SEIU blasts Indiana GOP challenger Todd Young over 'Fair Tax' stance

We've written before about a conservative proposal called the "Fair Tax," which would eliminate the federal income tax, employment tax, and estate and gift taxes and replace them with a 23 percent national sales tax. Supporters say it would reduce the cost of compliance and close loopholes. Critics counter that it would be regressive and would actually require a higher rate than the advertised 23 percent.

Whatever the truth of these claims, Democrats clearly consider it a winning issue: They've used the Fair Tax as the basis for many ads against Republicans this year, one of which we recently rated Half True.

We noticed the issue crop up once again in a close House contest between incumbent Democratic Rep. Baron Hill and Republican attorney Todd Young to represent a swing district in southern Indiana. Here's what caught our eye in an Oct. 20, 2010, ad placed by the political arm of the Service Employees International Union.

The ad says Young, "supports a 23 percent national sales tax on everything you buy -- food and clothing, even medicine. You worked hard for your money and you paid your taxes when you earned it. Now, Todd Young wants to tax it again when you spend it. Attacking Social Security and taxing seniors twice? Indiana can't afford Todd Young."

Let's start by exploring the evidence that Young supports the Fair Tax, or something like it.

The issues page of Young's campaign website urges Congress to "immediately simplify our complicated tax code — and reward work, savings, and investment — by replacing the current code with either a consumption-based tax or a flatter tax." Democrats have also pointed to instances in which Young cited the Fair Tax by name, including in a North Vernon Republican debate on April 10, 2010.

When we asked the Young campaign for his official position, they pointed us to an Oct. 21, 2010, article in the Jeffersonville News and Tribune in which Young said he is flexible on which tax system to use.

"Young said a better approach than the Fair Tax would be a system that would give options where people could choose to stay with what they’re familiar with or go for a simpler tax code," the newspaper reported. "Whatever tax reform proposal we move towards, I have to ensure in order to get my support that it doesn’t involve raising taxes."

Still, even if Young is backing off specific support for the Fair Tax, we do think there's enough evidence that he once supported it, or supported something very similar to it, to make it fair game for the SEIU.

Now to the substance of the ad's charges.

One issue is the ad's reference to taxing "food and clothing, even medicine." This statement is largely correct, but there's an important caveat. While the Fair Tax would indeed tax such items, it would also include a "prebate" -- an advance refund intended to cover the costs of such basic purposes. Still, the prebate would be a flat amount pegged to family size, and would not directly exempt purchases of food, clothing or medicine but would rather compensate families indirectly for a portion of the sales tax they pay. So we think the SEIU's wording is justified.

But the issue in the ad that most intrigued us is the notion of double taxation. After watching a variety of ads about the Fair Tax, we had yet to see one that explicitly called the Fair Tax double taxation. And that set off alarm bells for us, since the Fair Tax, whatever you think of it as a policy, is definitely not designed to be layered on top of the current tax code. It is explicitly designed to replace the current tax code.

Both PolitiFact and our friends at FactCheck.org have criticized ads that gloss over the notion that the Fair Tax would replace the current tax code. In a previous Truth-O-Meter item, we said that the absence of such context in an ad by Sen. Blanche Lincoln, D-Ark., amounted to "a very deceptive omission." But not even Lincoln's ad went so far as to say, pure and simple, that the 23 percent sales tax amounted to double taxation. So we approached this ad thinking it might earn a Pants on Fire.

Then we checked with the SEIU. They acknowledged that the Fair Tax would be a replacement for the current tax system. But they made an interesting point -- that for seniors, the explicit target audience for the ad, there is something that you might call double taxation. For many years, seniors paid taxes on their income when they earned it. Whatever they didn't spend, they saved, and in their retirement years, when they aren't earning fresh income that would be tax-free under the Fair Tax, those accumulated savings would be spent -- and thus taxed at 23 percent. Voila -- double taxation.

To see whether this argument holds any water, we checked in with an ideological cross-section of economists. In general, they agreed that SEIU had a point.

When we contacted Bruce Bartlett, a former official in the administrations of Ronald Reagan and George H.W. Bush, he referred us to a 2007 article he wrote in the journal Tax Notes titled, "Why the Fair Tax Won't Work." Bartlett said the proposal "penalizes those who are older who have saved for their retirement during an era when saving was heavily penalized by the income tax. But rather than being able to spend their savings tax free, as they anticipated, they will now have to pay sales taxes on everything they buy, including health care. It will be hard for them to avoid seeing this as a double tax.

Bob Williams, a senior fellow with the Urban Institute-Brookings Institution Tax Policy Center, agreed that the Fair Tax double-taxes savings. "It's a transition issue that would disappear in time, once all savings held at the time of transition have been spent," Williams said. "The ad is clearly aimed at seniors, for whom the issue is definitely valid." Williams added that seniors would also fail to get much of a benefit from the Fair Tax's elimination of income tax because "most Social Security income is not subject to income tax."

Dan Mitchell, a tax policy specialist at the libertarian Cato Institute, criticized the ad for leaving out the notion that the Fair Tax would replace the income tax. But he acknowledged that "there is potentially an element of truth to the secondary point about taxing seniors who earned money while young, paid income tax, saved some of the after-tax money, and now want to spend that money." Mitchell added that not all seniors would be affected equally -- it would more heavily affect seniors who had substantial savings outside of 401(k)s or other plans in which income is not taxed initially.

So where does this leave us? We think SEIU makes a legitimate point that seniors -- the group that is specifically singled out for mentions in the ad's narration and in its visuals -- would face what amounts to double taxation of their savings if the Fair Tax were to pass. But we're also wary of giving this a full True rating, because we think that most viewers watching the ad would assume that the 23 percent tax would be levied on top of the existing income tax (which, we'll point out, is referenced at one point by a visual of someone filling out an IRS Form 1040). And it's simply not part of the plan for Americans to be hit by both the current tax code and the Fair Tax simultaneously. On balance, we give the ad a rating of Half True.

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