Fair Tax: Cure for all ills or just hot air?

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Americans for a Fair Tax say their proposal – essentially a national retail sales tax – would lower prices, increase productivity, reduce outsourcing and lower the tax burden on the middle class, as well as eliminate illegal immigration, the Internal Revenue Service and the 16th Amendment to the Constitution.
Dan Mastromarco, principal in the Argus Group, a law and government relations firm in Arlington, Va., has been working to get the Fair Tax approved by Congress through Americans for a Fair Tax. He was in Colorado Springs this week to discuss the finer points of the proposal.
In a nutshell, the Fair Tax eliminates all federal income, payroll, estate and capital gains taxes. The IRS system, with its contradictions and complications, would be replaced with a national retail sales tax. The IRS would be eliminated and replaced with a sleeker collections agency, 90 percent smaller than the current agency.
The tax would be 23 percent, an amount that AFT says would equal the current taxes collected by the federal government.
The government would collect taxes on every item and service at the point of purchase – from food and clothing, to cars and houses. Only business expenses would be exempt from paying the tax. Used cars and existing homes also would not be taxed.
Families would receive a “prebate,” about $492 for a family of four, each month to cover “essentials.” The prebate is tied to the federal poverty rate, and Mastromarco says the proposal is an “untax” of the poor.
Under the rosy picture painted by Mastromarco, the Fair Tax relieves every problem plaguing the country: illegal immigrants would not receive the prebate, but they would pay 23 percent on the things they buy here, and fewer of them would arrive illegally; companies would invest in the United States because they no longer would labor under heavy taxes; businesses would no longer pay a share of payroll taxes, and would pass those savings along to employees, who would no longer pay Medicaid or Social Security taxes; and, with take-home pay increasing, the amount of money spent in local economies would increase.
“Exports come in tax free from their countries,” Mastromarco said. “And goods made here in the United States are taxed up and down the supply chain – multiple times. This tax would level the playing field for U.S. goods, because foreign goods would be subject to the tax. The U.S. becomes a better country for business – the only country in the world with a zero tax rate.”
Opponents of the Fair Tax don’t see it as a national cure-all. They say the 23 percent rate quoted by Mastromarco could reach as high as 67 percent to cover the government’s expenditures, according to a 1998 Brookings Institute analysis. A senior fellow at the National Center for Policy Analysis agrees the rate will be higher.
“When Congress’s Joint Committee on Taxation scored the Linder (Rep. John Linder, the main sponsor of the bill) four years ago, it estimated that it would actually require a tax-inclusive rate of 36 percent, not 23 percent, to equal current federal revenues. Calculating the rate in a normal, tax-exclusive manner would mean a 57 percent rate,” said Bruce Bartlett, writing in the National Review.
The proposal also doesn’t cover inflation. As inflation increases, goods would get more expensive, boosting the sales tax revenue.
The National Retail Federation, which once opposed the Fair Tax proposal, now simply considers it a nuisance. President Bush’s tax reform panel dismissed the concept, they said.
“It’s history, dead in the water,” said Craig Shearman, government relations vice president for the federation, an advocacy group for the retail sector. “The hearings killed it. It was introduced in 2005, but the panel released their study last fall and was against a national sales tax. It’s not going anywhere right now.”
Shearman dismissed Mastromarco’s efforts at creating grassroots support for the proposal as “attempts to save his job.” He said that once Tom Delay, former House majority leader, resigned amid corruption charges, there was little support for the bill.
Mastromarco disagrees. He said that 54 congressman support of Linder’s bill. And he hopes that grassroots efforts will rouse Congress to unusual action: changing the way the government collects revenue.
“Maybe he should tell that to the 54 congressman who signed on to the bill,” he said. “Maybe he should tell the 600,000 members of Americans for a Fair Tax that their efforts are over. As much as the National Retail Federation lobbyists wish this bill would go away, it won’t go away. Our tax system is a disease and we’re seeking a cure. It is not going to go away; we’re going to make some changes.”
But, Jerry Biggs of Biggs Kofford & Co. said he believes it would take tremendous effort to overcome Congress’ objections to the proposal. He attended Mastromarco’s presentation, and liked what he heard.
“I think our current system is broken,” he said. “It’s complex and difficult to comply with. There are things I do like. But there is a lot of complexity in any tax system. They don’t tax business to business, for example. So if I buy an airplane, and I use it partly for business and partly for personal, how do I get taxed? That’s where it will get complicated. There will be some negative consequences, some loopholes – but our current system is out of control.”
A tax accountant, Biggs is not concerned that he’ll be out of a job if Congress passes the Fair Tax bill.
“It will change the way we do business in a fairly substantial way,” he said. “But we should still have significant business, especially during the transition period. The new system will require businesses to account for things differently, and that’s where we can help. We can offer the layer of assistance.”
The proposal has negative consequences, Biggs concedes – but not for taxpayers. He sees negative consequences for Congress and government.
“A Fair Tax is not important to legislators,” he said. “The Internal Revenue code is the only law with no equitable remedy. Any other law, you can argue that the result is unfair, and you can win. No equitable remedy exists in tax law. It’s designed to be unfair to certain groups – any system that taxes some people at 45 percent and some at 5 percent is designed to be unfair.”
Despite his support for the proposal, Biggs is not optimistic about getting a Fair Tax law passed.
He said the current system is designed to manipulate society, offering deductions for charitable giving and deductions to stimulate business purchases. The sales tax, he said, will offer less opportunity for manipulation – and therefore, Congress will not vote for it.
“The tax code now is not so much a revenue generating tool as it is a society manipulating tool,” Biggs said. “From a legislator perspective, that makes it a negative. Unless we decide that we don’t like their decisions, and vote them out. But there will have to be such a groundswell of support to get this thing passed.
“Let’s put it this way: if we had a national referendum system like we do in Colorado, I have no doubt this thing would pass. But with just Congress, there’s not much chance at all.”
Amy.gillentine@csbj.com