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Opening Arguments

Flat or fair?

Do you think the current tax code should be scrapped? If so, what would you replace it with -- a flat tax or the FairTax, which is essentially a national sales tax. Democrats don't like such talk at all, and the Republicans seem to be sort or circling around the FairTax. The idea has its critics, including a former deputy Treasury secretary writing in The Wall Street Journal:

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 (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.

His critcism of the FairTax seem too harsh to me, but there are plenty of passionate advocates who can and will answer him. I think there are things to recommend either a sales tax or a flat tax, if we were just considering them in isolation. But we can't -- we also have to take into account the fact that the government isn't capable of being "revenue neutral," even if a reform were to start that way. So the question is: With which replacement tax would we be worse off once the government decides it isn't getting enough revenue from it?

With a flat tax, the danger is that the brackets will start to creep back in as politicians and lobbyists start carving out exceptions again. With every favor granted, somebody else will have to take up the slack. With the sales tax, the danger is that the government will eventually realize it can have a sales tax and an income tax, as most states do. So I'll go with the flat tax for now -- the worst that can happen is that we eventually end up back where we started. With the FairTax, we could end up with onre more thax than we already have.

It's all moot anyway, I suppose. The tax code isn't just about money. Too many people are too invested in the opportunities for manipulation built into it. No way they're going to give it up.


larry morris
Mon, 08/27/2007 - 8:07am

Yes, think of the (literally) thousands of people who would be out of work if we trashed the current tax code. Not going to happen, ... just like we're not going to stop growing or making tobacco products - it would put too many people out of work. I would be the first to say we should get rid of the IRS and replace it with something even I could understand, but I don't see it happening in my lifetime, ...

Bob G.
Mon, 08/27/2007 - 8:16am

I used to WORK for the IRS...and think we should scrap it...how's THAT for loyalty?

My take is that as long as we have SO many "options" for unscrupulous people to take advantage of (read tax laws), things aren't going to change all that much.

Whether it's property tax (and their counterparts called abatements), a flat tax, a fair tax, or even income tax, there will always those that skirt the system, making everyone ELSE pay more (that would be US).

Too many of the wrong people have their hands in the right pockets already to affect any change in the near future.

That alone needs to change.


Mon, 08/27/2007 - 9:59am

Bob G. nailed it.

"Too many of the wrong people have their hands in the right pockets already to affect any change in the near future."

Too many influential individuals/corporations/groups (whichever) are making a lot of money the way things are now. "They" won't even let this type of change make it to a vote.

and Larry... more so than the unemployment issue that stopping tobacco farming/production would cause - its the BILLIONS and BILLIONS of dollars in lost revenue. I think that is the real issue. No double standard there.

Mon, 08/27/2007 - 5:35pm

"So I

A J Bogle
Mon, 08/27/2007 - 7:52pm

Well first off any tax system devised by a nutty celebrity cult based on a cheezy 1950s science fiction novel can't be the greatest idea.

Flat and the so called "fair" tax based on higher sales taxes by their very nature are regressive taxes that shift the largest burden of tax paying to the lower and middle classes.

The only real fair tax is one that is progressive that scales upward as wealth increases. The middle and lower class should not be paying any income tax at all. As Theodore Roosevelt has said, the wealthy should pay more as they benefit more from the privileges of a free society.

One tax that should be done away with altogether is the homeowners property tax - of all the unfair tases this is absolutely the worst.

JP Davis
Tue, 08/28/2007 - 3:04am

The Fair Tax idea is very strong. All people would pay a proportionate percentage based on their earnings, and deductions would be eliminated. Flat taxes are as fair as we will get for an income tax. Consumption taxes are the fairest, because each person pays as he/she consumes. 20th Century income taxing has always been inherently unfair because of the assumption that higher tax rates for higher income earners, death taxes, interest taxes, are actually collected. What a wonderful, practical way to help our country to get out of the sick, bloated current tax system which is favors the wealthy who have the means to shelter their income. This would eliminate those shelters. Hallelujah. Don't be deceived by those who wish to continue the current mess in Washington that punishes honest, hardworking citizens of our country.

A J Bogle
Tue, 08/28/2007 - 7:16am

JP - the real way is to start cracking down and enforcing the rich tax dodgers.

The so called fair tax is really just another regressive tax - because lower and middle income people will inevitable spend more of their money on consumable taxes than the wealthy will.

Do not be fooled by the orwellian language of "fairness"

Wed, 08/29/2007 - 1:04pm

I am on the doorstep of retirement after working and saving for 40 years and paying taxes on my earnings.
The Fair Tax would tax that savings heavily again as it was spent. What's fair about paying a heavy tax on the same money twice?
I vote for the flat tax.