Sunday, September 04, 2005

The FairTax Plan

If you've been to the website lately, you'll see that I've been reading The Fair Tax plan by Neal Boortz and John Linder. I'm a CPA but I don't deal in tax matters a great deal, my preference has always been financial work. Tax rules have no logic to them and I prefer the challenge of figuring things out. But I do have plenty of exposure to tax work, I just don't do it regularly. The Fair Tax plan would have no effect on my livelyhood.

Well, I'm done with the book and this is my initial review. I may come back for a second round but this is the start. As a reminder, I'm a conservative so go ahead and factor that bias in as well.

Overall, I think the plan has merit. I would love to see it implemented. My criticisms are less about the plan than about the book. With that being said:

  • The book is presented at a kindergarten level that I found offensive. The tone is extremely patronizing. Liberals and liberal programs frequently take the tone that Americans are too dumb to know what's good for them and that some one else should make decisions for them. Unfortunately, this book has that tone. The book is presented below the intellectual level of just about everyone I know, including a recovering meth head. On the plus side, if you don't understand the plan after reading it, check yourself into rehab.
  • The gotcha's with tax are always around the definitions and the book glosses over some the definitions. As an example:

The person who pay's tax under the FairTax plan is the final purchaser of NEW goods. Ok, I can think of two quick scenarios,

  1. New Car Dealer buys a truck from GM to sell to the public. Truck doesn't sell. New Car Dealer needs a truck for parts delivery so they take the truck, already in the dealer's name, and stop offering it for sale, but use it for deliveries. The Final Purchaser point is a little fuzzy. The dealer should pay tax when they decide to use it for their own use but in the real world, this won't happen alot. Think about demonstrator models and things like that, when does a new car become used without a sale?
  2. We'll pick on car dealers again. New Car Dealer is sharp to the point of fraudulent. New Car Dealer owns New Car Dealership and Used Car Dealership. New Car Dealership buys car from Ford for $10k and sells to Used Car Dealership for $1. Sales Tax is paid on the $1. New Car Dealership takes a loss, Used Car Dealership sells the car for $20k as a "barely used" vehicle and makes a profit. The owner makes the same amount of profit, gains a competative advantage (no sales tax). Nobody catches the transaction because it flowed through income between related parties. (no income tax to report anymore.) Depending on how Final Purchaser is defined, this transactions could even be perfectly legal.
  • These are simple scenarios but they highlight the importance of definitions. I would love to see a deep, technical book for accountants and finance types on the FairTax plan. Take away this Twinkie and give us a steak. I think a large group of CPA's endorsing the plan would help build a groundswell for it. People still look to their CPA's for advice about financial and tax matters and even post Enron, CPA's have a better reputation than the IRS!
  • The problems I've highlighted can be overcome but they need to be resolved BEFORE a law is passed. We pass waaay to many bad laws with the intent of fixing them later.

Finally, read the book. Give the book to your 8 year old, they'll understand it. Use your paystub as a bookmark when reading it. It's helps you get past the patronizing tone.


Anonymous said...

Many of the objections I have about the book are it's
simplifications made to explain what the legislation means to the
average person. For a more complete picture I found going to the
bill, HR25 answers many of the questions that arise.

The latest introduction of the legislation is on Congress' Thomas
website under the bill number H.R.25:

For example, you bring up a question of constitutes used under
the legislation, the bill's language answers that question quite

Section 2 definitions, defines used property as taxable
property for which the tax has been payed.

For the question of one business creating a fraudulent conversion
by selling to another below market, to evade the tax is broadly
covered by the penalties for fraud under Section 505(b) &
505(c) for willful failure by businesses to collect the tax, and
would seem to cover your concerns.

The legislation itself appears to be pretty complete as far as answering
most concerns, providing for most situations that one
could imagine would arise.

Brad Warbiany said...

I suggest checking out the FairTax Blog. It's a place where we have gone into some of these issues in more depth than the book.

I agree the book was written at a low level, but the typical Average Joe doesn't have the same level of accounting and economics as a CPA. I'll second the motion of your previous commenter about reading the actual bill. Some things in there (like how government and "government enterprises") are handled WRT paying the tax are much different than simply reading the book would suggest. And if you're a CPA, you'll understand the legalese better than an engineer like myself :-)