One of the questions I am often asked about the FAIRtax is, “Why is the sales tax (FAIRtax) applied to governments?” And, to that, I have a very simple response, “Because every government of the United States pays federal taxes today and the amount of revenues from those taxes must be recaptured with the sales tax in order to continue paying for the expenditures and debts of the Federal Government.”
That response then raises the next question, “How do governments today at the federal, state and sub‑political entities of the state pay federal taxes?” And, again, I have a simple, but slightly longer, response. “They pay them ‘directly’ through the federal income taxes deducted from each government employee’s pay and through the payroll taxes collected from both the employee and employer for Social Security and Medicare. An exception to the direct collection of federal taxes occurs when government employers, and some or all of their sub-political entities, are exempt from payroll taxes because they provide a retirement and health care program for their employees. And, last, Federal taxes are also ‘indirectly’ collected through government purchases of products and services, all of which contain embedded and cascaded income, payroll and corporate taxes.”
One of the requisites for Congress to begin considering any new tax reform or replacement measure is the probability the new measure will raise the same amount of tax revenues as are collected under the existing measure, or measures, it will replace. After implementing the FAIRtax, governments will no longer be deducting federal income and payroll taxes from their employees’ pay nor making employer deductions for payroll taxes. Given that there are approximately 22-million federal, state and local government employees; 15% of an approximately 146-million non-farm employees in the U.S. today; the amount of federal tax revenues that would no longer be accessed through income and payroll taxes would be substantial.
Also eliminated from producing federal tax revenues under the FAIRtax are the embedded and cascaded income, payroll and corporate taxes included today in every product and service purchased by governments. With government consumption expenditures approximating $3 trillion; 16% of the nation’s $18‑trillion GDP; then, as with the elimination of directly deducted income and payroll taxes, the loss of embedded taxes also represents a substantial loss of revenues for the Federal Government. Fortunately, the FAIRtax has included measures to recapture these tax revenues with governments that, otherwise, would have been passed to the private sector and with the consequence of significantly higher sales-tax rates.
To explain how the FAIRtax includes governments, we begin first by noting that the FAIRtax recognizes government entities to be of two types, those that are government enterprises and those that are not. Government enterprises are entities that collect a fee for the products or services they provide. At the Federal level, the U.S. Post Office represents such an entity while, at the local level, public utilities are a good example. Government enterprises will include the federal sales tax in the ‘gross amount’ price of the products and services they sell (gross amount = product or service price + sales tax). The benefit to government enterprises, and as long as they continue to meet the requisites for an enterprise, will be the same as offered to businesses in the private sector. In other words, government enterprises can pay employees for their services and make purchases to operate the enterprise without paying intermediate (business-to-business) sales taxes.
Before addressing government entities that are not enterprises, an important point needs to be made with respect to subsidizing a government enterprise. In order to maintain a financially-equitable playing field between government enterprises and private enterprises, the sales tax will be assessed on any subsidy provided to a government enterprise. Why is this so? Because no such ‘free-money’ remedy exists for private enterprises. If a private enterprise needs money for their business, then they are likely to borrow the money from a lending institution, which will necessitate passing to their customers the sales tax for the servicing of that loan until it is retired. This measure also helps eliminate the misconception that government can provide comparable services available from the private sector at less cost.
Turning to government entities that are not enterprises, the FAIRtax includes two methods through which tax revenues can be collected. The first requires every non-enterprise entity to pay the sales tax on purchases of products and services used to operate the government entity. This method, in effect, replaces the ‘indirect’ taxes collected today in the purchases of all products and services consumed by governments.
The second method introduces a term called the ‘taxable employer.’ This is an entity that is the final consumer of taxable services and for which the consuming entity is responsible for paying the sales tax. This application essentially replaces the ‘direct’ taxes collected from government employees and employers today. The difference, though, is that each non-enterprise entity will have its payroll assessed the sales tax while each employee will receive their pay, including the amounts formerly withheld for income and payroll taxes.
Excluded from the taxable employer assessment are those government employees who directly provide primary, secondary and post-secondary education and job‑related training. Why? Because their output represents an investment for America, one with the potential to generate more tax revenues through better qualified employers and employees. Another financially important aspect of exempting educators is that they represent about 50% of all employees at the state and sub-political levels of government. Therefore, this huge segment of government employees imposes no direct federal-tax consequence on the people, a substantial change from the income and payroll taxes imposed today on the services of these employees.
Now to the final question I often hear, “Does taxing governments, as you have described, violate the principle of intergovernmental immunity.” The answer to that question is, “No.” (Briefly, intergovernmental immunity is the concept whereby one government is restricted from imposing itself upon another government.)
Under the FAIRtax, the Federal Government will exercise its demonstrated authority to tax the services provided by any individual to any employer. It will also demonstrate its authority to tax the consumption of any products and services consumed by the people. It will do these things without violating the concept of intergovernmental immunity, which is specifically addressed for compliance in the FAIRtax legislation. For example, the Federal Government will not tax the services provided by the local fire department to put out a fire at a person’s home, a service for which they pay taxes to the local government. However, the Federal Government will tax the local government for the services individuals contribute to the fire department as firemen and do so through the taxable employer assessment. The local government will also pay the sales tax on every piece of equipment and services it purchases for the fire department. In both cases, the concept of intergovernmental immunity is preserved.
I hope to have provided an effective explanation of the reasons why governments must participate in the collection of the federal sales tax and how the collections will be accomplished. I also hope that I have made it clear that without such measures the full weight of taxes would fall upon the private sector and present a false illusion that government can provide products and services at less cost. I recommend reading the legislation, HR 25 or S 155, the Fair Tax Act of 2015, to gain an even greater understanding of the process. The bill, just 131 pages, can be accessed at www.Congress.gov.
Kerry D. Bowers
2016 Republican Candidate
Nevada Congressional District 3