The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:

Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.

Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).

Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.

Assumption #3 - The Fair Tax proposal is defined as being “revenue neutral” in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.

Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.

Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.

The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.

(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS - It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.

There is no legal requirement for any business to reduce prices by the amount of any embedded cost elimination savings and there is no way to measure if or by how much any business do actually reduce prices.

Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the “free market” healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.

The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.

Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.

Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn’t understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.

(2) IMPACT ON MOST AMERICANS - The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.

While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Child Tax Credit and Additional Child Tax Credit, Foreign tax credit, elderly or disabled, etc. which currently provide substantial help to eligible people. The Fair Tax proponents provide no comparison as to which program (current IRS or Fair Tax prebates) offers the most dollars to assist low income individuals and families currently receiving these tax benefits.

(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.

The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.

The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.

Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.

With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.

(4) WHAT IF PRICES DO NOT DROP BY 23%? - If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.

Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits keep any embedded costs at less than 3-5% of the retail price, not 23%.

(5) WILL INDIVIDUALS PAY MORE TAXES? - The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. i>Since individuals are the only ones paying taxes, by default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.

The Fair Tax will result in everyone (children, everyone in the work force, and retirees) paying the 30% Federal sales tax on every service and new product they buy from “cradle to grave” with a small offset for any prebate. Since everyone except those in the top 5% of income brackets spends just about all their available lifetime income on goods and services subject to the Fair Tax, the effective tax rate for most Americans will be close to 30%.

(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax is expected to remain the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.

Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.

Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find a large increase in the cost of tax compliance activity as a result of having to report to up to at 46 agencies on a monthly basis based on the number of states where they conduct business.

If you think the IRS can be heavy-handed, you don’t realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.

CONCLUSIONS - Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.

Note: Although many smaller businesses will appreciate not paying Federal business taxes and FICA, they may quickly conclude making monthly payments to a combination of State and Federal bureaucracies is substantially more onerous than the current reporting requirements.

In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.

Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.

In closing, I have reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.

I am also concerned about the high potential for rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.

Unfortunately, its pretty much a farce. For one thing, it taxes the federal government — to pay the federal government.

Neal Boortz wrote (page 148 in FairTax Book) “The federal government itself will become a MAJOR TAXPAYER.”

Fairtax depends on about 500 billion dollars from the federal government “paying” its own taxes.

Fairtax paying itself is like me paying myself 10,000 to cut my own grass. Oh yeah, I can write the check, and I can even deposit the check. Even if I do this every day, I don’t get 300,000 a month. I just get short grass.

Since the federal government has to PAY the Taxes to itself, it doesnt really GET any money. The effect would be exactly the same, if the government DIDNT pay the tax. Therefore, the 500 billion fairtax pretends to collect — can’t possibly be collected.

That one fallacy alone means the fairtax rate would have to be much higher, to make up for that 500 billion- probably raise to about 40%.

Are there any other things that Fairtax depends on taxing, but can not?

Yes. Health care for example. Fairtax assumes it can collect 540 billion from this market segment.

But can it really make people pay 560 billion in taxes on their health care?

While some people may be able to pay a 40% sales tax on their cancer surgery, heart bypass surgery, and hip replacement — many could not possibly pay it. How could the parents of a child with leukemia pay a 40-60,000 sales tax on their efforts to keep their child alive?

Insurance surely isn’t going to suddenly pay 40% more for health care. Insurance only pays for certain procedures — and tax isn’t one of them. Plus, insurance invariably caps out. So the Fairtax would give a whole new meaning to the term “co-pay”

SOme people have 100,000 medical costs — but only make 25,000. Their insurance pays the difference, or the government. Who will pay all these taxes?

I think its clear, there would be a huge uproar over the tax on health care, and this market would rightly get an exception.

That would make the tax rate more like 50%, to make up for that 500 billion that wouldn’t be collected.

Few people realize that all utitlies will be taxed — your electric bill, your gas, and even the gasoline that goes into your car.

Plus — rent is taxed - do you think renters would be able to pay an extra 50% sales tax?

I don’t see how a high sales tax could work - not for cancer patients, not for people who have rent.

Since tonight is the final State of the Union address for Dubya, who’s made tax cuts a focal point of his presidency, it only seems right that this, our 29th Carnival of Taxes, be our official State of the Tax Union. Cue Hail to the Chief! Now, since …

They will also get the prebate.

I can see one may be concerned about those living mainly off of savings made with after tax dollars. Remember that prices are supposed to drop to about what they are now do to the elimination of the embedded taxes and compliance costs. The economy should grow in part because our exports will be permanently discounted by around 22%. Therefore in the worst case seniors could reinvest some of their savings in any of the now rapidly growing companies to have higher income if they don’t mind taking a little risk.

I hope I’ve been of some help.

If the FairTax passes America will become the tax free haven of the world. There is an estimated 10 trillion dollars stashed away in offshore accounts. There will be no reason to keep any money any where but here if it passes. Imagine what that will do for interest rates and availability of loans to start or expand businesses, home loans, credit cards or whatever.

I hate the whole class warfare thing. While the wealthy might not pay as much tax as a percentage of their income as other income groups will, unless they stash their cash under the mattress they will invest here in ways that will help the economy to grow.

There are many people spreading disinformation about the FairTax. I suppose there are many invested in some way in the current system or maybe just afraid of change.

Keep reading at FairTax.org. I think it’s all good and the best way to grow the economy which we have to do if we are to have any chance of meeting our obligations to the ever growing entitlement programs. Hopefully a fast growing economy will reduce government dependency as well.

Mike: many point out that the proposed tax model does a great job a generating revenue and is in fact successful in a handful of small economies around the world.

TheIssue.com recently ran a feature on the matter expressing the different views people have http://theissue.com/issue/7294.html

Feel free to comment and join on the discussion.

Best,
Robert
The Issue | http://www.TheIssue.com

The FairTax website addresses your concerns and retirement funds.
fairtax.org

Good Luck