Tuesday, June 14, 2011

Fair Tax: One More Time

Almost as a footnote in current events, Senior Senator Richard Lugar (R-IN) announced that he is joining a new push for an old GOP favorite, the Fair Tax. Senator Saxby Chambliss (R-GA) introduced Senate bill S.13 with the support of fellow Senators Burr (R-NC), Coburn (R-OK), Cornyn (R-TX), DeMint (R-SC), Isakson (R-GA) and Moran (R-KS). According to Lugar, 60 members in the House are also on board with the Fair Tax and have a bill of their own, HR.25, titled “Repeal of the Income Tax, Payroll Taxes, And Estate and Gift Taxes.” Representatives Dan Burton (R-IN), Marlin Stutzman (R-IN) and Mike Pence (R-IN) have cast their endorsements of the legislation. The bill has been referred to the House Ways and Means Committee.

The U.S. budget controversy continues to be about austerity and so-called spending cuts, which is a misnomer and an aside. Discussion of revenue opposes any tax increases as election time approaches. With the deficit apparently more important than unemployment, so much so that Republicans have dumped their previous job creation promises to voters, maybe the time has come to reconsider the Fair Tax. So let’s do that.

The S.13 Senate Fair Tax bill would impose a national sales tax on “the use or consumption in the United States of taxable property or services.” It sets the sales tax rate at 23% in 2013, but the Fair Tax rate is actually 30% when calculated the way state and local sales taxes are. S.13 defunds the Internal Revenue Service after 2015, but it creates two new bureaus: an Excise Tax Bureau and a Sales Tax Bureau. Finally, if the Sixteenth Amendment to the Constitution is not repealed within seven years of its enactment, the Fair Tax terminates. The bill has been referred to the Senate’s Committee on Finance.

10 years ago when revenues were as high as 20.6% of gross domestic product (GDP), the Fair Tax might have meant a huge tax cut for most Americans. Today, with revenues as low as 14.9% of GDP, it would create a huge tax increase. The GOP likes good old ideas, facts notwithstanding. Such Republican ideas like term limits, the flag-burning amendment and the balanced-budget amendment got plenty of media and public attention, but they lost traction and failed to be legislated. Still, announced presidential candidate Herman Cain has made the Fair Tax idea part of his campaign platform, just as Richard Lugar did sixteen years ago. Perhaps Cain should talk to Steve Forbes, the last unelected presidential candidate to champion the Flat Tax cause, twice. However, that is another story.

10 years ago in January, 2001, the Congressional Budget Office forecast surpluses totaling $5.6 trillion by 2011. Balanced for the first time in decades, at that time, the U.S. budget has since plunged from surplus to debt. A third of that $12.7 trillion plunge can be accounted for by three policies for which no one in office claims responsibility: the 2001 and 2003 Bush tax cuts, the wars in Afghanistan and Iraq funding and the 2009 Obama stimulus bill. Expressed a percentage of the economy, except for a period after WWII, those three policies contribute to the national debt being larger than at any time in U.S. history.

So while everyone is blaming everyone else for a crisis in which they are complicit, politicians like to drag out the tax code and beat it like a populist’s piñata. It worked for President Obama.

"We've got a tax code that's making things worse,” candidate Obama said, October 22, 2007. “This isn't an accident. Special interests in Washington have carved out a trillion dollars worth of corporate tax loopholes at a time when income inequality is larger than any time since before the Great Depression." But candidate Obama was talking about a fair tax system, not the Fair Tax bills being put forth in Congress.

Its central idea is that the Fair Tax would eliminate complexity in the tax code. The idea is long on rhetoric, like what you earn is what you keep; like no more withholding taxes; like no more income tax. However, it is short on reality. For example, taxpayers would still pay the FICA Social Security tax, which is already a bigger burden than income tax for most people. Somebody would have to enforce the new tax law, so the plan would not eliminate the IRS altogether. The Fair Tax would not help the poor, who pay no income taxes under current tax code.

That is all before special interests hire lobbyists to propose exemptions. Tax attorneys, tax accountants and tax preparation companies be damned. Not.

The very idea of a federal income tax is barely a hundred years old. President William Howard Taft (R-OH) floated the idea in 1909. Oddly enough a greedy coalition of Republicans and Democrats of the day turned Taft’s idea into the 16th Amendment to the U.S. Constitution. At the time, no one really thought that the states would ratify the amendment. But a majority of states did ratify it in 1913 and people have been griping about income tax ever since.

The 16th Amendment created income tax as method of raising revenue and it created a federal bureaucracy called the Internal Revenue Service to collect it. Its ratification trumped an 1895 Supreme Court decision, Pollock v. Farmers' Loan & Trust Co., holding a similar congressional attempt to uniformly tax incomes to be unconstitutional.

“And so the question is, is there a way of achieving simplification, but still having some element of progressivity and some element of fairness in the tax system?” President Obama asked a conference in Buffalo last year. “That’s part of what makes it complicated.”

So is repealing the 16th Amendment which both of the Fair Tax bills require. It takes Constitutional amendment to repeal a Constitutional amendment and that has to be ratified by the states. So far it has only happened once. In 1934 the 21st Amendment repealed the 18th Amendment that created Prohibition in 1919. Civics lesson aside, the Fair Tax bill that Senator Lugar endorses has a Republican appeal that the tea party fringe will surely enjoy. But as interesting as the idea is, it is only interesting.

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Originally published on Blogcritics June 6, 2011

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