Anyone Read “The Fair Tax?”

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By JLP | October 30, 2006

All the sudden one of my posts from over a year ago is getting a lot of attention!

Over the weekend I noticed that a post I did on the Forbes Flat Tax Plan was receiving some new comments. Most of the comments are from people suggesting something called The Fair Tax Book by Neal Boortz.

I have not yet read the book. Have any of you? (If somebody from the Boortz Camp is reading this, if you send me a book I’ll read it and post about it.)

From what I can tell, it is a consumption tax rather than an income tax. I’m not sure what consumption is taxed, but it seems to me that those with lower incomes, who spend most of what they make, would be paying a bigger percentage of their income in taxes than someone who has greater income but doesn’t have to spend it all on consumption. If this is true, it doesn’t seem “fair” to me. I think that’s why I’m a fan of a modified flat tax.

I don’t like Steve Forbes’ Flat Tax plan because he doesn’t tax dividends or capital gains, which heavily favors the wealthy. I say make it a flat tax but tax ALL income.

Topics: Flat Tax, Taxes |

Comments to “Anyone Read “The Fair Tax?””

Dus10 Says:
October 30th, 2006 at 10:55 am

JLP,

The Fair Tax is indeed consumption-based. What is taxed? All end-consumer goods (meaning absolutely everything at the retail level, basically), and that is all. However, there is one piece that you have not seen yet; no one has to pay taxes on the basic costs of living, based on a cost of living index that I think is down to each zip code. Essentially, everyone would get a prebate on the taxes they would pay on the basic cost of living, and then they pay taxes.

As Boortz has put it himself, the Fair Tax is the ONLY plan that COMPLETELY eliminates taxes on the poor. Why? There are embedded taxes on everything you buy. How much? About 20%. So, by only taxing at the end-consumer level, it removes all of the embedded taxes. Then, because of the prebates, no one (which is fair) pays taxes on the basic costs of living. This would eliminate the need for the IRS, it would force the taxation of illegal activities (to an extent) since the profits from these activities are taxed when they are spent, increases citizen privacy, and makes you ability to save nearly endless, because you are not taxed on your savings.

Further, studies suggest that the US GDP would double in 15 years, under the Fair Tax, which is 5 years sooner, if I recall correctly.

And, the Fair Tax would replace ALL forms of government taxation (Income, Estate, Payroll, Corporation, etc). You would get 100% of every paycheck from now on (barring state and local exemptions).

You really need to check it out. I think it is one of the top 5 things that the government needs to do. My top 5, in no particular order:

1) Presidential line-item veto
2) The Fair Tax
3) Reform or Phaseout of Social Security
4) Reduce spending by 50%
5) Actually embrace the entire Constitution (not just the parts the particular party in power at the time decides to embrace, because BOTH major parties use it like toilet paper when it suits them…)

Number 5 would actually fix numbers 3 and 4, as well as many others. Anyhow, I am getting all political, but it is difficult not to do so when talking of money, and specifically things like the Fair Tax.

jtc Says:
October 30th, 2006 at 10:55 am

it costs like $8.00 on Amazon.

It isn’t excessively regressive becasue of the rebate on taxes paid up to abnout 200% of the poverty level.

A philosophical question: How many times should the same dollar be taxed?

Jeremie Beaudry Says:
October 30th, 2006 at 12:20 pm

I’ve read the book twice, and it won’t be passed till more people are educated about it. Whenever you hear a politician say their opponent wants to increase or put on a 25% sales tax means the opponent believes in fair tax. It still amazes me that we are still complaining about Social Security, GDP, taxes and so on and we aren’t solving the problem. We are just fixing a broken pipe with duct tape. Temporary fixes that will resort in huge flood problems later. Fair tax would help in immigration issues, SS, Medicare, and our poverty level would shrink. Try to get involved as much as possible to get this passed. Read the book first though.

BBrown Says:
October 30th, 2006 at 1:17 pm

Yes, the time has come for the Fair Tax (H.R. 25). Doesn’t look like anything is going to happen anytime soon regardless of who is in control, Republicans or Democrats. It is going to start with a revolution by the people. As a CPA, I find it amazing that we have a tax code that is for the most part a political toy rather than a basic means of revenue collection for the basic governmental needs of citizens. Furthermore, some things in life are inherently complex. Our tax rules and regulations should not fall into that category. By the way, the FairTax started with Rep. John Linder of Georgia who later joined with Neal Bootz in writing a book about the FairTax. If you would like to read more, I have my commentary on the Fair Tax via my blog.

Here is the link:
H.R. 25 (FairTax Act) – The time has come!
http://www.brianbrowncpa.com/blog/?p=29

Also, I’ve written about the real estate related impact of the FairTax. Here is a hint – It is great for real estate related matters.

H.R. 25 (FairTax Act) and the impact on real estate
http://www.brianbrowncpa.com/blog/?p=33

For even further information, go to http://www.fairtax.org

MoneyFwd Says:
October 30th, 2006 at 1:57 pm

I haven’t read this so I can’t give much of a comment, except I would think this type of tax would cause a lot of troubles with municipal finance. It would get complicated trying to figure out how to distribute the money properly to provide the proper amounts of fire, police, and other services for each area. And with municipals depending on this one source for most of its income, any variations would cause an uproar.

Foobarista Says:
October 30th, 2006 at 2:58 pm

My big question: what about Roth IRAs? If a consumption tax is implemented, how do you avoid double taxation on Roth IRAs? It may seem like a small-bore concern, but given that a popular retirement strategy is to shovel as much money as possible into Roths to avoid taxes at retirement, it could cause all sorts of problems.

JLP Says:
October 30th, 2006 at 3:05 pm

Some thought-provoking comments today.

MoneyFwd,

That’s a good point. I never really thought about that. If the tax-free status of municipal investments becomes null and void, it makes investing in them unnecessary (other than to show support for a community).

Foobarista,

I hadn’t really thought of that either. It is the big things like this that make me think that we will never rid ourselves of the income tax.

samerwriter Says:
October 30th, 2006 at 3:55 pm

I haven’t read the book, but I have read a little about the fair tax in articles and blogs.

Municipal bonds don’t seem like a problem; the bonds just need to be offered at a competitive rate. I assume MoneyFwd’s comment was more related to the reliance on property taxes to fund local expenses.

The pre-bate idea seems like it could be useful for solving the Roth IRA dilemma as well. Money withdrawn from a Roth IRA could simply increase the amount of your pre-bate, effectively making the Roth IRA tax-free.

The thing that has not ever been clear to me is precisely what is taxed with the fair tax (this may be answered in the book). If I buy a car, presumably that’s taxed. Now let’s say I sell the car to someone else; is that taxed? Then that person sells the car; presumably it’s taxed again?

This seems like it would give rise to a pretty active black market (similar to what already exists for cigarettes, to avoid tax).

jack straun Says:
October 30th, 2006 at 6:26 pm

I hate to be a pessimist, but I’m not getting my hopes up on tax reform. I recently cleaned up the home office and had the opportunity to look at my tax returns for the last 8 years. Every year the pile of paper is thicker, even though household circumstances haven’t changed. So then I wrote down all the taxes I’m subject to because we have a family farm and retail the product to the end consumer. Result = 15 separate taxes. These are not the imbedded taxes, but the stuff I got to keep track of and file with the various public entities. So then I think of my grandfather, who’s still alive. He didn’t have to pay or file any of this crap. All this happened within the last two generations. My prediction - a national sales tax will be implemented shortly. It will be sold to us as a way to eliminate the income tax. But the income tax won’t go away. For history buffs, you know this [excessive taxes and regulation] is a common thread in the decline of great civilizations going back thru recorded time. Sigh. I’m gonna go have a beer now.

TC Says:
October 30th, 2006 at 11:22 pm

>> how do you avoid double taxation on Roth IRAs?

The short answer: you aren’t avoiding them now.

The cost of an item includes “embedded” tax costs - taxes and tax compliance costs incurred along the way in producing that item.

So, the $100 Acme widget you buy today contains something in the neighborhood of 20% embedded taxes. If you remove that cost, but add it later in the form of a sales tax … what’s the difference?

Perhaps the difference is people will have to notice how much of our money the government spends.

Chad Sargent Says:
October 31st, 2006 at 1:15 am

“My prediction - a national sales tax will be implemented shortly.”

Agreed. The current tax code is becoming so complex and expensive that it will eventually collapse under its own weight. Personally, I want to see that happen sooner than later.

http://www.impactlab.com/modules.php?name=News&file=article&sid=7118&mode=&order=0&thold=0

“It will be sold to us as a way to eliminate the income tax. But the income tax won’t go away.”

The FairTax grassroots has two goals: pass the FairTax legislation, and repeal the 16th amendment to the Constitution. Efforts to achieve both goals are underway now.

Once we eliminate the 16th amendment it will be virtually impossible to reinstate an income tax. If you join the grassroots FairTax effort, this will all happen faster.

http://www.fairtax.org/

Dus10 Says:
October 31st, 2006 at 8:04 am

MoneyFwd and JLP,

The Fair Tax is for Federal revenue only, so it does not replace state or local taxation, at all.

jack straun,

If you look at it from the proper perspective, everything except for your personal income taxes (which does not include the special taxes you have to pay for having a farm and retail business) are embedded taxes. You see, it would be foolish for any business owner to not include taxes into the costs of operating a business. If you were able to make a 10% profit before considering taxes, and then you had to fork it over because of that, you wouldn’t be in business very long. So, you include it as a business expense and then pass the cost along to your customers. There is absolutely nothing wrong with that, in fact, there would be something wrong with not doing that (given our current tax code). With the Fair Tax, you would be paying any of those taxes, but you would be charging your retail customers the sales tax and remitting it to the government. You would be paying your taxes whenever you consumed goods yourself.

Simple, clean, effective.

sman Says:
October 31st, 2006 at 9:13 am

Foobarista,

There would be no “double taxation” on the Roth IRA. Remember, you would no longer be paying an income tax. For example, if your gross income is currently $100k per year, under the Fair Tax plan, your bring home pay would be $100k per year.

The Roth does lose some of it’s appeal since you would now be taxed on your spending, but there is no double taxation.

On a side note, if my memory serves me correctly, there isn’t a tax on used goods. Only new items.

yabadaba Says:
October 31st, 2006 at 9:32 am

I think its a great idea other than for homeownership. I went to the fair tax webpage and read the whitepaper on how the fairtax would work on homeownership and the numbers make sense.

However, in today’s day and age where everything boils down to the monthly payment, would it mean that I would have to get a loan of an additional $57,500 (23% sales tax) for a house with a purchase value of $250,000?

Independent George Says:
October 31st, 2006 at 11:32 am

My apologies for a long post, but this is a great topic:

1. The regressivity argument is the strongest one against a consumption tax, but I think there’s a lot of room to play around with keeping a consumption tax progressive. Most proposals I’ve seen provide a monthly tax rebate to cover living expenses; the formula can be adjusted as needed, and there’s nothing to stop us from additional supplements like an expanded EITC (which seems to be something that everybody loves). The consumption tax can still be progressive quite easily - it all depends on the actual implementation.

2. I think the issue with Roth IRAs is not for future contributions, but past ones. Eliminating income/capital gains taxes effectively turns every savings/checking/brokerage account into a Roth IRA going forward. Previous Roth IRA contributions, however, were made with after-tax earnings, with the expectation that no taxes would be paid on withdrawal. A consumption tax would effectively tax existing contributions twice. I haven’t read the book, but this doesn’t strike me as unmanageable; since each account presumably has records on each year’s contribution, it wouldn’t be too hard to offer a one-time tax refund for existing Roth IRA holders. You can take 15% of each year’s contribution; or to be more accurate, you can use the marginal tax rate on the individual’s income tax return for the year each contribution was made. Additionally, we could also add interest based on historical market rates.

This would definitely be a significant one-time expense, but seems like a reasonable transition cost. As someone who’s maxed out his Roth contributions since 2002, I can’t say that I’d really be all that upset even if no compensation were offered. Sure, I’d have been better off making regular IRA contributions instead of the Roth, but I’m not actually any worse off than if I’d spent that money, or put it into a savings account. It’s a bit unfair, but not exactly a rip-off.

3. I haven’t run the numbers, but how much difference does it really make in the cost of a house? On the surface, it seems to me that you are worse off if, over the life of the mortgage, your average income tax rate would have been below 23%, but better off if it would have been above it. Of course, this does not factor in the loss of the mortgage interest deduction, appreciation of property, embedded taxes, opportunity costs, etc., but, on the whole, I would expect that most homeowners would actually benefit over the course of a 30-year mortgage. Of course, this really depends on how the taxes are implemented/collected, which I’m admittedly fuzzy on. There’s a certain amount of sticker shock in paying an extra $50k on a house,

4. With a consumption tax in place, I would completely support cutting capital gains taxes, even if the primary beneficiaries are the wealthy (which wouldn’t necessarily be the case - see below). Remember, eliminating cap gains taxes effectively turns everybody’s checking, savings, and brokerage accounts into Roth IRAs. The wealthy have more in those accounts, and get a bigger immediate benefit, but that disappears entirely with a consumption tax (as opposed to a flat income tax), as they would be taxed the moment they spent that money - and at 23%, instead of 5%/15%. The only way the rich truly benefit is if they stopped buying yachts and instead saved/reinvested their capital gains - which would actually provide a huge macro benefit for everybody.

5. As a tax accountant, my job would disappear roughly one week after it goes into effect. That sucks for me, but, in the long run, it benefits society as a whole. Right now, I work with a lot of smart, educated people don’t actually produce anything. Tax compliance is essentially a negative value added industry; after a short-run dislocation, the country as a whole would benefit from having us actually create wealth, as opposed to figuring out how much should be taken away.

Dus10 Says:
October 31st, 2006 at 1:27 pm

yabadaba,

It is likely, via competition, that new home construction prices would slightly decrease to compete with existing homes. This would mitigate the tax. In addition, all of the supplies and labor should decrease, since the embedded taxes are all gone, meaning that the cost should drop by about 20%, anyway. Further, I doubt you would have to pay sales tax on the property itself, as it is pre-existing, but only on the home and any related improvements.

Independent George,

You must also consider that the Fair Tax would replace all Federal revenue, which includes Social Security, which is hyper-regressive. And then, there is always the prebate for cost of living. Overall, the Fair Tax is certainly not regressive, based on these figures. Beyond that, since it is consumption based, you choose to pay taxes by consuming. So, when you save, you do not pay taxes, which lets all saved monies operate like tax deferred funds in 401(k), IRA, and capital appreciation.

In regards to the mortgage, you must also consider that the prebate that is for the basic costs of living includes housing, so at a basic level, you are not paying taxes on 100% of the purchase of a new home, anyway, just because of the prebate.

» Taxes are Playing Hide & Seek Says:
November 15th, 2006 at 6:24 pm

[...] Good discussion post about FairTax at AllFinancialMatters- Anyone Read “The Fair Tax?” [...]

johnwk Says:
December 13th, 2006 at 8:13 pm

The alleged fair tax, H.R.25, is rejected at a conservative site in a
NEW POLL by more than a two to one margin in favor of our Constitution’s original tax plan!

Seems the supporters of H.R. 25 are unable to defend their socialist friendly proposal against the wisdom of our Founder’s original tax plan. They continue to avoid an HONEST COMPARISONbetween H.R. 25 and our Constitution’s original tax plan.

The only tax reform we need is to have the following words added to our Constitution:

The Sixteenth Amendment is hereby repealed and Congress is henceforth forbidden to lay “any“ tax or burden calculated from profits, gains, interest, salaries, wages, tips, inheritances or any other lawfully realized money

Regards,
JWK

[url=http://usafoundingfathers.blogspot.com/2006/03/founding-fathers-original-tax-plan.html][b][CONSTITUTION‘S ORIGINAL TAX PLAN[/b][/url]

Basketball Games Says:
December 12th, 2008 at 12:06 am

After reading your post I am totally agree with your thoughts that the people with lower income are paying a big amount in taxes while other who are earning greater income do not spend in consumption.This is really not fair.Now I am sorry to say that I am also from those who haven’t read the book but I think there is some good stuff about Fair tax in Neal’s book.So we both should read this book.

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Anyone Read “The Fair Tax?”