Alexander Hamilton On Taxation

A 'Consumption Tax'.  One important advantage of a consumption tax is that it doesn't discourage investment. Also, it doesn't discourage working harder to earn more, as does a progressive income tax. Another important advantage is that there is no need what so ever for the government to know anything about your income, your expenses, your charitable donations, etc. In short, it avoids government snooping into your financial affairs. For the retail business remitting the tax, all the government needs to know is gross income. Expenses and other details are irrelevant.

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Alexander on consumption taxes: "

. . . There is no method of steering clear of this inconvenience, but by authorizing the national government to raise its own revenues in its own way. Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. If inequalities should arise in some States from duties on particular objects, these will, in all probability, be counterbalanced by proportional inequalities in other States, from the duties on other objects. In the course of time and things, an equilibrium, as far as it is attainable in so complicated a subject, will be established everywhere. Or, if inequalities should still exist, they would neither be so great in their degree, so uniform in their operation, nor so odious in their appearance, as those which would necessarily spring from quotas, upon any scale that can possibly be devised.

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.

 

The Entire Federalist No. 21 Paper (PDF) at http://www.fairtax.org/PDF/Federalist_No_21.pdf and printed in full below.

 

See The FairTax at http://www.fairtax.org/site/PageServer

 

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Alexander Hamilton, our nation's first Secretary of the Treasury shares his thoughts on taxation:

 

FEDERALIST No. 21

Other Defects of the Present Confederation For the Independent Journal. Wednesday, December 12, 1787

HAMILTON

To the People of the State of New York:

HAVING in the three last numbers taken a summary review of the principal circumstances and events which have depicted the genius and fate of other confederate governments, I shall now proceed in the enumeration of the most important of those defects which have hitherto disappointed our hopes from the system established among ourselves. To form a safe and satisfactory judgment of the proper remedy, it is absolutely necessary that we should be well acquainted with the extent and malignity of the disease.

The next most palpable defect of the subsisting Confederation, is the total want of a SANCTION to its laws. The United States, as now composed, have no powers to exact obedience, or punish disobedience to their resolutions, either by pecuniary mulcts, by a suspension or divestiture of privileges, or by any other constitutional mode. There is no express delegation of authority to them to use force against delinquent members; and if such a right should be ascribed to the federal head, as resulting from the nature of the social compact between the States, it must be by inference and construction, in the face of that part of the second article, by which it is declared, "that each State shall retain every power, jurisdiction, and right, not EXPRESSLY delegated to the United States in Congress assembled." There is, doubtless, a striking absurdity in supposing that a right of this kind does not exist, but we are reduced to the dilemma either of embracing that supposition, preposterous as it may seem, or of contravening or explaining away a provision, which has been of late a repeated theme of the eulogies of those who oppose the new Constitution; and the want of which, in that plan, has been the subject of much plausible animadversion, and severe criticism. If we are unwilling to impair the force of this applauded provision, we shall be obliged to conclude, that the United States afford the extraordinary spectacle of a government destitute even of the shadow of constitutional power to enforce the execution of its own laws. It will appear, from the specimens which have been cited, that the American Confederacy, in this particular, stands discriminated from every other institution of a similar kind, and exhibits a new and unexampled phenomenon in the political world.

The want of a mutual guaranty of the State governments is another capital imperfection in the federal plan. There is nothing of this kind declared in the articles that compose it; and to imply a tacit guaranty from considerations of utility, would be a still more flagrant departure from the clause which has been mentioned, than to imply a tacit power of coercion from the like considerations. The want of a guaranty, though it might in its consequences endanger the Union, does not so immediately attack its existence as the want of a constitutional sanction to its laws.

Without a guaranty the assistance to be derived from the Union in repelling those domestic dangers which may sometimes threaten the existence of the State constitutions, must be renounced. Usurpation may rear its crest in each State, and trample upon the liberties of the people, while the national government could legally do nothing more than behold its encroachments with indignation and regret. A successful faction may erect a tyranny on the ruins of order and law, while no succor could constitutionally be afforded by the Union to the friends and supporters of the government. The tempestuous situation from which Massachusetts has scarcely emerged, evinces that dangers of this kind are not merely speculative. Who can determine what might have been the issue of her late convulsions, if the malcontents had been headed by a Caesar or by a Cromwell? Who can predict what effect a despotism, established in Massachusetts, would have upon the liberties of New Hampshire or Rhode Island, of Connecticut or New York?

The inordinate pride of State importance has suggested to some minds an objection to the principle of a guaranty in the federal government, as involving an officious interference in the domestic concerns of the members. A scruple of this kind would deprive us of one of the principal advantages to be expected from union, and can only flow from a misapprehension of the nature of the provision itself. It could be no impediment to reforms of the State constitution by a majority of the people in a legal and peaceable mode. This right would remain undiminished. The guaranty could only operate against changes to be effected by violence. Towards the preventions of calamities of this kind, too many checks cannot be provided. The peace of society and the stability of government depend absolutely on the efficacy of the precautions adopted on this head. Where the whole power of the government is in the hands of the people, there is the less pretense for the use of violent remedies in partial or occasional distempers of the State. The natural cure for an ill-administration, in a popular or representative constitution, is a change of men. A guaranty by the national authority would be as much levelled against the usurpations of rulers as against the ferments and outrages of faction and sedition in the community.

The principle of regulating the contributions of the States to the common treasury by QUOTAS is another fundamental error in the Confederation. Its repugnancy to an adequate supply of the national exigencies has been already pointed out, and has sufficiently appeared from the trial which has been made of it. I speak of it now solely with a view to equality among the States. Those who have been accustomed to contemplate the circumstances which produce and constitute national wealth, must be satisfied that there is no common standard or barometer by which the degrees of it can be ascertained. Neither the value of lands, nor the numbers of the people, which have been successively proposed as the rule of State contributions, has any pretension to being a just representative. If we compare the wealth of the United Netherlands with that of Russia or Germany, or even of France, and if we at the same time compare the total value of the lands and the aggregate population of that contracted district with the total value of the lands and the aggregate population of the immense regions of either of the three last-mentioned countries, we shall at once discover that there is no comparison between the proportion of either of these two objects and that of the relative wealth of those nations. If the like parallel were to be run between several of the American States, it would furnish a like result. Let Virginia be contrasted with North Carolina, Pennsylvania with Connecticut, or Maryland with New Jersey, and we shall be convinced that the respective abilities of those States, in relation to revenue, bear little or no analogy to their comparative stock in lands or to their comparative population. The position may be equally illustrated by a similar process between the counties of the same State. No man who is acquainted with the State of New York will doubt that the active wealth of King's County bears a much greater proportion to that of Montgomery than it would appear to be if we should take either the total value of the lands or the total number of the people as a criterion!

The wealth of nations depends upon an infinite variety of causes. Situation, soil, climate, the nature of the productions, the nature of the government, the genius of the citizens, the degree of information they possess, the state of commerce, of arts, of industry, these circumstances and many more, too complex, minute, or adventitious to admit of a particular specification, occasion differences hardly conceivable in the relative opulence and riches of different countries. The consequence clearly is that there can be no common measure of national wealth, and, of course, no general or stationary rule by which the ability of a state to pay taxes can be determined. The attempt, therefore, to regulate the contributions of the members of a confederacy by any such rule, cannot fail to be productive of glaring inequality and extreme oppression.

This inequality would of itself be sufficient in America to work the eventual destruction of the Union, if any mode of enforcing a compliance with its requisitions could be devised. The suffering States would not long consent to remain associated upon a principle which distributes the public burdens with so unequal a hand, and which was calculated to impoverish and oppress the citizens of some States, while those of others would scarcely be conscious of the small proportion of the weight they were required to sustain. This, however, is an evil inseparable from the principle of quotas and requisitions.

There is no method of steering clear of this inconvenience, but by authorizing the national government to raise its own revenues in its own way. Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. If inequalities should arise in some States from duties on particular objects, these will, in all probability, be counterbalanced by proportional inequalities in other States, from the duties on other objects. In the course of time and things, an equilibrium, as far as it is attainable in so complicated a subject, will be established everywhere. Or, if inequalities should still exist, they would neither be so great in their degree, so uniform in their operation, nor so odious in their appearance, as those which would necessarily spring from quotas, upon any scale that can possibly be devised.

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country. Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment. Either the value of land, or the number of the people, may serve as a standard. The state of agriculture and the populousness of a country have been considered as nearly connected with each other. And, as a rule, for the purpose intended, numbers, in the view of simplicity and certainty, are entitled to a preference. In every country it is a herculean task to obtain a valuation of the land; in a country imperfectly settled and progressive in improvement, the difficulties are increased almost to impracticability. The expense of an accurate valuation is, in all situations, a formidable objection. In a branch of taxation where no limits to the discretion of the government are to be found in the nature of things, the establishment of a fixed rule, not incompatible with the end, may be attended with fewer inconveniences than to leave that discretion altogether at large.

PUBLIUS

Josie06 Josie06
56-60, F
24 Responses Mar 13, 2009

Healthcare is not a constitutionally guaranteed right. Entitlements, the government feeding citizens is not a constitutionally guaranteed right.<br />
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Promoting the well being of the people, the citizens, does not entail giving them money. The taxes collected are public monies to be used for public purposes. Being on the dole is not a public purpose.<br />
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Promoting the common good such as limiting crime, speeding laws are two such i see.<br />
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In the United States the power comes from the consent of the governed. <br />
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The States created the Federal Government not the other way around.

So what unconstitional spending do we have them cut first?<br />
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The preamble alone gives them a pretty broad mandate, an awful lot can be argued to be promoting domestic tranquility and general welfare.

The FairTax has promise. The Flat Taxes i've read do not show as much promise for reform.

We need to make them have to live with a realistic budget like we have to run our households!

In principal I agree with you. I think that certain services, groceries, basic clothing etc etc however should be exempt. <br />
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There are always going to be winner and losers in the tax game. <br />
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Whatever they decide to do, it is fair to say the entire tax code needs to be simplified.

Exactly outercalm. Bust them back to their Constitutional duties not their userpt and stolen power.

I could be wrong, I'm not even sure where to start looking for the data but I don't think 2% would generate any where near the revenue the government sees today.

Tax reform is desperately needed. As is spending reform.<br />
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The AIG hearings are a farce as now Congress believes they can cancel the rule of law on contracts.<br />
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As much as i dislike and despise the huge bonuses (especially from tax dollars) it is contractually obligated. The company boards and shareholders authorize it.<br />
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Government doesn't need to place themselves in between boards/shareholders and employees ... there are too many real problems Congress should be tackling.

A pure flat tax on income at 2% from everyone, with no exemptions or credits or loopholes would be the answer. That too will never happen.<br />
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That would be more like it. At least with sales tax the Illegals do pay *something* but I digress..............LOL So many issues, so little time. I'm going to go sing, while I block my ears with my fingers. Lalalala.... The AIG Bonus hearings today are a farce, a joke. Disgusting. Lalalalala!

The income tax can not be considered fair in any stretch of the imagination with all the loopholes that prevail. Loopholes that the average citizen doesn't qualify for.<br />
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The income tax has become regressive because of the loopholes benefiting either exclusively or primarily the very rich. <br />
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As a general rule, when people get wealthier the actual percentage of their income derived from wages and salaries decreases, while the percentage of tax-favored income like capital gains, dividends, and inheritances increases. Warren Buffet's secretary pays more tax than him because she has a salary, he has stocks and bonds, etc ... they are taxed at different rates and different time. Not every April 15th for him.<br />
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We have a Regressive Income Tax ... regardless of how much you and others cite its Progressive basis. That very progressiveness has morphed into regressive because of its provisions.<br />
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You're right Jojo, Congress will not make this change willingly. They will force more on the citizenry and gain more POWER. The citizens must force the change, Congress has excessive POWER and they will not give it up willingly.<br />
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A pure flat tax on income at 2% from everyone, with no exemptions or credits or loopholes would be the answer. That too will never happen.<br />
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But do enough citizens see this ... i think not!

I believe librarylover explained how regressive this tax is in words I could not articulate. It's the same thing with the FICA tax. Currently, I pay FICA based on 100% of my income, people who earn over, what is it now? $97,500 do not. That is a regressive tax. I don't care how much people make. Why should the middle class pay the most based on their income?<br><br><br />
Regressive is regressive. That's all I am saying. I certainly understand the progressive tax system. I'm just saying that the "Fair" tax is everything but "fair." Companies are going to charge whatever they want to stay competitive, even if it's inflationary. The taxes people pay in proportion to their income is not "Fair" in the oxymoronic "Fair" tax.<br />
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And I agree with you about getting spending under control. We could never run our business or household budgets like the government does. Those people have no incentive to fix things. We need to clean house up there and bring in new blood. New blood with term limits.

Spending will never get under control without other measures. Congress has no impetus to stop spending let alone to stop spending excessively.<br />
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The income tax is a drain on the worker and a boon for the government.<br />
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No other plan (Forbes or Armey) makes as much sense. It's not perfect but a consumption tax is head-and-shoulders above the income tax scheme.

The whole prebate idea is one of the reasons I take issue with the web site. On one hand they point to the cost of compliance and the complexity of the current system and on the other they are guarenteed to create a complex compliance mess to manage the prebate system. That just makes no sense.<br />
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If I have more money in my pocket in practice then the government has less in practice. Better have them get spending under control and balance the budget with current revenues before taking any away or the debt will be twenty trillion dollars in no time.

You need to understand taxation in general. Yes the FairTax is a 23% when calculated as inclusive (as income taxes are) and 30% when calculated as exclusive (as sales taxes/consumption).<br />
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The FairTax is also the total of what is now the income tax and the social security tax and the Medicare tax. Currently the income tax is at varying rates; the social security tax is 6.2% paid by the employer and employer (12.4% total) and the full 12.4% is owed by those who are self-employed; the Medicare tax is 1.45% paid by the employer and employer (2.9% total) and the full 2.9% is owed by those who are self-employed.<br />
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So that is SS + Medicare total of 13.85% of the 23%/30% leaving either 9.25%/16.25% (inclusive/exclusive) Also there is a prebate, money sent to everyone to cover taxes to a specified level and all other taxes are repelled.<br />
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As i have said repeatedly here the FairTax is the best plan to come along to date even though it is not perfect. It is worlds better than another income tax and keeping all the taxes we currently have in statutes.<br />
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Prices are higher as business builds in their costs to the level the market will bear to get their sales price.<br />
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The FairTax is only on new items and services. It does not tax used items.<br />
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In practice folks would have more money in their pocket. More than the $13.00 you'll be getting back here shortly.

Hey Josie,<br />
I think that the LONG Convoluted tax code we already have needs to be revamped. <br />
You said "The consumption tax gives the people, the consumer, the decision making power to determine when their money will be sent to the government." The problem with that, to me, is that it is severely regressive. Rich people and poor people alike have to buy necessities. Taxes on groceries is one of the most regressive taxes we have in this country.<br />
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The "Fair" tax legislation would eliminate essentially all Federal taxes and replace them all with a single tax on all new goods and all services. In essence, it is a sales tax, but would apply to services as well as goods. The proponents say that a tax rate of 23% would be sufficient to raise the same amount of revenue as do all of our current Federal taxes and the payroll taxes combined.<br />
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This number has provoked a lot of discussion. Looking briefly, under the plan, an item that would cost $1.30 to the consumer would, in its price, contain $0.30 of tax. They say that since 0.30/1.30 = 23%, that the tax rate is 23%. That math is correct. However, when we typically pay sales tax, we look at the price of the item BEFORE the tax is added and then add a set percentage on top of that. So, this item cost $1.00 to which $0.30 tax was added. We would call this tax rate 30%: 0.30/1.00 = 30%. This is actually just a definitional difference, but it is important because the so-called “FairTax” is often called a “national sales tax” or a “consumption tax” and these are usually computed such that the tax rate above should be viewed as 30%. We can dwell on this – but let’s just recognize that, depending on how it is computed, the tax rate is either 23% or 30%.<br />
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Who are the proponents of the so-called “Fair" Tax? Apparently, it has its origin within a group of Texas businessmen who did not like the current taxation system for a variety of reasons. They formed a group called the “Americans For Fair Taxation” and formulated the plan. <br />
the relationship between prices and take-home pay will remain the same after the Fair Tax in put in place. Perhaps both would remain the same – perhaps both would increase by about the same amount. But the fantasy that everyone would have 25-30% more money to use on goods and services that had not increased in prices is just that – fantasy.

The IRS Code is L-O-N-G and convoluted. To simplify and correct ... is laughable for Congress. They do that every year and add more to it.<br />
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The Tax Code has grown from 400 pages in 1913 to 67,204 pages in 2006. i don't have data on 2007 and 2008, but i do know that Congress has made changes during both years.<br />
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Business pays 55.7 percent of compliance costs, individuals 41.7 percent and non-profits 2.5<br />
percent. (Moody, J. Scott, Wendy P. Warcholik, and Scott A. Hodge, “The Rising Cost of Complying with the Federal<br />
Income Tax,” Tax Foundation, Special Report No. 138, December 2005.)<br />
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The problem is complicated or inflicted with lobbyists that "donate" to politicians and then lobby for what they want for themselves or clients ... and they normally get it. Lobbiests must be taken out of the equation, therefore SCRAP the IRS Code and begin anew.<br />
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A complete change in philosophy regarding taxation is what this country needs. It what politicians need so to end their POWER of every day citizens and setting themselves above everyone else.<br />
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A radical change in the method of taxation is needed in this country.<br />
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It does sound too good to be true ... that Congress and politicians would once again work for the people instead of the people working for them.

This looks more like politics as usual to me than a real effort at reform. I couldn't help thinking while reading the web site that it "sounds to good to be true" and for me anyway that is a big red flag.<br />
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Why not start with some small things to simplify and correct the current code. It seems to me that a complete change in philosophy like this is near impossible to sell.

The FairTax isn't perfect but it is a h*ll of a sight better than the current income tax and all the Orwellian/Machiavellian ways government steals from their citizens. It is also better, in my opinion that the Forbes and Armey Flat Tax plans i have read.<br />
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The consumption tax gives the people, the consumer, the decision making power to determine when their money will be sent to the government.<br />
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The Progressive Tax has benefited higher incomes with lower but still high rates (basically 30+% of their income - at one time as high as 90% in the 1950's on the marginal tax rate) ... but it also benefited lower incomes with a lower tax due or a refund or no tax due.<br />
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The money went to those who were already wealth ... True. And the already wealthy paid the largest percentage of total taxes also as revenue to the government. Proven fact. You really need to cite both sides of the coin not just the one that you have a problem with.<br />
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There are problems with the current system, however making the harder working or investing group that pays more tax pay even more may just have them defer tax or stop working as hard to fall into a lower tax bracket and pay less. Human nature. Then changes would have top be made to get the money from others. Vicious cycle.<br />
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The problem is with the Tax Code and it needs changed!

The flat tax is the latest Orwellian maneuver in the realm of politics and government. Why call something a “Fair” tax, other than to disguise that fact that it is unfair to most people? <br />
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The so-called “FairTax”, has been introduced each year since 1999 by Georgia Congressman John Linder. Most who have heard of it learned what they know by reading the book that he co-wrote with Atlanta radio talk show host Neal Boortz. In a nutshell, this proposal would replace most federal taxes (income, estate, capital gains, payroll taxes, etc) with a single tax on all services and new goods sold in the country. The tax rate would add 30% to the base price of goods and services: according to supporters, this rate would produce the same total revenue that is currently collected. <br />
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The Boortz and Linder book make a number of rather remarkable claims. The most outlandish of these is that the new tax plan would allow everyone to keep all of their paycheck (because there would no longer be any withholding) while the price of goods and services would be essentially unchanged, even after the imposition of the tax. So, everyone would get about 25% more money each paycheck and things would cost the same.<br />
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Sounds pretty good, huh? It’s sheer nonsense. Boortz and Linder also suggest that the IRS could be abolished and wouldn’t need to be replaced with any enforcement agency. Apparently, they believe that although huge amounts of money are now needed to make sure that people pay their taxes, under this new plan, everyone would happily hand over what is essentially the same amount of money. <br />
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Currently, the greatest expense at the IRS is associated with collecting payroll taxes from businesses that don’t want to send them in. Payroll taxes involve a tax of about 15%. Boortz and Linder, however, think that collecting a tax at least twice as high will require no enforcement.<br />
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Most who have conducted thorough analysis suggest that the tax rate in the proposal may be much too low to provide the necessary revenue. These analyses suggest that a rate one and one-half times, or even two times as great would be necessary. So, realistically, implementation of this idea may require a tax that adds 40% or more to the base price of goods and services. <br />
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Boortz and Linder further claim that their proposal is inherently simple and easy to understand. I doubt anybody would disagree with the assessment that our current tax code is very complex. It might be appealing to think of a simple tax with a single rate. However, the income tax started out as a tax that was just as simple. The intervening years have seen a huge number of modifications to that simple initial income tax.<br />
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If the so-called “FairTax” were implemented, the full force of lobbyists would start the very next day trying to make exceptions and exemptions for select groups of taxpayers. In Boortz and Linder land, implementation of their proposal would put lobbyists out of business. Who believes that this would happen? <br />
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A detailed study of the effect of the “FairTax” in states across the country indicates that the amount of tax paid by a vast majority of the people would increase. Only those in the upper several percent of the income strata would have their taxes lowered. So, a truthful name for this proposal would be “The Middle Class Tax Plan”. These are the folks who would bear the brunt of it.<br />
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Presidents Reagan, then Bush Sr., and "W" Bush have overseen tax plans that have benefited this upper income group. What is the result? We now have a National Debt that is greater than $30,000 per person. Three-quarters of this was accumulated under the three aforementioned Presidents. The money went to those who were already wealthy. Let's call it what it really is, the regressive Middle Class Tax Plan!

Under the FairTax only new, retail is taxed. Savings are exempt as are used itmes. Lobbyists do not have anything to lobby to exclude. Opening it up to exemptions defeat the purpose.

I'm sure they could find ways to pervert it.<br />
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The lobbyists would have plenty of work lobbying for products to classified as exempt.

Politicians would not like it well cause they give up power.<br />
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Lobbyists on K Street would hate it cause they would be out of business. No more loop-holes.<br />
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Same businesses now collecting State Sales Tax would collect the Fair Tax, and others but the base is in place. And many States now collect the federal fuels taxes and pass them to the US government.

A consumption tax would do away with the black market. If their is one it exists today as the States have their sales tax and it has been a revenue gainer for decades.

Seems to me this would create a black market for an awful lot of goods.<br />
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The web site claims it costs $265 billion to enforce the current tax code. That would be abot 8% of the 3 trillion dollar budget. Seems like a lot.