Friday, September 12, 2008


  1. 9/21/2006

As a tax professional I realize that the Fair Tax (HR 25) it is indeed a simple plan that will put me out of work (but I can live with the plan if it is indeed fair)

The Plan is strictly a consumption tax that eliminates the income, payroll and inheritance tax system now in effect. It has two major flaws in my estimation that can easily be fixed which I shall address briefly.

1) The proposed rate acknowledges that the payroll tax portion of the current system (7.65% X 2, or 15.3%) is included in the proposed rate of 23 to 26% or about 60% of the new rate. However, the current and future retirees (next 20 years) have already funded their portion of their respective SS retirement program and now would be expected to repay into the retirement system by a consumption tax, this could be adjusted by allowing for an annual 5% declining monthly additional allowance equal to 60% of the proposed monthly stipend. An alternative would be to using the same 20 year phase out and gross up their current determine social security benefit.

2) When one considers annual income that an individual receives there is in reality 3 distinct categories based upon the use of that income, it is either (A) consumed, (B) Given away or (C) invested. Temporary savings can be ignored for it will ultimately end up in one of the three categories so mentioned. It is the Invested portion of the income that must be addressed to make this system truly fair. I would apply 40% (granting that the payroll tax element has been satisfied by consumption) of the proposed rate to all investment transaction at date of investment. In other words if the fair tax rate is 25%, charge 10% tax on all security transaction to the buyer on equity securities including all stocks (except original issuance stocks), traded partnerships and any property that is not used in an active business venture, i.e. farm land. This approach recognizes that stock exchange transactions (the vast majority of Invested Income transactions) has little economic benefit and if anything has adverse effect (as the current trend by too many in the business community is concentration on quarterly results for favorable marketing of stocks leading to Enron's, WorldCom's, etc. This would greatly effect the stock market as we know it today for an investor would be thinking of longer term results as he now must recoup 110% of his investment in order to break-even. Because it would be such a shock to the stock market system it could be phased in over a 10 year period beginning at !%. All Corporations and Institutional Investors as well as individual would pay this tax thus the overall rate of 23% could be greatly reduced.

The supporters of this Fair tax plan claim that consumer prices would see a decrease and cite studies that economist have made. I have not been able to find any of these actual studies and suspect that they were made by academics that have never had any real world experience. I have not heard of any major corporation endorsing this concept and my own analysis (though brief) would expect a company such as GE to decrease their prices by no more than eight percent.

The big argument over financing the affairs of state seems to be on how to do this instead of who should carry this burden. Remember the Income tax system when it began started taxing only the wealthy then in the early 40’s when withholding was introduced the masses were sucked into the system. A simple concept was used by applying a formula of X times Y where X was a variable rate and Y was taxable income. Thus the complexity of defining Y has led to a mired of complex regulations that leaves us in the mess we are in today while the politicians tried to pull the wool over the publics eye by trying to simplify X.

The burden should be born from all but in proportionate to each ones source of income. Income is used to satisfy ones, needs, wants and excesses... These three objects are indeed complex so in an attempt to simplify the FairTaxers concentrate on the first two Needs & wants with a consumption tax and ignore the Excesses. I believe their approach would only lead to a society that has two classes the Super Rich and the rest of us.

My approach with the fair tax after the two major flaws are corrected may be worth considering.

However, what would happen and how to prevent moving cash to foreign source investments needs to be kept in mind.

Revisited: 05/01/2008

As I have been watching the Fair tax move forward at a snails pace with the conviction that this could evolve into a truly fair plan a look at the big picture is in order. To find this big picture I surfed the web and found the following two sites:

1). specifically Table 1.1.5 Gross Domestic Product.

2). http:// First chart “How Congress Spends Your Money”

From this information the spreadsheet Exhibit A has been generated. Now a little caution is in order. I am an accountant and not an economist however the concept presented herein can easily be refined to satisfy the purest and tweak the methodology to accomplish the end. That is to finance the affairs of state. This financial burden must be borne on the backs of those strongest to bear the burden; that is a relevant task that will have a progressive burden but at the same time should not be demotivational. In other words only a fool who has acquired by his own efforts a sum 100 times the average of the masses would turn down a sum that increases his proportion to 101 if his additional burden is less than 1 but proportionally higher than the average and not punitive.

When looking at the chart and numbers think in terms of any average family budget. Replace that scary term trillions and think of it as your income. If your personal income were $13,308.30 and your tax burden was $3,235.20 now you must figure out: do I spend 9,355.50 on my wants and needs leaving only $717.60 for investment or to pay down and retire part of my $9,400.00 debt. Last number makes this Trillion dollar debt seem manageable as the interest is in government expenses and the total assets are not even calculated! Why do you ask is that $717.50 not the $2,227.60 investment per line 6. This is due to the $+700 import deficit and the 700 for social security taxes.

There are two other obviously benefits to this approach that are needed in order for us to build a more perfect union. 1) The collection process will start locally by the venders of the consumed products and services then remitted to the state. 2) Corporate governance and motivation will move away from the quest for quarterly numbers that excite the secondary investors to long term steady and responsible growth in profits and quality.

Notice that the Government Expenditures number of $3 + trillion includes state and local taxes as well as Federal taxes. We should keep the inheritance taxes in place with a $12,000,000 exclusion per beneficiary (but indexed for inflation) as l under Exhibit A , this plan would get rid of state and local income and sales tax in there present form along with gasoline and all excise taxes as well. The inheritance tax would be split 50/50 between federal and state of residence: let this undetermined tax serve as the source for the politician’s pork projects.

If this legislation were in the form of a uniform state law adopted by all 50 states as other Uniforms Laws such as the Commercial Code then in effect we could have the federal government collect one tax return for each state. The state would deduct a standard allowance for all activities such as publically funded (but privately administered with vouchers) road maintenance and other infrastructure now funded, Medicaid and other social programs and any existing mandated programs. An alternative would be to pay the federal government a per capital tax for only those services such as Military, Courts System and other that all states agree are necessary.

Probably the biggest unknown impact of a fair tax is what will this do to corporate profits and the related cost of consumer products and services. Large corporations particularly those whose stocks are exchanged by investors continue to grow and growth but who benefits by that growth. Corporate governance and leadership too often becomes like a government bureaucracy and inept in adapting to change and innovation. We need to encourage competition and innovation by making room for new companies that will grow and proper.

A mom & pop operation that continues through several generations and is privately owned should be able to add to their equity (built up by profits {that beautiful concept}) by having an initial public offering whereby new stock ownership is expanded. This type of investment should never be taxed even when the original shares are sold to a new Investor. It is only those shares exchanged at the next level for that activity does nothing for improving the performance of the entity itself. Likewise hedging activities do not appear to stabilize prices of commodities but too often accelerate the price of products used by business up/or down depending on what those investors fill the effect of political shifts will do to various industries. The Value of these Futures transactions will exceed $300 trillion in one year. A system needs to be developed to tax these transactions so that these activities are limited. When three hedge fund managers can earn over $7 billion in one year who loses, most likely the consumer. It’s time that we let supply and demand work itself through the business cycle.

The securities subject to that designated consumption application can be defined as that under USC Title 15, Chapter 28 Par 78ee (b) (c) and (d).

EXHIBIT A ( $ in trillions)

LINE YEAR 1 2 10
  1. GROSS DOMESTIC PRODUCT 13.308 13.308 13.308
  2. Pers Consumption Expenditres 9.356 9.356 9.356

6. Gross Private Domestic Inv't 2.228 2.228 2.228

    20. Gov't consump'n Exp't/gross Inv 2.535 2.535 2.535

    A. Social Security/Medic Taxes (est) .700 .700 .700

    B. Total Tax Burden 3.235 3.235 3.235

      C. Percent of tax to PCE 34.58% 34.58% 34.58%

      D. Secondary Investing 48.000 45.600 30.252

      E. Inv't Amt deemed Conms'n 2.5% 5.0% 25.0%

        F . Portion deemed Consumption 1.200 2.280 7.563

          G. New Consumption Base 10.556 11.636 16.918

            H. Rate Required to Maintain

            Tax Burden 30.65% 27.80% 19.12%

              Notes: Numbered lines are correspond to descriptions on BEA Table 15.1.1 amounts vary slightly due to data updates.

              Lettered lines are those that Author has added to demonstrate this conceptual revision of a FAIRER TAX system.

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