FairTax Speaker™
Imagine your life without the I.R.S.!
by Richard
Tuesday, January 29, 2008 7:30 p.m.
It's quite popular in the press and around the Internet to criticize the FairTax. I'll briefly examine some of the more popular criticisms and how supporters might respond.
Almost all critics claim the FairTax is deceptive because it uses a 23% tax rate, when, after all, the FairTax actually taxes sales at 30%.
The truth is that both rates represent the same amount of money. I know, I know. It must be that new math. How in the world does 23% equal 30%?
The following is excerpted, verbatim, from the President's Advisory Panel on Federal Tax Reform Final Report
Box 9.1. Comparing "Tax-Exclusive" and "Tax-Inclusive" Rates
The 34 percent tax rate mentioned in the introduction to this chapter is a tax-exclusive rate. Sales tax rates are typically quoted on a tax-exclusive basis, while income tax rates typically are quoted on a tax-inclusive basis. If a good costs $100 and bears an additional $34 sales tax, the tax-exclusive sales tax rate is 34 percent. The tax-inclusive rate is 25 percent -- $34 (the tax paid) divided by $134 (the total amount the consumer paid). An individual who earns $134 and pays $34 in income taxes would think of themselves as paying approximately 25 percent ($34/$134 = 0.254) of their income in taxes.
Although tax-exclusive and tax-inclusive rates are both valid ways of thinking about tax rates, the easiest way to compare the retail sales tax rate to the state sales taxes paid by most Americans is to consider the tax-exclusive rate. On the other hand, it is appropriate to compare the retail sales tax rate with current income tax rates by utilizing the tax-inclusive rate. For ease of understanding, this chapter uses tax-exclusive rates unless otherwise specifed in the text. Tax-inclusive rates are provided in the Appendix.
Wow! What an argument! Let's see. Even if a change in our tax law benefits almost every single living person in the United States, does wonders for the economy, and spreads the burden of running the government by collecting taxes from people who are currently avoiding, either honestly or dishonestly, paying taxes, we should just give up because it won't pass. Well, then why bother with anything that's beneficial and worthwhile.
Where does this argument come from?
There have been no studies about the FairTax bill, other than those done by Americans for Fair Taxation. So, critics use whatever is nearest to hand. Almost all the critics, whether they know or it not, base this argument on the President's Advisory Panel on Federal Tax Reform. This was the group that President Bush created in January 2005 to recommend changes to the tax code. The Panel's consideration of its National Retail Sales Tax is contained in Chapter 9 of its final report.
Even though, the FairTax bill was supported by volumes of scholarly research and had been introduced in each of the last five Sessions of Congress, the Panel used it as a starting point and then went on to develop its own sales tax plan. The sales tax plan that the panel ultimately rejected wasn't anything like the FairTax. The Panel found that its plan would have to have a higher rate -- between 34% and 89%, depending on assumptions -- than the 30% FairTax rate. Curiously, the Panel rejected its sales tax plan, but not on the basis of the rate. It's primary objection was the rebate; what it called a cash grant. Somehow the Panel couldn't come to grips with the idea of giving all that money back to its source, the people.
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