UNITED STATES – MAY 16: Representative Buddy Carter, Republican of Georgia, leaves the House Republican Conference meeting in … [+]
The House of Representatives will vote on a plan that would abolish the IRS!
According to a Fox News Story by Houston Keene, holding the vote is part of the deal that got the Freedom Caucus to agree to Kevin McCarthy becoming a speaker. Representative Earl (Buddy) Carter introduced that the Fair Tax Act is leading with the IRS abolition aspect:
Cosponsoring this Georgia-made legislation was my first act as a member of Congress and is, appropriately, the first bill I am introducing in the 118th Congress. Instead of adding 87,000 new agents to arm the IRS against small business owners and average America, this bill will eliminate the need for the department entirely by simplifying the tax code with provisions that work for the American people and encourage growth and innovation. Armed, unelected bureaucrats should have no more power over your pay than you do.
Some thoughts
I consider the hint to be somewhat false since under the law the IRS will be replaced by the Bureau of Excise. the Sales Tax Office and offices or offices or departments or whatever in as many of the fifty states as want to join in the fun of collecting on behalf of the federal government a 29.8% sales tax on just about anything you buy. people consume except used goods.
If you want to form an opinion on this proposal, I really encourage you. to read the bill. It’s only 132 pages long, which is pretty tight given what you’re looking to accomplish. There is great simplicity to the plan compared to the current income tax system we have. Arguably not an entirely fair comparison. Collectively, we have chosen to use the income tax not only as a way to increase revenue, but also as a kind of Swiss Army knife to encourage and discourage all sorts of different things.
The Tax Reform Act of 1986 lowered rates and simplified a bit, but it didn’t take long for the complexity to overlap. Where will the political will come from to not complicate the FAIR Tax? States with sales tax have all kinds of exemptions and a tendency at times to declare sales tax holidays. It seems inconceivable to me that industries and interests favored by the income tax would not seek special treatment by the sales tax.
the rate
You will see the rate indicated sometimes as 23% and sometimes as 30%. The proposed statute states that the rate is “23 percent of gross payments for taxable property or service.” Gross pay is defined to include tax. So if something costs $77, the tax is $23. I understand the idea is to do an apples-to-apples comparison with income tax. If you earn $100 and pay 23% income tax, you have $77 to spend.
But sales tax is usually set as a percentage of the item’s price. So there are commentators who call it a 30% sales tax. Then I do the math and get 29.8%. I have not found the source of the 0.2% discrepancy. Referring to it as a 23% sales tax is a bit disingenuous anyway, since that’s not how sales tax usually works.
bureaucracy
Visceral hatred of the IRS seems to be a major selling point for the FAIR tax, which has been around as a proposal in one form or another for decades. In 2014 I covered a documentaryand called UnFair: Exposing the IRS which turned out to be some kind of infomercial for the FAIR tax.
This was at the height of the “IRS scandal”. Remember Lois Lerner. That was a big part of the focus of the documentary. The scandal was about the IRS’s treatment of applications for exempt status. Ironically, the legislation would not eliminate the fundamental problem that gave rise to the scandal. There is special treatment for nonprofit organizations that apply for a “certificate of qualification.”
The bill repeals payroll taxes, income taxes, and inheritance and gift taxes. That actually leaves quite a few weird federal taxes that few people give that much thought to. Take a look at Form 720 if you want information about them. The IRS collects and enforces those taxes. That part of the IRS is not abolished. It is renamed.
There is an implication in some of the FAIR tax arguments that the national sales tax will be easier to collect than the income, payroll, and estate taxes, but when you study the material, it is clear that they admit that making the economy turn over more than $4 trillion is a big job. The IRS abolishment comes from handing over the work to the states in exchange for an administrative fee. One of the findings in the introductory part of the law is – “it is good tax administration policy to encourage the administration and collection of federal sales tax at the state level in exchange for a reasonable administration fee for the states“.
A state may contract with another state to handle the administration. If a state doesn’t elect state administration or screw it up enough, the federal government will collect from that state. This seems to me much more complicated and prone to abuse than having a single agency collecting the tax. It looks like there will be a lot more opportunity to slip between the cracks and significant inconsistency in management.
In my more than forty years of experience in the net tax business, I have found that the IRS is easier to deal with than the states, but the IRS has clearly been deteriorating. I did one of my unscientific surveys of my professional brothers and here is the result.
So maybe the folks at FAIR Tax are right, but I still think having multiple agencies collecting the same tax is a recipe for chaos.
waivers and shenanigans
The tax is very broad. A taxable property or service is any property except intangible property or used property and any services. The service includes salaries. So at Downton Abbey they have to pay taxes on all that money that they’re paying to the butler, cooks and maids. There are two big exceptions to the definition: intangible property and used property. Then there are the exemptions.
Exemptions are goods or services purchased for:
- Commercial purposes or use in a trade or business. In the definitions, it indicates that education and training will be treated as services used to produce, provide, lend, sell taxable goods or services.
- An investment purpose
- State government functions that do not constitute final consumption
The third exemption raises an interesting constitutional question. It appears that the tax applies to state government functions that constitute final consumption. Having the federal government tax the states seems troubling.
Exemptions for business purposes, investment purposes, and the exclusion of used property send my inner villain into something of a riot. At fairtax.org you can find research indicating that the tax gap for sales tax will be less than the existing system. Some of it is quite persuasive, like this observation from Jade Walle.
A staggering 1.3 percent of all US retail businesses account for 75 percent of gross revenue, which is a minuscule 13,019 retail businesses. The vast majority of current US retail receipts and state sales taxes would be collected by an infinitesimally small number of retail businesses, such as Sam’s, Walmart
WMT
AMZN
I’m still cooking up all sorts of dodge schemes, but thanks to my chaotic good lineup I’ll never share them.
A Pinch of Escalation – The Prebate
Progressivity in the system comes from the allocation of family consumption. This will be a monthly check for each family for the amount of poverty level income multiplied by the tax rate. There are some complications in the definition and we will still have people fighting over who is entitled to the children.
—If the parents of a child are divorced or legally separated, the child for purposes of this chapter shall be treated as part of the qualifying family of the custodial parent. In joint custody cases, the custodial parent for the purposes of this chapter shall be the parent who has custody of the child for more than half the time during a given calendar year.
The weirdness of Social Security
Wages will still be reported to the Social Security Administration even though there are no longer payroll taxes, benefits will still be calculated based on earnings. As of the first year, the income will be imputed between Social Security and General Revenue. I worry about cutting the connection between what you pay in social security taxes and your bottom line benefit.
Feeding inequality?
This really sounds like something that will fuel inequality. The richer you are, the smaller the percentage of your income you consume. Add to that that at the highest levels it is easier to disguise consumption as investment or business related. And there will be no sales tax on amounts you earn in the United States but consume elsewhere. That seems to favor the rich.
The only plus point I see on the lower end is the used property exclusion. However, I suspect that may make used property more valuable. Given the 30% markup, I don’t think I want to buy a new house, a new car, new clothes, new furniture, almost anything new.
A plea
Try to avoid discussion of this proposal that is not based on looking at current legislation. If you think I have the wrong proposal, please point out where in the proposed statute I have deviated. Of course, I have overlooked the administrative details.
