Americans for Fair Taxation executive director Tom Wright and regional director John Collet met with me Thursday. They are pushing to replace corporate and personal income taxes and Social Security and Medicare taxes with a 23 percent retail sales tax.
No, they’re not nutcases. And they have some compelling claims.
For example, they argue that a consumption-based tax system could cut the estimated $260 billion spent annually enforcing and complying with tax laws by 90 percent — which could be a big boost to the economy. They also argue that the new system would be more progressive, because taxpayers below the poverty line would get a rebate on all their taxes and the burden of paying for Social Security would be spread throughout the population, including the rich (the current system has an income cap on payroll tax collections).
They are aiming to have the change pass Congress in 2006. But Wright acknowledged that the timetable could be hurt by the battle over the U.S. Supreme Court vacancy and the fact that President Bush’s Social Security reform is “in the ditch.”
I have trouble seeing an entrenched Congress and a cautious public going along with such a huge change. Still, our byzantine tax system does needs overhauling, so I welcome this debate. To learn more, go to their Web site at www.fairtax.org.
Posted by Phillip Brownlee
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20 Comments
I agree! I’ve been following fair tax for quite awhile. Did you know that over 10 Trillion dollars that are at overseas banks would come back to the USA if this would pass. It would be HUGE boost to our economy. Neal Boortz is coming out with a book on Fiar tax that is to explain everything about it.
I’m not familiar with fairtax.org, but in general I would support a system whereby government is funded by taxing consumption spending rather than through taxing property or income. The biggest attraction to me is that such a system would encourage saving over consumption. Again, my support is general because, as we all know, the devil’s in the details.
Taxes and paying them are first-order change agents. What I mean is that taxing schemes are very effective at reordering patterns of consumption, investment, and personal saving.
The US could certainly benefit by saving more of its national income. For instance, our balance of trade account, for the PROC (China), would begin to swing in our national interest (would become less negative in sign). In other words, this kind of taxing scheme could help us save our way out of having China in particular financing our present consumption (of goods, like cotton products, manufactured in China only).
Why is that important? Well, for starters, China is currently trying to buy a large American oil company (name escapes me). China wants a better return on its investment in the US, and buying an oil company is their preferred alternative. That this investment could lead to further scarcity of a national resource like oil, for the US only, would seem to provide a strong incentive for us Americans to finance our personal consumption with exactly this kind of pay-as-you-go system.
One very important caveat to this approach, though. After such a taxing scheme has succeeded in reordering our economic behavior, taxing consumption could lead to chronic deflation. This is similar to the situation Japan has faced since for the past 15 years or so. Japan’s strong saving ethic has necessarily precluded personal consumption as a remedy to recession.
By the way, a Neil Boortz book on this topic is a total waste, unless you believe his appeal to populists would help this kind of taxing structure become politically viable. Populists aside, Neil is going to be preaching to the choir (the moderate wing of the GOP).
flike,A consumption tax makes sense by putting taxation where the active money is and where the social activity is.
It also seems that changing to a consumption tax would give the government a more direct lever for boosting the economy out of a recession, but it might also change the effectiveness of the Federal Reserve Board in controlling the money supply (inflation) through interest rates.
A federal consumption tax would do nothing to rid us of state and local property and income taxes, though.
Yuur comments about Japan seem to be a central issue in this. Would a huge consumption tax act like a huge tariff and help to wreck the economy like the Smoot-Hawley tariffs of 1930? Some will argue that, overall,it makes no difference to the economy whether tax money is taken before or during a purchase, but I suspect the method of transition from one approach to the other is of utmost importance. For starters, an instant and large increase in prices will carry a serious sticker shock problem. Brownlee’s example is a good one. Also, the median price of an existing Wichita home would instantly climb from $107,000 to $132,000.
We can expect the automotive, real estate, and airplane people to dump all over this idea, and no wonder
Joe Williams, It will take a Constitutional Amendment and the communism still amongst us will rally against it. Senator Ted Kennedy, at a democratic convention said: “we love the graduated income tax.” And the cheering was deafening. But many democrats should break ranks and support the consumption tax.
E., yes a federal consumption tax wouldn’t affect any state and local taxes. I’ve seen some white paper studies, though, that argue replacing all income and property taxes with a consumption tax would increase overall tax revenues (federal, state, local).
I am not sure how that would work, and again the devil’s always in the details.
I suspect that, given our growing public debt, the US federal reserve system probably has plenty of room left to affect GDP, so retaining interest rate adjustments as its tool to set monetary policy is probably likely in any event. The speculation is idle on my part, however, since I’m basically guessing.
My point about Japan is that, just about the time the US would adjust to this kind of tax system, given a series of recessions over a undetermined period, then it might be time to change systems again. It took Japan about 35-40 years to get to the place where the national “savings ethic”, or choice to save rather than consume, likely learned in the postwar rebuilding, effectively precluded its ability to borrow its way out of recession.
Since tax policy is at least as significant a third rail as Social Security is in American politics, I’m not sure how effectively the US could adjust under conditions similar to Japan’s (they still haven’t adjusted, in fact).
Seems to me there must exist some fine balance between, on the one hand saving so religiously that nobody buys anything on credit, and on the other hand literally borrowing billions from foreigners who we should not necessarily trust (China) to finance a lifestyle we leave to our progeny to pay.
And yes, Phillip’s example is a great one. Of course, if you’re not having federal income taxes deducted from each paycheck then it becomes more manageable – but $4,600 would still be $4,600.
How about just doing what is right instead of what is right just for the special interest groups ?
Damn guys, there’s some great minds at work here. You’re a lot beter versed than I am. Anybody got any opinions on a V.A.T.?
Fair tax???? How is it fair? Is it fair that Donald Trump will pay the same tax on a loaf of bread as I do?You only have to listen to the Neil Boortz ( the author of the “fair tax” ) to know what its real goal is. Mr Boortz is a feudalist. For the uneducated let me define that for you: Mr. Boortz believes in the golden rule, that being he who has the gold makes the rules. In other words, he has money and you don’t and he would prefer to keep it that way.A little about Mr Neil Boortz, the author of the “fair tax”:On the homeless, Boortz has said “Pave’em over”On voting and elections, Boortz has said that “people should only be allowed to vote if they are over the age of 25 and a college graduate, or alternatively if they are running a successful business” (Guess that lets most of our young servicemen out.)Mr. Boortz has also intimated that women should not be allowed to vote and that votes should count accordingly to taxes paid. Nuff said?The income tax is the only restraint against those who make their wealth on the backs of others. It is the only small re-distribution of this nations wealth back to those who actually make and work and do from those who sit and use and exploit. I submit that the income tax should not only be maintained but also supplemented with a luxury tax, the re-instatement of the estate tax (which applied ONLY to those whose estates exceded 5 Million dollars and which Bush repealed) the re-istatement of the capital gains tax (which only applied to those who already have enough money to make more money and which was also repealed by Bush)Starting to get the drift?I’ve no doubt I will be assaulted with the usual “Karl Marx ” arguements. Save it. I don’t want communism. But if this nation continues on a course where the few accumulate wealth and power at the expense of the many, and those many have increasingly less chance to better their lot, well that is where we are headed. And it will be just those most opposed who will take us there.
The old Kansas saying: The rich get richer and the poor get poorer ! When people like Bill Gates and Warren Buffet tell us what Bush and Company is wrong for the country somebody ought to listen.
Very rich people can do several things with their money — bury it (hardly ever happens), save it in a financial institution (where it gets re-invested in the economy to create jobs), invest it directly where the economy (jobs) will benefit, spend it (also creates jobs), or give it to charities and other public services (far more efficient and effective than government doles).
Without very rich people, only governments can raise enough capital to do anything significant. That is what communism attempts, but it has never once succeeded wherever it has been tried. One reason is that capitalism provides almost endless opportunities and incentives for capital formation and growth (i.e., lots of rich people), whereas the communist countries have only the government as a source of growth and it is stymied by having bureaucrats in the middle of every aspect of all transactions. The only economic legacy worse than communism is found in the medieval kleptocracies of the Middle East, where tribalism and corruption are entrenched.
The common thread that unites the failure of those economies is the lack of incentives for most citizens to do their best for themselves and their families. In stark contrast, those incentives are provided by capitalism; and a key incentive is property ownership, which includes the essential ability to keep one’s accrued wealth earned by investing in the hopes and economic well-being of others.
Capitalism isn’t only for the rich, nor is it only for powerful business leaders. If you have an interest-bearing checking account, you are a capitalist. If you have stock in any company or any kind of investment fund, you are a capitalist. If you buy coins or stamps or cabbage-patch dolls in hopes of their increasing value, you are a capitalist. If you do any of these kinds of things, you are earning money through the investment in others; you are not a bad person for doing this – far from it. Obviously it is essential to distinguish between the essential good of capitalism and the downside of its abuses.
For example, it is popular to talk of the egregious greed of the CEOs of large corporations, and much of the criticism is well-deserved, as is the criticism of corruption in the major financial markets; but none of it comes close to government greed and corruption, especially in socialist, communist, Middle-Eastern, African, Asian, and South American dictatorships. Why do we hear so little about that?
How is it that the people in Cuba are scratching at the poverty level while Castro has cabbaged onto so much of Cuba’s wealth that he is now one of the richest people in the world? Why do we never hear of his greed?
I have never been rich, but I’ve worked with very rich capitalists of every political stripe, even some that might be described as greedy. Still, I never felt that they got rich on my labor, or anyone else’s for that matter. Instead, I found them to be productive agents of growth. Rather than carp at their wealth and ignore their many good life choices and occasional good fortune, it seemed best to pitch in with them to improve economic growth and my own wage as well.
It is easy to agree that not all rich capitalists are good people. For example, we sometimes hear stories of people losing their jobs because their health expenses are high; and while I know that a few business owners could be that callous, I sometimes also find a hint of malingering in the stories. Nevertheless, there are unquestionably some unscrupulous, unethical, and heartless people in this world; and some of them are rich. This does not define all rich people, however.
Of course, resentment of the rich, especially the undeserved or ungracious rich (lottery winners, Paris Hilton, etc.) is natural; so are resentments about sluggards in the workplace and undeserving welfare recipients. What then? Do we penalize all the wealthy by taxing away their wealth, penalize all workers with rigid work rules that never allow for health or family emergencies, and put an end to all social services? I hope not.
One can rightly argue that the wealthy gain the most from the strengths of good governance, and that they should, therefore, pay proportionately more of the cost of government; but it does not follow that a tax system should be motivated by resentments that lead to confiscation of wealth and disincentives to the very mechanism that has created our high standard of living.
Great post Ireland. Thumbs up!
The tax system is also used for social engineering. They give incentatives (tax decreases) when they want and punitive (tax increases) when they don’t want it. But they use it for social means.
E. Ireland:
Your last paragraph makes a lot of sense to me. Those who have earned great wealth depend greatly on good governance in order to keep their wealth. Who wants to see looters in the streets, workers who can’t read or write, or a population whose health care diminishes the working lifetime of those who labor?
Tax systems should not be used for social engineering but to provide a basic infrastructure to insure a healthy, educated, and secure population.
I do think the wealthy have an obligation to pay proportionately more of the cost for that governance.
Zoom! You have two types of wealth. One is earned, the other is inherited.
The one who earns it are most likely those in business. They pay a lot in taxes beyond just their income tax. Corporate double taxation, Corporate, and payroll just to name a very few. So their interest of protecting their wealth goes way beyond their own incomes.
But those who inherited their wealth, they could care less about the business side, they just want to protect what they have and the interest they are making off of it.
Earned wealth want to reduce their tax burden on the business side, they don’t mind the government taking a high income tax from them.
The inherited wealth want the higher taxes to be paid on the business side and reduce the income side of it, so they can keep more of their own money.
The working class are just happy to have a job, and the poor just waits for their paycheck from the government.
The trouble with flat taxes such as sales taxes is that some income is disposable, and some isn’t. Some of us are hard-pressed to buy groceries and pay rent, while others get upset when they might have to do without a second annual trip to the Riviera. Each of us defines our necessities differently. I tend to resent missing meals so that some joker can bask another two weeks at Club Med or wherever, so I want a return to the tried and true progressive income tax. I’m sure the joker doesn’t see it that way. So, if a sales tax is in the cards, let’s make sure it only applies to non-essential products and services. Country Club memberships and greens fees are NOT essential!
Jed wrote “I tend to resent missing meals so that some joker can bask another two weeks at Club Med…”
I remember missing meals as a graduate student, but I can’t remember ever feeling any resentment toward others because of it. I focused instead on how dumb I’d been for not planning my expenses just a little better.
With today’s broad public and private social net, a free meal is relatively easy to get. The bigger worry these days seems to be obesity among the lower income groups. The underfed kids I’ve seen have parents who are incompetent and/or addicted to gambling, drugs, or booze.
Anyway, the plan for the consumption tax is to give refunds to people below the poverty level, but refunds aren’t a good mechanism for people who are living hand to mouth. Some states already have progressive features in their sales tax by not taxing necessities (groceries, restaurant meals, clothing, housing, education, or medical expenses). This makes sense for any major consumption tax, as it would then only tax disposable income.
It’s never going to happen, folks. Every retailer in the country is going to line up against this, and they fill the coffers of the Republican party.
It’s ironic that the Right wing loves this idea, since the Right also embraces the free marketers who are going to drive a stake through the heart of this plan.
Greg,In case you hadn’t noticed, the reason poor people tend to be obese is that carbohydrates are cheaper than green vegetables, and a whole lot cheaper than meat! As for that social net you speak of, it’s not nearly as broad or easy as you think, it has gaping holes and is chronically underfunded. I know- I’ve been there, on both sides! Don’t be too quick to blame it all on lazy or addicted parents. Sure, they exist, but the vast majority are people who are doing their damnedest to just survive! I’ve seen both, and most poor people put in three or four days of heavy labor to every one a rich guy spends at his desk not playing with his toys! Yes, I’ve seen the welfare Cadillac- it’s 20 years old, running on three cylinders and the left front fender is a different color! Get real!
Jed,I forgot to consider the single parent poverty problem, which you reminded me about with your comment about just surviving. Have you ever heard of a real solution for getting irresponsible men to tend and pay for their offspring? It has to be the biggest, basic social problem of our time. So many of our other problems fall directly from this one issue.
I know that it takes two to tango, but why does just one (usually the woman) have to end up with all the responsibility? What kind of man does that?
Hey Greg,Yeah, single parents do have it rough, but they aren’t the only ones. One of the worst cases I had to work with was a woman with four young kids and a husband (a former trucker who’d been brain-injured in an accident), trying desperately to live on a meager disability check. Not everybody who’s poor is that way because they didn’t measure up to your idea of morality! I realize that attitude may help you sleep at night, but it does nothing to solve the problem.
The title of this entry is incorrect. You would actually pay $6,000 (30%) instead of $4,600.
The FairTax rate is actually an inclusive tax, much like our current income tax. This means, that in order to pay the government their 23% share, you would need to be charged $26,000. Do the math: $26,000 – (23% x $26,000) = $20,020.
That being said, I’m personally in favor of this idea. It’s not perfect, but with a little work I think it would be an enourmous improvement over our current tax laws.