There is considerable publicity for "The Fair Tax" by its author, Neal Boortz, and seems to be embraced readily by many front-line politicos and spokesmen. But, having read the book, I see no indication that there has been any input by any practicing tax preparer accountant or tax attorney.
Had there been, they would surely have seen the weaknesses in that plan. Here are some apparent ones:
1) It claims to eliminate the IRS, and perhaps it would because it switches from an income tax to a retail sales tax. BUT, the features of the plan result in an overbearing requirement for bureaucratic oversight. Do we want the IRS, or would the FBI be better?
2) To explain the above, let's look at its taxing provision. It plans to tax only new retail items. No used items would be taxed. At 23 cents on the dollar--23%--, a new auto priced at $20,000 would cost an additional $4,600 in the form of a tax. But a used car would not cost any tax. How many miles should a car have on it before it can be classed as "used"?
The doorway for fraud swings wide open right there! Plus, the new car market would drop like a rock! How long would it take in an environment such as I have depicted for the auto market to begin developing "used" vehicles in order to create more sales--in order to survive? Or, apply the principles to any large item market in which only new items are taxed--a house full of furniture would have quite a price addition to cover the tax.
3) The claim that 22% of every item's price in the market place is really the built-in tax build-up, and that the prices would drop by that amount, is an assumption that is hopeful, but not realistic. At the least, it would not become an immediate response in the market place, were the plan to be adopted. And, it may never fully wring out the 22% build up.
4) In order to offset the cost of basic living expenses, the plan has provision for a "pre-bate" payment to every household, on the first of every month. The government would issue a check to each verified household at the first of every month, based on previously determined amounts according to the number of persons in the household. How many truly conservcative-minded, independet-minded citizens really want to get on the public "dole" and become akin to the welfare class? Are we not trying to get people off welfare and on their own? Socialism starts where? So, which bureau of the government will be watching over this aspect of the plan?
5) How about the collection of the tax? Who will oversee that aspect? The retailer is supposed to "send it in" at month's end. Suppose he decides those accumulated 23% dollars of his total take that month are so much that he cannot see that the government needs them more than he does. There goes your Irs elimination factor, it seems to me!
6) And, how does this switch to the "fair tax" work out with states which have gradually developed a seemingly inseparable hookup with our present income tax code? Can they switch, too, and what would their tax rate be, added to the 23%? As a matter of fact, state retail sales taxes have the most invasive, contrary regulations of them all. And if they were to stay the same, taxing both new and used items, perhaps also services, those rates on top of the 23% would really give us a jolt at the cash register. Right?
There is a better plan. Simplify the system by broadening the base, setting the rate low, and collecting the tax immediately. If you want to know the details, contact me.
Gene Lawley, MBA, CPA
Twin Falls, Idaho
fiddlefax@yahoo.com
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2 comments:
There is an error in your #2. The 23% is an "inclusive" tax rate. That means that the tax is 23% of the price including the sales tax! The "exclusive" rate (the way all other sales taxes are quoted) is 29.87%. Your $20,000 car would cost an additional $5,974. The 23% comes from the fact that $5,974 is 23% of $25,974.
Pretty screwy, huh?
The two-fold Fair Tax proposal is based on two premises with major shortcomings:
(1) Replace the Federal personal income tax, Federal corporate tax, and they payroll tax (Medicare and Social Security) with a 23% sales tax to provide the funding to run
the US Government.
(2) Providers of goods and services will reduce prices up to 30% offsetting the 30% sales tax applied to new purchases and all services.
The problem with item (1) is that the Fair Tax is in effect a 30% tax. The proponents arrive at 23% sales tax rate by saying the $30 tax on a $100 purchase of goods and services is really 30/130, or 23%. In addition, it overlooks the massive tax evasion that will occur as consumers either order goods from abroad, or go to Mexico or Canada to purchase goods, and those who will make “under the table” cash purchases.
The problem with item (2) is that providers of goods and services will not reduce prices up to 30% to offset the new sales tax of 30%. Many products, including imported items such as oil, do not have a product price based on the US tax code. In addition, it is intuitively obvious that the vast amount of the tax savings, reduced costs, and increased profits will flow to the bottom line and be passed onto executives and investors, not the customers or employees.
The savings and increased profits gained from moving millions of manufacturing, service, and technical jobs that began in the early 1990s to low-cost sweat shops in Asia, China, India, and Mexico, cutting millions of US jobs, and dropping Federal Corporate taxes to 5% to bring back money from overseas entities went directly to the executives and investors and no one else.
Note: If you think that US employees receive pay increases when work is moved offshore, then you should review the situation in the Information Technology (IT) industries. The IT industries have moved tens of thousands of previously high-paying jobs for engineers, programmers, data base analysts, systems analysts, etc. offshore and laid off tens of thousands of US professional employees since the mid-1990s.
When US technology corporations need more technology personnel, including engineering and IT professionals, in US locations, they tell the US Government that they can’t find the skills in the US labor force and petition and receive H-1B visas to bring in computer technology and engineering specialists from foreign countries (primarily India and China). The offshore employees are given temporary work visas, paid substantially less than comparable US employees, and reminded that they can be replaced (and returned to their home country) if they should ask a salary increase deemed inappropriate by the employer.
When the Medicare Advantage HMOs talked the Government into giving them a $7 – $9 Billion dollars more than Medicare spends on Medicare Part A and Part B beneficiaries, most went to executive perks, bonuses, and retirement for the HMO executives (such as the $400-Million Dollar retirement bonus taken by one HMO executive).
In addition to eliminating the payroll tax (Social Security and Medicare), the Federal personal income tax, and the Federal corporate income tax, the Fair Tax proposal in effect also eliminates the system used to report earnings to calculate Social Security benefits and would eliminate the Social Security Trust Fund.
The Fair Tax proponents have not mentioned how they would calculate a Social Security benefit since the earned income will no longer be reported under the Fair Tax plan.
The program is in essence a reverse “Robin Hood scheme” that shifts raising funds to finance the US Government by shifting the raising of tax revenues) from the higher income Americans (top 5%) to the Middle Class and retirees via the proposed (the 30% National Sales Tax).
The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.
With no mention or statement of intent that the Social Security program and Medicare will be maintained and no way to caluate individual Social Security benefits, it’s a safe assumption that the Social Security and Medicare programs will be declared “no longer required” and the Social Security Trust Fund eliminated (no return of the Trillions borrowed or returned to the individuals who provided them via the payroll tax, just eliminated).
The Fair Tax proposal will enable retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products with an offset for people below the poverty line.
Retirees will also pay a 30% tax rate on purchases made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new productys made with Social Security income that is currently tax free for many retired individuals and couples, and partially taxed for the rest.
The fun will only be starting. If the Fair Tax is enacted, the proponents will then recommend the following:
(1) Eliminate the Social Security Trust Fund (which has loaned Trillions of Dollars to the US Government) and state there is no need to return the Trillions they borrowed and spent. They will propose funding Social Security and Medicare out of the annual Federal budget.
(2) Declare the Social Security and Medicare beneficiaries to be "freeloaders sponging off the largesse and charity of the Government" and guilty of a giant entitlement fraud perpetrated upon the hardworking titans of industry, notwithstanding that tens of millions of Americans have prepaid payroll contributions that will sustain current Social Security benefits for another 30-35 years. This was based on the foolish assumption that the US Government will pay back funds borrowed from the Social Security Trust Fund (the Payroll Taxes paid by tens of millions of working Americans and legal resident aliens).
Note: If we can pay back funds borrowed from China and Saudi Arabia, we ought to be able to pay back the contributions borrowed from the Social Security Trust Fund (that were received as payroll taxes paid by working American citizens and legal resident aliens.
(3) The final step will be to means-test the receipt of Social Security and Medicare to make sure that no one ever receives back benefits they paid for over working careers of 40-50 years or more.
(4) Now that they have decimated retirement and health care for tens of millions of retired Americans, they will now subject them to a 30% sales tax for the rest of their lives to continue the charity program for the friends of the Fair Tax and Global Economy (does not include the middle class). American Industry,
Members of Congress and the current Administration have participated in the decimation of defined benefit pension plans, eliminated millions of US jobs and run the Federal deficit from approximately 5 Trillions Dollars to well over 9 Trillion Dollars in the name of Global Economy (and a welfare program for their friends).
The name of the proposal should be “Your Money is My Money”. The quote that comes to mind on this giant Ponzi scheme, which I believe was made by Joseph Welch at the Congressional Army hearings in the late 1950's regarding Congressman Miller (R-Buffalo, NY), is “HAVE YOU NO SHAME”?
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