On Taxing Government Expenditures
From John Warr:
Can anyone explain how the federal government can generate revenue by imposing a tax upon itself? If revenue cannot be generated this way, why does HR 25 require the federal government to pay the tax on all its purchases and why are government and households employing domestic servants the only categories defined as “taxable employers” in the bill, requiring them to pay the tax on the wages and salaries of all employees and contractors, as a “purchase of services”?
My own quick answer:
1. I have never seen anyone suggest that the government can generate revenue by imposing a tax upon itself. In The FairTax Book Boortz and Linder explain that if you did not tax government purchases, then private organizations would be at an automatic disadvantage, required to pay higher prices than their public/government counterparts. And so purchases by private and government entities are taxed at the same rate.
2. I am not familiar with the “taxable employers” section and cannot comment on that. Perhaps James Kidd would care to comment on this portion of Mr. Warr’s question?
Perhaps others can offer further illumination too.
John — a former FairTax supporter — nailed it in his original post. (And Bruce Bartlett expands upon it in his podcast and William Gale opined on it in his analysis.) The only reason to tax government spending is to bring the rate lower, even if it is ony an illusion because now the government needs to spend more, and thus ultimately need to collect more tax revenue.
With regard to Joshua’s point:
1. I have heard this as a quick explanation by the FairTax folks, but it never made sense to me. Businesses are not taxed under the FairTax, so why would government get an unfair advantage if government is not taxed? Something does not sound right.
2. Government must pay taxes on it’s employees, for the same reason as above. To make the tax seem sound lower since the government employs so may employees. I don’t have a clue as to the domestic worker issue, though one must wonder how much of payments to domestic workers would actually be reported and paid to the government.
On #1: The federal government will still have an advantage. There is no way around it. Joshua, if you give me a dollar and I give myself a dollar, is that even?
For the sake of “fairness”? I didn’t understand that in “The Book”, either. In my conservative way of thinking, the only reason for a tax should be to provide revenue for the government.
For those unfamiliar with the particulars of HR 25, I highly recommend you go to thomas.loc.gov, search under Bill Number HR 25 and read TITLE II, SEC.2, DEFINITIONS, (a) 12 - TAXABLE EMPLOYER. In fact, I recommend you read the entire bill. You might find some other interesting tidbits also not fully covered in “The Book”. My answer to those supporters who are so fond of repeating Neal’s stock answer to critics that they obviously have not read “The Book”, is “Have you read THE BILL?”
Perhaps it’s just me, but I take personal exception to the taxable employer definitions. You see, I’m a retired federal agent, and a vet. In both of those positions, I was within one of two “taxable employee” categories, the other being “domestic servants”. That struck a nerve! Our brave military folks in Iraq and Afganistan, the cops and firemen who went into the Twin Towers as everyone else was rushing out - should never in any way, even in a tax bill, be equated with “domestic servants”. Like I said, maybe it’s just me and I’m being a little sensitive.
On the subject of governments, the bill also requires states and other subordinate governments to pay the tax on all purchases and employees’ salaries. This means your state, county, and municipal government would be required to raise funds to pay this tax - how and from whom would this extra tax money come?
That’s not the biggest problem. This requires a little history lesson. The concept of sovereignty is likely not being taught in our government schools nowadays. One of the basics in English common law, on which our system is based, is that one sovereign cannot demand tribute, i.e. tax, from another sovereign. More than a few wars have been fought over this concept. So far as I know, both the federal government and the state governments (including their subordinate political divisions) are separate sovereigns, and neither can impose a tax upon the other. I hope our nation has not “advanced” to the point where the states are merely a subordinate political division of an all-powerful federal state.
IF, the federal government cannot generate revenue by taxing itself, AND IF the federal government cannot generate revenue by taxing the state, county and local governments, how does that affect the computation of the proposed consumption tax rate? Still 23%?
Anyone care to dive in?
Regards and Merry Christmas, everyone.
John
Excellent post, John,
And if any of you are advocates of the Fairtax, the answers to John’s questions may trouble you a bit.
On this blog, (and others), there has been a lot of chatter recently about who pays, zero sum, revenue neutral, etc. Well, folks, we all can get a tax cut and the Fairtax could still be revenue neutral. And it isn’t the possible revenue from illegals and foreign visitors that makes that true. It is the brand new class of tax payers called governments! Today, governments don’t pay taxes directly, but, under the Fairtax they all will. Over 20% of the revenue neutral amount needed to fund the federal government is raised from governments. Welcome, governments, to the tax paying community??!
What will it cost governments to pay their share of the taxes? Assuming a net price increase of a minimum of 17%, the net annual cost to governments can be estimated at $220B for Federal, and $280B for State and Local. (details in my “Fairtax Impact on Governments” study. (vanlinda@comcast.net)
How will governments pay those added costs? Why, most likely in higher State and Local taxes, or perhaps lower services. So, 20% of the cost to fund the federal government is hidden in government taxes. Is that really a simple and transparent tax system? I don’t think so!
Now, the AFFT stated reason for taxing governments is to prevent competition with the private sector. Under current law, governments really do have a cost advantage over competing businesses who have to pay taxes. By eliminating business taxes, the private and public sector would be on relatively even terms, but the Fairtax goes further by adding a tax on governments. That will indeed ensure that governments won’t compete with the private sector. But there are some simple legislative means to do the same thing at far less risk . For instance, go to Thomas and call up HJR23. Forget who the sponsor is, Section 1 does the job.
Now, what is the risk? Taxing governments will increase State and local costs by a significant amount. That, in turn, increases the possibility that States won’t become “conforming” or “administering” states, but will become “see you in court” States. Portions of the Fairtax, by taxing governments, will likely be found unconstitutional by the Supreme Court under the doctrine of intergovernmental tax immunity. John is right about that!
So, what then? To finally answer John’s question about the revenue neutral rate, if, according to Kotlikoff/BHI the Fairtax consumption base is $9355B and the revenue needed is $2228B, removing the $2.009 B in government consumption would result in an inclusive rate of 30.3% (2228/7346) and an exclusive rate of 43.5% (2228/5118).
Add the Florida adjusted sales tax of 8% to 43.5% and the sales tax at the cash register would be over 50%. Damned if you do, damned if you don’t. Awesome!
In closing, think about an alternative national sales tax plan. No tax on governments, no exclusions, a targeted prebate just for those below the poverty level, leave payroll taxes for phase 2, and you can get rid of the complicated income tax codes and the hated, despised IRS, all for a national exclusive sales tax of 15%, phased in at 3% each year over five years. Such a deal!
Hank -
Thanks for the kind words. Yours also is a very excellent post. And your tax plan sounds like it has some potential.
In regard to the state and local governments paying tax to the feds, assuming that would ever actually happen, to paraphrase one of Neal Boortz favorite sayings about corporations, “Governments don’t pay taxes, people pay taxes.”
I can’t help but wonder where all the FairTax supporters are. No one is weighing in with their answers. Perhaps they are all busy combing through HR 25 (for the first time?). We can only hope.
Please SOMEBODY, ANYBODY tell me how the federal government can achieve revenue by taxing itself? I really would like to jump back on the FairTax express, but can’t without getting past this issue. Help me, please!
Kindest regards,
John
The federal government can not achieve additional revenue by taxing itself - it is a zero sum game. This is a strawman argument - we all agree here. However, contrary to Bartlett, increased federal government expenditure due to the FairTax is included in both the BHI and Beacon Hill studies.
So the question is - does it change the tax rate, and the answer is no if other variables are adjusted... but there lies the issue as other variables are not adjusted, which results in a higher rate. For example, the federal government taxes itself today - the FairTax doesn’t introduce anything new here. The current system is counting taxes the government would pay to itself by including matched payroll taxes of government employees, covering the corporate and payroll tax expenses of its contractors and their suppliers, and paying embedded tax costs under the current system. If all current self-taxation is removed, it should decrease the “revenue neutral” figure required to fund government. However, they don’t remove this and then expect the FairTax to untax government, and use the same revenue neutral figure (which includes self-taxation under the current system).
A similar level of taxation is required when shifting from taxing income to consumption in order to maintain the tax burden on government. Government needs to be taxed to keep a level playing field between government enterprises and private enterprises. Since government does not collect taxes on the services it performs, it uses taxable employer to assess a similar cost.
Morphh -
Thanks so much for your effort. I would modify your first sentence. The federal government can not achieve ANY revenue by taxing itself. After all, it prints the money. In fact, the bookkeeping chore would cost the government whatever it would take to administer this fruitless exercise. I will grant you that the government currently pays the embedded taxes, as do we all, included in everything it purchases. It’s just included in the price of goods.
I do not agree, however that the government taxes itself today. As Mr. Boortz has often said, and I agree, the “employer portion” of the payroll tax is money that would otherwise end up in the employee’s pocket, so in actuality, that money belongs to the employee and it, along with the “employee’s contribution”, i.e. “tax”, is withheld and sent to the government, even though it physically may not change hands.
It’s a question of ownership. The tax “paid” by the government “back to itself” is money that is transferred to the individual, then collected back by the government, even though the individual never sees it. Once ownership is conveyed, then the revenue back to the government becomes real, because something of real value is conveyed. The government is not paying a tax, the individual is, as is always the case. Bottom line, only people pay taxes, not corporations, not governments.
You lost me on your last paragraph. Maybe I’m just not bright enough to grasp it. It seems to me there may be a better way, legislatively, to control government competition with private business, assuming that is a major problem, than going through this non-productive exercise.
All I am asking from the FairTax folks is to tell me what percentage of sales tax I will have to pay in order to generate the same amount of REAL revenue that is currently being received by the federal government. No fair counting revenue that is not revenue from the federal government. And, no fair counting revenue to be received from state and local governments, since I think we all agree that could not and would not ever happen, unless we change our form of government.
Thanks again for trying. I admire your courage. Pardon me if I’m not convinced, yet. Feel free to expand - Please make it simple, because obviously, I’m not very bright.
Anyone else want to have a go at it?
Regards to all -
John
I’ve just gotta say... embedded taxes are a myth. You don’t hear this term outside of FairTax discussions.
[Ed: How on earth does that follow? Just because other people use different words for something doesn’t make it a myth. Google alone shows hundreds of thousands of examples — many of which contain no reference to the FairTax. –Joshua]
John, I believe I agree with your statement regarding the individual paying the tax. However, there is a transfer that is recorded as an expense to the government (to pay the employee to include taxes) and a receipt of government income from that same payment (the employee paying the tax). What is the difference between paying government employees gross income (which is tax free) or the same net income (that is tax). It is a wash as the expense is equal to the gain, but this does factor into revenue neutrality as the government has now just collected income (and then spent it). If you switch to a system that does not tax the government, you have to reduce the revenue neutral figure by that same amount. This does not happen in the examples discussed - they try to match revenue neutrality under the current system. So removing government taxation under the FairTax results in an increased rate as no adjustment is made to reduce the revenue neutrality figures for funding the government once you remove the current cost in paying itself.
For example. Current system pays employee $10, of which $2 goes to tax. The government uses the $2 to pay the employee. There is no difference between the government paying the employee $8 tax free or $10 with $2 income tax withheld ($8 net income). However, now the government has increased it’s revenue neutral figure by $2. It collected $2 in taxes, so the FairTax must now collect $2 to be revenue neutral. The argument is that the FairTax should not tax government, but still must collect the revenue neutral figure (which includes the $2). You see the problem... If you remove the tax the government paid to itself here, their would be no cost $0. The figure for what the FairTax would need to collect should decrease by $2.
The FairTax is not adding anything new. The current system already taxes itself and we need to continue to tax it. The FairTax just goes about it in a different way. I can’t tell you what it would be if you want to rewrite the legislation. This is the plan. If you change it, then your not discussing the FairTax anymore. It is what it is.. it taxes government. It may get challenged. There are tons of things with the current tax system that I think are unconstitutional, but the courts seem to uphold it. I’m not going to spend effort in discussing a what if the legislation looked like this progression.. perhaps someone with more time may go down this road.
Fred, that’s not true - the cost associated with taxation is discussed all the time in regard to the impact on domestic goods. Here is an article by Forbes in Forbes that discusses it.
Now, I’m not suggesting that the cost is 22% or that all the tax incidence falls into the price. I’m just saying there is a cost of our tax system that does impact the price.
Morphh -
Thanks again for the try. As we seem to be only discussing the taxes paid by federal employees, a much simpler fix involving only a one-time, not ongoing process would be to adjust all federal employees pay to their current take-home pay. Forget about taxing them on their salaries, which is what HR 25 attempts to do.
If you think HR 25 is written in stone, you’re mistaken. I’ve had a brief experience with watching legislation being made, up close. Not a pretty sight! Kinda like watching sausage being made. Believe me, if HR 25 makes it to Committee, it will be hacked up, torn apart and examined under a microscope by experts in the field, scholars, and every special interest group you can imagine, not just FT supporters. What emerges, if anything emerges, probably will not even resemble the draft of HR 25 which has been filed. Better to have it cleaned up going in.
Any comments on the taxing of the states and locals?
Thanks for your input.
John
I think you would be hard pressed to find a serious study (on op-ed by Forbes doesn’t count) on the incidence of the corporate income tax and payroll taxes that show they are borne by the consumer.
As evidence that “embedded taxes” are a myth spread by FairTax supporters lets go to Google. Searching for the term “embedded taxes” on US sites (.com, .gov, .org, .edu) returns 6,240 pages. Remove pages that have “FairTax” and “Fair Tax” from the search and you only get 994 pages. Remove pages with “Romney” (it seems he’s picked up on from the FairTaxers) and you only get 653. And quite a few of those appear to be discussing the FairTax in some way and none that I could find were serious discussions about the incidence of corporate and payroll taxes.
[Ed: Way to move the goal post. Why must anyone conduct a “serious study” of whether embedded taxes “are borne by the consumer”? Are taxes different from any other business expense which must result in higher prices if the company is to stay in business? You walk on thin ice, here, because your “myth” thing is starting to sound a lot like an ad hominem argument against FairTax supporters as such. Businesses started raising prices to offset taxes long before the FairTax was invented, and the fact that FairTaxers are talking about this phenomenon doesn’t make it a “myth.” –Joshua]
Taxing states and locals is a hideous idea. I wish they would remove that from the bill. Better to tack on another 3% to the rate than go down that messy road.
Morph, I follow your logic about the taxing federal government being a wash under the current system. But under fairtax, I am assuming everyone’s gross will still be their gross? So that $2 of income tax revenue in your example is now collected by the employee instead of the government. It is a windfall for the employee as he has more cash to spend. But it is no longer a wash because it is not being sent back to the government as tax revenue. So when the fairtax is applied on top of the employees wage that the government must pay, the government can’t grab that $2 because it belongs to the employee now. A new 30% fee must be levied against his wage. This new 30% fee was not accounted for in the Beacon Hill study as far as I know. Only the $2 fee you mentioned was accounted for, and that is being held by the employee as compensation. When you say the figure the fairtax should collect should drop by $2, you seem to be arguing for the employee taking a pay cut to his net pay. I thought we abandoned that hideous idea?
Kublikhan, I agree with you there - that’s why did not list it as a cost in my first discussion. I only stated matched payroll taxes of government employees, covering the corporate and payroll tax expenses of its contractors and their suppliers, and paying embedded tax costs under the current system. In the example, I tried to make it simple to understand and in doing so made it less accurate. Thanks for the catch.
I’m pretty sure the Beacon Hill Study did include the taxable employer costs as did William Gale. They referred to as “the mistake” in earlier studies.
Way to move the goal post. Why must anyone conduct a “serious study” of whether embedded taxes “are borne by the consumer”?
There have been studies on the incidence of the corporate income tax and payroll tax. The ones I have read had concluded that they are incident on labor and the holder of capital, not consumers.
Are taxes different from any other business expense which must result in higher prices if the company is to stay in business?
But most businesses that start don’t stay in business. They fail. Why is that? Because they can’t pass their costs on to the consumer (btw, the short answer to your question is taxes are not a cost of production). The market sets the price through supply and demand. If a business’ costs of production are above the market price, they’ll will lose money. If they do that long enough, they will leave the market (which, btw, should reduce the supply thus raising the market price - even though those still in the market have the same costs as before). If they do make a profit, then they pay taxes.
You walk on thin ice, here, because your “myth” thing is starting to sound a lot like an ad hominem argument against FairTax supporters as such.
Sorry if you took it that way. I’ll admit I do get a little frustrated. It seems “you forgot about the 22% embedded taxes” is the FairTax reply to any negative point. And there is no telling them otherwise.
Businesses started raising prices to offset taxes long before the FairTax was invented
Then there should be some empirical evidence that a past change business tax rates had some effect on prices. I think you would be hard pressed to find any.
the fact that FairTaxers are talking about this phenomenon doesn’t make it a “myth.”
Maybe “myth” was the wrong choice of words or I should have qualified it as “22% embedded taxes.” I’ll avoid putting things like that in the future.
One example would be the airline industry on Dec 31, 1995, where one of the taxes on the airline industry was still being debated and expired, so for a brief time, there was a drop in the taxes on the airline industry. The airlines tried to hold prices constant, to raise their profits, but as a competitive marketplace will do, someone decided to lower their prices to get more ticket buyers, and thus raise their profits above their competitors. This resulted in a lowering of prices in the airline industry, because the airlines didn’t have to pay the particular tax which had expired.
Even if we assumed for a moment that currently the tax incidence falls completely on the worker or shareholder, the removal of those taxes will be split. Employees will receive the gain of their gross income. Employers will receive the gain of their half of payroll, corporate taxes, and any compliance cost savings. The windfall gain of the business will result in a shift, which will likely result in lower prices. The incidence then logically discovered by what would happen when the tax burden was removed.
Taxes are a cost of production, along with the factors of production (labor, capital, and land). Taxes could actually be included as built into the factors of production. They are part of the labor, capital, and land cost. When you remove these taxes, you reduce the cost of labor for example. The figure for 22% embedded taxes (an average) is from a study by Dale Jorgenson. While FairTax proponents sometimes misrepresent his data to include both price drops and receiving gross income, Jorgenson stands by his research that this represents the tax burden build into products.
Hopefully you won’t mind a novice jumping in to ask a few questions concerning the embedded taxes. As a business owner who sets competitive pricing and runs a successful business, I have ALWAYS included the tax burdens at EVERY level, whatever they might be, into my final price to the customer. If I did not do that I would be out of business. The same way I use my expenses to calculate the profit margins, I need to maintain profitability and must somehow account for the cost of Taxes and include them in my pricing. Especially in a competitive economy when every penny counts, I absolutely must know exactly where the line is to ensure profitability. So to say there are no embedded tax costs seems ludicrous, or at least naive. I’m wondering if anyone has seen what was used to calculate the 22% embedded costs by AFFT? I know Hank says that the most he can find is 10%, when you count the employer portion of payroll taxes, but 10% seems to be a very low figure to me, considering the taxes on savings and investments, which many times, the dollars from those savings and investments are used as another profitability tool in many businesses. For instance the Insurance industry, which reinvests the money from it’s paying customers, and then uses those investment profits to pay out claims when needed. My understanding is that those investments are currently taxed, which in my world, those tax costs would absolutely be passed on as embedded costs, Under the Fair Tax those investment taxes would be gone, so in my thinking that would add to some percentage of an embedded cost. Am I missing something?
Dennis,
I, for one, welcome your “jumping in”, although I think you are far from a novice? (Or you may not be the Summerville Dennis, or the Dennis who was so active on this blog last summer. Hard to tell the players without a scorecard, isn’t it?),
Last things, first. You used an insurance company example where companies invest their net income and pay out claims from investment returns. If, as you say, those investment returns are taxable income, then the taxes are included as part of the embedded costs of the income tax system. Insurance companies have higher embedded costs than almost all other industry segments. Check it out on page 54 of the Boortz/Linder paperback. Notice that the service industry, which the insurance company is a part of, has among the highest embedded costs? Makes sense?
Now, as for the actual embedded costs, what I said was that the business portion includes income taxes, payroll tax share, and compliance costs. There are at least two ways to estimate the total embedded cost percentage:
(1) Assume the Jorgenson 22% is right, use the 2007 revenue data from the Kotlikoff/BHI study, which shows that individuals paid in $1536B in income/payroll taxes, and businesses paid in $726B in income and payroll taxes. Two thirds of the embedded costs can therefore be attributed to individuals and one third to businesses. If the 22% is right, than businesses can reduce costs by 7.3%, not including tax compliance costs.(Jorgenson didn’t include compliance costs in his study).
(2) Another way to get at business costs is to use the 2005 CBO estimates for federal revenue, which showed that business taxes were $284B, and the business share of payroll taxes was $402B. By removing profits of an average of 10% from the $10709B in total 2005 consumption, consumption costs were $9.7 Trillion. Therefore, in 2005, payroll taxes were 4.2% of business costs, and income taxes were 2.9% of costs for a total business cost estimate of 7.1%. Looks like Jorgenson was about right?
Compliance cost estimates are all over the lot, but if compliance costs are $265B as some say, then those costs can be estimated at 2.7% of total business costs. The average total embedded costs for the 20 million businesses is therefore either 9.8% (7.1+ 2.7 = 9.8%). Or, if you want to add the compliance cost estimate to the one third of Jorgenson’s 22%, you get 10%. (7.3 + 2.7 = 10%). Works for me.
Now, maybe you would be willing to provide some anecdotal data. You are a businessman, so maybe you could take your total costs from your tax return, and divide that number into both your total payroll tax share(7.65%) and income tax paid amount. Then, estimate just your federal tax compliance cost percentage. I suspect that may be difficult because you also have to keep books for state and local taxes as well as the SEC if applicable. I’d be interested in just what you determine your embedded costs are for federal taxes. And, no, I don’t work for the IRS. I’m just looking for a sanity check on the process I used.
Thanks!
Hank, that sounds about right to me. I was thinking about 10-13% (inclusive) myself.
I think Arduin, Laffer & Moore Econometrics estimated production costs would decrease by a minimum of 11.55%. Hank - One thing to consider in your calculation.. there is also an estimated 200 billion that is cost of making business decisions related to the current tax system. So that puts “compliance” closer to $450 - $500 billion.
Morphh,
Thanks for the reference. I now have a copy of the ALM study, and the way I read it, after admitting there are no good studies on the so called “making business decisions” costs, they seem to say that the total embedded costs range from 2%-5% of GDP, or from $200B minimum to $500B maximum. Using the mid point of $350B, the compliance costs would be 3.6% and total business embedded costs around 11% or pretty close to the 11.55% from their ALM study. So, I’d suggest that after tax prices will still rise by 14%-15%?
I’d also like to point out that the ALM study seems to ignore such consumer price increases, making their rosy conclusions somewhat suspect? Not sure about that one?
Hank, I personally think 2.7% compliance costs is way too high. $278 billion would be almost 4 million people, making $75,000 per year, working full-time on nothing but federal tax compliance. I just don’t find that likely.
The most recent work for the IRS on compliance costs is being done by IBM (they replaced Arthur D. Little whose methods were ridiculously simplistic). The latest from IBM I have seen on the subject is a paper from this summer, “Aggregate Estimates of Small Business Taxpayer Compliance Burden.” It estimated that for businesses under $10 million the time and money burden was 1-1.5% of receipts. And the burden gets less as a percentage of receipts the larger the company. Businesses between $1 million and $10 million had a estimated burden of only 0.3-0.5% of receipts.
I don’t think they’ve applied their model to large businesses, but I would be surprised if their burden was a larger percentage of receipts than small businesses.
Fred,
I agree with you completely. This is a murky area. However, as pointed out earlier. there is another element in compliance costs that is being called “business decision costs”??? I understand it covers lost efficiency costs from businesses sitting around trying to make business decisions involving income tax considerations. The studies I’ve seen seem to say that element of compliance costs could double the total compliance costs. And, after struggling through the IBM study, I’m not sure that those types of costs were included?
My 2.7% estimate is certainly conservative, and probable represents a floor, not a ceiling.
Thanks for the IBM study input–it’s a good one, and very informative. I’m hopeful that some of the business owners that participate on the various blogs might provide some anecdotal info as to what they believe their compliance costs really are? Nothing so far.
Dennis -
Welcome - from a fellow novice. Anyone out there is welcome to join. I would love to read new perspectives.
Morph & Kubli -
Thanks for trying to keep it simple for the rest of us.
Hopefully, we all can agree that the feds taxing states and locals is not only a hideous idea, but will never happen. If it does, I, for one will be looking for another place to live! This would not be the US I was born and raised in. States are still separate sovereigns from the federal government. Nether can levy a tax upon the other.
Let me see if I have this straight -
Because under the current system, the federal government taxes its employees, in order for the FairTax to be revenue neutral, it must continue to tax its employees (along with “domestic servants”, the other taxable category). I thought the “revenue neutral” term applied to total revenue, not broken down into separate categories of “revenue”.
Remember (and please prove me wrong), to paraphrase Boortz, governments and corporations do not pay tax, they collect tax. Individuals pay all the taxes. This is because individuals produce a unit of value. Governments and corporations administer. If government employees are taxed on their income, AND also pay a consumption tax on all they purchase, are they not being double taxed? Why should they (and “domestic servants”) be treated any differently than all other employees in the economy?
This applies also to government purchases. The cost of goods should go down if embedded taxes are removed. Therefore, since the government pays (or should pay) market price for all its purchases, the cost of government should go down, thereby reducing the amount of revenue required to pay for government.
If, as is commonly said, the federal government taxing the federal government is a “wash”, then why do it? If it is only a bookkeeping entry, it does not constitute a transfer anything of value AND it would have to cost the government something to administer this valueless transfer, thereby resulting in a net loss.
What say you?
Merry Christmas, Everyone and To All a Good Night.
John W.
Fred,
What I meant to say is that the projected 17% retail price increase is probably a floor, not a ceiling. Sorry, it was a late night post, I guess.
John W,
I also think taxing governments is a bad idea, but that’s the way HR25 is written. The stated reason is to head off government competition with the private sector, but perhaps lowering the final rate 6% was also a factor? By the way, HR25 also mandates that the burdened cost of government wages be taxed, which can be estimated at 150% of the unburdened cost.
You are correct that governments don’t pay taxes, people pay taxes. So, by treating governments as consumers rather than as businesses, paying the sales tax on new goods and all services (burdened payroll), will create a huge cost which I estimate at close to $500 billion annually. And you know who pays? All of us, in the form of higher state and local taxes, and a potentially higher Fairtax rate to account for federal added costs.
John, embedded costs can’t all be removed, unless you think all government employees will accept a huge gross pay cut. Do you want to be the first to inform the troops in Iraq that their gross pay just got cut by 25%? After tax costs to governments won’t be less, but will be much greater.
This thread seems to be playing out. If you folks will indulge me a bit longer - And I would hope we can hear from other FT supporters. They all seem to be content to let Morphh carry their water.
I would like to break this subject down into its elements.
Is there anyone who thinks that the federal government attempting to tax the state and local governments is a good idea?
Further, anyone who would argue for this proposition - Do you seriously think that such a proposal could ever get passed into law, considering all the state and local officials who be be opposed? Those folks are the grass roots of both political parties and wield considerable clout in the Congress and in the White House. The other special interest lobbyists are mere pikers compared to these folks.
Of course, there is the sovereignty problem, previously discussed.
Regards,
John
I don’t want to say that I support taxing state and local government. I haven’t really thought about this point very much or formed a strong opinion on if it is a good or bad idea. You make some very good points John - the sovereignty is an issue for me at least. Do federal excise taxes have this issue? Is the state exempt from fed gas tax for example? Would the VAT have this same issue, which has also been pushed by a good number of economists and legislators? I’m not being sarcastic.. I’m really asking a question as I don’t know. I’m not a lawyer and I’m not going to pretend to know about constitutional law. It seems what I think is constitutional and what the legislators and courts today think is constitutional, are two very different views.
BHI states “As for constitutional issues, any burden imposed by the FairTax on state and local government would not differ materially from the burden already imposed under current law.” However, I don’t think we’re really talking about burden here. It seems more about method. Where is our resident lawyer.. Hayden.
What I do like is having the government, at whatever level, on equal footing with private industry. I don’t want government to take over areas or compete unfairly with private industry. Perhaps a non compete legislation may be the thing to do but then I also have concerns with this approach. What if the state fills a need that no one has but then someone comes along and nails up a weak shingle and forces via non-compete law, a monopoly. I’ll give that sometimes government services can actually help the people of a community.
Maybe the legislation would account for such things... I’m thinking out loud here so forgive me.
Let me through out some of the proponent lines as not to disappoint and keep the discussion going... State and local government do incur some of the same burden of taxation under the current federal system that the Fed Gov incurs (described above - or one of these threads, loosing track now). To this thought, we would be giving the state a windfall gain if we untaxed them under the FairTax. One source on the point may be the BHI study “Taxing Sales Under the FairTax: What Rate Works?” There is a section on the “Effects on State and Local Government”.
If a person incurs a rather large medical bill for services rendered, and the persons insurance company pays its share of the bill, who pays for the 23% Fair Tax, the insurance company or the person who received services? The tax alone could be a substantial amount.