Reforming The Taxcode - "Fair Tax"

Today Americans face the tax filing deadline (except in Massachusetts where it is tomorrow) so it is fitting that I discuss the federal tax code.

(See here) an MSN Money article that does a pretty good job of describing the American federal tax system and reporting on some of the statistics behind them. Please note the article briefly discusses ideas/attempts to reform the tax code. Let me quote:
Last year, the President's Advisory Panel on Federal Tax Reform solicited ideas from the public to find out what exactly is wrong with the system. Complaints poured in from individuals, businesses and experts, with many upset about complexity. The panel is trying to simplify the tax code without losing its progressive nature, which forces Americans to pay more as they earn more. Some suggested a national sales tax that would replace the income tax. Others want a flat tax, exempting the poorest Americans. Some want value-added taxes, or VATs, which are common in Europe. These taxes are collected in small increments at every state of production of an item, such as a car.

I wish to discuss one proposal that is being actively touted on right wing radio in America, the so called "Fair Tax".

(See here) an article that appears at Fair Tax Volunteer that provides a thumbnail of the proposal.

Let me try and further clarify one thing this article does a fairly good job of explaining. Proponents of the Fair Tax speak of the tax rate as being 23%. As in, if after the Fair Tax is calculated into the expense of an item, if you paid $1 for the item, 23% of that cost would go to the government. Hence the rate they guote, 23%. This rate does most favorably compare with the federal income tax rate, because there, if you earn a dollar and are taxed at a rate of 23%, 23 cents of every dollar you earn goes to the government. Where this comparison breaks down is the comparison to a sales tax. Here Americans traditionally think of it in the way opponents think of it. With the fair tax, something that costs $1 will cost you about $1.30 after the Fair Tax is calculated in, thus it is often described as a 30% tax rate. This is more like a sales tax of 7%, where something that costs $1 costs $1.07 after sales tax. Both manners of speaking of it are correct in their own way.

But let me point out where this thumbnail gets overly enthusiastic in pushing the "fairness" of the Fair Tax.
To ensure no American pays tax on necessities, the FairTax plan provides a prepaid, monthly rebate (prebate) for every registered household to cover the consumption tax spent on necessities up to the federal poverty level. This, along with several other features, is how the FairTax completely untaxes the poor, lowers the tax burden on most, while making the overall rate progressive.

They say the Fair Tax is progressive, got that? It is progressive up to a point, but only progressive in that it protects the lower class. But what about the middle class? Will the Fair Tax result in a shift of the tax burden from the upper class to the middle class? Let me again quote the article.

So, instead of paycheck-earning Americans paying 7.65 percent of their paychecks in Social Security/Medicare payroll taxes, plus an average of 18 percent of their paychecks in federal income tax, for a total of about 25.65 percent, consumers in America pay only $23 out of every $100. Or about 30 percent at the cash register when they elect to spend on new goods or services for their own personal consumption. And this tax is collected only on spending above the federal poverty level, providing important progressivity.

Again they speak of progressivity. But where do they come up with their average of 18 percent? I know the MSN Money article contains a chart that shows the average, total (including state and local) tax bite for the average American taxpayer with two kids is 11.9%, considerably less then 18% of federal income tax alone after excluding the Social Security/Medicare payroll taxes. I know my own average, effective tax rate is something like 12.32% and I am fairly well off. While I too would enjoy the "prebate" that would effectively lower what I pay in taxes to something significantly less then 23%, it seems to me that many middle class people are going to end up paying significantly more in taxes every year under this proposal.

(See here) another article that goes to great lengths to argue for the Fair Tax. This one appears at Neal Boortz's website. I point to this one because Neal often and vociferously argues for the Fair Tax on his radio talk show. He also is attempting to make a buck by coauthoring a book that tries to sell the idea. Let me quote Neal:
It is amazing how many people don't like the idea because they don't think that the rich will be paying enough in taxes. It doesn't matter that paying taxes will be voluntary under the Fair Tax plan. It doesn't matter that nobody pays the retail sales tax on the basic necessities of life. It doesn't matter that lower income Americans will virtually get a free ride when their entire federal tax liability disappears, including Social Security and Medicare taxes. What does matter? Some people are afraid the evil, hated rich won't pay enough. How dare these people work hard, make good decisions, and save all that money? How dare they achieve that much more than I have? Make 'em pay!

Neal just doesn't seem to get it does he? Why doe he think it is "fair" that we protect the lower class, that the middle class will be willing to pay more then the lower class, but when it comes to the upper class progressivity should disappear? Remember now people, proponents say this proposal is revenue neutral. Think about it, the upper class is going to end up paying a whole lot less in taxes. Somebody is going to have to take up the slack we are going to be giving to the wealthy. Who is going to be taking up the slack? I say the burden is going to be shifted to the middle class.

Neal Boortz and proponents do not have a problem with shifting more of the tax burden to the middle class. Well I do. Seems I am not alone in demanding a progressive tax code. When Abraham Lincoln (wasn't he a Republican?) came up with the first federal income tax to pay for the civil war he came up with a progressive system. The lower class would pay nothing, the middle class would pay some, and the wealthy would pay more. Every generation of loyal Americans, including my Daddy's generation (sometimes called the greatest generation) continued with a progressive tax code. Now some would have us scrap what these previous generations agreed to in order to reward the most fortunate members of our society.

Well I stand against it. Perhaps some remnant of the Fair Tax would not be a bad idea (although Alan Greenspan seemed to have problems relying to such a large degree on a tax code that discourages consumption, he evidently thinks it would be bad for the economy) but not if it is enacted according to the wishes of the loudest proponents.

I stand against any new system of financing our government that rewards the most fortunate at the expense of the working stiff.


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