BWS
The fair tax one is really good as an interim measure prior to
eliminating all taxation.
The Fair Tax Fraud
by Laurence Vance
[Posted on Wednesday, May 18, 2005]
Since my recent article [1] on the evils of the withholding tax,
I have been inundated with e-mails by supporters of the
"FairTax [2]," including a request that I endorse "The Fair Tax
Act of 2005" currently pending in the Congress. But like the
calls for "fair trade" instead of "free trade," the FairTax is a
fraud because it is based on the fallacy that government
theft (taxation) should be done in a "fair" manner instead of
eliminated altogether.
FairTax proponents are correct in their assessment of the
Internal Revenue Code:
o The current U.S. income tax code is widely
regarded by just about everyone as unfair,
complex, wasteful, confusing, and costly.
Businesses and other organizations spend
more than six billion hours each year complying
with the federal tax code. Estimated compliance
costs conservatively top $225 billion
annually -- costs that are ultimately embedded in
retail prices paid by consumers.
o The Internal Revenue Code cannot simply be "fixed,"
which is amply demonstrated by more than 35 years
of attempted tax code reform, each round resulting
in yet more complexity and unrelenting,
page-after-page, mind-numbing verbiage (now
exceeding 54,000 pages containing more than 2.8
million words).
But could the cure they offer be worse than the disease?
The FairTax is a consumption tax in the form of a national retail
sales tax on new goods and services. It is designed to replace
"federal income taxes including, personal, estate, gift, capital
gains, alternative minimum, Social Security, Medicare,
self-employment, and corporate taxes." The FairTax would also
abolish the IRS and repeal the 16th Amendment.
The elimination of the 16th Amendment, the IRS, and all those
taxes sounds like a great idea that all free market economists
and advocates of liberty could agree with. So if the FairTax is
such a great thing, why would anyone in their right mind oppose
it?
That is exactly what I have been hearing:
o "What could you possibly have against the FairTax?"
o "The FairTax is the only way to go."
o "I find it weird that you would oppose the concept of
the Fair Tax."
o "The choice boils down to the Fair Tax (H.R. 25) or the current
'system.'"
Even Ludwig von Mises, I was told, "would approve the Fair
Tax idea, as do dozens & dozens of rational economists."
Various consumption tax proposals were recently critiqued
on this site in an article by Murray Rothbard [3]. So rather
than just repeat them and apply them to the current FairTax
scheme, I will focus instead on problems with the FairTax
proposal itself.
The Fair Tax Act of 2005 is H.R. 25 [4] in the House
(introduced on January 4) and the identical S. 25 [5] in
the Senate (introduced on January 24). FairTax proponents
who complain about the complexity of the Internal Revenue
Code are going to have a hard time convincing those of us
who have actually read this bill (it came to 59 pages when
I printed it out from my computer) that it will simplify
the tax code when it contains language exactly like that
which appears in the tax code:
(b) Rebate Defined- For purposes of subsection (a)
(2), the term 'rebate' means so much of an abatement,
credit, refund, or other payment, as was made on
the ground that the tax imposed by chapter 41, 42,
43, or 44 was less than the excess of the amount
specified in subsection (a)(1) over the rebates
previously made.'.
Strangely absent from the list of co-sponsors [6] of H.R. 25
is Congressman Ron Paul [7] (R-TX). Representative Paul has
consistently been named the "taxpayers' friend." If the Fair
Tax proposal was as friendly to taxpayers as its proponents
say it is, I would expect Congressman Paul's name to be first
on the list of co-sponsors.
FairTax advocates claim that their plan would repeal of the 16th
Amendment. However, all H.R. 25 does is repeal Subtitle A of
the Internal Revenue Code of 1986 that relates to income taxes
and self-employment taxes and Subtitle C that relates to payroll
taxes and the withholding of income taxes. The only mention
of the 16th Amendment in H.R. 25 is when it says: "Congress
further finds that the 16th amendment to the United States
Constitution should be repealed."
To repeal the 16th Amendment would require a constitutional
amendment. Can Congress be relied on to pass a constitutional
amendment that repeals the 16th amendment after a national
sales tax has already been enacted? And even if Congress
passed a constitutional amendment, it would still have to
be approved by three-fourths of the states. Without the
repeal of the 16th Amendment, what is to prevent an income
tax from being imposed again after a national sales tax has
been enacted?
Although the FairTax would eliminate the filing of all
individual tax returns, the FairTax turns every business
into a tax collector. Every small service business and
every Internet business that does not currently collect
state sales taxes will have to collect taxes for the
federal government. Every doctor will now have to charge
sales tax on his services. Where will this end? Will the
neighborhood boy who mows lawns have to begin collecting
federal sales tax on each lawn mowed? Will the neighborhood
girl who baby sits have to do likewise?
The national retail sales tax rate under the FairTax plan
is 23 percent. That is on top of state sales taxes that
are currently collected by forty-five states. That is on
top of the sales tax that many cities and counties also
collect. That is on top of the special taxes that exist
on hotel rooms in most areas of the country. I suppose
that a national retail sales tax would also apply to
gasoline. There is no mention of the federal gas tax
anywhere in the Fair Tax Act of 2005. No list of taxes
that are supposed to be eliminated under the FairTax
includes the federal gas tax. Does this mean that there
will be an additional 23 percent tax on each gallon of
gasoline?
The FairTax will make it easier for Congress to raise
taxes. The initial rate of 23 percent is supposed to
begin in 2007. For years after 2007, "the rate of
tax is the combined Federal tax rate percentage."
This combined percentage is the total of three
things: the general revenue rate (stated to be
14.91 percent); the old-age, survivors and disability
insurance rate; and the hospital insurance rate. This
is all but saying that the rate will be adjusted every
year. And it will be very easy for Congress to do so.
To raise several billion dollars of additional
revenue, all that will be necessary is for Congress
to raise the tax rate by one percentage point by
small adjustments in one or more of the three items
that make up the combined percentage rate. It will
be sold to the American people as "a penny for
progress," or some other deceitful scheme.
Under the FairTax system, there are no longer any
Social Security and Medicare taxes. However, this
does not mean that Social Security and Medicare
will be eliminated. The inclusion in the combined
percentage of the old-age, survivors and disability
insurance and the hospital insurance rates means
that the Ponzi scheme known as Social Security will
continue as is -- only the way it is funded will change.
The "underground economy" that income tax advocates
complain about will certainly increase under the
FairTax system. Even if the highly dubious claim that
there will be an "average producer price reduction
of 22 percent for goods and services in just the
first year after the adoption of the FairTax" is
true, not having to pay a 23 percent tax on an item
is a tremendous incentive to make a purchase in the
"underground economy."
The claim that the IRS will be eliminated under the
FairTax is bogus. Although the national sales tax
will be collected by the states from retailers, it
is still a national sales tax, and as such, its
collection will have to be overseen by some agency
of the federal government. Just because the
bureaucracy will no longer be called the IRS doesn't
mean that it will be eliminated. According to The Fair
Tax Act of 2005:
There shall be in the Department of the Treasury
a Sales Tax Bureau to administer the national
sales tax in those States where it is required
pursuant to section 404, and to discharge other
Federal duties and powers relating to the
national sales tax (including those required
by sections 402, 403, and 405). The Office of
Revenue Allocation shall be within the Sales
Tax Bureau.
Title II, chapter six, section 603 of The Fair Tax Act
sets up the Problem Resolution Office and authorizes
"problem resolution officers." There will still be
tax courts according to title II, chapter six,
section 602 and chapter nine, section 7451. Changing
the phrase "Internal Revenue Service" to "Department
of the Treasury" and "Commissioner of Internal Revenue"
to "Secretary" doesn't eliminate the federal bureaucracy.
With the FairTax, the federal government will also be
a tax collector in a new way: at the post office.
There is no exemption of postal goods and services
mentioned anywhere in the Fair Tax Act of 2005. I
suppose this means that stamps, P.O. Box rental
services, and package mailing services will be subject
to the new 23 percent tax.
The FairTax is progressive. What could possibly be
fair about a progressive tax where some people have
to pay a higher percentage than others merely because
they are deemed to be "rich"? How is the FairTax
progressive? I thought it was a flat 23 percent on
all new goods and services? It is and it isn't. Under
the FairTax plan, everyone pays the 23 percent tax on
everything, but "every household receives a rebate
that is equal to the FairTax paid on essential goods
and services." The rebate is given out each month,
and is based on family size and the poverty level.
But like the current tax code, the FairTax can also
function as a tool for income redistribution because
"the poor [will] actually pay less than zero-percent
retail sales tax on their spending. Much like with
the earned income tax credit of today, the rebate
may give them more money than they actually spend
on retail taxes."
The real problem with the FairTax is threefold. In
"An Open Letter to the President, the Congress, and
the American People Concerning Reform of the Federal
Tax Code [8]," which is posted on the FairTax website
along with the endorsement of seventy-five
"professional and university economists," we can see
the trouble with the FairTax immediately:
We are not calling for elimination of federal
taxation, which would be irresponsible and
undesirable. Nor does our endorsement call
for reduced federal spending. The tax reform
plan we endorse is revenue neutral, collecting
as much federal tax revenue as the current
income tax code, including payroll withholding
taxes.
There is only one word to describe the fact that the
federal government now spends almost $3 trillion a year:
obscene. At least 90 percent of what the federal
government spends is unconstitutional, wasteful, or
against the limited-government principles of the
Founders. The only thing the FairTax does is change
the way the state confiscates the wealth of its
citizens. As Congressman Ron Paul says: "The real
issue is total spending by government, not tax reform."
Because the FairTax is a consumption tax, Murray
Rothbard's conclusion about consumption taxes is
apropos:
The consumption tax, on the other hand, can
only be regarded as a payment for
permission-to-live. It implies that a man
will not be allowed to advance or even
sustain his own life, unless he pays, off
the top, a fee to the State for permission
to do so. The consumption tax does not strike
me, in its philosophical implications, as one
whit more noble, or less presumptuous, than
the income tax.
The FairTax does nothing to tame the federal leviathan.
The solution is nothing less than a drastic reduction
or wholesale elimination of its revenue source. What
is fair about allowing the government to confiscate
23 percent of the value of every new good and
service? FairTax proponents may call it necessary
legislation, but I call it highway robbery.
Laurence M. Vance is a freelance writer and an adjunct
instructor in accounting and economics at Pensacola
Junior College in Pensacola, FL.
[1] http://www.mises.org/story/1797
[2] http://www.fairtax.org/
[3] http://www.mises.org/story/1768
[4] http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.00025:
[5] http://thomas.loc.gov/cgi-bin/bdquerytr/z?d109:SN00025:
[6] http://thomas.loc.gov/cgi-bin/bdquery/z?d109:HR00025:@@@P
[7] http://www.house.gov/paul
[8] http://www.fairtax.org/pdfs/Open_Letter_President.pdf
http://www.mises.org/story/1814
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