Nothing is Certain but Death and the FairTax
In a piece on Townhall today Mike Adams offers an amusing look at conversations from the trenches of a grassroots movement. The premise is that he carries around, in public, a copy of FairTax: The Truth which draws out unsolicited comments from various critics. Here is one:
Supporter of the Flat Tax of Yesterday (SOFTY): Sorry, I support the flat tax.
Adams: How often do you change your underwear?
SOFTY: What?
Adams: I assume you change your underwear every day?
SOFTY: Yes, what the hell does that have to do with it?
Adams: That means you’ve changed underwear 8036 times in the last 22 years.
SOFTY: And?
Adams: And the I.R.S. has changed the tax code 16,000 times in the last 22 years. They change the tax code twice as often as you change underwear. How long do you think a flat tax would remain flat?
SOFTY: (Silence)
Adams: Would you like to borrow my book?
Actually, the IRS didn’t change the tax code even once in the last 22 years - Congress and the President did. And, while the FairTax bill may do away with the IRS, Congress and the President will still be there to make mischief.
I never understood why people think the FairTax wouldn’t be manipulated by politicians - it’s just as susceptible to tinkering as the current system (maybe more so). If the FairTax were passed, does anyone really think the politicians and lobbyists are going to pack up and go home. IMO, wiping the slate clean would make them more active than ever.
LOL - That’s a good one. Ok, who’s going to admit to a higher ratio. haha I fully expect a critic here to change his/her underwear three times a day to kill this argument.
Regarding his Archer comment in the article, the study was for European and Asian companies, not solely Japan.
Fred-
The semantic distinction regarding “who” changed the code is not important. Ok, so the president and congress make laws that the IRS implements and enforces - there are three parties involved but no matter how you slice it, changes happened. That’s the point.
On susceptibility to future change I believe the design of the FairTax is far stronger than both the flat tax and the existing code. Does anyone think that politicians and lobbyists are going to pack up and leave? I certainly hope not - I know I don’t. To the contrary, to me, it is the recognition that those two elements will always be there that drives the design of the FairTax.
There are two basic design characteristics in the FairTax that I think are important in this regard:
First, anonymity. If the government doesn’t know who you are, who you work for, your job title, where you live, what you make, the color of your skin, etc., then the vast majority of their justification for tinkering has been removed. For someone that wants central economic control the anonymous element of the FairTax is their worst nightmare.
Second, simplicity. Very few moving parts. I think simple structures are more resistant to change because they make the motivation for proposed changes more transparent and the likely outcome more predictable. Complex structures on the other hand support an endless number of justifications for change (often conflicting within the same proposal) and, once changed, measuring the effect is very hard and can often be interpreted in as many different ways as the original justifications. The bottomline is that complex structures are a paradise for politicians and lobbyists.
Keeping politicians out will require a constant vigil. There is no magic bullet. But just like mousetraps, some designs are definitely better than others.
Morphh, have you ever been able to find the original source of that Archer survey? I’ve looked and never been able to find any real data. I sure would like to look at the methods used. I’m not sure how you would ask a corporation if they would move to the US if we switched to a consumption tax (which, BTW, includes the flat tax). Who do you talk to in a corporation that could answer that question? The CEO? Did they survey 500 CEOs?
The best that I was able to gather was Congressional testimony regarding the study. I have not seen the study itself, but it was supposedly done by Princeton University econometrics. I’m not sure if it was a generic consumption tax. Archer opposed a flat tax and I think he commissioned the study. It included dropping the corporate tax rate to 0%. Here is a quote.. Former House Ways and Means Committee Chairman, Bill Archer reported, “A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, ‘If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?’ Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America!”
That’s pretty sketchy. This is one of those things you only hear about in the FairTax circles. Until I see the original source, I’m not buying it.
Here is a congressional reference. Might add a little more creditability to the statement.
On page 8 (page 14 in PDF count) Linder states “You, Mr. Chairman [speaking of Archer], have said—you have quoted on this floor on several occasions that a research group interviewed 500 international corporations domiciled overseas, asked them what they would do if we abolished all taxes on income and went to a sales tax. Eighty percent said they would build their next plant in America; 20 percent said they would relocate to America. ...” On page 23 (page 29 in PDF count) Linder states “Let me add something to that. I mentioned in my opening statement that the chairman often refers to the poll done by Princeton Group of foreign companies wanting to relocate here. ...”
So it seems clear to me that Archer was at least making the statement. Linder might be able to provide the survey/poll.
Well Linder says here it was “Princeton Group.” Wikipedia states it was “Princeton University Econometrics.” The book (”America’s Best Kept Secret: Fairtax”) stated on Wikipedia as a source for the “Princeton University Econometrics” claim, says it was “Princeton Economics.” (Which raises the questions, why would Archer use an outside group when he has the Congressional Research Service available to him?)
And doesn’t 80% building their next plant in the U.S. seem awfully high? Doesn’t your BS detector buzz even just a little when you read that (do 80% of those business even have their own plants - are 80% of businesses even manufacturers and lot of manufacturing is outsourced)?
This gets less clear the more you look into it.
No. There are only two parties envolve in making changes to the tax code - Congress and the President. And they aren’t going anywhere even if you pass the FairTax. That’s the point.
First, I don’t think “the vast majority of their justification for tinkering” with the tax code is so the government can get more demographic information - it’s politicians currying favors with voters or groups. And that desire will still be their with the FairTax. Second, the FairTax would still require your employer to submit the amount of your wages to the government - so they will know who you work for and how much you make. If you want your “prebate” you will have to provide where you live and who you are. And the FairTax wouldn’t change the census, so the government would still be asking the color of your skin and other demographic quesitons.
Taxing every retail purchase of goods and services is simple? You may have smaller cogs, but you have a lot more of them. You also have more specific types of transactions. It would be much easier to target specific types of purchases for manipulation. The proposed gas tax holiday is just small taste of what you could expect under the FairTax. (Here’s a quick thought, suspension of the FairTax on construction goods and services in a federal disaster area like Katrina. “Why is the government taxing us when we’re just trying to rebuild our homes?!?”)
Well the people aren’t vigil now. What makes you think the FairTax would change that?
I don’t think you are understanding that the people want these “complexities.” They want the mortgage deduction. They want the child credit. They are the ones who ask for them. And they will keep asking for them under the FairTax and the politicians will fall over themselves to provide them.
Ok, so maybe you are saying that the author is implying that the FairTax will not be able to be changed because the IRS is the one that makes the changes and with the FairTax the IRS no longer exists - therefore no changes. That’s valid. Upon re-reading, I think he does probably give that impression. I guess I personally didn’t get that impression because I believe that the FairTax is more resistant to change than the flat tax with or without the IRS.
I was not suggesting that the justification was to garner more demographic information. I was suggesting that because people are legally bound to file the demographic information and because the tax code is tied directly to it, the levers are there for politicians to use. It is that information that allows them to form groups in the first place. That way they can propose that the returns with demographic information A should have law A applied and the returns with demographic information B should have law B applied. I am suggesting if you remove the politician’s legal handle on the demographic information, you have substantially damaged their ability to create interest groups. Of course, this won’t do anything to the reduce the desire to create interest groups - that’s another story.
We are talking in relative terms - specifically relative to the current code. In that context, yes, of course it is simple(r). There are less than 1/6 of the collection points. Compliance with the current code costs taxpayers half a trillion dollars - that’s an additional 20% on top of the federal budget just in the transaction cost to fund it! Yes, the FairTax is simpler by any measure.
I think you are twisting the words pretty hard here Fred. I don’t believe people want complexity. What they want is to reduce their burden and the only way to do that in an income system is to either work less or create special interest groups. With a consumption system, the two options are to either buy less or demand the government spend less. I’ll take the latter
The FairTax is hardly subject to manipulation! The rate is set at 23%, when you try to move that up do you know how crazy people will get. They will see the number going from 23% to 24%. With the current system then don’t see that rule 100.1.100.382 (f) has been purged.
Great analogy.
Neil — You say the rate is set at 23% and people will go crazy if the government tries to raise it.
So, what will the government do when the first year under the FairTax yields a deficit of $525 billion (which their own study shows would happen at a 23% tax inclusive rate), in addition to the $600 billion in transition costs. (And lets not even talk about the 100’s of billions of dollars that would also be lost through tax evasion and tax avoidance.
To put it simply, what will the government do if it doesn’t work?
Actually, the rate isn’t set at 23%. With the bill as it’s written, it changes every year. But changing the rate isn’t the type of manipulation we were discussing (there haven’t been 16,000 rate changes in the last 22 years), we were talking about changes to the base.
Hayden, you know the FairTax is meant to be revenue neutral, not spending neutral. You also know the economic growth factoring for the study year would very likely reduce the deficit to existing levels. I’m not sure why you continue to trounce on these point, knowing them to be empty. You certainly have better arguments than rehashing this. While I don’t agree with your costs figures, the other points are good. I’m not sure if transition costs is something that should be worked in year one. It seems to make more sense to incur this cost over a longer budget period. Now this is something that I can agree would effect the deficit and should be factored over the budgeted period. I’m also not opposed to a transition period, which may help us iron out potential issues.
Comment to all - what would be an effective transition strategy? I think I would eliminate payroll taxes first (since this would apply to both the employee and business). I’d then transition the corporate income tax and personal income tax at the same time in increments. Combining the transition on personal and corporate income taxes should help balance the regressive / progressive nature (so you don’t get to a point where the increase in the sales tax is only reducing tax on high income). It may even be best if all income taxes were tied together, dropped as a percentage of the rate across the board (done incrementally over the transition period). Poison pills, sunsets, and supermajority provisions to make sure it all stays on course. I’d give it about a 2 year transition. Of course, I’d prefer it to all be switched over day one, but I’m open to other options in this area.
Morph –
As indicated by Neil’s post, many of the FairTax supporters think we’ll just get rid of our existing tax system and implement the FairTax at 23% then the deal is done.
My point was: What if the whole thing doesn’t work? What’s Plan B?
You can’t just say, well, in that case, we’d go back to our prior income tax system, because everyone with any significant deferred income (real estate investors, for example) will realize all of that income in the year(s) that the FairTax is in effect so that they don’t need to pay any income or capital gains taxes. If we subsequently went back to an income tax system, all of the potential tax revenue from that deferred income will be lost forever.
I believe you are correct that the FairTax wouldl need to be transitioned in over time to make sure it works and to iron out the kinks, but, with all due respect, you would be hooted out of any FairTax gathering (and many Republican circles) for making that sort of heretical suggestion.
Hayden,
I’m willing to take the chance on the Fair Tax knowing my 2 1/2-year-old grandson’s future may be at stake. Cooper has a certain dim future if we don’t.
~Jim
Morphh,
I’d also start with the payroll tax. What would you calculate the tax rate would need to be to replace just that tax? What adjustments do you think would need to be made to the revenue requirement (put the IRS costs back in?) and consumption base?
With regard to post 14, in my opinion, a five year transition plan (give or take) would be preferable, even to a one day switch. Introduce the fair tax 20% at a time and reduce all other taxes uniformly 20% at a time until the switch is complete. There could be a 5-year “real” revenue neutral goal that would adjust the fair tax rate based on meeting the target (I would like a predetermined formula).
This would help wages adjust more gradually. It would also make the transition smoother for people moving away from the mortgage interest deduction and employers moving away from the health insurance deduction. If the tax laws were frozen, except for the rate reduction, at least some tax decisions wouldn’t have to change from year to year. Also, people will be more likely to free up capital if they aren’t waiting for such a huge payday, i.e. if they new their capital gains rate would go from 15% to zero in two years they would be a lot more likely to wait than if it went from 15 to 12 to 9, etc.
This might be a change of subject, but since the fair tax gets rid of the employer purchased health care tax advantage, does anyone see a benefit of the fair tax when it comes to lowering health care costs (not to mention, labor mobility)? Now that more people will own their own health insurance, they’ll demand lower prices.
My concern with the graduated transition is that Congress will get angst, and the transition will stall, leaving us with both an income tax and a sales tax - i.e., an economic perfect storm. For that reason I favor the cold turkey approach over the figurative nicotine patch (or perhaps I should say methadone). The inventory credit and the indexing of Social Security under the Fair Tax should minimize the jolt.
~Jim
Jim — Without intending this to be sarcastic, I am somewhat surprised to hear that would be willing to bet on a completely untested, never-been-tried-anywhere-in-the-world, tax theory for the sake of your grandson’s future. Something tells me you would be more careful in going about choosing a child seat for your grandson.
The whole debate with the FairTax reminds me of the “debate” on Medicare Part D prescription drug that the Bush administration pushed a few few years back. Some Republicans with back-bone balked at the whole thing. Others said they would pass the bill only if the 10-year cost would be less than $300 billion. The administration swore up and down that the cost would be less than $300 billion, while all the while suppressing their own studies showing that the cost would be far greater. After the bill was signed into law, the study becomes made public, which of course in itself underestimated the cost of Medicare D, and now we are all stuck paying for a trillion dollar boondoggle.
The administrations motto was: pass the bill now and reap the political benefits, some future administration (and future generations) will need to worry about the price.
That’s sort of the same way the FairTax is being pushed. The primary proponents supress any discussion of the true costs and problems with the FairTax, and instead push these endless rosy scenarios. The attitude being, we’ll pass the FairTax now, and worry about the consequences later.
I am less concerned about the FairTax actually being passed into law, because if it ever got anywhere close to being passed you would see far greater scruitny from economists, the news meda and Congress so its problems would become so well-known that talk-show hosts could no longer control the message.
My real problem with the FairTax is that it is so appealing to a large portion of the Republican electorate (who either don’t know or don’t care about the many studies and report of its problems) that unscrupulous politicians get elected by promising to support the FairTax even when they know full well it could never work. I suppose we will be stuck with unscrupulous politicians no matter what, but it is still frustrating to those of us who want integrity from our elected officials.
By the way, I sent Mike Adams a (very polite) email asking him if he was aware of any independent research supporting the 23% tax rate. No response yet. If I get a reply, I’ll post it.
Regarding #18…Andrew, your health care costs question might seem off topic; but, the answer might be a deal-breaker for policy makers and the public. I’ve gone back and forth on some fundamental questions:
Would employees receive wage compensation to replace “lost benefits”?
(Example: an employer pays $6,000 in health insurance premiums today for an employee. How much of that would the employee receive in wages instead?) Would retirees with coverage provided by a former employer receive like compensation? Those receiving private employer or government disability payments?
Would mandatory employer contributions for workers compensation insurance continue and would they be taxable?
Without the cost moderating effect of large employee-wide risk pools, would insurance become unaffordable or un-renewable for some households: those with a disabled member, those having a member with a pre-existing chronic condition, those having a member newly diagnosed with a chronic condition; those filing higher than average claims for whatever reason?
Would health care providers have the option to refuse service to those without the resources in hand (insurance, savings) to pay the full cost of treatment?
I haven’t been able to decide what portion of those covered through employer plans might be priced out of a non-employer based market. Or what portion might opt for the lowest cost plan regardless of coverage sufficiency. The question for me is: if the number of under or un-insured increases, would that result in health care rationing, more taxpayer subsidized care, a combination of the two or lower costs no matter what?
Hayden,
In response to post 20, I would take any car seat on the market versus strapping my child to the hood of my car. To clarify, the fairtax is a car seat and the current tax system is the hood. Many fair tax opponents state that the fair tax is just too risky, i.e. we don’t know what is going to happen. But we don’t know what is going to happen with our current tax system either. History has shown that overall the government takes more and more of our GDP (I believe it was ~10% in the 30s and is ~20% now), so under our current tax system where does it stop. We don’t know. That doesn’t mean the fair tax will necessarily change the confiscation of our wealth, but the current tax system surely doesn’t.
Ellen,
In regard to post 22, before I answer your questions, removing the tax benefit does not make it illegal for employers to provide health insurance. They’ll still have have the pooling benefit. It just removes the huge market distortion currently caused by the tax benefit.
“Would employees receive wage compensation to replace “lost benefits”?” Yes. Not because they want to, but because of market conditions.
“Would retirees with coverage provided by a former employer receive like compensation? Those receiving private employer or government disability payments?” That’s a contractual question between employer and employee. Why does the former employer provide the health insurance now? I am assuming they are somehow obligated.
“Would mandatory employer contributions for workers compensation insurance continue and would they be taxable?” You could still have mandatory contributions. I am not sure about the taxability.
In response to para 4, all those problems still exist today, but I am assumining you are saying they are mitigated by the fact that many of these people get around this by just joining an employers large health care pool. This may be so and moving away from employer sponsored health care would reduce the size and number of these pools. However, there is nothing stopping people from creating risk pools that are independent of employers (as far as I know. There may be laws).
“Would health care providers have the option to refuse service to those without the resources in hand (insurance, savings) to pay the full cost of treatment?” They would have no more option than they have today.
“The question for me is: if the number of under or un-insured increases, would that result in health care rationing, more taxpayer subsidized care, a combination of the two or lower costs no matter what?” I don’t quite understand this question. I believe costs will be lower. As some employers stop providing health insurance, some of those who took the benefit may decide not to purchase it in the open market. That would be set against the currently uninsured that are priced out of the market currently because of the lopsided employer advantage.
Re: 22
Ellen:
Healthcare and insurance are interesting subjects under the Fair Tax, but the benefit is subtle.
The starting point is that medical inflation today exceeds the general rate of inflaction largely due to the prevalence of third-party payors, which our tax code encourages. The one field of medicine whose price increases have not exceeded the rate of inflation is cosmetic surgery - where insurance generally is not available.
Under today’s tax code, health insurance is tax-deductible to the employer but not tax includable as income to the employee. Therefore, when today’s employer seeks to have the employee participate in control of his or her healthcare costs in a meaningful and affordable way (such as through co-pays and deductibles) the employer finds itself wasting a tax shelter.
The Fair Tax redresses the tax disparity between employer-provided health insurance and individually-purchased heath insurance by making the premium taxable both to the employer - under the proxy buying provisions of Section 901 - and to the individual purchaser, without distinction. Once the tax is paid on the premium, the covered healthcare service is deemed to have paid the tax and does not again pay tax at the point of delivery. (Deductibles and co-pays, however, do pay tax.)
It is difficult to predict the short-term impact on the health insurance industry and the population, but over the long term healthcare should become affordable to more people through the taming of medical inflation.
~Jim
Andrew, I think you can stop worrying about your child. History has not shown the government to be taking more and more of our money. In fact, federal receipts as a percentage of GDP have be pretty level since World War II - hovering around 18%. If you want to worry about your kids, don’t worry about the current tax system - worry about spending (a problem the FairTax actually exacerbates by increasing Social Security payouts). The debt is the real threat.
Actually, what I really wish is that some state would go ahead and institute their own mini-version of the FairTax so we’d all at least have some idea as to how it worked. I vote for Indiana, or wherever the heck Morph lives.
Or even better, let one of the economic basket-case countries try it out. You have to figure they can’t have much to lose, particularly since any tax system they currently have is probably being ignored.
Re: 26
Hayden,
It’s true that no country has tried a Fair Tax, but two of the world’s largest economies, Florida and Texas, have no state personal income tax and have experienced better than average growth over years. While these are not perfect laboratory cases, there is also empirical evidence of a correlation between low or no income taxes and high growth. See research (some old) by Dean Stansel, Richard Vedder, Iowa Tax Education Foundation, Thomas Dye, and your friend Stephen Moore.
Perhaps a state-level Fair Tax will make it onto the Michigan ballot this year, and we will see how it workd. I thought I also heard once that Georgia was debating getting rid of its income tax. Does that get your vote?
~Jim
Jim –
I’m from Texas and moved to Georgia a few years ago. Believe me, I HATE paying the Georgia income tax. However, Texas had very high sales tax rates (in Houston, it was 8 1/4%)
But more importantly, Texas (and presumably Florida) don’t rely just on sales tax. They have VERY high property taxes (3%-4% of the value of the property) and have started imposing other excise taxes, business licenses, personal property taxes, etc. trying to raise additional revenue.
And I believe Texas gets a lot of revenue from oil and gas tax, and Florida of course gets a ton of revenue off of tourism. Finally, Florida and Texas have been going through persistent finance/budget crises for the last few years.
My point is not that argue income taxes are a great idea, but that it might be overly simplistic and not entirely accurate to say that since Florida and Texas don’t have state income taxes, they prove that the FairTax would work on a national level. (I realize you didn’t say that, but I’ve seen others make similar arguments.)
The so-called Georgia GREAT Tax would not eliminate the Georgia state income tax, but would replace property taxes with an expanded sales tax. So it’s not really analogous to the FairTax and, for various reasons, will probably never pass. However, in answer to your question, I would be very interested in seeing a state FairTax proposal for Georgia. I’m not saying I would necessarily support it, but I’d like to see how the numbers would work.
The FairTax will likely not work at a state level unless or until a national version is implemented, for the main two reasons most educated people have against the FairTax.
Namely, border controls and the higher prices of imported goods.
I live in a state with a fairly high income tax (~5%) and a fairly high sales tax in most towns (~7.5-8.5%) and a fairly high property tax (I believe it’s around 8-10%).......meanwhile, my state lags behind most of the rest of the country in nearly every government sponsored benefit (crappy roads, crappy schools, crappy police, etc.)
Meanwhile, nothing much is made in my state, and 4 of my 6 border states are less than 3 hours away.
With so little made in my state, there wouldn’t be much of a decrease in untaxed prices, so the state consumption tax would push retail prices up pretty much across the board by around 80% of the SCT rate. this is going to encourage me to drive to one of my border states to buy the bigger goods (true, i’m not driving 2 hours to buy milk, but i’ll drive to buy supplies for my house remodeling and my new furniture).
this will cause my state to either control the importation of untaxed goods into the state (and spending more money to do so, causing a rate increase, making the trip even MORE enticing), or my state’s economy will fail while the border towns in the surrounding states boom.
It’s possible that my home state could start producing more stuff in state to sell here, but the current education and infrastructure levels will not support the kind of growth necessary.
The same argument cannot be as easily made against the National FT, however.
First off, Mexico and Canada are more than 2 hours away from most of the American population.
Secondly, America used to make a bunch of the stuff Americans buy. Under the FT, it probably would do so again.
the FT will work, but Americans will have to be willing to allow the Border Patrol and Customs to do their jobs, and we’ll have to want to “Buy American”.
Justin — I’m curious as to what state you live in. I’m guessing Ohio.
And, I think you are correct that the FairTax would not really work at the state level for the reasons you point out. If Connecticut had the FairTax and Rhode Island did not, for example, all the big box retailers in Connecticut would go out of business because everyone would buy their appliances in Rhode Island.
I do have some issues with your assertions that the FairTax would work on the national level. Although U.S. Customs would keep folks from bringing in TVs and new cars from Mexico, it would be much harder to prevent the importation of watches, jewelry, clothes, etc. How would Customs prove that an expensive watch was bought in Mexico?
But more significantly, some folks would choose to simply live overseas (Paris Hilton in France, for example, or retirees in Central America) to avoid the FairTax altogether. Even if they don’t live overseas full time, wealthy folks could and would buy and moor their yachts in the Bahamas where they buy luxury villas, all free of the FairTax.
I strongly agree with you that it is a real problem that stuff isn’t made in America anymore, but I believe it has far more to do with the high cost of wages and health care benefits in this country, and far less to do with taxes. After all, a U.S. corporation must pay U.S. income taxes on any profits regardless of where it manufactures its products.
Hayden,
I actually agree with you that it would be best if some more states dropped the income tax and went to basically a fair tax like retail sales tax. I think it would be a much better way to introduce it to the public.
I live in California, so we could actually get it done without the legislature being involved at all. Our initiative process would allow us to end around the state government. At least if some states tried it and obtained some success, the national movement would have something to point to.
Jim and Andrew,
It’s difficult to arrive at an informed opinion when using different assumptions. I, for one, don’t assume all employers will give cash compensation (including the added tax $) to employees in lieu of providing insurance – whether that’s life, disability, long term care or basic medical/dental/vision. We’re all familiar with the normal benefits disclaimer stating they’re not guaranteed. Nor do I assume states will rescind the coverage and care mandates they put on insurers and providers. I lean toward the opinion that employers maintaining existing plans will do little to decrease health care costs. On the other hand, replacing employer plans with individual “choice” will price some employees/retirees who use more medical care out of the market – also unlikely to decrease costs. I haven’t heard a compelling explanation of why the costs for providing health care would track inflation or the costs for manufacturing a “widget” absent a change in the belief health care is a right.
I read an interesting PricewaterhouseCoopers analysis breaking down 13.7% increased health care costs: 3% technology and pharmaceutical advancements; 2.5% rising provider expenses; 2.5% general inflation; 2% increased customer demand, 2% government mandates and inflation; 1% litigation; .7% fraud. Some causes within those large categories were discussed – previously untreatable or chronic conditions (including sports injuries) now managed with drugs or technology; increased use of brand name drugs due to direct-to-consumer advertising and increased marketing to health care providers; inadequate reimbursement from government programs; rising labor costs (nursing shortage); an increase in chronic diseases; increased preventative care and an aging population (those reaching age 50 and above) using more services. One surprising factor was a building boom for new or remodeled provider facilities raising the issue of a costly medical “arms race” in areas such as cancer, heart and orthopedic care.
To 32:
Ellen,
I think you are right that, if we get rid of today’s tax shelter for employer-provided health insurance, employers may be more inclined to give cash compensation in lieu of insurance, or increased “employees-choice” cafeteria-type plans for the same dollar amount. I can’t see how increasing choice this way for employees would do anything but make employees better consumers of health insurance and medical services. In the long term, medical inflation would have to drop.
Laurence Kotlikoff, writing on the health-care crisis and not on the Fair Tax, proposed government healthcare vouchers for every citizen/resident. The amount of each voucher would be tailored to each person’s individual medical risk. A healthy young person would get a lower voucher than a senior with health issues. The total voucher cost to the government would never rise faster than increases in the GDP.
Kotlikoff thinks we could cover the country this way for the same dollars that we use today to cover just seniors on Medicare and Medicaid. Part of the reason is that consumers would become more savvy shoppers.
~Jim
Re 29:
Justin,
I thought you were talking about my state! (NJ)
We have the trifecta of the highest income, property and sales taxes in the nation (or are at least close it on on all three). We have the third highest per capita state debt in the nation, too, and a crisis budget deficit of 10% per year. We are in stagnation and are running out of choices. Retirees are fleeing because it’s just too expensive to live here. If we were better managed, we’d be one of the most propserous states in the country, as we once were, having both the NY and Philly metro areas.
About the only thing I could say that’s favorable is that our suburbs (but not our urbs) are still very desireable with top public schools. That may not last long.
Hayden, if I could leave, I might take my chances with Florida or Texas.
~Jim
Jim — Not only do you have the trifecta on taxes, but you get the highest car insurance rates in the country as well!
I can see how Texas or Florida would look pretty appealing from up there. Trust me, I don’t like high taxes (or government waste) either. We’re on the same general page, we just disagree on the best form of taxation.
Jim,
Re: #33 The hard to quantify issue is how “savvy” a consumer could be when the prices he/she pays for medical care aren’t driven by the costs to provide that service to him/her alone. When I buy other goods, a car perhaps, I pay for the features I want and some that are mandated (air bags, safety belts). My cost for the mandatory features isn’t based on the seller providing them to 20% of the entire population “free” or well below cost. I lived in NJ for several years and my car insurance wasn’t based solely on my record or risk. I think NJ was one state I lived in with a surcharge to fund the “uninsurable” pool because auto insurance was mandatory. What’s often ignored, imo, is that if I break my car in an accident, I decide whether and how to fix it taking my insurance coverage into account. If I break my leg in that same accident, my choices are limited no matter what my coverage is. If I caused the accident, my car premium might go up. If I had health insurance, should my premium go up?
Bottom line, I think most medical care is due to actual need for service. That need is somewhat predictable based on individual risk factors. But, the cost for like treatment is the same regardless of risk factor pool (using the high risk/user over 50 versus low risk user under 50). I think we kid ourselves if we don’t consider the possibility under-insuring based on low risk criteria, affordability or poor choices couldn’t drive provider prices up. I’ll have to read Kotlikoffs voucher idea to see how it addresses the relative randomness associated with incurring medical costs compared to incurring real discretionary “widget” costs.
i try to be as savvy as possible when it comes to my health care needs.
So, I’m enrolled in United Health Care’s Health Savings Account program, and my employer pays the greater portion of my premiums, as well as making quarterly contributions to my account.
UHC has made a deal with my Preferred Healthcare Provider (he used to be my doctor) for nearly every possible medical code my doctor can perform.
If I choose to have my gall bladder removed, UHC and my doctor have already agreed on what UHC will allow my doctor to bill, and what I’ll have to pay up to my $2000 deductible.
However, I cannot get UHC or my doctor to give me that dollar amount until after I have the surgery done.
One of the most common outpatient surgeries available, and I won’t have any idea what it will cost until AFTER i’ve been committed to pay for it.
What other service industry works like this? I don’t take my car to the shop, have them fix it, then tell me what it costs. They call me before they turn a wrench and say “we think it is this, it’ll cost that to fix it, do you want to do it or not?” If i choose no, they give me the car back and charge me a diagnosis fee. if I choose yes, they apply the diag fee to the total labor bill. if new stuff comes up, they either choose to eat it and fix it, or they inform me of the next step and risk losing the business altogether.
my insurance company and my doctor have colluded to charge me a price for my healthcare. i’m not allowed to know what that price is until it’s too late to opt out of it.
exactly how am i supposed to make informed choices?
Fred,
In response to post 25, I’ll concede that spending as a percent of GDP has hovered around 18% (+14 %, -20%) since 1945, but contrary to popular belief, even US history starts before then. If you go back to 1930 (the earliest I could come up with GDP on short notice), the federal government took in 4.2% (1932 actually is the lowest I found at 2.8%). Compare that to the 20.9% taken in 2000 after 8 years of “peace” and prosperity (which is coincidently the same amount taken in 1944 after being in a world war for 3 years) and you get a 5 fold increase in 70 years. I guess we’re at least fortunate that mathematics makes another 5 fold increase impossible.
To end on a note of agreement, I do worry about the spending side and debt as well. Spending and revenue seem to go hand in hand, although revenue seems to lag spending a bit.
Ellen,
In response to post 36, if you define “most” as more than 50%, then you are probably right when you say “most medical care is due to actual need for service.” However, third party payer systems (which 77 cents of every medical dollar spent in the US is. I think its 44 cents federal government and 33 cents employer provided insurance) are notorious for over consumption, i.e. consumption of unneeded medical services. I think there was a study on the use of Michigan Medicaid that came up with a rate of 40% over consumption. Mix the already paid for services with the fear of getting sued by medical practitioners and a lot of otherwise unneeded tests are being performed.
That’s why I think that the natural shifting of medical care decisions to the actual consumer of the care (which the fair tax implicitly does through removing the employers tax advantage) will help drive down prices.
Okay, I’ve been away for a while, but I’m back (that doesn’t mean I’m going to stay). As a Floridian, I had to comment on Post 37.
Jim, you said: “It’s true that no country has tried a Fair Tax, but two of the world’s largest economies, Florida and Texas, have no state personal income tax and have experienced better than average growth over years.”
The key part of this paragraph is the phrase “over years.” Over what years? Yes, Florida’s growth has been fast-paced, thanks mainly to the tourism and housing sectors. But the bottom has fallen out of housing, and tourism — while still strong in Florida — is slowing because of higher gas prices.
The result? The Florida Legislature has had to slash $512 million from the state’s budget already this year. That follows $1 billion in cuts made last October, and the legislature will have to cut another $3 billion — that’s billion with a “B” — to balance the state budget by July 1, which the state constitution requires.
Those cuts have been made to services people in this state use and depend upon — health care services, education, juvenile justice programs, and on and on.
Why are these budget cuts being made? Because economic growth in the state is slowing, meaning revenues from the sales tax are way down. This has been exacerbated by tax cuts, mainly during Jeb Bush’s administration, which went largely to the wealthy and corporations.
Increased sales tax revenues through economic growth aren’t going to pull us out of this one. According to Florida TaxWatch:
“The odds of the state’s economy falling into recession in 2008 are currently 40 percent (the same as for the U.S.), with the first six months or so of the new year standing out as the especially critical period. The contraction in the weak sectors of Florida’s economy has deepened, and a trough is not yet in sight.
“Moreover, while other sectors of the Florida economy have continued to expand, the pace of growth is relentlessly slowing. Spreading economic weakness can be attributed in part to diminished growth in the national economy, but primarily to spillover effects from the increasingly severe contraction in the residential real estate markets. Broadening and deepening
economic weakness are classic signs of a recession.
“Should a recession occur, the downturn in Florida is likely to be deeper and more prolonged than in the rest of the nation. And, even if a recession is avoided, growth in Florida will likely lag behind the rest of the nation in 2008. Healthy population gains, a bottoming of the residential real estate market slide, an improving national economy, an easing of the liquidity crunch that has seized financial markets and genuine progress in resolving the subprime mortgage fiasco are necessary to stave off recession in Florida in 2008.”
(Source, Florida TaxWatch 2008 Economic Outlook http://www.floridataxwatch.org/resources/pdf/eco23.pdf)
Sales taxes are not miracle cures for ailing economies. And right now, at least, Florida is most decidely NOT a poster child for a successful sales tax-based economy.
Bill, I’m not sure how much of your above statement can be attributed to the sales tax verses an income tax. It seems a good bit of it has to do with the real estate market in Florida, which was very aggressive in the housing boom and fell hard in the bust (my parents are Florida real estate brokers). The entire country is dealing with housing, gas issues, and threats of recession. You can’t blame these on a sales tax verses an income tax. Would having the tax taken before you spend it make this any worse or better? Would taxing the citizens more and visitors less make this a better situation? My state is facing huge losses due to a water drought by people conserving thus not creating water revenue.. should I blame this on the income tax?
Bill,
I’ll take your state over mine (NJ) any day! Read my post No. 34. I even garnered Hayden’s sympathy. See his post No. 35. At least your people are cutting budgets when revenue is down. That will prime Florida for growth when the cycle turns, as it inveitably will. Mine pile up debt.
~Jim
Morphh:
I’m not blaming the sales tax for Florida’s economic downturn. I’m saying that the economic downturn has resulted in decreased sales tax revenues, which in turn has led to budget cuts which are having a severe negative impact on the people of this state. And the decrease in revenue was made worse by tax cuts given to corporations and the wealthy during Jeb Bush’s administration, cuts which the legislature now refuses to roll back to increase revenue which could ease the pain of the budget cuts.
You can’t have your cake and eat it too. You can’t say on the one hand that the fact Florida relies on a sales tax has nothing to do with our troubles now, while at the same time saying the fact that Florida relies on a sales tax is the reason for its phenomenal growth during the 80s and 90s.
Jim:
Yes, we’re cutting budgets instead of piling up debt on our kids and grandkids. As far as that goes, that’s a good thing. You seem to see only Option 1 — Cut the Budget, or Option 2 — Pile up Debt.
Option 3, of course, is to Increase Revenue. But lord, we can’t have that!
What libertarians and the Grover Norquists of this world — people who want to shrink government to the size where they can “drown it in the bathtub” — always seem to forget is that cuts to government budgets have real-world consequences that impact real peoples’ lives. Kids don’t get the education they should. Police and firemen get taken off the streets. State employees lose their jobs, and thus the ability to support their families. Roads go unrepaired. And yes, people die from lack of access to proper health care services.
Many on this board believe — like Norquist — that the provision of all services except police and fire protection and a standing military should be provided by the private sector. That means roads, education, health care, prison building and staffing, and on and on.
The problem with that is that the private sector exists to make a profit. I’m perfectly fine with that. The private sector is fine for building cars, appliances, computers, home entertainment systems, DVDs and CDs, selling groceries, cooking restaurant meals, giving haircuts, and providing hotel rooms. I could go on and on with things the private sector is good at.
But there are some services for which the profit-making model is less suited. Business either doesn’t want to get involved in those services, or if they do get involved, the necessity of making a profit from those services makes the provision of those services less cost-effective to those receiving them. That’s where government — which has no profit motive, and therefore can provide those services more efficiently — has a role to play.
Libertarians scoff at this idea. They say government is wasteful because it involves a huge bureacracy. I’ve got news for you. Of all the myriad health care services providers in this country — including private for-profit hospitals and health clinics, non-profit medical facilities and HMOs, guess which one has the lowest overhead costs, and provides the highest-rated service? The United States Veterans Administration (VA). And of all the myriad health insurance companies paying for medical care in this country, guess which one provides the most care with the least hassle (for both doctors and patients) at the lowest cost? Medicare.
Government has a role to play. It’s an important role. And the taxes we pay for government services generally provide us more bang for our buck than the what those services would cost us if we had to obtain them from the private sector.
That’s not a knock on the private sector. There’s a lot the private sector is good at. I don’t want the government to build and sell cars or computers, I don’t want the government running restaurants or hotels, and I don’t want to get a haircut from a government barber.
I do want the government building my roads, providing for the education of the kids in my community, and yes, paying for my health care, because I’m convinced the government can do those things better than the private sector.
I read a column the other day in which the writer — and economist — gave a name to the philosophy of limited government. He called it YOYO Economics (YOYO meaning “You’re On Your Own”).
Yoyo about sums it up, in my book.
We’ve tried it the YOYO way, and that’s brought us the Iraq War, the Katrina debacle, the failed (thank goodness) effort to privatize Social Security, tax cuts for the rich and corporations (which boosted corporate profits and the personal incomes of the top 1%, but have led to very limited job growth and stagnating incomes for the rest of us) and the deregulation of financial markets (can you say “subprime mortgage mess?”), to name a few.
My hunch is Barack Obama will be elected president in November, and the Democrats will pick up seats in both houses of Congress. Then we’ll try things my way for a while.
I’ll bet my way leads to more jobs, more economic growth and higher incomes across the board. Any takers?
Bill — Great post! And what you said about the efficiency of Medicare and VA versus the “private sector” health care we have now is right on point. I’ve had that same discussion a dozen times.
Bill, I’d say that Florida still has one of the strongest economies in the country and that fact hasn’t changed in relation to the overall condition of the U.S. Budget issues are also multiplied by unexpected cost increases, such as gas, which may have little to do with the revenue. You would have to show that income from Florida residents is a more stable base of revenue then sales revenue, which is contrary to charted trends but possible in short term views. Overall, consumption is a more stable base then income, but Florida also exempts a good deal of consumption. You could have shifts in the consumption base to more essential items, which are not taxed. Point is, the sales tax can still be responsible for better economic growth than an income tax system, even though Florida is having budget issues (as are most states).
I’m not going to comment regarding the Jeb Bush’s tax cuts or your welfare state rant. I always like the trouncing out of police, schools, roads, etc. I’d be happy with those. This year, my state spent over $200,000 to dig up an old pirate ship, $400,000 on a teapot museum (with an additional $1 million from the Fed), and half a million on a theater (now featuring a new variety show - how nice).
Bill,
My disagreement is with your implied premise that adding taxes and raising rates on existing taxes brings in more revenue to the government. It’s a feel-good argument but not necessarily grounded. In today’s (May 20, 2008) Wall Street Journal there is an editorial piece by David Ranson citing a study by Kurt Hauser and updating it. Go here.
Adding taxes and raising rates, particularly on the top bracket, can have the unintended effect of contracting the economy, which does the greatest harm to low and middle-income people. The Fair Tax redresses that problem, and Florida is closer in the real world to the Fair Tax than New Jersey, where we have gone down the tax, borrow and spend road and now have run out of options.
~Jim
Jim –
I know we will never see eye to eye over this, but I read the article and closely looked at the chart referenced in the article. If you closely examine the chart, you will see that tax revenue as a percentage of GDP DECLINED following both the Reagan tax cuts and the Bush tax cuts.
Or, to put it another way, tax revenue as a percentage of GDP was higher under the Carter adminstration than under the Reagan/Bush administrations, and higher under the Clinton administration than under the BushII administration.
You need to examine the chart closely, because the WSJ editorial writers, who never saw a tax cut they didn’t like, presented the graph in (in my opinion) a deceptive manner to make it appear that the relevant tax-revenue line is more or less flat, when in reality a difference of one or two percentage points makes a HUGE difference in over-all tax collections.
I am not trying to argue that we should raise taxes on every occassion, except to point out that the rhetoric of the right on tax cuts is usually not accurate. There is absolutely no correlation between raising tax rates on the highest tax brackets and a contraction of the economy. (Just look at the economy following the Clinton tax hikes, for example, or the economy following WWII when top tax rates were in the 90% range.)
On the other hand, tax cuts do not lead to revenue growth and do not pay for themselves. While government revenue might continue to grow after tax cuts, the rate of revenue growth is almost always lower than if taxes were not cut in the first place.
And, of course, there are other factors that impact the economy (such as interest rates) more than tax policy.
I really don’t see much use in a chart comparing the marginal rate on the top tax bracket to tax revenue as a percentage of GDP. Sure the top rate in 1950 was 91%, but it only applied to income over $400,000 - that’s $3.4 million in 2007 dollars! It’s not surprising that adjusting the rate that affects so little of the income earned has minimal effect on the revenue generated.
[I would also add that the WSJ’s chart is a little deceptive in another way. Plotting revenue as a percentage of GDP on the scale with a maximum of 90% makes it appear much more level than it is - which conveniently supports their claim. It’s not a “horizontal straight line” if plotted on an appropriate scale. I can make any plot appear as a “horizontal straight line” by changing the scale.]
The WSJ’s whole conclusion is predicated on the assumption that “Economists of all persuasions accept that a tax rate hike will reduce GDP.” But all economists don’t accept that. In fact the facts say different, average GDP growth was significantly higher in the 50s and 60s, with their high marginal rates, than it was in the 70s, 80s, and 90s - which is contrary to the WSJ’s claim. [My quick calculation using NIPA numbers: 1950s = 4.12%, 1960s = 4.4%, 1970s = 3.27%, 1980s = 3.07%, 1990s = 3.11%, 2000s (to 2007) = 2.55%]
I think the important aspect here is relativity. In most cases, tax hikes should reduce GDP when all else is held constant. The GDP growth is not due to the tax hike but by some other economic force, so GDP would have likely grown more if the tax hike had not been present. Likewise, when you reduce taxes and hold things constant, it should increase GDP - your putting money back into the economy. The debate is more around the whether the broad increase in GDP makes up enough revenue to cover the tax cut (short term / long term).
It’s not correct to just look at revenue and GDP without considering the other economic factors as causality. You have to look at the overall economy changes when considering the effect of the Bush tax cuts on revenue. Had the economy stayed as projected at the time of the cuts, the revenue would have been much much higher. Outside factors effected the growth and revenue. It would certainly be their argument that the tax cuts softened the downturn. The decline in revenue was a combination of the tax cut and economic decline (economic decline being the larger factor), which is what I think is the main point article gets at. All the changes are relative to what they would have been under a different model. Revenue would have decreased significantly with or without Bush’s tax cuts. Understanding the difference is the challenge.
Jim:
So, “adding taxes and raising rates on the top bracket results in a contracting of the economy, which does the greatest harm to low and middle-income people.”
And you’ve been where for the past 7 years?
In 2000, Bush passed a massive tax cut, the vast majority of which went to those at the top of the income ladder. If YOYO economic theory is correct, one would have expected the economy to boom.
It didn’t.
In fact, the business cycle from 2000-2007 has shown the weakest growth (and in some cases, drops) in a number of economic indicators, including GDP, investment, employment growth, and employee compensation.
To see the numbers, check out this study by the Economic Policy Institute:
http://www.epi.org/briefingpapers/214/bp214.pdf
So much for tax cuts increasing prosperity. How about their effect on revenue?
I read the WSJ column you recommended. I’m a bit skeptical, since Hauser is a devotee of Laffer, and built on Laffer’s work. I also would point out that Hauser’s work, while interesting, seems to me irrelevant to the debate. Simply citing revenue as a percentage of GDP doesn’t actually show you what was happening to revenue or GDP during the period in question (in this case, 1950-2007).
Again, if YOYO economics is correct, growth in GDP (and by extension, tax revenues) should have been extremely low during the period when the top marginal rate was above 90%, and extremely high in the past 7 years. That’s not the case, according to the EPI study. Growth (and shared prosperity) was strong in the 1950s, and much less strong during the past 7 years.
Clinton raised taxes and the economy boomed. Bush cut taxes, and the economy slowed. Draw your own conclusions.
As for the old canard that cutting taxes boosts revenues — which is really what Ranson is suggesting in the WSJ op-ed — it just ain’t so.
Ronald Reagan is largely credited with boosting revenues by 80 percent during his term as president, and the credit for that revenue boost is largely given to the tax cuts he instituted at the beginning of his term. But this fails to take population growth and inflation into account, according to Krugman:
http://krugman.blogs.nytimes.com/2008/01/17/reagan-and-revenue/
The fact is, revenue growth has been stronger under Democratic presidents (higher taxes on the top brackets) than under Republican presidents (lower taxes on the top brackets). And while most economists believe the economy rises and falls independent of tax policies, tax cuts certainly haven’t been the economic growth driver their proponents have constantly argued they would be.
Which brings us back to the issue of fairness. Those in the top 1% of income earners pay an average of 18% of their income in taxes, according to the IRS. That’s because most of their income is from capital gains, which are taxed at just 15%. Hence Warren Buffett’s by now familiar argument that he pays a lower percentage of his income in taxes than does his secretary. Buffett argues (and I would agree) that’s just not fair.
Morphh:
While I would personally prefer an income tax to a sales tax for Florida, I’m enough of a political realist to know it won’t happen. Our state constitution would have to be amended to create an income tax, and it’s not realistic to believe that a strong majority of Floridians (it now takes, I believe, 60% to pass a constitutional amendment in Florida) would vote for it.
I was not arguing in my post for an income tax. Nor was I arguing that the sales tax was the CAUSE of our economic woes. But it hasn’t made the situation any better, either.
You talk about “wasteful” uses of taxpayer dollars, such as $200,000 to unearth a pirate ship, or $400,000 for a teapot musuem. So you eliminate those expenditures. What have you saved? $600,000. Big whoop. In Florida, we’re talking about a $3 billion deficit. Yes, we fund archeaological digs, museums and even libraries in this state. Zeroing out those items won’t save a significant amount of money, certainly nowhere near the $3 billion we need to save. So not only are those “frivolous” (unless your a librarian, which my sister happens to be) items being slashed, but yes, police, fire, education, health care and education are experiencing deep cuts as well.
So, we empaneled a budget and taxation reform commission to study our tax and budgeting system to see if there was a way to provide necessary services without overtaxing our residents. They put two constitutional amendments on the ballot, both trying to boost Jeb Bush’s private school voucher schemes. Yeah, that’ll help.
You guys are pushing the FairTax as an economic panacea — pass it, and all our economic woes will disappear, and there will never, ever, be another recession. The reality is that the economy ebbs and flows independent of how we collect our taxes. The only real questions we need to answer about taxes and budgets are these: (A) How much taxation is “too much?”; and (B) What are our priorities as a nation, and how can we fund those priorities?
I happen to believe government CAN fund health care, education, infrastructure and yes, even libraries, pirate ship digs and teapot museums, without overtaxing its citizens.
For me, the key question concerning taxation is: Is it simple and fair? I believe our current system is fair, but not simple. I believe the FairTax is simple, but not fair. That’s why I favor a reformed, much-simplified progressive income tax structure with few exceptions and loopholes. That would be simple and fair. And that’s where we need to be.
Bill, I wish it were that simple. We’re facing a fiscal gap of 60 trillion in unfunded federal social programs (which does not adjust for medical advances extending lifespans). How in the world do you plan to pay for it, while heaping on more? We’re headed for a governmental economic collapse of massive proportions.
Morph –
I agree with you regarding the $60 trillion upcoming gap due primarily to care for our elderly. (Although Europe and Japan are in much worse shape demographically and fiscally than we are; it will be interesting to see how they cope with this since they’ll go through it before we will in the US).
But it does not follow that “We are facing a looming fiscal crises, ergo we must replace our income-based tax code with a consumption-based tax.” There are far less-dramatic and less risky ways to deal with this upcoming crisis. For example
1. Since health care for the elderly is paid for through Medicare taxes, the Medicare tax system could be changed. (E.g., apply the Medicare tax to non-wage income such as capital gains, dividends and interest; replace Medicare tax with a consumption tax so it will not hit so hard on working Americans).
2. If you believe that corporate income taxes are a drag on our economy (which I do), then we could reduce, simplify or eliminate corporate income taxes (and, instead, tax dividends and capital gains as ordinary income).
3. Since our overall tax burden is significantly less than most other developed economies, we (theoretically, at least) have room to raise overall taxes. (Note: I’m not advocating this, but pointing out that compared to the rest of the world our overall tax burden is relatively low.)
My point is that although I agree with you and Kotlikoff (in his book, The Coming Generational Storm) that we are facing a fiscal crisis, I very much disagree with his prescription for a solution.)
Fred,
In post 25, you said “In fact, federal receipts as a percentage of GDP have be pretty level since World War II - hovering around 18%.” In post 48, you said “It’s not a “horizontal straight line” if plotted on an appropriate scale.” Did my post 38 convince you or is “horizontal straight line” over the top compared to “pretty level”?
Bill,
Clinton raised taxes at the beginning of his first term. The economy grew at an annual average of 3.5%(from memory, must verify). He (the republican congress actually) lowered taxes at the beginning of his second term. The economy grew at an annual average of 4.5%(still from memory). Most left wingers usually point out that Clinton raised taxes and the economy grew, but fail to point out that it grew faster after he cut taxes.
I think I read the same opionion piece Bill is referring to (if it was on the Huffington Post) because this one also used the term YOYO. The main point was that there are some economic indicators that performed poorly, Bush was president, Bush is a Republican, therefore his policies are “free market” and that shows we must go to a collectivist system. Since LBJ, no president has increased non-defense spending more than Bush. Bush increased medicare (Part D) when medicare is well ahead of Social Security going towards insolvency (must be all the “efficiency”.) Bush helped push through a huge federal ethanol program that not only is a heavy contributor to the increase in food prices, but will probably be worse on the environment than the fuel it’s trying to replace. The problem isn’t the free market, the problem is most people assume the president controls the market. The president can’t (and shouldn’t try to) control the market. The president (with the help of congress) can only do things to change the market and then see what happens.
My comment in post 25 was in response to you statement “History has shown that overall the government takes more and more of our GDP.” In 25 I was stating that this isn’t true - the trend line is actually pretty level (and slightly declining). But because the trend line is level does not mean the actual amounts are level - thus my comments in 48. As you can see from this chart, they vary. That doesn’t look like a “horizontal straight line” to me.
The top marginal rate didn’t change from when Clinton raised it in 1993 until Bush lowered in in 2001. It is this top marginal rate that the WSJ claims is so magical.
Note: I think my last submission got lost (somewhere after post 53). If not, this may be a repeat.
Fred,
In regard to post 54, your chart doesn’t actually have a trend line, it has an average line. I’m not sure if you have the data points graphed with a trend line, but the chart I used, also only had an average line. I actually think the data since WWII is on the uptick, but it’s close, but I’m even more convinced the data pre WWII is trending up. I’ll graph it when I get home. (Update below)
The author of WSJ article was stating that top marginal tax rate had little effect on revenue as a percent of GDP because the values are “pretty level” (your words) although he used the term “horizontal straight line”. Both have to do with deviation from the post WWII average.
In response to post 55, I was referring to Bill’s statement “Clinton raised taxes and the economy boomed. ” It had nothing to do with top marginal tax rates. I should have been clearer.
After graphing the data contained here, for table 1.2, I got a slope of 0.147139 going back to 1930 and 0.025192 going back to 1945 (using excel’s Slope formula which I believe fits a line to the data points using the method of least squares). In other words, it takes 7 years to go a percentage point fitting from 1930 and 40 years fitting the data from 1945, or .8% and .014% per year based on 18%. Anyway you cut it, the trend is up. And if you don’t think we could have another jump like we did in the 30’s, wait until they (the politicians) try to socialize medicine or resolve the current entitlement crisis.
hayden you make very good points, and your solutions seem valid:
[quote]1. Since health care for the elderly is paid for through Medicare taxes, the Medicare tax system could be changed. (E.g., apply the Medicare tax to non-wage income such as capital gains, dividends and interest; replace Medicare tax with a consumption tax so it will not hit so hard on working Americans).[/quote]
a ‘(assumedly flat) Medicare tax’ applied to all forms of income....?
how would this be different that a flat Medicare tax applied to all forms of consumption? except that it would be punishingly regressive on the lower incomes?
oh, wait, that’s your second suggestion, which looks an awful lot like the Fairtax.
[quote]2. If you believe that corporate income taxes are a drag on our economy (which I do), then we could reduce, simplify or eliminate corporate income taxes (and, instead, tax dividends and capital gains as ordinary income).[/quote]
eliminate corporate taxes and flat tax all forms of income...?
how would this be different than a flat tax on all forms of consumption? i mean, besides punishing people for working?
a consumption tax does tax all forms of income AND savings (eventually)...so it sounds like this turns into support for the FairTax as well.
[quote]3. Since our overall tax burden is significantly less than most other developed economies, we (theoretically, at least) have room to raise overall taxes.[/quote]
and what kinds of freedoms do those higher taxes buy those other countries’ citizens? surely you are not suggesting that american life sucks because american citizens aren’t taxed enough, and that that life would be improved if only we could talk the citizenry into working for the government more than they currently do.
you have done well to point out some of the problems, but your suggested solutions are merely a regressive (prebate-less) FairTax with extra layers of government and between the taxers and the taxed.
I fail to see the benefits.
Justin, as a FairTax supporter, I don’t disagree with Hayden’s plan for tax reform. I don’t want to speak for him as I’m sure he’ll do that himself, but I think he recognizes many of the flaws with the current tax system and many of the positive goals of the FairTax. There are other ways to achieve similar results without doing so as a national sales tax. The sales tax is not without its flaws and issues. I think we have to recognize that and consider each plan on its merits. While I would argue some policy points, I would fully support Hayden’s tax plan if it reached the halls of congress. If he included H.R.2600 (Border Tax Equity Act) in his plan as well, it would be a very strong proposal in my view.
The only problem that I have with such plans is that they’re non-existent, so its like shouting at the wind. So I see it as you only have a handful of choices: Fair Tax Act, Freedom Flat Tax, Taxpayer Choice Act, McCain’s plan, or the current tax system (with a possible rollback of Bush tax cuts on high income). So there you have it, I say pick the ones you feel would work for the future of this great country (rank them in your mind) and support them in that measure. I philosophically like the FairTax better than Hayden’s plan, but would be happy if his plan reached the level of support for law. While non-existent, I rank it above all the other options presented above. Now.. If only I could get Hayden to stop shouting at the wind and support the best “achievable” option, we’d be good.
Justin– Thanks for the comments to my post No. 52.
I was replying to Morph’s post no. 51, who (correctly) pointed out that we will be facing a fiscal crisis over the coming decades with resepct to care for our elderly which will require drastic action of one type or another.
His proposed solution is the FairTax, which he (and others) believe will boost the U.S. economy sufficiently over the next few decades that we will be able to keep tax rates relatively low. (I’m not trying to speak for Morph, but I believe that is the general idea.) The alternative is to raise taxes on working folks to the extent it will drag down the economy, as well as become increasingly unfair to those of us who actually work for a living.
What I was suggesting is that there might be other, less drastic, solutions to be explored other than a wholesale switch to the FairTax. (Which, as I’ve tried to point out, nobody seems to contemplate what will happen if the FairTax does not work out as planned.)
In reply to your comments:
I agree that a consumption tax (without a rebate) to replace the Medicare tax would be regressive, but the current Medicare tax is already regressive and presumably the tax rate on such a limited consumption tax could be kept low enough that it won’t be that burdensome for low income folks. A rebate would be an administrative hassle and cause the tax rate to be higher than it would otherwise need to be (which is something that many FairTax supporters seem not to understand. I mean, who do you think pays for the “prebate?”)
When you say that an income tax punished people for working; I could turn that around and say that a consumption tax punishes people for eating (or getting cancer.) I’m sure we both agree that each forms of taxation has its faults.
I don’t buy into the argument that a consumption tax taxes income and savings. I hope to have enough saved up in a few years so that I can live off of income thrown off from my investments while my principal grows indefinitely. I assume you are trying to do the same thing. The more you have saved up, the less likely you are to need to ever tap into your savings, thus, the savings of the well-off among us will likely never be taxed under the FairTax. (I am not knocking saving or investing. We should all do that in order to take care of ourselves. I am merely pointing out that the notion that a consumption tax is a tax on income and savings is not really true.)
I didn’t say that life in America sucked. I only pointed out that in comparison to other developed countries our current tax burden is relatively low. And I would say that most folks in Canada and Europe are pretty satisfied with their lives and their freedoms (and their health care) notwithstanding their higher tax burdens.
Before Europe adopted its “socialistic” tax policies and social programs, the vast majority of immigrants to America came from Europe. Since WWII, however, we haven’t had many folks from Europe trying to immigrate to America anymore. Do you think there might be a coorelation there somewhere? I’m sure Europeans complain about their tax burdens, but you don’t see many of them leaving to start a new life in America anymore.
Andrew, my point in 25 was that the line was horizontal. The WSJ claims it’s a horizontal straight line. I simply pointed out that it’s not straight. It’s a horizontal squiggly line.
Well, you could go back to 1492 and the trend would be way up. If you go back to 1945, the trend is slightly up. If you go back to 1950 the trend is more level (0.024). And 1960 even more level (0.016). And 1970 (0.015). And 1980 (0.004). And 1990 (0.002). All more level. And if you plot from 2000 the trend is actually down (-0.26). I mean, really, what time frame is significant to claim “History has shown that overall the government takes more and more of our GDP”? It seems to me that if you look at the trends historically, the New Deal and WWII were significant events that greatly increased the amount money the government was taking out of the economy and since then the amount is more and more level. Is the 0.005 slope over the last 30 years statistically significant?
RE: Hayden, Post 59
Those whose spending is high enough the poverty level to create the funding for it, who else?
I have to work to eat; I have to eat to live.
Under an income tax, I am taxed for working-eating-living.
Under the FairTax, I am taxed for eating-living above the national poverty level.
The FairTax is an incentive to live frugally, regardless of income level.
Any Income Tax is a disincentive to work above the standard deduction level. (and let’s not even think about the people who stop working in September so they don’t eclipse the EIC limits and disqualify themselves for ‘refunds’ of money they didn’t pay in the first place)
Never be taxed? Granted under the FairTax you’ll pay tax when you spend your interest; under your suggestions you’ll be taxed when you are paid that interest (BTW, can you get a refund when your IRA decreases in value?), where does the principle money go when you die? Under the current system, the gov’t gets ‘their’ share, under your system i’m not sure, and under the FairTax, your kids get all of it. So they never spend it either..nor their kids...?
(yeah, cuz trust fund kids in this country have a proven track record of living frugally.)
Either you spend it, and pay for things that create the economy; or you save it and loan it to people who make those things that everyone else is paying for.
When you die, your kids have the same choice.
I see the correlation....Europe offers it’s US Funded government teat to masses, and Europeans (and western Asians) stop moving out and start lining up for the hand-outs.
And that’s why young unemployed immigrants from the middle east burn down France every couple of years....France suggests they aren’t going to force employers to keep worthless employees and ’students’ riot.
Fred,
The New Deal was a significantly BAD event. That’s the whole point. People who like the New Deal tend to judge history as if our country was established in the 30s or for good measure, after WWII. You can’t go back to 1492 if you’re judging our federal government. Our federal government began operating under our constitution in 1789. You can go back before that but I only argue that the federal government needs to follow our constitution. In other words, stop all the ILLEGAL tax and spending.
While you may be right that the rate of growth is declining (thank god for small favors), the trend line is definitely not “slightly declining”. And is there anything that points to another huge jump? Leaving out the entitlement fiasco, try socialized medicine and green jobs.
Fred said:
IMO, the New Deal and WWII are just artifacts of the real events that matter which are the Civil War and the Great Depression. I think those two are the root causes that resulted in substantial seismic shifts in power towards the fed. To me, the New Deal was just a reaction to, and enabled by, those events. Not that its not important - but it is not the root event, it is more of a symptom.
Personally, my interest in the FairTax is that it would help to destabilize and undermine that power shift. While the FairTax may not be able to do it single handedly, it will at least help to create conditions that are necessary for a seismic shift back the other way.
So, again personally, I have always used the beginning of the 20th century as the real starting point for measuring the trend that I think we are wrestling to get under control today.
I was looking at different numbers and I can’t remember where I found them (I may have been doing my own calculation on NIPA numbers) and they showed a slight decline in the trend. Either way, if you want to get riled up over a very slight 60 year trend up - even when the 30 year trend is basically flat - have at it. I don’t see that the FairTax would do much about that and I think there are bigger fish to fry. At least we can agree that the WSJ was incorrect when they said government revenues were a ““horizontal straight line.” I think it’s obviously not straight and you don’t believe it’s horizontal.
Justin — I can see you feel strongly about the FairTax for very good reasons. I won’t bother to try to talk you out of it.
Given the current political environment, it is unlikely that the FairTax will make much headway, but given the attention it received from the books and Huckabee over the last couple of years, it is quite possible (and I sincerely hope) that it will be the subject of a few more independent studies. I hope we will all keep an open mind when those studies come out.
You know the one argument that I find the strongest is that we shouldn’t attempt the FairTax because it has never been attempted anywhere else. This new and untried system is theoretical at present and who knows what the unforeseen ramifications might be. We should definitely wait until there is some precedence before we attempt anything as radical as this new system.
Let me provide a few points to justify my position. A couple of hundred years ago some dissidents from the British Empire dared to take a stand against the British crown and they won their freedom and implemented a radical new form of government. This new country had the audacity to boldly forge off into the unknown in the establishment of this new form of government. Today this country is, wait for it, The United States of America!!!
We are not a country to sit by and wait for others to blaze a shining trail ahead. We are a country of explorers and risk takers. I think most would agree that our independent and pioneering spirit is one of the things that makes America great. Let us look to our past when we question attempting something that has never been tried before. Innovation is a quality to be embraced, not feared. This is not to say that we should blindly pursue something for the novelty of it, but that we should not use the argument that we should avoid it purely based on the fact that it has never been done before. Personally, I’m quite thankful that our forefathers did not share this same attitude as those who espouse this point of view.
I endorse Scott’s comments, primarily because the biggest risk is not in attempting the Fair Tax but rather in not attempting it. To repeat my previous blogs, if we keep going in the present direction, revenues by the year 2040 will not be enough to cover even the interest on the Federal debt. My grandson will turn 35 that year. I’d rather take a chance for his sake.
~Jim
OK, JIm. I’ll bite.
Why do you think revenue will increase under the FairTax?
Specifics, please.
Looking at the US from the outside. I am struck by much it is resistant to change. The Sixteenth Amendment of a century ago, taxes raised during the Civil War and by eighteenth century English Kings are regularly discussed here,. Many countries change course completely - the decentralisation and conservatism of the US make a radical tax plan very difficult to implement.
Many countries have adopted a VAT, so taxing spending is not uncommon outside the US. What is unusual is abolishing income tax in a country other than a tiny tax haven or oil exporter. It would be an interesting experiment but could turn out the same as for citizens of Vallejo in California where tax revenues do not cover expenditure.
Hayden, my thought, and almost every economist studying the FairTax (including opponents such as Gale), believe the FairTax would boost economic growth. Some saying it would double the size of the economy in 15 years. If the economy grows, then tax rates can be maintained (or more evenly adjusted). Under the current system, economic growth is insufficient to prevent tax rates from having to increase dramatically to meet future obligations (which would further decrease economic growth). You’re tax plan, while not as significant, would also offer a similar economic stimulus by eliminating corporate taxes and providing border tax adjustment. Minus all the small issues today, I think the FairTax can prevent economic collapse in the future. While we talk about other methods and how the FairTax is lacking in areas, I see no other suitable options on the table.
GDP 1992 = $6.3 trillion
GDP 2007 = $13.8 trillion
So the economy grew 219% in the last 15 years. The FairTax only doubling the economy would be a disaster.
Fred, you know that economists predict FairTax growth significantly above the current system - this is one ellement of the FairTax that doesn’t have much dispute. There are certainly many varibles that could be accounted for in past growth, such as it being fuled by the baby boomers. Now that boomers are entering retirement and we face a changing global economy, do you have predictions that we will see equal growth over this period? How would this compare? Your zinnger was cute, but we both know what the data shows and what is coming down the track.
Morph –
You amd Mark might want to start a new thread on studies/articles predicting economic growth under the FairTax.
From my memory, I thought that Kotlikoff and others had really concluded that the actual economic growth under the FairTax would not be very dramatic, something like 10% over the current baseline estimates over the next CENTURY. In addition, I thought that most economists belived that you would see a contraction in the economy in the short run due to reduced consumption. However, I really don’t know for sure and would like to examine some of the studies if you could post links to them.
Another aspect of the economic growth is the fact that the consumption tax is applied to a much larger tax base. Using the numbers from the second Boortz/Linder book, in 2005 the total personal income reported was $10.3 trillion but under the income tax system the “total taxable income minus all deductions and exemptions” was only $5.1 trillion. Total personal consumption for that year was $8.7 trillion. Forgive me if I did the math wrong, but that is almost a 71% increase in the size of the tax base (granted this is only factoring in personal income tax and NOT the other taxes that would be repealed with the implementation of the FairTax). I think it’s safe to say though, that the FairTax yields an overall larger tax base.
The larger tax base would be inherently more stable. Furthermore, in a comparison of state tax revenues including both sales and income taxes the income tax revenues fluctuated across a much greater range consistently. This is further evidence of the greater stability of the sales tax model as compared to the income tax model.
The larger comparative tax base coupled with the increased projected economic growth over the current system should yield higher revenues. These revenues should also be more stable based upon the results of comparative studies of state sales tax and income taxes.
To Fred, I would have to concur with Morphh about the impact of baby boomers. This is a huge segment of the population that is now entering retirement age and therefore will lead to a huge reduction in income tax base over time. I am definitely not advocating the raping of our senior citizen’s retirement savings. I am only suggesting that the FairTax is a more efficient mechanism for collecting a similar amount of taxes from our seniors that they are currently paying in both embedded taxes and income taxes from interest gains on their savings.