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Tuesday, January 29, 2008

Another Response To John Bowyer's Misinformed Criticism Of The FairTax

Looks like lots of people read John Bowyer's January 9, 2008 column where he sarcastically questions the FairTax. Over at TownHall, William Phelps has a response to Bowyer's questions. Here are some of the more pertinent ones:


Q: Are sales taxes, where they area currently in operation, simple and free from special interest lobbying?

Since there are no exemptions and no tax shelters under the fair tax, there would be no work for the tax lobbyists in Washington who currently manipulate the income tax for the special interests.

Because the fair tax includes the prebate reimbursing on the necessities of life, there is no need for exemptions.

Fair tax is not based on any existing system, but was developed based on original research by leading institutions and economists on the charge to develop of the best tax system for the federal government.


Since the tax applies uniformly to all new goods and services a tax lobbyist would have to get Congress to consent to changing the tax on one single commodity, say lumber. However, in order to make up the shortfall, Congress would have to raise the tax on a comparable commodity, say plumbing supplies. Such a manipulation of the tax code could not be hidden and would immediately be seen by consumers (as the FairTax applies at the retail level where consumers pay the bill) and Congress would face major negative publicity as a result, not just from constituents, but from business leaders of other industries. That would be incredibly bad for re-election prospects.

Q: Isn't it that the rate is not really 23% but 30% at least, because it's tax inclusive?

Bowyer doesn't understand that inclusive and exclusive ways of computing rates don't change the dollar amount of the tax. Either way the tax is the same $23 per $100. Computed the same inclusive way as the income tax, the fair tax is $100 -$23 = $77. Computed the exclusive way it is $23 divided by $77. =30%. If you computed the income tax on the exclusive basis, the 25% bracket would be the 33% bracket, or $25 divided by $75 =33%. Either way it is the same $25 tax per $100.


This just shows how desperate opponents of the FairTax are to find a flaw in the system. They parse words and play with numbers to make people think the FairTax is more than it really is. But as Phelps notes, it does not matter what rate you believe in, in real numbers, the tax on a $100 purchase will always be $23.

Q. How do we determine interest rate portion of the mortgage?

Just as now, the market rate is the interest rate, but market interest rates will fall to the level of tax free bonds today which will make it easier for home buyers who will be paying the purchase price in pretax dollars, rather than after tax dollars under the income tax. The borrower and lender will continue to state the interest rates in the debt instruments, but this is irrelevant to how the home would be taxed.

The fair tax applies to the purchase price of the home, if it is new.


This last question (as well as the question about used goods being taxed) is why I firmly believe that Bowyer never even read the FairTax Plan. Had he done so, these questions would have seemed stupid to him.

You can access the complete column on-line here:

A Fair Defense For The Fair Tax
William Phelps
TownHall.com
January 28, 2008

1 comment:

Mark said...

I wish the fairtax would work. I loved it when I first heard of it.

I wanted it to be true. The tax code we have is horrible, mostly cause it punished earned income -- aka work.

But Fairtax is based on several fatal fallacies.

In fact, it would be impossible -- not just difficult -- for the Fairtax to last if it were enacted.

The major problem -- the fairtax would have to be 40% or more, just because of ONE math mistake

And that is -- the impossibility of the federal government paying taxes to the federal government.

Oh, I know that fed gov paid FICA for their employees, and that sort of thing. But thats money it pays to its employees, or an account for their employees.

Thats entirely different than taxing yourself on purchases you made, which is in effect, sending yourself a check every time you buy something.

When the US Navy has to send 4 billion in sales tax on an aircraft carrier -the Treasury has to pay that 4 billion. In no way is that a gov receipt that it can spend. Therefore, its a defacto exemption -- since no money is gained by the treasury.

Boortz insist that the "federal government itself will be a major taxpayer " (Page 148 FT BOok)


But thats like me paying myself 500 dollars a day to cut my grass. I can write the check to myself, I can even deposit the check. But I dont make 500 dollars.

If I could make money by paying myself to cut my grass, I would pay myself 500,000.

This one fallacy (there are others). The tax rate would have to be 35-40% to make up for this one fallacy.

A 40% sales tax on new homes, on cars, on rent -- would actually be preposterous.

Here is another major fallacy -- that people will be able to afford the sales tax on items, because they get to keep their entire paychecks.

That might be true -- if everyone had a paycheck, and no one had huge bills from cancer, or other diseases or health conditions.

People living in nursing homes dont have paychecks. But they will have sales taxes of 25,000 a year, just on the cost of living in the nursing home.

Cancer patients -- could easily have 50,000 sales tax on surgery, chemo, and rehab in hospital.

The Cancer patient might not even MAKE 50,000 a year - but get a tax bill for that amount.

Their insurance might have paid the 250,000 for their medical care. But the insurance isnt going to pay the tax.

When cancer patients, nursing home patients start to see these taxes, they will scream bloody murder.

And congress won't make them pay the sales taxes. Any congressman silly enough to insist cancer patients pay a tax greater than their income, won't be re-elected.

So health care get an exemption.

Thats a 460 billion dollar shortfall in the Fairtax budget -- because Fairtax depended on taxing health care.

Ive just shown two fallacies -- 1)government taxing itself, 2) health care paying 460 billion in taxes. Together, thats 800 billion or so shortfall in the Fairtax receipts.

There are OTHER fallacies - but just these two, would make the tax rate over 60%.

I would actually love to see the Fairtax enacted, because I think our country needs a wake up call. Not about taxes so much - -but about our addiction to "easy answers" and believing propaganda.

I think it would be great for the us to learn that the truth matters, math matters.