Ignoring Bush tax panel's findings, Boortz again misled on "Fair Tax"

››› ››› JEREMY SCHULMAN

On Fox News' Hannity & Colmes, Neal Boortz made misleading claims about the Fair Tax Act, introduced by Rep. John Linder, which would replace all existing federal taxes with a national retail sales tax on most consumer and government purchases. In fact, Boortz relied on an unusual method of describing sales tax rates. Moreover, according to President Bush's Advisory Panel on Federal Tax Reform, Boortz significantly understated the tax rate necessary for the Fair Tax Act to be revenue-neutral.

On the May 24 edition of Fox News' Hannity & Colmes, nationally syndicated radio host Neal Boortz made misleading claims about the Fair Tax Act, introduced by Rep. John Linder (R-GA), which would replace all existing federal taxes with a national retail sales tax on most consumer and government purchases. In his interview with co-host Sean Hannity, Boortz claimed that in order to fully replace all federal taxes, the national retail sales tax rate would have to be set at only "22 or 3 percent." In fact, Boortz's relatively low figure relies, in part, on an unusual method of describing sales tax rates that differs significantly from the method used by most states and localities. Moreover, according to President Bush's Advisory Panel on Federal Tax Reform, Boortz's figure significantly understates the tax rate necessary for the Fair Tax Act to be revenue-neutral.

Boortz appeared on Hannity & Colmes after speaking at a May 24 "Fair Tax rally" in Atlanta, which was also attended by Hannity, Linder, and ABC News' John Stossel. In 2005, Boortz and Linder co-authored The FairTax Book (ReganBooks, August 2005), which laid out the case for Linder's bill.

Boortz and Linder have repeatedly asserted that the Fair Tax would be revenue-neutral -- that is, it would fully replace all revenue generated by existing federal taxes. On Hannity & Colmes, Boortz stated: "So, we get rid of all these taxes, and we take the embedded tax out of everything we buy. We replace it with a retail sales tax on the final retail sale of all goods and services. It's revenue-neutral." Boortz went on to say that in order to be revenue-neutral, the Fair Tax would have to be set at "22 or 3 percent." (In their book, Boortz and Linder said the proposed tax rate is "currently 23 percent" but could be "somewhat lower" [page 76].)

But neither Boortz nor Hannity explained that Boortz was referring to a "tax-inclusive" sales tax rate. As Media Matters for America has noted, inclusive taxes are calculated differently from the "tax-exclusive" sales taxes generally used by state and local governments. In fact, the "23 percent" inclusive tax touted by Boortz would actually be a 30 percent sales tax as most Americans understand it.

Moreover, according to President Bush's Advisory Panel on Federal Tax Reform, to whom Far Tax proponents submitted their proposal, the actual revenue-neutral rate for the Fair Tax would likely be much higher than the 23 percent tax-inclusive (30 percent tax-exclusive) rate touted by Boortz and Linder. In its November 1, 2005, final report, the Advisory Panel noted that the figures provided by Fair Tax proponents conflicted with the calculations of the Bush Administration's Treasury Department:

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).

The Advisory Panel explained that the Fair Tax proponents' proposal appeared to have made internally inconsistent assumptions that largely account for their "relatively low revenue-neutral tax rate." The Advisory 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 that the Advisory Panel called "unreasonable":

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.

Second, FairTax proponents' rate estimates also appear to assume that there would be absolutely no tax evasion in a retail sales tax. The Panel found the assumption that all taxpayers would be fully compliant with a full replacement retail sales tax to be unreasonable. The Panel instead made assumptions about evasion that it believes to be conservative and analyzed the tax rate using these evasion assumptions.

Neither Boortz nor Hannity mentioned the Advisory Panel's findings, and co-host Alan Colmes did not participate in the interview.

The Advisory 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 the Fair Tax Act in 1999 estimated that the revenue-neutral rate for the Fair Tax would be 36 percent, using Boortz and Linder's tax-inclusive method, and 57 percent using the tax-exclusive method that most states use to describe their tax rates.

From the May 24 edition of Fox News' Hannity & Colmes:

HANNITY: Neal Boortz, tell our audience we could literally eliminate the IRS and the income tax.

BOORTZ: Well, we can. We eliminate business taxes, personal income taxes, estate tax, capital gains taxes, Medicare tax, Social Security tax. All of these taxes show up eventually in the price of everything you buy. The embedded taxes, in every car, every house, every can of soft drink that you buy, amounting to about 22 percent.

So, we get rid of all these taxes, and we take the embedded tax out of everything we buy. We replace it with a retail sales tax on the final retail sale of all goods and services. It's revenue-neutral, and we don't have to worry about April 15th anymore.

HANNITY: So, in other words, if you make $50,000 a year, you don't make $33,000, you make 50.

BOORTZ: No, you make 50. You're -- if you're -- under the Fair Tax, if you're -- if you sign on, sign a contract, get a $50,000 a year salary, well, then each one of your 26 paychecks is 1/26 of $50,000. There's no withholding.

[...]

HANNITY: We have a certain level of things that we expect from the government.

BOORTZ: Yes.

HANNITY: How is this revenue-neutral?

BOORTZ: The Fair Tax was designed -- by the way, this is the first tax reform idea ever completely designed by the private sector, by economists at places like MIT and Harvard, by businessmen, not by politicians. This is not a good plan for politicians. It takes power away from them. But they looked at our economy. They looked at the consumption levels. They said, "This is how much money the federal government takes in in tax revenue right now. What would the Fair Tax rate have to be to match that?"

HANNITY: And it is?

BOORTZ: It would have to be just about equal to the embedded tax in our goods and services now. The embedded tax is about 22 percent. The Fair Tax would be 22 or 3 percent. So, a $10,000 car would still cost about $10,000.

Posted In
Economy, Taxes
Network/Outlet
Fox News Channel
Person
Sean Hannity, Neal Boortz
Show/Publication
Hannity & Colmes
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