It's Time for a Second Tax Revolt

Ken Hoagland

2/11/2010 4:02:54 PM - Ken Hoagland

More than 200 years ago a new idea about the rights of individuals and the rights of government began as a tax protest in Boston Harbor. “No taxation without representation” was the rallying cry that led to the new concept that all government power and authority should derive from the consent of those governed. Is a second American tax revolt now needed to restore that noble but increasingly tattered idea?

Somehow, these many years later a new American aristocracy is taxing generations of future citizens, not even yet born, in order to secure mind-numbing levels of national debt today. With government debt now totaling more than $500,000 per household, the voice and best interests of the average American seem lost. We have taken a destructive national path of spending beyond our means that retards job creation, shreds responsible fiscal policy and undermines the pursuit of happiness itself.

The foundation for the second American tax revolt might very well be found in HR25, the long-pending FairTax legislation that most in Washington love to hate. The FairTax replaces all federal taxes on income with a simple and transparent tax on personal retail consumption. It raises the same amount of revenues now raised but in a way that helps the economy rather than hurting it and, most importantly, doing so in a manner that restores the role of the American citizen. In one stroke the earnings of American citizens are again defined as belonging, first, to the citizen, not to the federal government. No single piece of legislation in the history of the nation would do more to shift power from our government back to the individual citizen.

Today our federal taxes are hidden from plain sight through withheld payroll taxes and by embedding and hiding tax costs in the price of American goods and services. The relationship between personal wealth and the cost of government has been effectively hidden, making almost impossible any real check and balance on government spending and self-defeating debt. For candidates from both parties, the promise of new spending buys elections and to many citizens it is “free money" instead of "our money" that is being thrown around like Monopoly paper. The FairTax ends this destructive sleight-of-hand and establishes that the fruits of our labors belong first to us with taxes paid out of the entirety of what we take home in our paychecks.

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But the most important virtue of the FairTax is how it makes the cost of the federal government both visible and obviously connected to personal wealth. The price tag for federal spending appears on every sales receipt of new goods purchased. By eliminating all federal withholding and payroll taxes, the FairTax brings federal taxation into the open so that every consumer can first see and then fairly debate the cost/benefit of devoting so much personal wealth to so much government spending. It is a desperately needed awareness if we are to control our government.

The FairTax doesn't pit the poor against the rich or Wall Street against Main Street. While every economic level benefits under the FairTax, the poor and middle class see the greatest immediate tax benefits. If there are losers it is congressional committees who can no longer sell off pieces of the tax code, illegal immigrants and those in the $1.5 trillion a year underground economy who become taxpayers as consumers, and foreign producers who now enjoy a tax advantage over American manufacturers.

The FairTax shifts national taxation away from what makes the economy stronger — work, savings and investment — to what comes out of the economy — consumption. It dramatically expands the tax base so that nearly every American sees a tax reduction. The average tax bill (adding together Social Security/Medicare and income taxes) now amounts to more than 30 percent of everything earned. The FairTax caps taxation at no more than 23 percent of what is spent. In essence, those who spend more, pay higher taxes without exceptions granted by Congress to the favored few who can afford to employ powerful tax lobbyists. Bringing home paychecks without federal withholding and payroll taxes first deducted also creates a permanent stimulus of the economy and shifts taxation decisions to individuals through their consumption choices.

The FairTax protects the poor and middle-class in several ways. First, a monthly “prebate” paid to every American family reimburses the FairTax paid on retail spending up to the poverty level--wiping out federal taxes on the poor including the highly regressive FICA payroll tax. For a middle-class family of four, the prebate allows more than $28,000 of federal tax free spending a year on top of an overall tax reduction. This prebate slams the door shut on the $1.5 billion a year tax lobby industry and eliminates Congress ability to sell tax breaks, complicate the tax code and play mischief with our economy. Advanced economic modeling shows that the poor and middle class are the biggest beneficiaries of the FairTax in terms of tax reductions.

At the same time, shifting away from taxing labor, manufacturing, investment and upward mobility itself will make the United States the most favorable tax environment in the world. This will bring trillions of dollars of private investment, now offshore, into our economy. Without borrowing against the future earnings of our offspring (another case of taxation without representation), these private investments create jobs, better benefits and a new era of economic growth where productive American workers are again in high demand. In addition to attracting huge investments to our economy, the FairTax eliminates the built in tax disadvantage now suffered by American producers that is helping kill off the "Made in America" label. The FairTax is fair, simple and transparent unlike the 67,500 pages of income tax regulations that require more than $300 billion a year in tax preparation costs.

The income tax system is very good for Washington and very bad for the rest of us. Because the FairTax ends the "royal treatment" of those who sell tax breaks from Congressional committees, exposes the cost of the federal government and ends the lucrative tax lobby business in Washington, D.C. it will take another tax revolt to trump the narrow self-interests of Washington insiders. That work has begun. The good and bad news is that a relative few but politically powerful and influential Americans profit richly from the corrupted tax system. With all their profits and power, can they be bested by hometown Americans across the political spectrum? Only if we remember that the first American tax revolt won us the right to do it again.