They Like That Stuff over at the Fair Tax Blog
From FairTax critic Hayden Kepner:
Joshua –
I don’t know what thread this comes under, but your blog just got a plug (or a back-handed compliment) from FairTaxGroups.com. Somebody there was asking pointed questions about how the rate added up, and one of the others got so frustrated he said, (I’m paraphrasing):
If you want to debate the economics of this thing, go over to www.fairtaxblog.com; they like doing that over there! But don’t bother us with that sort of thing over here!
This site has really been picking up some interesting folks over the last few months, with some really well-thought out ideas. (Of course, other than me and, occasionally, Hank, they’re all wrong, but who’s keeping score.) So congratulations on a well-run blog!
Thank you, Hayden. Happy to be of service (and to have you among our elite cabal of willing-to-be-civil critics). 
Hmmm. Yes, it looks like we’ve come up more than once over there.
My perspective is that if the FairTax can withstand well-reasoned criticism on the internet, it’s got a better chance of succeeding in the real world.
Of course, the AFFT folks have a somewhat different emphasis: they’re trying to organize a movement, and I can appreciate the different dynamics involved there. My goal is to support their work while providing a complementary service for the people who want to talk through the issues in the context of civil and constructive debate.
Overall, I’ve been pleased to see the quality of back-and-forth discussion on our web site. Hopefully other people will find it a valuable resource for researching the strengths and weaknesses of the FairTax.
Thanks Joshua for the service you provide on this site. It is an invaluable service to have someone continually discussing any intricacies or questions there may be with the Fair Tax. I was the frustrated poster over there on the forum. I’m sure Hayden was very excited about seeing a Fair Tax supporter become frustrated, but the frustration was not at the question or some kind of inability to answer, it was that the questioner could not understand the explanations being given and was continually pushing confusion into the topic of discusion. I simply gave this person another alternative to get more explanation and answers to his question, rather than lead a forum thread in circles. I’m one who believes that the Fair Tax is simple enough to understand that you either support or you don’t. People can make the the equation of 2+2=4 complicated if they try hard enough, or disagree with the way you come up with your answer. Sure there may be rough spots with the Fair Tax, or things that will need some tweaking, but with the coming Financial disaster looming in the near future if things aren’t changed ....what’s the alternative? Hayden and others might think adding a few thousand more pages to the current tax code is just fine with them ...and somehow less complicated than the Fair Tax, or somehow re-adjusting the tax rates to a particular segment of the population will fix things....but I’ll NEVER understand or agree with their point of view, no matter how complicated they want to make the Fair Tax discussion.
Dennis –
One of the points of this blog, is that even the supporters of the FairTax on this blog (who make up the majority of posters) agree that the FairTax is not as simple (or as simplistic) as some of its’ more vocal proponents make it out to be.
For example, I don’t think anyone on this blog accepts the (formerly) gospel that prices will drop 22% when the embedded taxes are eliminated, and when the 23% FairTax is added back, prices will stay about the same. But the AVERAGE FairTax supporter still believes that. And Linder still goes around making speeches that we will all keep 100% of our paychecks but prices won’t rise.
Unfortunately, when people point this sort of erroneous reasoning on the radio or on certain other blogs or websites, they are attacked, censored, and eventually banned. I don’t think this censureship of debate really does your cause much justice. (I’m reminded of the Medicare Part D debate, where the administration had studies showing that the true cost would be well higher than advertised, but kept those studies secret until the bill passed. Now we are all stuck with the consequences.)
I certainly don’t hold the views of Joshua or the majority of the posters here, and they routinely put me in my place, but I think it’s safe to say that we’ve each learned quite a bit from one another.
I’m sure we’ll learn much from you as well. So, welcome aboard! (And I hope Kublakan, or whatever his name is, makes it as well. I’m sure some folks over here could probably give a pretty well-reasoned answer to some of his questions.)
Hayden,
I’m one of those supporters of the FairTax. I live in Georgia, am a volunteer speaker and a volunteer district director working with candidates who support the FairTax with their election efforts.
I guess I have a different view on the legislation than a lot of the supporters. For example, I believe there will be some drop in prices but it depends on the industry and level of competition. In some cases it will be to the companies advantage to drop their prices trying to take customers from their competitors while other industries will simply take the extra profit and probably not even say thank you.
I don’t believe anyone knows exactly what will happen when the FairTax becomes law but it’s the best option I’ve seen.
This country will not survive in a global business environment with the primary government revenue source coming from the workers’ earnings. For anyone who hasn’t, I suggest reading “The World Is Flat” by Thomas L. Friedman. I also suggest looking at the web sites for companies in Europe where a VAT is in effect. You will notice that only those making purchases within the EU are taxed and the VAT is removed from purchases being shipped outside the EU. We must achieve that same effect if we are to become competitive.
Duane –
First of all, I applaud your efforts at tax reform and trying to make government better. If more of us took an active role in pushing the things we believe in (rather than leaving it to the lobbiests, who work for the highest bidder), we wouldn’t have such a screwed up system.
I also live in the Atlanta area (Cobb County). I agree that we are in for some serious economic problems in this country going forward. (I’m a corporate bankruptcy lawyer; I see this everyday. Interestingly, my son who’s interesting high school must read “The World is Flat” for his World Georgraphy class. I hope that’s a good sign. (Now I won’t have any excuses left for not having read it.)
Regarding your point on the VAT. I have heard some politicians say something similar — that goods produced overseas do not have a tax component in them when they come to the United States. Setting aside the personal income tax component embedded in such goods, I did some quick checking on the internet and it seems that virtually every other country also imposes a corporate income tax. Are you saying that the corporate income tax component of these products is somehow removed before they are imported into the US? (I don’t know; I’m just asking.)
A VAT is obviously different from a corporate income tax. I can understand the VAT being taken out from exported goods, but not the corporate (or personal) income tax components. If you can enlighten me on this, I’d appreciate it.
Finally, one off topic point. I agree we’ve got to remove as much as the costs from our corporations as possible in order to stay competittive. That’s one reason I’m for universal health care. Why should our corporations bear the financial cost of providing health insurance for our workers? That just drives up the price of goods and services we try to export. OK. I’ll get off my soapbox on that before Joshua gets on me.
Hayden,
I don’t want anyone to get the idea that I would ever be against an intelligent debate on ...anything...ever. And I also realize that calculating the effects and changes of the Fair Tax can be very complicated and almost impossible to pin down due to the almost daily changes in the economics of things in this country. I’m not a blind follower of every financial estimate put out by those researching and calculating the numbers involved with the Fair Tax, but I do know, beyond a shadow of any doubt, that this Fair Tax is far better for the majority of America than anything else proposed by anyone. The status quo is fine if your waiting for a voilent revolution or a total economic collapse in the U.S. Government, which is where we’re currently heading....very quickly, but I’d rather put my efforts into something that has a good chance of making a difference and putting our country back on track. My point was that a debate trying to pin down absolute specific numbers, or even something close is really an almost impossible pursuit. We can get good fair estimates to work with, but no one will really know for sure until it’s in place. I would hope that even those who are die hard supporters of the Fair Tax would understand that if the Sales Tax rate had to be 40% (which we KNOW it doesn’t) to come up revenue neutral, then that’s what it is...that’s how much the government spending is out of control and thats what it takes to get rid of the IRS and put the taxes out where we can see them. You can say and try to calculate that if we pay 23% in hidden taxes and if we pull them out we will only get 15% return or what have you, but you would be hard pressed to Absolutely bet your life on that fact, just as I would that we’d get 22% of the 23%. Because neither one of us know...absolutely how everything will shake out 10 years after the Fair Tax is implemented. All I know for SURE is that after 10 + years of battling the IRS over the current Tax system, doing my best to run a profitable business and provide for my family, while they bob and weave trying to squeeze every penny out me that they can....and at the same time knowing that even after going through all of this, the government will be coming after even more of my money very soon and it still may not be enough for the government to survive. SOMETHING HAS TO CHANGE! I’m not trying to get out of paying one dime in taxes, I just want a system that ANYONE can understand (in theory), pay what’s required, and have some comprehension of the amount of money that is actually being required of them to fund the governments programs.
And this is the best thought out, Fair, and researched plan that I have seen to date.
There is a Clear difference between those who like and understand the Fair Tax but have HONEST questions or concerns about issues they don’t understand, or even those sitting on the fence vs. those who just really don’t like the idea and want to make issues about the slightest calculation differences or items they don’t like....the latter is a pointless and waste of time pursuit, if they don’t like it move on.
I was not attempting to censor anyone, my attempt was to guide someone that others were not capable of properly putting a theory into words or numbers to an option of possible better explanations. Now I’ll get off my Soap Box
Dennis –
I did not mean to imply that you were censoring people, but some of the moderators over there do. (Hank and I have both been banished from over there; and all of prior posts were deleted.)
I, too, have a small business and share the same frustrations you do over our current tax system. The FairTax would be great for me if it were enacted as written and could actually work. If the American people want it — God bless ‘em. I just want to make sure they understand the plusses AND the minuses.
Your point that you would support the FairTax even if it turns out to require a 40% rate is a valid position to take. And, you’re right, at this point we are just speculating. Moreover, the fact that the FairTax, at whatever rate, would make it much more difficult for politicians to raise taxes and might force the government to keep a lid on spending is also a valid point.
This may seem off topic, but the mention of the “gospel” that prices will drop 22% and then rise about 23% (from Dennis in post 2) got me thinking a bit. Though it’s probably been answered somewhere before, I’m a regular reader of this and other sites regarding the FairTax, but haven’t seen whether the 22% drop + 23% rise is calculated using exact numbers from sales price changes alone, of if it’s a net effect on the relative purchasing power of an individual when the FairTax is implemented. By this I mean: Does the statement that “prices will remain about the same under the FairTax as they are now...” mean that the actual price on the item in the store will remain the same once the FT is added at the register compared to the actual price today (which is the way the statements makes it seem), or that the relative price will remain the same due to the changes in retail prices and the changes in paychecks? As Dennis mentioned, it seems unlikely that prices will actually drop 22%, but I could see the net effect being a relative equality in purchasing power after the FT is introduced into the equation. Just curious.
Generally the idea that was originally advertised and is still bandied about, unfortunately, was that all the embedded taxes in items today represent roughly 22% (inclusive) of the costs we pay today. The FairTax would remove that and then add a 23% inclusive tax back on top for a nominal cost increase of slightly more than 1% in prices. The AFFT line at the time was ‘give yourself a 20% raise!’ since you’d be taking home your entire paycheck and (theoretically) paying the same amount of money for everything you were going to buy.
The problem with this is that included in that 22% number is the amount of taxes withheld from workers’ paychecks, which would not go away (necessarily) under the FairTax. Only the employer’s share of SS and Medicare taxes, about 7.65%, could be expected to go away, in addition to the corporate income tax on profits, and tax-free business inputs should also be cheaper. Depending on the item in question, this means we probably will only see a 10-15% inclusive drop in prices (some things more, some less) and a 23% inclusive increase, which works out to a 8-13% inclusive increase in prices or something like a 9-15% increase in prices exclusively. Hence the oft-used axiom of ‘There is no such thing as a free lunch.’ Since this small revelation, AFFT and Neal Boortz, et al have revised their statements/books to reflect this reality (though few have appeared to notice, be they supporters or critics).
Now relative purchasing power after the FairTax will likely stay the same, although that is not what the AFFT folks were promoting a few years ago. With the prebate and full take-home pay with no withholding, most folks should break even or perhaps get a slight tax cut overall. Some people (those with no payroll taxes anymore) will likely get a slight tax increase over their current situation (for example, low capital gains rates would disappear, making it easier to invest, but the gains you use will be taxed at 23%, which is higher than current capital gains rates). The size of the cut/increase is relatively small, on the order of 5% or less in most cases, although you could come up with scenarios that might have zero or negative tax or 7% increase in tax over current law, with a little imagination and a calculator.
Hayden,
Thank You for taking the time to read my rant and being able to decipher what was said there, and I very much appreciate your understanding. Sounds like alot of us are in the same boat and just want some things to change. I truly believe that these honest “debates” on various aspects of the Fair Tax help all of us get a better grasp on the details, so that we are able to answer the Tough questions when they come up. And I KNOW that the attacks will only get more intense the closer the Fair Tax comes to becoming a reality..so the debate is good ...as long as it’s constructive and educational. It’s the people who want to argue, and do it knowing they’ll never let themselves be convinced to change their mind that drive me crazy. These people get you talking in circles and saying so much that by the time you realize what’s going on you’ve wasted hours saying the same thing over and over in 100 different ways. The way I see it is that there are 300 million people in this country that are affected by the Current Tax System and just a guess, but probably 95% of those people have very little to no idea about even the Basics of our current tax system, much less the really detailed parts and calculations similar to what’s talked about on this site....and who has the time to even attempt it. On the other hand, within just a few hours most people of average intelligence like myself can get a pretty good handle on Everything in the Fair Tax plan that will affect my family and I. There are Very few people who are going to want to, or have the time to, get into any kind of Deep calculations of numbers like alot of guys on here do, and I believe that may be why they booted you guys from their forum, 90% of them don’t want to have to get too deep into this thing. I really don’t like it much either, but I don’t want to take anything at face value, and if I’m going to be passionate about something I better be able to have at least a few answer’s or at least know some of the guys that do. Thanks again Hayden
The notion that prices will drop 22% before the Fair Tax is added comes from an erroneous interpretation of a study done several years ago by ( I believe) Gale. He totaled the taxes collected from Payroll and income taxes on both business and individuals. He then divided that total by some per centage of GDP to show on average what per centage of product costs came from these taxes.
Many people have jumped to the conclusion that elimination of these taxes would reduce prices by 22% or more. Producers can only reduce their prices as costs are eliminated. After the Fair Tax goes into effect, business payroll taxes and business income taxes along with a big chunk of compliance costs will be eliminated. This should translate to about a 9-10% reduction in prices on average. The other 13% of costs relate to employee share of payroll taxes and individual income taxes. The only way these taxes can show up as savings to business is if salaries and wages are cut. This would be nearly impossible to implement. In fact, proponents of the Fair Tax say that everyone will get their full pay check. I guess if salaries were cut, business costs would be reduced and your current net pay would become the new gross pay and you would get your entire paycheck. Of course, it would be the same amount as your current paycheck after withholding.
The extra money that people will have in their pockets under the Fair Tax will be used to pay the Fair Tax. The same amount of taxes will be collected and the net real cost of products and services will be the same from a Macro perspective, There will be individual winners and losers under the new system.
Over a long period of time, the market place will establish the new relationship between labor and capital. Wages will move doownward or not grow as rapidly. This will reduce business costs and bring the economy closer to the price reduction of 22% that is talked about. If it will ever reach 22% price reduction or how long it will take is anyone’s guess.
The biggest problem with the Fair Tax as now written is that revenue neutrality can be reached by a Fair Tax rate of about 20.5%. The prebate will require another 2.5% tax. Thus the 23% rate works. However in the first year, the inventory transition credit will cut tax revenue by several hundred billion. Indexing social security by 30% will cost another $140 billion. Collecting the fair tax on goverrnment purchases will increase government (federal, state and local) costs by several hundred billion. Either taxes will have to be increased to cover those added costs or the various governments will operate at a deficit.
Keep in mind, that the money to pay these added taxes will be in the hands of the people. The only way the Feds can raise the extra revenue will be from increasing the Fair tax. State and local governments can increase state income taxes, sales taxes or property taxes. I don’t think shifting several hundred billion of taxes to state an local governments is going to be very popular. I don’t think adding several hundred billion to the federal deficit will be very popular or very wise. Putting several hundred billion extra in the hands of consumers will spur economic activity but may cause unwanted inflation.
I believe the solution is to phase the Fair Tax in over 3 years and eliminate the indexing of social security and the transition inventory credit.Social security will be properly adjusted each year for the cost of living increase as is now done. This will be net of price reductions. Business will be able to absorb the transition losses (actually it will be passed on to consumers in the prices they poy). The Fair Tax rate can stay at near 23%. Economic growth will smooth out any differences.
Hayden,
I’m far from an expert on the tax structures in the EU but I’ve heard that the concept of removing taxes from export goods is based on the principle that those who live in or visit a society pay for the things provided by that society. This is exactly what the FairTax does. Goods manufactured here are only taxed if they are sold here. This allows companies who manufacture here to compete world wide without a buyer in the EU (or anywhere else in the world) having to contribute a portion of a congressional salary for the right to purchase that item.
We have the luxury of sitting here debating this percentage vs that percentage or this wording vs that wording but when we step back and look at the entire system worldwide the FairTax is the only solution that works. Of course many, including many in congress, cannot see that far or they wouldn’t try to do things like control internet content. They simply cannot see that a world exists beyond the borders of this country.
Dennis –
Thanks for the kind words. Now, before this love-fest gets too disgusting, we had better going back to slamming each others’ ideas.
By the way, just out of curiosity, what are of Georgia do you live in and what type of business do you have?
Marvin — I could see phasing in the FairTax over three to five years. That would be one way to see whether it really worked and to deal with unexpected consequences. As we know, the road to hell is paved with good intentions. (Of course, that would have the dreaded result feared by all FairTaxers, of both an income tax and the FairTax at the same time! I recall an Republican primary debate in Houston from years back when every candidate supported the FairTax, but one had the audacity of suggesting that it be phased in so that problems could be identified and addressed. He was resoundly booed and defeated.)
I believe that Jim Poterba of MIT has suggested some sort of phased in consumption tax. And Michael Graetz of Yale has proposed a smaller consumption tax/VAT than the FairTax, together with a simplified income tax for people making more than $100,000 per year. I think Graetz’s idea probably would probably result in most of the benefits of the FairTax without the inherent regressivity problem, but unless he gets a radio talk show host behind him, he’s got no chance at getting on the radar screen.
If we were to phase in the FairTax, I would start with replacing the Social Security tax (replace one regressive tax with another), then the corporate income tax.
Hayden,
I’m in Charleston, South Carolina, a transplant from Toledo, Ohio two years ago. Currently have a flooring business, along with a few other minor pursuits. And I’ve never listened to Neal Boortz on the radio, in fact the only time I’ve heard him speak at all was at the Columbia, SC Fair Tax Rally. Until recently I wasn’t aware that any Radio host anywhere was talking about the Fair Tax on a regular basis.
I’m not sure if this has been asked before on here if this is so way off topic that it will be ignored, I’m not as up on current economic theories as I probably should be, but has anyone calculated what the economic consequenses will be for the onslaught of retirees entering the Social Security system that the current worker’s will pay for with their “payroll” taxes? What is the economic consequence placed on the current American worker for the onslaught of illegal aliens using government provided services? Maybe there’s an easier way to ask this question, but there are so many HEAVY economic hits coming very soon, I’m trying to find out if anyone has yet tried to determine what the tax rate will have to be on those few that are actually paying into the “Income” tax system when these and many other MAJOR economic hits come barreling down on the U.S. Government? I haven’t heard anyone in the government put up a plan, other than legalize 20 million illegals and hope they put in enough to help make a difference.
Dennis — I got you mixed up with Duane. He lives in Georgia. Too many “D”s.
A great book on the retiree issue is by Larry Kotlikoff and Scott Burns called “The Coming Generational Storm.” Both Kotlikoff and Burns are FairTax supporters, but that aside, this is a teriffic book and should be required reading of every American (particularly politicians.) Medicare is the big issue; Social Security pales by comparison.
In fact, the best argument I heard in favor of the FairTax comes from that book. They don’t spend more than a paragraph on the FairTax, so don’t get your hopes up, but the argument is that a consumption based tax will force better off seniors to pay a larger percentage of their Social Security and Medicare benefits than our income based system. Hank (our designated retiree representative on this board) isn’t particularly fond of that argument, but the alternative — as you point out — is unsustainable high taxes on younger, working Americans to pay for old farts like him (and, sadly, soon to be me.)
So, go buy Kotlikoff’s book! Now maybe he’ll forgive me for slamming his stupid FairTax studies.
Hello. This is my first post here, I hope this is going into the correct thread. I have been posting on fairtaxgroups awhile now and was directed here for a visit. I have a few questions on the rate fairtax will need to be. As I understand it, most agree that the base rate, with a prebate, is 30% exclusive. Where debate starts to creep in is with adding a few realistic assumptions. Just a few I have run across:
Assumptions:
A. a 2% evasion rate was included in the NIPA data used to calculate this 30% rate. More realistic evasion would seem to be 15-30%.
B. Indexing SS for increased fairtax costs was not included in this rate.
C. Government purchases were included in the taxbase but not the additional revenue needed to cover paying the tax on these purchases.
D. Inventory tax credit is not included in the 30% rate.
E. Budget increases since the 30% rate was calculated are not included(~ 1.27% increase in the exclusive rate).
F. retiring BB’s will push the 30% rate higher.
My questions are:
1. Are these above assumptions correct?
2. For the assumptions that are correct, what would the new fairtax rate have to be to account for all of the above variables?
Hi Kublikhan,
Thanks for joining us–I tried to email you several times using your fairtaxgroups email info, but with no success. Perhaps you had a spam blocker? Here is my take on your assumptions-others may have better data.
A. The NIPA data is understood to be lower than actual consumption due to evasion. I’ve never seen the 2% evasion estimate, but it’s probably good?
B. Indexing for SS is included in the Fairtax legislation?
C. This issue has two parts–federal and state/local. The net federal cost increase can be estimated at a little over $200 billion. But, because the federal government simply owes itself, no adjustment in the rate was deemed necessary. (kind of a shell game IMHO, but no one seems to care?). The increased cost to state/local government agencies can be estimated at $300 billion, and here, the Kotlikoff/BHI base/rate study published last September stated that an increase in state/local taxes would probably be necessary, but no estimate of the magnitude of the tax increase was made.
According to constitutional scholars I have contacted, the concept of the federal government taxing state/local governments is probably unconstitutional under the doctrine of “intergovernmental tax immunity”. The AFFT position is that the court approved the SS payroll tax, so a precedent was set. Stay tuned!
D. True. And the Boortz estimate is that this will reduce revenue by $365 billion in year one. Which in turn means that the federal budget deficit will be increased by that amount if the rate isn’t adjusted.
E. The latest.Kotlikoff/BHI study did increase the rate estimate by your 1.27%. But they also noted that the rate could be returned to 30% if fairly small (but unspecified) reductions were made in discretionary spending.
F. Probably true. I believe I read in another Kotlikoff study report that the inclusive rate might have to be 28% to account for increased pressure from the BB’s and the rising costs of healthcare.
Calculating a new rate based on the above can certainly be done, but it’s kind of a futile effort IMHO. There are many other unknowns that could impact the rate such as legal evasion, illegal avoidance, growth in the economy, the constitutional issue, increased federal spending, the budget deficit, etc. etc.
No one can say with certainty what the rate needs to be, which is one reason I’d like to see a phased transition over 3-5 years so adjustments can be made without sinking the ship of state. (No support for that idea largely due to paranoia about having two federal tax systems operating concurrently?)
Kublikhan –
Welcome over here! You’ve posted some interesting posts at faitaxgroups.com, but unlike Hank and me, you somehow managed not to get banned. I guess you are more diplomatic than us.
Regarding rates, I’m one of those who think the real rate will need to be 50%-60% or higher. I won’t repeat all my arguments, but suffice it to say that my views are a minority on this blog. I assume you are familiar with the William Gale study published in the May 15, 2005 edition of Tax Notes magazine. (This blog has a link to it somewhere.) Although most folks around here don’t agree with that analysis, it’s at least a good place to start to get a critical view of the FairTax.
With respect to the Beacon Hill/Kotlikoff study which suggested a 30% (tax exclusive) rate was “feasible”, the things that stood out for me were (a) the study assumed a $473 billion deficit in 2007, and (b) the study did not account for tax evasion and, more importantly, tax avoidance. If we assume that the FairTax (or any tax reform proposal) would actually need to fully fund government spending, the Beacon Hill/Kotlikoff study indicates that a tax rate of 39%-40% would be required for the tax year 2007 (which was the only year studied.) If we assume an evasion/avoidance rate of 10%, then the required rate jumps to 45%. And, of course, that’s only at the federal level, state and local taxes would push the combined rate considerably higher.
Now, the Beacon Hill/Kotlikoff study says that the numbers it used assumed some tax evasion. I, too, heard the 2% number during a later broadcast of a discussion of the issue, but it is hard to know for sure. But putting tax evasion (which is illegal) aside for a minute, I think the real wildcard will be tax avoidance (which is legal means to avoid paying a tax.) Fairtax proponents like to claim that the FairTax is a “voluntary” tax. While that is true to a certain extent, the flip-side is that many tax-hating Americans will “voluntarily” change their consumption habits to reduce their tax obligations.
The most obvious tax-avoidance strategies will be to buy existing homes and used cars (which would not be subject to the FairTax) rather than brand new homes and cars (which would be). Also, ski vacations in Canada would not be subject to the FairTax, but ski vacations in Colorado would be. Yachts bought in the Bahamas would be tax-free, while yachts bought in Florida would be taxed. You get the idea.
Now, each of those suggestions are subject to valid criticisms (e.g., the price of used goods will rise, so there won’t be as much as much substitution going on as one might think), but nevertheless I think it is a virtual certainty that there will be SOME tax-minimizing behavior going on, which essentially means that less taxable goods and services will be purchased than the FairTax models predict, which will thus require the rate to increase.
What the amount of that increase would need to be is purely speculative at this point. Anyway, those are my thoughts.
kublikhan,
On the NIPA data, I think this is still likely to understate total household consumption (even with 2% evasion). You also have to consider that these studies did not account for the expected capital gains that would result from a reduction in the real nominal value of U.S. government debt and the increased economic growth that economists believe would occur. There are things that work against it and things that work for it. I don’t know if “B” (SEC. 303.) was included. “C” is a non-issue and does not change the rate (this was included in the studies). Don’t know about “D”. “E” - the FairTax is revenue neutral - not budget neutral. “F” - The 23.82% rate is that of 2007 in the Beacon Hill study. Gale’s rate for 2007 is 28.2%. Gale’s average rate for the years 2006-2015 is 31% (an increase that accounts for the replacement of an additional $3 trillion in revenue collected through the Alternative Minimum Tax impacting the middle class over the 10 year period). So the U.S. has an automatic tax increase every year via the AMT, so likewise, the FairTax would have a tax increase every year (in a static model) if it were to replace the revenue of the AMT (where it to still exist in its current state in the future). So some assumptions are correct but there are other assumptions that counteract the effect. Dynamic analysis is a tricky thing.
Thanks for the responses guys. Not sure why my email bounced. I have no additional spam blocker other than what hotmail has. You have to login every 30 days or so or your account goes inactive. I am guessing that’s what happened.
A. I got the 2% figure from a debate I watched: http://www.aei.org/events/eventID.1466,filter.all/event_detail.asp
For the increased economic growth that would occur, I am guessing most of this growth would occur in the export industries? I would imagine consumer spending in the United States would drop after this tax was implemented as the incentive structure has changed to reward people to be savers rather then spenders. Personally I think that would be a good thing, the US consumers spend too much. But would this not have drastic consequences on our tax base, not to mention the rest of the world who depends on exporting goods to the US economy?
B. The legislation includes indexing SS, but I am not sure if this was accounted for when the calculating the 30% rate. I was referring to Marvin’s post above where he uses a $140 billion figure for the unaccounted indexing cost.
C. For the federal government half, I was going with the info found in the President’s tax advisory panel: http://www.taxreformpanel.gov/final-report/TaxReform_Ch9.pdf
Specifically, box 9.2 on page 11(217). They claim a math error was made when calculating fairtax. But you are saying this is not the case?
For the state half, assuming for the moment the states/courts allow this, I just think it would be nice if people were to mention a state tax increase upfront so as not to find this out at the last minute. IE, a 30% sales tax rate plus a 30% rise in state/local taxes(or whatever the rise would be).
Hayden,
But like Josh said, they have a different emphasis so its understandable.
Sorry to hear you and Hank got banned. I did notice they tend to be rather trigger happy with the bans/thread locks over there so I tried to stay more diplomatic
I agree with many of your points and also tend to think the rate is closer to what Gale says it would be. I have brought up the same argument about tax avoidance. Yes, it’s nice to have the freedom to tell the government “you’re not getting my money today, I’m saving it.” But when you do that, and millions of Americans do that, you are lowering the government’s tax revenue. I also had some reservations about what this bill would look like after going through the political meat grinder. Even with a prebate, special interest groups are not going to go away and people will still cry for exemptions. This “erosion” of the tax base will just push the rate higher. So my biggest 3 issues are Evasion, Avoidance, Erosion. Plus the lack of transitions rules to protect legacy wealth.
Here are the claims for economic growth: The efficiency cost of the current tax system — the output that is lost over and above the tax itself — is between $240 billion and $600 billion every year according to a 2005 report from the U.S. Government Accountability Office. It is claimed that the FairTax system would reduce these compliance and efficiency costs by 90% and return a larger share of that money to the productive economy. In addition, an estimated $11 trillion is held in foreign accounts (largely for tax purposes), which former Federal Reserve Chairman Alan Greenspan predicts would be repatriated back to U.S. banks if the FairTax were enacted, becoming available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States. In an open letter to the President, the Congress, and the American people, seventy-five economists, including Nobel Laureate Vernon L. Smith, stated that the FairTax would boost the United States economy. According to the National Bureau of Economic Research and Americans For Fair Taxation, GDP would increase almost 10.5% in the year after the FairTax goes into effect. In addition, the incentive to work would increase by as much as 20%, the economy’s capital stock would increase by 42%, labor supply by 4%, output by 12%, and real wage rate by 8%. Further, studies of the FairTax at Boston University and Rice University suggest the FairTax will bring long-term interest rates down by as much as one third. As falling tax compliance costs lower production costs, exports would increase by 26% initially and remain more than 13% above present levels. According to Professor Dale Jorgenson of Harvard University’s Economics Department, revenues to Social Security and Medicare would double as the size of the economy doubles within 15 years after passage of the FairTax. Bill Archer, former head of the House Ways and Means Committee, asked Princeton University Econometrics to survey 500 European and Asian companies regarding the impact on their business decisions if the United States enacted the FairTax. 400 of those companies stated they would build their next plant in the United States, and 100 companies said they would move their corporate headquarters to the United States. Because the FairTax is automatically border adjustable, the 17% competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home. With an entire paycheck in there pocket, Americans will do what Americans do and spend spend spend.
“B” - reading through the Beacon Hill study - it does look like it accounts for the indexing of SS. As for “C”, the tax panel report was done before the Beacon Hill study and was going off of assumptions of old studies. The Beacon Hill study and the Gale study do not have this “math error”. Speaking of.. would be nice if the Treasury Department (IRS employees) that did the tax panel analysis would disclose the economists, their methodology, or detailed numbers for peer review. Kotlikoff is having to go through the Freedom of Information Act to try and get it released. As for the States, they will benefit from the economic growth as well. They may not need to increase tax rates (depending on how they implement - they could apply their tax on top of the FairTax price). I think the hope is that the states will follow the FairTax lead and convert their sales tax to the FairTax base, which would decrease their rate by a good amount. Also note the state will be getting a large check from the government to administer and enforce the FairTax (a system most already have in place). State employees have to pay federal income taxes today. So the state will receive close to the same reduction in business cost as private industry. Everything that we are working off of is a static analysis, which does not consider the impact of fiscal policy changes by forecasting the effects of economic agents’ reactions to policy. It is almost conventional wisdom that a consumption tax is superior to income taxation, but we don’t get to count all those positive economic forces in calculating the rates. Go figure.
Kublikan –
By day, Morph is the most rational, fair-minded guy you could imagine. For example, he has gone so far to start putting alternative tax reform plans up on Wikipedia. But by night (particular during a full moon), he becomes a raging, unrepentent FairTaxTruBeliever.
I don’t think he can help himself.
Although I believe he’s correct that most economists believe that a consumption tax (at some rate) will promote greater economic efficiency than an income tax, these assumptions are tempered by the fact that NO country or state has ever tried to impose consumption rates as high as the FairTax (even assuming, for the sake of argument, that the FairTax could be kept at 30%). So, regardless of whether one wants to use “static” or “dynamic” calculations, its’ just a complete guess.
Notwithstanding that, I’ll make two quick points. Although many FairTax advocates like to point to certain research Dale Jorgenson of Harvard allegedly did on the FairTax a decade or so ago, he has stated several times that he does NOT currently support the FairTax. Since Morph has been in correspondence with Dr. Jorgenson on an alternative tax plan proposed my Dr. Jorgenson, I am wondering if Morph could try to get Dr. Jorgenson’s current thoughs on the FairTax (though I suspect that Dr. Jorgenson would not want his private thoughts blasted over a blog).
Also, Larry Kotlikoff of Boston University, who’s the primary FairTax supporter among economists, I believe has said many times that the economic benefit of the FairTax would be pretty minimal, something like 10% higher economic growth over the LONG RUN than under our current system, but when he talks about the long run he means generations. I don’t want to misquote Kotlikoff, so if Morph has some better data, I will stand corrected.
Kublikhan,
I don’t agree with morphh that government taxation is a non-issue, and was covered adequately in the Kotlikoff/BHI report. The constitutional argument alone could sink the Fairtax legislation. I do agree with the comments from Box 9.2 in the Presidents Tax Reform Commission report. You either have to tax federal consumption and raise the rate to cover the additional costs, or don’t tax government consumption and raise the rate accordingly based on the lower consumption base. Taxing the federal government consumption without raising the rate, as proposed by AFFT, is nothing but a shell game IMHO. There is nothing in the Kotlikoff report that addresses this issue directly.
As for taxing the state/local government agencies, all the Kotlikoff report says is that state/local taxes may have to be raised to pay the costs, or states could “tax the tax”, which is at odds with the goal of HR25 to eliminate double or cascading taxation. I think the whole AFFT argument about tax transparency suffers due to this transfer of federal taxes to the state/local governments. It would be nice to understand the magnitude of the state/local tax increases in advance, but don’t hold your breath!!
Hank,
This federal government taxation issue has been giving me a headache for awhile now. I asked Dr. Karen Walby about this awhile back. Here was her response:
Me: In table 5 of “What rate works”, federal government consumption is included in the FairTax base as taxable revenue. However since this tax is a new government expense, shouldn’t there be an expense line item also included in table 5?
Response:
“Your main premise is incorrect. The tax on government is not a new government expense. Today, the income tax and payroll tax are imposed on government consumption by taxing government employees (income taxes and payroll taxes) and government contractors (payroll taxes and corporate income taxes, and the income/payroll taxes paid by their employees), making government pay more than it would in the absence of these taxes. These taxes are counted in the expenditure column of the current federal budget and also show up in the “receipts” column as federal tax revenue.
So the tax revenue currently “paid” by the federal government is already part of the tax revenue that the FairTax replaces. It is already reflected in current federal spending numbers and the current federal tax revenues. Therefore, it does not need to be shown as an expense item in Table 5. It is already included in the $2,288 revenues/spending that needs to be raised. The budget constraint is that revenues = spending.”
Assuming I am getting this correctly:
Example(these aren’t real numbers I just pulled them out of the air):
Under our current system, the federal government needs to raise 200 billion in expenses. This amount includes taxes paid for government employees, and higher costs because of taxes from government contractors.
If, under our current system, federal government employees/contractors were exempt from taxes, the federal government would only need to raise, say, 154 billion. So 154 billion would be the real federal government expense. The extra 46 billion is just tax getting paid by the government to itself.
In the fairtax calculations, this extra 46 billion was never stripped out of gross tax revenues to be raised. So even though the paper did not walk through adding in the tax on government consumption on the revenue side of the equation, I think it is in fact covered in the 2,288 billion figure, because this captures all revenue, even money the government paid to itself.
Kublikhan,
Very interesting! But it raises a number of questions. The somewhat tortuous logic employed by Dr. Walby, which basically says”trust me, it’s in there”, is brand new to me. This explanation can’t be found in the Kotlikoff/BHI report, although Dr. Walby spent almost one year in close consultation with the study team in Boston. So, where did this explanation originate? And who has vetted it?
It seems to me that the math only works if the cost of current taxes she mentions is the same as the increased costs of the Fairtax. But we really don’t know what the Fairtax costs are because no one has been willing to do a price impact study. As you may have noted, the Kotlikoff base/rate study not only assumed revenue neutrality but added a new assumption dealing with spending neutrality, thus allowing the study team to ignore what happens to the price level. The rate was determined “independent of the price level”, the report states.
My sense is that, despite all the interesting bookkeeping magic, there will be an increased cost to the federal government due to the Fairtax and the rate needs to rise to cover the increased revenue requirements. One of the reasons I believe this is the case is the little noticed fact that HR25 defines wages as “burdened”, i.e. the costs include all benefits. Applying the Fairtax 30% rate to the burdened wages of government employees results in a big cost number. When added to the 15%-18% increased net cost of goods, I’m not convinced that “it’s in there”?
Hank,
I share you concern that there are a few problems with this argument. Because of the price neutrality requirement, this would only work 100% if prices don’t rise. And that would only happen if everyone’s gross pay was cut to their net pay, a highly unlikely scenario. The more likely scenario is that people receive the same gross pay and goods will rise by about 15%. This would change some of that 46 billion in my previous example from “tax government pays to itself” into a net pay raise to it’s employees/contractors(even though gross pay is the same). The paper took the easy way out and did not account for any price fluctuations. If a modification was made for this 15% rise in the price of goods, I estimate it would be about 137 billion(913 billion[from table 5] * .15) of additional revenue to be raised. Slightly better than the 200 billion figured quoted earlier. I estimate this might end up being about a 2.3% adjustment upwards of the exclusive rate. It might be slightly lower if you factor in compliance costs savings(perhaps 2.2% in this case).
There are a lot of problems that would arise with prices increasing. Can you imagine that every child support agreement in the country would have to be renegotiated.
Kublikhan,
Since you seem to be familiar with the Kotlikoff report data, as I’ve pointed out earlier, my $200 billion, (compared to your $137 billion) is based on the assumption that wages are defined as the burdened cost–I.E. includes all benefits. (I’m going to email you a copy of my government impact analysis, but it may not get to you –earlier efforts were returned??)
I’ve asked the troops this question before, but my $200 billion federal estimate included a 50% allowance for the burdened part of payrolls. This estimate may be high, but I googled “burdened payroll” and found estimates ranging from 20% to 80%. (As companies move away from pension plans, I guess the burdened percentage will decline somewhat?)
Kotlikoff didn’t include the burdened cost of government payrolls in his federal government consumption data, as far as I can tell. If he had, the Fairtax rate might have been lower? Check HR25 definitions for confirmation that wages do indeed include the burdened cost of benefits. Was that the intent of the authors of HR25, or was it a mistake in the legislation that needs correcting?
Stay tuned!
Kublikan –
Thank you for posting Karen’s explanation. I have to admit, it seems to make sense. But, as we all know, the devil is in the details and, as Hank and Fred point out, it’s hard to say what the true effect of government spending/revenue will be unless we know the effect the FairTax will have on prices and gross wages levels.
I certainly do not claim to be an expert on the effect of the FairTax on government spending, so if someone (Morph or Quad, perhaps) could put some numbers out there to explain it to us non-quantiative types, it would be most appreciated.
I believe, however, that William Gale always claimed that the FairTax folks did a miscalculation in this area. Specifically, he claimed that the FairTaxers assumed that prices would RISE by the amount of the FairTax in predicting government revenue, but that prices (and costs fo the goverment) would remain the SAME in predicting government expenses.
In other words, as I understand it, if the government paid a worker $100,000 per year (before the FairTax system went into effect.) The FairTaxers assumed that the government would get $30,000 in revenue for this expenditure post-FairTax, which implied that the gross wages for the employee would have increased. That is, 23% of $130,000 equals $30,000.) But in calculating government expenditures, the FairTaxers assumed that the workers wages would remain at $100,000.
This is all very confusing and making my head explode, so if anyone has a better explanation please let me know.
I could try to dig up numbers but I’d suggest we ask Kotlikoff or the Beacon Hill team. I know that Gale has made this charge at AFFT in the past for their studies (it was one of his major gripes) but I don’t know that I’ve heard him charge this of the Beacon Hill study. This was describe as “the error”. From what I understand, Beacon Hill actually used much of the Gale methodology (and “improved” upon it). If Gale made such inclusions or calculations in his methodology, then it is likely that Beacon Hill also included similar calculations. They discuss fixing “the error” in the past debate. However, the best thing to do is just ask them.
Great idea, Morph.
I’ll be happy send him an email, as we corresponded about the FairTax several times last year. (If you’ve had more recent correspondence, you might want to send it.)
Here are the questions I’d like to ask. Feel free to add your own, though I don’t want to make the email too long or he’ll probably ignore it.
1. Can you please explain the discrepencies in the required rates calculated for the FairTax by William Gale in his 1995 study and the Beacon Hill/Kotlikoff study of 2006?
2. William Gale has often asserted that the studies favorable to the FairTax over-count goverment revenue under the FairTax and\or under-count government expenditures under the FairTax system. Does the Beacon Hill/Kotlikoff study address that concern?
3. How was tax evasion and tax avoidance accounted for in the Beacon Hill/Kotlikoff study. The study seemed to suggest that the NIPA figures must have had some tax evasion factored in, but didn’t specify the extent of the assumed tax evasion. In the AEI discussion, you made some reference to the NIPA numbers undercounting tax evasion by 2%. Could you eloborate?
4. Has anyone tried to factor in shifts in consumer behavior under the FairTax. That is, woudn’t it make sense for tax-hating Americans to shift their consumption to used cars, exsiting homes, foreign vacations, etc. in an effort to avoid paying taxes? Wouldn’t this raise the required rate?
5. The Beacon Hill/Kotlikoff study seemed to assume that a tax exclusive rate of 31.5% would have left the federal government with a a budget deficit of $376 billion in 2007? What rate would have been required to fully fund the government?
6. Any estimate of the impact on state taxes?
I realize these are “hostile” questions, but that’s due to my own bias. Any more friendly questions are also encouraged. If I get enough responses, I’ll try to send the email out by this Friday, Aug. 10.
Remove question #5 - it is irrelevant. Might as well ask him how much the current tax rate would be to fully fund the government. The goal is to be revenue neutral - lets not make more work on a pointless question. Now if you want to phrase the question around, would a decrease in the deficit under the current system (via economic growth) also equate to a likewise decrease under the FairTax’s projected deficit? Perhaps...
Another question: Any luck in getting the Tax Panel methodology?
I don’t necessarily agree with Morphh’s view of #5. The BHI/Kotlikoff study didn’t seem to think it would be irrelevant to speculate what the rate would be absent the prebate, so I think yours is a fair question. On the other hand, anyone with a calculator could figure it out (27.8% inclusive/ 38.5% exclusive), so in the interest of brevity, you might drop this one?
#6 needs to include local as well as state impact.
In previous posts, Marvin did a good job of rationalizing the probable price increases under the Fairtax. AFFT has refused to address prices (other than their original erroneous assumption that “prices would remain about the same”). Does Gale have any thoughts about the impact of a 15% price increase on the economy? Does he even agree that prices will likely increase?
Good luck!
Morph –
One reason #5 is relevant is because Dr. Kotlikoff had authored a great book called The Coming Generational Storm, in which he argued that the aging of our population is going to push Medicare and Social Security costs out of control, driving the deficit (and/or taxes) to unforeseen levels unless drastic action is taken.
Many proponents of the FairTax claim that the FairTax will “save” Social Security and Medicare, though I have never seen an explanation as to why that is so. In his book, Kotlikoff argued that the FairTax would be a way of forcing seniors to contribute to their current and future Medicare and Social Security benefits since they tend to be large consumers. (Thus, that would ease the tax burden on younger workers.)
So, my question would be a natural one. If we’re worried about the long-term deficit, what would that FairTax rate need to be in order to eliminate the deficit. (Or, to put it more bluntly, why’d they pick 2007 with a projected deficit of $476 in order to determine the “revenue neutral rate? Why not use actual data from one of the Clinton years when the budget was balance or in surplus? The answer, of course, is that the “revenue neutral” rate will be a lot lower if you can choose a year in which revenue is particularly low.
But, rather than get into all of that, I think it is a perfectly valid question to ask what the FairTax would need to be to fully fund the government.
Hank — Sorry, my friend, but I believe your calculator is wrong. You might have forgotten to add in the additional cost to the government of increasing the “pre-bate” if the required tax rate increases above the proposed 30% tax-exclusive rate. Since the pre-bate is calculated at the taxes that would be paid by a hypothetical family at the poverty level, if the tax rate rises then the pre-bate must also rise, which would then increase the required tax rate even higher. By my calculations, at a tax rate necessary to fully fund the government, the pre-bate for a faimly of 4 would increase from just over $6000/yeat to around $8000/yr. I think that would increase the overall FairTax rate to around 40% tax-exclusive in order pay for the higher prebate.
Hayden, I don’t disagree with you on the projected SS and Medicare thoughts. I’m not sure how even the most optimistic FairTax figures can save 60 trillion of overspending. I believe the claim is that economic growth and the future generational change will help it. If you take a baby boomer from work into retirement under the current system, most will decrease greatly their “income” as they live off their wealth. Under the FairTax, they will continue to consume. So the issue of 3 to 1 or 2 to 1 based on workforce paying SS becomes less of an issue. At least that is what my understanding is. Perhaps I’m being cautious as I think your then going to go around beating people up with some inflated figure that includes the deficit as I know this is a common point that you bring up. Deficit seems like an entirely different discussion and could be address in many differnet ways. I don’t agree with your 2007 conclusion. Why would you not pick the current year? Revenue is low? We’re comparing with the current system so low is low or high is high.. makes no diff. Revenue neutral... now if you want to speculate on what the current system’s rate would be or what the FairTax rate would be to handle the future crisis facing the country - that’s fine but it is irrelevant to the current proposal at this point in time. I don’t think we should waste his time with it. I think the more relavent question is if the current system or the FairTax is better at reducing or covering that future cost and how.
Morphh makes a solid point. No tax system we could propose can solve the issue of government overspending. 2007 has proven to actually be a record-high revenue year, and the deficit is still gigantic, so simply bringing in more money will never fix the problem.
Indeed, some economists have pointed out that only deficits actually succeed in persuading government to reign in spending. Where there are surpluses, governments never scale back.
Bah. It seems I now have the distinct privilege of joining the group of banned posters at fairtaxgroups.org. I guess they didn’t like my recent posts. Ah well. Is there an initiation ceremony or something I need to go through?
Congratulations! It simply means you chose not to drink the Kool-Aide, I guess.
Just out of curiosity, was it “Fairtax Sunshine” that pulled the plug? He is a 60ish Fairtax advocate with no tolerance for debate. I complained to Leo Linbeck, but was advised the blog is not an official AFFT activity and Houston has no control over decisions to ban, etc.?
I look forward to your continued participation on this blog!!!
It was a stealth ninja ban! No word I was banned, I just try to log in one day and bam, I’m banned. I’m not sure who did it.