"Fair Tax" advocate on KVOR claimed 23 percent sales tax proposal is "revenue-neutral"; Bush tax panel disagreed
Research ››› ››› MEDIA MATTERS STAFF
Guest host Gary VanDyke of News Radio 740 KVOR's Afternoon Show on August 16 allowed Americans for Fair Taxation spokesman Bill Spillane to assert that the proposed "Fair Tax," which would replace all federal taxes with a "23 percent" retail sales tax, would be "revenue-neutral." In fact, a panel commissioned by President Bush has suggested that the actual revenue-neutral sales tax rate for the proposal would be significantly higher.
During the August 16 broadcast of News Radio 740 KVOR's Afternoon Show, guest host Gary VanDyke uncritically allowed Bill Spillane, who is National Spokesman and District Director for Americans for Fair Taxation, to claim that a so-called "Fair Tax" proposal to replace all federal taxes with a "23 percent" national retail sales tax would be "revenue-neutral." In fact, as Colorado Media Matters has noted, President Bush's Advisory Panel on Federal Tax Reform -- to which Fair Tax advocates submitted their proposal -- suggested that the revenue-neutral sales tax rate for the proposal would be far higher than 23 percent.
Fair Tax advocates propose abolishing the Internal Revenue Service and replacing all existing federal taxes (including corporate, Social Security, capital gains, and estate taxes) with a national retail sales tax on most consumer and government purchases. The Fair Tax system would include a monthly cash rebate (sometimes called a "prebate") intended to offset the tax for poverty-level households.
Discussing the Fair Tax proposals submitted to Congress (currently H.R. 25 and S. 1025), Spillane dismissed criticism of the legislation by "people who have reorganized the bill to their own liking and stuffed deductions or whatever else in there and then recalculated and said, 'Oh my God, it takes a 60 percent sales tax to raise the same amount of money.' " Spillane then asserted, "We have studied this with some of the top economists in the country from coast to coast over and over again, and it comes out to about 23 percent inclusive." Later, Spillane explained that the Fair Tax "raises the same amount of money as the present income tax does. That's why it's called 'revenue-neutral.' "
However, Spillane did not mention that one critic of the proposal was the president's tax reform panel, which asserted that the actual revenue-neutral rate for the Fair Tax would likely be much higher than the 23 percent rate that Spillane touted. In its November 1, 2005, final report, the Advisory Panel explained that the figures provided by Fair Tax proponents conflicted with the calculations of the Bush administration's Treasury Department. The report described the 23 percent tax-inclusive rate cited by Fair Tax Act sponsor U.S. Rep. John Linder (R-GA) 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 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. [emphasis added]
The 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." [emphasis added]
The 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, and 57 percent using the tax-exclusive method that most states use to describe their tax rates.
From the August 16 broadcast of News Radio 740 KVOR's Afternoon Show:
VANDYKE: This is going to be a sales tax.
VANDYKE: So that in the numbers I've seen, it's about 23 percent sales tax.
SPILLANE: Yes, that's right --
VANDYKE: Which is, you know, when you, when you look at sales taxes already for federal sales tax, and then plus your income tax, what we're talking about is, if you don't go out there and buy a whole bunch of stuff, you won't be paying much, will you?
SPILLANE: No, that's correct. However, because of the prebate, your, your tax rate, your overall tax rate, will be quite low depending upon how much you spend. It has, has nothing to do with how much you earn, but how much you spend. For example, with a prebate for a family of four, if you choose to spend about $54,000 a year on only new goods and services, your overall tax rate, including payroll tax and so forth, the whole thing will be about 11 and a half percent. Now, that, that's less than just the payroll tax, let alone the income tax.
VANDYKE: But what I'm reading also is that it eliminates Social Security withholding, eliminates hidden taxes, eliminates taxes on education, but it still raises the same amount of money to finance the federal government as our current tax system.
SPILLANE: That's exactly right. And, and this has been studied over and over again. I mentioned early, at the top, that there are plenty of lies about -- about the Fair Tax out there, and one of them is that, "Oh my gosh, the only way to replace all of our spending and so forth, all of our taxes that we have now, is to have a humongous sales tax rate." And that's just not true. These are people who have reorganized the bill to their own liking and stuffed deductions or whatever else in there and then recalculated and said, "Oh my God, it takes a 60 percent sales tax to raise the same amount of money." We have studied this with some of the top economists in the country from coast to coast over and over again, and it comes out to about 23 percent inclusive.
VANDYKE: OK, so what about, what happens to corporate taxes?
SPILLANE: They go away.
VANDYKE: They go away, which means products now can probably be sold a bit cheaper than they were to cover those corporate taxes.
VANDYKE: You know, corporations do not pay taxes, folks. They don't pay taxes. They charge you an excess amount of money over and above the cost of goods and over above their profit so that they can pay the taxes. So you're actually paying corporate taxes. So you're paying income taxes, you're paying Social Security taxes and all these other taxes, but you're also paying the corporate taxes every time you purchase something. And we're talking about eliminating that entirely. Can this be done and still do the things we do around this country? Are we gonna have programs fall off the face of the world because there's no funding for them?
SPILLANE: No, sir. This raises the same amount of money as the present income tax does. That's why it's called "revenue neutral." Raises the same amount of money. So those are separate issues. If you want to have roads built, or potholes fixed, or a new hospital on the corner, or whatever the case may be, that's a separate issue. That's appropriations, that's spending. This is only the issue of raising the federal tax money.