Book Presentation: The FairTax Book by Neal Boortz and John Linder


			 Book Abstract


The FairTax Book examines the FairTax Plan. A proposal for a completely new way to raise revenue in the United States, the FairTax would abolish the current Internal Revenue System and its Income Tax while funding the government (including Social Security and Medicare) through a national sales tax of 23% on new goods and services. Boortz and Linder explain the FairTax and how it differs from our current tax system while answering many questions and objections commonly associated with the plan.





About the Author


Neal Boortz, an attorney, is the host of The Neal Boortz Show, a nationally syndicated radio program. He has been nominated twice for the Marconi Award given by the National Association of Broadcasters for the country’s best radio talk-show host.

Congressman John Linder, a Republican representative from Georgia, is the main sponsor of the FairTax Act in Congress.





Summary of The FairTax Book (Neal Boortz and John Linder)


			 The History of Our Income Tax


Originally, the federal government levied few taxes. The first income tax law was passed during the Civil War, a three percent income tax on earnings between $600 and $10,000 per year. That tax was eliminated in 1872 and replaced with taxes on tobacco and alcohol. In 1894, Congress passed a new income tax law, but the Supreme Court ruled it unconstitutional.

On February 12, 1913, the Sixteenth Amendment to the Constitution legalized an income tax. People voted for it thinking that only the rich would be taxed. Over time, however, the income tax became a burden to all.





…Then Came Withholding


A tax refund sometimes gives the impression that you didn’t actually pay too much in taxes. But actually, this refund simply means that you initially paid more than you owed. Most American workers have no idea how much they actually earn. They only know the amount of the paycheck they receive after income, Social Security and Medicare taxes are deducted. Because taxes are collected in installments, people never miss them.

The withholding of taxes began when Beardsley Ruml devised a plan that offered to forgive 1942 tax obligations if people would support withholding taxes in 1943. If Americans had to write a check on April 15 for their entire year’s income taxes, they would realize how much in taxes they actually pay.





The Myth of Corporate Taxes


«No corporation or business really pays taxes. The burden—all of it—falls on us.» Businesses collect taxes from their employees and send them to the government. Only wage earners pay taxes. Companies owe taxes on their corporate profits, but to pay those taxes, companies either decrease shareholder dividends, raise the price of their product or cut back on expenses in some way that affects employees adversely. Ultimately, the ordinary citizen is paying those taxes.





Our Current Tax Code: The Cost of Compliance


The amount you owe as shown on the bottom line of your tax return does not represent all the taxes you pay. In addition, the average taxpayer spends 27 hours preparing his or her tax return while many more pay for an accountant to prepare their return. Some find the process so complex that they file a return with no deductions.

Most Americans pay 25% of their actual income in taxes plus 8% in payroll taxes. The Tax Foundation estimates that people and businesses spend 5.8 billion hours and $194 billion just complying with the tax code. Compliance takes place in three ways:

			 				Tax planning.

				Tax seminars, forums, record keeping and form preparation. *

				Audits and tax litigation.



(* Only number 2 is included in the $194 billion cost estimate.)

And don’t forget that the money withheld from paychecks can’t be invested to earn interest, that figure too is lost money for the American worker.

The complexity of the tax code adds to the expense of administering it, an expense borne by taxpayers, and causes many taxpayers to hire professional accountants to do their taxes.

Not only would the FairTax Plan eliminate the vast majority of these expenses, but under the FairTax, businesses would not have to consider the tax implications of their decisions and employees would not have to pay income tax.





The Embedded Costs of Our Tax Code


When a consumer purchases an item, part of that item’s cost goes to the federal government as taxes. At every stage of its manufacture, the item is taxed, including when it is packaged and advertised. These are called embedded taxes.

Dale Jorgenson, former chairman of the Harvard University economics department, studied tax costs and concluded that embedded taxes account for 22% of a product’s price. Embedded costs also exist in services like medical care.

Under the FairTax, the price of consumer goods will decrease by the proposed FairTax rate of 23%. A demonstration that this will happen occurred when the federal tax on airline tickets expired in 1995. As soon as one airline removed the tax from its fares, the others followed suit and the tax cut went directly to the air traveler. Under the FairTax, a worker will receive 100% of his or her earnings with no taxes withheld and the worker will pay about the same for purchases that he or she currently pays. He or she will also receive a monthly government check equal to the taxes on items deemed basic necessities.





Bringing American Business Back Home


Because of high American taxes, many businesses relocate overseas where foreign countries treat their businesses in a more tax friendly way. The U.S. taxes American corporations for profits earned overseas, but other countries, such as France, do not tax their companies for profits earned outside of their country. About 4 million U.S jobs have moved offshore and European/American companies like Daimler Chrysler now have their headquarters in European cities.

The FairTax would eliminate all corporate taxes and make American corporations competitive in the world market. Foreign companies would build in the U.S. because of the tax-favorable situation. Jobs would be created in America and everyone’s purchasing power would be increased.





The Birth of the FairTax


The FairTax idea began when a businessman at a corporate meeting in Houston, Texas complained that most of the meeting involved the tax implications of every decision. He felt that the company should be more concerned with its customers, shareholders and employees. Challenged, he created “The Americans for Fair Taxation,” a group whose goals were to create an alternate tax system that would bring in the same income to the federal government as the present tax system.





The FairTax Explained


The FairTax will repeal:

			 				The individual income tax

				The alternative minimum tax (AMT)

				Corporate and business income taxes

				Capital gains taxes

				Social Security taxes

				Medicare taxes and all other federal payroll taxes

				The self-employment tax

				Estate taxes

				Gift taxes



Instead of these taxes, there will be a single federal sales tax on new goods and services.

The FairTax is not the same as the value-added tax used in some European countries. VAT’s are added at each stage of production, leading to embedded taxes, but the FairTax is only added at the point where new goods are sold or new services delivered. It will not be added to the sale of used goods.

The FairTax replaces federal income taxes. Services to be taxed include medical care, but since present medical care costs’ embedded taxes amount to about 26%, a patient’s charges should not increase and will actually decrease in many cases.

Under the FairTax, wage earners would have a 25-30% increase in take-home pay because of no withholding from their paychecks. With the FairTax, prices should go down at least 20% because the current 22% embedded taxes would be eliminated. People will have to pay a sales tax for every new item they buy, but even with that tax included, the total cost of everything should remain about where it is now.





The FairTax Prebate: The Key to Fairness


The FairTax eliminates the tax burden on the lower and middle classes. “It provides that the federal government will send every family in America a prebate (that is, an advance rebate) to cover taxes on the basic necessities of life.” This monthly prebate will be sent to every head of household “to reimburse every American family for the sales tax that family will pay on all spending up to the federal poverty level.” Americans will receive their entire paychecks plus this monthly tax prebate.

The amount of this check will be based on the government’s published poverty levels for different household sizes. For example, a family of four in 2005 would receive $5,902 ($491.82 per month) from the government to cover the sales tax for their basic necessities. This means that the poorest Americans receive by far the biggest tax advantage because “low-income families, and many middle-income families, would be exempt from paying the national sales tax on all or most of their spending.”





Underground and Offshore Economy…Taxed at Last!


Cheating on taxes in the form of not reporting all income is epidemic in the U.S. This “shadow economy” accounts for about 10% of the GDP of the U.S. The IRS estimates the amount of lost taxes to be $355 billion. These figures are obtained by comparing income declared on tax returns with consumption, or by measuring the demand for currency. Under the FairTax law, people and entities that are not now paying taxes will pay them every time they purchase something.

Around $11 trillion is held offshore by the world’s wealthiest individuals. Offshore banking began in the ‘50s when Soviets wanted to do business in U.S. dollars. Soviets kept their dollars in European banks, creating a «Eurodollar» market. Now, such deposits are also made in the Bahamas, the Cayman Islands and a total of 55 places where banks are relatively unregulated. During the Vietnam War, the U.S. government turned U.S. offshore banks into «a flight-capital center» for dictators and people with illegal money. Today, Eurodollar transactions cost the U.S. about $100 billion per year in uncollected taxes.

Offshore financial centers are used by multinational corporations, international business corporations, insurance companies, wealthy individuals and foreigners to shelter their money from U.S. taxes. Fifty years ago, corporate taxes accounted for about 1/3 of American income taxes. Now, corporations pay only about 10%. Under the FairTax, “the U.S. would become the world’s tax haven.”





What Happens to Our Economy?


Economists estimate that in the first year after the FairTax is initiated, the economy will grow by 10.5%, exports by 26% and capital spending will increase 70%. Interest rates will decline. Wealth presently in offshore accounts will return to the U.S. Members of the underground economy will contribute their fair share whenever they buy anything. People who have been unable to save will start saving due to their increased income. On the global level, corporations whose goods have no embedded taxes in their cost will have an advantage. Other countries may be encouraged to also do away with their taxes.





The Opposition. Where Will It Come From?


The opposition to the FairTax will come from people who profit from the present tax system. They will claim that a consumption tax will create a new wave of sales tax evaders, that the costs of transition to the new system will be staggering and that the FairTax is “regressive” or harmful to the poor.

The FairTax will be harder to evade than income taxes. Buyers and sellers must both collude to avoid the tax and would need to trust one another.

The costs of transition are also being exaggerated. The FairTax plan includes payments to retailers for their transition expenses. Retailers concerned that their stock value may decrease will find that eliminating embedded taxes and payroll withholding will increase profits.

Some retailers fear that when wage earners receive 100% of their earnings, they will start saving, not spending. This is likely, but an increase in savings will benefit the economy. Accountants have not objected to the FairTax.





Social Security and Medicare Under the FairTax


FairTax revenue will pay for Social Security and Medicare. Workers will not have payroll deductions for these items. Medicare is due to go broke in 2020 and Social Security in 2042. Each American worker currently pays 7.65% of his or her income to support these programs and employers match that amount. Interestingly, wealthy Americans who live off investments do not contribute to Social Security and Medicare.

Seventy-five percent of Americans pay more in Social Security and Medicare taxes than they do in income taxes and low-income retirees receive 90% of their income in Social Security payments. «Workers paying taxes on $50,000 of income will receive a check for only 32% of their pre-retirement income.» Those with an income of $90,000 will receive only 15%.

In the beginning, 42 workers paid into Social Security for every retiree drawing benefits, but today the ratio is 3 to 1. The Medicare tax is collected on 100% of earnings. The government’s major expenses are Social Security, national defense, and Medicare.

To solve the coming crisis, President Bush proposes that workers invest their Social Security contributions in the stock market. This might work, but none of the proposed solutions to the Social Security/Medicare crisis can circumvent the fact that the number of workers paying for the number of retirees is decreasing. A study concludes that a permanent fix would cost $74 trillion, and the total household net worth in the U.S. is only $43.8 trillion. “The only way to save those retirement programs…is to change the way we collect the money needed to fund them.”

The FairTax will receive money from the entire economy, not just from workers, and the cap on taxed earnings for Social Security will be eliminated. Plus, the economy will improve to the point that many people may not need Social Security when they retire.





Tax Outrages


The IRS has sometimes mistreated taxpayers. For example, a company that sent in $4,448,112.88 in taxes was fined $46,806.37 because their payment was ten cents less than the amount they owed. In another example, a couple was notified that they owed $180,000 after the statute of limitations had expired on their liability – the IRS claimed to have sent a certified letter to them before the expiration date, but had actually sent it to the wrong address. The IRS claimed in court that the couple should prove that they had not received the letter. Since they couldn’t prove this, the IRS put a lien of $300,000 on their construction business and the husband committed suicide.

Neil Boortz owed $50,000 in taxes in the mid-80s and didn't have the money. He filed without paying and contacted the IRS to make payment arrangements. He made a delayed payment arrangement with an agent and when he received a large contingency fee, he contacted the IRS to pay off his debt. He spoke to a different agent who refused to tell him the payoff amount and showed up in his office with three armed agents to seize his office building due to his failure to pay. Boortz then paid and did not lose his office building, but had to wonder why the agent acted that way. Perhaps the agent received a bonus for seizing his office and then collecting the funds.

Under the FairTax, none of the above situations would have occurred.





Answers to Questions and Objections


			 				The 23% rate was decided by researching how much income the government would need to replace the present tax revenue.

				Critics who think the rate must be higher ignore the fact that the federal government itself will be a taxpayer.

				The rate may go down in the future. The FairTax bill includes a formula for setting the future rate to ensure that Social Security and Medicare are properly funded.

				A $100 coat will not cost $123 under the FairTax because the current 22% of embedded taxes should reduce the cost of the coat by the amount of the tax. Also, the price will include the tax. If you buy a $100 coat, the retailer gets $77 and the government gets $23. If the tax of $23 were added to the $100 coat (this is called an exclusive tax), the actual sales tax rate would become 29.9%, not 23%.

				The FairTax is different from the VAT in Europe because the VAT is added at every step of production and the FairTax is only added once. Combining a VAT with the FairTax would give the worst of both.

				The FairTax will replace the Alternative Minimum Tax, a tax designed to make sure the rich pay their fare share. The AMT has never been indexed for inflation and now endangers the middle class.

				The prebate is preferable to exemption of taxes on food and other necessities because the prebate restricts spending on those items to a reasonable amount, excluding such things as lavish parties.

				The FairTax does not affect state or local taxes, but after its implementation, states may reform their own tax structures, which are now tied to federal income taxes.

				Used items, even cars and houses, will not be taxed. The FairTax is levied only on new consumer goods purchased at the retail level. Although a newly constructed home will be taxed, embedded taxes on that home are currently estimated at about 25%.

				Services like medical services will be taxed under the FairTax, but since the embedded tax costs for medical services are about 26%, the actual payments for these services should not rise.

				Charities won’t suffer if payments to them are not deductible because taxation is not the reason people give to charity.

				The transition to the FairTax will be easy. The one transition rule is “that the value of any inventory on hand December 31 can be used as a credit against collecting taxes in the next year.” This is because the tax on those goods has actually already been collected.

				Politicians will only raise the FairTax rate if voters let them.

				The FairTax will create jobs through economic growth.

				Social Security will still be funded because it is funded by government revenue.

				Retirees living on dollars that were taxed when they were earned will be taxed again when they spend those dollars, but retirees will benefit from reduced prices and will receive the monthly government check.

				Sales conducted over the Internet will be taxed.

				School tuition of any kind will not be taxed.





So What Do We Do Now?


The FairTax has behind-the-scenes support in Washington, D.C., but many elected officials fear that the voting public won’t support it. If people inform their elected representatives that they want the FairTax, write letters to editors and talk to their neighbors, Congress will be encouraged to pass the FairTax. And remember that letters to members of Congress are more effective than phone calls or e-mails. At the website http://www.fairtax.org, other types of action are available, including financial contribution.





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