9News "Truth Test" claimed Beauprez-supported 23 percent sales tax proposal is "revenue-neutral"; Bush tax panel disagrees

››› ››› MEDIA MATTERS STAFF

A 9News "Truth Test" about an ad criticizing Republican gubernatorial candidate Bob Beauprez uncritically repeated the dubious claim that a proposal Beauprez co-sponsored to replace all federal taxes with a "23 percent" national retail sales tax would be "revenue-neutral." In fact, a tax panel commissioned by President Bush has suggested that the actual revenue-neutral sales tax rate for the proposal Beauprez supported would be significantly higher.

In the written version of an October 9 online KUSA 9News "Truth Test" of a campaign ad criticizing Republican gubernatorial candidate Bob Beauprez, 9News uncritically repeated the dubious claim that a "Fair Tax" proposal Beauprez co-sponsored to replace all federal taxes with a "23 percent" national retail sales tax would be "revenue-neutral." In fact, a federal tax-reform panel commissioned by President Bush disputed Fair Tax proponents' claims and suggested that the revenue-neutral sales tax rate for the proposal would be far higher than 23 percent.

In other words, contrary to 9News' "Truth Test" by reporter Adam Schrager, the proposal Beauprez supported likely would result either in a federal revenue shortfall or in a national sales tax rate significantly higher than 23 percent.

Beauprez co-sponsored the Fair Tax Act of 2003 (H.R. 25), which was introduced by Rep. John Linder (R-GA). Beauprez has not co-sponsored a similar version of the bill -- the Fair Tax Act of 2005 - that Linder introduced for the current Congress. In its "Truth Test," 9News cited a July 23, 2003, letter from Linder published in The Wall Street Journal. In that letter, Linder explained that "the FairTax repeals all federal personal income taxes, corporate income taxes, payroll taxes, self-employment taxes, capital-gains taxes, and gift and estate taxes." Linder went on to state that the proposal "would replace all of the burdens associated with these income taxes with a revenue-neutral 23% sales tax on all retail sales of new goods and services."

A recent campaign ad approved by Democratic gubernatorial candidate Bill Ritter noted that while in Congress, "Beauprez pushed for a national sales tax of 23 percent on everything we buy, including new homes, food and medicine." According to the written version of Schrager's "Truth Test," the Ritter campaign's claim "is true, but needs more explanation." Echoing Linder, 9News asserted that the Fair Tax would be "a revenue-neutral 23 percent sales tax":

Beauprez signed on as a co-sponsor of H.R. 25 in 2003. (Source: House of Representatives) It was called the "FairTax" plan and its author, Rep. John Linder (R-Georgia), said it would repeal all income taxes, payroll taxes, capital-gain taxes and estate taxes. In exchange, the legislation called for a revenue-neutral 23 percent sales tax on all retail sales of "new goods and services." Linder told the Wall Street Journal "You would become a voluntary taxpayer paying taxes when you choose, as much as you choose, by how you choose." (Source: Wall Street Journal, July 23, 2003). So under the plan Beauprez supported, the 23 percent sales tax plan was NOT in addition to the taxes we already pay, but instead of them.

In its final 2005 report, President Bush's Advisory Panel on Federal Tax Reform noted that the actual revenue-neutral rate for the Fair Tax would likely be much higher than the 23 percent tax-inclusive rate touted by Linder and echoed by 9News. The Advisory Panel explained that the figures provided by Fair Tax proponents conflicted with the calculations of the Bush Administration's Treasury Department. In its report, the Advisory Panel described the 23 percent tax-inclusive rate cited by Linder as a 30 percent tax-exclusive rate. (The two figures represent different ways of describing the same tax):

In their submission to the Panel, proponents of the FairTax claimed that a 30 percent tax exclusive sales tax rate would be sufficient not only to replace the federal income tax, but also to replace all payroll taxes and estate and gift taxes and fund a universal cash grant. In contrast, the Treasury Department concluded that using the retail sales tax to replace only the income tax and provide a cash grant would require at least a 34 percent tax-exclusive rate.

Some may wonder why the tax rate estimated by FairTax advocates for replacing almost all federal taxes (representing 93 percent of projected federal receipts for fiscal year 2006, or $2.0 trillion) is so much lower than the retail sales tax rate estimated by the Treasury Department for replacing the income tax alone (representing 54 percent of projected federal receipts for fiscal year 2006, or $1.2 trillion).

As Media Matters for America noted, the Advisory Panel explained in its final report that the Fair Tax proponents' proposal appeared to have made internally inconsistent assumptions that largely account for their "relatively low revenue-neutral tax rate." According to the Advisory Panel:

First, it appears that FairTax proponents include federal government spending in the tax base when computing revenues, and assume that the price consumers pay would rise by the full amount of the tax when calculating the amount of revenue the government would obtain from a retail sales tax. However, they neglect to take this assumption into account in computing the amount of revenue required to maintain the government's current level of spending. For example, if a retail sales tax imposed a 30 percent tax on a good required for national defense (for example, transport vehicles) either (1) the government would be required to pay that tax, thereby increasing the cost of maintaining current levels of national defense under the retail sales tax, or (2) if the government was exempt from retail sales tax, the estimate for the amount of revenue raised by the retail sales tax could not include tax on the government's purchases. Failure to properly account for this effect is the most significant factor contributing to the FairTax proponents' relatively low revenue-neutral tax rate.

The Advisory Panel further stated that Fair Tax advocates "appear to assume that there would be absolutely no tax evasion in a retail sales tax," an assumption the Advisory Panel called "unreasonable."

The Advisory Panel did not provide an alternative revenue-neutral rate for the Fair Tax, and economists disagree about what that rate would be. But a 2000 study conducted by Lindy Paull of the Congressional Joint Tax Committee after Linder first introduced a version of the Fair Tax Act in 1999 estimated that the revenue-neutral rate for the Fair Tax would be 36 percent using the tax-inclusive method employed by Linder, the Ritter campaign, and 9News; and 57 percent using the tax-exclusive method that most states use to describe their tax rates.

Additionally, in the October 9 broadcast version of the 9News at 5 p.m. "Truth Test" of Ritter's ad, Schrager incorrectly claimed that "the so-called 'Fair Tax' plan would eliminate every other tax we pay, including income taxes." In fact, the Fair Tax would only replace federal taxes, not state and local taxes.

From the written version of the KUSA 9News.com "Truth Test" by Adam Schrager, "Ritter blasts Beauprez on fiscal policies":

QUOTE: "What kind of ideas has Congressman Bob Beauprez picked up in Washington? Beauprez pushed for a national sales tax of 23 percent on everything we buy, including new homes, food and medicine."

TRUTH: This is true, but needs more explanation.

Beauprez signed on as a co-sponsor of H.R. 25 in 2003. (Source: House of Representatives) It was called the "FairTax" plan and its author, Rep. John Linder (R-Georgia), said it would repeal all income taxes, payroll taxes, capital-gain taxes and estate taxes. In exchange, the legislation called for a revenue-neutral 23 percent sales tax on all retail sales of "new goods and services." Linder told the Wall Street Journal "You would become a voluntary taxpayer paying taxes when you choose, as much as you choose, by how you choose." (Source: Wall Street Journal, July 23, 2003). So under the plan Beauprez supported, the 23 percent sales tax plan was NOT in addition to the taxes we already pay, but instead of them.

From the October 9 broadcast of 9News at 5 p.m.

SCHRAGER: This is true, but it needs more explanation. The plan Beauprez supported was a flat sales tax of 23 percent on everything we buy. But, in exchange, the so-called "Fair Tax" plan would eliminate every other tax we pay, including income taxes.

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