Tuesday, March 30, 2010

Fair Tax or Fairy Tale- It's Tax Time

"Make a Hole, Make it Wide"

Big Poppa looked at his calender the other day and realized the misery was a few weeks away. That's right April 15Th TAX DAY! Time for misery of the day and headache of Media talkers spewing their thoughts on "Fair Tax" theories, which sounds good but essentially make no sense and can be confusing. So Big Poppa decided to give the two bar stools a much needed rest and waddled on over to see "Rajheid" the accountant.

*Public Service Announcement- Always be nice to those who do your taxes, especially a caffeine induced accountant. With the wrong click of the mouse, you could end up in audit hell!*

"Rajheid" is basically family to Big Poppa and I trust his opinion on many topics, even if I disagree. I mentioned I was researching "Fair Tax" and wanted his thoughts. "Rajheid" said "well the best would be a national sales tax." And through my research that would be the "Fair Tax" theory,

Now a "Fair Tax" is supported by many people, both ordinary and media, and is basically National Sales Tax on consumer goods, but only new goods, all used goods would not be taxed, since they were already taxed once already. And no one can agree upon what the tax should be set at. Friendly accountant "Rajheid" says well a tax around 7%-10% is a decent amount for anyone to understand, but I threw the grenade at him and told him that I have found that they want between 17% - 23% and one report at 30%! His jaw bounced off his glass top desk and the ill audible words of "are you serious?"

As I explained the reasoning for such a high percentage, is that the Fair Tax/National Sales Tax would essentially remove all taxes from ones paycheck, taxes such as Social Security, Medicare, Employee, Corporate taxes would be removed as well as Capital Gain, Estate and Gift taxes would be cast aside. He agreed that a high percentage in a Fair Tax/National Sales Tax system would be needed to cover the entitlements of Social Security and Medicare and not to mention other government functions that we pay for in the current tax system, but 23& and even 30% was outrageous.

Well my taxes were done and I left pleased with my Federal return, but left with more questions concerning the Fair Tax/National Sales Tax.

Is this a set tax or adjustable tax? If used goods are not taxed, couldn't these business owners charge outlandish prices for goods? Wouldn't lower income households consume less? Who monitors the retailers?

Now, everyone would see a larger paycheck, because nothing would be taken out, YIPPEE! But lower income households could adjust their spending habits, they would have to without a doubt. Sure the higher income families spend more, they eat out more, buy higher priced goods such as cars and electronics than the lower income families. And at year's end, that Fair Tax/National Sales Tax will add up and hurt the pocketbook.

If a household brings in $50,000 and spends on average $300 at the grocery, about 75% of that grocery bill is taxable. So the bill drops to $225 then add in the higher 23% Sales Tax, the bill comes to $276.75, saving $23.25 a trip. So people would consume more because they see a savings. And there's no factor that companies wouldn't charge more for goods or if the government decided to raise the Fair Tax/National Sales Tax if desired.

Competition drives prices, however, if people desire more hybrids than regular vehicles, the auto industry can drive up prices on the hybrids and gas companies can raise their prices as well because not everyone could afford a hybrid, and people would be stuck buying expensive gas. Win for business, lose for consumer.

Under the Fair Tax/National Sales Tax, retailers will send their share of revenue tax to the state which they reside and then the state takes their share and then sends the rest to the U.S. Treasury. Companies would then have to answer "how much was actually sold?" when the Federal government asks. Also, under the Fair Tax/National Sales Tax, states could lower property taxes, but also choose not to conform to the Fair Tax/National Sales Tax and keep their current Sales tax system. And if that happens, how many people would move from state to state and how would it affect mortgage rates?

Well, the Fair Tax/National Sales Tax could lower interest rates on mortgages, but then, as we saw over the last decade, people would buy more of a home then they need, not realizing the cost to maintain that larger home, because you'll pay that 23% tax on services. You think electricity is free?

Fair Tax/National Sales Tax theory believes that business would grow due to higher consumption and profits, but also that business would have less operational cost, meaning less employees, which could lean towards high unemployment. Sure some companies are reporting profits nowadays, but are also hiring less because they would rather pay overtime to the current employees than deal with the cost of new hirers not to mention health care, life insurance, operation cost, etc.. (please do not mention the health care reform if making comment)

It wasn't long ago, President George W Bush signed a tax cut to large business to reinvest in America, but about 90% of those companies reinvested out of the country. Companies like Coca-Cola reinvested in the European market while Pepsi reinvested in Asia. Why? Cheaper operational costs and a larger market share.

And then there's the Federal government, the evil empire amongst the galaxy. Under Fair Tax/National Sales Tax, the Federal government wouldn't see a change in revenue under the first year under the tax, however, they may see a downturn in the second year and so on. So technically, business would profit hoping people will consume more (just like today), business could run on less overhead, but the Federal government could adjust the Fair Tax/National Sales Tax higher on service and goods. Services like unemployment, because companies would need less overhead, a large amount of accountants would be looking for work as well, and the IRS could possibly higher more employees to regulate the Fair Tax/National Sales Tax properly, because "all" business is truthful nowadays.

We are trained in this nation to consume, the more we consume the less in savings people have and after the near collapse of our wonderful banking system, people are already near zero in savings.

The Fair Tax/National Sales Tax is a win in theory for many, but in the end run, it "hope for change" theory is that people will consume more for a "feeling" of saving more. The Federal government could adjust the Fair Tax and states would not have to join in if they don't feel like it. Companies could/would operate with less employees and gain larger profits. Consumers could/would buy larger homes and newer vehicles due to smaller interest rates and property taxes, but pay more for services for the larger home and newer vehicle.

But then again, this is all a theory or is it all fairy tale?

Peanut bowl is empty and the 2 bar stools are cold... Pay your tab


  1. Sounds good but what is to guarantee that the Fed won't keep raising the rate as they need more $. Also, you said "and after the near collapse of our wonderful banking system, people are already near zero in savings." If you are talking retirement accts, yes they were hit hard. If you are talking savings accounts at your local BOA, say...how were they affected? If so much of our paycheck were not already taken out in fed, state, and local taxes perhaps we'd have more to invest.

  2. That is one of my points, there's no guarantee the Fed wouldn't raise the rate. I used the higher 23% in the blog, but what if the Fed raised it 25%, then the 30% the made the accountant freak. Also there's no guarantee companies wouldn't raise their prices to get a bigger chunk of the 23% Sales tax.

    Over the last 8 years, people have saved less and invested a little more. However, the saving less part had more to do with "kepping up with Jones'" attitude of buying the newest gadget before someone else. Also, less savings in the last 2-3 years is also due to unemployment or living outside the mean.

    Greed fuels many in this country.

  3. Why does it always "come down to greed" to you. We work for the Money...why is it considered greedy to spend it on what one wants instead of what the FEDS want to spend our money on. Actually, who are the greedy ones here? They take a good portion of what we pay to them to spend on pork projects that will help to get them reelected.

  4. I ain't crazy about "Pork" projects, some are insane, and some go to good use. In 1991, "Pork" was @ $3.1 billion (546 projects), reached it's zenith in 2006 with $29 billion (9,963 projects) and as of 2009 it was @ $19.6 billion (10,160 projects).

    "Pay Go" under Clinton and Gingrich worked and paid down debt, but Pres Bush dismissed it in 2000. Why? Did he believe Congress learned control?

    And I was talking about "greedy" people. If a neighbor bought a brand new 52" Sony TV, another neighbor would have to go out and buy a large 60" Everyone wants something better then the other person. People get greedy, they want more then they need just to show off. Trust me I know people like this and I know neighborhoods like this.

  5. I'm actually for a flat tax. I disagree it would hurt unemployment numbers and lead to inflated prices. I happen to think the opposite. I also believe that by allowing states to collect the tax, you can eliminate the overinflated government bureaucracy that plagues us and in turn curb pork projects that run rampant. Return the powers to the states the way the government was originally set up and you'll see a remarkable reduction in federal pork project spending because they won't have to bribe the states to get their agendas passed.

    This country was founded on the belief that man was selfish yet able to reason. Most households will still have a family budget but they won't have to live paycheck to paycheck any longer. Granted you will have those who will spend the money as soon as they get it, but you will always have those that will live beyond their means.

    As for government entitlements, that is nothing but a federally mandated charity as far as I'm concerned and most were never meant to turn into what they have turned into. (government piggy banks)

  6. I agree w/Kimmie that a flat tax would eliminate much bureaucracy. When one has to pay a tax preparer because the codes are so damn confusing,complicated and overly long as well as written with loopholes and exceptions...then time for a change.
    Instead of using the word greed in your response, perhaps envy is a better choice. People don't buy cause they are greedy but envious, or too darn immature to wait till they can afford it. ...But then it is the NOW generation and the world revolves around them. Oh, wait, these are the same folks who think we can afford to pay for healthcare, all entitlements, and still have $ left over for consumer goods. Good luck.

  7. The flat tax proposal is on income only, as a replacement for Federal Income Tax. It would eliminate any exemptions however.

    Yet just like the "Fair Tax" no one can agree on what the Flat Tax should be set at and there is no guarantee the Fed wouldn't raise/lower as they wish. The same 17%-23% rate is applied in the theory of a Flat Tax.

    Kinda makes you wonder who's coming up with these numbers.

  8. Well you have to come up with the numbers somewhere. There would also have to be a mechanism in place to regulate increases in the percentage rate to control government misuse of raising the rate to cover unjustified spending. Either way, something has to be done to put a stop to this out of control spending and the idea that if you're succesful you owe something to those who aren't.

    I read an article the other day where Geitner claimed it was "terrible" that financial institutions that received tax payer money during the bailouts are doing better than the average American person. Blaming the situation of course on George Bush and saying Obama had no choice but to implement the program fully. Ahhh, wasn't it the purpose of the bailouts the imperative need to save those institutions to prevent an "economic collapse?" So what? Now that was avoided it was a bad idea because it did nothing (and everyone knew it wouldn't) to create jobs or financial security for the average American. Well what about the over 700 billion in stimulus money that followed quickly after the bailout money and has done nothing but help the unemployment rate rise, fund the study of rats on meth, and build a brazillian steak house? Those 20-30 jobs at that steak house are sure to put a dent in the over 30,000 who lost their job this quarter alone. IDIOTS!!!

  9. BP, there is a lot to your post. I will attempt to address your concerns one by one. (multi-part – it will not allow me to post my full response)

    First, the tax rate. There is a lot of confusion out there about this, because opponents constantly try to confuse people about it. Bottom line, the most recent research done by Americans For Fair Taxation shows that the tax rate will need to be between 23-24% to raise the same amount of income as the present tax system. This number was arrived at before the current economic downturn, and as consumption is more steady than taxable income, that % would be lower now, but the % was researched extensively, and on average, over a number of years, a 23% tax rate would raise the same amount as the present system.

    Now don't be bamboozled by the 30% nay-sayers. Consider this – income taxes are figured as a percentage of how much you paid out of how much you made. Sales taxes are figured as a percentage of how much you paid out of how much you have AFTER you pay. Case in point, a 25% tax, quoted tax-INCLUSIVE (the income tax way) would, out of $100, have you pay $25, with $75 left. If you quote it the OTHER way, the tax-EXCLUSIVE way (the way sales taxes are reported), you would take the $25 you paid in taxes and divide it by the $75 you have left, which would result in a 33% tax rate. Notice, you paid the same amount and had the same amount left over, but one tax rate looks higher.

    The FairTax proponents believe that since the FairTax will replace the Income Tax, the two systems should be reported and compared using the same system. As people are very familiar with the income tax (tax-inclusive) way, the FTs quote the 23% tax rate. Opponents, however, believe it is okay to compare apples to oranges when it serves their purpose of making the tax rate look higher than it really is. So they quote the 30% tax rate (tax-exclusive). It is interesting to note, though, that if our present income tax was quoted using a tax-exclusive manner, current tax rates for the lowest income brackets would be about 20%, and that is without figuring in the amount that everything we buy is increased due to corporate taxes (which averages about 22%). So I hope all this clears up confusion for you.


  10. You seem to be a bit confused about how the FairTax is progressive. First, there are NO exemptions except on investments and, as you mention, used items, which have already been taxed. (It has been a while since I read the bill, but there are not ticky-tack, this and that exemptions like in most sales tax systems... allowing exemptions like that would keep the tax lobbyists in play and just as if not more powerful than they are now.) Therefore, what you wrote: “about 75% of that grocery bill is taxable. So the bill drops to $225 then add in the higher 23% Sales Tax, the bill comes to $276.75, saving $23.25 a trip” etc. would not be the case. What IS expected to happen is that companies will be able to drop prices because they will no longer have to pass on their corporate taxes in order to turn a profit (that 22% embedded tax mentioned earlier). Then when the 23% FairTax is added back on, the price will be about the same. Some economists estimate that prices may actually rise a bit (10%), but that will not be a big issue because people will be bringing home approximately 12%+ more because they will get their whole paychecks.

    The FairTax is progressive because of the prebate. The prebate is, in essence, an advance rebate on what a family at poverty level of spending is expected to spend on the basic necessities, i.e. clothing, food, shelter, and transportation. The prebate is based upon family SIZE, not income, and EVERY family gets it. For instance, in 2009, the prebate for a 2-adult family of 4 was based upon a poverty level of spending of $29,100. 23% of that spread over 12 months is about $557 a month. So the prebate exempts every family based upon size the exact same amount to each family of that size. Therefore, the 2af4 making $36k a year is exempt on $29,100 of spending, and the 2af4 spending $3 million is exempt on $29,100 of spending. Obviously, the $36k family paying 23% on $6,900 of spending will pay much less percentage of income than the $3 million family paying 23% on $2,970,900 of spending. Now the disparity occurs if that $3 million family lives on $36k a year and invests the rest. But hey... if they are investing that much, it is likely going into business, which provides products and jobs for the public, hence providing a living for more people... etc. So every family has the right to decide what % they pay in taxes, and when you keep in mind that invested money stimulates the economy, even rich people who don't pay much in taxes because they live on little and invest the rest are stimulating jobs for many others.


  11. Another aspect I think you are overlooking is that the FT is supposed to be built in to costs as they are reported to consumers. This is not to say they are to be hidden – far from it – instead, when the cost of something is published, the ENTIRE cost is to be on the tag (counting the FairTax); then when you receive your receipt, the receipt is to tell you the dollar amount that you paid in taxes, which is 23% of everything you paid.

    This is important in your concern that people would buy more house than they need. A $300k house today will still be about $300k under the FairTax; the difference is that today, that $300k contains about $75,000 in hidden taxes passed on to the consumer that the consumer has no idea he/she is paying. Under the FairTax, that receipt would look like $300k, taxes: $69k. Likewise with electric bills – Electric bill: $200; taxes: $46. Current bills do this, except businesses are not required to quote you the full amount and then detail the taxes on your receipt when you get it. That is why the phone company can say “$29.99 for a year”, then when you get your bill, it is actually $45... they quoted you flat fee without any taxes or additional fees included. Assuming the same example, Under the FairTax, they would be required to say “$45 for a year”, then when you received your bill, it would show how much of that full amount was paid in taxes.


  12. If business no longer has to keep up with the extensive and complicated tax system, it is true that companies will do one of two things with the employees they formerly used for that purpose: 1) lay them off; or 2) reallocate them. Every CPA I have spoken with about the FairTax is initially against the idea because they are concerned about their tax preparation business. However, they usually come back after a few minutes and state plainly, “In reality, if people didn't have to mess with taxes and I didn't have to spend so much of my time on it, there are many other services I could provide to my clients.” The same goes for businesses.

    Keep in mind that less operational cost doesn't directly mean fewer employees. I do not know why you drew that conclusion. Less operational cost means ability to lower prices to be more competitive... it means ability to hire more individuals... it means the ability to pay current employees more (because you don't have to match taxes every time you give a raise).

    I believe if the FT passes, initially there will be an adjustment period. I expect that to last 1-2 months at the most. I expect initially, prices will rise a bit because businesses will not know exactly how the new system will affect their bottom line, so they will leave prices about where they are now, then stick the FairTax on top of it. It will not take very long, however, before they figure out their bottom line. When that happens, all it takes is one competitor in each industry lowering their prices to try to grab a larger market share. When that happens, everyone else will follow. No one will want to give up market share by having their prices so much higher than their competitors. Eventually (but relatively quickly), company and industry prices will level out where the companies have about the same profit margins that they do now.

    It is also not likely that the largest re-investment of capital will occur outside of the US. With passage of the FairTax, the USA will become the most favorable tax haven in the world for international businesses. No corporate taxes means that every business can operate without taxes in their overhead. While countries that use the VAT, like Germany, refund the taxes collected on all products sold overseas, the complexity of the VAT means that every company in Germany has to have a whole division within their company to assess and properly collect/distribute the tax... a whole division that they would not need if they were headquartered in the US with the FairTax. Additionally, Americans would be likely to spend a lot of their money... and we have more of it than most other countries.

    Business adapts. The companies that are based on tax preparation will change to meet the times. Every time society changes, business does this. When the car came along, companies adapted to focus on cars instead of horses and buggies. The companies that did not adapt died. And new companies sprang up to fill niches that had previously not been needed. The same will happen with the FairTax. Business will adapt.


  13. While it is true that the Federal government could adjust the FairTax rate to whatever they desired, in contrast with the current tax system, raising the FairTax rate essentially raises the taxes on EVERYONE. Instead of just punishing the people who create jobs, everyone would be punished if they surpassed poverty level of spending. On the other side of the coin, if they lowered the FairTax rate, EVERYONE would get a tax cut.

    This brings up one of the reasons there is a lot of opposition to the FairTax among elected leaders. The adoption of the FairTax will stop the catering and pandering to certain segments of the population on taxes. It will also stop the tremendous amount of manipulation that presently goes on with regard to the tax code, in which Congressmen/women can give tax perks to their favorite special businesses or contributors, hiding their graft in the tax code.

    In the FairTax, not only would special interests lose this manipulative ability (putting a significant number of $1 million-a-year tax lobbyists out of work), but Congress would not be able to pander to special interests as easily. Additionally, Congressmen/women would no longer be able to claim they will cut/raise taxes on certain segments of the population. You can see clearly how such loss of control is not popular among those Congresspeople who benefit from all of these processes.

    The IRS would likely be cut significantly. The FairTax bill actually “contracts” the collection services out to the states, who use their existing tax collection structure to collect. These state organizations already perform these duties, so they will not have any added burden. A central organization would still be necessary to coordinate the entire system and address the few abuses that crop up, but by and large, the IRS will lose a lot of power. This, too, is not popular inside the Beltway.


  14. The FairTax is not built on a theory that people will consume more for a feeling of saving more. Far from it. Investigation of long-term consumption levels versus long-term taxable income levels show that consumption levels drop significantly less in times of economic hardship than taxable income, so a tax built upon consumption is significantly more stable than a tax built upon income. Additionally, a tax built upon consumption fuels consumption, and therefore, business. A tax built upon income saps money out of the economy before it can be spent by consumers. Consider... If I'm going to pay $1000 in taxes, which is better for the economy... for me to spend that $1000 and then have it taken by government, or for government to take the $1000 up front and not let me spend it? It is reasons like these that large sales-tax states – like Texas and Florida – are doing significantly better economically than states built primarily (or entirely) upon income taxes – like my state of Oregon.

    The FairTax was actually built on the truth that the consumer ultimately pays 100% of taxes, and that US businesses were suffering because of our punitive tax code. When it comes down to it, business provides 100% of all income to families, and families provide 100% of all income to businesses. It is a circular thing. If you allow this cycle to proceed unhindered, with government having as little influence in that circle as possible, families and businesses succeed at a higher rate than if government interferes in that cycle, as it does now. The FairTax seeks to minimize government's role in business to allow business to flourish; it also allows families to “get ahead” more easily by not being penalized if they succeed.


  15. In the end, the longer you follow the FairTax, you will find that largely, opponents will fall in to one of three categories: 1) people who do not understand it fully; 2) those who favor larger government control of economy; or 3) those who profit or benefit from the present tax code.

    I have run across all three of these types in my 6 years of studying (and discussing) the FairTax. I have read the FairTax legislation twice, and have examined the economic studies fully, assuming middle-case scenarios instead of best-case or worst-case. I have not once made more than $40k a year in my life, so it isn't like I'm a rich fat cat promoting a soak-the-poor-and-middle-class scheme... I AM the middle class! And after all of that, I am a strong proponent. I hope what I have written over my free time in the past week clears up some of your points of confusion about the FairTax. And I hope that you, too, will see the benefits and hop on to the FairTax revolution.

    Your fellow American,


  16. "Anonymous" Kilborn.. I want to personally thank you for the time you spent writing your many comments. Your next round of drink (no matter your liking) is on me.

    On Monday March 29, all Media giddly reported how business' were turning positive sustainable profits, which I questioned those profits as merely caused by less hires/higher unemployment. Basically companies seeing they can do more with less overhead- no extra cost of salary, health insurance, life insurance, etc.- and would rather pay the downsize employee staff overtime to complete the work.

    Don't get me wrong, I do see positive in Fair Tax, who wouldn't like to have a smaller mortgage for their current home and (as you stated) the truth as to what companies are not telling you when you sign the line for service until the first bill arrives sometimes.

    Once again, I thank you for your time and comments, also I wil apologize for calling the Fair Tax a "theory"

  17. http://biggovernment.com/dmitchell/2010/04/05/flat-tax-or-national-sales-tax/

    an interesting little article and youtube about the flat and fair tax proposals