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Thursday, June 02, 2005

"Family Friendly" Tax Reform vs the FairTax


The so-called “Family Friendly Tax Reform” is complicated, invasive and, overall, the poorest of all the proposals so far put before the panel.
Proponents claim the FairTax is unfair because a family making $50,000 a year would pay the same amount in taxes for food, housing clothing, etc. as a family making $500,000 annually. This is not so simply because the wealthy family buys more expensive goods and services (mansions instead of houses, limousines instead of Toyotas, Versace dresses instead of Lane Bryant) than the middle class family. Therefore, they would pay more taxes.

In this piece I take each of the arguments presented by a proponent of the “Family Friendly Tax Reform” and compare them to the FairTax.
The estimate of necessary sales tax rate of about 60 percent to fund the federal government at its current levels because taxable retail sales account for less than one-third of all U.S. economic activity fails to consider the fact that the FairTax will tap the $350 Billion a year that the IRS says tax evaders do not pay every year as well as assure that drug dealers, porn pushers, and illegal immigrants all pay into the system along with 40 million foreign tourists annually,
I explain why refundable tax credits, replacing old tax breaks with new ones and exchanging old exemptions and incentives for new and broader ones do not meet the requirement for fairness and, in fact, penalize the elderly, the poor and people who don’t own homes.
In conclusion, a tax that gives everyone 100% of their paycheck or pension and still funds the government, provides a rebate so no one pays tax on necessities up to the poverty level, broadens the tax base by assuring that present tax evaders have to pay taxes, repeals the income tax and other regressive taxation and makes US companies the only ones in the world that do not tax production is the best, most profitable way to go for the country and for its citizens. The FairTax is a win/win tax – taxpayers win, government wins and the economy wins.

Family Friendly Tax Reform vs the FairTax

A new proposal for tax reform called "Family Friendly Tax Reform" should be compared to the FairTax to see which best meets the President’s directive.
Daniel Weinstein, a major proponent of the "Family Friendly Tax Reform" asks, "How would a national sales tax actually make matters worse? Its advocates have long argued that by taxing the things we buy instead of the salaries we earn, such a tax would both simplify the tax code and promote personal savings over material consumption. But the reality would be far different. Consider this: A family making $50,000 would pay the same amount in taxes as a family earning $500,000 for such basic items as food and clothing. For the lower-income family, sales taxes would add up to a big chunk of the family budget. For the wealthier family, taxes would barely be a consideration. That's hardly fair." Weinstein chooses not to recognize that the wealthy spend differently from the rest of us.

If wealthy families spent money the way middle- and lower-income families did, they would all pay the same tax. However, lower-income families don’t buy two or three mansions – one in town, one in Aspen, another on the shore – and they don’t drive around in limousines and Jaguars. They wear clothing from Walmart and Penney’s instead of Versace, Chanel, Vera Wang, etc. Their weddings are in church halls instead of country clubs; they eat out at Red Lobster or Olive Garden instead of Daniel’s, La Cirque or Babbo’s in NYC or The Dorchester Terrace in London. That’s why higher income families will pay more tax – they buy more expensive things.

Weinstein continues, "Some proponents say that food and clothing could be taxed at lower rates -- or exempted altogether -- while luxury goods could be taxed at higher rates. . . And while some have argued that a national sales tax would eliminate the need for the Internal Revenue Service, they overlook the fact that we would need a new agency to collect tax revenues from businesses." Instead of exemptions, FairTax provides a rebate for all taxpayers. That’s fair. It would be nonsense to tax luxury goods at higher rates since they are more expensive in the first place. Elimination of the IRS is elimination of the 60,000 page tax code that no one understands and that the IRS enforces unfairly and unevenly. The collection system for a sales tax would be smaller and non-invasive.

"Worst of all, a national sales tax would have to be much higher than its proponents admit. In fact, the Brookings Institution's William Gale estimates that it would take a sales tax rate of about 60 percent to fund the federal government at its current levels, because taxable retail sales account for less than one-third of all U.S. economic activity." Mr. Gale’s figures did not include consideration of the $350 Billion a year that the IRS says tax evaders do not pay every year, which would necessarily be tapped by a consumption tax. He also left out the money that will be paid into the system by drug dealers, porn promoters, and illegal immigrants who now pay no income tax at all. Add to that income from consumption taxes paid by 40 million foreign tourists annually and you begin to see where Mr. Gale’s estimates are totally incorrect.

Also, the FairTax was developed by some of the finest economic minds in America, not as a superficial intellectual exercise or as a weighted response to make the figures prove a foregone conclusion, but over a 10-year period with careful research into all phases of the US economic system. Economists from a wide political spectrum (Harvard, Rice, MIT, Stanford, and more) came up with a politically unbiased system when they developed the FairTax.

Weinstein again: "There is another hearty perennial tax reform idea: the flat tax -- one theoretically low income-tax rate for everyone. But that, too, would be a raw deal. As former Undersecretary of Commerce Robert Shapiro has calculated, maintaining current federal revenues would require a 21 percent flat tax. . . A flat tax would thus represent a substantial tax increase for a large majority of taxpayers." I have to agree with him here – because the flat tax does not get rid of the current income tax. We do not need any tax that is simply added to the system already in place, including the “Family Friendly Tax”. THAT would be regressive.
Weinstein continues, "'Family friendly tax reform' would bring $436 billion in net new tax relief to American families. It calls for eliminating 68 tax breaks that are redundant. . . replaced by four generous new tax incentives that would be easily understandable, available to the vast majority of taxpayers, and consistent with the progressive values of work and family." That’s exchanging tit for tat and therein lies the first major problem with this plan. First, It keeps the income tax and the IRS. The IRS is the only group in this country with search and seizure rights – you are guilty until proven innocent and the cards are stacked against you. Under this so-called family-friendly reform” those rules still hold.

"The first new incentive would be a refundable college tax credit that would substitute for five existing education tax breaks and provide a $3,000-a-year incentive to students for four years of college and two years of graduate school. . . The second major incentive would be a home mortgage deduction that would be available to all homeowners, not just those who itemize. By allowing non-itemizers to claim the deduction, we can increase homeownership while reducing the number of Americans who must file the more complicated 1040 tax form. Third, a new family tax credit would replace three existing tax incentives -- the Earned Income Tax Credit, the Child Credit, and the Dependent Care Credit -- and provide more benefits to more families than all of them combined."
What about renters? People don’t buy houses to get tax credits; they buy homes that remind them of their idea of “home,” or because they like the schools or they want privacy. Or maybe they’re just tired of living with white walls and generic light fixtures in a rental that they can’t personalize.
Incentives, as we have learned with the income tax, most often turn out to be dis-incentives. With Weinstein’s plan you are still paying for education and homes with after-tax dollars. How much better – and what better incentive – to pay with before-tax dollars. Under the FairTax plan, everyone gets to keep 100% of their income to spend, save or invest however he or she sees fit.

"Finally, a universal pension (UP) would replace 16 existing IRA-type accounts with a single portable retirement account for all workers. . . . Universal pensions could also offer a progressive alternative to Bush's plan to divert Social Security payroll taxes into private accounts." The FairTax leaves it up to the individual to choose how to save and invest money. Tuition, house payments, all purchases – all paid with before tax dollars. It’s cynical for government to treat citizens like incompetent children, trying to guide them with "incentives."

Other things are missing in this tax plan that are simply and neatly handled by the FairTax. The "Family Friendly" plan neglects the elderly and the disadvantaged – the FairTax takes care of them nicely by providing a prebate – a monthly stipend so that no one pays tax at all up to the poverty level.

The FairTax does not tax productivity. The Family Friendly plan does. To be the only country in the world that doesn’t tax production gives the US a HUGE international trade advantage. The "Family Friendly" tax system doesn’t even address those issues nor does it promise to expand the tax base like the FairTax does. Under this system, Weinstein again: "This approach would also restore basic fairness to the system by treating everyone the same. Millions of middleclass and low-income families are not able to take advantage of the existing mortgage deduction because they don't itemize, and millions more don't contribute to an IRA or 401(k) because they can't afford it. By making all four of these broad new tax incentives available to non-itemizers and making the incentives for college and retirement refundable, everyone will get a tax break." But it doesn’t treat everyone the same: What about families who don’t own homes? There’s no help here for renters – many of the elderly don’t WANT to struggle with the upkeep of homes and yards. Giving them all of their pension funds, like FairTax does, is fair.

The President charged the panel with the direction to simplify tax laws, to make the tax law fair while encouraging home ownership and charity giving, to promote economic growth and strengthen US competitiveness in global markets. There is only one proposal before the panel that meets all those criteria and that, ladies and gentlemen, is the FairTax.


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