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    Here begins your journey into the mind of everybody's favorite asian, and I don't mean Jet Li.
What follows is the somewhat inane, mostly irrelevant, and self-important ramblings of a man on the brink of madness.
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Thursday, May 14, 2009
 FairTax misconceptions    [L]

An author of one of the blogs I peruse had some wild misconceptions about the FairTax - unfortunately this seems to be pretty common - but as somebody who actually, you know, read the book, I figured I'd take a shot at correction.

Now, in order to make this work, this Consumption Tax... you can't just hand it all to the retailers. This has to be tracked individually. Which means everyone from the moment of birth must have a Social Security Number, or some other National ID card with related number. Everything you do will be monitored, tracked, recorded, and taxed. You buy a carton of eggs and a gallon of milk, that is going to be recorded. You buy a new car or a new gun. That's going to be recorded. The IRS will not go away... they will be up your backside.

AFAIK, there is no requirement for tracking who purchases what - only that a sale was made, and that a tax was collected. This already happens in the routine course of business! There would be no extra personal information associated with the sale other than what we're already comfortable with (credit cards, reward cards, etc.) In fact, personal privacy will INCREASE - the IRS will not go away, but their scope becomes dramatically reduced, because they are no longer needed to collect income taxes! They don't need to collect them, so they don't need to know your income, they don't need to audit you, etc. They simply become a federal version of what states do with their sales taxes. However, the IRS will still need to know some personal information, such as your address, as they will be required to send out the prebate checks.

The prebate checks actually put the poor at an advantage compared to those above the poverty line. The prebate checks will be calculated (and here's where the possibility of things going screwy is the highest) based on the estimated consumption taxes a person or family would pay for their cost of living expenses. The reason its called a prebate, and not a rebate, is that you get this money in advance of the month ahead, rather than after the fact! Sure, it's inefficient in that a person may actually get compensated MORE than what they spend in taxes, but that's highly preferable to getting reimbursed after they spent their money. So anybody living at the poverty level effectively pays 0% in taxes. What's nice about this system is that you don't have to be at the poverty level to do this - you could earn a million dollars a year, but if you're frugal with your money you pay no taxes. But how many millionaires do you know spend the minimum to survive?

Admittedly, the way the prebates are handled seem to be a concession to the poor (rather than being completely fair), however I argue its drastically better than the methods currently in use for compensating the poor for being poor. It's not ideal, but it's negligable, and if it helps the FairTax get passed then so be it.

Everyone that sells any goods or services become Tax Collection Agents. All those people would have to register with the .Gov or they can't be in business. If they neglect their collection duties, they are in big Federal trouble. This gigantic invasion of privacy is something I find distasteful.

And this is different from these retailers collecting sales tax, how?
Almost all businesses (i'm excluding private sales for now) already have a mechanism/framework for collecting state sales taxes, unless you happen to live in a state w/o sales taxes (lucky you). So how difficult would it be for a a business to report federal sales tax as well as the state sales tax which they are already doing? I must admit I do not remember what the FairTax's policy is on private sales, but as long as an item is USED (ie not new) the FairTax should not apply to it. FairTax only applies to NEW items at its final POS.

I'll leave the question of what this means for private sales of new items (ie cottage industry) to someone else.

If you put money into savings or if you have paid into social security, when you pull it out to spend it, you will have been double taxed on it.

FairTax COMPLETELY REPLACES the federal income tax. So the salary you earn has not yet been taxed! Therefore funds going into Social Security come from the FairTax in the first place. It's a little strange here as the consumption tax goes into SS, and when you get your SS check and spend it, a portion of it goes back into SS - however i'm not sure that's that big of an issue.

The tax rate for the "Fairness" is about 30% and the rate calculation is so vague, it's too easy for the government to raise it.

And this is different from how the federal government determines income tax rates ... how? Imagine no income tax brackets. Imagine how much easier it would be to set tax levels, when all the gov has to adjust is a single rate, instead of hundreds of income brackets! Again, this is another place where things can go screwy, because here it's up to the public to keep an eye on the gov and make sure they're not a) spending like drunken sailors and b) raising the tax rates for no good reasons.

The Fair Tax doesn't do anything to address the fiscal responsibility of the .Gov to manage the money and control the spending... this is like using your Debit Card instead of your Checks... your still spending it... your just transferring that money a different way.

Believe it or not, this is actually a FEATURE of the FairTax as it is written. Sure, it'd be nice to throw in a balanced budget amendment, but adding that in there would exponentially increase the difficulty of getting it passed (as if it wasn't going to be hard enough). That's why the FairTax is simply written as a replacement for the federal income tax, and that's it.

And now for another big reason to avoid the Fair Tax – A whole new economy will spring up almost over night... The Black Market. Organized Crime will be be the regulation there, the Mob, whoever. The Black Market will be able to service you for everything you need... Smuggling will become huge. As a result, ordinary people would easily become Tax Dodging Criminals. Or are you going to tell me that just because the tax is Fair everyone is going to all the sudden become completely and perfectly honest?

I don't buy this argument. Think about how much money is spent at Wal-Mart, Best Buy, car dealers, grocery stores, malls, etc. Businesses like those never be able to skirt the law and get away with not collecting the consumption tax. Now think about the percentage of the overall economy that these businesses represent - I'm no economist, but my WAG is that they represent the non-trivial portion of it. My point is that, yes, there may be black market profiteers willing to risk it all by skirting the tax, but they would represent such a small portion of the economy that the impact would be trivial.

As a bonus, think of all the illegals living and working in the US right now. How much is the federal gov't collecting from them? NOTHING - because they work under the table and don't file income taxes. But illegal workers, drug dealers, and the like still buy food, supplies, diapers, dvds, electronics, cars, etc. - so under the FairTax, for the first time, the fed gov would actually collect from them! As a bonus, because the illegal immigrants are not registered with the IRS (like all of us hard-working citizens who pay income tax), they don't get a prebate, making it harder for them to live/work in the US illegally. They would actually be ENCOURAGED to become a legal citizen, instead of today where there is a huge advantage in being here illegally. (Now I realize that the legal immigration process here is f'd up, but that's another discussion).

FairTax is a pretty much a direct tax on our GDP... 30% on our GDP.
You've heard the phrase that you tax what you want to reduce? Think about that. This would kill us as a nation. Look at how many business out there live for 2 seasons, Christmas and Tax Returns.
Fair Tax would damage our economy like a kick to the nuts. After it was already taken down to its knees.

Except that
1) The FairTax will be calculated so that the price of goods remains consistent. Whatever rate they set for the sales tax will be close to the rate of federal income tax embedded in the cost of each product.
2) If the price of goods remain consistent, and all of a sudden everybody no longer pays federal income tax... (for me in 2008 that would be equivalent to a 23% raise). What do you think happens to the economy when everybody gets 23% raises?

Now admittedly I've only read the first book, so I may be misinformed as well, but I found the arguments and logic presented by the FairTax to be very sound and even rooted in reality. I truly believe it is a "fair" tax (even if it is a tad skewered in favor of the poor) and worthy of honest discussion.

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I couldn't agree more. Going off of the "tax collection agents" argument, an additional point is that any business that has employees already is a tax collection agent, but for payroll taxes! A sales tax would be much easier to administer than payroll. One flat rate, one place to file each month, and that's it.

Also, speaking as someone who files sales tax in multiple states, you are correct. Any business that has to collect sales tax would already have the processes in place. All they would need to do is collect an additional 23% to send to the fed.

By Blogger Rob, at 5/16/2009 08:34:00 PM      

^^^ speak up ^^^