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Tax plans look good on surface, rotten underneath

Thursday, February 19, 2009 | 10:00 a.m. CST; updated 8:47 a.m. CST, Wednesday, February 25, 2009

This is a tale of two tax schemes: one federal, the other state, both seemingly too good to be true.

Let’s start with the feds and H.R. 25, “The Fair Tax Act of 2009.” This is not the first time this proposed statute has hit the federal legislative chambers. I can only assume it will not be the last.

The purpose of this proposed law is “to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.” Anything that abolishes the evil and despised payroll tax and the Internal Revenue Service cannot be all bad. We get to take home more of our paycheck. This is a good thing, right?

The offset here is the creation of a new tax-collecting arm of the government and have you pay a sales tax, a 23 percent federal sales tax, as well as city, county and state sales taxes. 

“Wait a minute,” cry the opponents of this bill. “The math just does not add up. The tax rate would be 30 percent, not 23. ”  

Just imagine going to the store and buying a pair of slacks for $100 and having to pay $130 with the federal sales tax alone. Here is the math according to the conservative and Libertarian anarchists: The proponents of the bill take cost of the goods, $100 and divide that into the total charge, $130, you will find the reduction difference at 23 percent. They are call that “the tax rate.” That is not how the tax is determined.

The $30 sales tax is based on the $100 retail sale, not the end price. The $30 federal sales tax, therefore, would be 30 percent. The proponents of H.R. 25 are working the numbers backward. It is the “rule of the ridiculous.”  

Now for Missouri's scheme to take your money. This time the culprit is the Missouri Department of Transportation. The problem is that Missourians are buying less gasoline, which is a good thing, and buying more fuel-efficient cars, which is even better. However, these two factors mean that Missouri is receiving less fuel tax revenue to fix our highways and bridges.

The St. Louis Post-Dispatch reported that MoDOT is interested in eliminating the state tax for gasoline, a savings of 36 cents per gallon (42 cents for diesel). Sounds good, doesn’t it? However, this is a “drive now and pay later” scheme. The plan is to charge you a “per mile” fee based on a new meter installed in your motor vehicle. Two questions: first, who is going to pay for having this mileage meter put on our cars; second, is this just another sneaky way to impose an already unpopular tax?

Mind you, I dislike paying taxes as much as the next guy. I hate hearing that some legislator has earmarked money for his or her district so the member looks better in the constituents’ eyes and remember to vote in 2010. I hate seeing FEMA and other government agencies being so inept with my tax dollars that entire regions of this country might be scared for generations.

I also hate being misled. Remember the old adage, “numbers don’t lie but liars use numbers?” I coined “The Rule of the Ridiculous,” or using a number so big or so small that you look like a hero.  

Just moving or renaming the tax is not a benefit to anyone. Simplify state and federal tax codes to a something smaller than the Encyclopedia Britannia, maybe the size of the New York City telephone book. St. Louis Post-Dispatch columnist David Nicklaus agrees, even daring his readers to decipher line 70 of the 2008 Form 1040. 

So members of the state and federal legislative branches, manage our tax dollars smarter and with appropriate oversight. Simplify the tax codes. Do your jobs as the elected leaders of our community. Don’t play to our wallets and forget our brains. We are much smarter than that.  

David Rosman is a business and political communications consultant, professional speaker and college instructor in communications, ethics, business and politics. Besides the Missourian, David is also a featured columnist for MissouriTribune.com and TRCB.com. He welcomes your comments at ProfDave1011@netscape.net.


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Comments

John McDaniel February 19, 2009 | 3:42 p.m.

Go to: www.fairtax.org

PLEASE CONSIDER THIS ALSO:

22% of the price
of all that you buy currently is tax / tax compliance cost. When that cost goes away (under the Fair Tax) the price of your $1.00 item (purchased at Wal-Mart, for example) drops in price to 78 cents (without damaging Wal-Mart's profit margin).

1.23 X 78 cents = 96 cents.

Seeeeeeeeeeeeeeee!!!! Even with the 23% Fair Tax added on, your originally $1.00 item is now 4 cents cheaper.

The "out-of-pocket" cost of living , under the Fair Tax , will be no more than it is now.

Under the Fair Tax there are NO LOSERS, only winners, the difference being that some win BIGGER!!!! than others due to their increased FRUGALITY.

(Report Comment)
Christopher Foote February 19, 2009 | 4:18 p.m.

Mr. McDaniel,

Where does your magical 22% decrease come from? A survey of corporate tax payments from 1998-2005 indicated that 2/3 of all corporations in the United States paid 0 federal income taxes (Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005). This is from the GAO.

(Report Comment)
John Schultz February 19, 2009 | 4:34 p.m.

As a Libertarian and not an anarchist (would one even argue for a tax as David claims?), the Fair Tax is a massive simplication of the tax code, just as the author seems to want. I have issues with it myself, such as it doing nothing to reduce the size of government (the Fair Tax is set to be revenue-neutral) and basically making everyone dependent on some Federal agency to receive their monthly prebate check (essentially welfare for all). I'm not sure how correct David's interpretation of the 30% tax rate is as there seems to be some confusion on both sides of the argument.

(Report Comment)
John McDaniel February 19, 2009 | 4:55 p.m.

Mr. Fotte,

Over 20 Million $ was spent in research (at MIT) to develope the Fair Tax. That is where the "magical" 22% figure came from.

for the answer to ALL your questions, go to:

www.fairtax.org

(Report Comment)
Christopher Foote February 19, 2009 | 5:00 p.m.

Mr. Schultz,
There is absolutely no confusion on the side of rationalists. A tax is added on to the cost of an item. If an item costs $100, and you end up paying $130, you have been taxed $30, which is 30% of $100. Total cost of an item = (cost of item) + ((cost of item) X (tax rate)). Just for kicks how would determine the "23% tax rate" for an item costing $77 without using "30%" in your equation?

(Report Comment)
Christopher Foote February 19, 2009 | 5:14 p.m.

Mr. McDaniel,
If you can't tell me the answer, perhaps you should do more research. Also you have made a mistake in your equation. You need to multiply your 78 cents by 1.3, not 1.23. If you don't believe me multiply $100 by 1.23 = $123. $100 X 1.3 = $130. You have made the "mistake" of the rationalists. Your "%23 tax rate" is determined from the final cost of the good including the taxed amount. To derive this you must use 30%. .78 X 1.3 = 1.014. Looks like you are not revenue neutral, even accepting your magical 22% reduction, which I don't.

(Report Comment)
John McDaniel February 19, 2009 | 5:51 p.m.

Mr. Foote,

What you don't see is that, with no income tax cost included (embedded) in retail prices, as is the case now, those prices would be forced downward (by competition) an average 22%. Wal-Mart is our guarantee that this will happen, in order to keep their parking lots full, as they are now.

(Report Comment)
John McDaniel February 19, 2009 | 6:06 p.m.

Mr. Schultz,

Your monthly prebate check IS NOT welfare. It is the refund of your sales tax on what you spent up to the POVERTY level figure for a household the size of yours.
All you spend above that level is sales taxed.

The Department of Health and Human Services re-calculates the "poverty level" for each size household every year.

This will encourage you to spend little and save BIG!! for a fat retirement.

(Report Comment)
John McDaniel February 19, 2009 | 6:16 p.m.

How does the prebate work?

All valid Social Security cardholders who are U.S. residents receive a monthly prebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The prebate is paid in advance, in equal installments each month. The size of the prebate is determined by the Department of Health & Human Services’ poverty level guideline multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc.

(Report Comment)
Charles Dudley Jr February 19, 2009 | 6:20 p.m.

I have read quite a bit about the Fair Tax and it sounds like a great idea.

I do not think some like it because Neal Boortz had a hand in it's founding.

(Report Comment)
Christopher Foote February 19, 2009 | 6:54 p.m.

Mr McDaniel,
We now get pack to my initial point that a sizable majority of corporations (66% according to the GAO) pay 0 income tax. Just as your 23% tax rate is fictional, so is your justification for a 22% reduction in the price of goods, as is your revenue neutral claim.

(Report Comment)
John Schultz February 19, 2009 | 6:55 p.m.

I understand quite well where the prebate is coming from. Making each household dependent on a monthly check from Uncle Sugar is where I have issues with it.

(Report Comment)
David Nelson February 20, 2009 | 6:57 p.m.

There are different times and reasons for using the inclusive or exclusive rate.

When trying to figure the amount of tax that would be added to a product or service for which we know the pretax price, the only feasible way to do so is (as you state) to multiply it by the exclusive figure (approx 30%). If we know a candy bar has a pretax price of $1.00 we can expect to pay $1.30 at the cash register.

When discussing the percentage of the total amount spent, it is important to discuss it as an inclusive number while making the distinction. When we spent $1.30 on the candy bar, 23% of the total was tax. If you have exactly $1000 to spend in a month, and spend every dime of it on new goods or services, you will have spent $230 on taxes (not $300). This is important because this is usually how we refer to a person's annual spending, weekly check, monthly budget etc. and I have seen people argue that a hypothetical person living in a FairTax world actually spent more in goods + taxes than he had to spend in the first place.

When discussing the "effective" tax rate, or the percentage of ones wealth that is taxed, we always use the inclusive number. That is why when compared to the effective rate of income taxation, the inclusive number is more appropriate.

But let’s look at the phenomenon in the reverse.

Please take a dollar bill out of your pocket.

C’mon

Do it!

OK

How much did you have to earn to have that dollar bill in your hand?

Assume I am in the 15% income tax bracket. I had to earn $1.27 to have a dollar in my hand.
For every $1.27 I earn, I pay $.19 in Federal income taxes and $.08 in payroll taxes.
Before I get to see it, $.27 is taken from every $1.27 I earn. So that means that for every dollar I get to spend, I had to earn $1.27.

Are you with me so far?

We have let the IRS get away with calling this the 15% bracket for way too many years.
I understand the math, but it still feels like I’m paying 27%.

With the FairTax, you will take home your entire paycheck. You pay no federal taxes at all until you have spent more than the poverty level on new goods and services, and then when you spend the next $1.00, $.23 of that dollar will be federal tax. When you spend $1.30, $.30 will be tax.

Nobody who can be taken seriously about the FairTax tries to hide these numbers at all. In fact, much of the literature specifically avoids using the word percent and instead says, “twenty-three cents out of every dollar you spend.”

The real question is why aren’t you devoting your energy to blasting the IRS for lying to us about the 15% tax rate?

(Report Comment)

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