National Retail Federation Doesn’t Get it

What would you do if I told you that I would give you the equivalent of whatever you pay in Federal payroll taxes each payday? What would you do with that money? The National Retail Federation thinks you would put it a coffee can and bury it in your backyard. Or maybe you’d put it under your mattress. Maybe you’d hermetically seal it in a mayonnaise jar and leave it on Funk and Wagnall’s back porch.

You probably wouldn’t do any of the above. If you’re like the average American, you’d spend it in some way. You might pay bills, maybe pay off a credit card or two. You might put it in a savings account and use it to pay off your car or mortgage. Or maybe take a vacation. You might save it for your child’s college education. You might save it towards a down payment on your first home. The idea is that you would spend it.

For the last several years, Florida has given its citizens a tax-free week where no state sales tax was collected when people bought items that would be used for going back to school. It wasn’t just for children’s clothing; adult clothing was included. Also included were backpacks, school supplies and the like. The eligible items were really stretched the imagination. Last summer, instead of tax-free school supplies, the state gave us $.08 cents per gallon off gasoline because gas prices were so high. I wonder if they’ll do that again this year.

I know that the Florida legislature has decided that in June, we’ll have a tax-free week for hurricane supplies. Batteries, generators, lumber, radios, and just about anything else that could be used for hurricane alerts will be tax-free.

And, if I know Florida taxpayers, they will be out in droves, buying things they didn’t buy last year to prepare for hurricanes because it will be cheaper (no state sales tax). It’s human nature to buy “stuff”. Hurricane supplies, gasoline, and back-to-school items aren’t exactly “stuff” but I think you understand what I’m getting at. When people have money, they spend it. The NRF has it all wrong. When the economy is good, people spend. When your personal economy is good, you go to dinner, you go to the movies, you buy clothes, cars, boats, jewelry, and even houses. You begin to take vacations. You begin to think of saving and investing for the future.

The NRF is also concerned that the working poor would be all but destroyed because a tax rate of 23% would take all they earn. What the NRF doesn’t say is that there is already a corporate tax hidden in the price of all goods they are currently buying. Economists say that tax is as high as 22%. With the Fair Tax, prices would be reduced because taxes would not be charged to the retailer, only the end user – you, the purchaser. So, that item that now costs $100 would be reduced to about $78. A national retail tax of 22% would be about $17 and you would pay $95.00. You would save $5. Not a big savings, but it’s a savings!

You would also have your entire paycheck, minus state income tax and any deductions you have that are not Federal taxes. I have about $350 taken from each paycheck. That means I would have an additional $350 each and every paycheck to spend as I see fit. I doubt that I would bury $350 in a coffee can in the backyard!

I honestly just don’t understand why the NRF isn’t behind this 1000%. More money in the pocket means money spent in the stores. The stores will benefit, the store employees will benefit, and the taxpayers will benefit by a national retail sales tax.

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The FairTax is Still the Answer

There was recently a letter presented to the Americans for Fair Taxation for answers. Karen from Iowa needed some help answering several questions that her son, Michael, had. I decided to take the questions that Michael had and answer them in a public forum. The following questions and comments were presented, in red text. My responses are in black text (and bold).

He opens with: The Tax Gap is an interesting topic, and unfortunately one that is rife with holes. Did you realize that most of the tax gap is attributed to illegal trade? Not cheating on taxes, but actually selling drugs, prostitution and the like.?

Ok, nonetheless, we still have a tax gap and the FairTax would solve most of the problem by putting a sales tax in the face of prostitutes and drug pushers. Also, only retailers would be taking on tax form filing, which reduces the number of filers by 80%, and subsequently compliance and cheating.

One of the problems with a consumption tax vs. an income tax is that consumption taxes increase the incentive to shop on the black market.Because the drug dealers are already not paying taxes on the product they sell, having a consumption tax will not provide much more of this $300B (tax gap) to the government. Yes, the dealers will pay taxes when they buy homes or fancy cars, but a consumption tax will create black markets for these types of goods, and the drug trade takes money out of the hands of the drug users that is then not taxed when they consume the money by purchasing drugs.

Illegal drugs will not be taxed – correct. But, are they taxed now? Not quite. We’re looking for better alternatives than the current system. It would be great if there was a perfect option that has been as researched as the FairTax, but there isn’t.

Keep in mind that used items are not taxed under the FairTax. Tax avoidance with the FairTax will dramatically decrease (not go away) with the FairTax. There will be stiff penalties in place for retailers that cheat the system, which will be the only filers.

There actually are many downsides to HR-25. If you want to champion this cause, you'll need to find these and understand the cost/benefit trade off. There is no black and white.

Correct. I’ll go ahead and tell you the downsides. Current Roth IRA holders will have a disadvantage with this system. Municipalities that use tax-free bonds for debt will have a disadvantage under the FairTax, compared to the current system (when only considering that aspect of the plan). However, compared to other bond holders, there is no disadvantage. But overall; even tax-free bond debt holders; everyone will thrive under the FairTax system.

The important thing to take from this is to come up with a solution for the little problems that need tweaking, along the way. Slamming the whole system because of these issues does no good. Optimism can do you good! No one could disagree that the FairTax in general is much better than the current system.

On a separate note, sometimes there is black and white in this world.

For example, consumption taxes increase black-market activity. Will anational sales tax create a new federal criminal class of people who trade on the black market? i.e: you can go to the Federal Pen with Martha Stewart for selling Grandma's collectable jewelry and not reporting it?

Once again, used items are not taxed at trading time. So, the answer is “no”. Taxes will be collected at the retail level (i.e. Wal-Mart and Target).

Where should the tax be applied, only at the end-consumer (a sales tax as proposed) or at every exchange in the process (a value-added tax)? A sales tax will encourage cheating by people starting fake businesses. How do you regulate this? Will it take another Federal entity like the IRS?

The FairTax bill explicitly states that the only tax that will be collected will be at the cashier’s register, as an end-consumer, only once. Fake business entities are a possibility, but will be regulated, at a much smaller cost and size than the current IRS, I might add. The states already regularly regulate activity such as this for business licenses.

Like (I asked on a different occasion), do you allow a "poverty line", or any exemptions to the sales tax, like home-sales? When you start doing this, who should make the decisions about what "favored industries" will get this very large and lucrative tax break? If we exempt home sales, how much does that increase the taxes on clothing sales? Remember that food, clothing, housing and transportation are four of the five largest consumer expenses - the largest is taxes. What about college tuition?

The FairTax plan explicitly includes a monthly rebate for a set amount for every American at the sales tax (30%) times the poverty level already set by the Health and Human Services. This creates, like you stated, a way to avoid favoritism, which is most efficient and reduces lobbyists. This will create the effect of progressivity, which many Americans feel is important for a tax system. The only items that will not be taxed, which are technically not retail items, are education expenses, charitable contributions, and interest payments. Education is considered to be a human investment. This is essentially the same thing as an income tax deduction for charity and mortgage interest. Which, I might add is more efficient than the current system of deductions because workers will be able to donate and pay for their home with pretax dollars.

Consumption taxes also go against "family values", because they increase the tax burden on young, working families that need to spend more money than older established families do. A young family needs a home to live in, affordable appliances, diapers, bed-sheets, and more groceries than older couples. Because of this, younger families are also likely to purchase lower-quality durable goods (appliances), that need to be replaced (and taxed again) sooner than an older couple. If I buy a new house, I need to get a washer, dryer, fridge and stove - and let’s say for $2,000, but these appliances are of such quality that they only last for 10 years. An older couple who has an irreparable stove can elect to spend $1,000 on a new high-quality stove - that will last for 30 years. So the average annual taxes are higher on the young couple for the exact same service, just because they don't have enough money to afford the better quality durable goods with a lower per-year tax rate.

I’m sure you will agree that young people grow old eventually, right? I wish there was a fountain of youth, but there is not one, yet. Everybody’s entire life spending pattern will be the same, eventually. This is a transition issue, and it is understood what you are saying, but it will all work out in the end. Once again, no tax reform plan is perfect.

I also need to get you a copy of (the book) How to Lie with Statistics. The article (you quoted in another text) uses bad statistics because it tags a "flat surtax" against a floating allocation system. (Our) taxes were not $4,000 too high last year because of tax cheat(er)s. $312 billion divided by $2,052 billion (the national budget) is a tax increase of 15.11%. (We) will pay approx(imately) $8,000 in Federal taxes this year. So if the drug dealers had paid their taxes instead of me, and the government was nice enough to lower the tax rates so that I could keep this money, I should only pay $6,800. This means that (we) only get socked for $600 each ($1,200 / 2 people), not $2,000. The proper statistical number is that "Federal income taxes could be lowered by 15% without reducing Federal expenditures if the cheat(er)s paid this money". This is because the top 5% of earners ($250,000+ a year) pay approx 75% of the income taxes.

You are correct. I’m sure somebody had their math wrong on that one. It’s still an issue that would be helped by the FairTax, no matter how much it is. About the high taxes of the top income-earners... isn’t social redistribution awesome?

A consumption tax is a good idea, but one that is fraught with pitfalls and unknowns. There is a much more simple solution. IRS tax simplification is a concept that few politicians talk about anymore.They made a feeble attempt in the late 80's, and Ross Perot championed the idea, but Congress soon started mucking the process up again under Clinton and Bush.

In 1913, when the income tax was enacted, our system of income taxation was simple. From there, it all fell apart. I would agree that tweaking the current system would be easy and not require much change for the very courageous politicians that we have in Washington. But, we would still have the IRS and the ability to muck up the system, just one year later with lobbyists and new rules. You remember 1986; you said it yourself. No matter how much simplification, (unless completely redone) there will be too much room to get where we are today.

Tax simplification is easy to understand. There are only 3 brackets, poor, middle class, and rich. When I looked at this in college, the numbers were not too complicated. For each person in a family (including children), you can get your first $10,000 in income with no tax and no social security. The next 20,000 pays approx 10% federal tax and 5% FICA. Everything over 30,000 pays 35% federal tax and 8% FICA. Simple, (right)? It is a postcard system for the 80% of American's who only earn W-2 salary, interest and pensions. A family of (four) gets the first 40,000 tax free, pays 15% on the next 80,000, then 43% on everything over 120,000.

As I was saying, the Flat Tax (which is what you are championing) is a good idea in theory. It won’t work though. The 1913 tax legislation started out as a Flat Tax, even more so than you are proposing. In fact, after listening to the Tax Reform Panel’s meeting today, I’m more convinced. Even called a Flat Tax, there are already plans for loopholes and deductions. We have to scrap the system and start over. We have to cut our losses. There is no way out without getting rid of the IRS completely and the income tax. Why are we so stuck on taxing work anyway? We need to open the door for people to get ahead, not to be taxed on everything they make.

Again, in college, this decreased total taxes on the poor (bottom 20% of taxpayers) by just a little bit, decreased taxes by about 10% on the middle class (21% to 90%) and increased taxes on the rich by only 5% (top 10% of taxpayers). Since the mid-1990's, the tax burden has shifted more to the middle class from the rich, so I would expect the top-tier increase to be somewhat higher if somebody recalculated this today. The brackets would also need tuning, maybe $15,000 for the poor and $25,000 for the middle class.

One problem with your theory is that, unlike the FairTax, it hasn’t been researched. You mention that a set range of income has not been set. The FairTax has been researched for more than a decade and is ready to go, with legislation already in the House.

Another problem is that your plan’s burden of taxes shifts from one class to another. We don’t need class warfare. The FairTax only shifts the burden from current taxpayers to current non-taxpayers, which increases the tax base significantly. Virtually all current taxpayers will benefit under the FairTax. An increased tax base comes from prostitutes, drug dealing income-earners, tourists, illegal aliens (millions of people that use our federal services now), and tax cheaters.

I also need to add that a system like this focuses on "family values". A truly fair system would not be based on family size; after all, it is my decision to have 3 or 4 children, so why should retired people or people without kids pay more in taxes than I do?

I would agree. I hate it when welfare recipients have children just to get more money from the government. The current income tax system with child credits is exactly like you say. The FairTax (I guess similar to the current system), however is based on the logic that more goods and services are needed for each individual, child or adult. Because the monthly prebate is given to everybody, it covers the tax on essential goods and services for one person. The tax system is not based on family size; it is based on individuals that just happened to be in a single family.

To add some more comments, I would suggest that everybody read about the bill at http://www.fairtax.org/ and http://www.myfairtax.org/, and contact your congressperson in support of the bill.

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The Time for FairTax is NOW

by Frank Salvato

It is a rare thing when the American people can get excited about a piece of federal legislation that involves taxes. Normally, our elected officials are trying very hard to figure out how to sugarcoat yet another tax increase so they can supplement their habit of funding things like museums for ground hogs and rodeos and tropical biospheres in the farm belt. But a bill sponsored by US Representative John Linder offers a “once in a lifetime” opportunity for our lawmakers to not only do what is right by the American people, but do something that makes them look good as well.

Say the word “change” to a member of congress and immediately their palms begin to sweat and their eyes start to shift nervously from side to side. Faster than the New York Times can put up another picture of a terrorist with a hood over his head, politicians erect a security wall in an effort to maintain the status quo.

But this time it doesn’t have to be that way.

Congressman Linder’s bill — H.R. 25, dubbed the FAIR Tax Bill — is a brilliant piece of legislation. What it proposes is nothing short of genius in its simplicity. The bill would replace our current inferior system of the income tax with a revenue-neutral personal consumption tax. The IRS would be eliminated as we know it and there would never be another tax deadline or audit again. It sounds too good to be true, right? Well, it is within our grasp. All we have to do is “lobby” our elected officials for it.

This proposed legislation would put in place a more equitable tax system while affording a win-win situation for the American people, business and government. In fact, there are no losers but for the political spendthrifts, not even the people employed by the Internal Revenue Service would lose.

If the FAIR Tax system was adopted, taxpayers would be able to keep 100% of their paychecks. In return a 23% consumer tax would be assessed on goods at the time of purchase. That may sound high but consider that most Americans fall into the 15% tax bracket and have to pay 7.65% in payroll taxes (just about 23% right there). Then add in all of the hidden taxes placed on goods and services, 23% is less than what most people pay now.

The beauty of this system is that it is directly proportionate to what people spend. Those who earn more tend to spend more and would pay more in taxes because they make more and spend more. Those with lesser income tend to spend less thus they would be paying less in taxes. The system is proportionate unlike the system in place today.

Critics say that the proposed tax would be unduly harsh on those below the poverty level. That couldn’t be further from the truth. Under the FAIR Tax a rebate payment would be issued to every American household to replace the sales tax paid on necessities. No American would pay taxes on necessities and those living below the poverty line would effectively pay no taxes at all.

Congressman Linder’s proposal provides a more stable tax revenue generating system than the income tax because consumer sales vary less than does the income of the American people. We have the most robust economy in the world with consumer confidence that is rivaled by none. This tax system allows us to benefit from that confidence.

Further, because this tax is assessed on the “end user” business-to-business purchases and expenditures would not be taxed. The proponent organization Americans for FAIR Tax has commissioned research studies that indicate that would stimulate an estimated 20% to 30% drop in consumer prices allowing for our spending dollars to go even further than they do today.

In a last gasp of twisted rationalization I can almost hear the politicos now, “But what of all the employees at the IRS and at the tax preparation companies?”

To be sure, there will be a need for credentialed tax professionals within the FAIR Tax system. Taxes are still being extracted so there will be a need for auditors. The difference here is that auditors would be allowed to be auditors instead of having to act like law enforcement officers. There would be some who would be in need of employment after the change — there’s that scary word again — most tax professionals are highly trained. With the estimated 10.5% growth the FAIR Tax would stimulate, the economy would be ripe to absorb these professionals into the private sector. This would eliminate the IRS and its feeding off of the public trough at a cost of $250 billion every year.

Oh, and by the way, the FAIR Tax would make moot the ongoing argument about Social Security and Medicare. Government would be fully funded under the FAIR Tax system.

The only reason this exceptional piece of legislation may not become a reality is that the politicians didn’t want it put in place. The only reason they could possibly have to cheat you and me out of a superior and more equitable system of taxation would be because they are afraid of “change.” The new system might spotlight their pork barrel addiction and their failure each and every year to balance the budget and spend within their means. The only reason they wouldn’t vote for this intelligent piece of legislation is greed.

If you are tired of taxpayer funded studies on the mating habits of the South American three-toed tree sloth and redundant public works projects, contact your elected officials today and demand that they support the FAIR Tax. After all, they work for you, you shouldn’t have to work a third of a year for them.

Frank Salvato is a political media consultant and managing editor for TheRant.us.

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ZERO Income tax and Zero Payroll Tax

I originaly wrote this op-ed in late January after Stephen Moore wrote his article on the flat tax. Considering that Stephen will also be testiyfying along with Steve Forbes on the Flat Tax ( tired, weak and anemic solution) to the President's tax reform panel, I thought it would be good to share it again.. I hope you will enjoy the car analogy and remember the Fair Tax is a fullly researched and documented package that has already been put into full legislative form and is waiting in the garage ready to rev up our economy and give every American Family a raise in take home pay.

Merrill Bender is an author of several articles on the ten-fold economic benefits of the Fair Tax Legislative package and writes on his tax blogger site - Tax Reform "Fair To All"

The answer to Stephen Moore's January article titled "How much Tax would you like to Pay?", is ZERO Income tax and ZERO payroll tax. That is actually what will happen under an up to date and ready to go Legislative Package- HR 25/ S25 commonly called the Fair Tax- www.fairtax.org.

The FairTax has a ten-fold economic benefit to the American economy that far surpasses the limited benefits for a Flat Tax that Mr. Moore admits he rolled out over 8 years ago. Mr. Moore has resurrected from the auto junk yard of tax reform a car that won't run and is easier for special interests to hijack and steal later on. He is trying to inflate the tires but the engine in this car will not provide enough energy to rev up our economy or go the distance to create quality jobs.

Mr. Moore's car only eliminates about half of the $225 to $250 billion dollars in tax compliance costs where the Fair Tax eliminates a much stronger 80 to 90% of compliance costs. Mr. Moore leaves 90% of the cumbersome IRS tax code because even under a Flat tax, 90% of the code determines the definitions and calculations of the income to be taxed.

He also leaves in place a tax code that is more likely to be corrupted by lobbyists and special interests in the future. Lobbyists who will continue to manipulate the code to rob Peter to pay Paul. Under the Lemon Law he should return this car to the used car lot he got it from. American families want a new tax reform car that is safe and well tested for the economic roads of a new century. Two of our largest states operate their state budgets on a sales tax with no income tax, Florida and Texas.

The Fair Tax is " Family Friendly Tax Reform " whose time has come.The Fair Tax package eliminates all Personal and Business income taxes, payroll taxes, AMT, and Death taxes. Due to these eliminations, prices will drop 22 to 25% and then the Fair Tax replaces them all with a revenue neutral federal retail sales tax on new products and services. Consumers will pay about the same as they do now.

However, exports are not taxed thus the Fair Tax will provide a boom to American manufacturing because American products will be 22% lower in price for sale overseas. We can't compete with low wage countries but we can compete with lower taxes on business, products and services made in America.

The Fair Tax Legislative package has been well researched and is well supported in the research section of their web site - www.fairtax.org. Though Mr. Moore uses old information from Dr. Dale Jorgensen of Harvard University in his article, he must be unaware of the up to date information and research quoted from Dr. Jorgensen that supports the Fair Tax Legislative package. Dr. Jorgensen calculates a 10.5% growth in the economy in the first year of the Fair Tax.The Tax Reform debate and the research is far beyond the simple discussion of Flat Tax, VAT or National Sales Tax, though some will still go through the motions.

The Fair Tax is much more than a National Sales Tax, it has additional provisions that result in prices dropping 22 to 25% before you add in their NST. Consumers will pay about the same for products and services as they did before but take home a much bigger paycheck that is 100% free of federal income or payroll tax. In addition, the Fair Tax has provisions to maintain Progressivity by providing a prebate of the sales tax up to the poverty line to every family. For a family of 4 they receive $479/m for a Couple they receive $357/m. An Average family of 4 making $50,000/yr will have more than $7500 in additional take home pay and after tax purchasing power under the Fair Tax there by making it both progressive and fair. The more you spend the higher your effective tax rate. Supporters say, "Those that Know the Facts Love the Fair Tax". More importantly it is the only comprehensive tax reform proposal that eliminates the income tax and the more regressive payroll tax.

The Fair Tax has just been re-introduced from the 108th Congress to the 109th Congress as bills, HR 25 and S25. The Fair Tax had 55 Co-Sponsors in the last Congress and plans to have over 100 in the new Congress. Dennis Hastert and Tom Delay have both indicated support. Congressman John Linder of Georgia was the original sponsor of the Fair Tax bill and has just been appointed by the Speaker to the important House Ways & Means Committee and its tax writing subcommittee.

The Fair Tax meets all the guidelines set down by President Bush for his tax reform panel including promoting home ownership and supporting charities. In addition, the Fair Tax also meets the 3 standards set by House Minority Leader, Nancy Pelosi in her open letter to the President on Tax Reform sent 12/15/04; 1) Tax Simplification; 2)Tax Fairness(Progressivity); 3) Revenue neutral.

This Car is waiting in the garage gassed up and ready to go. Democrats and Republicans need to climb on board and drive our economy in a positive and new direction with the Fair Tax Legislative package. The Fair Tax has been built from the ground up, it has been test-driven and shared with many researchers, economists, average Americans and American Organizations. Supporters include 560,000 members of Americans for Fair Taxation, 350,000 members of The National Tax Payer's Union, and is outlined as a legislative agenda item of the 6 million member American Federation of Farm Bureaus.

The Fair Tax has been fined tuned and polished for the 21st century. It is an economic engine waiting to rev up our economy and send us down the road better able to compete fairly in the global market place and to grow a financially stronger "ownership society" at home.

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