The FairTax Is About Economic Growth
In a recent post, it was commented that we should discuss the studies/articles predicting economic growth under the FairTax, remarking “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.” Before we get into the studies, I thought I would establish how significant such “non-dramatic” changes may effect future revenue. Louis R. Woodhill writes:
Right now, the Social Security Trustees forecast the real long-term growth rate of the U.S. economy at about 2.0% per year. This is a reasonable projection of what current policies would yield. However, I believe that adoption of the FairTax would increase growth to at least 3.5%. How significant is the difference between 2.0% and 3.5% real growth? Let’s look at the numbers over a 75-year period, the way the Social Security Trustees do.
Our economy would be almost three times larger in 2082 if we average 3.5% growth than it would be if growth averaged 2.0%. The “present value” of our GDP over the 75-year period would be more than 70% larger. The implications of this difference are staggering
For one thing, the financial problems of Social Security and Medicare, which seem overwhelming today, would simply disappear. For 2007, the combined costs of these programs will total about 7.5% of GDP. Under the Social Security Trustees’ GDP growth assumptions, these costs are projected to balloon to over 17.5% of GDP in 2082. However, if our GDP grows an average of 3.5% per year, the same projected real-dollar costs would total only about 6.0% of GDP—less than today.
Here’s another way to look at the potential impact of the FairTax. If you add our national debt to the projected (75-year) “unfunded obligations” of Social Security and Medicare, the Federal government is in a $48 trillion financial hole. However, assuming Federal revenues at their historic average of 18.5% of GDP, a real GDP growth rate of 3.5% would increase the present value of Federal revenues from about $138 trillion to about $236 trillion. This additional $98 trillion is enough to pay off all of our “debts” and pay for a tax cut equal to 3.9% of GDP. - Read the full article
Virtually all economists agree that the following will promote economic growth: Replacing the income tax with a consumption tax, Replacing a graduated rate system with a flat marginal tax rate system, Lower marginal rates and a broader tax base. The FairTax does all three. Kotlikoff and Jokisch find that the capital stock will be 13 percent higher under the FairTax system than under the current system by 2010, and 41.4 percent higher by 2030, and that long-run interest rates would be 150 basis points lower than under the current system. Their study states that, “the shift to the FairTax raises marginal labor productivity and real wages, over the course of the century, by 18.9 percent and long-run output by 10.6 percent.
Arduin, Laffer & Moore Econometrics finds that investment will be 33 percent higher in the first year and 41 percent higher by the tenth year than under the current tax system. The effect of an increased rate of productivity growth and the reduced efficiency costs yields GDP up to 24.4 percent greater than under the current system by the tenth year. Consumption, fueled by 1.7 percent higher real disposable income in the first year which increases to 11.8 percent higher by the tenth year, is higher by 2.4 percent in the first year and 11.7 percent by the tenth year. Read More...
Great post. I think this is a really good argument on the long term benefits for the FairTax. I’m sure that the detractors are standing by to begin picking this apart, but it looks well documented to me.
Frankly, I don’t believe any economic model. It’s kind of silly to put stock in their results when none of them have be shown to be accurate - short term or long term. Even just predicting the economy under the current system, with all the history and experience and data, has been completely futile, let alone predicting the economy under a tax system that has never been tried.
So, sure, we can talk about what the models predict the economy would be like under the FairTax, but it’s just an academic exercise. It has nothing to do with the real world and I surely wouldn’t want to risk our future on the basis of their results.
I honestly have no frame of reference for your first point. I have never done any kind of research on the accuracy of validity of economic models so I’ll have to assume you are correct here. The second half of your argument I do have a problem with however...
I made this same argument to a different thread, but I think it bears repeating here. Our founding fathers took a gamble in founding our country on a completely radical form of government. Never before had a government such as ours been created, yet this did not stop them. America has a rich history of innovation and risk taking. The FairTax is simply another opportunity for America to lead the world in a new direction.
Change can be a scary thing, and it should not be taken lightly. The economic problems facing our country are enormous and failing to take action is both irresponsible and in the face of your argument, cowardly. Something MUST be done to right our economy, and head off the impending disaster that is facing our Social Security system. The FairTax is the best option that I have been made aware of.
Fred, we do know from world history what things work and what things don’t. We can make some level of prediction using empirical research regarding flat rates, lower corporate taxes, etc. The way you word it, you would think economics as a field was futile. We can attribute many false predictions to static models, which do little to account for economic effects. Most aspects of the FairTax are not new theories or methods. They just happened to be packaged together at the Federal level, which makes it a new proposal. Economically, we’re looking at a flat tax on consumption (very similar to a VAT) with the removal of income taxes. It is more important to look at the relative changes. We can’t predict economic changes such as 9/11 but we can make relative predictions regarding economic changes from a corporate tax rate of 35%, 25%, or 0%. Based on trends, you can see what tax effects would be positive or negative to economic growth, which is different than predicting the future economy.
Morph — Thanks for the link to the info. Even though I suggested it, I can see this will probably be an exercise in futility for the obvious reasons, but here goes my initial comments.
1. My first comment is semantics. These studies did not “find” anything. You “find” something after you have examined the evidence and determined “x” to be true or “y” to be true. At best, what you have cited to are opinions as to what would occur in the future based on a hypothetical situation. So it would be more fair to say,” “Based on the assumptions he put in his model, Kotlikoff [or whoever] estimated that economic growth would be [whatever.].
2. All of these studies/reports/opinions assume (a) that the FairTax rate will be only 30% (on a tax-exclusive basis), and (b) that other countries will not retaliate if we tax their imports at 30% (plus state taxes) while eliminating all internal taxes on our exports. I doubt if either of those assumptions are remotely realistic.
3. From what you cite above, Kotlikoff did, in fact, estimate that the FairTax would increase economic growth (or, as he puts it, long-run output) in this country by only 10.6% over the next CENTURY. Even assuming this is correct, and without getting into the math, that means that economic growth would rise by less than 0.1% per year on average over the baseline.)
4. That’s a far cry from what what Louis Woodhill (who’s an engineer, not an economist) is claiming would happen. He says economic growth would increase from 2% per year to 3.5% per YEAR. That would be a 75% increase per YEAR over the basline, which would come out to about a bazillion percent over the next century, give or take a few gazillion.
5. By the way, Woodhill also notes (at the very bottom of his piece) that economic growth in the U.S. has averaged 3.72% per YEAR over the last 75 years under out dreaded income tax. So he’s saying we’ll do WORSE under the FairTax than we did for the last 75 years under the income tax.
6. Laffer (of the infamous Laffer curve) and Moore (of the Club for Growth, now a WSJ editorial page writer) are anti-tax zealots who don’t exactly have much credibility outside supply-side circles in the Republican party, who have so generously bestowed the $9 trillion national debt upon us and our children by their repeated (and thoroughly debunked) claims that tax-cuts for the rich boost revenue to the government.
Notwithstanding all of that, I would still like to look at one of their studies to try to understand the assumptions they are making. There is a new study done by BHI on the fairtax.org website predicting (surprise!) increased economic growth under the FairTax which I have not read. But if this study is anything like the other BHI studies, it will be impossible to follow and probably have a number of unrealistic assumptions buried in it somewhere.
Hayden,
1. I would not argue with this point. Those are not my words but that copied from AFFT.
2. Point taken
3. I was thinking decade in my head, so I’ll have to look into this further.
4. This falls more inline with the 10% decade figures I’m use to hearing (like the 11.8% offered by ALM).
5. This would assume we’ll continue to grow like we did in the baby boomer phase. Their retirement combined with a global economy will change the economic picture. It is an overwhelming statement of opinion that a consumption tax would do far better than the income tax for economic growth. Whatever you through out as economic predictions, the FairTax would likely improve it. This same theory goes for your tax plan as well. They both have similar economic advantages and similar revenue requirements (tax levels). By arguing against the FairTax in this area, you’re belittling the economic value of your own plan in my view.
6. Point noted
I’ll take a shot at responding to a few of your points...
1. I’m not even going to bother trying here. Never been a big fan of arguing semantics.
2. I could be WAY off base here, but how exactly would foreign countries retaliate against a FairTax? Doesn’t the VAT basically accomplish the same thing? Tax on export items is credited back to the manufacturer on it’s way out of the country, right? This is actually one of the selling points for the FairTax in that is levels the playing field with the EU and the VAT situation.
3. I’m not having much luck finding anything on this particular study. Hard for me to respond to this one without reading it and digging into it for myself.
4 & 5. These two go together. I think the point made here is the the 75% increase is based upon the 2.0% to 3.5% increase. My guess is the the 2.0% increase is a current economic forecast. This leads me to believe that the economic forecast that generated this 2.0% is indicating that we will see much weaker economic growth in the coming years than we have in the past. I would be inclined to attribute this growth reduction due to globalization of markets, and the punishing nature of our income tax code. Other countries have been more progressive in addressing globalization than the US and have made changes to become more competitive. The US has been rather stagnant in this area, in my opinion.
6. This one just seems a bit ad hominem. It would be nice to see you dispute the numbers with something other than character bashing of the authors. I’m definitely not defending the authors, but your point here is only made weaker by your lack of anything more substantial than “I don’t believe these guys”.
Let me also say that I’m a cautious optimist of the FairTax. I have read a lot of literature on it, and I’m intrigued. In researching this for myself I see a LOT of attacks against the FairTax. The most potentially valid of these being that the tax burden of the rich may go down disproportionately, and the elderly realize the least tax benefits. The real question this raises, is who benefits the most by adopting this?
I would contend that the politicians certainly aren’t the big winners here. If the FairTax is passed in it’s current, untarnished form, this would greatly limit the tinkering opportunities that Congress now has with our current system. I know that this is a point of contention, but the supermajority requirement alone makes tinkering much more difficult. The rich might benefit more in some instances, but the people who benefit the most are going to be those who live frugally and in my experience this rarely applies to the rich. I just don’t see where the argument can be made that this system is “for” one group or another. The answer in my mind is that with every few exceptions, like the IRS employees, everyone benefits to some degree as compared with our current system. Maybe this is just naivete or foolish optimism, but that’s my read on this.
Morph and Scott –
Dang! You guys are too rational and too polite. You’d never make it as talk show hosts .
You are correct in that VAT are not included on exports so the lack of a consumption tax is a disadvantage for US exporters.
As for retaliation, I would consider it unlikely the EU would allow Airbus to be undercut by Boeing who would appear to pay no taxes at all on the manufacture of their planes. Starting a trade war with your trading partners might indeed be one of the consequence of ditching income tax . Perhaps it might be justified in the long run but if the tax turns out to be successful, your competitors could do the same by increasing their existing VAT and take away any advantage.
Forigner,
The possible retaliation you are alluding to here is actually of very little concern in my mind. Let’s face it, the most extreme action that would likely be taken is for our competitor nations to implement their own version of the FairTax to “level the playing field”. The FairTax in and of itself is NOT the same as a tariff on imported goods, so the most likely retaliation would be to eliminate tax on exports. Your trade war scenario is a lose-lose situation for the countries involved, so the protective tariffs you are talking about would be an extreme measure that I doubt many of our allies would seriously consider.
There would be nothing preventing countries from following the lead of the US and implementing their own FairTax. In fact, the books point out this as a likely scenario. However, the first country to implement the FairTax will have an advantage over the rest of the world as companies greedily eye the first opportunity to migrate business there. There will always be cheap labor available somewhere, but removing the built-in tax will give America a very significant competitive advantage.
Linder makes this type of argument suggesting it will spread freedom around the globe.
I am heartened that this board has such freedom-loving patriots.
OK, freedom-lovers, riddle me this. If the consumption tax is such a wonderful improvement over income taxes, why is it that European countries have high VAT taxes IN ADDITION TO persona income taxes, corporate income taxes and social security taxes, etc. If their VAT worked so well, they woudn’t need those other taxes.
I have heard many rightwing talkshow host make the same argument that Mr. Woodhill does (if you read the complete article) that Ireland’s economy rose significantly after they reduced their corporate tax rate to 12.5%. But those same commentators fail to note that Ireland also has a personal income tax at 40%, a social security tax of 14%, and a VAT of 21%. Don’t you think that the good folks of Ireland would love to reduce or eliminate their high personal income taxes and social security taxes if the VAT worked so well?
Hayden, I don’t think that your comment is so much about taxation economics, rather spending and politics. Having both tax systems does not remove the aspect of improvement or economic development to the degree at which they are capable based on their required revenue. They are still constrained by the public perception, and hiding taxes in many forms allows them impose a higher bruden. This is not an economic development but a political one - How to pluck the goose with the least amount of hissing. Rarely does policy follow good economics.
Hayden,
Thanks for the compliment back on 8, at least I’ll take it as such. Sometimes being combative is a good thing, but from my experience most of the time it simply puts people on the defensive and entrenches them in their position. Much better to try and keep people in a relaxed and opened minded state as much as possible if you are actually trying to sway someone’s opinion.
As to your post 12... You are simply DEAD WRONG. You couldn’t be more wrong if you tried. It just proves what a complete LOSER you are and how totally inept you are on this issue. See what I mean about combative.
Seriously, I agree with the main premise of Morphh’s response. I have no idea what government spending is like in Ireland. I believe they have a national healthcare system. Who knows what other welfare programs they have in place, and what drain of resources these impose on their economy. In evaluating a foreign country as a basis for comparison, you have to look at numerous factors, not just one side of the issue.
Morph — My point is that it is politically popular everywhere in the world to lower taxes.
If a consumption tax was the magical elixer that some claim it would be, then it wouldn’t take long for a politician in a country that ALREADY HAS a consumption tax to advocate for an expansion of the conumption tax in exchange for the reduction or elimination of personal income taxes. The fact that all of the countries that have VATs also have high personal income taxes (as well as other taxes) does not bode well for the argument that we could replace all federal taxes with the FairTax.
Hayden, I do think there is a limit to how much you can tax consumption. Alexander Hamilton stated that “It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess.” Based on the revenue needed (the level of taxation in those countries), I don’t believe they could eliminate their income taxes. Keep in mind that VAT taxes are inclusive like the FairTax, so a 21% VAT is 27% exclusive. They also have few measures in place to reduce regressivity, which if included would increase the tax rate. The U.S. on the other hand has a larger economy (tax base) and a smaller per captia tax burden, which makes replacing income taxes more feasable.
Morph said:
“The U.S. on the other hand has a larger economy (tax base) and a smaller per captia tax burden, which makes replacing income taxes more feasable.”
You might be correct that replacing the income tax with a consumption tax might (theoretically, at least) be more “feasible” in the U.S. than in Ireland. It’s also more “feasible” for Tiger Woods to hit 18 holes-in-one in a golf game than it would be for me to do so. But it still ain’t gonna happen for either of us.
Now, all sarcasm aside, the more I think about the Irish example the more unrealistic the FairTax becomes. You might argue that Ireland has higher per capita government spending than does the U.S. (which, as a percentage of GNP, is probably true), and thus can’t finance all government expenditure through a consumption tax. So, maybe they need the VAT and the 12.5% corporate income tax, or the VAT and the 41% personal income tax, or the VAT and the 14.5% social security tax, but the fact that Ireland has all FOUR taxes (plus a 2% tax on wages for medical insurance) is pretty strong evidence that a consumption tax alone just ain’t gonna cut it in the US or anywhere else.
Scott — Just how much do you reckon each American family would need to spend on an annual basis for the FairTax to work?
Hayden, I don’t see the direct correlation and why the politics of Ireland, which we know nothing about, seems to be of importance. The point with referencing Ireland was empirical research regarding the effects of certain tax policy changes. Ireland is nothing unique; many U.S. states have both an income tax and a sales tax (my state does). Some have no income tax and some have no sales tax. Obviously it does work and can work using varying degrees of tax policy. You don’t have to go to Ireland to draw your conclusions (Florida’s GDP is triple that of Ireland). There are certainly many arguments (see the Tax Foundation) on why consumption taxes would be better for state economic growth. This does not mean that citizens are demanding it or that politicians are proposing it, although some states are moving in this direction.
Morph — I clicked on the link to the Tax Foundation and could not find what you were referring to. Where would it be?
By the way, some time ago you had told me about podcasts of Tax issues at some website or another. I listened to a few of them and thought they were interesting, but I can’t remember the website.
Hayden,
I would read their 2008 State Business Tax Climate Index. Keep in mind this is not only tax policy but spending policy (tax systems being equal - a state with higher taxes ranks lower). I can’t remember if this particular paper advocates a consumption tax over an income tax but it is a good place to start as it covers a good bit of the topic area. I read a lot of their material so I can’t remember where they advocate what.
The audio might have been their Tax Policy Podcast, which is pretty good.
By the way, I did print out the Tax Foundation’s report entitled, “Why Taxes Matter.” According to the chart on p. 7, it appears that state and local taxes are roughly half of what federal taxes are. That is, folks pay about twice as much in federal taxes as they do in state and local taxes.
This is important for the FairTax for two reasons.
1. First, assuming that states adopt their own versions of the FairTax (i.e., they abolish state income taxes and property taxes) if the federal government adopts the FairTax, that means that the state FairTax rate would be approximately 1/2 of the federal rate. Or, if the federal FairTax rate was 30% (tax exclusive) then the state/local tax rate would be 15%, for a total tax rate of approximately 45% (tax-exclusive.)
2. But, the state/local tax burden would be even higher than that because, as you know, the spending of state and local governments would be taxed by the federal government under the FairTax. So the state/local tax rate could be as high as 20%, giving a combined fed/state/local tax burden of 50%.
This assumes, of course, that the federal tax rate would be only 30%, which, as you know, I consider unrealisticly low.
If anyone has any other data as to what the state/local tax burden is vis-a-vis the federal tax burden, I would be interested in seeing it, because I frankly don’t know.
Hayden, there have already been studies on several state rates and they were no where close to that. You have to consider what the taxes are replacing. Much revenue reported from the state and local level is from property taxes, something the FairTax system would likely not replace. It would also not replace excise (gas, tobacco, alcohol), lotteries, etc. If it did start to replace some of these additional taxes and the rate increased several points, it would not likely be an increased tax burden but an exercise of transparency.
Morph — You are probably right. 50% did seem quite high (though I was just judging from the graph), but I would like to learn what the state/local tax burden is vis-a-vis the federal tax burden if anyonw know.
Hayden,
I would also be very interested in seeing more supporting information that state/local tax burden is half of what the federal tax burden is. I know here in Texas that we pay NO income tax, and the state sales tax is about 8.25% depending on the city/county you live in. Even adding property taxes into this equation, I would guess that my state/local tax burden is more like 10-20% of what my federal tax burden is.
This would make a great deal of sense to me when you consider the things that the federal government does that the states don’t. The largest of these obviously being national defense and foreign relations/affairs. These are two enormously expensive aspects of the federal government that states bear absolutely no direct responsibility for. Add to this the fact that the federal government subsidizes many aspects of state government, such as transportation, and I find this that much more difficult to believe.
It would be very hard for most other countries to introduce a FairTax - so it is unlikely to spread. Let me give some figures.
I earn around $US65 000 in local currency. better than average. My total income tax works out just under 30% over the whole year, with my top tax bracket at 39%. I pay 12.5% VAT on everything I buy other than second hand goods and financial services. The Government also sneaks in a few mores taxes - on fuel, some imports and on booze mostly but I am sure it adds up. That is easily 45% taxation and I expect it really could be 10 % higher. Seems high but we get a few more benefits for our money.
So to get all its revenue from VAT, the rate would have to be around 80 to 90% in my country and no politician would ever suggest that. Maybe you could do it at 30% - if you can, the tax burden must be a lot lower than here,
Dear Foreigner,
What country are you from? I lived in Germany six years - three on the local ecoonomy. I don’t think Germany was that high, although it is hard to see through their tax code because the income tax rate in the Income Tax Code (Einkommensteuergesetz) was expressed as a mathematical formula consisting of brackets inside brackets inside brackets of a numerator divided by brackets instide brackets inside brackets inside brackets of a denominator. I ran my data through and came within a few Marks (it was Deutsche Marks back then, not Euros) of the Finanzamt’s version of my tax liability.
~Jim
Scott & Hayden, with regard to the states paying half of the federal burden, we should keep in mind that not all states are equal. A good portion of that pool is probably California.
Hayden,
I don’t have any fancy studies, but my personal tax situation certainly supports the 50% claim you reported. Perhaps the fact I’m retired and not paying federal payroll taxes is an important difference, but in any event, my federal taxes amount to around $10,000, and my state and local taxes are around $5,000. By the way, the state and local taxes were kind of difficult to estimate. No problem with the $4,000 property tax, but the $1,000 in Florida sales tax was a bear to figure out because I don’t keep receipts.
As for your assumption that the States will adopt a Fairtax plan, don’t hold your breath. As I have previously written, (1) the National Governors Association policy paper on taxes opposes a national sales tax such as the Fairtax, and (2) it is very likely unconstitutional for the federal government to tax state and local operations. Remove government consumption from the base, and the inclusive rate goes to 30%, exclusive 43%. How high is too high?
Morphh, any response to our questions from Walby, Kotlikoff, or BHI, or are we still being given the “mushroom” treatment??
I live in New Zealand. My 30% tax rate is calculated from my yearly tax summary ending March 31 2008, and this has already been deducted at each pay. Interest payments and dividends from NZ based companies have also already been taxed, and for most wage and salary earners, filing a tax return is not required and most tax payers do not do so. I will file as I hold overseas based stocks and will claim a tax loss from a forest. I have been registered as a individual operating as a company when I have done contractual work - thankfully I no longer have to file VAT returns based on purchases and goods supplied but many I know still have to do so.
The estimate of my indirect tax is based on 12.5% GST built into nearly every good and service I buy locally. As I spent a month in China in the last tax year, I avoid some of this local consumption tax. I can also only pay Goods and Services Tax on my after tax earnings so it is probably closer to 8% of my gross income so I get to 38%.
The rest is embedded tax, I pay around $US5.90 per US gallon of gas, GST being 1/9 of this and probably $2-3 being other taxes. O f course I pay embedded taxes on every goods and service i admit to buying so around 50% of my income being taxed is a reasonable guess.
I do earn more than the average and pay tax accordingly. To get me to pay all of this by moving the GST rate up, it would have to move up to close to 100%. This would not work - both my partner and I have and could work in several countries and we also have the option of spending very little money until our retirement - again overseas. Emigrants like us would be those with the skills to find work offshore, and this would cripple the economy.
Ireland sound similar in its taxes and no country other than tiny tax havens and nations with a government too inefficient or corrupt to organise a income based taxation system has attempted to take all its tax from consumption only. i would not be looking for examples outside the US for your new tax system- no one else is even thinking about it.
The Tax Foundation website has state and federal tax burdens. According to the data, the state burden in Texas is 9.3% and the federal is 20.5%. State tax burden does come closer to 50% of federal than I thought. Burdens for California are 11.5% , 22.9%.
I’m not an economist but I am a consumer who knows the difference between projections and facts. The growth projections cited are driven by assumptions about consumer behavior. There is no data available that proves how consumers would behave under a system that taxes only consumption. In 2006, an Auerbach analysis of consumption taxes concluded “simulation evidence to date has not taken into account a variety of issues that could significantly affect the estimated efficiency gains from adopting a consumption tax. Several of these issues point toward smaller potential gains, while others point toward larger gains. Recent contributions in behavioral economics suggest that a variety of institutional characteristics beyond the effective tax rate on capital income may be very important in determining the effects of adopting a consumption tax.”
I’ve only found one 2005 research paper that attempts to backfit the Kotlikoff models to prior economic results. A conclusion from that was the models are missing behavioral aspects that are considered important. That’s consistent with an earlier paper by Nishiyama (2003) who found well-being losses to households when stochastic wages were incorporated into the Kotlikoff model. Those losses turned into significant gains when stochastic wages were turned off. They key reason for the losses was the reduction in risk sharing under a consumption tax versus a progressive income tax when wage uncertainty was incorporated into the simulation.
My own conclusion is models that assume perfect consumer foresight and no wage or consumption shocks or uncertainty might well overstate both the individual and overall economic benefits of taxing only consumption. Particularly if the gains are driven by taxing existing capital at a much higher rate than under the current system. (The issue of the inter-generational wealth transfer from the initial elderly to the initial young/not yet born.) This is a case where reasonable people will disagree about whether available data supports the belief putting all your economic eggs in one basket is the best course of action.
Ellen –
Wow! All I can say is, I’m glad we’re on the same side. If I ever need a debating partner, I know who I’m calling.
Hank, I did not here from any of the researchers regarding our study questions.
Hank — Good to hear from you again. I thought you were RV’ing across the country or something.
I agree that states will not likely support the FairTax, but my point was that IF the FairTax were to be enacted into law and the federal income tax is eliminated, then states would feel compelled to eliminate their own income tax systems (and, possibly, property tax systems).
After all, what state is going to burden its citizens (and try to enforce) it’s own income tax if it can no longer piggy-back on the federal government’s income tax system? And, if the federal government adopts the FairTax, which taxes certain purchases but not others, it would be very confusing if states retained their existing sales tax systems which would tax (or not tax) different purchases.
So, presumably, states would adopt some version of the FairTax if the federal government did so.
Hayden,
Well, I started out RV’ing but at 9 mpg and $4.00/gal, it seemed to be time to park this thing and just sit in the cool NC mountains.
I don’t totally share your view that the states would adopt a version of the Fairtax should it become federal law. I think it was Bartlett that suggested that all the states might instead go to an income tax and scrap their sales taxes if the Feds got into the sales tax business. I’m not convinced that it would be all that tough for each State to arrive at a taxable income amount given that the State/Local governments already get a copy of the W-2 from employers? Certainly not an easy path, but expanding the consumption base to reflect the Fairtax base would not be easy either. Probably tilting with windmills though, because this thing is going nowhere imho!
I certainly agree with your comments re Ellen’s input. Very well stated, and supports your view that avoidance is just as important as evasion. My old Econ prof used to claim he was the last of the economic philosophers. He had little patience for long range models with all their assumptions, and was more attuned to how consumers might act given different scenarios.
It sure is disappointing that BHI/Walby/Kotlikoff haven’t responded to our queries. In reviewing the BHI credentials, it seems clear that they were a pretty competent think tank when dealing with Massachusetts issues. But I can’t find any national issue experience until AFFT chose BHI for the base rate/study back in 2006, (probably at Kotlikoff’s recommendation?). And that 2006 study has a lot of warts, including their failure to offset federal consumption with an appropriate revenue increase, adopting a revenue neutral and price neutral assumption in order to avoid the issue of prices, failing to provide any supporting data or discussion about the constitutional issue of the feds taxing state and local operations, etc. etc.
As of last discussion with BHI and Kotlikoff, they deny to have some of the “warts” Hank stated.
Regarding #34...good to hear from Hank. I’m wondering if Hayden is thinking many states don’t have the existing manpower or software systems to effectively collect income taxes without a central data repository. Don’t the states rely on the IRS for most non-wage income data? It does seem that states would need to spend some additional dollars on both the filing and enforcement aspects of their individual income tax systems. Interesting that the New York Times has a story today on states reducing income tax enforcement personnel to eliminate budget costs.
I don’t personally think states would initially dump the income tax. I do think it could become too expensive to enforce for non-wage income.
Where is the law for individual income tax?
What is the question that begs to be answered. What is the question?
Suppose that on this very moment the police were to knock down your door and arrest you for first degree murder. Immediately you will think how and when but mostly importantly “WHO”?
The “who” is the subject of the murder law.
Here are three legal accusations, three indictments:
1)You murdered
2)You murdered a cockroach
3)You murdered Nicole Simpson
The first indictment has no subject matter, thus the indictment is invalid. The second names a subject but there is no law that refers to this subject. The third has a proper subject. When the IRS indicts people, they never name a subject. Their indictments is in the order of the first on the list. Without a subject there is no valid indictment ....no subject matter jurisdiction.
What if someone tell you that the subject is the income? Well they are wrong because the Supreme Court has long held that individual Income tax is an indirect tax and therefore not a tax on income but on the activity which produces the income. The individual income tax is an indirect tax in the nature of an excise tax. An indirect tax is ruled by Article 1, section 8, Clause 1 of the constitution. The 16th Amendment did not affect the income tax, supposedly all it did was to reinstate its indirect classification.
The indirect classification is very hard for people to understand, because it appears to involved a subject, but in actuality, due to logistic reasons in writing laws, the event becomes the subject. For example when you buy a television from Walmart for 100 dollars, the subject is not the television but the sales.
So where is the law that state, in general, that work is a revenue taxable activity?
Morphh,
I’d be happy to retract my comments about BHI warts if only they would respond to our questions with reasonable answers. Just denying the problems doesn’t cut it with me. Is there any reason to hope they will get around to us eventually?
Antonio — You are free to believe whatever you wish to believe, but please don’t get yourself or the owner of this blog in trouble for advancing frivolous arguments that folks don’t need to pay income taxes. The link below addresses your argument and virtually every other tax protester’s argument. Also, the IRS’s website has refutations to each of the tax protestors’ arguments. But, the bottom line is, you can go to jail for evading the Income Tax, regardless of whether you believe it is constitutional or not. You might not believe courts have the authority to put you in jail, but that argument’s not going to get very for with the warden.
http://evans-legal.com/dan/tpfaq.html#nonewpower
Antonio, I agree with Hayden here. The Law that makes the average American liable to pay income taxes is in Section 1 of the Internal Revenue Code, 26 U.S.C. § 1. Congress put the law right up front so that nobody could miss it (well, nobody who was actually interested in knowing, anyhow). The Dan Evans site that Hayden linked to is a good source and rebuts about every tax protestor argument but here is a link to a direct answer.
Here is the Law That Makes the Average American Liable for the Income Tax
Antonio, I would say that your argument is a definite failure, sorry. Anytime that Hayden and Morphh can agree on something that is pretty amazing.
Ha!
Actually, Morph and I agree on another thing: Our current tax system stinks!
Antonio,
Sorry to join the folks who are piling on you, but I have researched cases that tax protesters claim support their argument that the Sixteenth Amendment, providing for the income tax, was not properly ratified. One such case cited by tax protesters is US v. Cryer, US District Court for the Western District of Louisana, Criminal Docket 06-50164-SMH, where the federal judge’s instructions to the jury were clear that people had an obligation to file an income tax return. Cryer was a criminal prosecution for not filing a return where the defendant was acquitted by a sympathetic jury. The case does not support the argument that one does not have to file an income tax.
Another tax protest case is United States v. Benson, 941 F.2d 598 at 607 (7th Cir. 1991) where the United States Circuit Court of Appeals for the 7th Circuit expressly rejected Benson’s argument that the Sixteenth Amendment was never properly ratified. The Court in that case reviewed the legislative history of the Sixteenth Amendment exhaustively and concluded that the Amendment was properly ratified.
In a subsequent Benson case the United States Attorney successfully enjoined Benson from marketing a so-called “Reliance Defense Package” that contains advice in regard to filing federal tax returns, including advice that the Sixteenth Amendment was never properly ratified. See No. 04 C 7403, United States District Court for the Northern District of Illinois, Eastern Division. The court, in a memorandum opinion dated December 17, 2007, did not permit Benson to re-litigate his argument concerning the Sixteenth Amendment, as the same issue had already been adjudicated in the earlier Benson case, res judicata.
Some people who think the income tax is not valid are attracted to the Fair Tax, but unfortunately they hurt our movement. Since the Fair Tax represents a paradigm shift in itself, it is important for supporters to avoid tangents.
~Jim Bennett
Speaking of Economic Growth, does anyone know when the Open Letter to the President posted on the fairtax.org website was actually written? The reason I ask this is becuase I emailed several of the signators in 2005 after the FairTax Book came out, and none of those who responded were aware of any research on the FairTax. In particular, none of them were aware of any research supporting the 23% claim and some of them made the point that the letter they signed did not specify a tax rate. (And it was my impression that several of them actually thought they were signing a letter in support of the Flat Tax, which had a great deal more publicity at the time as well as serious academic research supporting it.)
Now that the FairTax has received a great deal more publicity as well as academic scrutiney, it would be very interesting to see in seei just how many of the originnal signators of that letter (or any other economists) would sign such a letter today. Who knows, maybe 800 would, but it would be interesting.
Also, Nobel Prize winning economist Vernon L. Smith is listed as a signator on the Open Letter and is prominently mentioned in Wikipedia and other cites on the FairTax. I tried to track him down to get his current views on the FairTax, but cannot find him anywhere. I also tried to see if I could find anything that he might have written on the FairTax or consumption taxes in general, but was unsuccessful.
Hayden,
I don’t know where one draws the line between aggressive marketing and prevarication. I suspect that many of the 80 economists do favor tax reform, but am not so sure they grasped the details of HR25 when they signed that letter back in 2005(?)
The Boortz/Linder books also claim that the Fairtax has been studied (and supported?) by MIT economists, naming Jim Poterba specifically. Professor Poterba is a fellow alumnus of MIT, and in response to an email I sent him last year, here is an excerpt from his reply:
” My one page in 1997 has been widely described as an endorsement of
the Fairtax but in fact it was only an arithmetic calculation requested by
the Fairtax group; I agreed that IF the base was as broad as they say it
could be, THEN a rate along the level they suggest would be feasible. But
I never endorsed the feasibility of such a broad base, nor the absence of
evasion, nor the plan in general.” Draw your own conclusions about the validity of the books claims!
As for Vernon L. Smith, simply call or write: Chapman University, 1 University Drive, Orange Ca 92866 Tel:714 628-2830. That should put you in touch with the Chapman Economic Science Institute where Vernon Smith heads up a team each summer that teaches “High School Workshop in Experimental Ecomomics”. Perhaps the admin there will have your contact information? I doubt seriously if Dr Smith has ever published anything about consumption taxes. His expertise lies elsewhere. He is also an “aspie”, suffering from Aspergers Syndrome, and at age 81, there is no telling what kind of response you might receive. Worth a try?
The letter mentions the 109th Congress, so this dates it between 2005 - 2007, unless the letter was updated to reflect the new congress. I don’t recall seeing it before 2005 and I remember it being published (just can’t remember when). Supposedly a university economist worked with AFFT to circulate the letter among his peers. I remember Karen Walby (perhaps on Phil’s show) stating that they were working an updated copy with more economists, but I’ve never seen it.
Thanks. The letter must have been written in 2005 then, because it was there when The FairTax Book first came out. (Aug., 2005). I too remember someone on the Phil Hinson show saying they were going to circulate an updated copy, but never heard anything else.
re: hank, post 45
the book claims Poterba studied the FT plan.
you claim Poterba studied the plan.
the book claims Poterba concluded the plan works at the rate/base described.
you claim Poterba concluded the plan works at the rate/base described.
the book doesn’t appear to claim that Poterba has endorsed the plan.
you claim Poterba hasn’t endorsed the plan.
if, somehow, you and the book are at odds, I imagine it is because one or the other is assuming or implying facts not in evidence.
your parenthetical.....is it yours and yours alone? did you draw that conclusion because the book says elsewhere that everyone who has studied it also supports it?
....or did you draw that conclusion because the book implies that everyone who studies it has found the conclusions and calculations to be sound?
remember, the books are written by a politician and a lawyer/talk show host....causing people to draw their own conclusions while never specifically saying something is what makes most people in those three fields successful.
Justin — If I recall, one of the last paragraphs of the second book says that Poterba studied the FairTax and concluded that the tax-inclusive rate was 23.1% Moreover, Boortz and Linder have said over and over again that the FairTax plan was “developed” by economists at MIT and Harvard and/or based on MIT and Harvard studies. It’s not a matter fo people drawing incorrect conclusions; it’s a matter of lying.
Ooops. I realize I should not have accused anyone (even talk-show hosts) of lying. If Morph has not already pulled my last comment, I should rephrase that and say that in my opinion certain proponents of the FairTax (not on this blog) appear to have over-exagerated the academic support for the FairTax. (At least until the recent studies.)
“If I recall, one of the last paragraphs of the second book says that Poterba studied the FairTax and concluded that the tax-inclusive rate was 23.1%”
and still the fact remains....
....certain learned people have studied the FairTax and found the mathematics accurate.
unless or until someone makes the claim that ‘acknowledging accuracy’ is always the same thing as ’supporting the plan’...you don’t have much room to say there is fault with pointing that out.
“I say ice is cold.....an MIT physics professor agrees that ice is cold.”
is not the same as
“I say ice is cold because it has irritated Rayos, the God of Heat....and an MIT physics professor agrees that ice is cold.”
if you infer that that the MIT professor believes in Rayos, the God of Heat.....that’s YOUR ill-informed conclusion. perhaps you could blame me for setting it up for you, but it’s still your thought. I didn’t say it.
you want to blame a lawyer/talk show host and a politician for implying something without actually saying it? fine......but please realize....that’s exactly how both of them make their livings.
the book (and most supporters) says “these learned people studied the plan, and agree with the findings (math, rate, etc)”. the book does not say “these learned people studied the plan and agree it should be implemented.”
if you are drawing the conclusion that one is the same as the other, that’s probably the intent of the authors....but that’s still YOUR conclusion, it’s not one that has been made directly by the book or its authors.
as it stands...nearly every mathematical study of the FairTax that comes to a different mathematical conclusion (the rate is too low, the base is too small/big, the revenue is too low, etc) is found to be lacking in understanding of the total plan, or intentionally fudging numbers.
as Boortz so often reminds his listeners:
“In order to attack the FairTax, one must either fundamentally misunderstand it, or substantially alter it. In either case, the ‘problems’ then exposed are directly related to those changes, and not the original FairTax plan as it is written.”
Justin,
Regarding Jim Poterba’s position, you need to reread his email to me closely. Yes, he agreed that a rate of 23.1% would work, provided that the consumption base that was given to him was reasonable. Which he does not believe. He does not support the Fairtax, and I choose to believe that he was used and abused by the inferences in the Boortz/Linder “bible”.
As for your final point, you seem to be ignoring the Rice study results, which are based on facts prepared by unbiased economists, and are consistent with HR25. The rate is closer to 28% than 23%, and that seems to me to be unassailable.
Justin –
I am a lawyer. I can assure you that if I tried to make the sort of misrepresentations to a judge that Boortz routinely makes on the air I’d very likely lose my license and quite possibly be thrown in jail. His own website states that you cannot believe what he says. You seem to think that Boortz is very careful to say the truth, then allows his listeners to infer what he hopes they will infer. But that’s not right.
As an example, look at the last paragraph of your post no. 51, where you say Boortz says:
“In order to attack the FairTax, one must either fundamentally misunderstand it, or substantially alter it. In either case, the ‘problems’ then exposed are directly related to those changes, and not the original FairTax plan as it is written.”
That’s simply a lie. Gale did not misunderstand or alter it. Not did Graetz. Nor did Jorgenson. Nor did the Rice University guys. Boortz simply will not admit that learned economists have looked at the FairTax AS WRITTEN and concluded that it does not work. They have concluded that the numbers don’t add up.
For Boortz to claim that they “either fundamentally misunderstand, or substantially alter” the FairTax is a false statement. It is not, as you say “implying something without actually saying it.”
By the way, when Boortz said in his first book that we would all get “virtual raises” because we’d keep 100% of our paychecks but prices would stay about the same under the FairTax — would you call that a lie or just implying something without saying it? I ask because that is the message he repeated over and over in his book and on his show until Jorgenson and others called him on it. So, now he doesn’t actually say that anymore, but that’s what most people who have heard of the FairTax believe and Boortz hasn’t exactly gone out of his way to correct the false impression that he created in the first place.
Hank -
I think i read him accurately. he agrees with the rate and the math as it is presented. he does not appear to agree with the plan or the base (tho what issue he takes with the base (and by extension, the plan) is anyone’s guess.)
I don’t think i’ve made any statement that diverges from those about his opinion.
has he offered what he believes to be a better or more accurate base?
has he offered what he believes to be a better or more equitable plan?
exposing problems is of little use when one does not present solutions.
i’m reading the rice study now, i’ll be interested to see what they found that you feel supports an anti-ft position.
who knows.... perhaps a study funded by people who are quite vested in the current system will be able to sway me.
justin
since there isn’t a posting specifically about the rice study on this blog, i’ll make this comment here:
pg 17:
“Kotlikoff et al. assume elimination of the Earned Income Credit and the refundable Child and Dependent Care Credit, which would reduce the revenue requirement by roughly $48.9 billion, while Gale treats these items as expenditure programs that should continue to be funded. Although both positions are tenable, we err on the side of making a conservative estimate of the real revenue-neutral sales tax rate and assume that these extremely popular programs would be maintained even if the income tax were eliminated.”
anyone want to guess how these credits (which currently exist as nothing more than a schedule and a line item on the 1040) will be maintained?
if you don’t have income tax to credit against, how can a credit against income tax be applied?
this is only page 17....i hope it gets better.
justin
Justin, how would any means-tested program be administered under the FairTax?
OK, I got to the crux of the rice paper....28% instead of 23% (based mostly on the retention of the credits i mentioned above and the acknowledged inaccuracy of the calculations for gov’t expenditure...money the gov’t has to have in order to give it back to itself).
how does that kill the plan or make it unworkable?
i’ll run the numbers tonite, but i’m thinking that my effective tax rate for 2006 was more than that.
i’ll have to make sure that i remember to bump the prebate 5% as well....
justin
Justin,
I think you have a reasonable handle on the Rice study. You will find agreement on this blog that their assumption about the EITC and Child Care Credits may not be workable. I think they let their emotions get in the way of the real intent of HR25. If you remove the revenue needed to pay for those two entitlements, the 28% goes to around 27.5% inclusive. But you shouldn’t assume that getting rid of the income tax would make it impossible to grant those entitlements. Remember, earned income will still be reported to the SSA, and the SSA could figure out who might qualify. Not too difficult, imho.
Overall, it doesn’t “kill the plan or make it unworkable”. But the higher the rate, the more evasion/avoidance, (particularly the latter), and we are now looking at a 39% sales tax added on to the retailers cost plus profit amount. Add in the State/Local tax (after adjusting for the States having to pay the federal sales tax), and you are getting upwards of a 50% total sales tax. How high is too high???
Justin — The Rice study does not make any allowance for tax evasion, tax avoidance, or folks reducing or altering their consumption to avoid paying the FairTax. So, as they point out, the 28% (tax inclusive) rate is the lowest possible rate (i.e., the actual rate will need to be higher.)
evasion and avoidance:
i’ve been asking for over two years for someone to come up with a practical method of evading or avoiding the fairtax that would result in a significant enough shortage of revenue to force or cause an increase in the rate.
the best anyone has come up with is the “using a business exemption to buy person goods” which is at worst is nigh impossible/improbable/impractical, and at best nothing more than currently happens under the current system (which is a major portion of the current rate calculations for consumer spending).
reducing or altering consumption:
so, because of the FT, everyone is going to suddenly stop buying new goods and services? really? that’s funny, ‘cuz nothing else that results in more money in consumer’s pockets has EVER done that. the majority of Americans believe it is their life’s work to spend more than they have, some more than they’ll ever make, and the government is setting a shining example of how to succeed at that. when was the last time consumption levels dropped significantly? the recession following the oil, banking, and housing busts of the 80s, right? you know what would make a cool study? using the rice method to figure the ‘right’ rate for every year since 1980. i wonder if the consumption/income/revenue triangle altered significantly during the recession and the tech-boom and 9/11......
administration of means tested programs:
since means-tested programs are little more than government subsidized social engineering via wealth redistribution...i don’t know that they need to exist in a post FT America....at least not to the level they currently do.
if every household gets the prebate, regardless of income, but dependent on size, isn’t that a type of means-testing? for an EIC type program to exist after the FT, someone is going to have to make the case that the prebate doesn’t give them enough money to live. well, frankly, the prebate isn’t designed to do that. the prebate untaxes that single mother of six up to the poverty level...if she spends less than the poverty level, then she is getting ‘free’ money, that is money that she would not have spent on taxes in the first place in order to get it back in a refund....
hey, look, the EIC is money she did not spend on taxes in the first that she got refunded anyway.....
show me the difference, and maybe we can progress that conversation.
for the EIC to work, someone is going to have to create a new welfare program and cut a new welfare check, since it can no longer be incorporated into the income tax system.
can it be done? sure.
will it be easy to get past the majority of americans who don’t get the EIC now, and won’t stand for a ‘welfare queen’ to get a second check on top of her prebate? probably not.
Justin — As Morph has pointed out, I take this stuff far too seriously, so I hope I do not appear too obnixious and overbearing. If so, just tell me to shut up.
Anyway, you say that you have been asking for practical ways to evade/avoid the FairTax. Here’s a list of ways I came up with off of the top of my head.
1. Buy a one-year old used car instead of a brand new car.
2. Buy an existing home instead of a brand new home.
3. Buy a brand new vacation home and rent it out so it gets classified as investment property, (This would actually be more complicated than that, but that’s the general idea.) Of course, if it’s an existing vacation home it’s tax-free anyway.
4. Buy a multi-million dollar yacht in the Bahamas rather than in Florida.
5. Retire to Mexico rather than Arizona.
6. If you are independently wealthy, move to Europe or travel around the world for a few years.
7. Buy a luxery beach house in the Cayman Islands rather than Hawaii.
8. Open up a small business. Buy a big-screen TV for your business. Temporarily store it in your living room.
9. Buy a car for your network marketing business. Use the car for personal use.
10. Have an expensive dinner with friends and ask them if they’d like to invest in your latest venture.
11. Have your corporation buy an airplane or, depending on how successful your corporation is, a jet.
12. Buy a ranch or a farm.
13. Send your kid to private school.
14. Take your ski vacations in Canada rather than Colorado. Beach vacations in Mexico rather than Florida.
15. Have plastic surgery in Brazil rather than Los Angeles.
That’s just a few ideas. Imagine how many more ideas creative lawyers and accountants and others would be able to come up with if we actually enacted the FairTax. Most of what I listed above would be perfectly legal under the FairTax. After all, as the FairTax advocates like to say, the FairTax is a “voluntary tax, that you pay when and how much you choose.” Surely you agree that many, if not most, of us tax-hating Americans will choose to pay as little taxes as possible.
Of course, some people will still buy new cars and new homes, particularly if the price of used cars and existing homes rise under the FairTax. And, some of the strategies I’ve suggested would be illegal, just as they are today. But you get the idea. People wont’ need to strain their imaginations too much to figure out how to avoid paying taxes under the FairTax.
Think of how successful “tax-free holidays” are today when you can buy back-to-school clothes and computers without paying state sales taxes. Think how successful duty-free stores are in airports. Now, imagine a federal tax at least triple the state sales tax rate and more than most customs duties. Doesn’t it stand to reason that many, many folks are going to do what they can to avoid paying that tax, particularly if it’s as easy as I’ve described above?
I’d be interested in knowing whether that answered your question as to whether there would be practical ways to evade/avoid the FairTax.
“Nigh impossible”? All you have to do is start a business. It doesn’t even have to be profitable (how would the government even know if it was or wasn’t?).
Really? The FairTax is going to eliminate the need for welfare, food stamps, Medicade, school lunch programs, supplemental security income, etc..
fred:
“all you have to do it start a business.....”
then you have to file for the sales tax exemption....
then shop at places that actually allow you to use it.....
then take the risk of losing it, your business, and possibly your freedom for conning the system.
again, lots of words, very few practical applications.
will the FT eliminate the need for those programs? no.
are any of those programs funded thru the income tax structure? no.
would the FT directly impact any of those programs? no.
Yeah, I guess it’s is a pretty big risk. Don’t want the IRS to be knockin’ on your door? Oh, wait...
So I guess “since means-tested programs are little more than government subsidized social engineering via wealth redistribution...i don’t know that they need to exist in a post FT America” wasn’t an accurate statement.
hayden:
1: where did that used car come from? someone else bought it new. perhaps you can ‘evade’ the tax directly, but the car itself cannot, so you will indirectly pay the tax when you buy the car from the guy who directly paid the tax.
2: same song, second verse. for you to evade the tax, you’ll have to buy a used home that has never been taxed.
3: rent out your new vacation home...and you are a business. follow the business side of the FT, and congratulations, you enjoy the benefits of being a private business owner in America.
4: ....and pay for the bahamas tax code (wonder how long it will take them to adopt a ft system?). besides, whats preventing you from buying that yacht there now (and pushing the consumer spending side of the neutrality equation down?)
5: ...and live in mexico. whats stopping you from doing that now? why are people who do that now doing it? you decide to move to mexico becuase you’ld rather trade the tax implications for spending your savings for the glory that is living in mexico (hope you saved up enough to pay the ransom on that kidnapping your are risking).....while someone else decides to move to the US becuase their stock portfolio is no longer going to be taxed just becuase it exists.
6: same thing. people do that now....why?...would the FT encourage more or less of it?
7: more of the same
8: more business practices....and the government hoop-jumping that comes with them.
9: same
10: same
11: same (and really....doesn’t that currently happen? so those dollars have alredy been taken out of the consumer side of the rate calcuations. in order for these ideas to bump the rate, MORE people than currently do will have to start doing it.)
12: still a business, but with the FT in place, your family won’t have to sell that ranch or farm to pay the tax burden you incurred by thoughtlessly dying.
13: if you don’t spend money on public school (at least not directly) are you really evading a tax by paying for tax-free private school?
14 and 15: ...and fund their tax systems and public policies. be a good american while you are at it..invite them to vacation in the US. oh, and.... good luck with that out of country medical care.
“choose to pay as little as possible” while maintaining the lifestyle you want. if you are willing to choose to live like a miser and pay little to no taxes, go for it. others won’t...and judging by the spending habits of the majority of us.....most americans will easily balance out the few that choose to live like warren buffet.
every example you’ve used is basically one of two options:
1) create a heavily regulated business and become one of a relative handful of tax-collecting entities, so that you can attempt to defraud the government.
or
2) leave the country to spend your money.
guess what.....both of those are perfectly viable options to get out of the current american tax code, yet millions of people DON’T do it every day....even ones who can afford to.
“Doesn’t it stand to reason that many, many folks are going to do what they can to avoid paying that tax, particularly if it’s as easy as I’ve described above?”
it would, if the laziness of the average American could be ignored.
people in my state love to smoke. we also love our indian population. we love out indian population so much we’ll allow the state government to give massive tax breaks to the indian smoke shops that line our borders.
yet, somehow, the non-indian smoke shops don’t seem to have any trouble moving product.
if evading those taxes were so easy, all you had to do was drive an hour or so (not even leaving the state), you’d think the local gas stations couldn’t move a carton of marlboros if their financial solvency depended on it.
Oklahomans will drive three hours for real (and overpriced) porn across the river in texas.....
but they’ll buy their butts at the gas station around the corner before they head out.
Justin — Like I said on another thread, I guess our minds just work differently. A year ago I would have bet good money that anyone who learned the “truth” about the FairTax would immediately oppose it. But you, Morph, Andrew, etc. have proven me wrong. You’ve read the same studies that I have and clearly understand it, yet still support it.
For the life of me I cannot understand why, but I guess that’s what make democracies so fascinating. I would offer to come by and buy you a drink sometime, but, seeing as I’m from Texas, we consider Oklahoma to be enemy territory. I’m sure the feeling is mutual. : )
nothing in the studies that you’ve cited do anything to prove the concept is flawed or unworkable.
at best they suggest that the rate (as written) is incorrect. since the rate is designed to be variable (unlike the AMT), it’s not a concern to me.
other studies that “show it won’t work” are fundamentally flawed in one style or another (they leave out parts of the base, they assume facts not in evidence (evasion rates, etc.), or they are based on formerly produced flawed research.)
everything else is bartlett style straw men:
...the NRST is a Scientology ploy.
...people will jump the border to evade.
...people will do all sorts of things to evade that they don’t do now.
...people will become dependent on the prebate.
...the prebate will be the largest welfare system ever.
...the rich won’t pay their fair share.
...the poor will pay too much.
...the 16th has to be abolished first.
every one of those is a ‘fact’ based on little more than flawed knowledge or outright dishonesty.
like i said, the most persuasive study I’ve seen is the rice study, and all that convinced me of was that the as written rate would have been too low for 2006, therefore it is likely it will have to be bumped immediately upon enactment or be changed before passage to preserve the revenue neutrality.
nothing else has come to my attention that that makes this a non-starter.
the fact that most of the opponents i’ve seen (present company excluded...but you can meet many of them on fairtaxgroups), find some corner they think they’ve wiggled up and they latch onto it.....no matter how many times you show them that that corner is attached to an entirely different sheet of paper. then, no matter how a proponent attempts to show them the error of their logic, they continue to be unwilling to progress from that spot. (see any recent post by markmd on the aforementioned site)
Justin — I will give you credit that you at least appear willing to engage in dialogue with FairTax opponents, are willing to reivew the research and even concede that the FairTax will need to be higher than advertised. That is far more than most FairTax proponents (other than the ones on this blog, of course) are willing to go. (If you think MarkMD is bad, how about Dr. Pete or Psychoboy? Of, for that matter, Boortz and Linder.) However, I think you are overly optimistic in your view that folks will so willingly line up to pay the heavily-taxed goods and services under the FairTax.
You dismiss the evidence of non-compliance with much lower state sales taxes and European VATs as being irrelevant. You dismiss the myriad of opportunities for tax avoidance as being insignificant. You dismiss the tax-hating nature of Americans as being unimportant. And you dismiss the desire of most Americans to save money as being practially non-existent.
Thus, there’s just no way to convince you that folks would rather keep money in their own pockets under the FairTax system (just as they do under our current system) than give it to Uncle Sam. As I said earlier, I suppose we just view the world (and human nature) differently.
I’m trying to think if I know a single person who would buy a brand new $500,000 house under the FairTax system and voluntarily pay $200,000 in taxes to the government.
Nope. Can’t think of a one. But I’m sure glad to know there are folks out there who would.
Hayden,
“I’m trying to think if I know a single person who would buy a brand new $500,000 house under the FairTax system and voluntarily pay $200,000 in taxes to the government.” I’m not sure I know of anyone who would voluntarily pay the $200,000 either. That’s why the government has to force you.
For the most part, people do not alter their purchases based on where their money goes, but on how much they have to spend. Sure, they may complain more based on what they know goes to the government (and vote to lower that amount. That’s what a lot of us advocates hope.), but they don’t alter their spending.
That’s why I think the tax avoidance issue is overblown. If one believes the price of products after the fairtax will be the same as prices before, what would be the motivation to buy used goods, i.e. new goods and used goods have the same price ratio today. If, on the other hand, one believes prices will be higher under the fairtax (only in a nominal sense of course), then used goods will be more in demand. That higher demand will drive up prices until equilibrium is reached (and used goods will be higher in a nominal sense as well). So, the new/used price ratio that existed before the fairtax will return.
hayden:
“However, I think you are overly optimistic in your view that folks will so willingly line up to pay the heavily-taxed goods and services under the FairTax.”
i’m not sure what other choice you might think they are going to have, short of going without.
“You dismiss the evidence of non-compliance with much lower state sales taxes and European VATs as being irrelevant.”
i consider it irrelevant because it’s not comparable. the avoidance of state sales taxes comes primarily by two methods, buying out of state or using business exemptions. under the FT there is no practical “out of state” and business exemptions will create too large of burden o’ hoops for the average american to try to jump thru.
again, i reference my fellow oklahomans. we could easily buy low-tax cigs....but we don’t. it’s not cuz we love funding the cancer research, it’s cuz we are lazy.
“You dismiss the myriad of opportunities for tax avoidance as being insignificant.”
your “myriad of opportunities” can be boiled down to a couple of general options, and i’ve already detailed why i think those options are not practical for anyone not currently taking advantage of them.
“You dismiss the tax-hating nature of Americans as being unimportant.”
nope, I just feel the willingness of americans to spend money they don’t even have is more prevalent than their hatred of taxation.
“And you dismiss the desire of most Americans to save money as being practially non-existent.”
it IS practically non-existent. when savings rates in this country get out of single digits, then you might have a point.
desire to save money? sure....
actually willing to make the sacrifices to do so? not so much.
“Thus, there’s just no way to convince you that folks would rather keep money in their own pockets under the FairTax system (just as they do under our current system) than give it to Uncle Sam.”
and the beauty of the FT is that they can choose to do exactly that. right now the only way to avoid uncle sam is to avoid working or making an income.
under the FT, you have to avoid spending money.
at that simple level, which is better for americans?
“I’m trying to think if I know a single person who would buy a brand new $500,000 house under the FairTax system and voluntarily pay $200,000 in taxes to the government.”
the same guy who spends $500,000 on a house right now? the guy that had to make $750,000 in income to have enough money left over after taxes to purchase the $500,000 house, perhaps?
Andrew — Like always, you make good points. However, if your wife is anything like mine — who will drive to the next county to save one percent on the sales tax (notwithstanding gas prices)– you would agree that some folks are just genetically predisposed to avoid paying taxes no matter what!
And, of course, to cynics like me, if the price of used goods raise in proportion to the price of new goods, that just brings up a whole new set of problems.
If the prices of both new and used goods rise, that means those who currently have substantial assets (e.g. homes, art, jewelry) will see the value of their assets immediately rise under the FairTax system. Those who have their savings in banks will see the value of their savings immmediately be devalued. And those with few assets (renters, for example) will get the short end of the stick when they finally get around to buying a house, whether new or used.
So, the moral of the story is this. If we switch to the FairTax, we should all borrow as much money as possible and invest in real estate and foreign currencies (or whatever George Soros buys since he’s a lot smarter than any of us.) We might still disagree on everything, but at least we’ll all be a lot richer and can have our debates in between ski-runs at Aspen rather than over the internet.
Hayden,
Do you think your wife drives to the next county to not pay taxes or to save approximately 1% on your purchases? I’d assume (based on my wife) it’s a little bit of both. You could totally prove me wrong; however, if she drives to the next county to pay 1% less in sales tax, but pays 1% more in total price. That would be overwhelming tax hatred.
“If the prices of both new and used goods rise, that means those who currently have substantial assets (e.g. homes, art, jewelry) will see the value of their assets immediately rise under the FairTax system.” From my point of view, price and value are two completely different. The value of these items rising will only come from greater demand (or smaller supply). The price is simply how many dollars it takes to buy something. It is totally possible that under the fair tax it will take more dollars to buy an item, but that item will have less value.
“Those who have their savings in banks will see the value of their savings immediately be devalued.” You are absolutely right (assuming fairtax inflation). And people with large debt will see that debt significantly reduced.
“And those with few assets (renters, for example) will get the short end of the stick when they finally get around to buying a house, whether new or used.” This part is inaccurate. If you don’t have any assets, the inflation will affect your pay as much as it affects what you buy (although many argue wages lag inflationary changes).
Owning gold or real estate will be much better to fight the effects of inflation than keeping your money in the bank. And getting things will also be better assuming the inflation occurs. Of course, I don’t think market forces will even come close to letting any 30% inflation take place. I could definitely see more inflation in the very short term than would otherwise be expected. But that, imho, will be more from the fed feeling its way through this new economy than thing being “more expensive”.