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On August 2 and 3, Rep. John Linder (R-GA) and nationally syndicated radio host Neal Boortz hit the cable news circuit to promote their new book, The FairTax Book (ReganBooks, August 2005), which lays out the case for Linder's proposed national retail sales tax (NRST). Linder's "Fair Tax Act" (H.R. 25) would replace all federal taxes with a national sales tax on most consumer and government purchases, presumably set at 23 percent. Even though several of the claims made by Linder and the NRST's supporters have been disputed, cable news interviewers allowed Linder and Boortz's deceptions and falsehoods to go unchallenged.
At the heart of Boortz and Linder's proposal lies a bait-and-switch that they have yet to be questioned on -- one that makes their idea far less palatable in truth than in the version they are selling.
When Boortz and Linder have discussed the NRST, they said it would be a 23 percent sales tax. An attentive viewer might have noticed that they refer to it as an "inclusive sales tax." On their August 3 appearance on Fox News' Your World With Neil Cavuto, host Cavuto said that the NRST "would be a straight, 23 percent sales tax, essentially." Boortz then pointed out it would be an "inclusive sales tax." The 23 percent tax rate was repeated several times throughout the show, but at no point did Cavuto or his guests ask for or receive an explanation of what "inclusive sales tax" means.
So just what is an "inclusive sales tax?" Not the kind of sales tax imposed by states and cities around America. Those are "exclusive" sales taxes. Boortz and Linder acknowledge this in their book, writing, "This [the tax-inclusive rate] is the biggest difference between the FairTax and most current state sales taxes, which are 'exclusive.' "Exclusive sales taxes are calculated as a percentage of the pre-tax price. With a typical "tax-exclusive" sales tax, if a widget costs $100 before tax, a consumer would pay $123 at the register if the tax was 23 percent (.23 x $100 = $23). By contrast, a "tax-inclusive" sales tax would be calculated as a percentage of the total, post-tax purchase price. This means that under a 23 percent "tax-inclusive" sales tax, the same widget that cost $100 pre-tax would cost $130 post-tax ($30/$130 = 23 percent). In other words, the NRST's 23 percent "tax-inclusive" rate is equivalent to a 30 percent "tax-exclusive" rate of the kind we are all used to.
The August 3 edition of Fox News' Fox & Friends First featuring an interview with Linder was even more deceptive. An onscreen graphic read: "FairTax would set a national sales tax rate of 23 percent." Co-host Andrew Napolitano further confused the issue when he incorrectly stated, "So if you were going to buy something in a store for $100 -- its normal cost is $100, under your system it would cost $123, and the retailer would send the $23 to the government." As noted above, anything that cost $100 pre-tax would cost $130 under a 23 percent tax-inclusive sales tax.
Boortz and Linder contend that actual consumer prices would not rise under the NRST, but regardless, their proposed "tax-inclusive rate" is a 30 percent sales tax as most Americans understand it. But even this 30 percent number probably underestimates what Boortz and Linder's proposal would entail. In fact, in order to meet their requirements, the effective tax rate could be as high as an astonishing 56 percent (tax-exclusive).
Why would the rate be as high as 56 percent (tax-exclusive)? The answer lies in Boortz and Linder's contention that their proposal would be "revenue-neutral" (i.e., it would bring the same amount of money into federal coffers as does the current tax system). While economists disagree about the tax rate necessary to achieve revenue neutrality under Linder's plan, a 2000 study conducted by Lindy Paull of the Congressional Joint Tax Committee (JTC) after Linder first introduced the Fair Tax Act in 1999 placed the revenue-neutral rate substantially higher than Linder's 23 percent. According to the JTC memorandum, dated April 7, 2000, the NRST "tax-inclusive" rate would have to be 36 percent in order to achieve long-term revenue neutrality. Under a 36 percent tax-inclusive rate, the $100 widget would cost $156.25 ($56.25/$156.25 = 36 percent), for an exclusive tax rate of 56.25 percent.
Several interviewers have failed to challenge Boortz and Linder's claim that replacing existing federal taxes with a 23 percent "tax-inclusive" sales tax would be "revenue-neutral." Linder made this claim in response to a question from host Sean Hannity on the August 2 edition of Fox News' Hannity & Colmes, and Boortz repeated it in an exchange with anchor Soledad O'Brien on the August 3 edition of CNN's American Morning. Although Boortz and Linder did not repeat this claim in their August 3 Your World with Neil Cavuto appearance, in the following panel discussion, Maxim Group market strategist Barry Ritholz asked, "Is it really revenue-neutral?" Cavuto responded, "They say it is. They have Harvard smartiacs like [Fox News senior business correspondent and co-panelist] Brenda [Buttner] saying it's fine."
Deceptive claims on federal tax burden
In promoting the NRST, Linder also overstated the current federal tax burden. On Hannity & Colmes, Linder claimed, "Currently 33 percent of what you earn you give to Uncle Sam." Similarly, he claimed on Fox & Friends First that "[c]urrently, you give the government 33 cents of every dollar you earn."
However, a recent Congressional Budget Office (CBO) study estimated that combined federal taxes amounted to 20.7 percent of average household income in 2002 -- not 33 percent as Linder claimed. (The study did not include the estate and gift tax, which, according to the Congressional Research Service, accounts for only 1.2 percent of federal tax receipts.) According to the CBO study, the federal tax burden approaches 33 percent for only the top one percent of households. Linder's inaccurate assertion went unchallenged on both Hannity & Colmes and Fox & Friends First.
From the August 2 edition of Fox News' Hannity & Colmes:
HANNITY: I think it was great. You give a history of taxation and the IRS and the income tax. How is it revenue-neutral? Because some people say, well, wait a minute, what guarantee do we have that we'll have the money that we have now to fund Medicare, Social Security?
BOORTZ: Well, John wrote the law.
LINDER: Studies from seven different institutions tell us that roughly -- some say 22.5 percent, some say 24.5 percent. Currently 33 percent of what you earn you give to Uncle Sam. Under our plan, 23 percent of what you spend you give to Uncle Sam. And it's revenue-neutral. It will raise the same amount of money.
From the August 3 edition of Fox News' Your World with Neil Cavuto:
CAVUTO: You're saying no income tax, period.
BOORTZ: No income tax, business or personal.
LINDER: Or payroll tax, or gift tax, or estate tax.
CAVUTO: So it would be a straight, 23 percent sales tax, essentially.
BOORTZ: Inclusive sales tax.
BOORTZ: And you take the embedded taxes out of the price of a new home. That's gone. That averages about 25 percent. You add back the inclusive 23 percent sales tax. The new home doesn't cost any more then than it does now.
CAVUTO: Which wins out -- a flat tax like Steve Forbes, I think it's 17 percent on income, keep it flat across the board, or something like this, which is effectively a 23 percent sales tax?
RITHOLZ: That's right. This'll make the government receipts more volatile. The other question is, is this really revenue-neutral? If it's not, if the entire U.S. population --
CAVUTO: They say it is. They've got Harvard smartiacs like [Fox News senior business correspondent] Brenda [Buttner] who say it's fine.
From the August 3 edition of Fox News' Fox & Friends First:
LINDER: Of the 22 million dollars we spend -- in a study -- the most compelling study was out of Harvard that said currently, 22 percent of what you spend represents the embedded cost of the IRS. You're paying the income taxes, the payroll taxes, and the compliance costs of every business entity that helped make that loaf of bread. Under ours, it would be 23 percent, but you get to keep your whole check, and the average income earner would have a 50 percent increase in take-home pay. Currently, you give the government 33 cents of every dollar you earn; under ours, you would give the government 23 cents of every dollar you spend.
NAPOLITANO: And how would you give the 23 cents to the government?
LINDER: It would be built in the cost of things at retail. Goods and services. On personal consumption, on new goods.
NAPOLITANO: So if you were going to buy something in a store for $100 -- its normal cost is $100, under your system it would cost $123, and the retailer would send the $23 to the government.
From the August 3 edition of CNN's American Morning:
SOLEDAD O'BRIEN: It's our pleasure. Give me a sense of how this plan -- I mean, you get rid of the IRS. You get rid of the federal tax, period. Where do you make up the money?
BOORTZ: Well, it's very simple. All corporate taxes, business taxes -- gone. All personal federal taxes, they're gone. You get 100 percent of your paycheck.
BOORTZ: But there is a consumption tax added to retail goods and services, only at the final retail sale. So that -- it's revenue-neutral. The consumption tax raises the exact same amount of money for the federal government that all of these taxes we're getting rid of now raise.