'FairTax' Better Explained: Something to Wish For
Two accounting professors took a hot air balloon ride. Drifting over the tiny people in
the land below, they waxed effusively about favorite sections of the 10,000 page Internal
Revenue Code – believing the document to be the highest achievement of mankind.
Eventually exhausted with their repartee, they released some hot air to find out exactly
where they were. And floating past a man walking along a country road they
importuned.
“Sir, sir, may we ask you a question?”
“Well, yes,” said the squinting pedestrian, “anything you’d like.”
“Having nothing but the most fascinating discussion as our compass, we’ve lost track of
where we are. Tell us, precisely where are we?”
“With certainty!” the man replied. And after some thought, hollered back, “You are 50
feet off the ground in a hot air balloon.”
The professors looked at each other stunned until one broke the silence. “Amazing.
What do you suppose are the odds of finding another accountant all the way out here?”
The lesson of this story helps readers critically review Accounting Professor Walter
Austin’s November 4th article, “The 'FairTax' Explained: Be Careful for What you
Wish.” In his article, Accountant Austin stated the FairTax would replace the entire
system of federal income taxes. True enough, but Accountant Austin wrongly concluded,
“businesses will no longer pay federal income tax, [which] lost tax revenue must be made
up by individual taxpayers.” No matter how Congress succeeds in burying taxes in
amorphous entities called businesses, or taxing the same income multiple times, there is
but one taxpayer – the American people. Taxes fall out as lower wages and/or higher
priced products which businesses pass along.
What Accountant Austin missed is that a good tax system like the FairTax does not hide
its burden. A visible tax keeps politicians honest by eliminating the ability to raise taxes
by hidden loopholes on which accountants thrive. A visible tax ensures a built-in
downward pressure on the size of the government by making everyone a stakeholder,
rather than exempting 40 percent of Americans from income taxes as today.
Accountant Austin implied that the FairTax 23 percent "inclusive" rate is disingenuous,
since “most of us are not familiar with” that rate which “really means 30 percent.” But
50 feet off the ground or 600 inches will not change the distance. What Accountant
Austin missed is that Americans must honestly compare rates of reform alternatives,
which means comparing tax-inclusive rates to tax-inclusive rates and tax-exclusive rates
to tax-exclusive rates. Taxpayers are familiar with the tax-inclusive rate because every
tax replaced by the FairTax is measured on that basis. Who today would refer to a
middle-class taxpayer in the 25 percent tax bracket as paying at a 48 percent tax rate
(including payroll taxes) – its tax-exclusive equivalent?
Accountant Austin represents that a $200,000 house would bear a $60,000 sales tax, but
fails to add that cars and homes are less expensive under the FairTax, that more than five
times more existing homes are sold than new homes, and that previously owned items are
not taxed. New products no longer bear embedded taxes or compliance costs imposed
upstream, or are taxpayers required to spend only what remains after the IRS has taken its
partnership share from their paycheck. And under the FairTax, all interest is paid with
pre-tax dollars, which is much better than today since even mortgage interest for
itemizers must be paid with after-payroll tax dollars. And three-quarters of Americans
pay more payroll taxes than income taxes.
Accountant Austin quoted President Bush's tax reform panel that the rate of the FairTax
is not revenue neutral, the plan hurts the middle class, and the prebate program is too
costly. But the truth is the President's tax panel – itself led by lobbyists – never actually
evaluated the FairTax. Had they, they would have seen how a straightforward static rate
calculation guarantees the FairTax is revenue neutral at 23 percent tax inclusive. They
would have seen the FairTax base is almost twice the base of taxable income under the
current system.
Had they evaluated the FairTax, they would have found that researchers from Harvard,
MIT, Boston University, and others unanimously agree real wages would increase under
the plan. According to Dr. Laurence Kotlikoff, low-income households experience a 26.3
percent gain in purchasing power, middle-income households experience a 12.5 percent
gain, and high-income households a 5.0 percent gain in spendable income.
They might have found that the prebate is not a welfare plan, unless it is welfare not to
ask Americans to contribute to others before they have provided for their families.
Moreover, the full amount of these prebates would be $485 billion, an amount about half
of the $945 billion in estimated tax expenditures (standard deductions, personal
exemptions, etc.) today. The National Taxpayers Union estimated the actual cost of
mailing monthly prebate checks to be negligible, less than one-thousandth of the amount
wasted today in compliance costs.
Mr. Austin concluded that if the FairTax could do what it claims, “almost every
American would readily support it.” But the truth is the FairTax is resisted by a vocal
minority precisely because it will do what it claims in eliminating the IRS, the more than
$300 billion in compliance costs, and the corruption of the current system. And that
adjustment will be hard for tax lawyers, special interests, lobbyists, and those in Congress
who see the tax code as a way of generating campaign contributions. Apparently, it will
also be hard for accountants.
Gene Key
Fayetteville, Georgia
FairTax.org, Georgia State Director
