Is the fair tax really fair?

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OCALA, Fla., February 17, 2014 — The United States federal income tax is perennially unpopular with taxpayers.

Since the tax was instituted over 100 years ago, countless schemes to drastically reduce it, confine it to a flat rate, or even abolish it in favor of a tariff on imported goods have been surfaced. None of these have found any meaningful success.

Enter the fair tax. It would be levied on purchases made within the United States, much in the same way that state and local sales taxes work. There is far more to the tax than this simple definition, though.

For instance, how does the fair tax compare to the flat tax?


“Both are broad-based consumption tax systems that achieve a singular, low rate by broadening the base but not taxing returns on capital twice, e.g., the capital gains and corporate income taxes,” says Annapolis-based tax attorney Dan Mastromarco. He has been leading the charge for years on fair tax-related matters.  

“Under the flat tax, businesses deduct the cost of inputs from gross receipts and pay tax on the difference — the value added. It is basically a sales tax where the tax is collected in stages from each producer on the supply chain rather than all at once from retailers, as in the retail sales taxes that are common in the U.S.  Since businesses are allowed a deduction for wages paid, employees pay the ‘flat tax’ on their wages directly. Both benefit by imposing a simpler system that will unleash economic growth.” 

Mastromarco claims that the fair tax “has an edge over the flat tax” because “(t)he choice is not between earning income or leisure, but between spending beyond the necessities of life. The [fair tax] lets you keep your whole paycheck or pension until you decide to consume. That is an unmatched advantage. … While the flat tax makes tax filing simpler, like the current 1040EZ, the [fair tax] would end the IRS and all individual tax returns, audits and frustrations. April 15th would be just another day.”

Beyond this, “(t)he flat tax still hides taxes paid through corporations — the hidden taxes that has allowed taxes to reach their current high levels. … The flat tax preserves the IRS infrastructure to administer a system that is not structurally different from the income tax. This means the flat tax can more readily be converted into a graduated income. Only the [fair tax] can repeal the 16th Amendment, returning to what our Founding Fathers’ originally intended.”

Those who hold left-of-center views might be surprised to learn that, in Mastromarco’s words, the fair tax “‘untaxes’ the poor, while the flat tax raises their taxes since it abolishes the Earned Income Tax Credit, which currently offsets some of the payroll tax burden. The flat tax also retains the payroll tax, the most onerous tax for at least 8 of 10 low income Americans. … The flat tax taxes exports and exempts imports from tax. The [fair tax] taxes U.S. produced and foreign produced goods the same when sold at retail in the U.S. and forgives the tax on exports.  

“These are a few of the differences, but I caution those who like making war between allies of a common enemy. The real enemy to both plans is the current system; Flat or Fair, either plan would be superior.” 

So then, what makes the fair tax truly fair, as opposed to America’s current tax system?

Former New Mexico Governor Gary Johnson is one of America’s foremost libertarian voices. He stood as a candidate for the 2012 Republican presidential nomination and ultimately left the GOP to run as the Libertarian Party’s standard-bearer. Today, Gov. Johnson continues his advocacy for individualist public policy.

He explains that the fair tax “is simple, it is transparent, and it treats everyone equally. That is obviously the exact opposite of the current system.”

Mastromarco says the question of fairness is among “the most important and avoided” in politics.

“Congress shuns defining fairness so it doesn’t have to grade tax plans against known objectives. We need to define fairness for them,” he states. “A truly fair system is [one which] anyone can understand … vs. enabling two prior Chairmen of the Ways and Means Committee and a Treasury Secretary (collectively, the ‘tax writers’) to avoid paying taxes with the excuse ‘they couldn’t possibly understand it.’”

Mastromarco goes on to mention that a fair tax “does not tax the poor rather taxes us on what we choose to spend, does not unvest Americans but does allow for the maximum amount of upward mobility … does not impose monumental costs on the American taxpayer … imposes the least burden on economic growth as measured by savings, investment, productivity, and GDP, capital stock or compliance costs … does not punish exports — taxes imports same as U.S. produced goods,” and last, though certainly not least, “reveals the real costs of the Federal government now hidden from taxpayers.”

He adds, “Under these criteria, our present system is without any redeeming qualities.”

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  • Gene Johnson

    The “fair tax,” like the flat tax, is a tax on consumption As such, it hits the poor and what’s left of the middle class much harder than the wealthy. Poor people spend everything they make. Thus, they pay taxes on their entire incomes. However, wealthy people save and invest a good portion of what they make. Thus, they pay taxes on only the portion of income they spend. Their savings and investment growth is protected from taxation, much like investments in a regular IRA or 401k is protected from taxation until the money is withdrawn and spent. The income tax is fairer because it taxes income with a progressive tax rate–the more income, the more taxes you pay. This is fair because the tax is progressive (i.e., progressively a higher rate of tax on people with higher incomes who can afford to pay higher taxes). The “fair” tax and flat tax schemes are regressive taxes because they tax poor peoples’ entire incomes, while wealthy people pay taxes only on that portion of their incomes that they spend.

    • Krokodil Bill

      except huge ticket items like mansions, boats, jets, cars, designer clothes, fancy furniture, fancy food, vacation destinations, etc. Also, is not purchasing stock still a purchase? Wouldn’t it be taxed like anything else that can be bought? Also, I think you are missing the larger picture, b/c poor people still get taxed on their entire income in the current system, and if they were able to save under a fair tax, and not be taxed on their income, then wouldn’t it allow them to enter the middle class more efficiently, by good old fashioned DIY-ness and self sacrifice? Rich people don’t live the same way or consume the same things poor people do, rich people have expensive tastes. Your argument is flawed b/c you are basically stating that the fair or flat tax is a bad idea b/c poor people will get taxed on their entire income (which already happens) and rich people won’t get taxed on their entire income (which already happens). So instead of dissolving the IRS and moving to a consumption tax, to not, because if you did, the same things would be happening that are now, except now that they are now clouded by the IRS. Good job…

      • Yankee

        I do not understand what you are saying – you are confusiing me.

        The IRS may be techinally unfunded, but there is s NEW IRS (i.e., the STAA) that will likley be much WORSE.

        AND, when Congress repeals the FT’s laughable Sunset Clause and enacts a NEW Income Tax, we will ALSO have a NEW NEW IRS, as well.

      • Herb Smith

        No, purchasing a stock would not be taxable nor the income earned by such assets. Purchasing stocks and bonds is not considered consumption and would not be taxed. It would be considered saving/investing akin to depositing money in a savings account or a mutual fund account.

    • jbennettatty

      Consider, however, what happens when wealthy people do not spend their entire incomes. Unless wealthy people keep their money under a mattress, they invest it. We all benefit from the investment, including the poor. That characteristic is the ultimate fairness of the FairTax(R).

      ~Jim Bennett

      • Gene Johnson

        In theory, wealthy people invest in companies and corporations that create new jobs. This is Ronald Reagan’s “trickle-down” theory. However, corporations have been creating jobs in China, other Asian countries, Mexico and Latin America, and in Eastern Europe.

        • jbennettatty

          You’re right. That’s how it is today.

          But under the FairTax(R) the tax incentive to create jobs in China, other Asian countries, Mexico, Latin America and Eastern Europe would disappear. Poor people here in the United States would benefit from investment. That is the ultimate fairness of the FairTax(R).

          • Gene Johnson

            If there’s a tax-incentive to create jobs in developing countries, that advantage should be ended under the current tax code.

          • jbennettatty

            I’ll do you one better. End the current tax code.

          • Yankee

            I am not aware of tax incentives to create jibs in foeign countries – they may have lower tax rates but likley have much lower labor rates, no unions and less govt regulation, etc.

          • Yankee

            Keep on drinking the Kool-Aid, Jim.

        • Robert Heiney

          With no corporate taxes anymore, companies would benefit more by building manufacturing plants here, instead of sending jobs to China. Foreign companies would rush in to build here to for the tax savings created by the Fair Tax. Thus more jobs available. WIN, WIN!

          • Gene Johnson

            It would have to be a whopper “Fair-Tax” rate of 25% to 30% to make up for corporate and business taxation. As a retiree, my rate is about 11% for federal tax, so that would double or triple my tax bill.

          • Yankee

            You can fantasize anything.

      • Robert Heiney

        Wealthy people only want one thing. MORE WEALTH! They’ll invest it, and spend it.

    • Yankee

      Comrade (Progressive taxes are an element of Communist philosophy),

      Everyone should pay somthong for the cost ofesential govt services.

      Everyone should pay for THEIR OWN SS/Medi benefits.

      • Gene Johnson

        Progressive income taxes are also a key element of the U.S. Tax Code under the theory that “of those who have much, much is expected.” And we all paid our Social Security and Medicare payroll taxes all during our working careers. So, please don’t change the rules now that some of us have retired.

        • Yankee

          Yes, sad to say, but the US has become infected with Progressive-Socialist policies – “of those who have much, much is expected” is simply Progressive-Socialist nicer-sounding verbiage.

          I don’t want to hurt seniors who have paid for SS/Medi all their lives, except that we all need to pay a lot more for Medicare because we have not paid enough for our benefits. That is, (after phasing out the means-testing of annual premiums) everyone’s standard Medicare monthly premium needs to rise graduallly for a very long time, until payments equal actual claims.

          What I was referring to was that we should not be providing free Ss/medi too anyone, as the FT does (& gives them a big tax welfare check in addition). In general, my point is to move AWAY from wealth redistribution in these 2 programs and move them both back to individuals funding THEIR OWN benefirs.

          • Gene Johnson

            Income and wealth redistribution was changed drastically 30 years ago when Ronald Reagan reduced the top tax brackets from 70% down to 35% max. It’s now 39%. but a long ways from 70%.He also reduced capital gains taxes from 50% to 15% and more or less ended estate taxes, which did redistribute wealth.I think quibbling over Social Security and Medicare payroll taxes takes the “wealth redistribution” argument a step too far. However, I will say we all need to pay more for Medicare. Parts A, B, and D … but gradually please.

          • Yankee

            Gene,

            Yes, while those rates came down, the wealthy still pay a gigantic share of total taxes AND today we have a higher (50%) percentage of people paying zero or negative income taxes and getting free SS/Medi is GREATER than ever in our history (and no-tax welfare is at historically high levels as Obama tries to expand welfare as fast as possible). Thus, wealth redistribution is at its zenith in America today.

            I agree fully, we need to raise those monthly premiums graduallay over time (I think they need to grow to over $1,000 a month). Thus, how about increasing them by $10 every month for the foreseeable future.(while eliminating curret means testing of those premiums). Eventually, I think we should eliminate the 2.9% Medi tax on UNLIMITED earnings and relace it with a lifetime monthly premium that starts off low and rises with age.

          • Gene Johnson

            The owner of Polartec in Massachusetts was asked maybe 10 years ago why he kept his plant in the U.S., while he could save a bundle by moving it abroad. It was a family-owned business, and he said his employees were like family. He added, “How much more can I eat.”
            As to Medicare, it would be fair to eliminate “means-testing.” And premiums of $12,000/year would seem fair for a retired couple. When premiums get that high; however, Medicare may need to offer levels of coverage. Or Medicare offers basic coverage and we buy added health benefits, kind of like we do with Medigap coverage.

          • Yankee

            The fact that the owner of POLARTEC was willing to stay in MA was HIS PERSONAL CHOICE. It is SOCIALIST govts which make the decision for its citizens as to who has “enough” and who is in “need” – remember Karl Marx. I am NOT a Socialist.

            I am not sure we are in the same page (and that is my fault). When I meant to eliminate current means-testing of premiums,I was referring to the ADDED tax the welathiest must pay, i.e. those who have paid th most 2.9% Medi Tax during their working years will pay as much as 4x the Medicare annual premiums paid by lower income people. That is the means-testing that I say is wrong – is that what you are agreeing with?

            I do not understand exactly what you are saying about Medicare when premiums reach $12,000 per year. Are yu saying Medicare should offer lower coverage for a lower premium? If so, people will sttil have to pay added premiums to cover that lesser coverage, so that their total premiums would be the same.

            But maybe you are right and Medicare will have to offer some lesser coverage for a lower premium, especially fo those who can’t afford to pay the $12,000 (or for others). Maybe Medicare should offer an option for a high-deductible catastrophe medical insurance policy.

            Actually, I would like to see the fed govt devolve edicare (& SS) back to the private sector where it belongs under the Constitution.

          • Gene Johnson

            I understand “means testing.” It means wealthy retirees pay higher Medicare premiums. That theory follows the theory of the progressive income tax. If I were wealthy, I would call it unfair. But my point was that the owner of Polartec said, “How much more can I eat.” So if you’re taxed at a higher rate or pay more for Medicare does it still leave you enough to eat?

          • Yankee

            Good, I am glad we agree that such means-tsting is a bad thing.

            The fact that the wealth owner of Polartec would still have enough to eat if you taxed him more, does NOT make it right or fair for the givt to take that extra amount from someone who has already paid the very most Medicare tax during his lifetime. That goes right back to the Progressive-Socialist “from each according to his means and to each according to his needs” – Karl Marx.

          • Gene Johnson

            Though we may not agree, I believe we understand one another’s positions on taxation and public assistance for people of lessor means. Actually, if poor people had self-sustaining jobs, they wouldn’t need public assistance. I’ve enjoyed the conversation, and I think we’ve taken it about as far I can go. With regard, Gene.

          • Yankee

            Available jobs would certainly help, but that is not enough to get people off welfare – work is not attractive while welfare is so profitable.

            What is needed is a gentle push – that is, put BACK the work requirement to receive welfare; no-work = no welfare. When we did that in the 90’s many State welfare rolls almost disappeared over time.

          • Robert Heiney

            I don’t like the idea of continued SS/Medi payments either. BUT I hate the income/payroll tax even more, and (as a semi retiree) am willing to bite that bullet really hard to end the 16th amendment and the IRS in one fell swoop. The Fair T is simple. Flat T requires the IRS to stay in business and you still have to file every year. Waste of time and government tax payer money. I realize change is hard on some of us, specially us retirees. But I don’t Uncle Sam’s hand in my finances or bank accounts. MY MONEY, MY GOVERNMENT, MY TAXES. Learn to spend it better in DC.

          • Yankee

            Robert,

            Newsflash – the FT does NOT get rid of th 16th Amendment.

            The FT has a NEW IRS (the STAA) and will also have a NEW IRS when it enacts the NEW Income Tax (after it repeals the FT’s laughable Sunset Clause)..

            You may have to file an “Annual FT Summary” and a a NEW Income Tax return when Congress enacts the NEW Income Tax.

          • Kibber_SF

            Don’t forget Ronnie also lowered the middle class from 14+ to 11+ and then raised it to 17+ before he left office.

    • Robert Heiney

      Did you read the article? Or are you so opposed to radical good change, that you just don’t want it, and you’ve made up your mind. The Fair Tax “Untaxes” the poor and middle class, because we don’t spend as much as the rich. Anyone who believes the current system is fixable, is a fool.

  • Yankee

    The author, Mr. Cotto is a journalist, not a financial or tax professional. . This article is merely a collection of statements by one of the authors of the FT (and as such is really DM’s article) and as such represents mere propaganda.

    As such, this propaganda of course does not disclose ANY of the FINANCIAL or practical problems I see with the FT, including;

    1) the sticker shock 40-70% sales tax that will spark a revolt that would destroy our retail-sales-sensitive economy,

    2) several hidden taxes for Fed + S/L taxes to pay the FT they must pay, AND more fed taxes to pay for SS & all fed pension COLA’s caused by FT AND for fraudulent SS benefits invited by FT’s elimination of the tax “penalty” for reporting higher SS Wages.

    3) Big incrase in new hime prics AND in required down payments (because lenders will require any sales tax to be baid in full buy the buyer).

    4) a more invasive new IRS (STAA) which will likely audit consumers AND request cnsumers to file a “Annual FT Summary”.

    5) the ineveitable repeal of the FT’s laughable Sunset Clause and the enactment of a NEW Income Tax so that we are saddled with BOTH.

    In addition, it fails to disclose the FT’s dangerous welfare aspects. The Prebate resuts in the poor being directly dependent upon (and thus very obedient to) the fed govt.The Prebate also goes much further than advertised and makes sure that the poor get back all the FT they might pay AND get a big extra tax welfare check AND get free SS/Medi.

    When you understand all of the detail that is behind the comments that I make here, you should then be able to dispel this propaganda fog.

    Edit

    • Mark Crane

      Point 1. A 40-70% sales tax? In your dreams. You have to be making this up.
      Point 4. The STAA? You live in a state where the sales tax is the primary tax. Have you EVER gotten a bill from the state for a tax summary? I didn’t think so.
      Point 5. You don’t really understand the prebate at all. It is not to provide an income, it is to compensate for the sales tax paid up to the POVERTY level. I would assume the majority of the rich will not even apply for it. Why do you care what others might get? If you don’t want the prebate, don’t apply for it.
      Have YOU created a tax bill to present to congress that is better than the Fairtax? No? Then who cares what you think?

      • Yankee

        Mark,

        Point 1. I have explained 100 times. The 40% is the combination of the FT’s 30% (not 23%) plus an illustrative 10% S/L sales tax. The 70% is an illustrative rate needed if evasion/avoidance hits 30% (remember, the FT allows for ZERO evasion/avoidance). Do you understand now?

        Point 4. No, the States do not audit much today – their 5-10% sales taxes are only a small part of their total revenues. But when the FT is the SOLE revenue source for the fed govt and people try so much harder to evade 40-70% sales taxes, they will HAVE TO audit consumers to slow down evasion. And yes, they will have to supplement that with an “Annual FT Summary” required filing by all consumers – that is the sad reality which will blindside you if you don’t see it coming (did you think you would lose your medical insurance under ACA?).

        Point 5. It is YOU who have been totaly fooled by the FT propaganda. I will review this discussion to see if I posted my more detailed paper which shows that the Prebate OVERPAYS any FT the poor might pay (by a lot) and results in a big tax welfare check.

        No-one will decline to acccept the Prebate and that is NOT the point. The point is that BOTTOM LINE,the Prebate resuts in 1) the poor pay zero tax, 2) the poor get free SS/Medi. 3) the poor get a big tax welfare check. That is my objection.

        Lastly, and while you try to distract from the FT’s fatal flaws, I HAVE presented my very Flat Income Tax (which you obviously did not read). Whether or not you like my My Flat tax is a totally separate issue from the FT’s fatal flaws.

        If you fail to read or understand anything, your comments lose credibility.

      • Yankee

        Mark,
        Below this reply, is my initial reply to your comment. This is the more detailed further response to your POINT 5 – PREBATE that I mentioned there.

        The Fair Tax (“FT”) INCREASES WELFARE, by Stephen C. Eldridge

        The FT’s Prebate is a WELFARE check that leaves many dependent upon the govt for a large portion of their monthly income – a very bad idea. The Prebate is not a refund of FT paid, but a new independent $600B ENTITLEMENT, that will only increase in the future – the very last thing we can afford.

        The Prebate is advertised to insure that the poor pay no FT, merely assuming that we all agree with that goal. Further analysis exposes that the Prebate goes much further – it gives the poor a large FT PROFIT.

        The Prebate gives every family a monthly check purportedly to cover the FT they would pay on “poverty level purchases” as defined by the US HHS Dept.’s Poverty Guidelines and makes “adjustments” to them. The Prebate next “assumes” that EVERY family of each size spend a certain amount of dollars (For 2014; $11,670/adult, $4,060/child) which is then multiplied by 23% (the tax-INCLUSIVE rate) to yield the Prebate that will reimburse all the of the FT ($2,684/adult, $934/child) that is THEORETICALLY paid.

        To illustrate, assume there is a family of 5; Husband, Wife, 2 kids, and the Wife’s Sister lives with them. They would be “assumed” to spend a total of $43,130 ($11,670 x 3, plus $4,060 x 2). Their 2014 Prebate would be $9,920 ($43,130 x 23%, the “tax-inclusive” FT rate). The $9,920 Prebate is calculated to pay back 100% of the FT THEORETICALLY paid by the family, but as shown below it greatly OVERPAYS the amount of FT ACTUALLY paid by the family.

        Point 1. The FT corrects for the “Marriage Penalty”. The problem is that there IS NO “Marriage Penalty” in the underlying HHS Guidelines – they were developed as impervious to the age (or the marital status) of the person. They provide $11,670 in spending for the 1st PERSON in the household and $4,060 for the 2nd PERSON (the 1st PERSON gets more to pay the rent) – it does not matter whether the person is an adult or a child or whether the adults are married or not. What the Prebate does is “make believe” that the HHS Guidelines say “Adult” & “Child” and then is more generous to marrieds – the Prebate is generous in giving away more money, YOURS.

        RESULT: The Prebate assumes this family spends $7,610 MORE and overpays them by $1,750.

        Point 2. The Prebate’s more generously defines “family”. FT’s more-limited (than the HHS guidelines’) definition of “Family” allows for more FT “families” in a single physical household than the underlying HHS Guidelines would allow. A FT “family” includes only lineal ancestors/descendants (plus adopted). Thus, the Wife’s Sister would be treated as a separate family under FT, and thus as an adult (this would NOT occur if the HHS Guidelines were followed).

        RESULT: The Prebate assumes this family pays $7,610 MORE and overpays them by $1,750.

        Point 3. The Prebate “assumes” that ALL spend AT the poverty limit. If the family ACTUALLY spends LESS than the maximum amount a family can spend and still be at the HHS Guidelines’ limit, they will be overpaid. This family is “assumed” to spend $43,130.

        RESULT: If ACTUALLY spending is only $40,130, the Prebate will OVERPAY them $690. RESULT: For Points 1-3, The Prebate assumes $18,220 MORE spending and overpays by $4,190.

        Point 4. The Prebate OVERPAYS for USED goods.

        If the family buys some goods USED (and can prove the seller paid FT) they will not have to pay FT.

        Yet the Prebate “makes believe” that they DID pay FT.

        RESULT: If the family bought $5,000 of USED goods, the Prebate would overpay them by $1,150

        Point 5. The Prebate OVERPAYS for Black Market purchases.

        If the family buys some goods on the Black Market, they will pay no FT. The FT “makes believe” that all of the money is spent legally so that full FT is paid.

        RESULT: If the family spends $5,000 in the Black Market, the Prebate overpays them by $1,150.

        Point 6. The Prebate OVERPAYS for In-Kind Welfare

        If the family is on Welfare, a substantial portion of their support will be paid IN-KIND (e.g., Medicaid, Housing Assistance). The poor will NOT receive cash for these items and pay FT – WE DO. Thus, the FT “makes believe” that the poor actually paid the FT and repays THEM for FT WE paid.

        RESULT: If in-kind welfare is $6,000, the Prebate overpays by $1,380.

        RESULT: For Points 4-6, Prebate assumes FT paid on $16,000 of purchases and overpays $3,680.

        RESULT: For Points 1-3, Prebate assumes $18,220 MORE spending and overpays by $4,190.

        RESULT: Grand Total overpaid Prebate; Points 1-6 = $7,870 (i.e. $9,920 minus $2,050, total actual amount of FT paid on actual spending on which FT is paid in this illustration ($8,910).

        PLUS, the poor get free SS/Medicare.

      • dutchman3

        Mark,
        Mr Cotto quotes Dan Mastromarco as claiming that under the Fairtax, there will be no more audits And, as you have noted, Yankee suggests otherwise. Yankee has made this claim numerous times on other blogs, and has been ridiculed and insulted. Both can’t be right! It turns out that Yankee, a retired tax lawyer, caught some fine print in HR25, Sec.101d, that clearly says that consumers (us) are liable for the sales tax unless we can produce a receipt showing the tax paid. The obvious implication is that all families are going to have to collect and store each and every receipt, no matter how insignificant, in order to avoid any liability. And it is not unreasonable to predict that the STAA or the State sales tax agency will want to audit individual taxpayers in order to stamp out any attempt to defraud the system. And, an annual consumption report may be the best way to discourage individual family fraud. This whole scenario put forth by Yankee is no laughing matter, imho.

        I suggest that the Fairtax leaders participating here (heads up, Jim) might want to review Sec 101d with Congressman Woodall in order to make changes to HR25 and protect our privacy rights. The STAA needs to concentrate their audit efforts on businesses, not individuals. That is where the real tax revenue is!

        • Yankee

          For the very same reason that States complement their SALES taxes with USE taxes, you MUST make buyers liable for the tax in order to prevent evasion.

          • dutchman3

            Use taxes are a very poor way to increase federal revenue.! So far, because use taxes are self assessing, they have failed to provide significant revenue. The public just won’t support the concept. Legislation aimed at improving use tax collections has passed the Senate, but not the House and in an election year, the chances of passage are slim and none!

            Your prediction regarding STAA individual audits may have technical merit, but from a common sense viewpoint, there is no way your very intrusive concept will take hold. I can’t imagine 150 million families collecting and storing every single sales tax receipt. Nor are Americans willing or able to create the annual consumption report you invented all for the purpose of reducing evasion. I think if your intent is to find employment for future tax lawyers, you certainly succeeded. But, I would rather assume 15% evasion due to the black market in the beginning, and leave American families alone. The revolt against your intrusive STAA plan would make your predicted revolt against the 40-70%sales tax look tame.

          • Yankee

            Dutchman,

            A USE tax is not really a separate and new tax – it is a plug to protect SALES tax revenues from leaking. Some States call their taxes SALES & USE taxes. It can be a very useful tool to prevent loss of Sales tax revenues.

            So far States have not made a big issue of use taxes and apparently do not want to audit buyers. Importantly, the relativey low-rate sales taxes lost are lost to evasion are not that big a deal to the States that have several other sources of revenue.

            In contrast, when the FT becomes the fed govts sole source of revenues, and all rational analysts expect runaway evasion at such high sales tax rate, the fed will have no option except to try to enforce the FT’s Sales-Use tax. That will be be done with audits of consumers AND ny “Annual FT Filing” – a very efficient way to stem the loss to evasion.

            I am sorry, but if you DO NOT save those FT receipts, the FT STATUTE DOES NOT absolve you from lliablity. I cannot read the FT
            STSTUTE any other way.

            Americans are not HAPPILY willing to fill out Forms 1040 ( I HATE IT) – BUT WE ALL DO IT. As we discussed, for most people, my 1 page “Annual FT Summary” will be much easier for people to fill out that a Form 1040. Yes, you would need to have a record of all receipts, exempt purchase and ALL of your FT receipts. See below:

            L.1. Total Spent (complete analysis of all accounts/assets, receipts, copies of all records)

            L.2 Exempt Purchases (“used”, tuition, etc.) (schedule + receipts,
            documentation)

            L.3 L. 1 minus L. 2 = Taxable Purchases

            L.4 Total FT Due: Line 3 x 23%

            L.5 Less: Total of all FT receipts attached

            L.6 FT due: L. 4 – L. 5

            No, I would prefer to have thse auditors doing productive work in the private sector – not auditing consumers for the govt.

            Just think about what you wrote. $450B (15%) to $900B (30%) FT would be lost to evasion and you are simply willing to let that go out the door.That would mean that honest taxpayers will have to pay MORE FT – roughly 46% (@15% evasion) and 63% (@30% evasion) – plus say 10% S/L x 115% or 130%). I don’t think so!

            A govt (anxious to build up its own power) would instead do what it can to protect that revenue and would audit consumers and require an “Annual FT Filing” (after all, we sat still for filing mind-boggling Income tax returns., without a revolt. Reenber for most people, my annual FT filing is very simple.

            BOTTOM LINE: I cannot GUARANTEE this will happen and YOU can’t GUARANTEE it won’t. I am merely trying to point out what in my professional opinion is a SIGNIFICANT RISK – I am placing MY (PROFESSIONAL) bet that consumer audits and an “Annual FT Filings” are more likely to happen than not.

          • dutchman3

            Yankee,

            Thank you for showing everyone just what your “simple” forms contain in order to reduce black market activities. I believe I can guarantee this will never happen because there is not one word in HR25 that authorizes such an intrusive system for individuals. Plenty of guidance for businesses, but no hint of individual audits or penalties. Quite the contrary, here are a couple of the stated intents of the legislation:
            “(4) To simplify the tax law and reduce the administration costs of, and the costs of compliance with, the tax law.

            `(5) To provide for the administration of the tax law
            in a manner that respects privacy, due process, individual rights when interacting with the government, the presumption of innocence in criminal proceedings, and the presumption of lawful behavior in civil proceedings.” None of this would seem to support your individual audit concept.

            As for your annual consumption report itself, I can’t get past line #1. In order to determine how much was available to be spent on taxable goods and services, not only would we need annual income, but also a complete credit card accounting as well as a beginning and ending balance in savings and investment accounts. No small task for the 150 million families you are so interested in. And I would hope that all accounts are as of Dec 31st or we would be having to prorate/estimate everything. Assuming I can arrive at my annual spending, I would then need to review all receipts for non taxable items such as education, used goods, State and Local government fees and taxes, etc. etc. Once I have taxable spending in hand, I can quickly figure out tax supposedly paid. Then I can tote up several shoe boxes of receipts and hope they show the correct tax paid. If not, I guarantee you that the local black market in receipts will help me balance my books. And all for what? 150 million families will turn in a clean consumption report at great cost and aggravation and none are worth the paper they are printed on.

            The STAA, and the State sales tax agencies (if any volunteer to act as the federal tax collector??), will have their hands full just auditing the 20 million retail business which is where the real tax revenue is. Let me suggest that rather than intrude on the lives of 150 million families, government resources should concentrate on reducing black market activities, which is what your whole individual audit scheme seems to be aimed at. Depending on their success, there may come a time when individual audits could be warranted, but certainly not at square one. Congrats on identifying a potential individual liability issue, but your solution isn’t justified without some experience on such a high rate, broad based national sales tax.

          • Yankee

            Dutchman,

            My friend, the generic verbiage about the Statute’s INTENT that you quote means absolutely NOTHING – it does not control. The only thing that matters is the verbiage of its operative provisions.

            As you have already agreed, Sec. 101(d) makes buyers liable and requires them to get reciepts. The statutue need not go into detail about auditing and filing requirements – those are administrative subjects to be dealt with later.

            “Annual FT Summary” – Line 1 – you will have to account for TOTAL SPENDING MINUS EXEMPT SPENDING, (I may change my Summary) – including reconciling all financial accounts. For most people, that will be a very simple task becuase they do not have many financial accounts.

            Even for most middle income families with a few financial accounts, this is a fairly simple process (most financial institututions prepare such a reconciliation for you). This would be INFINITELY simpler than preparing today’s Income tax returns.

            Locating exempt purchases would be a simple matter of reviewing the list of checks, credit card, etc.- not much different than the exercise that takes place under the Income Tax.

            If you collected fraudulent receipts, you would likely be subject to criinal penalties. That decision to report fraudulent receipts will make many consumers hestitate to do so.

            From those reports, WHICH THE PUBLIC prepares, the STAA will select some for audit, just like IRS does today.

            If YOU are selected the new Commssioner of STAA, you can do whatever YOU think will help reduce FT loss to evasion. If I were that Commisssioner, I would certainly go for the “Annual FT Summary” and do as much auditing of buyers as possible AND also do some of the things you suggest.

            The point is, my scenario is a very real threat to occur and we are taking that very real risk – based upon my lifetime of professional experience, I would not bury my head in the sand and simply expect that buyers won’t be audited and that we won’t have to file an “Annual FT Summary” under these circumstances.

            There is no experience on such a high rate sales tax, but IMHO it is an invalid argument that you make that unless I can prove that audits and an Annual FT Summary” were actually used under similar circumstances, that my scenarios are invalid. IMHO, it is unralistic and unwise to contemplate realistic and probable scenarios fro MY professional experience.

          • dutchman3

            Yankee,

            It seems to me that we have wasted enough time and energy on what is just a distraction from the major criticisms of the Fairtax. Therefore, based on my professional experience as a lobbyist who has originated draft legislation and one who pays special attention to Congressional intent, I can now share with you that the whole reason for 101d is to encourage buyers to insist on a sales receipt, thereby reducing the possibility of cheating by the seller. There never was any intent to audit buyers, nor will such audits occur.

            The STAA will be fully occupied with monitoring 20 million retail businesses, and will certainly appreciate any help consumers can provide to reduce evasion.

          • Yankee

            Dutchman,

            My dear friend, while I respect your training as an economist and your experience an internal company lobbyist, (but you are not trained lawyer) I must disagree with your continued focusing and dependence upon what someone “intended” for the legislation to do and accomplish.

            To paraphrase the words of my legal idol, SCOTUS Justice Scalia,
            “Noboby gives a rat’s behind about what somebody INTENDED – the ONLY thing that matters is the verbiage of the statute.” In this discusion, you admitted that the verbiage of the statute inded makes the buyer liable for FT unlless he recived a receipt.This verbiage is certainly clear emough for the STAA to audit consumers (using my 6 line Filing as a Pre-Audit Questionnaire and later as a separate FT filing).

            Incidentally, I sent you an e-mail in which I noted that a tax legislation organization reviewed my scenario of auditing and “Annual FT Filing” – their simple response was “Of course!”.

          • dutchman3

            Yankee,

            No, I am not a lawyer–fortunately?–but I did spend 10 years on Capitol Hill as a Corporate lobbyist. I suspect I know more about Congress and their proceedings than the average lawyer. I agree with your Scalia quote, but what you don’t seem to grasp is the process when dealing with any ambiguity in legislation language. And, surely you agree that the English language is not always absolutely clear!

            In this case, it is obvious that we don’t agree on what the liability language intends. After a little research, I have confirmed that AFFT never intended for consumers to store a years worth of sales receipts, nor did they intend to harass consumers with threats of an audit. The simple fix would be, in the event HR25 ever comes up for a vote, to conduct a two minute colloquy in order to clarify the intent of 101d. Woodall and Camp could easily clarify intent and at that point, even Scalia would agree that words count–in this case the words of the Congressman. There is no way the future STAA Director would even consider generating consumer audits in the face of the Congressional Record on this issue.

            Your speculation only distracts from legitimate Fairtax criticisms and serves no purpose, imho.

          • Yankee

            Dutchman,

            Scalia; When the language is perfectly clear on its face (i.e., the buyer IS liable, liablitlity is satisfied by getting a reciept)) the court will not set aside those clear words for the “intent” of the people who lobbied for the FT. The court will look at the ONLY apparrent intent as expresseds by the clear verbiage of the statute.

            You miss the entire import of Scalia’s teachings. Even RW’s comments in Committee do NOT control. ALL that matters is the verbiage of the bill that was voted upon by Congress. You are asking us to trust what AFFT intends and will assure gets fixed somehow? that is a bridge too far. IMHO, you are far too trusting – did you believe you could keep your doctor and your premiums would go down?).

            I know that your focusing on intent is rational and logical, but it is NOT the tax law. Strict construction rules the day. An ambiguity (and there is none here, IMHO) can be resolved by a reading that makes the statute make sense, rather than a reading which produces an irrational result. If the words as written can be interpreted rationally (which they can), then the court will assign that rational meaning and not some alternate meaning – they will not rewrite the statute to say things it does not say,

            If I were a lobbyist as you were, I would not leave my goals open to possibe misinterpretation – instead I would write the exact words that are needed to get me to my goals.

            Please tell me, if that is AFFT’s true “intent”, why then doesn’t the AFFT simply change the verbiage of the statute to ELIMINATE consumer liability and SPECIFICALLY absolve the consumer from keeping FT receipts and from audits. Why would they not try to guarantee exacty what they are promising their target audience? Answer; Because they know it won’t remotely work without consumer audits and keeping FT receipts (and it still won’t work even with audits, receipts, etc.). Note that this is beside the point I make above.

            Even if AFFT rewrites the statute to guarantee those things, when reality sets in and evasion avoidance skyrockets and FT revenues plummet, after Congress first enacts an emergency NEW Income Tax, it will change the FT law to allow auditing of consumers, require Annula FT Summary and require reciepts. I sent you an e-mail which showed th clesr INTENT and specific rules that Congress simply swept away.

          • dutchman3

            Yankee,

            You still don’t seem to get it. We are in agreement that liability shifts to the seller when a receipt is provided to the buyer. But at that point, you speculate that the buyer will have to produce that receipt, and be subject to an annual audit and an annual consumption report. There is no language in HR25 that even suggests you may be correct.
            I, on the other hand, believe that AFFT does not expect the consumer to keep receipts. 101d states “A person
            using or consuming a taxable property or service in the United States is not liable for the tax imposed by this section if the person pays the tax to a person selling the taxable property or service and receives from such person a purchaser’s receipt within the meaning of section 509.” By law (Sec. 509), every retail business is required to charge the FairTax and provide a receipt –
            the business is liable for the tax on the retail sale of that good. The purpose of section 101d is to clarify the liability in the cases not covered by the vast majority of everyday purchases, such as the imports described in 101c. If you buy a car in Canada and drive it down, you’re liable to pay the tax.
            This also covers the B2B transaction if the first business is audited (they’re not liable), but the second party could be liable if their use is non-business consumption. In such cases, the individual is liable to pay the tax themselves to either the U.S.
            Customs, State Tax Agency, or directly to the federal Sales Tax
            Bureau. So, 101d(1) doesn’t apply the vast majority of Americans. The enforcement of the FairTax is via business audits, just as it is today with our everyday sales tax and we don’t keep receipts for that.
            As I suggested earlier, if there is any question about the meaning of legislation, (as there could be here), the issue will be resolved on the floor of the House during final passage. If Woodall and Camp have a two minute colloquy on the floor and make it clear that there is no intent to audit consumers, your case is dead. The Congressional Record will provide legal guidance to the STAA and there will be no attempt to audit consumers.

          • Yankee

            Dutchman,

            I respectfully suggest to you that it is YOU who does not get it.

            You admit that the statute makes the consumer is laibale unless he RECEIVES a receipt. As a practical matter (like your insurance company raising premiums and your doctors droping Medicare) how is the STAA to know whethr or not you RECEIVED a receipt unles the ask you to PRODUCE it. That, IMHO, is not only the plain verbiage of the statute, but the ONLY rational interpretaton of its words.The tax lobbyist organization I just reviewed this with said “Of course”.

            I don’t quite understand your belief. IMHO, it does not matter what AFFT believes – it is only relevant what they WROTE IN THE STATUTE (and if they want that result, why in the world don’t they spell that put perfectly clearly in the statute – even if they did that would never survive FT’s passage by more than 10 minutes.

            Your reasoning about the purpose (just as irrelevant as “intent”) is NOT supported by the verbiage of Sec. 101(d). You would have to read 101(d)(1) to cover your “purpose” and then Sec 101(d)(2) protects all purchasers from legal US stores. You would have to read many words into that statute to get to your purpose and a court would not do so. My reading is far more the plain meaning of the words of the statute.

            Your B2B is a little confusing. If the 1st business is audited on it’s purchases (and used none for non-business use) it is not liable.
            The 2nd business that bought from the 1st business is subject to the same audit rules as applied to the 1st business. I see Sec. 101(d) making a busines liable for FT upon conversion of business
            property to personal use, but Sec 101(d)(2) is not at all relevant to their circumstances (same for other similar circumstances).

            You simply refuse to accept the fact that Scalia says it is irrelevant what RW says to Camp. The only thing that matters is what the statute says (those words are the only words Congress agreed to).

            Again, why wouldn’t RW make it PERFECTLY clear in the
            statute (and even if he did, I would not believe that would not be amended ASAP after enactment in any event, because it would be a practical impossibility to protect the FT revenue without auditing consumers. Again, my tax lobbying organization agrees
            with me fully.

            The ACA can provide anything it wants, but insurance companies practiclly must raise premiums by a lot and many docs will give up trearing Medicare & Medicaid patients, nothwitstanding that the STATED INTENT of ACA is to lower premiums and get everyone coverage.

          • dutchman3

            Your claim that your interpretation is the only rationale one is arrogant beyond belief. And if the AFFT prepared legislation is somehow ambiguous, that can be cleared up during passage of HR25. Here is the definition of a colloquy, FYI.

            “Colloquy: Discussion between members during floor
            proceedings, generally to put on the record a mutual understanding
            about the intent of a provision or amendment. The discussion is usually
            scripted in advance.”

            Case closed!

          • Yankee

            Dutchman,

            Only the Judge can declare “case closed” – the plaintiff or defendant cannot do so oj their own.

            So you defined “colloquy” – so what? I cannot seem to get through to you that coloquy does NOT control – the words of the statute control, and they are capable of a very straightforward meaning without resort to colloquy that Congress did not vote on.

            From the words of the statute, I have a very hard time getting to your interpretation and Scalia would not try and would not look to the coloquy for an explanation if he could reach a rational interpretation from the words of the statute and he would in fact find such rational interpretation from the words of the statute.

            What I am saying is that reading the verbiage of the statute, mine is a natural and logical reasoning that Scalia would say is controlling, notwithstanding that some other, more strained meaning is suggested by colloquy.

            You STILL have not answered the $64 questuon. Why would AFFT refuse to make their “intent” perfectly clear in the Statute rather than hope that the colloquy would work (not that I would have any confidence that such language would survive without almost immediate amendment)?

          • dutchman3

            Yankee,
            In the event of ambiguity, the colloquy is absolutely controlling. Perhaps you should ask Scalia what he thinks? One thing is for sure, your interpretation of 101d is in the minority, and your arrogance is starting to wear very thin. Are you claiming that only your reading of 101d is accurate? Are the rest of the thousands that agree with me just morons and fools? Unfortunately we will never resolve this debate because HR25 will never get a vote, imho!

            Cheers!

          • Yankee

            Dutchman,

            The words of the stautute are NOT ambiguous.

            I really don’t care if my opinion of the verbiage of Sec 101(d) in in the minority of non-tax-lawyers (and i am sufficiently self confident not to be worried if I was in the minority of tax lawyers).

            I am sorry that you have gooten crabby and irritable and beleive (wrongly) that I am being arrogant – that’s the very ast thing I am.

            Let me try again. My reading is a plain reading of Sec 101(d) – Scalia would go no further. IMHO, yours is s strained reading that requires the judge to look to the colloquy to come up with verbiage that is NOT plainly stated in the statute – Scalia would not do this.

            The thousands who agree with you are FT “true believers” who swallow all of the FT propaganda, and never even get to your rationale. You appear to simply ignore the tax lobby firm that agrees with me.

            STILL – you do not address why RW would not make his “intent” perfectly clear in the verbiage of the statute.(which would not last long before amendment anyway, IMHO).

        • Mark Crane

          Sec 101d states the person making the purchase is liable for paying the tax. It makes no mention of PROVING it with receipts. The fine print is in your mind. End of discussion. As far as I’m concerned you won’t need to respond as I won’t read it.

          • dutchman3

            Ignorance really is bliss. I will let Yankee, a retired tax lawyer, explain the implications of the term “liable” from a legal standpoint.

          • Yankee

            READERS;

            Please note that Mark appears to be a typical closed-minded FT’er who cannot tolerate absorbing reality – notice that he wil, NOT even read this response.

            I am sorry but Mark does not understand how to read a tax statutute – that’s what I did all of my professional life.

            Sec 101(d)(1) makes YOU the buyer LIABLE to pay the FT (just like any S/L USE tax that compements their Sales taxes.

            Sec 101(d)(2) says that you can satisfy your LIABIITY if you “received” a receipt showing that you paid the FT. How will the STAA know if you “received” a receipt unless they ask you to “produce” it (common sense)? Obviously you can and likley will be asked to produce that receipt and therefore you must keep ALL FT receipts. And that audit will be followed by a requirement to file an “Annual FT Summary”.

            What I have done is read the statute and simply thought through what has to play out in the real world (I tried to think of what I would do if I were apointed Commissioner of the STAA).. Can you imagine if we all had done the with the Obamacare statute before iit was enacted (but they “slam dunked” us with a 2,000+ page statute).

    • jbennettatty

      Rasputin could not have said that better.

      • Yankee

        It’s a shame that you do not have the necessary skills, education, experience to understand what I wrote.

  • Mr Sinatra

    the Fair Tax is the best gov’t reform short of a balanced budget amendment anyone has thought of for a century!

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