Why income is irrelevant in a consumption based tax
Often, the taxes paid in a consumption model like the FairTax are indexed against income in an attempt to convert it back to an income model. With this conversion in place, it is then argued that consumption taxation is unfair because the taxes paid are more than likely going to be a smaller percentage of income as income increases. At first blush, this seems to be the case. But this argument relies on the idea that income is wealth. Of course, in an income model income is wealth. But the FairTax is a consumption model.
If we are speaking in the context of taxes, then I would hold that wealth is what is taxed. With an income tax, income is wealth. With a consumption tax, consumption is wealth. Given this, with a consumption tax, the wealthy are those that spend a lot, not those that earn a lot. What a person earns becomes irrelevant. Here’s how.
In a previous post, the following three taxpayers were used as an example:
Person A, income $30,000, consumption $25,000
Person B, income $60,000, consumption $55,000
Person C, income $500,000, consumption $80,000
The argument is, with the FairTax, person C is making out like a bandit because he is only paying taxes on 6.25% of his income while A and B are paying taxes on 83% and 92% of their incomes respectively.
But this argument is having its cake and eating it too. It assumes that there is value derived from the unspent money. In other words, person C gets to keep 93.75% of his income to “enjoy” while persons A and B only get to keep 17% and 8% of their incomes to “enjoy” respectively. But, if they are not allowed to spend the money from the remainders of their incomes, how exactly are any of them going to “enjoy” it?
Remember, the FairTax does not have a reporting period like the current income tax. Currently, after you pay your taxes, the liability is over and the remainder is free and clear to do with what you want. Given this, it may be easy to forget that the FairTax does not work this way.
Under the FairTax, person C does not pay his tax on $80,000 of consumption this year and then have free reign to the remaining $420,000 next year. In fact, if we enforce the assumption of this argument - that being that person C consumed $80,000 of the $500,000 that he made this year - then what we are saying is the remaining $420,000 will never be touched by him ever again. He will literally die with that $420,000 from this year’s earnings still in the bank if the only taxes he paid on it were $80,000 of consumption.
So if person C’s $420,000 is off the table, so is person B’s $5,000 and person A’s $5,000. And, what we are left with is not a $30,000 person, a $60,000 person and a $500,000 person. Instead, we are left with a $25,000 person, a $55,000 person and an $80,000 person. In other words, their wealth is defined not by their income, but by their consumption.
In this case, their consumption lined up in the same order as their income (ie, person A made and spent the least and person C made and spent the most). And, thanks to the FairTax prebate, the tax rate on each person increased as their base increased. That is, person C payed a higher rate on his $80k than person A paid on his $25k. So we have a progressive tax in place which should make everyone happy.
Now, what if person C only spent $40,000? Then he falls in the middle of the wealth order and person B jumps to the top. Person B becomes wealthier because he is living in a nicer house and driving nicer cars. Even though his income was only 12% of person C’s income, person B actually ends up being wealthier in a consumption model because the remainder of the income, by the definition of the argument, is gone. Income, in this scenario, was irrelevant. In fact, in a consumption model, it is always irrelevant.
As soon as you identify how much someone spent - you have already defined their wealth in a consumption model. It doesn’t matter what they earned because by defining their consumption, you have already removed their access to the remainder of their income for life.
Just to be sure I understand this model, let me add Person D to the revised wealth rankings. Person D earns $55000 and spends $60000. His wealth isn’t spent on a nicer house, car, vacations; it’s spent on medical bills.
Person D is borrowing against future consumption dollars to pay for todays needs. Does he vault to the top of the revised wealth list?
In a consumption model in which income is always irrelevant, how does one account for personal “deficit spending” when defining wealth?
Ellen, I think there are two answers for this depending on the source of the deficit spending - savings or debt. If it is savings, then yes - the person jumps to third in the wealth list (not the top, since C consumed $80,000). If it is debt, I would suggest that the wealth is consumed over the period of time the debt is repaid. For example, purchasing a home for $200,000 does not instantly make me wealthier by $200,000. My wealth is based on $200,000 over 30 years of spending.
Neither an income or consumption model care what the expenditure is in defining wealth (medical, vacation, etc) - you either earned it or consumed it.
When you have a problem in the nation with ever-increasing wealth inequality, what do you do? Simple! Change the definition of wealth!
You see, poor people are wealthier than we think they are because they spend more than they make! And rich people are poorer than we think they are because they spend far less than they make! Voila! No more income inequality! Woo-Hoooooo!
Oops.
Small problem with this model.
By spending more than they make - which they must do to survive in an era of ever-rising prices and stagnating wages - poor people pile up debt, incurring not only the costs of what they originally spent, but interest costs as well. In otherwords, they must PAY interest on what they spend on credit.
By spending less than they make, rich people have money which is free to generate more wealth. In other words, they can EARN interest on what they DON’T spend.
So the poor person PAYS interest - thus putting a further burden on his meager income - while a rich person EARNS interest - thus adding to his already high income.
That’s where the model breaks down. Wealth is not - CAN NOT - be measured by consumption, because consumption on credit is not the same as consumption by cash. Consumption on credit adds to the cost of the consumable good or service through interest payments, placing an even higher burden on the income of the working poor. This, under your model, makes them seem even wealthier, because they’re spending more - but in reality, they’re spiraling towards bankruptcy.
(This, by the way, makes the FairTax even more pernicious, because as I understand it - and please correct me if I’m wrong, but it seems I’ve read this on this blog - interest payments on debt ARE taxable under the FairTax.)
On the other end of the scale, if you take $1 million and put it in a savings account paying 5% interest, it will generate $50,000 a year without your having to lift a finger. You can live on the $50,000, and never touch the $1 million principal, so it will continue to generate $50,000 a year into perpetuity.
So, to sum up, consumption in excess of income does NOT make one wealthier, it consumes wealth. Whereas consumption below income allows the unspent income to generate wealth.
Which brings us back to square one. Wealth is income. Period.
Bill,
You often throw around terms like stagnating wages. Here is an excerpt from a cato op/ed (http://www.cato.org/pub_display.php?pub_id=8797):” The critics have it all wrong: The middle class isn’t disappearing — it’s moving up. The Census reports that the share of U.S. households earning $35,000 to $75,000 a year (in ‘06 dollars) — roughly, the middle class — has indeed shrunk slightly over the last decade, from 34 percent to 33 percent. But so, too, has the share earning less than $35,000 — from 40 percent to 37 percent. It’s the share of households earning more than $75,000 that’s jumped — from 26 percent to 30 percent.” I believe the constant 2006 dollars are based on core inflation, i.e. not including fuel (directly, but everything is affected by fuel) and food. However, I still think this contradicts generalities like “stagnating wages.” Is there some source for this claim, so I can understand the difference? Maybe you’re using a different time period like two decades or two years.
Personally, I only have a problem with wealth inequality if those with the wealth gain it through coercion. And I am not saying that they don’t (although mostly it would be with the help of the same authority you trust to properly redistribute the wealth). Do you have an example of a country with less wealth inequality that has a higher standard of living? Like Sweden maybe. Do you also have some reasoning on how this smaller inequality leads to the higher standard of living? I might be able to come up with some counter examples. Of course, I’d have to know how you define this inequality. Is it something like the percent of wealth held by the top 50% of country compared to the bottom 50%, or top 20% to the bottom 20%?
Bill, much of what you said was just a rant on class and had little to do with taxation. Sounded like a lot of hate the rich because they can make money on their savings, which happens in either situation (income or consumption).
If someone poor is incurring debt (which I argue is most often lifestyle choices, rather than survival as you claim), they must pay interest on what they spend on credit in either situation (income tax or consumption). Their spiral toward bankruptcy has little to do with the tax system. The FairTax has the lowest burden on the poor - full income purchasing power is maintained, perhaps even increased. Even if you did assume the prebate is income and not a refund of tax paid, you would still have the original purchasing power of your income (as if you paid no tax on your original income).
The FairTax does tax interest above the basic rate as a financial transaction, but the current system taxes all interest, since income used to pay the interest is taxed. I’m not sure what makes the FairTax “pernicious” since you would pay less tax on the same interest. In addition, studies of the FairTax at Boston University and Rice University suggest (in part due to the non-taxing of savings), the FairTax will bring long-term interest rates down by as much as one third, greatly decreasing the interest burden overall.
You example for $1 million can happen again under either situation. The issue is when the $1 million is taxed. If you tax it before, you hurt the economy, increase interest rates, reduce the persons ability to earn a retirement, which all hurts the poor struggling for survival (much more than a non-tax burden on interest). Those working toward some form of retirement make out much better when they can earn interest on non-taxed savings.
Bill, let me also restate from my post #2. Deficit spending from debt is not immediate wealth. You are correct to say that “consumption in excess of income does NOT make one wealthier”. Debt pushes the spending (and likewise the income) into the future. So while the consumption is immediate, we’re describing future spending or future income.
Andrew:
My data on income inequality comes from the website inequality.org, which in turn gets their statistics from a wide variety of sources. Go to their web site, click on the “by the numbers” link, and you will find all the data and the sources for it.
Let’s start with the numbers from 1979-2005. In real dollars, the bottom quintile lost ground, seeing their real incomes drop by 1% over that period. The next two quintiles saw modest gains, of 9% and 15% respectively, but some economists - most notably Paul Krugman (who I’m sure you trust about as much as I trust the Cato Institute) - maintain that this is because most families in the 1970s had single breadwinners, while today both adults in many households work. The top quintile saw a boost of 81% in their incomes.
As for an example of a country with less inequality having a higher standard of living, yes, I can name one: The United States, from 1947-1970. I have to leave the computer now, so I’ll elaborate on that and get to the other points later.
Morph,
I take it you don’t fully agree with the statement in the originating post that income is always irrelevant in a consumption model. That’s consistent with economic reality: consumption requires income from some source. The FairTax prebate wasn’t proposed just to hand out money. It was in recognition of the fact that low income consumers would be hurt without it.
I disagree with your statement that the poor who incur debt do so most often because of lifestyle choices. The ability to incur debt for todays spending requires sufficient future income potential for repayment of that debt. I would agree that some middle class consumers incur unsustainable debt due to lifestyle choices while others incur it due to unforseen events (job loss, medical conditions). In either case, a consumption model that considers income irrelevant is not a reliable indicator of consumer economic health.
Bill,
The real inequality is between the class of individuals that can defer there tax burden to others and those who can’t. Taxing income makes it posible to defer taxes, while taxing consumption removes this advantage. I can understand why a business owner who understands this may be against the Fair Tax, because most if not all of their tax burden is being paid by their customers. It’s a short-sighted view but I can understand it. The Fair Tax will do far more for those on the lower end of economic spectrum than anything that can be done to modify the current income tax.
Bill, I’ve been to inequality.com before. It is a popular site for liberal and progressive politicians who want propaganda to spout in an attempt to win on emotion rather than fact. All that aside, last time I tried the “by the numbers” link, I was bounced to one of the numerous paid advertising sites set up to look like a search engine home page. While I admit I haven’t been there lately, I question the validity of their sources, especially given the fact that the conclusions they draw could hardly be described as objective. As with any attempt at opposition research, it is best to rely on the original concrete source rather than an agenda-driven compilation of such data.
Brad
Bradley:
I probably won’t get to the substance of the arguments in this and the previous post (re-defining regressive) until tomorrow, as I’ve got a lot on my plate today, but I do want to address your comments about inequality.org.
If you go to the site today, as I did a couple of minutes ago, you shouldn’t get bounced to an ad by clicking on the “by the number” link. It took me directly to the stats page.
Here is a list of their sources, as shown by clickable links to all their information:
U.S. Census Bureau
Congressional Budget Office
Thomas Piketty and Emmanuel Saez
Economic Policy Institute
Federal Reserve Board
Bureau of Economic Analysis
Beyond that, for now I’ll only say that I agree with Ellen: “Consumption requires income from some source,” and, I would add, so does taxation.
I’ll expand on this thought tomorrow.
Bill, I suppose they have fixed the link since last time I went there. Regardless, judging by the editorial content, it is easy to discern that their veiwpoint at that site is decidedly Marxist in ideology. As pointed out by some far wiser than I, numbers can be cherrypicked to justify a predetermined goal. This happens often on either end of the political spectrum, so I’m not lopsidedly pointing fingers.
The figures I used in my original illustration of effective tax rates under the FairTax are not arbitrary or subjective. They simply are what they are. By presupposing, as you seem to have done in your response, that the money the rich guy has left will never be spent (thus not subject to tax) you have commited a logical fallacy. That money, regardless of what percentage of his income it represents or indeed whether HE is the one that spends it, will be spent and taxed. As Hank has pointed out, if he invests it at a higher rate of return than basic interest, some portion will be taxed. If it goes into a simple savings account, it increases the amount that financial institution has to lend out. Entrepreneurs, whom you admire, will borrow it and spend it (thus be taxed on either the principle or interest) to start businesses which will employ more people who will then consume and be taxed, et cetera, ad infinitum, ad nauseum. None of this changes the fact that, under the FairTax, ceteris paribus, the more you spend, the higher your effective tax rate. This is the exact opposite of regressive, and it is wholly unproductive to pretend otherwise.
Brad
I haven’t been closely following this thread–been more interested in determining if the Fairtax rate was miscalculated or not. But, unproductive or not, here is my oft repeated view on whether or not the Fairtax is regressive or progressive.
Any dictionary will define a regressive tax as falling more heavily on those with lower incomes. Sales taxes are usually described as regressive. The first attempt by AFFT to soften that perception was to add in the prebate, and then try to call the Fairtax progressive. But that argument ran aground when it became clear that the prebate only moved the point of regressivity from zero income to the poverty level, although the AFFT definition of the poverty level is quite different from that used by HHS it seems–30% different it turns out? So much for poverty?
The latest attempt to ease the pain of the Fairtax on the poor was to redefine progressive/regressive. By switching from income to consumption, it seems that the Fairtax is certainly progressive. The more you spend, the higher tax you pay. Sounds great, and I wonder why the states, who have employed sales taxes as their rightful and exclusive means of raising revenue, didn’t think of this clever redefinition?
Well, add this redefinition to several other changes that will be required in the thinking and beliefs of the American public if they are to accept the Fairtax, including: (1) Used means tax previously paid; (2) Sales taxes are inclusive; (3) the prebate is a tax refund; (4) governments can tax themselves into prosperity; (5) Prices will remain about the same; (6) the 23% rate is revenue neutral; and (7) Investments are not taxed.
I’m sorry, but I’m too old to reprogram my personal internal computer, so I will just hang in and watch with interest to see if the Fairtax has had it’s 15 minutes, or if you really can fool all of the people all of the time?
Hank said:
“Any dictionary will define a regressive tax as falling more heavily on those with lower incomes. ”
But when I look, the four biggest dictionaries that I know of use my definition:
Webster
3 : decreasing in rate as the base increases (a regressive tax)
Dictionary.com
3.(of tax) decreasing proportionately with an increase in the tax base.
Wikipedia
A regressive tax is a tax imposed so that the effective tax rate decreases as the amount to which the rate is applied increases.
American Heritage
3. Decreasing proportionately as the amount taxed increases: a regressive tax.
Make no mistake about it, these are the mainstream definitions. Those who spin otherwise are trying to change the definition because they want any tax to ultimately be framed as an income tax.
Hank:
I was not pointing that last sentence of #14 specifically at you but at the popluar tendancy to call the FairTax regressive.
But you are absolutely right about it being a big task to get people to understand that the concept of wealth is different. I think part of the problem is several generations raised with the idea that the tax code is a weapon for class warfare.
If you take away the income, you unload the gun. The tax then becomes impotent for that purpose.
Its not unlike pictures we see of children in the streets of countries with state sponsored terrorism, holding guns and rocket launchers. What you grow up with becomes ingrained in the culture.
To me, that’s all the more reason to pull the rug out from under it sooner than later.
Mark,
Investopedia defines regressive taxes as: “A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.”
Britannica says a regressive tax: “imposes a smaller burden (relative to resources) on those who are wealthier;”
Investorwords.com says a regressive tax is: A tax that takes a larger percentage of the income of low-income people than of high-income people.
Mike Moffatt at About.com: “A tax on income in which the proportion of tax paid relative to income decreases as income increases.”
Mr Moffatt went on to write that the Fairtax has a prebate to make the tax “less regressive”.. Note he didn’t say it made the Fairtax progressive, just less regressive, and I would have to agree with that.
I’m not trying to frame the question in any particular way, just trying to be accurate when describing the Fairtax. And I, along with 300 million Americans, believe that a sales tax is fundamentally regressive.
It might be interesting to start another thread about your suggestion that the tax code is a weapon for class warfare. I certainly don’t see it that way at all. Just read your 1040 if it’s handy. Under adjustments to income, you will find: educator expenses, health savings account deduction, moving expenses, alimony, IRA deductions, student loan interest deductions, and tuition and fees deduction, among others. These deductions are available to everyone, rich or poor, black or white, etc, etc., so, just exactly what class warfare is at work here?
Look at page 2 on the 1040. Setting aside the standard deduction and exemptions, read the list of tax credits which include: child and dependent care, elderly and disabled credits, education, residential energy credits, foreign tax credits, child tax credit, retirement savings contributions credit, and others. Again, who is making war on whom?
I’ve lived under the income tax all my life, and I think the tax code is an effective way to make citizens lives easier or better. (Don’t die laughing!) It’s easy to demagogue the IRS/IRC, but the fact is that almost half of Americans pay no income tax. 66,000 pages sounds terrible, but in fact, most taxpayers do just fine with the 140 page 1040 instruction booklet, or the even simpler ten page 1040EZ instructions. What I’m getting at is just how might Fairtax advocates plan to implement legislation that might accomplish the same goals as listed above. Tax deductions and credits are great motivators, and, while it might be called social engineering or even class warfare, what is the alternative? (I suspect I know the Libertarian answer, so you don’t have to treat this question as anything more than rhetorical in nature)
Hank
Hank,
You are right almost half of Americans pay no income tax but it’s not the half you are talking about. In reality, it’s those that can defer their tax liability to others that are not paying any taxes. Everyone lives on take home pay in one form or another. For example, the bar owner that derives 100% of his income from the profits of his bar will adjust his profit margin to allow his take home pay to be enough to support his family. If his personal tax burden is increased he must raise the prices to patrons to maintain his ability to support his family. He’s not an evil person, it’s just the way the current system works. What is called taxable profit is not real profit. The only taxes that the bar owner is actually paying is those defered upon him when he makes a purchase with his real profit. Under the Fair Tax only real profit will exist, increasing the owners buying power and allowing for lower prices to his patrons.
Still pulling my stats together, and may not get to post today before I got o work at two. Some of the things being said here really require a comprehensive and well-sourced answer.
I, of course, agree with Hank on the definition of “regressive,” and the fact that FairTaxers are trying to re-define it. And I’ll say this once again: The only thing that matters, especially to the working poor, is whether or not they have more money than month... that is, whether they earn enough to pay the bills, but food on the table, and keep a roof over their heads.
We can debate the academic meaning of “regressive tax” and “wealth” all day. But in the real world, those definitions are meaningless. It’s what you earn vs. what living costs you that matters.
I agree with your last statements Bill. I think you’re the only person suggesting that the poor would be hurt by the FairTax. Every study that has come out, even those used by opponents (like the tax panel hybrid NST, which doesn’t replace the regressive payroll tax) say that it would have a lower burden on the poor.
Morphh,
Make that two persons that think the poor might be hurt by the Fairtax. Having my tax stuff handy, I just did a back of the envelope effective tax rate and purchasing power comparison for some very poor family units. For instance, take a single working person making $10,000 gross. Income and payroll tax in 2007 is $890, offset by $196 EITC for a net payment to the government of $694. This would leave $9306 in purchasing power.
The same person under the Fairtax would receive a $2392 prebate for a total spendable income of $12,392. The sales tax would be $2850, leaving $9542 in purchasing power, $236 more than under current law. So far, so good?
Now add one child to the family unit. Under current law, there would be no income tax, just $765 payroll tax and that would be offset by a $2853 refundable EITC credit, leaving a net payment from the government of $2088, and purchasing power of $12088.
Under the Fairtax, the prebate would increase to $3220 resulting in spendable income of $13220. The sales tax would be $3040, and purchasing power would be $10,180, almost $2000 less than purchasing power under current law. If you were a poor widower trying to raise a kid, which would you prefer?
Yeah, yeah, I know. You will want to argue about just how much of the $10,000 is untaxed spending under the Fairtax. All that stuff about controlling when and how much tax you pay. But I keep reminding folks that there are no “used” rental units, no used services, no used groceries, etc., etc., etc. So, are the poor really better off. It’s certainly debatable imho.
Hank,
Assuming your numbers are correct, then what you are looking at is a tweak of the prebate amount. This is not a characteristic of the consumption model itself only an adjustment in its implementation.
Take $2,000 out of the marriage bonus allowance and add it to this prebate class. Problem solved.
Aside from that - if we look at your FairTax side of the scenario - what happened to all that corporate tax that she is paying in consumption today? It seems to me that in your scenario, she is still paying it in her consumption and she is also paying it in her sales tax.
Hank, your model assumes that there is no burden on the poor by the other 7.5% payroll tax on wages or the 35% tax on corporate income. We both know this is not the case. You’re making an indirect comparison, apples to oranges, since you’ve effectively removed 1/3 of the tax burden from one side. You could either add the estimated burden to the current system or reduce the burden on the FairTax side by the estimated amount.
Hank,
I got a bit confused by your math. I think it might have to do with adding the prebate dollars to the income dollars. If you do that, don’t you have to treat the total as tax inclusive? Using your second example, it seems to me the $13,220 total spendable income breaks down to $10,748 in purchasing power and $2472 in tax paid. I assume the FairTax rate you’re using is 23% : 10748 * 1.23% = 13220. It’s not that big a difference in dollars. Correct me if I’m off base.
I don’t see how some families could maintain their purchasing power under the FairTax. The universal application of the prebate and the inane “marriage bonus”, as Mark has labeled it- love that!, both seem created to try to replicate specific features of the income tax system. But the prebate doesn’t address the loss of income tax credits that gave some families enough spending to get close to the poverty levels. The assumption is they will make up those initial losses given enough time. Time is what politicians won’t have and quick fixes don’t usually work well long term.
I don’t believe there is data available to support a significant increase in purchasing power due to the elimination of corporate taxes or employer payroll tax contributions. If that happens, we’ll see a corresponding reduction in prebate amounts across the board.
Ellen,
I think the difference is that you probably did not tax the prebate amount when spent? My approach was simply to treat the prebate as an income supplement, add it to the paycheck, and spend it all at the inclusive 23% tax rate. No matter what everyone wants to call it, it is still income to be saved or spent and taxed as desired.
Morphh/Mark,
In a way, you are correct. I was trying to oversimplify the analysis by simply deducting taxes from gross pay to get purchasing power. What you are suggesting is much more complicated because now we have to get into the retail price impact of the Fairtax, for which there are no authoritative studies as far as I know. So, here is another cut at purchasing power based on several price scenarios.
First for review, my poor widower/divorcee with full custody of one child under the income tax starts with $10,000 pay, loses $765 to payroll taxes, pays no income tax, and gets a refundable EITC credit of $2853 for a net increase in spending power to $12088. Retail prices remain where they are.
Under the Fairtax, this family unit gets the full paycheck of $10,000, a $3220 prebate for a total income of $13220. If producer costs do not fall at all, then retail prices rise by 30% (with full monetary accommodation) and purchasing power is reduced to $9254. If producer costs fall 10% (my estimate), then retail prices will rise by 17% and purchasing power will fall to $10,972. If producer costs fall by 11.55% (ALM estimate), then retail prices will rise by 15% and purchasing power will fall to $11237. (I don’t want to go any further because then we would be asking employees to take a reduced paycheck if producer costs fall more than 11.55%.)
Please notice that in all scenarios, purchasing power is less than under the income tax. So, it seems that Fairtax advocates better hope that there aren’t too many young widowers or divorcees around?? We could go on and look at other family units, but I’d like to first know if you agree with the mechanics of this little exercise?
Hank, this may decrease your FairTax argument regarding the poor not paying for SS, looks like (in this small case anyway) we’re already handing out welfare through the tax code.
Hank,
Sorry, but I still need clarification on your math. The $3220 prebate pays the tax due on spending up to the $14,000 poverty line. When you add the prebate to the $14,000 spending, you have a total tax inclusive spending number: $17220 * .187% = $3220 for tax; $14,000 purchasing power. Using your sample family: $13220 * .187% = $2472 tax; $10,748 purchasing power.
A sanity check:
When the sample family spends its wage income, the tax will be $2300. That leaves $920 of the $3220 prebate to be spent. Of that $920, $172 will go to tax leaving $748 for goods. Purchasing power is $10,748.
Morphh,
You are absolutely correct. There are around one million workers under current law that pay no net federal tax. That is, they can reduce their income tax liability to near zero through deductions, exemptions and credits, and then completely offset their payroll tax amount by qualifying for the refundable EITC and Additional Child Care credits.
My argument is that under the Fairtax, that one million workers grows to thirty million as best I can estimate. You and all Fairtax advocates are fond of saying that the prebate untaxes the poor. My question is–How many poor families are we talking about? I say it’s 30 million, but I would welcome any input that might increase or decrease that number. My data source was the 2004 IRS data, which, after removing retirees, and using the Fairtax version of “poverty”, left me with 30 million workers paying no tax, sometimes for a lifetime.
Is this the kind of country you all have in mind? Boortz called it a “mommy state”, and he could be right.
Ellen,
I wasn’t talking about a family that earned $14,000, just $10,000. Look, just consider this example in terms of the persons checkbook. Income of $10,000 is deposited, as well as the $3220 prebate checks. Total in is $13,220, and if you assume it will all be spent on taxable goods and services, then the tax would amount to $3040, and the purchasing power would be $10180. Oversimplified as I later pointed out, but I still think you are trying to make the prebate a tax refund, which it really isn’t. It is an income supplement pure and simple, to be saved or spent and taxed depending on your economic situation. Just look in your checkbook!
Hank, I think your 30 million number may be correct but I don’t think it is workers. I think that is 30 million in poverty total (including children, non-workers, retired, etc), which when grouped by household, is much less. Using the U.S. Census (which puts it at 36,950,000 for 2005 / 12.6% of the population), the household figure was 7,657,000.
Morphh,
Thanks for checking in. I started with 135 million tax returns in 2004, determined that 50 million had incomes at or below the Fairtax version of poverty, and subtracted 20 million retirees. Certainly not exact, but I would submit that my results had nothing to do with children or the US Census definition of poverty. However, any help in getting a handle on the Fairtax claim that it “untaxes the poor” is appreciated. How many are we talking about? Inquiring minds want to know!
Sorry I’m running behind the discussion, but my on-line time has been limited the last few days by work, taking advantage of some decent weather to do yard work, and the fact that my brother and I share the computer. I’ll jump in on the “untaxes the poor” debate the next time I get on-line and my reasoning about why the FairTax hurts the poor.
But let me respond to previous comments and criticism first.
Andrew directed me to a Cato Institute article which he says refutes my claim that wages are stagnating. I read the entire article, which actually deals with trade policy, and IMHO is full of holes, but I’ll deal with the specific section Andrew pointed out.
The article uses median household income as the measure, which is fine, but doesn’t get at the whole picture. That’s because most household income from 1946 through the 1960s came from a single breadwinner. Now multiple members of the household must work to keep the median income rising.
That’s borne out by the Census Bureau’s 2006 income, poverty and health insurance report (http://www.census.gov/prod/2007pubs/p60-233.pdf). The table on page 6 of the report shows that median individual incomes for both men and women have fallen for the third year in a row, by 1.1% for men and 1.2 percent for women. Even the median household gains are deceptive, since the entire gain came before 2000. Median household income has been rising, but is still down 2.1 percent over 1999 levels.
It’s also borne out by the poverty statistics themselves. Look at the poverty rates for families on page 14 of the report. The overall poverty level for families was 9.8% in 2006. For married couple families, the poverty rate was only 4.9%, well below the overall rate. For male-headed families with no wife, the rate was 13.2%. And for female-headed families with no husband, the rate was 28.3%.
These statistics are the basis for my comment that wages are stagnant. But I also base that comment on a more immediate source: my own paycheck. I earned $3,000 less in 2007 than I did in 2006, simply because my employer cut 45 minutes off of each of my workdays.
Some more quick points for Andrew: I consider the measure of income inequality to be the wealth held by the top 10% vs. that held by the bottom 90%. When the top 10% hold more than 50% of the wealth, you’ve got a problem, because it means the wealth earned by individuals at the top of the scale is not going back into the economy in the form of wages for the bottom 90%.
How does inequality affect standard of living? The answer should be self-evident. If a high percentage of a population’s wealth is concentrated among a low percentage of that population, only that low percentage enjoys an elevated standard of living. The more evenly distributed wealth is among the population, the more people enjoy a good standard of living.
That sounds Marxist, but it’s not. Marx advocated a utopian system in which wealth is distributed perfectly evenly. I realize that’s not a workable system.
My belief is twofold:
(1) Everyone who is willing to work should earn a living wage.
(2) The rich and corporations, because they benefit from living and doing business in the free society maintained by the U.S. government, should pay their fair share of the cost of running that government. I don’t think 35% of their income/profits is too much to ask.
Of course, you’re free to disagree. But don’t call my thinking in this regard radical, Marxist, or an indication that I “hate the rich.” This same philosophy is held by business leaders like Costco’s James Senegal and billionaire investors like Warren Buffett. I don’t think you’d call either of them Marxist.
Bradley:
I agree with you that the unspent income of the rich does not just sit idly in a vault somewhere. But the logical fallacy is yours when you say that all of it is ultimately going to spent and taxed.
That’s because, as FairTaxers are fond of pointing out, all taxes are ultimately paid by individuals.
Let’s say Person A deposits $100,000 in a savings account. The bank loans $20,000 of that to Person B to buy a new car, and $4,600 in FairTax is paid on the car. Technically, part of Person A’s money paid the tax. But Person A himself didn’t pay the tax. Person B did. If Person A wants to withdraw his $100,000 from the bank, he can. Person B, on the other hand, has to pay back the $20,000, plus interest (which will also be taxed). As soon as the money passed out of the bank into Person B’s hands, it ceased to be counted as Person A’s income and started to be counted as Person B’s income. None of the tax liability for the purchase of the car comes back to Person A, even though his money technically helped pay for it.
And just as all taxes are ultimately taxes on individuals, so too are all taxes ultimately taxes on income. Money, as the old cliche goes, doesn’t grow on trees. Every penny, nickel, dime, quarter and dollar in your pocket came from somewhere — either from wages you earned, a Social Security check you received, interest on your savings, a pension check, a welfare payment from the government, unemployment insurance, a loan from a bank, a line of credit, the balance on your credit card, or even your Prebate check under the FairTax. It’s all income.
Without income from some source, you’d be living under a bridge, stealing clothes off clotheslines and rummaging through dumpsters for food.
Without income from some source, you can’t buy anything. And without income from some source, you can’t pay a consumption tax on the stuff you buy.
Every tax — be it an income tax, property tax, or consumption tax — is ultimately paid with income. And therefore, every tax — even a consumption tax — is a tax on income. Maintaining otherwise is either naive or intellectually dishonest.
Bill,
Here is the antidote to your idea that every tax is an income tax because it has to be paid for with income:
The way I see it, government’s only essential function is to care for an economy. If a government does not have an economy, it cannot exist. There are other things a government can do - but it is not well advised for it to do anything else until it has first made sure that the economy that supports it is running.
At the same time, the economy has several essential costs and one of those is the government. Without the government, the economy couldn’t stand. So aside from making payments for labor, materials and overhead, the economy also needs to pay for the government. The functions from the government that are essential to the economy’s existence are national security, domestic security and civil and criminal justice.
In other words, in order for any business to make its product, it has to be protected from criminals outside and inside the country and it has to have a body to enforce contracts and mediate disputes.
The bottomline is that the government’s force allows the economy to operate and it is the economy’s operation that pays for the government’s force.
By this model, the amount of government needed (for these essential functions) is proportional to the size of the economy. The more products, the more government needed. The less products, the less government needed.
So, the cost of any product you buy is the sum of labor, material, overhead, government and profit.
Therefore, the amount of product you buy is proportional to the amount of labor you consume, the amount of material you consume, the amount of overhead you consume, the amount of government you consume and the amount of profit you provide to start the next business up.
So, to me, government is a natural function of consumption. It is part of what goes into making the things I buy.
And I like to pay for the things I buy based on the sum of their costs plus profit.
In other words, when I get to the checkout at the grocery store, I really like it (and I think it makes a lot of sense) when they count the things in my cart and add up the labor, material, overhead, government and profit and, based on that, give me my bill.
Conversely, I would really not like it if, instead of adding up their costs for the items in my cart, the grocery store said, “Forget how much your are consuming, how much do you make? Here at ABC Grocery, we base the prices on your income, not the cost of the goods that you buy”.
I am pretty sure that, as long as I am free to do so, that I would leave my cart there and find another store.
So let’s take your argument for the cost of government being recouped by income instead of by consumption. If you are going to pull one of the five fundamental costs of goods out of the cost of goods and recoup it via income, how do you argue that the other four (labor, material, overhead and profit) should stay in the cost of goods and not also be recouped by income?
If government must be paid for by income, why not everything?
Hank,
Sorry again; but, I’m trying to apply the logic inherent in the FairTax: the prebate pays the tax $ associated with spending up to the poverty guideline. The fact that we arrive at different purchasing powers means I might misunderstand the implications of what you’re saying. So, let me ask a different way:
In your example, if the family spends $10,180 (purchasing power) on taxable goods and services, will their tax be $2341 ( $10,180*.23%) or $3040 ($10180 * .2986%)?
I used a 23% exclusive FairTax rate and that might be where I got lost.
So Bill,
I don’t think that people that think otherwise to you are necessarily naive or intellectually dishonest. I think it has more to do with their priorities for what they want to achieve with government.
As you can see from my perspective, my first priority is to align revenue and costs so that we have a system that is not only sutainable but that has the profit to grow.
It would seem like the priority from your perspective is to manage productivity so that its output is more equalized across the population.
Mark Bostleman wrote, “...the cost of any product you buy is the sum of labor, material, overhead, government and profit.”
Although any business owner would prefer to sell their products or services at prices set as described by Mr. Bostleman, the cost of any product we buy is ultimately set by the laws of supply and demand. Bostleman’s assertion is, I believe, a fundamental flaw in the argument from FairTax proponents that embedded taxes would be replaced by the FairTax and nobody would be the wiser–an argument contradicted by AFFT’s own economists (i.e. BHI).
Mr. Bostleman also wrote, “...the amount of product you buy is proportional to...the amount of government you consume...”
People who have savings accounts benefit from the FDIC. People who buy stock benefit from the SEC. People with pensions benefit from the PBGC. Investment brokers and investors benefit from the Federal Reserve Bank.
There’s also no relationship between consumption and investors who benefit from government financed infrastructure (roads, bridges, damns, railroads, ports, sports arenas ...). There’s no relationship between consumption and investments benefiting from tax-allocation districts (TADs). There’s no relationship between consumption and those that benefit from our national parks and other natural treasures (that’s all of us – whether we visit them or not). And of course, there’s no relationship between consumption and national defense (fat or skinny, big house or small, a life saved is a life saved), which makes up the largest chunk of non-entitlement federal spending.
In truth, both consumers and investors benefit from government, and a strong argument could and has been made that the more we have available to both consume AND invest (income), the more we benefit from government.
The FairTax was never designed to be a free-market approach to charging for government services (essentially an after the fact argument) any more than a progressive income tax exists in theory or practice to primarily take from the rich and give to the poor. The goal for all of us is, I would argue, should be to determine the most practical way to raise revenues to fund essential government services.
Ellen,
No need to apologize, the application of inclusive or exclusive tax rates can be very confusing to everyone. To answer your question, you should have use the 30% exclusive rate to determine the tax raised. Try it this way. If you start with total dollars available, you should use the 23% inclusive rate to see how much tax you would pay. If you start with the after tax amount, you need to use the exclusive rate of 30% to determine how much tax you paid.
From all the online references, an exclusive rate does not include the tax in the denominator. (Te = R/C). If the revenue is included in the denominator, the rate would be inclusive Ti = R/(C+R). Don’t know if this helps, but until Morphh gets a reply from BHI, there is still some question about the 23/30% Fairtax rate. I still believe it should be 19/23%. Stay tuned.
Helena,
...the cost of any product we buy is ultimately set by the laws of supply and demand.
As are the costs to produce the product.
The use of savings accounts, pensions and stock transactions is consumption and the products and services that make up the management of them are made with the FDIC, SEC and PBGC as part of their value proposition.
Infrastructure is an important part of both economic efficiency and stability - who would you rather consume from, FedEx or pony express?
National defense - not sure that I understand your thinking here. Seems to me there wouldn’t be an economy without national defense.
But let me turn this around. I would suggest that anything you do find that the federal government does that does not directly protect or stabilize the economy and which is not proportional to consumption, is probably something the federal government should not be doing.
Bill, you seem to contradict yourself there. You said that “corporations, because they benefit from living and doing business in the free society maintained by the U.S. government, should pay their fair share of the cost of running that government. I don’t think 35% of their income/profits is too much to ask.”
But then you stated (which I agree with this one) “And just as all taxes are ultimately taxes on individuals”.
So which is it, are corporations paying their “fair share” or is it passed to individuals? No need to respond, I already know the answer. Corporations paying their “fair share” is a fallacy. Read “Who Really Pays the Corporate Income Tax? Here’s a clip “The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters.”
How about the employer half of payroll taxes? Who bears that burden? Economists believe that the worker is bearing almost the entire burden of the tax because the employer passes the tax on in the form of lower wages. The tax incidence falls on the employee. See the CBO paper “International Burdens of the Corporate Income Tax“.
Helena wrote, Although any business owner would prefer to sell their products or services at prices set as described by Mr. Bostleman, the cost of any product we buy is ultimately set by the laws of supply and demand. Bostleman’s assertion is, I believe, a fundamental flaw in the argument from FairTax proponents that embedded taxes would be replaced by the FairTax and nobody would be the wiser...
America may be the closest thing to a pure capitalist society, but unfortunately were not that close that taxes have no effect upon price to the consumer. Taxes have a direct and indirect effect on the price consumers pay. It’s rather obvious that removing taxes embedded in the cost of production, including payroll and compliance costs, would lower price from the front end of the ledger. What seems to be ignored here is there is also taxes hidden in the profit margin that would allow prices to fall also. Every business is going to be different but if a retail store is operating on a 40% margin and have a net tax rate of 25% they could lower their margin to 30% and receive the same real income. Prices may not fall right after the Fair Tax is initiated but it will not take long for prices to stabilize near or lower than are under the current tax system. No matter how you spin it the Fair Tax takes the same amount and spreads it over a broader base, everyone pays less, especially those in the lower and middle income groups that have no way of deferring their tax liability to others.
Helena said:
The goal for all of us is, I would argue, should be to determine the most practical way to raise revenues to fund essential government services.
Agreed Helena!
Hank,
You asked how many of the poor will be untaxed under the FairTax. To answer that, one has to use FairTax concepts. “Untaxing the poor” isn’t the same thing as maintaining or increasing current purchasing power. As long as the tax paid doesn’t exceed the prebate amount (additional income to pay taxes), the taxpayer has a zero tax burden and is untaxed. The fact that your sample family lost purchasing power ground doesn’t mean it wasn’t untaxed.
Let’s give your family an income of $11,000 to determine if it’s still untaxed.
Income = $11,000 + $3220 (prebate) = $14,220. The tax on $14,220 will be $3271 - $51 more than the prebate allows. The family is no longer poor or untaxed because its spending exceeds the poverty level guideline ( $14,000) on which the prebate is based.
The single $10,000 wage earner in your example exceeds his/her prebate amount by $400+, is not poor and pays tax.
I think the question you’re really asking is how many of the poor will maintain or increase their purchasing power under the FairTax. I don’t think the data exist to answer that question with any degree of certainty.
Ellen,
No, I am not asking how many of the poor will have increased purchasing power. I really am asking just how many workers are going to get a free ride under the Fairtax compared to current law. Free ride means paying no net federal tax, yet qualifying for full retirement and health care benefits from SS.
Under current law, I estimated that about 1 million workers are able to reduce their federal taxes to near zero using deductions, exemptions, and other credits, and then totally offset their payroll tax amount (7.65%) by qualifying for the refundable EITC and Additional Child Care credits. The key here is that EITC and ACC credits are refundable which not everyone seems to understand.
Under the Fairtax, I think you will agree that a certain number of workers will pay no net sales tax due to the prebate, and my question is simply–”How many?” My estimate is 30 million, but others may have better date. I wrote the IRS for suggestions on how to use their data, but didn’t get much help.
The underlying issue is just how many workers under the Fairtax will be getting a free ride, and is that a good thing for the country. Obviously I don’t think so, particularly when the same Fairtax legislation being proposed forces all retirees, having paid into the trust funds for typically 45 years, to resume paying into the trust funds with our sales tax dollars. Is that really fair? I think it’s a major breach of my “pension contract” with my government.
Bill,
First off, thanks for the response. Of course, while I don’t agree with your reasoning, at least I understand where some of your data comes from. But let me address some of the issues.
You said “The article uses median household income as the measure, which is fine, but doesn’t get at the whole picture. That’s because most household income from 1946 through the 1960s came from a single breadwinner. Now multiple members of the household must work to keep the median income rising.” The Cato use of median household income has absolutely nothing to with what happened in the 60s. The author’s point is that over a 10-year business cycle, the middle class as defined by $35K to $70K a year has only shrunk because they have moved up in “class”, not down. 10 years. Nothing about 60s, 70s, or 80s for that matter.
You also said, “Even the median household gains are deceptive, since the entire gain came before 2000. Median household income has been rising, but is still down 2.1 percent over 1999 levels.” Using your census report (http://www.census.gov/prod/2007pubs/p60-233.pdf) page 4, I respond to those statements as “so what?” That chart clearly shows the trend that median household income peaks just before a recession bottoms out and then peaks again higher before the next recession. There is not one thing in that chart (which is built off the data you claim shows deception) that indicates that trend won’t continue.
Back to your definition of stagnating wages. You define stagnating wages as stagnating because full-time, year-round workers age 15 and older have had their real wages decrease for three consecutive years. That’s fair. At least it is a definition, but if you expand the time frame (page 8), you can that (like median household income) the numbers go through peaks and valleys. However, the general trend for women has been that this number increases and since about 1974 men’s wages have been stagnant. So if you take women out, one can say since 1974 wages have been stagnant using your preferred criteria. My response, “women are people too.”
By the way, none of this includes many people’s perception that the CPI index is grossly overstating inflation.
If you want to use individual income over household, you should at least acknowledge the fact that more women working increases the supply of labor, which holding all else equal, drives down wages. But as the median household numbers bear out, the economy has handled this labor supply increase quite well.
Is your income inequality based on wealth or income? There is a huge difference. Although the distribution may be the same in terms of the 90/10 split.
You said, “How does inequality affect standard of living? The answer should be self-evident. If a high percentage of a population’s wealth is concentrated among a low percentage of that population, only that low percentage enjoys an elevated standard of living. The more evenly distributed wealth is among the population, the more people enjoy a good standard of living.” Are you defining standard of living on relative scale based only within a specified society for a snap shot in time? If so, I’ll agree with your statement by definition. I guess I define standard of living between generations and among different societies. As an example, take us and China. Would agree that the Chinese are closer in wealth distribution? After all, “the people” own all the land. But would claim their standard of living is higher than ours? I guess that’s why I asked for an example earlier.
My final point: I think you’ll agree that since the 30’s, good things have happened and bad things have happened in the US. Furthermore, more collectivist ideas have been tried and more free market oriented ideas have been tried here. So assuming everything good is because of your own political bend and everything bad happens because of someone else’s isn’t very constructive. So when things are said like “wages are stagnant because of Reagan’s policies,” you could at least point out if it’s because of his tax lowering or tax raising policy.
Bill,
I did check out inequality.org. The by the numbers is interesting. Of course, their point is inequality, so most of their numbers I could ignore on pure principal alone. By their chart on the bottom quintile losing 1% made me want to investigate further. I first wondered on why they chose 1979 (2005 was the last date data was available). Then it all made sense, 1979 was a peak. If you use 1983, that quintile goes up by more than 13%. So can I conclude now, that while the poor had some rough times between 1979 and 1983, that since then the rich have gotten richer and the poor have gotten richer? So I guess everything’s cool now. IMHO, it is this kind of number manipulation that gives these sorts of sights a bad rep.
Why do I believe the FairTax will hurt the poor, rather than “untaxing them?”
Person A is a single person who earned $13,000/yr. in 2007. He paid a total of $1,458.00 in federal income and payroll taxes, or 11.22% of his income.
Now let’s imagine the FairTax had been in place in 2007. Person A made $13,000 a year, and got $2,352 in prebate checks over the course of the year, boosting his total income to $15,352. To keep his tax liability at or below 11.22% of his income, he would have had to pay no more than $1,722.50 in FairTax. That would have allowed him about $7,490 in taxable spending for the year. That’s $2,720 BELOW what FairTax.org listed as poverty-level spending for 2007.
Even if you buy into the notion that prices will come down by an average of 22 percent — and I don’t buy that — that’s a pretty small budget.
And please, no more trying to convince me that I can’t look at a consumption tax as a percentage of income. All taxes, including consumption taxes, are paid with income. You can’t deny that fact (and if you do... well, you know).
What I’m concerned about is the bite taxes will take out of the little guy’s income under the FairTax, compared to the bite taken now. And the bite I’m concerned with now is the bite taken by the federal taxes the FairTax explicitly wants to replace: FICA and payroll taxes.
You can also try to hit me with the “hidden” tax burden corporate taxes place on individual incomes. But remember, once that burden is lifted, corporations will have three choices: They can raise wages, cut costs, or take the extra money as profit. If they put it all into raising wages, they can’t cut costs or post higher profits. If they put it all into cutting costs (by the famed 22 percent), they can’t raise wages or post higher profits. And if they put it all into higher profits, they can’t raise wages or cut costs.
Anybody want to bet where the savings will go? Hint: I don’t believe it will be into higher wages or lower costs.
To sum up: The prebate will boost buying power, and slightly reduce the tax burden, giving our guy a little more spending leeway than he would have had without it. But it won’t “untax” him — he’ll still be on the hook for 23 cents of every dollar he spends on taxable goods. And more of his income will go to pay the FairTax than went to pay income and payroll taxes.
Bill said: All taxes, including consumption taxes, are paid with income. You can’t deny that fact...
You are correct Bill, income is what pays for taxes no matter what the taxes are. I don’t think there was ever a question as to what pays for tax. The question is what is taxed, not what pays for the tax.
Given this, my point is that what has value changes depending on what you tax.
With an income tax, income has value because it is being taxed.
With a consumption tax, consumption has value because it is being taxed.
The real question here, which hasn’t really been explored, is what value does unspent income have in a consumption model?
Bill - referring to the examples in the original post, even with a consumption model, I am assuming that you would rank the three people’s wealth by their income. But you can only do that by assigning value to the unspent income. In other words, you insist on counting the unspent income, along with the consumption to rank wealth.
This is the difference between what we are both saying - so to really get at the issue, that is what we have to foucus on - unspent income and how it has value. You say it does, I say it doesn’t. I say unspent income doesn’t have value and my justification is that the person doesn’t have access to it. You say unspent income does have value - but you haven’t provided the justification for that yet (or maybe I missed it).
Take the wealthiest, by income, of the three - he has $420,000 of income that he can never touch. However, despite the fact that he can’t touch it, spend it, enjoy it or use it, you are assigning value to it?
What value does that $420,000 have?
At one point, you did touch on the fact that the unspent money could be used to make even more money via investments. But he can’t touch that new money either. So if you don’t have solid justification for the value of unspent money, simply pointing to the fact that it is capable of making even more unspent money doesn’t really solve the problem.
Hank,
Got the intent of your question. It seems the only method to answer your question is to get key data:
How many households will have total spendable income, from all
sources, less
than 77% of the applicable poverty level “allowance”. Earnings need to
include all income and cash alternatives: food stamps, housing vouchers, free or below cost room and board etc. And spendable income needs to exclude state
income, property and sales taxes as well as local taxes.
I’ll venture a guess that few of the working poor will get a free ride.
As a soon to be Social Security beneficiary, I thought seriously about your comments on that tax issue. Even under the FairTax, Social Security will continue to be an insurance plan: all participants pay premiums (taxes) that are pooled together to provide monetary benefits under specific conditions. The monetary benefit paid under Social Security is a given level of spending capacity and the condition is retirement from work. Sec. 201 of the 2007 FairTax bill, Credits and Refunds, lists the credits allowed each person “with respect to the taxes imposed by section 101 for each month”. Included is the insurance proceeds credit. If I understand the math correctly, the credit is 77% of the FairTax burden: $1500 benefit paid * .23 = $345 * .77 = $266. ( see Sec. 206)
There is a requirement that the premium paid was subject to the FairTax. As it applies to Social Security, there are two ways to address that: 1) 30+ years of mandatory payroll tax premiums on gross income are a legitimate substitute or 2) after a month of paying FairTax on benefits, the insured meets the “premium subject to the FairTax” rule.
I see no reason to exclude only Social Security insurance benefits from the credit applied to those from life, health, general liability, disability, long term care insurance and all insurance contracts that provide a combination of those types of coverage. What are the arguments used to support treating Social Security, under the FairTax, as something other than an insurance contract?
Bill, I don’t understand your example. Under the current system earning $13,000/yr, taxes paid (assuming no burden from corporate or employer payroll taxes) were $1,458.00 for a total $11,542 purchasing power (11.22% of $13,000).
Under the FairTax (which includes the hidden burdens of corporate and employer payroll taxes), 13,000 plus the rebate brings you up to $15,352, which is taxed at $3,530 - leaving you with a total $11,821 in purchasing power, which is $280 more then the current system (9.06% of $13,000).
Now lets talk about the embedded taxes - 22% is a average total that includes income taxes, payroll taxes, and corporate taxes. So a percentage of this will go to the employee in the form of higher wages (or gross take home) - Income taxes and employee half of payroll. This leaves the business (embedded cost) of corporate taxes and employer payroll, which is estimated to be a minimum of 11.55% by Arduin, Laffer & Moore Econometrics. Hank has estimated it to be around 10%. Neither of these (I believe Hank’s doesn’t) includes the reduction of 500 billion in compliance costs. You can argue that such a cost would go to stuff rich coffers but this is highly unlikely and against standard economics. Let me ask you this... why don’t they raise their prices today to stuff their pockets? Profit margins will stay in line, which will reduce product cost. Prices will not increase by the full amount of the FairTax. Hank estimates 17% exclusive, I think it will be closer to 15% exclusvie... either way this is something you’re not even factoring.
So using apples to apples - This decreases purchasing power under the current system by at least 10% or $1,300 in your example, for a total $10,242 purchasing power ($1,579 less then the FairTax).
Morphh and Mark:
I’m moving on to the new post about the prebate, and I’ll address your issues there.
Ellen,
I don’t agree that under the Fairtax you pay premiums on the SS contract. Some of your sales taxes do go to the Trust fund in order to pay out the benefits. It is unlike any other insurance plan where you do pay a premium and the premium will have a sales tax element. Why do you think that the funds allocated to the trust fund will be taxed. The funds were already the result of taxing consumption. Surely you aren’t proposing to tax them again?
Morphh,
I agree with your numbers but when you get into the embedded tax discussion, why did you reduce purchasing power under the current income tax system by 10%? This is the same mistake that AFFT made with their Fairtax Calculator, isn’t it. The purchasing power under current law is basically income less tax, and in Bill’s example that would be $11,542. That number can’t change–it’s a fixed baseline against which the Fairtax can then be compared after considering either taxes paid or net price inflation.
By the way, my 10% business cost reduction did include a 2.5% allowance for compliance costs, and was taken from a December 2005 Tax Foundation Special Report #138. Business compliance costs were $148 billion in 2005, but this number did not include tax planning or tax litigation costs. However, even when including those costs, coupled with the rising costs of compliance, I question where you got your $500 billion estimate? Sounds much too high to me?
Hank, how else do you account for corporate taxes and employer payroll when comparing the two systems? You can’t just ignore the burden. There is a cost associated with it - conservatively a 10% loss in purchasing power on goods and services. Essentially, that’s what tax is, a loss of purchasing power. Most is lost directly from income, and we can see that some is lost by inflated prices. This has to be accounted for in any proper comparison, otherwise we could just reduce the FairTax rate by 30% and leave those taxes as they are. Perhaps you think that it would be better to add it as an increase in purchasing power on the FairTax side. That would be fine, same thing in my view.
As far as compliance costs. According to a report from the U.S. Government Accountability Office, the efficiency cost of the tax system—the output that is lost over and above the tax itself—is between two percent and five percent of the gross domestic product (between $240 billion and $600 billion a year). “Payne, Costly Returns: The Burdens of the U.S. Tax System” states today’s tax code imposes 24.4 cents of compliance costs for every dollar of taxes raised, where the Tax Foundation puts the cost at 15.2 cents.
I’ve heard several times that tax planning costs equal basic compliance costs, so you often end up with something like $250 billion for compliance and $250 lost in tax planning. So that’s how I put it around $500 billion.
Morphh,
I guess I’m doing a lousy job of explaining that business costs are already in today’s prices. They are accounted for, in spades. Prices are what they are, and nothing you do with the Fairtax plan has any impact on todays prices and purchasing power. Purchasing power under current law is the baseline, and can be compared to the Fairtax plan several ways. You could increase Fairtax purchasing power by 10% to reflect the reduced business costs, but then you have to reduce purchasing power by the amount of the sales taxes, just like the income tax is removed from income today.
You seem to be concerned about an apples to apples comparison and the embedded costs cause you some problems. It’s not that tough. Figure the purchasing power under the income tax, and then do whatever suits you for the Fairtax purchasing power to make the comparison. One last time, todays purchasing power doesn’t change no matter what you do with the Fairtax. It is what it is.
As for compliance costs, I think your data doesn’t reflect the fact that only 55% of the total compliance costs are business costs, 40% individual costs, and 5% non profit organizations, at least according to the Tax Foundation report. I’ll buy into $275 billion, but not $500 billion, and that includes planning etc.
Hank, I was just thinking in regard to employer half of payroll, this would be fairly easy to include / compare. Just increase what would be gross wages by the additional 7.5% (for the full 15% payroll burden). This would at least take care of that part of the comparison, then you’re just left with the corporate income tax.
Morphh,
I still don’t understand why you want to tinker with what is? My income, taxes and therefore purchasing power are what they are. Nothing you do with the Fairtax calculations can change those facts.The employers share of payroll is included in the retail prices I pay. What is your reason for wanting to change the current facts? How can you do a legitimate comparison by muddying up reality?
It seems to me you are saying you want to add the 7.5% employers share of the payroll tax to my wages, and then subtract 15% from my total income (plus income tax) to arrive at my purchasing power? What is the point? The answer is the same. But prices at the cash register should go down due to the reduction in employer costs. And my purchasing power will therefore go up. And none of that is real! Again, what is the point of messing with current facts?
Sorry, but I don’t get it!
Hank,
No..I’m not proposing to re-tax already taxed funds. What I’m proposing is that there is no standard premium cost per person for Social Security under the FairTax. That’s unlike the payroll tax that imposes a flat premium rate on wages. It’s also unlike other insurance policies that charge a known cost on which tax will be paid.
Under the FairTax, the variable SS premium you pay is based on the amount of your total taxable spending. You’re paying into the big insurance pool....you just won’t know how much. That doesn’t change the fact that SS is an insurance plan collecting funds (premium dollars) and paying out those premium dollars in benefits to those who meet the insured condition. As with every insurance plan, some premium payers will receive benefits, others will not. Example: people might pay flat wage or variable spending based premiums for 40+ years but die too young to meet the insured condition (retirement).
Ellen,
O.K., but under the Fairtax, your benefits from Social Security have nothing to do with how much you paid in sales taxes. The amount of your benefits is still based on your wages paid for the necessary period of time. (40 quarters, or whatever?) That’s why you will still have to have your earned income reported to the SSA under the Fairtax.
In rereading Section 206 (a-e), it is clear that this section isn’t dealing with Social Security. Look at 206(e). It doesn’t mention pension contracts as being included in the definition of “insurance contract”. And if you read 206(a) closely, it says that the credit can be paid “if the entire premium for the insurance contract giving rise to the insurers obligation to make a payment to the insured was subject to the tax imposed by section 101 and said tax was paid.” Translated means that to accommodate your claim that SS is an “insurance contract”, then all sales taxes paid to the government would have to be taxed, or at least those taxes allocated to the trust funds. Taxing the tax makes no sense, as you must agree. Section 206 is dealing with standard insurance contracts, not Social Security.
Ellen, nice try, but there are no credits resulting from your payment of sales taxes into the trust funds. However, if you still believe the language is vague or misleading, I’ll add it to my list of bill changes to be suggested to Congressman Linder for incorporation in the 2009 version of HR25. What say you?
Hank, My issue is that you’re using partial accommodation to wages and full accommodation on prices when presenting the purchasing power. We don’t know what they will do regarding accommodation (full, partial, none). The business could very well give the employee those extra taxes - increasing wages, which is why adding to gross wages is not unrealistic (as you move closer to a full accommodation model).
Perhaps it would be simpler to use a full accommodation model or no accommodation model because your leaving out part of the partial accommodation, which is the decrease in cost. You can account for this as a decrease in purchasing power on the income tax side or an increase on the FairTax side.
Perhaps some partial accommodation examples with a $100 widget:
$13,000 - $1,458 = $11,542 under the income tax gets you 115 widgets.
FairTax goes into effect - gross wages, and production cost reduce by 10%
Widgets cost $90 * 30% = $117
$15,352 under the FairTax gets you 131 widgets - purchasing power $11,821
When you look at dollars in the example above regarding purchasing power, you don’t see the increase (the fact that you can buy more widgets). So the increase of $280 didn’t allow you to buy 3 more widgets (as one might expect), it allowed you to buy 16. If you reduce the 10% on the income tax side, they can see the purchasing power in “today’s dollars”, which purchases 16 widgets ($1,579).
If you don’t show some form of increase in purchasing power, you’re essentially holding the widget cost at $100 * 30%.
Morphh,
You wrote: “Perhaps it would be simpler to use a full accommodation model or no accommodation model because your leaving out part of the partial accommodation, which is the decrease in cost. You can account for this as a decrease in purchasing power on the income tax side or an increase on the FairTax side.”
My whole point is that you can’t “account for this as a decrease in purchasing power in the income tax side”. The income tax side is fixed at whatever your current tax and purchasing power might be. You are welcome to adjust the Fairtax side any way you want, depending on assumptions, but you should not change the income tax facts.
Hank, I don’t see that it matters... but whatever, just increase the purchasing power on the FairTax side by an exclusive 11.2%. So 15,352 would be worth $17,071 in today’s dollars, purchasing 131 widgets at $130 a widget. This maintains the $100 price for a widget, plus the FairTax burden but shows the relative increase in purchasing power.
Morphh,
Looks good to me, but what is the 11.2%. I thought your ALM study said 11.55% reduction in business costs which could be translated into an increase in purchasing power?? I think this arcane discussion has run it’s course, and we can move on to larger issues??? What is the status of your email to the “three wise persons”??
Hank, I’ve been using your 10% figure, which is about 11.2% exclusive (doing the math, it’s actually 11.11%). If we used the ALM 11.55% inclusive, you would multiply the figure by 13.05% exclusive to show the increase in purchasing power. I haven’t sent the e-mail yet.. I need to reply to Fred and Hayden.. make sure we’re all good. At the moment.. I need to mow the lawn. I’ll try to get back to it tonight.
Hank,
Maybe we should look a little closer the millions that you say are not paying any income tax at all under the current system. I’ll assume you are speaking of the working poor because they would need some income to qualify for the earned income credit that would make it possible to bring their income tax liability down to zero or even below.
They , the working poor, work all year and have their taxes deducted from their paychecks, just like the rest of us. They buy products and services with their take home pay, that have inflated prices because of the taxes embedded in them, just like the rest of us. Then on February 1st of the next year they get their W2 so that they can go through the hassle of filing their 1040ez just to get some of the federal taxes they paid. They may get all of the income taxes they paid back in refund but what about the rest of federal withholding or hidden taxes in the purchases they made. The feds don’t thank them for the loan or even pay interest on money they used all year before they had to give it back in the form of a refund. It’s the current system that is not fair to the wage earner no matter where they fall on the income scale.
This thread is getting pretty long.. but since we seem to have worked out the purchasing power aspect, bonus points to the one that can translate this into the effective tax rate. One thing the with applying it to the income tax side, you could show this loss of purchasing power via business taxes as an indirect tax burden, an increase to the effective tax rate. So likewise, if applied to the FairTax side as an increase in purchasing power, we should be able to show how this reduces the effective tax rate relative to the current system.
rmforbes,
That is not what I’m saying at all. My contention is that around one million workers today can reduce their income tax liability to near zero, and then completely offset their payroll tax amount through the refundable EITC and Additional Child Care credits. These million workers pay no net federal tax under current law. The key is that the EITC and ACC credits are fully refundable–unlike other credits that can only reduce tax liability to zero.
Compare this number of workers to workers under the Fairtax that will pay no net sales tax due to the prebate. I estimate that number to be 30 million, but would certainly accept any other data. Basically, the question to be answered is: If you say that you are untaxing purchases up to the Fairtax modified poverty level mdefinition, how many workers are you talking about that are at or under the poverty level?
As for the working poor you are so concerned about, I have no sympathy for any of them that are having any income tax withheld. You are right that giving the federal government an interest free loan is a very bad idea. It turns out you can under withhold by 10% and not incur a penalty. The choice is up to the worker, either a forced savings plan by making an interest free loan to Uncle Sam, or under withhold and write a check in April. You can argue whether or not the country would be better off with a consumption tax rather than an income tax, but there is nothing basically unfair about the income tax, imho.
Hank,
I guess you have not worked for awhile, you do not have a choice. Withholding is done on all wage earners, you can claim an excessive number of exemptions to lower the income tax side but FICA and medicare are withheld no matter how many exemptions you claim.
You missed my point completely, we all loose under the current system. We are all paying the taxes for everyone that owns a business and can defer their tax liability through the price they charge for their product or service. The current system is completely unfair, no matter where you lie on the income scale. Even the business owner is being manipulated by the federal government and forced to raise prices to collect federal taxes. Making a one to one comparison between the current income tax and the Fair Tax is difficult because they are really two different things. If you want to count winners and losers you must take into account choices individuals can make in both systems to lower their real tax liability. Also, you have to take into account elements that individuals have no control over from both sides. If you were fair you will see everyone wins with the Fair Tax except maybe a congressman.
I was going to jump out of this thread, but I want to get my two cents in on the discussion between Hank and Morphh.
Morphh wrote: “The business could very well give the employee those extra taxes - increasing wages, which is why adding to gross wages is not unrealistic (as you move closer to a full accommodation model).”
First of all, my employer sets a target of payroll equaling 15% of sales. Their calculation of an employee’s payroll DOES include gross earnings (in other words, what they withhold from my paycheck for FICA, Social Security and Medicare is part of their payroll calculation) but DOESN’T include their contribution to my payroll taxes. In other words, at least in the case of my employer, they don’t count that as a payroll expense. So the idea that they would give that money to me is probably a fantasy.
Second, Dr. Dale Jorgenson is on record as saying employers likely WON’T give the current taxes withheld back to the employee. Neal Boortz has conceded this point, saying that “getting to keep your whole paycheck” will likely mean getting to keep what you now net, not what you now gross.
That brings me back to something I forgot to include in my response to you in the prebate thread. On April 12, you wrote: “Now lets talk about the embedded taxes - 22% is a average total that includes income taxes, payroll taxes, and corporate taxes. So a percentage of this will go to the employee in the form of higher wages (or gross take home) - Income taxes and employee half of payroll. This leaves the business (embedded cost) of corporate taxes and employer payroll, which is estimated to be a minimum of 11.55% by Arduin, Laffer & Moore Econometrics. Hank has estimated it to be around 10%. Neither of these (I believe Hank’s doesn’t) includes the reduction of 500 billion in compliance costs. You can argue that such a cost would go to stuff rich coffers but this is highly unlikely and against standard economics. Let me ask you this... why don’t they raise their prices today to stuff their pockets? Profit margins will stay in line, which will reduce product cost. Prices will not increase by the full amount of the FairTax. Hank estimates 17% exclusive, I think it will be closer to 15% exclusvie... either way this is something you’re not even factoring.”
I dealt with the issue of payroll taxes, and why I don’t believe those will go back to employees. There are several reasons I suspect the savings from the elimination of corporate taxes and compliance costs will go on the balance sheet as profit rather than wages or lower prices.
(1) Corporate America follows Wall Street thinking, and current Wall Street thinking is that businesses must squeeze all possible costs out of their business for the sake of the bottom line. There’s plenty of evidence for this thinking, but perhaps the clearest is this quote from Bill Drehae of Deutsche Bank in which he complained about Costco’s business model: “Costco’s corporate philosophy is to put its customers first, then its employees, then its vendors and finally its shareholders. Shareholders get the short end of stick.”
Reverse this sentence and you get Wall Street’s (and thus corporate America’s) priorities: Shareholders come first, then vendors, then employees and finally customers. This leads me to suspect that with the bonanza provided them by the FairTax, the LAST two things most companies will do is raise wages or cut prices.
(2) Cheap labor (mostly from China) has resulted in a flood of new, low-priced goods on our market, but the goods once produced here and now produced in China are another matter. When Stanley Tools moved their factory from the U.S. to China, they realized a tremendous savings in labor costs. But those savings went to the bottom line (and to CEO John Trani), not to consumers in the form of lower prices for Stanley Tools.
(3) I would argue that very little of the $500 billion in compliance costs is money added to the tax burden of corporations (and thus to our tax burden through higher prices). Everyone assumes business spends money on “compliance” to do the paperwork of paying taxes. I maintain those costs are from the paperwork required to AVOID taxes. A 2004 CBO study bears me out. They found that 61% of ALL U.S. corporations paid NO corporate tax from 1996 to 2000. Since 2000, more tax breaks for corporations have been added to the tax code, so if the study were repeated today, I suspect the level of corporate tax avoidance would be even higher.
Ask yourself this question: Why would American corporations spend $500 billion on “tax compliance” when it would be relatively simple (and far less costly) to pay the standard corporate tax less basic deductions? The answer, obviously, is that they expect to SAVE money through tax avoidance. And this, in fact, is what many of them have been doing.
rmforbes,
Give me a break! I may not have held a job for 14 years, but nothing has changed about being able to file a revised W-4 in order to adjust your withholding. There is even an IRS online calculator to help you do it. So, I repeat –there is no excuse for over withholding unless you simply want an expensive forced savings plan.
If you think that having 30 million workers pay no net federal tax due to the prebate is fair, so be it. And if you also think it’s fair to effectively change the rules, scrap the contract I made with the government 55 years ago, and make us retirees pay for our own pensions with our sales tax dollars, so be it. But I certainly don’t agree.
Bill, I don’t disagree that partial accommodation would likely be employees getting their gross pay, which would not include the employer contribution to payroll. Most if not all on this board believe that to be the case, in which partial accommodation is the likely outcome of a move to the FairTax. However, full accommodation and no accommodation are also possible outcomes (depending on the monetary authorities), with variations in-between. The point was that they should each show the same level of burden, and you can’t mix partial accommodation on wages with full accommodation on prices.
Boortz and Linder have changed their tune and now state (in their latest book) that partial accommodation is the likely outcome - employees getting gross pay or some variation of their entire paycheck. I don’t remember Dr. Jorgenson stating that employers “WON’T give the current taxes withheld back to the employee” and I have read his study - please provide a reference for this “on record” statement. Employees have a contract with their employer for gross pay. I don’t expect it would even be possible without extreme efforts to get to a no accommodation model (employees get net pay - prices stay the same after the FairTax is added). Again, whichever way it goes, the outcome should be the same level of purchasing power and this is stated in every study done, opponent and proponent alike.
In regard to business and price reductions, price maximization is not profit maximization. Businesses have an optimum level of profit margin that works for their business model. If you think businesses will be able to keep these taxes as some huge continuous boost to profit margin, then you’re out there by yourself, as no serious economist would subscribe to such nonsense. There is no point in debating it.. it’s like you’re arguing that the world is flat. Tax avoidance would be a non-issue with corporations under the FairTax.
I’ve got a new tax plan for you. We just tax business, and then we’d have no tax burden at all. Fact is that corporate taxes and their associated costs are a regressive burden that falls on workers and consumers.
Morphh,
The on-the-record comment I’m referring to is an exchange of e-mails between Dr. Jorgenson and someone interested in the FairTax, which was published on the Free Republic blog. You can find the exchange here:
http://www.freerepublic.com/focus/f-news/1470200/posts
Obviously, corporate tax avoidance will cease to be a problem under the FairTax, since corporations won’t be taxed.
It’s funny — I keep reading various business writers saying there’s no such thing as “excessive profits,” and that from a shareholder’s view, a company can’t have profits that are too high.
People out there working in corporate America like me have seen what’s really going on. I mentioned in a previous post the fact that my company cut my hours by 45 minutes a day, resulting in my losing $3,000 in wages over the course of a year. At our company Christmas party that year, the boss proudly bragged that we had had a record year in terms of profits. Needless to say, those of us whose salaries had been slashed didn’t really see the plus side of that.
Today in corporate America, the bottom line is the bottom line: Everything is done in the quest for increasing profit to satisfy shareholders. As Bill Deher of Deutsche Bank intimated, the employee (raise wages) and the customer (cut prices) come last.
If the FairTax passes, I hope I’m wrong. Because if I’m right, I’m in trouble.
Finally, as to your “new tax plan,” once again, you’ve again got me all wrong. I don’t want to overtax corporations. I’ve said I don’t think 35% of profits is too much to ask, and I’ll stick with that. Having said that, I wouldn’t mind seeing the top marginal corporate rate dropped if it would mean a drop in corporate tax avoidance. However, I still believe corporate profits should be taxed, and nearly every developed nation does so, to some extent.
Bill, I think your misreading Jorgenson’s comments. Jorgenson is discussing the assumptions he used in his analysis. No where in there does he state what businesses will or won’t do. His purpose was to assess the cost, and those were the base assumptions, which describe the figures derived.
As far as profits, I don’t argue that they want more profits (of which many go back into the business), but the issue we’re discussing isn’t profits but profit margins. The difference is huge.
Satisfying shareholders is often not a win / lose as you seem to suggest. If customers are not satisfied, then you have no business. If employees are not satisfied, then you have no workforce. You have to sufficiently satisfy your customers and maintain a sufficient workforce in order to then satisfy shareholders. A business is not a charity - it will maximize profit and this often done by creating a good customer base and hiring employees that bring value to the business.
I think you might have missed my jest regarding business taxes. A business doesn’t have a tax burden, the burden is passed to individuals.
Morph –
I realize you were being facetious, but your suggested new tax plan on businesses IS the FairTax.
Under the FairTax, all businesses that sell products to consumers in the U.S. must pay 23% of their GROSS REVENUE from such sales to the federal government in taxes.
Wonder how many businesses will be able to survive that sort of draconian tax policy? Are you sure you’re not a closet Democrat?
Haha, good catch Hayden.. As long as they don’t hide it from me, so I’m not under the delusion that I’m not paying it.
Hayden,
Absolutely agreed. The FairTax is replacing several taxes with one, concentrated, corporate income tax - which I think is great. And there are no loopholes or shelters or need to expend huge amounts of resources to fit your business around it. Everything that everyone sells is taxed at the point of purchase - no questions asked. There is no way for you to get a leg up on your competitor by having less tax on your goods than theirs.
Besides this savings in compliance cost (which Bill termed “avoidance cost”), it is better than the current corporate tax because the consumer can see it broken out.
For instance, what’s the material cost for you car vs. the labor cost? You probably don’t know. And with the FairTax you still won’t know - but you will know the government cost.
Bill,
Morphh said it well enough in the second half of his #71 - but for what it is worth, I will re-iterate.
This concept of corporations saving on the old taxes they no longer pay and then “taking” the savings themselves for their “profit” and the shareholders - thus keeping it from the customers and employees wages - really mischaracterizes the forces at work in a free market.
Customers, labor, material vendors and investors are all hammering the business for the best value they can get for their own selfish needs. When the value that any one of them gets falls below that of what the business next door is offering - they are gone.
That goes for investors who want the most profit, labor who wants the highest pay (plus anything else you want to liquidate like vacations or other benefits), material vendors who want the highest order and customers who want the most quality for the lowest price.
The only way that these forces could work as you describe - that is, businesses taking the cost savings purely in profit at the expense of the other stakeholders - would be if ALL businesses got together and decided to the same thing. If they did that, then they could be assured that everyone’s prices would stay the same, that everyone’s wages would stay the same and that material costs would stay the same. If they could be sure of that, then they could take it all as new net profit.
But that is highly illegal for this very reason - not to mention virtually impossible to coordinate and enforce everyone’s participation. At some point, someone’s going to crack and lower prices and raise wages in order to boost sales and productivity volume over their competitors.
If Business 1 does not take the savings and lower customer prices or increase labor wages - but instead takes it all for shareholders - then it is a matter of time before Business 2 slashes prices and / or increases wages and ends up eating Business 1’s lunch. And then the shareholders of Business 2 are the big winners by having a lower profit margin than the investors in Business 1, but a higher volume.
The relationship between price, wages, and profit is not determined by what any one business owner decides. It is determined by what the collective of consumers, labor, and business men decide by making decisions based on the free exchange of products and services, i.e. the market. The market can be altered by limiting these free exchanges, e.g. through the government, crmine, etc., but it can’t be controlled. That’s why there are embedded taxes, tax on profit, labor, or sales for that matter is just another business cost that will get put into the final cost (partially, some will lower profit and some will come out of labor) of a product or service based on what people are willing to pay and what people are willing to charge. That is why based on employer payroll and corporate profits, prices will go down. It has nothing to do with the generosity of business. It completely has to do with market forces.
Hayden,
I’ve asked this of Bill and I think some others on this site. Maybe you can answer it. If prices aren’t determined by the market, are our current set of prices based on corporate altruism?
Andrew –
I’m not sure I understand your question. Of course prices are determined by the market. (Which is why a tax equal to 23% of gross revenue will put so many companies out of business. If they could have raised their prices by that amount they would have already done so.)
Mark –
I agree with your general sentiments.
Replacing a host of different taxes with one, easy-to-understand tax is a great idea.
Eliminating loopholes, deductions and lobbyist-driven complexity is a great idea.
Allowing businesses and individuals to avoid unnecessary, expensive and ridiculous compliance costs and engaging tax-driven activities is a great idea.
Regardless of whether the FairTax is a good idea or not, it sure would be nice if our elected officials would start on those goals today.
Hayden,
I only ask because sometimes people seem to be indicating that the fair tax will be better for businesses because businesses while make an arbitrary decision (as opposed to a market decision) on whether or not to take more profit.
The reason the fairtax won’t put these companies out of business is because currently 22% of gross revenue is already given to the federal government. Of course, that will be gone. We still have a 1 point gap, but I haven’t mentioned compliance costs or economic growth.
Andrew —
I might be dense, but I still don’t understand the question. Of course market forces will determine price, and if market forces can’t justify a price to pay a company’s costs (including the new 23% gross revenue FairTax), then the company will go out of business.
And, not to rehash a topic that’s been hashed to death already, what makes you think that 22% of gross revenue is already “given” to the government by US companies?
The current maximum corporate income tax rate is 35%. That only applies to PROFIT. Many businesses, particularly start-ups, have no profits. Those that do generally have profit margins of under 10% of gross revenue, so the companies’ direct taxes to the federal government are