Fair Tax has problems
By: George Warren; Columnist
Despite “The Fair Tax Book” written by my friends John Linder and Neal Boortz, and the legislative efforts to pass the Fair Tax; I have studied it intensively, and come to the conclusion a version of the “Flat Tax,” originally suggested by Steve Forbes, is a better plan for America.
Yet, I am amazed at the support which Fair Tax people have built among the public, especially conservative Republicans. I am convinced this support is fostered by the ultra rich, who would benefit most from this concept, and the disgusted but trusting, who are ill informed about its full ramifications.
These are my reasons why:
The proposal is that the Fair Tax does away with all other taxes, including all corporate and personal income tax, Social Security and Medicare, to be replaced with a “sales tax” on all new goods and services consumed; even a new home, at the rate of 23 percent. Then, the poorest people will still get government pre-bate checks each month, similar to today’s earned income tax credits, which are now payable on April 15.
I was originally attracted to their thesis that this would catch an unreported underground economy, i.e.: illicit drugs, illegal labor, and pornography, which supposedly amounted to 10 percent of our total economy. But, upon analysis, I decided that in fact a new 23 percent-30 percent sales tax would probably foster an even greater underground economy of otherwise legal trade, simply to avoid this huge “sales” tax.
I do agree that present corporate taxes are built in to the price of every processed product we buy, probably to the tune of about 22 precent. There is no question that all corporate or business income taxes should be repealed! Businesses absolutely do not pay taxes, they simply pass the tax on in the price of their product, which is paid by persons, who do pay taxes. This hidden tax cost included in all products must be exposed and repealed.
A further note, under the Fair Tax proposal; let’s suppose you see a $100 toaster at the store. You don’t pay $123, you pay $100. Then the merchant sends $23 to the government. So, in net effect you paid $77 for a toaster, and gave the merchant $23 in sales tax. When you figure it this way, the net effective rate is really almost 30 percent. ($77 times 1.2987 percent equals $100)
Lastly, the Fair Tax is extremely regressive, in that it will tax the poor, the youngest and the eldest the most, while relieving the ultra rich the most, those who are in their prime income producing years. For example, the young, the old, and the poor generally have to spend all their available income to survive. On the other hand, the ultra rich either save or invest most of their income, and pay Fair Tax only on that amount which they spend on goods and services.
To give an example about the ultra rich; the hedge fund managers- who contributed greatly to the recent crash of our economy, generally work on a two percent management fee of the money they manage, plus 20 percent of all the profits. Hedge funds are largely unregulated pseudo-mutual funds sold on the basis they do not need regulating, because they are sold only to rich investors who should be able to take care of themselves. The managers can, but are not required to, invest their own money in the fund. However, ALL THE PROFITS they share are taxed only at the lowest 15 percent capital gains rate, under a category called “Carried interests.”
In 2007, the highest earning hedge fund manager made $1.7 billion personal income. The average of the top 25 managers was $570 million each. This was taxed at 15 percent. Think how little of this tremendous income will really be taxed at all under Fair Tax. But, My Republican Party won’t even talk about changing this huge present injustice, even in our present system.
I support a version of the Flat Tax with dependent exemptions, but no deductions
Printed in the May 21, 2009 edition.