Tuesday, August 12, 2008

FairTax Fraud?

A commenter recently argued against my support of the FairTax and pointed me to a site called www.fairtaxfraud.com.

For review:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including:

  • A progressive national retail sales tax.
  • A prebate to ensure no American pays federal taxes on spending up to the poverty level.
  • Dollar-for-dollar federal revenue neutrality.
  • Repeal of the 16th Amendment through companion legislation.

I'm not going to try to explain the FairTax here in any more detail than that except for the particulars necessary for rebuttal.  The post will be long enough. Go here for some more information.

Unfortunately, it's hard to take the FairTaxFraud seriously. You're greeted with hyperbole and misinformation on the very first page, before you even enter the site, with lots of marquees scrolling "information" about the FairTax. I think I copied them all down.

  • Fair Tax Fraud
  • LIES
  • Un-Fair Tax
  • Does NOT cut taxes
    • Does NOT eliminate the IRS
    • EVERY DAY is Tax Day!
  • Everyone gets a welfare check from the government every month
  • Money worked for an earned is taxed
    • Unearned money is not taxed!
  • The Definitive Guide to Understanding the Biggest Tax Ripoff in the History of America
  • The children of the rich inherit mansions tax free...
    • ...Poor couples pay a 30% tax when they buy a home
    • ...and lost the home mortgage deduction!!!
  • Don't Get Sick!
    • You'll Have to Pay
    • a 30% TAX on your Surgery!!
  • Created by and backed by billionaires,
    • promoted by hate radio and neocons,
    • the FairTax puts huge new taxes on
    • food, shelter, clothes, and medicine,
    • while making billion dollar estates, capital gains, and expensive gifts COMPLETELY TAX FREE!

These marquees are in various font sizes and colors and scrolling in various directions.

I don't like "shoot the messenger" type of arguments, but, seriously, if they want to be taken seriously, the opening page needs to be better than this. I know when I see lots of exclamation points and CAPITAL LETTERS in

LARGE FONTS

that I'm unlikely to be seeing a well-reasoned argument.

Sadly, the rest of the website lived up to my initial expectations.

Their page on The FairTax Book (entitled The Book, The Crook, and the Followers) seems mostly devoted towards attacking one of the authors, Neal Boortz, and for propagating wealth envy. Now, there's plenty of reasons to dislike Neal Boortz, and if you don't like him, fine. But the merits or issues of the FairTax should stand on their own, not the messenger. It doesn't matter who supports it and who doesn't. A good idea could even be supported by David Duke and still be a good idea.  Conversely, a bad idea could've been supported by Mother Teresa and yet still be a bad idea. Don't shoot the messenger.  Learn the message.

The link to the second page (The Real Supporters) has pictures to some of the supporters. Interestingly, one of the pictures is of President George W. Bush (R-USA). I guess anything supported by Bush must be bad, but he's not actually a supporter, and isn't listed as such on the actual page you're redirected to by the link. Despite being called "The Real Supporters" the page spends only a little time on the supporters, although that's actually a good thing. Because then I'd have to point out again the validity of "shoot the messenger" type arguments, but it does accuse FairTax supporters of belonging to a cult. There's little of relevance on this page except for some more wealth envy.

Then there's the next page, which finally has some "real" criticisms of the tax. The titles of this page is "Fairness VS. FairTax" with the subtitle "Fairtax is Fair and Balanced in the Fox News sense - like giving equal time to holocaust deniers." Ahh...the site brings up "hate radio", neocons, has a couple pictures of Bush for no apparent reason other than to make the FairTax look bad, and now it ridicules Fox News. So much for objectivity, but at least I now fully understand the slant. However, there are some points on this page worth debating.

Progressive & Regressive taxes describe taxes; not morals or political opinion. In a progressive tax, the more you earn, the higher your tax rate. In a regressive tax, the less you earn, the higher your tax rate.

Except that's not true, and even the linked articles don't claim that (you really should read the things you link to). The definitions of "progressive" and "regressive" have nothing to do with "earnings" but with wealth. An important difference as we'll see later.

The clever but dishonest presentations of the FairTax Book never tell the reader that there are two tax rates that the FairTax is proposing. Under the old income tax, your individual tax rate varied but covered everyone's income (100 percent) minus deductions. Under the FairTax we have two tax rates: 1. A sales tax rate of 30 percent for everyone.  2. An income tax rate that depends entirely on how much you consume.

I think this is never told to the reader because it's completely untrue. Then there's a nice little chart where they try to tie income levels to tax levels and "convert" the FairTax into an income tax, suggesting that a person making $30,000 is taxed at 92.5%. This is only true using the most bizarre definition of "tax" that I've ever heard of. Their argument is that since the  person making $30,000 a year is near the poverty level and has to spend all of that money on basic living commodities that he's taxed at nearly 100%. So, when you spend $5 on that Big Mac meal at McDonald's that's a $5 tax on you. Yeah. Right.

Then the rest of the page goes back to wealth envy, and some points that claim to show that the evil rich won't pay their fair share under this system. This is a fallacy, of course, but that didn't stop the authors from perpetuating it. The wealthy are very good at avoiding income taxes now, because they don't have income. They have money that's inherited, or capital gains, etc.  The FairTax is better at taxing these people because it's a tax on what they spend, not what they earn. So, if David Rockefeller, Jr. buys a $4M house in the Hamptons, he's going to pay about $1M in taxes under the FairTax plan. Under our current income tax?  $0? He has very little income.

Of course, wealth envy is denied later on:

Question: Should the spoiled, pampered offspring of a self-made man be allowed to get his parent's money and property, totally tax free without ever working for it or earning it just because he was ripped out of the right crotch at birth? (and maybe even run for president some day?)
Answer: Hell NO.

That question and answer speak for themselves on the wealth envy topic, I believe. It's also untrue. See my example on David Rockefeller, Jr., above. But, they had to bring it up, because their preferred tax plan imposes a heavy tax on inheritances. Because that's fair. Their idea of the "American Way" is that everyone has to start out from square one, with no advantages from their parents. I suppose that's fine unless you're a parent trying to give advantages to your children.

Here's an interesting excerpt.

It's a fact that drug dealers, prostitutes, and other assorted criminal types do a lot of cash-based transactions, but contrary to popular belief, this does not take place in a vacuum. When a criminal eats at McDonalds he still pay sales taxes. When a gang-banger wants some new bling or the latest shoes he pays taxes. When a prostitute rents an apartment she pays a portion of the property taxes. Is this going to change under the fair tax? No.

I guess this is meant to be a criticism of the FairTax, but I don't see how. This IS one of the merits of the FairTax. The criminal does already pay the sales tax at McDonald's. This is why the FairTax works. Since all revenue comes from sales, and not non-taxable income, it's all taxable. So, the criminals pay taxes, the "idle rich" pay taxes, international tourists pay taxes, and even illegal immigrants pay taxes. The taxable base is much larger under the FairTax plan.

Next comes one of the standard whines about the FairTax. It doesn't balance the budget and it doesn't reduce spending.

Ok, that's true.

So?

No, I mean that, really.

So?

Not that those aren't admirable goals, but should I expect a "tax plan" to do that? No, that would be a "government reform" plan. You want to talk about that? I'm all ears, and will gladly jump in and join the discussion, but let's not be foolish enough to confuse two entirely different issues.

The link to next page, entitled "The FairTax Effect" has a nice picture of a nuclear warhead exploding. This is to represent the fallout of the FairTax plan, I guess.

They have two interesting sections. The first is "What You Lose Under the FairTax":

    1. The Home Mortgage tax deduction - no more deduction your mortgage interest - no incentive to buy a house.
    2. The Per-Child tax deduction for dependants - no more help for large families.
    3. The deduction for State and Local taxes - tack on the taxes.
    4. The College Tuition tax deduction - sorry kids.
    5. Roth IRA - will be taxed twice because your money is taxed again when you spend it.
    6. Charitable Contributions deductions - no help for the faithful.
    7. Child Care Credits - no more help for single moms and poor families with kids.
    8. Refinancing Points deduction - no more incentive to refinance.
    9. Health Insurance Premiums deduction - no more help for the sick.

There are varying degrees of truth and varying degrees of idiocy here.

Let's take this one at a time.

  1. Mortgage tax deduction -- Yes, you're right.  There's no income tax deduction on your mortgage payment.  Because you no longer pay income tax.  Of course, you'll be paying your mortgage out of pre-tax dollars (because your income isn't taxed), so why should you care anyway? Also, it's generally believed that the FairTax would cause interest rates to fall dramatically, letting you lower your payment considerably. As for the mortgage payment deduction being the only reason to buy a house, if you really believe that, stop reading now.  You're incapable of logical thought.
  2. Per-Child tax deduction -- Yes,you're right. There's no income tax deduction for your children. Because you no longer pay income tax. The monthly pre-bate however is based upon the size of your family, so while this claim is technically true, the "benefit" remains the same.
  3. Deduction for State and Local Taxes -- Yes, you're right. There's no federal income tax deduction of your state and local taxes. Because you no longer pay income tax. In all likelihood, once the FairTax is adopted at the federal level, your state will follow suit.
  4. College Tuition Tax Deduction -- Yes, you're right. There's no income tax deduction for college tuition. Because you no longer pay income tax. And your tuition is not taxed under the FairTax, so you'll actually save money here.
  5. Savings -- Yes, you're right.  You've already paid taxes on this money and it will be taxed again when you spend it.  Somehow that's different from the way it is now, I take it?  Remember, when you buy gasoline or food or your Nintendo Wii, the corporation doesn't pay taxes! Your price is adjusted so that you pay the tax for them. Nothing changes here. A difference which makes no difference is no difference.
  6. Charitable Contributions -- Uh huh.  You really think people contribute to charities because of the tax deductions? So, I give $1,000 to the United Way so I can deduct $1,000 from my AGI and lower my tax bill by about $300? If you actually are a person that spends $1,000 to save $300, then you're right.  The FairTax is not for you.
  7. Child Care Credits -- Yes, you're right. You no longer get a credit on your income tax for child care. Because you don't pay an income tax. Also, see above, as this is just a repetition of the incorrect statement about the per-child deduction.
  8. Refinancing Points Deduction -- Yes, you're right. You no longer get a refinancing points deduction on your income tax. Because you don't pay an income tax. As for incentive to refinance, I would hope that the lower interest rates would be incentive enough.
  9. Health Insurance Premiums Deduction -- Yes, you're right. You no longer get this deduction on your income tax. Did I mention that you no longer pay an income tax? Of course, doctor's charges to insurance companies are not taxed, only direct charges to you are. This means your premiums will drop.

This isn't that hard to figure out.

Now, for the next section.  "What You Gain Under the FairTax:

    1. New 30 percent tax on every New House or property you buy.
    2. New 30 percent tax on Cars, Boats, Campers, Home Appliances, TV's
    3. New 30 percent tax on Food, Clothing, Shelter, Rent, Electricity, Gas, Phone Service
    4. New 30 percent tax on Medicine, Surgical procedures, Hospital stays, Dental Services
    5. New 30 percent tax on Legal Services, Trial Services, Legal Advice, Legal Winnings and losses.
    6. Double Taxation on Roth IRA's or retirement money you took as a lump sum.
    7. Your consumption is now directly linked to inflation - prices go up - your taxes go up.
    8. Interest on Credit Cards, Loans, and Mortgages now taxed at 30 percent on top of what you owe.
    9. You now have to pay the government for permission to live in America by paying taxes on all you consume.
  • 1-5 are just different ways of saying the same thing. As I've mentioned before, you're paying all of those taxes now. They're embedded in the purchase of everything you buy. #4 is moderately interesting. I pointed out earlier that doctors won't charge insurance companies the FairTax, but this says that you do pay the FairTax for medical expenses.  Ah ha! I've been caught in a lie! No, it's very simple, really, B2B transactions aren't taxed (mostly), but B2C transactions are.
  • Double taxation on savings -- we've looked at this before.
  • Tax is tied to inflation -- This is technically true, but that would cause an increase in overall tax receipts meaning a smaller debt, or even a surplus. This is a bad thing, how?
  • Loan interest taxed -- This is not quite correct. The only part of interest that is taxable is the difference in your interest rate and the prime rate. And, as I said earlier, interest rates should go down, so this should be a wash. This is possibly a valid point. The only one I found on the entire site.
  • Pay taxes to live -- Ok, fine. I have no answer to this. Other than to say that you a) already are, b) don't have to tell the government incredibly personal details about yourself once a year (or four times a year for your small business), and c) you could avoid most of the tax entirely buy purchasing only used goods if you are terribly concerned about this.

The next section has more wealth envy and plants FUD by worrying about what will happen when the FairTax fails. Since it will make the U.S. a business haven, which will grow the economy greatly, that seems unlikely.

The pre-bate section is loaded with bad math. It assumes that everything is going up in price by 30% with no real basis to support such a claim. This quote is also interesting.

If fact, the excuse used in the FairTax Book for not making food tax-free is that it would benefit the wealthy disproportionately. Give us a break. Who do they think they are fooling? You would have to be an uneducated moron to believe that.

Then I'm an uneducated moron. Who spends more on food? The millionaire or the person living at the poverty level? Since poverty level expenses are essentially untaxed due to the prebate, it sure looks like to me that the millionaire is going to pay a lot of taxes on food that would go away if we didn't tax that.

There's a section on salary that's worth addressing. Your salary may be reduced due to the FairTax. It will be reduced to approximately what your current "after-tax" amount is. Your company may elect to do that so it can lower it's prices. Or, your company may not, and your salary may stay the same, giving you a very large raise, in effect. Most likely, it will take a little while for the dust to settle here. That's a legitimate criticism (Note that my criticism here is not exactly the one on the page, which isn't legitimate).

The FairTax plan calls for people to stop paying social security - both the employees and employers share. That's it...just stop paying it. Just take it out of the general fund.

True, but we've been doing that since the Reagan administration. We just pretend we're not by having two different line items on your paycheck.

The rest of the page has already been debunked.

I've never claimed the FairTax was without warts, just that it has fewer warts than anything else I've seen to date.

The rest of the site lists some of the authors preferred alternatives to the FairTax. I haven't investigated these alternatives thoroughly. Some of them may be better than the FairTax. I doubt it, though, because they clearly either don't understand the FairTax, or are deliberately spreading misinformation on it. Either way, it makes it difficult for me to believe any of their other claims.

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