Allen Buckley, Libertarian Candidate for U.S. Senate, Calls Fair Tax a Sham

Allen Buckley for Senate

Published: August 3, 2004

Allen Buckley, the Libertarian Party's candidate for U.S. Senate, has called the so-called Fair Tax bill (H.R. 25), a "sham."  The bill, co-sponsored by his Republican opponent, Johnny Isakson, would cause the deficit to explode, shut down the new housing market (and industries flowing thereto) and doubly tax retired persons.

The Fair Tax would replace the income tax, estate and gift taxes and payroll taxes with one sales tax system applicable to sales of goods and services.

Backers of the bill say that the price of goods and services would decrease by 20-25 percent, which would roughly equal the advertised tax rate of 23 percent.  However, under the bill, the tax rate is 29.9 percent, thus causing a good with a sales price of $1 to bear a 30 cent tax.

The bill is allegedly "revenue neutral," meaning that the tax revenue to the federal government from the proposed tax would equal the lost revenue from the eliminated income, payroll and estate and gift taxes.  However, according to a letter of Joint Committee on Taxation Chief of Staff Lindy Paull dated April 7, 2000, in order to be "revenue neutral," a rate of 59.5 percent would need to apply in the first five years of applicability.  The 59.5 percent rate does not take into account how businesses would recoup the foregone tax benefits of depreciation deductions that were included in calculations performed to value capital assets.  It also (conservatively) assumes that the rate of evasion that exists under the current tax system would apply.

A study done by William G. Gale of The Brookings Institute in 1999 estimated that, largely due to increased evasion and improper economic assumptions, the revenue neutral rate for such a sales tax would need to exceed 100 percent.  Mr. Gale informed Mr. Buckley that:  "A major problem with the bill is that prices are assumed to remain constant for government revenue purposes, but to decrease for consumer purchasing purposes."

Based on the Joint Committee on Taxation letter, the proposal would produce approximately one-half of the revenue produced by the current tax system, causing the already enormous deficit to balloon.  Buckley said:  "In my opinion, to propose this bill and call it revenue-neutral is fiscal irresponsibility. The people of Georgia deserve more from their leaders."

Backers of the Fair Tax proposal suggest that the price of goods would decrease by 20-25 percent.  Mr. Buckley believes that it is very unlikely that such a reduction would occur.  Any significant reduction would need to presume a 7.65 percent reduction in wages due to foregone payroll taxes.

Buckley believes that virtually all retired persons and many (perhaps most) middle class persons would pay more tax under a true "revenue neutral" tax rate of 59.5 percent or higher.  He also said that the tax would discourage some people from buying big ticket items, while encouraging other people to make "big ticket" purchases outside the country, thus potentially hurting many retailers. In this regard, Buckley notes that reimportation of "small ticket" drugs from Canada is now commonplace.

The tax would also apply to purchases by state and local governments, as well as to wage payments made to state and local government employees.  Thus, state and local taxes would rise if H.R. 25 were enacted.

Additionally, the tax is administered by the cash-strapped states. Currently, states do not tax services.  Buckley believes that the states would begin taxing services under H.R. 25.

The tax does nothing to solve the massive problems of Medicare and Social Security.  Furthermore, like the current income tax system, there is no connection between the tax rate and spending.

Buckley said: "We absolutely do need a simplified tax system for individuals that ties tax rates to spending to annually balance the budget. This is the only way that Congress will reduce spending.  If enacted, the Fair Tax would vastly increase the deficit.  Our country cannot afford any more debt absent an emergency situation."  (As provided in Mr. Buckley's website, including Medicare and Social Security, the unfunded liabilities of the U.S. government total approximately $42 Trillion, or about $330,000 per full-time worker.)

Buckley said:  "I've calculated the winners and losers under the revenue neutral rate provided by the Joint Committee on Taxation, and in my opinion the biggest potential winners would be most wealthy persons and self-employed persons, while the biggest potential losers are single retired persons and single middle class and upper middle class persons, the home building industry, and suppliers to the home building industry.  The proposal is also terrible in a recession, as it discourages spending."

Under the bill, apartment rentals and new home sales would be subject to the tax, but sales of homes in existence prior to 2005 would be exempt.  Thus, a new $400,000 home would cost $519,600 with the tax ($638,000 under the true revenue-neutral 59.5 percent rate), whereas an identical existing home would continue to cost $400,000.  Also, the gross profit to a lender on a home loan would be subject to the tax.  Buckley said:  "I don't see the new home industry as being able to survive.  In the unlikely event that it did, the tax burden on the middle class would be multiples greater than the burden that presently exists."

To solve the country's massive financial problems, Mr. Buckley proposes a simplified income tax system with a higher exemption to help the poor and middle class, and a "common tax rate" that virtually everyone pays that is tied to spending to annually balance the budget, pay off some of the debt and induce Congress to shrink the size of the federal government.  For Medicare, he proposes a national referendum to allow the people to decide whether the current benefits system should be retained with current tax increases to fund the benefits or the current benefits percentage (of the General Fund) retained with benefit reductions.  He recommends that the current Social Security surpluses be invested in traditional pension assets (instead of being loaned to the federal government), and matching contributions be added for people entering the workforce hereafter to make up for Social Security's impending shortfall.

Mr. Buckley, who is an employee benefits and tax attorney and a CPA, will be on the ballot in November.