FairTax: The Truth

Neal Boortz, John Linder, Rob Woodall

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061763700
• Topic: Business
• Subtopic: Taxation
• Index: Business

The author of the #1 New York Times bestseller The FairTax Book offers a new look at the fast-growing populist tax reform movement that's poised to become a key campaign issue for 2008

In 2005, firebrand radio talk show host Neal Boortz and Georgia congressman John Linder teamed up to create The FairTax Book, the first book devoted to the FairTax movement they had been promoting for years. Riding the growing groundswell of popular support for the tax reform measure, The FairTax Book became an overnight sensation.

As the election season heats up, Boortz and Linder return to add fuel to the fire with this radical follow-up. Talking back to the critics who have grossly misrepresented the simple principles behind the tax reform measure—which would abolish the IRS and replace it with a 23 percent retail sales tax on all new goods and services—Boortz and Linder:

• Debunk myths about the tax and answer critical charges—that it would bankrupt the economy, that it would leave poor people in the lurch, that the math doesn't work

• Offer new insights into aspects of the plan not originally covered

• Show the American voter that there's still hope of replacing our currently outdated, corrupt, and punitive income tax system with a simple plan that will revolutionize the way American pays for itself.

10

THE GOOD—AND WORTH ANSWERING

With all of that silliness out of the way, let’s get to some of the “good” criticisms. This will be the MOAC (Mother of All Chapters) in this book—long, but we think you’ll agree it’s the prime cut.

In this chapter, we take a look at those criticisms we hear most often and that deserve a good explanation. These “good” criticisms come in two categories: those with a grain of truth that we can easily explain and those with a grain of truth that pale in comparison with the merits of the FairTax. Again, we’re always willing to consider offers of help to improve the H.R. 25 language—but if we want to rescue the American economy, there may be some warts we’ll just need to live with until we can figure out how to treat them. It’s been said that nobody looks good in direct sunlight (or, for that matter, on HDTV). Nobody—and no tax reform plan—is completely without tiny flaws.

One of the most rewarding things about promoting the FairTax is working with the millions of men and women across the country who are on our team. They are the true believers who, when they hear from a friend a criticism that seems to make a lot of sense, have the instinct to find the plausible explanation and take it back to that friend. They don’t turn and run from conflict. They see it through. There’s no substitute for working with people with that kind of commitment. For the dedicated defenders of the FairTax, we want to put these answers in your peer education arsenal. For the undecided, we hope the answers will make your decision a bit easier. For the dyed-in-the-wool opponents—well, we may never get through to you, but we want you to have the best information anyway.

Criticism: What is the rate, anyway: 23 percent or 30 percent?

From the very beginning of our efforts to transform the way we fund our federal government—and to make our tax system simple, fair, and easy to understand—our opponents have argued that we’re misleading America on the FairTax rate. If you should ever hear or read that the FairTax proponents are lying, that we’re trying to put one over on you, you can bet the next sentence will go something like this: “Those FairTax frauds say the sales tax rate will be 23 percent when it’s obviously going to be 30 percent.”

No doubt most of these critics fully understand the game they’re playing. They know that if they can convince the American people that we’re not telling them the whole truth, they can effectively cripple the FairTax effort—thus preserving the status quo and in many cases their power and even their very jobs. They know that the 23 percent calculation put forth by the FairTax advocates is accurate. They also know that with a bit of a mathematical and rhetorical twist they can make this figure appear to be bogus. Most important, they know that most people won’t take the time to noodle this thing out on their own. They’ll listen to the FairTax opponents and say “Yeah, we’re being lied to. Those people are trying to trick us.”

Let’s see if we can’t take this demagogic weapon away from the FairTax opponents. It would certainly be better for all sides to debate the FairTax on its merits rather than wasting our time on mathematical trickery.

We’ll start with the simplest mathematical equation in the entire FairTax universe. After the FairTax is implemented, if you go to the store and pay $100 for an item, $23 of the cost of that item will go to the federal government. The $23 isn’t added to the price of the item when you get to the cashier, it’s included in the price of that item as it sits on the display shelf. That’s the FairTax. Even recognizing the deficiencies of our system of public schools, most high school graduates in this country know that $23 is 23 percent of $100.

So how do these opponents and skeptics come up with the 30 percent figure? By playing on the confusion that exists between an inclusive and an exclusive sales tax, that’s how. This confusion is exacerbated by the fact that virtually every one of the forty-five states that collect a sales tax computes that sales tax on an exclusive basis. That’s the difference: the FairTax is computed on an inclusive basis. It’s as simple as that.

All taxes—income taxes, capital gains taxes, Social Security taxes—are either inclusive or exclusive. In other words, the taxes are either included in the dollar amount being taxed or added onto it.

Virtually all income taxes are inclusive taxes—that is, they’re included in the dollar amount being taxed. If you’re in a 15 percent tax bracket, you are paying $15 out of every $100 you earn in income taxes. Your Social Security and Medicare taxes are also inclusive:¹ for every dollar you earn, your employer takes 7.65 cents and sends it off, along with that “matching contribution,” to Washington. Your income taxes and payroll taxes aren’t added to what you earn, they’re taken from what you earn.

The embedded tax that presently exists on everything you purchase is also inclusive. The farmer who grows the wheat factors the taxes he has to pay into the price he charges when he sells that wheat to the processor. The processor then factors his taxes into the price when he sells to the bakery. The bakery then factors those taxes into the price charged to the grocery store, and you finally end up paying them all—including the grocery store’s tax burden—when you buy a loaf of bread and take it home. All those taxes, rolling downhill, are included in the purchase price of your bread.

Some taxes are noticeably different. The prime example, as we indicated above, would be state sales taxes, and this is where the confusion arises. All but five states have state sales taxes.² In every one of the forty-five states with a state sales tax the tax is computed on an exclusive basis. In other words, the tax is excluded from the price of the item as it sits there on the shelf, and then added to the price of the item at the cash register.

Unlike those state sales taxes, the FairTax would be an inclusive sales tax: it would be included in the sales price that you pay when you walk up to the cashier. When you see that nifty digital camera sitting there chained to the display table at your electronics store, the FairTax would be included in the price shown on the tag.

If you’re a footnote reader, you know that Oregon is one of the five states without any state sales tax. This makes Oregon a perfect place to denigrate the FairTax. A columnist for The Oregonian, Jeff Mapes, wrote a column with the headline “30 Percent National Sales Tax Proposed to Replace IRS.”³ If you were to read Mapes’s article, you wouldn’t see one single reference to the correct FairTax rate of 23 percent. Instead Mapes refers to the FairTax as “a 30 percent tax on all purchases” and suggests that sales tax–averse Oregonians wouldn’t be all that thrilled with the idea. Mapes’s column suggests how far and wide this “30 percent” falsehood has spread. Not once in his column does he bother to distinguish between inclusive and exclusive taxes or clarify that the FairTax is included in the price of an item or service, not added to it.

Frankly, if I were an Oregonian with no knowledge of the FairTax whatsoever, Mapes’s column would have frightened me to death—and sent me marching forth to join the FairTax opponents.

At this point, you may be wondering: Why don’t we give in and quote the tax as exclusive rather than inclusive? Wouldn’t that defeat this particular line of criticism?

The reason is simple: because the FairTax isn’t designed to replace another sales tax system. It will replace the existing income tax and payroll tax system. It will replace the embedded tax system in everything you buy. Isn’t it logical, not to mention honest, to quote the FairTax on the same basis that the taxes it is designed to replace are quoted?

Let’s go over this again, in case you’re planning to rip these questions out and stick them in your back pocket so that you’ll be ready. Here’s the math.

You spend $100 for a toaster. Under the FairTax plan, when you get your sales receipt it clearly shows that $23 of your $100 goes to the government as FairTax revenue.

Of course, this is where the opponents chime in: “Hold on! You’re really spending $77, and then they’re adding $23 tax on top of that! That works out to 30 percent!”

Now do you see the mistake they’re making? They’re calculating the FairTax the same way these forty-five states calculate their sales tax, by adding the tax to the price of the item at the cash register. Are they making that mistake sincerely or dishonestly? It probably depends on the character—and math skills—of the critic. But since we’re quoting the FairTax on the same basis as the income taxes the FairTax will replace, we think it’s only fair—not to mention correct—for our opponents to do the same.

Let’s take a look at the income tax for a moment. As we’ve said, the income tax is quoted by the government as an inclusive tax. The most common marginal income tax rate for an American is 25 percent. Add the payroll tax, and the average American pays 33 cents of every dollar he earns to the federal government in income and payroll taxes. That leaves 67 cents⁴ to spend.

Now consider this: What would happen if the critics quoted the federal income tax on an exclusive basis, the same way they keep trying to quote the FairTax? Your 33 percent common income and payroll tax rate would suddenly become 48 percent. (And that doesn’t even include the payroll tax that your employer is paying on your behalf.) Go ahead: Get out your calculator, try to remember how percentages are calculated, and give it a go! While you’re at it, give some of the higher income tax rates a shot. They look pretty ugly, don’t they?

But no one ever makes that mistake. (They must know they’d never get away with it.)

All we’re asking is for the FairTax opponents to be honest. Shoot straight with the American people. You know the FairTax is designed to replace the income tax. Give us a fair side-by-side comparison. Compare apples to apples. If you insist on quoting your precious income tax on an inclusive basis, then do the same for the FairTax. On the other hand, if you’re going to demagogue the FairTax by throwing that 30 percent figure around, at least be honest enough to quote the income and payroll taxes on the same basis. Stop telling middle Americans that they’re paying a 25 percent income tax rate and a nearly 8 percent payroll tax rate when, by your logic, they’re really paying a combined 48 percent.

Jeff Mapes isn’t the only fellow to make this mistake. Such venerable institutions as the Ludwig von Mises Institute, an economic think tank, have published stories citing the 30 percent argument. But we do wish that these folks would check their math before hurling their slings and arrows. It would make them look smarter—and make the FairTax look as good as it really is.

FairTax supporters are not afraid of the math. If you want to continue to quote the average marginal income and payroll tax burden as being 30 percent, then use the same inclusive basis for quoting the marginal FairTax rate. If, on the other hand, you feel better quoting the FairTax rate on an exclusive basis as 30 percent, then be honest enough to start quoting the income tax the same way. Start quoting the 15 percent income tax rate as 18 percent, the 28 percent income tax rate as 39 percent, and the 38 percent rate as 61 percent…and then quote the 15 percent payroll tax as another 18 percent tax on top of those other rates.

It seems to us that those who oppose the FairTax come from the same crowd that is always talking about a “level playing field.” Well, if you’re so eager to bring that “level playing field” into play, how about debating the FairTax on just such a playing field? It is simply disingenuous⁵ to insist that the tax rates be expressed differently to make it appear that the FairTax supporters are lying, or so that it appears that the income tax rate is lower than the FairTax rate.

Criticism: Will a 23 percent rate really be enough to fund current spending? I’ve been told some important government panels say the rate will need to be much higher.

This is a great criticism—because, if it were true, we’d be right there beside you stomping our feet and holding our breath until we turn blue.

But it’s not true.

To show you why, let’s start by playing a little game.

The two panels whose opinions are often cited on this question are the Congressional Joint Committee on Taxation and the President’s Advisory Panel on Federal Tax Reform. Let’s pretend, for a moment, that they’re right.

Remember, the FairTax is revenue neutral. Under the FairTax, our government would collect the same amount of tax revenue as it does today under our current individual and corporate system of income taxes. So if the crazy numbers these panels quote are true—that the FairTax would amount to a sales tax of 40, 50, or 60 percent—then it must be true that this is what our government is getting from us today!

Can this be? Is it possible that it has done such a good job of disguising and hiding those taxes that we aren’t really aware they’re there?

We really don’t believe that those who oppose the FairTax and calculate wild, high rates are lying to you (well, the loud coauthor might). Generally, we believe they’re just misleading you. The only real way to calculate an appropriate tax rate is to take the total amount of money the government needs to bring in and then divide that by whatever amount will be subject to tax. At the risk of being remedial for some and overly mathematical for others, if the government needs $10 and it has $100 in individual income or consumption it can tax, it will need to impose a rate of 10/100—which is 10 percent.

Given that simplicity, how do people come up with so many crazy rates for the FairTax? The answer is that they develop different assumptions about the numerator (how much money the government needs) and the denominator (how much money—either income or spending—is available to be taxed). How can that happen? Let’s look at a few examples.

When FairTax.org hires economists to help to determine the rate, it chooses a single year—such as 2009—and asks the questions “How much is the government currently predicted to raise in taxes in 2009?” and “...