Archive for December, 2011
There is something about the peaceful quiet of Christmas time that I believe leads the human mind naturally to reflection. As I sit in the afterglow of a perfectly happy Christmas I’m drawn back with a reflex to our founding. Like many of us I am guilty of romanticizing this time in our history and those involved. However, there is still a treasure-trove of information available to us on the intent of our founding fathers that provide for us today an idea of their dreams for our future. And it is in this left behind lore that we can gain insight into our current situation and view the present in light of the past to judge our progress and lack thereof.
Keeping in the area of interest covered by this website we will be focusing specifically on the issue of taxation viewed at our founding and by certain luminaries throughout our history. It is clear from the outset that our founders understood what was at stake when it came to the federal government’s power to tax. Thomas Jefferson is attributed with this quote, “The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.” From the beginning the founders understood that a redistributive tax structure would lead to a disastrous end. John Adams looked at a larger picture when he said, “The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.” Rather unfortunately from President Adam’s point of view we no longer allow the “laws of God” as acceptable public discourse and those that hold property as sacred are counted as “greedy one-percenters”. From the perspective of our second President there are two dismal outcomes awaiting us.
Our founders also realized the danger of unchecked government. James Madison, the author of our Constitution, stated, “There are more instances of the abridgment of the freedom of the people by gradual and silent encroachment of those in power than by violent and sudden usurpations.” Today we have the displeasure of sitting back and watching the wisdom in these words materialize under the very Constitution written by the man who forewarned us about it. Thomas Paine discussed the tendency of those in power to manipulate words to mask truth. “What at first was plunder assumed the softer name of revenue.” This is an important quote that fits well into today’s tax debates and one we would all do well to remember. Semantics is a favorite game of the bureaucrat and elected official, the only losers are the ones cut out of the game, the voters. John Marshall wrote in one of the first landmark Supreme Court cases involving the idea of federalism, McCulloch v. Maryland, “The power to tax involves the power to destroy.” Today that power rests with the federal government and a myriad of opaque agencies cloistered away from the oversight of the voting public. This is antithetical to the specific and enumerated example set forth by our founders. All of the above exemplify the distaste and distrust our country has shown in the past toward a powerful centralized government. What we face today is such a government insulated from public criticism by layers of faceless bureaucracy. Our tax system adds to this needless complexity and serves to sever our connection to our representatives.
The income tax itself has been discussed by many throughout history. In fact, Plato wrote in The Republic, “When there is an income tax, the just man will pay more and the unjust less on the same amount.” One of history’s greatest minds recognized the inherent injustice of an income tax, what hampers us from reaching the same conclusion? Even the progenitor of the Keynesian economic theory, John Maynard Keynes, concluded, “The avoidance of taxes is the only intellectual pursuit that carries any reward.” Our current system breeds dishonesty and avoidance, hardly the principles that helped to found our nation. In addition to dis-incentivizing virtue the current tax code is impossibly complex. Albert Einstein said, “The hardest thing in the world to understand is the income tax.” Apparently unraveling the secrets of a universe carefully crafted by an omnipotent Creator is nothing compared to grappling with the IRS.
Luckily we are not left merely with warning. We have been given guidance by the strong and sure steps of those that have come before us. Tax changes that have made the greatest positive impact on the country all have one thing in common, giving money back to the people. John F. Kennedy recognized this when he spoke, “Prosperity is the real way to balance the budget. By lowering tax rates, by increasing jobs and incomes, we can expand tax revenues and finally bring our budget into balance.” It is unfortunate that many sharing his party designation have taken the polar opposite approach. The FairTax accomplishes all of the above and more. It lowers the tax burden and gives money back to the people, where it originated. It dismantles the centralized power of Washington bureaucrats and simplifies the tax code so that it can fit on a receipt. It respects individual freedom and stops encouraging theft and fiction. Ronald Reagan said, “I am more than ever convinced of the greatness of our people and their capacity to determine their own destiny.” The FairTax frees us to do so, so that we may fulfill our loftiest aspirations without the overwhelming burden placed by government.
As we peer into the future and see the dawn of a new horizon before us there is wisdom in looking to our past, even if briefly. It is to the words and actions of those that have come before us that we owe our current position. We do currently enjoy liberty that was paid for with the blood of patriots, the freedom created for us by the sharpest political minds in human history, and the strength of every entrepreneur that has taken a risk for an idea. We have much to learn that they may teach. In 1783 the author of the same Constitution that has protected our livelihood for over 200 years said this, “Taxes on consumption are always least burdensome, because they are least felt, and are borne too by those who are both willing and able to pay them; that of all taxes on consumption, those on foreign commerce are most compatible with the genius and policy of free States.” It is time we had a system that strove for the genius and policy of free states instead of shunning them. The FairTax represents a return to that ideal spoken so long ago. A new year brings with it opportunity and promise, and with your help, a turning of the tide.
There is no secret to the internationally known fact that Americans like to give. Just last year 311 million people and the corporations that they work to support gave$290.89 billion according to the American Association of Fundraising Counsel. It should also be noted that of this rather impressive amount $211.77 billion (73%) was given by individuals and households. 8% was given in charitable bequests and 13% was given by foundations, many of which rely on charity. Only 5% were given by corporations. We as Americans are quick to spread our blessings and in this season of giving I would like to examine the impact of the FairTax on charitable giving. Before moving on it is tantamount that we understand that the above figures are taken from 2010 in which Americans faced an average effective tax rate of close to 20% and an unemployment that topped 10%. Imagine what lowering that effective tax rate and really stimulating the economy could do.
Yesterday, on 12/18/2011, the L.A. Times published an op-ed calling for the end of the charitable-giving tax deduction. While there are a few problems with the conclusions drawn in the op-ed it is true that there is little evidence to suggest that the deduction is a major catalyst for giving. Though there are many other areas that are discussed that prove again the ineffectiveness of our current system. Many use this area of their tax form to easily manipulate the IRS and fudge the numbers higher than they should be. It is in situations like this one that the sheer multitude of filings makes it difficult to catch perpetrators. The charitable-giving deduction also does not even affect the behavior that it seeks to encourage and forces potential charities to follow a strict set of rules and guidelines so that they can be considered a qualified recipient. This, of course, calls for the usual restrictions on free speech and political involvement. It should be said that all religious institutions fall under this umbrella of acceptable charitable recipients. There does not seem to be any immediate issue with this particular caveat however when taken with the unsettling news from the congressional franking commission the future seems all but certain. According to the commission the official mail coming from members of congress cannot use the phrase Merry Christmas. Not even our elected representatives have the freedom to speak. “Currently, incidental use of the phrase Happy Holidays is permissible but Merry Christmas is not,” said Salley Wood. It seems to me that a government this far removed from the reality of everyday citizens is not beyond disallowing churches from being allegeable recipients of tax dollars.
The entire discussion of which charities are allegeable or not stem from the same flawed idea. It is the problem at the heart of the above L.A. Times op-ed. Both operate under the assumption that it is the government’s money first. Jack Shakely asks in his op-ed, “Want to know a way to reduce our national debt by a quarter of a trillion dollars over the next decade…?” The money being deducted is going to charity. It is not coming from the government. It is being spent by the citizen not wasted by the treasury. By first looking at the money of the economy as belonging to the government it is easy to understand why the citizen is often ignored in tax discussions. The FairTax recognizes the true place of the citizen in the tax food chain. Without entrepreneurs there are no jobs, without jobs there are no workers, without workers there are no taxes. The government comes in at the end of the equation not at the beginning.
It is insulting to insinuate that Americans give because of a tax break. It is just as irrational to believe that removing this deduction would irreparably harm giving in America. We give not out of obligation or to dodge a tax, we give because it is in our very nature. We are the first to respond when international crisis comes. We give our lives and treasure to defend ideals in other countries without seeking repayment. Americans have never shirked or ignored an opportunity to spread the blessings we have been given on an international scale. The best of us have given their lives in order to preserve the fragile freedom that has been cherished in this country since its birth. Americans give without provocation and seemingly without end. The concern that the removal of the charitable-giving deduction will end this is an unwarranted distraction.
There is one other issue that is particularly maddening. Why is it that only at this particular time does the government value giving? Only when gaining oversight of how we handle our money and in spending money that it does not have does our government value charity. At all other times ours is a confiscatory system. The money is taken from you before you see it. The amount the government takes is only notated on a pay check and even then may still be an inaccurate calculation of what you owe. We are a nation that likes to give; it is about time that we had a tax system that freed us to do it. And in this season of giving it is time for the government to set the example. It should cede the control and power over our hard earned money and give it back to the people, where it belongs. Fortunately, the Christmas season has already given us its miracle, the greatest gift of all. It is too much to hope that the government would follow suit. That is our job; we endeavor to pass the FairTax to let the American people do what they do best. Give.
On Tuesday, December 6, 2011 the President gave a speech in Osawatomie, Kansas. This location is historically significant and was specifically chosen because it was the site of Theodore Roosevelt’s New Nationalism speech. (text here) Just over a century ago tens of thousands packed the streets of the small Kansas town to hear Roosevelt announce his new vision for America’s future along with what he called his Square Deal. It is not a coincidence that his cousin, Franklin Delano Roosevelt, had a similarly named plan, the New Deal. Some of the ideas and aspects of the Square Deal were rolled into the New Deal.
In 1910 there was a rift growing in the Republican Party between those that supported President Taft and those that wished for another Roosevelt term. Roosevelt sought, at this point, a unified party and part of the aim of this particular speech in Osawatomie was to help mend that divide. One does not need to be a student of history to read the speech and the one given last week to notice the difference. Theodore Roosevelt acknowledged the soldiers of the Civil War saying, “We can admire the heroic valor, the sincerity, the self-devotion shown alike by the men who wore the blue and the men who wore the gray; and our sadness that such men should have had to fight one another is tempered by the glad knowledge that ever hereafter their descendants shall be found fighting side by side.” How disappointed he must be to hear over 100 years “hereafter” that the President has altogether different sentiments. Echoing the inane talking points of the street rabble referred to as an Occupy movement the President referenced the top 1% of income earners, discussed how billionaires paid 1% in taxes, (which helped to earn him a three Pinocchio rating) the breathtaking greed from a few, and a make or break moment for just the middle class. This was analogized yet again with the Warren Buffett and his secretary melodrama. The question left unanswered however is how, aside from theoretically answering some nebulous sense of injustice, does taxing the Warren Buffetts of the world do anything to help his secretary? If anything, lower her taxes to even things up. Or better yet, pass the FairTax to ensure everyone pays the same rate!
In terms of a speech of unification the two are light years apart. However, there is an underlying reason for the decision to speak in Osawatomie. In 1910 Theodore Roosevelt laid out a plan called New Nationalism that was considered by many to be quite radical at the time. It is here that a little more historical perspective is called for. The problems facing the nation at the turn of the century that New Nationalism sought to address included runaway corporate monopolies and child labor. Major issues facing the economy today include runaway government spending and a growing deficit. Rather unfortunately this is where the two speeches tend to align. New Nationalism stated, “[t]he betterment which we seek must be accomplished, I believe, mainly through the national government”. This coincides with the President’s criticism that a lack of basic oversight helped nearly destroy our economy. Of course, increased oversight did not stop the collapse of MFGlobal and the disappearance of $1.2 billion or the bankruptcy and subsequent loss of taxpayer money with Solyndra. We already know, however, that the government is not the answer. Regulatory agencies already have oversight powers and capabilities but are robbed of their effectiveness when their employees use public computers to watch pornography. The 2011 speech also attacked mortgage lenders who “tricked families into buying homes they couldn’t afford”. It was the Community Reinvestment Act of 1977, the rules of which were altered in 1994, that mandated agencies make even risky loans to avoid discrimination lawsuits. Both Roosevelt and Obama held the certainty that government held the solutions. Roosevelt said that “the New Nationalism puts the national need before sectional or personal advantage.” This sounds remarkably similar to the growing demand for people to pay their fair share.
The ideological underpinnings for both speeches start with the premise that a national government can answer localized problems with centralized authority, directly opposed to the Federalist bent of our Founders. One reason that the Osawatomie speech is particularly noteworthy for FairTax supporters is because it was a moment when Theodore Roosevelt put his support behind an income and inheritance tax. He supported a “graduated income tax on big fortunes,” and a “graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly in amount with the size of the estate.” No doubt the farmers that he spoke so highly of rankled a bit when half of their farmland was taxed as income. In fact the 1912 Presidential election was between three opposing parties, the candidates of which all supported the institution of an income tax. The point is that Americans in that election did not have a choice. An income tax was coming in full force. A century later we can look back to see its disastrous effects on our liberty and commerce. The inception of the income tax has created for us a world where we are forced, by politicians that do not have the courage to have a substantive discussion, to examine the incomes of Warren Buffett and his secretary in a bald attempt to raise our ire at the “rich”. The needle mark on “the rich” seems to move based on the political need of the day and in the end is only a smokescreen to hide the true issues from the national discourse.
The truth is that we are heading in the wrong direction. New Nationalism demanded “of the judiciary that it shall be interested primarily in human welfare rather than in property”. President Obama said of the economic theory which he admitted was “in America’s DNA” that “it doesn’t work. It has never worked.” This is a President who has drawn an ideological line in the sand. One summarily rejected by the words of our Founders, the American people in 2010, and by the ideological foundations of the FairTax. It is true that the FairTax is bipartisan. And it stands directly opposed to both ideas presented in Osawatomie, by a Republican and a Democrat, spread across 100 years. In 1912 Americans did not have a choice, an income tax was coming. However today we face a new destiny, one of our own making. Ronald Reagan said, “I am more than ever convinced of the greatness of our people and their capacity to determine their own destiny.” This is the liberating thought at the heart of H.R. 25. As seen throughout 100 years of our history we cannot wait on our politicians to deliver it to us. It is up to the American people to stand and claim their rights back, it is up to you. “I do not speak of this struggle of the past merely from the historic standpoint. Our interest is primarily in the application today of the lessons taught by the contest of half a century ago.” These words were spoken in a small Kansas town ten decades ago. We now can learn from the mistakes that were made in the passage of the 16th Amendment, the great Soviet collapse of a centrally planned monstrosity, or the welfare states of Europe that have out taxed their people. We still have in this country the capacity to determine our future, we can repeat the errors that have brought us here or take a new road. One that leads to personal independence and liberty. It’s called the FairTax.
Recently our local DFW FairTax group received a letter from one of our Congressman. It was in response to a visit we made to his office to discuss H.R. 25. He was very gracious with his time and even more so to send us a follow up letter to inform us as to his position on the bill. Unfortunately he has decided to not become a cosponsor. In his letter he specified six reasons that he felt that he could not support the FairTax. This week we will delve into these issues to show how some misunderstandings and unwarranted fears are keeping good people from supporting a very worthy cause.
The first on his list and probably the most widely circulated misstatement is that the 23% tax the bill calls for is actually a 30% tax that the FairTax movement is somehow trying to obfuscate or hide. The difference is really far more mundane than it looks originally. The difference between 23% and 30% is nothing more than numerical semantics. The 23% rate is calculated exactly like the tax it replaces, the income tax, which is to say a tax-inclusive rate. The 30%, which is how other state taxes are calculated, is a tax-exclusive rate. As I do not work in finance I find it easier to understand with an illustration, the one used by fairtax.org. Take a hypothetical taxpayer, Joe that earns $125 a year, and a hypothetical government that requires $25 in taxes. If the taxes are removed from Joe’s income he has $100 left of his paycheck to do with as he pleases. If the tax is taken as the money is spent Joe has $125 to spend and the $25 is taken at the point of sale. A tax-inclusive rate is reported as $25/$125= 20%. A tax-exclusive rate is reported as $25/$100= 25%. The terms inclusive and exclusive rates derive their name from whether or not the tax is included in the base. Both rates deal with the same information and calculate the same numbers. When the FairTax correctly uses the 23% number it is decried as being dishonest, if the 30% number were used then there would be accusations of overtaxing. This is frustratingly the most widely used argument against the FairTax. It is a facetious argument mostly used by those already predisposed against the idea and when studied is a smokescreen to distract from the positive aspects of the plan.
The second objection raised against the bill was that it would tax home purchases and health care. The third complaint about the plan was that it would also tax government spending, everything from pencils for kindergarteners to body armor for troops. These two concerns go hand-in-hand because they both ignore perhaps the most egregious aspect to our current system. The embedded taxes. Home purchases and health care are already taxed. The government is already paying taxes for pencils and body armor. As we have already covered, we have the highest corporate tax rate in the world; this cost is passed down to the consumer, or government, at every level so that companies can still make a profit. Also, by lowering the effective tax rate for all Americans, they will have more money in their pockets for bigger purchases. Since the FairTax also removes the penalties for investment Americans also have easier access to their money without the unnecessary cost of a capital gains tax. The greater purchasing power given to every American family and the removal of any and all embedded taxes should not make home ownership and health care more difficult to purchase, all studies have shown quite the contrary. The government benefits from this fact just as much as the everyday citizen. On the point of the equality between the government and citizen, this aspect is met with far more favor outside of the beltway than within it. The idea that government should not be exempt from the same rules that we are forced to follow is a paradigm shift in the right direction.
The fourth criticism brought to us by the congressman was that the FairTax would be easier to evade than our current system. The term “relatively easy” was used to describe the ease in which someone could evade the FairTax. This complaint is easily the most head-scratching. With all due respect, if the future Treasury secretary can cheat on his income taxes while using a tax facilitator program, like Turbo Tax for example, than there is no plan that is “relatively easy” to evade. Under our current system it only takes one person to cheat at filing their statements. This often happens by accident. In fact we regularly hire outside help in the form of experts to make sure we do not accidently cheat. We go out of our way to accommodate a senselessly complex tax code. For the FairTax cheating would require an agreement between two parties to cheat the government out of its tax money. It would require one person to be relieved of the cost of only the sales tax of a particular good or service and the other party would get nothing out of the deal. The incentive for cheating falls even further when it is realized that cheating the government is a federal crime. It should also be noted that both Texas and Florida have largely sales tax run governments and still do not have as much of a tax evasion issue as most of the proposed Cabinet leaders only three years ago.
The fifth concern surrounded the creation of the Sales Tax Bureau. It is folly and irresponsible to pretend that a new federal tax system would come without a form of oversight. It is the complexity of our current code that limits our ability to oversee it completely. The Sales Tax Bureau however is a blessing compared to the IRS which it would be completely replacing. The Sales Tax Bureau would not have the power or authority to audit American citizens. It would not have the authority to dictate to our pulpits what they can preach. The bureau would only collect its money from the states and have oversight on businesses which is substantially less than 311 million American citizens. Also, in connection with the previous point, the larger ticket items would be far easier to track and also pose a larger risk for fraud. Since the size and scope of this bureau would be very limited policing would be more effective and successful.
The sixth concern assumed that the FairTax would be unfair to elderly Americans who have already paid income taxes their whole life and are now being taxed on what they spend. Sadly this describes the system that we currently endure. Under the FairTax all taxes on Social Security income is erased, it also repeals the capital gains tax allowing those who have made long term investments to access their money which has already paid income and payroll taxes. In addition to ease the tax burden on the elderly, along with every other American, the FairTax requires no tax record keeping and tax filing. This is a weight lifted off of all of our shoulders. Furthermore, the FairTax removes the tax on used items and the addition of the prebate will help ease the tax burden on the elderly far more than anything this current system could offer.
The congressman stated in his letter that he felt the FairTax was not “the right alternative” to our current code. When one takes a step back to see that our current tax code: has an income tax rate ceiling of 35%, in addition to payroll taxes, and the highest corporate tax rate in the world, makes any purchase more difficult by hiding the largesse within the price of every good and service, can easily be evaded even by those trying to comply, has an over-reaching IRS that can look into the pocket book of every citizen, and re-taxes the money we earn through Social Security income taxes, the capital gains tax, any tax on used goods, and a widely criticized death tax. The FairTax is not only the right alternative, it is the only alternative.