In a recent survey that my wife took, she indicated that she supported the Fair Tax. I asked her why. Without knowing any of the details of the proposed legislation, she said “Because fairness is good”. Of course, calling something Fair, doesn’t necessarily make it fair.

The Fair Tax has been discussed, and even supported by some of the candidates, in the Republican and Democratic presidential debates, but is it really fair? I, for one, don’t think so.

The proposed Fair Tax legislation would eliminate income taxes, payroll taxes, and estate and gift taxes and replace them with a national sales tax on all retail purchases of goods and services. It would also eliminate the IRS. The legislation proposes a tax rate of 23%, but that is an “all inclusive” rate. State sales taxes are stated as “exclusive” rates, a rate that is added to the price of the good or service. That rate for the Fair Tax would be approximately 30%.

At first blush, the Fair Tax sounds simple and may even seem fair, but its not. Let’s assume that you are retired and live off of your savings and social security. Chances are that you pay little or no income tax, and certainly no payroll tax, under the current system. However, under the Fair Tax you will pay a 30% national sales tax on all of your purchases of goods (including food) and services (including haircuts). You already paid income tax on your savings (when you earned the money that you saved). Now you have to pay tax again when you spend those savings. Fair?

Let’s assume you want to buy a house to live in. You will have to pay a national sales tax of 30% on top of the price of the house. You will be competing to purchase the house with an investor who wants to hold it as a rental property. Guess what? The investor isn’t buying the house as a retail purchaser so he doesn’t have to pay the 30% sales tax. In other words, there is no way you can compete against an investor to purchase that house. Fair?

Let’s assume you are single and make $35,000 a year. No more federal income tax or payroll taxes are withheld from your paycheck. You (and everyone else) also get a “prebate”, an advance rebate of the Fair Tax equal to the amount that would be paid by someone earning at the poverty level. What a great deal! But, you have to pay a 30% sales tax on all purchases of goods and services. Would your total federal tax burden, net of the prebate, decrease? If you use all of your income for consumption of goods and services it would actually increase. Fair?

Let’s assume you make $5 million a year in compensation. You only consume $1.8 million and save the rest. Your total federal tax burden would go down by approximately 60%. It would go down by an even greater percentage if you had gains on the sale of investments, since they aren’t subject to the Fair Tax. Fair?

Other arguments for the Fair Tax are that it is simple and that it is easy to administer (thus the elimination of the IRS). I don’t agree with either of those arguments, but I’ll leave that discussion for another day.

What the Fed is doing and the stimulus package that Congress is likely to pass and the President sign will mitigate how long and deep a slowdown or recession will be but I don’t believe we can avoid a downturn now. As we know, monetary policy works with a lag and it will be months before the full impact of the Fed change works its way through the economy. Similarly the stimulus package most optimistically will hit in June or July of 2008. So while both will help and the beginning financial and economic responses to the Fed change should be felt much earlier than the middle of 2008, it is unlikely that this will be enough to prevent the downturn. I am glad that the Fed has moved aggressively over the last two weeks but wish the FOMC had recognized the seriousness of the credit crisis and its impact on the economy in general several months ago. Better late then never though as I suggest and I am certainly glad that the Fed has moved aggressively now.

Foreclosure rates have increased dramatically in the last year. Yet bankruptcy filings are much lower than they were before the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect. Experts at the W. P. Carey School of Business examine various factors that may be contributing to the gap and discuss possible policy responses.

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IRS officials estimate some $290 billion dollars that should have come into federal coffers in 2001 never made it into Uncle Sam's pockets. But, take heart. The IRS has a seven-component strategy for bringing in the bucks. In the second part of a series on the tax gap, Charles Christian, director of the School of Accountancy at the W. P. Carey School of Business, points to the agency's goal of expanding information-reporting vehicles as one change that might bring in a healthy payback.

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As the stock market continues to shake following the crash of the subprime market, all eyes are on the Federal Reserve. Now more than ever it's important to understand how the Fed works. For example, what is the federal funds rate and how does it differ from the discount rate? Here with a primer on how the Federal Reserve operates is Herbert Kaufman, professor of finance at the W. P. Carey School of Business.

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The meltdown of the subprime mortgage industry, often associated with the lower end of the U.S. housing market, continues to spread upward, bringing uncertainty into the jumbo mortgage loan market (loans above $417,000). Luxury home communities are impacted, but so are less fancy neighborhoods in cities such as Los Angeles, where mortgages on small homes occupied by middle income families fall into the jumbo category. At this point the severity and duration of the impact on the high-end market are still unknown. The surprise is how far the subprime contagion has already spread, say experts at the W. P. Carey School of Business.

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According to IRS estimates, there is a $345 billion gross "tax gap" for 2001. The tax gap is the difference between taxes the IRS thinks should have been paid and taxes that actually were paid. Not surprisingly, "the tax gap is, on and off, seen as a revenue source," says Charles Christian, professor of accountancy at the W. P. Carey School of Business.

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The collapse of the subprime market has hit hedge funds hard. According to Anthony Sanders, professor of finance and real estate at the W. P. Carey School of Business, many hedge funds forgot due diligence when the real estate market was hottest, and are now stuck with bad paper. Although the long term effects have yet to be seen, some consumers will feel the repercussions in constrained lending policies. An upturn in the housing market would help, and Sanders thinks that may happen sooner than some have predicted. 14:29

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Today's health care leaders are constantly challenged with the seemingly incompatible goals of improving patient care while developing strategies to reign in skyrocketing costs. Among the many cost-reduction ideas batted around the industry, one of the most promising -- yet often overlooked -- areas is supply management. Recent research by Professor Eugene S. Schneller of the School of Health Management and Policy at the W. P. Carey School, examined the PPI purchasing and standardization efforts of 25 major U.S. hospitals.

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Too often, Chinese customers buy wealth management products without a real understanding of what they’re getting into, according to Xiaoling Wu, deputy governor of the People’s Bank of China. Wu was speaking at the Fourth Annual Executive Forum, hosted by the W. P. Carey School of Business and the Shanghai National Accounting Institute. To grow wealth management services in the next decade, she said, Chinese institutions would do well to clarify regulations, communicate with customers, and offer a higher level of service to China’s new investors.

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Managers, markets, and the many players who must contract with a firm: all three groups need credible information about companies. The financial statement -- which includes the income statement, balance sheet and statement of cash flows -- tells a compelling story when read as a whole. Phil Drake, clinical professor of accountancy at the W. P. Carey School, talks about the information contained in the financial statement and who needs to know it.

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The attitudes judges hold toward auditors have eroded since the accounting debacles of Enron, WorldCom and others earlier in the decade. Not only do judges have lesser views of auditors, they also have conflicting views with auditors. In fact, auditors see their roles and standards differently than those in both legal and business communities. That expectations gap is one of the problems facing auditors today, according to Philip Reckers, Marianne Jennings and Kurt Pany at the W. P. Carey School of Business.

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