Catching Up... -- Fitzy

On September 19, 2008, the Democratic Congressional Campaign Committee released their first Walberg-specific television advertisement:



My initial reaction? "Finally, someone's talking about this stupid plan!" And I mean stupid. Astoundingly stupid.

I've had a quarrel with the "FairTax" for a while now, starting long before Walberg Watch. I want to talk a little bit about it, if you're interested. But first, here's the Walberg campaign response to the ad:

Dear Friends,

Just wanted you to be aware of a recent attack ad that has aired on behalf of Congressman Walberg's ultra-liberal opponent, Mark Schauer. The Democrat Congressional Campaign Committee (DCCC) has invested significant amounts of money in our district to go on the attack, and spread lies about Tim's record.

Below is a press release we issued that explains the truth. Please feel free to share this with any friends who may have questions.

Thank you all for your support - let's all keep working toward victory in November!


Best,


Justin Roebuck

Campaign Manager

(Thanks to the friend who passed that along to me...)

I want to stop right there for a moment and remind Justin that it's actually the Democratic Congressional Campaign Committee, not the "Democrat" Congressional Campaign Committee. It just sounds dumb when you don't use the right word.

Yeah, that's a minor complaint, but it bugs me, and that's the reason that people like Tim Walberg do that. Just remember, every time you call it the "Democrat Party," an English major cries out in pain.

Moving on...

Jackson, MI- Today, Mark Schauer's Washington DC friends, the Democratic Congressional Campaign Committee, kicked off their massive television ad blitz by attacking Congressman Walberg for supporting the Fair Tax proposal, H.R. 25. The ad claims Congressman Walberg supports a new 23 percent sales tax, but the ad fails to mention the Fair Tax proposal would repeal the federal income tax, payroll tax, capital gains tax, corporate income tax, and death tax, and junk the tax code, shutdown the IRS, and be a net tax cut.

"It's not surprising Mark Schauer's Washington DC supporters would attack Tim Walberg for fighting to junk the tax code, shutdown the IRS, and reduce the tax burden on Michigan families and small businesses. While Mark Schauer was the deciding vote for the largest tax increase in Michigan history, Tim Walberg is fighting against higher taxes and for the families of Michigan," stated Justin Roebuck, campaign manager.

Background:

Details on the Fair Tax, H.R. 25, the proposal the DCCC uses in the ad:

This is from a detailed study on the Fair Tax entitled “Taxing Sales under the FairTax – What Rate Works?” published by several well-known economists, including a Research Associate from The National Bureau of Economic Research.

[Link]

Key takeaways:

Repeals a myriad of taxes and replaces them with a simple single rate consumption tax - “As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level.” (page 2)

Net tax cut - “Revenues from the FairTax at a 23% tax rate, plus other federal revenues, are estimated to yield $3,209 billion which is $76 billion less than current CBO spending projections for 2007… ensuring real revenue neutrality at the federal level… implies a rate of 23.82%.” (page 2)

The press release then goes on to talk about Schauer as supposedly voting for the largest tax increase in the history of humanity. That's for a different post to debunk. Right now, let's talk about the "FairTax."

I'll concede a few points to Congressman Walberg-- the DCCC ad wasn't totally fair. If enacted, the "FairTax" would replace all other federal taxes you pay now. So, no more income tax, no more gas tax, no more business taxes, no more Social Security payroll tax. Instead, everything would be covered in a 23 percent sales tax on everything that you buy. Advocates say that prices wouldn't actually increase, because, no longer having to pay taxes while producing goods or services, businesses would lower their own prices and it would all balance out.

Sounds nice, right? Well, no. I'd like to give a few reasons for why this is a bad idea. This is by no means a comprehensive list.

For starters, it's not a 23 percent sales tax. That number is the result of mildly creative mathematics. Michigan's current sales tax, 6 percent on most items, takes the pre-tax price of the product, calculates 6 percent, and adds that on for the post-tax price. In other words, if a business sets a price at $1.00, tax is 6 percent, and the price you pay is $1.06. It's pretty straightforward.

That's not how the "FairTax" people calculate it. Instead, they get their 23 percent figure by deciding that 23 percent of the item's price will be tax.

As the Washington Post explains:

First, the 23 percent figure is disingenuous. If the current price of a widget is $1, a 30-cent sales tax would be added at the register under the FairTax. Because 30 cents is 23 percent of $1.30, backers of the tax claim that the tax rate is 23 percent.

So, it's not a 23 percent sales tax, it's a 30 percent sales tax. The DCCC ad was wrong. It might seem like a minor point, but it matters.

The Post continues:

The Presidents' Advisory Panel on Tax Reform -- that's President Bush's tax panel -- calculated that the rate would have to be at least 34 percent, not 30 percent, "and likely higher over time if the base erodes, creating incentives for significant tax evasion." Brookings Institution economist William Gale puts the rate at 44 percent -- and his calculation doesn't take into account cheating, for which there would be ample incentive.

(Emphasis added.)

So, now we're up to 34 to 44 percent federal sales tax. Add in Michigan's 6 percent sales tax, and we're looking at a 36 percent sales tax at the minimum and up to a 50 percent sales tax. That's a big increase in prices.

Except, that's not the whole story. Currently, Michigan's state sales tax is not levied on certain items, like food or prescription drugs. This would not be the case for the new Walberg tax, which would be applied to everything. Prices will go up.

And here's where a lot of "FairTax" advocates get angry. They say that prices won't go up, because of the savings businesses experience, not having to pay taxes earlier in the process. The idea is that certain taxes, like business and Social Security taxes, are embedded in the cost of your goods. Since these costs will be eliminated for the businesses, their prices will be lowered, so the new 34 to 44 percent sales tax won't have a real impact.

Setting aside for a moment the question of whether businesses would actually lower their prices to reflect changes in the tax code, FactCheck.org pretty decently refutes this argument:

A bit of critical analysis shows that this cannot be right. The FairTax is revenue-neutral. That means that for every tax dollar collected under the current system, the FairTax has to collect a dollar. If the FairTax exactly equaled embedded taxes, then it could not possibly be revenue-neutral, since embedded taxes do not take into account personal income or estate taxes. The FairTax rate would have to be high enough to replace embedded taxes plus income and estate taxes.

Chris Edwards, the Cato Institute's director of tax policy studies, points out that prices do not really matter; corporate, payroll, income and estate taxes currently generate approximately $2.4 trillion, and a revenue-neutral FairTax would still require that taxpayers pony up $2.4 trillion. Nor is it clear that the 22 percent embedded tax figure is particularly meaningful. David Burton, chief economist of the Americans for Fair Taxation, calls it "simplistic" to think that the entire cost of corporate taxes is borne by consumers. Cato's Edwards suggests that while consumers do pay at least part of the costs, producers also bear some of the burden. That is, employees pay part of the costs of hidden taxes (in the form of lower wages), and corporate shareholders pay another portion (in the form of lower returns on their investments).

So, the prices you pay will be higher.

Then comes the question of whether this makes any sense from the government's perspective. The only way the math works out is if the government pays itself the tax whenever it makes purchases... which gets a little messy. As the Boston Globe explains:

Governments must also pay. The FairTax would apply to all government purchases at every level. Only education spending is exempted.

States would have to pay 30 percent more on every highway and bridge they build, local governments would have to pay 30 percent more for police and fire protection, and even the federal government would have to pay the tax to itself when it buys weapons and ammunition for troops.

Taxes would have to be increased at the state and local level to pay the FairTax to the federal government. The FairTax rate would also have to be higher to pay for the additional federal spending it will require. However, FairTax supporters exclude this higher spending from their calculations. The 23 percent rate is designed only to be revenue-neutral, not spending neutral. Thus the federal deficit would either rise by more than $200 billion per year or spending would have to be cut by this much.

Hm. So, not only would this potentially be a 44 percent sales tax, and not only would prices rise, but local and state taxes will also increase in order for local and state government to afford paying new taxes to the federal government. And then the federal taxes-- now just the "FairTax"-- will have to be increased in order to afford paying... taxes... to... the federal government.

I don't know about you, but I'm starting to lose faith in Congressman Walberg's idea.

But then comes the "prebate." It's the magical addition to the "FairTax" that makes it okay for poor people. Basically, every month, every family in America would get a certain amount of money, calculated based on the size of your family. That check from the government would be enough so that families below the poverty line wouldn't be overburdened by the sales tax. How much would this cost? FactCheck.org:

Sometimes sales taxes are called regressive, meaning that the poorest pay higher rates than the wealthy. Strictly speaking, sales taxes are flat, since everyone pays the same rate. But because the poor tend to spend a high percentage of their income on basic consumer goods such as food and clothing, sales taxes do require the poor to pay a higher percentage of their income in taxes.

The FairTax plan, however, helps to alleviate this difficulty by exempting sales taxes on all income up to the poverty level. Taxpayers would receive a "prebate," which Edwards calculates to be about $5,600 annually. The Treasury Department estimates that the prebate program would cost between $600 billion and $700 billion annually, making it the largest category of federal spending. Americans for Fair Taxation disputes the Treasury Department numbers, claiming that the actual cost would be closer to $485 billion per year. The Treasury Department has so far refused to release its methodology, making it difficult to determine whose estimate is correct.

So, let's say $485 billion is the right number. For comparison purposes, the Social Security Administration expects to pay out about $660 billion this year. So, the "prebate" proposal isn't quite as big as Social Security, but it's getting up there. And here I was, thinking that Republicans didn't want to add extra spending on entitlement programs.

The Boston Globe points out another problem:

Although FairTax supporters tout the generosity of the rebate, it is extremely modest because it is based on the poverty level income - a figure that bears no relationship to the actual cost of living. As a consequence of the way the poverty rate is calculated, childless couples would get a monthly rebate of $391 per month, but a single mother with two children would only get $329 per month.

That doesn't seem very "fair" to me.

Supposing the "prebates" actually did make this a viable plan for those below the poverty line, how would the system effect the rest of us? Back once again to FactCheck.org:

With the prebate program in effect, those earning less than $15,000 per year would see their share of the federal tax burden drop from -0.7 percent to -6.3 percent. Of course, if the poorest Americans are paying less under the FairTax plan, then someone else pays more. As it turns out, according to the Treasury Department, “someone else” is everybody earning between $15,000 and $200,000 per year.

In other words, the net result of the "FairTax" is a middle-class tax increase and an upper-class tax cut.

But let's set all of that aside for a moment. If it makes it simpler, is it worth it? One of the main arguments in favor of the "FairTax" is that it would simplify the tax code, it would be easy to understand, and we could eliminate the IRS. The next, logical question then becomes: Who runs the massive "prebate" system? Who collects the sales tax in the first place? I've got to think a new bureaucracy on the scale of the Social Security Administration (or bigger) would be needed to make all of this work.

And there are more questions. What about charitable giving? Will people give as much if there's no tax incentive? What about tax credits that are used to stimulate certain parts of the economy, like alternative energy?

For that matter, what happens in economic times like we're facing now? If the federal government's primary source of income is a national sales tax, what happens if, in a recession, people just buy less stuff? Government revenues go down, arguably at a time when the government most needs resources to act to stimulate the economy (or bail out failing banks).

So, yes, Congressman Walberg, the DCCC ad didn't tell the whole story. Unfortunately, the whole story is much, much worse.

This is a stupid idea, and I'm embarrassed that my congressman supports it.

Labels: DCCC, Economy, National Sales Tax, Taxes, Tim Walberg