation? Or does the Fair Tax only address final retail transactions? (And if so, how do you determine which transactions are final? And what about resale transactions? It seems to me that defining 'sales' may be as tricky as defining 'income'.) In any event, if either a Flat Tax or a Fair Tax are going to be revenue neutral, then the same number of dollars have to come out of the economy somewhere. Please help me out here; I really am trying to understand this point. And please give me some specifics beyond the talking points; I think I'm a bit past that at this point.

Perhaps "incredibly naive" was a bit strong ;-), but I do think you may be kidding yourself a bit if you think people won't be able to figure out ways to game the Fair Tax. The human animal is remarkably adept at gaming the system. For example: As a business owner my partners and I annually update the compensation package for our employees with the intent of incenting certain desirable behaviors. (This is particularly true with respect to commission plans for our sales staff.) Each year this becomes a lesson in unintended consequences. We may or may not successfully incent the desired behavior, but invariably unforeseen behaviors arise as a result of the compensation tweaks. You see, our employees game the system in ways we did not foresee. This isn't good or bad, it's just human nature. And I'm pretty sure the Fair Tax will be subject to human nature, too.

I am fundamentally a "conservative" in the textbook sense in that I am reluctant to cast aside long standing institutions, even if they are flawed. I'd rather work to resolve those flaws than expose myself to the risks of the complete unknown in social arrangements that so profoundly affect our way of life. To quote an old saw, I'd rather wrestle with the devil I know than the devil I don't. I'm pretty sure I'm not alone in this outlook, so to convince me and others of like mind you're going to have convince me that you have carefully analyzed the Fair Tax for unintended consequences. You've yet to do so. On the contrary, you seem unwilling to contemplate the notion that the Fair Tax might have some devilish characteristics of its own. (I am aware that this venue's existence is primarily devoted to trumpeting the virtues of the Fair Tax, so perhaps this is not the place for a truly serious conversation on the subject.)

I totally agree with you that the Fair Tax is superior to the VAT. As I understand it, the VAT is a dream vehicle for those fond of hidden taxes. I believe I read somewhere that our socialist friends across the pond considered a simple retail consumption tax before adopting the VAT for the EU, but ended up adopting the VAT because the retail tax rate had to be significantly higher than the VAT rate. Have I got this right?

BTW, thanks for all your time on this. It's not my intent to monopolize the conversation; I'm just trying to get edumacated.
Comment by Ken Hoagland on December 14, 2009 at 8:33am
At its heart, the FairTax eliminates federal taxes on savings, labor and investment. That Flat Tax reduces the amount levied on these critical elements of our economy but retains the same flawed concept. That alone, James, makes the FairTax far superior to the Flat Tax or any other income tax.

And rather than being "incredibly naive" about Congress' habits, the FairTax makes a single consumption tax so visible that political pressure from every consumer (read voter) finally controls the now inherent ethic to spend more, promise more, buy votes and manipulate the code for power and profit. Those tempted to makes changes will have to deal with the political effect of a nwely visible rate that requires a visible increase in order to make up for revenues lost to favors, promises and special treatment to gain political advantage. Of course politicians from either party will seek to curry favor with one group or another by using the tax code to buy their votes. The FairTax makes that ambition very difficult by maing plain that every other voter/consumer has been required to pay for that ambition and largess.

The whole point is that the invisibility of withheld taxes makes such habits irresistable to politicians today. That changes with the FairTax but won't with a flat tax that remains withheld from paychecks and hidden from plain sight. This is hardly "conversion to Islam" but a return to the promise of the Founding Father's faith in the good judgment of the American people to control irresponsible government actions. That control can't be exercised without transparency of taxation and it's relationship to what we earn through daily work.

As for houses and every thing else, embedded tax costs now amount to as much as 20% of the American producer's costs. The FairTax eliminates those costs and the Flat Tax merely reduces them. The retail cost comes down when those costs are eliminated and even if not a wash after the FairTax, you pay for that house with a far fatter paycheck after federal withholding and payroll taxes are eliminated. The Flat Tax leaves income taxes and FICA taxes, withheld and hidden, and in place. That means that "embedded" tax costs also remain in place.

Steve Forbes had a good idea but not as good as the FairTax. His idea makes the income tax system less painful but does not solve its inherent problems and doesn't offer a needed restoration of the American citizen to check and balance government profligacy. Should we settle for "less painful" but still flawed? Why would we? There are no Congressional co-sponsors for the Flat Tax but FairTaxers have won the support of more than 60 Members of Congress.

Our campaign is growing, is backed up by Nobel Prize winning economists and has $22 million of peer reviewed research behind it. In other words, it represents the better--and better developed-- idea between the two and has made more grassroots and Congressional progress.

James, that's why we have to bring the FairTax message to every American household and why the FairTax is far better than the Flat Tax, the VAT, the reforms around the edges of the central problem or the current situation--do nothing and hope for the best.
Comment by James Tracy Thorleifson on December 13, 2009 at 9:52pm
Gentlemen, thank you for the kind welcome. It’s a pleasure to enter a flame free zone.

Let me take Ken’s points one at a time:

“…any income tax system has two fatal flaws--it taxes the very things that make the economy grow, in particular those things that lead to capital formation…”

I’m not sure I understand Ken’s distinction between income taxation and retail taxation. As far as I can see, any kind of taxation is a drag on a free market economy; does it really matter whether taxation occurs at the front end (income), or at the back end (retail consumption)?

“….and, a system that taxes income leaves in place Congress' ability to "tweak" exceptions for profit and power.”

True, but it’s incredibly naïve to think that Congress will not tweak exceptions to the Fair Tax for the same purposes. Does anybody really think that that all transactions will be treated equally over the course of time? Remember how simple income tax was at its conception. To use an analogy, the federal income tax system has become as corrupt as the Catholic Church in the time of Martin Luther. Ken suggests the only solution is conversion to Islam; I suggest merely that a Reformation is in order.

“The definitions of income have become so tortured by both Congress and a century of court cases that it's quicksand that can't be reformed.”

This is a strong point, and is to my thinking perhaps the strongest argument for conversion to a completely different form of taxation, like the Fair Tax. The Fair Tax will undoubtedly engender its own set of unintended consequences, but at least it’s a fresh start.

“It's a toss up which is worse but I believe the taxing of work, savings and investment is the more destructive of the two.”

It is a toss up. Taxation is taxation, period. Any form of taxation takes wealth out of the free economy and distributes it for some other purpose than that which would be exercised by the individual being taxed. If this were not the case, taxes would be unnecessary.

“The FairTax does make collection a lot simpler…”

Really? How so? I do not grasp the logic of this assertion. The punitive nature of the IRS is due to taxpayers’ attempts to avoid taxation. Does anybody really believe that tax avoidance will magically disappear with the Fair Tax? I suspect the opposite will occur, and predict we will see the creation of massive black markets to purchase and sell goods tax free. The IRS may disappear, but the FBI will be forced into massive expansion.

“…it also makes the cost of the federal government highly visible. Think postage rates--even a one cent increase causes a lot of comment because the rate is so visible. Same goes for the FairTax.”

Granted. If either a Flat Tax or a Fair Tax successfully eliminates all other federal taxes, then obviously the remaining tax would be highly visible. But again, visibility is not the only issue. The Fair Tax is just too painless. I am quite confident that folks will figure out how to finance the consumption tax for big ticket items like home or car purchases. Once financed, it’s out-of-sight-out-of-mind. Conversely, nothing focuses the mind like writing a check out to Uncle Sam once a month.

“If someone thinks it a great idea to exempt some category from FairTaxation…”

Bingo. This is how the gaming of the Fair Tax will start. Does anybody really think Joe Taxpayer is going to tolerate the huge sales tax amount associated with a new home purchase? I think not; exception 1. How about expensive university tuition? Exception 2. What about medical expenses for devastating or chronic illness? Exception 3. And so it will go. The Fair Tax will not alter human nature; taxpayers will still be taxpayers, and politicians will still be politicians.

“Even though the flat tax is better than the income tax as it now exists, it has no sponsors in Congress, no body of research to validate it…”

Please. I'm no expert and cannot provide a complete bibliography, but for starters see the work of Dan Mitchell at the Heritage Foundation (http://www.heritage.org/Research/Taxes/bg1866.cfm), or the folks at Freedom Works (http://www.freedomworks.org/issues/flat-tax), the bill proposed by Dick Armey, etc. The flat tax and variations have been successfully employed by a variety of eastern European nations moving away from communism.

“…the proposed Flat Tax rate of 15% has FICA taxes added on top, which raises the rate to 22.65% and 30.65% for the self-employed.”

I’m not sure which Flat Tax proposal Ken refers to. (I’m still trying to get an education here.) However, if the Flat Tax and the Fair Tax both eliminate all other forms of federal taxation, and if they are revenue equivalent, then it follows that the rate for either has to be about the same.

“…remember that the prebate is returning a portion of the personal wealth that all we pay in taxes and is not a welfare payment that redistributes income.”

And finally, here’s the rub. No, it won’t start as redistribution in the classic sense. It’s just the government taking money from you with one hand that it should not have taken in the first place, and then giving it back to you with the other hand. This is the same pernicious logic that gave use such marvels at the Bush tax rebates, TARP, and the Obama stimulus program. Just exactly how long do we expect prebates to remain non-“progressive”? I’ll bet dollars to doughnuts, a certain political party will do everything in its power to turn prebates into classic wealth redistribution at the earliest opportunity.
Comment by Jim Tomasik on December 13, 2009 at 5:44pm
James, No worries.

Ken H. can explain the pros and cons as good as anyone I've heard. He can do it with politeness, ease and class!

(Anyhow, outright flaming is not allowed on FairTaxNation.)
Comment by Ken Hoagland on December 13, 2009 at 1:59pm
Thanks James for your thoughtful remarks. I disagree, however, primarily because any income tax system has two fatal flaws--it taxes the very things that make the economy grow, in particular those things that lead to capital formation and, a system that taxes income leaves in place Congress' ability to "tweak" exceptions for profit and power. The definitions of income have become so tortured by both Congress and a century of court cases that it's quicksand that can't be reformed. It's a toss up which is worse but I believe the taxing of work, savings and investment is the more destructive of the two.

The FairTax does make collection a lot simpler but it also makes the cost of the federal government highly visible. Think postage rates--even a one cent increase causes a lot of comment because the rate is so visible. Same goes for the FairTax. If someone thinks it a great idea to exempt some category from FairTaxation (causing the rate to increase) or proposes something big that requires a rate increase, for the first time in a long time--try more than a hundred years--every consumer is going to want (and really does deserve) a word about that. It's how we deal the American people back into control of the spending habits of our government.

Even though the flat tax is better than the income tax as it now exists, it has no sponsors in Congress, no body of research to validate it and cannot be low enough to attract much offshore investment interest (some, but not as much as the FairTax). And, while retaining the flaws of the income tax system I mentioned, the proposed Flat Tax rate of 15% has FICA taxes added on top, which raises the rate to 22.65% and 30.65% for the self-employed. You also can't capture the underground economy or illegal immigrants or taxation of existing wealth when spent, with a flat tax on income.

Finally, remember that the prebate is returning a portion of the personal wealth that all we pay in taxes and is not a welfare payment that redistributes income. It goes to every household, including Bill Gate's, but has a progressive and proportionate effect the lower one's income. James, what could be more fair? While reimbursing taxes on necessities, the more you spend, the higher tax you pay. All contribute and all benefit.

There, my gentle thoughts--without flames--James.

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