ClampIt vs "Fair Tax" - Boortz

email Neal Boortz comment

Neal Boortz is co-author of a book (other believed to be John Linder, D-Ga) and he solicits and receives a lot of callers that support the concept of "The Fair Tax" which has been touted as a replacement to the federal income tax.

He remarked last year (02/07/06) on his Radio talk show that there was an estimated (by whom is unknown) 3-4 trillion dollars of retained earnings from U. S. citizens and corporations that have relocated off-shore and that as soon as the FairTax is adopted, this money will be sucked into the U. S. economy and that manufacturing would return.

Why, I couldn't follow. The abolishment of the income tax would be an incentive, but a 24% consumer tax on labor would make it the single highest labor cost ever. One way or another, 36-50% of anything spent in the U. S. goes to a federal, state or local government in the form of tax. It is simply too high, and leaving it as it is and only collecting it from consumers doesn't change anything except make it extremely lucrative for bootleggers. Yet, this is what Mr. Boortz proposes, because he has taken a "revenue neutral" position, meaning it will exact the same tax as before but only from consumers.

I subsequently spoke to Mr. Boortz on the air, questioning why 1) he advocated having just a "one size fits all" singular rate of tax and 2) why it was not reduced and applied to all sellers, not just retail (so that the rate could be reduced). He was venomously adamant that the rate had to be the "same for everybody" in order to be "fair." He was equally resolved that all businesses had to be exempt, as well as investments, because that "was good for the economy." He cut me off when I asked if any of the states were still free to levy any additional tax they pleased, including an income tax. A few days later, he did remark that (he)"...would like to have repealed the income tax..." so doubt he was thinking about its vulnerabilities.

The "Fair" Tax is patterned after an earlier effort by the Citizens for an Alternative Tax System (CATS), whereby they proposed essentially the same thing. This same idea was resurrected and advanced by Representative John Linder (R-GA) as the "Fair" Tax. Essentially, they are more alike than the differ, in that both advocate a "consumer only" consumption sales tax in lieu of the income tax and both end up with intractable problems of protecting the poor and seemed to be catering solely to business and spend most of their time preaching to the choir, with some spattering of ardent followers.

I sent correspondence to Mr. Boortz after reading his book, but it was no answered. Thus, I thought it might be fitting to ask provide a bit of clarity here.

Contrastingly, the 1USATax reduces tax bite to 20-25% of the economy and halts tax on ownership. It taxes international goods at the same rate as domestically produced goods, and intrinsically favors those goods produced locally as close to market as possible. Tax is imposed by product, not by market or territory. This reduction in tax rate and control of government size and intrusion would seem to better stimulate foreign investment, though the latter is not relied upon to make the system work. It will reduce the cost of American labor because it will reduce the largest cost to labor, i. e., government taxation. This will make American labor more competitive to European or Japanese manufacturers.

It will also require that imported goods support the common defense, health care, unemployment and social security - something that is not done now, nor will the "Fair" Tax.

Microwave ovens produced offshore in Pago Pago would have no tax load under the so-called "FAIR" tax, and the labor producing it certainly do not have a 24% consumer tax where it is produced. Any competitive U. S. manufacturer would have to pay wages that would cover this burden, which would be made larger by the dropping any tax contribution by distributors and middlemen. It would make certain, as Ross Perot predicted, that the "giant sucking sound" would reach epidemic levels.

By contrast, the 1USATax would impose (say) a five percent tax on the Pago Pago microwave when it is imported and another five percent whenever it is sold. American labor cost would be reduced by 10 to 15 percent in real dollars (payroll deduction would decline from 20 to 25 percent to five percent) and would pay the same tax. Thus American workers would have more money to spend, yet the government burden would be uniformly shifted to the entire economy. Although this will not totally compensate for order of magnitude differences in labor rates, it is certainly heading in the right direction, because the tax load would be reduced on American domestic goods significantly.

It is important to realize that the reason the United States is not competitive is due to loading of government expense onto the American consumer and labor. Issuing a 24% tax exemption certificate to off shore production (which in essence the shift to only the consumer would do) would tend to make foreign goods artificially even more competitive. It is the wrong thing to do.

There must be a constraint to increasing government size and it must be asserted by those governed; history has shown that it will never be done by sitting government.

Boortz does have some argument that having only one tax rate is certainly simpler than have more than one. But the "FAIR" tax has no limit as to how high the tax can become and it passes out exemptions to all but the final consumer. There are three significant costs in the distribution of any product, cost (what was paid for the product), markup (what the product is sold for) and investment intensity in inventory (inventory turnover). Milk, for example, has a very short investment intensity and relatively low markup. Jewelery, on the other hand, has a relatively high investment intensity and a relatively high markup. A tax levied only at the consumer level will therefore lower the investment cost of jewelery (since it is deferred until sold), yet it will not appreciably affect the investment intensity of milk, but greatly affect the price. For this reason, we have designed the 1USATax to have the elasticity to treat these differences by permitting high inventory turnover, low markup commodities (typically necessaries) to be set lower than the target average of five percent, thus to lower the tax load on these products; conversely, a higher tax rate may be established on luxury or "sin" items to make up this difference (what economists call "externalities"). To illustrate, assume both liquor and milk have a four level distribution structure and that the average markup on liquor is 2.0 and milk is 1.2, respectively. What would be the tax yield between the two under the 1USATax?

Example
Assuming the manufactured product each cost $1.00, the price of milk would be as follows:

Ratio: Tax to net price: 5.84%

Now let's take a look at the same thing with liquor with a 2.0 markup and tax of 8 percent.

Ratio: Tax to net price: 13.5%

We note that the high turnover, low markup, 4 distributor channel to consumer milk had a final price of $1.84, while the liquor had a final price of $10.31, though both had an initial cost of $1.00 per unit.

With the example given, the cumulative tax collected on milk was about 5.5%; the cumulative tax collected on liquor was 13.5%.

It is important to realize that the shelf life of milk is very short (days) and that of liquor very long (months to years) and that the cost to sell controlled substances is higher for both government and industry. The 1USATax permits this to be recognized within limits that would not encourage bootlegging (under ten percent). Now let's examine this same affect uses the so-called "FAIR" Tax.

Ratio: Tax to net price: 19.5%

Ratio: Tax to net price: 19.3%

Note in the example given whereby the tax is withheld to the final consumer, no distributor pays anything in the way of taxes and the price of liquor goes down and the price of milk goes up. Foreign goods have advantage of no tax load until it is sold.

'''The "FAIR" tax price of milk: $2.15; liquor, $9.92. The 1USATax price of milk: $1.84; liquor, $10.31'''

Under the 1USATax, the price paid by the consumer is the advertised price.

The retailer pays 2% tax for milk sold. The retailer pays 8% tax for liquor sold.

So does everyone else.

So imported liquor would pay 8% at the port of entry, hardly enough margin to justify bootlegging. But with the so-called "FAIR" tax, it would pay nothing, then have a whopping 24% duty when it is sold.

Contrastingly, the 1USATax is always reasonable (less than or equal to ten percent) and is always fair (every seller of the same product pays the same rate), yet provides the elasticity for Congress to adjust for differences in investment intensity, public need and other factors within controlled limits. The 1USATax is simplest to the consuming public because no calculation need be done at all: all tax is included in the advertising price. It needs no exemption certificates and need not classify buyers and consumers. It does not permit any other tax, thus controls the ratio of government expenditures to the size of the economy.