RE: Six Reasons Why The FairTax Is A Really Bad Idea

The reason I’m posting this here is because, as you can see, my rebuttal to Alex Kauffman’s post “Six Reasons Why The FairTax Is A Really Bad Idea” is quite lengthy. The Blogger interface, although very easy to log in with my OpenID, limits posts to 4,096 characters. This was well over 11,000; so I would have had to split it into 3 separate responses. Besides, I get to format it the way I want now. Sorry Alex, posting here was by far the simplest option.

Alex, first and foremost, thank you for the blog post about the FairTax – any exposure is good exposure. At first glance, I thought you had an easily refutable set of basic arguments.  I found that only 5 out of the 6 were easy to answer. Congratulations on the other one (#2); that was where I spent most of my time.

For simplicity, I’ve used the same numbers you have and added some additional points at the end.

1. I will agree that a sales tax (as we most commonly know them – State Sales Taxes) are regressive; I’ll give you that. BUT, the FairTax is not just a “Sales Tax”, it is a consumption tax. What’s the difference, you ask? I know the terms are generally interchangeable, but look at it this way: The FairTax only taxes “goods and services purchased for final consumption”. Because Company A sells their product to Company B with the sales tax included, Company B has to pass that tax on to Company C when it sells their product, and Company C has to pass it on again when they sell their product. It is because of this that we have “embedded taxes”, but as far as the FairTax is concerned, an item is not “consumed” until it is purchased by the consumer (or end user). Therefore, business to business transactions are considered tax-exempt under the FairTax, because they are passing their purchases on to another business who will in turn either collect the FairTax from their consumers or sell to another company who will do so.

I do disagree with you about how “sales taxes are often the most regressive form of taxation“, because in our case they are not. In fact, the most regressive form of taxation we deal with is a major part of our existing income tax system; you might know the terms as FICA and/or SECA. FICA, with no deductions, is only imposed on the first ~$100K of gross wages – so anyone making over $100K isn’t paying any additional taxes. With FICA, you (the employee) pay 7.65% of your earnings and your employer pays the additional 7.65%. If, however, you’re Self-Employed, you are lucky enough to pay both your share and your employers share; the entire 15.3%.

Now, with that being said, the portion of the FairTax that you thought should be #6 on your list actually plays a pivotal roll in turning a “naturally regressive tax” into the progressive tax that will become the FairTax. Enter: The Prebate. If you study this image for just a minute, you will see how the prebate acts as a deterrent to regressiveness by giving you back the taxes that you’re expected to spend in the coming month.

Click to view full-size image

How the Prebate Makes the FairTax a fair tax. (Click to view full-size image)

If you’re like most of us here, you probably spend anywhere from $30,000-$50,000 per year. As you can see, the prebate changes the FairTax rate you actually pay to as little as zero percent. If you happen to spend even less, then you are able to keep that ‘prebate’ to help with other things; such as credit card debt, or child support, or even dinner out for you and your spouse.

One point I have to argue here is that in #1 you, Alex, are arguing that the FairTax isn’t progressive, but later (in point #6) you consider the item that actually makes the FairTax progressive (the prebate) an “entitlement”, and “welfare”. I’ve seen this same logic used in many other arguments against the FairTax and it still boggles me.

2. I’m going to be honest with you, this sounds like a viable argument. But I don’t believe it’s worth not voting on the FairTax for. Lobbyists are a huge part of the American culture now and I don’t think we’re going to get rid of them within the next few hundred years. Point being, that regardless of the tax system being used, they can all become “just as convoluted as the current income tax“. Throwing out the best proposal on the table because of something that can (and likely will) happen to any system is foolish.

3. As our current tax code stands now, they can do everything you’ve stated, but one of the selling points of the FairTax is that it is a “flat rate” tax. Meaning that there is a single rate for all new goods and services sold in the United States. That rate is explicitly defined in HR-25 ‘SEC. 101. IMPOSITION OF SALES TAX and cannot be changed without our Congressmen voting to change it; in which case, we will know when they do and can opt to not vote for them in the future. In fact, one reason the prebate was added to the FairTax was to prevent certain necessities from easily being excluded from taxation. The concept there is that if everything is taxed equally, then there are no exceptions.

4. Here are the basics from the Constitution regarding taxation. The language in section 9 about direct taxes does not apply to the FairTax because the FairTax is an indirect tax.

The US Constitution sets forth only a few criteria regarding taxation.

Section 8, Clause 1 states that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

Section 9, Clause 5 states that “No Tax or Duty shall be laid on Articles exported from any State.

The FairTax is, by definition, a form of excise tax; so it meets the first criteria of the type of taxes that Congress can levy. Since the FairTax rate and definition of the tax base would be the same in every state, it meets the second criteria that excises shall be uniform throughout the United States. In addition, the FairTax does not tax exports. Therefore, the FairTax appears to meet both the spirit and the letter of the Constitution, and would therefore be in compliance with the Constitution.

In the case of the income tax, it is a different story. Section 9 states that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” The income tax is a direct tax, but the only direct tax that the Constitution allows would be one that is based on the population, for example, what is known as a “head tax”, i.e. so much money per person. That is why the 16th amendment was necessary.

5. First, we have to remember here that “deductions” are for income based taxes; without those the need for deductions becomes obsolete. Second, Are you aware that the National Small Business Administration (The NSBA) endorses the FairTax? This directly from their website:

The current U.S. income tax system discourages personal savings and investments by taxing capital gains, dividends and earned interest. Business owners and wage earners struggle under the burden of a very regressive payroll tax. The income tax ‘not to mention the Alternative Minimum Tax’ is unbelievably complex, time consuming and costly to administer.

Third, “all business-related purchases would [NOT] be taxed at the point of sale”. Your statement is incorrect because business-to-business transactions are tax-exempt under the FairTax. So, not only do businesses NOT have to pay taxes on the products they purchase which go into the production of items they produce and sell, they DO NOT pay taxes on common items they use around the office, like copy paper, pens, paper tablets, toilettries, dishware, etc.

And Fourth, because the FairTax untaxes income, businesses no longer have to pay their 1/2 of their employee’s FICA taxes.

6. The prebate is no more an “entitlement” than our current annual tax refunds are; and it is certainly not “welfare”. The prebate is nothing more than a monthly tax refund instead of an annual refund; and because EVERBODY gets the same amount (based on the size/type of your family) it eliminates “class warfare” by being fair to all.

To address some of your other concerns:

// “Congresses could change the amounts paid in prebate” // The architects of the FairTax didn’t just sit down and say “Ok, 1 person gets $209 per month, 2 persons get $417 per month“. The actual prebate amount is explicitly defined in the FairTax Act (HR-25, ‘CHAPTER 3 — FAMILY CONSUMPTION ALLOWANCE) as

“Each qualified family shall be eligible to receive a sales tax rebate each month. The sales tax rebate shall be in an amount equal to the product of– ‘(1) the rate of tax imposed by section 101, and ‘(2) the monthly poverty level.”

The monthly poverty level is set by the Department of Health and Human Services. To learn more, see HHS LINK.

// “exempt some (wealthy) persons while being quite generous with (poor) others” // ALL legal U.S. citizens are eligible for the prebate. No Exceptions! BUT, if you don’t want it, you don’t have to register for it. Simple as that.

// “eventually converting the prebate into yet another welfare entitlement- much like the Earned Income Tax Credit- and in so doing, reinforce the already-existing welfare trap.” // The EITC is a refundable tax credit primarily for individuals and couples with qualifying children. Unlike the EITC, the prebate can be claimed by the unemployed and the homeless. The prebate would also require a lot less paperwork than the EITC (just names, address, proof of citizenship, etc.). That’s a good thing for families who are especially time constrained or people who are poorly educated. And statistics show that such families are exactly the ones who would need such a credit the most.

// “Additionally, I can’t understand how FairTax proponents believe that this proposal would reduce the size and scope of the IRS, when the IRS would have the responsibility of paying out a prebate to more than 100 million people every month. That would require an awful lot of bureaucrats!” // Wait, back up a second. Isn’t the EITC administered by the IRS? And you want to attack the FairTax for this same reason? (Which isn’t even true with the FairTax). The IRS isn’t needed to “write checks” any more than it is needed to stake its claim to a baseball. Any “bureaucracy” created by the FairTax will not only be a miniscule fraction of the bureaucracy created by the IRS; it will not be as invasive, intrusive, or overbearing as the IRS is.

The prebate checks would be handled by the Social Security Administration which already transfers millions of checks each day with a push of a button. Under the FairTax you need a bank account number and to register those in your home with legitimate Social Security Numbers. Easy Peasy!

Now, for a few good points to leave you with about the FairTax (yes, there are many other good points, but this response is already long enough):

A. Because taxes would be placed at the register, everybody buying anything at the register would automatically be paying the FairTax – including illegal immigrants, tourists, drug dealers, and the rest of the underground economy. This broadens the tax base by well over 20 million people per year and is much of the reason the FairTax rate can be lower than the others.

B. Your receipts would look something like this:

Your Neighborhood Dept. Store
Item A: $10.00
Item B: $65.00
Item C: $25.00
Subtotal: $100.00
FairTax: $23.00
State/Local Sales Tax: 8.25%
Total: $108.25

C. No Tax cuts for the rich. As you can see from the image (or link) above, the rich are the people who truly pay their “fair share”; the middle-class still pay some taxes, and the lower-class don’t pay any taxes. This is truly a system that caters to “We The People”

Your comments are welcome here or on Alex’s blog. Thank you!

Staunch FairTax Supporter

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Posted in Corporate Taxes, FairTax, FairTax Act of 2011, FairTax vs. flat tax, HR-25, Illegal Immigration, Income Tax, Prebate, Progressiveness, Tax Reform
8 comments on “RE: Six Reasons Why The FairTax Is A Really Bad Idea
    • MerlinYoda says:

      Alex, I’m replying here because blog-spot doesn’t have an option to log in through twitter to post a comment and I keep my Google account pretty guarded.

      It’s rather convenient how, in your reply to the replying article, you put forth the assumption that politicians and lobbyists corrupting policy is “inevitable” and, as such, the FairTax would becoming as (or more) convoluted than our current income tax code is also “inevitable”. However, you don’t apply that very same assumption the Flat Tax you espouse. This is ignorant at best and intellectually dishonest at worst.

      This current incarnation of an income tax system *started* as a fairly flat tax structure (6 tax brackets from 1% to 6%) and with a pretty high “standard deduction” in that you weren’t taxed on the first $20,000 (in 1913 dollars, that’s roughly $500K today after adjusting for inflation). How long until politicians and lobbyists start to turn that Flat Tax of yours back into something like what we have today (or worse!)? How long until they use politics of class warfare and claim that the “rich aren’t paying their fair share” to garner votes? You can’t logically use an assumption against one tax structure you don’t support and not apply that same assumption to one you do support … assuming of course the assumption is logically applicable to the latter and, in this case, it is.

      On an overall note, your reply shows a serious lack of research on the actual FairTax legislation and smells more of second-hand opinions and here-say. For example, you say that “if a business buys, for example, a vehicle for deliveries, they’d have to pay the tax, because they are the “end user””. This is *patently false* as *any* new good (as used goods, ones that are “unconsumed”, wouldn’t be taxed in any case under the FairTax) or service purchased by a business which is utilized in the furtherance of that business providing it’s goods or services to others is *not taxed*. This would include delivery vehicles for delivering product to customers … of course, if a business claims a new Ferrari as one of their “delivery vehicles”, then that’ll probably raise a few eyebrows at the State Secretary of the Treasury’s office and prompt an audit of the business to investigate for possible tax fraud.

  1. fairtaxer says:

    Thanks for that, Alex. My response was short enough to just post it on your blog; so that is where you’ll find that.

    When you want to do some serious research on the FairTax we’ve got all the links here for you.

  2. Thanks for pointing that out Hank, but your numbers are also severely flawed. You are ADDING the FairTax to the cost of the goods, which is incorrect. The FairTax is inclusive of the cost of the goods.

    Here is the revision per SECTION 509:

    ‘(a) In General- For each purchase of taxable property or services for which a tax is imposed by section 101, the seller shall charge the tax imposed by section 101 separately from the purchase. For purchase of taxable property or services for which a tax is imposed by section 101, the seller shall provide to the purchaser a receipt for each transaction that includes–
    ‘(1) the property or services price exclusive of tax;
    ‘(2) the amount of tax paid;
    ‘(3) the property or service price inclusive of tax;
    ‘(4) the tax rate (the amount of tax paid (per paragraph (2)) divided by the property or service price inclusive of tax (per paragraph (3));

    … other extraneous stuff not associated with the price of goods or their taxes.

    So, here is what a $100 item would look like on a standard receipt, based on the (numbers) above:

    (1) $77
    (2) $23
    (3) $100
    (4) 23%

  3. Does the FairTax deal with State sales taxes, Hank?

  4. What’s your true angle, Hank? You come across as a pretty smart man, but these rudimentary misconceptions of yours tell me that you’re either being intentionally obtuse or you’re not as smart as you come across. Since you’ve been doing this for more than 6 years, I’m guessing it’s the former, which tells me that you are just a naturally disingenuous person who preys on those who may not be able to defend the FairTax as well as you can attack it.

    For others reading Hanks comments, I ask that you take the time to understand the FairTax for what it truly is, not for what Hank is portraying it to be. Take the time to read some of the basics on how the rate is actually calculated:

  5. Hank, you have to excuse me, I’ve not been doing this as long as you. It would be disingenuous of me to say that 23% in embedded taxes are taken out of every item sold, when in fact studies show 19-25% of the price of goods/services are embedded taxes. Of course, we cannot guarantee the prices coming down by that amount but we must understand that prices will not automatically go up by 23% (or 30%), because they simply won’t. Overall the price will be offset by a combination of the removal of those embedded taxes, the increase in your take home pay, and the prebate.

    For instance, if prices go up 10%, but I’ve got 15% more in my paycheck, I am still “ahead of the game”. And even more after I add in the prebate I receive.

    That said, prices are likely to rise a bit (some say 10% or so), but if the vast majority of Americans have effectively increased their income by more than 10%, the effect is the same as a 0% price increase, in terms of purchasing power.

    So, the item sold for $100 today, may or may not be exactly $100 after the FairTax. But with our increased purchasing power under the FairTax, we would be able to afford a slightly more expensive item and still have money in the bank.

    Item Today: $100
    – (minus) estimated embedded taxes have been removed: $77
    + (plus) FairTax:
    either @23% (inclusive): $100 * 23% = $23
    or @ 30% (exclusive): $77 + 30% = $23
    = (equals) item after the FairTax is added back in. $100
  6. So, Hank, you feel that the potential of a State taxing the FairTax “would cause a fracas”, but it doesn’t bother you that our government is double, triple, and multi-taxing every -new- AND -used- item we buy now?

    Sorry, sir, but I would be more concerned with getting rid of all this extraneous taxation that IS happening to us now before I would start to speculate that states “might” add their tax on top of the FairTax. Please DON’T try to convince me otherwise, because you won’t.

    I think what you’re missing is that there are currently State AND Local sales taxes being added to the receipts of goods in 45 States right now. None of those tax the tax of the other. So why would you think the States would automatically start taxing the FairTax? We have always taxed the goods pre-tax, not post-, so why would we start now? It doesn’t make sense to me – unless you just want to scare people into thinking they’re going to start getting double taxed under the FairTax. Which as I just mentioned above is already happening under our noses.

    This is a quote from the same research which you previously mentioned:

    On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base.

    So, if states could cut their sales tax rates by that much AND get that 0.25% admin fee – what was it that you said? $25,000 for Wyoming? And $300M for California? – then why would they not accept that offer?

    If you feel that the FairTax would just “die on the vine”, then why not let it and see where it goes. Our economy is in the crapper already and not going to get any worse. Let’s give the FairTax a fair shot at actually trying to help our economy. If it works, awesome. If it doesn’t, then we move on and try the next best thing.

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