A Room with a Viewpoint

“The time has come,” the Walrus said, “To talk of many things: Of shoes—and ships—and sealing wax— Of cabbages—and kings— And why the sea is boiling hot— And whether pigs have wings.” (Lewis Carroll)

Thursday, December 15, 2005

The Fair Tax Act of 2005

It has been suggested by one of my loyal readers that I put my moderate viewpoint to the test and review the proposed Fair Tax Act of 2005. This bill (HR 25 in the 108th Congress) was introduced by Representatives John Linder (R-GA) and Collin Peterson (D-MN) earlier this year and has a number of co-sponsors.

For a number of reasons, I have been mulling over whether I should take on such a task, but have decided to take the plunge.

To begin with, I am not a tax policy expert, but I do have experience in policy analysis and I am a taxpayer. So I am as qualified as any of us to take it on and, in fact, have a bit more a framework in which to view proposed legislation than do a lot of people. However, I'm not going to do this the "correct" way, which is to review the legislation and commentaries and explanations, analyze in various ways, and then write. That takes too long and this is my blog, not my employment. So you're going to see a little sausage in the making. I don't know if I'll end up with three posts on this or thirty, but what the heck, it might be full "blogger" employment. And there may be inconsistencies, because I'm going to start shallow and dig deeper as I go along. And while I'll try to be analytical, I don't have to be unbiased (did I mention it's my own blog)? And it goes without saying that my opinions are mine alone and not those of any (unnamed) organization I work for.

The first thing to do is try to understand the bill. I'm going to start with summaries.

I found a summary of the act, prepared by Americans for Fair Taxation (supporters of the bill). Here is what they call a "plain English summary."

The Act is called the “Fair Tax Act of 2005.”

As of Dec. 31, 2006, it repeals all income taxes and payroll taxes, specifically:
• The individual income tax (including capital gains taxes and the alternative minimum tax)
• The corporate income tax
• All individual and employer payroll taxes including Social Security, Medicare and federal
unemployment taxes
• The self-employment tax (a self employed person pays both the individual and the employer portions
of Social Security and Medicare taxes)
• The estate and gift tax

Effective January 1, 2007 it replaces the above taxes with a national retail sales tax on all goods and services sold at retail, except that used goods are not taxed. The tax rate is set to be revenue neutral – at the level necessary to replace the revenues generated by the repealed taxes.

A 23-percent (of the tax-inclusive sales price) sales tax is imposed on all retail sales for personal consumption of new goods and services. Exports and the purchase of inputs by businesses (i.e., intermediate sales) are not taxed. The sales tax must be separately stated and charged on the sales receipt. This makes it clear to the consumer what the amount of the tax is and that he or she is paying it.

The FairTax (SM) provides every family with a rebate of the sales tax on spending up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The rebate is paid monthly in advance. It allows a family of four to spend $25,660 tax free each year. The rebate for a married couple with two children is $492 per month ($5,902 annually). Therefore, no family pays federal sales tax on essential goods and services and middle-class families are effectively exempted on a big part of their annual spending.

Funding for Social Security and Medicare benefits remains the same. The Social Security and Medicare trust funds receive the same amount of money as they do under current law. The source of the trust fund revenue is a dedicated portion of sales tax revenue instead of payroll tax revenue.

States can elect to collect the federal sales tax on behalf of the federal government in exchange for a fee of one-quarter of one percent of gross collections. Retail businesses collecting the tax also get the same administrative fee.

Strong taxpayer rights provisions are incorporated into the Act. The burden of persuasion in disputes is on the government. A strong, independent problem resolution office is created. Taxpayers are entitled to professional fees in disputes unless the government establishes that its position was substantially justified.