Monday, April 20, 2009

The Fair Tax; Good or Bad?

I attended the Tax protest or as it is referred to as the Tea Protest on Saturday. I handed out fliers from my 2008 campaign in the hopes that my platform would resonate with the majority of the people. In handing out one flier a gentleman asked me what I thought of the Fair Tax proposal. My position on this is that the 23% tax rate that is thrown out is incorrect. In 2006 I asked the Fair Tax Committee to answer questions I had concerning their calculations. I presented my own analysis and found they had made major errors in not only the assumptions, but the overall cost of government in relationship to the total income reported to the IRS. I had assumed they were going to be able to recover additional taxes that go unreported. In essence the Fair Tax is:

The Fair Tax plan abolishes all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes and replaces them all with one simple, visible, federal retail sales tax – collected by existing state sales tax authorities. No family pays taxes on basic necessities because of a generous rebate system built into the FairTax plan. The rebate system, which makes the FairTax as progressive as the current income tax system, refunds, in advance, the sales taxes paid on consumption expenditures up to the poverty level for families of various sizes.

One major reason I am against the Fair Tax proposal is that it changes the way Social Security and Medicare are paid for and eliminates the safety feature for these two programs enacted in 1984.

Social Security by law cannot borrow money. It has statutory authority to spend only those funds received from the dedicated social security tax on wages, tax on benefits and funds in the trust fund. Federal Law prohibits transferring general revenues to any trust fund.
United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a), http://www4.law.cornell.edu/uscode/42/911.html

By law the trust fund cannot be drawn down to zero. The trustees must submit a report promptly to congress detailing benefit cuts or tax increases when in any given year the trust fund is projected to fall below 20% of that given years expenses. Social Security's ability to pay future promised benefits is dependent solely on the ability to raise social security taxes.
United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a), http://www4.law.cornell.edu/uscode/42/910.html

For over twenty years the Social Security Trustees have projected and reported the trust fund to be exhausted anywhere between 2019 and 2042 which is decades before its original projection of 2064. Where is their report detailing benefit cuts and/or tax increases to rectify the inadequacy?

This law keeps both Social Security and Medicare from being able to take general funds away from funding the government and using them to fund Social Security and Medicare. It mandates that these programs can only spend the dedicated taxes and no more. In other words there is a limit to what they can spend. This requires Congress to raise taxes which will be difficult. It also will force the issue for major reform in favor of the worker. The Fair Tax by taking over the promised liabilities of Social Security and Medicare will place horrific taxes on our children or squeeze out other spending. The Fair Tax allows Congress to side step this needed reform.

Basics:
The FairTax proposal would replace all current federal revenue taxes with one federal sales tax. The FairTax is a single-rate, federal sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed.

Single people and married couples are treated equally. Each adult would be given a $9,310 rebate with a $3,180 rebate for each dependent. For a family of four, this means the first $24,980 would be exempt from any taxation. Any income above this that is spent would be taxed at 23%. Table 1 compares the current tax structure versus the Fair Tax proposal. My analysis uses just the standard deduction, personal exemptions and child tax credit. It also assumes all income is from wages and is treated as an employee wages with a Medicare tax rate of 1.45%. All income is spent, none saved. The savings rate in the US can be no greater than the rate of change in productivity and population growth.

The IRS reported in 2001 that the marginal tax FIT for those making over $200,000 was 23% rising to 29%. This does not include the Payroll tax. In fact none of the IRS tables on income taxes include the payroll tax. The marginal tax FIT on $20,000 was 5%. The marginal FIT was 9% for those making $40,000. Again none of these values include the payroll tax of 15.3%. None of these include corporate taxes, death tax or the gasoline tax. And none are addressing the $>$600 billion deficits we have been running since 2002. Which, means that the Fair Tax comes up short on the tax needed to be revenue neutral?

For those interested my analysis you can view it at http://www.justsayno.50megs.com/pdf/larsen-fairtax-annalysis.pdf

You will need to copy this into the address bar to get to the link. My host does not allow my files to be linked from another source.

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