The Unrepentant Individual

...just hanging around until Dec 21, 2012


August 21, 2005


The FairTax Plan – the opponents

(As promised, here is Part II of my FairTax post. Part I can be found here)

Jesse Taylor of Pandagon has put together a very well thought out 4-part series of posts regarding his opposition to the FairTax. Some of his points are valid, some are not, and some are simple semantics. I will do my best to explain where I think he is going right and where he is going wrong. But I have chosen to refute his arguments because it is clear that he actually read the book, and he’s responding to facts about the FairTax plan, not hyperbole or conjecture.

The overriding point that I want to drive home, before I begin, is that this is a matter of pointing out flaws in a proposed system. Every tax system will have flaws! We need to ask ourselves whether this system is better or worse than the current system, and whether there are any unproposed systems which would be better than either.

His posts:
Part I: You’re Embedded With Me
Part II: When Is A Tax A Tax?
Part III- The Real Purpose Of The Flat Tax
Part IV- The System Is Unassailable, Really

Part 1

Boortz and Linder, after complaining about the income tax system for four chapters (missing entirely that the problem isn’t really a progressive income tax system, but instead the thousands of pages of code added to it largely as an effort to help various constituencies – they treat the income tax and complexity as unalterably intertwined, which is your first real clue that they’re so full of shit all their clothes are made by Charmin), then switch to “embedded taxes” in chapter 5 before ever explaining to you what the Fair Tax is. Believe me, there’s a reason.

The income tax was largely devoid of loopholes after the changes made in 1986. The problem is not the progressivity of the tax, as Jesse rightly points out. What Jesse doesn’t point out is that the government is not funded only by the personal income tax. The government is funded by income taxes, corporate taxes, estate and gift taxes, capital gains taxes, payroll taxes, etc. Kill off all the complexity of the personal income tax, replace it with a progressive income tax, and you’ve still only changed one funding mechanism of government. This is why I don’t support the flat tax advocated by Forbes, because it leaves all other taxes left standing. The reason Boortz opposes simply trying to close the loopholes in the tax code is because he knows that they’ll just be opened up again over the next 10 years. In addition, leaving those other taxes hidden by calling them corporate taxes doesn’t mean that corporations pay that tax. Those taxes are passed along in the cost of goods, but the lobbying and loopholes in the corporate tax code are just as nasty as those in the personal tax code.

Remember one thing: the tax code is horribly complex because politicians want it that way! The tax code is one of, if not the biggest, mechanism for politicians to peddle influence. Unless we kill that mechanism, the tax code will again become horrendously complex. Using a tax structure that taxes corporate earnings, payroll taxes, capital gains, estate and gift taxes all in separate ways is inherently counterproductive, as tax implications force people and companies to restructure their money in obscenely inefficient ways to avoid taxes. If Jesse thinks he can fix all that by trying to close loopholes in the progressive income tax, more power to him. But history shows otherwise.

Boortz and Linder are asking you to absorb the taxation costs of businesses, which will result in goods being the same price. They also propose that the same money which is covering the sector of business taxes will simultaneously cover the sector of personal income and payroll taxes, contributed by individuals and not a part of any intrinsic cost of goods and services. The money is being effectively doubled (actually, more than doubled, as those “embedded taxes” don’t make up half of all taxes collected), even as it becomes obvious that the Fair Tax only replaces one kind of tax revenue, not all of it. Long story short – the rate would have to be raised significantly to actually make up for the loss of all federal taxes…which would in turn dampen all those wonderful benefits of the Fair Tax, which is guaranteed to grow our economy tenfold within the blink of an eye.

First of all, they’re not asking you to absorb business taxes. They’re recognizing the fact that you already are! Thost taxes are passed right along to you in the cost of goods, exactly what he means by “embedded taxes”. I’ve pointed out that I don’t think goods and services would immediately drop in price by 22%, so Jesse is right in his concern there. After all, removing the personal income tax and payroll tax wouldn’t change the cost of labor immediately. You would see a nearly immediate drop as the “employer contribution” of the payroll tax portion disappears as a part of the cost of goods, as well as all the other corporate taxes seen. I do think that goods would raise in cost slightly once the FairTax takes effect, and then slowly come down as the market adjusts and labor costs come in line with the new system.

But what Jesse doesn’t point out is that income taxes are basically collected by businesses. They withhold your taxes, and you typically don’t pay any at the end of the year. So that money will be given to you directly to be used for paying the FairTax. At the same time, removing all the waste the tax structure adds to our economy will immediately increase economic growth, foreign investment, outsourcing from other countries, etc.

And the money is not being doubled, because much of the money that is spent will be money that was never subject to income taxes. Capital gains and interest income, of course, is currently taxed at a much lower rate than personal income, especially considering the high tax rates of the wealthy people who have large amounts of this income. Many wealthier business owners structure themselves as corporations to avoid paying higher income and payroll taxes, which money will then be taxed during purchase of goods.

Again, to make this clear, which I explained in depth in part I of my analysis, I do think that the initial adjustment period will see the final cost of goods being higher than they are now. This is because labor costs won’t immediately drop for corporations, as workers will demand to simply get their whole paycheck, not have their salary decrease. In the long run, however, those goods will drop in price. The market will eventually bring this about, but not immediately. This is the main benefit of the prebate, as poorer and fixed-income individuals will feel that increase.

Part 2

It’s not a semantic argument, it’s a syntactical one. Boortz and Linder are arguing that the more complex syntax that’s completely non-predictive and serves no useful purpose is the accurate one, and the syntax that predicts exactly how much tax you’re going to pay is the dishonest one. Absolutely nobody would calculate your income tax rate based on the amount you’re going to have after you pay income tax, and absolutely nobody should calculate a sales tax rate based on the amount an item’s going to cost after the tax is applied.

Calling the sales tax “inclusive” because you propose that it be included in the final sticker price before you go to the register doesn’t mean you can calculate it in a nonsensical way. The tax is already set at a ridiculously deficient rate, playing with numbers to make it seem even smaller is just lying to yourself about the lie you’re telling.

This is a stupid debate, but one I guarantee I’m going to have all the time. Again, this is one of those points where both sides are right, because it’s a matter of semantics.

Here’s my take on it. You buy a good that costs you $100. $23 goes to the federal government. What is the tax rate? 23%. It’s that simple.

The way sales taxes are normally calculated is that you take the cost of a good, multiply it by the tax rate, and add that amount. The only reason it is done this way is the wide range of tax rates in multiple localities. Create a federally uniform rate, and that problem disappears. To the business making the sale, it’s certainly not a difficult calculation.

Jesse is right in that calculating inclusively vs. exclusively makes a difference in the way the FairTax is sold. But I feel, nonetheless, that an inclusive way is correct. You spend $100? $23 is taken as taxes. That sounds like a 23% tax rate to me. Jesse is correct that this is an exact inversion of the way we normally calculate sales taxes. But I think it is actually more intuitive to consider this tax rate as a percentage of what we spend, not as a percentage tacked on to the cost of what we buy. After all, let’s say you buy the same good in a foreign country where there is no sales tax. How much do you save? $23 dollars. You save 23% of what you would have had to spend in the US.

It is right to say that this will make it easier to sell the FairTax. And that using the term “sales tax” and “23%” sounds, to someone who doesn’t know the plan, like it is 23% tacked on to the cost of a good. I agree with Boortz that the 23% number, quoted inclusively, is a much better way to think about the tax, because that is the percentage of what you spend that goes to the government. I think that the only reason that we naturally consider the sales tax to be an exclusive tax, is that is how it is normally quoted. Just as most people only really think about their income in relation to their take-home pay, most people consider when buying items the after-tax cost, not the pre-tax cost. The tax rate is truly a function of the after-tax cost.

It’s an argument that’s going to go back and forth over and over, because neither Jesse nor I are actually wrong. He quotes the number that makes the FairTax sound worse, and I quote the one that makes it sound better. We both also believe our own method to be subjectively more correct. But it is, and will remain, an argument of semantics.

Part 3

Jesse’s take on how the goverment is taxed by the FairTax is completely wrong. But I don’t fault him for that, in researching my rebuttal, I was forced to actually read the FairTax bill (I was using 2003). Basically, Jesse’s point is that the FairTax will give the federal government an accounting trick to completely hide spending (like they don’t already have a dozen), and will give the federal government a huge advantage over state governments in the provision of services. Truthfully, reading the section he excerpted from the FairTax Book, I completely understand his point.

However, the text of the actual legislation is different. First, the proposal states that federal and state governments would have to pay the tax on goods and services. In this respect, they are treated as an individual who consumes the good, rather than as a business using the good as an expense. This, of course, is normal in some senses. This applies to anything where the government typically provides a service for free. I.e. the military provides the service of protecting the nation without actually requiring a payment from each citizen directly (other than taxation, of course). Thus, they need to pay the FairTax on goods consumed during that service. This would apply to local and state police forces as well, where they would have to pay the FairTax on their firearms, squad cars, etc that they use. The reason that this is put into the bill is to keep government businesses from competing with private businesses in other ways. For example, municipal Wi-Fi. Let’s say Google (who is reported to be looking into starting a Wi-Fi service) is forced to compete with municipal services offering it for “free”. If Google buys hardware, they don’t have to pay the tax. If a municipal entity purchases the hardware, they do have to pay the tax. This portion of the bill is designed to discourage government from competing except where they are doing so on fair terms. This is covered in section 703 of the bill.

HOWEVER, THIS ONLY APPLIES TO SERVICES PROVIDED FOR “FREE”. There is a section of the bill related to government “enterprises”. A government enterprise is an entity which exchanges goods or services with individual taxpayers in a monied exchange. I.e. the postal service. For government “enterprises”, the rules state that they have to collect the FairTax from their consumers, and that they are subject to the same rules for private businesses regarding paying the tax. I.e. the post office would not be forced to pay taxes on intermediate goods and services (i.e. mail trucks, sorting machines, etc), but would be forced to charge the FairTax on postage when they sell it to consumers. This is in section 704 of the bill.

Thus, in this sense, everything that Jesse said was wrong. I don’t fault him for it, because he read the book, not the actual bill. Most of what Boortz and Linder said was wrong. The FairTax ensures not that the government cannot provide any services, but does discourage them from competing with paid services by providing the same service for “free”. In paid services provided by the government, the tax law ensures that private and public provision of goods and services is at least on equal footing.

The most controversial point, however, which Jesse touches on briefly, is education. Private education would then have a very strong ability to compete with public education, as public education would be forced to pay all those taxes before being sold for “free”. Private education would not have to pay those taxes, and educational tuition is exempted from the FairTax, which may break the stranglehold the government has on education. Knowing Boortz’ thoughts on government schools (he considers sending your kids to them to be a mild form of child abuse), it’s no surprise that he likes this.

(My reading and analysis here, admittedly, may be hazy. I highly suggest that anyone double-check me here. Particularly lawyers and tax accountants, who understand this stuff a little better than I do.)

Step 4

The first half? Jesse lambasts Boortz and Linder for claiming the IRS will disappear. He rightly states that it will simply be replaced by another similar organization. The one advantage? Once individuals no longer have to file 1040’s, individuals won’t live in fear of an audit. The IRS as we know it will disappear, but there will certainly be a new government bureaucracy to ensure compliance. Boortz and Linder act like this new agency will be puppy dogs and bunnies, but I’m sure they’ll still be putting tax cheats behind bars. Jesse also talks about how Boortz and Linder have low-balled their estimates of tax evasion. Note that I do say “evasion”, not “avoidance”, because we’re now talking about illegal activity, as opposed to trying to minimize income tax revenue through legal means and loopholes. As I’ve said in part 1 of my analysis, I agree with Jesse here. I think the tax evasion will be higher than they state. But Jesse did step over the line with one statement:

Of course, it doesn’t take Wal-Mart to knock the Fair Tax off of someone’s purchase. It takes a clerk. That’s it. For instance, at my part-time job, I have the ability to make any transaction tax exempt. As long as you have a form which says that you’re tax exempt (which is much harder to obtain now than under any Fair Tax system), I can knock off the sales tax on any purchase you make.

This is patently false. All retail transactions will be taxed. Section 202 of the FairTax bill explains how actual business owners can be credited back with that tax that is paid. I.e. if I own a business, and need to buy some legal pads. I don’t have time to order them, so I run down to the local Office Depot and charge it to my corporate card. The tax is paid, and it is my responsibility to submit the required forms to receive a credit back on that tax paid.

Next, he goes off the deep end:

Oh, and I haven’t gotten to the best part. Suppose that you need to start a business in order to avoid paying your taxes altogether. What’s a very easy way to start an incredibly cheap, nominally profit-generating enterprise from your very own home?

Start a blog. Go to Blogger or Typepad, fire up a site, get Google ads or an Amazon box, and you’ve got yourself a business. Write about whatever you want to buy, then go out and buy it – within minutes of the Fair Tax’s passage, Pandagon would become little more than a CD and game review service, with sporadic forays into food, books, cars and virtually anything we could get away with. Within ten minutes, the entire nation could be tax-exempt.

A while back, I was wondering about this, so I looked into it. I have a blog. I registered a domain name, I rent hosting space. I have a high-speed connection, occasionally purchase computer equipment. Can I declare my blog a business and write off all the expenses (losing money the whole while, which would exempt some of my personal income from taxation)? Of course not! The current IRS has simple rules to determine whether you actually own a business or run a hobby. Section 701 pulls the relevant IRS rules right into the FairTax. My blog (or Pandagon) would not be a business under the FairTax, it would be a hobby. That wouldn’t be true for Instapundit or DailyKos, whose blogs are actually real businesses, but it would exempt people like me. Also, there are certain things called “mixed use” items. I.e. if I buy a car and use it once a month to drive to the post office and mail my check to my internet hosting company, that doesn’t make it a business vehicle. To be exempted from the FairTax, any good or service needs to be used over certain thresholds of time (Section 705). Of course, this text is pulled right from the basics of the current income tax write-off for business or mixed use expenses. So buying CD’s and reviewing them won’t exactly allow you to live tax-free.

Next, he attacks whether the FairTax will bring back businesses and jobs:

Of course, notice what’s missing from that description of Fair Tax heaven – taxation. The “offshore economy” might come back to the U.S., but the Fair Tax would simply entice them back by ending any and all tax burdens on them. The U.S. would become a giant version of the Cayman Islands…only with a lot more snow.

There was something else, too. I forget what it was…oh, well, I’m going to go apply for this computer programmer job. Wait a minute – THAT’S IT! The major reason for offshoring isn’t tax avoidance – it’s labor costs. I don’t care how much you reduce the cost of taxation on American labor, even if it’s to zero. Unless an American will accept three dollars an hour for a job that now pays twelve, offshorers will still be offshoring because Americans can’t compete with foreign labor rates and live. The end result of the Fair Tax will be a lot more corporate profits in America’s economy, going towards purchasing tax-free goods and paying out tax-free dividends.

Yes and no. America will never again hold the textile market, our workers are far too prosperous and won’t work for wages that industry can support. But it’s not the cut-and-dried cases which will come back, it’s the cases at the margin. Let’s say a tech support position, for example. If you hire someone in the US, you need to pay them $30K per year. Plus 7.65% of their $30K salary into payroll taxes. Plus accounting, plus benefits, etc etc. You’ll probably end up spending $50K/year on that employee. If you hire someone in India, you can get away for $25K/year (maybe $15K wage/salary, and $10K other costs) rather than $50K, but you know that there will be higher turnover, a lower skilled workforce, and take maybe a 25% productivity hit due to communication issues with someone a half a world away. After the FairTax, let’s say you can pay that American employee $25K (which he’ll love because he sees every penny of it), and the repeal of payroll taxes, corporate taxes, etc mean that you can profitably drop his cost to $38K. You run the math, and it suddenly becomes an even proposition (or perhaps even more worthwhile) to keep that job in the USA. A large portion of labor costs are wrapped up in taxation. A removal of corporate taxes means you can hold a smaller margin and still be profitable. OF COURSE IT’S GOING TO IMPROVE THE JOB SITUATION AND ATTRACT BUSINESSES! There are a lot of disadvantages for a company to outsource, and this makes the comparative advantage to a country with lower labor costs much smaller.

Of course it will never mean that every job will suddenly become profitable in the US. But a lot that are made unprofitable now due to our tax structure will make much more sense to keep here. That, coupled with the tax haven status will result in all this offshore money coming back into our economy to be spent and invested. Corporations will want to open shop here, and might as well hire local employees, right?

I fail to see how anyone can look at the current tax system compared to the FairTax and not think that we’ll see massive foreign investment and much stronger economic growth. I can understand some criticisms, but that ain’t one.

Next, Jesse points out his questions regarding the Social Security administration. Rather that simply refute him, I’ll point him to section 903 and 904 of the bill. Basically there internal checks on what is reported if you have self-employment income (i.e. related to the FairTax you’re required to pay on goods and services you sell), and portions of the FairTax revenue is automatically allocated to the Social Security and Medicare trust funds.

And last, he asks about how the prebate will be fraud-proof. He points out that there will be “50 state departments of taxation”. The prebate will be monitored and distributed federally. I certainly hope they’re capable of making sure one SSN doesn’t show up under two households in different states. And his next point is pretty funny, regarding the idea of crediting the prebate to a debit/credit card:

Hm. A national card, with personal information likely bearing a picture, a name and a signature, encoded with Social Security numbers and personal financial information. Sounds like a national ID to me! It seems like a surefire way to kill support for this among the very people it’s supposed to draw support from, namely conservatives and libertarians.

Really? Do your credit cards have all that information on them? Or do they have your name, an account number, expiration date, and a pin code embedded into that magnetic stripe. I don’t see any reason why the card has to have your picture, SSN, or anything else on it to allow you to swipe it and buy products. But if you’re really that worried? I’m sure you can tell them to send you paper checks. Or to direct-deposit into your bank account, which they seem to be able to do reliably well with tax refunds now.

I’m going to end up emailing this over to Jesse, to give him a chance to respond. Jesse put a lot of time and effort into his series of posts, and as I said, I am very grateful that he gave the topic due attention and a fair treatment. I’m sure he’d love nothing more than to tell me just how wrong I am, so I hope we can get a dialogue going. I’m also going to send it over to Boortz and probably submit it to the Carnival of the Capitalists. Again, like my last post on the FairTax, I welcome your comments and criticisms.

Hopefully I haven’t bored everyone just yet. Granted, nobody is still reading by the time I’ve gotten here. If you read this, be the first person to leave a comment with the text “42″ and I’ll write a post talking about how great of a blog you have, or about what a wonderful commenter you are if you don’t run a blog :-D


Fearless Philosophy for Free Minds linked with End Success-Based Taxation
Searchlight Crusade linked with Carnival of Liberty
Saving the world, one 1040 at a time :: The FairTax Blog linked with Saving the world, one 1040 at a time :: The FairTax Blog
dangerous liberty linked with Video: Neal Boortz on CSPAN
Posted By: Brad Warbiany @ 7:13 pm || Permalink || Comments (7) || Trackback URL || Categories: Uncategorized

7 Comments

  1. 42.

    Lot of good information. Needs more scrutiny than anyone can really give it on short notice, but philosophically it is superior to what we have.

    Comment by Dan Melson — August 21, 2005 @ 10:02 pm
  2. Brad –

    One point I liked seeing you assail, and would love to see other LLP bloggers hammer as well, is this: “There is NO SUCH THING as a tax on business!”

    Comment by Quincy — August 22, 2005 @ 1:04 am
  3. Video: Neal Boortz on CSPAN

    Neal Boortz was on CSPAN Sunday morning. Watch his appearance here, 45 minutes, you need Real Player. Neal does his usual persuasive and eloquent job of defending liberty. I’m listening now, and cannot wait for callers, because CSPAN has some of the d…

    Trackback by dangerous liberty — August 22, 2005 @ 1:14 am
  4. [...] ding some of the positive and negative effects that will come with it. The second post is a response to the criticisms of Jesse Taylor of left-wing blog Pandag [...]

  5. Carnival of Liberty

    Welcome to Carnival of Liberty the Eighth!

    The Law:

    He walks into the room,
    He’s got a briefcase like a bomb
    A smile on both faces
    And he calls it aplomb
    (Al Stewart, “License to Steal”)

    Trackback by Searchlight Crusade — August 23, 2005 @ 5:03 am
  6. End Success-Based Taxation

    The Fair Tax authors recognize that the individual has the right to the fruits of his labors. As Americans, we do not pay taxes; the federal government TAKES a percentage of our money (property) based on how much we earn. Those who work the smartest …

    Trackback by Fearless Philosophy for Free Minds — August 23, 2005 @ 3:14 pm
  7. I read the entire blog on 1/26/2006, a few months after the posting after finding the site by random Google search. I found it to be a good rebuttal blog. Anyways, just as Boortz believes, those who oppose the FairTax have much to lose, mainly lobbyists for their jobs and politicians for their power over the people. My first recommendation to anyone is to read the actual bill and then make his or her determinations about it, rather than making determinations based on a book to illustrate the positive points about the bill. I like the fact that I would not have to pay H&R Block money to file a form where I have to pay even more money in income taxes because I did not withhold enough money throughout the year. People like Gates, Perot, and Trump know how to pay very low income tax rates. With the FairTax, they would be on the same playing field as any other person. Their purchases are greater in price, so their contributions would be greater. Would they use their businesses to avoid taxes? I wouldn’t be surprised, but they would have to prove it was for business purposes rather than personal use. As for me, I do not buy much in clothing, entertainment items, etc. I believe if what I have lasts, it is fine for me. As I said, I like the idea of not having to pay H&R Block a filing fee just to pay more money to the federal government.

    For you opponents of the FairTax, consider what you are opposing. If you are of those who play the lottery, and you hit the jackpot, under the FairTax you would keep everything. So that $10 million would stay as $10 million rather than drop to $6 million or less. What if a family member or friend who was very rich willed you the money? You would have to pay income and death taxes on that rather than enjoying the fruits of their labor. Again, consider what you are opposing.

    Comment by David Gooley — January 26, 2006 @ 8:42 pm

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.