Atlanta Out Loud

Politics and rantings and just stuff that catches my attention.

Wednesday, August 10, 2005

|| 12:37:12 AM
Opponents Refuse to be Fair About the FairTax

They make it so easy to rebuff their arguments. Either they can't understand simple logic, elementary math, or they just refuse to believe something that seems too good to be true. Or they're just liars.

Opponents of the FairTax for the most part all argue the same points. has done as good a job as any of the critics of the FairTax in arguing against it in this post. Just for fun, let's untangle his arguments:
"I highly recommend this Michael Kinsley article on the Fair Tax. A few things: He's right when he says it is impossible for everyone to pay lower taxes. Not unless we massively cut government spending, which this Republican Congress and President has shown isn't happening any time soon."
Michael Kinsley was writing about the FLAT Tax, not the FAIR Tax -- two completely different animals. To find out how they are different, go here. The FairTax plan never claims that everyone will pay less. Most people will pay less, some will pay more, and everyone will know exactly what they are paying in taxes unlike under today's tax scheme.

One of the arguments I hear quite frequently from fair tax proponents (including maybe President Bush) is that the rich don't pay their taxes anyway. That's a good populist critique of the current system, and in many cases it's true -- the rich don't pay their fair share in taxes. The trick (so far) of the fair taxers is that under their fair tax, the rich on average will pay much less in taxes than they do now. A few bad apples pay almost nothing in income taxes due to creative accounting, but the majority of the rich pay about 30% of their income in taxes. Some guy that makes $10 million a year doesn't spend it all, he sticks most of it in savings to pass on to his heirs. Maybe he spends $4 million in a big year -- he'd pay 30% on that $4 million instead of 30% on the whole $10 million. The point is, he'd be paying about $1.2 million in taxes in a year when he spends a lot of his income. Even with tax aversion, the average wealthy American is paying substantially more than 12% of their income in taxes now. Way to make the rich pay their taxes!
Those evil rich. Just what is "their fare share." I've never heard the claim that the rich "really don't pay taxes." In fact, the top tier of wage earners pay the vast majority of taxes. It is true the corporations really don't pay taxes, and instead pass their tax liability on to customers, employees, or shareholders. As for the $10 million example: (1) the $6 million in savings would only go untaxed forever if it stayed in savings forever. Highly unlikely. (2) He doesn't owe tax "on the whole $10 million" BECAUSE the FairTax taxes consumption, not income. We'll skip the fuzzy math for now, 'cause we'll do some cipherin' of it in a minit!

In DeKalb County, when I buy something that costs $1, I pay 7 cents in tax. I call that 7%. The "Fair" taxers call that 6.5%. That's because they're using dishonest math. Here's a more extreme and relevant example.
The math here would be accurate, if we were talking about a traditional sales tax. But the FairTax is designed to replace the income tax not the county or state sales taxes. So, in order to compare apples to apples, we have to calculate the taxes the same. If you earn $10 and you take home $8, you've paid $2 in taxes. Most people would call that 20%. Since Chris wants to calculate it on the "pretax" amount, I suppose he would call it 25%. This is the eseence of an inclusive vs. an exclusive tax.

They say the Fair Tax would be 23%. That means, when your total is $1.30, the merchant would pass on 23% of that cost as tax. 23% of $1.30 is 30 cents. But that's really like buying something that costs $1 today and paying a 30% tax and getting to $1.30. It would not suprise me if they are using similarly dishonest math to calculate the current tax burden of Americans in their book.
See answer above. We have to compare apples to apples. The income tax which the FairTax will replace is an inclusive tax. Therefore, the rate for the FairTax is inclusive. An item you pay $100 for today (before you tack on additional sales tax) will still cost you $100 the day after the Fair Tax is implemented. It's 23% because the retailer will keep $77 and Uncle Sam gets $23. $23 out of $100 is 23%. Same with todays income tax. If you are in a 23% tax bracket, and you earn $100 you take home $77.

Now let me address another of the arguments of the fair tax -- that it would encourage saving. The savings rate in the United States is anemic. It's lower really than it's ever been, especially during a time of such relative prosperity. And yet, nobody saves. Well, the fair taxers envision a world where a tax on spending means that people would wisely not spend so much. But there's no proof this would happen. What's worse is that people who spend more than they earn would literally be taxed to death. If you think credit card borrowing is bad now, imagine tacking 30% onto every purchase. Someone that makes $20,000 and spends all of their money (on rent and living expenses) and goes into debt by an extra $10,000 that year would effectively pay a 35% income tax rate -- higher than even the rich pay now.
Responsible people will continue to save, irresponsible people will not. What will change, is the middle group of people who are responsible, but just can't do it under today's financial burdens. Those people will begin to save and that's a good thing. We've already pointed out the errors in the assumed 30% rate. But, let's stick with the example: a person who makes $20,000 but has $30,000 spending habits. Under today's system, that $20,000 wage earner takes home $16,225 if they are lucky enough to live in a state with no income tax. Therefore, he/she needs to run up credit card debt of $13,775. Under the FairTax, the wage earner gets a $3,775 raise, and therefore needs to incur debt of only $10,000. Of course the real answer here is to live within your means. If this example were of real concern, the National Retail Federation would not be so adamantly opposed to the FairTax. Their stated reason for opposition is because it would encourage savings.

Then Chris spins right back into typical Democratic problem-solving mode. The solution to every problem is to give TAX CREDITS or to FORCE people into a certain behavior. Some people may very well be beyond help and those people don't deserve the FairTax.

He encourages us to study the history of withholding presumably to expose all the cheating that goes on under such a system. Neal Boortz and John Linder do a great job of explaining the origin of withholding. The bottom line is that it was implemented so that taxpayers would never know exactly how much they are paying in taxes.

Finally, there's the doomsday prediction of some rich guy running all his personal expenses through a business to avoid paying tax on them. They can do that today and it happens. The business then passes those tax liabilities on to people like that $20,000 wage earner Chris feels so sorry for. The FairTax is not cheat-proof. But, right now, a business owner needs only himself to conduct the cheating. Under the FairTax, he needs himself AND a retailer to cheat.

Enough for tonight...


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