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Sunday, May 29, 2005

Lancing Vance

Lawrence Vance wrote this piece called FairTax Fraud for the Mises Institute online. Here is his entire argument (it begins about halfway down the first page of his article). Just for the record, I want to state here that I have read S 25 and HR 25 in their entirety. Vance seems to think FairTax supporters haven't done that.

But onward: His article is in blockquotes. Mine is in straight text.

. . . So rather than just repeat them and apply them to the current FairTax scheme, I will focus instead on problems with the FairTax proposal itself.

The Fair Tax Act of 2005 is H.R. 25 in the House (introduced on January 4) and the identical S. 25 in the Senate (introduced on January 24). FairTax proponents who complain about the complexity of the Internal Revenue Code are going to have a hard time convincing those of us who have actually read this bill (it came to 59 pages when I printed it out from my computer) that it will simplify the tax code when it contains language exactly like that which appears in the tax code:

(b) Rebate Defined- For purposes of subsection (a) (2), the term 'rebate' means so much of an abatement, credit, refund, or other payment, as was made on the ground that the tax imposed by chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.

Come now, Mr. Vance, surely you know better than that: The language of the bill has nothing to do with the performance of the FairTax. It simply describes it; it will be a matter of history once it is passed and the FairTax goes into effect.

Strangely absent from the list of co-sponsors of H.R. 25 is Congressman Ron Paul(R-TX). Representative Paul has consistently been named the "taxpayers'
friend." If the FairTax proposal was as friendly to taxpayers as its proponents say it is, I would expect Congressman Paul's name to be first on the list of co-sponsors. FairTax advocates claim that their plan would repeal of the 16th Amendment.

I suppose Congressman Paul is like so many of his peers, he doesn’t care what his constituency says, he’ll wait to see what everyone else does. That seems to be how Congress operates – lots of Indians and a very few Chiefs. And the Indians are more interested in themselves than their constituency. That, however, can and will be changed.

However, all H.R. 25 does is repeal Subtitle A of the Internal Revenue Code of 1986 that relates to income taxes and self-employment taxes and Subtitle C that relates to payroll taxes and the withholding of income taxes. The only mention of the 16th Amendment in H.R. 25 is when it says: "Congress further finds that the 16th amendment to the United States Constitution should be repealed." To repeal the 16th Amendment would require a constitutional amendment. Can Congress be relied on to pass a constitutional amendment that repeals the 16th amendment after a national
sales tax has already been enacted? And even if Congress passed a constitutional amendment, it would still have to be approved by three-fourths of the states. Without the repeal of the 16th Amendment, what is to prevent an income tax from being imposed again after a national sales tax has been enacted?

Actually you're only partly right. A constitutional amendment has to be passed by 3/4 of the LEGISLATURES of the states. That's so easy that it was accomplished in less than a year when they passed the 26th Amendment.

The FairTax will be passed only if a massive grassroots effort gets it passed. Once that is done, that same grassroots effort will turn toward the repeal of the 16th Amendment.

I find it sad that you, who supposedly are an expert in these matters, do not seem to be aware that the current income tax system we labor under is unconstitutional. Surely you would mention that in this context if you were aware of it. Article 1, Sec. 9 of the Constitution of the United States says, “No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.” Amendment 16, the US Supreme Court found in Stanton vs US Baltic Company, “conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged.” In fact, the tax on individual income is so unconstitutional that the IRS hasn't challenged a number of lawsuits about it lately. But that's another issue. Back to the FairTax.

Although the FairTax would eliminate the filing of all individual tax
returns, the FairTax turns every business into a tax collector. Every small
service business and every Internet business that does not currently collect
state sales taxes will have to collect taxes for the federal government.
Every doctor will now have to charge sales tax on his services. Where will
this end? Will the neighborhood boy who mows lawns have to begin collecting
federal sales tax on each lawn mowed? Will the neighborhood girl who baby
sits have to do likewise?

Those retail businesses already pay taxes – state taxes. FairTax would simply be an extra checkbox on the state sales tax form. As for the babysitter and lawn-mower, those are service jobs that are so small that there’s no reason to expect them to pay taxes at all. Certainly no one’s going to come after them if they don’t.

The national retail sales tax rate under the FairTax plan is 23 percent.
That is on top of state sales taxes that are currently collected by
forty-five states. That is on top of the sales tax that many cities and
counties also collect. That is on top of the special taxes that exist on
hotel rooms in most areas of the country. I suppose that a national retail
sales tax would also apply to gasoline. There is no mention of the federal
gas tax anywhere in the Fair Tax Act of 2005. No list of taxes that are
supposed to be eliminated under the FairTax includes the federal gas tax.
Does this mean that there will be an additional 23 percent tax on each
gallon of gasoline?

You forgot to mention that every item that is sold at retail already has from 20% to 30% embedded taxes in the price. Companies and corporations pass the taxes they pay along to the customers who buy their product. Those taxes would be eliminated by the FairTax, thus bringing the price of those goods and services down so that adding the FairTax to the price comes out even. Although the prices of goods and services would be reduced by elimination of income taxes, employee taxes and other corporate taxes, the price to the consumer will be the same when the FairTax is added on. The reason for that is to fund the government.

Of course if we should insist that the government reduce its spending, we could lower the FairTax.

The FairTax will make it easier for Congress to raise taxes. The initial
rate of 23 percent is supposed to begin in 2007. For years after 2007, "the
rate of tax is the combined Federal tax rate percentage." This combined
percentage is the total of three things: the general revenue rate (stated to
be 14.91 percent); the old-age, survivors and disability insurance rate; and
the hospital insurance rate. This is all but saying that the rate will be
adjusted every year. And it will be very easy for Congress to do so. To
raise several billion dollars of additional revenue, all that will be
necessary is for Congress to raise the tax rate by one percentage point by
small adjustments in one or more of the three items that make up the
combined percentage rate. It will be sold to the American people as "a penny
for progress," or some other deceitful scheme.

So what’s new? It’s already easy for Congress to raise taxes; the difference with the FairTax is that they can't do it in secret like they can with income taxes. They do it all the time without bothering to tell the taxpayer. With the FairTax, individuals know what they are paying and can see exactly what Congress is doing (unlike now, when so much of our taxation is hidden). Under FairTax, the economy will expand Under FairTax, the taxpayer can control how much s/he pays in taxes simply by controlling his/her spending. You can do that with income tax only by stifling your income – and people do that, to the detriment of their livelihoods and the economy.

However, you’re overlooking a most important facet of the FairTax and that is the fact that it taxes consumption rather than productivity. When the US is the only country in the world that does not tax productivity we will become immensely attractive to foreign investment. American corporations who have left the US will find it economically feasible to bring those jobs home. Corporations like Daimler will find the US fertile ground for business. The economy is predicted (by world-class economists who have studied this) to grow by 10% a year once the FairTax is in effect.

Under the FairTax system, there are no longer any Social Security and Medicare taxes. However, this does not mean that Social Security and Medicare will be eliminated. The inclusion in the combined percentage of the old-age, survivors and disability insurance and the hospital insurance rates means that the Ponzi scheme known as Social Security will continue as it is, only the way it is funded will change.

There’s nothing wrong with social security and medicare that a little money wouldn’t cure. These are programs that are in place to ease the way for our older and physically disadvantaged citizens that speak well for the humanity and social consciousness of our society. With the increased tax base and burgeoning economy stimulated by the FairTax, both will be in fine shape.

The "underground economy" that income tax advocates complain about will
certainly increase under the FairTax system. Even if the highly dubious
claim that there will be an "average producer price reduction of 22 percent
for goods and services in just the first year after the adoption of the
FairTax" is true, not having to pay a 23 percent tax on an item is a
tremendous incentive to make a purchase in the "underground economy."

I think you misunderstand what the underground economy is. You are speaking of embedded taxation, which I covered earlier. The “underground economy” consists of tax evaders ($350 BILLION annually, according to the IRS), drug dealers, pornography of all kinds, illegal immigrants and more, all of which are, necessarily, consumers and all of which would pay taxes under the FairTax system. Add to that 40 million foreign tourists a year and you have a very significant increase in the tax base.

The claim that the IRS will be eliminated under the FairTax is bogus.
Although the national sales tax will be collected by the states from
retailers, it is still a national sales tax, and as such, its collection
will have to be overseen by some agency of the federal government. Just
because the bureaucracy will no longer be called the IRS doesn't mean that
it will be eliminated. According to The Fair Tax Act of 2005:

There shall be in the Department of the Treasury a Sales Tax Bureau to
administer the national sales tax in those States where it is required
pursuant to section 404, and to discharge other Federal duties and powers
relating to the national sales tax (including those required by sections
402, 403, and 405). The Office of Revenue Allocation shall be within the
Sales Tax Bureau.

Title II, chapter six, section 603 of The Fair Tax Act sets up the Problem
Resolution Office and authorizes "problem resolution officers." There will
still be tax courts according to title II, chapter six, section 602 and
chapter nine, section 7451. Changing the phrase "Internal Revenue Service"
to "Department of the Treasury" and "Commissioner of Internal Revenue" to
"Secretary" doesn't eliminate the federal bureaucracy.

No, but it cuts it significantly – from thousands to tens. Nothing is going to eliminate the Federal bureaucracy and no one in their right mind would want to do so. FaitTax just makes it smaller and more efficient and frankly, Mr. Vance, I think you’d have to be either insane or stupid not to support that.

With the FairTax, the federal government will also be a tax collector in a new way: at the post office. There is no exemption of postal goods and
services mentioned anywhere in the Fair Tax Act of 2005. I suppose this
means that stamps, P.O. Box rental services, and package mailing services
will be subject to the new 23 percent tax.

There is no exemption for anything in the FairTax. With e-mail, UPS and FedEx, the USPO is somewhat redundant anyway. Besides, a postage stamp that used to cost 3 cents now costs 37. That happened without the FairTax and with no improvement in service.

The FairTax is progressive. What could possibly be fair about a progressive tax where some people have to pay a higher percentage than others merely
because they are deemed to be "rich"? How is the FairTax progressive? I
thought it was a flat 23 percent on all new goods and services? It is and it
isn't. Under the FairTax plan, everyone pays the 23 percent tax on
everything, but "every household receives a rebate that is equal to the
FairTax paid on essential goods and services." The rebate is given out each
month, and is based on family size and the poverty level. But like the
current tax code, the FairTax can also function as a tool for income
redistribution because "the poor [will] actually pay less than zero-percent
retail sales tax on their spending. Much like with the earned income tax
credit of today, the rebate may give them more money than they actually
spend on retail taxes."

Rich people get rebates, too. And the wealthy don’t have to pay more if they don’t want to. They can shop at WalMart instead of Armani’s or Chanel, buy at Target rather than Harry Winston’s or Nordstrom’s. They can drive Chevys and Toyotas instead of using limousines or scooting around in Jaguars. A purse from Penneys lasts as long as a Kate Spade purse and a house is just as nice as a mansion or two. But I bet they won’t do it. Half the fun of being rich is showing off.

The real problem with the FairTax is threefold. In " An Open Letter to the President, the Congress, and the American People Concerning Reform of the
Federal Tax Code," which is posted on the FairTax website along with the
endorsement of seventy-five "professional and university economists," we can
see the trouble with the FairTax immediately:

We are not calling for elimination of federal taxation, which would be
irresponsible and undesirable. Nor does our endorsement call for reduced
federal spending. The tax reform plan we endorse is revenue neutral,
collecting as much federal tax revenue as the current income tax code,
including payroll withholding taxes.

There is only one word to describe the fact that the federal government now
spends almost $3 trillion a year: obscene. At least 90 percent of what the
federal government spends is unconstitutional, wasteful, or against the
limited-government principles of the Founders. The only thing the FairTax
does is change the way the state confiscates the wealth of its citizens. As
Congressman Ron Paul says: "The real issue is total spending by government,
not tax reform."

If you think the real issue is Federal Spending, then deal with that issue and leave the FairTax alone. Like veteran’s benefits and prescription prices, national health care and national transportation, Federal Spending has NOTHING to do with taxes. If that’s your issue, deal with it. Reducing income taxes won't cut spending; it'll just cause a raise in taxes somewhere else. MY issue, and the issue of 600,000 other Americans is to get rid of the current income tax structure and replace it with the FairTax.

Because the FairTax is a consumption tax, Murray Rothbard's conclusion about
consumption taxes is apropos:

The consumption tax, on the other hand, can only be regarded as a payment
for permission-to-live. It implies that a man will not be allowed to advance
or even sustain his own life, unless he pays, off the top, a fee to the
State for permission to do so. The consumption tax does not strike me, in
its philosophical implications, as one whit more noble, or less
presumptuous, than the income tax.

That’s poli/soci-speak. Jargon that has nothing to do with the actual day-to-day problems of working, paying bills and trying to earn a little better life for your family. “Permission to live?” That’s sheer semantic stupidity. A consumption tax like the FairTax makes it possible for people to control 100% of their income – to spend it, save it or invest it. Whatever we do with it is good for the economy and good for us. Stop throwing smoke bombs like that in your arguments and stick to reality.

The FairTax does nothing to tame the federal leviathan. The solution is
nothing less than a drastic reduction or wholesale elimination of its
revenue source. What is fair about allowing the government to confiscate 23
percent of the value of every new good and service? FairTax proponents may
call it necessary legislation, but I call it highway robbery.
You are repeating yourself; I suppose because that's your real argument. And it is not an argument against the FairTax -- actually it's an argument FOR the FairTax. No tax or lack of tax is going to tame that. Only control of your congresspeople and senators can do that and if you can’t control them, replace them. What’s fair about adding the tax is that with the eliminated embedded tax, prices come out even. FairTax doesn’t cost more but it increases the tax base and the economy. Call it highway robbery if you want, but you’ve called so many other things incorrectly (and emotionally) in this piece, I don’t think another little bit of tacky name-calling will matter a bit.


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