Sunday, July 11, 2010

Help to pass HR 25 (the FairTax): Replacement to our tax system (July 2008)

The FairTax Book (Synopsis)
Saying Goodbye to the Income Tax and the IRS
By Neil Boortz and John Linder
  1. The History of Our Tax System
    • 1776 - No National Taxation, Only Local Govt - Alcohol, Carriages, Consumer Items (Sugar and Tobacco)
    • 1812 - Luxury Items Taxed due to war of 1812
    • 1817 - Tax system abolished, Govt Funded by Tariffs on Imports
    • 1861 - Union passes bill assessing 3% income tax on earnings btwn $600-$10,000 and 5% plus and inheritance tax on earnings +$10,000 (+$166,700 today) – Confederate states adopted similar system
    • 1872 - Feds remove tax system after Civil War due to the displeasure of American Citizens. Returned to taxing tobacco and alcohol
    • 1894 – After Panic of 1893 (Railroad and dependant banks fell into receivership) 2% tax on income +$4,000/year (+$50,000 today) – State and local govt officials are EXEMPT from this tax – became law without signature of President Grover Cleveland who found it unconstitutional. This split the govt into the Democratic (pro tax) and Republican (anti tax) parties
    • 1896 to 1908 – public told the income tax would “soak the rich” by Democrats and would leave middle class alone. Joseph Bailey (D) hoped to show Republicans as hostile to poor by introducing a bill calling for the income tax. Liberal Republicans voted for the bill in hopes to derail it with the condition that an amendment had to be passed as a result of an amendment to the Constitution. Democrats pushed idea that any income tax would be directed ONLY at the wealthy and that ordinary Americans would be left virtually untaxed (tobacco and alcohol).
    • 1913 – 16th Amendment Ratified with very little objection
  2. …Then Came Withholding
    • The 1913 law that established the income tax also allowed the federal govt to withhold taxes from paychecks
    • 1917 – American citizens complained to their representatives and a law was passed barring the practice of withholding taxes
    • Taxpayers would calculate the full amount of income taxes they owed for the previous tax year and write one check to the IRS in one lump sum. (This meant no Medicare, social security, etc was withheld for every paycheck during the year)
    • Withholding was a means to camouflage the actual tax burden pressed upon the American people and under the guise of patriotism and propaganda during World War II, the funding needs of the federal government could no longer be sustained by the wealthy, everyone had to chip in.
    • 1942 – Walt Disney creates “The New Spirit”, a cartoon, at the urging of the Treasury Department, in which Donald Duck telling the public “it is your privilege to help your government paying your tax and paying it promptly.”
    • 1943 – The Ruml Plan (Current Tax Payment Act of 1943) was created to gain more supporters of the withholding tax. If individuals supported the plan, they were told they would not have to pay taxes for 1942 in March 15th, 1943. In reality, during the course of the year of 1943, they would be paying the previous year’s taxes paycheck by paycheck. 
    • 1970’s – President Jimmy Carter attempts to have withholding extended to interest and dividend earnings. The public cried foul and the effort failed.
    • 1982 – The interest and dividend idea was brought up again during President Ronald Reagan, in which Congress authorized the additional withholding measure. It was repealed a month later due to public outcry
  3. The Myth of Corporate Taxes
    • Myth : We pay less as individuals when taxes are transferred to businesses and corporations
    • In reality, corporations have never paid or ever will pay taxes. The burden will always fall to the individual
    • Businesses and corporations merely collect taxes from individuals and pass them on to the government. Taxes are paid from wages, and in America, only individuals pay taxes
    • For example, a fictional company, Gilco, has 100 shareholders, and fifty employees who make 200 widgets per year. The company sells the product at $100,000 each. Gilco’s gross revenues in $20 million per year. It costs the company $18 million a year (labor cost, federal taxes, marketing and production) to make the widgets. This leaves $2 million in profit.
    • If the federal government decides to create a 5% corporate tax increase, this means that Gilco will owe $100,000 more in federal income taxes where will that money come from?
      1. It can come from the $2 million profit. This profit, though, belongs to the shareholders who, when receiving their dividend checks will see a decrease. The corporation hasn’t paid the tax in this scenario
      2. Raise the price of widgets to cover the tax increase. The customers end up paying for the tax increase. The corporation doesn’t pay here either
      3. Cut costs of running Gilco to cover the additional tax. This will most likely mean either cutting employee benefits, lay off some employees and increase productivity on the remaining employees. The individual employee ends up paying for the tax increase. The corporation pays nothing.
      4. Cut costs of running Gilco to cover the additional tax. You can buy cheaper components to make the widgets. Cheaper components come from Company X who can afford to sell cheap because they’ve had to cut back by paying their employees less or cutting benefits. Your supplier takes a beating and passes it down to their employees and suppliers. The corporation doesn’t pay here too.
  4. Our Current Tax Code: The Cost of Compliance
    • 52.8% of tax compliance costs are paid by businesses, 2.8% are paid by nonprofit organizations, and 44.4% are paid by individual American citizens (Remember that the taxes paid by businesses come from the individual)
    • Opportunity Cost – money lost as a result of business decisions that prevented you from exploiting certain opportunities
    • In 2002, $950 billion in individual income taxes were collected from the government by withheld taxes from individual paychecks. Should the taxpayers had been able to keep that money when it was due – and invested that money in T-bills – nearly $24 billion dollars in interest payments could have been pocketed by the American taxpayers. The $24 billion is the opportunity cost.
    • Under the FairTax, there would be no income tax, meaning that the estimated $950 billion collected from the taxpayers paychecks would have stayed in the hands of those individuals who earned it.
  5. The Embedded Costs of Our Tax Code
    • When a consumer item is purchased (bread, car, house, eggs, etc.) part of the cost goes to the people who had a hand in producing and selling you that item. Part of that cost is given to the Federal Government as taxes
    • 22% of the price paid for a consumer item represents embedded taxes. That 22% of what you spend supports the Federal Government in addition to the money taken out of your check in income taxes and payroll taxes!!
    • The embedded tax exists also in services as well (cable, electric, doctors visits, etc)
    • Under the FairTax, only 23% of the price paid for consumer items and services will go to the government, but that is all. There wouldn’t be anything withheld from income and payroll taxes because there would be no taxes!
  6. Bringing American Business Back Home
    • American corporations are moving overseas to escape the punishing tax structure here in America, acting on the best interests of their shareholders, employees and customers.
    • For example, if DaimlerChrysler were headquartered in the United States, they would face a 67.5% tax rate, while the actual company is located in Germany, pays 44%. Under the current tax system, moving a corporation overseas is better for the stockholders and customers. Unfortunately, the American employees would be more likely to suffer.
    • The FairTax would completely remove corporate income taxes, thus eliminating the need for American businesses to move out of the country. This will also give incentive for foreign companies to move into America. The end result would be more jobs, better opportunities and higher wages for the American individual.
  7. The Birth of the FairTax
    • • Began by a group of Americans who formed the Americans for Fair Taxation (AFFT) whose goal was to develop a new tax system that would raise the same amount of revenue for the government as our current tax system, but would be less intrusive, abusive, coercive and corrosive. This is after researching other tax systems (the flat tax, VAT (value added tax) and consumption tax)
    • The FairTax (www.fairtax.org) is a method of taxation that would be totally voluntary, that would allow citizens to pay what they choose, when they choose, by how they choose to spend their money. It is a national sales tax on goods and services sold at the retail level.
  8. The FairTax Explained
    • The Fairtax will repeal (remove)
      • The individual income tax
      • The alternative minimum tax (AMT)
      • Corporate and business income taxes
      • Capital gains taxes
      • Social Security taxes
      • Medicare taxes (along with other federal payroll taxes)
      • The self-employment tax
      • Estate taxes
      • Gift taxes
    • The FairTax is not a Value-Added Tax (VAT) as in Europe. VATs are added at every stage of production and hide tax costs in the price of goods. In contrast, the FairTax is levied once, and only once, at the retail cash register and is printed on the receipt for all to see.
    • The FairTax is a replacement for, not an addition to, our current federal taxes. It is not at tax cut nor is it a tax increase.
    • The FairTax abolishes all taxes on income. Consumers will way an embedded personal consumption tax in the amount of 23% on all goods and services sold at the retail level. (This also includes doctors visits, dentists, lawyers, accountants, and internet sales) The 23% tax will not be imposed on the sale of used or previously owned items (including used cars, homes). It is a ONE time tax on new items.
    • True, this is a 1% increase to the current embedded taxes for our goods today. Yet consider this: if a company doesn’t have to pay a federal tax on their product, they could sell that product at the same price and make a profit. Because of competition with other products, prices will eventually decrease because one company will find that they can get more business will lower prices. Eventually, the other companies will follow suit. It is estimated that the price of goods and services may fall 20%.
    • The FairTax is revenue neutral. This means the sales tax rate will be set to ensure that the federal government, and all the programs within it, will receive from the national retail sales tax exactly what they have been receiving under the current tax system. It will also treat government purchases as taxable purchases. State, local, and federal government purchases will also pay the tax.
    • The FairTax will eliminate the tax burden on the middle- and lower-income Americans, allowing them to save money and judge for themselves when and how they’re comfortable making taxable purchases.
    • The FairTax allows everyone to be treated fairly because it provides that the federal government will send every family in America a prebate (advanced rebate) to cover taxes on the basic necessities of life. Every head of household will receive this prebate every single month, to reimburse every American family for the sales tax that family will pay on all spending up to the federal poverty level, plus extra to prevent any marriage penalty. The end result? Low-income and many middle-income families would be exempted from paying the national retail sales tax on all or most of their spending.
  9. The FairTax Prebate: The Key to Fairness
    • The Earned Income Tax Credit (EITC) was passed to relieve lower-income Americans of the tax they pay for Social Security and Medicare. This also includes the income tax paid for our defense, parks, courts, FBI, housing, education, etc. The budget to pay for this (which comes from American taxpayers) has grown to $38 billion.
    • Under the FairTax, the poor—along with everyone else—will no longer have Social Security or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. This would mean an immediate 25-30% increase in take-home pay.
    • 22% is already inflating the retail sales prices we all pay in the form of embedded taxes buried in the cost of all consumer goods. The price of goods will fall 20% on transportation, food, clothing, and shelter once the embedded taxes have been removed. (I.e. if groceries cost $45 a week under the current system, once the 22% embedded tax has been removed, the price falls to $35.10. Add the FairTax 23% and the groceries would cost $45.58—a few pennies more. But remember, you also get to take home 100% of your paycheck, does this sound bad to you?)
    • The FairTax prebate (monthly check from the government towards basic necessities) will be based on the government’s published poverty levels for various sized households. This number would be updated every year to keep up with inflation. (i.e. in 2005, a household of a married couple with two children would be granted a consumption allowance—a government estimate of what a household of that size would spend for that year to buy the basic necessities of life for that family—of $25,660. The sales tax on this amount would equal $5,902. This amount would be rebated back to the household in 12 equal monthly installments of just under $492.) Therefore, the tax that would have been paid for the basic necessities of life for that year would be returned during the course of that year (meaning no tax for the goods needed to survive!)
    • The purpose of the FairTax prebate is that no American has to pay the FairTax on the basic necessities of life. This covers all Americans, poor and rich alike, unlike our current tax system eliminating the need for class envy.
    • To prevent scams on the system, the name and social security number for everyone under your household must be provided every year to collect the prebate. This includes households as small as one person up to however many you can claim as dependants.
    • In the end, everyone would receive 100% (given that the individual state governments adopt this system, otherwise, its more like 90-95%) of their paychecks and a prebate check every month in addition, and lower prices on goods and services.
  10. Underground and Offshore Economy…Taxed at Last!
    • There is a “shadow economy”—the world of legal activities that are not reported for tax purposes. Add to this figure the “underground economy,” the world of illegal activities—drug dealers, hookers, and the like—and the magnitude of the problem becomes clear. In 2000, a survey concluded that our shadow economy counts for more than 10% ($355 billion) of America’s GDP that isn’t getting taxed
    • The problem is, this loss is made up by the people who pay their taxes. Each of the 150 million American taxpayers pays an average of $2,000 extra every year to the IRS to cover the missing revenue
    • Trillions of dollars are sent into offshore financial centers (OFCs) in places like Switzerland and the Cayman Islands:
      • OFCs are used to set up international business corporations (IBCs), which are popular (tax and regulation free) vehicles for managing investment funds
      • Insurance companies use OFCs for reinsuring catastrophic risks, which often have lower actuarial requirements and capital standards.
      • Wealthy individuals use OFCs to protect assets and for tax planning
      • Foreign wealth is often kept in OFCs, to be protected from weak banking systems Tax evasion and money laundering schemes are difficult to track down in OFCs
    • With the FairTax in place the trillions of dollars in those OFCs would flow back home to America for the very reason they found themselves offshore to start with. Even more so, trillions more from foreign nations would flow into the United States because of the same reasons.
    • The shadow economy, under the FairTax, would be paying into the federal tax system every time a purchase is made in the United States. Illegal immigrants and foreign visitors would even be contributing to the tax system under the FairTax.
In closing, there are an additional 6 chapters which covers the main opposition to H.R. 25 (The FairTax bill), IRS horror stories, a question/answer section, and a chapter on what you can do to get this passed. I urge all who’ve read this to spread the word, talk to your representative, newspapers, friends and family and get this movement going! The website for more information is http://www.fairtax.org/ .

2 comments:

  1. I see that you conveniently left out the fact that Milton Friedman is the reason why we have payroll tax witholding. We had to pay for the war somehow!

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  2. Note that this is a "synopsis" of a book.
    If I missed anything from the book, I assure you that it wasn't left out purposefully. I'll review the book again to see if I missed anything.
    On a side note: Since the purpose of this post is to advocate for a new tax system, I don't see how the missing Friedman contribution would cause the argument to fall apart.
    Regardless, the current tax code needs to be changed.

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