Incumbent Democratic Senator Blanche Lincoln .. struggling for her political life in Arkansas.. runs an ad saying that her opponent, Republican John Boozaman, is "excited about putting a 23 percent national sales tax on everything you buy." In the Colorado Senatorial race polls show Democrat Michael Bennet trailing Republican Ken Buck by as much as five percent, Bennet is running ads saying that under Buck's tax reform plan a bag of groceries could cost $11 more and your prescription drugs could cost over a hundred dollars more.
In North Carolina's 8h Congressional District Republican Harold Johnson is hoping to oust Democrat Larry Kissell. There we have the NEA (National Education Association) Fund for Children and Public Education running an ad replete with the sounds of a crowd attending a college football game (note the appeal to sports fans) and an announcer saying "It's Harold Johnson Tax Day at the game, where every fan pays a 23% national sales tax." The ad goes on to say the tax would be added to tickets, hot dogs, groceries and gas."
That's all rather frightening, isn't it? After all, who would want to see their grocery, gas, food, prescription drug – or any other bill, for that matter – increased by 23%? Answer: Not a soul. So what sane candidate would ever propose such a tax increase? Answer: No sane candidate would.
So … where are these ads coming from? Even the most baseless of attack ads must have a grain truth to hold on to, if for no other reason than to avoid generating nothing other than ridicule and laughter.
Congressman Larry Kissell, Senator Blanche Lincoln and the NEA Fund for Children and Public Education are all aiming these attack ads on opponents who support The FairTax (H.R. 25), a bill introduced by retiring Republican John Linder from Georgia.
Is the FairTax really that frightening? Would it add 232 percent to the cost of your groceries and prescriptions? Hardly. The ads mislead, and those who run them know full well they mislead. If you read on to the end of this column you will be a fan of the proposal at best, or seeking more information at worst. One thing is certain. You'll soon see that Lincoln, Kissell, the NEAFCPE and other Democratic candidates who are running scare ads against FairTax supporters are engaged in an attempt to deliberately mislead voters about this bill and the candidates who support it. You might even say that they are deliberately lying.
In 2005 Congressman Linder and I teamed together to write The FairTax Book. We debuted No. 1 on the New York Times Bestseller's list. Now think about that: A book about tax reform coming out as No. 1. Something there must have stirred the imagination of lovers of great literature. Two years later we published "FairTax, The Truth; Answering the Critics." Yet another NYT Bestseller's List debut. Here I take on the task of condensing well over 115,000 words from two books into one column to explain this tax reform idea. To offer the truth and to embarrass those who created the attack ads.
First: H.R. 25, The FairTax Act, could well be the most thoroughly researched piece of legislation ever introduced in our Congress. About $22 million private-sector dollars worth of research from some of our most brilliant economists and academics went into the development of this plan. Compare this, if you will, to the dollars and time spent on researching ObamaCare. The FairTax is not a hare-brained idea thrown together in a legislative flurry to be passed quickly so that people could then find out what's in it.
Let's answer the primary charge first. Does the FairTax really establish a 23% national sales tax? Yes, it does. Does it add that tax to the price of your groceries? Not really. Here's what the attackers don't tell you. The key here is that the FairTax first removes all of the embedded taxes that are already contained in the price of all consumer items. The FairTax is added as a replacement for already existing taxes, not an addition to those taxes. The retail price of the item remains essentially the same.
What are these embedded taxes? We'll use the example of a pair of shoes, and start with the cow. Somewhere a rancher raised a cow that was destined to become your next pair of shoes. That rancher purchased feed, medicines, veterinary services and supplies and a host of other items to assist in the raising of our cow. Every one of the businessmen who supplied those products or services had a tax obligation to the federal government to fulfill, and every one of those businessmen would then incorporate that tax liability in pricing their services to our rancher. The rancher also has his own federal tax liabilities to put into the mix.
At some point the rancher sells the cow to a processing plant. The meat goes in one direction, other less savory body parts in another, and the hide to a tanner. The rendering plant has its own federal tax liabilities that will be incorporated into the price charged for these cow components.
The hide eventually arrives at the shoe manufacturing (furniture, belt manufacturing – whatever) company, there to be turned into a shoe. Along with the hide our shoemaker is receiving metal eyelets, dyes, shoelaces, rubber soles and fabric inserts; all arriving with their own share of federal tax costs to their manufacturers, distributors and transporters. The shoe is then trucked to your shoe store with all of those taxes embedded into the price. The retailer then adds his tax bite and other costs, plus a few percent for profit, to the shoe and in you walk with credit card in hand.
What's the final tax tab? That's where some of the $22 million in research went; arriving at that figure. The embedded taxes in an item you buy at retail can range from 19 percent to 26 percent or more, depending on the article. The average was determined to be around 22 percent.
Here's where the FairTax steps in. The FairTax removes all of these tax components from the price of every service or item you purchase. How? By completely eliminating all federal taxes on business. Including income taxes, self-employment taxes, capital gains taxes, the businessman's share of payroll taxes …. ALL of it. Gone! The same goes for you! The FairTax eliminates all personal federal income taxes, capital gains taxes, dividend taxes, Social Security and Medicare taxes, and the estate tax. Gone. IRS paperwork, tax forms and audits? Gone. In fact …. IRS? Gone!
Where are we thus far? The FairTax is passed, and the 22 percent embedded tax in everything you buy is eliminated. Then a 23 percent national retail sales tax, the FairTax, is embedded in the price of your retail purchases. You buy a $100 toaster, the receipt says "Toaster - $77.00. FairTax - $23.00." Why 23%? Exhaustive research showed that this would be the tax rate necessary to achieve revenue neutrality. The FairTax is tax reform, not government reform. One thing at a time. The goal was to keep the revenue stream to government at the same level after the FairTax as before. Under the FairTax, then, How much more would a $50 bag of groceries cost? Not the $11 that Bennet's attack ad on Buck suggests. How about fifty cents? Quite a difference. Suddenly Bennet's ad loses a bit of its steam, doesn't it?
Consider, also, what happens to your personal finances! If you happen to live in a state with a state income tax you might want to have some serious discussions with your local legislators … but if you live in Texas, Florida, Tennessee or one of the other six states with no income tax, the elimination of your federal tax burden means you get 100% of your pay every two weeks. If you're hired at $1000 a week you know that your check every two weeks will be $2000. Plus .. there will be no more record keeping, receipt saving, accountant hiring or any of the other pains that accompany your efforts to comply with a federal tax code. April 15th becomes just a nice Spring day .. maybe even your birthday or anniversary … but nothing else.
Here's a question: Let's say you're in a 25 percent federal income tax bracket. Would you rather pay 25 percent of everything you earn? Or would you rather pay 23 percent of everything you spend?
Think about this. With the FairTax you only pay taxes to the federal government when you spend at the retail level. Save the money .. no federal taxes. Invest the money .. no federal taxes. Keep the money in your checking account .. no federal taxes. Give the money to your children .. no federal taxes. Pass away with boxes of money stacked up in your house .. no federal taxes.
You're really starting to hate this idea now, aren't you?
Here's the cherry on the FairTax sundae. When the FairTax plan was being developed it was thought, and people in focus groups confirmed, that nobody should ever have to pay a penny of their earnings to government until they had first taken care of the needs of their family. What is the moral justification for allowing the government to seize a portion of your earnings before you've taken care of your family's needs for the basic necessities of life? The designers of the FairTax were determined to find a solution to this problem, and came up with the "prebate."
The government publishes Federal Poverty Guidelines every year. These figures are supposed to represent the amount that families of varying sizes would have to spend every year to meet their basic needs. The FairTax plan calls for every head of household in the country – legally in the country – to get a "prebate" at the beginning of each month equal to the amount of the FairTax that person will pay during the following month while purchasing those basic necessities. That poverty level for a family of four is $22,050. This equals $1,837.50 per month in spending, of which $423 would be FairTax. At the beginning of each month this head of household would receive a credit to his checking account, debit card or credit card in the amount of $423. This means that no citizen or legal resident of this country would ever pay one penny in tax to the federal government before his or her family needs were met. The prebate is what caused a focus group participant to blurt out "Well, that's a fair tax!" Hence the name.
Are there downsides to the FairTax? Yes, as a matter of fact -- one huge downside, if, that is, you're a member of the political class. The FairTax would be the most massive transfer of power from government to the people since this country was founded. Politicians have this strange aversion to giving up power. Another problem is that, as Democrats are now illustrating, the FairTax is very easy to demagogue. If honesty isn't your forte you can tell people that your opponent wants to add a 23 percent sales tax to everything you buy without including the pesky little details. As Politifac.com says: "Our bigger issue with the Lincoln ad – and a number of similar ads being run against Republicans who have had nice things to say about the "Fair Tax" – is that it highlights support for a 23 percent national sales tax but fails to mention that it would replace federal income taxes. No matter what you think of the plan, that's a very deceptive omission."
When you condense over 100,000 words from two books into one column of around 2000 words, much must remain unsaid. There's the economic and jobs growth that would result from a system wherein people could do business without any tax component on capital and labor. There's the $300 to $500 billion in annual tax compliance costs that would be eliminated. That's just for starters.
If you want more information perhaps the two books mentioned at the beginning of this column might be a good place to start. There's also a great deal of information at http://www.fairtax.org.
The midterms are approaching. Take some time to look behind the ads.