Fair Tax talk is sweeping the land, but how ‘fair,’ really, is such a tax?

Tue, 06/20/2006 - 5:48pm
By: Letters to the ...

Earlier [last] week I attended a presentation by a proponent of the “Fair Tax” plan. The basic idea of the plan is to replace the federal income tax (individual and corporate), social security tax, and estate tax with a tax similar to a sales tax.

The presenter claimed that the tax would be revenue neutral at a rate of 23 percent of each gross dollar collected (the equivalent to a 30 percent rate added to purchases). There would be a “pre-bate” sent to all taxpayers equal to the tax that would be paid on purchases equal to the poverty income level. The tax would apply to essentially all purchases of new tangible property and services in the United States.

I came away from the presentation convinced that the “Fair Tax” is unfair. The largest single problem with the “Fair Tax” plan is that it is undoubtedly regressive as compared with our current income tax system.

The presenters tried to portray the proposal as a progressive tax, but they are clearly mistaken. They used a chart indicating that higher levels of spending are taxed at higher effective rates, because the portion of spending that is not taxed due to the pre-bate becomes proportionally less of the total as spending rises.

However, if you were to look at projected tax burdens under the plan as a percentage of income (rather than spending), you would see that high income individuals pay at a lower rate under the proposal than lower and middle income individuals. This is due to the fact that higher income people spend a lower portion of their income on consumable items that are taxable under the plan.

Some argue that this is appropriate, and that progressive income taxes are bad because they “penalize success.” Shouldn’t citizens pay for the government services based on a quid pro quo basis?

Frankly, I think the answer is no. But, even if you accept that they should, individuals with higher incomes are those that have most benefited from our government.

Think about it. The ability to make money in our society is predicated on good government. Capital markets are regulated by the SEC, our workforce is educated in public schools, law enforcement provides security from theft, infrastructure is needed for transportation, intangible property laws foster innovation, the environment and labor rights are protected by regulation – the list could go on.

If you do not think that successful businesspeople have benefited from government, look at how businesses fare in countries that do not have good government services.

On the other hand, our system should reward hard work and success; and, high marginal income tax rates lead to inefficiencies by thwarting free market mechanisms.

There is a balance to be made between the taxes necessary for good government and not stifling economic activity. It seems to me that the United States has been an economic success in large part because we have historically done a good job of balancing these two goals.

Another reason for our success is the presence of a large educated middle class. As opposed to countries that have a pronounced division of wealth between the rich and the poor, we have been able to sustain a stable democracy and a society that provides the basis for success.

A progressive income tax and an estate tax help to maintain a large middle class. Some disparagingly call it “income redistribution,” but the fact of the matter is that the result is fairer and more effective for all of us than totally unbridled capitalism. If anything, our current system is not progressive enough due to the regressive nature of the Social Security tax.

Unfortunately, over the past 25 years our county has been moving away from the very things that have lead to our success.

Remember the “trickle down” theory. The claim was made that by reducing the taxes on high income people, the deficit would decrease because the economy would do so well.

The results: 1) the federal debt has increased from under $1 trillion in 1979 to over $8 trillion now, 2) poverty levels have increased from 11.7 percent in 1979 to 12.7 percent in 2004, and 3) the division of wealth has increased.

The claims of spurring economic growth made by the proponents of the “Fair Tax” plan sound a lot like those of the trickle down theory. I suspect the result would be more of the same – the rich get richer, and the poor get poorer.

Ed Outlaw
Peachtree City, Ga.

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Submitted by Gene Key on Fri, 06/23/2006 - 2:53pm.

I noted with interest the letter to the editor from Mr. Ed Outlaw with his concerns for the Fair Tax plan. I have promoted the Fair Tax for several years now, and I have rarely come across anyone that was such a proponent of the present tax system. The Income Tax is out of control, inefficient, and penalizes U.S. business and manufacturing competing within an escalating global economy. The Fair Tax is a simple alternative method to fund the Federal Government that is fair, simple, and visible. As a by-product, it just happens to solve some very serious economic problems that are caused by the present Income Tax.

I find it interesting that Mr. Outlaw listened to a 20 minute presentation on the Fair Tax and came away “convinced” that the plan was bad. His main concern seemed to revolve around whether the plan was “progressive”. By every definition that I could find, the Fair Tax plan is progressive because of the “prebate” given to each family. No one will have to pay Federal taxes on their basic needs. The more money that you spend above the poverty level, the more the effective tax rate you pay. No one’s total tax obligation will ever exceed 23%. The debate is how progressive do you want it to be, and there are infinite opinions on that issue. I suspect that Mr. Outlaw suffers from the “Sin of Envy”. Arguing that some should pay more because they took advantage of the opportunities available to everyone is the same as saying that we should limit a person’s educational opportunity because they would have an unfair advantage over someone that dropped out of High School.

The Fair Tax benefits poor and middle income Americans. The largest tax impact on lower income Americans is the payroll tax. The Fair Tax eliminates Medicare and Social Security withholding. In fact the Presidential Tax Advisory Panel issued a statement last summer that the Fair Tax was the only plan presented to them that “totally untaxed the poor”. It benefits all but the people that have been avoiding taxes, either legally or illegally in the past. Plus, you never have to maintain tax records, file tax returns, or worry about the IRS seizing homes or accounts.

The Fair Tax will return this country to one envisioned by the founding fathers. The Constitution specifically forbids an income type tax to fund the Union. In Federalist Papers 21, Alexander Hamilton explains that they were afraid that an income type tax would “of itself be sufficient in America to work the eventual destruction of the Union” whereas, a consumption tax “contain in their own nature a security against excess”. He also stated that a consumption tax would be like a fluid and would reach it’s own natural balance.

I believe that Mr. Outlaw is consumed with many issues and chose the Fair Tax as a vessel to vent. The Fair Tax plan is apolitical and was developed by the American people and academia outside of Washington. I challenge anyone to start from scratch and develop a tax plan that is simpler and fairer to all Americans.

Gene Key
Fayetteville, GA

Submitted by Ed Outlaw on Mon, 06/26/2006 - 1:51pm.

You commented that by any definition the Fair Tax is progressive. I realized from your comment that I did not define "progressive" in my article. By progressive I mean that higher income individuals pay a higher percentage of income in taxes. By this definition, the Fair Tax is not progressive. Higher income individuals may pay a higher percentage of their spending on taxes, but not of their incomes.

You also claim the the Fair Tax would help the middle class. I do not think this is supportable given that:

1)the lowest income people would be generally unaffected by the Fair Tax (they pay no tax now when offsetting the earned income credit and payroll taxes, and will pay no tax under the Fair Tax), and
2) the highest income people will clearly pay less tax under the Fair Tax, and
3) We are talking about a zero sum game, so those in between the above two will pay for the tax cut to the highest income people.

Submitted by 1bighammer on Mon, 06/26/2006 - 2:58pm.

Mr Outlaw. I fail to see exactly why the Far Tax needs to be "progressive" as you put it. You defined progressive as higher income individuals pay a higher percentage of income in taxes. Why should they? Of course you being the obvious financial and tax "GURU" you probably have some mile long,theoretical explanation of why people that make more, should have to pay more! Will you PLEASE explain it to us? Or maybe you can't and you are just regurgitating the talking points of your liberal (socialist) peers.

ArmyMAJretired's picture
Submitted by ArmyMAJretired on Mon, 06/26/2006 - 3:19pm.

Taxes need to be progressive, so Accountants can charge rich clients big bucks to try to save them money! Poor people don't pay for tax return preparation, unless they get money (earned income tax credit) for not applying themselves and getting a good paying job.

Simple tax codes and plans would mean that anyone could fill out their taxes with no professional help, can't have that. Better yet the Fair Tax would eliminate tax returns and the IRS! No withholding, tax collected point of sale on consumption.

What would estate planners do without the Death tax?

K Street lobbyist are paid millions a year to complicate and carve out the tax code for someone's benefit and you can bet they are lining someone's pocket.

How much goes untaxed because of the cash economy around illegal immigrants and drug/crime trade? When Ludicrus and Snoop buy their megamansions and pimped out rides, they will be progressively paying more.

Do you really think Kerry and Kennedy pay their fair share. Look into Kennedy's trust funds based out of Guam.


I came from a Blue Collar family, Dad a Steamfitter and Mom worked in a bakery after the youngest was in 2nd grade. They paid fr private school (where is our rebate)untill senior year of HS when we had to get a job and pay for it and college. (Again private, not public).

Submitted by defins on Fri, 06/23/2006 - 5:35am.

revenues increased! Deficit went up cause SPENDING-see Tip O'Neil-went up. So according to you-getting a pay raise puts you in debt.

Robert W. Morgan's picture
Submitted by Robert W. Morgan on Fri, 06/23/2006 - 4:22am.

Ed Outlaw says "But, even if you accept that they should (pay higher taxes), individuals with higher incomes are those that have most benefited from our government."

"....those that have benefited the most from government???

The way it works, Ed is most of those with higher incomes have worked hard and earned what they did in spite of governmental regulations, roadblocks and excessive taxation. Those with little or no income (excepting those with real disabilities) have not applied themselves or taken advantage of the educational and vocational opportunities this country has to offer. These people (everyone actually) get a free education in our public schools, yet many drop out early and blame "the system" for their sorry lives, then demand government handout money.

As a bleeding heart Democrat, Ed you actually support and encourage that activity and the victim mind set that goes along with it.

The Fair Tax proposal is great - even without the "prebate" That prebate was thrown in so people like you wouldn't wring their hands and agonize over the "poor" people. I think the prebate is a waste of money, but realistically it has to be paid (as a bribe to the Democratic inner city legislators) in order to get the Fair Tax passed in Congress.

Push for the Fair Tax everyone, it is a real win-win solution and best of all gives us control of our own future.

Submitted by Ed Outlaw on Mon, 06/26/2006 - 2:00pm.

I also have a problem with people that do not take responsibility for doing their part, lack gratitute for the opportunities that have been given to them, and blame others for their problems. We just differ as to who we think fits this description.

mudcat's picture
Submitted by mudcat on Mon, 06/26/2006 - 6:57pm.

As they say - if the shoe fits - wear it.

I believe Robert W. is talking about teenage thugs and welfare recipients who may not have done their part to get ahead in life. Who are you talking about?

PTC Guy's picture
Submitted by PTC Guy on Fri, 06/23/2006 - 9:59am.

To Atlanta or Dekalb?

Keeping it real and to the core of the issue, not the peripherals.

Submitted by Sailon on Fri, 06/23/2006 - 9:08am.

We will always have the poor with us (I think that comes from a well known best-seller). Everyone can't get rich, it is impossible. Judging those who don't is dangerous for your soul. Pay your taxes if you make or have a lot of money, and be glad you can.

PTC Guy's picture
Submitted by PTC Guy on Fri, 06/23/2006 - 10:07am.

I know some very well off folk who are complete fools. They inherited, knew someone or just got plain lucky.

Double and tripper dippers didn't work hard for their money. They were in the right place at the right time and now make twice as much, in retirement, as many now working in the government.

Age, time and place play a great deal on if one succeeds or not. Not to mention plain old blind luck, no morals about stabbing others to get ahead and putting careers above raising kids and being a spouse.

Yep. The divorce rates among these folk is very telling.

Reducing it to working hard or not working hard is a foolish, blind and short sighted argument.

Indeed. There are exceptions who did well. But not many.

Morgan, your statements are ill thought out and just plain wrong.

Keeping it real and to the core of the issue, not the peripherals.

ArmyMAJretired's picture
Submitted by ArmyMAJretired on Wed, 06/21/2006 - 2:46pm.

Ed just happens to be a TAX CONSULTANT.

Does his occupation, suddenly put in jeopardy if the IRS is dissolve have anything to do with his opinion?

Alternate explainations can be made for the following:

1) the federal debt has increased from under $1 trillion in 1979 to over $8 trillion now. Cars that sold for $10,000 in 1979 now sell for $20,000. Inflation and unbridled pork spending could also be the problem not the tax system. Individuals must live within a budget, goverment sadly seems not to.

2) poverty levels have increased from 11.7 percent in 1979 to 12.7 percent in 2004. Maybe all those uneducated illegal aliens have had a negative impact on this stat.

3) the division of wealth has increased. Maybe the rich keep doing the things that make them rich and the poor keep doing the things that make them poor.

Bottom line, I can use my money better that the Government can. If I could opt out of Social Security, like the City of Galveston did, my retirement check would be 2 to 3 times larger!

Support the Fair Tax!

Submitted by fcteacher on Fri, 06/23/2006 - 6:56am.

What happens to the money that I've been paying in for over 20 years? Do I get it back in one lump sum with interest? Also, will this tax law get rid of that ridiculous earned income credit feature that some get and that totally P***es me off every year when I have to write a fat check to the IRS. I feel they should give me the name of the person it's going to and I can write it to him/her and save the cost of a stamp. By the way, poverty levels have possibly increased because there is such a gap between the cost of living and the wages that most blue collar workers make (as compared to the 1960/70s). I remember families (while growing up) where the father was a teacher (and the only one working)and was able to buy a house, car, and go on vacation. That's not the case anymore. Check out the pay scale at FCBOE.org. The days of single family incomes are over and you have to ask yourself why? What has happened and when did it happen?

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