I.O.U.S.A.

In the latest book by John Linder and Neal Boortz, FairTax: The Truth, they argue the FairTax will supercharge the economy and help avoid fiscal disaster. These sentiments are also expressed by Laurence Kotlikoff and Scott Burns in their book The Coming Generational Storm.

Former U.S. Comptroller General Dave Walker and other concerned Americans including former Treasury Secretary Paul O’Neill, former Fed chief Alan Greenspan, Sen. Judd Gregg, and Warren Buffett appear in a new documentary called I.O.U.S.A. that takes the audience through the story of our rapidly growing national debt — and the consequences we face if our government keeps spending money it just doesn’t have.

America the Uncompetitive

Economists at the Organization for International Cooperation and Development released a new working paper titled “Taxes and Economic Growth“ where they studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that “corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption.” The study adds that “investment is adversely affected by corporate taxation,” and that the most profitable and rapidly growing companies tend to be the most sensitive to high business tax rates.

The U.S.’s high corporate tax rates were a focus of an editorial in the Wall Street Journal last Friday entitled “America the Uncompetitive,” which pointed out that “every month that goes by without tax reform, America is a relatively less attractive place to do business.”  Tax Foundation president Scott Hodge stated in a new awareness campain CompeteUSA that ”20 years ago, the U.S. led the world in cutting the corporate tax rate to make our economy more conducive to job creation.  Since then, almost every other industrialized country has cut its corporate tax while the United States has stood still, and as a result, the U.S. corporate tax rate is now 50% higher than the OECD average.”

On the CompeteUSA site, the Tax Foundation presents an article titled “What Do Corporate Income Taxes Cost American Families?“ where they state that corporate taxes accounted for 6.3 percent of low-income households’ tax bills last year compared to just 4 percent for individual income taxes.  They estimate that American households pay $3,190 on average in corporate income taxes per year. 

Kepner debates Boortz

Post from Hayden Kepner

I was fortunate enough to participate in what I believe to be the first-ever debate on the FairTax to be aired on national TV. (OK, there was a semi-debate aired on C-Span a few years ago.) The debate was moderated by Rick Sanchez of CNN.

On the anti-FairTax side were me, Jay Bookman (a liberal columnist from the Atlanta Journal Constitution) and Allen Buckley (the Libertarian candidate for Senate in Georgia). On the pro-FairTax side were Rep. John Linder (the primary FairTax sponsor), Neal Boortz, and Mark Darrow (a retired telecom executive who owns the upscale coffiee shop outside Atlanta where the debate took place).

Parts of the debate will be aired on CNN Newsroom (with Rick Sanchez) on Sunday nights (probably Aug. 24 and 31) at 10:00 p.m. Eastern. CNN will post the whole thing on the internet, which I assume fairtaxblog will link to so that you can throw rotten tomatoes at me.

I thought I’d give you my thoughts/impressions while they’re still fresh in my mind. So, in no particular order, here goes.

Read Hayden’s take in the comments...

Mike Huckabee on the Fairtax

Flat Tax vs. FairTax - Transition?

The Heritage Foundation’s Dan Mitchell discusses the current tax code and offers solutions for fundamental tax reform.

FairTaxBlog - A broader scope?

As you may have noticed, many of the recent discussion points have not been directly about the FairTax. Over the years, this group has discussed the plan in more depth than any group I’ve been apart of. We’ve blogged the entire bill, discussed the most relevant news, and debated probably every study released. As we move forward, it seems we end up rehashing many of the same debating points, which may lead to stale discourse. We want to keep the blog interesting and active. So, would you enjoy a broader scope of discussion? While we would continue to give FairTax developments top placement, would you be interested in discussing other tax reform plans as part of a comparison to the FairTax? (Topics such as the Automated payment transaction tax, Competitive Tax Plan, Efficient Taxation of Income, Real Property Use Tax, Taxpayer Choice Act, Freedom Flat Tax, etc). Should we try to cover more topics regrading plans offered by presidential nominees and studies regarding the failure of the current tax system? On the other side, we don’t want to become too broad and lose focused readers. We look forward to hearing your thoughts.

Summary of the Presidential Candidates’ Tax Plans

	McCain	Obama
Taxation of Households
Income Tax Rates	Permanently extend lower tax rates (wages, dividends and capital gains).	Rollback lower wage tax rates for those with incomes above $250,000 Raise tax on dividends and capital gains from 15% to 28%
Alternative Minimum Tax	Permanent repeal	Reform
Families and Children	Raise dependent exemption from $3,500 to $7,000	“Making Work Pay” tax credit ($1,000 for families/$500 for individuals) to offset payroll taxes (refundable) Expand and enhance Child and Dependent Care Tax Credit by making it refundable and increasing the credit rate to 50% Expand the EITC
Housing	No specific tax proposal	A new 10% Universal Home Mortgage Credit for taxpayers who do not itemize (refundable)
Savings	No specific tax proposal	Expand Low Income Savers Credit—50% match for first $1,000 saved for families with up to $75,000 in income (refundable)
Job training and education	Tax-free training accounts for education and also health care	New American Opportunity Tax Credit — credit for the first $4,000 of college education expenses (refundable)
Overall Reform	Allow taxpayers to pay tax under a simple alternative tax with two tax rates, broad tax base, and a large standard deduction	Simplify tax filings so that most Americans can fill our their returns quickly—moves towards a return-free tax system for many taxpayers
Estate Taxation
Estate Tax	Reform with $10 million exemption and 15% rate	Not specified
Taxation of Businesses
Corporate tax rate	Lower top corporate tax rate from 35% to 25%	No change
Investment	Full expensing for investment in equipment	Eliminate capital gains taxes for start-up businesses
Small business expensing	Permanently extend expansion of Sec. 179 expensing	No change
Research and Development (R&D)	Permanent tax credit equal to 10 percent of wages spent on R&D	Permanently extend the R&D tax credit
Energy Taxes	Holiday for federal excise tax on gasoline (18.4 cents) and diesel (24.4 cents) from Memorial Day to Labor Day	Extend production tax credit to renewables Windfall Profits Tax on oil selling above a threshold

Source: Tax Foundation

Obama Tax Plan Show Dramatic Redistribution

According to a new Tax Foundation analysis, Senator Obama’s tax plan is a dramatic redistribution of the nation’s tax burden.

In Tax Foundation Fiscal Fact, No. 132, Tax Foundation president Scott Hodge uses revenue estimates from the Tax Policy Center to show that Obama’s plan would greatly accelerate the decades-long trend toward a federal government that depends for tax revenue almost exclusively on a few high-income people.  This contrasts starkly with the McCain plan, according to Hodge, which would give every taxpayer a cut and leave the current tax burden distribution approximately where it is. “Under the Obama plan for 2009,” explains Hodge, “more than $131 billion would be redistributed from the top 1 percent of taxpayers to all other taxpayers.”   

I thought the closing comments were interesting.

While many Americans may cheer this outcome as just or equitable, this sort of direct redistribution raises some important questions that should be part of a larger national discussion:

• What is the long-term effect on the economy of so few households shouldering such a large share of the tax burden?
• What are the consequences for our democratic system when a majority of Americans are disconnected from the full cost of government? Will that majority demand more from the government because they bear little of the cost?
• Should the tax system be used as a means of redistributing income or simply as a neutral mechanism for raising money for government services? Can a tax system premised on redistribution also be compatible with economic growth?
• The Obama plan assumes little behavioral change from such a large tax hike on high-income workers. Is this realistic or will the higher rates encourage tax minimization strategies and reduced work effort, which will lead to lower tax revenues?

The Impact on Housing and Homebuilding

A new study was released from the Baker Institute For Public Policy at Rice University - The Impact of H.R. 25 on Housing and the Homebuilding Industry (thanks Hayden for the link).

Abstract: This report examines the macroeconomic and transitional effects of implementing a specific type of consumption tax reform—the national retail sales tax known as the FairTax, as specified in H.R. 25—with a focus on the effects of such a reform on the housing sector, including reform-induced reductions in the prices of existing housing. The analysis is conducted within the context of a dynamic overlapping generations computable general equilibrium model that includes a corporate sector that produces a nonresidential composite good as well as noncorporate rental housing and owner-occupied housing production sectors and allows for the costs of adjusting all capital stocks in response to the enactment of the reform.  

The study also includes an analysis on the tax rate, which they put at 28% inclusive.

Hauser’s Law: Why You Can’t Soak the Rich

Over the past 60 years, no matter how much federal tax RATES have been raised or lowered, tax REVENUES have remained at about 19% of GDP:

The chart nearby, updating the evidence to 2007, confirms Hauser’s Law. The federal tax “yield” (revenues divided by GDP) has remained close to 19.5%, even as the top tax bracket was brought down from 91% to the present 35%. This is what scientists call an “independence theorem,” and it cuts the Gordian Knot of tax policy debate.

The data show that the tax yield has been independent of marginal tax rates over this period, but tax revenue is directly proportional to GDP. So if we want to increase tax revenue, we need to increase GDP.

What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser’s Law says it will also lower tax revenue. That’s a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich — if they knew about it.

Read the full article in the Wall Street Journal for more.

November Election Provides Unique Opportunity for Tax Reform

Tax Foundation President Scott Hodge recently published an article in the Heartland Institute’s Budget & Tax News on the opportunity for federal tax reform during the next administration—regardless of who wins. The article outlines five basic steps for politically realistic tax reform:

Step 1: Eliminate tax exemptions and deductions.
Step 2: Make any tax reform a tax cut and tax simplification.
Step 3: Continue to shield low-income earners with a super-deduction.
Step 4: Make everyone a stakeholder.
Step 5: Fend off the special interests.

Below is an excerpt from the article, and the full version can be found here.

For the first time since 1986, the stars may be aligning for a grand bipartisan compromise on fundamental federal tax reform.

Regardless of who wins in November, the next president and Congress will have to deal with the collision of two cataclysmic tax events: The 2011 expiration of the Bush tax cuts and the growing irritation of the Alternative Minimum Tax (AMT).

The seeds for compromise lie in the fact that both sides have something to gain by addressing these problems at once. Naturally, Republicans want to avert the largest tax hike in history by maintaining the lower tax rates on income, capital gains, dividends, and married families with children. Meanwhile, Democrats will be brought to the table by the fact that the AMT is largely a Blue State problem, mostly affecting those living in high-tax and high-income states such as California, Massachusetts, New Jersey, and New York.

The FairTax Is About Economic Growth

In a recent post, it was commented that we should discuss the studies/articles predicting economic growth under the FairTax, remarking “that Kotlikoff and others had really concluded that the actual economic growth under the FairTax would not be very dramatic, something like 10% over the current baseline estimates over the next CENTURY.” Before we get into the studies, I thought I would establish how significant such “non-dramatic” changes may effect future revenue.  Louis R. Woodhill writes:

Right now, the Social Security Trustees forecast the real long-term growth rate of the U.S. economy at about 2.0% per year. This is a reasonable projection of what current policies would yield. However, I believe that adoption of the FairTax would increase growth to at least 3.5%. How significant is the difference between 2.0% and 3.5% real growth? Let’s look at the numbers over a 75-year period, the way the Social Security Trustees do.

Our economy would be almost three times larger in 2082 if we average 3.5% growth than it would be if growth averaged 2.0%. The “present value” of our GDP over the 75-year period would be more than 70% larger. The implications of this difference are staggering

For one thing, the financial problems of Social Security and Medicare, which seem overwhelming today, would simply disappear. For 2007, the combined costs of these programs will total about 7.5% of GDP. Under the Social Security Trustees’ GDP growth assumptions, these costs are projected to balloon to over 17.5% of GDP in 2082. However, if our GDP grows an average of 3.5% per year, the same projected real-dollar costs would total only about 6.0% of GDP—less than today.

Here’s another way to look at the potential impact of the FairTax. If you add our national debt to the projected (75-year) “unfunded obligations” of Social Security and Medicare, the Federal government is in a $48 trillion financial hole. However, assuming Federal revenues at their historic average of 18.5% of GDP, a real GDP growth rate of 3.5% would increase the present value of Federal revenues from about $138 trillion to about $236 trillion. This additional $98 trillion is enough to pay off all of our “debts” and pay for a tax cut equal to 3.9% of GDP. - Read the full article

Virtually all economists agree that the following will promote economic growth: Replacing the income tax with a consumption tax, Replacing a graduated rate system with a flat marginal tax rate system, Lower marginal rates and a broader tax base. The FairTax does all three. Kotlikoff and Jokisch find that the capital stock will be 13 percent higher under the FairTax system than under the current system by 2010, and 41.4 percent higher by 2030, and that long-run interest rates would be 150 basis points lower than under the current system. Their study states that, “the shift to the FairTax raises marginal labor productivity and real wages, over the course of the century, by 18.9 percent and long-run output by 10.6 percent.

Arduin, Laffer & Moore Econometrics finds that investment will be 33 percent higher in the first year and 41 percent higher by the tenth year than under the current tax system. The effect of an increased rate of productivity growth and the reduced efficiency costs yields GDP up to 24.4 percent greater than under the current system by the tenth year. Consumption, fueled by 1.7 percent higher real disposable income in the first year which increases to 11.8 percent higher by the tenth year, is higher by 2.4 percent in the first year and 11.7 percent by the tenth year. Read More...

Uncharacteristically, McCain Misses the Popular Choice

McCain seems to have a talent for knowing what sells, even if it transcends party direction or consistent political ideology. By not endorsing the FairTax, is he losing his touch? Or maybe he is selling to the media - is he thinking that despite support from the electorate, the media will not like the FairTax?

Poster Jim Bennett offers these thoughts on McCain’s support of the Flat Tax:

I was disappointed in McCain’s speech May 15, 2008 in Columbus, Ohio, in which he endorsed the wrong tax reform plan. McCain, speaking about the Flat Tax, HR1040, claimed correctly that millions of taxpayers would file under a flat tax and save billions in the cost of preparing their returns. The Flat Tax does represent a vast improvement over today’s Byzantine code and has been implemented successfully in 16 foreign jurisdictions, in which former Soviet republics and satellites are strongly represented (Two more are about to adopt it, and three are actively considering it).

The weakness in the Flat Tax, however, is that it continues to be an income tax retaining the IRS. Congress, in increments, is certain to return it to today’s code that serves us poorly.

The Flat Tax has less popular support than the Fair Tax. It has one sponsor in the House, Michael Burges, R-TX26, and 8 co-sponsors (some of whom also are Fair Tax co-sponsors), all Republicans. The Fair Tax, by contrast, has one sponsor in the House and 69 co-sponsors, and can count at least one Democrat. There are other Democratic supporters in the House who have been discouraged by Speaker Nancy Pelosi from signing on as co-sponsors.

The Fair Tax, furthermore, can count several hundred thousand among its supporters throughout the country. The Flat Tax, championed by Steve Forbes, has a more limited following.

The National Association of Realtors opposes the Flat Tax because of the loss of the local property tax and mortgage interest deductions. The NAR does not oppose the Fair Tax - nor should it.

The choice by McCain of the Flat Tax is an unfortunate distraction and will be redressed over time.

On the same note, Julia Malone notes Linder’s concern with a Libertarian candidate endorsing the FairTax and the Republican candidate not endorsing it:

Republican Rep. John Linder is fretting aloud that Libertarian presidential candidate and fellow Georgian Bob Barr could draw enough votes from “fair tax” enthusiasts to tilt the outcome in a close state contest next November.

Linder, himself an ardent advocate of abolishing the IRS and replacing it with a form of national sales tax, said Tuesday that Barr’s support of this “fair tax” concept could win enough votes to affect the results in Michigan, Florida and even in Georgia.

The expected Democratic nominee Sen. Barack Obama “is going to turn out a helluva vote” in the normally safe Republican state of Georgia, Linder said.

He said he is contacting advisers of the presumptive GOP nominee, Sen. John McCain, to urge them, “Do not take this lightly.”

Linder’s prescription for solving the problem is, not surprisingly, for McCain to embrace the fair tax idea too.

Nothing is Certain but Death and the FairTax

In a piece on Townhall today Mike Adams offers an amusing look at conversations from the trenches of a grassroots movement. The premise is that he carries around, in public, a copy of FairTax: The Truth which draws out unsolicited comments from various critics. Here is one:

Supporter of the Flat Tax of Yesterday (SOFTY): Sorry, I support the flat tax.

Adams: How often do you change your underwear?

SOFTY: What?

Adams: I assume you change your underwear every day?

SOFTY: Yes, what the hell does that have to do with it?

Adams: That means you’ve changed underwear 8036 times in the last 22 years.

SOFTY: And?

Adams: And the I.R.S. has changed the tax code 16,000 times in the last 22 years. They change the tax code twice as often as you change underwear. How long do you think a flat tax would remain flat?

SOFTY: (Silence)

Adams: Would you like to borrow my book?

Linder Town Hall News

Pulled from discussion on Yahoo Groups... 

Congressman Linder held a teleconference town hall meeting on April 28th 2008 (tuesday night) @ 7 pm on the FairTax.  In the conference, he said that he would agree to add language to the bill to delay implementing the FairTax until after the 16th amendment is repealed. This was in the context of his meeting with Senator McCain, who said that we would have to repeal the 16th.  Linder seemed to be implying that he was open to that idea, if that is what it took to get Senator McCain on board.  He has no intention of withdrawing HR 25 from this session of congress and reintroducing it under a new bill # unless it would mean a major increase in support, such as getting Senator McCain.  In the past, Linder has decided against making changes between sessions because of the difficulties surrounding informing all of the co-sponsors.  Linder says that the bill will not come out of committee this year - while Chairman Rangel has been verbally supportive, he isn’t taking any action.  He also said that the “flatter” tax proposal that Senator McCain has proposed isn’t revenue neutral.

It is quite common to hear the flat taxers object that we have to repeal the 16th first or else we would end up with both.   In the past, Linder has also considered adding sunset language so that we would not have to delay implementation for several years until the 16th could be repealed.

Purchasing Power - The Forgotten Factor

In many recent posts, I’ve noticed that purchasing power is often forgotten about in tax comparisons between the FairTax and the current tax system. Since many discussions assume employees get gross wages, we also need to factor for production cost changes. In this post, I lay out the effect that purchasing power has on tax comparisons and why I believe factoring is necessary.

Summary - When comparing tax systems, we need to consider changes in purchasing power and standard of living. If the value of the dollar changes between two systems, stating that $1 in tax from one system is equal to $1 in tax in the other system is incorrect if the first dollar can buy more goods. If I pay the same amount of taxes, but my standard of living increases - how does that compare? We need to hold standard of living consistent in a comparison, which means adjusting the dollar figures based on changes in purchasing power. In this example, I show purchasing power for a family earning $50,000 is increased by $7,900, dropping their effective rate from 19% to 3.3% comparatively. When computing comparisons in purchasing power, the taxable spending should be multiplied by .855, which is equal to 1.0 minus the tax inclusive value (14.5%) of a 17% price increase. Effective tax rates can also be adjusted to account for purchasing power changes (base income - taxable spending * .855 / base income).

Variables - I will use a base income of $50,000 for the discussion ($48,201 was median for 2006), with an income tax burden of $6,697 (13.4% effective - married filing jointly 2008), a payroll tax burden of $3,825 (7.65%), and a $1000 child tax credit, for a personal tax burden of $9,522 (19%). I’ll use 10% for the decrease in production cost (which is the removal of corporate income taxes, employer payroll taxes, and compliance costs) and a 17% increase in prices after the FairTax is added. Median family size is 3.5, so I’ve used 3 (married w/ 1 child) for child tax credit and prebate allowance. The 2008 base prebate for this family is $5,612, which would be indexed to price increases (17%) making the prebate $6,566. I will assume 100% (including the prebate) is spent on taxable goods and services.

Part I - Purchasing Power

Let’s take a $100 widget under the current tax system

$50,000 - $9,522 = $40,478 under the income tax gets you 404 widgets at $100 each.

FairTax goes into effect - employees receive gross wages, and production cost reduce by 10%. Widgets cost $90 (10% reduction) * 30% (FairTax) = $117 (17% increase in price)

$50,000 + $6,566 prebate = $56,566 under the FairTax gets you 483 widgets at $117 each.

You get 79 more widgets under the FairTax, which is equal to $7,900 under the current system. We’ll come back to this number as this is the increase in purchasing power over the current system. To buy the same 404 widgets under the FairTax would cost $47,268 after taxes, paying $10,872 of it in FairTax, but leaving you with $9,298. The $9,298 can be counted as either a reduction in taxes (bringing you to $1,574) or an increase in spending (buying 79 more widgets).

If we look at the base of purchasing power:

$50,000 - $9,522 = $40,478 for the current system
$56,566 - $13,010 = $43,556 for the FairTax

This seems to be where most people stop. We have a difference of $3,078 (good for the FairTax in this example), but that doesn’t buy 79 more widgets!? The above base of purchasing power does not take into account that production costs have reduced by 10%, allowing you to buy more with less after taxes. So in terms of todays dollars, the cost of 404 widgets is $36,360 ($90 * 404) under the FairTax, which is equal to $40,400 under the current system because it produces the same amount of widgets. To factor this in a comparison, we can multiply $36,360 by an exclusive 11.11% (which represents an inclusive 10% decrease in production cost), making $36,360 equal to $40,400 ($36,360 * 1.1111) in today’s dollars.

So for a proper comparison between the tax systems, we should show the dollar value of the additional widgets gained as an increase in purchasing power. Therefore, when using a partial accommodation model in which production cost decrease by 10% and prices increase by 17%, we need to multiply the total income by 1.1111 (substitute your preferred values as needed). To show the purchasing power, we should have (Income + Prebate * 1.1111) * .77 = Purchasing Power. In this example, (56,566 * 1.1111) * .77 = $48,395, which is $7,917 more than the current system. The $7,917 increase in purchasing power buys the additional 79 widgets in the current system, which is the difference between 404 and 483. For simplification, this is essentially the same thing as multiplying $56,566 by the inclusive value of the price increase. 17% exclusive would be about 14.5% inclusive, which is factored $56,566 * .855 = $48,364.

By making this adjustment, we can show the purchasing power in todays dollars in a comparison, revealing the real changes in tax burden with a consistent standard of living.

Part II - Effective tax rate

I think the standard of living and purchasing power are the real measures of tax burden in a comparison, and a proper effective tax rate calculation should reflect the relative increase or decrease. Let’s consider the effective tax rate using these examples.

If we did nothing to factor purchasing power, our effective tax rate would also be affected. Example: $50,000 * .23 = $11,500 - $6,566 = $4,934 or 9.9%. When including prebate as taxable, we would have $56,566 * .23 = $13,010 leaving $43,556 or $6,434 in tax on $50,000, for a rate of 12.9%. Using the income tax example above, we have an effective tax rate of 19% ($9,522 / $50,000) leaving $40,478 in purchasing power. As shown in the last post, the FairTax increases purchasing power by $7,917 to $48,395 in today’s dollars, leaving this family only $1,605 under $50,000 comparatively. What’s missing here?

While it is correct to say a 12.9% tax rate (as well as paying $6,434 in tax) - is this a proper comparison based on the relative burden? 12.9% under the FairTax includes the removed corporate taxes (income and payroll), but the 19% in personal taxes under the current system does not. We have the same issue as above where there is no factoring for the increase in purchasing power. Going from an effective tax rate of 19% to 12.9% implies that the burden is less, but we know from above that the change should be significantly less comparatively. Using the same base of income reference of $50,000, the $48,395 purchasing power adjustment shows a comparable effective tax rate of 3.3%. 19% to 3.3% better compares the relationship based on the consistent standard of living.

To factor the changes in purchasing power on the effective tax rate, we multiply the amount spent by the tax inclusive value of price increases (14.5% or .855). Using the math above (that resulted in the 12.9% rate), we make the purchasing power adjustment: $56,566 * .855 = $48,364. Therefore, $50,000 - $48,364 = $1,636 for a comparable effective rate on $50,000 of 3.3%.

A more complete measure requires solving for all the main variables in the economy using a complex model but purchasing power is key. The study “A Macroeconomic Analysis of the FairTax Proposal” makes the assumption that only the employer portion of payroll taxes is used to reduce prices (a 5 -6% reduction in pre-tax prices) and roughly a 24 - 25% increase in after tax prices. Given this, the study finds that disposable personal income (adjusted for changes in the price level) increases by 1.7% under the FairTax the first year over what it would be for the current system. This goes up to 8.7% increase in disposable income (same as purchasing power) by the fifth year and to almost 12% after ten years.

A message from Senator Robert Clegg

New Hampshire State Senator Robert Clegg is currently running for congress in New Hampshire’s 2nd congressional district. A Republican, Senator Clegg served four terms in the New Hampshire House of Representatives prior to his current term in the state senate.

Senator Clegg is a supporter of the FairTax and offers this post to The Fair Tax Blog with his thoughts on the “stimulus” package and the FairTax:

This week folks will see checks in the mail from the federal government. As part of the so-called stimulus package, the government is returning $600 that it originally took from your paycheck. Apparently Washington politicians have come to the realization that more money in your pocket will stimulate the economy and create jobs. The cost of notifying you of the $600 being returned to your pocket is somewhere in the neighborhood of $42 million and that didn’t even cover the cost of printing new checks and mailing them back to you!

Imagine if the government had left that money in your paycheck in the beginning. Imagine if the government didn’t spend $42 million to let you know it was sending you back some of your hard earned dollars. Imagine if the government didn’t spend millions more of your money sending you back your money.

That is why I am a proponent of the Fair Tax. Lets leave the paycheck with the family. Let’s not tax the worker who takes on a second job to send his daughter to college rather than sitting back relying on the government to increase taxes to do it for him. Let’s change the system to one where your purchasing decisions determine what taxes you pay and your productivity is rewarded not punished.

It’s time for America to allow a family to work hard to better itself, to feed itself, to nurture the belief that a self-sufficient, self-reliant population is a better place than one that waits for government to do it all. We need to reward hard work. We need to leave the paycheck in the pocket of those who have earned it. The time has come for a Fair Tax.

NH State Senator Bob Clegg

Tax on Skittles

One of the perspectives that is often lost in the analysis of tax bases, rates, economic growth and the details of this study or that study is the cultural effect that taxation has on a population.

While I have no interest in using government as a tool for social engineering, the fact is that funding a government, regardless of its size, will have an influence on a culture’s behavior. And it seems reasonable to say that the level of that influence will be proportional to the size of the government.

And since our federal government has grown from around 3% of our combined productivity at the beginning of the last century to around 20% at the beginning of this century, it probably makes sense to spend some time considering the manner in which we compel people to commit so much of their personal effort for the collective.

Representative Steve King from Iowa provides an excellent anecdote about the cultural effects of taxation and the contrast in paridigm that causes people to focus on what they want others to pay for under an income tax model as opposed to what they personally want to pay for in a consumption model:

FairTax Lite

Regular poster Hank Van Gieson proposes the following:

Fairtax-Lite is a broad based 14% national sales tax with

(1) no exclusions,

(2) A targeted prebate,

(3) no taxation of government entities,

(4) leaves payroll taxes and gift/estate taxes alone,

(5) no inventory tax credits and,

(6) implements the plan over five to ten years.

I would be happy to address any criticisms or concerns you might have for each of the Fairtax-Lite components

If you are really serious about getting rid of the income tax and the IRS, I suggest that Fairtax-Lite has a far better chance of gaining Congressional approval than HR25.

Starting with the Fairtax consumption base of $9353 trillion and the Fairtax revenue neutral goal of $2228 trillion, I first added $221 billion in private education consumption back into the taxable base.

I then added the entire prebate consumption allowance of $2112B back into the base, effectively eliminating the prebate which was my original plan. (I’ll restore a targeted prebate later).

Removing government consumption from the base lowers the base by $2009 trillion and lowers the revenue required by $211 billion. (Note: The reduction in revenue was made because Kotlikoff insisted that when BHI included the $916B in the base, an offsetting revenue addition of $211B was also made. Governments can’t tax themselves and raise any new revenue, so the offset was required. However, I’m not so sure any more that a revenue offset was added, in which case, the $211 reduction would be in error. We can check that out at the end and see what difference in the rate might occur if the reduction wasn’t made).

Leaving the payroll and estate/gift taxes in place reduces the revenue neutral requirement by $897 billion.

Eliminating the inventory tax credit reduces the federal budget deficit by $600 billion in the first year of implementation, but does not change the base/rate calculations. This is because the inventory credit was never included in the Fairtax base/rate calculations. It was essentially ignored by the study group.

The five year transition period does not change the rate calculations. (More about transition later.)

By making these changes, the consumption base would be $9679 billion, the revenue required would be $1120 billion, and the rate would be 11.57% inclusive and 13.1% exclusive.

Recognizing that some sort of prebate would probably be needed, even at these significantly lower sales tax rates, I then provided a targeted prebate to 37 million families at or below the poverty level with an annual cost of $59 billion. Adding this revenue requirement back in results in a base of $9679 billion, $1179 billion revenue required, and an inclusive rate of 12.2%, exclusive 13.9%. This is how I arrived at a 14% estimated sales tax.

Going back to the issue of whether or not there was a revenue offset to the inclusion of federal government consumption in the base, if the answer is no, then the revenue required with a targeted prebate would be $1390B and the rates would be 14.4% inclusive and 16.7% exclusive.

As for a transition that would be more evolutionary in nature, and thus more appealing to Congress, in round numbers, just implement a 3% national sales tax in year one, increasing the rate by 3% each year over the next four years to arrive at a total of 14%. The last year, or for that matter any year, can be adjusted for actual needs. At the same time, reduce income taxes by 20% per year with a simple line entry after 1040, line 63-(total tax-20%), and increase the tax reduction by 20% each year until the income tax is zero in year five. Not very complicated and very easy to implement.

Compared to the Fairtax, the Fairtax-Lite proposal would:

(1) Remove any possible constitutional challenge from the States;

(2) Reduce the number of workers that pay no net federal tax to current levels;

(3) Restore fairness to our nations retired community;

(4) Continue to have businesses contribute their share to the Social Security Trust Funds;

(5) Reduce the coming entitlement crunch;

(6) Eliminate the excessive budget deficit in year one of implementation;

(7) Reduce the possibility of future exemptions; and,

(8) Allow the government to “try before buy” with ample opportunity to correct unforeseen problems without wrecking the national economy.

Huckabee Starts a PAC, Supports FairTax

As a supporter of Mike Huckabee in his bid for the Republican nomination for President, I received an email today that was encouraging. It was an announcement of the formation of the Huck PAC:

Don’t you wish April 15 were just another spring day? I know I do.

Everyone, (that is everyone that isn’t a Democrat), knows that Americans are over-taxed and over-regulated. As I campaigned for President over the last fourteen months I heard that same complaint time and again when I sat down with families and individuals eager for change in Washington.

Many of these voters also felt that their Party needed to get back to its core principles: less government, lower taxes, a strong national defense and unwavering support for the family and the sanctity of life.

I campaigned to be the agent of that change and while we may have come up short, I remain (and I hope you do as well), undeterred and eager to make a difference.

Enter Huck PAC.

Huck PAC is founded on the principles that make America great: Life, Liberty and the Pursuit of Happiness. And because we believe our Republican Party embodies these ideas and is best suited to lead America forward, we are committed to supporting Republican candidates nationwide.

We will identify candidates who hold firm to these principles, promote their campaigns and financially support their efforts.

Today I hope you will join us. I ask that you first sign up for my Huck PAC email updates on our new website and then make a contribution of $25 or more in support of our efforts.

You can be certain we will invest your support efficiently and in the most effective manner possible. We were known as the campaign that did more with less and we plan to bring that same innovation and spirit to Huck PAC.

Now I know the skeptics say the FairTax and massive tax reform is impossible to enact. We will see. What I also know is that we won’t have a chance if we don’t have the courage and the leadership in Congress to see the task through to the end.

That is where Huck PAC comes in, because the path to a FairTax or additional tax reform is far more certain when you walk into a room full of small government, tax-cutting Republicans.

Help me make April 15 just another spring day. Support Huck PAC and tell your friends and family to do so as well.

With deep gratitude,

Mike Huckabee

Ways To Help Today:

1) Sign up for Huck PAC emails today on our new website.

2) Make a contribution of $25 or more in support of Huck PAC.