- Revenue neutrality of the FairTax
Fair Tax Act" (USBill|110|HR|25/USBill|110|S|1025) is a bill in the United States Congressfor changing tax laws to replace the Internal Revenue Service(IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.cite web| title=H.R. 25: Fair Tax Act of 2007| work=110th U.S. Congress| publisher=The Library of Congress| date= 2007-01-04| url=http://thomas.loc.gov/cgi-bin/query/zRetailing?c110:H.R.25:|accessdate=2007-01-14] cite news| url=http://people.bu.edu/kotlikoff/WSJ%20Op%20Ed%203-7-05.pdf| format = PDF | last=Kotlikoff| first=Laurence| coauthors=|title=The Case for the 'FairTax'| publisher=The Wall Street Journal| date= 2005-03-07| accessdate=2006-07-23]
A key question surrounding the FairTax rate is the ability to be revenue-neutral; that is, whether it would result in an increase or reduction in overall federal tax revenues.cite book | first=Al | last=Ose | year=2002 | title=America's Best Kept Secret Fairtax: Give Yourself a 25% Raise | edition=Paperback | publisher=Authorhouse | id=ISBN 1-4033-9189-0 ] Economists, advisory groups, and political advocacy groups disagree about the tax rate required for the FairTax to be truly revenue-neutral. Different researchers use different time frames and methodologies that make direct comparison among estimates difficult. The choice between static or
dynamic scoringfurther complicates any estimate of revenue-neutral rates.cite web| url=http://www.ipi.org/ipi/IPIPressReleases.nsf/0/34899156780cc5fe85257088005d0294?OpenDocument| last=Gingrich| first=Newt| coauthors=Ferrara, Peter |title=Doesn't Anyone Know the Score?| work=Institute for Policy Innovation| publisher=Wall Street Journal| date=2005-09-26| accessdate=2006-07-20]
Proponents offer studies that calculate the
tax rateconsistent with the legislation (23% inclusive), while critics argue that the rate would need to be much higher and offer competing studies. Supports argue that if the rate seems too high or is otherwise higher, it brings to light the cost of the federal government and the true tax burden Congress has levied on the American taxpayer. Bruce Bartletthas stated that "public opinion polls have long shown that support for flat-rate tax reforms is extremely sensitive to the proposed rate, with support dropping off sharply at a rate higher than 23%." When the FairTax is calculated like U.S. state sales taxes (tax-exclusive), the rate would be presented as 30%. Opponents argue the 30% tax-exclusive figure is better understood by the general populace and that the use of the 23% tax-inclusive number is deceptive and misleading. Proponents state that the 23% presentation is easier to compare to the inclusive income tax rates being replaced.
Tax rate for revenue neutrality
The primary rate presented adheres to the legislative framework of the FairTax bill in rate presentation, which is calculated as a percentage of total spending, sometimes called a tax-inclusive rate. The rate presentation of a traditional sales tax may also be included and is referred to as the tax-exclusive rate "(see Presentation of tax rate)".
Americans For Fair Taxation(AFFT) states that early research at Stanford University, the Heritage Foundation, the Cato Institute, and Fiscal Associates have calculated revenue-neutral rates between 22.3% and 24%. Jim Poterba of the Massachusetts Institute of Technologyestimated a rate of 23.1% and Laurence Kotlikoffof Boston Universityfound a rate of around 24%. Dale Jorgenson, a professor of economics at Harvard Universityand past President of the American Economic Association, purportedly estimated the revenue-neutral rate to be 22.9% but indicated in his 2002 book that he believes the rate would need to be higher.cite book | first=Dale | last=Jorgenson | coauthors=Yun, Kun-Young| year=2002| title=Investment, Vol. 3: Lifting the Burden: Tax Reform, the Cost of Capital, and U.S. Economic Growth| edition=Hardcover|publisher=The MIT Press| id=ISBN 0-262-10091-6 ] The research was commissioned by AFFT and they have not made these studies public. The studies are also not published by the economists that conducted those studies. Critics have stated that the early studies failed to properly account for the additional revenue required for the increased government spending needed pay the FairTax on their purchases.cite web|url=http://www.opinionjournal.com/extra/?id=110010523 | title=Fair Tax, Flawed Tax| publisher=Wall Street Journal | date=2007-08-26| accessdate=2007-08-30 |last=Bartlett |first=Bruce]
One of the leading economists supporting the FairTax is Dr.
Laurence Kotlikoffof Boston University. A detailed 2006 study published in " Tax Notes" by Beacon Hill Instituteat Suffolk University and Dr. Kotlikoff concluded the FairTax would be revenue-neutral for the tax year 2007 at a rate of 23.82% (31.27% tax-exclusive) assuming full taxpayer compliance.cite web| url=http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf| format = PDF |last=Bachman| first=Paul| coauthors=Haughton, Jonathan; Kotlikoff, Laurence J.; Sanchez-Penalver, Alfonso; Tuerck, David G.| title=Taxing Sales under the FairTax – What Rate Works?| work=Beacon Hill Institute| publisher=Tax Analysts| date=November 2006| accessdate=2007-03-06] The study states that purchasing poweris transferred to state and local taxpayers from state and local governments. To recapture the lost revenue, state and local governments may raise taxes in order to continue collecting the same real revenues from their taxpayers. State and local governments would be able to maintain their real spending levels, despite the requirement that they pay the FairTax on their purchases. The Argus Groupand Arduin, Laffer & Moore Econometricseach published an analysis that defended the 23% rate.cite web| url=http://www.fairtax.org/PDF/GaleRebuttal.pdf| format = PDF | last=Burton| first=David| coauthors=Mastromarco, Dan| title=Rebuttal of the William Gale papers| publisher=The Argus Group| date= 1998-03-16| accessdate=2006-10-26] cite web| url=http://www.fairtax.org/PDF/JCTRebuttal.pdf| format = PDF | last=Burton| first=David| coauthors=Mastromarco, Dan| title=Rebuttal of the Joint Committee on Taxation (JCT) letter| publisher=The Argus Group| date= 1998-02-04| accessdate=2006-10-26] cite web| url=http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf| format = PDF | title=A Macroeconomic Analysis of the FairTax Proposal| publisher=Arduin, Laffer & Moore Econometrics | date=February 2006| accessdate=2006-11-07] While proponents of the FairTax concede that the above studies did not explicitly account for tax evasion, they also claim that the studies did not altogether ignore tax evasion under the FairTax. These studies implicitly incorporated some degree of tax evasion in their calculations simply by using National Income and Product Account based figures that presumably understate total household consumption. Moreover, these studies did not account for the expected capital gains that would result from a reduction in the real nominal value of U.S. government debtand the increased economic growththat economists believe would occur.
In contrast to the above studies, one of the leading economists opposing the FairTax,
William Galeof the Brookings Institution, published a detailed 2005 study in "Tax Notes" that estimated a rate of 28.2% (39.3% tax-exclusive) for 2007 assuming full taxpayer compliance and an average rate of 31% (44% tax-exclusive) from 2006–2015 (an increase that accounts for the replacement of an additional $3 trillion in revenue collected through the Alternative Minimum Tax(AMT) impacting the middle class over the 10 year period).cite web| url=http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/| last=Regnier| first=Pat| title=Just how fair is the FairTax?| work=| publisher=Money Magazine| date=2005-09-07| accessdate=2006-07-20] cite web| url=http://www.brookings.edu/views/articles/gale/20050516.pdf | format = PDF | last=Gale| first=William|title=The National Retail Sales Tax: What Would The Rate Have To Be?| work=Tax Break| publisher=Tax Analysis| date= 2005-05-16| accessdate=2005-06-15] cite web |url=http://opencrs.cdt.org/rpts/RS22200_20050719.pdf |format = PDF | title=The Potential Distributional Effects of the Alternative Minimum Tax |accessdate=2007-05-30 |author=Gregg Esenwein |date= 2005-07-19|publisher=Center for Democracy and Technology] The study also concluded that if the tax base were eroded by 10% due to tax evasion, tax avoidance, and/or legislative adjustments, the average rate would be 34% (53% tax-exclusive) for the 10 year period. The study did not take into consideration the increase in economic activity that Gale expects would result from the imposition of the FairTax.
Additional sales tax studies
Additional studies have been performed on national retail sales tax plans that do not necessarily conform to the tax base as defined in the FairTax legislation but are often considered when discussing FairTax rates. These studies are often of prior sales tax legislation, similar tax models, or based on the assumption that the tax base used in the FairTax legislation is flawed or likely to be modified by Congress before passage.cite web| url=http://www.taxreformpanel.gov/final-report/TaxReform_Ch9.pdf| last=| first=| coauthors=| title=National Retail Sales Tax| work=| publisher=President's Advisory Panel for Federal Tax Reform| date=2005-11-01| accessdate=2006-07-23] The
President's Advisory Panel for Federal Tax Reformperformed an analysis to replace the individual and corporate income tax (excluding other taxes) with a retail sales tax and found the rate to be 25% (34% tax-exclusive) for 2006 assuming at least 10% evasion. The rate would need to be substantially higher to replace the additional taxes replaced by the FairTax (payroll, estate, and gift taxes). The Chairman of the President's Advisory Panel, former U.S. Senator used in the tax panel analysis. FairTax proponents, including the Beacon Hill Institute and Dr. Kotlikoff, have criticized the President's Advisory Panel's study as having altered the terms of the FairTax and using unsound methodology.
The Treasury Department estimates (prepared for the Tax Panel) excluded government consumption, significantly altering the tax base and therefore the tax rate. Other studies point out that the current system is also counting taxes the government would pay to itself by including matched payroll taxes of government employees, covering the corporate and payroll tax expenses of its contractors and their suppliers, and paying embedded tax costs under the current system (see Theories of retail pricing). The tax panel included large expenditures to local and state governments for the FairTax burden; however, the Beacon Hill Institute suggested a flaw in this logic and showed that the FairTax imposes no additional real fiscal burdens on state and local government. A similar level of taxation is required when shifting from taxing income to consumption in order to maintain the tax burden on government. Proponents assert that government needs to be taxed to keep a level playing field between government enterprises and private enterprises.cite web| url=http://www.fairtax.org/PDF/FairTaxRebuttal.pdf| last=| first=| coauthors=| title=Debate on the Fair Tax - Graetz Rebuttal| work=| publisher=Americans For Fair Taxation| date=2006-04-16| accessdate=2006-10-26] Dr. Karen Walby, Director of Research for the Americans For Fair Taxation, discussed a recent study by Young & Associates on evasion and enforcement that identifies certain key variables which influence the level of compliance (marginal tax rates, likelihood of audit, severity of penalties, etc) and concludes the FairTax is superior on most/all of these and would therefore have lower rates of evasion than alternatives.cite web| url=http://www.fairtaxindiana.net/main/modules.php?name=News&file=article&sid=85| last=Walby| first=Karen| coauthors=|title=Phil Hinson's Tax Reform Hour| work=Radio Sandy Springs| publisher=Hoosiers for the FairTax| date=2005-12-18| accessdate=2006-07-20] While the FairTax studies did not account for tax evasion, neither did they ignore it. The studies have implicitly incorporated a significant degree of tax evasion in calculations simply by using National Income and Product Account based figures that understate total household consumption. In addition, the studies did not account for the capital gain stemming from the reduction in the real nominal value of U.S. government debt and the increased economic growth that economists and FairTax supporters believe would occur.cite web| url=http://www.fairtax.org/PDF/Open_Letter.pdf| last=Economists' Endorsement| first=| coauthors=| title=An Open Letter to the President, the Congress, and the American people| publisher=Americans For Fair Taxation| date=| accessdate=2006-07-23]
bipartisan Joint Committee on Taxation(JCT) evaluated a proposal similar to FairTax that included additional exemptions and estimated a revenue-neutral rate of around 36%.cite web| url=http://www.nationalreview.com/nrof_bartlett/bartlett200408090847.asp| last=Bartlett| first=Bruce| coauthors=| title=A National Sales Tax No Vote| work=| publisher=National Review Online Financial| date=2004-08-09| accessdate=2006-08-07] In a 2004 study, the Institute on Taxation and Economic Policy (ITEP) contends that by excluding certain levels of taxation (sales to the government, financial services, etc.), a national sales tax rate would have to be upwards of 36% to be revenue-neutral.cite web| url=http://www.itepnet.org/sale0904.pdf| last=| first=| coauthors=| title=The Effects of Replacing Most Federal Taxes with a National Sales Tax: A State-by-State Distributional Analysis| work=| publisher=Institute on Taxation and Economic Policy| date=2004-09| accessdate=2006-07-23] Proponents charge that the Presidential Tax Panel, the JCT, and ITEP are motivated to maintain the "status quo" and thus modify the tax base from the proposed legislation to achieve higher rates,cite web| url=http://www.fosterfriess.com/content/view/101/38/| last=Linbeck| first=Leo| coauthors=| title=Tax Reform Group Blasts Presidential Tax Panel| work=| publisher=Foster Friess| date=| accessdate=2006-07-23] and conclude that since opponents could not kill the FairTax proposal based on merits or lack thereof; they create their own plan with an exaggerated rate to make it politically not feasible.cite web| url=http://www.fairtax.org/PDF/ITEPRebuttal.pdf| last=Burton| first=David| coauthors=| title=A response to Institute on Taxation and Economic Policy| work=The Argus Group| publisher=Americans For Fair Taxation| date=| accessdate=2006-10-26] cite web | url=http://www.fairtax.org/PDF/A_FairTax_rebuttal_to_ITEP-110706.pdf | title=Institute on Taxation and Economic Policy Rebuttal | publisher=Americans For Fair Taxation | accessdate=2008-01-13] The FairTax would apply to a gross base of $11.467 trillion, one-third larger than the income tax base of $9.706 trillion.cite web| url=http://www.fairtax.org/PDF/FairTaxFlatTaxIncomeTaxComparisonChart.pdf|title=FairTax, flat tax and income tax comparison chart| publisher=Americans For Fair Taxation| accessdate=2007-04-06] For that reason, the average marginal rateunder the FairTax would be, by definition, significantly lower than current law. If the rate is too high, no matter what the rate, it brings to light the cost of the federal government and the true tax burden Congress has levied on the American taxpayer (see Tax burden visibility). The Secretary of the Treasury, Henry M. Paulson, stated in 2006 that he would investigate the FairTax in a very comprehensive way using resources outside the Treasury.cite web|url=http://www.fairtax.org/pdf/LinbeckConfCall02-100306.pdf|title=Grassroots Leadership Council Conference Call|publisher=Americans For Fair Taxation|last=Linbeck|first=Leo|date=2006-10-03|accessdate=2007-02-04]
Americans For Fair Taxation
Distribution of the FairTax burden
Predicted effects of the FairTax
*cite book | first=Neal | last=Boortz | coauthors=Linder, John | year=2006 | title=The Fair Tax Book | edition=Paperback | publisher=
Regan Books| id=ISBN 0-06-087549-6
*cite book | first=Al | last=Ose | year=2002 | title=America's Best Kept Secret Fairtax: Give Yourself a 25% Raise | edition=Paperback | publisher=Authorhouse | id=ISBN 1-4033-9189-0
*cite book | first=Laurence| last=Kotlikoff | coauthors=Burns, Scott | year=2004 | title= | publisher=
MIT Press|id=ISBN 0-262-11286-8
*cite book | first=Edward, J. | last=McCaffery | year=2002 | title=Fair Not Flat : How to Make the Tax System Better and Simpler | edition=Hardcover | publisher=
University Of Chicago Press| id=ISBN 0-226-55560-7
* [http://www.fairtax.org FairTax.org] - Americans For Fair TaxationLegislation:* [http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.25.IH: H.R.25: "Fair Tax Act of 2007"] - Text of House bill H.R.25:* [http://thomas.loc.gov/cgi-bin/query/z?c110:S.1025: S.1025: "Fair Tax Act of 2007"] - Text of Senate bill S.1025
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