Understanding the BHI FairTax rate
After some discussion in multiple threads, I’ve collected some questions regarding the BHI FairTax rate study to pose to BHI, Kotlikoff, and Walby (AFFT). Here are the questions thus far, which I’d like to keep short. I’m creating a new thread as I expect we’ll give this a good bit of discussion.
(1) When the study team added federal consumption of $913B to the base (denominator), did they add an offsetting amount to the revenue(numerator)?
(2) When the study team divided the revenue by the base, why did they label the rate as inclusive? (Ti = 2228/9355 = 23.8% exclusive)
(3) If we multiply your 30% exclusive rate by the base of $9355, the revenue generated is $700B more than the revenue neutral goal of $2228T. Is the Fairtax really revenue neutral?
(4) How does the equation, te x (C+G) = G x (1+te), become equation 27 from the paper. ti = 2,228 / (9,189 - 0.01 + 913 + 1,089 + 276 - 2,112) = 23.82%
(5) The BHI study assumed a deficit of $476 billion for 2007; however, the deficit turned out to be only $162 billion. Did BHI overstate the deficit in factoring the rate or would the economic growth for 2007 balance this out?
If this looks ok to everyone, I’ll send the e-mail.
Hank, wasn’t #1 answered by Kotlikoff in post 9 under the florida discussion?
Hayden, I didn’t add your other question as it seem to come down to tax avoidance, which they somewhat responded to in their paper. Also trying to keep the e-mail short. I didn’t think hitting them with a request for tax avoidance estimations would really be anything they would answer.
Morphh,
Not exactly. Larry’s answer said that the exclusive rate(Te) was G/C, and went on to say that was the formula they used in the study. He explained that that meant that the government paid no tax and bought C with taxes (G) paid by individuals. But, if the federal government paid no tax, then you can’t include federal consumption in the base, because the base by definition is taxable consumption. Both Larry and Gale have made it clear that the federal government creates no new revenue if it taxes itself. So, I believe the base consumption should have been reduced by $913B and the rate would have been 2228/8442=26.4%, not 23.8% as shown in the BHI study. Alternatively, they could have left the $913 in the base, but then they should have added $242B to the numerator(G). Either way the rate is 26.4%, and that is an exclusive rate (no revenue in the denominator). The government can’t tax itself, and any federal government involvement must be a wash.
Otherwise, the email looks good, and we really need a response. There may be a very simple answer, but I haven’t been able to uncover it.
I would like the issues I raised here regarding the census data and how it affects the prebate calculation answered. One of the issues is an obvious error (you can check yourself). The other (regarding nonfamily households) might have some interpretation involved but I’m pretty confident I am right.
Morph — I’ve just returned from vacation. I appreciate your efforts to get some hard answers from the economic gurus behind the FairTax, so you can certainly send what you want. However, I believe that without including some reasonable estimate as to tax avoidance (and by that I mean the delaying or shifting of consumption by consumers in order to LEGALLY minimize taxes), you can’t get a meaningful result. In addition, of course, there will be ILLEGAL tax evasion.
Also, I would like to know just how much in taxes the average American family would need to pay under the FairTax. From my calculations, it would be around $37,000 per family, which would require annual spending of around $160,000 per family on TAXABLE goods and services. I’d like them to comment on how that could even be possible.
Hayden,
I suspect that their answer to your first question will be that evasion, avoidance, and other pesky problems that might cause the rate to rise, will be more than offset by the economic growth that the ESP model is forecasting?? (great name for an economic model that looks out 100 years?)
As for the amount of taxes individuals would have to pay under the Fairtax, what revenue did you assume, and how many families? I used private consumption of $2124T from the BHI study, and 135 million families based on the number of tax returns filed in 2006. This comes to $15,700 per family and taxable spending of $68,400. And I assumed that at that level of spending, gross income might be $82,000 to account for untaxed spending.
With a median income of less than $50,000 last year, it sure looks like there may be a disconnect here, possibly caused by the fact that lower income workers have a lot of debt, and much higher consumption than their income might support. The Fairtax also taxes wealth which is not counted as income, I guess?
None of my rough calculations reflect the possibility that there may be two significant errors in the current Fairtax base/rate calculations, but we will have to wait for a response to Morphh’s email to the experts.
Hayden,
Oops!..That private consumption number should have been $9235T, and the revenue generated at 23% would then be $2124T. Sorry!
Hayden, I want to make this e-mail specific to understanding the BHI rate study. Tax avoidance / evasion is a study within itself and was already commented on in their paper. I don’t think we have a misunderstand or confusion over what they meant. I want to keep this e-mail as short and to the point as possible. If we add a bunch of indirect questions, it’s unlikely to get answered. It will look like an attack instead of clarification. We’re looking for understanding, not to wave anything in their face. You’re welcome to write that e-mail yourself.
Fred, could you rephrase your findings into a question you would like answered? Here’s my take...
(1) In Appendix B, households were inflated 2004 - 2007 by a stated 2.77%; however, it appears it was only inflated by .92% (one year). Please clarify
(2) This is also a question with Gale’s study. The Census data (as shown in Table H1) breaks down households into “Family Households” and “Nonfamily Households.” It appears that the prebate was based on households in that if there were two or more people in a nonfamily house, only one would get the full amount of the prebate for a single person and the rest would get the amount for a “lineal ancestors and descendants.” However, the prebate is based on families, not households. Nonfamily households in the Census data are unrelated people living in the same dwelling, e.g., roommates. Under the FairTax, if there are two more unrelated people living in the same household (nonfamily households) they are considered separate “families,” would file for the prebate separately, and they would each get the full amount of the prebate for single people. Please clarify
I think we could probably combine Hank’s question (2) and (3) to make the question list appear shorter. Perhaps Fred can better summarize his last question.
Morph — Whatever you send it find. By the way, even though I complain a lot about the (allegedly) deceptive tactics of the FairTax proponents, I don’t want you and Mark to think I through you guys in the same category of FairTax proponents (or weasles, scoundrels, crooks, liars, etc.) that I complain about. I realize you guys are sincere. Misguided, misinformed, mentally deficient, perhaps, but certainly sincere.
Hank –
1. The latest budget proposed by GWB is $3 trillion.
2. Add $500 billion due to the prebate.
3. Total government spending would equal $3.5 trillion.
4. Divide by 110 million families (per census bureau).
5. Averaget taxes required per family = $32,000
6. Divide by .23 (the proposed “tax-inclusive” rate)
7. Required spending per average family on taxable goods and
service = $138,000.
8. Mean family income (per census bureau) = $66,000.
I believe the discrepency between the number of families per the census bureau and the number of income tax returns filed is due the fact that a family unit (as defined by the census bureau) might have multiple tax returns filed. (i.e., spouses filing separately, teen-age or college-age children filing separate returns, etc.) In any case, it doesn’t really matter. Assuming that the 135 million number was the best one to use, the mean family income would therefore presumably go down as well unless you have better info on the mean income reflected in the income tax returns.
If you say that government spending must be added to private consumption, my response is that the government must get its money from the tax payers, so it all comes out of consumers’ pockets anyway.
Dear Hayden,
Don’t forget, businesses, government and aliens (especially the illegal kind) also buy stuff. I’ll get back to you when I get a chance to review your numbers.
Here’s a frightening thing. A friend of mine told me that our income taxes where sufficient to pay for our government and the entire deficit equals our military expenditures over the last 60 years. If true, that’s chilling. President Eisenhower’s military industrial complex come to life.
Misguided, misinformed, mentally deficient, sincere - yep, that’s me!
Casey
Hank, I was looking over this to prepare the e-mail and I’m not sure where you were with questions 2 & 3. Still questions? Reworded? Thanks... Sorry it’s taking so long. Every time I get some time to play around, I seem to spend my time involved in the other discussions.
Morphh,
How about we scrap #2, and go with #1 and #3? I think we both agree on #2, and the reason they call it inclusive.