Is the prebate too complex?
I think one of the attractive things about the FairTax is its simplicity. Not only does a single rate on a single base provide transparency, it also reduces compliance cost. I also think there is a certain force that makes simple systems less susceptible to tampering than complex systems.
And the basic function of the prebate is consistent with this as it removes taxation on consumption up to the poverty level while eliminating the huge complexity of consumers having to file income with the government.
However, at the end of this thread, the discussion turned to details of the prebate’s implementation and the number of different classes - single, married, children - and all the combinations possible in a household.
As poster Ellen correctly pointed out, the two areas prone to political manipulation are, 1) the types of products and services subject to the tax and, 2) the prebate. If there are already 3 classes plus combinations for the prebate, is a precedent being set for economic interest groups from the beginning? Would a single value per person, regardless of age or marital status, be a safer design to insulate from political interference? Or are there other options?
As a Fair Tax advocate I don’t mind saying that the prebate is my least favorite aspect of the Fair Tax, but it does have some benefits. Perhaps true, we would be better off if HR.25 got rid of the prebate and dropped the rate 3-6 points. (The 23% tax-inclusive rate provides for the cost of the prebate.) That step would lower consumer costs and benefit the poor the most.
However Realpolitik dictates that the bill will not get by the Democrats without the prebate. Having said that, there are some positives. First, giving the prebate to every American household gives everybody an incentive to work harder and smarter and improve themselves. People don’t lose it by earning more. Also, the prebate is based on household size and is not means-tested. It keeps the government from prying into citizens’ personal finances.
Second, the prebate takes into consideration that many minimum wage earners, such as high-school kids, are members of households that are above the median family income. The prebate goes to a household, not to individuals.
Third, the prebate does make the Fair Tax very progressive, more progressive actually than today’s individual income tax when resources are measured properly.
Fourth, the incremental cost of the prebate will be minimal because 70% of American households already depend on the Federal government for come kind of a benefit. In fact, credit card companies have offered to PAY the federal government to administer the prebate program.
Fifth and finally, if you are one who thinks that the country should be less attractive for illegal aliens, then the prebate is clearly for you. Illegal aliens do not qualify because they do not have valid social security numbers. They go from paying less than their fair share of tax to paying more than their fair share of tax, thus the “Fair Tax.”
The point being: don’t kill the Fair Tax simply because you are not thrilled with the prebate.
~Jim Bennett
Summit, NJ
Credit card companies usually don’t pay the people they are providing a service to. They’re in business to make a profit. If they would pay the federal government, they would be making more money somewhere else - probably a “fee” (taxable???) charged to the recipients of the prebate.
While you are debating progressive/regressive and the morality of the existing prebate amounts, I’d suggest you step back out of the box for a moment and consider that the prebate just may not be affordable!
I wish I could link you to it, but there is a popular CBO chart entitled “Current Trends are not Sustainable” It depicts a 100 year period from 1970 to 2070, and shows the growth of federal government spending, broken out in three buckets; mandatory spending (entitlements), net interest, and discretionary spending including Defense. On the chart, CBO also holds spending to 18% of GDP, which is the historic average, and overlays that revenue line over the projected spending. From the chart, it is clear that by 2020,discretionary spending will have to be reduced by 20% or taxes as a percent of GDP will have to rise. By 2030, there won’t be enough discretionary revenue to fully fund just the Defense Department, let alone the rest of the government. Mandatory spending and interest on the national debt will consume all available revenue by 2040. This chart is an excellent overview of the approaching budgetary train wreck.
Now, if you are still awake, what does the $600 billion cash grant entitlement do to the CBO picture. The short answer is that the train wreck will occur in 2010, two years from now. Here are the details: GDP will be $15 trillion in 2010 and revenue at 18% will be $2.7 trillion. Entitlements (without the prebate will be $1.5 trillion, interest-$300 billion, and discretionary spending will be $900 billion. Add the $600 billion to entitlements and you can see that discretionary spending will have to be cut by two-thirds, or taxes must go up significantly. That is not enough revenue to fund even the Defense Department. The train wreck just wrecked.
Why am I boring you with this very bleak scenario? Simple. The nation can’t afford the Fairtax prebate, and you need to seriously consider a targeted prebate, similar in execution to the EITC. Turns out such a prebate would cost around $59 billion and would not cause the train wreck. It would give you time to see what happens to the economy under a national sales tax. Can we grow the economy out of the problem? Perhaps!
I don’t know where the notion that everyone deserves to be able to purchase the essentials came from, but I don’t think it’s in the Constitution? Focus on the low end of the income scale, and let the rest fend for themselves. Or would you rather see a train wreck??? Stay tuned.
Actually, Fred, it makes perfect sense if you think about it. The prebate goes to EVERY household, including rich folks who don’t have any use for a credit card, and pofolk whose credit rating won’t let them get a credit card. What better way for Chase, Capital One, or whoever gets the contact to put one of THEIR cards in the hands of every head of every household? It would be like butter for them to then monitor who spends it right away, and who lets the amount build up, and issue ACTUAL credit cards based on the associated risk factor. If I ran a credit card company, an opportunity like that would be worth millions, and I’d jump at it.
P.S., in the last para, it should have read “purchase the essentials tax free”. Sorry!
They may make some money on the float - but, just like a free checking account, under the FairTax the interest not earned by the consumer on this money is actually payment for a service (the credit card company is getting the interest instead) and would be taxable.
Hank, I’ve been over this with you before and it kind of runs tangential to the current topic, but here goes. The right to personal property is a central theme of the Constitution and the Federalist Papers. Take away personal property rights and every right outlined in the Bill Of Rights collapses on itself. I’ve stated numerous times, and this was the core belief this nation was founded on, that a man works for a wage and that wage is used to provide for the needs of himself and whatever family he may have. Those wages are his by right of a private contract for compensation between him and his employer. The sole reason he labors is to reap its fruits to benefit himself. This is a basic and universal truth. The fundamental flaw in income tax withholding is that it violates personal property rights. Again, without the right to property, NO other rights can exist. When any entity uses force to lay claim to wages before they are used for their intended purpose, the violations which follow are limitless. We can argue over the prebate being more, less, or equal to the amount needed for basic sustenance all day. The bottom line is that, to have a free and truly moral society, a man’s property must be his own FIRST, then the government can pass the plate. NOWHERE in the Constitution will you find a sanction for the government to take food a man earned out of his mouth to fulfill some arbitrary whim. When more people realize this fact, perhaps the 21st century tea party will begin in earnest. Again, the train wreck you allude to can only be solved through proactive means, not getting to the brink of the chasm and being forced to crisis manage.
I’ll pick up on different points Jim and Hank made: the prebate goes to every household, is not means tested and is too expensive. Under the FairTax, I’ll argue that the intent of the prebate is to be means tested based on poverty level spending needs by household/family size. A single value prebate per person would add significantly to the prebate cost and wouldn’t be based on household spending needs. One of my assumptions is that a married couple household is able to save more consumption on necessities than two unrelated adults - one shared bedroom shelter vs. 2 bedroom shelter; family insurance rates, all food costs combined etc.
I see two other options that are not complicated, are based on total shared household consumption and reduce the total cost of the prebate program. I’ll even offer some dollar amounts:
1) The single adult household is the same: $2392. Each additional related adult adds $1012; each additional non-related adult adds $1527 and each child adds $900.
2) The single adult household is the same: $2392. Each additional person is a flat $1555 (65% of $2392). Each child adds the amounts indicated by the existing prebate chart using the single adult column.
While Option 1 gives a larger total prebate to a household with 2 unrelated adults, the argument that’s a penalty on married couples doesn’t hold up. Both the married couple and the unrelated adult households receive the same tax percentage break: 23% of poverty level spending for their respective household.
Option 2 is even simpler but more expensive than Option 1 and does have a built-in “marriage bonus”. Of the two, Option 1 is more consistent with the intent of the prebate and also keeps the FairTax rate lower.
The fact is, without the prebate the majority of the public would never support a 23% or 30% tax on every dollar spent on food, shelter, clothing, medical care etc. Too much of the population lives paycheck to paycheck spending every dollar earned. Politicians of all persuasion understand that.
My issue with not giving a non-related single a lower amount is who get’s the bigger check. If I shack up with someone, I’m not going to want to concede a lower amount to them.
Morphh,
I like your Post 9 because it gets to the heart of every tax plan. Nobody wants to get less than someone else regardless of the basis of the particular tax. No matter the tax plan, emotion plays a part in whether it’s seen as fair or not.
To me the prebate is inherently inconsistent with “tax-free poverty level consumption” if it’s based on something other than consumption data. A prebate that gives tax-free spending of 100+% to some households and 90% or less to others establishes a basis for legitimate criticism of the underlying logic, intent and fairness.
It’s interesting to read the posts full of FairTax theory and assumption; but, it’s sometimes more instructive to put those to the test. A basic question is in order: if poverty level consumption is a factor of household makeup and size and the prebate is to provide every household an equitable “tax free” cushion, why be concerned that Household A gets a smaller check than Household B if both are getting the same effective rate?
I want to answer some of the questions Mark and Morphh asked me at the end of the “Why income is irrelevant in a consumption-based tax” thread, but let me weigh in on the prebate concept first.
Ellen is absolutely correct in her final paragraph: “The fact is, without the prebate the majority of the public would never support a 23% or 30% tax on every dollar spent on food, shelter, clothing, medical care etc. Too much of the population lives paycheck to paycheck spending every dollar earned. Politicians of all persuasion understand that.”
Neal Boortz said as much in the FairTax Book when he said (and I’m paraphrasing here because I don’t have the book handy) that the prebate was created because those who came up with the FairTax realized it would go nowhere if its only effect was to tax the poor 23 cents on every dollar they spend.
So the prebate is vital to the success of the FairTax.
By now, you all know my problem with it — regardless of how it’s set up, it doesn’t “untax” the poor, because it’s a direct cash payment. When it’s spent (if it’s spent on taxable goods), it will be taxed at 23 percent just like the rest of the recipient’s income. So it doesn’t cover 23 percent of poverty level spending.
Morphh, you made the point at the end of the “irrelevant income” thread that the prebate will boost the poor person’s purchasing power, even though the FairTax will take a bigger bite out of his income than the income tax would. That’s true, up to a point. But adding $2,300 to someone’s income should boost their purchasing power by nearly $200 a month. Instead, the boost to Person A’s purchasing power would be only about $23 a month under the FairTax with the prebate. Still, I suppose we should thank the AFFT for small favors.
Another problem many FairTax critics see with the prebate is, as Hank pointed out, the enormous cost of applying it to every household with a Social Security Card. It’s doubtful Congressional Democrats (or, for that matter, true conservatives) will vote to give what amounts to a monthly welfare check to billionaires. My guess is the prebate will be scaled back to target only households up to the poverty level, or to some threshhold slightly above it, to cut down on its cost. But that means, of course, that the government will still have to know how much you make.
Mark, I wanted to quickly respond to your question about the value of unspent income.
It comes back to the marginal utility of money, and choice. To refresh, the marginal utility of money simply means that a dollar has more value to a poor person than to a rich person.
Someone making $13,000 a year has little control over his ability to spend. Gas, food, rent, clothing, utlility bills, auto insurance, car repairs and medical expenses quickly eat up his budget. There’s no room for discretionary spending, and thus little leeway in controlling his effective tax rate under a consumption tax.
I would hold that the value of high unspent income in a consumption model is the level of discretionary spending, and thus choice, it allows to the rich person: He can actually set his own tax rate by controlling how much he spends. And to reach the same effective rate of taxation as the poor person, he has to spend nearly 100% of his income, which he’ll never do.
Beyond that, I do have to agree with you on one thing: Liberals like me, who are concerned about income inequality, have often wondered just why the top 10 percent of Americans NEED 70% of the wealth. They can’t spend it. They can’t even give it away. What good is it, really?
Which leads me back to inequality.org, and their quotes section. Here are two of my favorites, the first from George Hirshhorn, the second from George Bernard Shaw:
Joseph Hirshhorn: “The money doesn’t matter - not after the first million. How could it? You can’t wear more than two shirts in a day, or eat more than three meals.”
George Bernard Shaw (1928): “Perhaps you know some well-off families who do not seem to suffer from their riches. They do not overeat themselves; they find occupations to keep themselves in health; they do not worry about their position; they put their money into safe investments and are content with a low rate of interest; and they bring up their children to live simply and do useful work. But this means that they do not live like rich people at all, and might therefore just as well have ordinary incomes.”
P.S. Oops! In my last paragraph before the quote, that should have been Joseph Hirshhorn, not George!
Hank said: While you are debating progressive/regressive and the morality of the existing prebate amounts, I’d suggest you step back out of the box for a moment and consider that the prebate just may not be affordable!
Actually, Hank, the prebate costs less than the sum of the income tax exemptions in the current tax code. I read that on the FairTax website in one of the background documents. The FairTax is revenue neutral with the prebate, by design.
Also, since the prebates are sent to households, there are many fewer checks sent than would be sent to individuals. The household information is available through the census data and would be relatively easy to administer between censuses.
Casey Elliott
Casey,
You are correct, and my use of the word “affordable” was a poor choice. My point is that the prebate is a $600 billion cash grant entitlement, and will surely accelerate the coming federal budgetary train wreck. Entitlements are rapidly squeezing out discretionary spending, including national Defense. We would be faced with raising federal taxes way beyond the 18% of GDP which is the historical average, or cutting other entitlements should the Fairtax become law. Of course, cutting spending would also work, but don’t hold your breath.
Sorry about the confusion.
I am new to this thread, so please excuse me if this has all been gone over before or elsewhere.
Concerning the Prebate - Mr. Van Gieson’s train wreck is not a correct analysis. The Prebate doesn’t take anymore away from the tax revenue than it adds. Other than perhaps administrative costs, the prebate is a wash (meaning it doesn’t add to or take away from the amount of money the government is currently receiving). The FairTax rate (whether you call it 23% or 30%) is designed to keep the current income level of the gov’t. The rate is higher than it would otherwise need to be to cover the cost of the Prebate. So they are taking in more money than they did before (and this is why the train wreck scenario is incorrect), but then they are turning right around and giving it back. I know it sounds silly, but it actually has a lot of benefits. If we didn’t tax the necessities, then the wealthy people (who benefit more because they buy more - and sub sequentially waste more - and also buy the more expensive necessities) would be getting a bigger break than the poor. It also helps to keep lobbyists from being able to get their item placed on the ‘tax-free’ list.
I won’t deny that selling the program to the public would be easier if we didn’t have an earning cut-off or graduated scale for the Prebate (say, those earning over $100,000 either don’t get it at all, or maybe it starts to taper down by percentages to some other cut-off level), but how soon do you think it would be before that level was dropped to raise more money. Transparency is one of the FairTax’s ideals. If there is a way for the politicians to tinker with the code to adjust how much money they are getting, then we loose that ideal. By giving the Prebate to every household based on the poverty level and size of the household doesn’t leave a lot of room to maneuver. They will need to raise the tax rate and it will be transparent to us, the taxpayers, when, where, why (maybe), and certainly who.
Bill wrote “...it doesn’t “untax” the poor, because it’s a direct cash payment. When it’s spent (if it’s spent on taxable goods), it will be taxed at 23 percent just like the rest of the recipient’s income. So it doesn’t cover 23 percent of poverty level spending.”
At first I thought Bill was wrong about the way he was thinking. But after looking at the numbers, I see he is correct. To lay it out for others who think he had it wrong, let’s consider some numbers: For a family of four, the poverty level is calculated to be $26,400. Under the Prebate any family of four would receive $6072 each year regardless of how much money they made. If they actually made (and spent) $26,400 then they would have paid $6072 of that money in taxes ($20, 328 in actual products bought). And they would get it back in the form of the Prebate and could spend it again, but would be taxed on that spending, paying another $1396.56 in taxes ($4675.44 spent on items). So they would have ended up purchasing a total of $25,003.44 in actual items. In order for them to get the full purchasing power of their poverty level income, they would need a Prebate of $7885.71. The Prebate amount would have to be nearly 30% higher for them to retain their poverty level purchasing power. The reduced purchasing power for a family of four (if the Prebate stays as is) would go down to an income level of $20,328. Below that level, the family would have more purchasing power. We have to remember, however, that a current income level (under our current tax system) of $26,400 doesn’t translate into $26,400 of purchasing power. They will have a portion of that income removed for payroll taxes (Social Security and Medicare), so maybe we don’t need to make any changes in order to actually increase their overall purchasing power.
My concern at the moment is the ‘benefits’ that an employer could give to their employees in order to circumvent the taxes that the ‘rich’ would otherwise have to pay. Suppose a company decides to buy a car for it’s executives (or cell phones, or computers - enter whatever you wish here). The company buys them as an expense of doing business and therefore doesn’t pay taxes. They let the executive have full use of the car and maybe even sell it to them as used after a time. At no point did anyone pay taxes on the car, but they got to drive their shiny new vehicle anyway. You know that if an opening like that is there, they will take full use of it. A corporation could even set up a medical or legal center as part of the employment package for its executives - making the purchase an expense of hiring an individual just as their income is an expense. If anyone knows why a scheme like this couldn’t/wouldn’t work, I’d like to hear about it.
Cheers, Rob
Bill, you misunderstood my statement. The purchasing power increase is on top of the prebate, not because of it. You make $280 off the prebate. In addition, purchasing power is increased. Your purchasing power on $15,352 ($13,000 + $2,352) is equivalent to $17,071 using a conservative 10% decrease in production cost. This is equivalent to $1,579 more then the current system after taxes. See this example in which I discuss it in more detail.
Rob, this could be applied to your examples as well.
Rob said:
If anyone knows why a scheme like this couldn’t/wouldn’t work, I’d like to hear about it.
Rob,
I don’t think it is a scheme. If companies expend dollars on cars and let their employees use them, they will have to reduce the employees pay proportionately. In other words, the car becomes part of the employees’ compensation.
Now, on the other hand, if the company sells used equipment to employees - or anyone for that matter - that is an issue.
As discussed before the value of used goods will carry the cost of the tax when it was purchased new. So buying used goods does not get you out of paying the tax. And as such, used goods would not be lower priced because there is no tax at the time of the second sale.
However, if you are buying the used good from someone who didn’t pay the tax in the first sale (like a business that purchased it as a business expense), then the value would be lower and you would be getting out of paying the tax in the second sale.
Is there an accomodation for this in the proposal?
Basically, this would involve any business that wanted to dispose of old equipment. Cars, computers, furniture, anything that a consumer would want.
It almost seems that, even though it is “used” in terms of its wear and tear, it should still be treated as new when sold the second time unless the second buyer also has the business exemption.
My guess is that is how it is covered. Experts?
Mark, you are correct regarding the item as new when sold the second time unless the second buyer also has the business exemption. A good would be considered “used” and not taxable if a consumer already owns it before the FairTax takes effect or if the FairTax has been paid previously on the good, which may be different than the item being sold previously. In the example, the good was sold previously but no tax was paid on it, therefore, when resold to a consumer, tax must be paid.
Morphh,
Thanks for the clarification.
I think the confusion comes from the definition of “new” and “used” in the context of the proposed tax code vs. what the common definition is.
By the tax code, “new” means the tax has not yet been paid on that item and the buyer does not have a business exemption. It doesn’t have anything to do with how much its been driven, how old it is or how many scratches it has on it. “Used” means only that the tax was collected previously.
So it could be old and broken down and still be “new”, or it could be hot off the press and in the original unopened container and still be “used”.
By the tax code definition, you could buy a car that has 75k miles on it and it would still be “new” because it has not been taxed before and you are not buying it under the exemption.
So, Rob, I think that clarifies your “benefits” concern.
Chapter 7 Sec (705) seems to allow for some adjustment of mixed-used items.
Mark and Morph,
Thanks for the clarification. Do you know how they intend to track such items. Presumably the items would be in use for a long time (at least in some cases). Does it just fall to the company to collect the tax when they do sell it and thus be in trouble if they don’t and get audited? It seems that a lot of tax would fall away due to the difference in value between being new and being sold as used (especially with cars that depreciate severly as you drive them off the showroom floor).
There was a point in my response that I was trying to get across. Here is an example to better illustrate. The board of directors of XYZ company decide to supply all of the executives with a package of goods to include new vehicles every year, cell phones and an unlimited calling plan, the latest and greatest laptop every time an upgrade comes along, they open a private medical center and pay the doctors and nurses salaries, etc... all as a condition of employment. The company would only need to reduce the monetary compensation for each executive by the amount they are spending to supply all these services - sans the tax cost. The executive is then receiving all these items without paying the tax on them. On physical items, such as the car and computer, the tax payer would be the one that the company sells it to - presumably a lesser paid individual.
It would be a case where the tax is again not paid by the wealthy, but instead, the lower income workers are picking up the bill. And in the case of services, the tax is gone all together.
Hope this helps...
Cheers, Rob
Rob, from what I understand, that would not be allowed under the FairTax. To prevent businesses from purchasing everything for their employees, in a family business for example, goods and services bought by the business for the employees that are not strictly for business use would be taxable. Health insurance or medical expenses would be an example where the business would have to pay the FairTax on these purchases.
For an individual to purchase items tax-free for business purposes, the business would be required to be a registered seller with the state sales tax authority, and thereby be subject to audit. During audits, the business would have to produce invoices for the “business purchases” that they did not pay sales tax on, and would have to be able to show that they were genuine business expenses. Since 145 million individuals would no longer be filing tax returns, there would only be about 25 million businesses that could be audited. The federal government would be able to concentrate its entire tax enforcement efforts on a single tax—the FairTax. The bill has several fines and penalties for non-compliance and authorizes a mechanism for reporting tax cheats and obtaining a reward.
When the state issues a registered seller’s certificate, it would enable the business to purchase tax free from wholesale vendors, but they must give a copy of their registration certificate to the vendor to leave an audit trail. Businesses would be required to submit monthly or quarterly reports (depending on sales volume) of taxable sales and sales tax collected on their monthly sales tax return. Retailers would receive an administrative fee equal to the greater of $200 or 0.25% of the remitted tax as compensation for compliance costs.
Morphh,
I have been perusing the rest of the site and realize that I’ve gotten off the original topic - I apologize for that, but I assume that if it warrants it, this will be moved to its own thread. So on I go.
I understand everything that you outlined. I guess the real question is whether there is anything in the FairTax plan as written that specifically forbids those types of shenanigans.
I wasn’t talking about the employer buying insurance, but actually setting up a medical office that strictly caters to the executives (or anyone else they deem worthy). The specifics of the benefits aren’t as important as the theme. The employer will claim that, just as paying an employee a higher wage is necessary to attract the right candidates (their salaries will be considered an expense of producing the final product), they need to offer these types of benefits to get the cream of the crop. Since it is part of the payment for their ‘labor’ it would be a necessary expense to produce their product.
I doubt that anyone can’t see through this type of arrangement, but is it specifically forbidden in the FairTax code?
Which actually brings me to another point (again, probably shouldn’t be here, but...): The FairTax plan is currently 133 pages (help me if I’m wrong), but does anybody really believe that it wouldn’t grow over time as new technology arises and times change. If a loophole is there to be found, there will be people to find it. Then the code will need to be modified to have it closed. Now, on to my point. I’ve read a lot of the comments on this site and others about the FairTax. A lot of complaints and a lot of counter arguments. But what we really need to get the darn thing passed is for people to make constructive suggestions on how to modify it so that it will work. But the overriding idea here is to keep it simple, and transparent. The more complicated it becomes, the more likely it will be warped to the detriment of the majority. I know that a lot of people smarter than me have done research on the FairTax, and I wouldn’t presume to tell them they are wrong - on either side. But nobody is able to think of everything. Maybe someone has an idea that could be incorporated into the plan that works to the benefit of all. If all we are going to do is to say it won’t work, than nothing is going to change, because all plans are going to have faults. If you are one of the crowd that thinks the underlying plan of the FairTax is wrong, then submit a plan of your own - or at least start a dialogue that will end in a new plan. I could go on and on about this, but I think you get my point and I’ll leave it at that.
Cheers, Rob
Rob, was the service necessary before the FairTax? Are other companies finding it necessary to offer the service? I’m sure these are the things tax auditors will question. There are parts of the legislation that address shenanigans (most notably Chapters 5, 6, & 7), though I certainly expect someone may come up with something to try to get around the rules. Legislators will quickly see it for what it is and make the necessary corrections if needed. So this goes directly to your second point, yes - it will very likely grow. Hopefully not to much though...
Rob,
Since you asked, I’ll repeat my simplified national sales tax plan which meets your criteria for simple and transparent.
First, a reality check. HR25 has been introduced five times over the last ten years, with little or no changes to the original language as far as I can tell. Despite all the enthusiasm by advocates, the legislation has gone nowhere in Congress. Yes, there are 70 cosponsors or so, but there is still only one sponsor on the only committee in Congress that can move this bill along. John Linder is the only member on the 13 member Revenue subcommittee of the House W&M committee that favors the Fairtax. And that is the subcommittee that has to get the ball rolling. Ten years, no changes or improvements, and still only one supporter where it counts! As my grandmother used to say, if the dogs won’t eat the dog food, buy a different brand of dog food!!
In very broad terms, here is why the Fairtax dog food isn’t palatable on the Hill, imho. The group that put HR25 together badly overreached:
(1) They taxed governments at all levels in order to reduce the sales tax rate and reduce government competition with the private sector, but incurred the strong possibility that that portion of the legislation will be found to be unconstitutional under the doctrine of intergovernmental tax immunity.
(2) State and local taxes will have to be increased by 12% in order to pay the federal sales tax. Hiding the true cost of the federal government in higher state and local taxes certainly is not simple or transparent.
(3) They added payroll taxes to the list of taxes to be replaced, and thereby created a large class of an estimated 30 million Social Security net non-contributers, all of whom will still qualify for full pension and health care benefits.
(4) They treated all current retirees very unfairly by forcing them to resume paying into the trust funds with their sales tax dollars.
(5) They completely untaxed businesses, a major political mistake.
(6) They added gift and death taxes to the list to be replaced, and left the plan open to political criticisms that it is unfairly reducing the tax burden on the wealthy.
(7) They adopted a prebate, the largest cash grant entitlement in the history of the country at a time when entitlements are squeezing out discretionary spending, including critical Defense spending.
(8) They adopted an inventory tax credit which will contribute to a very large federal budget deficit in the first year of Fairtax implementation.
(9) They excluded education tuition, thus allowing the “camel’s nose under the tent flap”. That precedent would certainly encourage future politicians to try to exclude such things as medical expenses, home ownership or anything else they might consider equally important to education tuition.
(10) And finally, They chose a “cold turkey” implementation schedule. The Congress is institutionally conservative and far prefers evolutionary change to revolutions such as the Fairtax.
Here is a simplified national sales tax plan that draws on the lessons learned from both advocates and critics over the last ten years. I call it Fairtax-Lite.
Fairtax-Lite is a broad based 14% national sales tax with (1) no exclusions, (2) A targeted prebate, (3) no taxation of government entities, (4) leaves payroll taxes and gift/estate taxes alone, (5) no inventory tax credits, and (6) implements the plan over five to ten years. I would be happy to address
any criticisms or concerns you might have for each of the Fairtax-Lite components
If you are really serious about getting rid of the income tax and the IRS, I suggest that Fairtax-Lite has a far better chance of gaining Congressional approval than HR25.
Re Post #26
Hank,
Let me be sure I understand your Fair Tax Lite proposal. Your most significant change to the Fair Tax is to take Social Security and Medicare out, both from a revenue and from a tax-replacement perspective.
To test my understanding, let us use the Fair Tax as a starting point and make the following adjustments to get to Fair Tax Lite:
ADJUSTMENTS TO EXPENDITURES AND PROGRAMS FUNDED BY THE TAX:
Reductions:
Partially lower the prebate by making it targeted.
Remove Social Security and Medicare.
Additions:
none
ADJUSTMENTS TO TAX REVENUE
Reductions:
Remove taxation of government entities.
Remove the education exemption.
Remove inventory credits.
Reduce the rate to 14%.
Additions:
Add back estate, gift and generation-skipping taxes.
NOTE: add back payroll taxes also, but they now fund Social Security and Medicare separately outside of Fair Tax Lite.
Did I get it? I will not comment other than to commend you for getting rid of corporate and individual income taxes. As you know from my past writings, having an income tax contemporaneously with a sales tax would be an unmitigated deal-breaker for me. In my mind, that would be an economic perfect storm.
Please let me know how you would propose to phase in the plan and how you arrived at the rate. Thanks.
~Jim Bennett
Oops!
The item “remove inventory credits” belongs under additions to revenue, not reductions. (Looking at it statically).
My error!
~Jim
A hybrid system is not a deal breaker for me.. I’d support it. Now get it in Congress Hank. Haha
Jim,
Thanks for taking a look at Fairtax-Lite. You have it about right, but let me recap the changes that I made.
Starting with the Fairtax consumption base of $9353 trillion and the Fairtax revenue neutral goal of $2228 trillion, I first added $221 billion in private education consumption back into the taxable base.
I then added the entire prebate consumption allowance of $2112B back into the base, effectively eliminating the prebate which was my original plan. (I’ll restore a targeted prebate later).
Removing government consumption from the base lowers the base by $2009 trillion and lowers the revenue required by $211 billion. (Note: The reduction in revenue was made because Kotlikoff insisted that when BHI included the $916B in the base, an offsetting revenue addition of $211B was also made. Governments can’t tax themselves and raise any new revenue, so the offset was required. However, I’m not so sure any more that a revenue offset was added, in which case, the $211 reduction would be in error. We can check that out at the end and see what difference in the rate might occur if the reduction wasn’t made).
Leaving the payroll and estate/gift taxes in place reduces the revenue neutral requirement by $897 billion.
Eliminating the inventory tax credit reduces the federal budget deficit by $600 billion in the first year of implementation, but does not change the base/rate calculations. This is because the inventory credit was never included in the Fairtax base/rate calculations. It was essentially ignored by the study group.
The five year transition period does not change the rate calculations. (More about transition later.)
By making these changes, the consumption base would be $9679 billion, the revenue required would be $1120 billion, and the rate would be 11.57% inclusive and 13.1% exclusive.
Recognizing that some sort of prebate would probably be needed, even at these significantly lower sales tax rates, I then provided a targeted prebate to 37 million families at or below the poverty level with an annual cost of $59 billion. Adding this revenue requirement back in results in a base of $9679 billion, $1179 billion revenue required, and an inclusive rate of 12.2%, exclusive 13.9%. This is how I arrived at a 14% estimated sales tax.
Going back to the issue of whether or not there was a revenue offset to the inclusion of federal government consumption in the base, if the answer is no, then the revenue required with a targeted prebate would be $1390B and the rates would be 14.4% inclusive and 16.7% exclusive.
As for a transition that would be more evolutionary in nature, and thus more appealing to Congress, in round numbers, just implement a 3% national sales tax in year one, increasing the rate by 3% each year over the next four years to arrive at a total of 14%. The last year, or for that matter any year, can be adjusted for actual needs. At the same time, reduce income taxes by 20% per year with a simple line entry after 1040, line 63-(total tax-20%), and increase the tax reduction by 20% each year until the income tax is zero in year five. Not very complicated and very easy to implement.
Compared to the Fairtax, the Fairtax-Lite proposal would: (1) Remove any possible constitutional challenge from the States; (2) Reduce the number of workers that pay no net federal tax to current levels; (3) Restore fairness to our nations retired community; (4) Continue to have businesses contribute their share to the Social Security Trust Funds; (5) Reduce the coming entitlement crunch; (6) Eliminate the excessive budget deficit in year one of implementation; (7) Reduce the possibility of future exemptions; and, (8) Allow the government to “try before buy” with ample opportunity to correct unforeseen problems without wrecking the national economy.
Jim, I understand your paranoia about having both an income tax and sales tax in play at the same time, but I also think it much too risky to implement an untried national sales tax plan overnight. Having all our eggs in one basket causes me some paranoia as well. We have lived with the income tax for 95 years, getting rid of it in five years doesn’t seem to me to be so unreasonable?
Morphh, with the help of the outstanding members of this blog, I’ll wager I could get more than 70 cosponsors overnight if given the chance. Haha!
Hank,
9 and 10 right on. 7 yes, but I think it needs to be included for political purposes. I’ll mostly disagree with the rest. 4, you can’t ignore embedded taxes.
Hank,
Although I still support the Fair Tax proposal as drafted in HR25 (I’ll spare the group my reasons), I would have to congratulate you on a proposal that is the first constructive alternative I have seen. It makes you stand out favorably from the rest of the Fair Tax critics.
I do have a concern, knowing how committees of people (and particularly Congress) work, that the phase-out of the income tax under Fair Tax Lite can stall - and eventually stop before it reaches its conclusion. Nevertheless I am gratified by the goal of the elimination of income taxes and the IRS. Unlike the Flat Tax for example which retains the IRS, Fair Tax Lite would require the IRS to be brought back in order for Fair Tax Lite to be undone. I think that step would prove unpopular.
My plan is to continue to work with FairTax.org to build the grassroots base and push for HR25 as currently written. FairTax national reminds us that Congressmen and Congresswomen don’t listen to facts, they listen to numbers, and the numbers are growing.
However Fair Tax Lite has the makings of a fallback negotiating position in the event HR25 should get to the floor of Congress and then stall.
Congratulations on a well-considered proposal.
~Jim Bennett
Summit, NJ
PS: Let me make one point about my opposition to income taxes. I personally was never audited by the IRS or had a run-in with them. My position is simply one of economic philosophy.
Hank,
I definitely agree your five year phase in. My main criticism of the fair tax (and remember I am a supporter) is that the implementation will be a huge shock to the economic system mainly manifesting in inflation as wages attempt to reach equilibrium. I’ve been kicking around the same idea of a five year phase increasing the fairtax and decreasing its replacement taxes proportionally.
Further, since there is so much debate on the actual rate needed, I thought we could have a five year target revenue neutral goal. After each year based on how close the fairtax was to the revenue neutral goal, the rate could be adjusted. So if economic growth outdid the new evasion-avoidance schemes, we could lower the rate. I’d like a pre-established formula for deciding the rate adjustment, but I’m pretty sure congress would never allow that.
Hank — Your FairTax Lite idea would probably be a step in the right direction. Particularly the five year implementation.
My assumption is that politicians and citizens would quickly discover that the tax rate would need to be too high to completely replace the income tax system and it would be impossible to enforce above a certain level. Thus, we would end up with both an income tax and a consumption tax (as well as SS and Medicare taxes), which would be Jim’s nightmare come true. However, by implementing a consumption tax, that could give politicians an incentive to greatly simply the income tax at the same time.
What we might end up with could be similar to the tax plan proposed by Micael Graetz. http://en.wikipedia.org/wiki/Graetz_tax_plan
While I’m not familiar with all the details, I understand he would eliminate income taxes altogether for incomes under $100,000 and have a flat income rate of 25% on household incomes over than $100,000 and corporations. He’d make up the difference with a VAT. Not sure what he’d do about social security and Medicare taxes. Guess I’ll need to read his book.
Anyway, Hank, it’s a testiment to your diplomatic skills that you could propose an alternative to the FairTax without immediately being crucified (at least, as much as one can be crucified over cyberspace.) Now, you just need to get on a certain talk-show!
Hold your thoughts on FairTax Lite - I’m going to start a new thread for it...
Hank, I appreciate your work. It’s coherent and well thought out. I do not agree that we should support your Lite edition just because some of us don’t believe it’s palatable to our Congressmen.
Did you know there is legislation in Congress to eliminate the entire Internal Revenue Code on July 4, 2010, that requires Congress to completely replace it with something new? (Senate Bill 747, Tax Code Termination Act, by Johnny Isakson, R-GA).
There is unrest in Congress and they are searching for concepts and answers. They are listening. Even George Voinovich (R-OH) is a co-sponsor for S.747 and also introduced S.304, the SAFE Commission Act to study the United States fiscal challenges and recommend changes. They already plan to look at the Flat Tax, the FairTax and other proposals. They are listening.
During all of this, the FairTax legislation is on front of Congress now. It is a well studied, complete proposal and gives us a framework to rally around.
As they say in the Calvary, “Keep the ‘skere on!”
Casey Elliott
casey.elliott@earthlink.net