Remaining Questions from John Warr
I’m bumping this extended comment, from “On Taxing Government Expenditures Part II,” to start a new thread.
Wow! Sounds like most of us are on the same page in this discussion. Please indulge me in the two-part final major problem I have with the FairTax.
These are overall “federal government taxing federal government”, divided into 1.) Federal government purchase of goods and purchase of services of contractors, and 2.) Federal government wages/salaries paid to employees.
Concerning government purchase of goods and services, theoretically the government will be paying market price for those, competing with other businesses for those goods and services. The private businesses, for the most part will not pay the FairTax, as they are not the ultimate consumer, so the playing field would essentially be even.
I believe the “fairness” argument is not valid for this reason and because, in my humble opinion, the tax code should not be used to perform any function other than to raise necessary revenue. Again, my opinion - Attempting to affect other functions in the society and the economy in general with the tax code is what has led us to this train wreck of a code which certainly creates more problems than it solves.
Very simply (which is the only way I know how!) - If I, being the government, have $1 in in one pocket, take it out and put it in another pocket, am I any richer? In fact, I am poorer because I have had to expend a certain amount of measurable energy to move that dollar bill. If this is true, then what is accomplished for the federal government to participate in the exercise?
Point 2. - The taxing of the federal government on the salaries of its employees, or, in other words, the taxing of the salaries of federal employees.
If we adopt the wording of HR 25, that the government is a “taxable employer”, adopting the notion that the government will pay itself a tax on all salaries, then the argument posted above in Part 1 would apply.
If, as I believe it is true that governments (or corporations), do not in fact pay taxes, but either collect or administer taxes, the employees actually pay the tax on their wages - assuming that the other class of “taxable employee”, the “domestic servants” are removed from the bill - they would be the only employees in the economy still paying an income tax. The reason I say this is, if these taxes were not imposed, the salaries of the employees, in a free and open market, would increase by that amount.
Since federal employees would also pay the FairTax, would they not be taxed twice, while all others in the nation are only taxed once under the FairTax? The government is competing with all other employers in the economy for labor and talent, and at some point will have to pay market price. While this may not immediately occur when a consumption tax is passed, the labor market, when allowed to operate freely over time will settle out at a fair market rate for government employees.
If, as I believe, 1.) The federal government cannot raise revenue by taxing itself, 2.) The taxing of household domestic servants is unworkable, cannot raise any significant revenue, and is just plain a bad idea, and 3.) The taxing of state and local governments could theoretically raise federal revenue, it also is a bad idea and would never happen - Then, why were these provisions placed in this very cleverly crafted bit of legislation?
You may have your answer, but I, just being suspicious by nature, have to believe these provisions were placed in the bill in order to keep the proposed sales/consumption tax rate at what most of the public would consider a reasonable rate.
I (and it’s just me) believe this is the “Achilles Heel” of the FairTax plan. I believe that a less ambitious consumption tax plan, perhaps just replacing the income tax and death tax, along the lines proposed by Hank in Post 4 of the Part I of On Taxing Government Expenditures thread may have some real merit. I would propose calling it the “Fair And Honest Tax” FAHT, for short. Then again maybe not - sounds too much like a fat tax.
I believe it is way too ambitious to try to fund the Social Security ponzi scheme and the runaway Medicare fiasco with any new tax plan. Those programs need to be fixed separately. Continuing to attempt to fund them will lead us to bankruptcy. The baby boomers are coming!
For you “True Believers” out there - Don’t blame me. I’m just following the advice of the High Priest of the Church of the Painful Truth, Neal Boortz. He often exhorts his listeners to “Not believe anything you hear on this program, or read in my program notes unless you have independently verified it from another reliable source, because I will flat-out lie to you.” That’s all I did - researched the bill and came to my own conclusions. You should try it!
Have at it! Regards,
John
John,
The issue of the Fairtax treating governments as consumers, and requiring governments to pay the tax on all new goods and all services, is one of the most complicated and difficult issues around. Here is another attempt to shed some light, not heat, on the issue.
For review, there are an infinite number of variations of the relationship between wages and prices under the Fairtax. However, at the two extremes, I would suggest that (1) all gross wages would immediately fall to the current net after withholding, and, depending on market forces, prices may also fall as the cost of the income tax is eliminated; and (2) at the other extreme, workers will keep their whole paycheck (gross pay) and prices will increase as needed to pay the national sales tax while still preserving reasonable profits.
The first option seems to create difficult problems such as the legality of reducing pay for workers under real or implied contracts; the issue of minimum wage workers taking a pay cut in the amount of their FICA payments (7.65%); the unfairness of reducing workers pay by the amount of income tax withholding when everyone withholds by a different amount depending on their particular circumstances; and the very knotty issue of reducing government employee’s pay. (I’ll come back to that).
Elsewhere on this blog, there seemed to be an emerging concensus that the most likely outcome would be that workers would keep their gross pay, businesses would be able to lower costs somewhat due to eliminating business taxes, and prices would rise to pay for the net increase in after tax costs. Estimates made by participants of that price increase were pretty close to 15%. However, there are no “official” price studies to rely on.
However, in recent weeks, I became aware that the spokesmen for AFFT seem to have chosen the path of most resistance, namely a pay cut and a price decrease. This is clear in the Chairmans letter to the WSJ, comments made by Boortz/Linder at the Gingrich affair last summer, and some comments made to me recently by the AFFT Director of Communications. Perhaps this would be a good time to remember that the Fairtax plan was created by businessmen for business men. So, ask yourself, if you ran a business, which would you rather have; (1) an immediate and major reduction in costs from eliminating business taxes and keeping your employee’s income tax withholding amounts, and then reducing your prices as the market forces dictate; or, (2) a smaller reduction in costs by eliminating business taxes but giving your employees their gross pay, and raising your prices in order to send the tax receipts off to the State collection agency. I believe that the first option would be preferred by every business, but certainly not the employees. Imposing a significant pay cut along with a promise that businesses will lower their retail prices is not going to be an easy sell.
If that is really the AFFT preferred position, here is how that will impact governments. Using the Chairman’s 20% cost reduction figure, that means that the cost to the government of purchased goods would rise by 4%. (1.00 x .8 x 1.3 = 1.04). Using data from the Kotlikoff/BHI study, that means that the increased costs to governments at all levels for new goods would be $51 B.
Now, the issue of taxing government payrolls is much more complicated. There are two possible outcomes. (1) governments do not reduce employee pay, (why should they?) and (2) governments follow the private sector lead and reduce government payrolls by the amount of income tax and payroll tax withholding. In the first case, the cost impact, including the government share of FICA savings would be $277B. In the second case, the added net cost would be $222B.
My prior estimates of an almost half a trillion cost impact on governments would be cut almost in half, mostly due to savings on the cost of purchased goods. The impact is still significant, and no adjustments for the added government costs are currently included in the revenue neutral Fairtax rate of 23%.
Final comment. I believe that AFFT has chosen a very difficult marketing strategy. It would have been far easier to just assume an employee take home pay increase and let businesses worry about what happens to prices. Such is not the case! Stay tuned!
Hank -
Thanks for your very well-researched response. You certainly did provide light to my heat. My emotion stems from having been an avid FairTax supporter. but upon doing a little research and determining for myself (namely, the government taxing government thing, which neither Boortz nor the AFFT folks seemed to want to discuss), I felt that I had been misled.
BTW, I would be interested in any response you received from the AFFT Communications Director to your email of 12/26, concerning the Chairman’s assertions that prices would fall under the FairTax.
As I told my local FairTax group about two years ago at the final meeting I attended, I cannot go out and try to recruit people into a movement I no longer believe in. Thank you, Mr. Huckabee, for surfacing the FairTax as a national issue. This has certainly generated more interest and discussion of the issue than anything previously - Sorry, Neal.
The promotion of the FairTax has taken on an almost religious fervor, at least down here in Florida, with rallies becoming akin to revival meetings. I suppose I am viewed by those “true believers” as a “heretic” due to my questioning of some of the assertions in “The Book”. I think the more wide spread discussion of the proposal will generate more questioning by supporters (at least those who are willing to think for themselves).
As I mentioned in one email to Boortz, beware of the peasants with pitchforks, once they figure this out. So many folks are so emotionally invested in the FairTax movement, that once they begin to believe they have been misled, they will turn that emotion against the promoters. It may not be very pretty.
Concerning wages and prices, I think there are too many moving parts to accurately predict what would happen under a consumption tax. It seems fairly obvious that a tax law cannot wipe out contracts between private entities. There would have to be a transition period, possibly quite lengthily, because in both government and private business, not only are employers and employees involved, but unions and legislators. It could take years for the labor market to reach equilibrium. For at least the last 30 years, the federal government has been trying unsuccessfully to design a pay system which would equate government employees’ wages and benefits to private industry. The more they try, the more complicated it gets.
Again, I believe that the basic problem with the FairTax is that it is way too ambitious, attempting to replace essentially all federal government taxes. A more targeted approach, eliminating the income and death taxes, replacing them with a consumption tax, might address the majority of concerns most of us have with the current tax code.
Unfortunately, when the FairTax fails, it will probably destroy any chance for consideration of an alternate consumption tax plan.
Whatever mechanism is in place to fund Social Security and Medicare is doomed to failure unless the programs are repaired. There will simply be too many recipients and too few workers (or, taxpayers) supporting these programs. We are rapidly moving in that direction.
Again, thanks and I appreciate the work you are doing.
Regards,
John
John,
I am in agreement with you. The truth is we need major change; however, we must change carefully or we may be in even greater chaos.
We need a tax like the fair tax but it must be fair and not favor business/Corporations.
We need less Federal government and more business-like use of our tax money which is provided from a tax.
We need institutions that can regulate themselves and not become corrupted by short term plans and greed (heath insurance, mortgage banks).
When greed is the dominating creed, more Gov regulation is required to protect us from ourselves.
Perhaps our present laws/penalties against the high riders and inside traders both inside and outside of government need to be updated to make these crimes against our economy, national integrity, and culture of freedom seen as crimes of treason, against our national security.
As the dollar falls and world prices of goods increase, we should all wonder what happened or was left undone to bring us to this place in history?
A true fair tax could be part of the answer.
We just need to assemble men/women of inegrety to create a true fair tax.
Within this mission the interlinking issues of SS, MC, Mciad must also be healed.