Cafeoutdoors.com: Fair Tax Fraud

The Fair Tax Fraud
By Laurence M. Vance
Posted on 5/18/2005

Since my recent article on the evils of the withholding tax, I have been inundated with e-mails by supporters of the " FairTax," including a request that I endorse "The Fair Tax Act of 2005" currently pending in the Congress. But like the calls for "fair trade" instead of "free trade," the FairTax is a fraud because it is based on the fallacy that government theft (taxation) should be done in a "fair" manner instead of eliminated altogether.

FairTax proponents are correct in their assessment of the Internal Revenue Code:

The current U.S. income tax code is widely regarded by just about everyone as unfair, complex, wasteful, confusing, and costly. Businesses and other organizations spend more than six billion hours each year complying with the federal tax code. Estimated compliance costs conservatively top $225 billion annually?costs that are ultimately embedded in retail prices paid by consumers.

The Internal Revenue Code cannot simply be "fixed," which is amply demonstrated by more than 35 years of attempted tax code reform, each round resulting in yet more complexity and unrelenting, page-after-page, mind-numbing verbiage (now exceeding 54,000 pages containing more than 2.8 million words).

But could the cure they offer be worse than the disease?

The FairTax is a consumption tax in the form of a national retail sales tax on new goods and services. It is designed to replace "federal income taxes including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes." The FairTax would also abolish the IRS and repeal the 16th Amendment.

The elimination of the 16th Amendment, the IRS, and all those taxes sounds like a great idea that all free market economists and advocates of liberty could agree with. So if the FairTax is such a great thing, why would anyone in their right mind oppose it?

That is exactly what I have been hearing:

"What could you possibly have against the FairTax?"
"The FairTax is the only way to go."
"I find it weird that you would oppose the concept of the Fair Tax."
"The choice boils down to the Fair Tax (H.R. 25) or the current 'system.'"
Even Ludwig von Mises, I was told, "would approve the Fair Tax idea, as do dozens & dozens of rational economists."

Various consumption tax proposals were recently critiqued on this site in an article by Murray Rothbard. So rather than just repeat them and apply them to the current FairTax scheme, I will focus instead on problems with the FairTax proposal itself.

The Fair Tax Act of 2005 is H.R. 25 in the House (introduced on January 4) and the identical S. 25 in the Senate (introduced on January 24). FairTax proponents who complain about the complexity of the Internal Revenue Code are going to have a hard time convincing those of us who have actually read this bill (it came to 59 pages when I printed it out from my computer) that it will simplify the tax code when it contains language exactly like that which appears in the tax code:

(b) Rebate Defined- For purposes of subsection (a) (2), the term 'rebate' means so much of an abatement, credit, refund, or other payment, as was made on the ground that the tax imposed by chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.'.
Strangely absent from the list of co-sponsors of H.R. 25 is Congressman Ron Paul(R-TX). Representative Paul has consistently been named the "taxpayers' friend." If the FairTax proposal was as friendly to taxpayers as its proponents say it is, I would expect Congressman Paul's name to be first on the list of co-sponsors.

FairTax advocates claim that their plan would repeal of the 16th Amendment. However, all H.R. 25 does is repeal Subtitle A of the Internal Revenue Code of 1986 that relates to income taxes and self-employment taxes and Subtitle C that relates to payroll taxes and the withholding of income taxes. The only mention of the 16th Amendment in H.R. 25 is when it says: "Congress further finds that the 16th amendment to the United States Constitution should be repealed."

To repeal the 16th Amendment would require a constitutional amendment. Can Congress be relied on to pass a constitutional amendment that repeals the 16th amendment after a national sales tax has already been enacted? And even if Congress passed a constitutional amendment, it would still have to be approved by three-fourths of the states. Without the repeal of the 16th Amendment, what is to prevent an income tax from being imposed again after a national sales tax has been enacted?

Although the FairTax would eliminate the filing of all individual tax returns, the FairTax turns every business into a tax collector. Every small service business and every Internet business that does not currently collect state sales taxes will have to collect taxes for the federal government. Every doctor will now have to charge sales tax on his services. Where will this end? Will the neighborhood boy who mows lawns have to begin collecting federal sales tax on each lawn mowed? Will the neighborhood girl who baby sits have to do likewise?

The national retail sales tax rate under the FairTax plan is 23 percent. That is on top of state sales taxes that are currently collected by forty-five states. That is on top of the sales tax that many cities and counties also collect. That is on top of the special taxes that exist on hotel rooms in most areas of the country. I suppose that a national retail sales tax would also apply to gasoline. There is no mention of the federal gas tax anywhere in the Fair Tax Act of 2005. No list of taxes that are supposed to be eliminated under the FairTax includes the federal gas tax. Does this mean that there will be an additional 23 percent tax on each gallon of gasoline?

The FairTax will make it easier for Congress to raise taxes. The initial rate of 23 percent is supposed to begin in 2007. For years after 2007, "the rate of tax is the combined Federal tax rate percentage." This combined percentage is the total of three things: the general revenue rate (stated to be 14.91 percent); the old-age, survivors and disability insurance rate; and the hospital insurance rate. This is all but saying that the rate will be adjusted every year. And it will be very easy for Congress to do so. To raise several billion dollars of additional revenue, all that will be necessary is for Congress to raise the tax rate by one percentage point by small adjustments in one or more of the three items that make up the combined percentage rate. It will be sold to the American people as "a penny for progress," or some other deceitful scheme.

Under the FairTax system, there are no longer any Social Security and Medicare taxes. However, this does not mean that Social Security and Medicare will be eliminated. The inclusion in the combined percentage of the old-age, survivors and disability insurance and the hospital insurance rates means that the Ponzi scheme known as Social Security will continue as is?only the way it is funded will change.

The "underground economy" that income tax advocates complain about will certainly increase under the FairTax system. Even if the highly dubious claim that there will be an "average producer price reduction of 22 percent for goods and services in just the first year after the adoption of the FairTax" is true, not having to pay a 23 percent tax on an item is a tremendous incentive to make a purchase in the "underground economy."

The claim that the IRS will be eliminated under the FairTax is bogus. Although the national sales tax will be collected by the states from retailers, it is still a national sales tax, and as such, its collection will have to be overseen by some agency of the federal government. Just because the bureaucracy will no longer be called the IRS doesn't mean that it will be eliminated. According to The Fair Tax Act of 2005:

There shall be in the Department of the Treasury a Sales Tax Bureau to administer the national sales tax in those States where it is required pursuant to section 404, and to discharge other Federal duties and powers relating to the national sales tax (including those required by sections 402, 403, and 405). The Office of Revenue Allocation shall be within the Sales Tax Bureau.
Title II, chapter six, section 603 of The Fair Tax Act sets up the Problem Resolution Office and authorizes "problem resolution officers." There will still be tax courts according to title II, chapter six, section 602 and chapter nine, section 7451. Changing the phrase "Internal Revenue Service" to "Department of the Treasury" and "Commissioner of Internal Revenue" to "Secretary" doesn't eliminate the federal bureaucracy.

With the FairTax, the federal government will also be a tax collector in a new way: at the post office. There is no exemption of postal goods and services mentioned anywhere in the Fair Tax Act of 2005. I suppose this means that stamps, P.O. Box rental services, and package mailing services will be subject to the new 23 percent tax.

The FairTax is progressive. What could possibly be fair about a progressive tax where some people have to pay a higher percentage than others merely because they are deemed to be "rich"? How is the FairTax progressive? I thought it was a flat 23 percent on all new goods and services? It is and it isn't. Under the FairTax plan, everyone pays the 23 percent tax on everything, but "every household receives a rebate that is equal to the FairTax paid on essential goods and services." The rebate is given out each month, and is based on family size and the poverty level. But like the current tax code, the FairTax can also function as a tool for income redistribution because "the poor [will] actually pay less than zero-percent retail sales tax on their spending. Much like with the earned income tax credit of today, the rebate may give them more money than they actually spend on retail taxes."

The real problem with the FairTax is threefold. In " An Open Letter to the President, the Congress, and the American People Concerning Reform of the Federal Tax Code," which is posted on the FairTax website along with the endorsement of seventy-five "professional and university economists," we can see the trouble with the FairTax immediately:

We are not calling for elimination of federal taxation, which would be irresponsible and undesirable. Nor does our endorsement call for reduced federal spending. The tax reform plan we endorse is revenue neutral, collecting as much federal tax revenue as the current income tax code, including payroll withholding taxes.
There is only one word to describe the fact that the federal government now spends almost $3 trillion a year: obscene. At least 90 percent of what the federal government spends is unconstitutional, wasteful, or against the limited-government principles of the Founders. The only thing the FairTax does is change the way the state confiscates the wealth of its citizens. As Congressman Ron Paul says: "The real issue is total spending by government, not tax reform."

Because the FairTax is a consumption tax, Murray Rothbard's conclusion about consumption taxes is apropos:

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.
The FairTax does nothing to tame the federal leviathan. The solution is nothing less than a drastic reduction or wholesale elimination of its revenue source. What is fair about allowing the government to confiscate 23 percent of the value of every new good and service? FairTax proponents may call it necessary legislation, but I call it highway robbery.

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A government survey has shown that 91% of illegal immigrants come to this country so that they can see their own doctor.

now Hellbender is a champion of the flat tax, and in all honesty the flat tax is a good choice, if I had to choose it versus the current tax system, but it would be my second choice if up against the fair tax

but Hellbender's writer had this to say about the flat tax

"The Problems

If many people will have a lower tax bill and a shorter and simpler tax form to fill out under the Forbes flat tax plan then what problems could there possibly be the plan?

Problem #1: the flat tax is not a flat tax. It is a highly progressive tax that shifts the tax burden to the "rich" ? the middle class and upper middle class that earn wages and salaries. Forbes obviously has no problem with a progressive tax; indeed, he proudly proclaims the progressive nature of his flat tax: "Those who complain that the flat tax isn't progressive are mistaken. Just look at the effective tax rates in the Flat Tax Rate Table."

Forbes says that under his plan "there would be one rate ? 17 percent ? after generous exemptions for adults and children." In another place he says that a key feature of the flat tax is "generous and refundable exemptions for adults and children." The significant words here are "after" and "refundable." The 17 percent tax is not applied until the "generous exemptions" are deducted from the taxpayers' income. This means not only that no one will actually pay 17 percent (everyone will in fact pay less than 17 percent unless he makes over about $5 million), but that people will pay different rates (just the opposite of what a flat tax is supposed to be).

Furthermore, the Forbes flat tax would enable "a family of four to pay no federal income tax on its first $46,165 of income." A family of six "would owe no income tax until its earnings exceeded $65,930." This is because not only does the Forbes plan include deductions for each adult and child in a family, it also includes a tax credit of $1,000 per child "as under the current system." This credit is refundable: "If the child tax credit exceeds federal taxes owed, the family can receive a refund." A refund of what? Why, a refund of other taxpayers' money. This is a welfare scheme, pure and simple. It is incredible that Forbes retains what he admits is a "complex relic of today's code."

In actuality, the flat tax has tax brackets just like the current system. There is the single bracket, the single mother bracket, and a series of married with children brackets. If you want an example of a real flat tax then look at the Medicare tax. The rate is 2.9 percent for everyone no matter how much or how little they make. What Forbes calls the flat tax may be a lower tax and a simpler tax than the system we have now, but it is not a flat tax.

Problem #2: the flat tax eliminates some key and longstanding tax deductions. If there is one theme that resonates throughout the book it is how unfair deductions, credits, shelters, and loopholes are. Most every one of these would be eliminated under the Forbes flat tax plan, as well as "the possibility of setting up complicated tax-avoidance schemes." Because when you mess with a man's home and his church you are asking for trouble, the mortgage interest deduction and the charitable giving deduction are two deductions that are of particular concern to some taxpayers. Both of these would be eliminated under the flat tax.

Naturally, Forbes assures us that any loss of benefit would be offset by additional benefits gained under the flat tax. And besides, the mortgage interest deduction "results in a disproportional benefit for taxpayers earning more than $100,000." On the corporate level, there will no longer be deductions for fringe benefits or interest payments.

Forbes says to "think of it this way: Washington politicians take one dollar from your pocket ? and then return fifty cents in various tax deductions. Wouldn't it be better if they taxed you only that fifty cents in the first place?" No, it would be better if they taxed you only forty cents, thirty cents, twenty cents, or ten cents in the first place.

Not mentioned by Forbes is an important deduction for small business owners that would disappear under the flat tax: the deduction for one-half of self-employment tax paid. All small business owners, including those who own the smallest of home-based businesses, are currently entitled to this deduction because it helps to offset the self-employment tax paid on their profits. Currently, employers and employees each pay half of the 15.3 percent that is taken by the feds for Social Security and Medicare taxes. Self-employed individuals have to pay the full amount, hence the deduction for one-half of self-employment taxes paid.

Deductions, exemptions, credits, shelters, and loopholes all accomplish the same thing; albeit in different ways: they allow people to keep more of their money. But instead of arguing that people gain when they get to keep more of their money, Forbes maintains that the government loses: "Since 1993, the government has lost $85 billion in tax payments because of abusive tax shelters ? money that could have been returned to you, the people." This statement also shows what Forbes believes should happen to the money that the government loses ? it should be transferred to "the people." But what is wrong with letting the rightful owner of the money keep it in the first place?

But is Forbes really against tax deductions and credits? Well, first of all, we have already seen that his flat tax includes "generous exemptions for adults and children." Secondly, he criticizes the current system for phasing out some deductions and exemptions beyond a certain level of income. And third, the Forbes plan includes ? are you ready ? that fraudulent welfare tax credit scheme known as the Earned Income Tax Credit. Forbes even acknowledges that "there are people who receive the EITC but should not. An estimated $6.5 billion to $10 billion in EITC payments each year may be improper. That's about one-fourth of the dollars spent on the program." He claims that the EITC is "a back-door way of effectively refunding" the Social Security and Medicare taxes paid by "low-income families with children." Why is Forbes so concerned about "low-income families" paying half of their Social Security and Medicare taxes but not at all concerned about the self-employed small business owner who struggles with the whole amount?

Problem #3: the flat tax retains the withholding tax. Forbes modestly claims that his flat tax proposal "is a first, major step towards a total overhaul of the entire American tax system." But the Forbes plan is no "first, major step"; short of doing away with a tax on income altogether, it is the most drastic overhaul of the income tax system that has ever been devised. Yet, the flat tax contains no provision for the elimination of the withholding tax. Forbes recognizes that "most Americans don't realize how far the politicians reach into our pockets." He believes that "the politicians have anesthetized us to the scale of their tax larceny."

And he even specifically informs his readers what is wrong with the withholding tax:

The problem with withholding is that it reduces the discomfort of paying income tax by spreading payments out over the course of a year. Americans end up feeling a sting instead of a painful bite. Withholding made collection easier: But it also made Americans less acutely aware of the impact of taxes on their financial well-being ? allowing the system to grow more easily and become less accountable. And, like income taxes themselves, withholding was supposed to be a temporary wartime measure!

So why is there no mention of the withholding tax in the chapter that outlines "how the Forbes flat tax will free America"? True, it doesn't state that the withholding tax will be retained. But since all the bad things in the current system that will be eliminated are mentioned in this chapter, I take Forbes's silence on the matter as consent. But what about "The Steve Forbes Flax Tax Form" found on page 73 of the book ? there is no line for "income tax withheld" like we see on our current tax forms? The form in question is obviously just an example of how simple a form we would need under a flat tax plan that eliminated most credits and deductions. Since there is no space on this form for a taxpayer's name and address it obviously cannot be taken as an example of a "real-world" flat tax form. The "real-world" tax form that a smiling Steve Forbes holds in his hand in the picture on the book's cover reads differently than the form on page 73.

The withholding tax makes it possible for the government to silently steal the wealth from its citizens with little or no outrage about the loss. A flat tax that reduces the taxpayer's discomfort by masking how much tax is being paid while at the same time simplifying the filing process will eliminate both the sting and the bite of paying taxes.

Problem #4: the flat tax is still an income tax. As mentioned previously, Forbes calls for "a new tax system that is simple, honest, and fair." But what is so fair about a tax on income? And what is so fair about the government confiscating 17 percent of our income, even after "generous exemptions for adults and children." Ignoring for the sake of argument the fact that all taxation is theft, the least harmful and "fairest tax" would be a head tax (an equal tax) low enough for "low-income families" to pay. What is fair about requiring the "rich" to pay more just because they can afford to do so?

In his chapter on the history of the income tax, Forbes criticizes the income tax the whole way through: "In 1909, President William Howard Taft's successful enactment of a corporate income tax laid the groundwork for acceptance of the idea of a personal income tax ? allowing the beast to rise again." But if an income tax is so bad then why advocate one ? like the flat tax? Yes, the tax rates would be lower under a flat tax than they are under the current system, but the rates were much lower back then without a flat tax.

The reason we "need" an income tax is because of the federal government's insatiable desire for money. Such was not always the case, as Forbes himself says: "Between 1817 and the start of the Civil War in 1861, the federal government operated successfully without having to levy any new internal taxes." Before the advent of the income tax, as Forbes again says, "The biggest source of tax revenue was tariffs on imported goods. There were also levies on a variety of items, including whiskey." The problem is clearly the size of the federal government.

The "best" tax system from the standpoint of liberty, and not from the standpoint of what the government says it needs, would be one that interferes the least with the free market. The ideal amount of taxes collected would then, of course, be zero. Therefore, the best type of tax reform is one that has for its goal the lowering of the amount of taxes collected. "The flat-tax movement, as explained by Murray Rothbard, "is part of a process by which the government and its allies have been able to split and deflect the tax protest movement from trying to lower the taxes of everyone, into trying to force everyone into paying some arbitrarily defined "fair share."

Problem #5: the flat tax increases government revenue. Proponents of other plans to change the US tax system usually talk about how their tax will be revenue-neutral. Forbes does them one better:

The flat tax is a reform of our federal income tax system. It does not affect, for example, state and local taxes. But, contrary to what some may fear, it will generate increased government revenue.

A flat tax enacted in 2005 would, four years from now, produce $11 billion more for the government than the current system.

The flat tax will create some $6 trillion in new assets and $892 billion in additional payroll tax receipts.

From 2005 to 2015 the flat tax would generate $56 billion more in net government income tax revenue than the current tax code.

But how will cutting everyone's taxes increase government tax revenue? Although he doesn't mention it, Forbes is relying on the old Laffer Curve argument that there exists an optimum point on a curve that corresponds to a tax rate percentage that maximizes government revenue so we can in some cases lower the tax rates and still "get more tax money from the rich." Forbes has a paragraph heading on page 71 that reads: "The Numbers Show: The Flat Tax Will Create Wealth and Government Revenue." But what could possibly destroy wealth more than government revenue? Where does Forbes think government revenue comes from? Why would we want to maximize the government's tax revenue? And even if it were true that the flat tax would raise more revenue, what makes this government worthy of almost $3 trillion dollars a year for its spending orgy? Spending cuts and deficit reduction be damned ? the flat tax allows members of Congress to maintain their obscene spending orgy and cut taxes at the same time. The masses get to enjoy their tax cut and their government subsidies ? for a while. But after taxes inch back up and more deductions and credits are added, Congress can reform the tax system again by lowering rates and closing loopholes.

Forbes wants the government to have its revenue and spend it too. And what will the government do with all this extra revenue it receives under a flat tax? Forbes tells us that his flat tax plan will result in "more government revenue and dollars to fund programs like Social Security and Medicare" and will "give rise to a strong, innovative, and dynamic economy that will help us wage a successful war against Islamic terrorism." In other words: the flat tax will help perpetuate the welfare/warfare state.
Real tax reform

Forbes is a typical Republican. Reagan is praised as a great tax cutter, but no mention is made of the Social Security tax rate increasing from 10.16 percent when he took office to 12.12 percent when he left, or the Medicare tax rate increasing from 2.1 percent when he took office to 2.9 percent when he left. And what about Reagan's record spending and deficits?[1] Forbes also praises Reagan for "a massive military buildup" while he criticizes Carter for "gutting the military." The most laughable statements in the book are about President Bush. He is said to be "a genuine tax-cutter" who "is fully committed to a major overhaul of the tax code." The truth, however, is that Bush has presided over an increase in spending that Lyndon Johnson and his Democratic congresses only dreamed about."