Fair aboloishes IRS, Then What?

[Lee B]

Good article in Forbes:   FAIR Tax Abolishes IRS - Then What?

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I’m always annoyed when I hears somebody arguing that if we made some tweaks in the tax system, we could abolish the IRS.  Then we come to the FAIR tax, which actually explains, in detail, how its enactment allows for the abolition of the IRS.  FairTax.org has quite a bit of information about the various aspects of the program, I’d suggest that you take a good look at it.  It is probably worth studying.  Here is the nutshell version of the Fair Tax Plan:

Description unavailable (Photo credit: TheodoreWLee)

The FairTax Plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (HR 25 / S 122) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax – administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

But You Still Need To Collect It

They’ve got that covered.  The collection of the national sales tax will be handed off to the states, which will be paid a percentage.  Most states already know how to collect sales taxes.  So the abolition of the IRS is accomplished by substantially ramping up 50+ revenue departments (Besides the states, you have DC, the territories, and maybe some of the 500+ sovereign Indian nations).  So when you hear that enacting the FAIR tax will save all that money we are spending on the IRS, it is not really happening.  In an article available on the site Tax Administration and Collection Costs: The FairTax vs. The Existing Federal Tax System, the authors estimate that it will cost the states $9.66 billion to collect the Fair Tax and there will be a net federal savings of $9.38 billion.  So there is actually a small increase in the government tax administration.  The big savings projected are in the private sector compliance costs, which they estimate as being reduced by over $340 billion.

Progressive?

The proponents claim that the “prebate” concept makes the Fair Tax progressive.  The “prebate” would be a monthly check on the amount of tax that would be paid by someone spending a poverty level income.  They peg that at just over $11,490 per adult and $4,020 per child.  So a single person who went through the proper registration would get a check for $220 monthly based on 2013 numbers. The check goes up by $77 per child.  So all those Tax Court cases about who gets the exemption, child credit and head of household status – now we can have them about who gets the kid’s prebate.

That makes the tax progressive when it comes to consumption (at least overtly), but it is highly regressive when using income as a measure.   Superficially, this system is Thomas Piketty on steroids. Most people spend most, if not more than their income, so among them, thanks to the prebate, the tax is progressive.  Different story for the 1% who can invest most of their income.  As a percentage of income, the amount they pay in sales tax will be much, much lower.

There is another odd quirk that adds a touch of regressivity to the Fair Tax.  The social security tax will be repealed, but the wage reporting and benefit calculations will remain in place (although, there are hints that there might be other things in the works).  Let’s imagine two guys, call them Joe and Harry.  They each spend $80,000 per year, so they pay the same in sales tax.  Joe makes $80,000 per year and Harry makes $90,000.  Harry saves the other $10,000 for his retirement.  Harry will also have a higher social security payout than Joe.

It is worth noting that the progressive income tax and the estate tax were put into place in response to Gilded Age inequality, when the government was funded mainly by consumption taxes.

Simpler?

Of course, the Fair Tax is simpler than the current income tax, but it would probably be easier to prune the bells and whistles from the income tax, if you can forgive a mixed metaphor, than to pass the Fair Tax.  With an income tax, though, there remains a core complexity-  What expenditures are being made to produce income, making them deductible in arriving at income?  That core complexity remains in the Fair Tax.  Vendors of all types collect the 23% on everything they sell, goods, services and rentals.  They pay the tax on everything they buy, but then take a credit for the things that were used in the business.  OK.  So will the moderately sociopathic who own businesses ever buy anything that they don’t take credit for?  Here is what the proponents have to say about that issue

So all the litigation that we have about deductible business expenses will remain relevant with the Fair Tax.  Only the audits will not be conducted by one agency.  There will be fifty or more with a possible race to the bottom in terms of how aggressive they are in order to make their states more business friendly.

Also, as registered sellers, they are subject to the possibility of being audited by the state. During such an audit, they will have to produce the invoices for all the “business purchases” that they did not pay sales tax on and will have to be able to show that they were bona fide business expenses. If they cannot prove this, then they will have to pay the taxes that should have been paid when the items were purchased, plus interest and penalties. The probability of being audited will be much greater than it is under the current system with its over 140 million tax filers. Under the FairTax, there will be less than 20 million businesses that will be filing sales tax returns and thus subject to the possibility of being audited. Thus, the probability of tax cheats getting caught will be much greater than it is today, making tax evasion riskier than it is today. Additionally, while the FairTax has much stronger taxpayer rights than does the current tax system, the FairTax legislation provides for a number of fines and penalties for noncompliance. It also authorizes a mechanism for reporting tax cheats and obtaining a reward.

Finally, one of the things that makes the Fair Tax simple is its comprehensiveness.  All final consumption by everybody is subject to the tax.  The income tax would be vastly simpler if Congress did not use it as the Swiss Army Knife of social policy using income tax credits and deductions to encourage various things, like research and historic preservation.  What will stop them from doing this with a national sales tax?  Gee, I could afford to pay $100 for that life-saving drug, but I can’t afford $123.  Let’s exempt prescription drugs, but not birth control, unless its needed for some other condition – on and on and on.

And In The End?

Most of the l the cases that I read would still be matters of controversy under the Fair Tax.  Who’s kid is this? Is that really a business expense? You flat out did not pay, so we are taking your stuff.  With fifty plus different revenue departments doing the enforcement, how likely is it to be consistent across the country?

Fifty plus revenue departments implementing a federal tax is a recipe for massive inconsistencies.  Eventually, after horror stories about the aggressive New York and California auditors and the way too easygoing ones in Alaska, it will occur to somebody, that collecting federal taxes consistently across the country probably requires federal employees.  Somebody feeling nostalgic might propose calling the resulting agency the IRS, but that probably will not happen.

 

[Jack from Ohio]

WRONG information:

<<<In the example I give for a hypothetical argument for a prescription exemption, I wrote that somebody would argue they could afford $100 but not $123. Actually, with the proposed Fair Tax it would be $130.>>>

The price would be $100.00. $23 of the $100 would be sent in as tax. This is the most INTENTIONALLY quoted error.

Example: If you have $40,000 income and you pay Federal tax of 25%, your income is still only have $40,000.

The savings by the seller and or manufacturer would be the taxes that they would NOT pay.

I think cbslee should only be quoting information from the books put out by the group that created the Fair Tax idea.

Intentionally sending WRONG information out is the lowest form of political actions there is.

For my part, the Congress will NEVER replace the tax code. They feed and thrive on the power to tax the populace and will never give that up. Period.

[Lee B]

I posted this article from Forbes, because I thought it was interesting.

It doesn't mean that I agree with everything it says or that I endorse what says.

If we only posted things from primary source documents only, there would be

a lot fewer posts and a lot less to discuss.

[Jack from Ohio]

I posted this article from Forbes, because I thought it was interesting.

It doesn't mean that I agree with everything it says or that I endorse what says.

If we only posted things from primary source documents only, there would be

a lot fewer posts and a lot less to discuss.

And lots more factual information instead of conjecture.

[kcjenkins]

I also think it's OK to post from any source that leads to thought on the subject, Jack.   That is the real goal.  I post things I don't fully agree with, fairly often, to alert the members to something, or to gain feedback from people who I respect.  i.e. the members here.

 

BTW, I fully agree when you say 

 

For my part, the Congress will NEVER replace the tax code. They feed and thrive on the power to tax the populace and will never give that up. Period.

[Jack from Ohio]

If the OP has actually read the books shown in the picture, then intent to deceive is proven instead of just suggested.  Just sayin...

[Richcpaman]

My whole problem with the "FairTax"? 

 

You can not implement it in a day.  It will have to be phased in, and most likely, over at least 6-10 years.

 

So, you start with the National Sales tax at say, 5% and that increases every year by 2-3% till they get to the 23% magic number.

 

But the "prebate" checks start immediately.

 

Then you have elections.  Several of them, every two years and even a presidential one in there...

 

So you have 3-4 Congress's to "tinker" with the changes and to slow down the tax increase, and to allow the special interests to lobby and pay for their exemptions... 

 

Since they will be the last to be shut down, the Social Security and Medicare systems continue and that whole tax collection and payout process is still around. 

 

Many of the taxes like estate, inheritance, gift and capital gains that mainly benefit the rich will be repealed first.

 

So what will happen is, the federal income tax will still exist, although the brackets may be broader and the rates lower, a new National Sales tax, capped at 10-15% and SS and MC systems. 

 

And you will still be deducting the mortgage interest on your house...

 

So, what have you really accomplished?  Creating a new national sales tax....

 

And we still have the IRS.

 

Really, it is the FULL employment act for us accountants.

 

Rich

[taxxcpa]

There is no such thing as a fair tax since all taxes are unfair.  Once I commented that one tax was unfair, but the person I was talking to replied that it would be unfair if it were the ONLY tax.  Theoretically the unfair burden of one tax would be offset by the unfair advantage you got from another one.  Of course anything can be  theoretically possible.

 

My plan: abolish all taxes and just print the money the government needs.

[Abby Normal]

Nothing would drive the economy underground faster than a national sales tax.

[GeneInAlabama]

>>My plan: abolish all taxes and just print the money the government needs.<<

 

Then we would all lose our jobs.  But then if we learn how to print money, we wouldn't have to work.

[Jack from Ohio]

Nothing would drive the economy underground faster than a national sales tax.

Another person who has NOT read the books being referenced.