0 comments on “Analyzing the FairTax”

1. It took four months for him to do so, but Connie Mack, the chairman of the Joint Commission on Taxes, eventually admitted that what they scored in the above quoted graphic was not indeed the FairTax as written, but what the FairTax might look like if changed by politicians.
   They assumed many more exemptions. One of the reasons that a typical state sales tax ends up being regressive is because food is exempted whether you spend $100 a week or $4000 a week on food. The Mack/Breaux panel assumed politicians would exempt food from the proposal once passed. That is not the FairTax.
   They neglected to consider that used goods (including homes and cars) are not taxed under the FairTax. The calculations that lead to the above chart include mortgage payments on homes regardless of whether a family lives in a previously owned house or has custom built their own. Anyone who lives in America knows that the vast majority of middle class live in previously owned homes and thus would not pay taxes on their mortgage payments (except for a couple bucks considered to be tax on the service provided by the bank). To leave out the effects of used cars, furniture, and clothing, the Mack/Breaux panel skewed the numbers to the right. That is not the FairTax.
   The Mack/Breaux panel didn't remove the payroll taxes from their model and the FairTax does. The payroll tax is one of the most regressive we face in this country. You begin paying it with the first dime you legally earn, and stop paying it when you earn more than $97,500. Look again at the table above. A big chunk of the problem we see in that chart is a direct cause of keeping the payroll tax. Do you see how the tax rate goes from 9.5 to 9.2 to 24.8? That is our payroll tax system at work. That is not the FairTax.
   The chart itself is designed to skew the perception of the numbers. Consider that a family of four earning and spending 26,400 is the poverty line. By putting the poverty level in the middle of a grouping skews the results. Consider further, the disparity between the stages. Each column represents a different group. 15K, 15K, 10K, 10K, 25K, 25K, 100K, and the rest. Any statistician will tell you to automatically suspect any chart that jumps around like that. The author of the chart is manipulating the numbers. By the Mack/Breaux panel’s own calculations, the blue line would have continued to be higher than the green for ten or twelve more columns if they had stayed at 25K, or even 3 or 4 columns at 100K each. Their own numbers didn't begin to show the wealthy paying less under their version of a sales tax than the current system until well over 500K, but by lumping everything over 200K together, it gives exactly the appearance and has exactly the effect that the propagandists who drew the chart intended. That isn’t the FairTax.
   The bottom line is that several of the members on the Joint Commission on Taxes are extremely tax advantaged under the current system. The super-wealthy have so many loopholes and perfectly legal tax evasion mechanisms that they frequently pay less in taxes than the merely wealthy. But surely you realize that either they are spending more or their heirs will be spending more. Either way the spending will eventually be taxed at a much more fair rate under the FairTax than the income is taxed under the current hyper-manipulated income tax structure.

   There is a full rebuttal to the JTC report here:
   http://www.fairtax.org/PDF/Excerpts_from_response_to_tax_panel-103006.pdf

   To contact this poster, see http://TampaBayFairTax.org

2. That is an excellent anaylysis of his post, David. I would add one more point. The chart does not take into account any amount of savings, or spending on used goods. The more someone saves, the less their tax rates.

3. I think that the focus on savings, especially at the lower levels (read 15k-30k) is a red herring. People earning that kind of money are going to have to spend most of it just to get by -- especially in the major metropolitan areas. While the FairTax would encourage savings over spending, I don't think that would start happening until you're in the 40k-50k range.

4. Two points. As David noted, the article attacks a straw man, not the Fair Tax as written. The payroll tax elimination alone makes it a net winner for the truly poor.

   Second, and most important, it is not healthy for our government to be paid for by a minority of its citizens. I don't care how this is resolved, but if you don't pay for it, you shouldn't be able to vote.

5. I have supported the FairTax for 10 years. The best tax plan I have ever seen. I am also a tax accountant. My only response to Hoystory's post: Where are you paying for efiling? It's a no-brainer, so I charge nothing for it and I am charged nothing for it. There is no IRS fee for efiling.

   OK, one comment about the FairTax. It would broaden the tax base, greatly. Everyone who pays for services and new products, would become subject to the FairTax, including drug dealers, criminals and tax dodgers. Foreign visitors would pay it and undocumented immigrants would pay it. And anyone without a valid SS number would not receive the prebate.

6. To add to what Joshua said, I think the lower the income range, the more benefit the used goods exemption would be. How many households making $100k or more a year buy used cars? How many making $15k-$30k buy new cars? What about thrift stores? yard sales? Even the used house exemption can easily be seen as better for low to middle incomes, since most first time home buyers buy existing homes anyway.

   I wonder if the environmental crowd would get on board with the fair tax as a reuse/recycle motivator. There should be a much more thriving used goods market after the Fairtax.

7. what part of g.rowson's post was so damning that it was removed?

   was it the part where he disproved the author's "unbiased-ness" using his own words, or was it the part where he sytematically refuted every "drawback" to the FairTax presented, since they were complaints about items that are not portions of the FairTax?

   FactCheck is factually inaccurate on several points about the FairTax.

   If this stays up, I might list those points and explain how the factcheck article is taking issue with items that are unrelated to, or not a part of the FT propsal.

   if this doesn't stay up, perhaps some of the watchers of this blog will come over to http://www.fairtaxgroups.com and ask their own questions and get their own answers.

   thanks for providing the opportunity for comments, it's disheartening when those comments get pulled because they don't agree with your position.

   [G. Rowson's post was removed at his request. He didn't say why. I didn't care enough one way or another to query him on it. - Ed.]

8. The Official FairTax.orgsm Response to FactCheck.org article, “Unspinning the FairTax”

   The following are excerpts in summary form of the Fairtax.org’s official response to the factcheck.org article, “Unspinning the FairTax.” You can find the complete version here:
   FairTax.org Response with letter to FactCheck.org

   Introductory Remarks

   Recently, we noted that FactCheck.org – a site apparently devoted to “objective” analysis – had taken a very biased tone against the FairTax and was propagating false and misleading statements. We shared with FactCheck.org our view that tax reform, like so many other national public policy issues, must be resolved in the crucible of public opinion based on accuracy. And because of the impartial reporting for which FactCheck.org is supposed to be devoted, we expressed to them grave concern that false and misleading facts appeared on their site in “Unspinning the FairTax” posted on May 31, 2007. We did so in the hope they might correct the misstatements and ensure that future reporting is more accurate.

   The ability of the American people to properly analyze candidates and the policy they support is only as good as the accuracy in the analysis and reporting. And that, in a nutshell, is the very important mutual goal we share.

   Unfortunately, we were successful only in part. Despite our telephone discussion with Joe Miller of FactCheck.org, FactCheck.org refused to correct blatant errors; for example, insisting that presentation of a chart on distribution that purported to be the FairTax but actually was an entirely different tax plan was acceptable. We pointed out to FactCheck.org that the FairTax taxes all consumption above the poverty line equally at 23 percent. We explained why the FairTax was more progressive and was revenue neutral. We also detailed that under the FairTax the vast majority of American families will be much better off because the economy will boom, U.S. economic competitiveness will be enhanced, compliance costs will fall, and incomes will grow. According to measures that capture real-world economic effects, the gains disproportionately go to low- and middle-income groups. Americans For Fair Taxation regards such an outcome as fair, just, and equitable.

   We will continue to work to ensure accurate reporting on behalf of Americans For Fair Taxation. In the meanwhile, we want our supporters to understand the nature of FactCheck.org’s mistakes and biased effort

   (A) The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax.

   This sentence is false and misleading. The FairTax is a 23 percent tax as measured by the same basis we measure all of the federal taxes it replaces.

   Since the FairTax is a replacement for income and payroll taxes, and they are both measured, reported, and quoted on a tax-inclusive basis, it is appropriate to use the 23 percent tax-inclusive rate when referencing the rate. To do otherwise as FactCheck.org seeks would actually be misleading. In other words, apples should be compared to apples, not to oranges, and the tax-inclusive rate of the income and payroll taxes today should be compared to the tax-inclusive rate of the FairTax tomorrow.

   To quote the tax panel’s final report, “Although tax-exclusive and tax-inclusive rates are both valid ways of thinking about tax rates, the easiest way to compare the retail sales tax rate to the state sales taxes paid by most Americans is to consider the tax-exclusive rate. On the other hand, it is appropriate to compare the retail sales tax rate with current income tax rates by utilizing the tax-inclusive rate” (page 208). We don’t disagree. That is why we refer to the rate in the appropriate tax-inclusive manner.

   (B) And it is revenue-neutral only through an accounting trick.

   This sentence is false.

   If the FairTax were to exempt government from tax and if federal spending were held constant, then the purchasing power and size of the federal government as a share of the economy would be dramatically increased. Further, not taxing government consumption would artificially make government consumption appear cheaper and promote increased consumption via government. So, though a wash, there would be negative economic consequences if the FairTax did not continue the practice of taxing government consumption. This is not an accounting “trick” any more than it is an accounting trick to tax government workers and the income of government goods and services providers today.

   (C) [The FairTax] will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.

   This sentence is false. And FactCheck.org's own document shows their statement to be false.

   FactCheck.org’s statement is based on a U.S. Treasury Department analysis (Figure 9.4 of which is shown) of a plan which is not the FairTax. The chart and the Treasury study depict an alternative retail sales tax plan invented by the Treasury Department that had a different tax base than the FairTax. In fact, the chart depicts a “plan” that does not repeal payroll taxes, which are 41 percent of personal income taxes, and leaves out more than $771 billion in regressive taxes that fall mostly on the poor and middle-income wage earners. Although the chart label refers only to federal income taxes paid, this point is not made in the discussion of the results, thus almost begging for the reader to wrongly infer that the distributional picture portrays the FairTax.

   Since the payroll tax is regressive and is the largest tax paid by lower- and middle-income Americans, ignoring the fact that the FairTax repeals payroll taxes is tantamount to ignoring what the FairTax is when analyzing the FairTax.

   A recent study by Dr. Laurence Kotlikoff, that does analyze the distribution of the FairTax, was conveniently ignored by FactCheck.org, although brought to their attention. That study finds that the FairTax lowers remaining average lifetime tax rates, thereby enhancing overall progressivity. This occurs because the reduction in rates is proportionately much greater at the low end of the earnings distribution than at the high end.

   (D) It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.

   This sentence incorrectly assumes that economic growth will be distributed unfairly. The FairTax is called “fair” because it disproportionately benefits the poor and middle class and the economic studies support this statement.

   The FairTax entirely untaxes the poor and reduces the tax burden on the near poor substantially. The FairTax taxes all consumption above the poverty line equally at 23 percent. The FairTax is progressive, and by two out of three commonly used measures of progressivity is more progressive than the current system. Finally, and most importantly, under the FairTax the vast majority of American families will be much better off because the economy will boom, U.S. economic competitiveness will be enhanced, compliance costs will fall, and incomes will grow.

   [C]onsumers would pay taxes on a great many things that may not intuitively seem like consumption. The list would include:

   (E) Interest on credit cards, mortgages and car loans

   This sentence is misleading. The FairTax does tax the loan service charges or fees charged by the lending institution to the borrower. If the lending institution does not separately state these charges, but rather rolls them into the interest rate for the loan, then a portion of the interest is really hidden services charges. The FairTax taxes only that small portion of interest. A more noteworthy effect of the FairTax on interest, which dwarfs the above, is that the FairTax will bring down interest rates by about 25 percent.

   (F) The result is that many FairTax supporters (about 15 percent of those who wrote to us, for example) do not understand that the 23 percent figure is tax-inclusive.

   When 85 percent of the public understands a relatively complex tax issue, then it would seem that FairTax is (1) not being misleading and (2) doing a pretty good job of explaining the issue. We would bet that those same people do not know that the current income, payroll, capital gains, alternative minimum, and estate taxes are also expressed as tax inclusive, which is the whole reason for making the honest comparison in the first place.