I’m still pondering your home ownership argument, but there really is no need to develop new arguments as to why the Fairtax is regressive. By any definition in any business dictionary, all sales taxes are regressive. What AFFT did was to claim that the prebate somehow changes that definition, and “voila”, sales taxes are now progressive according to the new AFFT definition which is based on consumption instead of income. But, you won’t find any support for that fairy tale in any economics books!

I never have bought into that argument. If anything, the Fairtax simply moves the point of regressivity from zero to the poverty level. The scheme is still regressive no matter how Fairtaxers scramble to redefine tax burdens.

If you still want to argue based on consumption, then your post does make sense, but assuming that federal tax burdens are based on consumption rather than income hasn’t been accepted by the experts, yet?

Inconvenient truth: Under the FairTax, some consumption is more equal than other consumption.

Specifically, homeowners (especially those with existing or used homes) enjoy housing consumption which is partially taxed and partially exempt from tax.

If homeownership were evenly distributed across incomes, one might be able to argue with a straight face that the FairTax is not regressive.

But homeownership is strongly correlated with income (and especially with lifetime income, which is more relevant than annual income which is often volatile).

Because homeowners enjoy untaxed housing consumption, homneowners enjoy lower effective FairTax rates than renters, and whenever a homeowner and a renter have equal consumption, the renter will pay more FairTax than the homeowner EVERY TIME.

Whenever a homeowner and a renter have equal spending, the renter will pay more FairTax than the homeowner, while enjoying less consumption than the homeowner.

Now that you are becoming an economic study “wonk”, let me try to help you understand my concern.

Go to the “What Rate Works?” study, turn to page 10, and look at table 5, line 7. It is entitled “Adjusted Tax Base (Inclusive of Tax) components. But the component numbers correlate closely with the 2007 NIPA numbers which form the Fairtax base. And, there is no tax contained in those numbers— BECAUSE THERE WAS NO FEDERAL SALES TAX IN 2007!!! If the sales tax of $2228 trillion was included, the adjusted tax base of $9355 would have had to be $11583, which it isn’t. The inclusive rate of 23.8% is really an exclusive rate, imho.

While you have this chart in front of you, look at the “Revenues to be Replaced” at the top. Can you see an entry of around $242 billion to offset the inclusion of the federal consumption of $913 billion below? No, you can’t because it isn’t there. The adjusted revenue is simply the amount raised in 2007 by the current income, payroll and estate/gift taxes. No adjustment for having the federal government tax itself. You have to add a revenue offset or remove the federal consumption, but you can’t do one without the other. Having the government tax itself raises no new revenue–it’s a wash. The Fairtax rate should have been 26.4%, no matter if federal consumption was taxed or not.

I eagerly await the responses to the email that Morphh is putting together–and the sooner the better

In fact, here is a link to all there studies BHI Studies on the FairTax

They include:
* A Comparison of the FairTax Base and Rate with Other Tax Reform Proposals
* A Distributional Analysis of Adopting the FairTax: A Comparison of the Current Tax System and the Fair Tax Plan
* The Economic Effects of the FairTax: Results from the BHI CGE Model
* The FairTax and Charitable Giving
* Tax Administration and Collection Costs: The FairTax vs. the Existing Federal Tax System
* Fiscal Federalism: The National FairTax and the States

I know that I had the BHI study at one time but I can’t find it now. Can you point to a link?

Come on into the mosh pit, the weather is just fine and so is the view, although a little murky at times?

Yes, you can assume that the 9355 is truly just base, because as Gale and Kotlikoff have assured me, there are no taxes included in the GDP. And the GDP data, as modified by BHI to account for education and other non taxable things, is the Fairtax base. The revenue is simply the amount of revenue that was collected in 2007 from income, payroll and gift/estate taxes. You seem to understand that revenue divided by the base creates an exclusive rate, so perhaps you can share in my confusion about the fact that BHI calculated an exclusive rate, (2228/9355 = 23.8%), labled it an inclusive rate and recalculated a new exclusive rate (2228/(9355-2228)=31.3%). That is how we got to the 23%/30% rates, which I still believe should be 23%/19%. There may be a logical explanation, but so far I can’t find it.

And you really ought to hope I’m right, because it would sure be easier to sell the 23% exclusive rate rather than 30%, wouldn’t it. And the cost of the prebate would drop significantly, And the impact on retail prices would lessen. And the impact on state and local governments would be less. And, etc. etc. etc.!

Unfortunately, I am not up on the nuts and bolts of the studies – at least nowhere near the level that you and Morphh are.

With this post, I am only trying to reconcile the high level math and logic fundamentals of the model with the rhetoric that criticizes it – two things that are not quite in line.

That said, I assume that the 9,355 is truly just base? It is not 7,127 base + 2,228 tax?

Oh no – I can feel myself being dragged into the mosh pit of study details

Here is why (in my opinion) the whole “tax inclusive” rate is nonsense. (My examples below assume that the FairTax rate will be 23/30%, which, as I’ve argued many times, is woefully low.)

1. The tax-inclusive rate was developed solely because the market-researchers and focus groups hired by AFFT (which made up the bulk of the “$20 million in research they and Boortz brag about) found that any tax rate above the mid-20′s would not be acceptable to the voting public. So AFFT quoted the FairTax rate as a “tax-inclusive” rate for the sole purpose of making the tax rate sound lower than it really is. It had nothing to do with making the rate comparable to the income tax rate.

2. People are familiar with current sales tax calculations on a tax-exlusive basis. Tax exclusive rates are used in every state in the nation that has a sales tax. Throwing in “tax-inclusive” rate just confuses people because not one person in a thousand know what tax-inclusive is, so they assume it is a tax-exclusive rate. Even columnists who should know better write about a “23 percent” tax rate without explaining (or, perhaps, even realizing) that they are talking about a tax-inclusive rate.

3. As Kotlikoff/BHI have conceded, the “tax-exclusive” rate will need to be added to the cost of goods and services, so the prices will go up by the tax’exclusive rate. So, it’s a little bit ridiculouse to say that the tax will be 23% of the price of goods and services that have risen by 30% because of the addition of the FairTax. It’s much more honest to simply say that the tax will be 30% on top of the price of the goods and services (in addition to state and local taxes, which are quoted in tax exclusive rates.)

4. To put it in perspective. Say a toaster costs $100 on a pre-tax basis. If a business owner goes into a store and purchases a toaster for his business, he will pay $100 for the toaster because it will be free of the FairTax. If a consumer goes into the same store and buys the same toaster for his own personal consumption, he will pay $130, because he will need to pay the FairTax. The consumer will realize that he is paying 30% more than the business owner. To tell that consumer that he is “only” paying a 23% tax-inclusive amount is totally disingenuous. He will know that he is paying 30%.

On the same vein, the whole concept that “the FairTax is progressive as to spending” is equally misleading. I suppose the Stamp Act was progressive as to spending as well. So were the consumption taxes in pre-French Revolution times in France. Regardless of semantics, when the government shifts the tax burden onto the poor and middle class, they will not be happy.

I realize we are never going to agree on this, but instead of playing hide-the-ball with semantics I would really like to see FairTax proponents just admit that the tax burden on the middle class will increase under the FairTax and try to argue that the economic benefits (or whatever) of a consumption-based tax will make up for the shift in the tax burden.

Nice explanation-crystal clear!!

Now, please explain to me why, when BHI divided the Fairtax base into the revenue neutral amount (T/B), they called the rate an inclusive rate? ( 2228/9355=23.8%) Using your equations, that 23.8% would be an exclusive rate. The inclusive rate would be 2228/(9355+2228) = 19.4%. What’s wrong with this picture?