Fair Tax is wealth redistribution and anything but fair

Fair Tax is wealth redistribution and anything but fair

Image by: JD Hancock http://www.flickr.com/photos/jdhancock/
Image by: JD Hancock http://www.flickr.com/photos/jdhancock/

WASHINGTON, February 14, 2014 – The so-called “fair tax” (FT) is a fraud. It is more wealth redistribution and a financial scam.

In the words of its own creators, FT is more progressive than the current income tax; it increases welfare payments through its “prebate” mechanism.

The FT is essentially a national retail sales tax. The prebate is “supposed to” merely return the expected amount of fair tax paid on purchases below some cut-off, in order to prevent the tax from hurting the poor or being regressive.

This prebate is not really a refund of FT paid as its supporters say it is. It is a new $600 billion entitlement. It would have all Americans receiving a substantial monthly check from the federal government – a very bad idea for those of us who are not socialists. We simply cannot afford yet another huge entitlement that is likely to grow in the future.

The FT and prebate would leave the working poor making no contribution at all to funding the federal government. They would pay nothing even for their own Social Security and Medicare benefits. The FT and the prebate extend tax welfare to the non-working poor – and also take the next progressive Cloward-Piven step towards giving Social Security and Medicare benefits to all, regardless of work. It removes the tax penalty for misreporting Social Security wages, thereby inviting the fraudulent reporting of those wages.

While, the prebate is supposed to merely reimburse the poor for any FT they pay, it would actually pay them far more than that. It assumes that the poor spend more than the underlying Health and Human Services Poverty Guidelines, and it assumes that they will pay FT on all of their purchases. They won’t. FT also provides free Social Security and Medicare benefits to the working – and some non-working – poor.

In order to replace existing income tax revenues, FT would result in a 40 to 70 percent in-your-face retail sales tax. That would spark a taxpayer rebellion and would destroy our retail-sales-sensitive economy. That 40 percent lower bound is a base 30 percent — not 23 percent — FT plus, plus state and local sales tax – say, about 10 percent.

The 70 percent upper bound is the rate needed if we get an illustrative 30 percent FT evasion/avoidance rate. FT proposals incredibly assume zero evasion and zero intentional reduction in spending, as well as no migration from new to used goods in order to avoid the burden of the tax.

In addition to that 40 to 70 percent tax, the FT contains several hidden taxes.

The FT’s 30 percent rate is really 42 percent or more; the 12 percent is hidden by having federal, state and local governments paying FT on their purchases; ultimately, they must get that money from you.

The initial 30 percent rate is 1 to 5 percent short, and that plus any other revenue shortfall will have to be made up by raising the FT, or reintroducing an income tax.

The federal budget will rise for higher Social Security (COLA) benefits and higher COLA’s payable to all federal retirees, both induced by FT’s price increase of up to 30 percent, and for fraudulent new Social Security benefits invited by FT’s removal of the tax penalty for misreporting Social Security wages. A higher FT rate, or a new income tax, will be required to fund these.

The new IRS – the Sales Tax Administration Agency (STAA), the new federal agency that administers the FT – may well be far worse and far more invasive than today’s IRS. Consumers are liable to pay FT and must receive receipts to prove they paid FT. The STAA may audit consumers (including asking them to produce all FT receipts), and we may well have to file an “Annual FT Summary.”

We may well wind up with both a new income tax and the FT when Congress repeals the FT’s sunset clause and enacts a new income tax.

Seniors will start to pay for Social Security again, and some will pay a second or third tax on their earnings. Many middle class seniors will pay more FT than they would have paid in income tax, and many will lose purchasing power because of the nearly 30 percent price increases.

They will also lose purchasing power because of the higher state, local and federal taxes required to cover those governments’ FT payments. We will pay higher federal taxes due to higher Social Security and pension COLA’s and fraudulent Social Security benefits.

The FT promises grand economic benefits, but these are unpredictable, making the claims mere hype and promises of change.

What we need is a flat income tax with no deductions, no exemptions, no credits and a 10 percent rate. It should tax business income directly to shareholders on a very simple basis – that is, there should be no corporate income tax, with business income taxed directly to shareholders. That is, every business would be taxed like a partnership or Sub S; the shareholders pay tax rather than the entity, and there is no tax on dividends. The IRS could be neutered, and tax returns reduced to a single page.

The fair tax is neither fair nor simple, and it entails the creation of huge new bureaucracies and government payments. The flat tax is superior in all regards. Call your representatives in Congress and let them know that this is what you want.

Stephen Eldridge is a retired lifetime tax consulting professional, JD, LLM in Taxation, CPA, co-author of a 3 volume tax treatise, and lecturer. He has no financial stake in any tax system. 

Follow him on Twitter @StephenCEldridg

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