The Third Rail

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The FairTax: Attacks and Facts

Much has been written about the FairTax. Some of it has even been true. The following table is an attempt to examine many of the attacks on the FairTax and provide facts to refute the negative claims.

Attack Fact
“You’re talking about putting a large number of people into unemployment from not being needed. Even if the IRS isn’t counted, there’s a huge industry around filing taxes today. Putting that many people out of a job instantly would be felt.”
Source: devil’s advocate on the flat(-ish) national sales tax
All changes in the economy and marketplace cause some people to (temporarily) lose. This is not a long-term problem in a strong economy such as we have today. If nothing else, the IRS employees can start guarding the border. But seriously, the buggy whip, 8-track tape, punched card machine, … manufacturers and related employees adapted fine. To be against the FairTax for this reason is to say that we have to get rid of the free market system.
Reference: “The Fair Tax would create jobs and make America a welcoming place to do business.” (Marietta Daily Journal)
“Whether they’d admit to it or not, most people get huge refunds (because they don’t get the ‘interest-free loan’ idea) around April 15th and consider it some kind of gift from the govt. Trying to explain that those $3k is actually their money just doesn’t stick. There are always signficant spikes in the sales of ‘big ticket’/’luxury items’ (big screen tv’s, for instance) around April/May due to this refund effect – another net economic negative to consider.”
Source: devil’s advocate on the flat(-ish) national sales tax
Wow. This one is really a stretch. So…since people don’t realize that all their money paid in is, well, their money, we are supposed to view letting them keep their entire paycheck free of federal withholding as a bad thing?! They may miss a refund of a portion of their money each year, but they will notice the big increase in take-home pay every paycheck! What about the market benefit from that on an ongoing basis?!
Reference:
The FairTax will have a dramatic positive impact on the standard of living of the American people and lead to higher rates of economic growth.” (Leo Linbeck)
Reference: “…in 1993 the Cato Institute commissioned a study by economist Lawrence Kotlikoff of Boston University to examine the economic impact of replacing federal income taxes with a national sales tax… the Kotlikoff study finds that after ten years, a national sales tax would:

  1. More than double the national savings rate.
  2. Increase the capital stock by 8 percent above the level attained under the current tax system.
  3. Raise income and output by 6 percent more than would be achieved under the current tax system. That would increase national output by almost $400 billion per year.
  4. Lift the real wage rate by 3 percent.
  5. Reduce interest rates by 50 to 100 basis points.” (The Cato Institute Congressional Testimony)
“The FairTax is intended to be revenue neutral; that is, the federal leviathan and all of its programs will receive exactly the same amount of funding as under the current tax system. Federal spending will remain at the same obscene level that it is now.”
Source: The Fraudulent Tax
I agree that the US Government budget is out of control. I would love to reduce it significantly. However, passing the FairTax is hard enough. One of the rules I live by is “pick your battles”. When we get the FairTax passed and the amount of taxation we are enduring is much more transparent, then we can start dismantling bloated, useless bureaucracies (starting with the Department of Education). However, those that oppose the FairTax because it doesn’t greatly reduce government intrusion in our lives are dismissing an opportunity for great improvement in our current situation because it doesn’t go far enough. All I can say is “one step at a time” – lets take this important step and then I will join you to take more steps.
“Boortz’s rate of 23 percent (which is actually 30 percent)…”
Source: The Fraudulent TaxAlthough Boortz explains that he is using an exclusive rate rather than an inclusive rate to figure the percentage, his “mathematical equivalent of a game of semantics” still results in a FairTax rate of 30 percent.
Source: There is no such thing as a fair taxMany other places…
This one has been around a long time, but people still hang onto statistical manipulations to try to make their point (and confuse people). Those that argue that the figure is 30% are really being disingenuous. The way our tax is reported goes something like this: if your taxable income is $100,000 and your tax rate is 25%, you owe $25,000 in taxes, leaving you with $75,000. That’s how the FairTax is calculated as being approximately 23% – the same way our taxes work and are understood by everyone. The opponents that claim it is over 30% use the $75,000 after tax number to figure out the tax. To be fair, this is how sales taxes work…but the FairTax proposal is an income tax. That’s why the FairTax defines it as a 23% tax – so that we don’t mix apples and oranges (sales tax and income tax).
Reference: Compare: Income Tax vs Sales Tax
Reference: The FairTax Book, pp. 151-3
Reference: FairTax not what it appears
The FairTax is progressive. Boortz correctly identifies a progressive income tax with Karl Marx. Yet, because of the prebate, the FairTax sets up a progressive tax system like we have now. Millions of Americans will pay no taxes at all.
Source: There is no such thing as a fair tax
Well, this is correct. But it is not appropriate to expect someone living below the poverty level ($14,386 for a family of four) to pay tax on basic needs, such as food, electricity, and shelter. Sorry, but it just seems mean-spirited to want the poorest among us to pay the same as everyone else…and is not necessary to keep the FairTax to the 23% rate.
The FairTax does not abolish the IRS. Changing the name and some of the functions of the IRS does not mean that it will go away. The FairTax simply exchanges one federal agency for another. If there were no IRS or other enforcement bureau to enforce the collection of a national sales tax, then why would anyone bother paying or collecting the tax?
Source:
The Fraudulent Tax
There is a big difference between collecting taxes from a few tens of thousands of businesses and hundreds of millions of individuals. How many IBMs or Targets or even a local restaurant are likely to try to stiff the government out of the sales tax owed? So, yes, the objection is correct – there will have to be a group to audit and enforce a sales tax…uh, just as there is today! And at way lower levels than required for the income tax. The IRS as we know it will go away with the FairTax.
Reference:
Enforcement Mechanisms of the FairTax
…in order for pre-tax prices to fall so sharply, companies would also have to cut wages they pay.
Source: Money Magazine uncovers flaw in FairTax Book
“In an open letter to the President, the Congress, and the American people, seventy-five economists, including Nobel Laureate Vernon L. Smith, stated that the FairTax would boost the United States economy…Laurence Kotlikoff of Boston University finds that the shift to the FairTax would raise marginal labor productivity and real wages over the course of the century by 18.9% and long-run output by 10.6%.”
Reference: Predicted effects of the FairTax
This doesn’t help me with my NC income taxes. States aren’t going to roll over and adopt this just because the fed said so, so I’m still stuck with the current system in one way (filing taxes once a year).
Source:
devil’s advocate on the flat(-ish) national sales tax
State tax returns are usually based on federal tax returns. I would wager that when the federal government goes to a consumption tax, the states will follow. They will not want to tackle the complexities of 50,000+ pages of tax laws themselves. They will surely follow the lead of states such as Michigan: “To achieve the maximum economic benefit of enacting a MI FairTax it is imperative that Michigan be the first
state to adopt such a business friendly tax. Time is of the essence, as some other states are already
looking at adopting a state FairTax. In order to compete with Michigan, other states will soon follow our
lead. A MI FairTax will cause us to be the most attractive state in the Union in which to do business.” (Michigan State FairTax Estimates)
What’s the economic motivation? Similar to #6, once the tax burden is solely on consumption, you’re motivating people to a) stop consuming more than they need to (chilling effect on economy and cash flow) and b) when they do consume, do so outside of the normal sales method which incurs this high sales tax.
Source:
devil’s advocate on the flat(-ish) national sales tax
This complaint is ironic to me – we know that Americans have a very low savings rate; so low that most are nowhere near ready for retirement and many have recently had foreclosures on houses they can’t afford. So, what is the problem with “stop consuming more than they need to”?I am also skeptical that many people will go the “black market” route. Do you know anyone who would risk jail to buy a TV without paying sales tax? I don’t. This one seems ludicrous.
The FairTax makes it easier for the federal government to raise taxes.
Source:
There is no such thing as a fair tax
Actually, just the opposite is true. Currently, many taxes are “hidden” in our daily lives. Do you know how much tax has been paid to produce some product you are considering buying in WalMart? Nope. Do you even know how much tax you are paying when you pump a gallon of gas? Probably not. When the FairTax becomes law, you will see exactly (on your receipt) what you are paying. And no politician will be able to raise taxes without everyone being aware of it. Do you think that motivates politicians to raise taxes? I think not.
Reference:
Lifting the Lid on Hidden Taxes
The FairTax makes certain exceptions while supposedly having none. After saying that there are “no exclusions or exemptions” under the FairTax, Boortz specifically mentions exemptions for Internet access services and tuition.
Source:
There is no such thing as a fair tax
Sorry, but this is at best a misunderstanding and at worst a bald-faced lie. On page 170 of The FairTax Book, it clearly states:
“While we agree with Congress’ law forbidding government from taxing access to the Internet, we believe that the only fair way to handle sales conducted over the Internet is to tax them in just the same way as any other sale of goods or services.”

The FairTax does not repeal the Sixteenth Amendment. When FairTax advocates discuss their plan, they talk as though the FairTax would result in the repeal of the Sixteenth Amendment that gave us the income tax. To his credit, Boortz doesn’t make that mistake, but when many people read about “saying goodbye to the income tax,” that is what they think. The FairTax bill now pending in Congress ( H.R. 25 in the House and the identical S. 25 in the Senate), repeals 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 Sixteenth Amendment in H.R. 25 is when it reports: “Congress further finds that the 16th amendment to the United States Constitution should be repealed.”

Source: There is no such thing as a fair tax

This is clearly answered on Congressman Linder’s site:The FairTax, H.R. 25, cannot include legislative text to repeal the Sixteenth Amendment. To become law, the FairTax simply needs a simple majority approval by both the House and Senate and the signature of the President. A repeal of the Sixteenth Amendment requires a House Joint Resolution (H.J. Res) and the approval by two-thirds of the U.S. House, two-thirds of the U.S. Senate, and three quarters of the 50 states–the standard that all constitutional amendments must meet for passage. Therefore, we must move legislation that repeals the Sixteenth Amendment separately from H.R. 25.If the FairTax is enacted, I expect that the Congress and states would promptly begin consideration of legislation to repeal the Sixteenth Amendment. To make certain that occurs, however, I am in favor of adding language to H.R. 25 during the 111th Congress that includes a sunset provision, meaning that either we succeed in repealing the Sixteenth Amendment within 5 years after the implementation of the FairTax or the FairTax goes away. In my view, we simply cannot risk having both a national income tax and a national sales tax in place at the same time.
Reference:
FairTax FAQs
The FairTax does not eliminate all federal taxes. Although it is implied throughout the book that the FairTax will be a replacement for the various federal taxes, there are some federal taxes that will still be with us under the FairTax… Two examples of federal taxes that will still be with us under the FairTax are the excise tax on gasoline and the various taxes that one pays when purchasing an airline ticket.
Source:
There is no such thing as a fair tax
OK, so let me get this straight… Are you saying that “the FairTax solves a lot of problems, but because it doesn’t solve them all it is not worth doing”? Well, I’m sorry but I’d rather solve what we can and deal with remaining problems later. We will get nowhere if we take an “all of nothing” approach!
Countries that have tried to enforce retail sales taxes at rates above 10 percent have uniformly given up because of evasion.
Source: William Gale’s Argument Against the FairTax
Hmmm…a quick search found up to 25% – much higher than 10%.“…most of the European Union, Mexico and other countries which charge on average a 15-25% VAT rate.”
Reference:
Sales tax
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.
Source: The FairTax Fraud
“Under the FairTax, small businesses enjoy a zero tax rate. And zero compliance cost.
Corporations, subchapter S corporations, partnerships, limited liability companies, and sole proprietorships pay no tax on their income. Both the employee and employer share of payroll taxes, the self-employment tax rate, and the estate and gift tax are abolished.”

Reference:
The Impact of the FairTax on Small Business
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.
Source:
The FairTax Fraud
The FairTax is revenue neutral, which means that Social Security and Medicare are fully funded just the same as with the income tax. The difference is that the tax base is broader due to the fact that tourists, illegals, criminals, and virtually anyone that buys anything in America contributes. So, these programs are arguably better off with the FairTax.I agree that the funding of Social Security is broken and is heading for a fiscal fiasco. This, however, has nothing to do with the FairTax.
What’s stopping retailers from collecting 23 percent more obscene profit and simply adding the tax to the current price?”
Source: Received via email from Paul Bergener
The short answer is: competition. If one company tries to keep inflated prices to achieve more profit, a competitor will undercut the higher price. Read more at How the FairTax Affects Retailers.
Good idea, but it’ll never happen.  The politicians are too entrenched in the current system.
Source:
Received via email from Paul Bergener
That’s why the grassroots program is so important. The politicians don’t want it – they like spending our money. The special interests don’t want it – they like playing games with 65,000+ pages of tax laws. The only way it will happen is if we want it badly enough to make it happen. The best place to start is the Grassroots FairTax page.
But the filthy rich can’t possibly spend ALL their money on retail items.  They won’t be taxed much at all.
Source:
Received via email from Paul Bergener
You are correct that as a percentage of net worth, the more money someone has, the less tax paid. Of course, this is offset by the fact that a richer person will undoubtedly spend more also, and thus pay more taxes.  I for one don’t mind.  I hope to be rich someday too! 😀

I and the other FairTax proponents welcome healthy debate. But there are a lot of people who seem to have agendas (think accountants, lawyers, politicians) that lead them to fight against the FairTax. It is interesting to me that as I went through this exercise, I saw the same arguments over and over. I purposely left some of them out, such as some of the more extreme Libertarian harangues against the government. I get it that Libertarian “purists” are against the FairTax because it doesn’t wipe out all government interference in their lives.

I have been reading and researching the FairTax pros and cons for literally years and I have yet to come across an argument that holds up under scrutiny. If you have an argument against the FairTax, please tell me what it is…and back it up with facts. No room for “global warming” type scare tactics. I also welcome other attack/fact pairs.

Further reading:

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April 11, 2007 - Posted by | Policy, Politics, Tax

4 Comments »

  1. Exceptional page Mark, thanks for putting it together!

    Comment by Aaron | April 15, 2007

  2. Mark, here is a list, in no particular order, of my criticisms of HR25 and the Fairtax, only two of which (my #1 and 2)you addressed. Good luck!

    (1) Describing the sales tax rate as “a 23% sales tax” is false and misleading. According to the Kotlikoff/BHI study report, the sales tax rate in terms all Americans understand is currently estimated to be 31%, or, if preferred, 23.8% of every dollar spent.
    MEL> Addressed above.

    (2) Pretax prices may fall by an estimated 12% after removal of the employer share of the embedded costs of the income tax system. After tax prices will initially rise by an average of 15% for all services. (1.00 x .88 x 1.31 = 1.15) Prices will stabilize at 15% higher for all new goods at such time as the existing inventory works through the pipeline.
    MEL> Addressed above.

    (3) Effective tax rates for many retirees will be higher under the Fairtax than under current law.
    MEL> This has been answered before, so I’ll quote Candidates Stop Lying about the FairTax:
    “The latest detailed studies have show that the FairTax will lower effective rates (Kotlikoff – “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation”). He shows that average remaining lifetime tax rates decline for all 42 household types (married vs single, young, middle-aged, seniors, and 7 income categories). See Table 5 on page 27 for the chart that compares the average remaining lifetime tax rates under the current system with the FairTax.”
    Here is the referenced document: Comparing Average and Marginal Tax Rates. Table 2 on p. 24 shows that all seniors are better off under the FairTax.

    (4) Federal government taxation of state/local governments may be unconstitutional under the doctrine of intergovernmental tax immunity.
    MEL> Well, I’m not a tax law lawyer — I don’t see how this is any different than how laws have been worked out between the federal government and states.

    (5) State and local bond issues, which are currently tax advantaged, will have to offer higher than normal interest rates in order to attract investors.
    MEL> I agree and that is a good thing! That’s part of the point of the FairTax – stop using taxes as a criterion in the marketplace. We are better off without taxes as a factor. Now, you can buy and sell stocks, bonds, houses, … without thinking about “short term” versus “long term” tax rates.

    (6) The implicit taxation provisions in Section 801 of HR25 may add to consumer debt costs and reduce investment returns.
    MEL> I don’t think anyone understands all the effects of the changes due to the FairTax. You may be right or you may be wrong. What I do know is that the FairTax will have many positive effects, including no returns to file, being able to choose when you pay taxes through consumption, a wider support base through additions of tourist and illegals and criminals, and more visible taxes.

    (7) State/local government costs will increase by an estimated $300 billion annually, which will result in either increased taxes or reduced services.
    MEL> Where does this number come from?

    (8) Government enterprises are not taxed under HR25 and will continue to compete with the private sector.
    MEL> Can you be more specific? What exactly are you objecting to?

    (9) Placing a tax on permits at the local level could adversely impact the construction industry.
    MEL> OK. And maybe it won’t. And maybe many other things will affect the construction industry a whole lot more.

    (10) Roth type savings will be essentially double taxed.
    MEL> Please explain.

    (11) In year one of the Fairtax implementation, the federal annual budget deficit will exceed $700 billion.
    MEL> The FairTax is revenue neutral, so this is not true. If the federal reserve chairman can’t predict the budget deficit reliably, I wonder where you’re getting your “number”.

    (12) At an estimated $600 billion, the annual “prebate” will become the largest single entitlement program in history.
    MEL> I don’t know what your point is. The American people do not want to tax people that have so little that they can’t eat and have a roof over their head. Also, given that Social Security amounts are measured in trillions, I don’t think the prebate is in the same league. You seem to imply that the prebate is like welfare or something – you know it is not even close.

    (13) Adding the prebate to the federal budget will result in entitlements becoming the largest share of the federal budget and will put increased pressure on discretionary spending.
    MEL> Do you think that politicians spend our money wisely? I’m fine with them having less money to spend on bridges to nowhere.

    (14) Inducements for social policy change through use of the income tax code will be lost forever.
    MEL> I’m totally fine with that. I don’t want politicians deciding where my earnings go. Things the government try to “manage” typically get messed up big-time. How about if we vote on policy changes!

    (15) The time honored separation of church and state will be placed at risk by removing the income tax restrictions on churches.
    MEL> I disagree – I think you are confused. I’ll refer you to FairTax Treatment of Churches and NonProfit Organizations:
    “There is no definition of church in the FairTax legislation. Churches or houses of worship come under the definition of not-for-profit organizations. In order to receive advantageous tax treatment, a church must be a “qualified not-forprofit organization” – an organization that is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes”. This goes on to explain further, so read more there if you like.

    (16) Governments cannot tax themselves into prosperity. Under HR25, the estimated $200 billion in annual taxes owed by the federal government to the federal government is nothing but a bookkeeping entry, which has the effect of lowering the revenue neutral sales tax rate by several percentage points.
    MEL> Again, you bring up technicalities – what is it you are trying to say? I assume you are saying that the tax rate under a consumption tax will be higher than predicted. You may be right or you may be wrong. You don’t know and neither do I. What I do know (again) is that there will be many advantages to the FairTax.

    (17) Tax transparency claimed by Fairtax advocates is a myth. The only way to determine an individual’s annual tax burden with the same degree of accuracy as under current law would be to collect and add up every expenditure bill and receipt during the course of the year, an unlikely process for all but the most anal!
    MEL> I’ll put this as clearly as I can. Today, you and I pay taxes all over the place during our daily lives. B2B trading incurs taxes. Pumping gas incurs taxes. Buying a car incurs taxes from the parts, perhaps import taxes, … And the list goes on. We have no idea what taxes we’re paying. When you get right down to it, we don’t really know why we’re paying the amount we pay in income taxes. Who can understand 65,000+ pages of tax laws?!
    One thing that you and I are very aware of is how much tax we pay when we buy a TV at the local store. It is right there on the receipt! It doesn’t get much clearer than that. This is the rate that matters, not some total of all purchases across all time by all people. If politicians try to raise taxes, you and I will see it every time we buy something!

    (18) Claims of “controlling taxes by controlling spending” are misleading. Half of the average person’s budget is for services and there are no “used” services. For the majority of citizens, the purchase of used goods is limited to automobiles, houses, boats and similar infrequent purchases. Adopting a reduced lifestyle in order to avoid paying taxes is an unlikely outcome.
    MEL> Again, I don’t know what your point is. There is no “used” income under the current system. There are significant ongoing purchases that can be “used” – houses and cars are two that are typically the biggest purchases people make. But, yes, you are right – many things are not “used” (groceries, power, …). Of course, beyond the basic necessities, people do control whether to buy more or to save. This is control and is what is meant by your phrase that is taken out of context. So, I guess you’d be happier with “people have some control of their taxes by their spending choices”.

    (19) Purchasing used goods will avoid federal taxes, but the prices paid for all used goods will include a portion of the original sales tax. This could be thought of as the “embedded Fairtax”.
    MEL> OK. Is there a point here? Your items seem to be getting flimsier and more meaningless. This one should be dropped the next time you post your list somewhere else.

    (20) While purporting to (1) eliminate all income taxes, and (2) encourage foreign businesses to relocate to the United States, under the provisions of HR25, foreign corporations with income from US sources must pay a 23% income tax.
    MEL> I assume you mean a sales tax.

    (21) Adding the 31% national sales tax to the normal customs duty charges for all foreign imports could clear the retail shelves of inexpensive foreign made products and increase consumer prices.
    MEL> You’re assuming no competitive pricing pressures. And I think it is a bit melodramatic to say that shelves would clear. The US is the number one consumer country – no one will leave and you know it. And just as a note, you have switched to the sales tax figure, which is comparable for income tax discussions to the oft-quoted 23%…just for those that may be confused. See my “apples and oranges” attack/fact entry above.

    (22) In order to raise the revenue needed by state and local governments to pay the national sales tax, cascading taxation may become a reality. This is in direct conflict with one of the stated goals of HR25.
    MEL> You include a lot of “maybe”s in your items. I have no idea if this will occur and neither do you.

    (23) When including the prebate, tens of millions of family units will pay no net federal tax under HR25, but will still qualify for all Social Security pension and medical care benefits when eligible.
    MEL> OK. What is your point? No one will have paid sales taxes up to the poverty level – not you, not me, not anyone. Yet we all get Social Security payments (assuming it’s not bankrupt). And of course, the amount will be based on your income during your working years. This is another item you should drop as a non-issue. What? You don’t like that it’s regressive – i.e. gives a break to the poor?

    (24) Retirees, who paid into the Social Security trust funds for forty to fifty years, and no longer contribute under current law, will resume paying for pension and health care benefits through their sales taxes, depending on their gross income.
    MEL> I agree that not everyone will get the same benefit from the FairTax. I am in my 50s and have saved for retirement. I will not benefit as much as my daughter who just started working after college. That is OK with me. Why? Because I will still benefit in many ways (no taxes to file for one), and my daughter, friends, family, and everyone else will benefit. And, as you know, less and less people have pensions anyway and 401(k) plans are pre-tax.

    MEL> Thanks so much for your input! It is truly valued. I hope we can all come up with the best solutions to our problems, together.
    I have seen that you have posted this list over and over, even though you have received answers by others in the past. Please remove those that have been answered and/or provide the back and forth debates rather than just posting the original list again.

    Comment by Hank Van Gieson | April 15, 2007

  3. This is a great service you are providing. It is great to have a site that debunks the usual arguments to help those who are new to FT get past the basics. Keep up the good work.

    Comment by Allen M. Smith | April 15, 2007

  4. Mark, I’ll be offline for a few days while moving from Florida to our NC summer place. When I get back up, I’d like to respond to many of your comments, perhaps a few at a time to make reading and understanding easier. I’ll always give you the last word–promise! Your site could indeed be a great service for all readers.

    Hank

    Comment by Hank Van Gieson | April 16, 2007


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