The FairTax and Globalization of the U.S. Economy
From Duane Neighbors:
I would like to see a new thread started that discusses the current tax system, the FairTax and globalization of the nations economy. How would this country fare in the global marketplace under each of the tax systems?
45 Responses to “The FairTax and Globalization of the U.S. Economy”
This is a bit beyond my abilities. However, one thing to keep in mind is responses from other countries.
For example, if the US just imposed a 25% tariff on all imported goods, other countries would probably slap tariffs on US goods.
If the US unilaterally devalued its currency by 25% to increase exports, other countries would eventually retaliate. (As you probably know, the US and other countries routinely complain that China artificially keeps the value of its currency low. We used to complain that Japan did that as well.)
As I understand it, all major industrialized countries have corporate and personal income taxes, which are “embedded” in the prices of their goods and services. If the US did away with corporate and personal income taxes, and imposed a consumption tax on goods and services, including imported goods, other countries might claim that the US is effectively imposing a tariff on their goods. (That is, they might claim that the US is essentially forcing other countries to pay a portion of the US’s tax burden.) Thus, it is very likely that they would retaliate.
Just something to keep in mind.
Is this not what the VAT already does to us? U.S. businesses have complained of this border-tax discrimination for 40 years, and Congress has repeatedly tried to resolve it by good-faith negotiations with VAT countries. But other countries continue to say, “No dice,” while the WTO turns a deaf ear. Time to turn the tables.
http://www.bendweekly.com/Opinion/7758.html
Hayden,
The facts are just the opposite of what you say. Today, on websites from inside the EU, merchandise is listed with 2 prices, the higher for shipment within the EU and the lower for the rest of the world. They do not expect the rest of the world to pay for their government.
We, with our “built-in” tax on wages, are inflating the price of our goods expecting the rest of the world to pay for our government. This raises the price of our goods by some percentage making US produced merchandise non-competitive. The FairTax would correct that and allow US manufacturers to compete on a more level field in world markets. The FairTax also levels the field internally by taxing all merchandise and services the same. Under the FairTax imported goods are taxed the same as domestic goods.
Morph — First, I have to admit that I am a bit skeptical of anything written by Phyllis Schlafly, but in this cas — assuming she got her facts right — she makes a good point. If countries that have a VAT system are using it to discriminate against US-manufactured goods sold in their countries, then we should be able to retaliate one way or the other.
But, as I said above, it’s my understanding that most of these countries have corporate income taxes, personal income taxes, etc. that are “embedded” in the price of their goods, in addition to any VAT that’s added onto it. (I’m not sure about corporate taxes in those countries, but that’s what my quick research on the internet indicated.) So I’m not really sure just how much U.S. goods are really being discriminated against, but — hey — if it’s a valid issue it should be addressed.
Morphh,
On another site (which I can’t access), you wrote the following:
“Keep in mind these numbers do not take into consideration the reduction of complaince cost. Complaince cost is built into the FairTax rate where it is not under the current system. A $500 billion return to the economy will have an additional effect on lowering production cost.”
Where is it written that the Fairtax rate takes into consideration compliance costs? Other than making an adjustment in revenue needed, by reducing the cost of the IRS, I can’t see where Kotlikoff included anything in his study about compliance costs, evasion, economic growth, etc.
What is the basis of your statement?
Hank, What I was referring to was the .25% of the FairTax collection that is retained by the state and the .25% of the FairTax collection that is retained by the business for the cost required to enforce and administer the FairTax. For example, California should receive over $500 million for enforcement. According to the California 2004–05 budget analysis, this is more than the $327 million California is spending to enforce the state’s more complex sales and excise taxes.
Morphh,
O.K., I understand the context of your statement now. The Fairtax rate includes an allowance for the fee.
Using the 2005 census figures, and assuming that consumption is directly related to population, California will actually receive $608 million annually or $1.67 million daily to administer the Fairtax. (I think the .25% fee is for admin and enforcement, not just enforcement as you wrote?). Wyoming, on the other hand, would get only $25,000 per day to do the job. Makes me wonder if there isn’t a fairer way to pay the states to administer the Fairtax? Will it really cost California 66 times as much as Wyoming to do the job?
Hank,
What do you think is the ratio of retail businesses and service providers between California and Wyoming, one of the most populace states vs one of the least populace? I would be very surprised if it was only 66 to 1. On a per filer basis it’s very possible that California is receiving less than Wyoming.
Hank - Yes.. Administration and Enforcement. I stated both in the first instance but then just said enforcement when discussing California.. thanks for the correction.
Duane,
My comments dealt only with the $5 billion in fees that go to the State governments, not the other $5 billion that goes to the 20 million retailers that collect the revenue and file the reports. I wouldn’t argue that on a per filer basis, California may indeed get less than Wyoming, although I haven’t really looked at that aspect.
I’m simply concerned that on a consumption basis, there may be some unfairness from state to state in paying the fee. The top ten,(Cal, Tex, NY, Fl, Ill, Penn, Ohio, Mich, Ga, and NC), will presumably receive 55% of the $5 billion state fee. The other forty states will scrap for the rest. Is that really fair, particularly to those states that don’t already have a sales tax administration in place, and will have to create one from scratch? Is there really that large a difference in the duties and responsibilities of the proposed state sales tax authorities? Just wondering!
Hank, they don’t have to. Any state, even one with a sales tax, may opt out of the collection and administration function. It would then fall to the Treasury Department to administer and police the collection.
If you look at the states that have a sales tax, the budget for the administration and collection are not the same. Wyoming does not require the same number of employees to administer their program as California. The work to be done has a related proportional cost and those states with a large volume of filers to administer must spend more to accomplish that. I’m sure those states doing administration and collection of their own states sales tax know how many filers one employee can handle.
I believe a state can also choose to have another state administer and enforce the tax.
Morphh - You are correct.
If is possible that the states will have a windfall increase in their sales tax. If prices rise after application of the FairTax there will be a corresponding increase in the state’s sales tax because the sales tax will be applied to the FairTax portion as well as the merchandise. This would only happen in an inclusive environment where the FairTax is part of the price charged for the merchandise. If the FairTax is applied exclusively, as the state’s sales tax is, then both taxes would be based on the price of the merchandise and the states would not receive the windfall.
Re global corporate tax rates. Here’s a graph from the Wall Street Journal (alas, though, it’s from the editorial page rather than the news pages, which means you can’t really trust it). Anyway, it show all of our major trading partners also have corporate taxes, though the maximum rates appear to be less than those of the US. I do not think these corporate rates include VATs. So, even if the VATs are excluded from exported items, the goods produced in those countries would still have their corporate and personal income taxes “embedded” in the price of those goods, just as we have over here. And, of course, the individual tax rates are generally much higher over in Europe than in the U.S.
Here’s a better, and more honest, graph of corporate tax rates.
Duane,
Interesting point.
HR25 describes the second and third purpose of the legislation as follows. “(2) to tax all consumption of goods and services in the United States once, without exception, but only once. (3) to prevent double, multiple, or cascading taxation.”
Some time ago, Dr. Walby responded to a query by writing that States and local governments would not be allowed to “tax the tax”. However, while working closely with, and advising the Kotlikoff/BHI study group, her guidance was modified to the point where the study report now says, “A partial solution (to the question of whether or not the Fairtax imposes a burden on state and local governments), would be to take the simple step of imposing state and local sales taxes on the Fairtax-inclusive price of goods (and services?)”
It seems to me that this is another area that needs some clarification and rewriting of the legislation. Either you are going to prohibit cascading taxation or you’re not. And the purpose of taxing everything once, without exception, seems to overlook the education tuition exemption.
The devil is very much in the details!
Hank, They don’t define education as final consumption (so there is nothing to exempt) but as an investment in yourself.
Hayden, I agree with you there. Other countries have these burdens as well. Some taxes are border adjustable and some are not. It makes sense for government to distribute the tax burden accross multiple methods - less hissing.
[T]he task of the taxing authorities is to “so pluck the goose as to obtain the largest amount of feathers with the least amount of hissing.” We the taxpayers, of course, are the geese. — Murray Rothbard
Morphh,
Not to quibble, but HR25 says: ” `(D) EDUCATION AND TRAINING- Education and training shall be treated as services used to produce, provide, render, or sell taxable property or services.
So tell me, so what taxable property or service does tuition produce, provide, render, or sell? Basically, the bill seems to treat education tuition as an untaxed service with the expectation that at some point, there will be a taxable property or service created. What is it? Looks like an exemption to me.
I feel a Bill Clinton moment coming on... Tap dance begins - I guess it is on how you define exemption.
Certainly a fuzzy line there. I guess you could argue that they defined education and training so they wouldn’t have to exempt it, if you consider an exemption to be exempting an item from final consumption. Education and training are not final consumption, so there is nothing to exempt. If that makes any sense... They are a service (investment) into yourself. It is used to improve your mind (the primary motor of any work). It is your mind that produces, provides, renders, or sells taxable property. It is an investment into your primary tool of business. - Tap dance ends [Morphh wipes his brow]
Although I couldn’t hear the music over the sound of the tap dancing, I think you should be awarded a 10-10-10 for that performance!!! Keep up the good work, but remember, learning doesn’t end with a diploma??!!
Returning to Duane’s suggestion to discuss the income tax, Fairtax, and the impact of both on the world market, I’d like to try to explain why I don’t favor the Fairtax. My views are those of a retired couple, who have lived under the income tax for our entire life. So, here are the facts as we see them.
(1) Income tax.
- With a gross income of $80,000 from six pension checks, (including two from SS), and using the standard deduction and two exemptions, my federal taxes for 2005 were $9230 which was an effective tax rate of just over 11%.
- In addition, we paid a 6% Florida sales tax on new and used goods that were not exempted, (basically essentials and all services are exempted in Florida).
- We keep no records, just wait for the six 1099’s to arrive in the mail.
- It takes about thirty minutes to fill out the form 1040. I don’t recall ever paying any professional firm for assistance in filing. While there may indeed be 66,000 pages in the IRC, the 140 page 1040 instruction booklet serves us just fine.
Before leaving the income tax, a few words regarding the “evil” nature of the income tax system. It’s easy to demagogue the IRS/IRC, the tax collector is never very popular. But consider the following. Just by reading the 1040, anyone can see that the IRC is an important and effective instrument used by the federal government to implement social engineering policies.
- Tax adjustments such as for health savings accounts, moving expenses, alimony payments, IRA contributions, education tuition and fees, student loan interest, and investment losses are all items that lower taxable income and promote beneficial activities.
- Tax credits for child care, elderly or disabled care, education, retirement savings, child tax credit, and adoption credits all have a very positive social impact.
- Refundable tax credits such as the Earned Income Tax Credit and the Additional Child tax credit help offset the cost of the payroll tax for less fortunate working families. (Note: In 2004, an estimated one million filers of a total of 132 million individual filers were able to reduce their net federal tax burden to zero through the use of tax adjustments, tax credits, and refundable tax credits).
- In addition, if a taxpayer finds it advantageous to itemize deductions, deductions can be made for some costs of home ownership; state and local sales, real estate, and personal property taxes; interest on debt; charities; gifts; medical expenses; and casualty losses and theft.
Many of the Libertarian leaning folks on this blog may feel that the federal government should not be involved at all in the lives of Americans, but I would simply ask everyone to consider the negative impact on society if the IRC was eliminated. How will the Fairtax encourage the same level of positive social change?
(2) The Fairtax as proposed in HR25.
- Using a Fairtax calculation worksheet provided by Dr Walby, and adjusting spendable income by 20% to $64,000, my estimated sales tax came to $14,720, about $5,500 higher than income taxes paid on the same gross o0f $80,000. (Note: While I could have assumed that all gross income was taxed, as gross incomes rise, there will certainly be a decrease in spendable income subject to the Fairtax. Budget items such as education tuition, charities, savings/investment, installment payments, and state/local property and sales taxes are not subject to the sales tax.)
- But what about the prebate, you ask? OK, here are some thoughts on the proposed cash grant entitlement program that has an estimated cost of from $500-$600 billion annually.
(1) We would have received $4402 in prebate payments in 2005, thus narrowing the cost difference with the income tax to $1100.
(2) But, according to Kotlikoff, the Fairtax rate was increased by 3.5%to pay for the prebate. It seems to me that I’m funding over half of my own prebate. (3.5% x $64,000 = $2240)
(3) And, if I spend the prebate income, it will be taxed at the 23% rate which adds up to $1012 in additional sales taxes.
(4) In addition to the cost of the prebate, the prebate payments mean that almost 30 million working families may pay no net federal tax, and yet, will qualify for full Social Security retirement and medical benefits. Having paid into the trust funds for 45 years, I am not eager to resuming paying into the funds through my sales tax payments while millions of others get the same benefitsm but pay nothing on balance. This concept breaks faith with all senior citizens! And, is creating 30 million “welfare families” really good for the country?
So, in summary, under the Fairtax, prices are going to rise by an estimated 15%, I will be paying higher federal taxes, my state and local taxes will increase in order to pay the Fairtax on all government activities, and I will have to resume paying for the retirement and medical benefits that I thought I had paid for in full over the last 45 years.
Why should I support HR25?
P.S. Flaming is discouraged on this blog!?!!
Hank,
That’s some interesting circular math. The purpose of the prebate is to pay the tax on poverty level spending. Since you’re using it to pay the tax on basic purchases, how does it get taxed again.
The reason I wanted to start this thread is that all the discussion to this point has been about the individual and the tax. The effect of the tax on and the relationship directly to them, as your comment does.
I want to discuss how this country competes in a global economy. We have seen that we cannot do this with the current tax system. We need something that allows a level playing field with our competitors worldwide. To me, the FairTax does that but I am open for anyone to propose something better, or even different.
A very good primer on this is “The World Is Flat” by Thomas L. Friedman.
Duane,
I understand what you are interested in, but I’m not a world trade expert. Perhaps others are and we can all learn. I will say that the reason the stock market is currently doing so well is largely due to corporate profits being made overseas. As to why companies moved offshore or set up foreign subs, I think federal taxes are pretty far down the list of reasons for moving out of the country. The cost of labor is certainly very important, as is the proximity to raw materials. Expanding market share is high on the list it seems to me. And offsets necessary in any sale play a big role. It seems a bit inconsistent to claim that corporations simply pass tax costs on to the consumer, yet also claim that federal taxes are a reason for moving?
Based on my Boeing experience, I might add that state and local taxes do play a role in where to headquarter a corporation in the US. The state of Washington badly misjudged Boeings Washington “roots”, state taxes got out of hand, and the Corporation moved to Chicago!
As for my “circular logic”, it seems to me that, not only do you not agree that the prebate is an entitlement, you don’t seem to even believe the prebate is income—income that will be spent and taxed. Using my Fairtax example, my spendable/taxable income was $64,000 and I paid $14,720 in sales taxes. I also received $4400 from the federal government, making my total spendable income $68,400. Total taxes would then be $15,732 as I explained in my paper. Of course, I might not spend the prebate windfall, but at lower gross incomes, the monthly check will surely be spent–and taxed. Just what do you intend to do with the government prebate check? If the prebate is not additional spendable income, what is it?
I don’t on principle agree that tax breaks for ‘necessities’ are so praiseworthy. They are simply necessary. They represent the government ‘backing off’ because to do otherwise would really be unfair. So I don’t count them as a plus or a minus. Personally, I think lower tax rates would do the same job, and would be more beneficial to more people. As they stand, they simply back off of some of us, rather than all of us.
Now social engineering, I see as completely overrated. Most attempts by the government to steer society in one direction or another completely fail or don’t quite get the job done. Society is simply too large and complex to be ‘engineered’ and because of this we usually get unintended consequences. Many tax incentives were invented to attempt to encourage long-term marriage and to discourage abortion. Today we have a sky-high divorce rate in spite of them, and a population of people who literally breed themselves an EIC-based income stream. Who could have guessed?
But on principle alone I think social engineering by the government via the tax code is a Bad Thing. To reward certain people for their lifestyles or behavior, choice of automobile (can we say Toyota Prius tax break) or what-not, is bribery. Inversely, to tax someone for some other form of behavior not so blessed by the government (as some have suggested in Congress for SUV’s) is extortion. Here’s some money, do as we say. Do otherwise, and we will stick it to you in April. I can handle fines for crimes, I can handle taxes to pay for government needs and services, but I don’t condone bribery or extortion.
The only social ‘engineering’ the government does well is when it backs off and reduces taxes. Any tax reduction on any group of people for any reason usually has good economic effects, and few unintended consequences if any. It is only when the government attempts to control people that we start to get Bad Things happening.
James,
You did a yeomans job blogging the bill, and everyone learned a lot IMHO.
But, it’s very disappointing to me that a member of your generation would have such a dim view of the positive impact of the IRC on our society. Based on our 45 year age differential, I can only conclude that you didn’t have to pay for your education, never married (or divorced), have no children (adopted or otherwise), have never paid for a household move, rent (don’t own), have no IRA investments, are not in the habit of giving gifts or contributing to charity, are rarely ill, and have never suffered any significant investment losses or casualty or theft losses.
I’m a lifelong “R”, and certainly don’t believe that big government is the answer to everyone’s problems. But, after 94 years, I think the IRC has got it about right for a majority of Americans. It remains to be seen if the Fairtax would be a better revenue collection system.
Well actually I paid for most of my college education (I am still paying for it) and my parents paid the rest (no grants). I have a stepdaughter and a wife, whose family I support overseas and I am working to bring them here to the USA to live with us. I have been contributing to one 401K or another for more than 7 years now. I recently did pay for a household move (though I am working on getting my first house next year). I give some money to charities (though right now my family takes about all the charity I can handle). So I have had some OK tax benefits in some years.
The problems I see with the IRC is not so much that the IRC doesn’t help reduce its tax burden in many appropriate situations, it does! But to give it credit for ‘helping me out’ is nonsense. It seems to me that it’s a matter of perspective. The government didn’t give me any free money. It gave me my money back. It was an obstacle before, and it has under my specific set of circumstances, backed off in ways it has deemed appropriate. Should my circumstances change, they might not back off anymore.
It seems as though we have people here who inherently trust government more than others. Since you are a veteran and presumably an officer, I am not surprised. I work as a contractor with the military and I have seen for years how well many soldiers are indeed taken care of. But honestly, the government hasn’t helped me much in life. Until I was 30 I had never received a tax refund. Ever. Every job I had generally screwed up withholding and I usually had to pay a little extra each year on top of the roughly 30% I lost each check. I simply cannot see that empirically the government deserves much credit for ‘helping’ folks with tax breaks when it is honestly taxing most of us so much that they feel those tax breaks are ‘necessary.’
It isn’t so much a ‘positive social impact’ as much as ‘mitigating negative social impact.’ And it is done at the expense of those deemed ‘able to pay,’ who are rarely rich people.
But honestly the social engineering stuff galls me. It is not the government’s role nor is it within their power to try to ‘manage society.’ it doesn’t work and it is arrogant and a bit tyrannical to try, in my opinion.
Hank,
Does the prebate increase the income or reduce the tax? Depends on how it is applied in the person’s mind. Do you say “I have more to spend and be taxed on” or do you say “this is paying the tax on what I’m already spending”.
James.
It’s not that I trust government so much as I distrust the lack of government. You may not approve of attempts to manage society, but can society really manage itself? Anarchy awaits! And I’m glad to hear that you never received a tax refund–shows me that you were smart enough not to give the government an interest free loan!
It’s time for me to move on and turn the role of senior retiree over to Marvin–he’s got a much more positive attitude. This blog has really become the premier site to meet and discuss the Fairtax. I’ve learned a lot. The good news is that I’m now convinced that a consumption tax is preferable to an income tax. The dilemma is how to get there. In my view, HR25 is badly flawed and the authors badly overreached, tried to do too much, too fast. Here are some of the mistakes I believe that the Houston tax lawyers and business leaders made while crafting HR25.
(1) Using a rationale of preventing government competition with the private sector, HR25 treats all governments as consumers and taxes them accordingly. This shifted some of the federal tax burden to state and local agencies, will probably be found to be unconstitutional under the doctrine of intergovernmental tax immunity, and, for the federal government to tax itself, resulted in a shell game of sorts. Governments cannot tax themselves into prosperity!! Government competition can be controlled through other legislative means.
(2) HR25 includes payroll taxes on the list of taxes to be replaced. This, coupled with the prebate, has the undesireable effect of creating an estimated 30 million working families that may never pay any net federal tax, yet will still be eligible for SS retirement and health care benefits. It also means that current retirees will resume paying into the SS trust funds with their sales tax dollars, a major break in faith with workers that paid into the trust funds all their lives. In addition, it completely untaxes businesses, which may prove to be a political mistake no matter how much economic sense it might make.
(3) The prebate is supposedly the centerpiece of the Fairtax. This $500-$600 billion cash grant entitlement proposal comes at a time when entitlements as a share of the federal budget are squeezing out discretionary spending, including Defense. A budgetary train wreck could occur in the next ten years. Paying for the prebate added 3.5% to the Fairtax rate, and will be paid to tens of millions of Americans that don’t need it. The national “one size fits all” application (except for Alaska and Hawaii) makes no economic sense. Current assistance programs for the poor such as food stamps, housing assistance, and public transportation, admin istgered at the local level could prove to be far more effecient and effective.
(4) HR25 also eliminates the gift and “death” taxes. What on earth were the authors thinking? These taxes currently impact only the very wealthy, and the proposal to eliminate them adds credence to the criticism that the Fairtax benefits the rich.
(5) HR25 includes a transition inventory credit, which has the undesireable effect of adding $350 - $400 billion to the federal budget deficit in the first year of transition.
(6) HR25 exempts education tuition from taxation. This precedent opens the door to other exemptions for other expenses such as health care and mortgage costs which some members of Congress might feel are just as important as education tuition. The camel’s nose is under the tent flap!
(7) The “cold turkey” implementation is high risk and politically unacceptable. Congress is fundamentally conservative in nature and prefers evolutionary change to revolutionary changes such as the Fairtax.
(8) The 30% sales tax rate is high enough to raise the prospects of significant legal tax avoidance and illegal tax evasion.
In closing, HR25 has no prospect of passage in it’s current form. If you all are really serious about getting rid of the income tax, consider this: A 16% national sales tax on an exemption free consumption base, and with no tax on government agencies, no prebate, no inventory tax credits, and phased in over a five year period, would replace the income tax and would be revenue neutral. Is this plan perfect? Certainly not, but the chances of gaining Congressional approval are much better than for HR25!
That’s all, folks.
Duane,
It doesn’t make a bit of difference how you think of the prebate in your mind. You can think of it as a tax refund, a gift from the feds, or monthly winnings at the race track. Whatever you feel like calling it is fine by me. But it is nevertheless income, and the proof is in your checking account. Check it out–you will find deposits for your pay from your employer, and deposits from the Treasury for the prebate. It’s all income, to be spent (and taxed) as you wish.
Cheers!
I think it reduces the tax, but, when determining the effective rate, you have to reduce the value of the prebate by the amount of tax that would be paid when the prebate is spent. It’s sort of like if your income tax refund check were taxed as income.
The simple formula to determine the effective FairTax rate is:
net FairTax paid / income = effective FairTax rate
My net FairTax paid is calculated as:
gross FairTax paid – prebate = net FairTax paid
My gross FairTax paid is calculated as:
total taxable consumption inclusive of tax * inclusive FairTax rate = gross FairTax paid
But my total consumption inclusive of tax is not limited to my income - it also includes the prebate. So I must add the prebate to my income (assuming 100% spending of income on taxable consumption) to determine total taxable consumption inclusive of tax. So the complete formula is:
(((income + prebate) * inclusive FairTax rate) – prebate) / income = effective FairTax rate
So for a family of 4 making $65,000 and receiving a $6,297 annual prebate, the formula would be:
((($65,000 + $6,297) * 0.23) - $6,297) / $65,000 = 15.54%
To break it down:
$65,000 + $6,297 = total consumption including tax, or $71,297
$71,297 * .23 = gross tax paid, or $16,398.31
$16,398.31 - $6,297 = net tax paid, or $10,101
$10,101 / $65,000 = effective FairTax rate, or 15,54%
(Of course, this isn’t how FairTax.org calculates it. They assume the prebate isn’t taxed when spent and don’t use it as a factor in gross FairTax paid. Their effective FairTax rates are therefore higher than they should be. Their calculations for this family would show the effective rate as 13.31%. But that’s wrong.)
Have been away from this site for 3 weeks. The great minds here have probably solved all of the tax problems in the interim. I look at these issues differntly than many of you.
Judging whether any tax system is fair probably boils down to how each of us is personally impacted. Because the tax code is so complex there will be winners and losers at most income levels above the poverty level. The system should be evaluated on a macro basis; the overall impact on society. Whatever is best for America will be best for all of us in the long run.
America’s trading partners have higher total tax rates for the most part. A lot of that is in the form of VAT which is rebated by the individual governments when an item is exported. The U.S. collects most of it’s tax from payroll and income. These are included in the prices of products making U.S. products less competitive.
Many believe that social engineering is a proper role of government. I do not believe this should be accomplished through exemptions from taxes. Let congress vote these benefits and fund them out in the open through spending measures. Don’t hide the costs by reducing tax revenues.
Taxing governments is folly. The tax paid has to be replaced by other taxes on individuals. Governments like business can not ultimately pay taxes. Find another way to control government competition with the private sector.
There are pros and cons on taxing education as a service. It is truly an investment in the future that benefits all of society; not just those receiving the education. If you don’t tax government purchases, do you tax the tuition paid to public schools? Property taxes used to fund schools are exempt. If we raise property taxes the education costs would be exempt. What about business education? Do you tax the items purchased to provide that education? That seems to conflict with the principle of not taxing business. If you add 30% to the tuition, does that exclude more poor people from getting an education?
The prebate will put additional money into your pocket. Your will spend that extra money and you will pay Fair Tax tax on most of what you spend. It doesn’t matter how you state your net tax bill. I look at it as fair tax minus the prebate.
I agree partially with Hank. Full implementation on January 1 of year X will be tough on the economy and lead to a large deficit in year one. I believe that implementation over 3 years would eliminate the need for a transition inventory exemption. The 30% indexing of social security should be eliminated. The normal annual COLA adjustments will cover the needed adjustment. I don’t want to continue to tax payroll because it increases business costs and prices to consumers and on exports. This doesn’t create a large class of free loaders. Everyone will pay the Fair Tax on spending above the poverty level. Pay according to what you take from society not on what you give to society.
Marvin,
Welcome back! Us old folks have been seriously under represented of late?!
You wrote: “Many believe that social engineering is a proper role of government. I do not believe this should be accomplished through exemptions from taxes. Let congress vote these benefits and fund them out in the open through spending measures. Don’t hide the costs by reducing tax revenues.”
While it all sounds good at first reading, I’m puzzled now about just what kind of spending legislation you envision? Current tax law includes deductions, exemptions, adjustments, credits, and refundable tax credits, — all of which simply reduce one’s tax burden. The opportunity to reduce taxes is what drives folks to the kinds of social behavior that the IRC promotes.
Please tell us what the legislation might include for any of the following benefits. How would the government help with these personal expenses through spending legislation?
(1) Moving expenses
(2) Home ownership
(3) State and Local taxes
(4) Gifts/Charity
(5) Casualty losses and Theft
(6) IRA’s or other retirement savings
(7) Student loan interest
(8) Investment losses
(9) Etc. Etc.—(the list is quite long)
Under current law, all of these benefits (?) reduce one’s tax burden. I can’t imagine just what kind of spending legislation you might support that would provide these same social benefits? Surely you aren’t suggesting that the government pay for all of them outright? What would be the incentives that would replace the current tax deductions?
Well Marvin’s point is that the government is actively paying for them by exempting revenues it would otherwise receive. These exemptions allow more than 100 million people to file zero balance tax returns, as you pointed out earlier.
On net, if the government removed those exemptions and offered to simply pay folks the same amounts of money they were being exempted through subsidies or grants, there would be no difference in the money. Revenue lost equals revenue spent, theoretically.
However Marvin’s point is that using the IRC to do it is sneaky. It generally is used to make it seem as though the government can do these things ‘for free’ when it really can’t. Tax-based welfare is an easier sell than real welfare checks, all other things being equal.
That makes one wonder if it is something voters want. If voters would accept a tax-based welfare expenditure versus the same actual expenditure with no tax break, one wonders if perhaps they’re being snookered.
Hank — I have to say that I agree with Marvin on this one. I don’t think the government should use the tax code for social engineering. It drives up the rates, forces some groups to subsidize the behavior of other groups, and increases complexity, which forces many of the same people the government purports to want to help to spend money hiring tax preparers because they can’t understand the forms.
In response to your particular points:
1) Moving expenses — The government already pays unemployment benefits to those who lose their jobs. This shoud help defray some moving costs for those who must move because of a factory closing or something. Why should the government pay gainfully employed folks who voluntarily choose to move somewhere else for a job?
(2) Home ownership — Why should apartment dwellers, those who live in modestly-priced homes (and probably take the standard deduction), and those who’s homes are paid for be required to subsidize rich and upper-middle class families who borrow money to buy McMansions? (And, even more unjustifiable, vacation homes?) If we really want to encourage home-ownership, it would be much more direct and efficient if the government simply gave direct grants to first-time home-buyers up to a certain income level.
(3) State and Local taxes — Why should those living in low-tax states subsidize those who live in high-tax states?
(4) Gifts/Charity — Why should those who donate their TIME to charity (which is not tax deductible) have to subsidize those who donate the MONEY to charity (particular since many of the most expensive tax-deductible recipients — such as private colleges, operas, etc. — aren’t really what most of us would call charitable organizations.
(5) Casualty losses and Theft — That’s what insurance is for.
(6) IRA’s or other retirement savings — These benefit upper middle class folks (like myself) more than poorer folks in lower income brackets. Plus, they are hidden time-bombs since withdrawals are taxed as ordinary income (max. rate 35%), instead of capital gains (max. rate 15%). I think this is the sort of social engineering that has unintended consequences. Why not reduce taxes on everybody, let people save what they want, and then (if necessary) provide a safety-net through social security and medicare?
(7) Student loan interest — Direct grants would be more efficient.
(8) Investment losses — These are deductible against income (mainly investment income), so I don’t really see that as a subsidy.
(9) Etc. Etc.—(the list is quite long) — So are the arguments against using the tax code for social engineering.
This is one of the few areas I actually agree with the FairTax crowd on. (*cough* *cough* Excuse me while I gag. *cough*). Taxes should raise money and, in my opinion, be mildly progressive, but we shouldn’t use tax policy to achieve other goals.
O.K., it’s getting very lonely out on this limb. Clearly, we disagree about the merits of the government using the IRC for social engineering. And that’s just fine. But we have now moved beyond the basic discussion and I want to air out your proposal that we could replace the deductions, exemptions, credits, etc. with a plan that taxes gross income (no deductions) and then uses cash grants or subsidies to help the taxpayers. (I think this is what James proposed?)
There are two basic types of individual tax filers; (1) standard deduction/exemption, and (2) itemized returns. Two out of three filers use the standard deduction/exemption. (In our case, we reduced our taxable income by $16,400 in 2005 using the standard deduction and two exemptions).
Now, if I understand James, you would have me pay the income tax on my gross income, and then have the government figure out a refund based on my marginal tax bracket and mail it back to me. With all due respect, that concept would be dumber than dirt! I’m not about to favor a tax plan that mandates that I give the government an interest free loan, even for a couple of months. And just consider the complexity and potential for legal disputes.
Moving on to the one-third that itemize, the proposal makes even less sense. I guess everyone would pay the income tax on their gross income, and then they would have to apply for each and every cash grant or subsidy that they qualified for. Talk about a bureaucratic nightmare?
Look guys, social engineering may gall you, and you might wish things were different, but we are where we are, and after 94 years of tinkering, the IRC is getting the job done. And none of you have explained just how, under the Fairtax, additional legislation would address all of the benefits currently enjoyed under the income tax code. Reducing taxes legally is a time honored American tradition, and the IRC provides the necessary incentives. What is the alternative?
Hank — I have been called far worse (on the air even) than “dumber than dirt.” And I fully admit that at times I am dumber than even smelly dirt. So, excuse this dumb*ss question — but I don’t understand your last post.
If we got rid of all deductions, exemptions, and credits, then the tax RATES could come down under the Tax code. So, you would pay taxes based on your gross income, but the rates would be lower. You wouldn’t be getting a cash grant, rebate or anything else.
Now, if the government wanted to subsidize you (for the initial purchase of a home, for example), it could just send you a check. But that wouldn’t have anything do do with paying income taxes. It would be two entirely different transactions. (I’m not advocating sending out checks to people to buy homes, by the way, I’m just using that as an example of a possible government subsidy.)
Am I missing something?
I made no such proposal. I simply made the point that using the tax code to ’subsidize’ things was basically equal to paying for them outright. It seems to have been a matter of political expediency to offer such a wide variety of tax welfare programs in lieu of real entitlement programs with budgets and the whole nine yards.
For example if there was a program out there to subsidize you for buying a home by giving you a cash grant once per year based on your mortgage interest (not your income mind you), but no mortgage interest deduction for taxes, and the overall budget for these outlays was roughly the same, you should be able to more honestly and transparently achieve that without trying to ’steer’ people towards financing a home. The economic arguments for owning a home are still valid regardless of the government’s tax strategy, and no manipulation of society is needed for people to own homes. People want to own homes for the sake of personal ownership, for investment purposes, etc. I doubt seriously the tax code can take much credit for any of us wanting to buy or buying a house, and even if it could, if we would rather rent, isn’t that our business? Why should the tax code bribe me into buying a house? If they want to promote good housing for people, why don’t they give me a tax break on my rent too?
And in all honesty the bureaucratic nightmare you describe is exactly what goes on today, as we all have to apply for each and every deduction or coin up to the tax man, so the level of paperwork is likely bound to not make any difference.
On a separate but related note, you seem to not trust government with your money (you don’t want to give them an interest-free loan), but you seem to think it’s OK for government to try to tell people how they should use their own money (by steering them towards one behavior or another presumably beneficial to them). I don’t follow.
Gentlemen,
James exact sttement that got my attention was as follows: “On net, if the government removed those exemptions and offered to simply pay folks the same amounts of money they were being exempted through subsidies or grants, there would be no difference in the money. Revenue lost equals revenue spent, theoretically.”
My understanding of James writings was that exemptions would be done away with, and payments equal to the exemption value would be sent to every tax payer based on grants and subsidies. Nothing was said about reducing the income tax rate. (In fact, rates could not go down if the government needed revenue to pay the subsidies and cash grants.) What am I missing?
I stand by my comment that this concept and dirt are equally brilliant!
As for my supposed inconsistency that James noted, I believe anyone who withholds an excess amount and receives a check back from the Treasury is giving the government a tax free loan. However, the government doesn’t tell anyone how to spend their money or structure their lives. Reasonable social goals are encouraged through tax policy. I recall that my first economic decision to own a home, with all the benefits of ownership, was based on a financial plan that showed that owning was cheaper than renting when tax considerations were factored into the plan. Nothing wrong with that, is there?
“Look guys, social engineering may gall you, and you might wish things were different, but we are where we are, and after 94 years of tinkering, the IRC is getting the job done. And none of you have explained just how, under the Fairtax, additional legislation would address all of the benefits currently enjoyed under the income tax code. Reducing taxes legally is a time honored American tradition, and the IRC provides the necessary incentives. What is the alternative?”
The alternative is to tax spending and not investment. With our current tax system, you could theoretically put money into an IRA and immediately withdraw it, put the remaining amount back in, withdraw it, etc. but then you would be seriously taxed on your spending. If you lose 50% of your money that way, it is as if you paid a 50% tax! I believe that there should no taxation of financial investment. If you don’t spend money on investment, then it is simply spent elsewhere, and then FairTax is charged! The easy way to not tax investment it is to not tax it! However, how much investment you maintain, all that remains in the economy, meaning that you are not really spending it yet. But once you do spend that money, it is probably in a debit or savings account somewhere, and it is at moment of payment for goods and services when it should be subject to tax.
Banks could easily determine which transactions are taxable and which ones are not, by virtue of transaction information. It is in the position of being able to charge FairTax as you spend from debit or as you make payments to your credit card. Having banks do taxation could easily make many processes of taxation automated.
If I want to take money from the bank and use cash, I should be able to withdraw my money without being charged FairTax. The prices before FairTax on store shelves should be 23% lower. While credit and debit users would be simply charged by the STORE at those prices, those using cash would have to pay 30% extra to make up for the fact that BANKS cannot automatically charge them FairTax as they use cash. This would be a “30% cash fee”. Normally, tuitions and other investments are not paid in cash, so the bank’s automated systems can simply omit those from taxation.
86,
I have no clue just what your proposal regarding banks collecting the tax revenue is all about. Currently, 20 million businesses collect state and local taxes, and I’m not aware of any problems with that. It seems that you might be following the old “If it isn’t broke, break it!” adage?
I agree with you that investments should not be taxed. Unfortunately, HR25 taxes both debt and investment instruments. (see section 801-806). Very bad idea!
Social engineering can be accomplished without using the internal revenue code. It has been done extensively ithrough farm price supports, subsidies for industry, etc. Under the fair tax, congress could still make grants to encourage poor people to have more children. Some would say the purpose is to assist needy kids.
Education could be encouraged by direct government grants to schools to lower tuition. Property taxes could be reduced by the federal government picking up a bigger share of the cost of operating schools. Roads and transportation improvements could be encouraged by increasing grants for those purposes. Don’t underestimate the creativity of congress in finding ways to spend money.
All that congress has to do is set an objective, devise a bill to accomplish the purpose, and determine the cost of the program. The beauty in this is that the value of the program can be determined by the people (through their elected officials) before the bill becomes law.
Just say this program will require an X % increase in the Fair tax rate. Wouldn’t it be nice to know the cost before making the committment?
“Social engineering can be accomplished without using the internal revenue code.”
I agree. One can imagine simple plan such as the following:
US BUDGET = $2.7 trillion
$300 billion goes to $100 per prescription
$300 billion goes to $300 per insurance claim
$600 billion goes to $8000 per senior
$300 billion goes to $2000 per senior and child
$600 billion goes to $1 per customer purchase payment of businesses in order to increase the effective minimum wage of each business
$600 billion to the rest of government
Notice that none of this budget is taxes! The government should not tax itself. Taxing oneself is an abomination.
just started readin this blog and i must say that dealing with the IRS is like dealing with the mob. I’d vote for anything that would balance the burden of taxes in this country. My bitch about the whole thing is the techniques that the IRS use to collect taxes is counterproductive to to what We The People are trying to achieve. I’m just a handyman and what they did ruined any chance of me being a homeowner a i figure they extorted about 30000 bucks out of me because i owed them 3300 bucks. Plus any equity in a home, so now at 50 years old after busting my ass all my life in construction, I’ve got nuthin and am about to go belly up. In my book that’s cruel and unusual punishment. But enough about my destiny, I want my children and grandchildren to live a better life than I. Just the stress it would remove from millions of Americans would probably be an an enormous Health benefit to this country that nobody has even thought of.