Brian Baker: Nothing fair about Fair Tax program

By Brian Baker

Last update: Wednesday, July 12th, 2017

After the recent publication of my column on the GOP tax reform plan that would eliminate the federal tax deductions on home mortgage and interest payments (“Republicans shooting themselves in the foot,” June 29), I was discussing tax reform with some friends when a couple of them proposed instating the Fair Tax program, which would allegedly eliminate the IRS and simplify our tax code.

I admitted I didn’t know much about the plan, and after the discussion decided to educate myself. So I went to the website of the group promoting this plan (https://fairtax.org/) to learn more. But what I found out is that the Fair Tax is neither fair nor even particularly sane. I’m not buying into this at all.

First of all, the federal mortgage and property tax deductions will be gone, once again, and I am dead set against that for the reasons I stated in my previous column. It would devastate the real estate market, drive down home values, and essentially steal people’s home equity, which is no different from robbing their savings account in a bank. In fact, it compounds the problem, as we’ll see in a moment.

Secondly, you’re essentially talking about a VAT, a “value added tax,” and that’s a recipe for disaster. I’ve seen it in operation in Vancouver, B.C., when I visited there about 15 years ago. They had a 14 percent VAT. It jacked up the price of goods and services immensely.

In the case of the proposed Fair Tax, the rate is 23 percent. Now add that to any state taxes a person pays, and the tax burden’s even worse than now. How’d you like to add 23 percent in tax to the price of a new car?

Or a new house, as I mentioned a moment ago? Here in L.A., our local sales tax is about 11 percent. Add a VAT of 23 percent, and anything we buy (with certain limited exceptions) would have 34 percent added to the cost in sales taxes … plus we’d still face state income and property taxes, and any other taxes and “fees” imposed from the state level on down. It’s absolutely absurd.

Compound that with the fact that there’d be nothing to prevent that VAT from being jacked up in the future, and you can bet your last dollar — which would very soon be leaving your wallet under that system — that the VAT would continue to be jacked up as time went on.

On top of all of that, you just know that in order for such a program to actually pass, there’d be so many “exemptions” and special treatments for “the poor” carved into it that not only would it not do anything to ease the burden on the current taxpayers, it would actually make it worse.

As to the amusing claim that the Fair Tax would “eliminate the IRS,” how would it do that? There would still be a need for a bureaucracy to administer and enforce the new tax laws, as well as to receive, process and distribute the funds. So, maybe, the actual name “Internal Revenue Service” would be replaced by something like “Fair Tax Administration Agency,” but it would still be the same animal with a different moniker, that’s all.

Which brings us to the root of the issue. The problem in this country isn’t the tax system. It’s spending. Ever since FDR we’ve been trying to create a bastardized mix of socialism and free-market liberty in this country, and that’s like trying to McGyver a car out of two bicycle wheels and an empty tuna can. It ain’t gonna work.

I have absolutely zero interest in any “tax reform” plan until I see some serious actual spending cuts. And I don’t mean cuts in the rate of spending increases, which is what that term actually means today.

I mean an actual decrease in the dollars shoveled out the door.

Brian Baker is a Saugus resident.

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Brian Baker: Nothing fair about Fair Tax program

After the recent publication of my column on the GOP tax reform plan that would eliminate the federal tax deductions on home mortgage and interest payments (“Republicans shooting themselves in the foot,” June 29), I was discussing tax reform with some friends when a couple of them proposed instating the Fair Tax program, which would allegedly eliminate the IRS and simplify our tax code.

I admitted I didn’t know much about the plan, and after the discussion decided to educate myself. So I went to the website of the group promoting this plan (https://fairtax.org/) to learn more. But what I found out is that the Fair Tax is neither fair nor even particularly sane. I’m not buying into this at all.

First of all, the federal mortgage and property tax deductions will be gone, once again, and I am dead set against that for the reasons I stated in my previous column. It would devastate the real estate market, drive down home values, and essentially steal people’s home equity, which is no different from robbing their savings account in a bank. In fact, it compounds the problem, as we’ll see in a moment.

Secondly, you’re essentially talking about a VAT, a “value added tax,” and that’s a recipe for disaster. I’ve seen it in operation in Vancouver, B.C., when I visited there about 15 years ago. They had a 14 percent VAT. It jacked up the price of goods and services immensely.

In the case of the proposed Fair Tax, the rate is 23 percent. Now add that to any state taxes a person pays, and the tax burden’s even worse than now. How’d you like to add 23 percent in tax to the price of a new car?

Or a new house, as I mentioned a moment ago? Here in L.A., our local sales tax is about 11 percent. Add a VAT of 23 percent, and anything we buy (with certain limited exceptions) would have 34 percent added to the cost in sales taxes … plus we’d still face state income and property taxes, and any other taxes and “fees” imposed from the state level on down. It’s absolutely absurd.

Compound that with the fact that there’d be nothing to prevent that VAT from being jacked up in the future, and you can bet your last dollar — which would very soon be leaving your wallet under that system — that the VAT would continue to be jacked up as time went on.

On top of all of that, you just know that in order for such a program to actually pass, there’d be so many “exemptions” and special treatments for “the poor” carved into it that not only would it not do anything to ease the burden on the current taxpayers, it would actually make it worse.

As to the amusing claim that the Fair Tax would “eliminate the IRS,” how would it do that? There would still be a need for a bureaucracy to administer and enforce the new tax laws, as well as to receive, process and distribute the funds. So, maybe, the actual name “Internal Revenue Service” would be replaced by something like “Fair Tax Administration Agency,” but it would still be the same animal with a different moniker, that’s all.

Which brings us to the root of the issue. The problem in this country isn’t the tax system. It’s spending. Ever since FDR we’ve been trying to create a bastardized mix of socialism and free-market liberty in this country, and that’s like trying to McGyver a car out of two bicycle wheels and an empty tuna can. It ain’t gonna work.

I have absolutely zero interest in any “tax reform” plan until I see some serious actual spending cuts. And I don’t mean cuts in the rate of spending increases, which is what that term actually means today.

I mean an actual decrease in the dollars shoveled out the door.

Brian Baker is a Saugus resident.

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Brian Baker

Brian Baker

  • Jim de Bree

    Great points. I wrote column about this a year ago which can be read at this link: http://archive.signalscv.com/archives/154156/

    At the time, I referred to Ryan’s tax plan called “A Better Way” as the greatest work of fiction since the original Star Wars movie.

    To be technically precise–the Republican plan does not overtly eliminate the home mortgage deduction. It leaves the deduction on the books, but limits its applicability such that few people will use it.

    The other proposal that would be even more debilitating to the real estate markets and to small business is the repeal of deductions for interest on business loans. Large multinational businesses will benefit from rate reductions that exceed the tax savings from their interest costs, but small business–the driver of job creation in this country–will see that the cost of losing the deductions will not be offset by the rate reductions.

    Finally, Ryan even admits in his report, using the most optimistic economic analyses possible, that the incremental taxes stemming from economic growth created by the rate reductions only offset a third of the tax cut. That is why they have to shift to a consumption tax or VAT. One interesting factlet is that whenever a country has imposed a VAT, the party in power lost power for about 20 years. Yet the Republicans are choosing to down this route.

    I disagree with Brian that a VAT would contain exemptions for the poor. The tax is not imposed like a sales tax–rather it is an incremental tax on profits associated with the delivery of goods and services. In a manufacturing context, the extraction of raw materials is subject to a tax. Then the manufacturer is subject to a tax, the wholesaler, the retailer, etc. Unlike a sales tax, the consumer does not pay the tax directly, rather it is embedded in the cost of the goods and services being consumed. There is a similar dynamic in how services are taxed–particularly since service based industries are becoming increasingly capital intensive due to the utilization of technology.

    Brian stated: “Which brings us to the root of the issue. The problem in this country isn’t the tax system. It’s spending.” You are correct–but so much of our spending is nondiscretionary that the cuts will be difficult to make. There will be a great reckoning in the coming years.

    • Brian Baker

      Jim, regarding your description of how the tax is implemented, in the case of the “Fair Tax”, as described on their own web site (that I linked in the column), it is actually imposed as a sales tax on goods and services, paid by the consumer.

      • Jim de Bree

        Interesting to see that. The Republicans have been going back and forth over this. For reasons you cite, a tax directly paid by the consumer is going to be extremely unpopular–particularly if it funds tax cuts to corporate America and the wealthy. From what I have been hearing lately, the GOP is not openly discussing the details of its proposals and this Fair Tax group may be sending out trial balloons.

        The more recent discussions of which I am aware have been more along the lines of a VAT, where gross profit margin is taxed as it makes its way along the supply chain. There are two reasons why this may be preferable to Mssrs. Ryan et al. First, the taxation is more covert. Instead of being paid directly by the consumer, it is paid by providers of goods and services and is passed on to the consumers in the form of price increases (which is intended to be perceived as inflation rather than additional tax). Second, the Trump Administration is looking for a way to back into tariffs without getting sanctioned by the WTO. In Europe, they accomplish this by messing with the VAT. The VAT is a tax on the gross profit margin, but for purposes of computing the tax, costs incurred in foreign jurisdictions are disallowed. Apparently the WTO is OK with that approach even though it is a de facto tariff.

        I am sorry, but I am just not going to be able to participate in much discussion in the Signal forums for the foreseeable future because of time constraints related to several matters I am dealing with.

        • Brian Baker

          This has nothing to do with any GOP tax proposal. This is an idea that’s been kicking around for years in certain conservative circles.

Brian Baker

Brian Baker