NTF Issue Paper: fairtax3.doc. 3-07.
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
THE FAIR TAX 2007.
BACKGROUND. Cong.
John Linder (GA.) has re-introduced HR 25, the Fair Tax Act of 2007, as
a bill in the 110th Congress. He has introduced basically the same
bill each congressional session since 1999.
HR 25 will repeal all individual and corporate federal income
taxes, payroll taxes, self-employment taxes, Social Security and Medicare
taxes, capital gains taxes, and estate and gift taxes. The Center on Budget and Policy Priorities
declares that 3/4ths of taxpayers pay more in payroll than in income
taxes. It will abolish the IRS. Replacing all these onerous taxes is the Fair Tax, a personal consumption tax,
administered primarily by states that remit the tax collected minus
administrative fees of ¼ of 1% and where resides the most practical experience
and expertise in sales tax administration. Businesses that collect and remit
this tax will receive equitable compensation for costs incurred. This 23% national retail sales tax will apply
to sales of all new consumer property, goods, and services only once, at the
final destination for consumption. Every
American taxpayer will pay the identical rate, without exception. It would decrease overall tax burdens by
broadening the tax base and more efficiently taxing wealth. Nebraskans will
keep 100% of their paychecks, pensions, and Social Security checks, allowing us
to save more money, invest in business, and stimulate our economy by job
creation. The legislation would take
effect on Jan. 1, 2009. The tax would
add to import duties but would not apply to wholesale exports. Personal services such as health care, legal services, haircuts, and auto repairs would fall subject to tax,
also renting apartments or condos and other property. Inventories
held by businesses at the end of the workday on 12-31-2008 will qualify for Fair Tax inclusion if sold within the next
year. Illegal immigrants would pay this
tax. Many free market economists and tax
experts believe that this tax would positively impact savings and investment,
ease tax compliance, increase economic growth, and offer incentives for
international business conglomerates to locate in the U.S.
Cong. John
Linder (7th Dist. GA.)
ITS
PROGRESS. This bi-partisan bill has
52 co-sponsors from 24 states. Several
congressional committees have heard testimony on this tax, but neither chamber
has voted on it. To become a law, a
lawmaker must include it in the final version of tax legislation from the House
Ways and Means Comm. or the Senate Finance Committee, then gain support from
the Joint Committee on Taxation and finally win passage again in both House and
Senate. Conservative Sen. Saxby Chambliss
(GA.) has introduced an identical bill into the Senate. The Fair Tax
would require a constitutional amendment to become implemented, a high
hurdle.
POSITIVE
EFFECTS. The number of
individuals required to file taxes drops from about 145 million to 25 million,
an 80% drop. This
bill will prevent duplicative taxation, simplify the federal tax code, and
reduce compliance and adminis- trative costs.
It will show the true cost of everything we buy. Lowered are costs of employment. No longer will heirs have to sell family
businesses and farms to pay estate taxes.
High tax planning costs on small businesses and farms will
disappear. Small, family-owned
businesses and farms and ranches will thrive. HR 25 will encourage
capital formation and entrepreneurship.
It will spur productivity and international competitiveness. Because our current tax system has a hidden
effect on prices, the Fair Tax would
decrease production costs by the removal of business taxes and compliance
costs.
TAX
COLLECTION. Sellers impose the tax
separately from the purchase. Sellers of
taxable property and services will collect and remit the tax. For taxable
property or services bought outside the U.S. and imported, the buyer will remit
the tax. For wages and salaries paid by
a taxable employer for taxable services, the employer will remit the tax. Consumers will get credit for amounts paid in
excess of amounts due after filing a monthly report. They will get refunds within 60 days with no
interest; balances due not paid within 60 days will bear interest. All tax and taxpayer information is confi-
dential except to other Fair Tax
administering authorities and congressional committees in closed session. The number of tax collection points would greatly
drop under the Fair Tax, as only
retailers would file a tax return, not each income earner, with filing
complexity reduced to a simple state sales tax form. Simplified tax system
means greater compliance. The lesser
number of collection points will permit tax administrators to investigate tax
fraud with greater scrutiny. Increased
business audits would make tax evasion more risky. The International Monetary Fund revealed that
Russian transition to a flat tax increased income reporting from 52% to 68% in
1 yr. Similar results happened in
Slovenia. Businesses would submit
monthly or quarterly reports, depending upon sales volume, of taxable sales and
sales tax collected. Retail outlets would keep ¼ of 1% as collection fees. 45 states and the District of Columbia levy
sales taxes, accounting for 97% of our population and economic output. Most states collect a host of county, city, and state sales taxes. Therefore, our nation has a large
infrastructure currently to collect a sales tax. The underground economy would suffer, because
tax evasion under the present system only needs the payer to lie on tax
forms. Evasion under the Fair Tax requires collusion from both payer and
payee. The Fair
Tax contains fines and penalties for non-compliance and authorizes a
means for reporting tax cheats and getting a reward.
EXEMPTIONS. Dues, contributions, and other payments to
nonprofit organizations, like religious and community groups, are exempt. Taxable property and services purchased by
nonprofits also are exempt. Mortgage interest up to the basic interest
rate determined by the Federal Reserve would be tax-free. Intra-business purchases
for the production of goods and services would not face taxation. No tax on taxable property or service bought
for an investment purpose and held only for such purpose. Education, training,
savings,
and financial investing would identify as
investments and therefore not face taxes.
DISTRIBUTION
OF TAX BURDEN.
The tax rate paid by households would vary
according to spending habits and monthly rebates. A family of 3 spending $30,000 per year on
taxable items would pay about 6% of total spending in Fair Tax, whereas a household spending $125,000
on taxable items would pay about 19% in Fair Tax. Total amounts of spending and the proportion
of spending on taxable items would determine a household effective tax
rate. Buying or receiving used items
would contribute towards a negative rate. The Fair Tax
would broaden the tax base and actually tax wealth and foreign tourists and
visitors. Regular sales taxes many
consider regressive, taxing the poor more, but the prebate would create a
progressive effective rate on consumption.
A poor family would pay a rate of 0% on 100% of consumption, while a
high income family might pay a tax rate of 15%. The Fair
Tax would broaden the tax base and actually tax wealth and foreign
tourists and visitors. Regular sales
taxes many consider regressive, taxing the poor more, but the prebate would
create a progressive effective rate on consumption. A poor family would pay a rate of 0% on 100%
of consumption, while a high income family might pay a tax rate of 15% on its 80%
of consumption while saving 20%. Families
at the lower end of the income scale spend almost all their income. Households at the high end usually save some
money and finance purchases from savings, not income. Savings would face tax when it buys
something. Income earned and saved would
not face tax immediately, but spent in the future and taxed accordingly. The Fair Tax
greatly reduces marginal taxes on work and savings and greatly lowers overall
average remaining lifetime tax loads on present and future employees at all
income levels.[1] A study on marginal and average tax rates
discovered that the Fair Tax would
reduce most family average lifetime tax rates greatly.2 Boston U. economists found that this tax
gives poorer households 26.7% more purchasing power, middle class folks 10.9%
more, and higher income households 4.7% more.
REBATES. Lower income families, at or below the
monthly poverty level and lawful U.S. residents, will receive a consumption tax
rebate, determined by the rate of tax and monthly poverty level, by filling out
a form. This rebate means that the tax rate is progressive on consumption,
leading to a tax burden down to zero for some, and thus increases purchasing
power for lower incomes. Received in advance,
it is called a prebate. It would equal
the estimated total Fair Tax paid on
poverty level spending according to guidelines published by the U.S. Dept. of
Health. These poverty level guidelines
vary according to family size and represent the cost to buy household
necessities. The prebate would arrive in
12 monthly installments equal to 23% of poverty level spending for every
household size and eliminate taxation on necessities. This formula would adjust
yearly for inflation. To become eligible
for a prebate, a family would register once each year with their sales tax
administering authority, and the SS Administration would disburse monthly
rebate checks by mail or electronically to a bank account. The National Taxpayers Union estimates the
yearly cost of mailing these checks at $225 million. The Beacon Hill Institute, a prestigious
research institute, figures the rebate cost at $489 billion. However, Fair Tax
experts state that income tax deductions, tax preferences, loopholes, credits,
etc. under the present system costs $945 billion. The IRS actually mailed out $270 billion in
refund checks in 2005.
REVENUE NEUTRALITY.
The Fair Tax rate
is revenue neutral, not increasing or reducing total federal tax revenues,
according to experts like Prof. Dale Jorgenson, economics professor at Harvard
U. and past president of the American Economic Association, and Jim Poterba of
the Mass. Institute of Technology. Also
advocating such are researchers at Stanford U., the Cato Institute, the Beacon
Hill Institute, and the Heritage Foundation.
Beacon Hill also found that this tax imposes no additional fiscal
burdens on state and local government entities.
FIGURING COSTS. The Fair Tax would
make the cost of federal government very visible, as consumers would see this
cost every time they bought something.
The tax would reduce compliance and efficiency costs by 90% and return
more of those dollars to the productive sector.1 Moreover, about $11 trillion held in foreign
accounts to avoid taxes holders would return to banks on our shores, becoming
available to U.S. capital markets and lowering interest rates.2
Boston U. and Rice U. studies both confirm that long-term interest rates
would drop by as much as 1/3. According
to the National Bureau of Economic Research, GDP would rise almost 10.5% in the
year following Fair Tax implementation,
productivity output would rise by 12%, capital stock would increase by 42%, and
real wages increase by 8%. As dropping
tax compliance costs lower production costs, exports would increase by 26%
initially and remain over 13% above current levels.3 Prof. Dale Jorgenson estimates that revenues
incoming to Social Security and Medicare would double as the size of our
economy doubles within 15 yrs. after passage.
Global companies consider tax structures when planning capital
investment decisions. Lower corporate
tax rates induce higher corporate investment in specific countries. The U.S. now has the highest combined
statutory corporate income tax rate among developed nations. Princeton U. economists surveyed 500 European
and Asian companies about the impact on their business decisions, if we enacted
the Fair Tax. 400 of these corporations stated that they
would build their next plant here, and 100 declared that they would move their
corporate hq here. Beacon Hill estimates that the feds could cut $8 billion
from the IRS budget of $11.01 billion in 2007, shrinking the size of fed tax
administration by 73%. Moreover, tax
preparers, lawyers, and software employees of companies that sell tax
preparation software will face large losses in employment. The IRS would not disappear until 3 yrs.
following enactment, providing employees with time and marketable skills to
find alternative jobs as the economy grew by 10.5% during the first year of the
tax. The tax would sweep almost all fed taxation costs of goods and services
from the supply chain, lowering production costs by up to 30%, leaving price
almost the same after tax paid. If
businesses paid employees with gross pay, production costs would decrease by
11.55%, according to Arduin, Laffer, and Moore Econometrics.
REPEAL OF INCOME
TAX. The Fair Tax would not automatically repeal the
federal income tax. Repeal would require
a separate congressional bill together with legislation expressly forbidding
such tax.
SOCIAL SECURITY. Fair Tax legislation
would adjust SS benefits for changes in price level, so a percentage hike in
prices would mean an equal percentage hike in benefits.
ILLEGAL ALIENS. The Fair Tax would give
illegal aliens incentive to legalize; otherwise they would not receive the
prebate. Illegals would pay the maximum
effective tax rate. No federal tax
savings for companies that hire illegals.
USED GOODS. The Fair Tax
would not tax used goods, so opponents claim that such would create a
differential between the price of new and used goods. Such differential might affect the sale of
new goods and homes. However, the
inherent value of a used good includes taxes paid when the good sold at retail.
BLACK MARKET BLUES. Fair Tax proponents
declare that black market illegal economic activities go mostly untaxed under
our current system. Economists state
this underground economy at between $1 trillion-$3 trillion annually.1
Imposing this tax would significantly tax this activity, when crooks
spend proceeds on legal consumption. The
present income tax system fails to collect a heap of tax. The IRS estimates 20c additional tax is owed
on unreported income for each dollar collected.
In 2001, this shortfall reached over $312 billion. These figures do not include taxes lost on
illegal sources of income, like drug peddling.
The transparency and simplicity of the Fair
Tax would make much of this unreported income taxable. Agencies within states could monitor and
audit businesses, and the collection fees kept by states would amount to $5
billion, all available for enforcement and administration. California would receive over $500 million,
which, according to the CA. 2004-05 budget analysis, is more than the $327
million it spends to enforce the state complex sales and excise taxes.2
BOOSTERS. The following
organizations have endorsed the Fair Tax: National Taxpayers Union, the American Farm
Bureau Federation, Associated General Contractors, Heritage Foundation,
National Bureau of Economic Research, and National Retail Sales Tax Alliance.
Research and
documentation for this issue paper done by Nebraska Taxpayers for Freedom
, with express prior permission granted for its use
by Citizens for Local Control, Cherry County Taxpayers, Dawes County
Taxpayers, and other groups in the Tax Freedom Network. 3-07.
C