Problematic And Unfair "Fair Tax" Would Burden Middle Class

April 22, 2011 3:21 pm ET

It's no secret hard-right Republican members of Congress love to advocate lower taxes for the richest Americans. One recent GOP proposal from Rep. Bob Woodall (R-GA) exhumes the long-discredited "Fair Tax," a bill that would abolish the IRS and replace income and corporate taxes with a national retail sales tax. But the proposal has numerous problems: It relies on unsound numbers and, in practice, it would cause taxes to rise, incentivize tax evasion, and shift the tax burden onto the middle class.

House Republicans Advocate Fair Tax Legislation

Rep. Rob Woodall Introduced Fair Tax Bill In The House Of Representatives. According to the Library of Congress, Rep. Rob Woodall (R-GA) introduced the Fair Tax Act of 2011 in the House of Representatives. The bill has 60 cosponsors, 58 of whom are Republican. [Thomas.gov, accessed 4/21/11]

Sen. Saxby Chambliss Introduced Corresponding Fair Tax Bill In The Senate. According to the Library of Congress, Sen. Saxby Chambliss (R-GA) introduced the Fair Tax Act of 2011 in the Senate. The bill has six cosponsors, all of whom are Republican. [Thomas.gov, accessed 4/21/11]

Rep. Steve King: "I Am An Advocate For ... The FairTax Act" Because It Would "Shut Down The Non-Essential IRS Forever." In an op-ed for the Washington Times, Rep. Steve King (R-IA) wrote:

If I had my way, we would shut down the non-essential IRS forever. This is why I am an advocate for legislation that does just that. The FairTax Act seeks to reform the tax structure of the United States by replacing the inefficient income tax with a pro-growth consumption tax and would eliminate the need for the IRS because the FairTax would be administered in much the same manner as states administer state sales taxes. Americans would no longer have to file a return because taxes would be collected at the point of sale for a good or service. [Washington Times, 4/14/11]

Rep. Ander Crenshaw: "I Have Repeatedly Backed 'Fair Tax' Legislation."  As reported by Sunshine State News:

Florida Republican U.S. Rep. Ander Crenshaw marked Tax Day by calling for the federal government to back the "Fair Tax" plan which would abolish federal income taxes and mandate a consumption tax on goods and services.  [...] "I have repeatedly backed 'Fair Tax' legislation, co-sponsoring this initiative since 2006," continued Crenshaw. "Every year, Americans must navigate thousands of pages of complex and wieldy regulations. They deserve a fairer and simpler code. A 'Fair Tax' delivers that by repealing all federal income-related taxes and replacing them with a transparent personal consumption tax on goods and services. [Sunshine State News, 4/18/11]

What Is The Fair Tax?

AEI: Fair Tax Proposal Would Replace Income, Payroll, Self-Employment, Estate and Gift Taxes With One Retail Tax. According to the conservative American Enterprise Institute: "The FairTax proposal, which now has fifty-four sponsors in the U.S. House of Representatives, would institute a national retail sales tax to replace individual and corporate income taxes, payroll and self-employment taxes, and estate and gift taxes. The question of what sales-tax rate would be needed to replace the revenue now raised by other taxes has been the subject of much controversy." [AEI, 2/28/07]

  • Current Fair Tax Proposal Would Set The Sales Tax Rate At 23 Percent. From a summary of the Fair Tax Act of 2011 via the Library of Congress: The bill "[i]mposes a national sales tax on the use or consumption in the United States of taxable property or services. Sets the sales tax rate at 23% in 2013, with adjustments to the rate in subsequent years." [Thomas.gov, accessed 4/21/11]

Fair Tax Proposal Would Disband And Defund The IRS. From a summary of the Fair Tax Act of 2011 via the Library of Congress: The bill "[p]rohibits the funding of the Internal Revenue Service (IRS) after FY2015." [Thomas.gov, accessed 4/21/11]

Fair Tax Plan Includes Rebate That Exempts Sales Tax On Income Up To Poverty Level. From a FactCheck.org analysis of 2007 Fair Tax legislation:

Sometimes sales taxes are called regressive, meaning that the poorest pay higher rates than the wealthy. Strictly speaking, sales taxes are flat, since everyone pays the same rate. But because the poor tend to spend a high percentage of their income on basic consumer goods such as food and clothing, sales taxes do require the poor to pay a higher percentage of their income in taxes

The FairTax plan, however, helps to alleviate this difficulty by exempting sales taxes on all income up to the poverty level. Taxpayers would receive a "prebate," which [Cato Institute director of tax policy studies Chris] Edwards calculates to be about $5,600 annually. The Treasury Department estimates that the prebate program would cost between $600 billion and $700 billion annually, making it the largest category of federal spending. [FactCheck.org, 5/31/07, emphasis added]

  • Fair Tax Legislation: Families Receive Monthly Rebate. From the text of the Fair Tax Act of 2011:

Each qualified family shall be eligible to receive a sales tax rebate each month. The sales tax rebate shall be in an amount equal to the product of —

(1) the rate of tax imposed by section 101, and

(2) the monthly poverty level.

[H.R. 25, Section 301, accessed 4/21/11 via Thomas.gov]

The Fair Tax Is Different From A Flat Tax Or A VAT. According to Businessweek: "Boosters say the FairTax is elegant in its simplicity. Yet part of the reason the idea hasn't caught on beyond a core group of conservative advocates is that it's more complex than it seems. It isn't the same as a flat tax, which is based on income. It also isn't akin to the value-added taxes used around the industrialized world, which are collected at the producer and wholesale levels, as well as at the point-of-sale. The FairTax is like the sales taxes that many U.S. states charge, though critics contend that the way it is calulated makes it actually a 30 percent levy, not 23 percent." [Businessweek, 4/7/11, emphasis added]

23 Percent Tax Levy Figure Is "A Ruse"

Former Reagan Adviser Bruce Bartlett: 23 Percent Figure Is "A Ruse." According to former President Reagan adviser Bruce Bartlett in a report for Tax Analysts: "...I think it is reasonable to conclude that the FairTax's emphasis on the 23 percent tax-inclusive rate rather than the 30 percent tax-exclusive rate is a ruse designed solely to increase support for the proposal above what would be the case if it were generally known that the more appropriate rate assumption is 30 percent. This conclusion is reinforced by other deceptions inherent in the FairTax proposal." [Tax Analysts, 12/24/07]

Fair Tax Levy Is Actually 30 Percent. According to Businessweek: "The FairTax is like the sales taxes that many U.S. states charge, though critics contend that the way it is calculated makes it actually a 30 percent levy, not 23 percent. The 23 percent rate is set at a level designed to raise the same amount of revenue as the taxes it would replace. Yet it assumes full compliance. If experience is any guide, that's too optimistic: The current tax code, even with safeguards such as W-2 forms and automatic withholding by employers, leaks roughly $300 billion a year due to avoidance and evasion." [Businessweek, 4/7/11]

FactCheck.org: 23 Percent Fair Tax Figure Is Equivalent To 30 Percent "On The Actual Price Of The Item." According to an analysis of the 2007 FairTax bill by the nonpartisan FactCheck.org:

First consider the way in which sales tax is normally figured. A consumer good that carries a $100 price tag might be subject to a 5 percent sales tax. That means that the final bill for the item is $105. The 5 percent figure is the amount of tax that is charged on the original purchase price. But now suppose that instead of pricing the item at $100, the shop owner simply priced the item at $105, then sent $5 directly to the state. The $105 price would be a tax-inclusive sales price. But $5 is just 4.8 percent of $105. That 4.8 percent number, however, is relatively meaningless. You are still paying exactly the same 5 percent tax on the item.

The 23 percent number in H.R. 25 is the equivalent of the 4.8 percent in the previous example. To calculate the real rate of the sales tax, we have to determine the original purchase price of an item. We can begin with the same $100 item, keeping in mind that a price tag that reads $100 has sales tax already built in. If our tax rate is 23 percent of the tax-inclusive sales price, then of the $100 final price, $23 of those dollars will be for taxes, meaning that the original pre-tax price of the item is $77. To get $23 in taxes on a $77 item, one must impose a 30 percent tax. In other words, a 23 percent sales tax on the tax-inclusive sales price is equivalent to a 30 percent tax on the actual price of the item. [FactCheck.org, 5/31/07, emphasis added]

Fair Tax Unfairly Burdens Lower And Middle Classes

CNN: "On Its Own, A National Sales Tax Would Be Extremely Regressive." According to CNN: "On its own, a national sales tax would be extremely regressive — that is, it would tax everyone who spent everything they earned (and that's a lot of us) at 23% of their income, while those who made enough money to set some aside would, in effect, pay a lower overall rate." [CNN, 2/21/08]

Businessweek: "The Fair Tax Would Weigh Heavier On Lower-Income Households." According to Businessweek: "The FairTax would weigh heavier on lower-income households, because they spend a larger proportion of what they earn. That's why Woodall's proposal calls for a 'prebate,' a monthly advance rebate that covers the cost of the tax up to the federal poverty level. Compared with the current system, the FairTax would be a boon to the highest earners, who spend a relatively low share of their income each year and would no longer have to pay taxes on capital gains." [Businessweek, 4/7/11]

FactCheck.org: Fair Tax Would 'Make The Tax Code Less Fair.' According to a FactCheck.org analysis of 2007 Fair Tax legislation: "It will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year. It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair." [FactCheck.org, 5/31/07]

Under Fair Tax, Workers Currently Paying Less Than 23 Percent Of Income In Taxes Are Worse Off. According to former President Reagan adviser Bruce Bartlett in a report for Tax Analysts: "But what if the worker is now paying less than 23 percent of his income in federal taxes? In this case, he is clearly worse off. The prices of the things he buys will rise by more than his income rises from the elimination of income and payroll taxes. Conversely, if one is wealthy and in a tax bracket above 23 percent, that person would be much better off. His income and payroll taxes would fall by much more than the prices of goods and services he consumes would rise." [Tax Analysts, 12/24/07]

CNN: Under Fair Tax Scenarios, "Burden Of Taxes In Any Given Year Likely Shifts To Lower Earners." According to CNN: "'Fair' is a value judgment, but a lot of people won't think this admittedly lurid scenario sounds fair at all: Let's say a hedge fund manager has a good year and earns $1 billion. If he can somehow manage to scrape by spending, say, $100 million, the other $900 million is tax free. He'll have paid about 2% of his income in taxes that year. If those who can afford to save a large chunk of their income pay less, the burden of taxes in any given year likely shifts to lower earners." [CNN, 2/21/08]

Flawed Rebate System Wouldn't Prevent Tax Burden From Shifting To Middle Class

Rebate Would Cause "Administrative Nightmares" And Not Prevent Transfer Of Tax Burden Away From Wealthy. From the New York Times:

Like any tax on consumption, the biggest burden, comparatively, would fall on the poor. To help compensate for this, the plan would provide a monthly check from the government to every American household, rich and poor alike. The rebate amount would be set to equal what a household living at the poverty level would pay in taxes, leaving some of the poor better off and cushioning the proposal's impact on the middle class.

But, apart from the administrative nightmares associated with giving every household a rebate, it would still not prevent transferring a substantial part of the current tax burden from those with annual incomes above $200,000, who tend to save a large part of their income rather than spending it, to those earning less.

"Even with the rebate counted the way FairTax supporters want it calculated," said Bruce Bartlett, a conservative tax analyst and policy maker in the Reagan administration who has emerged as one of the proposal's most powerful critics, "there would be an enormous shift in the tax burden from the wealthy to those with lower and middle incomes." [New York Times, 1/6/08, emphasis added]

FactCheck.org: Despite Rebate, Tax Burden On Everyone Earning $15,000 - $200,000 Would Increase. According to FactCheck.org: "With the prebate program in effect, those earning less than $15,000 per year would see their share of the federal tax burden drop from -0.7 percent to -6.3 percent. Of course, if the poorest Americans are paying less under the FairTax plan, then someone else pays more. As it turns out, according to the Treasury Department, 'someone else' is everybody earning between $15,000 and $200,000 per year. ... Those in the highest and the lowest brackets will see their share decrease, while everyone else will see their share of taxes increase." [FactCheck.org, 5/31/07]

Bartlett: Fair Tax Rebate Program "Would Constitute A National Welfare Program With A Flat Payment For Every American Regardless Of Need" —  And That's "Absurd." According to former President Reagan adviser Bruce Bartlett in an report for Tax Analysts: "There is no income or consumption test for the rebate. It would go equally to those with zero income and those who buy nothing in the course of a month, as well as to billionaires like Warren Buffett and Bill Gates. In effect, it would constitute a national welfare program with a flat payment for every American regardless of need. [...] In any case, there is essentially no relationship between the rebate and the cost of living or raising children. It's absurd to think that a single parent with three children needs to spend no more than a childless couple to achieve the same level of poverty — which is what the rebate is based on." [Tax Analysts, 12/24/07

Fair Tax Incentivizes Tax Evasion

Economists Say That When Sales Taxes Reach Certain Levels, "People Will Try To Buy Things Off The Books." According to PolitiFact: "Enforcement is also a significant concern for the Fair Tax. The 23 percent tax rate supported by the Fair Tax proponents assumes that most people would pay the taxes they owe. Economists say that when sales taxes reach that level, the incentive for people to cheat rises. People will try to buy things off the books, and underground economies will develop." [PolitiFact.com, 1/23/08]

  • Right-Wing American Thinker Op-Ed: Fair Tax Would Spur Growth Of Black Markets. According to an op-ed in the right-wing American Thinker: "The claim that a national sales taxisimpossible toavoid is also suspect. If the tax isset at the level needed to support current spending projections,I can guarantee that people will find ways to avoid it. Black markets and barter transactions immediately come to mind as ways to curtail its impact." [American Thinker, 4/11/10]

IRS Elimination Would "Exacerbate" Tax Evasion Problems And Necessitate Tax Hikes

Abolishing IRS Would Eliminate Income Audits, Making Tax Evasion Easy. According to former President Reagan adviser Bruce Bartlett in a Tax Analysts report: "Under the FairTax, every time you purchase a service, you would probably get two prices — one you can pay with a check or credit card that includes the FairTax and one you can pay in cash and save 23 percent. Because there would no longer be any audits of income, since the IRS would have been abolished, tracing such tax evasion would be extremely difficult." [Tax Analysts, 12/24/07]

Fair Tax Would Need IRS Enforcement To Function. According to CNN: "Somebody would have to enforce the sales tax law or it would have no teeth. So, in practical effect, the plan would not eliminate the IRS. The plan would just convert its function from income-tax compliance to sales-tax compliance. Some agency would have to step in." [CNN, 2/21/08]

CEPR Director: Without Enforcement, Tax Evasion Would Force Continued Tax Increases, Which Would In Turn Exacerbate Evasion. According to PolitiFact: "To compensate for tax evasion, the tax would have to be raised even higher, which would lead to more evasion. Abolishing the Internal Revenue Service would exacerbate this problem, said economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C." [PolitiFact.com, 1/23/08]

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