Predicted effects of the FairTax

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This article describes the predicted effects of the FairTax. For the main article, see FairTax

The FairTax Book, co-authored by Neal Boortz and John Linder, was published on August 2, 2005, as a tool to increase public support for the FairTax Plan.

The neutrality of this article is disputed. Please see the discussion on the talk page.

The following is part of the FairTax article, a proposal for changing United States tax laws to replace all federal personal income taxes, payroll taxes, corporate taxes, capital gains taxes, self-employment taxes, gift taxes and inheritance taxes with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The FairTax is expected to have positive ramifications for tax burden visibility, tax compliance cost (efficiency), economic growth, international business locality, and U.S. international competitiveness. Other indirect effects that are commonly discussed include the home mortgage interest deduction, charitable giving, state and local government debt, law enforcement, and illegal immigration.

[edit] Predicted benefits

[edit] Tax burden visibility

FairTax supporters assert that the proposal would make the cost of federal government highly visible as consumers would see most of this cost in a single tax paid every time they purchase a good or service. Under the current tax system, the federal government collects revenue through a wide variety of taxes on individuals and businesses. Thus the cost of government is spread out among many different avenues and may not be fully visible to individual citizens.^[1] For example, corporate taxes and compliance costs are passed partially from producers to final consumers when producers include those costs in the retail price of goods and services. The use of income tax withholding has also reduced the visibility of taxes. The U.S. Department of Treasury describes (in the history of the income tax) that withholding “greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.”^[2] Proponents claim that the FairTax would greatly reduce, if not eliminate, the "K Street tax lobbyist's" ability to influence legislators to manipulate the U.S. tax code for the benefit of their clients.^[3] Due to the transparency of the FairTax, the American people would be aware of any changes to the tax base from exemptions because a change in tax rate would be reflected. Politicians would have to justify to the American people any tax increase or decrease. In addition, the FairTax would remove the use of class warfare in taxes and the use of tax exemptions for corporate welfare.^[3]

U.S. Rep John Linder holding the 132 page FairTax Act in contrast to the more than 50,000 pages of tax code laws and regulations currently in effect.

[edit] Effect on tax compliance costs

The cost of preparing and filing all business and personal income tax returns is estimated to be $250-$300 billion each year. Approximately the same amount of money was estimated for calculating the tax implications of business decisions. That means approximately $500 to $600 billion was spent in the process of collecting roughly three times as much in taxes. According to a 2005 report from the U.S. Government Accountability Office, the efficiency cost of the current tax system — the output that is lost over and above the tax itself — is between $240 billion and $600 billion every year.^[4][5] Supporters argue that the FairTax system would reduce these compliance and efficiency costs by 90% and return a larger share of that money to the productive economy. With the FairTax system, the cost of compliance would be built into the tax by allowing the business and the State to keep 1/4 of 1% of taxes collected.^[6]

[edit] Promotion of economic growth

In an open letter to the President, the Congress, and the American people, seventy-five economists, including Nobel Laureate Vernon L. Smith, stated that the FairTax would boost the United States economy.^[7] According to the National Bureau of Economic Research and Americans For Fair Taxation, GDP would increase almost 10.5% in the year after the FairTax goes into effect.^[8] Real investments could increase by as much as 76% initially and remain 15% above present levels. In addition, the incentive to work would increase by as much as 20%, the economy’s capital stock would increase by 42%, labor supply by 4%, output by 12%, and real wage rate by 8%. Further, studies of the FairTax at Boston University and Rice University suggests the FairTax will bring long-term interest rates down by as much as one third.^[8] As falling tax compliance costs lower production costs, exports would increase by 26% initially and remain more than 13% above present levels. According to Professor Dale Jorgenson of Harvard University’s Economics Department, revenues to Social Security and Medicare would double as the size of the economy doubles within 15 years after passage of the FairTax.^[8][9]

Opponents offer a study commissioned by the National Retail Federation in 2000 that found a national sales tax bill filed by Billy Tauzin (Individual Tax Freedom Act) would bring a 3 year decline in the economy, a 4 year decline in employment and an 8 year decline in consumer spending.^[10] Proponents point out that the FairTax has different features than the Tauzin bill and that the study done by the NRF does not take into account the removal of embedded tax costs or the inventory credit that refunds 23% of the cost of held inventory. Research in 2006 on the FairTax plan by Arduin, Laffer & Moore Econometrics shows that consumption would increase by 2.4% in the first year of the FairTax. The increase in consumption would be fueled by the 1.7% increase in disposable (after-tax) personal income. By the 10th year, consumption would increase by 11.7% over the current tax system; and disposable income would be up by 11.8%.^[11]

[edit] Effect on international business locality

Global corporations consider local tax structures when making planning and capital investment decisions. Lower corporate tax rates and favorable transfer pricing regulations can induce higher corporate investment in a given locality. Such investment translates into higher economic growth. Ireland's real GDP growth was almost three times higher than the European Union average between 1991 and 2000. During the decade, Ireland taxed corporate profits from manufacturing at 10%, the lowest in the EU.^[12] The United States currently has the highest combined statutory corporate income tax rate among OECD countries.^[13]

Bill Archer, former head of the House Ways and Means Committee, asked Princeton University econometricists to survey 500 European and Asian companies regarding the impact on their business decisions if the United States enacted the FairTax. 400 of those companies stated they would build their next plant in the United States. 100 companies said they would move their corporate headquarters to the United States.^[14]

[edit] Border adjustability

The United States is the only one of 30 OECD countries with no border adjustment element in its tax system.^[15] Proponents state that because the FairTax would automatically be border adjustable, the 17% competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home.^[9] Leo Linbeck, chairman of FairTax.org, has stated that U.S. manufacturers and sellers can not complete successfully with foreign producers because of U.S. tax policy. "The Ways and Means Committee is tasked with writing the taxation laws that raise revenues for the nation but the fact that foreign nations routinely tax U.S. products upon entry and that these nations forgo national taxes on exports to the United States is a Ways and Means blind spot that has all but killed the 'Made in America' label".^[16] American companies doing business internationally would be able to sell their goods at lower prices but at similar margins, and this would bring jobs to America. In addition, U.S. companies with investments or plants abroad would bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment. This would result in imports and domestic production competing on a level playing field. Exported goods would not be subject to the FairTax, since they would not be consumed in the U.S.; but imported goods sold in the U.S. would be subject to the FairTax because these products would be consumed domestically.^[9]

[edit] Repatriation of offshore accounts

In The FairTax Book, Boortz and Linder assert that an estimated ten trillion dollars is currently held in foreign accounts, largely for tax purposes. They predict that enactment of the FairTax would result in a large portion of those funds being transferred to U.S. banks, where they would become available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States instead of the countries where those funds are currently held.^[3]

[edit] Other indirect effects

Like any policy change, the FairTax proposal would create several effects in other markets:

[edit] Home mortgage interest deduction

The current federal tax law allows individuals to deduct the home mortgage interest costs from taxable income.^[17] Home mortgage interest is one of the few personal expenditures that is treated in this manner. Someone paying a 25% income tax rate would receive $250 back from the government for $1,000 expended in home mortgage interest.^[17] While there is no deduction for payroll taxes and most do not itemize the income tax deduction for full benefit, this preferential treatment of mortgage interest encourages households to spend relatively more of their income on housing than would otherwise be the case.

The FairTax would be tax free on mortgage interest up to the basic interest rate as determined by the Federal Reserve. The interest above the basic rate applied by the lender is a financial intermediation service and is subject to the FairTax.^[18] Payroll and income taxes would not be paid under the FairTax, so there would be little change in the tax cost of the loan. However, since several areas would be tax free under the FairTax plan, it could decrease the incentive to spend more on homes in favor of savings, education, or other investments.

[edit] Charitable giving

Like the home mortgage interest deduction, charitable giving receives preferential treatment under current tax law allowing individuals to deduct the donation, to certain charities, from taxable income. Someone paying a 25% income tax rate would receive $250 back from the government for a $1,000 donation. While most do not itemize the deduction for full benefit, this encourages households to donate more of their income to charity than would otherwise be the case. As the FairTax would only tax new retail purchases, donations to charity would also not be taxed.^[18] FairTax advocates state that total philanthropy as a percentage of GDP has held steady at around 2% for at least two decades regardless of changes in income tax deductibility. According to the National Bureau of Economic Research, GDP would increase almost 10.5% in the first year after the FairTax goes into effect. FairTax advocates claim this economic boost, along with an estimated 8% real wage increase, would strengthen charitable giving.^[8][9] The FairTax would also remove the prohibition of political speech by non-profits therefore removing the threat to non-profit status. Taxable property and services purchased by a qualified non-profit or religious organization 'for business purposes' would not be taxable.^[19]

[edit] State and local government debt

The federal income tax system provides tax advantages to state and local municipal bonds.^[20] Specifically, the interest paid on such securities is exempt from federal taxation. This tax discount allows state and local governments to issue debt at low yields, which reduces their interest costs. By eliminating income taxes, FairTax would remove the federal tax advantage of holding state and local bonds as all investments would become tax free.^[21] However, state and local governments often exempt their own taxes when issuing bonds, so they could still contain some advantages.^[20] Issuers may have to offer higher interest rates to attract investors.

[edit] Effect on law enforcement and crime

Under current tax law, avoidance of income tax is sometimes used to prosecute members of organized crime syndicates to convict on charges of tax avoidance and tax evasion when insufficient direct evidence exists for other crimes. The most famous example of this is the 1931 conviction of Al Capone, but this tactic continues to be used today. Under the FairTax proposal, this avenue of law enforcement would change as there would be no income tax and, therefore, no income tax evasion. However, it would afford opportunities to bring charges of failure to collect tax on illegal products and services, a tactic already employed using tax stamp laws. Instead of being guilty of income tax evasion, they would be guilty of failing to submit sales tax.

[edit] Illegal immigration

The current system of taxation, in many cases, provides incentives for illegal immigrants and companies that employ them. It is estimated that approximately 5 million illegal immigrants are paid off the books ("under the table") in cash allowing employee and employer to avoid paying federal taxes estimated at $35 billion a year.^[22] Advocates claim the FairTax would provide incentive for illegal immigrants to legalize as they would otherwise not receive the FairTax rebate. Illegal immigrants would pay the maximum effective tax rate. There would also be no federal tax savings to companies that hire illegal immigrants. However, employers could still benefit by not providing other payment options such as unemployment and workers' compensation. Due to the FairTax burden, wage increases would be required for illegal immigrants to retain the same buying power. This would allow Americans to more effectively compete for jobs held by illegal immigrants.

[edit] See also

• Americans For Fair Taxation
• FairTax

[edit] Notes

[edit] References

• Boortz, Neal, Linder, John (2006). The Fair Tax Book, Paperback, Regan Books. ISBN 0060875496.
• Ose, Al (2002). America's Best Kept Secret Fairtax: Give Yourself a 25% Raise, Paperback, Authorhouse. ISBN 1403391890.
• McCaffery, Edward, J. (2002). Fair Not Flat : How to Make the Tax System Better and Simpler, Hardcover, University Of Chicago Press. ISBN 0226555607.
• De Vlieghere, Martin; Vreymans, Paul (2006-09-11). Path to Sustainable Growth. Lessons From 20 Years Growth Differentials In Europe (4.9Mb pdf). WorkForAll. Retrieved on 2006-10-14.

[edit] External links

Wikiquote has a collection of quotations related to:

Taxation

• FairTax.org - Americans For Fair Taxation

Legislation

• H.R.25: FairTax Act of 2005 - text of bill H.R.25
• S.25: FairTax Act of 2005 - text of bill S.25