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‘Fair tax’ momentum growing on Capitol Hill

Brian Francisco
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Armstrong

Is this a fair shake for taxpayers?

Congress replaces all federal income taxes – personal, corporate, Social Security, Medicare, capital gains, estate and gift – with a 23 percent consumption tax on the sale of new goods and services. And the government sends every household a monthly check to cover at least $200 in tax payments.

What supporters call a “fair tax” was hatched in the 1990s and has been building support in recent years on Capitol Hill. Nearly 80 federal lawmakers, including four from Indiana, have co-sponsored fair-tax legislation this year. A fair-tax advocacy group, Americans for Fair Taxation, submitted data last week for the congressional debt-reduction committee to consider.

And about 8,400 people have participated in online voting on this year’s fair-tax bills at Popvox.com, with 80 percent supporting either the House version (HR 25) or the identical Senate measure (S-13).

The praises of the fair tax were sung last week by local resident Dave Armstrong, a representative of FairTax Indiana.

“You determine how much tax you are going to pay and then you pay it, based on your purchases,” he said at a meeting of Fort Wayne 9-12, a conservative political activist group.

“Fair tax is a jobs bill disguised as a tax bill,” Armstrong, a retired district sales manager for a specialty seal manufacturer, said about prospects for reduced production costs if the corporate income tax is eliminated.The legislation also would exempt the consumption tax for exports and purchases by businesses, in theory strengthening American manufacturers.

“Everybody is treated equal, and there are no special deals,” Armstrong said about the plan, which would end income tax credits and deductions (although it would exempt school tuition).

“I found the one thing wrong with it: It looks too good to be true,” Armstrong told about 40 people attending the meeting.

But some people don’t like the looks of it at all. The fair tax has been attacked from the political left, right and center.

Opponents fear that low-income and older people will be hurt by having to pay taxes on food, rent, utilities and medicine. They worry about burdens on income tax-exempt entities, such as churches and charities.

There are forecasts that sales will tank for big-ticket items, new housing in particular.

Some foes warn about an expansion of welfare spending because of the monthly “prebate” paid to each household. Others claim the federal government will become more intrusive as it collects sales tax from teenage baby sitters and sets up bureaucracies to replace the IRS, even if pending legislation gives states control over collecting the tax.

Critics also contend the 23 percent rate – what fair-tax proponents say is required to raise the same revenue as income taxes, which range from 10 percent to 35 percent of income – is arbitrary and would be subject to increases by Congress according to the government’s fiscal condition.

Democrats in Congress have panned the fair tax proposal. So, too, have conservative groups such as the Constitution Party and the American Patriot Party.

“People want to like the idea initially,” said James Moody, a political consultant in Jefferson City, Mo. “But then the concerns are, ‘Well, what am I going to have to pay this tax on, what is the rate going to be, and what am I going to pay it on that I’m not currently paying it on?’ ”

‘Show Me’ test state

Missouri might be a test state for the fair tax. A group named Let Voters Decide is pushing for a 2012 voter referendum on a constitutional amendment that would replace the state’s personal income tax with a sales tax on products and services.

Moody is a spokesman for the Coalition for Missouri’s Future, which is fighting the proposed referendum. Coalition members include the Missouri AARP, the state school boards association, teacher unions and the Kansas City Chamber of Commerce. Real estate agents and broadcasters are in another organization opposed to the sales-tax plan.

“We are the Show Me State, and I think voters will figure this out,” said Moody, who has held various state posts, including administration commissioner, budget director and family services director.

Missouri’s income tax rate starts at 1.5 percent and climbs to 6 percent on earnings exceeding an adjusted gross income of $9,000. Its sales tax is 4.225 percent.

The referendum proposal would ditch the income tax and impose a 7 percent consumption tax, with combined state and local sales taxes capped at 10 percent. Food would be taxed at 5.5 percent. Child care, school tuition and rent would be exempt, according to news reports.

Let Voters Decide – bolstered by financier, philanthropist and chess enthusiast Rex Sinquefield – needs about 150,000 signatures to get its version of a fair tax on the ballot.

“Essentially, I think these folks just want to destroy government,” Moody said. “This isn’t really about tax policy. They have exempted so much, they just can’t generate enough revenue to make up for what you are going to lose from the income tax.”

That’s what Missouri’s public schools are afraid of, according to news reports. Moody predicted that people in higher tax brackets will not buy more goods and services to make up for their missing income taxes.

“The people that have that money – the interest, dividends and capital gains – are not going to take that money and consume enough to generate $900 million in sales tax revenue,” he said. “They’re probably going to put it in the bank, because they earned that money by investing it to begin with.”

He doesn’t accept the argument that anybody can choose not to pay the sales tax simply by refraining from purchases.

“I remember buying diapers,” he said. “Diapers are not really a discretionary expenditure. You are going to pay this enormous sales tax on the purchase of diapers.”

If both the state and national consumption taxes were to pass, Missouri moms and dads could face a combined 33 percent tax rate on a box of Pampers. But they would have bigger paychecks to buy them with, according to fair-tax supporters.

A little from everyone

Co-sponsors of federal legislation to impose a national fair tax include Sen. Richard Lugar, R-Ind., and Reps. Marlin Stutzman, R-3rd; Dan Burton, R-5th; and Mike Pence, R-6th.

“What I like is the simplification” of the tax code, Stutzman said.

The prebate “is supposed to offset all the costs of food. Anybody can sign up for the prebate, it doesn’t matter what level of income you’re at,” he said. “That is supposed to make the tax more fair.”

The amount of the prebate would depend on household size. Armstrong said it would come to $209 a person, $418 a couple and $73 for each dependent.

“I think it does give the consumer power over how much they want to pay in taxes,” Stutzman said about the fair tax.

He said 50 percent of Americans pay no income tax – a talking point among many Republicans in Congress. The non-partisan Tax Policy Center has put the figure at 46.4 percent, saying the population is largely low-income people whose tax bill disappears after standard deductions and exemptions, plus tax credits for such expenses as child care.

“I think everyone should have some skin in the game, somehow,” Stutzman said. “Because our No. 1 responsibility for the federal government is national defense. To live in a free country … a little bit should be contributed by every American for that freedom and that protection.”

Spokesman Andy Fisher said Lugar began advocating a national consumption tax in the mid-1990s.

“Then, no one in the Senate and only a couple of people in the House were interested,” Fisher said. “I was skeptical the first time I heard about it. The more you read about it, the more intriguing it became to the point you saw it would be something that would work. It would be extremely beneficial to economic growth and job creation. It would bring investment in from all over the world to revitalize manufacturing.”

The 23 percent tax “is almost identical to the embedded income tax in the final purchase price of a product or a service,” Fisher said. “All of that tax that is already structured, in a hidden way, into a product that you buy. … So it works out about the same.”

When he announced in June that he would co-sponsor the current Senate fair-tax bill, Lugar said if it passed, “savings will increase and therefore individuals and American companies will have more money to invest in job-creating growth.”

He also said it would halt tax incentives for special interests.

Lugar at the time gave a nod to “The FairTax Book,” published in 2005 and written by Rep. John Linder, R-Ga., who did not seek re-election last year, and Neal Boortz, a talk radio host in Atlanta.

In 1999, Linder began introducing fair-tax legislation, which never advanced to a vote in the House.

bfrancisco@jg.net

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