McCain calls for "alternative tax system"...uses the term "Fair Tax"...goodbye, middle class

[Amerigo Vespucci]

This adds weight to the possibility of Huckabee as McCain's VP, and the threat of a "National Sales Tax" (a.k.a. "The Fair Tax")...

McCain to Seek New Tax Cuts, Spending Curbs in Economy Speech

By Matthew Benjamin and Alison Fitzgerald

April 15 (Bloomberg) -- John McCain will propose new tax cuts and spending reductions in a speech today, laying out a plan that would give the federal government a central role in reviving the sagging U.S. economy.

The presumptive Republican presidential nominee will seek an alternative tax system, a temporary moratorium on gasoline taxes and a doubling of the tax exemption for dependents to $7,000 from $3,500, according to excerpts of his speech released by his campaign.

He also will propose plans for affluent Americans to pay more for the Medicare drug plan and for any homeowner in danger of foreclosure to receive a government-guaranteed mortgage.

``Economic policy is not just some academic exercise, and we in Washington are not just passive spectators,'' McCain, 71, will say, according to the excerpts. ``We have a responsibility to act. And if I am elected president, I intend to act quickly and decisively.''

``It is not enough, however, to make little fixes here and there in the tax code. What we need is a simpler, a flatter, and a fair tax code,'' he will say.

http://www.bloomberg.com/apps/news?pid=20601070&sid=apSZB3os2_iQ&refer=home

FairTax, Flawed Tax
By BRUCE BARTLETT
August 25, 2007

Former Arkansas Gov. Mike Huckabee's unexpectedly strong second-place showing in the recent Iowa Republican straw poll is widely attributed to his support for the FairTax.

For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS.

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other sales tax is calculated, with the tax on top of the price, yields a rate of 30%. (This is called the tax-exclusive rate.)

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

This legerdemain is done solely to make revenues under the FairTax seem larger than they really are, so that its supporters can claim that it is revenue-neutral. But for the government to afford to purchase the same goods and services, it would have to raise spending by the amount of the tax it pays to itself. The FairTax rate, however, is not high enough to finance the higher spending it imposes. Therefore the proposal only works if federal purchases are cut by 30%, close to $300 billion -- the increased cost imposed by the FairTax.

Similarly, state and local governments would have to pay the FairTax on most of their purchases. This means that it is partly financed by higher state and local taxes. It's also worth remembering that state sales taxes now average 6%, which means that the total tax rate will be 36% on retail sales.

State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles. But the FairTax would apply to 100% of services, including medical care, thus increasing their cost by 30%. No state comes close to taxing services so broadly.

Consumers would also find themselves taxed on newly constructed homes. Imagine paying 30% to the federal government on top of the purchase price of your next house.

Since sales taxes are regressive -- taking more in percentage terms from the incomes of the poor and middle class than the rich -- some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income.

Aside from the incredible complexity and intrusiveness of tracking every American's monthly income -- and creating a de facto national welfare program -- the FairTax does not include the cost of this rebate in the tax rate. As noted earlier, the FairTax is designed only to match current revenues and does not cover any increased spending that it may require. Since the rebate will cost at least $600 billion the first year, either federal discretionary spending would have to be cut by 60% or the rate would have to be five percentage points higher than advertised.

Rejecting all the tricks of FairTax supporters and calculating the tax rate honestly -- by including the higher spending that it mandates and by being realistic about what could actually be taxed -- professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.

A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).

I've emphasized problems with the FairTax rate because public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%. But there are also massive technical and administrative problems with collecting all federal taxes at the checkout counter and relying entirely on state governments to collect the federal government's revenue.

Among the problems: What possible incentive would the states have to be vigorous in their federal tax collections? What is to stop them from slacking off and giving their citizens a tax cut at federal expense? What about states with no sales taxes? What's to stop people from bypassing retail outlets and buying their goods from producers or at wholesale, tax-free?

Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal.

Yet all but six states now have state income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

Mr. Bartlett was deputy assistant secretary of the Treasury for economic policy from 1988 to 1993.

http://online.wsj.com/article/SB118800635034508655.html

[GoesTo11]

1. Same tax rate for rich and working class? Makes me bitter.

Flatter tax code = same rates for rich and working class. He thinks Bush's tax cuts weren't enough of a handout to the rich.

[chelsea0011]

2. Freeze on gas tax??? That's not what's driving up the price. All that

will increase oil profits and freeze stae money. How about a freeze on gas prices....period!!!!!!!!!

[sinkingfeeling]

3. Could someone explain to me why he wants to increase the dependent exemption to $7K?

This is on the same day that all 'news' are carrying a story that aid to divorced women and unmarried mothers is costing $112 billion in taxpayer money. Why do Republicans want to increase per child exemptions? Isn't that an incentive to some to have 'another' child?

[GoesTo11]

6. "FairTax" has big exemption then basically flat rate

At some income levels, you might actually be better off.

For example, if the total exemption (for a family of 4) plus standard deduction rises from 25000 to 40000, but the lowest rate goes from 15% to 30%, then if you earn 40,000, under the old system you pay 15% x (40000-25000) = 2,250. Under this new system you would pay 0.

But if your household income is 80,000 then under the old system you pay 15% x (80,000-25,000) = 8,250. Under the new system you would pay 30% x (80000-40000) = 12,000.

If you were making $10 Million, then the exemption basically doesn't matter and instead of 35% you now pay 30% (old tax: a little less than 3,500,000, new tax: a little less than 3,000,000)

Helps at the very bottom. Hurts the middle. Helps the top. And if it doesn't increase the deficit, any dollars that help the top (and to a small extent the very bottom) have to come straight from the middle.

[stahbrett]

4. Some "quibbles" with Bartlett's opinion piece

The monthly rebate proposed by the FairTax plan is NOT based on each household's income. Instead, it's based on the number of people in the house with valid Social Security numbers, and the U.S. poverty rate for that size of a household.

So if the government says that the poverty level for a family of four is $20,000 a year, and the sales tax is 30%, then a family of four would get a monthly rebate check of $500 ($20,000 x 30% = $6,000, divided by 12 months = $500). So a family of four that spends exactly $20,000 a year on taxable goods and services would wind up paying no federal sales tax, AND anyone in the household who earns a paycheck will no longer have federal withholding, Social Security, or Medicare taxes/fees withheld.

As far as states - they would get a percentage of the federal sales tax to offset their costs in collecting the tax. Most states do have a sales tax - the few that don't could either start collecting it, or businesses in those states would need to send the taxes directly to the federal government (it's not like businesses aren't already used to sending in taxes to the government).

Note - I am not in favor of the FairTax plan as it currently is devised. BUT - I think that it could be possible to modify it in such a way as to make it a better system than we have now. Because let's face it - the current system is awful.

I'd like to see something that would implement something similar (but improved) to the FairTax, but it would only take effect as the income tax is reduced. So if a 5% FairTax rate would replace X% of revenue from the taxes that it is supposed to replace, then the law that implements the FairTax would only become effective if those other taxes were reduced to offset that amount of revenue to make it all revenue neutral. Then we could all see how well/poorly it worked, without having our current system completely removed.

[TechBear_Seattle]

5. I don't see why so many people think a progressive tax is hard to figure out

It is really very easy.

1. Divide income into two piles, necessary expenses and discretionary. Necessary expenses represent basic housing, food, medical care and education, ie the amount of money spent on things that are genuinely necessary. Everything else is discretionary. Income going to necessary expenses is not taxed; only discretionary income is taxed. If there is no discretionary income, there is no income tax.

2. Determine the ratio of necessary expenses to discretionary income to determine the rate at which discretionary income is taxed. If discretionary income makes up a small part of total income, it will be taxed at a low rate. If discretionary income makes up a larger part of total income, it will be taxed at a higher rate. If discretionary income is at or above a certain ratio of total income, it will be taxed at a maximum rate.

The complexities of the US tax structure arise out of an effort to generalize. The four major tax categories -- single, single head-of-household, married and married filing separately -- serve to set four standardized levels of necessary expenses. This basic level can then be customized to fit a family's individual situation through exemptions, ie ways to move income from taxable "discretionary" to non-taxable "necessary." Some discretionary actions, such as charitable contributions and education, can be partially or fully exempted as well; this is to encourage individuals to support charitable actions and to become more productive members of society. Some individuals can also claim tax credits, which can increase a person's tax refund.

The whole point of withholding is to make paying one's income tax bill easier. Typically, withholding comes to about 20% of your income. If your final end-of-year tax rate is below that amount, you will get a refund of the withheld amount; if it is higher, you will have to send in more money. The per paycheck withholding is generally small, and having it taken out is much easier to bear than having to send in a very large check each year. Even if you owe taxes, it is easier to send in a check for $320 than a check for $6800.

Why are these such difficult concepts to understand?