UnFair Tax Assumptions and Goals

Since the recent debates involving declared presidential candidates, much buzz follows (former) Senator Mike Gravel, a Democrat. I didn’t watch the debates, so I haven’t followed him. But with the Internets being excited about him, I looked into his positions. I figured I wouldn’t need to look very far to dismiss him. I was right.

I saw his support for the Fair Tax, which is not quite enough for me to discount him outright. The details of his tax plan did that. For example:

There is only one one [sic] entity in the U.S. that pays taxes: the individual. Businesses and corporations do not, they merely collect taxes from consumers of their products and pass on the taxes to the government. The Fair Tax proposal calls for eliminating the IRS and the Income Tax and replacing it with a progressive national Sales Tax on new products and services. To compensate for necessities, such as food, lodging, clothing, etc there would be a “prebate” to reimburse taxpayers for the taxes paid on necessities.

I can’t figure out why he includes the (true) statement that businesses merely collect taxes. How will this help him in promoting a national sales tax? Who will collect taxes on products sold, if not businesses? But I didn’t want to get too distracted by that. “Prebate” spooked me more. So I followed his links to his more detailed explanation:

But the U.S. Income Tax system is unfair and regressive because Americans earning less than $97,400 pay a larger portion of their income in taxes than those who earn more than $97,400.

I’m not sure the data support that, or his later claim that Americans “with low or moderate incomes will automatically pay less in taxes”. But that’s a minor quibble in a sea of issues.

What sales tax rate will be applied to all new products and services?

The goal is to keep tax reform revenue-neutral. It is not a tax-cut program. Whatever the tax rate on new goods and services that will produce the same amount of money currently raised by the income tax is the sales tax rate. Best estimates indicate that the rate would be somewhere between 20 and 25%. Also, best estimates indicate that it would take a year to transition from one system to the other.

I really hate the phrase “revenue-neutral.” It’s an open (and incorrect) admission from Sen. Gravel that he’s content with the size of government. He’s wrong. And that sort of nonsense also implies that the sales tax rate will have to fluctuate to hit a target for tax-receipts. I doubt that will simplify the tax process.

Here are a few of Sen. Gravel’s basic Fair Tax facts:

Dramatically reduces the price of new products and services, estimated at 20-25%, because corporations no longer need to hide these costs in the retail prices that are now passed on to consumers. This reduction equals the present income taxes being paid.

I don’t care if the price of a book decreases from $25 to $20 if I’m still going to pay $25 after sales tax. That’s marketing, pure and simple. I suspect it isn’t particularly logical or effective marketing, either, because if I owned a retail store, I might advertise after-tax price so customers didn’t get a surprise at the register.

Businesses, and state and local governments collecting the sales tax will keep a small percentage to reimburse themselves for the cost of collecting and forwarding the funds to the U.S. Treasury.

There’s our answer to the statement about businesses collecting taxes. Not only will they continue, but they’ll interact with now-conscripted state and local governments in the collection of sales taxes. That should simplify the process none, as expected.

Encourages the re-use products [sic] and the purchase of tax-free, pre-owned products.

This will, of course, reduce the purchase of new, taxable products. That should do well for the bottom line for businesses, as well as the revenue-neutral mandate. Elsewhere, Sen. Gravel also talks about how bad “exceptions” are in the tax code, because they allow “wealth” to game the system. Isn’t zero tax on pre-owned items an exception?

Eliminates corporate taxes and the costs of compliance. These costs are currently hidden in the price consumers pay for the company’s product or services [sic]

Again, won’t there be compliance costs with state and local governments, as well as compliance costs with tracking the sales tax? Will they not be “hidden” in the price shown to consumers?

All that’s enough to induce fits of laughter, but we must look at the Prebate:

One of the most exciting features of the Fair Tax is the monthly payments to individuals and/or families to reimburse them for the tax they pay on the essentials of life (food, shelter, clothing, medicine). The amount of the Prebate is calculated by multiplying the cost of essentials by the tax rate. The resulting tax is divided into 12 equal payments and sent on the first of each month to consumers who have registered annually for the program. The progressiveness of the Fair Tax can be determined by adjusting the amounts selected for the prices paid for essentials, which should not be taxed in the first place. However, giving these essentials an exception from the sales tax opens the door for wealth to game the system and we are back with the problems we have in the income tax system.

Exciting? Right there, I’m done with Sen. Gravel. But looking at the prebate, I can’t comprehend how anyone can honestly imply that politicians won’t game that system. Also, how can we define one equal amount for each person’s basic food, shelter, clothing, and medical needs? Just assessing food, will Sen. Gravel argue that a petite, 5’1″ woman has the same food need as a muscular, 6’6″ man? How will the government account for this? Not with exceptions, right? Those would be bad. So what is it? Everyone gets 4 steaks, 12 chicken breasts, 5 pounds of bacon, 24 eggs, 1 bunch of carrots, 4 heads of lettuce, 1 pound of broccoli, 2.5 gallons of milk, and 6 cookies? I wouldn’t like that “average basket”.

I dislike the Fair Tax already, but these details are horrendous and show that Sen. Gravel’s plan is little more than the same belief that individuals serve government.

Here’s video explanation from Sen. Gravel at YouTube.