This presentation is intended to review and raise issues with respect to Federal legislative proposal H.R. 25 (109th):
Fair Tax Act of 2007, the “Fair Tax”. Because the title of the proposed
legislation prejudices the discussion, this presentation refers to this
proposed legislation as H.R. 25.
Summary of H.R 25:
* Elimination of all Federal individual and corporate income taxes, payroll taxes, and the Federal estate and gift taxes
* Implementation of a tax exclusive flat rate national sales
tax of 30% on all goods and services sold at retail (ensuring that
goods and services are only taxed a single time).[1]
Exports would be exempted from the national sales tax. Property
purchased for investment would be exempted from the sales tax. Retail
purchases of goods and services by government would be subject to the
30% sales tax.
* The flat rate national sales tax would be administered by
agencies organized in the individual states, sales tax administrating
authorities. If a state or states choose not to administer the flat
rate national sales tax, the Federal Department of the Treasury would
become the sales tax administrating authority in such states. In all
events, Treasury would have general rule making responsibilities.
* All lawful residents would receive a monthly “prebate”
intended to be equal to the sales tax on cumulative expected monthly
purchases at the poverty level. Unlawful residents would not receive
the prebate. The prebate would be paid by the Social Security
Administration acting upon information provided by sales tax
administrating authorities.
* H.R. 25 significantly revises the definition of self employment income for social security benefit calculation purposes.
H.R. 25 – Conclusions
- With all of its complexity, the current Internal Revenue Code is a
more evenhanded approach to collecting necessary Federal revenues than
H.R. 25. This is not to say that the author believes the current
Internal Revenue Code is the right long term answer for the United
States; it is to say that H.R. 25 is not the right long term answer.
Impacts on Taxpayers
- H.R. 25 eliminates any differential in the rate of taxation between
the first dollar purchase over the poverty line by low income Americans
and the last dollar purchase by the richest Americans.
- In any state where there is a decision to eliminate their
state income tax, the combined Federal, State, and local flat sales tax
rate could easily exceed 43%.
- H.R. 25 would result in an immediate reduction in purchasing
power upon implementation for existing savings which have previously
been subject to U.S. income taxes (double taxation).
- H.R. 25 would result in a very significant competitive
purchase price advantage given to an investor purchasing a new
residence over a couple wishing to purchase the same property as a
home.
- H.R. 25 would result in an on-going and significant
reduction in purchasing power for many social security recipients with
other sources of income or savings.
- H.R. 25 would result in the elimination of the safety net
provided by the Internal Revenue Code in reducing Federal taxes for
victims of disease and disaster, the elimination of incentives to save
through pension plans or investment retirement, and the elimination of
credits and deductions for child care.
- H.R. 25 would result in an increase in purchasing and
investing power for very high wage earners and the ability of the
wealthy to earn profits from investments and reinvest without taxation
while low income Americans are paying an H.R. 25 designated 30% Federal
sales tax on food. The ability of the wealthy to pass along exceptional
levels of never taxed wealth, tax-free, generation to generation, seems
a prescription for a feudal system.
- Under H.R. 25, while there could be a reduction of
compliance requirements for wage earners and retirees, compliance
activity for the self-employed and service providers would increase. If
a state did not eliminate their state income tax, there would be no
compliance reductions for wage earners or retirees.
Impacts on Social Security Benefits – Self Employed
- H.R. 25’s proposed change in the definition of self employment
income for the ultimate receipt of social security benefits is bizarre,
unfair and unworkable. Under the language of H.R. 25, many self
employed individuals currently earning social security benefits would
no longer be earning any social security benefits.
Administrative Decisions & Impacts
- H.R. 25 anticipates that virtually every state will willingly agree
to become a sales tax administrating authority. Given the proposed fee
for this administrative task and the political risk that would
accompany this decision, it is possible that not a single state would
decide to become a sales tax administrating authority.
- The administration required to implement and thereafter
continuously administer H.R. 25 might be beyond the capability of
Federal and state government. It may also be far more expensive than
administration of the current Internal Revenue Code. (The proposed
collection fees alone under H.R. 25 approximate the total annual budget
for the Internal Revenue Service.)
The very notion of initially and annually registering 300,000,000
lawful citizens, providing a monthly check to each and believing this
can be accomplished confidentially, efficiently and without fraud has
at least a touch of unreality to it.
H.R. 25 could not be implemented until (1) a sales tax
administrating authority was established and successfully organized and
staffed in every state, (2) every lawful resident given a legitimate
social security card, (3) every lawful resident registered
confidentially and without fraud, and (4) this information transferred
to the Social Security Administration and reviewed for duplicate social
security numbers and general fraud issues.
Economic Certainty & Likely Economic Impacts
- The economic risks, particularly in the immediate aftermath of
implementation, are far too significant to the overall economy to
chance.
- There are conflicting studies projecting the necessary tax rate required to achieve neutral tax revenues under H.R. 25.
- There have been no micro-economic studies with respect to the
impact of H.R. 25. The lack of study with respect to the prices of high
volume, low margin products (food) is especially worrisome.
- Taxing state and local governments on their purchases and
providing no interest rate advantage to state borrowings must result in
significant tax increases at the state level.
- Basic tax planning that would occur in the final year of the
Internal Revenue Code and the first year of H.R. 25 would reduce
Federal revenues by a very significant amount.
Legal Uncertainty
- H.R. 25 is fraught with legal uncertainty. There are constitutional
arguments that H.R. 25 would be unconstitutional with respect to
constitutional limits of Federal taxing power.
- There would be state and local challenges with respect to the exclusion of unlawful residents from the receipt of the prebate.
- The World Court could probably weigh in with respect to trading issues.
Other
- With every major conceptual change, there will be thousands of
different interpretations of the rules. It would take years to sort
these interpretations out. During that period, Treasury would issue
volumes of rules and regulations.
- The opportunity for Social Security fraud would increase with respect to actual employment.
- Should U.S. products begin to appear in the world market place
at prices significantly lower after the removal of Federal income
taxes, tariff responses could be expected.
- With exports untaxed, U.S. goods could be 30% more expensive for Americans than the remainder of the world.
H.R. 25 – Intended Results & Apparent Philosophy of H.R. 25
H.R. 25 would replace the Federal income tax, payroll taxes and the
estate and gift taxes with a flat rate national sales tax. After
reimbursing (in advance) lawful citizens for the estimated sales taxes
levied upon the dollar value of estimated necessary retail expenditures
at the estimated national poverty level, all lawful citizens would pay
a flat rate national sales tax on all purchases of retail goods and
services. Unlawful citizens would not receive a prebate.
H.R. 25 represents a philosophy of tax collection without any attendant social or economic policies.
H.R. 25 – Purchasing Power vs. the Tax Rate
There has been a significant amount of discussion regarding the proposed sales tax rate in H.R. 25.
H.R. 25 proposes a 23% “tax inclusive” sales tax rate. Sales taxes
are not traditionally described in a “tax inclusive” manner. Sales
taxes are traditionally described in a “tax exclusive” manner. A “tax
inclusive” sales tax rate is a percentage of the total register price.
A “tax exclusive” sales tax is a tax calculated on the purchase price
before the tax is added. As shown below, a 23% “tax inclusive” sales
tax rate is equal to a traditionally described “tax exclusive” sales
rate of 29.87013%.
H.R. 25 Tax Inclusive Rate: |
|
Purchase Price With Tax |
$129.87 |
Tax - 23% of "Register" Price - Tax Inclusive Method |
29.87 |
Purchase Price of Product Without Tax |
$100.00 |
|
|
|
|
|
|
Equivalent Tax Exclusive Rate: |
|
Purchase Price of Product Without Tax |
$100.00 |
Tax - 29.87013% of Purchase Price - Tax Exclusive Method - Traditional |
29.87 |
Purchase Price With Tax |
$129.87 |
|
|
This paper refers to the tax rate as proposed in H.R. 25 as 30%
(rounding 29.87013% to 30%) so that the tax rate may be more accurately
compared and contrasted with other sales tax rates which are
traditionally described on a tax exclusive basis. Using the traditional
“tax exclusive” rate of 30% will neither increase nor decrease the tax
shown for any transaction; it provides only clarity in presentation.
The important point of this discussion is not to dwell on the
appropriate description of the tax rate, but to understand the impact
of H.R. 25 on purchasing power. The following chart contrasts the
purchasing power to the individual buyer of his or her purchasing
dollars of (1) H.R. 25 on income previously taxed under the current
Internal Revenue Code, (2) the current Internal Revenue Code using
three separate average tax rates, and (3) H.R. 25 on income after the
implementation of H.R. 25:
Purchasing Power Purchasing Power Purchasing Power
Of
Dollars Of Dollars Earned Of
Dollars Earned
Earned &
Saved Under The
Under
Before Implementation Internal Revenue Code H.R. 25
|
Federal |
Federal |
Federal |
Federal |
Federal |
|
|
Tax-Rate |
Tax-Rate |
Tax-Rate |
Tax-Rate |
Tax-Rate |
|
|
15% |
34% |
15% |
23.00% |
34% |
|
|
|
|
|
|
|
|
Pre-H.R. 25 Earnings |
$1,000 |
$1,000 |
|
|
|
|
Federal Taxes Paid |
150 |
340 |
|
|
|
|
Cash At Implementation |
850 |
660 |
|
|
|
|
H.R. 25 Tax on Purchases |
195 |
152 |
|
|
|
|
Purchasing Power |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Gross Income |
|
|
$1,000 |
$1,000 |
$1,000 |
$1,000 |
Federal Taxes Paid |
|
|
150 |
230 |
340 |
230 |
Purchasing Power |
$655 |
$508 |
$850 |
$770 |
$660 |
$770 |
Calculating the impact on an individual’s purchasing power is
difficult because every Federal income tax return is different and
average rates of tax can be difficult to calculate. To determine
relative purchasing power of future income and receipts one needs
determine the gross income of the individual and actual purchases at
retail. Individual calculations for the impact of H.R. 25 would require
the following analysis:
Total Gross Income From All Sources Total Gross Income From All Sources
Including Social Security, Insurance Including Social Security, Insurance
Reimbursements, Tax Exempt Income, etc. Reimbursements, Tax Exempt Income, etc.
Less: Less:
Federal Income Taxes & Federal Withholding H.R. 25 taxes on Retail Purchases of Goods
Taxes & Services (calculated with either a tax inclusive rate of 23% or a tax exclusive rate
of 30%)
Purchasing Power - Current Law Purchasing Power - Under H.R. 25
The concept of purchasing power vs. raw data clearly confuses the
strongest supporters of H.R. 25. The following is copied from the
Fairtax.org website:
The FairTax benefits retirees who depend mostly on Social Security.
For older, low-income households, the FairTax generates a major
reduction in remaining lifetime taxes. Again, the reason is that the
elderly not only continue, under the FairTax, to receive the same real
Social Security benefits, they also receive the FairTax prebate. The
average Social Security benefits for a retired couple living solely on
Social Security are $18,776. The FairTax prebate for this couple is
$4,697 which is $381 more than the FairTaxes the couple would have to
pay if they spent the entire $18,776 on taxable consumption.
Every word of the above paragraph is accurate. However, the
inference that the result is good for this retired couple is incorrect.
Under H.R. 25, the purchasing power of the retired couple referred to
in the example is actually decreased under H.R. 25 from $18,776 to
$18,704.
Per Fairtax.org Website |
|
|
|
|
Social Security |
$18,776 |
|
Purchases Possible With $18,776 |
$18,776 |
Prebate |
4,697 |
|
H.R 25 Tax |
4,316 |
Total Income |
$23,473 |
|
Purchasing Power of $18,776 |
$14,460 |
|
|
|
|
|
|
|
|
Prebate |
$4,697 |
|
|
|
H.R 25 Tax |
4,316 |
|
|
|
Excess Prebate |
$381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Purchasing Power |
|
|
|
|
Current Law: |
|
|
H.R. 25 |
|
Social Security |
$18,776 |
|
Social Security |
$18,776 |
Prebate |
0 |
|
Prebate |
4,697 |
Purchasing Power Under Current Law |
|
|
Total Revenues |
$23,473 |
Without the Prebate |
$18,776 |
|
|
|
|
|
|
Total Purchase Price With $23,473 |
$23,473 |
|
|
|
H.R 25 Tax |
5,399 |
|
|
|
Purchasing Power of $23,473 |
$18,074 |
|
|
|
|
|
|
|
|
Reduction in Purchasing Power |
$702 |
|
|
|
Percentage Reduction in Purchasing Power |
3.74% |
|
|
|
|
|
Note that if this retiree is also spending funds from savings, the reduction in purchasing power is enhanced under H.R. 25.
H.R. 25 - Impacts
Impacts on Taxpayers
- Analysis of the comparative impact at and after the implementation of H.R. 25:
* At implementation, existing savings will have diminished purchasing power of 30%.
* At implementation, high earning citizens with deferred
income from such items as pension plans and stock options would have
immediate increases in purchasing power.
* At implementation, investors would have the ability to sell
investment assets without Federal taxes. The proceeds of such gains
would be immediately available for reinvestment without any Federal tax
consequence.
* At implementation, citizens would be able to make unlimited
gifts without tax consequences and estates of any size would be able to
be passed from one generation to the next without Federal taxation.
* At implementation, all of the social and business
incentives, benefits and disincentives included in the Internal Revenue
Code disappear:
* Incentives
- Home interest deduction – encouraging home ownership
- Individual retirement plans, self employed pension
plans, pension plans for businesses – encouraging saving for retirement
- Contribution deductions - encouraging contributions to charity
- Adoption credits – encouraging adoption
- Lower tax rate on capital gains - encouraging investment
- Lower tax rate on dividends - encouraging investment
- Energy credits – encouraging protection of the environment
- Research & development credits – encouraging research & development
* Benefits
- Deduction – casualty losses – lessening taxes after calamity
- Deduction – medical expenses – lessening taxes during serious illness
- Deductions & credits – child care costs – making it possible for parents to earn a living and feed their families
- Credits – foreign tax credit – ensuring that Americans working abroad are not double taxed on their income
- Reduced tax rate - social security income – lessening taxes for elderly
* Disincentives
- Loss of deduction – excess corporate compensation
* At implementation, those individuals who have deferred
income from Federal income taxes and who would be subject to estate
taxes upon receipt of those funds or death, would permanently avoid
those taxes
* Ongoing, many, if not most, retired individuals receiving
social security and currently paying Federal income taxes or spending
cash savings would have diminished purchasing power.
* Ongoing, for high income earners and the very wealthy, it
would be virtually impossible for there not to be a reduction in
Federal taxes
* Ongoing, the purchase of a home built after implementation of H.R. 25 would cost 30% more for a family than an investor.
* Ongoing, existing alimony agreements would become a serious
problem. Such agreements contemplate increased buying power for the
payor of alimony through tax deduction and decreased purchasing power
for the recipient through the payment being taxable income.
- For many individuals, the compliance requirements of H.R. 25 would
be significantly increased. Service providers, investors owning
property, and people performing part time jobs would be required to
file monthly sales tax reports with the sales tax administrating
authority.
Impacts on Social Security – Benefits Calculation For Self Employed Individuals
· H.R. 25 modifies the definition of self-employment income:
Gross payments received for taxable property or services
Less: Gross payments made for taxable property or services (without
regard to whether tax was paid pursuant to section 101 on such taxable
property or services)
Less: Wages paid by the self employed person to employees of the self-employed person
Self Employment Income
* Self employment benefits would be calculated differently for
the self-employed following implementation of H.R.25. Income calculated
in a traditional manner would no longer be the basis for social
security benefits for the self employed.
* Self-employment income for social security purposes would
exclude all self-employed individuals who are selling non-taxable
products or delivering non-taxable services, resulting in a total loss
of social security benefits
* Self employment benefits would decline should a
self-employed individual purchase equipment for the underlying
business, thus discouraging the self-employed from investing in their
businesses, a concept clearly at odds with any steps designed to expand
the economy
Administrative Decisions & Impacts
- Analysis of Administrative & Political Issues At the State Level
* Each State would be faced with a series of difficult
decisions with respect to whether it chooses to become a sales tax
administrative authority and/or makes changes to its own method of
taxation. Each of these decisions would include both political and
financial implications. There is no assurance that a single state would
determine to become a sales tax administrating authority. Where a state
determines not to become a sales tax administrating authority, the
Federal government would assume that role.
* In states that determine to eliminate their existing income
taxes and piggyback these revenue requirements on the new national
sales tax, sales tax rates could exceed 43%. (In a California city with
a current sales tax of eight percent, if California terminated its
income tax and substituted a new flat rate state sales tax of 6%, the
combined local, state and H.R. 25 rate would approximate 44%.)
* In states that determine to maintain their existing state
income taxes, there would be no reduction in compliance activities
regarding the income tax and there would be increased compliance
requirements under H.R. 25. The administrative costs of maintaining an
income tax at the state level without the existence of a Federal income
tax would be very substantial.
* Because H.R. 25 requires state and local governments to pay
the national sales tax and because the states would lose their ability
to borrow funds at favorable tax exempt rates, it is possible that
state legislators would have no interest in doing anything to make the
process of implementing H.R 25 easy.
Economic Certainty & Likely Economic Impacts
- The Federal government will lose its ability to influence the
economy or individual behavior through modest or significant changes in
the Internal Revenue Code.
- The application of H.R. 25 to purchases by state and local
governments would increase the costs of state and local governments and
require an increase in state and local taxes.
- The loss of the rate advantage available to state and local
government in issuing tax-exempt bonds would increase the costs of
state and local government and would require increases in state and
local taxes.
- At implementation, there would be immediate impacts on
pricing and disintermediation in certain markets. Prices on high
volume, low margin items, such as food, would likely increase
dramatically.
- At implementation, foreign buyers of American retail products would have a 30% competitive price advantage over Americans.
- Tax planners would legally, easily, successfully and
materially reduce Federal income tax revenues in the year precedent to
implementation of H.R. 25 and successfully reduce Federal national
sales tax revenues in the year following implementation.
- With H.R. 25 eliminating the Internal Revenue Service two
years after implementation of H.R. 25, it can be projected that
auditing of tax returns for the final year of the current Federal
income tax would be very low. Therefore, it can be projected that fraud
by both non-filing and enhanced fraudulent deductions or unreported
income would be greatly enhanced.
- That a national sales tax rate of 30% would produce revenues
equal to the revenues produced by the existing income, payroll, estate
and gift taxes is unproven.
- Ongoing, there will be a significant incentive to spend
money in other countries; there would also be a significant incentive
to leave retail purchases in other countries. There would be a
significant incentive for individuals buying second homes to locate
those homes outside the United States and avoid the 30% national sales
tax on that purchase. There would be a significant incentive to make
retail purchases in other countries and not report their use upon
bringing them into the United States.
- Large retailers would be required to post bonds of 1.5 times
their average monthly sales tax liability, amounts well beyond the
financial capabilities of some businesses.
Legal Uncertainty
· Proceeding with a new form of Federal taxation without a
constitutional amendment to assure that the methodology is
constitutional would be foolhardy. Without a constitutional amendment,
surely to be challenged under the Constitution is the ability of the
national government to tax purchases by the states. Challenges might
also be offered on constitutional grounds with respect to the ability
of the national government to impose a national sales tax and the
exclusion of illegal residents from receiving the prebate.
· State & local legal issues could be raised including
the relationship of taxing authorities with Immigration Customs &
Enforcement. Would the state sales tax authorities attempt or be
required to inform Immigration Customs and Enforcement of the location
of families which included unlawful residents. Challenges might arise
with an interpretation of the law to be effectively requiring national
identity cards.
· State and local legal issues might be raised as to the
propriety of providing prebate benefits to legal residents who are not
citizens.
· There could be a plethora of international legal issues including treaty enforcement and unfair trade issues.
Other
· Charging a sales tax on purchases by the Federal
government and subsequently paying two levels of administrative fees to
collect this tax would increase the cost of Federal purchases by the ½%
fees.
· With the elimination of payroll taxes and income taxes,
adding employees to payroll lists for purposes of increasing individual
social security benefits would come without cost to employers. The
Social Security Administration is neither staffed nor sufficiently
experienced to audit for such issues.
Impacts of H.R. 25 at Implementation
Immediate Loss of Buying Power – The current purchasing power
of after-tax savings would immediately decline by 30%. Cash that would
have purchased $1000 of goods and services would now only provide for
$770 in purchases of retail goods and services.
Loss of assets – Any current holder of long term tax exempt
debt would immediately sustain a dramatic decrease in the value of
their assets. Without the tax-free advantages of state and local debt,
new investors would dramatically discount the value of existing long
term state and local debt.
Immediate Increases in Buying Power - For taxpayers with
deferred ordinary income (various types of pensions, deferred salary
plans, stock options etc.), there would be an immediate increase in
purchasing power. Upon implementation, a corporate executive who is the
holder of qualified stock options with a value of $2,000,000 would see
an increase in purchasing power of over $200,000 after exercise of the
options. Should that person choose to reinvest those funds, the
increase in investing power would be $700,000. (Under current Federal
income tax law, the executive received the options without any taxation
and with the expectation that upon exercise of the options, he or she
would pay income taxes at ordinary income tax rates.)
For individuals with pension plans or investment retirement
accounts, under the existing Internal Revenue Code, there are penalties
as well as Federal income taxes if they take access to those assets
before age 55. These penalties would disappear as the funds could be
immediately accessed without Federal tax. For individuals who receive
the funds after age 55, the funds are currently subject to income taxes
at the time of receipt. With implementation of H.R. 25, these
individuals would be able to receive these funds, for which they had
previously received a reduction in federal income taxes, tax-free.
These taxpayers would also receive the earnings that these funds had
previously generated without taxation.
Generational Wealth Increase – Accumulated wealth is
currently taxed in the United States through the estate tax upon death
and via the capital gains tax when assets are sold at a profit. With
the current estate tax, there is no estate tax on net assets of
$1,500,000 or less. The estate tax rate on net assets over $1,500,000
begins at 18% and rises to 45% until the taxable estate reaches
$2,000,000. The estate tax rate increases to 46% on net assets over
$2,000,000. With basic estate tax planning, a couple with assets of
$3,000,000 escapes all Federal estate taxes. H.R. 25 would eliminate
the estate tax in its entirety. The ability to move money from
generation to generation is an issue
That should be more deeply considered.
For individuals that have invested in real estate for their entire
lives, because of existing Federal income tax rules, many have never
paid Federal income taxes on the appreciation of their assets. For
these individuals, the only tax to which they would currently be
subject is the inevitable estate tax. Their increase in both buying
power, investment power and the ability to pass wealth tax-free through
generations explodes with the end of gift and estate tax.
For those with untaxed gains in investment assets, there would be an
instant ability to generate gains and pay no Federal taxes prior to
reinvestment of the proceeds. For example, assume a taxpayer purchased
a stock in 1980 for $100,000 and that stock is now worth $500,000.
Today, if that individual sold that investment, he would pay a Federal
capital gains tax of 15%, $60,000. If the income tax were repealed,
that person would have the entire $500,000 to reinvest.
None of these benefits would accrue to America’s low income taxpayers.
Impacts of H.R. 25 - Ongoing
Prebate - H.R. 25 provides that all lawful residents receive
a monthly check, a prebate equal to the Federal income taxes imposed on
the expected retail purchases of an individual at the poverty level.
The prebate provides a national sales tax exemption at precisely the
poverty level. H.R. 25 provides this prebate to all lawful residents
regardless of income or wealth. No amount is provided for unlawful
residents. Wealthy would receive exactly the same prebate as America’s
poorest legal residents.
H.R. 25’s flat rate national sales tax rate, for a two adult
household, would indirectly exclude taxation on $1700 of monthly retail
purchases and services by delivering a monthly prebate check or making
an electronic deposit of $391. For each additional member of the
household, an additional $287 of retail purchases would be excluded
resulting in an additional $67 monthly rebate amount.
All purchases of retail goods and services would be taxed at the
national flat-tax sales rate of 30% with the expectation that the
prebate amounts would be used for the purchase of necessities. There is
no mechanism to ensure that the prebate would be spent on sales taxes
for the necessities of the individual or his family. There would be no
assurance that a child would not go hungry and the funds spent on
books, drugs, alcohol or chocolate bars.
Impact on recipients of Social Security - Under current law,
social security benefits for married couples are untaxed until the sum
of their other taxable income (interest and other pensions) plus
one-half of social security equals $32,000. As income grows, up to 85%
of social security can be taxed.
The purchasing power of a couple, totally dependent upon Social
Security, receiving $18,776 of social security income decreases by
3.74% under H.R. 25. If that couple has other income, the impact of
H.R. 25 is a further diminution of their purchasing power. Middle
income retirees would see their purchasing power reduced significantly
from their income and by a further reduction of 30% on any of their
savings that are expended for retail goods and services. With respect
to the taxes on their pre-H.R. 25 savings, these taxpayers would be
subjected to double taxation at the Federal level. For many social
security recipients, H.R. 25 decreases purchasing power.
Impact on High Wage Earners - At the highest income levels,
current Federal income taxes approximate thirty percent (after
deductions for state income taxes). If a hypothetical athlete or actor
earns $50,000,000 from salary and endorsements, his or her approximate
Federal income taxes would approximate $15,000,000. (Contrary to urban
legend, it is virtually impossible to avoid this tax unless the athlete
or actor is donating significant amounts to charity.) To pay the same
amount of taxes with a national sales tax, the professional athlete or
actor would need to make, after H.R. 25 sales taxes, retail purchases
of over $38,000,000. It is axiomatic that an individual who already
owns his home and a few favorite toys is unlikely to annually have this
amount of retail purchases of goods and services. As a result, the high
wage earner is going to have a dramatic reduction in Federal taxes paid
and will have funds far in addition than under the current Internal
Revenue Code to invest.
Impact of H.R. 25 on Relative Position of Home Buyer and Rental Residence Investor – H.R.
25 provides that the purchase of a new home by a buyer with the intent
of occupying the home for his or her family is subject to the flat rate
national sales tax. H.R. 25 provides that an investor purchaser of that
same residence would not be subject to the flat rate national sales
tax. That taxpayer would charge his renters the flat rate national
sales tax. The result is that the investor buyer would have a 30% price
advantage in competing with the home buyer for new residential
property. The purchase price for the investor would be $300,000; the
young couple would pay $390,000.
Impact of H.R. 25 on Personal Tragedy – The current Federal
income tax allows a deduction for casualty losses in excess of 10% of
income and medical expenses in excess of 7.5% of income. Through these
deductions, the taxpayer who has a casualty (Katrina / San Diego fire)
effectively receives a deduction in his or her Federal taxes. Under
H.R. 25, there is not a reduction in taxes and the citizen must pay an
additional 30% sales tax on the lumber to re-build his home after a
major fire and/or the wonder pill that is keeping his child alive. This
is contrary to the historical spirit of America.
Tax Planning for H.R. 25 (and before)
Tax planners will be attracted to H.R. 25 like bees to honey.
In the initial planning to decrease taxable income in the final year
of the current income tax system and in making retail purchases
proceeding the first year of the national sales tax, tax planners would
puncture expected Federal revenues in both years.
Final year of the Federal Income Tax - Every taxpayer in the
Untied States would be attempting to do the maximum tax planning
possible in the final year of the Federal income tax. Such efforts
would include completely legitimate actions such as:
* Prepayment of state and property taxes
* Prepayment of contributions for the next year
* Prepayment of medical expenses
* Acceleration of any business expenses that might be deductible – maintenance, repairs etc.
* Deferral of all sales of property where there would be a
taxable gain. Anyone contemplating the sale of any property at a gain
(including securities) would, if at all possible, wait until the
Federal income tax was eliminated before executing the transaction.
Transactions where the purchase would occur for the purchaser and the
income would be deferred for the seller would be the item of the day
* Deferral of salary and other income through the use of any
device possible including Rabbi trusts, late payments of bonuses etc.
* Maximization of depreciation methods
* One particularly elegant tax planning device would be the
legal payment to a self employed retirement plan. This payment is due
on April 15th, at the time of filing the personal tax
return. A taxpayer in the 34% tax bracket could make this payment, a
maximum of $40,000 on April 15th and reduce his or her taxes by $13,600. On April 16th, that person could retrieve the money from their retirement plan tax-free.
* Corporations would defer their dividends to avoid the income
tax on their shareholders in the final year of the Internal Revenue
Code.
* The list, while not endless, would be very extensive and totally legal.
With the expectation of the demise of the Internal Revenue Service
and a unique reduction in the number of audits by the Internal Revenue
Service, there would be the expectation of increased fraud in the final
year of the Internal Revenue Code.
After Adoption of H.R. 25 - For wealthy U.S. individuals,
H.R. 25 would encourage them to purchase and keep assets overseas.
There would be a 30% price advantage to a villa in Mexico or a castle
in Ireland versus a second home in the United States. Other big ticket
assets such as yachts etc. would also be best kept and purchased
offshore.
Every possible ambiguity would be resultant in plans to avoid a
national sales tax. The Treasury would need to continue to propose laws
and write regulations to insure that the intended Federal revenues were
collected. Tax lawyers and accountants would be there every step of the
way to attempt to reduce, legally, their clients’ taxes.
Impacts on Social Security – Self Employed
Self employed individuals currently receive social security benefits
based upon their self employment income. Self employment income for
social security purposes is currently calculated in a manner identical
to the calculation of taxable income for Federal income tax purposes.
H.R. 25 calculates self employment income as gross payments for taxable
property or services less the sum of gross payments for taxable
property or services and wages.
This appears to be a mistake of significant proportion.
The application of H.R. 25, as proposed, would eliminate any
consistency between the historical calculation of earnings from self
employment and that required under H.R. 25. The proposed change in the
rules could be viewed as inappropriate by both retirees and current
self employed individuals. Any business that was selling products for
re-sale would have no gross payments received for taxable property and
therefore no self employment income, regardless of the business’s
actual income. In a growing business, where the profits are poured back
into the business to buy more equipment, the self employed owner would
be garnering no social security benefits.
If self employment income was calculated in the traditional manner,
the taxpayer would be required to calculate taxable income under the
current Internal Revenue Code after implementation of H.R. 25. This
would require the continuance of the Internal Revenue Code and the
continuing requirement of a calculation of taxable income for the self
employed. It would result in the promise of lesser compliance costs and
the elimination of the Internal Revenue Code being inaccurate.
Administration Decisions & Impacts
The Administrative Processes - Requirements
It is uncertain whether the administrative tasks required by the
Federal government including the Social Security Administration and the
participating states can be accomplished in a timely and fraud free
manner. It is uncertain whether the costs of implementing and
administrating H.R. 25 would be less than, equal to, or greater than
the current costs of the Federal government and the states of
administrating the current Federal income tax. The costs of collecting
the Federal taxes under H.R. 25 (1/2 of one percent) would approximate
the entire 2008 budget of the Internal Revenue Service. With increased
costs for the Social Security Administration along with the possibility
of states attempting to preserve their state income tax codes,
administrative costs of implementing the tax system could easily grow
under H.R. 25.
There will be both increased and decreased compliance costs for individuals dependent upon their specific circumstances.
Sales Tax Administrating Authority
- The first administrative step in the process of implementing H.R.
25 is for the Federal government to enter into an agreement with
interested states for the creation of individual sales tax
administrating authorities. Included in these agreements with the
states would be requirements including confidentiality, collection of
the tax, and remittance of the tax. The collection fee paid to the
sales tax administrating authority for the tax would be one-quarter of
one percent of the amount remitted.
- Where a state agrees to become a sales tax administrating
authority, the state would need to create a staff, develop software and
find locations around their state to register lawful residents. The
staffing for the original and continuing registration of all lawful
residents would include significant numbers of one time and seasonal
employees. Where the state did not determine to participate in the
process, the Federal government would also need to go through the
process of creating a staff, developing software and finding locations
around the state to register lawful residents. The sales tax
administrating authority would be responsible for collecting the tax
and transmitting to the Federal government.
- The sales tax administrating authority would be responsible for auditing the payors, registrants and administrating the law.
- The Treasury would be responsible for creating the underlying
paperwork for the sales tax payors and providing rules and regulations.
Social Security Administration
Social Security Numbers – The first step in the process of
receiving the prebate is the receipt of a social security card. Social
security cards are legally produced only by the Social Security
Administration. The processing under H.R. 25 would be exceptional in
that every lawful child of every illegal resident would be eligible for
the prebate. The requirement of an unlawful resident applying for a
social security card for his or her lawful children (born in the United
States) is problematic. The relationship between the Social Security
Administration and the Immigration and Customs Enforcement (ICE) would
need to be vetted and clarified. The relationship between ICE and the
sales tax administrating authorities would need to be vetted and
clarified. As at least two of these entities would be Federal agencies,
there could be enforcement opportunities with respect to immigration
matters. This would be a serious issue in the United States Congress
and many cities and states.
Social Security Administration – State sales tax authorities – information, systems, costs etc. – The
system requirements of integrating information systems with fifty
separate sales tax administrating authorities would be daunting and
expensive. Each state would need to have a system that was integrated
with the Social Security Administration and the Social Security
Administration would need to be able to move payments from state to
state as citizens moved from state to state.
The Social Security Administration relies upon the Internal Revenue
Service to audit for fraud in the self employment context. The Social
Security Administration relies on the requirement of payroll taxes to
insure that extra individuals are not added to payrolls for the purpose
of collecting social security benefits. Without the Internal Revenue
Service and without payroll withholding, this dynamic of ensuring a
fraud free social security system would be lost. An entire system of
auditing and enforcement would therefore need to be developed and
implemented by the Social Security Administration.
Prebate Administration – Annual Registration and payments to 300,000,000 lawful residents
- After obtaining a social security number, every lawful resident
would have to submit social security numbers and their family
information to the sales tax administrating authority for the purpose
of the sales tax administrating authority transmitting the information
to the Social Security Administration for monthly payment of the
prebate. The sales tax administrating authority would be responsible
for ensuring that the applicants were legal citizens, signed various
assertations about residence, and that there was sufficient information
for the Social Security Administration to mail or electronically
deposit the monthly prebate to the lawful resident.
- The Social Security Administration would be responsible for
receiving the information from the sales tax administrating authority,
ensuring the accuracy of the information (duplicate social security
numbers etc.) and timely sending the monthly prebate checks or making
the electronic deposit.
- Each sales tax administrating authority would receive and
transmit to the Social Security Administration changes to the
residency, filings including family additions and subtractions, as well
as changes of address etc. The information would be updated in
perpetuity for births, deaths, changes in address, and marriages.
- Every lawful resident will be required to annually
re-register with the sales tax administrating authority. Assurance that
only lawful residents are registered and that no fraud was taking place
would be very difficult to achieve. The very nature of large groups of
one time and part time employees, which initial and annual registration
would require, would exacerbate all levels of risk with respect to
fraud and abuse. No state agreeing to be a sales tax administrating
authority would have any reason to be concerned with the issue of
unlawful residents. State sales tax authorities would have no incentive
for accurately performing the registration task as for each unlawful
resident considered lawful under H.R. 25, more funds would flow into
the state economy.
- The initial and on-going costs of registering 300,000,000 citizens would be staggering.
H.R. 25 Sales Tax Collection Administration
Collections – State sales tax authority
The sales tax administrating authority would be required to register
each seller in the state using federally produced forms, collect the
funds from each seller each month and transfer the money less a one
quarter of one percent fee to the Federal government. The sales tax
administrating authority would be charged with insuring that all sales
taxes are paid and with auditing the payors. As discussed previously,
the auditing task would include determining who owed use tax on items
such as houses being converted from investment to personal use and
whether houses were rented at fair market value to family members.
Administrative requirements – Taxpayers
Sellers of taxable goods and services would be required to report
their sales and pay taxes at least monthly. These reports and payments
would be made to the state sales tax administrating authorities. These
reports would be required from sellers, including service providers and
the self employed. There have to be serious issues with any
expectations that small and individual, part-time service providers
will comply with these rules. At the lowest income levels, there would
be little hope for compliance and a belief that services provided by
unlawful residents would result in payments under H.R. 25 would seem to
be incorrect.
Wage earners – Each wage earner would be responsible for
attaining social security cards for all legal residents of his or her
home and annually registering the family with the sales tax
administrating authority. These individuals would have a significant
reduction in paperwork.
Self employed lawful citizens -
- Each lawful self employed resident would be responsible for
attaining social security cards for all legal residents of his or her
home and annually registering the family with the sales tax
administrating authority.
- Before selling a product or delivering a product, every
person liable to collect and remit taxes pursuant to H.R. 25 would be
required to register with the sales tax administrating authority. This
would include sellers of products and services for retail and investors
owning property for rent.
- Annually, a filing would be required with the Social
Security Administration with respect to self-employment income. A
filing would also be required with respect to self employment income
with respect to wages paid to third parties.
The Administrative Processes – The political decision making process
Would a State Agree to become a sales tax administrating authority?
The implementation of H.R. 25 in each state would require each state
to make very significant and politically charged decisions. The
timeliness of these decisions would determine the time line for
possible implementation of H.R. 25. The delay of a single state in
making its determination and entering or not entering into an agreement
with the Federal government to be a sales tax administrating authority
would slow the implementation date of the program. A national sales tax
with only forty-nine states ready to begin operation is a non-starter.
The implementation of H.R. 25 could only begin on a January 1st.
H.R. 25 assumes that each state would desire to administer the
national sales tax (inclusive of its requirement to annually register
every lawful resident). H.R. 25 assumes that the Federal and state
governments are capable of registering every legal resident and
delivering a monthly check or deposit to each legal resident with
competence and fraud-free.
If this author were asked for a recommendation by any state as to
whether that state should become a sales tax administrating authority,
my opinion would be that there is dramatic downside and absolutely no
upside to a decision to become a sales tax administrating authority.
There is not a single compelling reason for any state to accept the
responsibility of being a sales tax administrating authority. There is
no significant profit to be made by the state, and there is the
possibility of a significant loss as the result of the initial and
annual registration of lawful residents. There is the possibility of
failure to accomplish a confidential and fraud free registration and
the accompanying political and legal fallout there from. There is the
possibility that simple participation in this process would have
significant negative state-wide political consequences.
Would a state repeal its existing income tax?
Regardless of whether a state determined to be a sales tax
administrating authority, the state would be required to consider
whether it should or could continue to administer its own income tax.
Without a state eliminating its own income tax, the promise of a
reduction in compliance costs and activities for the residents of that
state are lost. In states which continued their income tax, the
residents would be required to complete state individual and corporate
tax returns nearly identical to the current Federal income tax return
along with beginning to comply with the requirements of H.R. 25.
Forty-five states and the District of Columbia have state income
taxes. Virtually every state relies on the Federal income tax system in
some major part to administer their state income tax system. Most state
individual and corporate tax returns begin with the Federal taxable
income of the individual or entity filing the state tax return. Most
states refer directly and indirectly to the Internal Revenue Code, and
Regulations and case law to provide much, if not all of their legal
underpinnings for their law. All states with an income tax have
arrangements with the Internal Revenue Service to share audit
information and individuals and corporations audited by the Internal
Revenue Service generally receive a state billing at the end of the
Federal audit process be that with appeal to the courts or through
negotiation and billing. Not all, but substantially all individual and
corporate audits conducted in the United States are conducted by the
Internal Revenue Service. State taxing authorities tend to audit only
for state residency and state specific income tax laws.
Most states neither have the resources nor the tax expertise to
adequately review complex transactions, multi-state or multi-national
corporations or complex tax returns. To continue a state income tax
system, each State would be required to administer their own law
without Federal assistance. This would require recreating all of the
elements of Congress, Treasury, Federal courts and the Internal Revenue
Service to administer their state tax. If all forty-five states
maintained their state income tax systems, the current costs of law,
regulation and audit may be multiplied by as much as forty-five times.
Further, as time ebbed, undoubtedly, each state would pass laws and
rulings not consistent with other states and business and state courts
would begin to adjudicate matters differently making the entire issue
of complexity an entirely new matter for multi-state businesses. The
costs of this would be dramatic.
Should a state abandon its income tax and add a new state sales tax
to the sales under H.R. 25, sales tax rates would explode. Total sales
taxes collected in some states on every retail transaction could easily
exceed 43%. A hotel room in New York City with combined hotel tax,
national sales tax, state sales tax and local sales taxes could have a
total sales and hotel tax rate exceeding 50%.
Would a state change its state sales tax to conform to H.R. 25?
Currently, most states impose sales taxes, exempting particular
items such as food. Today, many or most local governments also impose
sales taxes, also exempting particular items such as food. H.R. 25
presents a cascading of issues for every legislature and local
government body.
If a state sales tax currently exists, does the state or local
government determine to tax everything as provided in H.R. 25 or will
the state or local sales tax exempt items currently exempted?
Continuing any differences would seriously impact the technology costs
of all sellers of both Federal taxable and state non-taxable items. If
the state elects to follow H.R. 25, that state could need or feel
compelled to initiate its own prebate to ensure that the poor are not
suddenly incurring a substantial unreimbursed increase in taxes on food
etc. Perhaps, the Federal government would increase its prebate and
surcharge the states in some manner for a state prebate. (This would
result in different prebates in different states, opening the door to a
plethora of issues surrounding equality of value as opposed to equality
of prebate payment.)
If a state collects its disability and unemployment taxes from
withholding, either it would have to require withholding on salaries,
perhaps as the only withhold if Federal and state income taxes
disappear, or determine a new methodology to collect such taxes.
Political Issues:
Economics for the State - Each state would need to determine
whether one-quarter of one percent is a sufficient payment to
administer H.R. 25. The dynamics of the decision are fairly robust.
First, is there a profit to be made? If not, why would a state be
interested in participating? (If the Federal government will come into
the state, hire state residents, lease property in the state and buy
local products, unless there is a significant profit to the state from
becoming a sales tax administrating authority, there would be no
compelling financial reason to become a sales tax administrating
authority.) The decision with respect to whether a profit can be made
for the state in deciding to become a sales tax administrating
authority would include a full analysis of implementation costs. As the
intial costs would be expended before the first dollar of tax
collections, there might be a significant cash drain on the state from
the implementation process. Politically, does the state wish to manage
and deal with all of the issues of becoming the Internal Revenue
Service in a much more visible way than their current state taxing
activities?
Where a state determines to become a sales tax administrating
authority and does not abandon their existing income tax, that state
should have no interest in its requirement to provide and/or implement
the auditing and enforcement provisions of H.R. 25. When an audit
produces one quarter of one percent of any collections to the Federal
government, the costs of virtually all audits will exceed the revenues
to the sales tax administrating authority. With respect to determining
the lawful status of a resident, there would be no revenues resulting
from the audit process and therefore no benefit to the state from
actively pursuing such audits.
Where a state determines to abolish its income tax and adopt the
H.R. 25 methodology of taxing everything, there is an argument to be
made to stay out of the Federal government’s business and simply
consolidate its current tax authorities into one state agency and begin
its new sales tax form with: Federal Taxable Retail Sales and Services.
There are ample savings available to the state in this scenario.
State Decisions – unlawful residents - Lawful / Unlawful
Citizens – One of the most contentious issues in the current political
arena is the issue of the unlawful resident immigrant. H.R. 25 proposes
to exclude unlawful residents from the “prebate”. In certain states and
within certain areas of those states, the number and percentage of
individuals who are unlawful residents is very significant. The number
of families with both lawful and unlawful residents is also very
significant and the resulting increased taxation of food and the basic
necessities of life would be a serious issue to be confronted by these
individuals and these individual states. There would be significant
political pressure to have no part of a system that would increase
taxes on the poor, lawful residents or unlawful residents.
While not politically correct to state, there is the possibility of
social instability if prices are raised to the poor, regardless of a
prebate or not. Certain areas of the country are populated by
significant percentages of unlawful residents along with less
economically advantaged lawful residents. This is a formula for
isolated civil unrest issues following the implementation of new and
significant sales taxes on food.
It is of interest that the prebate is intended for any lawful
resident. As a result of this notion, all legal alien residents will
receive the monthly prebate.
Undoing a state sales tax authority agreement – Based
on the statutory language, it would be very difficult for the Federal
government to “fire” a state that was not doing an adequate job as a
sales tax administrating authority. Beyond that, the Federal government
would be totally unprepared to take over the work for a sales tax
administrating authority if it won such a battle.
Economic Certainty & Likely Economic Impacts
Macro-economics
This paper does not address the long term macro-economic impacts
that would accompany the adoption of H.R. 25. Supply side economists
argue that lower tax rates generally increase economic activity and
therefore are good for everyone. As the express goal of H.R. 25 is to
achieve a tax neutral result, the supply side economists should argue
that the impact of H.R. 25 is neutral. This excludes the issues of
increased state taxes resulting from H.R. 25 requiring the taxation of
state government purchases and the loss of the advantage from tax
exempt borrowing.
The impact of disintermediation of the short term macro-economic
impacts should be deeply studied before there is any serious
consideration of H.R. 25. Further data needs to be collected with
respect to the volatility of the securities markets that H.R. 25 could
create. The elimination of all Federal taxation of securities
transactions would eliminate any potential for an investor to wait out
a sudden drop in the marketplace because of income recognition and tax
payment issues. This might or might not cause some level of instability
in the securities markets.
One of the abilities lost in H.R. 25 is the ability of Congress to
stimulate the economy through tax reductions in times of economic
decline or malaise. This tool would be permanently lost with a passage
of H.R. 25.
Tax Rate
There are conflicting studies with respect to the tax rate that
would be required to achieve revenue neutrality with a flat rate
national sales tax. The Arduin, Laffer & Moore Econometrics study supporting H.R. 25’s “23% sales tax on all final consumption expenditures on new purchases” shows as follows:
Revenues Raised in 2004 from Taxes Replaced by the FairTax Proposal
Tax Source |
$Billions |
Individual Income* |
$809.0 |
Social Insurance Taxes |
$733.4 |
Corporate taxes |
$189.4 |
Estate and Gift Taxes |
$24.8 |
Total Revenues Replaced |
$1,756.6 |
Total Receipts |
$1,880.1 |
Percentage of Total Receipts |
93.4% |
*Individual Income tax
receipts include: Personal income taxes, Capital gains taxes, taxes on
dividend income, and the Alternative minimum tax.
Source: Congressional Budget Office, Historical Budget Data, http://www.cbo.gov.
Estimated 2004 Revenues if the FairTax Proposal were in Effect
Description of Taxable Item |
Tax Base (2004) |
Personal consumption expenditures |
$8,214.30 |
+ Purchases of new homes |
$572.20 |
+ Improvements to Residential Structures |
$147.00 |
- Imputed rent on housing |
($904.70) |
- Foreign travel by U.S. residents (one-half) |
($91.60) |
- Food produced and consumed on farms |
($0.20) |
+ Total Government Consumption |
$1,843.40 |
+ Total Government Gross Investment |
$372.50 |
- Education expenditures |
($211.30) |
+ Expenditures in U.S. by nonresidents |
$96.60 |
Gross FairTax Tax Base |
$10,038.20 |
Total Gross FairTax Revenues |
$2,308.79 |
Estimated Prebate Value |
$446.14 |
Total FairTax Revenues |
1,862.65 |
Issues that should be raised here include: If the government is both
paying and receiving the $1,843,400,000,000 of sales taxes on
government consumption, should this amount be removed from the
schedule? With the advantage being provided to investor-buyers of new
residential housing (exemption from the 30% national sales tax), can
the taxes being projected from the purchase of new homes be accurate?
Are collection costs considered in the analysis? Many other questions
need raising and discussion.
The President’s Advisory Panel on Federal Tax Reform predicted that
a national sales tax of 30% would result in more substantial tax
evasion than occurs in the current Federal income tax system. This
evasion could only be enhanced where states abolish their income tax
structure and add their tax collection amount as an additional sales
taxes to the 30% proposed under H.R. 25.
Cost of State Government
H.R. 25 would cause an immediate increase in the cost of state
government. The 30% sales tax added to the cost of state purchases
would increase state government costs by the amount of retail
purchases, 30%.
H.R. 25 would result in the loss of economic advantage for state
bonds which are issued tax free under the current Internal Revenue
Code. There currently are approximately $1,800,000,000,000 in
outstanding tax-free state and local debt. Assuming a 2% differential
between the tax-free rate and other investment rates, this represents,
over time, an increase of $36,000,000,000 in annual costs of local and
state governments. There is also the concomitant impact to the value of
existing bonds. This impact would be the immediate reduction in value
of these bonds which in some cases could destroy the economics of many
bondholders.
Exports
If a foreign buyer, not subject to paying U.S. taxes on U.S.
exports, has a 30% price advantage over a U.S. purchaser, that buyer
can afford to outbid the U.S. buyer and continue to pay a lower price.
This is a problem for U.S. buyers.
Imports/Use Taxes
It is notoriously hard to collect use taxes. Taxpayers often
consider use taxes as “for someone else”. Collection would prove very
difficult.
Microeconomics
Empirically, high volume products with traditionally low margins would have resultant and instant price increases under H.R.25.
Safeway Corporation currently pays approximately 1% of its sales for
its products in Federal income taxes. Without study of any other
factors and assuming that there is very little in the way of U.S.
income taxes paid by its suppliers in its costs (farmers do not
generally earn dramatic profits from their products), to achieve the
same after-tax profit with the elimination of the Federal income tax
and the implementation of H.R. 25, Safeway would have to increase
prices by about $ 11.5 billion dollars a year. This equates to an
approximate 27% increase in the price of food. There are cascading
impacts to this issue. At the poverty level, the rebate would be
recalculated only annually resulting in any immediate disintermediation
in prices of low margin, high volume items being born by purchasers for
the first year. Beyond the poverty level, the increasing taxes on food
would impact other purchasing decisions.
Legal Uncertainty
The likelihood of legal challenges in the court system to H.R. 25 is
significant. These challenges could result in restraining orders with
respect to the initially required administrative steps of
implementation. A successful attack on H.R. 25 after elimination of the
Federal income tax would be a national disaster. If there is any question as to its constitutionality, a constitutional amendment should be the form of this legislative change.
Constitutionality
Before enactment, at a minimum, a formal finding, available for
public review and response by private legal counsel and special
interest counsels, by the appropriate legal counsel representing the
United States government should be released confirming the
constitutionality of H.R. 25. Both the general concept of a national
sales tax and the concept of a prebate limited to lawful residents and
its enforcement plan should be fully vetted. The language of the
sixteenth amendment to the constitution allowing taxation by income tax
appears to have been written to provide explicit protection from
Article One, sections 4 and 5 of the Constitution.
The recent Ninth Circuit of Appeals ruling disallowing the Federal
government from using social security numbers as a methodology of
policing immigration should cause anyone to give pause to the entire
concept of the prebate being limited to lawful residents and the
government’s ability to enforce such a provision.
Unlawful Residents
Courts could intervene on the issue of lawful residents being the only individuals being able to receive the prebate.
The sales tax collection requirement for an unlawful resident
represents a significant dilemma. If the registration form asks for a
social security number, the unlawful resident will be unable to obtain
the correct paperwork to implement the national sales tax under H.R.
25. Those willing and desiring to obey this law, but who remain in the
United States illegally would be unable to comply with H.R.25.
Other
Withholding - H.R. 25 eliminates withholding, the most
effective manner of tax collection in the world. The current system of
withholding would be lost to the Federal government by enacting H.R. 25
Fraud – There is ample academic research that tax fraud
expands as sales tax rates go up. Tax fraud also logically expands as
opportunities increase. Both are a concern under H.R. 25. For states
that abandon their state income taxes, combined Federal, state and
local sales tax rates could exceed 43%. This is sufficiently high for
sales tax fraud to become rampant. The issue of performing a task as a
local maintenance person etc. with a price of $500 cash or $650 with a
credit card or check cannot be overlooked.
As there would be no requirement to pay payroll taxes, there would
be incentive for fraud with respect to social security filings. Unless
the Social Security Administration dramatically increased staffing,
there would be little opportunity for the Social Security
Administration to review payrolls from businesses which include family
members who actually performed no work. These individuals would be
added to the social security benefit lists. Adding a sister, daughter
etc would be far too easy.
Elimination of the IRS – The plan to eliminate the IRS two
years after passage of H.R. 25 would be a mistake. The IRS would need
years to complete current audits and a full compliment of auditors
would need to be available to audit the last year of the Internal
Revenue Code or taxpayers would assume they could get away with
anything. Completing their work would take about six years after the
passage of H.R. 25.
General claims by H.R. 25 advocates & responses thereto
Proponents of H.R. 25 make the following claims (with responses in italics by the author):
- H.R. 25 eliminates the Internal Revenue Service. – H.R. 25
replaces the Internal Revenue Service with fifty separate sales tax
administrating authorities. The Treasury will create a new agency to
administer the laws of H.R. 25. It is the tax collecting agency that
people have hated for centuries, not the name thereof.
- Closes all loopholes and brings fairness to taxation – In
the Internal Revenue Code, one person’s loophole is another person’s
definition of fairness. Both the deduction for home interest and a
specific credit to encourage research and development can be loopholes
for one and intelligent social incentives for another. As people become
knowledgeable about H.R. 25, tax planning strategies will develop and
loopholes will be identified.
- Ensures Social Security and Medicare Funding – H.R.
25 no more assures funding for social security and Medicare than the
current Internal Revenue Code. H.R. 25 would collect the same revenue
as the current payroll tax. Adequate funding for social security and
Medicare remains dependent upon actions by Congress.
- Brings transparency and accountability to tax policy – H.R. eliminates tax policy.
- Allows American products to compete fairly – Trade policies
are by their very nature, very fluid. To the extent that U.S. products
begin to arrive in nations where they will ultimately be untaxed, it is
safe to assume that trade barriers will be erected to restore the
current balance of trade.
- Reimburses the tax on purchases of basic necessities
- Enables retirees to keep their entire pension check – This
claim is disingenuous. While the pension check will not be subject to
income taxes, the purchase of goods and services will be subject to a
flat rate national sales tax on all purchases of retail goods and
services. For individuals spending their pension check of good and
services, this claim is without meaning.
- Enables workers to keep their entire paycheck - This claim
is also disingenuous. While the pension check will not be subject to
income taxes, the purchase of goods and services will be subject to a
flat rate national sales tax. For individuals spending their pension
check on goods and services, this claim is without meaning.
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