How Fair Is The Fair Tax?

There have been many proposals to overhaul the U.S. federal tax system, and one that is getting a good deal of attention is the FairTax plan, which is currently known as House Resolution 125. The FairTax plan proposes a repeal of income taxes in favor of a 23% sales tax applied to all goods and services. It differs from previously proposed “flat tax” systems by eliminating the IRS, and offering a monthly “prebate” of sales taxes based on the Federal Poverty Level and the estimated cost of basic necessities for those below this income level. The intent is to create a progressive tax system that doesn’t require that lower-income households pay a larger percentage of their income in taxes compared to wealthy households. The plan’s simplicity is its main selling point. Americans for Fair Tax, the organization advocating the FairTax plan, emphasizes simplicity on their web site, fairtax.org:

Everyone Agrees! The current Federal income tax system is broken. Patching up the existing code is pointless. It's time for a fresh approach, a fair approach.It's time for the FairTax. Simply put, the FairTax replaces the way we're currently taxed - based on our annual income - with a tax on goods and services. The FairTax is a voluntary “consumption" tax: the more you buy, the more you pay in taxes, the less you buy, the less you pay in taxes. It's simple. Everyone pays their fair share of taxes, and with the FairTax rebate, spending up to the poverty level is tax free. The Federal government is fully funded, including Social Security and Medicare, and you don't need an expert to determine your Federal taxes. It's simple.

Yes, simplicity rules the day for Americans for Fair Tax (AFFT), and other professed grassroots organizations which seem to repeat the same “simple” message: Repeal the Income Tax and replace it with a national “sales tax.” Many Americans would welcome a little relief in the tax department, so what does the FairTax plan offer? What follows are a few questions which anyone should ask about a new tax plan, how the AFFT FAQ answers them (FTFAQ), the relevant passages from the text of H.R. 25 (H.R. 25), and commentary on what the answers reveal (I.A. Comment).

Upon what does the new tax plan impose taxation?

FTFAQ: “…new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed.”

H.R. 25: SEC. 2 `(14) TAXABLE PROPERTYOR SERVICE- `(A) GENERAL RULE- The term `taxable property or service' means-- `(i) any property (including leaseholds of any term or rents with respect to such property) but excluding-- `(I) intangible property, and `(II) used property, and `(ii) any service (including any financial intermediation services as determined by section 801). (B) SERVICE- For purposes of subparagraph (A), the term `service'-- `(i) shall include any service performed by an employee for which the employee is paid wages or a salary by a taxable employer, and `(ii) shall not include any service performed by an employee for which the employee is paid wages or a salary-- `(I) by an employer in the regular course of the employer's trade or business, `(II) by an employer that is a not-for-profit organization (as defined in section 706), `(III) by an employer that is a government enterprise (as defined in section 704), and `(IV) by taxable employers to employees directly providing education and training. SEC. 102 `(a) In General- For purposes of this subtitle-- `(1) BUSINESS AND EXPORT PURPOSES- No tax shall be imposed under section 101 on any taxable property or service purchased for-- `(A) a business purpose in a trade or business, or `(B) export from the United States for use or consumption outside the United States, if, the purchaser provided the seller with a registration certificate, and the seller was a wholesale seller. `(2) INVESTMENT PURPOSE- No tax shall be imposed under section 101 on any taxable property or service purchased for an investment purpose and held exclusively for an investment purpose. `(3) STATE GOVERNMENT FUNCTIONS- No tax shall be imposed under section 101 on State government functions that do not constitute the final consumption of property or services. `(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business' means purchased by a person engaged in a trade or business and used in that trade or business-- `(1) for resale, `(2) to produce, provide, render, or sell taxable property or services, or `(3) in furtherance of other bona fide business purposes. `(c) Investment Purposes- For purposes of this section, the term `purchased for an investment purpose' means property purchased exclusively for purposes of appreciation or the production of income but not entailing more than minor personal efforts. SEC 901 (a) Intangible Property Antiavoidance Rule- Notwithstanding section 2(a)(14)(a)(i), the sale of a copyright or trademark shall be treated as the sale of taxable services (within the meaning of section 101(a)) if the substance of the sales of copyright or trademark constituted the sale of the services that produced the copyrighted material or the trademark. `(b) De Minimis Payments- Up to $400 of gross payments per calendar year shall be exempt from the tax imposed by section 101 if-- `(1) made by a person not in connection with a trade or business at any time during such calendar year prior to making said gross payments, and `(2) made to purchase any taxable property or service which is imported into the United States by such person for use or consumption by such person in the United States. `(c) De Minimis Sales- Up to $1,200 per calendar year of gross payments shall be exempt from the tax imposed by section 101 if received-- `(1) by a person not in connection with a trade or business during such calendar year prior to the receipt of said gross payments; and `(2) in connection with a casual or isolated sale. `(d) De Minimis Sale of Financial Intermediation Services- Up to $10,000 per calendar year of gross payments received by a person from the sale of financial intermediation services (as determined in accordance with section 801) shall be exempt from the tax imposed by section 101. The exemption provided by this subsection is in addition to other exemptions afforded by this chapter. The exemption provided by this subsection shall not be available to large sellers (as defined in section 501(e)(3)). `(e) Proxy Buying Taxable- If a registered person provides taxable property or services to a person either as a gift, prize, reward, or as remuneration for employment, and such taxable property or services were not previously subject to tax pursuant to section 101, then the provision of such taxable property or services by the registered person shall be deemed the conversion of such taxable property or services to personal use subject to tax pursuant to section 103(c) at the tax inclusive fair market value of such taxable property or services. `(f) Substance Over Form- The substance of a transaction will prevail over its form if the transaction has no bona fide economic purpose and is designed to evade tax imposed by this subtitle. `(g) Certain Employee Discounts Taxable- `(1) EMPLOYEE DISCOUNT- For purposes of this subsection, the term `employee discount' means an employer's offer of taxable property or services for sale to its employees or their families (within the meaning of section 302(b)) for less than the offer of such taxable property or services to the general public. `(2) EMPLOYEE DISCOUNT AMOUNT- For purposes of this subsection, the employee discount amount is the amount by which taxable property or services are sold pursuant to an employee discount below the amount for which such taxable property or services would have been sold to the general public. `(3) TAXABLE AMOUNT- If the employee discount amount exceeds 20 percent of the price that the taxable property or services would have been sold to the general public, then the sale of such taxable property or services by the employer shall be deemed the conversion of such taxable property or services to personal use and tax shall be imposed on the taxable employee discount amount. The taxable employee discount amount shall be-- `(A) the employee discount amount, minus `(B) 20 percent of the amount for which said taxable property or services would have been sold to the general public.

I.A. Comment: The FTFAQ chooses a simple answer, and the bill text backs it but brings up other issues. Anything an individual buys is taxed. Business purchases are not taxed, nor are purchases made for investment purposes that are not “entailing more than minor personal efforts.” This could mean gold, jewelry, art, and the like. There is also a provision for gifts, awards, or prizes from a “registered person" that requires the conversion to personal use, subject to tax. There’s clearly more to the story.

Does the new plan impose or otherwise require taxes to be paid on basic necessities of life, such as food, clothing, shelter, or vital utilities such as heating fuel, water, or electricity?

FTFAQ: “Exempting items by category is neither fair nor simple. Respected economists have shown that the wealthy spend much more on unprepared food, clothing, housing, and medical care than do the poor. Exempting these goods, as many state sales taxes do, actually gives the wealthy a disproportionate benefit. Also, today these purchases are not exempted from federal taxation. The purchase of food, clothing, and medical services is made from after-income-tax and after-payroll-tax dollars, while their purchase price hides the cost of corporate taxes and private sector compliance costs. Finally, exempting one product or service, but not another, opens the door to the army of lobbyists and special interest groups that plague and distort our taxation system today. Those who have the money will send their lobbyists to Washington to obtain special tax breaks in their own self-interest. This process causes unfair and inefficient distortions in our economy and must be stopped.” “Because the 23-percent FairTax rate of $0.23 on every dollar spent is not imposed on necessities, an individual spending $28,808 pays an effective tax rate of only 15.6 percent, not 23 percent.”

I.A. Comment: This explanation makes no sense, and uses a Straw Man argument to cowardly evade the issue. The truth is actually quite simple, but if stated would expose the Fair Tax plan for what it really is, and how stupid the plan’s proponents believe the average American is. More on this in a moment.

Who is ultimately liable for paying the tax, and how does the new tax plan determine and enforce compliance?

FTFAQ: (No Specific Mention)

H.R. 25: SEC 101 (d) Liability for Tax- `(1) IN GENERAL- The person using or consuming taxable property or services in the United States is liable for the tax imposed by this section, except as provided in paragraph (2) of this subsection. `(2) EXCEPTION WHERE TAX PAID TO SELLER- A person using or consuming a taxable property or service in the United States is not liable for the tax imposed by this section if the person pays the tax to a person selling the taxable property or service and receives from such person a purchaser's receipt within the meaning of section 510. SEC.103 `(a) Liability for Collection and Remittance of the Tax- Except as provided otherwise by this section, any tax imposed by this subtitle shall be collected and remitted by the seller of taxable property or services (including financial intermediation services). `(b) Tax to Be Remitted by Purchaser in Certain Circumstances- `(1) IN GENERAL- In the case of taxable property or services purchased outside of the United States and imported into the United States for use or consumption in the United States, the purchaser shall remit the tax imposed by section 101. `(2) CERTAIN WAGES OR SALARY- In the case of wages or salary paid by a taxable employer which are taxable services, the employer shall remit the tax imposed by section 101. `(c) Conversion of Business or Export Property or Services- Property or services purchased for a business purpose in a trade or business or for export (sold untaxed pursuant to section 102(a)) that is subsequently converted to personal use shall be deemed purchased at the time of conversion and shall be subject to the tax imposed by section 101 at the fair market value of the converted property as of the date of conversion. The tax shall be due as if the property had been sold at the fair market value during the month of conversion. The person using or consuming the converted property is liable for and shall remit the tax. SEC. 506. BURDEN OF PERSUASION AND BURDEN OF PRODUCTION. `In all disputes concerning taxes imposed by this subtitle, the person engaged in a dispute with the sales tax administering authority or the Secretary, as the case may be, shall have the burden of production of documents and records but the sales tax administering authority or the Secretary shall have the burden of persuasion. In all disputes concerning an exemption claimed by a purchaser, if the seller has on file an intermediate sale or export sale certificate from the purchaser and did not have reasonable cause to believe that the certificate was improperly provided by the purchaser with respect to such purchase (within the meaning of section 103), then the burden of production of documents and records relating to that exemption shall rest with the purchaser and not with the seller. SEC 508 (a) Summons- Persons are subject to administrative summons by the sales tax administering authority for records, documents, and testimony required by the sales tax administering authority to accurately determine liability for tax under this subtitle. A summons shall be served by the sales tax administering authority by an attested copy delivered in hand to the person to whom it is directed or left at his last known address. The summons shall describe with reasonable certainty what is sought. `(b) Examinations and Audits- The sales tax administering authority has the authority to conduct at a reasonable time and place examinations and audits of persons who are or may be liable to collect and remit tax imposed by this subtitle and to examine the books, papers, records, or other data of such persons which may be relevant or material to the determination of tax due.

I.A. Comment: The buyer is responsible for paying the sales tax, and must keep documentation to prove that the tax was paid. In cases where business items are converted to personal use, the law seems to rely on citizen honesty to remit the tax. Sort of. The law provides for a telephone “tip” line and gives the sales tax authority extremely broad powers to audit anything a person has that the authority deems relevant. The IRS may be dismantled with this plan, but taxpayers face an even greater risk of personal audit, and must practice extreme diligence to protect themselves. If keeping W2 and 1099 forms organized is a chore, keeping receipts for every single purchase will be a full-time job…

Does the new tax plan appear focused on guaranteeing or increasing the Federal revenue base, or does it focus on shrinking it?

FTFAQ: “All it does is replace the current revenue source (narrow, regressive payroll taxes) with a new revenue source (broad, progressive sales taxes paid by all consumers). Additionally, research shows that consumption is a more stable revenue source than income.” HR 25: SEC. 1 (b) Purposes- The purposes of this subtitle are as follows: `(1) To raise revenue needed by the Federal Government in a manner consistent with the other purposes of this subtitle.

I.A. Comment: “Smaller Government” is obviously not a goal with this plan. “Progressive sales taxes” is only a meaningful term if the rate changes according to a schedule, e.g. $5 in personal goods may be taxed at 10%, but $5,000 in goods is taxed at 20%. If the rate is the same for everyone, by definition it cannot be progressive. See next question…

Does the new tax plan seek an even distribution of the tax burden, or does it shift the burden according to discriminatory factors such as income level, or entity status (individual, business, or church)?

FTFAQ: “A rebate makes the effective rate progressive…All valid Social Security cardholders who are U.S. residents receive a monthly rebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The rebate is paid in advance, in equal installments each month. The size of the rebate is determined by the Department of Health & Human Services’ poverty level multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc. Under the FairTax plan, poor people pay no net FairTax at all up to the poverty level! Every household receives a rebate that is equal to the FairTax paid on essential goods and services, and wage earners are no longer subject to the most regressive and burdensome tax of all, the payroll tax. Those spending at twice the poverty level will pay a tax of only 11.5 percent – a rate much lower than the income and payroll tax burden they bear today.”

HR 25: (d) Annual Registration- In order to receive the family consumption allowance provided by section 301, a qualified family must register with the sales tax administering authority in a form prescribed by the Secretary. The annual registration form shall provide-- `(1) the name of each family member who shared the qualified family's residence on the family determination date, `(2) the Social Security number of each family member on the family determination date who shared the qualified family's residence on the family determination date, `(3) the family member or family members to whom the family consumption allowance should be paid, `(4) a certification that all listed family members are lawful residents of the United States, `(5) a certification that all family members sharing the common residence are listed, `(6) a certification that no family members were incarcerated on the family determination date (within the meaning of subsection (l)), and `(7) the address of the qualified family. Said registration shall be signed by all members of the qualified family that have attained the age of 21 years as of the date of filing. `(e) Registration not Mandatory- Registration is not mandatory for any qualified family. `(f) Effect of Failure to Provide Annual Registration- Any qualified family that fails to register in accordance with this section within 30 days of the family determination date, shall cease receiving the monthly family consumption allowance in the month beginning 90 days after the family determination date.

I.A. Comment: The rebate is based on the cost of necessities calculated for the poverty level for a given family size. Seems to make sense, but is not grounded in reality. What is touted as the element to make an otherwise regressive tax become progressive is more deception. The rebate is calculated according to an average that does not take cost of living differences into account, or even sales and income taxes that already exist in the states. The rebate, while offsetting a portion of the tax, will be taxed when it is spent. It is a bit reminiscent of the “free money” that casinos give to gamblers as comps. They give this money knowing full well they’ll get it back, and then some. The "prebate" is nothing more than a bribe, a consolation gift for being forced to literally pay ALL of the taxes!

What are the motivations for creating the new tax plan? Who does the plan ultimately benefit and why? Does it translate to a net benefit for individuals, businesses, or the economy at large and how so?

FTFAQ: “Like all federal spending programs, Social Security operates exactly as it does today, except that its funds come from a broad, progressive sales tax, rather than a narrow, regressive payroll tax… the FairTax dramatically improves economic growth and wage rates for all, but especially for lower income families and individuals. In addition to receiving the monthly FairTax rebate, these taxpayers are freed from regressive payroll taxes, the federal income tax, and the compliance burdens associated with each. They pay no more hidden taxes on goods (averaging 22 percent) or services (averaging 25 percent), and used goods are tax free. As a group, seniors do very well under the FairTax. Low-income seniors are much better off under the FairTax than under the current income tax system. Corporations are legal fictions that have not, do not, and never will bear the burden of taxation. Only people pay taxes. Corporations pass on their tax burden in the form of higher prices to consumers, lower wages to workers, and/or lower returns to investors. The idea that taxing a corporation reduces taxes on, say the working poor, is a cruel hoax. A corporate tax only makes what the working poor buy more expensive, costs them jobs, lowers their lifestyle, or delays their retirement. Under the FairTax plan, money retained in the business and reinvested to create jobs, build factories, or develop new technologies, pays no tax. This is the most honest, fair, productive tax system possible. Free market competition will do the rest.”

HR 25: To promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States. SEC. 1 (b) Purposes- The purposes of this subtitle are as follows: `(1) To raise revenue needed by the Federal Government in a manner consistent with the other purposes of this subtitle. `(2) To tax all consumption of goods and services in the United States once, without exception, but only once. `(3) To prevent double, multiple, or cascading taxation. `(4) To simplify the tax law and reduce the administration costs of, and the costs of compliance with, the tax law. `(5) To provide for the administration of the tax law in a manner that respects privacy, due process, individual rights when interacting with the government, the presumption of innocence in criminal proceedings, and the presumption of lawful behavior in civil proceedings. `(6) To increase the role of State governments in Federal tax administration because of State government expertise in sales tax administration. `(7) To enhance generally cooperation and coordination among State tax administrators; and to enhance cooperation and coordination among Federal and State tax administrators, consistent with the principle of intergovernmental tax immunity.

I.A. Comment: “The idea that taxing a corporation reduces taxes on, say the working poor, is a cruel hoax.” The FairTax is thusly revealed for what it actually is: a plan to shift all taxation onto regular Americans who work for a living, and free corporations from all taxes. Or, put another way, it is a method for making supply-side economics a permanent reality. The only "cruel hoax" is the FairTax itself, as it masquerades as a plan to assist the lowerand middle classes. Read on…

Does the new tax plan address reducing, limiting, or eliminating the national debt (now nearly $8 Trillion)?

FTFAQ: (Nothing mentioned)

HR 25: (Nothing mentioned)

I.A. Comment: The debt is an issue that proponents of the Fair Tax spend time blaming on welfare, and propose solving by cutting funding for vital programs. Some advertise that we must help Hurricane Katrina victims by cutting the budget. I.A. would hope that those to whom “morals and values” matter will see how truly cold and heartless this is, and question the proponents' motives accordingly.

Does the new tax plan allow for changes to the rate of taxation in a flexible manner, a rigid manner, or have vulnerabilities that could allow for backdoor introduction of new taxes? Could it potentially be manipulated to provide favorable benefits to some and unfair punishment to others?

FTFAQ: “Yes, of course Congress can raise the FairTax rate just as it could raise the flat tax rate or can and does raise the income tax rate. And if we in the grassroots allow them to do it, shame on us! However, the FairTax is highly visible. And because there is only one tax rate, it will be very hard for Congress to adopt the typical divide-and-conquer, hide-and-disguise, strategy employed today to ratchet up the burden gradually, by manipulating the income tax code. Ultimately, the tax rate will be dictated by the size of government. If government gets larger, higher tax rates will be required. If government shrinks relative to the economy, then the tax rate will fall. After the first year, revenue is expected to rise because of the growth generated by this plan. At that time the American people, the Congress, and the President will have to decide whether to lower the tax rate, or to spend the additional revenue. The public must remain vigilant to ensure that the economic gains caused by the FairTax benefit the people and the causes they deem worthy.”

I.A. Comment: The tone of this is extremely artificial, evasive, and worst of all, a red herring. “We in the grassroots…” should be a telling sign that whoever is responsible for this explanation is not a member of the message’s intended audience. It is simply an evasion that is so obvious, it tries to make the audience feel guilty for a hypothetical situation that would be even further beyond their control than it is now. Politicians, on the whole, have proven that morals, values, or family issues are words that sound great at election time, but have no meaning when it comes time to get down to business. What matters to politicians is who can afford to buy their loyalty. Average Americans cannot compete with the corporations in this regard, and with the Fair Tax, these corporations, free from any taxation whatsoever, will have just that much more money to influence the politicians whom average Americans hire to represent them.

The backers of the FairTax and any other plan that claims the wealthy are overtaxed prefer that Americans overlook one important fact: The wealthy only became wealthy by using society, its people, and its services. The wealthy, no matter how hard they worked, did not, and could not do it alone. The money they made is not “theirs.” The theory that “hard work” will make you rich is worse than a theory, it’s a myth and a lie. If “hard work” alone creates wealth, why were there no millionaire slaves? The only way hard work alone can make you money is if you own a printing press.

The proponents who back tax cuts for the wealthy claim that by allowing the wealthy to keep more money they will automatically start expanding their businesses and creating jobs, because they want to make even more money. Problem: if the wealthy are already sufficiently rich enough to buy their way out of paying taxes, why would they bother going through the extra work of building and hiring when all they need do is spend a little more to simply collect money from consumers directly, through an increase in the sales tax maybe? The wealthy already own Boardwalk. The Fair Tax would give them Park Place as well, and extra money to put up hotels. The average American would be nothing more than a slave. Morals and values, indeed!