Fair Tax: Out of fire, into frying pan?
By SHARON KERR Staff Writer

A magician relies on smoke and mirrors, illusion and misdirection to achieve sensational effects that thrill an audience. The Fair Tax Act (HR25 AND S25) before Congress does much the same thing.

Retiree Bob White of Jasper questioned U.S. Congressman Kevin Brady (R-Woodlands) at a recent town hall meeting. Brady is a co-sponsor of the bill.

White asserts the Fair Tax is anything but fair to older Americans, "or anyone who has been putting after-tax dollars into savings accounts."

The Fair Tax bill hasn't registered much more than a blip so far, but White believes it is a sleeper that will become a major issue in the 2008 elections. Republican presidential candidate Mike Huckabee endorsed the Fair Tax proposal last week, and support is growing in Congress.

In short, the Fair Tax bill purports to replace all federal taxes- income taxes, capital gains, the whole lot- with a uniform national sales tax of 23 percent for all goods and services.

White has sent letters to several elected officials expressing his concerns. His letter states, "(HR25) would penalize many Americans as they liquidate their already federally-taxed savings, home equity or investments to spend for living or retirement expenses... (we) would be required to pay a federal sales tax on these same dollars which have been previously taxed."

White told Brady a national sales tax would make retirees pay taxes a second time at the cash register.

Brady's reply was, "You already do. You just don't know it." The congressman picked up a woman's purse as an example and said there is a concealed tax burden in every consumer item.

That concept is explained in "The Fair Tax Book," written by talk show host Neal Boortz and Congressman John Linder (RGeorgia), the original sponsor of the Fair Tax bill.

The chapter on "The embedded costs of our tax code" is based on research by Harvard economist Dr. Dale Jorgenson, who concluded that concealed taxes in consumer goods range between 15-26 percent; the average is 22 percent.

Embedded taxes include all the payroll taxes and hidden accounting costs to collect and pay all kinds of taxes. Those costs are built in (embedded) in every single step a product takes towards its final sale to the consumer.

As an example, the authors take a loaf of bread and follow it from the seed of wheat to the flour mill, the bakery, packaging, distribution and finally to the grocery store that sells you the loaf of bread.

"All of these elements make up a part of the cost of the consumer goods we buy... and they're all eventually paid by the end consumer," according to the authors.

The book's premise is that if we substitute a national sales tax for all other taxes, then companies relieved of that tax burden would roll prices back. (White says, "Sure, we believe that will happen.")

We could all keep 100 percent of our paycheck, and the government would only collect tax when we spend our money, according to the authors.

Does it sound too good to be true? But wait, there's more, according to White.

Consequences

"Once you get into it, you see they haven't really thought it through," White says.

There's a reason the authors use a loaf of bread as their example. It is one of the very few consumer goods wholly produced within U.S. borders.

Since most of what we buy is imported (think of clothes, cars, bananas, almost everything else), we're not likely to see price rollbacks on those items.

The authors say that's a good thing. The benefit is that American goods will be more price-competitive.

The authors predict that the Fair Tax will usher in an era of unprecedented economic growth and opportunity, but the math gets a little fuzzy, according to White.

For instance, the Fair Tax book says corporations will take the money they save on taxes and re-invest it in growing their business. (Wait, didn't the book say they are supposed to take that money and rollback prices for us consumers?)

The authors claim that the Fair Tax will finally tax criminal income from illegal drugs and pornography.

When the criminals spend their money, the government collects sales tax on their illegal gains. (Wait, doesn't the book explain they already doing that with embedded taxes?)

The book says companies that now have corporate funds in tax-sheltered offshore accounts will bring that money home. (Wait, won't money go offshore when people travel to evade the national sales tax here?

The book doesn't predict that, but White thinks it will be an obvious tactic by those who wish to avoid the sales tax.)

Simplicity itself

The Heritage Foundation think tank that advises Washington policy makers says, "Complexity is a hidden tax amounting to more than $100 billion. This is the cost of tax preparation, lawyers, accountants and other resources used to comply with the Internal Revenue Code."

The Fair Tax book claims the system is so fair and transparent that it will eliminate most forms of tax fraud.

White says tax fraud won't go away, it will just find different courses. It does seem like the lines are not as clear as Fair Taxers believe.

Take, for example, a builder who buys a bathtub under the Fair Tax system. Lowe's doesn't tax him, because only the end user (the new home buyer) pays tax. Meanwhile the builder's brother wants to upgrade his bathroom with a luxury tub. If Bubba buys it himself, he pays hundreds more in sales tax... guess what?

Yes, we will need auditors, and the fair and simple tax that was going to remove IRS agents from knowing your personal business now has them snooping in your bathroom.

What about services? All services will be subject to sales tax.

How will it affect small businesses?

People already hire illegal immigrants because they work cheaper.

When a landscaper has to add a national sales tax to his service, there's that much more incentive for someone to hire an illegal alien and pay cash instead.

Libertarian writer Claire Wolfe predicts a booming black market in goods and services.

Cash purchases will automatically be suspect and the government will push to make all purchases trackable through national ID cards, "The excuse will be to prevent the terrible crime of sales tax evasion."

Economics 101

With elections looming, IRS-bashing plays well, as does the promise that eliminating income taxes "will make April 15 just another lovely spring day," according to the authors.

However, leading economists are not leaping to support the Fair Tax proposal.

Dr. Jorgenson, whose research was quoted in the book, says that a revised income tax, rather than shifting to a consumption tax, is "still the most fruitful direction for reform."

The fact is that the Fair Tax book admits it is not about tax reform at all. It is "revenue neutral," meaning that it is designed to give the government the same income it has now.

The authors claim that the beauty is that the Fiar Tax is so transparent that legislators could not raise or conceal taxes, as they do now in complex tax codes.

What they do not say is that the simplest way for government to increase revenue with the Fair Tax in place would be to allow inflation to take hold and run wild.

If the feds get a percentage of every loaf of bread, they get twice as much when the loaf costs twice as much.