Learn YOUR Tax Rate with FairTax Calculator
From the mailbag:
I noticed on the blog website for FairTax you are mising the #1 best tool for converting folks to Fairtax….that is the FairTax Calculator www.fairtaxcalculator.org. This was produced by the PA FairTax State team and has been OK’ed by both Karen Walby, economist, and Leo Limbeck, AFFT chairman, as being accurate and acceptable to them in its methodology.
The FairTax calculator has had over 18,000 hits, more than any other single site outside Natl. Each time I post it to the Free Republic it gets 1000 hits within 24 hrs. Folks want this.
Simply in 8 inputs, a person sees exactly what his FairTax net effect tax rate and dollar figure would be, after considering all the Fairtax deductions (tax free spending) in their life. Because of it’s format, it also educates a person quickly on the “non-taxable” items in fairtax and how it would effect them personally.
For example: The post by Ralph Ekwall on Aug 28 concerning “Mr. Rich vs Mr. Average Joe”, would have been shown to be false in 2 seconds by sending Ralph to the calculator and popping appropriate numbers into the calculator. It’s totally anonymous so there are no privacy issues.
Mr. Ekwall would have seen that there is no such thing as 23% (or 30% depending on your point of view), on one’s total income. Mr. Ekwall would have seen the exact figures for the “prebate” for his situation. The calculator quickly shows that there are “deductions” under Fairtax (nontaxed spending), more deductions than the current income tax for most people. It shows that a person making $30000 will most likely pay 0% tax or close to it….and it does it all within 5 min of work….
When the Flat Tax was introduced in 1994 they had a post card form online and it received over 100,000 in a month. The FairTax calculator if it caught on, could be the single most important contact to the grassroots on this issue. Bottom line, most folks want ONLY to know what Fairtax will do for them exactly. The FairTax calculator does this.
I would hope that you would post the www.fairtaxcalculator.org to your web links and post a write up on it somewhere on your blog. At least post something to Mr. Ekwall to set his mind at ease. Anytime anyone makes the argument that the poor will pay more than the rich because of savings, or any reason….send them to the calculator. It does the job of explaining in an instant. A picture truly is worth a 1000 words.
Marlene Tobin
Pittsburgh
I just went through the process. By conventional standards, my wife and I would be considered middle-class or perhaps upper-middle-class, and our “estimated annual net effective FairTax rate” was 3.98%. …Very nice.
I was left with a lot of questions at the end, though, like the line item that says “Your maximum annual FairTax dollar costs (including social security contributions) based on estimated income & spending above.” What does that mean? (It would be nice if there were links next to each line item to explain what it is, in plain language.)
I looked at the FairTax Calculator. Although I’m no fan of the FairTax, I’m glad that the Calculator is out there because I think it shows how bogus the 23% rate actually is.
Using the Calculator and putting in my own income and expense situation, it seems that I’ll save a TON of money on my taxes under the FairTax system. Over 90%, in fact. So, the FairTax should be a great deal for me, right?
But just to double check, I put in a number of other income and expense scenarios and — guess what — EVERYONE will save a ton of money vis-a-vis their current taxes no mater what their income is.
So, my question is: How can the FairTax be revenue neutral if EVERYONE saves a ton of money in taxes?
The answer is: It can’t be. The tax rate is bogus. The numbers just don’t add up. And the FairTax Calculator proves it.
Comments?
I understand your skepticism. I walk through the FairTax revenue neutrality calculation here, and an explanation for why the FairTax is revenue neutral here.
The long and short of it comes down to tax base. The current system levies taxes on roughly 41% of our GDP. The FairTax system taxes 84% of our GDP. When you broaden the base, you can lower the rate.
Quad –
Thanks for your reply. But I don’t think it answered the fudamental question, which was how can we ALL save money and the FairTax be revenue neutral? Or, to put it another way, who’s taxes go UP under the FairTax?
When I ask this questions to most FairTax proponents, the standard answer I receive is: (a) tourists, (b) illegal aliens, and (c) the “underground economy.” But I don’t find this answer very compelling for the following reasons:
a. Tourists. For every dollar of tax revenue we receive from tourists visiting the US, we lose the tax dollar that American tourists spend abroad. I’m pretty certain that Americans spend a lot more traveling abroad than vice versa.
b. Illegal aliens. Most illegal aliens save a great deal of their incomes and send it back to their home countries. And much of the spending they do in the US would not be taxed under the FairTax system, because they don’t tend to buy many new items (such as newly built homes, new cars, new furniture) or purchase taxable services such as health insurance, car insurance, etc. Also, many of them already pay federal taxes (by using fake Social Security numbers).
c. The Underground Economy. I think this is the largest red herring. First, we can’t really measure the current size of the “underground economy,” nor can we know what it’s size will be under the FairTax. Second, we already tax the “underground economy” in that when a drug dealer buys a new Corvette, the car dealer will pay income tax on the sale, the salesman will pay income tax on his commission, the manufacturer will pay income taxes on its profits. So, when the FairTax proponents claim that the FairTax will cause the drug dealer to pay a tax when he buys a corvette, that same transaction is ALREADY being taxed under our current system.
So, again, I am wondering just who’s taxes will go UP under the FairTax? Other than retired folks, I can’t think of any. So, again, I don’t believe the 23% rate is anywhere close to being accurate.
Thanks for the civil reply. I look forward to your next thoughtful response.
I think you have somewhat missed the point of quadrupole’s response.
The amount of money that is being taxed under the FairTax is roughly 84% of our GDP, or about twice the amount of money currently taxed, about 41% of GDP. The reasons for this are myriad, but it’s not about counting people getting taxed, it’s about counting dollars being taxed. With income taxes, a vast array of things are NOT taxed due to loopholes and rules that shelter certain activities and business from taxation. That would no longer be the case with the FairTax. Assuming all things were equal, that means twice as many dollars should be taxed at roughly half the effective rate, which is how the FairTax works (once you include the prebate and such).
But allow me to retort a bit:
a. Tourism in the United States is a HUGE industry particularly in California, New York City, Hawaii and Florida. Do not underestimate how much money is spent in America by tourists. Florida’s Sales-tax system in large part works due to Florida’s tourism industry.
b. Illegal aliens still spend a lot of money on FOOD. Go to the gas station in the morning and you’ll see plenty of immigrants picking up coffee and lunch for the day at the construction site or wherever. Do not underestimate how many retail purchases an immigrant might make. For most poor folks, food and shelter are the two largest expenses in their budget. Someone here illegally would be taxed with no relief, and would have significant incentive to get legal as well.
c. It is true to say that we in some way tax (via income taxes) virtually everyone at the retail level, but how fair or efficient is it? Taxing a percentage of a retail cost (say 19% or so) on a drug dealer gets less tax money from the drug dealer than we get from the regular joe, who was already income taxed (say 25% or so) on the money he buys the car with. With the FairTax, at least the drug dealer and the regular joe pay the same taxes on the cars they buy. Surely you can see that making the drug dealer pay his taxes at retail brings money to the treasury that is otherwise being missed by income taxes today, that law-abiding folks have to provide instead.
Kepner’s Question: How can everyone’s tax rate go down and still raise the same amount of money?
Answer: Because you are taxing a different part of the economy — a much larger segment, and to which taxes are applied much more consistently.
If you tax income — but provide thousands of exemptions and loopholes — then everyone’s tax rate has to be relatively higher in order to raise a certain amount of money.
But if you tax expenditures — and provide almost no loopholes — then everyone’s tax rate can be lower and still raise the same amount of money.
If this sounds complicated, it’s because the current income tax system is distorted beyond recognition, into a tool for lobbyists and politicians. There are so many loopholes that nothing is what it seems when it comes to raising money for the federal government.
The difference between the income tax and the FairTax, from the federal government’s perspective, is like asking whether they would rather have 5% of $100 (analogous to how the FairTax is raised) or 10% of $50 (analogous to how the income tax is raised).
Other things being equal, it makes no difference to the government’s bottom line. You generate the same revenue either way.
Of course, other things are not equal. Virtually any credible economist agrees that taxing expenditures rather than income provides less drag on an economy, which means more income for the federal government as the economy soars.
I hope this helps, Hayden. I know that you personally still have plenty of reasons for opposing the FairTax, but this particular objection just doesn’t have any legs: Taxing a smaller percentage of a larger segment of the economy can easily yield at least as much revenue as taxing a larger percentage of a smaller segment of the economy.
First, let me say that you guys are good to argue with. You don’t make sarcastic remarks or personal attacks, which I appreciate.
Second, I agree that we need a broader tax base, more transparency, fewer loopholes, etc., all of which I will concede for the sake of argument that the FairTax accomplishes.
But, even if we have all of that, and even if we expand the tax base to 84% of GNP rather than 41%, SOMEBODY’s taxes will need to increase in order for the FairTax to be revenue neutral. Joshua has stated that his upper-middle class family’s effective rate under the FairTax will be less than 4% of his income. Mine will be something similar. Using the FairTax calculator, virtually everyone’s taxes seem to drop substantially vis-a-vis what they are currently paying.
So, my question remains. Who’s taxes will increase under the FairTax system? It’s all well and good to say that the tax base will increase, but ultimately all taxes are paid by people. Since so many of us would presumably be winners, who would be the losers?
Hayden,
I’m not sure if the 4% that we got on the FairTax calculator is 4% of our income or 4% of our expenditures. It says “Your estimated annual net effective FairTax rate on the income & spending listed above,” but I don’t know if it’s expressed as a fraction of income or of expenditures.
In answer to your question, it’s not clear to me that we’re going to get anywhere in this discussion as long as we’re talking about percentages (of income or expenditures), since any percentage is dependent on the denominator, and so they’re hard to compare.
Obviously, if some people are paying less money in taxes (as a total dollar figure, not a percentage of this-or-that) then someone has to be paying more.
And I don’t know the answer.
Quad, do you know the answer?
Joshua
PS. I’ve written Marlene Tobin and asked her to clarify this issue on their web site. It makes a big difference whether the percentage they show you is a fraction of income or a fraction of expenditures.
As to the question of why most will see lower taxes, the reason we will almost all see lower taxes is…
1. Tax base. We tax consumption not income. Consumption is almost twice income in this country and it is more stable. In good times or bad, folks need to purchase certain staples to survive. When income goes down, welfare goes up. This means consumption remains about the same. If you look at a chart of the GDP vs INCOME over the past 50 years in the U.S. you will understand pretty quick.
2. No loopholes for the rich…buy a $20,000 car pay sales tax on $20,000, buy a $60,000 car pay taxes on $60,000…buy a used car and pay nothing.. Today under income taxes even the used car is taxed because it is paid with after tax dollars. You must earn $5000 to buy a $4000 used car. Under FairTax you earn the $5000, buy the used car with $4000 and $1000 goes in your pocket to purchase other things that may or may not be taxed depending. This means the lower and middle class will pay lower taxes while the rich pay more in dollar amounts approaching 23% of their income…This is the progressiveness of the FairTax.
3. Try taxing the 20 million illegal aliens that currently pay NO income tax. Adding to the base number of taxable workers means a lower tax bill for each individual. There is also an estimated 20 million Americans that dodge taxes every year that will also find themselves in the tax pool. While much of their money is sent out of the Country they still have certain daily staples they purchase to live like everyone else. However, if they are undocumented they will NOT get the prebate monthly check, meaning they will pay sales tax on every item they consume (new) such as food, rent, utilities..those items the prebate is suppose to cover for everyone else.
4. 48 million tourists paying sales tax. Currently tourists use roads, hospitals, police, and other tourist services offered by the American tax payer. They often pay nothing for these services. Under FairTax they will pay their taxes to our system when they purchase food and other tourist items while in our country. Yes Americans will spend money outside of the U.S. that won’t be taxed, but there are more traveling in the U.S. that traveling outside. It’s a net difference in our favor according to current Government stats.
5. $1 TRILLION DOLLAR UNDERGROUND ECONOMY…. 1,000,000,000,000 dollars earned secretly in America today that is not reported. That is 1/3 of our current budget for the U.S. This is not only funds earned on Saturday cutting grass or painting houses, but also all the drug money that is transacted, prostitution, robbery funds…None of that is taxed today cause none of it is reported as income. Under Fair tax, it doesn’t matter how you make your money…you will be taxed when you spend it on new goods and services. If you are running drugs and need a good fast $100,000 boat you will pay your sales tax like everyone else.
6. NO IRS means a savings depending on the figure you accept of $250 billion to $750 billion in tax compliance for ALL . Even the lowest income will save from not having to save receipts and file tax returns each year.
7. Non taxed items today, must used by the middle and lower income that won’t be taxed under FairTax. For example, mortgages: Today you pay taxes on your principal part of your mortgage as you pay your mortgage with after tax dollars and only get the taxes back on the interest part of the mortgage. Under FairTax you pay your mortgage with before tax dollars so you are totally tax free on this item. This tax free mortgage item alone will effect 70% of all American bringing their taxes down, as 70% of us have mortgages, but only 1/3 of us itemize deductions today. These tax free payments also holds for ALL charity giving, not just certain “approved” groups you give to but all groups. It also holds for all education costs, cradle to the grave. You can use the total income from a 2nd job to send your kids to a private school of your choice totally tax free. Under FairTax ALL savings, all investments, are tax free. This means the poor and middle income can save for a downpayment on a house, and buy a used house, and all this will be totally tax free. Under today’s system, the downpayment and the house are all paid for with “after tax” dollars. Finally used items are purchased more by the poor and middle class than the rich. All and all, for most middle and lower income families, there are more deductions under FairTax than under the current income tax system. And remember the 7.65% FICA is included in the fairtax. This means the poor can actually achieve a 0% tax rate depending on their income and spending habits. Today the lowest they can go is their 7.65% FICA which must be paid.
8..FINALLY…FAIRTAX IS REVENUE NEUTRAL…It has been figured taking all tax payers into consideration so that not one penny more will be collected. This means that theoretically everyone should remain neutral at worst under FairTax. However, taking spending and savings into consideration and including ALL spending in the U.S. this will allow a large number of tax payers to pay less than they do today.
#8 also insures that spending will level off in DC. If their revenues are set to the GDP, they will have to rethink new spending programs in terms of raising or lowering the sales tax and stimulating the economy to increase the GDP. Currently only 51% of Americans pay income tax…the other 49% could care less if spending is up or down. Once the fairtax is implemented and taxes EVERYONE, 100% of Americans will have a vested interested in keeping the sales tax rate down, therefore keeping the spending in DC down. A lower tax rate changes taxes for everyone 100%. No more “tax cuts for the rich” arguments. Voters will pay more attention if their taxes are on the line. Remember, government will have no control. If they raise the sales tax, folks will just buy less, and revenues will NOT go up. Politicians will have to find a new approach to limited taxes, freedom and liberty for all.
Marlene Tobin
Pittsburgh
Joshua,
To begin with..just try some made up numbers to see how it works. Put in $100,000 in gross income….then mark 4 married for your deductions…and $25,000 for mortgage payments (non taxed spending). Leave the rest blank and submit. This example will show you very simply…Since married 4 is about $25,000 tax free spending along with your $25,000 mortgage tax free spending…you will see your bottom line will be $50,000 max left to spend on sales taxed items only. $100,000-$25000-$25000…X 23% inclusive (including price of item plus tax) …this will show after all your tax free spending you can only spend $11,500 in sales tax max ($38,500 in taxable items + $11,500 in sales tax for = $50,000 inclusive)….Of $100,000 gross year you started with, $11,500 sales tax max paid would be your 11.5% net effective tax rate….. The totals will show $11,500 in taxes and 11.5% in net effective tax rate…exactly the same as current income tax so comparison is easy.
I THINK I TOLD YOU THAT AFFT APPROVED THIS CALCULATOR AFTER THEIR CHAIRMAN AND THEIR CHIEF ECONOMIST REVIEWED IT….IT IS ACCURATE. The only way you could express it would be inclusive so that it could be compared to your current income tax. But I have explained that the figures (bottom line totals) are the same no matter what you call it.
The calculator totals are expressed as a fraction of your income just as your current income tax is…so you can compare it to your current income tax. The dollar amount of tax paid is the same no matter which way you loook at it.
FairTax: = $77 item bought + 30% sales tax ($23) = $100 spent from your gross income to buy a $77 item (exclusive)
Income tax: = $100 gross income (-) 23% Income tax = $77 left to spend on a new item…. meaning you buy a $77 item but have to earn $100 to buy it. (inclusive)
Either way you have paid $23 in sales tax and have purchased an item that cost $77, and had $100 to start with in gross earnings….
the difference is..income tax you MUST pay the 23% first (no option) leaving you $77 to spend …Under FairTax if you don’t by the $77 item (optional) you get to keep the $23 in sales tax you don’t spend.
In the first example you pay $23 in sales tax which is 30% of your $77 purchase (exclusive)
In the 2nd example you pay $23 in sales tax which is 23% of your total $100 out of pocket expenditure….(inclusive)
This is the difference between what is “inclusive 23%” and “exclusive 30%”….dollar amount is exactly the same..
Think of it this way…If I said to you for example 1 = 12 you would say I was nuts…but thats because I gave you the numbers and not the unit of measurement…
however….if I said 1 foot = 12 inches you would fully understand the equality…they are the same measurement just given in different terms… The unit of measurement is important and is what makes the numbers equal
Of course 23% is NOT equal to 30%…unless…. adding the unit of measurement 23% inclusive = 30% Exclusive same measurement given in different terms.
23% inclusive “including tax” is what it means or total amount spent out of pocket including the tax
30% exclusive means “excluding tax” or cost of item alone with tax added on to it.
BOTTOM LINE…MY CALCULATOR IS MEANT TO SHOW FOLKS WHAT THEY WOULD PAY IN TAX UNDER THE FAIR TAX ON AN EQUAL UNIT OF MEASUREMENT BASIS TO CURRENT INCOME TAX….
THE CALCULATOR DOES THIS: Takes your total gross income the (-) subtract off the prebate tax free spending allotment for your family, then subtract off all the money (the 8 categories listed) you would spend during your daily living on nontaxable items such as your current mortgage payment which is NOT a new good or service.
After you take your tax free spending including your prebate allotment off your gross you are left with the maximum total of money you have left to spend on taxable new goods and services if you choose to do so….This amount would be taxed at 30% at the register for all these items, but in “inclusive income tax terms” – the total would be the sum of your taxable spending PLUS the tax so 23% of these spendable funds would be used for sales taxes and 77% of the funds would determine your buying power left to buy items…..
This above is exactly what income tax does..it takes your gross income subtracts off your family’s “standard exemptions per family member” then takes off all your other tax free deductions…then what’s left gets multiplied by a percentage of tax bracket you fall in. Again the difference is the Gov takes their money FIRST under income tax …you have no say one way or the other.
We give you the total dollar amount you could spend on taxes after your “deductions” which you can compare to the total dollar amount of income tax and social security you currently spend. As to the percentage, we give you the net effect percentage of tax on your total income you would spend, which is exactly the same as income tax today…
Ex..Income tax: $10,000 gross income pays $2500 in tax after deductions, net effect tax rate is 25% of the total $10000 gross…
what we give you under the calculator is your net effective tax on total gross income just like the income tax example…. Total gross income $10000…amount spent on sales taxable items @ 30% after deductions $1700…for a net effective annual rate of 17%…most will see a lower tax rate on TOTAL GROSS INCOME because of all the non taxable items under fairtax that are taxed under income tax, such as mortgage & car payments, education, state taxes paid, charities and gifts, savings and investment. Under the current income tax you must use “AFTER TAX” dollar for these items, thus paying taxes on these items today. Under FAirTax you use “before tax” dollars on these items and then don’t have to pay taxes cause they are not new goods or services, the only items taxed under FairTax.
Bottom line..it doesn’t matter what you spend at the register for taxes at each purchase any more than it matters what they deduct from your paycheck today. The only thing that matters is what your bottom line is that you pay at the end of the year in income taxes after all your tax filing, as opposed to how much of your total gross you will pay out in sales taxes under FairTax . The calculator allows you to compare the two equally.
I hope this helps..I will look into the discussion. I am sorry I posted the calculator just at the time maintainence was being done to the server it is on….It was down for 3 days but is now working..so spread the word.
Marlene Tobin
Pittsburgh
Kepner’s question amounts to “Who would pay more taxes under the FairTax than they currently do under the federal income tax system?”
Based on the information Marlene provides above, it sounds like the short answer to Kepner’s question is:
1. 20 million illegal immigrants who pay no income taxes.
2. 48 million tourists who pay no income taxes.
3. (Unknown number of) “underground economy” criminals who pay no income taxes on an estimated $1 trillion in annual income.
4. Any wealthy individuals who spend a large portion of their income but have been avoiding income taxes so far through clever accounting practices.
So the reason that many current taxpayers’ effective tax rates would go down is that the FairTax turns a lot of non-taxpayers (illegal immigrants, tourists, criminals, and trust fund babies) into taxpayers.
I can live with that.
Joshua
All –
Even though I am relatively certain we won’t change each others minds, I’m glad we were able to have a spirited and intelligent debate about this on Joshua’s blog (which is something FairTaxGroups.com doesn’t allow, I’m sorry to say).
Just as I predicted in Response No. 3 above, the “missing revenue” is supposed to come from tourists, illegal immigrants and the fabled “underground economy” (plus, trust-fund babies.) I won’t repeat my arguments made above, but suffice it to say that I seriously doubt that those folks are going to make up the tax revenue that the federal government will lose when folks like me see our tax obligations reduced by 90% under the FairTax.
With respect to the trust fund babies, I’m pretty sure that they will save far more from the elimination of taxes on estates, capital gains and dividends than they will be required to pay under the FairTax.
But rather than bickering about this here, I would propose that AFFT or some neutral economist actually study just how much tax revenue would be really gained (or lost) from tourists, illegal aliens, the underground economy and trust fund babies under the FairTax system versus our current system. Obviously, nobody’s going to be able to come up with an exact answer because there are too many variables in play, but it would probably help answer the question as to whether the 23% rate could indeed be revenue neutral.
Best to all,
Hayden
One last thing, Dr. Karen Walby is the Director of Research at AFFT, but she’s not an economist. That doesn’t mean that she’s not smarter or better informed than most economists, just that her doctorate is in some other field. She told me what it was once, but I forgot. It sounded interesting though. Having said that, I will make it clear for the record that I’m not an economist either (though I’m still smarter than Joshua). : )
Hayden,
Hey, come back. Not so fast.
I too have enjoyed the civility of this exchange, but I (too) am left feeling unsatisfied by the exchange.
No study in the world takes the place of seeing how the numbers fit together first-hand. And Quadrupole has provided exactly this.
So I’m glad you’ve enjoyed the Q&A, but now I have a question for YOU….
What is wrong with Quadrupole’s numbers?
Joshua
I don’t have a study to link to that would confirm this, but here are a few types of people who currently pay virtually no taxes but who will:
1. Fake ‘contract labor’. This is used by many mom & pop stores to pay employees without paying any taxes or performing any witholding for them. Employees are paid cash typically, or a check for ‘contract labor.’ They are essentially self-employed, but usually don’t pay taxes because it would be a very high tax rate for them to pay. Since no one reports their income, they can frequently claim to make less than $6000 a year as a student or something, and pay no taxes at all in April. I know people personally who make upwards of $2800 per month tax-free in this fashion. The FairTax essentially legitemizes this, but catches you at the retail counter. These folks will be paying more taxes, and there’s a lot of them.
2. Unreported tips. Tips are typically cash money, and for many tip earners, unless their employers force them to report tips, they don’t. Tips are of course the vast majority of earnings for waitresses, casino table dealers, valets and bartenders, and the vast majority of tips go unreported. Currently they pay virtually no income taxes, but they will under the FairTax when they buy retail. And there’s a lot of them.
3. Cash basis services. People who mow lawns, wash cars, or otherwise make a living without a formal business front often operate ‘off the books’ and simply do business in cash. And there’s a lot of them.
There are (many) other scenarios, but the bottom line is this: the income tax currently has a HUGE dollar amount of evasion in it. That evasion is easy because the income tax really relies on employers to report on their employees to provide accurate results. People who are self-employed, small businesses, and cash earners have no one reporting on them, and are empowered to cheat. That’s not to mention abuse of legal loopholes used by larger businesses. Small business and self-employed individuals make up more than 52% of all United States workers, (http://usinfo.state.gov/products/pubs/oecon/chap4.htm, this is an older source) but are responsible for a much larger proportion of low-level tax evasion than any other legitemate portion of the economy.
State sales taxes, by comparison, have very low rates of tax evasion. Retailers have little or no incentive to help their customers cheat, because they run a much higher risk of being audited than any individual. The FairTax would enjoy a similar benefit, and would therefore catch many evaders that the current system cannot.
Joshua -
I need to fly out of town, but my quick response is as follows.
I don’t necessarily see anything wrong with Quad’s calculations. But I don’t see anything wrong with William Gale’s calculations either. The devil will be in the details, how easy it will be to collect (or evade) the FairTax, unintended consequences, and the behavior of the economy in response to the FairTax
.
Some of these issues will presuamably be addressed by the long-awaited new studies that have been promised by AFFT, but — as you know — they have been promising these for a very long time.
Here are some of the unresolved issues as I understand them:
1. Taxation of government spending at the federal level. Gale says that you can’t count this taaxation as increased revenue to the government, because the cost to the government in paying the tax on its own spending will exactly equal the revenue it receives from taxing such spending. I have seen other folks even claim that the cost to the government in taxing its own spending will EXCEED any tax revenue it receives from such taxation. I’m not smart enough to figure this out, but it seems logical that Gale is right on this.
2. Taxation of government spending at the state and local level. This will increase the costs of state and local governments, which will in turn need to be paid for by increased state and local taxes. So, even if the federal government gets additional revenue from taxing state and local spending, it ultimately comes out of our pockets anyway.
3. Tax evasion and tax avoidance. As you know, FairTaxers complain (rightly) about the tax evasion and tax avoidance that goes on in our current system, but are mysteriously silent about the tax evasion and tax avoidance that will occur under the FairTax. Much of this will be legal, as when people voluntarily decide to buy a used car (instead of a new car) or vacation in Mexico (instead of Florida). But there is going to be a lot of illegal tax evasion going on, just as in our current “underground economy”. I mean, drug dealers aren’t going to suddenly start collecting the FairTax when they sell their drugs. And you’l ss lots of people setting up personal LLCs to buy goods and services tax free, or smuggling in presription drugs bought in Canada, etc. How much of this will go on is difficult to quantify, but in calculating the FairTax rate, at least some assumptions about tax avoidance should be factored in.
4. Some tranactions are just too difficult to tax effectively under the FairTax. Gale points to mortgage and credit card interest as an example. Under the FairTax, a portion of the interest we are charged for mortgages and credit cards are for payment of the “financial service” the bank or credit card company provides us. Thus, a portion of each interest payment is theoretically taxed under the FairTax. But, I can tell you, credit card companies cannot tell you just how much of your payment is for interest versus how much is for principal, so taxing the interest payments will be very, very difficult. There are presumably a myriad of other transactions that make up a portion of GNP that are just too difficult to tax as a practical matter. I couldn’t tell you what they are, but I have heard economists claim that taxing 84% of our GNP (as the FairTaxers claim) is completely unrealistic.
These are some of the details that sharper minds than I will need to struggle with. This, of course, is even before you need to deal with the political issue of adding the FairTax to a widow’s medical bills for three years worth of ultimately unsuccessful cancer treatment for her dearly departed husband. I mean, can you just imagine what the political pressure will be to exempt healthcare from the FairTax?
Finally, with respect to James comments,
a. If you look at my Comment No. 3, all of these “untaxed transactions” will remain untaxed under the FairTax system as well. When the waitresses, etc. spend their earnings under our current system, the recipients of that spending must pay income taxes. Under the FairTax system, the recipients will collect and remit the FairTax. So, what’s the difference? The transactions are still taxed.
b. State sale taxes might have a relatively low rate of tax evasion. But (a) state sales tax rates are relatively low, and (b) state’s do not normally tax services. Under the FairTax, the tax rate will be AT LEAST triple any current state sales taxes and services will be taxed. Thus, there will be much more incentive and opportunity to cheat. (For example, under your “cash based services” example, these same folks are not going to suddenly start collecting the FairTax on their services and remitting it to the government. They will continue to work for cash and just pocket the money. Their risk of being audited will be nill because there won’t be any record of the transaction.
OK. Enough for now.
I would submit that a cash-based business would realize they could save a lot of overhead costs on materials or supplies if they could pay for them tax-free. To do that they would have to ‘go legit’ and remit the sales taxes. There would be less incentive to be ‘off the books’ since the burden of taxation would be on the consumer. However I would cede that people who want to stay ‘under the radar’ could still evade if they wished to. I just don’t see that under the FT that most businesses would feel a need to do so, because there would be little economic advantage to it.
Jason –
That’s a good point about businesses having an incentive comply with the FairTax in order to purchase their products tax-free. I’m not exactly sure how that works, though. I think there’s a difference between whether they purchase goods for re-sale or as inputs.
I understand that it will be harder for businesses to cheat than I had originally thought, but I’m pretty sure that creative minds strive hard to find a way.
Per Karen Walby:
I have a Ph.D. in Economic Geography or you could say “geographical or locational economics” with a minor in Quantitative Methods. My dissertation used a hedonic price model to estimate the impact on housing prices of jurisdictional differences in public spending on education. Two of the professors on my dissertation committee were economists from Ohio State University.
I was also State Economist for the State of Florida prior to becoming the Deputy State Budget Director.
I am using FairTax calculators, I want to invest in education, business and make a profit. If I have $20,000 yearly for consumption, I need to find out how much I can spend for education and business start up expenses.
I want to see if I can avoid paying taxes until my income exceeds $40,000 a year.
I believe if anyone earns less than $40,000 a year gross, with a spending allowance, taxation should be exempt up to the first $20,000 which is closer to the cost of living as a wage earner who
should not have to pay any federal income taxes period.
I believe the FairTax is fairer but it needs to be tweeked to take care of workers who have to work to jobs to make more than $20,000 a year.
Let’s be fair a pay those providing services to others a decent working wage and affordable health care.
When healthcare is affordable and when property taxes are affordable, and when daycare is affordable, life will become more enjoyable and FairTax will become a reality.
Let’s be American by first helping others see how big their income taxes are now and how big they will remain as a low income consumer.
When you send a property tax payment to your local government, is it subject to FairTax?
Commercial leases often break out property taxes as an item explicitly paid by the tenant.
If a residential lease breaks out property taxes, and the taxes are paid by the tenant, are they subject to FairTax?