Besides having a decidely un-presidential name, who is this man? Sure, he's got some nice endorsements, but where does he stand on these (not so) talked about issues? So, let's go straight to the source . . . .
Here's the one that caught my eye: taxes. So he says he wants to do away with the IRS and all income/payroll taxes. So where would the government be getting the revenue to provide for things such as Social Security, Medicare and also pay for the ever expanding cost of Iraq and Afghanistan?
Answer: The Fair Tax! (If you're too lazy to read the article, it's basically a federal sales tax.)
Ok, so we get that it's fair or it wouldn't be called the Fair Tax. Just like the Patriot Act was the essential act of patriotism, right? (Sorry, too early in the post to start getting snarky.)
To determine if it really is fair, lets see what the consequences of the Fair Tax would be:
All revenue previously acquired by the Feds by the IRS would have to come from the federal sales tax. What does this mean?
The amount you pay in taxes will no longer be determined by how much your total income is, but by how much you spend. For example, if an household makes $50k a year and another household makes $200k a year and they both spend $50k that year, they'll be taxed for the same amount. Household 2 would end up saving that $150k a year without any tax implications.
I pay sales tax at the store everyday, so what?
Well, the intention is to encourage people to save money and invest it rather than spend it on the house built of golden steel or the diamond car with the platinum wheels. (Yeah, that's a mean sousaphone in the back.) There are two problems with this: 1) when a household cannot afford to save or invest; and 2) there are already tax incentives to save and invest.
When a Household Cannot Afford to Save/Invest
Say a household brings in an income of the poverty level. Under the Fair Tax, the household would receive a check from the federal government each month for the amount of taxes they would pay if they spent their entire income. Every household receives a check for the taxable amount of the poverty level, regardless of their income. The problem is, however, that until they receive that check, they're being taxed. So, for simplicity of math's sake, let's say that the poverty level is $20k and the tax rate is 30%. (The 30% tax rate is what is suggested by Fair Tax proponents, but opponents suggest that it will need to be 34% to equal the same amount of revenue brought in by the government.) Each month they'd be taxed as they make purchases and have to wait for their refund check so they can get by. Essentially it'll create a lower class that is dependent on receiving their tax reimbursement check to get by. Any problems receiving this check could have dire consequences, especially since 30+% is such a large percentage.
Oh yeah, and this whole system would create a RIDICULOUSLY HUGE bureaucracy to mail out checks to every household, figure out who is in what household, when someone has moved, when someone has died, etc. And they'll have to keep this going every single month. I'm guessing that'll be pretty expensive for the taxpayers.
There are Current Save/Invest Incentives
If you have an IRA, 401(k) or any similar defined contribution plan with your employer, you are already taking advantage of some of the tax advantages offered to individuals to encourage saving for retirement as well as encouraging investment of these funds. The money deposited into your 401(k) account is withdrawn from your paycheck before being taxed and deposited in your own personal account where it gains interest without being taxed. It is only taxed when you retired and take the money out of your account.
Now, if you have a Roth 401(k) or a Roth IRA the Fair Tax is pretty much the worst situation. You've already paid your taxes, probably cause you thought that the income tax rate at the time you were going to withdraw your retirement funds would be higher than they are now. Well, with the Fair Tax, the rate would be 0.
As for investing, currently money made through investments are subject to a lower tax rate than ordinary income. Money made through the sale of investment properties are subject to the capital gains tax.
So the Fair Tax is different than the Income Tax. Does that make it bad?
I'm going to say yes. Most people make their money the old fashioned way: getting their ass to work and getting a paycheck at the end of the week. All that money you've saved up (if there is any) has already been taxed by the IRS. If we get this fantastic Fair Tax, as soon as you spend that saved money, you'll get taxed again. And you'll probably get taxed at a higher rate than you did when you first made that money.
The Fair Tax Double Tax
Say you're just some dood who makes his $45k a year. You try to be good and have been squirreling away a little here and little there, trying to get that sweet sweet house in the 'burbs you've always dreamed about. According to the 2007 IRS tax rates , about 25% of your money has already been taken through income taxes by the IRS. Now that you've saved up your 20% of that $200k house, you're ready to make a downpayment. Oh, but wait. The Fair Tax is gonna charge you a 30% take on that downpayment. So get ready to cough up another $60k for that house. Yeah, you've already paid your dues to the IRS, but tough crapola. Thanks Fair Tax!
How has the Fair Tax worked so far?
So former Arkansas Governor Mike Huckabee thinks the Fair Tax is a much better way to generate revenue for the government. So how has it worked for Arkansas? What's that you say? Arkansas still has an income tax? Maybe it was the AK legislature. What's that you say? Huckabee actually raised income taxes in his state? Makes you wonder why he's trying this grand experiment with the whole country when he wouldn't/couldn't do it with Arkansas.
Conclusion
This post is getting long, but I think you get the point. The Fair Tax is pretty whack. Sure, no one likes the IRS or paying taxes. Sure, paying income tax can be pretty confusing. But it works (kind of). Do you really want to roll the dice with our countries finances? Especially since we're now running a ridiculous deficit? Is this really a good idea or a ploy to get votes?
One thing is for sure though: the duty free section of the airport would be the most popular place to shop!
For some reference sites:
A Pro-Fair Tax Site
An Anti-Fair Tax Site
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What Does the Fair Tax Really Do for You?
One of the commentaries above expressed serious reservations about the Social Security program.
The Social Security program has been working out very well over the last 70 years and is currently at a point that the accumulated Social Security surplus represented by about $1.8 Trillion Dollars in US Treasury bonds is sufficient to pay benefits with no reductions required for approximately another forty years.
However, this is a Fair Tax blog, and my observations regarding the impact of the Fair Tax on retirees will be further clarified further below. The implementation of the Fair Tax is predicated upon four assumptions:
Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.
Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).
Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.
Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.
Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.
The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working, and retired not in the top 5% of the income brackets as shown below.
(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.
There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.
Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus to offer Medicare Part C over and above what Medicare was already obtaining from the healthcare industry for beneficiaries using Medicare Parts A and B.
The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.
Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.
Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.
(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans to the working Middle Class, retirees, and children not in the top 5% income bracket.
(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.
The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.
The Fair Tax proposal will put retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.
Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.
With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”? In its place, they will most likely propose a means-tested charity program.
The next step may be to propose the elimination of the Social Security Trust Fund that has loaned the Federal Government approximately $1.8 Trillion Dollars and the Medicare Trust Fund that has loaned the Federal Government approximately $400 Million Dollars, turn the proceeds over to the US Treasury and not return of the Trillions borrowed from the working Americans who provided them via the payroll taxes they paid.
Many Americans are unaware that the current (working and retired) demographic of the entitlement program of Social Security has paid in $1.844 Trillion Dollars more than has been paid out by Social Security. The excess has been BORROWED AND SPENT by the Federal Government to cover ongoing non-Social Security expenditures since 1986. The US Government has issued US Government Bonds to be held by the Social Security Trust Fund which are no different than those purchased by China and Saudi Arabia in very large amounts).
Regarding Medicare, the current (working and retired demographic) for the entitlement program of Social Security Medicare currently has accumulated $305 Million Dollars more than has been paid out for Medicare B expenses and $33 Million Dollars more than has been paid out for Medicare B expenses. As above the accumulated surplus of $338 Million Dollars has been BORROWED AND SPENT by the Federal Government to cover ongoing non-Medicare expenditures since 1986.
The “full faith and credit” of the US Treasury securities applies to Saudi Arabia and China and they are perfectly free to redeem their US Treasury securities and bonds when they come due. Unfortunately, far too many people do not feel it applies to the US Treasury securities and bonds amounting to $1.844 Trillion Dollars held in Social Security Trust Fund and the $344 Million Dollars held in the Medicare Trust Fund.
Perhaps the people complaining how unfair it is for Social Security to redeem bonds don’t realize that the redemption of US Treasury securities is accomplished by selling new bonds that total or exceed the bonds redeemed. In other words, the National Debt goes down by the amount of US Treasury bonds redeemed by Social Security, China, Saudi Arabia, etc. and up by the amount of new bonds sold.
(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.
(5) WILL INDIVIDUALS PAY MORE TAXES? The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.
Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.
(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.
Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.
Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.
If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.
CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens if individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.
In addition, State and Local governments will have to increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will have less income available to provide services.
Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.
In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in wage increases or reduced prices for the products and services they sell.
I also have serious concerns about rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate agencies.
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