Many libertarians (including me) have opposed the Fair Tax for reasons including its revenue neutrality – it’s designed to provide the Government with as much revenue (armed robbery?) as the current system. Another huge concern is that the Government will simply reinstate all the taxes the Fair Tax is supposed to eliminate, a charge the Fair Tax proponents quickly refute.
Our Presidential candidate, Gary Johnson is a big supporter of the Fair Tax.
Just to get the conversation going permit me to frame the question in a way designed to promote “spirited” debate.
Who is right – those who say we have to find a fair way to fund the reasonable activities of the government that has a good chance of being enacted (the minarchists) or those who propose that a government imposed by force has no moral authority to steal our property at gunpoint at all (the anarchists)?
At the LP National Convention GJ told the crowd “he’s listening” and at one point he referred to the Fair Tax as “the not so unfair tax”. But IMHO “if the people lead the leaders will follow” so each of us needs to decide for him or herself about the Fair Tax. It’s hard to imagine anything worse than the current system. IMHO there is a lot of good in the Fair Tax – big stuff – like eliminating the IRS. But can we as Libertarians live with this revenue neutral nonsense? Will our presidential candidate be supporting higher tax levels than –(gulp) Mitt Romney?
Ok – if that doesn’t put everyone on both sides in a fighting spirit I don’t know what will. I’ll consider my job done. In an effort to get the debate started I asked the New York State Fair Tax Director Oliver Johnson ( no relation) to answer a few questions.
SC: For those who haven’t heard of it, can you give us a short summary of the Fair Tax.
OJ: The FairTax (HR-25) replaces most federal taxes (income, withholding, AMT, capital gains, dividend, corporate, gift and inheritance) with a single consumption (sales tax on new goods and services, together with a family prebate). The collections, including funding the prebate, would be revenue neutral to the current federal tax revenues.
SC: What are the major advantages of this approach?
OJ: 1) There would be no more tax forms to fill out for the consumer. That includes no deadlines, no penalties, no audits, no bank holds, no government knowledge of your finances as an individual.
2) Earnings are not taxed, therefore you get your total salary without deductions.
3) There is no need for a tax deferred class of money. All money one has is before spending, therefore, before tax, so the need for charity deductions, 401-k’s, and other free transactions goes away. This includes all the rules, qualifiers, limitations, penalties, etc.
4) A major cause of the exporting of jobs would be eliminated. Today, we ship jobs overseas because US goods have imbedded (payroll, income and corporate) taxes that are recovered in the product prices. Foreign made goods have far less to none of these imbedded taxes. US goods would be on an equal basis or a bit better with the Fair Tax.
5.) Today, multinational corporations have an incentive to keep assets offshore rather than pay US taxes on foreign repatriated earnings. With the FairTax, corporations would have no barriers to repatriation of earnings, thus inviting more investment in the US economy.
6) The compliance costs of following the 73000 pages of tax law and rules (Not including government costs or the taxes themselves) is estimated at over $400 Billion/year, direct costs that must be recovered in US products and services. Almost all of these go away with Fair Tax, freeing up expertise to advance the US economy.
SC: Libertarians usually support a range of opinions that range between reducing taxes substantially and eliminating most taxes. Why should Libertarians support a revenue neutral tax?
OJ: 1) The burden of compliance is greatly reduced by the Fair Tax, including the government’s ability to track nearly every transaction by every individual.
2) Many of the earmarks politicians give donors are in the form of tax credits, or tax incentives. Those go away.
3) Rome wasn’t built in a day. Neither was the current tax code. The Fair Tax is a logical first step. There will still be debates about the rates, and about spending. It will be with a cleaner background and much more transparency.
4) Revenue neutral is not cost neutral. The costs and restrictions that are eliminated are extremely valuable to our economy and freedoms.
SC: It’s been suggested that the government will eventually reinstate the taxes that were eliminated. How can we be sure this isn’t just another new tax?
OJ: 1) We can only be sure of what the government (congress really) will do is by being diligent.
2) The FairTax (HR-25) will give the citizens a taste for the burdens lifts, the costs saved and the liberty regained. It also makes the continuation of the FairTax dependent upon the repeal of the 16th amendment. If it isn’t repealed, all bets are off. Most people believe we would have another revolution at the ballot box if not in the streets rather than return to the current tax system.. If it is repealed, the Income and payroll taxes, then are unconstitutional by previous Supreme Court rulings, and going back to the old taxes require an extremely high hurdle, and an unlikely one.
SC: Can you summarize the math behind the 23% rate? It’s been suggested that rate is way too low to be revenue neutral?
OJ: I look at this as a reasonableness question. (There have been several noted economists who have validated the detailed work, and I can look that up for you). Looking at www.usdebtclock.org the total GDP is about $15 trillion, and the total revenue for the US Govt. is $2.231 trillion. Some of that revenue (tariffs, etc. ) will continue. Of the $15 trillion in GDP, about 70% is accounted for by retail spending, thus about $9 Trillion taxable. 23% of $9 Trillion is about $2.4 Trillion. With a few plus’ and minus’s , the number is within range.
SC: Who will collect the Fair Tax? The Federal Government? The States?
OJ: The states who chose to do so and collect the fees as in the HR-25. For those who do not already have sales taxes, the US treasury would set up a collection system.
SC: Isn’t the prebate a potentially huge bureaucracy and couldn’t it be manipulated by the government? Assuming you must address the impact of a flat tax on low income people why not exempt purchases such as food, medicine and clothes under say $100 the way New York did?
OJ: 1. The bureaucracy needed to implement the prebate is simple and straightforward. It involves registration processing (validation eligibility and updating a data base) and issuing electronic checks to those in the data base. The registration is far more simple than Social Security already being done. The amount of the electronic checks is fixed simply by household size, making it far easier than Social Security.
2. Exempting purchases would motivate avoidance behavior on the part of the customer and the vendor. The items exempted are subject to manipulation in the tax code as we see with the states today. More affluent people would have a better chance of benefiting, rather than the needy. With the prebate, frugal needy people can possibly reduce their taxes by buying used (previously taxed items). They don’t have to buy anything to get the benefit.
SC: Wouldn’t the Fair Tax punish savers? For example, if one saved after tax dollars for retirement wouldn’t one be taxed again when those dollars are spent?
OJ: 1. The Fair Tax rewards earning, saving and investing. (Money saved in any form is not taxed. Only spending is taxed.) [Today’s system motivates dependence, spending and debt.]
2. Granted, money already saved will be taxed when spent. In the meantime, interest, and capital gains accrue without taxation. Money already saved in tax deferred accounts do get a break.
SC: Who is supporting it in Congress? Tell us about the strategy and probability of adoption.
OJ: 1. The bill H.R.25.IH can be read in it’s entirety at www.thomas.gov (Library of Congress). Simply search for HR 25. It is sponsored by Rob Woodall (GA-7). There are 67 co-sponsors listed. In the Senate, the bill is S.13. It is sponsored by Saxby Chambliss of Georgia. It has 8 co-sponsors. Each bill has been referred to committee. Co-sponsors are named in the documentation. Neither has been reported out of committee.
2. At first, the originators of the proposal believed that the proposal had such overwhelming merit that it would be easily adopted. The next strategic step was lobbying to educate the Congress. We are now moving strongly in developing a grass roots effort to convince enough sponsors to pass the bill. With new attention to “tax reform”, it is clear that not much real tax reform will happen when there are 73000+ pages of stuff that benefits somebody specific. The replacement strategy of the FairTax seems to be the only candidate at significant reform, despite all the rhetoric to the contrary.
3. When we are able to get an individual voter to understand the FairTax, some 90% agree, we should adopt the FairTax. Our strategy is to win over enough congressional and senate districts to pass the bill by educating and organizing local support to influence enough Congress to pass the bill.
SC: What are the Romney’s and Obama’s positions on the Fair Tax? Are there other major supporters and are any of them libertarians?
OJ: 1. Neither Obama nor Romney have endorsed the FairTax. They both talk about tax reform as a high priority, (so long as it is isn’t defined).
2. Gary Johnson and Mike Huckabee come to mind. There are the co-sponsors, and others. My focus is on the grass roots, and bringing more districts up to speed so as to force passage.
SC: Many people particularly those who don’t file income taxes, don’t ever see the true tax burden. Does it increase visibility of taxes?
OJ: It requires the amount of tax and total price including tax to be shown on all retail receipts. That is real visibility, compared to the withholding system and the payroll tax and the imbedded tax effects in the price of all goods and services.
SC: I understand the Fair Tax will eliminate the IRS. Can you confirm that?
OJ: The bill specifically eliminates the IRS. It is true that the treasury will collect the taxes from the states (those that agree to collect the sales taxes for a small cut of the collections) and whatever other collectors that are not the states themselves. That is a far different animal than the IRS having to write, follow, enforce, audit, … over 73000 pages of rules. The treasury fair tax collection function will be likely far less than 5% of the size of the current IRS.
SC: How can people contact Fair Tax? What actions do you propose supporters take?
OJ: 1. There are two websites to go to. www.fairtax.org is the website for Americans For Fair Taxation, also known as AFFT. The second is Fair Tax Nation, www.fairtaxnation.com . I am getting the support structure accessible through these websites. Try www.fairtax.org/newyork. If you can’t easily see what to do, contact me, email@example.com for assistance.