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The Chairman's Report January 22, 2021

BIDEN TAX PLANS, PUERTO RICO AND THE CASE FOR THE FAIRTAX

An article by economist Milton Ezrati discussed some of the likely income/payroll tax code changes that the Biden administration will be seeking.  Here are some of them:
 
  • The corporate tax rate will increase from 21% to 28%.
  • A 15% minimum tax for corporations with over $100 million in profits will be assessed if deductions would otherwise allow them to pay less than 15%.
  • Itemized deductions will be capped for those earning over $400,000 at 28% of adjusted gross income, and there will be a 12.4% payroll tax on all income over $400,000.
  • The individual mandate to purchase health insurance will be reinstated.
  • For people earning more than $1 million per year, capital gains tax rates will increase from 23.8% to 39.6%.
  • Instead of allowing heirs to defer the tax on appreciated assets they receive, taxes will be due when the heirs receive them.
  • It is anticipated that these changes will raise an additional $250 billion a year.

Directing most of the tax increases at people making incomes over $400,000 is “red meat” to their supporters who don’t want to pay more in taxes, but it has some significant drawbacks. Here are some:
 
  • It is like picking a fight with the biggest guy in the school yard.  It normally doesn’t end well.
  • The people targeted for these higher taxes can and do pay lobbyists and have the ear of their elected federal officials.
  • These people also generally have the ability to defer income.
  • By capping the itemized deductions, including charitable deductions, at 28%, it is likely that charitable donations from this group—who now give the most, will decrease.

PUERTO RICO HERE THEY COME

Puerto Rico is a U.S. territory and its residents have special tax benefits.  If a U.S. citizen moves to Puerto Rico and operates his/her corporation in Puerto Rico, they can have a 4% corporate tax—not the present 21%.

Puerto Rico residents pay zero tax on capital gains and passive investment income like dividends.  If you are paid a salary by your Puerto Rican corporation, you will have a maximum rate of 25%.  Of course, since Puerto Rico residents are covered by Social Security and Medicare, they will have payroll taxes of 7.65% deducted from their paychecks.

A report by the IRS to Congress concluded that it had calculated that 647 U.S. citizens that were now taking advantage of Puerto Rican tax incentives paid $557,978,112 in taxes over the previous five years prior to their move.

If the tax rates on the wealthy increase as proposed, the number of people who will transfer their assets to places like Puerto Rico will only rise.

The FAIRtax Solution

More and more people outside of D.C. are realizing how incredibly disruptive it can be if people must change their plans every time control of Congress and the Presidency changes to another party.

Many of these people have not been supporters of the FAIRtax.  It is a mistake to assume that almost all of the people who oppose the FAIRtax are acting for selfish or even ignorant reasons.

They mistakenly believe that enacting the FAIRtax will be a hindrance to achieving the results that they sincerely believe will help America.  One example of this could be universal health care.  Their beliefs, in most cases, are just as sincere as our beliefs.

They are the kind of people with whom you share many similarities.  They have families they love.  They believe in God.  They like sports.  They want their children to do well. If you avoid politics, they are pleasant company.

Sure, there are some who oppose the FAIRtax because they make money off the present income/payroll tax system.  And yes, there are politicians on both sides of the aisle who like to promise tax benefits to their supporters and also incite their voters by painting dire pictures of what their opponents’ tax policies will do.

The truth is that almost all Americans believe that the federal government cannot continue to borrow money and keep increasing the debt indefinitely.  Both the FAIRtax and the income/payroll tax system collect revenue.  Neither dictates where it is spent.

No one disputes that the FAIRtax is much easier on the taxpayer. Our job is to show the sincere people who oppose the FAIRtax that passing the FAIRtax and eliminating the burdensome income/payroll tax system will not keep them from accomplishing the objectives that they believe will help people.

For example, if you want to get money to people who now qualify for the earned income credit, the simplest way is to increase the amount of the Prebate to this group of people.  Then instead of waiting twelve months to get the money, the recipients get it each month.

If you want to incentivize charitable giving, the FAIRtax is a great way to do that.  By eliminating federal withholding and payroll taxes, the FAIRtax puts more money in peoples’ pockets.  And when people have more money, they’re more likely to give to charity.  If you believe some groups are not charitable, like political action groups, then make them charge for and remit the FAIRtax on all donations.

While this is heresy to FAIRtax purists, a Democrat Senator once told me that the only way he would support its enactment would be if large purchases like homes had a higher FAIRtax rate than everyday purchases.

CONCLUSION

Abraham Lincoln was known for his ability to avoid being drawn into arguments or even defenses of his own character.  He wanted to remain clearly focused on saving the Union and ensuring the end of slavery.  One of his friends was present when Lincoln met with a cotton broker who was seeking a permit to ship cotton out of New Orleans.

Lincoln listened to the man and decided to grant the permit.  When the man left, his friend was livid.  He said, “Don’t you know that this man is your enemy?  He is telling everyone that you are a baboon and an idiot.   He is your enemy and you should not be helping him but trying to destroy him.”

Lincoln smiled and said, “Do I not destroy an enemy by making him a friend?”

People who do not support the FAIRtax are not our enemies.  We should look at the things on which we agree and work to make them not only friends but supporters of the FAIRtax by explaining to them why it helps them accomplish their vision for America.

If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org.  Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.

Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.

Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:

“If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Is it hopeless?  When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?”  But I dream things that never were; and I say “Why not?”

Isn’t it time for us to ask, “Why not?”