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Fair Tax Act raises more questions than it answers

Wednesday, June 17, 2009 | 12:01 a.m. CDT; updated 12:58 p.m. CDT, Wednesday, June 17, 2009

When I first decided to write this week’s column on the Missouri Fair Tax Act, the task seemed simple enough.  I was tangentially aware of the issue, and I figured doing some research for a column would be a great way to further educate myself. I was sure that once I analyzed the proposal and scoured all of the literature, I would be left with an educated opinion.

I couldn’t have been more wrong.  

I quickly discovered that those who prefer solid ground beneath their feet when making a decision lack such dry land when it comes to this tax proposal. After sifting through each side’s talking points and reports, numerous articles and a few economic journals, I was only left with more questions. Unfortunately, I don't think I am alone, and therein lies my problem with this possible legislation. Although I think there are many advantages to adopting a consumption tax, the rhetoric can be complicated, and there are just too many “what ifs” that are unaddressed in this bill for it to become active legislation without further revisions and detailing.

For starters, the term “Fair Tax” should be replaced by “Consumption” if the act is to have any legitimacy. The word "fair" is a loaded term that presents immediate bias. If you aren’t for fair taxes, then you have to be for unfair taxes, naturally. Besides, there is no such thing as a completely fair tax, and there never will be. Somebody will always benefit, and somebody will always get the short end of the stick.

As Furqaan Sadiq noted in a recent analysis for the Missourian, those in the middle class earning between $40,000 and $100,000 would see an increase in their share of the tax burden, with those making less than $24,156 and more than $200,000 a year benefiting the most.  Now, I personally have no problem with benefits for those below the poverty level, since they are less likely to take advantage of the savings perks that come from striking our current tax policies, and as for the rich, they will always have an advantage. Get over it.  

But should the largest consumer base be hit the hardest when we are trying to bring ourselves out of an economic tailspin? Although the Library of Economics and Liberty states in its must-read reference for consumption taxes that “those who pay the most in taxes inevitably will get the greatest dollar benefit from tax reductions,” it also references the idea of “temporal neutrality” — which is different from revenue neutrality. It states: “A tax is neutral … if it does not alter spending habits or behavior patterns from what they would be in a tax-free world, and thus does not distort the allocation of resources.” Given that definition, no tax is totally neutral, but will the possible 12.5 percent consumption tax the Institute on Taxation and Economic Policy estimates will be needed on all goods and services to maintain revenue neutrality do so without drastically curtailing the spending habits of the middle class?

And that is just one of many questions the scant legislation leaves open for postulation. Will those living in Missouri's two biggest cities just cross the state line to save a little cash? Is that fair to those residing in the middle of the state when they have to pick up the slack? Since the tax is only applicable to new items, if I am extremely thrifty and purchase a used house and drive a used car, will I only be contributing to the tax pool when I buy food and on a few other rare occasions? Will there be a downturn in the purchasing of new products? What would happen to your grandmother if this amendment were passed. What if the nest egg she has saved and been taxed on all of her life now had to also cover consumption taxes on her food, rent and pharmaceuticals? 

I want to believe, but something still bugs me about the possibility of a consumption tax no matter how much I read. Something feels amiss. I  get this uneasy feeling that the results will be a lot like the FairTax rally this past weekend at Boone County Fairgrounds. Local organizer Colin Malaker was overly confident when he told The Columbia Daily Tribune, “For sure, we will get 10,000 to 15,000 (people).” The turnout was closer to 5,000, and even that number has seemed a little high according to other reports.  Either way, the estimates were generous, and that’s OK if it is a rally and it is on FairTax.org's dime, but not if it's legislation and it’s on everybody else’s.  

Andrew Del-Colle is a former Missourian reporter and a graduate student at the Missouri School of Journalism.

 


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Comments

Robert Lundin June 17, 2009 | 8:42 p.m.

Living in North Carolina, I was not aware of Missouri exploring the Fair Tax idea until Google notified me of it. Your fear of the unknown is a good thing any time politicians tell you they are going to solve a problem. From my limited knowledge of the proposal in Missouri, if it is like the proposal for the Federal government, then think of it like this. You pay a set price for gas. Within that price per gallon is a Federal tax and a state tax. This is a consumption tax. The more gas you buy, the more tax you pay. So, someone driving a vehicle that gets 10 MPG will pay more gas tax than someone who drives a vehicle getting 25 MPG.

If Missouri's proposal is like the proposed Federal Fair Tax, then you will no longer have state income tax withholdings on your pay check, you will not have to pay a tax on any investment income you make, you will only have to submit a tax return to the Federal government, and businesses in Missouri will not pay any state income taxes, thereby making your state very attractive to outside companies (Apple just made a decision to build a server farm here in NC after NC's government gave them huge tax breaks. If MO didn't have a state business tax, where do you think Apple would have gone if region wasn't an issue?).

Currently, when you buy a candy bar for $1 at the quickie-mart now, you have to add a sales tax of 7%(?). Under the Fair Tax, if the store is charging $1, you pay $1 and the receipt would show how much of the $1 went to the state. Wouldn't it be nice to know each time you gas up just how much of what you paid went to the state?

One last thing. With politicians at all levels talking about taxing internet access, miles driven, etc. wouldn't you like the tax rate to be the same for everything? Wouldn't that make it harder for the politicians to raise taxes in the future if it hits everything and everyone?

Things to think about.

(Report Comment)
mark mitchum June 17, 2009 | 9:04 p.m.

Ask any one of the 34 Missouri senators who tabled the public vote proposal for the FairTax what their concerns were. If their expected knee-jerk response for the poor and middle class is the concern, just have them google "texas economy". Texas' lack of income or corporate tax, while still being the hottest business/economic state, should ease their minds. I just can't believe the people tolerated this. A PUBLIC VOTE TABLED!!!

(Report Comment)
Ken Hoagland June 18, 2009 | 8:15 a.m.

There has been a deliberate effort in recent years by those who profit from the income tax system to distort the FairTax. Why? Because auctioning off the US tax code is big business in Washington, D.C. It amounts to a $1.5 billion a year lobby industry. There is an entire culture that has grown up around the tax code and tax writing commitees in Washington including scholars, reformers, lobbyists and speciality publications. It makes those on Congressional tax writing committees the most powerful legislators in Congress. It is a formidible population of political "elites" that must be overcome to see fundamental reform of a system that most agree is badly broken and destructive to the economy.

The FairTax eliminates the corruption that so permeates the tax writing committees and ends the giveaway of tax breaks, loopholes and sweetheart deals for contributors. It also makes the cost of the federal government very visible on every sales receipt. This change will inevitably lead to consumer pressure to limit the spending that federal politicians now use to buy our votes and which has put us on an unsustainable path of debt.

Recent analyses that claim higher taxes for the middle class under the FairTax notably left out of their calculations the elimination of FICA taxes under the proposal. This most regressive tax represents a larger tax payment for the poor than income taxes so it is a huge element of the FairTax. When one properly considers both the elimination of FICA taxes and the monthly prebate the FairTax is far more progressive than the income tax system.

The monthly prebate actually gives the middle class more than $28,000 of federal tax free spending a year and lifts federal taxation burdens entirely from the shoulders of those below the poverty line. Everyone can pay less because the tax base is expanded to include the $2 trillion a year underground economy, 12-20 million illegal immigrants and billionaires who see loopholes close. At the same time, elimination of corprate taxes and capital gains taxes is predicted by many economists to attract $12-15 trillion of private offshore investment into our economy. That's private investment--not money borrowed against unborn generation's future paychecks--and it means immediate jobs, better benefits and a growing economy.

It is Congress' jealous defense of its power over the income tax system that prevents creation of this far better tax system for the nation. Unlike past tax debates, the FairTax does not pit one citizen against another because all income levels benefit. In this the FairTax is the most unusual of issues--it has the potential to unite the left and right against the self-dealing of Congress and tax lobbyists. More information and $22 million of high level research can be found at FairTax.org

(Report Comment)
Ken Hoagland June 18, 2009 | 9:30 a.m.

A couple more thoughts for Andrew: The MidWest FairTax rally was actually planned, financed and managed not by FairTax.org but by local FairTax advocates. FairTax.org held similar rallies in South Carolina and Florida on April 15th but mid-west organizers wanted something closer to home. Turn out was lighter than predicted when local organizers,new to planning rallies and hoping for invited Tea Party participants to swell the crowd, got caught up in the excitement of this potential and predicted a larger crowd than actually arrived. There were people from all over the country attending, however, including Democratic, Republican, Libertarian and Independent speakers.

And grandma will do great under the FairTax because the purchase of the necessities of life will be rendered federal tax free with the prebate payment, because investment retirement income will grow once again, Social Security benefits won't be taxed if she works, there are no penalties for retirement fund distributions and because most seniors have already made the major purchases of life. She can also rest easier that her children, grandchildren and great grandchildren won't inherit huge federal debts now being legislated by this generation. They will have their own problems and we should not be spending their money today.

Consumption is a far larger base and more historically stable than earnings and the fact that every citizen will take home paychecks without withholding or payroll taxes deducted will stimulate consumption even with the FairTax.

In essence, those who spend more will pay more taxes and the FairTax shifts taxes from what goes into our economy--work, savings and investment to what comes out of our economy--consumption. The FairTax takes politics out of the tax code and the tax code out of every business decision.

Finally, I should have written above that a "middle class family OF FOUR" will see $28,000 of federal tax free spending a year. The amount varies by family size but the rpebate goes to every American household once a month. This prebate, by the way, is how we get rid of the lobbyists ability to influence Congress' awarding of loopholes because with the prebate covering spending on food, rent, medicine and other necessities there is no need for exemptions and special "favors" that now have the tax code at 67,500 pages of nearly indecipherable regulations.

The FairTax is not perfect--what federal tax system can be? It's just a far better, simpler and more fair national tax system that will dramatically help our economy and every taxpayer. It also goes a long way to restore the proper relationship between citizen and government by defining our earnings as belonging first to us--not the federal government--with consumption decisions only then collecting taxes for the common good.

(Report Comment)
Andrew Del-Colle June 18, 2009 | 2:15 p.m.

Ken,

I apologize for incorrectly stating who financed the FairTax rally here in Columbia. I'll get that fixed up.

As I said in the column, there are many parts of a consumption tax that I like. I get that businesses would be attracted to the state, and I really like how taxes become inescapable for illegals and others who avoid contributing to the tax pool. I understand embedded costs and real costs, and I get how the prebates work. But all of this still leads me to the same place: I am not comfortable with how overly sure everyone is that this will be the perfect remedy for so many of our problems.

I definitely am no fan of the current methods in which citizens are taxed (especially after I just had to pay the IRS $220 for misplacing two little forms), and I am sure there is a better system out there - possibly even a consumption tax. I just feel that there are many others like me that would prefer to be talked "with" than talked "at" when it comes to those who are passionate about making this switch. Overall, I think the consumption tax may be worth a shot as long as people would be willing to admit that this will be more of an experiment, and there could be unforeseen problems and costs.

Thanks for the info and commenting,

Andrew

(Report Comment)
Raymond Hartmann June 18, 2009 | 2:47 p.m.

Andrew Del-Colle: I can see how your being trained in investigative reporting would want you to know all the details. i didn't fully understand a few things at first either. However, I am fully in favor of the "Fair Tax bill' HR25which can and will save our economy, create millions of new well paying jobs, and return manufacturing to our shores without the onus of payroll tax withholding and employer contribution which adds 22% to 28% or more depending on the number of steps of production and distribution and then adding in the income tax paid by business also. I think that you need to go to Fairtax.org and fairtaxwarrior.com and do some studying and get the full info that you seem to lack. I wouldn't think that you are a person with a vested interest in keeping the current diabolical system or that you have been led to believe some of the misinformation that has been put forth by those who do have a special interest in keeping the current system.

(Report Comment)
Andrew Del-Colle June 18, 2009 | 3:29 p.m.

@Raymond

"I think that you need to go to Fairtax.org and fairtaxwarrior.com and do some studying and get the full info that you seem to lack."

Been there; read that. Just because I read everything and didn't all of the sudden see the light does not mean that I was incapable of understanding it. Although I will admit there was some information that was over my head, I bet it is the same for many others since most arguments I see are little more than cutting and pasting numbers from Web sites and reports.

In my research, I have also read enough from economists to make me remain hesitant on the issue. I definitely have no vested interest in the current system, and I certainly have been doing my best to avoid any misinformation - from both sides.

Again, there are a myriad of reasons why I like the idea of a consumption tax, but I am just not ready to jump on board quite yet.

Thanks for commenting,

Andrew

(Report Comment)
Ken Hoagland June 18, 2009 | 7:11 p.m.

Hey Andrew, I think your caution is more than appropriate. Something as important as the national tax system deserves careful treading. All I can really suggest is two things--first, I think we can all accept that the current system is broken. It cost us about $300 billion a year just to prepare our taxes. Any tax system that can't be easily understood and costs so much just to obey is, on its face, dysfunctional. And comliance costs are just the beginning of what is wrong with the income tax system. So let's start with agreement that something has to change.

Second, I just need to ask you to read the research. It's all peer-reviewed by some of the smartest thinkers in the country and DC economists have argued at length about the assumptions and conclusions. I always look first, however, at whether highly critical economists are making money with the current system because self-interest seems to have dramatically colored some opinions in the past (like leaving out elimination of the FICA tax). Many economists don't mind talking about their research so a little scratching from a grad J school candidate might decode some of the more complex formulas.

If you are getting "talked at" instead of "talked to" it's probably because folks have become so very frustrated at the slow progress legislatively. Sorry about that. There are a whole lot of folks, especially in Washington, who won't even engage on the income tax system beyond, "yeah, we really have to do something about that...". Been going on for decades with no discernable progress and it drives FairTaxers up the wall. Most of us chalk it up, not to ideology, but human nature and simple self-interest in both power and profits from essentially corrupt, insider manipulation of the tax code.

But there is a lot of back and forth out there that may help you decide whether this is worthy. Finally, take a look at the calculator at FairTax.org and plug in your own numbers. We don't retain any identifiers for this so its all between you and the calculator. Most people walk away from the exercise as brand new FairTaxers because the results are so promising. The calculator is based on nothing more than what is in the pending legislation as it is written. The calculator, by the way, is not really entirely comprehensive because you can't build one that takes every financial circumstance into consideration but it gives a pretty good idea of your tax burden under the FairTax.

Thanks for looking Andrew and thanks for keeping an open mind. You can tell anyone who hectors you for being cautious that the guy who manages the national FairTax campaign said he thinks caution is wise and that they should chill.

(Report Comment)

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