Last Thursday Townhall contributor Hank Adler published a column on this website entitled “A Hard Look At The Fair Tax (sic)”. Almost immediately the emails started pouring into my show – literally by the hundreds – urging me to post a response to Adler’s rather stinging critique of the FairTax.
Since Congressman John Linder, the author of H.R. 25, The FairTax Act, and I wrote “The FairTax Book” in 2005 we’ve seen an unprecedented and ever-growing nationwide interest in this tax reform idea. Let’s face it, you have to be doing something to capture the imagination of the American people to have a book on taxes debut No. 1 on The New York Times Bestsellers List. There are some, though not in what we call the mainstream media, who think that Governor Mike Huckabee’s embrace of The FairTax is an important element to his rise in the GOP presidential sweepstakes.
Now to make this column worth reading for those of you who are not familiar with the FairTax, a very quick introduction is in order.
The FairTax eliminates all corporate, business and personal federal income taxes, all payroll taxes, capital gains taxes, dividend taxes and estate taxes, and replaces them all with one embedded sales tax on the sale of all goods and services at the retail level. Tens of millions of dollars in research show that the corporate and personal income and payroll taxes that will be eliminated by the FairTax end up being paid by consumers at the retail level. The average amount of embedded taxes in the cost of everything we buy at retail is approximately 22 percent. This would mean that we are replacing the embedded cost of our present tax system (22 percent) with the embedded FairTax (23 percent).
Every household in America will receive a check or a credit to an account at the beginning of every month equal to the amount of FairTax that household would be expected to pay during that month on the basic necessities of life. Poverty figures for various family sizes from the Commerce Department will be used to calculate the size of this “prebate.” This guarantees that nobody will have to pay the FairTax on the basic necessities.
OK .. there’s your briefest of introductions. Let’s move on to the reason for this column.
Congressman Linder and I are no strangers to dealing with out-of-left-field attacks on the FairTax. When it comes to criticisms, it’s somewhat safe to say that we’ve heard it all. We’re both such strong believers in the FairTax and the massive transformation it would bring about, not only in our daily lives, but in the nature of our governance and our economy, that neither of us minds responding to substantive and well thought out critiques. We have, in fact, written a follow-up book entitled “FairTax, The Truth” that will be published by Harper Collins in February of next year.
Linder and I do, however, confess to a certain level of exasperation at having to spend the time responding to critiques proffered by those with a limited understanding of the FairTax, those who have chosen to ignore the basics of the FairTax, or those who just outright misrepresent the plan, in order, we suppose, to give support to a more damming criticism.
Helooooooooooo Hank Adler!
Adler’s column wanders (somewhat aimlessly) over 25 pages. With “FairTax, The Truth” hitting the book stores in less than three months there is no real need to use quite so much of your precious toner or ink cartridge in our response.
If someone criticized your purchase of a four-cylinder one-ton pickup truck on the basis that four cylinders simply can’t provide the power necessary to get any serious work done – and if the reality was that you were actually purchasing a hefty V-8 – you might be predisposed to ignore any other criticisms of your new truck on the basis that the critic simply doesn’t know what he’s talking about. That is the case with Adler’s FairTax essay.
At various points in Adler’s screed he exhibits a complete lack of understanding – even an awareness -- of the concept of embedded taxes. Suspecting that there is a slight chance that some of you who are devouring every word of this column share Adler’s lack of awareness of embedded taxes, a short explanation is due.
Simply put … every person, business or other entity that has any involvement at all in bringing any product or service to the retail marketplace incurs a tax cost arising from that involvement; and every one of these entities will incorporate that tax cost into whatever they charge for their labor, ideas or material goods. All of those tax costs come home to roost in the final retail cost of that product or service, to the average tune of 22 percent. Again, simply put, the FairTax removes those embedded tax costs from the price of all goods and services at the retail level and replaces them with the embedded 23 percent FairTax.
This is where you find the fatal flaw in Adler’s critique of the FairTax. Amazingly, not once in his entire 25-page essay does Adler mention the concept of embedded taxes in the price of everything we buy, or the fact that those embedded taxes will be removed by the FairTax. Not only does he not mention the embedded taxes, he doesn’t even give the vaguest of hints that he even knows they exist! To fail to understand, or to gloss over or simply ignore this crucial concept in a discussion of the FairTax is to render your entire argument lacking in credibility and barely worthy of response. But, being the argumentative type, I’m going to continue laying waste to at least some of Adler’s arguments.
Adler’s essay does not exactly flow effortlessly from point to point. So, in the name of brevity and out of a certain sense of mercy, I’ll just take aim at a few targets of opportunity here.
First of all we have this silly insistence on quoting the FairTax rate as 30 percent rather than 23 percent. This childish exercise is the favorite of people who either have a vested interest in preserving our present tax system, or who feel the need to criticize but lack the ability to make their criticism meaningful.
The FairTax is embedded in the price of everything you buy at the retail level. If you buy a $100 griddle, the price tag for the griddle will say $100. When you get a receipt for your purchase that receipt will itemized to show that $77 of the total cost will be retained by the retailer and $23 will be sent to the federal government as the FairTax. The total is $100, just as the price tag says. In most government schools across the country they will teach that the $23 going to the government is 23 percent of $100 you paid for the griddle. That, my friends, is why the FairTax is quoted as 23 percent; because it is embedded into not added onto the price of your purchase.
Another reason to quote the FairTax as an embedded tax is because it will essentially be replacing the 22 percent embedded tax already present in the price of everything you buy, as covered above.
Wait! There’s more!
• The FairTax is designed to replace the federal income tax. The federal income tax is quoted as an embedded tax. If you were to quote the income tax as an excusive tax the 25 percent bracket would be quoted as 33.3 percent, and the top bracket would be quoted as 54 percent.
• The FairTax will replace all payroll taxes. Payroll taxes are quoted as embedded taxes. If you were to quote your entire Social Security tax bill (and that includes your employer’s so-called “contribution,”) as an exclusive tax the rate would be 20.5 percent.
I don’t know, maybe it’s just me, but it seems to me that if people like Adler are so hell-bent on quoting the FairTax as an exclusive tax, why not quote the income tax and the payroll taxes the same way? Doesn’t that seem fair to you?
In case Mr. Adler is reading this … one more time. We’re replacing embedded taxes with embedded taxes. Apples to apples, you know.
Now let’s get on to addressing some of the specific points in Adler’s column. To make things easy, I’m simply going to put his quotes in a nifty little boxes, followed by my response.
Here we go:
H.R. 25 would result in an immediate reduction in purchasing power upon implementation for existing savings which have previously been subject to U.S. income taxes (double taxation).
Here Adler once again ignores the role of embedded taxes. The price of consumer goods in this country would remain essentially the same. The embedded taxes are merely replaced by the FairTax. How, then, does anyone suffer a decrease in purchasing power?
H.R. 25 would result in an on-going and significant reduction in purchasing power for many social security recipients with other sources of income or savings.
This is already getting monotonous. How does your purchasing power go down when you have the same amount of money in your pocket, perhaps more with the prebate, and the things you are buying cost pretty much the same?
H.R. 25 would result in the elimination of the safety net provided by the Internal Revenue Code in reducing Federal taxes for victims of disease and disaster, the elimination of incentives to save through pension plans or investment retirement, and the elimination of credits and deductions for child care.
What? These incentives Adler is talking about are tax deductions or credits. Of what possible value is a tax deduction or credit to someone who pays no income taxes? The income tax is gone under the fair tax; and Adler is going to sit around bemoaning the loss of tax deductions? This is like complaining that your 20% off coupons for bread are rendered worthless when the bakery starts giving bread away for free.
There are conflicting studies projecting the necessary tax rate required to achieve neutral tax revenues under H.R. 25.
Every one of these “conflicting studies” first changes the terms of H.R. 25 before they reveal that the tax rate might not necessarily be 23 percent. When the FairTax is scored as written economists agree on the proposed tax rate.
With every major conceptual change, there will be thousands of different interpretations of the rules. It would take years to sort these interpretations out. During that period, Treasury would issue volumes of rules and regulations.
Different interpretations of the rule! Oh, the humanity! And we all know that there are no differing interpretations of the rules under our present tax code, don’t we? Even the IRS can’t accurately calculate a taxpayer’s tax liability fifty percent of the time. Oh … and that part about the Treasury issuing volumes of rules and regulations. The current tax code takes tens of thousands of pages. H.R. 25 is 133 pages long.
H.R. 25 proposes a 23% “tax inclusive” sales tax rate. Sales taxes are not traditionally described in a “tax inclusive” manner. Sales taxes are traditionally described in a “tax exclusive” manner.
The FairTax is not a “traditional” sales tax. Consumer prices are traditionally quoted without the sales tax. Prices under the FairTax are quoted with the sales tax included. If Adler is so concerned about tradition, then let him sit on the sidelines while others with a view to the future get some things done.
At implementation, existing savings will have diminished purchasing power of 30%.
There’s that 30 percent silliness again .. and once again Adler completely ignores (if he’s aware of it at all) the fact that prices do not go up when the FairTax is implemented. The embedded taxes from our present tax system are removed, the FairTax is added … and we’re pretty much right back where we started. When you take money out of your savings account under our current tax scheme, and when you spend that money, you’re paying the 22 percent embedded tax. After implementation you’ll be paying the 23 percent embedded FairTax instead. Wrong, Mr. Adler. Flat out wrong.
At implementation, all of the social and business incentives, benefits and disincentives included in the Internal Revenue Code disappear:
A tax code should exist to procure the funds necessary for the operation of government, not to manipulate human or business behavior. Besides, the form of these “social and business incentives, benefits and disincentives” consist basically of tax credits or deductions. Credits and deductions are meaningless when there is no longer an income tax.
Among the “incentives” and “benefits” that Adler says will disappear we find references to the following:
Home interest deduction – encouraging home ownership
Contribution deductions - encouraging contributions to charity
Lower tax rate on capital gains - encouraging investment
Lower tax rate on dividends - encouraging investment
Come on, my friends. Are you beginning to see for yourselves how absurd these arguments are? Point by point:
• The home mortgage interest deduction is of no value whatsoever to someone who does not pay income taxes.
• People don’t contribute to charity in order to get a tax deduction. Who would give away $1000 just to save $350 on their taxes? Somehow that doesn’t seem to be a good trade to me.
• If lower tax rates on capital gains encourage investment … think what NO taxes on capital gains would do. That’s life under the FairTax.
• Ditto for dividends.
Look … I could go on and on picking apart Adler’s FairTax critique. You can see how easy this is. It’s like hunting over a baited field.
Truth is, Hank Adler certainly isn’t alone in his faulty interpretation and understanding of the FairTax. I actually took the time to read some of the comments to his essay posted on Townhall.com and came up with this incredible beauty:
23% on profits, not costs...
This is often mentioned by Fair Tax proponents (who should know better), but I don't think it carries any water. They claim corporations pay 23% (or whatever number) in taxes, and if removed, they could lower the cost of their goods by 23%.
Problem is, that is 23% on their PROFITS, not their COSTS. Most company's taxable profits rarely exceed 15% (most are under 10%, some even lose money over the course of a year).
Now please excuse my Norwegian .. but what in the wide, wide world of sports is this character talking about? A 23% tax on profits? Now we can really be charitable here and suppose that this character is referring to the average 22 percent embedded taxes in every product and service we buy … but by what incredible twist of logic can some (presumably) government-educated person even bring themselves to put that thought process on paper?
Implementation of the FairTax would constitute the biggest transfer of power from the government to the people in the history of this Republic. Perhaps that is what frightens Mr. Adler the most.