Dear Senator McCain,

In this essay I will give my thoughts on how:

1. 1.      The U.S. tax system puts U.S. companies at a disadvantage vs. international competition
2. 2.      Many other countries have tax policy that actually creates an advantage for their business.
3. 3.      What we can do about it.

Tax rates around the world is a page on Wikipedia.org.

It appears that the United States is the only country with payroll taxes (Social Security + Medicare) though I do see that the UK has a National Insurance Tax which appears to be similar. U.S. Payroll taxes cause U.S. workforce costs to be ~7.65% higher than most international competition. Multiply that 7.65% on salaries/wages across all business functions (both internal and supplied) in order to get a product produced, marketed, distributed, and out to end consumers and it is not difficult to see how higher costs creep into the end pricing to consumers.

In addition, U.S. Corporate Tax is among the highest in the world – up to 39%. We all know that corporate taxes are simply passed along to consumers, right? So while Washington may seem like they are playing good guys by taxing the evil corporations, you and I are paying for it either (a) at the register or (b) through loss of jobs to international competition.

As an example, a U.S. company that manufactures widgets has $100 million in gross wages/salaries which results in employer-side payroll taxes of approximately $7.5 million. If it has cost-of-goods sold and other costs (raw materials, plant & equipment, etc.) of $72.5 million for total costs of $180 million and then sold its widgets to a U.S. distributor for $200 million and makes $20 million it must hand over one third to the government which leaves about $13 million in profit.

Now let’s move the manufacturing to Ireland and assume that relative wages/salaries are similar.
Does Ireland have payroll taxes? No. That’s a $7.5 million savings. 
Ireland’s corporate tax is 12.5%. 

If the Irish company charged the same $200 million for its widgets and had similar raw materials and operating costs ($72.5 million) it would stand to profit about $28.5 million before corporate taxes of about $3.6 million which would leave nearly $25 million in after-tax profit.

Let’s say that the Irish company wants to be more competitive than the U.S. company. It could charge $10 million less than the U.S. manufacturer and still make greater profit. So the Irish company wins the business, the American consumer gets a less expensive Irish product, but the U.S. manufacturing struggles and eventually either closes or relocates. Either way the jobs are no longer American Jobs.

So how would this manufacturing example unfold with the FairTax?

The U.S. workforce costs would come to $100 million even (not $107.5 million)
Other before-tax costs remain constant at $72.5 million
There is no Corporate Tax so in order to make $13 million in profit our company would charge $179.5 million.

To recap, in order to get $13 million in after-tax profit:

1. 1.      Before the FairTax our U.S. company must charge $200 million
2. 2.      The Irish company could charge slightly less than $190 million
3. 3.      After the FairTax our U.S. company could charge $179.5 million

Ever hear of the tremendous trade deficit that our county runs? Well, if we take this newfound competitiveness under the FairTax system and apply it to U.S. exports exports as well, we will see a rapid reversal of the trade imbalance and have even greater prosperity in our lands. 

In terms of objectives for a better tax solution we covered why FairTax simplicity and FairTax revenue neutrality are important. It’s time to tackle the issue of removing barriers to economic growth.

First off, what are the barriers to economic growth?

The most basic answer is anything that impedes the overall prosperity of our people – almost exclusively associated with reducing our ability to compete in free markets. This wasn’t such a big deal 96 years ago (i.e. when we allowed the 16^th Amendment to be ratified) when our markets were more isolated and when gross manipulation of the tax code hadn’t occurred.

But where do we stand today?

1. 1.       We are in a competitive global market.
2. 2.       We have 66,000 pages of tax code that shift the burden away from those who can afford to lobby our politicians and onto the little guy.

Most U.S. companies compete with one arm tied behind their back. The exceptions are those with significant tax breaks – usually very large organizations. 

Entrepreneurs with great ideas must not only be experts in their fields they must be experts in complex tax compliance. Sure, they can hire tax attorneys and CPAs but financial resources must be committed which take away from developing ideas and getting products and services to market. 

Also, once started, companies must divert 7.65% of gross pay (employer-side of payroll tax on salaries and wages of its workforce) to our federal government. In a society that is increasingly service-oriented and when you consider marketing, distribution, sales, administration (as well as all marketing, sales, admin of suppliers) these payroll taxes make up a significant cost of doing business which must be priced into the end products and services that you and I buy as consumers. Of course we need to factor in the ongoing cost of tax compliance as well (payroll services and/or internal software systems plus tax attorneys and CPAs). If business is a pipeline and profits come out of the end of the pipe, inefficiency constitutes the leaks in the pipe where profits seep out. Unnecessary tax compliance is a major leak to all U.S. companies.

Finally, any profit that our entrepreneur is able to manage gets taxed via the corporate tax as well.

Speaking about profits, it is worth mentioning that our government wants companies to record profits sooner rather than later. Any significant investment that our entrepreneur makes in plant and equipment must be depreciated using complex tax schedules many years into the future rather than in the year of acquisition in order to maximize (in the government’s eyes) net profit before taxes. This enables the government to take “their share” sooner rather than wait until the capital expenditure pays for itself. Our entrepreneur must carefully consider the tax consequences and additional financing prior to committing to any large acquisitions which often-times prevents companies from moving forward.

The payroll taxes, corporate taxes, and capital investment considerations can be entirely removed from the production side of goods and services by replacing our 66,000 page 96-year-old tax system that is on life support with the FairTax (see FairTax in a NutShell). In addition, costly efforts to comply with tax complexity can be replaced with one simple calculation – 23% of net sales of new goods and services period.

Our entrepreneur can now take his/her great idea and really run with it unshackled! He/she can invest in facilities and equipment, research and development, production and operations, distribution, marketing and sales… all with little to no required consideration to and ongoing cost of tax compliance. 

To bring this point home, if our entrepreneur wants to tackle, for example, our energy challenges which might require $100 million investment in plant & equipment, scientific r&d, operations, marketing, sales, etc. ahead of sale #1 under our current tax system, he/she will likely need only $75 million after the FairTax has been around for a few years.   The government will get theirs… but on the consumption side not the production side.

Another of the important objectives in an alternate tax system is that of funding our government at the current level. Many of us will question this. In fact, I fully agree that our government wastes far too much of our money. However, if we are ever going to get tax reform in our country, we need to keep income and spending legislation separate. Why? Tax reform is enough of an uphill battle without bundling spending constraints along with it. We can voice our support for the FairTax Act and, in completely separate support, voice our support for spending reform.

Even with spending at current levels, many taxpayers will experience tax relief with the FairTax for two reasons. (1) tax tax evaders (the underground economy, etc.) will immediately start sharing the burden of taxation with their common every-day purchases and (2) we will all get a simplicity dividend (hey, I like that). We will no longer be required to pay hundreds (or thousands) of dollars in annual tax compliance. 

In a completely separate effort, We the People need get our politicians to curb their massive spending appetite. When we do, I would support keeping the 23% FairTax rate until we completely pay down the national debt. 

In my discussion with Andrew on important considerations for a tax system I argue that simplicity is something to seek whereas Andrew believes that simplicity is not so important. Andrew has his Simplicity write-up for your viewing pleasure.

All things being equal (i.e. does it treat taxpayers in a fair and balanced way), I do believe that simplicity in a tax system is something to strive for.   When I consider simplicity I am essentially considering the following:

1. 1.       Can the taxpayers (and tax collectors) understand what is expected of them without having a degree in taxation?
2. 2.       Does the taxpayer have to jump through complex hoops to comply?
3. 3.       Is the taxpayer restricted unnecessarily?

Since our current system is what we are used to, I provide examples from my own experience of what is required for our current tax filings. I have a small business and a family of four. My CPA does taxes for both entities because he has expertise that I would never be able to apply in order to pay my required share. 

On the business side I am required to withhold income and payroll taxes from payroll checks. I am required to withhold at different rates for different earning brackets and to stop withholding certain taxes when certain thresholds are reached. I am required to file 941 payroll tax deposits with each pay cycle. I am required to file quarterly reconciliation reports. I am required to report new hires. I am required to keep track of all revenues and expenses. Some capital expenditures I must expense years into the future. Some provisions allow me accelerated depreciation when the government wants to prime the economy. I file W2s, 1099’s etc. as well an annual tax return which, as a subchapter S corporation, flows income for my personal income filing through a for K1.

As an individual I may have to file quarterly estimated taxes. I fund my Individual Retirement Accounts, Health Savings Account, College Savings Account, Variable Life Insurance (all to reduce taxes and make my financial planners money).  I gather up all my W2s, 1099s, 5498-SAs for investment income, salary/wage earnings, interest income, dividend income so I can file my annual tax returns… I can write off mortgage interest. I get child credits. I can also write-off some losses (but I may have to take losses over time so that the government is sure to get their money). I may get some tax credits for certain activities. I may be subject to the alternative minimum tax. I may or may not get a tax refund.

Oh, and if I have a significant event in my life… I better talk to a tax specialist. If my health deteriorates and I am forced to cash in an investment, I must prepare to pay Uncle Sam before I take care of my specific needs.

Perhaps complexity is by design… If our politicians in their infinite wisdom make things complex, perhaps folks just won’t itemize & the government gets to keep taxes in excess of what is actually due… If so, who does this affect the most? Not the wealthy who can afford tax planners.

Does the current income tax pass my litmus test? No.

1. 1.       No, not everyone can understand it. It is 66,000 pages… not exactly a weekend read.
2. 2.      Yes, taxpayers have to jump through hoops to comply.  Businesses pass these compliance costs onto consumers as a cost of doing business.
3. 3.      Yes, taxpayers are unnecessarily restricted. To avoid paying more than due, we must separate funds into IRAs, HSAs, Variable Life Policies, etc.  We have tax consequences when we need to cash in on investments and even when we leave money to our heirs. 

There are too many entities and too many moving parts. Every business AND individual has significant filing requirements. The average person cannot understand this complexity.

As an option, we have the FairTax bill which has the following requirements:

1.       Registered Sellers file regular Sales Tax returns and remit payment of 23% based on the sale of new goods and services. These sales tax filings will likely be made part of a combined Federal and State sales tax filings vs. a separate federal and state sales tax filings.

2.       Consumers consume and see the 23% tax appear on their sales receipts.

3.       Qualified Families can register annually in order to receive monthly prebate checks.

Is it really that easy? For most of us, yes. Can it be more complex? Sure. Families using unregistered domestic help are required to remit the sales tax. There will be other possible complexities as well but this is far simpler than our current system. Does the FairTax pass the my litmus test?

1. 1.      Yes, everyone can understand it.
2. 2.      No, the taxpayer does not have to jump through hoops to comply.
3. 3.      No, the taxpayer is not unnecessarily restricted. Consume services and new goods? Pay the tax. Consume used goods, pay no tax.

Now, in fairness, a Flat Tax that is void of massive complexity would be simpler than what we have now but… where the FairTax puts only a small filing burden on registered sellers (sellers of new goods and services) the Flat Tax puts a more significant burden on every family and business to track revenues & expenses. Both are an improvement over what we have currently but, in my estimate, the FairTax is simpler and better.

Andrew and I have been having a conversation about my advocacy and his opposition of the FairTax. He recently gave a reply A Partial Reply to yt_knight to some objectives that I listed. First, some common ground:

I largely accept all of the bullet points that Andrew puts forth (restated below).

1. Minimizes the individual harm done
2. Treats all individuals and all types of income and wealth similarly
3. Does not target specific acts or assets for favorable or punitive treatment
4. Has the lowest total administrative cost per dollar of revenue
5. Taxes only enough to cover needs, not more
6. Produces consistent results

I would argue about Andrew’s point #5 in my point #2 below. I also argue that we should maintain funding to pay down (and eliminate) the national debt but otherwise we are in agreement on his points.

I would also argue that we are not far apart on several of the 18 objectives that I put forth in my FairTax counter - change for change sake... blog entry even though Andrew chose to argue semantics.   If Andrew simply argued from common agreement that some form of tax system is required vs. pitting my objectives against a system of no taxes whatsoever it would have been more constructive. To avoid the game of semantics perhaps I should have rephrased objectives to communicate “keeping harm to a minimum”. For instance, point #3 could have been rephrased to “minimize barriers to economic growth” rather than “promote economic growth”.  A clarification/counterargument on these points… Again, I believe that our tax system should be:

1. 1.       Simple (i.e. ability for taxpayers to comply without expensive tax preparation fees).   I agree that it should be consistent too.
2. 2.       Fund our government at the same level. I argue that massive tax reform will be hard enough to pass without including provisions to cut spending. I agree that government spending needs to be cut but I argue that taxing and spending need to be addressed separately – otherwise neither will pass if they are bundled into one reform push.
3. 3.       Remove barriers to Economic Growth.  
4. 4.       Remove barriers to U.S. Competiveness Internationally – (Promote U.S. Competitiveness) – I argue that when taxes are ultimately priced into U.S. products and services (ahead of actual consumption) that competing products/services that strip these taxes (either partially or entirely) ahead of export have a great advantage. Andrew puts forth an argument that the U.S. might run afoul of the WTO. Really? Is our country sovereign or not? Besides, isn’t the U.S. paying the largest tab for peace-keeping military efforts globally? Why shouldn’t we have a right to have a tax system that levels the playing field in terms of global competitiveness?
5. 5.       Minimize barriers to Capital Investment in the U.S. – High Corporate taxes chase away capital investment in our lands. Any tax system (FairTax, Flat Tax, or otherwise) that eliminates corporate taxes does much to solve this problem.
6. 6.       Minimize barriers to Capital Formation in the U.S. In a prosperous society I argue that a proper balance will be struck between investment and consumption.   Also, when the burden of tax planning is removed from business (i.e. what is the tax consequence of purchasing that equipment this year vs. next fiscal tax reporting year), commerce becomes more fluid. Many bold initiatives are often shelved (or altered) because of tax consequences given our current tax code. 
7. 7.       Minimize loss of productivity as a consequence of taxation – I agree with Andrew that 5, 6, and 7 are interrelated. In addition, though, unleashing small business (removing barriers) will create even more productivity and higher GDP.
8. 8.       Respect privacy and civil rights. Andrew and I disagree here. The income tax is intrusive and abusive requiring a running tally of all sources of income. There is no requirement in the FairTax to report detail of all purchases to the taxing agency (only monthly totals).   A key problem with the IRS is that we are presumed guilty with the burden of proof on us. A reformed tax system should presume innocence with the burden on the government to prove otherwise.
9. 9.       Make the true cost of government transparent. Andrew missed my point here. My argument here is that tax incentives on the income side of the ledger are completely hidden from “We the People”. In order for government to be transparent, all spending should show up on the spending side of the ledger. It is impossible to see what programs are being assisted (funded) via tax incentives when their programs never appear on the spend side of the ledger. I believe Andrew and I agree that free markets that do not create winners and losers in the tax code are preferable.
10. 10.   Remove barriers to upward mobility. My argument here is that it is preferable for families to be able to choose when to pay their taxes vs. have the government reach into our wallets as we earn… If young families choose to rein in spending in order to save, invest, and build their nest egg and then choose to consume more (and therefore fund our government more) after they are on solid financial footing they have more control over their lives. Try doing that under our current tax system. Work two jobs & you get elevated into a higher tax bracket & the government takes even more earnings.
11. 11.   Lower the cost of employment – Andrew misses the point here. By removing income and payroll tax withholding along with all of the associated compliance issues the cost of employment drops period. Not sure why Andrew went off on other non-employment arguments with this point…
12. 12.   Minimize barriers to Create Jobs – Small business and entrepreneurship has the potential to create more jobs when barriers are removed. Currently, if it takes $10,000,000 in labor and services to get a company off the ground (R&D, legal formation, marketing, operations, etc.) the government will get their roughly $2,300,000 in embedded labor taxes before sale #1 is even made – unless, of course, we have tax incentives but we are trying to get away from that right?
13. 13.   Treat everyone equitably – no disagreement so no further clarification
14. 14.   Minimize barriers to capital formation and entrepreneurship – with the addition of my argument from #12 above… Also, forming capital is easier when there is no tax consequence on the investment side.
15. 15.   Level the playing field between small and large business. Andrew and I agree that relative size of business should be of no concern. High compliance costs favor large business. Large business has the wherewithal to lobby congress and create tax advantages. This cannot be said for small business. A tax system that levels the playing field is more equitable.
16. 16.   Remove Tax Planning as a Burden – Andrew tries to minimize this issue but many investment decisions (capital expenditures, etc.) under the current tax system require careful thought to tax consequences. As indicated, some expenditures are shelved or delayed due to tax unfavorable consequences.
17. 17.   Easy to administer – I argue that this is essential. If Andrew wants to argue for argument sake (see http://www.youtube.com/watch?v=teMlv3ripSM) that’s fine but simplicity is a goal because complexity costs money.  Yes, I agree that there is a balance but ease of administration should be considered.
18. 18.   Address Medicare and Social Security – Andrew claims that these programs are not part of the tax system. I wonder if Andrew gets a paycheck & sees that 7.65% of his gross wages (+ another 7.65% that the employer matches) is withheld. If these programs aren’t dealt with at the same time as the income tax where should they be dealt with?

I have had the opportunity to debate GyroTyro (GT)over the last week about the FairTax and how it treats different generations. Some interesting revelations came of this debate.

1. 1.       It is very clear that those in/near retirement have real concerns about double-taxation
2. 2.       No generation wants to feel as though it is being taken advantage of

As much is our debate teetered beyond civil in some cases, I appreciate GT’s perspective and I appreciate his concerns. If I were in my twilight years after having paid taxes out of my earnings all of my working years and then I were faced with the proposition of having to be taxed again I wouldn’t be happy about it either. Let’s break things down though to determine whether retired folks will be better off, worse off, or about the same with a change to the FairTax.

First-off, it is worth mentioning that the first $10,400 per adult ($20,800 per married couple) of taxable consumption go completely untaxed with the FairTax. Let’s set this aside for now but it is a key provision that puts families’ and individuals’ survival first ahead of government needs.

Pricing of products/services:

Under the FairTax, anything 100% provided by U.S. Labor will be largely a wash (give or take 2-3 %). Embedded taxes that make their way into the pricing of U.S-made products and services via payroll tax, corporate tax, and tax compliance burdens on corporations (estimated 22%) get stripped away from the productivity side but then added back at the point of business-to-consumer sale at 23-cents-on-the-dollar. Net effect? A $100 pair of U.S.-made boots might cost $102 at the register. A $100 medical procedure might cost $98.00 with the FairTax. In effect, it is basically a wash.

What about imported items which is a concern of GTs? Well, if manufacturing is still roughly 30% of the ultimate cost of goods sold (as it was when I studied in Business School), than 70% of the price of an imported item (say for a $100 pair of loafers) would involve U.S. marketing, distribution, admin, and profit of 70% ($70) which would have 22% embedded tax stripped away ($15.40). Adding the FairTax in on an $84.60 item gives us an after-FairTax price of $110. 

Now a 10% increase over what it would cost at the register preFairTax for imported items is not attractive if it is considered in a vacuum but remember, we are only talking about imported items & how many individuals buy 100% imported goods and no domestically provided services? Is a 50/50 split reasonable? That would be a 5% overall increase in price. How about a 30/70 split which would result in an approximate 3% after-FairTax increase in price? 

Still, we are trying to prove that the FairTax, at worst, will be a lateral move for seniors so even 3% is unacceptable.

But does this hypothetical retired person have any income (social security, interest income, dividends, capital gains, rental income, etc.)? No more filing income tax returns… no more paying the CPA to generate tax returns… No taxable income? Well, we could argue that he/she has no business buying expensive imported items. In fact, we this person could be thrifty and maximize consumption of second-hand items (even imported second-hand items if desired) completely tax free since used goods are not taxable items under the FairTax.

Okay, so given the above, most seniors are better off under the FairTax than with the current system but if we aren’t quite there yet for some… let’s go ahead and add the FairTax prebate in ($200 per adult per month in 2008 figures).

Am I good with this realizing that I have a mother and father approaching their 70s with plenty of kick left in the years ahead? Absolutely. 

Under the FairTax we have much more control over our lives which is a great thing. I hope folks can see it.

Finally, it is worth mentioning for my friend GT’s sake that fairness across generations works both ways. As a 44 year-old, I have been paying into Social Security and Medicare for over 25 years. I will continue to pay until either the FairTax gets implemented (at which time Social Security and Medicare will be funded out of the general fund) or until it goes bankrupt. I have no illusion that I will receive dime #1 back from these programs under the current tax structure. So where you (GT) may be concerned about paying during your income-earning years and then paying again via consumption in your twilight years (but receiving Social Security and Medicare Benefits), I have a concern about paying all along the way and receiving no Social Security/Medicare Benefits. The generational argument cuts both ways.

This has been a good exercise for me. I hope others get some benefit as well.

Cheers,

YK

I have been having interesting discussions with AndrewS recently about his view that the FairTax is quite flawed an about my view that the FairTax would be the best thing since sliced bread. AndrewS posts on many interesting topics and he has very interesting and well-thought-out and extremely well written communication about his positions – many of which I agree with. His last communication “Why Argue” seems to make the case that by pointing out perceived theoretical flaws in the FairTax without offering up solutions is somehow a good thing. I see things differently.

In this world, I know two things with certainty… (1) those entities who succeed (individuals, businesses, governments) are those that come up with solutions to problems – not just problems with solutions and (2) you cannot please everyone all of time. It is easy to poke holes in any theory… 1770’s – Will democracy (a theory at that time) be a good thing? 1985ish - What happens if we (Microsoft) release Windows 3.0 with known imprefections? 2008 - What are the risks of the prebate becoming some uncontrollable welfare mechanism? What happens if the video rental service games the system by selling once-used DVDs as used in order to avoid taxation? Sometimes, though, implementing an imperfect solution is far better than doing nothing. 

Why did I mention Windows 3.1? Because I am in the technology industry. Also because many of us know that IBM’s OS2 and Apple’s Macintosh OS were far better at the time. But had Microsoft not released Windows 3.1 as an answer to the graphical world that was taking the computer operating systems by storm, it would have missed the boat entirely.   Were the risks weighed? I have to think YES. Did the rewards outweigh the risks? Absolutely YES. What would have happened had Microsoft taken a few more years to get the product much more stable before marketing? OS2 or Macintosh OS would have taken over market share and Microsoft would be a shadow of its current self.

Now, in our fast-moving globally competitive world of today… can we afford for the United States of America to miss the boat? What boat?   

Folks, while there are many things to get excited about with the FairTax, one of the most exciting things is making the United States more competitive both for our own consumers and for consumers away from our lands who buy products and services offered by U.S. companies. The prosperity argument is huge… I just don’t see it addressed in our current tax structure (other than rhetoric about penalizing companies for sending jobs overseas by some presidential candidates). I also don’t see it addressed with the FlatTax as I understand it. 

Again, the prosperity argument is that, under the FairTax, taxation is stripped away completely from the productivity side and replaced on the consumption side (national sales tax – with prebate). When this happens, it levels the playing field with imported items (untaxed coming into our lands) such that American-made items can complete for shelf-space at in our retail stores and markets. Stripping away these taxes from the productivity side also makes US-made goods/services more competitive globally.

By persuading others about “perceived flaws” with the FairTax without offering up solutions, I argue that we remain stuck in neutral (or worse yet… reverse) in a fast-changing globally competitive market. 

The mountain to climb in order to take back our country from politicians who create winners and losers with our 66,000 pages of tax code is extremely high. Washington is not going to want to give up this power without a fight. It is very clear to me that We The People need to rally around one viable (perhaps not perfect) alternative to the current system otherwise guess what? We get to keep our existing oppressive and abusive current system that manipulates the free markets and that puts us at a competitive disadvantage. 

We have an opportunity to be honest about things and recognize that our tax code (including Social Security and Medicare) is a huge problem that, if left unsolved, will cripple us.   We also have an opportunity to do something. Actively supporting the FairTax is doing something that is fair and that has extreme benefit in many areas that touch our lives.

Peace,

YK

Here is another reply to a FairTax debate with AndrewS. My reply is to his blog post HERE…

Andrew,

The prebate is really a good idea. It basically is a provision that puts family survival ahead of government. In the your posts I get the impression that there is no love of government ahead of the family so I would hope that you see the elegance of this.

The prebate is not designed as a welfare mechanism. Can it be monkeyed with? Well, with fewer dials to turn, raising the prebate amount (i.e. raising the poverty line) will have to offset by more consumption (more prosperity) or a higher FairTax rate (more than 23%) which is another feather in the cap of transparency. How many dials are there? Poverty line and FairTax rate = 2 dials. Not bad…

In fact, I would argue that the FairTax and the prebate system will help wean people off of welfare (and welfare checks). I believe that people want to have more self-reliance. Capital and Job repatriation will create greater prosperity in our lands. The FairTax and the monthly prebate basically remove obstacles from welfare recipients climbing out of poverty (i.e. lack of opportunity, complex taxation, welfare mindset, etc.).   When I refer to a welfare mindset, I consider that a welfare recipient receiving “welfare” vs. all families receiving a “prebate” puts welfare folks in an entirely different category with stigma, reliance, etc. associated with it. If everyone gets the prebate there is no “welfare mindset” or stigma that is associated with it. Your statement that FairTax supporters just believe the prebate check is just a refund incorrect. Again, it is putting family survival ahead of government. Plenty of people will not need it but the fact that everyone residing here legally WILL get it should appeal to your sense of fairness.

It seems as though Andrew argues that once legal residents are used to it that they will never want to give it up I believe misses the point. In this case, it is a really good provision that should remain indefinitely. We want government to know that family survival comes first – even ahead of government funding. All families who legally reside here do have a right to survival ahead of government funding. This is a good message and this is a good provision.

Andrew claims that the prebate will take on a life of its own… there are two dials as indicated above. (1) the poverty line and (2) FairTax rate. Okay, there are some minor sub-dials in how the Dept of Health Services constructs the poverty tables (i.e. 1 adult/0 children, 2 adults/2 children) but I hope we can agree that this is insignificant. I see the poverty line being shaped by inflation – not by the politicians.

Andrew claims that the prebate could start as dealing only with taxes but then grow to an even bigger “entitlement”. What he fails to realize is that the prebate goes to everyone based on the same criteria. What political capital will a politician gain by giving the same “entitlement” to everyone? Wouldn’t that be foolish? And if we aren’t tracking income there is no way to differentiate between rich, poor, middle-class which is one of the beauties of it.

I think in Andrew’s last statements about his “general opposition to making people view the government as a source of money” he has it backward. I have opposition to making government view that its funding comes before survival of every legal family and that government only gets funded after basic family survival handled.

Peace,

YK

Andrew replied to another of my comments on his blog with another blog entry HERE

While I agree with Andrew that no tax system will remove all uncertainties and all opportunities to game the system, I believe that the FairTax does a better job than the existing system and the Flat Tax.

Andrew tosses out a scenario with a DVD rental service and indicates that it would be uncertain whether used DVD’s would create a grey area that DVD rental businesses would have uncertainties with. Now I fully appreciate that DVD rental businesses may rent a DVD only once (and charge the FairTax on the rental) & then treat it as used with an ability to sell with no FairTax… I can also appreciate that overstocked DVDs that were intended to be rented but that were never actually rented might provide some uncertainty.  Chalk this particular scenario as more certain under a Flat Tax.

But I believe that most scenarios are much more certain under the FairTax. Take Walmart… 23 cents on the dollar goes to the tax period. Take your pool maintenance service… Add all service sales and subtract any refunds provided & 23 cents on the dollar goes to the tax. Take your restaurants… Gross receipts less refunds * .23 go to the tax. Your $1,000 removal of that mole that has been bothering you for years… $230 goes to the tax.

Okay, if you have a shop that sells new and used items, they will have to track sales differently but, heck, cash registers have been doing this for years (taxable and untaxable items). Rocket science? No. Potential for dishonesty? Yes. But if I were setting up the tax enforcement/auditing side of things I might put more focus on businesses that report sale of a significant volume of used goods just to let them know that the random audits will be keeping them under the microscope just a little more than businesses that don’t offer both. 

Andrews also believes that because the FairTax is calculated on billions of transactions that it would be more troublesome. The truth is that income-based taxes involve billions of transactions on both sides of the ledger and and every step of channel (manufacturing/import, distribution, etc.) in order to product a profit/loss (i.e. income). It is more complex to calculate income than it is to calculate a tax based on sales (even if you have to differentiate between new and used goods).  Another good point here is that the FairTax only applies to business-to-consumer (b2c) vs. b2b. Of the roughly 30 million businesses, many are b2b - distribution and/or business services (legal, marketing, etc.) - that support the b2b. If ~10 million are b2b, that is 10 million (monthly?) sales tax filings as opposed to 300 million annual income tax filings + 30 million corporate tax filings. Where do you think most uncertainty will exist?

Andrew claims that there will be chaos because no one will audit b2c businesses? I do wish he would debate fairly… I took time to communicate that my state of California would be funded on the order of $3.86b  through tax receipts to administer/audit the FairTax (in addition to what the state already has to admin/audit its current sales tax).  

Andrew claims that he wants folks to be fully informed about many options before deciding. Normally, I would agree. But we are not battling We The People here. We are battling politicians who are taking our country down a populist path for their own interest and for the interest of the lobbyists who keep them elected. Many options confuse the masses. A core idea needs to be rallied around. I maintain that the core idea should be the FairTax. 

Why the FairTax over the FlatTax? I have posted key reasons but don’t know how to do a trackback yet. Key reasons are as follows:

1.       The FairTax reverses the trend of jobs, capital, and opportunity being chased away from our lands from income-based taxation.

2.       The FairTax makes our nation more competitive (both at home and abroad).

3.       The FairTax spreads the tax burden to all who consume within our lands (including those operating in the shadows).

4.       The FairTax has us contributing to gov’t only after we pay for basic essentials of life through the tax prebate provision.

5.       The FairTax allows younger workers to choose to gain financial security ahead of contributing more to the gov’t vs. requiring younger workers to pay as they earn on the income side.

Finally (and Andrew, you might not appreciate this) I do encourage folks to read the book or at least scan through http://en.wikipedia.org/wiki/Fairtax to get more of a sense of it. Information is power.

Cheers,

YK

This is a consolidation of comments I made at a fellow blogger's blog considering costs of administering the FairTax... 

Regarding the bureaucracy:

There was a question as to whether the FairTax would add bureaucracy vs. slim it down. 

I addressed the consideration by mentioning that the FairTax would leverage the Social Security Administration to manage the tax prebates and existing state sales tax systems in 45 of the 50 states and that 1% of national sales tax is split between business collecting the FairTax and the collecting state agency to administer. We would not need nearly the number of administrators, auditors, etc. that the IRS employs and that the bureaucracy would significantly decrease.

With the babyboom generation retiring, the Social Security Administration (SSA) is going to have to administer payments to 30% of the households anyway.

As far as the states go... boy, it sure seems to me that streamlining taxes to do away with income/corporate/cap gains/estate taxes in favor of sales taxes would create great economies of scale.

I live in California (8.25% sales tax in my county). If it were an embedded tax and it broadened to include b2c services as well as sales of new goods, AND it did away with income/corp/cap gains/estate taxes I still can't imagine that State/Fed combined here would exceed 30% inclusive AND STILL NOT AFFECT PRICES MATERIALLY. I can envision states having their own tax prebate and administering the federal tax prebate as well to create even more efficiencies.

Also, with regard to enforcement... I believe there are something like 30 million businesses in the U.S. How many sell busine