Mar 3, 2008

March 2, 2008: Fair Tax/Fraud Tax, The Duct Tape Standard, Won't Get Fooled Again

Why is it that every time one sees a fundamentalist preacher turned politician campaigning for the Presidency he has the Bible in his left hand, his right index finger in your face and a tax cut for the rich in his back pocket? It is difficult to say, perhaps overweening ambition, perhaps the reluctance or the inability to understand something as complex as economics, perhaps intellectual laziness, perhaps a simple willingness to be a shill for wealth. But in any case we are now presented with another such spectacle this time in the form of Mike Huckabee, our very own Elmer Gantry.

He arrived late to the Presidential sweepstakes and took up the twin causes of God and good government in an effort to gin up the support of the fundamentalist wrong that heretofore were seen to have controlled the proceedings. Initially his message was a welcome variant from the old standard in which Christ was seen not as the apostle of greed but became, briefly in the hands of the Reverend Mike, once again the God of compassion. Accordingly Mike spoke eloquently, if only briefly, of our collective need to tend to the least among us. But his campaign, after Iowa, gained little traction with victories limited by religious and sectional boundaries. In order to breathe new life into his flagging effort, the Huckster has now transformed himself into a full-throated champion of the so called “Fair Tax”, not so much to win the nomination but to pick up the broken petard of Pat Robertson and become the new Champion of the idiot right.

Accordingly he is now out canvassing the country saying that “in Arkansas if it can’t be fixed with duct tape it cannot be fixed, and the tax code and the IRS cannot be fixed with duct tape”. There you have it in a ‘nut’ shell. If it cannot be fixed with duct tape it must go. Well Mike, I hate to break the news but you cannot fix the schools with duct tape, you cannot fix the military with duct tape, you cannot fix the roads with duct tape…..shall we get rid of those too? Talk to any heating and cooling contractor and you will learn that in fact one cannot fix anything with duct tape, not even ductwork. But it is by these standards that the Huckster wages his war to rid us of the onerous Internal Revenue Service.

No one, especially a progressive, is about to defend the present system of how we tax ourselves in these United States. The present tax code is as close to a ‘flat’ tax as we have seen in generations, with nearly all the progressivity having been taken out of it. But the problem of taxation in America is not that we are being taxed too much, for we rank near the bottom in overall taxation among industrial countries. It is that the near elimination of the graduated income tax of our forefathers has produced a society that has increasingly become more bifurcated between great wealth and the struggling rest of us. This tax proposal, coming as it does on the abject failure of a straight out ‘flat’ tax proposed by the likes of Pierre DuPont in his Presidential campaigns, is even more regressive. It would move the tax burden increasingly from the wealthy unto the backs of the working middle and lower classes; increasing the taxation on work while nearly eliminating the taxation of wealth.

When our forefathers introduced the graduated income tax they understood, as the ‘boomers’ apparently do not, that it is better to tax wealth than tax work. Reasoning from the tenets of Adam Smith, the founder of modern free-market capitalism, that work produces wealth, our forefathers rightly concluded that it would be counterproductive to tax work since it was through work that all wealth originates. Better, they said, to tax wealth at a higher rate. By taxing wealth at higher rates it leaves work with a relatively lighter share of the overall burden, freeing it to generate more wealth. This reasoning took the form of the distinction, in the terminology of our ancestors, between what was called “earned” and “unearned” income. Better they said to tax at higher rates unearned income (income from rents, interest and profits), than earned income (income from wages). Accordingly heavier taxes were laid upon the upper income tax bracket (in the 90% range), capital gains and estate taxes. The result was a more egalitarian society, one in which the fruits of our collective labor were generally shared, a society in which we witnessed the explosive growth of a large industrial middle class.

But the ‘Boomers’, the grand recipients of our forefathers collective wisdom, saw nothing in the lessons taught that we felt obliged to learn. Accordingly we have followed the siren song of greed introducing one tax ‘reform’ after another from the tax limitation craze set off by Howard Jarvis in California in the late ‘70s, to Ronald Reagan and the Republican assault on the graduated income tax, to the several flat tax proposals, and efforts to eliminate outright the capital gains and estate taxes. Let us take a brief look at the latest entry in the tax ‘reform’ craze put forward by the conservative stink tanks. The effort, such as it is, requires more from us than it deserves.

John Kenneth Galbraith once termed economics the ‘dismal science’, and although he was referring to the writings of Smith, Malthus and Ricardo, he can also be read to understand that approaching a study of economic theory or practice is like going to the dentist. Accordingly one approaches the study of the “Fair Tax” with all the enthusiasm of facing root canal work.

The idea came out of the bowels of Americans for Fair Taxation as a simple shell game in which the tax burden would be shifted from income taxes on profits and wages to what is, in effect, a national sales tax. Now even a flat rate tax of say 10 or 12%, as our friend Pierre DuPont proposed, has at least the appearance of ‘progressivity’ inasmuch as that the more one makes the more taxes one pays. But the so called “Fair Tax” proposes a 23% sales tax on all goods and services. It would eliminate taxes on savings and investments, all estate taxes, and virtually every other form of taxation. The result is that the tax burden would be shifted entirely onto consumption. What this means is that there becomes an inverse relation between income and the effective level of taxation. That is the lower your income the higher the percentage of your income to taxation. Those at the lowest levels, required as they are to spend virtually every cent on necessities, would pay the going rate. The higher one’s income the more can be put aside for saving and investment which, under this scheme, is shielded from taxation. Yes say the proponents but when it is withdrawn it is spent and taxes are paid on it. No say we critics because the interest on this money is earned and compounded while in the bank and is not subject to taxation. “Unearned” income, which is income nonetheless, is not subject to taxation unless and until it is spent. Suppose it is not spent, suppose it is left to constantly multiply itself over a period of time. Yes when it finally is withdrawn from the bank to make some purchases it is taxed but in the meantime it is tax free. Wages are not so lucky. One is presented then with the spectacle of the worker being taxed at every turn while the investor merely clips his coupons and watches his money grow.

What the inventors of this scheme have done is take the entire cost of government and raise the money by levying a consumption or sales tax. The proposal, with the requisite misleading moniker of ‘Fair Tax’ has the appearance, like the flat tax, of fairness. Everyone pays the same tax, right? Wrong. Everyone pays the same tax, as now, at the checkout counter, but not everyone pays the same effective tax. Whole parts of the economy, principally the investment community, earn money but are exempt from taxation. So for instance, the poor slob earning $15,000. a year pays an effective tax at the going rate of 23% while the billionaire, because so much of his money is off earning income at compounded rates tax free, pays an effective rate of less than 2%.

What makes this shell game so appealing is the deceptively simple complexity of it. It reminds me, in a perverse way, of the objections modern Republicans raise to the idea of returning to a graduated income tax. “The rich already pay the lion’s share of income taxes”, they point out parroting the talking points of the Republican National Committee. The Rich do pay nearly two thirds of all income tax in this country. But that is precisely the problem. The fact that the upper ten percent carry such a burden is not due to the unfairness of the present system or to the horrors of reinstituting the tax code of John Kennedy or even Jimmy Carter. It is due, quite simply, to the fact that the wealthy now own such a large share of the economic pie. No the answer is not to lower taxes on the all too heavily burdened upper classes, it is instead to raise those taxes and return a greater share of the wealth to those who labored to produce it in the first place. What is needed is a candidate for President to look the American people in the eye and tell them that what we want to see is the middle class paying 80% of the income taxes, because under this administration the middle class will control 80% of the wealth.

There are other problems with this so-called "fair tax" proposal:

There is the question of the effective tax rate. Proponents say that it is 23% but for the scheme to be income neutral—that is for it to generate as much money into the federal treasury as the current system—the effective tax on goods and services would be at least 30% and, according to the President’s Advisory Panel on Tax Reform, as much as a 34% in order to fund government at present levels. In fact according to economist William Gale of the Brookings Institution taxation at the 23% rate would blow a 7 trillion dollar hole in the budget over 10 years and he projects a more realistic rate of 31% or higher in order to reach present levels of funding.(see This new tax would be levied at time of purchase on new homes, rent, interest on credit cards, mortgages and car loans, doctor bills, utilities, gasoline (current taxes would not be repealed) legal fees, ad nauseum.

Conservative radio talk-show host Neil Boortz contends that there will be a 22% reduction in prices as companies will be able to produce and sell goods and services cheaper because they would no longer be required to withhold taxes. This is a blanket admission, by one of the scheme’s principal proponents, that by passing the savings on to the consumer wages will in effect be cut by at least 22%. In other words the money now being withheld would not be returned to the worker but would instead be passed on to the consumer who would then realize the savings when the product is purchased. For the worker, on the other hand, the tax burden remains but must now be paid at the check out counter. The tax must be paid, albeit at the reduced price, not with one’s old ‘gross’ income but with one’s old ‘net income’ that is what was previously left after the old IRS got done with it. Assuming that all of the savings are passed on to the consumer this is at best a simple economic wash. No real savings emerges.

Now either prices increase or wages must fall. Either the employer pockets the monies formerly withheld and passes the savings on to the consumer in which case it is a dead wash—if, and it’s a big if, all of said savings are recycled back to the worker as consumer. The worker is then confronted with a giant leap in retail prices. If the schemers allow us to keep all our earnings and we have all of our former paycheck in hand then prices we will face will be as high as 34% greater. In any case the system, as presented, is a wash. The proponents contend that it will raise as much money as the present system. The question is why make the change?

The answer lies in the hidden agendas. Remember these are the same folks that have been toying with the tax code now for nearly a generation, killing with a thousand cuts the golden goose given us by our ancestors. It began at the 1976 Democratic National Convention when Jimmy Carter, as he accepted his party’s nomination for the Presidency, called the American tax code a “disgrace to the human race.” The problem facing the nation at the time was that the tax code as it had evolved in the postwar era had not been adjusted for inflation. Greater numbers of working Americans were now lifted, by the hyperinflation of the era, into higher tax brackets fuelling a nation-wide tax revolt. Carter in calling for reform gave voice and legitimacy to this growing concern. Instead of simply adjusting the tax code for inflation the Democrats stalled and it was left to Ronald Reagan to do the reforming.

Posturing as a progressive Reagan, much as ‘Ol Two-Cows would do two decades later, put conservative stink tanks in overdrive spinning ‘tax reform’ that had the veneer of being progressive but in effect shifted the tax burden increasingly from wealth to work. Accordingly they cut the highest tax brackets from 72% to 35%; they cut the capital gains tax in half, made similar reductions in the estate tax. They increased Social Security withholding taxes and cut federal revenue sharing meaning that state and local governments, funded on flat rate income or sales taxes, were left to make up the difference. This had the effect of further shifting taxation over the entire spectrum from the graduated income to more regressive forms of taxation. To add insult to injury they eliminated the exemptions for consumer loans, most medical bills, and other previous exemptions that the middle class had enjoyed so as to raise the needed revenues. The result, as has been noted by Republican turned independent Kevin Phillips, is that there has been a growing gap between rich and poor and the middle class, now owning a smaller share of the national economy than at any time since before 1929, is shrinking relative to the rest of the economy. The economic high tides of the 80’s and 90’s did not, as Reagan had promised, raise all boats; and under the maladministration of ‘Ol Two-Cows, over 5 million have slipped through the now tattered safety net into poverty. It is from advocates such as these that the latest incarnation of ‘tax reform’ in the shape of the so called ‘fair tax’ comes. The question poses itself: why trust them?

The shell game gets complicated. The proposal calls for a “Prebate” program in which those at the lowest levels will be reimbursed for taxes paid giving the act a ‘populist’ veneer but this would ensure, under a revenue neutral standard, that the middle class will bear a greater share of the burden. And, to be fair, the proposal does for the first time shift social security funding in such a way as to make the rich belly up to the bar and pay more. But the fact remains that this is perhaps the most regressive tax proposal to ever have reached the national political debate since early in the nineteenth century. It is a shell game in which wealth walks away from the table nearly scot-free.

Nor does the ‘Fair Tax’ eliminate the IRS as the Huckster would have us believe. Some agency, however named, will have to collect the taxes. Taxes, in the new form would simply be collected not by the employer but by the merchant. How the retail industry will react to this burden is unclear. This proposal, by their own admission, will not cut the overall tax burden it will simply shift who will pay it. To suggest otherwise is to hint at a hidden agenda in which the real purposes are to simultaneously cut taxes on wealth and cut government revenue so as to further savage governance. It gets harder to fund the OSHA or the Consumer Protection Agency, when funding has gone dry. Whatever the real intent, one smells a rat under the kitchen sink.

It is doubtful that neither the Huckster nor Neil Boortz has studied Econ 101. If they had they would be able to recognize so obvious an economic shell game. Let us give them the benefit of the doubt and put this present misunderstanding down to a lack of proper schooling. To assume otherwise is to understand that they have become mere shills for great wealth, mere apologists for their corporate paymasters, and mere pimps for the GOP-- the Grand Old Prostitute.

In the immortal words of ‘Ol Two-Cows’, fool me once shame on you, fool me twice, shame on me, fool me three times, ‘won’t get fooled again’. No! No!

For another assessment of the impact of the “Fair Tax “proposal see:

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