In the previous two essays in this series, I have set forth the arguments in favor of replacing our current income tax system with a national consumption tax known as “The Fair Tax”, which legislation (H.R. 25) is currently bottled up in committee in Congress. In the first seven essays, I covered the history of our income tax, the options that have been set forth as alternatives (all of which are not alternatives but are additional taxes on top of the income tax, e.g., the Value Added Tax), the evaluations of reports, recommendations by leading economists, and even quotes from the former head of the IRS on how oppressive and anti-liberty our tax system really is.
The Fair Tax has its shares of critics, primarily individuals who would lose their ability to influence those in power to benefit them over the welfare of the nation as a whole. This includes politicians who are able to manipulate the tax system in order to benefit certain groups that will help keep them in power, or to award “tax breaks” to certain segments in our society in an effort to “buy off” their votes at election time. Sadly, too many of our fellow citizens have been too easily deceived by such manipulations; too often have we sold our freedom, liberties, and property rights for nothing more than some cheap “beaded necklace” trinket!
To recap how the Fair Tax will work, a retail tax of 30% will be levied on all products and services sold or provided, which is equal to the 23% that studies have shown is the embedded income tax cost in all products and services we purchase. The result of this is, as I gave an example of, a $100 pair of shoes (which comprises a cost of $77 plus $23 of embedded income taxes and related costs) will cost you $100.10 under the Fair Tax – yet, in order to earn that $100 to purchase the shoes you will only have to earn $100, not the $130 that you now have to earn under our current tax system in order to have a take-home pay of $100 (based upon an income tax bracket of only 15% and the FICA tax)!
In answer to the criticism that this tax will fall most heavily on the poor as it will tax the “necessities of life”, the Fair Tax has a “prebate” built into the tax. Each month the government sends a check or direct deposit to every family in the nation based upon their family size and the current year’s poverty level. As a position paper on The Fair Tax Organization’s website explains,
“ The monthly prebate check is calculated by multiplying the annual poverty level spending published each year by the Department of Health and Human Services times the FairTax rate and dividing by twelve. Poverty level spending represents what it costs families of varying household size and composition to buy their necessities.”
This means that the poor will not pay any consumption taxes on life’s necessities, nor will anyone else. Everyone will be treated “equally before the law”, which is after all a basic fundamental of our American system of government, is it not (or at least it used to be)? To see what this would have calculated as in 2009, you can read this position paper at 2009 Fair Tax Prebate Schedule.
Some have objected that certain items such as food, medicine, etc, should be excluded from the tax, but this is not wise. Once you begin down that road of exempting this and that from being taxed, you end up with a complex and manipulatively-susceptible system like we currently have. The key to making any tax system fair is to make it applicable to all people in all things across the board in equal fashion, which is precisely what the Fair Tax does. This is also the point in favor of it that Adam Smith set forth in his classic work, The Wealth of Nations. The only criticism that Smith lodged against a consumption tax was its effect upon the less wealthy in respects to the necessities of life and the prebate removes that objection. In truth, since all products and services have a built-in 23% cost related to income taxes, although the lower-income members of our society may end up paying little or no income taxes, they do have the payroll tax of 7.65% which when coupled with that embedded cost in their purchases actually make the income tax system more oppressive upon them than the Fair Tax would be. Under the Fair Tax they get to keep 100% of what they earn.
Our nation currently suffers from unemployment and under-employment levels not seen since the time of the Depression of the 1930s’. This problem that refuses to be reeled in, despite a one-trillion dollar “stimulus” plan, can be laid squarely at the feet of our income tax system. Before an individual can be employed there must first be an employer who has the capital to develop business and create a demand for its products or services. Yet, the more money government takes out of that capital pool which the employer has, the less it obviously has for the development required to create jobs for those seeking employment; and therein is the crux of the problem. Our nation with its onerous income tax system has the highest corporate marginal tax rate on businesses in the developed world! Despite this, whom do the “progressives”, aka fascists, in Congress and their supporters blame for the outsourcing of jobs overseas? The “evil greedy” corporations, of course, when in truth it is they and their taxes that are driving these jobs out of the country and creating more unemployment! In addition, for those products and services produced within our country with such a tax disadvantage against foreign-produced products, is it any wonder that those foreign products are less expensive, thus boosting their sales at the expense of the American made goods, resulting in a lower demand for the American products and subsequent layoffs and more unemployment?
In his testimony before the Subcommittee on Select Revenue Measures, Committee on Ways and Means in the House of Representatives in 2006, Leo Linbeck, Jr testified how other nations who have adopted a border-adjusted destination-based consumption tax have this tax advantage over the United States:
“Border-adjusted taxes are, quite simply, the most potent weapons foreign producers have against U.S. producers and workers. Border-adjusted taxes are consumption taxes removed on export by the producing nation and assessed upon imports as ad valorem taxes. At this point in time, 29 of 30 OECD countries enjoy border-adjusted tax regimes. Only one – the U.S. – refuses to adopt a border-adjusted tax system in order to continue to rely upon an origin principle, direct, world-wide income tax system that taxes returns to capital multiple times. We do so at our peril.”
Couple this with the testimony given before Congress by John Loffredo, the vice president and chief tax counsel for Daimler-Chrysler after Daimler-Benz purchased the ailing Chrysler Corporation, on the impact that tax systems played on the decision as to where to headquarter the new corporation:
“The U.S. tax system puts global companies at a decisive disadvantage,… This issue became a major concern, and when the time came to choose whether the new company should be a U.S. company or a foreign company, management chose a company organized under the laws of Germany.”
He went on in his testimony to give an example of the advantages of the German tax system over the U.S. system and concluded by stating that the headquartering of the corporation in Germany versus the U.S. would result in “a total effective tax of around 44%, rather than 67.5%.” That, my fellow Americans, is a staggering 23.5% greater tax burden for a U.S.-based corporation!! Is it any wonder, then, that our income tax system is driving business, along with employment and tax revenue overseas?
The obvious question, then, is “How does the Fair Tax solve this issue?” The answer is simple ─ every other nation in the world has an income tax of some kind; none of them have a consumption tax like the one proposed in H.R. 25. If you had the option of locating your company and your production facilities in a country with an income tax system and all its regulatory compliance costs or in a country with no such taxes, where would you locate? The answer is rather easy to see, is it not? I give you this stunning statistic ─ read it slowly and allow the impact of it to sink in deeply:
“When Bill Archer (R-TX) was chairman of the House Ways and Means Committee, he routinely quoted an informal survey of five hundred international companies located in Europe and Japan. These companies were asked, ‘What would you do in your long-term planning if the United States eliminated all taxes on capital and labor and taxed only personal consumption?’ Eighty percent ─ that’s four hundred out of five hundred ─ said they would build their next plant in America. The remaining twenty percent ─ the other hundred companies ─ said they would relocate their business to American altogether” (Fair Tax: The Truth, Neal Boortz & John Linder).
With this kind of inflow of business into the country, can you not see how this would alleviate our unemployment problem? With this kind of business influx comes more spending which generates more tax revenue, and thus reduces the cost of American-made products, thereby giving the U.S. a competitive advantage over those produced by other nations. Such an advantage would turn our trade deficit into a surplus, and through it all, with the increased revenue give the government the necessary funds with which to begin reducing the debt burden that threatens our very existence as a nation!
Is it any wonder, then, that over eighty economists from around the country sent a letter to Congress urging them to pass the Fair Tax Act (see Open Letter Concerning Reform of the Tax Code), or that economist Laurence J. Kotlikoff of Boston University would proclaim it as his preferred method of taxation? ─
“My preferred reform is the FairTax, which has three highly progressive elements. First, thanks to the prebate, poor households would pay no sales taxes in net terms. Second, the reform eliminates our highly regressive FICA tax. Third, the sales tax will effectively tax wealth as well as wages: When the rich spend their wealth and when workers abroad spend their wages, they will both pay sales taxes. By broadening the effective tax base to include the corpus of wealth, not just the income earned on it (much of which is currently exempted or taxed at a low rate), one can lower the required sales tax rate and, thereby, reduce the tax burden on workers” (“Averting America’s Bankruptcy with a New, New Deal,” The Economists’ Voice, February 2006).
There are so many other arguments and facts like these that I could give to convince you of the merits of the Fair Tax and how it will answer the ills that so beset our economy and our nation, but I trust that these are sufficient enough for you to see the need for our Representatives and Senators to pass this legislation. I urge all who are readers of my blog to research this topic more and to contact your Representative and Senators and press them on this matter before our economy completely implodes under the massive debt and tax burden pressing upon us. This is why, should I decide to become a candidate for Congress in the 2012 elections, the passage of the Fair Tax Act will be the number one focus of my campaign and my efforts in Congress, should I be fortunate enough to win election. To learn more I recommend the two books written by Neal Boortz and Representative John Linder (the original sponsor of H.R. 25), The Fair Tax Book and Fair Tax: The Truth ─ Answering the Critics, as well as the website of Americans for Fair Taxation, Fair Tax.org.
To sum up, herewith are the main benefits to be reaped from the passage of the Fair Tax, as stated on the above listed website:
- Enables workers to keep their entire paychecks
- Enables retirees to keep their entire pensions
- Refunds in advance the tax on purchases of basic necessities
- Allows American products to compete fairly
- Brings transparency and accountability to tax policy
- Ensures Social Security and Medicare funding
- Closes all loopholes and brings fairness to taxation
- Abolishes the IRS
What more could citizens ask for than this? If you recall Ayn Rand’s statement that you cannot have political freedom unless you have economic freedom, then it is clear that the Fair Tax delivers on the economic side of her quote, thus helping to ensure that we can maintain our freedom on the political side of the equation. Yet this is only one side of the coin to return us to economic prosperity ─ the back side of the coin is to control government spending, for what good does it do to increase revenue if all the government does is spend more instead of reducing debt? We’ll begin taking a look at this side next.
─Epaminondas
