FairTax?

I took a shot yesterday at Mike Huckabee, running for the Republican nomination for President, who is touting the FairTax. He’s taking some Media heat for the position. Should he?

I won’t tell you that I’ve fully investigated the plan, and can assure you that it will be an improvement over our current federal income tax system. But then, I haven’t fully investigated our current income tax system, and I can assure you that it has a lot of flaws. Here’s a link to a summary and the text of the proposed statute at FairTax.org; and, here’s the summary from the link:

"The Act is called the “Fair Tax Act of 2007.” As of Dec. 31, 2008, it repeals all income taxes and payroll taxes, specifically:

• The individual income tax (including capital gains taxes and the alternative minimum tax)

• All individual and employer payroll taxes including Social Security, Medicare, and federal unemployment taxes

• The corporate income tax

• The self-employment tax (a self-employed person pays both the individual and the employer portions of Social Security and Medicare taxes)

• The estate and gift tax

Effective January 1, 2009 it replaces the above taxes with a national retail sales tax on all goods and services sold at retail. The tax rate is set to be revenue neutral – at the level necessary to replace the revenues generated by the repealed taxes.

A 23-percent (of the tax-inclusive sales price) sales tax is imposed on all retail sales for personal consumption of new goods and services. Exports and the purchase of inputs by businesses (i.e., intermediate sales) are not taxed, nor are used goods or any savings, investment, or education tuition expenses. The sales tax must be separately stated and charged on the sales receipt. This makes it clear to the consumer exactly how much they are paying in federal taxes.

There are no exemptions under the FairTax, meaning that no lobbyist, corporation, or individual can obtain tax advantages that are not available to the general public. Also, everyone pays the same rate, but those who spend more pay more total taxes than those who spend less.

The FairTax provides every American family with a rebate of the sales tax on spending up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The rebate is paid monthly in advance. It allows a family of four to spend $27,380 tax free each year. The rebate for a married couple with two children is $525 per month ($6,297 annually). Therefore, no family pays federal sales tax on essential goods and services and middle-class families are effectively exempted on a large part of their annual spending.

Funding for Social Security and Medicare benefits remains the same. The Social Security and Medicare trust funds receive the same amount of money as they do under current law. The source of the trust fund revenue is a dedicated portion of sales tax revenue instead of payroll tax revenue.

States can elect to collect the federal sales tax on behalf of the federal government in exchange for a fee of one-quarter of one percent of gross collections. Retail businesses collecting the tax also get the same administrative fee.

Strong taxpayer rights provisions are incorporated into the Act. The burden of persuasion in disputes is on the government. A strong, independent problem resolution office is created. Taxpayers are entitled to professional fees in disputes unless the government establishes that its position was substantially justified."

One of the big promo points for the FairTax is that it would do away with the need for the IRS. Get rid of the IRS and its bureaucracy and you do away with a lot of anguish. More importantly, you do away with thousands of pages of tax code that are the bane of individual and corporate taxpayers (the summary and statute linked above total only 36 pages). The need for an entire industry of tax planners and return preparers is gone.

And what does that do? The Tax Foundation says that the cost of compliance with the tax code in 2008 will be about $325 billion which is about 23% of the revenue projected to be collected by the IRS.

For me the most attractive aspect of the FairTax is that it is transparent. Right now I don’t know how much of my $1.00 Double Cheeseburger from McDonalds is a pass on of embedded taxes. But let’s add up the taxpayers involved:

- Me of course. I’ve had to earn more than a dollar to spend that dollar for the burger.

- McDonalds pays federal income taxes and includes them in the cost of the burger.

- Its suppliers pay and add what they pay onto the prices they charge, and their suppliers and their suppliers.

- What all of the above pay into FICA for their employees.

(The only figure I could find for the average percent of tax paid on income by corporations was an article in The New York Times that pegged it at 20% in 1997. I couldn’t find a total embedded tax percentage.) The FairTax also does away with the fiction that corporations "pay" taxes. They merely remit taxes that you and I pay.

One final point, related to that 20%: the U.S. trade deficit. For a U.S. company, whether it sells its goods or services here or abroad, U.S. taxes must be paid. Not so for most companies in other countries. Their tax structures do not apply to exports. A 2004 article in Tax Notes estimated that this disparate treatment gave foreign companies an 18% price advantage. A 2006 article by an MIT economics professor estimated that this costs the U.S. $100 billion a year in exports. Take it a step further. Many of our major trading partners impose value added taxes on their corporations. Like here now, each level of production pays a tax on the "added value" (here on the income derived) at each level. If we didn't tax income, at any level of production, might that not lead to less out sourcing by our companies and some "in sourcing" by companies now subject to VAT, with increased capital investment and jobs here? Link to Source.

So, should I be more approving of Huckabee?