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Treadwell Plan for Tax Reform Evolving

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Lt. Gov. Mead Treadwell, Republican candidate for the U.S. Senate seat currently held by Mark Begich (D-Alaska), made some remarks about taxation at a Tuesday debate in Homer that are drawing additional scrutiny.

At the debate, Treadwell called for the abolition of the Internal Revenue Service (IRS) and the establishment of a new federal tax system. This is an escalation from his campaign website, which describes the IRS as a “rogue agency” that merely “must be reined in.” Treadwell’s site says, “I favor a simpler, fairer tax that incents savings, investment, self-reliance, and jobs.”

Treadwell sought to clarify what seems to be an evolving tax philosophy during a phone interview with the Alaska Dispatch News. According to the Dispatch, “Treadwell said he would prefer to see a ‘fair tax,’ based on ‘value as added to services or goods in the economy. It moves the tax away from income to a tax on consumption,’ he said.”

It is not entirely clear if Treadwell is calling for the Fair Tax as espoused by Americans for Fair Taxation (AFT) or a value added tax (VAT). Both are sales taxes, but a VAT taxes production all along the supply chain. The Fair Tax taxes the consumer only.

Treadwell did tell the Dispatch he would like to see the repeal of the 16th Amendment, which allows for the collection of federal income tax, a position held by AFT.

While Treadwell’s Republican opponent Joe Miller also supports abolition of the IRS and has expressed support for a “fair tax,” Mike Anderson, spokesperson for Dan Sullivan, another Republican aspirant to the U.S. Senate, said “It’s important we actually put forth viable solutions to reforming our tax code, rather than purporting to abolishing entire agencies for political purposes.”

Sales taxes are often criticized as regressive because, while technically flat (i.e., the percentage is the same for all rate payers), they disproportionately impact lower wage earners. These consumers must spend a greater portion of their income on basic needs. State and local governments have sought to reduce the impact by exempting items, like specific foods, from sales tax.

The federal government currently does not collect a general sales tax.

On the other side of the spectrum is the income tax, deliberately progressive by placing a greater tax burden on those with higher income. But these tax payers often argue that they are being penalized for being successful, disincentivizing the growth of businesses and jobs.

Proponents of the Fair Tax believe they have the answer to this conundrum. They would replace all income and payroll taxes with a flat sales tax of effectively 30 percent. (Supporters describe it as 23 percent because, on an item totaling $1.30, the 30 cents of tax represents 23 percent of the total cost. However, the original cost of the item, $1.00, when taxed at 30 percent, generates the same total of $1.30. This is a matter of perspective.)

Fair Taxers say that this version of a sales tax would be progressive because all consumers would receive a “prebate,” or rebate in advance, of tax on goods up to 23 percent of the Department of Health and Human Services (DHHS) poverty measure. The Social Security Administration would distribute monthly payments to all who register and have a valid Social Security number. In this way, the tax burden on those who earn the least would be reduced.

The DHHS poverty level for a family of four is $23,850. There is an adjusted amount for Alaska that recognizes the higher cost of goods and services. The poverty level for a family of four in Alaska is $29,820. For a single-person household, it is $14,580.

The annual prebate under the Fair Tax plan would be $6,859 for a family of four in Alaska.

Basing the prebate on federal poverty measures is problematic because these official figures are considered too low. According to the National Center for Children in Poverty, it takes between 1.5 and 3.5 times the poverty amount to cover basic needs.

Furthering their argument of progressivity, proponents say the tax is “Fair” because there are no exemptions on what is taxed. Everybody pays for everything, even the wealthy, who AFT says “spend much more on unprepared food, clothing, housing, and medical care than do the poor.”

But under the Fair Tax, the tax burden of those making over $200,000 per year would actually decrease, according to the Treasury Department. So would corporate taxes. “Under the FairTax Plan,” AFT says, “money retained in the business and reinvested to create jobs, build factories, or develop new technologies, pays no tax. This is the most honest, fair, productive tax system possible. Free market competition will do the rest” (emphasis in original).

Meanwhile, consumers would see 30 percent taxes on items like food, utilities, and rent.

If the burden is reduced at both extremes, which AFT admits, then the balance has to be borne by those in the middle if the tax is to be revenue neutral. The Treasury Department says that taxes would increase for those making between $15,000 and $200,000 per year.

AFT says this unfairly fails to include payroll taxes. Payroll taxes, it notes, are regressive and would be eliminated by a Fair Tax, benefiting the poor.

(Payroll taxes fund Social Security, Medicare, and unemployment insurance, programs that return a benefit to tax payers, particularly low wage earners. The regressive nature of Social Security taxes could specifically be addressed by a Begich-sponsored bill, the Protecting and Preserving Social Security Act. The bill would eliminate the cap on income taxed for Social Security, which currently stands at $117,000 and is adjusted for inflation. As it stands, all income over $117,000 does not contribute to Social Security.)

When payroll taxes are included in the calculations, FactCheck.org says that tax increases will be felt most by those making roughly $25,000 to $100,000 per year under a Fair Tax.

AFT says that social programs would be unchanged by the Fair Tax, which is designed merely to replace income and payroll taxes, thus being revenue neutral. However, the revenue neutrality is widely considered to be a fallacy. The Fair Tax assumes the absence of any tax fraud and that consumption is a reliable source of government funding. The Great Recession demonstrated that to not be the case.

Based on the plan’s impact on middle-class tax payers while lessening the tax burden on wealthy Americans, FactCheck.org deemed the Fair Tax a misnomer.

The Begich campaign agrees. Its Thursday press release characterized Treadwell as a firm supporter of the Fair Tax as described by AFT. The release reads, “Treadwell’s extreme tax scheme would shift the tax burden from wealthier Americans to lower-income households, strangling the finances of working Alaska families.”

A subsequent press release from the Alaska Democratic Party said that “Mead Treadwell strongly endorsed establishment of a 30% National Sales Tax.”

While, again, it is not clear from Treadwell’s remarks to the Dispatch that his position on the Fair Tax is as solid as these press releases suggest, it is clear that he has explored the Fair Tax and considers it superior to the current tax system. KTUU says a detailed Treadwell tax plan is forthcoming.

1 COMMENT

  1. Double it to 60%, and then increase the prebate about ten-fold. It’s the same idea (flat consumption tax with large prebate) and it collects roughly the same amount of tax money (eyeballing it; didn’t run the numbers) but since it taxes the rich more, I’d bet most flat-tax advocates wouldn’t go for it.