Posted: Jun 21, 2005 By: Kirk Ellis

Subject: FairTax Misinterpreted

Comment: Many people seem to make incorrect assumptions about the effect of the FairTax plan.

Most seem to think people will pay more because the FairTax will ab added onto existing prices. These people need to think about any business they are familiar with and honestly estimate how much of the price could be reduced if that business did not need to pay Social Security Taxes for its employees and Income taxes on profits. Then they need to think about how many LAYERS of business any product moved through before it is purchased. Only by doing this excersise for themselves will they come to understand and believe that prices COULD fall by 20+%. Thereby making the new price -- including the FairTax very close to current prices.

I say "COULD fall", because without competition, the businesses would simply keep the additional profit rather than reducing prices. So people need to ask themselves how many times they've seen competition work prices down and businesses fail because their prices were too high.

Some people assume wealthy people will hoard their money and thereby achieve a lower overall tax rate with the FairTax than with the current income tax. Why do people think that ? Money has no value in and of itself. Its value is in what it can buy. Wealthy people that do not spend their money cannot enjoy their wealth. Because that enjoyment is the purpose in aquiring the wealth in the first place, it makes sense they will spend it.

Also, people have mistaken the "marginal" income tax rate on high incomes with the "overall" rate. High incomes are rarely taxed anywhere near the "marginal" rate of 35% due to exclusions and tax-exempt income definitions. High incomes rarely exceed an overall tax rate above 25%. Teresa Heinz Kerry last year paid only 14% overall.

So the FairTax will not shift the burden away from the wealthy. To enjoy their wealth, they must spend. To spend they must pay tax. Quite different from today.

So if the wealthy wouldn't get a break and the poor would get a break, what about the middle. It is instinctive to think the middle must therefor end up with a larger burden. Looking at the examples of "tax returns" on www.fairtax.org, this is not true. It looks like everybody wins -- low and middle incomes. It doesn't show truly high incomes -- because they don't win.

To understand how "everyone" can win, it is necessary to understand just how much inefficiency is in our economy due to the existing tax system. Small businesses in 2004 paid $200 billion income taxes. But studies show that it costs on AVERAGE $724 for every $100 the business pays in taxes. That is extra bookkeeping, legal planning, estate tax planning, etc. So the cost to the economy as a whole is $1.4 trillion so the government can recover $200 billion. That is beyond foolish. That is $1.2 trillion wasted on unproductive activity and adds costs that must be recovered in prices.

The FairTax is so simple, with so little overhead, that the government can get its needed revenue while everyone pays less. In a sense, it is like handing the government "found" money instead of your own income. The money was "found" in the inefficiency of the old system.