Hank Van Geison on the FairTax Calculator
Hank Van Geison forwards the following, from an e-mail he sent to AFFT’s Director of Communications, for comments or suggestions from other readers:
The calculator is easy to use and seems to be accurate for everyone, except for retirees, and that feature is supposed to be fixed soon?
However, when one gets to the very last page and tries to adjust the pretax price reduction assumptions, strange things occur. I would have expected that by raising or lowering the pre tax prices, the Fairtax effective rate and purchasing power would be adjusted accordingly. Imagine my confusion when, as I adjusted the pre tax price/cost reductions, the Fairtax numbers remained unchanged, and the income tax numbers changed drastically.
After working with the calculator for a while, it now seems clear that what the pre tax price reduction option really does is simply add “embedded taxes” to the income tax side. My effective tax rate went from the 11%, that it really is, to 20% with a 10% pretax price reduction, and 30% with a 22% pretax price reduction. This would seem to make little sense. Here’s why.
In the first place, there is no such thing as an “embedded tax”. There are embedded costs, and removing business tax costs to any degree should change business prices only, not individual taxes paid. There is not one dime in taxes currently that goes directly to the federal government from a retail transaction. The business tax costs were already paid by the business, and are included in the price of goods and services sold at retail. In effect we reimburse the business for taxes paid, but that should only affect prices, not individual effective tax rates.
My income effective tax rate is what it is. Reducing pretax costs should increase my purchasing power, and that should happen with either the income tax or the Fairtax.
The central issue is whether or not the embedded business costs of the income tax system should be counted in computing effective income tax rates? I vote no!
As for the embedded costs that are attributable to individual payroll and income tax withholding, if the calculator adds those taxes to the income tax side of the ledger, you are clearly double counting those taxes. They are already included in the income tax effective tax rate calculations, and they should not be added in again when using the calculator pretax price reduction option. I would suggest that the option arrow be limited to 10%-12% which is the commonly accepted limit of business embedded costs. At least it is, according to Jorgenson’s study. And I haven’t seen any other embedded cost studies surface as yet?
Thoughts?
From what you stated Hank, you sound correct. Embedded tax cost should be limited (exclude employee income & payroll taxes). I do think there should be some factoring for the other business costs and 10-12% sounds reasonable based on the studies that I’ve seen. If they allow more than this, then it should start to reduce the gross income figures under the FairTax simulation.
Thanks Morphh,
I appreciate your comments. Hasn’t anyone else on this excellent blog even tried the Calculator. I’d sure like to get a consensus about the problem before I get all snarled up with Houston. What is at stake here is that the current version portrays the current income tax in a very misleading light. I can understand a certain amount of bias by AFFT, but that is no excuse for the errors in the calculator program.
Try it, you won’t like it?
Hank, was your test done on the new AFFT FairTax calculator announced by e-mail on Dec. 18th, or was it the other one at www.fairtaxcalculator.org? Just wanted to clarify.
Morphh,
I’m using the new one, not the old.
And just for my clarification, I think that you agree that individual tax withholding should not play a part in the calculator option page, because that would be double counting. However, you did write that the business embedded costs should be a consideration. My question is just exactly what changes on the income tax side should a 10%-12% reduction in Fairtax pre tax costs make? It seems to me that the income tax side shouldn’t change, while the Fairtax side should adjust tax rates and purchasing power?
I haven’t heard anything back from AFFT, but I see the same option page is still in use?
I think the burden of corporate taxation and associated costs should be show as a burden of today’s system. I just don’t think it should be left out like it doesn’t exist or somehow doesn’t bear a burden on the tax payer. This is difficult as it intentionally hides the burden. Part of the difficultly is people think they only pay xx in tax because they don’t see the other taxes. I would list it as a line item.
I guess you could just list it as a removed cost in the FairTax side. However, it would seem if you were going to remove something, you should list it on the other as a burden. I guess it doesn’t matter either way so long as it is represented and is limited (not double counted).
Morphh,
How about listing it as reduced purchasing power on the income tax side, if it needs to be on that side at all?
That sounds reasonable. I guess that is essentially what a tax does - the reduction of purchasing power either via a decrease in income or an increase in consumption cost.