April 15 as Just Another Day: The Fair Tax Proposal
Exclusive interview: Americans for Fair Taxation district director for Louisiana
The FairTaxproposal has received more research attention, $22 million worth, than any United States federal tax reform. Short of outright elimination of the federal income tax, it also appears to be the most likely candidate for repeal and replacement.
[audio:http://bit.ly/g47iJZ]To explain the mechanics of the Fair Tax, a streamlined national retail sales tax, Laura O’Halloran, pictured below, spoke with The Pelican Post. (Click above to listen or here to download – 47 minutes.)
The key hook for Fair Tax proponents is that its implementation would coincide with the elimination of all federal income taxes and associated loopholes: individual, corporate, Social Security, Medicare, death, gift, and capital gains. Since states would collect revenue via retailers, it would also coincide with the elimination of the IRS, its April 15 stresses, and feared individual tax audits.
Although revenue neutral, O’Halloran believes this consolidation into one tax would bring greater transparency, lower compliance costs, and incentivize investment. For these reasons, she notes, the National Small Business Association has endorsed the plan.
“Right now we have taxation without comprehension,” O’Halloran says, as she alludes to more than 70,000 pages of IRS tax code, which the Fair Tax would replace with 133 pages.
Arthur Laffer, formerly an economic advisor to Ronald Reagan, estimates that compliance costs 30 cents for every dollar of income tax paid. That comes to almost half a trillion dollars annually of wasted resources.
Passage of the Fair Tax at the federal level (H.R.25 and S.13) would also include repeal of the U.S. Constitution’s 16th Amendment, assuming ratification by 38 states within seven years. The intent of this measure is to prevent the existence of both a national sales tax and an income tax at the same time. If the states do not ratify the repeal, the Fair Tax would automatically end and all previous taxes would return.
The anticipated rate for the national sales tax is 23 percent on all new items, although there is some dispute over this level. A monthly prebate would also counter this marginal rate, as presented in the diagram (and explained in further detail below). O’Halloran is quick to assert that U.S. consumers already pay 22 percent in embedded taxes carried over to the consumer; this plan would merely make the burden more overt.
The final rate would tend to be higher than 23 percent, though, since states would likely combine this with their own sales tax. Many Canadian provinces already have a Harmonized Sales Tax, and at least eight states, including Louisiana, have legislation pending to that effect.
State Rep. Walker Hines (R – New Orleans) has announced he will introduce the Louisiana Fair Tax Act (H.B.239), which he describes as “simpler, fairer, and more transparent,” to replace the state’s personal and corporate income taxes. This plan would also eliminate hundreds of pages of tax exemptions, deductions, and credits, most of which he believes are antiquated and have an annual cost of approximately $4 billion.
Hines acknowledges, however, a low probability of passage this year.
Sales taxes draw on consumption and not investment, so wealthier people pay more but generally less as a proportion of their income. For this reason, prominent Fair Tax proponents, including Mike Huckabee, former governor of Arkansas, support a prebate component.
The current federal proposals do include a monthly payment for each household, a prebate, in return for the sales taxes they would pay up to the poverty level. In other words, the sales taxes on spending up to the poverty level – $22,350 for a family of four – would be neutralized.
2011 Fair Tax Prebate Schedule
The advocacy group, Americans for Fair Taxation, dates back to 1995, and Rep. John Linder (R – Ga.) first introduced it at the federal level in 1999. In the intervening years registered supporters have grown to 1.2 million, but the proposal has also received scrutiny and harsh criticisms – and that includes from people who agree that the prevailing system is overly complex and intrusive.
Bruce Bartlett, former director of the congressional Joint Economic Committee, has described its prebate as a new national welfare program and dismissed it as having zero chance of enactment. Others have estimated the needed rate as much higher than 23 percent and dispute the value judgement that fair implies ever heavier marginal rates on high earners.
Laurence Kotlikoff, an economics professor at Boston University, is a leading advocate and has responded directly to Bartlett. He asserts, without reform, grave fiscal danger for the United States and, along with 80 economic professionals, signed a letter in 2006 in support of the Fair Tax initiative.
For those interested in the debate, O’Halloran recommends these three books:
TheFairTaxBook; FairTax: TheTruth; and, published most recently,TheFairTaxSolution.
.
Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy and editor of The Pelican Post. He can be contacted at fhodgson@pelicanpolicy.org, and one can follow him on twitter.
.