Although I have not yet read Neal Boortz’s book on the Fair Tax, I understand a bit of what he means and wish to provide a simple illustration. I think if people see the math and understand the arguments, they will unite behind the movement. First, we must understand its implications and the barriers standing in the way thereof.
How the fair tax empowers the people
When I heard Neal Boortz endorse the tax, he explained that the Fair Tax empowers the people with another redress against tyranny. Under his plan, the government provides a rebate based on consumption and household size to reimburse you for tax paid on the staple necessities (toothpaste, toilet paper, food, etc.) similar to that in existence in Idaho. If you object to the policies of the government, you refrain from purchasing anything from a vendor that charges tax (does not include private parties and the like), thereby reducing revenues to the government and arresting their ability to reappropriate your money. Right now, nobody can escape paying taxes, so we are FORCED to support programs with which we disagree (see an earlier post of mine on the breakdown).
How the fair tax is a reduced tax
When you buy an item, there is already an embedded portion of the price that constitutes tax. When Senator Clinton (D-NY) told reporters last week she wanted to transfer the obligation for federal gas taxes to oil companies, Mark Levin pointed out that oil companies will simply raise prices to accommodate the burden, yielding no net change to the consumer in the end. Her policy simply changes from whence taxes come, as does the Fair Tax, except that the Fair Tax reduces an individual’s total tax obligation. If you purchase more goods, you pay more tax. This phenomenon accounts in part for the fact that when you buy a car and drive it off the lot, it depreciates so much- the car price includes a sum that represents the taxes paid by the corporation in order to provide you the commodity.
Under the Fair Tax, the only taxes corporations pay are in acquisition of raw materials they purchase. Since raw materials cost much less than finished products, corporations can cut prices under this tax system, reflecting their reduced tax burden. The corporate income tax rate currently sits near 40%, meaning that a federal sales tax of 20% constitutes HALF the current estimated tax burden paid by consumers at present.
Therefore, even in Nevada, the total effective tax rate for an individual becomes 27.75% (20% federal and 7.75% Clark County NV sales taxes), instead of the 50+% paid currently (15% Federal Income Tax plus 40% corporate tax burden and the 7.75% NV sales tax) when buying the same good. Now, granted it's not that easy, but if you don't have to compensate for a corporation's income taxes when buying a new product, the price of the item will be lower and the total tax paid will be lower even though it seems you're paying more. There is an embedded tax in the price of everything that is not itemized as a tax. So, you pay it but just don't know.
How it affects the Poor
First and foremost, the Fair Tax abolishes all Federal Withholding. Therefore, every cent you earn goes home with you. One complaint the poor have against the system as presently constituted is that if they go get a job the government takes enough from them that it acts as a disincentive to get off welfare. Under this program, you keep everything you earn. If you do not buy things that include tax, you pay no tax. Therefore, the poor, who typically don’t buy new cars or homes or fancy clothes etc., and typically only buy staple goods, for which the Fair Tax requires no sum cash outflow, pay ZERO tax. Plus, everyone is spared the pain and anguish associated with filing in April.
How it affects government revenues
Some argue that if the price drops, government revenue drops. While on an item by item case basis, this may be the case, except in cases where the savings on a commodity find their way into savings the government receipts will not decline. The money one person saves on one item allows him to buy more items, each of which comes with a tax burden. Thus the sum tax potential is not reduced but rather spread over a larger number and variety of goods and services, each having lower total cost, but the total spend, where expenditures are fixed as we assume since wages are fixed the total sum of tax will not decrease.
How to implement the Fair Tax
The biggest obstacle to the Fair tax is the 16th Amendment, which establishes the federal income tax. In order to implement the Fair Tax, we must concurrently repeal that amendment and replace it with a new tax via amendment. The reason why so many people feel that this is a pipe dream is the scope of the amendment process.
In 1976, the Equal Rights Amendment died at the state level. Despite having passed super majorities in both houses of Congress, it didn’t even make it onto the ballot in most states, and where it did it failed to be ratified by the people at large. Amending the Constitution requires:
- Passing of an act via supermajority (60%) in both houses, especially in the event of a presidential veto
- Ratification of the act in the states at the next election via sufficient signatures that get the initiative on the ballot
- Passage of the amendment in 75% of the states before the 10 year expiry period
Otherwise, the amendment dies. It’s supposed to be hard. It’s our last bastion of hope against tyranny.
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