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Monday, June 06, 2005

FairTax is Still the Way to Go

The President's Tax Reform Panel is soliciting comments on the potential benefits and problems with the various tax reform proposals that have been presented to the Panel (last month). I wrote in response to their request and have decided to share that reasoning here, as follows.

Dear Mr. Mack III, Mr. Breaux, and other Panel Members,

I admire your action to find out what the American people think about our current tax code system. Please consider what I have to say as you go further in your research. I favor the consumption tax system called the FairTax. The FairTax would eliminate the Internal Revenue Service and the repeal the 16th Amendment, under House Bill HR 25.

Please consider the following benefits of the plan, compared to the other plans presented to your panel last month (Flat Tax, Consumed Income Tax, Freedom Flat Tax, and the BEST Plan).

All FICA taxes are eliminated, both for individuals and corporations. All other plans leave the current payroll tax system in place, continuing the regressive nature of the payroll tax system.

The FairTax consists of one, simple rate at the cash register. All of the other plans, still tax businesses in one way or another. This not only taxes the producers of the goods of this country (which should be untaxed for being a driver in the economy), it also taxes different producers and different individuals at different rates, which is wrong.

These first two facts mean that there will be a dramatic reduction in the overall price level of all goods and services. The currently institutionalized cost of taxes that is contained in all prices will be eliminated, and competition will force the prices down.

The IRS is eliminated. As with the other items, the institutionalized cost of compliance, both for corporations and individuals, will be eliminated. The IRS has a "corporate culture" of its own that puts it into adversarial position with every citizen. It cannot be reformed or transformed. It must be eliminated. With the IRS and the income tax system in place, no matter how simple, it leaves room for changes and more loopholes. In 1913, the current income tax system started out as a Flat Tax on the wealthiest individuals. The current system needs to be scrapped, along with any other income tax.

The individual gets to decide, through lifestyle purchases, how, where and when to pay taxes. The "rich" cannot avoid taxation through sheltering. Every other plan still leaves many gaps for loopholes that politicians and beurocrats could enjoy to use the American people as puppets and shell out class warfare.
Under the FairTax, because only retail businesses will be filers (but, not payers of the tax), all other plans utilize between twice (the BEST Plan) to 10 times the amount of filers (All other plans). Because retail businesses will be collecting and remitting taxes, a 1/4% collection allowance will go to the retailers and the state governments for managing the system, without the Internal Revenue Service.

Every citizen gets to experience the cost of government in a direct, visible way, the share of which increases as the level of purchases increases. Because the other plans still tax businesses in some way, under those plans, individuals would not know their portion of business taxes that they pay.

The distribution of the tax burden is mitigated by a monthly rebate check to every family for taxes paid on purchases up to the poverty level. This offsets any taxes paid by the poorest among us. The BEST Plan also uses a rebate check. However, the other tax systems would still use “deductions” and personal “exemptions” to manipulate the tax burden of the American people.

The FairTax plan is an integrated proposal with many positive features, not the least of which are the advantages that will accrue to residential real estate ownership. Owners will be able to pay the entire house payment, both principal and interest, with “pre-tax” dollars. They will get this benefit without itemizing deductions, which only a small percentage of homeowners do today. With the other plans, extra filing will be required to get any deduction, if it is offered. Under the FairTax, they will be able to save for down payments much faster, without the penalty of taxation.

Also, interest rates will be even lower than they are today. Because all of the other plans still tax businesses, interest rates would stay near the current level.

Because only new (not used) goods and services will be taxed at the final point of purchase, there are some items that would include a built-in deduction (as they are called in the current system), including tuition, charitable contributions, savings, investments, and interest payments (the familiar mortgage interest deduction). The Freedom Flat Tax only uses a standard deduction. All other plans also use different deductions, such as the benefit the FairTax will bring, although it is not called a “deduction”.

We are losing jobs because of our tax system. The income tax on corporations causes the prices of our goods and services to go so high that we can no longer compete in the international marketplace. We all want products that are less expensive. Countries with lower corporate tax rates can make items at a lower cost.

To benefit American manufacturing and job growth, we need to eliminate corporate business and payroll taxes to not only eliminate the pass-through cost to American consumers, but also to create a greater demand for American-made products for export, if exports do not pay the same tax. American workers cannot compete with low wage countries nor do they want to, but we should compete globally with lower taxes on business and on American made products. Good paying manufacturing jobs will be the result of creating a corporate tax-free zone in America. Instead of business going offshore to Mexico or China or the Bahamas for Corporate headquarters, American businesses will have a major incentive to produce in the United States and increase their financial, investment, and equipment capital in our country.

The FairTax has an automatic provision for border adjustability. However, the Flat Tax, Consumed Income Tax, and the Freedom Flat Tax all do not have any border adjustability under their system, except for the business tax portion of the Consumed Income Tax. The BEST Plan has a destination principle tax, but is not automatic.

The FairTax has the lowest compliance costs of all the plans presented, with the BEST Plan not far behind. However, with the income tax in place, all other plans still have significant compliance costs, but lower than the current system.

System inequities will persist under the Consumed Income Tax and the Freedom Flat Tax. Under the Consumed Income Tax, there are higher marginal tax rates for larger businesses, while the election to choose between taxing methods under the Freedom Flat Tax creates unfairness.

Independent research supports revenue neutrality under the FairTax or the BEST Plan. However, no sufficient research data exists for the other income tax plans.

The tradeoffs for the FairTax plan include the diminished jobs for tax lobbyists and IRS agents. However, with the increased amount of jobs throughout the country, many other opportunities will open for them. No longer will drug dealers, prostitutes, and illegal immigrants be able to skirt by without paying their fair share.

Current seniors of the wealthiest caliber (extremely minor percentage of people) that have saved investments could be double-taxed after the passing of the FairTax. However, many benefits will be gained for their children and grandchildren. Also, the decreased retail prices and rebate checks will diminish most of the negative aspects for wealthy seniors. All in all, the difference will be nominal for them, compared to other citizens.

There will be some transition costs. However, those will be minimal, whereas most tax-incentivized investments and accounts will only need to take away the payment of income taxes. For example, municipal bonds will no longer have tax-free benefits, but they will still be the same bonds.

No matter what the plan you recommend to the President, all will have lower administrative costs, save the country money, and will be better than the current complicated system.

Please consider the FairTax plan, which has already been extensively researched and is in the works in Congress. The BEST Plan does not have any legislation currently in Congress and the other plans, besides the FairTax, are income taxes, which are inferior to the FairTax.


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