Kevin Geary on Why to Support the FairTax
January 21, 2008 · Filed under: Education
Reader Kevin Geary has made a run at presenting his reasons for supporting the FairTax, and why you should to.
30 Responses to “Kevin Geary on Why to Support the FairTax”
Seems to make the double argument, that you would get an increase in income and prices would remain the same. I say “seems” as he uses the phrase 100% of your paycheck, which is the case regardless of the size of the paycheck. I don’t like that terminology for that reason.
Actually that would only be correct it if you lived in a state with no income tax, or if your referring to 100% free of federal withholding. Anyway.. lingering thought...
He really needs to read this blog, but I doubt it would do him much good.
I just had a spirited conversation this weekend with a FairTax proponent. Sort of a Morph kind of guy - knowledgeable and polite. He made some good points on policy grounds that are not dependent on the exact rate.
I do have something to throw out for discussion, though, eiither on this thread or another. Boortz is claiming on his website that the FairTax will lead to a repatriation of $11 trillion dollars allegedly held by Americans overseas.
I’m too lazy to look this one up. Does anyone know where he gets these numbers? Are they anywhere close to being accurate? And who holds this dough — U.S. citizens, corporations, foreigners, etc.?
I suspect most of this is Eurodollars and the like, which are dollar demominated accounts used to conduct business overseas, mainly because so many goods and commodities (particularly oil) are sold in dollars, so dollar denominated accounts are needed to conduct business. Due to the weakness of the dollar, this might be changing, but it has nothing to do with tax policy.
In fact, all US citizens are required to pay income taxes on their worldwide incomes, regardless of whether that income is in dollars, Euros, yen or anything else. So it doesn’t really make sense to me why anyone would choose to hold dollars abroad if he’s trying to evade U.S. taxes. Why not just hold Euros? If you’re not going to report this to the US government in order to evade taxes, it really doesn’t matter much what currency you hold your stash in.
In addition, we’d be in big trouble if foreigners suddenly decided not to hold anymore US dollars. If all the dollars held abroad came back to America, it would cause the dollar to crash even further and cause incredible inflation.
Well, don’t mean to get too far off on a tangent here. I’m just trying to figure out who came up with this $11 trillion repatriating to America stuff.
Morphh,
It’s expected that states will follow suit with having a state sales tax only, no income tax. That’s why it’s stated that you’ll get 100% of your paycheck (no federal withholding and states following suit after they see how much better of a system it is).
Joshua:
Thanks so much for posting this.
Kevin,
I would suggest that there is a fifth group of Fairtax opponents for you to consider. I’ve read it, I understand it (better than most), I’m not a politician, and I certainly can’t game the system. I’m a retiree who files the standard form and has an effective tax rate of 11%. I can’t complain. I don’t support the Fairtax, and would be happy to send you my 24 reasons for why I don’t. And I’m not alone. Many thoughtful people see some basic flaws in the Fairtax plan.
A couple of nits re your article before we get to the clangers. First, the prebate is 23% of the poverty level for your family unit, not an amount equal to the poverty level as you wrote. Next, you need to clarify that used goods are goods for which the tax has already been paid. It’s misleading to say otherwise. And finally, there is nothing in HR25 that will repeal the 16th Amendment. Wisely, that issue has to be handled in a separate legislative action which requires a two thirds majority in both houses of Congress and ratification by three fourths of the States, a very lengthy and difficult process.
Now, lets talk about the price shown on the shelf. It may or may not include the tax. There is no mandate in HR25 requiring anything but a receipt at the cash register which shows the inclusive tax. Since state and local taxes will be added at the cash register, it’s entirely possible that the shelf price will be entirely pretax, and the register will do the rest.
Three points to consider. First, investments, as well as debt instruments, will be taxed under the provisions of HR25, Sec. 801-806. This little known fact could mean significant cost increases for credit card debt, and investors of all types.
Next, evasion may or may not be a big problem, but I think legal avoidance might be a larger issue. How many people will forgo a new car every year in order to avoid paying the tax? Might be quite a few. Better invest in an auto repair business??
As for embedded costs, two thirds of those costs can be attributed to employee payroll and income tax withholding. Unless you believe that workers will take a reduction in gross pay to their current net after withholding, there will be no way to reduce business costs by 22%. The best you can hope for is a 10% business cost reduction which leads to a 17% price increase after the 30% sales tax is added.
(1.00 x .9 x 1.3 = 1.17)
The biggest issue I have is with the claim that the 23% rate is revenue neutral. That issue is far from settled. It is only revenue neutral if you understand that 21% of the needed federal revenue is hidden in higher State and Local taxes, and the dubious concept of the federal government taxing itself? Not very simple or transparent, is it?
Governments can’t tax themselves into prosperity. Remember, governments don’t pay taxes, they just collect and spend tax revenue. All the studies done to date do not explain just where the money comes from to offset the government tax payments. And, in the end, it may also be found to be unconstitutional for the federal government to tax State and Local government operations. Our unique form of government consists of two sovereign powers, State and Federal, and it may be unconstitutional for one sovereign power to tax the other under the doctrine of intergovernmental tax immunity. So, ask yourself: “Who Pays?”
Hayden, Here is a link to Linder discussing this, although not very detailed. http://www.fairtax.org/site/PageServer?pagename=news_events_5
“The challenge of U.S. dollars being moved to offshore bank accounts in an effort to avoid paying taxes on capital gains and interest has grown to about $11 trillion (up from 1.3 trillion just a couple of years ago) and is growing by $800 billion per year, resulting in billions of dollars in lost tax revenue every year. Former Federal Reserve Chairman Alan Greenspan said that once the FairTax is passed it would take only months for that money to be repatriated back into U.S. banks where it could then be used to grow the economy.”
I think it misquotes him though.. I think they ment to say “up 1.3 trillion” not “up from 1.3 trillion” as Linder was saying 10 million a few years ago.
We as Fair Taxer supporters should put politics to aside to let our voices be heard by voters for Huckabee he is running on the Fair Tax. If we can make alot noise the more people will here about the fair tax. It will benefit ALL AMERICANS
So if $11 trillion comes back into the US in a few months, surely something has to go out of the US? Most of this money is owned by foreigners as a result of the longstanding US current account deficit, where the US has imported more than it exported.
So what are the foreign owners of trillions of repatriated US dollars going to get from the US?
Hank said in post #5
—–
And finally, there is nothing in HR25 that will repeal the 16th Amendment.
—–
However, Rep Linder plans to add a provision in the next session of congress to make the FairTax unlawful after 5 years if the 16th amendment hasn’t been repealed. This is to address the concern of many that we may end up with both the FairTax and an income tax.
—–
First, investments, as well as debt instruments, will be taxed under the provisions of HR25, Sec. 801-806. This little known fact could mean significant cost increases for credit card debt, and investors of all types.
—–
My understanding of this is only the part that represents the service charges associated with these is taxed.
—–
As for embedded costs, two thirds of those costs can be attributed to employee payroll and income tax withholding. Unless you believe that workers will take a reduction in gross pay to their current net after withholding, there will be no way to reduce business costs by 22%.
—–
Where do you get this information? I’ve shown you Dr. Jorgenson’s work where it looks clear to me he intended employees keep their taxes. It is also clear he did not include compliance cost savings.
I now have Dr. Jorgenson’s report to the AFFT and it’s the same as what I linked here with whole sections copied word for word and with the exception of the removal of the Flat Tax information. There are additional charts as well.
—–
It is only revenue neutral if you understand that 21% of the needed federal revenue is hidden in higher State and Local taxes, and the dubious concept of the federal government taxing itself?
—–
Where do you this idea that 21% of revenues come from higher state and local taxes?
We already discussed that on the federal level any FairTax the government pays comes right back next month.
dculling,
I wrote: And finally, there is nothing in HR25 that will repeal the 16th Amendment.
—–
Your response: However, Rep Linder plans to add a provision in the next session of congress to make the FairTax unlawful after 5 years if the 16th amendment hasn’t been repealed. This is to address the concern of many that we may end up with both the FairTax and an income tax.
My comment: It’s not clear to me that if HR25 passes into law, it will be implemented immediately and then repealed after five years if the 16th isn’t repealed, or if HR25 will be held in abeyance for five years while efforts to repeal the 16th proceed. In either case, that plan is dumber than dirt and Fairtax advocates better hope that Linder reconsiders! And, someone needs to explain to me just why so many folks are so paranoid about having two tax systems in place at the same time? Would the world come to an end if we adopted a consumption tax or VAT in addition to an income tax for just those with incomes over $100,000? Why are Fairtax advocates so willing to give the rich a huge break?
—–
I wrote: First, investments, as well as debt instruments, will be taxed under the provisions of HR25, Sec. 801-806. This little known fact could mean significant cost increases for credit card debt, and investors of all types.
—–
You responded: My understanding of this is only the part that represents the service charges associated with these is taxed.
My comment: Your understanding is incorrect. You are talking about explicit taxes, but HR25 also lays on an implicit tax. I beg you to read Section 801-806. If you still don’t get it, email me and I will send you a short paper I did on implicit taxes. (vanlinda@comcast.net)
—–
I wrote: As for embedded costs, two thirds of those costs can be attributed to employee payroll and income tax withholding. Unless you believe that workers will take a reduction in gross pay to their current net after withholding, there will be no way to reduce business costs by 22%.
—–
Your response: Where do you get this information? I’ve shown you Dr. Jorgenson’s work where it looks clear to me he intended employees keep their taxes. It is also clear he did not include compliance cost savings.
My comment: On the contrary, he did not assume employees would keep all their pay. Here is an extract from an AFFT paper on the Jorgenson study:
“An explanation of the 20 to 30 percent producer price drop from Jorgenson
In summarizing the findings of his research, Dale Jorgenson makes the following statement:
“Since producers would no longer pay taxes on profits or other forms of capital income under the national retail sales tax and workers would no longer pay taxes on wages, prices received by producers would fall by an average of twenty percent.” (page 3). He then goes on to say, “…in the long run producers’ prices would fall by almost thirty percent under the NRST [national retail sales tax]”.
To get his lowest prices, Jorgenson makes the assumption that workers will settle for their current, take-home pay in a post income-tax world. While unlikely, the least pay leads to the lowest prices. However, the real world likely sees people taking home their gross pay. More pay derives lower (not lowest) prices from the real world model. ”
—
I wrote: It is only revenue neutral if you understand that 21% of the needed federal revenue is hidden in higher State and Local taxes, and the dubious concept of the federal government taxing itself?
—–
Your response: Where do you this idea that 21% of revenues come from higher state and local taxes?
My comment: What I said was that 21% of revenues come from higher state and local taxes and from the federal government taxing itself. The source is the 2006 Kotlikoff/BHI rate study, where the Fairtax consumption base is $9355 billion and the government consumption is $2006 billion. That means that government share of consumption would be 21%. (2006/9355 = 21.4%). So, government share of taxes would also be 21%.
I’m holding off on commenting on your “government float” idea until I hear from the BHI experts.
Reply to Hank’s post #11
I think it is quite reasonable to worry about the possibility that once we have two tax systems we might not be able to get congress to give up that extraordinary power over us. This used to be a major objection of the opponents and now that a fix is proposed they are objecting to that. Just goes to show there’s no pleasing some people.
I think it’s safe to assume that the 5 year period begins after the FairTax goes into effect. This would give the FairTax a chance to prove itself with a sort of try it before you buy it plan. Personally I like the idea in that it will probably help sell the FairTax.
I’m lumping all charges associated with any debt or investment made with any financial intermediation service as a service charge because that’s what it is no matter what they call it; a charge or price for their services.
Whether these are explicit or implicit is irrelevant. It is also assumed that having to pay the FairTax on these will encourage many if not all of the implicit charges to be changed to explicit ones.
I object to how opponents try to use this to spin some kind of massive increase in payments for debts or investments. These financial intermediation services will also pass on the savings of embedded costs which for their sector of the economy is one of the highest at 25%. I suppose you’ll go right back to insisting that either they are “greedy” and won’t pass on the savings or insisting there is no where near those savings in the embedded costs.
Sure enough, there you go again. Take your Dr. Jorgenson quote and combine it with mine and what do you get?
“Finally, the income of the household sector is the sum of incomes from the supply of capital and labor services, interest payments from governments and the rest of the world, all net of taxes,
and transfers from the government.”
Seems clear to me “all net of taxes” means employees keep their taxes. Combining this quote with yours suggests employers are keeping their share of payroll taxes. In the worst case Dr. Jorgenson may have considered all payroll taxes as a tax cost of labor that producers would save.
Now I’ve brought this up before and apparently opponents are just ignoring it. Not surprising since so many arguments against the FairTax arise from this. There is a post at FreeRublic that is supposed to be from Dr. Jorgenson that is often used as the basis of opponents’ arguments. What they fail to say is in the very first reply Dr. Jorgenson, if it was from him, promotes his Efficient Taxation of Income plan for tax reform. On the one hand opponents claim that producers acting out of self-interest will not lower prices yet on the other hand they refuse to acknowledge the possibility that Dr. Jorgenson is human too and may be doing so as well.
You can’t have it both ways.
Initially, our current income tax system was meant to only target upper income individuals... but now it taxes everybody. If we left it in place, we would only repeat the whole process over again.
Having one flat consumption tax rate makes it so simple. For one, under the system, if congress wants to raise govt revenue - they have two simple choices... raise the tax rate or stimulate the economy. Obviously the second choice will have far more support from voters.
Also, congress would no longer be able to tinker with the tax system like they currently do... offering one group an advantage over another, and so on.
It’s obvious that materialism has taken over our society... it’s all about having the latest gadget or status symbol. And I think most of us could agree that materialism is a bad thing, as it relates to greed. FairTax is essentially a tax on materialism because the more you buy, the more you’re taxed. I have no problem with the idea of funding our government off of our societies’ greed for iPods, designer clothing, and impractical SUVs.
dculling,
With regard to the Jorgenson debate, here is the blog entry between “Rob from Georgia” and Dr. Jorgenson you refer to:
“Dear Dr. Jorgenson,
I am a private US citizen who is concerned that the FairTax proponents are misrepresenting your conclusions. Would you please comment on the attached letter I sent to Mr. Boortz and Rep. Linder? I think that they are being dishonest to imply that the wage earner will keep his entire paycheck, while at the same time businesses will be able to reduce costs? Your March 1996 testimony stated, in part:
5.Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart, would fall by an average of twenty percent
Are you expecting business to reap a benefit from the taxes that that the worker no longer pays? It certainly sounds like that is part of where you see the business reducing its costs.
Rob
Dr. Jorgenson responded:
Dear Rob,
A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers’ prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increase economic efficiency.
[He then went on to recommend his book called LIFTING THE BURDEN, about another tax reform plan he calls Efficient Taxation]
Best,
Dale
I wanted to be perfectly clear what he was saying, so I asked him to clarify his email:
At 06:41 PM 8/24/2005 -0400, you wrote:
Dr. Jorgenson,
Excuse me for my lack of understanding of your answer, when you say “workers would keep that after-tax pay” are you saying that if they are making $1000 a week now, and paying $200 payroll+income taxes now, that under the FairTax you were assuming that workers would get paid $800 and keep all of that? Or are you saying that you meant they would make $1000 under the FairTax?
Regards,
Rob xxx
Dr Jorgenson responded:
August 24
Dear Rob,
I am saying that the worker would continue to receive the after-tax amount of $800. Prices received by producers would decline to cover the cost of after-tax wages to workers and after-tax dividends and interest to investors. However, taxes paid at the retail level would include the Fair Tax.
Best,
Dale ”
I think it is impossible for anyone to read this exchange and not agree that Jorgenson included worker payroll and income taxes in his 22% study. Fairtax advocates are left with no rebuttal other than to question the validity of the blog exchange itself or question Jorgenson’s motives. Neither are particularly compelling arguments.
Until someone does a price impact study, I stand by my conclusion that, based on Jorgenson’s study, business costs may be reduced by 10% and retail prices will therefore rise by 17% on average.. I also agree that, because of increased income due to the recovery of tax withholding as well as the prebate, “real prices may be a wash for individuals. The argument I continue to make is that “real” prices for governments will increase significantly, and the 23% Fairtax rate is not really revenue neutral.
Hank,
I know it’s hard for you to accept, but I’ve shown you that Dr. Jorgenson contradicted himself. Do you think “all net of taxes” when listed as part of household income means something other than employees keeping their taxes?
It would be really tough on the opponents to accept that much of what they been saying is based off of misinformation. Your own comments are easy to find elsewhere on the internet.
I will NOT email the elderly Dr. Jorgenson and ask him to explain why he apparently contradicted himself.
Dculling,
And here all along I thought we had an economics problem. What we have is an english language problem. I’ll leave it to others more learned than I, but income net of taxes means income after paying taxes to me. Employees don’t get to keep their taxes as you suggest, but are used by businesses to reduce pretax costs as Jorgenson stated. I don’t see where he contradicted himself? You might want to rethink your position. And, no, I wouldn’t email him if you continue to believe that the good Dr. contradicted himself.
“Net of taxes” means after taxes, not that employees would keep their taxes. Dr. Jorgenson is not contradicting himself.
dculling,
I’ve had time to consider your suggestion that there really is no problem with the Federal government taxing itself, provided they simply borrow enough money to pay the first months taxes. You seem to believe that that tax money will come right back to the Treasury for use in the following months.
I’m sorry, but that can’t work! Look at it this way. We all pay taxes to fund the government. Up to now, only people paid taxes, but under the Fairtax, governments are to be treated as consumers and governments will pay the sales tax on the purchase of new goods and all services. Clever way to reduce the Fairtax rate from 29% to 23%, but it doesn’t add up.
Under the Fairtax plan, 82% of the cost to run the federal government comes from individual taxes paid on consumption. Of the remaining 18%, 55% comes from state and local taxes on consumption, and 45% from the federal government taxes paid on consumption. In dollar amounts, $2124B comes from private consumption taxes, $254B from State and local consumption taxes, and $209B from Federal consumption taxes. (You may notice that it adds up to more than the $2228 revenue neutral amount, because we haven’t paid for the prebate in this discussion.
Now, State and local governments can raise other taxes to pay the sales tax tab, but where does the federal government get the tax dollars from? You have suggested that the Treasurer simply borrow $17 billion (one month) to pay the bills, and somehow that tax money will return to the Treasurer’s other pocket to be reused the following month. No way that can work. The tax money was spent on soldiers, sailors, airmen and Marines as well as B-1 bombers, M-1 tanks, etc, etc. That $17billion isn’t coming back home to roost. The next month rolls around and the Treasurer would have to borrow another $17 billion, and so forth until at the end of the year, the national debt has risen by $207 billion.
Your plan is unworkable! And I still need an explanation as to “Who Pays?”
Dr. Jorgenson didn’t contradict himself. Net of taxes is the financial term used to designate amounts that appear in reports after taxes have been deducted from them. It means the same thing as after taxes. “All net of taxes” wasn’t listed as a separate item of household income, it was used to specify that the previously listed income sources were all “net of taxes”. The last component listed as part of household income was not.
His later reply that workers would continue to receive $800, their income after taxes, confirms what he originally meant:
Household income =
income from the supply of capital, net of taxes
plus
income from labor services, net of taxes
plus
interest payments from governments, net of taxes
plus
interest payments from the rest of the world, net of taxes
plus
transfers from the government.
Well I did ask for feedback at the bottom here:
http://www.fairtaxblog.com/20080116/lawrence-kotlikoff-why-the-fairtax-will-work/#comment-119703
Nice to finally get some.
Hank,
What your saying, basically, is that congress will spend the revenues from the FairTax on government consumption from the previous month on something other than paying the FairTax on the current month’s consumption? Well, they aren’t supposed too, but don’t expect me to promise they won’t give their proven insatiable appetites.
dculling,
I don’t know if we are getting any closer to an understanding or not. Yes, the government will be spending last months tax revenue on new goods and services. That is why we collect taxes- to fund government consumption. Basically under the Fairtax plan, individual consumption taxes pay for 82% of the federal tab, State and local pay for 10%, and the federal government is supposed to pick up the last 8%. That tax money is supposed to fund all federal government consumption. What is wrong with that? Why do you suggest it’s not supposed to work that way?
My question remains: Who really pays the federal government’s share? Governments can’t pay taxes, people pay taxes. Who pays? Or is it possible that the Fairtax is really not revenue neutral at 23%? If you think about it, it already isn’t revenue neutral because that rate won’t fund the $365 billion inventory tax credit, it won’t fund the federal tax bill of $209 billion, and it transferred the collection of 12% of the needed revenue to State and local governments which would in turn have to raise their taxes somehow to pay the federal tab.
And pushing this thought process out a little further, if you read the new BHI study on the Fairtax impact on state and local governments, you will find that BHI thinks state and local governments will “tax the tax”, or more specifically, they will tax the inclusive price of goods and services. Also, BHI shows that the States will tax federal consumption within each state border, which, at an average sales tax rate of 5+%, means the feds will owe an additional $50 billion annually to the States. Not only is this a serious constitutional issue, but now the federal government has to come up with even more money. Who pays?
Sooner or later, everyone is going to realize that taxing governments is a losing proposition. Isn’t it time to admit the Fairtax rate is really 29% inclusive, and end all of these constitutional and economic issues?
Hank,
I showed earlier why the federal government taxing itself makes no different mathematically (as far as the rate is concerned), except for the deficit. You might have missed it (I’ll try to determine which thread it is in if you want).
As far the inventory tax credit is concerned, let’s just assume it adds to the debt and that’s a bad thing to me. However, taxing all that inventory twice is much worse in my opinion.
As far as federal and state/local payment of the fair tax and any short fall, I see that coming down in one of the following three ways.
Case 1: All pre-tax prices fall by the full embedded tax. This means after the fair tax is applied, prices will be roughly the same. That means any product bought by the federal or local governments will cost roughly the same. The payroll/income taxes previously paid on behalf of the employees will be replaced by their new salaries times the fair tax. If the governments decided to pay the employees their pre-fair tax gross, that is bad management.
Case 2: Pre-tax prices stay exactly the same as they are today. That would equate to roughly a 30% inflation rate. While highly unlikely, the federal government would not have to a thing. Their revenue would adjust perfectly since their new tax base would be 30% higher. In other words, if everything costs 30% more, the tax on everything is 30% more. As far as the local governments are concerned, you are RIGHT. The products they buy will cost more so they will need to raise taxes (or cut spending. Good Luck.) I am assuming there employees will keep their pre-fair tax pay, since under this scenario, everyone else did.
Case 3: Somewhere in between cases 1 and 2. Re-read case 2, but replace 30% with x%.
Andrew,
By all means, please find your post that makes the case that taxing governments doesn’t affect the Fairtax rate. Because as near as I can tell, if you don’t add the $2 trillion in government consumption to the Fairtax base, the rate has to go up to 29%?
I have my own ideas about why government consumption was added in by the original authors of the Fairtax plan, but the fact that the rate is 6% lower seems obvious. The rationale given that taxing governments is necessary in order to prevent government competition with the private sector doesn’t wash. By untaxing all businesses, the playing field is then level, and taxing governments is certainly overkill of a non-problem.
I fail to understand why Fairtax supporters want to raise the cost of government. As I wrote earlier, you had a chance to lower the cost of government consumption by at least 10% by eliminating business embedded costs of the income tax. A balanced federal budget was in hand with absolutely no pain. Instead, the Fairtax plan hides 21% of the revenue neutral amount in higher state and local taxes and the dubious concept of the federal government taxing itself, and increases the cost of government consumption by more than 15%. Why is this such a good idea? And, who really pays the federal tax burden? Look in the mirror and you may find the answer.
Hank,
I couldn’t find the thread, but I found the simple math I used. Before I show it though, let me see if I can’t explain it in words. If you take the $2 trillion out of the tax base (which is in the denominator of the rate equation), you no longer need $2 trillion of government revenue (the numerator of the rate equation). You save $460 billion in tax cost, i.e. the government only needs $1,540 billion dollars of revenue. This of course assumes the 22% embedded tax is gone. Here it is mathematically:
Assume R[rate] = T[tax collected]/(T + D[deficit spending] + O[everything else in the consumption base]), or R=T/(T+D+O). I believe it’s suggested that the government no longer tax itself. Then you get R=T(1-R)/O which solving for R yields R=T/(T+O). I assumed the amount of tax collected needed to be reduced by the rate. Without the deficit, the two rates are equal.
On the point of a 10% reduction in the cost of government consumption, I never had such an option. Maybe (according to your calculations) we had a chance to let the government get a 10% discount on what they consume, but I can guarantee you (to 99.9% accuracy) that the government will immediately consume 11% more to make the cost of government consumption exactly what it was before (with the normal purchase of votes increases that occur under our current system).
I guess if there’s any question you could answer to help me see the light, it would be the following: If government no longer has to pay the fair tax, why do you assume they need the same revenue?
Andrew,
The answer to your question is “they don’t”. We may be saying basically the same thing–that is, if the Fairtax is adopted, and governments are exempt, they won’t need as much revenue. However, the first place where we differ is in the amount that might be saved. I believe that a 10% cost reduction is the best we can hope for. You suggest that a 22% saving is possible. What that implies is that all government workers at all levels would accept a significant cut in gross pay down to the current net after withholding amount. I just can’t buy into that notion. And, I’m not sure that anyone else here agrees with you? There are too many fairness and union contractual issues involved.
At a 10% savings, the federal government would reduce their costs by $91 billion. As for what to use the “windfall” for, there are too many possibilities. I mentioned paying down the annual federal budget deficit, although I tend to agree with you that any extra revenue seems to get spent. The windfall could also lower the needed 29% rate to 28%, it could be used to offset some of the $365 billion inventory tax credit revenue loss in year one, etc. etc. As for the state/local governments, they would save $110 billion and would have no trouble finding a use for the “windfall”. Instead of having to come up with an extra $280 billion to pay the Fairtax, they get a $110 billion cost reduction, a $380 billion swing. Might help to get state support for the repeal of the 16th Amendment??
Remember, the underlying issue is still “Who pays?”. I continue to look for some logic that explains just how governments can tax themselves into prosperity. People pay taxes, governments don’t pay taxes. The 23% rate is not revenue neutral unless you admit that 21% of the needed federal revenue is hidden in higher state and local taxes, and the dubious plan to have the federal government tax itself. Who really pays that tax?
Hank,
I think you misunderstood my question. It was in regard to the 29% rate you calculated. Using approximate numbers (assume in billions), 0.23 = (2,000)/(8,700). You then want to take out government taxing itself to yield 0.29 = (2,000)/(6,700). This calculation should be 0.23 = (1,540)/(6,700). If 8700 => 6700, then 2000 => 1540.
So based on this information, I’ll still ask: If government no longer has to pay the fair tax, why do you assume they need the same revenue?
The 10% vs. 22% reduction is a different issue than the federal government taxing itself. I categorize the 10% as the least we can expect (assuming 17% is based on labor and the 10% is what businesses will pass on). The market will force it. The 17% increase will most likely be lower based on businesses making decisions to pay employees less and general employee turnover.
I remember I once asked you if you work for gross or net and you stated gross. I then offer you this, for the same job you can get $200,000/year with a 50% tax or $150,000/year with a 0% tax. Your answer will determine whether you work for gross or net.
Andrew,
After a series of emails and phone calls with Larry Kotlikoff and Bill Gale, I am now convinced that you are right and I have been wrong. It seems that if you remove government consumption from the equation, you also need to reduce the revenue required, so the rate remains unchanged. As for the question about “who pays?”, the answer is no one pays. Any tax paid by the government goes right back to the government, so it’s a wash. However, in order for all this to be accurate, you have to overlook the 1/2 of 1% fee paid to the States and retailers who collect the tax, you have to assume there will be no evasion on government consumption, and you have to understand that states may tax government consumption within their borders if they adopt a Fairtax type system. That last one might actually raise the revenue required by the federal government by $50 billion annually. That would raise the revenue neutral rate by 1/2 a point. But, at this point, who’s counting?
As for prices, I see no reason to think that producer costs can drop by more than 10%, and retail prices will therefore rise by 17% on average.
Thanks for helping me understand the rate calculation.
Hayden,
try here
http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore.pdf
Briefing Paper
–
The Price of Offshore
Hank –
I somehow missed your post from Feb. 2. You said you had a series of phonecalls and emails with Gale and Kotlikoff.
Does Gale still believe the rate would need to be 50-60% on a tax-exclusive basis? Does Kotlikoff still believe the rate could be 31.25%?
I’m a little disappointed with Kotlikoff’s current writings on the FairTax (he did an op-ed piece in the Boston Globe last week) in which he essentially claims that the rich don’t pay much in taxes today but would under the FairTax.
His argument goes like this: The really rich make most of their money in capital gains and dividends, that are only taxed at a 15% rate. And they get out of the estate tax with a little tax planning. So they really don’t pay much today. But under the FairTax, they’d pay 23% tax on everything they spend, so the FairTax is really a way to tax wealth.
With all due respect to Kotlikoff, I found those arguments to be disingenuous at best. In the first place, conservatives routinedly complain that the rich currently pay too much in taxes, and show charts and graphs showing that the top 10% of taxpayers pay 60% of taxes (or whatever the number is), so to claim that the rich don’t pay much in taxes today is flat wrong.
Second, Kotlikoff ignores the fact that the rich spend relatively less on goods and services than do the poor and the middle class.
Third, Kotlikoff ignores the fact that only a portion of spending is actually taxed. As has been discussed ad nasueum on this board, with only a modicum of planning, one can spend a fortune under the FairTax without paying a dime in taxes. If the rich engage estate planning today to avoid the estate tax, imagine what sort of planning they will do to avoid the FairTax.
Fourth, although I’m not an estate attorney, I believe Kotlikoff has grossly overestimated how easy it is to avoid paying the estate tax. Yes, you can do a certain amount of planning to help pay the estate tax with life insurance and lower its effective rate with family partnerships and trusts, but once your net worth gets to be a certain level (currently several million dollars), you are essentially left with you choice of either paying the estate tax when you die or giving your money away instead. I sent Kotlikoff an email asking him why he thought the estate tax was so easy to avoid, and he wrote back saying that nobody really knows how much wealth is currently being taxed under the estate tax because no studies have been done. (Which, unless I misunderstood his response, I find somewhat hard to believe.)
Finally, if Kotlikoff believes that the rich currently do not pay enough in taxes, then the obvious solution is to adjust rates and close loopholes in our current system. After all, it wasn’t that long ago that dividends and capital gains were taxed at ordinary income rates. I’m not saying we should go back to those rates, but there seems to be some disconnect between Kotlikoff’s assertion that the rich don’t pay enough in taxes and the need to replace our tax system with the FairTax.