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December 07, 2007


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I think Huckabee is supporting what's called the Fiar Tax -- Replace all tax with a 23%-30% sales tax. Interesting idea to say the least. However, until now, there hasn't been a major candidate supporting it as far as I know.

Consumption is what drives our economy, i.e. most of us work for companies that make "stuff" or sell "stuff". Discouraging consumption by taxing it would cripple the U.S. economy. This would also hurt the lower class, who pay almost no tax now.

And they don't get the tax breaks the rest of us take for granted.

If you really want the government to be less of a part of our daily lives, the Fair Tax is probably the best proposal so far to that effect. The tax is transparent and not subject to the whims of politicians trying to shape people's behavior, or lobbyists looking to avoid paying taxes.

If your taxes went up tomorrow would you know? Would you know by looking at your next paycheck, or even when filing your taxes? If the Fair Tax was increased by politicians you would know the next time you even bought just a pack of gum, its required to be there on the receipt, and all prices are required to be listed at the price after the tax.

The bill itself is short and concise, in stark contrast to the 6000-16000 page tax code (I don't want to know if anyone has actually tried to print it all out), which no person, even at the IRS, knows all of it.

And the biggest boon to the frugal is that a product can only be taxed once, when bought new. Anything bought used is not subject to the taxation. And of course no taxes on savings & investments.

Due to the prebate provision all taxes up to the poverty level is refunded to each household, determined by the number of people in that household, at the beginning of the month. A poor family gets the prebate, and so does Bill Gates, but no one would pay taxes on the basics up to that level. The lowest classes would still pay no taxes, and get to keep all of any paycheck they receive.

I think that simplifying and over-hauling the tax code needs to be a priority for ALL candidates. I don't thing congress has officially finished this year's tax code, so the IRS can't print or create materials. Those materials might not be ready Jan 1 and might delay people filing returns. It's such a disaster... I'm learning first hand about the marriage penalty this year, which I think needs to be eliminated.

I think one candidate- maybe Ron Paul, is proposing a modified flat (income) tax. Basically everybody would have the same income tax rate (15% or something) and ALL income (earned, capital gains, etc.) would be taxed. The problem with the current system is that the MEGA wealthy who make most of their money in a passive manner are taxed at a very low rate.

I'd love for you to blog more about this so your readers can be educated. I believe politics and personal finance go hand in hand.

I second that. You have one of the best blogs on the internet and it would be great if you helped us sort out the politicians views on financial issues.

I love the FairTax idea--I have ever since I first heard of it, well before the presidential election run started. It's a shame Huckabee is the opposite of me politically, I'd be tempted to change my voting party and vote for him in the primaries. The one thing to note about FairTax is that the detractors have a lot of skepticism about finding the rate that would make this revenue-neutral. They argue that the tax would have to be exorbitantly high in order to pull this off. If you look on Wikipedia, they have a pretty good breakout of the plan as well as some more of the worries surrounding it. But basically it is set up to encourage saving and as already noted above, it rewards those who buy used. I wonder how it would affect retirement savings in Roth accounts, though...

Ron Paul, crazy Libertarian that he is (except on abortion, which I find strange) is fantastic, too.

This would also hurt the lower class, who pay almost no tax now

There are good reasons for and against the consumption tax, but I want to tackle this one because it's a common assumption which is mostly wrong.

In just about every consumption tax proposal I've seen - including the Fair Tax - there is a 'pre-bate' which essentially refunds a certain amount of money each month to cover taxes paid on the essentials. For example, if we deem $1,000 per month per person to be basic consumption, on a 25% flat tax, each taxpayer is given a monthly prebate of $250. Individuals who spend less than that - low-income people and cheapskates like me - keep the difference. And since passive income from investments & savings only get taxed when consumed, it's a pretty big incentive for thrift.

Again, the devil is in the details - IIRC, the FairTax sets the consumption amount at $900 per adult in household, plus $500 per child under 18, and taxes at 23%. You can tweak the amounts as you see fit, but the idea strikes me as basically right.

> Really? This is the first I've read of this proposal -- I must have
> missed it somehow.

FMF, you've got to be kidding me. This was a joke, right? I've even seen the Fair Tax mentioned on this blog in the comments section several times.

I encourage you to take a good look at it, read the Fair Tax book (a best-seller written by a US Congressmand and National Syndicated Radio Talk Show Host), and visit their web site.

Nobody seems to want to tackle the point that this FairTax would cripple the consumption based U.S. economy. Also, would there be rebates for charitable giving, if not that would hurt non-profit causes.

Anon --

I didn't mean this was the first time I've ever heard of this sort of tax proposal, it's the first time I've ever heard that Huckabee was advocating it.

Eric/Amanda --

I probably will dig into this a bit more in the future once we have fewer candidates and some more concrete proposals.

A bit off topic, but being from Michigan, I cannot understand why they do not pass a law that bans smoking in restaurants. I am generally in favor of smaller government, but this is a case where no one should ever have to breathe secondhand smoke if they do not want to.

The MI republicans argue that the "market" should dictate this, but that argument holds no water when you consider a single mother working as a waitress who has to breathe in smoke all day at work.

Sorry, just my political rant for the day.

Mark --

Can you say, "Big Tobacco lobby?"

Mark -- See today's Free Press:

The House passed the smoking ban; it still has to pass the Senate, though, and that will be tough.

Suze -- That article is what made me think of it, and the fact the the Republican (Big Tobacco) controlled Senate will probably stall the bill makes me angry.

The thing that gets me the most is that several dozen states have enacted these no-smoking laws, and none that I know of have resulted in a collapse of the restaurant industry as these MI politicians are claiming.


You are right, for some reason the more I think about politics the more angry I get, but the religious discussions do not do the same, good observation.

Now, if you mesh religion with politics (i.e. the 2004 election) then you get a REAL mess.

I am hoping that faith is less of an issue in this upcoming election, and I am encouraged by statements from Romney and Huckabee to the effect of keeping faith out of the race. Don't get me wrong, faith has it's place in these candidate's lives, but using it as a platform to get elected is exactly what this country is NOT about.

Neither the “Fair tax,” nor the decrease in consumption would cripple the US economy; in fact, it is likely to improve it. People who oppose this system likely either have not done their research, have a large amount of unreported income, or don’t want to be reminded about their wasteful spending every time they make a purchase. The current bill in Congress does allow rebates based on a household’s income relative to the poverty level, as otherwise it wouldn’t be “fair.”

You are missing the point of the rebates for charitable giving. With a consumption tax, there would essentially be a tax rebate for any money you don't spend (donate, save, or invest), which is more generous to consumers than the current system.

Considering average income and expenses, most middle class families would save money with a fair tax without changing their spending habits at all. This would effectively increase their income, improving their purchasing power and could even increase consumption. Even if spending did decrease, people would be more encouraged to invest that money (thus improving the economy), and there would be less waste, which would have a positive effect on the environment. In addition, illegal immigrants would be taxed on everything they buy and would not be able to receive a rebate unless they legalized.

I first heard about this type of tax years ago in HS econ class and I think it would have a lot of benefits after the initial transition period.

@ Laura,

Good points, it makes me like this idea more and more.

However, the "extra" money that people invest would be invested in companies that sell the products that people are no longer buying.

For example, if you are charged a 25% tax to purchase a vehicle, you are likely to wait much longer to buy one, or buy a used one. Given the current state of the U.S. auto industry, this would cripple a company like GM or Ford almost immediately.

Illinois goes smoke free in all public places (including all bars and restaurants) starting January 1, 2008, I'm counting down the days.

Also, would this Fair Tax also replace the corporate income tax?

Moving to the Fair Tax seems like it would be a huge disadvantage for anyone that has a Roth IRA.

This would not encourage people to buy used either because the market price of used goods would instantly rise by the amount of the tax.

I do not have a problem with the current income tax system, I just feel the government uses the money inefficiently, so a lot of it goes to waste. The problem lies with how the money is spent, not how it is collected.

I am a tax attorney. Lets hear it for the income tax! Go Income Tax!`

No, a consumption tax alone isn't feasible at current spending levels but that is the point for its proponents who want to reduce it.

Healthcare could be solved with tax incentives, but only negative ones. A 100% tax on healthcare should do it. Otherwise it solves nothing since most people don't pay taxes or enough taxes to pay for it.

The people calling the FairTax a "consumption tax" (a very misleading term, because that sounds like its penalizing consumption) really need to read (or re-read) the book. We already pay a hidden 23% tax on everything we buy. You don't actually think corporations pay the corporate income tax out of their pockets, do you? No, they compensate for it by raising their prices. In the end, the consumer pays the corporate income tax for every company a product passes through. In essence, the FairTax eliminates ALL forms of income tax and replaces it with an embedded tax directly on what you buy. In the end, there's very little difference in the net price of goods/products. A one dollar item will still cost a buck. Unfortunately, a blog comment just can't do it justice. Just check out the website.

I think a consumption tax would tax the poor to a greater degree and make the rich richer. The rich tend to consume less relative to their net worth (kinda how they got rich) even when considering lavish travels, jets, vacation homes, etc. The current system favors the poor at the expense of the rich, hard to get the dems to admit this.

The fact that the FairTax would hit the poor and middle class (bottom 99%) harder than the current system is the only thing I like about it. If the majority of the voters could realize the consequences of the spending they demand (or at least allow) of the government, maybe that spending would finally go down.

My biggest problem with the FairTax proposal is that it misses the real problem. Mark: you're on the right track, that the problem is how money is spent, not how it's collected. The real problem is WHO spends the money. When people spend their own money on themselves, they do so most efficiently. But if person A's money is spent by person B to benefit person C, it's wasteful and can even be counterproductive. The latter situation is government spending. Even with the smartest, most honest, benevolent and altruistic people working in government, that would still be the case.

Now on to some of the other problems with the FairTax itself. First of all, any tax that is only collected on retail of new goods is easily avoided. Before you know it, everyone is a proprietor of a small business buying everything at wholesale. Or suddenly Craigslist is bigger than Wal-Mart, though there would be no way to tell, because all transactions would be conducted in cash off the books. FairTax proponents claim their plan is so simple we could lose the IRS. But we would need some kind of big powerful agency to police this kind of cheating. Aside from that, the tax rate itself would need to be higher to get more revenue from the suckers who aren't cheating. That drives more of them into cheating, the cycle repeats, and soon, the whole thing has collapsed. The only kind of workable consumption tax is a value-added tax, which doesn't strike most people as much more fair than an income tax.

Back to Huckabee. On spending, he's a disaster. He loves big government even more than George W. Bush does. He's not a big fan of free trade either. He's a populist, which is to say he's an economic ignoramus.

I sure hope that the next election doesn't come down to a spendthrift Republican like Huckabee vs. a spendthrift Democrat like Clinton/Edwards/Obama/etc.

How is buying used goods cheating? People will still have to buy new eventually, and since most Americans don't care about how much money they spend and think they are too good to buy used, I don't think that consumerism would change that much.

Great to see some lively discussion concerning the FairTax. I found some information on this a couple years ago and fell in love with the idea.

Mark and Matt:
I wish both of you would look a little deeper into the FairTax proposal before shooting a bunch of holes in it. No, it isn't going to be perfect. But as someone once said don't let perfect be the enemy of the good. Compared to the current income/payroll/estate/gift/ system that we have today, the FairTax is a very good plan. I agree that government spending is the root of the problem but you can't pull up that root until you fundamentally change the way Americans pay tax. Let everyone see how much they pay in tax everyday when they buy things instead of having it siphoned off from their paychecks before they know they ever had it, and suddenly people will start to care where all of this money is going and how it is spent. Government accountability would likely follow. Give the FairTax a chance.

Money is a fluid. Money is not wealth. Changing the tax code, just means changing the flow of the fluid. It won't create wealth.

The question naturally naturally start with who gets more money and who gets less. Would a fair tax give people the incentive to create more wealth (i.e. work harder and create more actual goods)? That would be a positive.

I find it hard to believe that anyone would have the courage to nix the current system and put the fair tax in its place. That means a phase-out and a phase-in. The danger there, is that you could end up with both an income tax and a consumption tax. It's happened in plenty of countries.

How many states have scrapped their income tax entirely for a sales tax? How many have both income tax and sales tax?

While I disagree with almost everything that comes out of Huckabee's mouth, I think the fair tax has some merit. Unfortunately, I couldn't vote for him due to his other, more marginal views. I'd sooner vote for Ron Paul (who seems to only be fiscally, not socially, libertarian).

In European countries, isn't the "fair" tax called the VAT (value added tax)?

A positive side effect would be an added incentive to save, and a reduction of the incentive to consume - great for bank accounts, and probably also for the environment.

But it would have to be structured so it isn't regressive - and the prebate scheme looks complicated.

A negative side effect would be that it would create an incentive to barter. Another negative side effect would be we'd have to reformulate the GDP, since it would almost certainly shrink under the thrift pressure.

And what about all those people who stuffed money into Roth IRAs, Roth 401ks, 529 plans, and so on? Are they going to be double taxed?

And are we going to turn every shopkeeper into an IRS agent?

I'm sorry, but listening to tax ideas from an ignoramus who doesn't even believe in evolution is just not something I'm interested in doing. As far as I'm concerned, the best way to reduce the Federal government's hunger for our taxes is to line up all the bastards who voted for our war of aggression against Iraq and shoot 'em full of holes, then bring our boys and girls home where they belong. To hell with the fringe ideas on how to fix the tax code. There are way bigger problems out there. The poor overtaxed rich will just have to deal with their plight for now.

By the way, Ron Paul is not just a libertarian, he's an anti-semite too. Why do you suppose the neo-Nazis at have "vote for Ron Paul" banners all over their site?

Mark wrote:
I do not have a problem with the current income tax system, I just feel the government uses the money inefficiently, so a lot of it goes to waste. The problem lies with how the money is spent, not how it is collected.

So, you don't see a problem with the federal government confiscating money off the top of the paychecks of hard working people, leaving them with no say in how much is taken?

I agree that the money is used very inefficiently. Our federal government has grown into an insatiable beast that the founding fathers would be ashamed of. We need a former butcher in the White House to trim the pork that gets added to every bill that comes through.

"Why do you suppose the neo-Nazis at have 'vote for Ron Paul' banners all over their site?"

Because neo-nazis are, almost by definition, a few sandwiches short. Ron Paul is an outsider who opposes the current banking system. He believes, and I agree, that it's unstable, unsustainable, and functions as a hidden tax. The Stormfronters believe it's run by a Zionist cabal, or some nonsense.

Motives aside, Paul is bringing up legitimate issues that the black helicopter and white supremacist crowds have been on about for years. Though they may see him as their best choice, Paul isn't one of them. These attempts at 'character-assassination by association' that have been making the rounds are easily disproved by anyone who bothers to do research beyond the pages of the Daily Kos.

Back up at the beginning of the comments someone mentioned that Ron Paul was for a flat income tax - that's not true. He actually supports getting rid of income tax and the IRS all together. The income tax is only 30% of the budget - cutting it out may be radical but there are plenty of examples of household incomes cutting their spending by 30% so why can't the government cut there spending by 30%? Especially since so much of what the government spends money on seems unnecessary.
And yoko, just because some neo-nazis support Ron Paul does not mean that he supports them! That's just illogical! I'm not saying he for sure doesn't but I am saying that your assumption is unsound - besides I've listened to a number of interviews of Ron Paul and seen a number of the debates and never heard anything from him that would suggest he's anti-semetic or supports neo-nazis.

I agree with just about everything that Huckabee stands for, including the FairTax. He is a man of conviction, and one of the things he is convicted about is eliminating the IRS and fairly taxing all people in America - including the trillions that pass through the underground economies of illegal aliens and drug dealers every year.

So, I would encourage you to support the FairTax - research it and post information on your site. Think of what a difference it would make for investing! People would actually be given a reward for investing, rather than penalized for it.

I would also encourage you to vote for Huckabee. He is a true conservative candidate that stands for cutting taxes, family and the sanctity of life. He also has battled and won against the Clinton political machine in Arkansas, so he's got an advantage against all of the other candidates against Hillary.

How can you say Huckabee is a spendthrift? He saved the people of Arkansas $280 million in taxes during his time as the Governor. Which is a big deal in a democrat-laden state.

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