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A dream and a fairy-tale,
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This review is from: FairTax: The Truth: Answering the Critics (Paperback)
To paraphrase a famous quotation, "Fair Tax" is a dream, wrapped in a fantasy, inside a fairy-tale. It is amazing and perhaps disheartening that so many seemingly intelligent and educated people have been deceived by the dream. Most of the defenders are people who have never looked beyond the fairy-tale: A simple tax, replacing the insane complexity of the current system. The only excuse one can find for them is that these people look at "Fair Tax" as if it were an abstract concept. If there were no economy, no people earning money and using them for purchasing, and we just created a society, then a consumption tax for the new economy might be worth considering.
A book review, however, is not the right place for a discussion of the fundamental merits of a tax system. Let's leave that to the economy theorists. For the sake of the discussion (only), let's grant the authors the premises about embedded taxes and their (debatable) role in setting the price of goods. Most definitely, let's set aside the endless, asinine arguing about whether to cite the consumption tax inclusively or exclusively, and even what the actual percentage would be. Who cares? As the authors correctly state, the only thing that really should matter to people is the purchasing power, and the generated revenue.
It is appropriate, however, to evaluate the way the authors are making the case for "FairTax", the validity of their arguments. They write not about an abstract concept, but about a real switch to a new tax system.
Perhaps the most insidious and deceitful feature of Boortz and Linder's book and arguments is the use of averages. It starts with the "embedded tax." "In The FairTax Book we wrote extensively about a Harvard University study that showed that, on average, about 22 percent of what you pay for any consumer item or service represents the embedded costs in that item ..." (p. 29). The authors briefly mention, in this and the first book, that the actual embedded costs vary from industry to industry, but they do not bother to tell us how much. A simple consideration would tell them and us that the range must be considerable, and that it also must vary widely from product to product in the same industry, and is different for the same type of product made by different companies.
Why is that important? Because if those different percentages of embedded costs were replaced by a single, constant "FairTax" percentage, it would cause an unbelievable upheaval of the market as well as redistribution of the purchasing power of the population. Since, according to the authors, the embedded costs are mostly due to the tax burden of the employees involved, industries or companies with high mechanization and therefore low embedded costs would see their products burdened with a higher consumption tax than what their previous embedded costs used to be, while those with high embedded costs because of a large workforce would be at an advantage. The switch would penalize productivity.
Let's consider a simple example of two companies, making the same type of product, and let's assume that the production costs, excluding labor costs, are the same and that the final products are equivalent in quality. One company has a more efficiently organized production line, requiring a minimum of workers, and thus has lower labor costs, and therefore lower "embedded tax costs". Because of the competitive pressure both products sell for the same price, so that the more productive company shows higher profit. What would be the effect of replacing the "embedded tax costs" with a universal "FairTax" percentage? With the same purchasing price again, the relative profit margin of the more productive company would fall.
What about the effect on the purchasing public? Are we all just averages, everybody buying the same things? If products with currently high embedded costs satisfied your needs and lifestyle, you might perhaps see prices go lower, but if you preferred mostly the low-embedded cost products, you would be out of luck. Is that supposed to be fair and reasonable?
One of the most deceitful claims, which I heard Mr. Boortz to make on radio, and which is repeated in the book, is about the effect on retirees, who live on their savings. On radio, Mr. Boortz assured a caller that since FairTax would just replace the embedded tax, the prices would remain the same, so that there would be no change for his retired parents. In the book (p.190), the authors breezily assert: "... either you're going to pay the embedded taxes that lurk in every product and service you consume, or you're going to pay the FairTax. Six to one, half-dozen of the other." And: "Everything you buy with those savings is going to cost pretty much the same - plus you'll have that prebate check every month."
Here one must note that the authors certainly are not guilty of consistency. Throughout the book you can find any and all predictions about the change in the costs of products if "Fairtax" were instituted. Side by side with this "pretty much the same" statement repeated several times the authors mostly claim that the prices would get lower. But occasionally they slip: "For example, one macroeconomic study of the FairTax- a study that assumed that the employer's share of the payroll tax is the only savings that will be used to lower prices - estimated that prices would rise by 24.8 percent but wages would rise by 27.4 percent, more than compensating for the increase in prices." (p. 144).
If the study is correct, what will be the effect on the retirees living on fixed income from savings, who do not have wages that might rise? Somewhere recently Mr. Boortz has faced this question, and played a little different tune: The retirees mostly get money by withdrawing from their investments, and they pay income tax on those withdrawals, so they get the relief there. Really? What about those who have invested in Roth IRA, or another form of non-taxable savings? Even if many or even most people paid some income tax as retirees, could we simply write out those who do not, "let them eat cake"?
Even people with IQ in the range of low Lottery numbers must wonder how the "FairTax could be "revenue neutral," when the government loses the major source of revenue - the income taxes - while collecting a sales tax that replaces the "embedded taxes," which presumably are derived in part from income taxes, but cannot account for all of them, and the prices get lower. But then we learn that, of course, services will be taxed. Retirees take note: you will be paying more for those, many of you without the benefit of an income tax relief. And again we hear the argument: The cost of services includes "embedded taxes." How much and how variable? Do you use and need services with currently low embedded tax costs? Tough luck.
When it comes to fairytales, the Boortz/Linder prediction about what would happen with prices and wages if "FairTax" were instituted takes the prize. Following are, summarized, their conclusions (pp. 75-76):
Scenario one: Employees will be getting the same "take home check" (net salary). Employer would save the amount withheld for federal income taxes, SS taxes. Medicare taxes. This will result in reduction of price of products or services.
Scenario two: Paychecks will be increased by the previous matching contributions. Employees will keep withholdings. The price "wouldn't be reduced by the full amount of the embedded taxes."
And then we get from the authors the astounding prediction (pp. 77-78):
"Actually, it would most likely be a combination of the two [scenarios]: In some workplaces the savings would be passed down the line and the cost of the final products would be reduced accordingly. In other cases, the workers would retain that tax burden plus their share of the Social Security and Medicare taxes. Their businesses wouldn't see prices go down quite as much."
Are the authors joking, or are they certifiably insane? The workers of the second (scenario) group would see increased paychecks, and get an enormously increased purchasing power for the products made by the first group workers, the prices of which are supposed to drop substantially. The workers of the first group would be totally out of luck. They could buy the products of the companies that had made the decision to use the savings to lower the prices, but could hardly afford to buy the products of the other group. Do the authors assume that people purchase only products of the companies they work for?
Logical, rational? In your dreams!
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Showing 1-7 of 7 posts in this discussion
Initial post: Jan 30, 2009 6:50:23 PM PST
Amazon Customer says:
In reply to an earlier post on Feb 6, 2009 10:35:50 AM PST
The current tax system should be reformed, not swapped for one that would casue havoc in the price structure of products, and penalize productivity.
Posted on Mar 9, 2009 9:12:00 AM PDT
Malcolm A. Broussard II says:
I don't agree with all that you have said, but you are one of the extremely few who did an excellent job of expressing your opinion of not agreeing with the Fair Tax. Well done.
Posted on Apr 12, 2009 8:31:00 PM PDT
Michael Lombard says:
In reply to an earlier post on Apr 15, 2009 7:40:15 AM PDT
Anybody forcing you to read it? You prefer stupid short accolades that do not say anything substantial?
Posted on Aug 22, 2009 5:21:35 AM PDT
Mitchell Dobrenen says:
I agree that this is one of the more rational, albeit wrong, reviews.
The purpose of this book is to communicate an idea and persuade. I think it has succeed in its first task and, while not all have been pursuaded, its second.
The purpose of this review is to communicate and persuade.
First, let's take a look at our current system and some economic facts.
1. The current tax system is unfair. It is oppressive and prone to manipulation for political purposes.
2. ALL products and services have taxes imbedded in them. The only economic entity that can pay a tax is the end consumer. Businesses pass taxes on to the end consumer through higher prices thus imbedding the tax.
3. Taxes are theft. Anytime you take something from me to give to someone else without my consent it is theft.
4. No tax system is perfect.
Now, let's see how a consumption tax, in this case called the Fair Tax, addresses these problems.
1. It is designed to NOT be oppressive or subject to manipulation. The amount of the tax is suggested to be no more than is currently paid. Yes, the current amount is oppressive, but the amount of the sales tax can and should be reduced as the economy grows. The amount of the tax can be changed with the hope of manipulation, but since ALL citizens would be affected by a change it would be difficult to manipulate the system to benefit specific groups other than government.
2. NO product would carry an imbedded tax since only the end consumer pays the tax when they decide to consume the product or service.
3. The government would still be stealing our money, but at least the theft would be more obivious and due to the prebate we would at least get the essentials without the burden of a tax.
4. A consumption tax is not perfect, but it is less complex and less prone to manipulation than most other systems since it is consistent across all sectors of the economy. Transition to a new system will be painful and will affect different people in different ways. In the case of retirees it may appear to affect them adversly, but consider that their investments would likely increase in value and while it doesn't help them much the death tax is eliminated. At the very least others in society such as their family and friends would have more cash on hand to assist them with their daily needs.
I agree with the reviewer that logic and rationality appear to be rare commodities in today's society, but my young children exhibit both and many of the welfare recipients I come in contact with do as well. People will find a way to game any system (gaming usually requires logic and rationality), but the simpler the system the fewer ways to game it.
I think the vast majority agree that the current system is bad. I submit that it needs to be completely erased from our society and replaced by a fundamentally different approach to funding government.
Finally, I submit that government needs to reduced to its Constitutional limits, but that is another battle.
In reply to an earlier post on May 4, 2011 8:13:45 AM PDT
Last edited by the author on Jun 2, 2011 9:06:06 AM PDT
Acute Observer says:
What nonsense!! You would eliminate an AVERAGE 23% tax and replace it with a 30% retail tax. It seems to be the same on paper, but you can't trust a paid performer on the radio or a Congressman who had to resign.
A regressive "consumption tax" could be avoided like the Volstead Act. Or will we see swarms of Tax Police showing up at every store, or where two or more people are together?
Just do the match and compare your current monthly expenditure (you probably don't), your Federal income tax, to what it would cost with this Fairytale Tax (30% on EVERYTHING!
The "FairTax" book does not give any supporting dollar figures because it would destroy their argument.
For example, consider an individual earning $30,000. Their income tax would be $2,683 (plus $2,355 for Social Security and Medicare). That is $5,038 total, assuming no other deductions for IRA or 401K.
With the misnamed "FairTax" someone earning $30,000 and spending $23,100 would pay $6,900 with a 30% consumption tax. This is more than with the current system. (You can work the numbers yourself.) Where are the savings? Its even worse for the retired! If you get $15,000 in pension and $15,000 in Social Security you would pay around $560 income tax. But with the misnamed "FairTax" you would pay $6,900 on the $23,100 you spent.
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