Kepner debates Boortz
Post from Hayden Kepner
I was fortunate enough to participate in what I believe to be the first-ever debate on the FairTax to be aired on national TV. (OK, there was a semi-debate aired on C-Span a few years ago.) The debate was moderated by Rick Sanchez of CNN.
On the anti-FairTax side were me, Jay Bookman (a liberal columnist from the Atlanta Journal Constitution) and Allen Buckley (the Libertarian candidate for Senate in Georgia). On the pro-FairTax side were Rep. John Linder (the primary FairTax sponsor), Neal Boortz, and Mark Darrow (a retired telecom executive who owns the upscale coffiee shop outside Atlanta where the debate took place).
Parts of the debate will be aired on CNN Newsroom (with Rick Sanchez) on Sunday nights (probably Aug. 24 and 31) at 10:00 p.m. Eastern. CNN will post the whole thing on the internet, which I assume fairtaxblog will link to so that you can throw rotten tomatoes at me.
I thought I’d give you my thoughts/impressions while they’re still fresh in my mind. So, in no particular order, here goes.
Read Hayden’s take in the comments…
I was fortunate enough to participate in what I believe to be the first-ever debate on the FairTax to be aired on national TV. (OK, there was a semi-debate aired on C-Span a few years ago.) The debate was moderated by Rick Sanchez of CNN.
On the anti-FairTax side were me, Jay Bookman (a liberal columnist from the Atlanta Journal Constitution) and Allen Buckley (the Libertarian candidate for Senate in Georgia). On the pro-FairTax side were Rep. John Linder (the primary FairTax sponsor), Neal Boortz, and Mark Darrow (a retired telecom executive who owns the upscale coffiee shop outside Atlanta where the debate took place).
Parts of the debate will be aired on CNN Newsroom (with Rick Sanchez) on Sunday nights (probably Aug. 24 and 31) at 10:00 p.m. Eastern. CNN will post the whole thing on the internet, which I assume fairtaxblog will link to so that you can throw rotten tomatoes at me.
I thought I’d give you my thoughts/impressions while they’re still fresh in my mind. So, in no particular order, here goes.
1. Rep Linder is really a nice, polite Southern gentleman who I think genuinely believes the FairTax is the best tax plan for the country. Boortz was pretty much like he sounds on the radio.
2. During the course of the debate, it seemed pretty clear to me that neither Boortz nor Linder ever read either the Gale study or the Zodrow (i.e., Rice University) study, and they have convinced themselves that any study that does not conclude that the FairTax rate works at 23% cannot possibly be a study of the FairTax as written. Frankly, I don’t think either of them read the Beacon Hill/Kotlikoff study either.
3. Boortz/Linder kept repeating their mantra that the FairTax rate would be 23%, that the embedded taxes are 22%, and that prices would not rise (or would rise very little) when the FairTax replaced our current Tax Code. They would not acknowledge that wages would need to be lowered in order for that to occur.
4. Boortz/Linder always quoted the FairTax at the tax-inclusive rate. My side always quoted the FairTax at the tax-exclusive rate, which irritated the hell out of Boortz, who when throught his standard explanation as to why the FairTax should be quoted at a tax-inclusive rate. Bookman responded by saying that people are familiar with tax-exclusive rates for sales taxes, so the FairTax should be quoted in the same manner.
5. My side used the rates from the various “independent” studies (JTC, Tax Reform Panel, Gale, Zodrow) which we started off saying ranged from 40%-60%, then we (or, at least, I) sort of settled on 50% for the rest of the debate. Boortz/Linder insisted that all of those studies “changed the FairTax,” and exempted all sort so items (which, of course, they did not) so they claimed that none of those studies were valid.
6. Boortz/Linder did not cite any actual studies to support their claims, though Linder did say that Jorgeson, Poterba and Kotlikoff all did research backing up his claims. (As you know, Jorgenson and Poterba do not support the FairTax.)
7. Linder kept saying that prices would not rise under the FairTax. I said that his own economists say otherwise, that prices will in fact rise under the FairTax, citing Kotlikoff and BHI. He said “those aren’t my economists.”
8. Boortz/Linder said the FairTax was not regressive due to the prebate. Bookman tried to make the point that the FairTax burden would fall most heavily on the middle class and retirees, though I’m not sure the point really got across.
9. Boortz/Linder said that the $13 trillion in overseas dollars would be returned. Buckley, who’s a CPA, said that most of those dollars had already been retuned due to a recent change in the Tax Code. There was some back and forth over this point.
10. Boortz said people at Ireland told him they wanted to switch to the FairTax so they could become a tax haven. I pointed out that Ireland already had a consumption tax (a VAT)– plus an income tax, a social security tax and a corporate income tax. Boortz then said that a VAT was completely different from the FairTax and thus it didn’t count.
11. I’m sure there were a lot more points people made (or, at least, tried to make), but I can’t really remember the rest. There was so much jumping around between topics that it was hard to keep everything straight.
12. The guy who probably came across the best was the owner of the coffee shop (who was also a great guy). He essentially said that all he was concerned with was that our current Tax Code stinks and he wants to see something better. He was leaning towards the FairTax, but was willing to learn more about it and open for any alternatives.
13. With six people (plus the moderator) speaking, it was impossible to thoroughly discuss any particular points. People kept interrupting each other and changing the topic (sort of what happens on the FoxNews shows), so I did not feel we were able to achielve a good, coherent discussion of any of the substative issues of disagreement. Which, obviously was a disappointment.
14. I doubt if anybody’s minds will be changed by the debate. (Certainly, nobody’s mind on this board will be changed.) In fact, I doubt if the average viewer would be able to follow the discussion. But, nevertheless, it was a quite lively and, hopefully, useful debate. I’m not sure how well I came across, and I know Morph will give me grief for some of my statements (“How could you say the rate would be 50%”), but I owe you all a debt of gratitude for helping me think through my arguments. So thanks.
P.S. I sent the CNN producer a link to fairtaxblog.com, which he will hopefully put on their website together with links to the various studies. So maybe we will be getting some more vistors here.
Sounds like it was quite an event. I think #4 was likely a lose / lose and probably came off as both sides grabbing their ball and moving to the corner. On #5, I’d say you may have a half / half situation. I think Gale and Zodrow scored the FairTax using reasonable base assumptions. As for JCT and Tax panel, who knows.. I think the JCT did exclude a good bit (using 42 percent of GDP). I would have avoided the government studies myself, much easier to make your argument. How could you say the rate would be 50%! haha
Good report, Hayden,
I look forward to hearing the whole thing, but my initial (over?)reaction is shock and disappointment at the attitude of John Linder. Boortz can be excused as being possessed of very little real detailed information about the Fairtax. But the author of HR25 seems to have adopted untenable positions, if not outright lies. He also seems to have disavowed all the $23 million in AFFT research by indicating that “Kotlikoff/BHI weren’t his economists?” I’d like to know just who experts he is relying on???
I didn’t expect him to give up on the inclusive/exclusive issue. But for him to continue to claim that prices won’t increase (much?) is disgraceful, imho. And to continue to claim that $13 trillion in offshore assets will come home is just plain wrong. (I wish you had injected the Tax Justice study which we recently discussed?). And to continue to misrepresent Jim Poterba’s position is unworthy of a Congressman. I’m tempted to send him Jim’s email which disavows any support for the Fairtax?
I’m glad you settled on 50%, cause that is what it will be when the unconstitutional proposal to tax state and local government operations is discarded. How high is too high? hahaha
This is sad, very very sad. It’s pretty obvious this so-called debate wasn’t really about the Fair tax at all, it was only about burning Boortz- trying to trap him in a lie or force him to admit his ignorance thereby discrediting him.
Doesn’t sound like it worked very well. lol- nice try.
If you don’t trust what Boortz says about the Fair tax or any of his resources, then why trust anyone’s??? Go read the damn bill yourself and use your own vivid imagination to predict it’s effects.
I have read the bill and I support it, not because of who is promoting it but, because it would be very good for me (a very poor person) and for America.
The person you need to appear on the Fair Tax side on such a debate in the future is Professor David G. Tuerck, Chair of the Economics Department of Suffolk University and Director of the Beacon Hill Institute. I appeared with Professor Tuerck on the radio in Northern New Jersey, and Professor Tuerck gave well-reasoned, succinct and articulate answers to every comment and question. He was interesting and understandable to a general audience.
Include him next time.
~Jim Bennett
Summit, NJ
Jim,
Glad to read that Dr Tuerck had time to appear with you on radio, even if he didn’t seem to have time to answer questions previously generated by members of this blog?
Who asked the questions, call-ins, or the program moderator? Did any opponent of the Fairtax appear with you? Can you recall any Q&A’s that would be of particular interest to us? For instance, did he comment on the recent Rice study? Any comments about prices in general? Any questions about the constitutionality of the federal government taxing state/local operations? It seems to me that the quality of his answers depends largely on the quality of the questions, doesn’t it?
Is there any online record of the radio show-it would be interesting to hear? (What was the radio station identifier?)
The biggest thing left out of almost any debate on the FairTax is the simplest math fact. I, of course, can only comment on wht’s posted here though.
That math fact is the current number of “ACTUAL”. taxpayers versus the number of taxpayers under the FairTax. The FairTax has it’s critics certainly. Unfortunately almost nothing in this country can be discussed anymore except along party lines. The FairTax is easy to attack because it it so easy to understand. Why aren’t these same critics just as adament about attacking all the the negatives about the current tax code that the FairTax does? If everything about the FairTax is so flawed, please explain why the current code is good. In addition please explain your fair and just plan to cure the social security shortfall. Raise the retirement age? Cut benefits? Raise the Tax rate? Pass the FairTax? Not a difficult choice to me.
Anyone who wants to use the JCT as a credible source needs alot of help. Critics can have ther opinions, but all they are doing are playing into the hands of the socialist movement in this country and around the world.
If the FairTax never becomes law it won’t be because of it’s critics. It will be due to the same reason we have the two candidates for President we have now. It will be due to the same reason we have many of the problems we have in this country now. It will be due to the ignorance and apathy of the general population.
Morph — One thing I forgot to ask Cong. Linder was why he didn’t simply ask the JCT to do an updated analysis of the FairTax if he thought the 1998 and 2000 studies were flawed? I believe the economists on the JCT change fairly regularly, so there’s no reason to assume they would come up with the same numbers they did last time.
Hank — I was not aware of the Tax Justice report at the time of the debate, and I’m not sure I really understood it after all. Also, there were a lot of points we would have liked to have responded to (just as I’m sure there were a lot of points the other side would have liked to respond to), but due to the format and time contraints, it was impossible to respond to everything.
Jim — Do you have a link or transcript to the radio program with Tuerck? I would be interested in hearing what he had to say. It would be nice to hear a debate/discusion with a FairTax proponent who actually stuck to the facts. And I would love to hear what Kotlikoff would have to say about the FairTax now that he’s (allegedly) agreed that the rate would need to be at least 36% (tax exclusive) and that prices would rise and the dollar devalued
Tom — I certainly agree with you that the main thing left out in most discussions on the FairTax is simple math. We just disagree on what that math would actually show.
There doesn’t seem to be any quibbling of the 23%/22% numbers in item three so item four is kind of silly. Convert both numbers to exclusive amounts and you still have a near wash.
Sadly, the American people get the government they deserve.
The FairTax has the potential to trump the vote of 2004 in the screw yourself category.
My stupid America.
One thing I didn’t see mentioned in your synopsis was a discussion of the effect of the FairTax on the prices of domestically-produced goods compared to imported goods. For me, personally, that’s more than enough to sell me on the general idea of the FairTax (although there are other aspects I like as well). I’m surprised it wasn’t mentioned.
“If everything about the FairTax is so flawed, please explain why the current code is good.”
Really? Isn’t that sort of like arguing in favor of full frontal lobotomies for a patient with depression? “If lobotomies are so flawed, please explain why depression is good.” Sorry, but the flaws with the FairTax will still be there regardless of how good or bad the current system is. And while you can probably get a huge number of people to agree the current system is flawed, you still come up short in support for the FairTax. It’s sort of like the urban planner I heard on NPR a few weeks ago saying that if traffic lights at major intersections were replaced with roundabouts we’d save tons of gas we currently spend idling. A great idea, but very expensive and chaotic in the short term. The FairTax is exactly like that. Except a bad idea.
Regarding the “prebates” for lower incomes — Is this even a feasible idea? Our government spent $42 million to send out letters explaining the economic stimulus checks. How will this be any different? How many millions will we spend to send poorer Americans their money, not including the money itself? And without payroll or income taxes, how will we track just who gets the prebates? Of course, with the biggest income inequity between the op and the bottom since right before the Great Depression, we ALL may soon qualify for a prebate…
Hank,
The radio station was WVNJ 1160AM from Teaneck, New Jersey, and the show aired on August 8, 2008. I was in studio, and Professor Tuerck called in, as had Professor Kotlikoff a week earlier.
The host of the show was David Merker, who has many prominent New Jersey political figures on his show as guests. The name of the show is “Meet David Merker.” The forum was not a debate but a call-in talk show, so there were not many critics. As you may know, the Fair Tax is not as well known in New Jersey as it is in Georgia or Northern Florida, so the goal was more public education.
David Merker thought the show was worthwhile and wants to continue.
~Jim Bennett
Summit, NJ
Nice work Hayden. Sorry to hear the debate did not go better. As for point 3, that is just disgraceful Boortz/Linder did not recant that baloney 22% embedded tax figure. It was my understanding that Boortz himself corrected that number in the paperback edition of his book(I have not read it myself, just going by word of mouth)? Now he is backtracking and going with that figure again? AARRG!! I don’t know if it’s ignorance or intentional deception, but its nauseating whatever the reason.
As for TheNightFly’s comment, Boortz/Linder did lie(or were ignorant) about point 3 at the very least. No economist I know would argue that you can achieve a 22% savings by removing embedded taxes, unless you lower wages. They really need to stop repeating that as it is blatantly false.
In the future, it might be more beneficial to have people more knowledgeable about the studies behind the fairtax to be in the debate. Gale, Kotlikoff, Jorgeson, etc. Truly disappointing that Boortz/Linder were not more well informed. And get Morphh there next time! He presents good arguments and is knowledgeable about the FairTax.
Thanks for the complement.
Interesting thread. As usual, the FairTax opponents are totally silent about the broad range of economic challenges that this nation faces which are exacerbated by a highly dysfunctional tax system. Among those troubling trends are
1. a massive trade deficit – the largest ever recorded by any nation on either a real or relative basis,
2. the looming insolvency of SS and Medicare,
3. the long running increases in complexity and higher compliance costs of the current system,
4. the declining and now negative individual savings rate,
5. the falling value of the USD,
6. the federal budget deficit,
7. and others
What do these trends have in common?
1. They are all unsustainable, and
2. The current tax system contributes to all of them.
But hey, let’s just ignore them and hope they go away, shall we?
Let’s off-handly rip the Fair Tax Plan and turn a “blind eye” to the grotesque, onerous faults of the current system of taxing the income and earnings of those Americans who get their paychecks pilfered and are honest enough to actually file income tax returns. Go to IRS.gov and search for “Tax Gap!” They ADMIT to being unable to collect over $250 BILLION in a given tax year! (It’s probably much more.) Do you call that efficient? It would fund their budget for 20+ years! (Taxing the consumption of drug dealers, illegal aliens, propstitutes, gamblers, thieves, et al., who AREN’T reporting their “earnings” and being taxed would happen under the Fair Tax.)
And what about the regressive payroll tax (Social Security and Medicare Tax) that unfairly reduces the spendable income of those below the poverty level? They get NO break on that. Under the Fair Tax Plan the payroll tax goes away and EVERY registered household in America (EXCLUDING those without valid SSNs) would get a monthly prebate to cover taxes collected (up to the poverty level spending amount) on necessity items, i.e., food, clothing, etc. Where does all this money come from? . . . BY BROADENING THE TAX BASE!!! (Remember the formerly UNtaxed drug dealers, etc.?) We go from taxing 140-150 income tax filers to over 300 million consumers PLUS tax the spending of 40-50 million foreign visitors to America every year. (You help pay Italy’s taxes when you purchase things there.)
Oh, . . . Warren Buffet, the billionaire darling of the wealth distribution crowd, who knows how many years it’s been since HE’S paid Social Security or Medicare taxes! Why? Because he doesn’t receive a paycheck from which to deduct a payroll tax!!!! He’s been living on investment earnings with a capital gain rate presently capped at 15%. How do you like ‘dem apples?
Wake up . . . America’s about to be flushed, and you guys are no help!
Phil,
Since you are one of the leading advocates of the Fairtax, perhaps you might explain to us how the Fairtax would solve, or at least reduce the impact of the six troubling trends you listed above? For instance, how does the Fairtax address the federal budget deficit? Etc. etc.
Thanks!
Just got word that portions of the debate will air this Sat. (Aug. 23) and Sun. (Aug. 24) on CNN Newsroom with Rick Sanchez, which airs at 10:00 p.m. Eastern. CNN will also put a video of the whole thing on their website through Thursday, Aug. 29.
Phil — As always, you make insightful comments about economic problems facing the US that I agree with (though I disagree with your preferred solution). That’s why I had suggested to the CNN producer that you be added to the debate so that we could discuss real issues rather than soundbites. Alas, he felt we had too many as it was and needed Boortz and Linder for “star power.” Boortz/Linder did raise some of your points, though I can’t say we had much of a chance to really discuss them.
tea2dump — Boorz/Linder raised some of your points also, though — again — we really didn’t get to discuss them too throroughly. I would suggest, though, that if you actually ran the numbers you would find that we would get far less revenue from illegal ailiens and the underground economy that you suspect. And, if the FairTax naysayers are correct, the FairTax would be more regressive than the payroll tax.
Kublikhan — I agree with you completely. Let people who actually know what they’re talking about (especially Morph) out there to debate the FairTax. The key is — have a real debate (or, better yet, a discussion) of the issues rather than just soundbites.
Billy — I agree with you about income inequality and that the FairTax is a bad idea. I don’t think that the pre-bate checks would be that big of a deal, though Bookman (and Linder) seemed to agree that was one of the flaws of the FairTax plan.
Barry — I agree that prices of domestic produced goods would probably drop under the FairTax (though in large part that would be because of the drop in the value of the dollar if BHI/Kotlikoff are correct). I would wonder whether other countries would retaliate by imposing tariffs on U.S. produced goods.
Here is what I tell our local Rotary Clubs about the FairTax:
I happened to see the Fair Tax Book at our local library. I do my own taxes using tax software. The book is written by Neal Boortz, a radio talk show host and Congressman John Linder who represents the Atlanta area.
After reading it, I was convinced it would save Social Security and Medicare for our future while providing an extremely simple, fair and efficient way to collect taxes to fund our federal government.
The FairTax plan is a bill currently in Congress that replaces all federal income taxes with a national retail sales tax.
The FairTax:
· Enables workers to keep their entire paycheck
· Enables retirees to keep their entire pension
· Refunds in advance the tax on purchases of basic necessities
· Allows American products to compete fairly
· Brings transparency and accountability to tax policy
· Ensures Social Security and Medicare funding
· Closes all loopholes and brings fairness to taxation
· Abolishes the IRS
The FairTax Bill is non-partisan so it is good for Republicans and Democrats. This bill currently has 72 co-sponsors in House of Representatives and 4 co-sponsors in the Senate plus the Rep. Linder and Senator Chamblis from Georgia. The FairTax abolishes all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes and replaces them all with one simple, visible, federal retail sales tax – collected by existing state sales tax authorities.
The FairTax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral. So it is also cost neutral – the final cost for goods and services changes little under the FairTax. The FairTax is a fair, efficient, and intelligent solution to the frustration and inequity of our current tax system.
Most federal taxes today are hidden from view.
1. Under the IRS Federal taxes are withheld from our paychecks (or other source of income) so we refer to our “TAKE HOME PAY†rather than our Gross pay.
The FairTax eliminates all federal withholding taxes, giving every wage earner a significant take-home pay “raise.” What you or your children are paid at work is what you will take home. If you make $15 an hour, you would take home $15 an hour minus whatever your state withholds. No Federal Withholding, no Medicare Withholding, and no Social Security withholding.
Social Security & Medicare would still be distributed to you as they are today. The government would just collect the funds from a sales tax rather than from your income.
2. Embedded income taxes are hidden in the price of today’s goods and services.
1. Hidden, embedded income taxes and tax compliance costs represent up to 22 percent of the cost of everything we buy today. Economists predict that retail prices will fall rapidly as these costs are eliminated.
2. For EXAMPLE: If you go to a store to buy a new coat and it costs $100 today, research by national economists say that about $22 of the cost of the materials and manufacturing of that new coat are tax compliance costs. When the embedded compliance costs are stripped away, the coat then would cost $78. Add in the FairTax of $23 and the new price tag will still say approximately $101. Your receipt will say $78 for coat, $23 for federal sales tax.
JUST REMEMBER that you now have your entire paycheck or pension to pay for it. You also have the monthly prebate that will be automatically added to your bank account to help pay for your purchases.
PREBATE
A “prebate” is paid to EVERY American household at the first of every month. The prebate is paid based on the number of persons in the household who have LEGAL social security numbers. Even Bill Gates and Oprah will receive the prebate. It will mean much more to those who are at the poverty level. It is expected to be paid out by the Social Security Administration. If they find that multiple persons are using the same Social Security Number than an investigation will be done to determine which person legally owns that number.
· 1 adult = $196 per month
· 2 adults = $391 per month
· 2 adults and 2 children = $525 per month
Ilegal immigrants who have no social security numbers would pay a sales tax when they buy the necessities of life, but receive no prebate. So the FairTax is a dis-incentive for illegals to come to this country.
How would the FairTax Affect SENIORS?
· No record keeping and income tax filing of ANY kind for you. April 15 is just another spring day! No more income taxes will need to be paid on your pensions, IRAs, 401Ks, capital gains, dividends, interest, savings accounts.
·No complex estate planning since gift and estate taxes would be repealed.
·The prebate will be automatically deposited into your bank account each month in addition to your social security.
·The cost of goods and services will generally decrease since the cost of complying with the IRS will no longer be included in the cost of all you buy.
·The FairTax generates an economic boom, which will help the economy as businesses who have moved off shore, come back to America.
COMPLEXITY
IRS law began in 1913 and has grown to more than 67,000 pages. Since 1986 there have been over 15,000 changes to the tax code.
FairTax bill is 133 pages long. Read it at http://www.fairtax.org It is so simple, a sixth grader could understand it.
COST
·Did you know we currently spend $265 billion dollars each year measuring, tracking, sheltering, documenting, and filing our annual income tax returns? What do we have to show for $265 Billion dollars each year? We could have paid for 3 years of war in Iraq with $265 Billion!
·To comply with the Fair Tax would cost only about $30 Billion or 10% of what we currently pay to fund our federal government each year.
·Under the FairTax, the number of tax filers would decrease by 80%!
TAX AVOIDANCE
· $345 Billion with a “B†is NOT being collected each year because of tax cheats and the underground economy.
· In 2001 the average taxpayer paid $8,265 in taxes. If everyone had paid their fair share the average taxpayer would have only owed $5,600 – a gap of nearly $2,000.
·Some citizens are not cheating on purpose – they just don’t understand the tax code.
·The FairTax eliminates the ability of Congress and lobbyists to manipulate the tax code for favored clients, constituents, and contributors. The FairTax ends the corrupt process of auctioning off the tax code.
·Enforcement should be easier under the FairTax. Instead of every wage earner, investor and retiree having a chance to be audited, only businesses would complete a tax return each year. They would be asked “How much did you sell?â€
·Businesses will be paid ¼ of 1% to collect the FairTax.
SAVES SOCIAL SECURITY AND MEDICARE
Social Security and Medicare would be preserved for your future because the taxpayer base is greatly broadened. Remember that under the FairTax, we have many more taxpayers. They include illegal immigrants and the underground economy, drug dealers, and the 30 to 40 million foreign tourists a year who will contribute when they purchase new goods and services.
FAIRNESS
Is the FairTax fair?
Yes, the FairTax is fair, and in fact, much fairer than the income tax. Wealthy people spend more money than other individuals. They buy expensive cars, big houses, and yachts. They buy filet mignon instead of hamburger, fine wine instead of beer, designer dresses, and expensive jewelry. The FairTax taxes them on these purchases. If, however, they use their money to build job-creating factories, finance research and development to create new products, or fund charitable activities (all of which help improve the standard of living of others), then those activities are not taxed.
·The FairTax taxes consumption instead of income. The Fair Tax taxes what you spend rather than what you earn. If you purchase a used car or a used house, no federal tax. Tax is only on NEW goods and services at their final point of sale.
If you inherit or win $50,000 in the lottery, you would get to keep all of that income. You would only be taxed when you spent the money. If you decided to use it to pay for school tuition or invest the money, there would be no tax because education and savings under the FairTax are investments in our future and thus, not taxable.
How many of you have a small business or worked in a small business prior to retirement?
· Business to business sales would not be taxed. Goods and Services are taxed only once at the final point of sale. No tax on exports. Imports would be taxed.
· Fair Tax would eliminate 15.3% self-employment tax and 7.75% employer matching funds.
· Also ends the mountains of confusing IRS forms.
· The FairTax gives American companies and farmers a fair chance to compete
here and overseas. Unequal tax treatment favoring foreign competitors is ended. Domestic Manufacturing and agriculture will benefit!
· There is $10 TRILLION dollars parked off shore by businesses who have said they would return to the USA if we eliminated the IRS code.
3. How would the Fair Tax affect you?
· Remember that the cost of goods and services are expected to decrease because the embedded costs of IRS compliance are no longer there, so don’t think that the cost of what you buy will increase by 23%.
· States & Retail Stores would be paid by the federal government ¼ of 1% to collect the sales tax and forward it on to Washington.
4. How do we enact the FairTax?
Bringing the Fair Tax to a vote requires 31 members of Congress!
If 11 member of the Senate Finance Committee and
20 members of the House Ways and Means Committee support the FairTax, they can bring the FairTax bill out of their respective committees and onto the floor of both the House and the Senate.
At that point, the leadership must decide to go to a full vote by the entire membership.
We don’t want this to happen until we have 3,000 – 20,000 Fair Tax supporters in each of the 435 Congressional Districts.
What can you do to make it happen?
1. Ask your Congressman and Senators to be co-sponsors.
2. Read The Fair Tax Book! It has an excellent, entertaining description that takes about 4 hours to read.
3. Ask Presidential Candidates to support the Fair Tax.
Questions?
Flat Tax does not fund social security. Fair Tax does.
· How does the FairTax help seniors who have paid taxes on their retirement savings or invested in Roth IRAs?
Simply put, the FairTax is a revenue-neutral proposal, raising no more money than does the current system. The FairTax only changes where the money is raised, not the amount.
Additionally, some erroneously believe that people who have invested in Roth IRAs will never pay taxes on this money again. They may not know it, but they are paying corporate income taxes, employer payroll taxes, plus the associated compliance costs that are hidden in the price of every retail purchase they make. Under the FairTax, these hidden taxes are driven out of retail prices. And note, they can determine the amount of tax they pay through their own lifestyle choices.
Furthermore, used goods are not taxed because they have already been taxed once — when they were new. Therefore senior citizens, like all Americans, do not lose purchasing power, but gain it instead. Moreover, the FairTax preserves the purchasing power of Social Security benefits, and seniors receive a monthly prebate so they don’t pay taxes on the purchase of necessities. Tax-deferred investments get a one-time windfall. Savings invested in any long-term, income-generating asset such as a stock, real estate, or a long-term bond that can’t be called, increase substantially in value. Finally, complex estate planning is an artifact of an earlier.
It is an unfair tax, because we seem to dismiss the state taxes in this debate.
I currently pay 22% income tax and an additional “consumption” tax via
sales tax of 10.5% in cook county. At the same time, the rest of the money is going towards gas, which would then be about 5 bucks a gallon here.
Interesting topic – rather than give “prebate” cheques, why not grade the fair tax system like income tax – or make it “exclusive” in other words. If I’m making >$80k (or some max.) then I pay the full fair tax. ie. 23% or $1.23 on the dollar. I pay the max. If someone earns less income, they may pay $1.15…$1.08…etc until you reach the lowest bracket, paying $1 on the $1, or 0 tax. If you’re at the poverty line, you’re exempt from the tax.
Now…how is each person to be identified as to which “fair tax” bracket they’re in when they buy things in stores? No easy task I’m sure. I.D. cards? Ouch.
Hayden,
I just watched the snippet of the debate they showed on CNN Newsroom. Good job! Although you were only on for a second. I look forward to watching the entire debate when it is online.
I noticed that CNN put up two facts and got them both wrong. The first was “inclusive” vs. “exclusive”. Inclusive means everyone pays the same rate? I tried a quick search to determine if these terms are used like this anywhere. I couldn’t find anything (except Rob’s use above). At any rate, I guess they weren’t paying attention to what you guys were saying.
And, of course, they screwed up the prebate by defining it as a cash advance to anyone making poverty wages or less. They must have been thinking of the FairTax Lite.
Keep up the good work (of exposing the fairtax to the masses of course)!
I also caught the two mistakes in the CNN “facts”. Linder did do a dance around prices and wages. He even stated the wage increase on an exclusive basis, but of course took issue with doing it with regard to prices. It was as I had thought with Inclusive / Exclusive. A quarter of the show was taken up with this and I don’t think any of it was understood (certainly not by CNN). Buckley made a major error at the end, arguing with Linder that the bill did not a have a provision for increasing social security benefits. It does – Section 303. Hayden did pretty well, although I’m not sure about the white socks with khakis (maybe it was the lighting). ;-p
Rob, CNN got the inclusive / exclusive thing wrong. Inclusive is $23 out of every $100 (23% – similar to an income tax calculation). Exclusive is $23 on top of every $77 (30% – similar to a U.S. state sales tax). Same $23 tax – one presents it as 23%, and the other as 30%. When Hayden stated 50% tax on the show, it would be recalculated as a 33% inclusive tax if comparing it to income taxes. According to Linder, the plan is to be implemented as an inclusive tax (like a VAT) and included in the final price of the good, although this is not specified in the bill.
The CNN videos
Morph — You said,”Linder did a dance around prices and wages. ”
Linder did not do a dance. he said that under the FairTax folks would get a 50% increase in the net wages. He also said that prices of goods and services would decline under the FairTax.
We know both of those statements are wrong.
That is not a “dance.” You can call it what you want, but you know what it really is. You are just too polite to say.
Karen Heitman,
I believe there are numerous errors in your Rotary presentation, some fairly serious. I hope you will find the following comments helpful in presenting the real facts about the Fairtax. I also suggest you take advantage of the excellent Fairtax studies that can be found on this blog under a recent post entitled “Researchâ€. Reading only the two Boortz/Linder books can often lead to inaccurate claims which I’m sure you would want to avoid when speaking to your public.
First, the subject of the “embedded taxesâ€. There is no such thing! There are embedded costs of the income tax system which include income/payroll tax costs as well as compliance costs. These embedded costs impact retail prices, and in a 1997 study, Dale Jorgenson found that the embedded cost on average was 22%. Jorgenson’s study did not include compliance costs.
How much of the embedded costs would disappear if the Fairtax was implemented? Two thirds of the embedded costs consist of employee payroll and income tax withholding. These costs are not expected to be removed due to fairness and contractual reasons. Surely you don’t think that the unions would buy into a significant gross pay reduction in the hopes that businesses might eventually reduce retail prices? I certainly don’t, and neither do Boortz/Linder of late, although they aren’t real clear on this point. So, point #1 is that the 22% embedded costs will not all disappear under the Fairtax.
Next, what will most likely happen to prices? The most that businesses on average can expect to reduce costs is 10%,– 4% from eliminating the business payroll tax share, 3% from eliminating business income taxes, and a generous 3% for compliance costs. This means that retail prices will have to rise by 17%. (1.00 x .9 x 1.3 = 1.17). (Notice that you have to use the exclusive rate of 30% in this calculation, not the 23% you used.) Assuming the 2008 “Rice†base/rate study is reasonably accurate, the exclusive rate could actually be 39%, and prices would rise by 25%. (1.00 x .9 x 1.39 = 1.25). Retail prices will go up under the Fairtax, but each individual would have to review their particular budget to see if the tax savings plus the prebate would offset the higher prices.
A word on the “$10 trillion†in assets parked offshore. The vast majority of those assets won’t come home under the Fairtax because home isn’t here. In a recent Tax Justice Network study, they concluded that there was indeed $11 trillion in offshore assets, but those assets are owned by wealthy individuals and businesses from around the world. Only $1.6 trillion is owned by North Americans, and there are 23 countries in North America. US offshore assets are estimated at around $700 billion, and the lost revenue under current tax law is much less than $100 billion.
As for your discussion about Congress, only the House can initiate revenue legislation under the Constitution. In order for HR25 to move, it would need to gain the support of seven members on the Revenue sub committee of the full W&M committee. And it would take 22 members of the full committee to send the legislation to the House floor. After ten years of effort, and despite having 72 cosponsors as you wrote, there is only one member on the Revenue subcommittee, and two on the full committee that have cosponsored the Fairtax. The outlook for the future of this legislation would seem to be very dim!
Finally, it is very difficult for me to agree with you that the Fairtax is highly visable, when 12% of the revenue needed to fund the federal government is effectively hidden in higher state and local taxes. In addition, federal taxation of state and local government operations is very likely to run afoul of the long held Supreme Court doctrine of intergovernmental tax immunity. It is easy to overlook the basic facts that our republic consists of two sovereign powers, state and federal, each serving the same citizens but with different responsibilities. As Justice Marshall wrote long ago, the power to tax is the power to destroy. I look for stiff resistance from the states should the Fairtax move forward. The National Governors Association 2008 tax policy paper makes it very clear that the nations governors oppose a national sales tax.
Hope these comments are useful!
Actually, in going back over the debate, some of what Rep. Linder said would occur under the FairTax is truly astounding:
1. Employees will get 50% increases of their take-home pay.
2. Retirees will get increases in their Social Security payments.
3. We’ll all get monthly checks from the governement.
4. Prices of goods and services will decline. (Boortz said they will “stay about the same.”)
The only thing they left out was Santa Clause sliding down our chimneys on Christmas Eve to give us all presents. If this is what the author of the bill believes, I would hope that at some point,even the most ardant supporters of the FairTax would begin to realize that the emperor simply doesn’t have any clothes.
Hayden, 1 and 2 are tied together and 4 is a reverse of 1 & 2. If employees get gross (1), retirees would get an increase in SS payments (2), but prices would increase (opposite of 4). If employees get no increase in take-home (opposite of 1), than retirees will get no increase (opposite of 2), but prices would stay the same (4). We can’t have 1, 2 & 4 true at the same time. I have to assume Linder was thinking of production costs, not prices, when he suggested a decline (but who knows).
Karen,
This is a rebuttal to some of Hank’s concerns. In the interests of full disclosure, I am a fair tax supporter (although I don’t buy into all the claims).
Point 1: There are “embedded taxes”. Hank basically admits this, but he refers to them as embedded costs caused by taxes.
Point 2: How much of the embedded costs would disappear if the Fairtax was implemented? They all would, but only in real terms. In nominal terms, there is much debate. The difference being that “real” refers to actual value and “nominal” refers to actual dollars. So the range in nominal change, meaning amount of dollars, ranges from 0% increase to 30% (assuming a 23% fair tax rate). How this turns out has the biggest effect on people with monetary assets, like savings, retirement, loans (not having a loan, but giving one). The higher the nominal increase, the worse off people with those monetary assets are. When we debate it here, we usually say that Federal Reserve Bank accomodation will determine how much “fairtax inflation” occurs. If that’s accurate, I’d say very little inflation will occur. That is something the Feds usually try to avoid.
As far as employees being willing to accept lower wages, I agree this will be one of the main transition issues for the fair tax. Places of employment with high turn over ratios will be able to adjust faster than those say with union jobs. Although Hank disagrees, I firmly believe that people work for their net pay, not their gross.
However, I do believe this is an issue. That’s why I think the fair tax would best be implemented over a five year period. Smooth out some of these transition costs.
Point 3: As far as the offshore assets, I have to agree with Hank. Assuming the accuracy of his information, his conclusions seem completely reasonable.
Point 4: I agree with his legislative process interpretation, but I don’t agree with the potential outcome. I’m too optimistic for that.
Point 5: The fairtax will be highly visible, especially relative to our current tax system. Will the states comply? They currently pay the tax on use of employees (payroll tax) levied by the federal government. Could they refuse? Sure. Could the federal government threaten them into compliance (say by withholding highway funds)? Absolutely. And it wouldn’t be the first time (not that I advocate such behaviour).
Actually, Andrew, any state that pays Social Security on the wages of their employees does so because that state voluntarily entered into Section 218 Agreement with the Social Security Administration.
These agreements are necessary because of the constitutional questions that arise when the federal government taxes the states.
The states are also exempt from most, if not all, current federal excise taxes.
Hayden,
Good Job!
I have a few points to bring up, not addressed in your discussion, but would like your opinion.
1. No more IRS-Even Boortz has said (On Hannity and Comes) there would be enforcement of the Fair tax. What organization is better set up to deal with tax collection than the IRS??? I think this basic tenent needs to be knocked off the table at the start.
2. Municipal Bonds-What happens to the trillions of dollars of Muni bonds that are out there? Only 2 things can happen to issued bonds-1. They loose value, because there rate is less than taxable bonds or 2. Taxable (higher interest bonds) get a one time increase. While #2 would be better than #1, I don’t think anyone know for sure what would happen.
3. Muni bonds-Right now, these bonds pay a lower interest rate, and the trade off is tax-exempt status. If the Fair tax is in place, the bonds will have to compete in the market place with corporate bonds, and they will have to pay a higher interest rate. The problem is the revenue for these bonds comes from property taxes. Either you will never have a county road build again, or your property taxes will have to go up.
4. The $265 billion spent on complience-Lets accept this figure. This money does not go into a black hole. This money goes to accountants, secretarys, computer programmers, lawyers, etc. These people in turn buy house, send their children to colleges, go out to eat, etc. Sudden unemployment of these professionals would have a huge impact on our economy. (Even under a flat tax, this would be an issue, but at least accountants would be around to figure the bottom line)
5. Embedded taxes, prices would go down-Why? If you have a widget and it cost $1 to produce and now it cost $.67 to produce, why would you not keep the extra $.33? A basic economic tenent is prices are sticky upward. Large companies like GE or 3M does not have much incentive to lower prices. I know the argument about competition, but some items just will not come down, especially if you have only 1 or two suppliers of an item. (Like post it pads).
Fred,
As of July 2, 1991, Social Security and Medicare Hospital Insurance (HI) coverage is mandatory for State and local government employees unless they are members of a public retirement system or covered by a Section 218 Agreement, http://www.ssa.gov/slge/mand_ssandmed_cov.htm. The federal government is mandating they pay the tax, or optionally, allowing an alternative retirement system.
States “voluntarily” lowered their speed limits to 55 MPH for about 16 years (it was amazing how they “unvolunteered” once the federally mandated limit was gone).
I believe you are correct with regard to excise taxes. Although they may have more motivation to pursue state consumption taxes depending on how much more the revenue is.
I am not saying that states would not be able to fight the tax, I am just that the federal government will (as it has in the past) use its power to get it enforced (for both paying the tax and being the tax collector).
Andrew,
A rather odd “rebuttal” in that you wrote “I agree” at least three times. You can certainly continue to use the shorthand phrase “embedded taxes” if you wish, but I’m sure you know we are really talking about embedded costs. Not one dime in federal tax is generated at the point of sale under current tax law. And I’ve yet to see anyone refer to “compliance taxes”?
Since you say you believe people work for net pay, not gross, then I assume you will be first in line to contribute your payroll and income tax withholding amounts to your employer? Let me know how much prices drop because of your generous gift!
What is fair, simple and transparent about concealing 12% of the total federal revenue neutral amount in higher state and local taxes. I estimate that your state and local taxes, whatever your state uses, will have to be increased by 25%, a not insignificant amount. Alternatively, states could “tax the tax”, although one of the Fairtax goals was to eliminate cascading taxation. Stay tuned.
Andrew, I really do need some help from you-or anyone- on the subject of monetary accomodation. The term first was used by Larry Kotlikoff/BHI in their 2006 Fairtax study. My understanding is that the economic gurus believe that the Fed can control prices/inflation, I guess through the money supply. Now, put yourself in the shoes of a retail merchant faced with having to raise his prices by 25% in order to maintain the same profits under the Fairtax. What can the Fed do to stop him from doing just that, particularly if the alternative is to go bankrupt? What the heck is the Fed Chairman going to do in the face of this one time artificial shot of inflation caused by the Fairtax? I don’t get it!!! But I certainly agree with you about phasing in the Fairtax over five or ten years. Too bad John Linder doesn’t get it!
Larry — Thank you very much. To answer your questions.
1. Boortz/Linder say that state agencies would enforce the FairTax. Critics say that the states would not spend the revenue necessary to enforce a tax that goes to the federal government (and, in fact, states would need to pay the FairTax to the federal government on any amounts they spent in enforcing it!) Other economists who support the FairTax (e.g., Larry Kotlikoff) seem to believe that a federal agency similar to the IRS would enforce the FairTax. The assumption is that enforcement of the FairTax would cost significantly less than the enforcement of our current Tax Code.
2. Municipal Bonds. I’m not an economist, but I assume that the value of municipal bonds would be substantially lower because there would no longer be any tax advantage to them. Kotlikoff seems to believe that the value of U.S. government bonds would also drop by 30% because the value of the dollar would drop by 30% when the FairTax is enacted (assuming that the FairTax rate is only 30% tax-exclusive).
3. State and local taxes would have to go up on the FairTax. Partly for the reason you mention (the decline in value of muniicpal bonds), but also becasue the state and local governments would need to pay the FariTax directly to the federal government on all of their non-educational spending.
4. I believe that most of the so-called “compliance cost” with the income tax is not actual, out-of-pocket spending, but “imputed costs” (i.e., what you should be paid for the time you spend doing your own taxes and keeping records). So, a lot of the “savings” would not be in real money. Also, I believe there would be a lot more compliance costs (both actual and imputed) with respect to the FairTax than the proponents claim. However, I do believe that eliminating the corporate income tax would save a tremendous amount of compliance costs and tax-driven decisions.
5. Embedded taxes is quite controversial (at least on this board). As Hank points out, most of the so-called embedded taxes are part of employees’ wages. The only way for an employer to eliminate those embedded taxes from the cost of his products is to reduce his employees’ wages. Even assuming that some tax-costs could be eliminated, I agree with you that in many cases the company would just keep the extra-profit. I suppose it depends on how competitive the particular industry at issue is.
You raise very good points.
Hank,
Sorry for agreeing so much in my “rebuttalâ€. I try to call it like it is. I’ll try to disagree more in this response.
I guess I like the term “embedded tax†because it is more specific than embedded cost. It is true we are talking about a cost. The cost happens to specifically be a tax. The 22% doesn’t represent all embedded costs, just the tax costs.
As far gross vs. net, here is a hypothetical situation that I previously proposed (but never got an answer from you. Maybe this time): I’ll offer you one of two jobs that are identical except as follows. The first is for $150,000/year at a 50% tax rate. The second is for $100,000/year at a 0% tax rate. Which would you prefer? The answer will let me know if you work for gross or net.
Why would I donate money to my employer? After the fair tax, I will work for what the market is offering just as I do today. If that’s my current net, I’ll surely take it. If it’s something higher, I’ll definitely take it.
It’s transparent because people will actually realize the cost of government every time they make a purchase. They see it in a simple rate. Notice when we compare the fair tax to the current tax system, we give the amount spent plus family size and calculate the rate (add in income if you want the rate as a function of income). On the other hand, when calculating the current income tax, we give the income plus family size, plus home ownership, plus charitable contributions, plus 401K, plus 103(may not be accurate) other caveats to determine how the rate is calculated. You don’t believe this is more transparent than the current system? As far as hidden in the state and local governments, at least I’ll know how much they give to the Feds as well. Currently, I can only guess that it’s about 22%.
Here is how I look at money and the Fed. As a nation, we produce a certain amount of goods and provide a certain amount of services. Our money supply is our physical way of representing what is produced. The Fed produces more money which in turn businesses borrow and then use to produce more. If money is produced too fast relative to increases in production, you get inflation. On the other hand, if money is produced too slow relative to increases in production, you get deflation. Bottom line: money has a value based on what we produce.
So back to your example, first off why 25% to maintain? Here I think you are confusing revenue with profit. Even if the input costs are the same, the merchant will be able to lower his own salary (based on 15% payroll and whatever income tax). Depending on how much of his cost is own salary, he can decrease it quite a bit. But if he can lower his salary, those that produce his product can certainly do the same, which in turn will lower his input costs. If things aren’t selling because prices are too high, they will come down fairly quickly until they reach equilibrium.
It’s not inflation when the merchant raises his prices, it’s inflation when people are willing to pay it.
It feels good to disagree again.
Andrew, that’s really seems to be a catch-all to make sure no one falls through the cracks as virtually all employees are covered either by a state retirement plan or SS via a Section 218 Agreement. And even still, this option for the states to have their own retirement plan is unavailable to businesses. Why is that. The answer is the constitutional issues involved with the feds taxing the states.
Expect a huge fight before the states start handing over hundreds of billions of dollars to the federal government.
Re Threads 33 and 36: Municipal Bonds:
An often-overlooked beneficial effect of the Fair Tax on municipal bonds is the opening of the municipal bond market to all sectors of the investing public. Currently the state and local government and municipal bond market is limited to people in high tax brackets, whose incomes justify acceptance of the lower yields of municipal bonds. Middle-income investora and qualified plans shun this class of investments today.
The Kansas City Federal Reserve study projects that, with the Fair Tax, corporate bond yields will drop to approximately today’s municipal bond yields largely because the Fair Tax removes the tax delta in the yield between these two classes of securities. The FairTax monogram on that subject goes on to point out that this drop in the corporate yield has little practical effect on profitable corporations because corporations today can deduct their interest expense. Tax deductibility today renders the nominally higher cost of today’s borrowing to a corporation effectively comparable to the cost of borrowing to a municipality already.
Although I cannot cite authority, I intuitively believe that real interest rates can only stand to decline further under the Fair Tax. As the country swtiches from a tax system with a bias against thrift, effort and productivity to one that gets out of the way of these attributes, capital can only accumulate and become more available. The effect of this accumulation can be only to drive down real interest rates.
Lowered real cost of borrowing to a municipality under the Fair Tax will serve as a partial offset to any increased municipal costs as a result of the Fair Tax.
~Jim Bennett
Summit, NJ
Jim,
I am confused. You state you believe interest rates will decline further under FT. You further state the bias against thrift would be gone. Wouldn’t higher interest rates encourge thrift, not lower interest rates?
Also, you state the pool would be larger for muni bonds. Middle class investors would have to be educated on muni bonds vs. corporate bonds, and this would take time. The bottom result would be a decrease in the marketabilty of muni bonds, at least in the short term. The high income earners would be neurtal in what is in their bond portfolio, so that would mean a decrease in the established market. If the middle class does not step into the void, the market for muni’s would run into trouble. It is hard to sell new muni’s when you have excess old muni’s out there.
I also have a question on the sale of the bonds-would they be subject to Fair Taxation on the initial sale of the bond? I understand no tax would be charged in the secondary market, but what about the first sale?
Larry,
My hypothesis is merely that removing taxes from the fruits of savings (as well as lowering inflation through of higher productivity generated through more capital spending and investment), as the Fair Tax would, and taxing consumption encourages people to save and generate capital. If the effect of a larger supply of capital supply is lower interest rates, the investor has a choice between equities and fixed income, which is no different than today. If people can see their money grow in a low interest rate environment, as it will under the Fair Tax, they will want to put their money to work instead of consume. The effect will be to reduce all interest rates, including municipal bonds.
To say that the middle class will hesitate from stepping into the municipal bond market out of ignorance is being speculative and not giving middle class people the credit they are due. Many middle class people probably will rely on the research of financial planners or intermediaries such as Merrill Lynch, which has extensive retail operations and is savvy in all markets.
The sale of bonds under the Fair Tax is not taxed at all because it meets the definition of “intangible property” in the bill. The bill’s definition of “taxable property” specifically excludes “intangible property.” (Title II, Definitions Section, Section 201). There are special rules for “financial intermediation services” contained in Chapter 8 of Title II of the bill, Sections 801 et. seq. They are complex and require detailed reading, but in essence the services of a broker will be taxed. The sale of the security, as such, will not be.
I hope this helps.
~Jim
Andrew, Tell you what–if you will call them “embedded costs”, I’ll agree that we all work for net pay.
On a more serious note, I still haven’t gotten any answer to my question about monetary accommodation. Let me try again to phrase the question. Using the Jorgenson 22% embedded costs, and the Rice study estimates of Fairtax rates, retail merchants should be able to reduce costs by an average of 10% and then will have to add back the 39% exclusive sales tax. This means that prices will rise by 25%. (1.00 x .9 x 1.39 = 1.25) As I understand monetary accommodation, the Fed tries to control the money supply to dampen inflation, but, they have no experience with an overnight, one time, 25% price/inflation increase. Please tell me just what Bernanke could do that would stop these price increases. I don’t get it!! The outcome of implementing the Fairtax is either massive price increases or massive bankruptcy for the 20 million retail businesses, imho!
Finally, your description of business options as regards input costs seems to border on you believing that cost savings cascade up through the various levels of production? As we have previously discussed, that is just not true. It doesn’t matter if there are ten levels of production or just one, the percentage cost savings remains the same.
Hi Hayden,
I missed the on air Sundy evening showing due to the Closing Ceremonies, but will be sure to check in this Saturday and Sunday @ 10pm. Is CNN going to have the entire footage placed on their Web Site anytime soon or only snippets like this one?
You need to feature this on UTUBE also when you get the time.
Hey, I wonder who dresses you……….you know that wearing no socks have been the in thing now in Buckhead and elsewhere for some time now don’t you?…..inform the “big Boss”!
dononthefence-
If you elected to watch the closing ceremonies of the Olympics rather than a debate on the FairTax, you are probably beyond help. The videos exerpted above are what CNN showed, and I doubt CNN will post anything else on their website since most of the rest of the debate was really a lot of back and forth, interruptions and non-sequiturs by a certain talk-show host. And I wore tan socks.
So far I’ve received four comments on my socks and none on my oratory prowess. That is not a good sign.
Throughout the above comments by the critics of the FairTax is the constant criticism re the removal of embedded taxes of 22% on average & keeping 100% of your paycheck, free of federal taxes, resulting in retail prices being virtually the same after enactment of the FairTax. Although this statement is in error the important point they never mention is that purchasing power will be unchanged or even increased for many people after enactment of the FairTax. This purchasing power parity results from a combination of increased paychecks (no more withholding of income or payroll taxes for individuals) & reduced prices (no more corporate income or payroll tax payments, or cost of compliance) before the FairTax is added. Why keep beating the error to death & not concentrate on the important point that purchasing power is maintained under the FairTax?
There also is the usual intellectual dishonesty re the FairTax rate. The FairTax is not just another sales tax but rather is a sales tax that replaces all the IRS taxes & payroll taxes, & that is why the rate is expressed as an inclusive rate – the same inclusive way as the taxes it replaces. Suspicion of ulterior motives is confirmed when someone expresses the income tax rate inclusively as 25%, for instance, but insists that the FairTax rate is 30% (without mentioning that this is an exclusive rate). A 25% inclusive income tax rate corresponds to a 33% exclusive income tax rate – since it is the same dollar figure either way you express it, you can only conclude that someone who mixes & mismatches inclusive & exclusive rates has another point to make other than clarity.
The central point to understand about the FairTax is how it relates to federal spending. “The real issue,” as Congressman Ron Paul & Professor Walter E. Williams has so often said, “is total spending by government, not tax reform.’”
Of course the problem is government spending & the way you rein it in is through the transparency of the FairTax in which everyone will clearly see how much of their money goes to support the federal govenrment. The current tax system is not transparent and includes embedded taxes in everything we buy although we don’t even know we are paying these embedded taxes. Politicians thrive on dependency and an opaque tax system. The FairTax is transparent – everyone will know as it is raised or lowered, just like our recent increase in the NJ sales tax from 6% to 7% (a 16.7% increase).
The main problem some politicians have with the FairTax is that it transfers too much power from government to the people to suit them. They view the tax code as not only a means to raise revenue for the operation of government, but also as a tool to be used to redistribute income and manipulate the economic activities of Americans. With the FairTax it would be difficult for any politician to run for office on the promise of raising taxes. Today Congress can raise taxes because it can persuade a large number of people that somebody else will pay.
The true costs of running government will become visible for the first time under the FairTax as everyone sees what portion of their spending goes to finance government spending. People may start to take a closer look & when they do the earmarks & pork barrel spending that politicians thrive on to get reelected will disappear. Not only will the FairTax put tax attorneys & tax lobbyists out of business – it will also put career politicians out of business in effect creating term limits because the great powerful jobs will no longer be in Washington. I think that the 23% rate will fall to say 19% & then to 15% until it ultimately falls to zero & there are no taxes. Government is then paid for by user fees & philanthropy & if we need a tax maybe it could be an excise tax of 5% to 15% as it was in 1789. The FairTax is the bridge to whatever vision Americans can have for our country.
Hank,
Let me start with cascading cost savings. If a producer makes a widget for $8 (including taxes) and wants a 25% return on his money, they’ll charge $10 (or more if possible, but let’s say competition drove it to the lowest they were willing to accept, i.e. $10). Now let’s say the cost of the widget goes to $4/unit. Is the producer going to keep the cost at $10? He’d like to. Of course, he probably originally wanted to charge $12. But some force (the market, kindness) led him to charge $10. So that same force will most likely drive him to charge less $10. $5 would maintain his profit margin. Let’s just say he settled on $7. $3 of cost savings moved up through one level of production. This is all I was saying and I think you agree (I believe in your equation (1.00 x .9 x 1.39 = 1.25) that is what the .9 represents).
Now I’ll address your 25% price rise. First, I think using 22% for embedded taxes and 39% for the needed tax rate is inconsistent (I’m a supporter remember), so for fairness and nostalgia I’ll say the price increase is 17% (1.00 x .9 x 1.30 = 1.17) even though I disagree with only 10% savings. What happens to the other 12% (22-10)? That goes back to the wage earner, right? So the wage earner now has 1.135 (1+12/88) more dollars than they previously had, or 97% (1.135/1.17) of what they need to maintain their original purchasing power. The investors, however, still only hold $1 (since their generousity led to the 10%) discount, or 85% of their original purchasing power. If they can’t get ahold of more dollars by borrowing (which all starts from the Fed) they will make less purchases. This sink in demand will in turn lower demand for products which will in turn lower demand for labor which will in turn lower the wages recieved by labor. It will also necessarily lower the new 1.17 multiplier price until equilibrium is reached.
I think it was Morph that stated some countries introduction of the VAT were done with a one time influx of currency, but I still stand by my position of why would anyone want to do this. Now I think it is very possible that the Fed won’t really know how to react and will screw things up, but they have done a relatively good job the last couple decades of keeping inflation in check.
Reagan described inflation as “too many dollars chasing too few goods.” If you believe that definition, how can inflation occur if the number of dollars and the amount of goods remain constant? Short answer: it can’t.
Andrew,
I don’t know if we are making any headway or not, but let’s start with those cascading cost savings. As long as you are talking about dollar savings, they do cascade up through all the levels of production. However, my point is that in terms of percentage cost savings, it doesn’t matter how many levels there are, the percentage remains unchanged. There is an extended discussion about cascading costs in the July 2007 archives, but here is the bottom line as provided by our moderator, Morphh, along with my response.
“Example
1. $10 initial cost – 10% – $9
2. $1 value add – 10% – $.90
3. $1 value add – 10% – $.90
4. $1 value add – 10% – $.90
5. $1 value add – 10% – $.90
6. $1 value add – 10% – $.90
Total – $15 normal cost, $13.5 savings cascade
Total percentage reduced 10%
Morphh · Jul 11, 2007 at 7:07 am · Permalink
Morph, thank you!!! Light dawns on marblehead! I now understand that the savings at each step of production can only apply to the value added at that step, and if the average savings is 10%, then the final savings (or price reduction) will be 10%, period. And it doesn’t matter how many production steps, or what value added is involved at each step, the result will be the same.”
Now Andrew, moving on, there is nothing inconsistent about my using Jorgensons 22% embedded costs and the Rice study 39% exclusive Fairtax rate. The embedded costs aren’t going to change very much from the Jorgenson 1997 study, but the real Fairtax revenue neutral rate is still very much in doubt. There has never been a Fairtax price study to my knowlege, but members of this blog seem to generally agree that there will be a price increase. Perhaps not by the full amount of the sales tax as Kotlikoff/BHI seem to believe, but the most likely scenario is that costs will drop by a maximum of 10%, and prices will rise on average by 25%. Simple math! And I might add that a similar “most likely ” scenario was supported by AFFT’s Dr Walby some time ago.
Yes, the Fed has done a credible job of keeping inflation in check over the last decade or so. Here is my problem in a nutshell. Kotlikoff/BHI stated that price increases could only happen with monetary accomodation by the Fed. I think this is just not accurate. Regardless of any Fed action, prices on average are going up by 25%, period. Monetary accomodation has nothing to do with prices which will have to respond to the new sales tax. As Hayden wrote recently, there is no way that businesses can send off the sales tax to DC without raising prices significantly. What is the alternative but bankruptcy?
Too many dollars chasing too few goods is indeed the classic definition of inflation. But in the case we are discussing, I believe we are going to experience a one time, rapid price increase which is a form of inflation we have never experienced in the nations history. So, tell me again why monetary accomodation is necessary for a price increase?
Hank,
I thing we agree on cascading costs. A cost savings at one level of production will be seen in the final retail costs, but percentage changes do not build upon each other.
“Monetary accomodation has nothing to do with prices which will have to respond to the new sales tax.†Monetary accommodation has everything to do the relative value of the dollar which has to do with prices. If all retailers raised their price today 25%, but know one had the funds to pay, would that be 25% inflation? No. People would necessarily buy less goods. This would force prices to go down. Inflation occurs when the rate of dollar introduction into the economy outpaces the increase in productivity.
“What is the alternative but bankruptcy?†How about taking less profit? Lowering input costs (like salary)? Why do you think that no wages will go down? A smart company would ask their employees to take a pay cut before going bankrupt. Some would, some wouldn’t. Wages would naturally hit their equilibrium again. If phased in over 5 years, companies could plan by giving smaller annual wage increases.
Andrew
“Inflation occurs when the rate of dollar introduction into the economy outpaces the increase in productivity.”
Quite true, but you seem to be overlooking the massive, one time introduction of dollars into the economy in year one caused by the prebate ($600B) and individual income and payroll tax withholding ($1101 +$436 = $1537B) (2007 data).
With over $2.1 trillion in new spendable dollars, why don’t you think we will see massive inflation, regardless of what the Fed does?
Taking less profits, or reducing payroll costs can’t begin to solve the cost problems. Look for millions of S-Corporations to go under immediately, with the attendent loss of jobs and capitol purchases. As many here know, I was one at one time, a sailboat leasing business. There would have been no way for me to send off 23% (or 28%) of my sales to Uncle Sam had the Fairtax been implemented. With the income tax, no profits, no income tax. Kept a lot of folks in jobs.
Good luck with asking employees to take a pay cut rather than companies going bankrupt. What would you do about minimum wage workers. Could businesses legally cut their pay?
I certainly agree with you that any national sales tax should be phased in over time, but the Fairtax guru’s don’t want to even consider such a plan. I think it was ludicrous for Linder to give as his reason for immediate implementation that Americans deserve all the benefits right away. A sure fire way to destroy the economy, and one that is badly out of step with the institutionally conservative nature of Congress. How many more years are Fairtaxers going to push this wet noodle up hill? It’s time for a change.
Re Post 45:
An overlooked point in the overworn discussion about whether the Fair Tax should be expressed on an inclusive or exclusive basis is that European Value-Added Taxes, which are mathematically equivalent to the Fair Tax, also are expressed on an inclusive basis. If the German 19% VAT were expressed on an exclusive basis, as sales taxes are here, the rate would be over 23%. Thus our way of expressing sales taxes on an exclusive basis, togther with our use of 110 volts of electricity and our measuring in feet, pounds and gallons make us the odd person out in the world community.
~Jim Bennett
Summit, NJ
Hank,
The $600B is not new money. The Feds are taking more of the money in circulation and distributing it. The $1.5T is also not new money. It exists now, but companies send it directly to the federal government. Not even the inventory tax credit that is unaccounted for is new money. When we borrow for it we take dollars that are already on the market.
I don’t think we’ll ever agree about employees. Are you honestly saying that not one employee in America (besides me of course) will be able to see the folly of refusing a pay cut as opposed to losing their job? Even so, you don’t believe any companies in America have the power to fire these employees and hire others at a lower wage? I’m not saying that certain unions won’t fight it (they’ve been shooting themselves in the foot for years), but that doesn’t mean that my local Pizza Hut won’t be able to find people to work for less (attrition alone would have half the staff changed with 6 months). I’ll be honest. I don’t see wages being completely immovable as a reasonable position, but I guess we’ll have to agree to disagree.
But just so we can agree on something, companies will still be obligated to provide the minimum wage. In fact, based on my scenario, minimum wage will virtually be raised. What will happen? The same thing that always happens when you raise minimum wage: People making those wages will get less work.
Andrew,
New money, shmoo money!! Surely you aren’t going to try to defend the notion that my $2.1 trillion in new spendable income isn’t real? Under current tax law, the government extracts tax money which can’t be spent. And the prebate cash grant entitlement doesn’t exist today. Under the Fairtax, those dollars will become spendable, which results in $2.1 trillion in additional dollars chasing the same amount of goods–inflation!
As for our back and forth about employer/employee reactions to the Fairtax, I think we have lost sight of the basic subject which was that Linder/Boortz are on record as believing that prices will remain about the same. They seem to believe that one can remove 22% in embedded costs and replace it with a 23% sales tax. A nice argument for the feeble minded but entirely without any factual basis. Even Larry Kotlikoff, on contract with AFFT, believed that prices would rise by 30%. Of course, he isn’t qualified because “he isn’t my economist” per Linder debate statements.
So, while I’m not a businessman, I sort of think that when faced with a new 39% federal sales tax on January 1, I’d first raise prices to cover the tax, and see what the competition does, and if my market share declines, then I might reduce profits, lay off employees, and as a last resort, hold an employee meeting and try to explain that I need to reduce their pay by a significant amount or close the business down. I certainly don’t want to appear as believing that wages are cast in concrete. My point was simply that prices are going up, income is going up, and I’m sure we all hope that our purchasing power will remain about the same. Linder/Boortz don’t seem to get it!
Jim,
I have great respect for your NJ acumen, but I don’t agree with your claim that a VAT is an inclusive tax. Wickipedia shows that with a 10% VAT, the raw material producer would add 10% to his costs of $1.00 and sell to the next level of production for $1.10. He would send $.10 off to Washington and retain his profit margin. That is an exclusive calculation, not inclusive. The inclusive rate would be 9.1%.
I know this subject has reached the point of stagnation, and everyone, pro or con, is convinced their position is correct. The entire USofA understands that sales taxes are exclusive, the retail merchant has to add an exclusive tax rate to his costs plus profits, and the sales receipt which is supposed to be so transparent, never mentions that the retail tax calculation was exclusive. If you really want to get everyones attention about the cost of the federal government, why not tell the truth about the tax rate in terms everyone understands?? Why the charade about inclusive/exclusive unless it’s a way to conceal the real tax rate? Just answer one question–what federal tax rate will the retail merchant add to his costs plus profits?
Hank,
There’s nothing to agree or disagree with. European VAT’s are expressed on a tax-inclusive basis. Trust me on this one. I lived in Germany six years. In
Germany when you go to the cash register, the price you pay is the one marked on the shelf.
~Jim
That’s been my experience as well. VAT’s are inclusive (at least when presented to the customer). How the business calculates it in their production chain may be different.
OK, guys,
I guess you are saying that the tax is included in the price paid as shown on the shelf. But that makes it an “included tax”, not necessarily an “inclusive tax”. My contention is that the VAT tax is calculated on an exclusive basis and then added in to the price. Perhaps one of you would like to explain just how to calculate an inclusive tax? Hard to do without first coming up with an exclusive rate, isn’t it? (math is not my strong suit!!)
In the end, it doesn’t seem to me that it matters much. What I see Jim saying is that the Fairtax is quoted in inclusive terms, just like the income tax, and now, also just like the European VAT. Frankly, that’s not a real strong argument in the face of the state sales taxes which are all quoted in exclusive terms that all Americans understand. Use whatever suits you, but this issue will never go away!! Unnecessary confusion for the rank and file!
It’s also not a strong argument considering the FairTax bill requires the tax to charged separately from the purchase. So the bill requires exclusive purchase prices and an inclusive rate. Very confusing.
Also, what would the state sales taxes be applied to? The FairTax inclusive price? Are the states going to tax a tax?
Fred, the bill requires the tax to be displayed separately (broken out) on the receipt. This has no effect on exclusive or inclusive presentation. Total $100, Tax $23, Rate 23%. It’s the same argument – displaying it doesn’t change it.
The states would have to determine the best way to maintain the same amount of revenue. This may mean taxing the tax, converting to the FairTax, increasing their rate, or any number of solutions.
hank:
just because math is not your strong suit doesn’t mean the rest of us cannot understand what is being said here.
of course, with contradictory statements like:
“My contention is that the VAT tax is calculated on an exclusive basis and then added in to the price.”
and
“the Fairtax is quoted in inclusive terms,…just like the European VAT.”
i’m beginning to wonder if accurately rating the strength of arguements falls under the heading of things that aren’t your strong suit.
it’s only confusing for the rank and file that have no understanding of how the bulk of their current tax burden is rated.
nobody seems to misunderstand their personal income tax bracket, nor do they misunderstand their payroll taxes. nobody expects a 25% rebate on a $100 item to pay them $33.33, nor do they cringe at the idea of having to pony up extra money to cover the excise taxes cuz the fuel pump didn’t have them listed.
the american public seems quite capable of handling embedded taxation and inclusive rates….
the only people who can’t seem to be those who think it’s a legitimate sticking point for the FairTax.
fred @ #57:
my guess is that the states will just require the points of new retail consumption to submit some set percentage of their total receipts (minus any allowable deductions)…..
that would probably be the easiest thing to do.
Perhaps an example VAT receipt would be helpful to show what it could look like if presented inclusively. The total is £706.56. The VAT is presented as £706.56 @ 17.5% = £105.23 of the Total. Cash was £750 with £43.44 change. Here is another example with a full breakout at the bottom.
I can’t leave Hank hanging out here by himself on this issue. There are at least three fundamental problems with quoting the FairTax at the tax-inclusive rate.
1. First, 99% of the people who hear about the FairTax assume you are using a tax-exclusive rate. Even commentators and pundits who should know better will describe the FairTax as “adding a 23% tax to the price of a good or service.” Hermann Cain, for example, still thinks that the 23% rate is a tax-exclusive rate. FairTax advocates know this and use the confusion to make the rate sound better and discredit arguments against the FairTax. When Jay Bookman made that point during the debate that people assume the FairTax is quoted in tax-exclusive terms, Boortz simply said, “They are making an assumption. The assumption is wrong.” In other words, he knows exactly what he is doing by using the tax-inclusive rate.
2. Both BHI/Kotlikoff and Baker Institute admit that the price of goods and services will increase by the tax exclusive rate if the FairTax is implemented. (Sorry, Hank. I know you think it will be less.) So it is completely ridiculous to say that the FairTax rate will be 23% yet the price of goods and services will increase by 30% As Hank points out, you have to add the tax-exclusive rate to the price of a good or service before you can even calculate the tax-inclusive rate.
3. The FairTax is a federal sales tax. The state sales tax will need to be added to prices in addition to the FairTax. It would be totally ridiculous to quote the FairTax at an inclusive rate and the state sales tax at an exclusive rate. It makes far more sense and is much easier to understand to simply quote the combined rate in tax-exlusive terms. For example, the state/local sales tax in Houston is 8.25%. So, the combined federal/state/local tax in Houston under the FairTax would be 38.25%. (Of course, we also know that state and local taxes will be higher under the FairTax, but we can leave that discussion for another day.)
Now, let’s be honest for a minute. The whole reason that FairTax advocates came up with the tax-inclusive rate in the first place is because the P.R. firms and lobbyiests that they hired when they first tried to sell the idea of a 30% national sales tax told them that the public would not accept a sales tax at a rate higher than 25% or so. It was only then that the AFFT folks came back with this “tax-inclusive” rate. When they first publicized it in Houston (where I’m from), it was initially described as a 30% sales tax. It completely bombed until they repackaged it at the 23% “tax-inclusive” rate.
You might say that’s good P.R. It’s also intentionally deceptive.
Hank,
“The government extracts tax money which can’t be spent.†This is absolutely wrong. Every penny of tax money that goes to the federal government is spent, plus the money the federal government borrows for their deficit spending. The fairtax will only change the mechanism that gives the money to the federal government.
I’m not disagreeing that if all employees kept their current gross wages, businesses kept their same profits, and that all retail sales just added 30% to their price that we wouldn’t have a 30% inflation. What I’m arguing about is if and how those things will occur.
Hayden,
99% of people (I’ll assume my number is as good as yours because I think we used the same method to produce them) hear the fairtax rate and immediately compare it to their marginal income tax rates (I think Hank’s son (or son-in-law) did). This is just a basic misunderstanding of how all these rates are expressed. Remember the CNN quick fact?
Businesses express sales taxes as inclusive all the time. Usually every holiday (like labor day) some furniture business will claim to pay your sales tax. Trust me. If you’d purchase an item from them for $1000 under the fairtax, they will not be sending $300 to the government (it’ll be $230, i.e. they’ll calculate the tax on an inclusive basis without issue). Or, if you like to bargain, and you request a price “out-the-doorâ€, they will also get the inclusive calculation quite well.
I won’t deny that expressing the fairtax inclusively is a good PR move by proponents. Expressing it exclusively is a good PR move by opponents. But at least proponents don’t express the fairtax inclusively and the income tax exclusively. Would you mind telling me what you think the Federal corporate tax rate is?
Morphh, from the bill: “For each purchase of taxable property or services for which a tax is imposed by section 101, the seller shall charge the tax imposed by section 101 separately from the purchase.”
Morphh, the percentage rate in both of you VAT examples is an exclusive rate.
Frankly I find the first of those examples to be very confusing. It shows £706.56 @ 17.5% is £105.23 when 706.56 x .175 = 123.65. The math is actually £601.33 (tax exclusive price) x 17.5% = 105.23. The other at least shows the tax exclusive price (36.00) it’s applying the tax exclusive rate to.
[I do think it's kind of funny that FairTaxers are pointing to the Euro VAT as an example of how to do things.]
But this is all moot because the FairTax bill requires the tax to be charged separately from the purchase.
Morphh, one more thing. Neither of your examples has a second tax – like a state sales tax – being applied to the purchase. That would confuse the issue even more.
What I was getting at is you can make the receipt present the math any way you like. Charge it separately or included it. You can make it appear however you want to make it appear. I’m not debating if it is confusing, right, wrong or otherwise. I’m not going to spend time coming up with a receipt design to make a point. Use your imagination. It’s math and percentages.. it can be presented in numerous ways.
Maybe you should spend a little time trying to come up with a receipt design that shows what’s required in the bill and state sales taxes so you can the problem. I have and it’s a confusing mess – one that could easily be avoided by using an exclusive rate and exclusive prices.
But this is just the receipt, the bill requires the tax to be charged separately from the purchase, so there would be no inclusive prices.
You could still have an inclusive price and charge the tax separately on the receipt.
Food………… $5.00
NST @ 23%.. $1.15
Net Sub ……. $3.85
State x 7%…. $.35
Total………… $5.35
This seems pointless…
Hank, the math is not much different.
With an exclusive calculation you start with net and get gross.
$3.85 x 30% = $1.15
$1.15 + $3.85 = $5.00
With an inclusive calculation you start with gross and get net.
$5.00 x 23% = $1.15
$1.15 – $5.00 = $3.85
You end up with gross, net, and tax in both cases.
Morphh, if the store charged $5.00, $3.85 for the purchase and $1.15 for the tax, they wouldn’t be charging the tax separately from the purchase as the bill requires.
Also, 7% of $3.85 is $0.27, not $0.35.
And you’re right, this is all pointless. Just use the exclusive rate. There really is no reasonable reason to do otherwise.
Contrast Morph’s example to having the FairTax quoted on a tax-eclusive basis:
Food………………………$3.85
FairTax (@ 30%)……….$1.15
State Tax (@ 7%) …….$0.27
Total………………………$5.27
Without trying to argumentative, I believe that showing the tax at an exlusive basis is simpler, easier to understand and more accurately shows what the tax really is.
Try the same math, but add a state sales tax.
Let’s assume a 7% exclusive state sales tax.
$3.85 x 30% = $1.15
$3.85 x 7% = $0.27
$3.85 + $1.15 + $0.27 = $5.27
Now with the exclusive rates.
$5.27 x 23% = $1.21
$5.27 x 6.54% = $0.32
$5.27 – $1.53 = $3.74
Or I guess we could apply the inclusive FairTax rate to some subtotal but that seems to confuse the issue even more.
Of course, this is all pointless. Use the exclusive rates – like states have for decades – and everything is easy. This also allows you to just add the percentages (something you can’t do with inclusive sales tax rates) to get the total tax (federal and state) rate and get:
30% + 7% = 37%
$3.85 x 37% = $1.42
Easy.
Fred, could you explain how “charged separately” and it being “displayed as a separate charge” are two different things? Linder has stated on several occasions (including his latest book and I believe at American Solutions) that the tax is to be included in the retail price, not added on at checkout. The state could factor their tax in different ways. As stated in 58 – they could tax the tax to maintain real revenue, which I presented. They may also choose to conform to the FairTax base and/or present inclusively, which would change the presentation and simplicity. I’m not arguing that it would be simpler, better, correct or otherwise. I don’t disagree that the exclusive presentation would be simpler. Just saying this is how an inclusive presentation could be done.
Linder is irrelevant – the text of the bill is all that matters. He didn’t write the bill, he’s just the sponsor. He’s only reading the bill and interpreting it the same as us.
There is a whole section in the bill titled “Tax to be Separately Stated and Charged” that states “For each purchase of taxable property or services for which a tax is imposed by section 101, the seller shall charge the tax imposed by section 101 separately from the purchase.” I think that’s pretty clear. Having tax inclusive prices would not be stating and charging the tax separately from the purchase. It would be the opposite.
The bill then states seller shall provide a receipt to the purchaser and list 7 requirements for that receipt – the third of those requirements (after “the property or services price exclusive of tax” and “the amount of tax paid”) is “the property or service price inclusive of tax.” But this is really just legalese for the total of the purchase, isn’t it?
Even if things were as you claim – it’s the wrong way to do it. It’s totally contrary to the traditional way sales taxes are implemented in America and it gets even more confusing when state sales taxes are applied. There is absolutely no good reason to go through all this confusing rigmarole.
Also, the states switching to inclusive rates and prices would actually complicate the issue. You can’t just add inclusive sales tax rates and have them collect the same revenue as they would separately. This is because once you add another sales tax to the inclusive price that amount naturally gets larger and, thus, a set percentage of that amount (e.g., 23%) gets larger in nominal terms.
From the section that Fred quoted in the bill: Section 510 (a).
`(a) In General- For each purchase of taxable property or services for which a tax is imposed by section 101, the seller shall charge the tax imposed by section 101 separately from the purchase. For purchase of taxable property or services for which a tax is imposed by section 101, the seller shall provide to the purchaser a receipt for each transaction that includes–
`(1) the property or services price exclusive of tax;
`(2) the amount of tax paid;
`(3) the property or service price inclusive of tax;
`(4) the tax rate (the amount of tax paid (per paragraph (2)) divided by the property or service price inclusive of tax (per paragraph (3));
`(5) the date that the good or service was sold;
`(6) the name of the vendor; and
`(7) the vendor registration number.
The receipt is to present the tax rate as inclusive per paragraph (4). It is stated and charged separately on the receipt per paragraph (1)(2). The section is about the receipt, so we would be making an assumption that it must be “stated” before this point. Even if they do list the price exclusive of the tax on the shelf, the receipt will still show it calculated tax inclusively at checkout.
Morphh, re: #75. That’s the tax rate – specifically on the receipt. I didn’t think that was in question. I thought we were discussing the price on the shelf. The way I read the receipt requirements is:
(1) the total of the purchase (net or tax exclusive total)
(2) the FairTax charged (tax)
(3) the total (gross or tax inclusive total)
(4) the tax inclusive rate
Sorry Fred (Re #75 -> 76), I changed the time stamp on that last post so that discussion made sense. I posted a second before you and I thought it addressed your post. Yes, I agree with you there. I was discussing the receipt and how the tax is presented to the consumer at checkout. As far as what is listed on the shelf, that is not specified in the bill (as far as I know). I believe such a specification (if specified) would come later from the National Sales Tax Bureau.
Even though it is obvious that the proponents of the fairtax have the moral high ground when it comes expressing the tax rate (consistent between the fairtax and the taxes it replaces. I’m still awaiting an opponent to express what the federal corporate rate is), I’d like to suggest the following compromise:
We will use the inclusive (lower) rate while trying to sell the tax to the American taxpayer. Then we switch to the exclusive (higher) rate after the fairtax is enacted and while were trying to convince the American public how much the Federal government takes out of their pockets. Can’t we all just get along?
Morphh,
In #70, you wrote:
“With an inclusive calculation you start with gross and get net.
$5.00 x 23% = $1.15
$1.15 – $5.00 = $3.85″
But Morphh, how can you possibly start with gross if you don’t know how much the tax amount is. I may be just ignorant, but I can’t see hou you can get away from the fact that an exclusive rate is necessary in order for the retailer to calculate the tax.
And by the way, thanks for the VAT examples, but they seem to support my contention that the VAT is just like a sales tax in terms of how it is calculated. Add the tax amount based on the rate times the cost plus profit and you can arrive at the gross sales amount at the register. Please tell me how to use an inclusive rate without first using an exclusive rate?
I’m not sure I get your point Hayden. That understanding your production cost and base profit margin outside of taxation is necessary before setting a retail price… of course. Is this some big gotcha? Business do this every day with the current tax system and payroll tax costs. I’m talking about the receipt and the way the tax is presented to the customer. I don’t care if they’re using basic supply and demand or some dynamic stochastic general equilibrium model on their back end. The way the tax rate is presented to the consumer is inclusive to the price.
Andrew,
“I don’t think we’ll ever agree about employees. Are you honestly saying that not one employee in America (besides me of course) will be able to see the folly of refusing a pay cut as opposed to losing their job?”
If I am understanding you correctly, this is the scenario you are proposing:
Fairtax supporter: Hello fellow american, Can I interest you in the fairtax?
Average american citizen: What is that?
Fairtax supporter: A new tax code that gets rid of the income tax! You get to keep your entire paycheck! No more income tax! Instead you only pay a 23% sales tax!
Average american citizen: Sweet! You mean I get to keep my entire gross?
Fairtax supporter: Well no, not exactly. You see to prevent price inflation, you have to agree to take a pay cut. In essence, you will still get exactly the same net as now. All of that extra tax money goes to your employer now. But we have to do that to prevent price inflation!
Average american citizen: Oh that sux. But the fairtax guarantees that retailers will lower their price to reflect my pay cut?
Fairtax supporter: Well no, not exactly. But don’t worry about that! The wonderful forces of the free market will take care of that! Competition will force prices lower! Unfortunately we cannot force retailers to lower prices.
Average american citizen: Oh that sux. But at least the tax is only 23 cents on my $1 candy bar right?
Fairtax supporter: Well no, not exactly. You see the tax is actually 30 cents. But if you divide that $1 by 1.30, you see that the tax is really only 23% of the total price! We call that the tax inclusive rate. Americans think about sales tax in backwards ways like exclusive rates. With the fairtax, you have to learn about the difference between inclusive and exclusive sales tax rates to appreciate our 23% rate.
Average american citizen: So you want me to give my income tax money to my employer, I don’t see a penny of it. I do this to be nice to him in the hopes he will lower his prices. Now I go to the market and have to pay 30 cents more for every dollar I spend. I have to do the math to understand it is really only a 23% inclusive rate, but yet you take 30 cents on the dollar anyway. Is that correct?
Fairtax supporter: Yes! Care to sign up?
Average american citizen: Ill get back to you.
I just don’t see you selling the average american on the fairtax if you are going to be using the sales pitch above. Give your income tax money to your employer? Find out you have to pay a higher tax rate than you were lead to believe? Find out your state and local taxes are going to go up because they have to pay the fairtax too? And all that is assuming the 30% exclusive rate is correct. Numerous independent studies have shown you need a higher rate. You talk of how the fairtax is honest and transparent, I don’t see the above items as being either transparent or honest. It seems sneaky to me for fairtax to to have a stealth income tax in the form of a pay cut. It seems sneaky to me to quote inclusive rates when the average american thinks about sales tax in exclusive terms. It seems sneaky to me to have the fairtax be partially funded by a stealth increase in state sales/income/property taxes. I think these items should be spelled out more clearly before talking of the transparency of the fairtax. Once people learn all of the facts, they may not be as receptive as you think to the fairtax, even considering the monstrous complexity of its competition, the current tax code.
“If all retailers raised their price today 25%, but know one had the funds to pay, would that be 25% inflation? No. People would necessarily buy less goods. This would force prices to go down. Inflation occurs when the rate of dollar introduction into the economy outpaces the increase in productivity.” Are you arguing for a 25% reduction in economic activity?
Doug,
“The true costs of running government will become visible for the first time under the FairTax as everyone sees what portion of their spending goes to finance government spending. People may start to take a closer look & when they do the earmarks & pork barrel spending that politicians thrive on to get reelected will disappear. Not only will the FairTax put tax attorneys & tax lobbyists out of business – it will also put career politicians out of business in effect creating term limits because the great powerful jobs will no longer be in Washington. I think that the 23% rate will fall to say 19% & then to 15% until it ultimately falls to zero & there are no taxes. Government is then paid for by user fees & philanthropy & if we need a tax maybe it could be an excise tax of 5% to 15% as it was in 1789. The FairTax is the bridge to whatever vision Americans can have for our country.”
I don’t wish to be rude, but it appears you are living in a fantasy land if you really believe that. Only about 1/3rd of the federal budget is discretionary spending. That means 2/3rds has to be paid no matter what. Of the remaining 1/3rd, it cannot simply be trimmed to zero either. You really think the modern federal government can run on philanthropy and a few fees? This is not the government of 1789. Today’s government is up to its eyeballs in debt and obligations that cannot be wisked away with wishful thinking.
I just came back from a Greek Festival. All the food prices were tax inclusive. It was great to pull out $5.00 for a $5.00 snack. The baklava was awesome!
Morphh,
Is it possible that whatever state you were in had no sales tax on baklava? Just wondering? Or, do you by chance have a receipt that shows the state or local sales tax amount that you paid as part of that inclusive price?
We do have a state and local sales tax. I don’t have a receipt, so I’m not certain. They could be evading taxes or there could be an exemption on fair food – either is a possibility. I expect they set price by basic supply and demand (they’re going to make a good profit), then ring up their total sales after the event and send the proper percentage to the state. They also do this at sporting events and such. In any case, the price on the board is the price – I prefer that over figuring and counting tax change.
Kublikhan (response to post 82),
The pay you end of receiving is a market force. You can refuse to work for lower than your current gross wages if the fairtax is enacted. That is your choice. Your employer can refuse to use your labor for your current gross wages under the fairtax. That is their choice. How these choices interact is the force of the market.
“Competition will force prices lower!†Absolutely. Are you suggesting that the current prices retailers charge are because of their altruism? Even if you consider something a monopoly, it competes with other non-complementary goods for your dollars. Why don’t retailers raise their price by 30% today? What is stopping them?
“It seems sneaky to me to quote inclusive rates when the average american thinks about sales tax in exclusive terms.†Again proponents consistently quote both the fairtax and the taxes it replaces in inclusive terms. As an opponent, will you please tell me the current federal corporate income tax rate? Let’s see how consistent you are.
“Are you arguing for a 25% reduction in economic activity?†No. Not even close. I’m questioning how inflation can occur without additional dollars in a constant state of production.
(Response to 83),
100% of the federal budget is discretionary in the sense that congress can change all of it anytime they want. The congressional definition of “discretionary†is must be renewed on an annual basis. The congressional definition of “mandatory†is “do not have to renew on an annual basisâ€, i.e. is on automatic pilot until the law is changed. I think the army funding is the only thing constitutionally “discretionary†on a two year appropriations basis.
Andrew,
You wrote: “I’m questioning how inflation can occur without additional dollars in a constant state of production.”
Under current tax law, the government extracts income and payroll tax revenue which then can’t be spent by individuals, but, as you point out, will still be spent (overspent) by the federal government. Under the Fairtax, that $2.1 trillion will remain with the individual, to be spent as needed. The federal government will spend the sales tax revenue as needed. Color me slow, but it seems to me that an additional $2.1 trillion has been injected into the economy? Assuming a constant level of production, that means rampant inflation, imho!
What am I missing?
Andrew,
“The pay you end of receiving is a market force. You can refuse to work for lower than your current gross wages if the fairtax is enacted. That is your choice. Your employer can refuse to use your labor for your current gross wages under the fairtax. That is their choice. How these choices interact is the force of the market.”
And the average american can look at these options, and then not touch fairtax with a 10 foot pole. That is their choice. I really think you are doing fairtax a disservice by arguing that everyone take a large pay cut.
“As an opponent, will you please tell me the current federal corporate income tax rate? Let’s see how consistent you are.”
As an average american, I pay no federal corporate taxes. So why would I list their rate at all, either inclusively or exclusively? I’m talking about sales taxes here that the average american pays. I know of no one who does this:
“1$ candy bar. tax = 30 cents. I just paid 23% tax.” It is 30% tax. Now if you want to qualify that with a statement like, “However the average american will still pay about the same, or even slightly less in tax then they currently pay.” That is fine. But I still think saying the rate is 23% is misleading. It’s not a lie, it has it’s rationale, yet it is misleading to the average american.
Hank,
Where does that $2.1T come from? Originally (at least for our purposes) it comes from the Fed. To the employee, it comes from the employer based on how much the employer is willing to invest in labor. The employer either has it already or has to borrow it. I believe the Fed controls the availability of currency through the purchase and selling of bonds. I also believe it is controlled by altering the cost of borrowing (through the prime rate and discount rate). If everyone was making their current net, so that prices stayed the same once the rate is applied, purchasing power remains the same for individuals, the federal government gets its money, and no inflationary dollars are introduced. I hope you understand when I say people make their current net, this an average figure and pretty far removed from income tax withholding (although payroll is pretty close). People participating more in favored activities will be less than net and those participating less in favored activities will be more.
“What am I missing?†For this discussion, I think you’re missing the fact that current prices are set currently based on labor and profit taxes. Take those costs away and prices will be set without regard to those cost, so the market will force them down.
Kublikhan,
I am not arguing that anyone take a pay cut. I am arguing that the market will determine what wages are nominally based on what dollars are available. In fact, I’m arguing that based on the positive economic effects of the fairtax, the average American will be getting a pay increase. In real terms, they will bring home more money than they bring home today. Someone that makes $50K/year might have to now say they make $47.5K, but they’ll be taking home $47.5K rather than the $45K they might today.
As an average American, you do pay the corporate income tax, although you just may not believe it. But you avoided the point of my question (as all other opponents have thus far). That’s okay. If I was an opponent I would avoid it too.
By the way, I’m trying to sell the fairtax by building a reputation for being honest. I think when people look at it objectively it is a winning proposal. There are those out there that try to oversell the fairtax. I guess they at least counterbalance those that distort what the fairtax is. I prefer to have an honest discussion of what I think the effects are, both positive and negative. I’m just under the impression that the positives outweigh the negatives. I’m assuming you have the opposite impression.
Andrew,
As previously noted, the $2.1 trillion consists of $1.5 trillion in individual income and payroll tax withholding, and $600 billion in the Fairtax cash grant entitlement known as the prebate. None of these dollars are available to consumers under current law. Under the Fairtax, I believe that the income and payroll tax amounts will revert to individuals, and they will also receive the monthly prebate. All that cash injection will cause significant inflation on the order of at least 25%. Prices are going to go up!
Here is a quote from the AFFT Director of Research on the subject.
” Most likely, the worker will now see his/her take-home pay
increase to what their gross pay was before the FairTax, and only the
savings from the employer share of payroll taxes and income taxes will be
used to reduce prices.
Existing government workers are a good example. They have a contract
with the government (collective bargaining) to make a certain amount of
gross pay. Employers won’t be able to unilaterally reduce that amount.
Likewise, other employers want to keep their good workers so to be
competitive they pay the worker their gross pay before the FairTax.”
It seems to me that you are standing alone on your claim that prices won’t increase.
The back and forth on the inclusive versus exclusive calculation ignores Doug Hartlove’s comment above.
The FairTax replaces the income tax, payroll tax, and the other federal taxes. Those are calcuated inclusively.
If you insist on calculating the FairTax exclusively then you must do the same with the tax tables.
I.e. the current marginal tax rate is 25% (inclusive) – add the payroll tax (I’ll round) 8% – so just income and payroll is 33% (inclusive) – i.e. every dollar your earn (gross) you pay to the federal government 33 cents and you keep 67 cents.
If you calculate that exclusively then you have a 48% (using the unrounded, actual payroll value) rate.
The fundamental issue is intellectual honesty here – the tax tables and the payroll tax calculation are inclusive – so the FairTax should be as well as that is what it is intended to replace.
If you must use exclusive then you must conceptually change the tax tables to simply play fair.
MC,
Your whole argument (and Doug’s) is based on the incorrect assumption that the Fairtax rate can be fairly compared to an income tax rate. I believe that the only fair way to make personal economic comparisons is to calculate effective tax rates for both plans, and perhaps go on from there to examine purchasing power comparisons. Only then can any individual determine which tax plan is best for their particular situation.
This whole discussion about converting either to a common inclusive/exclusive presentation is just plain nonsense! I agree with Hayden that the real intent of expressing the Fairtax rate inclusively was to present a lower number for public consumption!
Hank, I agree with you regarding comparing systems using effective rates and purchasing power, but eventually they both need to be using the same scale of comparison when using percentages. So I don’t think it is nonsense. I think presenting it as inclusive has two main purposes, one of which is to present a lower number to the public, another of which is for a comparison to income tax marginal rates. I don’t think it makes sense for either side to deny the other. It is what it is.
Morph — I suppose if the inclusive/exclusive thing were the ONLY misleading (or inaccurate) thing about the FairTax that FairTax proponents espoused, one could reasonably say there is a legitimate difference of opinion as to how the FairTax rate should be described, but when you add up all of the things they say:
1. The tax rate is only 23% (but only if you calculate it as a “tax-inclusive” rate and you ignore all of the independent research that says this tax rate is way too low.)
2. Workers will get a 50% increase in their take-home pay (but only if their salaries don’t drop under the FairTax and so long as their currrent EFFECTIVE tax rate is 33%, which over twice the effective tax rate almost anyone actually pays.)
3. Prices will go down under the FairTax (but only if their salaries are slashed by 50% if Linders’ claim under no. 2 above is correct.)
4. Retirees will see their Social Security benefits increase (but only if prices rise, which Linder says under no. 3 above won’t happen).
5. We’ll get free money from the goverment every month (except that the government will need to take that money out of our pockets in the form of taxes in order to pay that money back to us in the form of a pre-bate).
6. Ten trillion dollars of offshore dollars will be repatriated (although we can’t articulate an exonomic reason for this, but it sounds good.)
7. It takes two to cheat the FairTax, but only one to cheat our current system (unless, of course, a retailer fails to remit the FairTax to the government or a purchaser claims a bogus business exemption or under a myriad of other scenarios where someone decides to cheat. And since there will no longer by dual reporting requirements, the opportunity to cheat under the FairTax will rise exponentially.)
8. The FairTax is the first tax on wealth we’ve ever had in this country (except for the estate tax, which Linder wants to do away with, and except for the fact that the FairTax is a tax on consumer spending in the Unitied States, and in no way a tax on wealth, other than in a very theoretical sense that primarily involves middle class retirees who may actually need to spend the money they’ve saved over their working years).
9. Under the FairTax we’ll finally collect taxes from illegal aliens and the underground economy (exept that we already collect taxes from them, both directly from payroll taxes and indirectly through embedded taxes, and, besides, since prices aren’t supposed to go up under the FairTax exactly how would we be collecting new taxes from these groups?)
This is all stuff they are STILL saying (as you saw in the debate) though they know none of this stuff is true or, at best, is intentionally deceptive. So when you put it in context I think its pretty safe to say that the whole “tax-inclusive” rate thing is just one part of this continuing intentional deception. It is abundantly clear that the most vocal FairTax supporters (unlike those on this board) have no intention of being intellectually honest about any of this.
I just went to the movies (took my 4 year old daughter to see “Fly Me to The Moon 3D”). The admission tickets and concessions had the tax included in the price. They stated on the price board “(all prices include sales tax)”. Since I’ve been trying to pay attention, I’ve been to three places this weekend and two included the tax in the price. Perhaps this practice is a little more common than we give credit.
On an additional thought, it seems the only reason that a business quotes the price without the tax is to make the price appear lower than it actually is. Oddly, about the same argument charged against the FairTax inclusive rate. In one case, the actual cost of the good is more than advertised, in the other, the price is the same but the tax percentage is different. Which is more deceptive to a consumer?
Hayden, let’s not make prominent FairTax opponents out to be the honest truth tellers either. I could create an equally long list of misleading statements. We’re talking politics – if you find any side of an issue that is laid out without spin, you let me know… I won’t hold my breath. Don’t hate the player, hate the game.
But I do agree with the underlining sentiment – there should be more truth and honesty in politics.
Hank,
The $2.1T comes from the Fed. You can argue that point, but it doesn’t change the fact.
“It seems to me that you are standing alone on your claim that prices won’t increase.†Alone. No. In the extreme minority? Maybe. My claims aren’t based on consensus, but on reason. The only thing I’ve heard on this blog that make me hesitate about my reasoning is when Morph said that (most?) implementations of the VAT included a one-time increase in the money supply. Of course, I am also assuming that all (not most) of those are VATs as additional revenue sources, not replacements. Can you tell me otherwise?
MC,
Right on. I think I’ve asked this questioned 4 or 5 times from opponents, but I’ve yet to receive an answer (if you don’t count dodging): What is the federal corporate tax rate in the US?
Hayden,
1. The rate is only 23%. I read it in the bill. Maybe you disagree with this being revenue neutral?
2. No. Increases in wages will only be due to positive economic effects of the fairtax.
3. Same as 2.
4. Just the prebate will help (in real terms).
5. Agree. It’s a redistribution plan only there to help sale the fairtax.
6. Agree.
7. Both systems are/will be able to cheat with one entity. In some instances both need two to cheat.
8. I’ll help you on this. Property taxes are a wealth tax.
9. If you define “underground†as illegal activity, then we don’t collect payroll taxes on most of them (I have heard of a prostitute that still sends in taxes). However, you are mostly correct that due to the embedded taxes, we collect from these individuals anyway. Although, if you believe in embedded taxes, you should believe in the fairtax for visibility purposes. I forgot. Where do you stand?
To your final point, don’t you agree that overzealous opponents are as much of a problem as overzealous proponents? It kind of reminds me of our current political race. Everyone that has chosen a side thinks it’s only their opponents that do things for political reasons.
Andrew, that comment was based on a statement by Bruce Bartlett, who in my opinion has certainly made several misleading and false statements about the plan. So you may want to look into that one deeper. You may be correct regarding an additional system versus a replacement. Bartlett sources:
Reading the last source p.20, it states.. as you assumed:
From my understanding, Kotlikoff and BHI use different models in their research based on what is easiest with regard to the mathmatics and explanation. I think BHI’s David Tuerck states it best regarding what would happen:
Andrew,
“As an average American, you do pay the corporate income tax, although you just may not believe it. But you avoided the point of my question (as all other opponents have thus far). That’s okay. If I was an opponent I would avoid it too.”
You act like I am avoiding your question because I know it would weaken my argument if I answered. But that is not the case. The truth is I really don’t know what you are getting at.
Are you trying to trap me into comparing one tax inclusively because I support it, and comparing the fairtax exclusively, thus proving I am a dishonest and biased person? If so you should know that I usually talk about income taxes inclusively, and sales taxes exclusively. Its just what I was raised to do, as I believe most americans do. Thats the entire reason I have a problem with trying to pitch a sales tax using inclusive rates, I don’t think that is an honest thing to do.
“By the way, I’m trying to sell the fairtax by building a reputation for being honest.” Aside from the inclusive/exclusive argument, what is your position on the provision of fairtax to tax state and local governments? In effect, causing state and local governments to raise their taxes to pay the fairtax? The state and local governments are sending revenue they collected under sales/property/income tax to washington, thus distorting the transparancy of the fairtax(some revenue collected by fairtax was actually collected under higher state/local sales/property/income tax).
Andrew,
I’m crtainly aware that the Fed tries to control the money supply/inflation. What’s that got to do with the issue of price increases? Look, you seem to be having difficulty dealing with $trillions, so let’s get personal. I assume you work and have payroll and income taxes deducted from your gross pay. Under the Fairtax, you will recover all those tax dollars plus the prebate. You will be running around with lots of edxtra cash to spend. Now, multiply that by 300 million Americans and it’s easy to understand why I believe that there will be $2.1 trillion in added spendable cash under the Fairtax. Inflation is sure to follow. If you don’t believe that the vast majority of workers will get their gross pay, then I will agree that inflation prospects would be less severe.
As for corporate tax rates, as near as I can tell, the rates run from 15% to 38% depending on taxable income. What is your point?
Hank,
“I’m crtainly aware that the Fed tries to control the money supply/inflation. What’s that got to do with the issue of price increases?†Everything.
“If you don’t believe that the vast majority of workers will get their gross pay, then I will agree that inflation prospects would be less severe.†That’s my point. Or more specifically, that the market won’t allow workers to get their gross pay because of available dollars.
“As for corporate tax rates, as near as I can tell, the rates run from 15% to 38% depending on taxable income. What is your point?†The federal corporate income tax is 35% inclusively, and 54% exclusively. I wanted to see how an opponent expressed it. Consistency would dictate 54%. That is my point.
Kublikhan,
“Are you trying to trap me into comparing one tax inclusively because I support it, and comparing the fairtax exclusively, thus proving I am a dishonest and biased person?†I am trying to get you to see the inconsistency of quoting one tax system inclusively and another (that specifically acts as a replacement) exclusively. I’ll assume I’m not doing too well.
Andrew — In the first place, you (and Morph, et al) are the sorts of people I enjoy discussing issues with. Neither of us have a financial stake in this, we aren’t trying to sell books or get elected to office, we’re not fanatics, we each would just like to see a rational tax reform that could better the economy. At worst, we disagree on what would be the best form of tax reform.
What I would like to see is the FairTax discussed in the context of tax reform in general, including alternative tax plans. At the end of the day, I’m sure we’d agree that there are plusses and minuses to the FairTax, our current tax system and every other tax reform proposal, but maybe some plans have more merit than others (or, perhaps, there would need to be some combination plan).
I agree with you that for some reason the FairTax excites passions the way other tax reform plans to not. As you say, it’s like Republicans versus Democrats, they don’t just debate each others policies, they impugn each others motives, so rational debate and discussion becomes very difficult.
I would agree that “overzealous opponents” are just as ridiculous and counterproductive as “overzealous proponents,”, but, with all due respect, how many overzealous opponents of the FairTax have you ever come across? There might be one or two on the internet, but that’s not even a drop in the bucket to the amount of FairTax fanatics.
And my point in post no. 95 above is that even after 10 years of studies the primary sponsor of the bill and its most publicly known advocate continue to misrepresent the FairTax, the rate that would be required to be revenue neutral, and its effect on prices and other issues. This goes far beyond a simple difference of opinions; those proponents simply lie. And since they get 99% of the air-time on the FairTax, personally attack any opponents of the bill, and paint any opponents as being “defenders of the status quo” or “afraid of change” or far worse insults, it makes it difficult for the opponents not to appear a bit “overzealous” when they actually get a chance to make their arguments known.
Whoa up, Andrew.
You believe that “the market won’t allow workers to get their gross pay because of available dollars.” It seems to me that the dollars are there already. It’s just a matter of the employer not removing them from the employees gross pay and sending them off to the federal government. If you want to assume that the employees won’t get their gross pay, that’s fine with me. I respect minority opinions! But don’t assume that market forces alone will dictate lower wages, particularly those covered by union and government contracts.
I would also suggest that you have worn out the exclusive/inclusive argument. No one’s mind on this board will be changed! And I see no point in converting corporate tax brackets to exclusive rates. After all, under the Fairtax, the rate for corporations will be zero!
Hank,
Let’s just say for now you and I totally disagree on the market on how it sets prices. I’ve openly stated that contractual obligations should still be met, and that those forces would act towards employees receiving gross wages. However, those are not the only factors affecting wages. According to this link, http://www.bls.gov/news.release/union2.t01.htm, 15% of full-time workers were represented by unions in 2007, or in other words 85% were not. Then you have to ask, how long is the average union contract? There will be many things affecting wages, not just unions.
“I would also suggest that you have worn out the exclusive/inclusive argument.†This argument was worn out long ago, but as long as fairtax opponents continue to bring it up, I’ll continue to point the inconsistency of their argument. If you want to go on record as not seeing any problem with expressing one rate as exclusive (the fairtax) and the other rates (all the taxes the fairtax replaces) as inclusive, that is your right. I’m just saying that I wouldn’t want my name associated with such a position.
Hayden,
It’s all about perspective. I don’t know many overzealous on either side since I mainly discuss it hear. Are the political entities that debate it overzealous (Linder, Boortz, Bartlett)? Absolutely. That is the nature of their animal. Is that how it should be? Yes because if there was a better way to persuade, it would be used. And no because we’d come up with much better outcomes if people were persuaded by logic rather than zealotry.
Andrew,
I thought to give you the last word on your logic behind wanting to compare “apples to apples” in terms of the inclusive/exclusive debate. But your self professed desire to apply logic and reason to issues such as this made me decide to ask you to perform a simple task to test the logic behind wanting to express all taxes in inclusive terms.
For discussion purposes only, here are the facts which we can agree on. I have in front of me my 2007 tax return, and I will assume the Fairtax inclusive rate is indeed 23%. Would you please describe in detail just how I could compare my income tax burden to that under the Fairtax.
Thank You!
Hank,
If one doesn’t believe that all taxes are just paid by embedded taxes, you could compare as follows (although the complicated nature of our income tax system makes this generalization difficult): If you figure out your effective income tax rate is approximately 15.5% and we know payroll is 7.5%, one could say 23% of all dollars they earn go the federal government (assuming under about $102K/yr earnings). If under the fairtax, one spend 100% of those earnings, one will send about 23% of what they earn to the federal government (adjusted for the prebate). Or if you’re an opponent, you could say under the current system 23% goes to Feds and under the fairtax 30% does.
Any more questions?
Andrew,
Thanks for your clear and convincing explanation as to how I should compare the Fairtax to current tax law. And, yes, I do have another question.
Why on earth should I and 37 million other seniors support the Fairtax when the data is clear that many of us will pay higher taxes? In my case, with pension income of $80,000, I paid $9,000 in federal tax in 2007, or around 11%. (Of course, I don’t pay any payroll taxes, being happily retired.) Under the Fairtax, after accounting for the prebate and other non taxed spending, my net tax bill at 23% would be higher than under current law.
Add to this the clear facts that my “wealth” will be double taxed, and my state and local taxes will rise by 25%, and it seems to me that you need to sharpen your arguments favoring the Fairtax.
What am I missing?
“Thanks for your clear and convincing explanation as to how I should compare the Fairtax to current tax law.” Only if you don’t believe that all taxes are just paid by embedded taxes. I, of course you probably just forgot, believe that taxes are part of the prices of goods. You know, embedded taxes.
Assuming your pension is fixed in nominal dollars, what you should worry about is will 80K post fairtax dollars be able to buy more than 71K pre fairtax dollars. Arguing about the effective tax rate is useless (I seem to remember going around in circles. Didn’t everyone agree that the only thing that mattered for being better off was purchasing power?) The inflation caused by the fairtax would have to be 12.6% or less. If you add in the prebate for two for $84,784, the inflation would have to be 19.4% or less.
“Why on earth should I and 37 million other seniors support the Fairtax when the data is clear that many of us will pay higher taxes?” If you think you’ll be personally be worse off because of the fairtax (or at least so much worse that it outweighs any benefits the fairtax might have on the economy), then by all means, don’t support it. Just realize it’s the same reason giant corporations don’t want to alter our current tax system. It would mean they have to pay higher taxes (relative to the medium and small corporations that can’t buy the political influence). Social security isn’t called the third rail of politics because it’s so solvent that anyone would be foolish to touch it. It’s because 37 million seniors don’t want to change the status quo. No matter the financial consequences to the nation.
I thought we did do a purchasing power and effective rate analysis with Hank, and I thought he came out ahead under the FairTax. Slightly before the purchasing power post where we used a generic example to break it down in more detail. The income taxes on capital gains, estates, social security and pension benefits would be removed. SS benefits would get a bump depending on price changes, as would the prebate. This is not to say that I disagree fully that many seniors will be hit, after all, they hold most of the wealth in this country. How much of a hit on the group as a whole will depend on their assets, income, investments, etc.
Hank’s military pension should get the same bump as SS, since they use the same COLA.
If we were looking at a 17% increase in price (and a 10% reduction of cost), the prebate, SS benifits and his government pension would be multiplied by 1.17. This total income (or taxable spending on the income) would than be multiplied by .855 for after tax purchasing power comparison. The effective tax rate (including the prebate as taxable income) can also be compared and adjusted for changes in purchasing power: (income – taxable spending * .855 / income).
Morphh,
According to the Rice study, we are now very likely looking at a 25% bump (1.00 x .9 x 1.38 = 1.25), rather than the 17% we have used previously. I’m having difficulty believing my SS and military pension will both be increased by 25%, particularly because I’m already getting an increase in net pension income due to no income tax, as well as receiving the prebate. Frankly, that seems to be an obscene increase for retirees. Remind us again just what section of HR25 sets up this overly generous increase? And more importantly, where is the revenue coming from to pay for this 25% increase. The cost has got to be measured in the hundreds of billions? Is this accounted for in the Rice or Kotlikoff studies? I don’t think so.
Help!
Hank, the rate is 23%/30%. You’re debating revenue neutrality with the 25% comment… will they raise it, will they cut back spending, will they incure debt, or will the economy grow enough to recover the possible losses. Now if you choose a higher rate, than it also changes the 10% factor we use… both sides would likely increase – cost reduction and price increase (not just price increases – it’s the same pie).
The section that defines the change in cola is Title III Sec 303. As far as where the money comes from, it comes from the additional revenue gained from the price increases. Price increases create more government revenue, which pays for the additional government expenses incured due to the same price changes. Gale and BHI show that accommodation of the tax, the increase in prices, does not change the rate (whatever that rate may be).
Remember that there will be no Social Security in 30 years unless we make some changes now. Our generation, and the generation before us, are guilty of “child abuse” since Social Security benefits we collectively have enjoyed have been disproportionate to our generations’ contributions. That, in my mind, is what is truly obscene. Therefore if a senior couple who consumes in excess of the prebate and indexed Social Security is asked to pay more under the Fair Tax, that is not unreasonable.
By the way, I’m 60, so my money is where my mouth is.
~Jim
Jim,
Show me the data that supports your contention that my generation on average has been given benefits in excess of our contributions? Use constant year dollars please. And by the way, your money really isn’t where your mouth is yet! Close, but aren’t you a bit premature?
Morphh,
I accept your explanation about where the cash comes from to pay the increased SS and government pension bills. But I think you are dead wrong about business cost savings being connected to the rate. We worked very hard, using the Kotlikoff/BHI data base, to establish that business costs might be reduced by 10%, 4% from payroll taxes, 3% from income taxes, and a generous 3% for compliance costs. The 10% estimate also assumes that all the cost savings go towards price reductions, which you know isn’t necessarily true.
Please explain why you believe that those cost savings will change when the Fairtax rate changes. I just don’t get it!
Hank, Here is the way that I see it…
Let’s say we have a pie that represents all the income taxes replaced.
Individual income taxes: 1,101 billion – 48%
Corporate income taxes: 290 billion – 13%
Payroll income taxes: 871 billion – 38%
Estate and Gift: 26 billion – 1%
Total Pie: 2,288 trillion – 100%
So let’s split this pie in a partial accommodation model where employees get gross and the remaining is used to lower cost. All of the individual income taxes, half of payroll, and estate/gift.
This leaves the pie split at 68% to the individual, which represents the piece of the pie going to price increases. 32% of the pie is going to lower production cost. This percentage balance should be maintained for whatever rate the FairTax employs. AFFT says this can be done with 24% (23.8), some of which goes to the prebate.
So as you noted above, we factored something like 4% from payroll and 3% for corporate income taxes, which represents 32% of revenue. This would put the additional revenue at around 14%, putting the total at 21%, leaving about 3% for the rebate for our 24%. If we now say the pie is 28%, we still have the same pie to slice as it represents the same revenue to replace. We’re inflating the pie, so I expect our breakdown of the percentages will get increased slightly, but the 32/68 split should hold.
Kotlikoff: “Why the Fair Tax will Work – Bartlett’s Unfair Attack on the Fair Tax” January 15, 2008 at Page 11:
…
“Double Taxation
“Barlett suggests that it would be unfair to force wealth holders to pay extra taxes when they spend their wealth (principal). He might have added in his defense of the rich that most of the rich are older and that we should tread lightly with respect to the elderly.
“Well rich members of today’s older generations may be a concern of Barlett. They aren’t a concern of mine. OUR COUNTRY HAS SPENT THE PAST FIVE DECADES TRANSFERRING EVER GREATER SUMS FROM YOUNG WORKERS TO CONTEMPORANEOUS OLDER GENERATIONS, INCLUDING EXTREMELY WEALTHY MEMBERS OF OLDER GENERATIONS. The most recent example his the introduction of Medicare Part D’s prescription drug benefit. This transfer to current and near-term elderly has a present value cost of some $10 trillion.
“THIS PROCESS OF PASSING THE GENERATIONAL BUCK CONSTITUTES FISCAL CHILD ABUSE, PURE AND SIMPLE, AND HAS LEFT THE COUNTRY WITH A FISCAL GAP (difference between the present value of future federal spending and taxes), which, by my estimate, now totals $70 trillion. There is simply no way we can deal with this huge insolvency without asking the wealthy, including wealthy older Americans, to pay substantially more taxes.
“What about the poor elderly living off of Social Security? How do they fare under the FairTax? They are made better off. The CPI-indexation of Social Security benefits will maintain the real purchasing power of their benefits, but they’ll also receive the rebate. Indeed, for elderly living at the poverty level, the living standard increase will be roughly 23 percent!” (Emphasis supplied.)
… .
It seems to me that we all need to be a little more informed, I have many questions as well, but from everything that I have read, I like it. As far as the “Prebates” it is my understanding that every person would recieve those prebates. It based on the poverty line or expenses to which their money goes towards necessity, it would go up or down based on the number of people in the family. The prebate would go to every “household”. So while they will not be filing individual tax returns every year, I imagine we could come up with a one time enrollment process, which would include number of dependants with names and SSN so that once the dependant leaves the nest he would be able to file for his/her prebate.
I understand that we have to do a little imagining to see some of the benefits of a consumption tax, but the fact remains that TX and FL are two examples of just that, no income tax, yet they are able to sustain their programs… Those would be two good case studies for us to examine. FL would be in trouble with out it because of the mass amounts of transient or part time residents that do not work!! SO they are able to use tourist dollars as well as the retired to add to their fiscal situation. I think their systmes would only be enhanced by the consumption tax on a National level. While you will always have to spend money, you do have some control of the amounts of money you spend therefore you can choose to be frugal, saving you tax dollars.
The bottom line I guess is the Middle Class, we have to protect that class or we become everything that our founding fathers were against. We would have aristocracy and peasants. The super rich have their loopholes to get out of taxes and the poor pay no taxes, the ones left holding the bag is you and me, there really is no telling how much more revenue this government will bring in when you take into account the underground economy as well as tourism. The more global our economy becomes the more ways we have to adjust the conventional wisdom to produce and stay competitive. Eliminating the massive amounts of dollars businesses have to spend a year on accounting department and CPA, just to find the loopholes in the current tax code that changes every year… It will level the playing field and allow the Mom and Pop stores to make a comeback, not to mention take big business out of the lobbying busness all together, everyone is treated the same under the sales tax. and everyone’s customers are treated the same.
Just some thoughts…
Well,there seems to be a nasty war going on in Georgia over the Fairtax. Adults who should know better are calling each other liars, etc. The argument is over a DNCC ad on behalf of Jim Martin who is challenging Senator Chambliss. I’ve listened to the ad several times, as well as reading the Boortz rebuttal, and can only conclude that both sides are dead wrong!
The ad says that the Fairtax would put a 23% sales tax on almost everything we buy. I believe that everyone on this blog knows that isn’t correct. The fact is that the Fairtax will put a 30% sales tax on almost everything we buy, and if the recent Rice study is correct, the sales tax will be closer to 40%. This statement is true when you realize that there is no federal sales tax under current law, and the Fairtax will institute a 30-40% sales tax. So, Martin isn’t a liar, he just understated the tax percentage.
Now, here is the Boortz 16 October rebuttal: “In the meantime … for those of you who don’t understand the basic dishonesty behind this ad … let me share a very brief explanation. The FairTax replaces all federal taxes paid by you and by businesses. No income tax. No capital gains taxes. No death tax. No Social Security tax. No alternative minimum tax. All gone. The elimination of these taxes will remove these tax components from the price of everything you buy. Surely, even if you’re government educated, you will understand that all of the taxes paid by all of the people who are responsible for bringing a loaf of bread, a movie theatre ticket or a gallon of gasoline to the marketplace are passed down the line and paid by the final consumer of that item. Think about this … where ELSE would the money to pay those taxes come from? There is no other way to generate the income necessary to pay these taxes OTHER than to include them in the final price of everything sold in our economy. So, how much is this tax component? About 22%. The taxes included in some consumer items are higher, lower in others, but the average is about 22%. When this 22% tax component comes OUT of the price of everything you buy, it is REPLACED by the 23% FairTax. So, THE TRUTH is that the FairTax does not “add 23% to the cost of everything you buy.” It replaces the 22% average tax component included in the cost of everything you buy with a 23% sales tax.”
Wow, there are at least two major problems with that fairy tale. (1) Boortz seems to believe that cost savings cascade up through the production chain. True enough for dollar savings but not for percentage of cost savings. It doesn’t matter if there is one level of production or ten, the percentage cost savings is a constant. (2) By calling the embedded costs “embedded taxes”, Boortz can make the erroneous case that the Fairtax simply replaces the income and payroll taxes. Take out 22% and replace it with 23% and it’s all basically a wash. Balderdash! Jorgensons embedded costs will not all be removed, and I think there is general agreement that the portion of embedded costs that belong to the employee, two thirds of the total, will stay with the employee. So, costs may fall by 10% and retail prices will rise by 17-25% depending on the final exclusive tax rate.
Some of you still think that we work for net pay and will accept a gross pay cut in the hopes that retailers will lower prices? Double balderdash!! I have never seen an employment contract, union, management, hourly, minimum wage, all legitimate contracts that always talk about gross pay, either salaried or hourly. Cutting pay as a first reaction to the imposition of the Fairtax can only benefit the lawyers unions.
I had thought that Boortz and Linder were moving away from this flat out lie, but in the Hayden/Boortz debate, it became clear that such was not the case. Now, based on this latest stuff, it’s clear that Boortz and Linder both hope that if they tell a lie often enough, folks will accept it as fact. Ain’t going to happen!
I have an issue when ads present or imply the FairTax is an additional tax. When it is presented as ‘so and so wants to add a tax to goods and services’, without any mention that it is tax reform or a replacement tax system – I think such is misleading and dishonest. I haven’t seen this add so I can’t say that’s what is done, but I’ve seen others that do that. Hank, I don’t see that Boortz mentions cascading percentages. It just sounds like he was describing a non-accommodation model. I don’t believe that would happen but I don’t see it as a lie, just less likely than partial accommodation. In any case, the accommodation doesn’t really change the burden. It seems to be one of the easier models to understand for those new to the plan. As far as the Rice study or higher rates, you’re describing revenue neutrality. The rate is 23%/30%. Now we can argue that the rate would cause increased deficits with current spending and that it would not be sufficient to replace the current revenue (a tax cut), but don’t be confused – the rate is that defined in the legislation.
Hank — I live in Atlanta. To say there is a “war” going on over the FairTax ad is somewhat of an overstatement. Yes, Boortz and Herman Caine have blasted Martin for the ad day after day, but it doesn’t seem to resonate much either way with voters.
Despite the fact that Saxby Chambliss held a rally at the state capital to support the FairTax and condemn the ad, in which the national director of AFFT flew up to attend, as well as Herman Caine and (I believe) John Linder attended, only somewhere between 10 and 50 supporters showed up. I think people during this election cycle have a lot more on their minds than the FairTax.
By the way, I listened to the ad. You can’t say much in a 30 second ad, but what it said was factually accurate. It said Chamliss wanted to institute a “new tax,” (which the FairTax is), which would raise the price of most purchases by 23% (which, as we all know, if far lower than most estimates), and that the price of groceries, gasoline, and other goods would rise (which is true.) The ad was paid for by the Democratic Senatorial Committee. If Chanbliss or the Republican Senatorial Committee want to run a ad defending the FairTax, they are certainly free to do so, but there’s no need for them to spend the money when they have Boortz and Cain doing so every day for free. (And taking far greater liberties with the truth.)
One last point. Chambliss was elected to the Senate six years ago during the run up to the war in Iraq with one of the most disgusting ad campaings in history. His opponent was Max Cleland, a decorated veteran who’d lost three limbs in Vietnam. Chambliss (who had conveniently avoided serviing during the Vietnam War) ran ads claiming Cleland lacked the “courage to lead” and showed Cleland morphing into Sadam Hussein. I note that neither Boortz nor Cain (who each also managed to avoid serving during that war) never complained about those ads. ’nuff said.
Morphh,
It’s kind of quiet on the blog at the moment, so, with your agreement, I’d like to revisit one exchange you and I had about the impact of the Fairtax rate on retail prices.
It was my opinion that , assuming workers get to keep their gross pay, businesses will be able to reduce production costs by around 10% including compliance costs. If that is true, then, if the Fairtax rexclusive rate was 30%, retail prices have to rise by 17%. (1.00 x .9 x 1.30 = 1.17).
After reading the Rice study which resolved many of the assumption differences between Gale and Kotlikoff/BHI, the Rice economists concluded that the exclusive rate would be 39%, not the 31.8% in the BHI study. At that time, I wrote that the adjusted retail price increase would be closer to 25%. (1.00 x .9 x 1.39 = 1.25). As I read your reply, you took the position that as the Fairtax rate increased, the business cost savings from eliminating business taxes would also increase. Your explanation for taking that position was as follows:
“So as you noted above, we factored something like 4% from payroll and 3% for corporate income taxes, which represents 32% of revenue. This would put the additional revenue at around 14%, putting the total at 21%, leaving about 3% for the rebate for our 24%. If we now say the pie is 28%, we still have the same pie to slice as it represents the same revenue to replace. We’re inflating the pie, so I expect our breakdown of the percentages will get increased slightly, but the 32/68 split should hold.”
Morphh, this still makes no sense to me. The two thirds/one thirds split in savings is correct, but there is no connection between the business cost savings from getting rid of the business taxes, and the rate for the Fairtax. Both stand alone, imho. As a retailer, you will first determine the cost savings, and then add on the sales tax at whatever rate is given. But the cost savings can’t increase over and above what the elimination of the income taxes provides. And that is roughly 10% on average across all businesses when compliance costs are added to the Jorgenson analysis.
Please take another cut at your pie analogy because I don’t understand your recipe?
Hank, why don’t you tell me how the 28% is broken up. This represents the revenue were replacing (the income tax system). Where is the other 4% coming from… who’s pocket? It is a replacement, so it’s got to come from somewhere. Perhaps it’s not business… maybe it’s the individual and we’ll get a bigger raise then expected. Maybe it’s government and the State will have to raise taxes very little. Someone is shelving this burden. I split the 4% across the different areas, suggesting our estimates were off. Where would you put it – The two sides have to be relatively equal.
Morphh,
Assuming you mean that the 4% is the difference between Kotlikoff’s 23.8% and the Rice study’s 28%, then the answer to “where does the other 4% come from” is simply all of us, plus, idiotically, the federal, state and local governments. 4% higher taxes for all! And, 3% of that 4% difference comes from the error BHI made by not including offsetting revenue when they added federal government consumption to the base. Governments can’t tax themselves and create net revenue! The BHI rate should have been 26.5%, not 23.8%, I believe. But, that has nothing to do with the cost savings by businesses, imho.
Look, I’m writing a paper on the price impact of the Fairtax, but I’m reluctant to claim that as the Fairtax rate increases, retail prices will increase as long as you continue to believe that business cost savings are somehow tied to the Fairtax rate. I really don’t care if our 10% estimates for cost savings are off a little. After all, ALM mentioned 11.4%, and the Director of Research at AFFT once thought it might be 12%. And to complicate things further, BHI wrote that they expect full monetary acomodation and prices to rise by the exclusive rate percentage. Unless I misunderstand the BHI statement, they appear to give no credit for any business cost reductions?? I certainly believe that there will be some pretax business cost reduction, and I have provided a rationale for choosing 10% based on the 2006 BHI study data.
I happen to agree with you that the rate is 23% by draft legislative edict, HR25. But there is not one economic study to support that percentage! Not one! Makes me wonder just where the original 23% came from? At any rate, please try again to explain in simple terms just why business cost savings from eliminating the income/payroll tax will change depending on the Fairtax rate? I still can’t grasp any connection. Thanks!
Hank,
As you stated, the increased rate (4%) is from “all of us”. Exactly – it is part of the cost estimated by Rice to replace the current system’s taxation. Lets take a full accommodation model. This means that all current taxes are windfall gains, and the FairTax is added on to current prices. The windfall gains are received by all, business and personal income and represent the cost burden of the current system lifted. Again, this is estimated by Rice to be 28% minus the rebate. This windfall must break down – who gets what windfall? I believe the percentage you suggest for business windfall is an invalid ratio in comparison to the overall windfall estimated by Rice. If you took the percentage afforded to business windfall and factored the proper ratio for personal windfall, you would not end up with a sufficient percentage. This worked when we used the Kotlikoff rate, but if we increase it 4%, we then have to ask, how is this windfall distributed. You can’t give more to personal windfall without also giving to business as these ratios are tied together as overall government revenue.
Morphh,
Between your pie recipe and your windfall argument, I think I understand where you are coming from. To be sure, here is the short version. You believe that moving the revenue neutral rate up 4% must mean that additional taxes are being eliminated, and the windfall for businesses and individuals must increase? I would agree if that were the case but here is the problem with that logic. The BHI/Kotlikoff rate of 23.8% was never revenue neutral, not ever! The increase of 4% by the Rice study simply added 3% to correct the fact that BHI failed to add offsetting revenue when they added federal government consumption to the base. In addition, the Rice study leaves the EITC in place which accounts for the other one percent. (We can discuss the wisdom of that at a later time?) In summary, the 4% difference is nothing but added revenue, and the 28% rate is revenue neutral. And, none of that has anything to do with business “windfalls”.
As a refresher, here is my rationale for the 10% reduction in business costs.
Using the 2007 federal revenue data from the Kotlikoff/BHI base/rate study published in September, 2006, individual income tax receipts were $1101 billion, corporate income tax receipts were $290 billion, and Social Insurance and Retirement (Social Security) receipts were $871 billion. By splitting the SS receipts, (ignoring owner operated businesses), individual taxes paid in 2007 were $1536 billion, and corporate/business taxes were $726 billion. Rounding off the percentages, two thirds of the embedded costs of the income tax system can be attributed to the employees, and one third to the businesses. So, if there is an average of 22% in embedded costs of the income tax system per Dr. Jorgenson, then only one-third or 7.3% can be used by employers for possible cost reductions, again assuming that employees keep their whole gross pay. The 7.3% estimate does not include compliance costs.
A crosscheck on Jorgenson’s 7.3% business cost savings can be made as follows. Assuming that retail prices are reflected by the GDP, then dividing $290 billion in business income taxes by the personal consumption expenditures in 2007 of $9772 billion results in 2.96%. In other words, average business income taxes are roughly 3% of sales. Applying the same consumption base to the business share of payroll taxes results in 4.45%. Total business taxes as a percent of sales is therefore 7.4%, or just about exactly what Jorgenson’s study data indicates.
Compliance costs can be estimated by assuming $9.7 trillion in total business costs, of which an estimated $250 billion is compliance costs. This results in a compliance cost of 2.6% of costs on average across 20 million businesses. (available studies show that compliance costs as a percent of costs fall more heavily on small businesses.)
After adding the 2.6% compliance costs to the other 7.3% embedded costs, businesses might be able to reduce their pre-sales tax costs by almost 10%. (This assumes that businesses would apply all the cost savings to price reductions, rather than increased shareholder dividends, employee pay increases, business expansion, or increased profit margins.) When a 30% federal sales tax is added on to the reduced business costs, an average retail price increase of 17% across the board results: (1.00 x .9 x 1.3 = 1.17). This price increase would occur immediately upon Fairtax implementation for all services, and prices would stabilize at 17% higher for new goods after the proposed inventory tax credit works through the system, but in no case later than one year after Fairtax implementation.
If the exclusive Fairtax rate turned out to be 39%, then retail prices would rise by 25%: (1.00 x .9 x 1.39 = 1.25). Raising the rate does not impact cost savings due to income tax elimination. Higher rates simply mean higher retail prices.
Hope this helps!
Hank, if 7.3% is equal to $726 billion and the individual cost is double that $1536 billion (including government employees). The individual cost is 14.6%. As you stated, this equals 21.9% or 22%. So how can the current system cost 22%, but the FairTax is 28% minus prebate. Giving 4% to the prebate, you have 2% here that is not associated with the taxes being replaced. Once you add 3% increased compliance, your looking at a 5% difference. It doesn’t work. Jorgenson’s 22% is in line with the AFFT 23% claim. If the rate is higher, then so is the cost of the current system (Jorgenson is wrong) as these two are directly tied to one another. You can’t maintain that the current system has a 22% cost if you’re suggesting at the same time that the cost to replace it is significantly higher. One of the two is incorrect – either the cost is off (which is then distributed) or the rate is off. An 8% business return (and 16% personal return), might produce close to the needed math. 8% * 3 = 24% + 4% rebate = 28%. 8% + 3% = 11% cost reduction and a retail price rise of 24%.
Morphh,
Jorgenson was wrong, by perhaps 2.5-3%. He didn’t include compliance costs.
Why don’t you ask Jorgenson? He’s stated publicly that one of the problems with the FarTax is that the rate would need to be significanly higher than 23%. Since he came up with the 22% “embedded taxes,” he should be able to explain why the FairTax rate would need to be significantly higher.
Ask away, but I think the answer is obvious. Assuming Jorgensons 22% in embedded taxes is correct, then the Fairtax rate has to be 22% (revenue neutral) plus rate increases to cover the prebate ($600 B), the death tax, and the inventory tax credits ($600 B) in year one, which Jorgenson did not address.These additions might add 6% total to the Fairtax rate. 28% looks reasonable to me, and that is also what the Rice report came up with.
By the way, scratch #127. I had my head up and locked over the price issue. Jorgenson was only concerned with the actual taxes, not compliance costs. However, when discussing retail prices, compliance costs must be added in to determine the total amount a retail business might reduce costs.
Rather than ping on Jorgenson, it might be more productive to ask Kotlikoff if he agrees with the following quote from page 6 of the Rice report:
“Because HR25 assumes that virtually all federal government services are subject to the tax, it effectively increases the revenue required by the amount of the tax–but this increase in required revenues is not taken into account in the (BHI) calculation of the 23% rate.
Both opponents of the Fairtax (Gale) and proponents (Kotlikoff/Tuerck) now agree that under a properly constructed revenue neutral national sales tax proposal, the tax rate should be independent of whether federal expenditures are taxed or not, as any revenues gained are fully offset by the increased expenditures needed to achieve real revenue neutrality”
If Larry K. and BHI agree with this correction, then the BHI Fairtax rate should have been 26.5%, not 23.8%. Other differences in assumptions resulted in the final 28% rate in the Rice study.
I sent Jorgenson an email asking him if he had any further thoughts on what the FairTax rate would need to be and how that would relate to the embedded tax rate. I’ll let you know if he responds.
I’m also trying to figure out how high a consumption tax would need to be to replace the Medicare tax, since I am becoming more and more convinced that our current system of paying for Medicare (by taxing workers) is unsustainable and thus we need to shift more of the cost onto retirees (sorry Hank) as well as foreign tourists, the underground economy, illegal aliens and the idle-rich, which, of course, a consumption tax would do.
Plus, since the tax rate should be relatively low, we wouldn’t need to include a pre-bate or exempt used goods.
Hayden,
No need to apologize for proposing to put it to retirees, as long as you include the “idle rich”, which you may be some day soon??? I agree that Medicare costs are the #1 problem facing our economy. Turns out that, using the BHI data in their 2006 study, a national sales tax of 1.75% would have been revenue neutral with the Medicare taxes collected in 2007. I figured that Medicare taxes are 19% of the total payroll taxes collected, so in 2007, Medicare collected $165 billion, and dividing by a sales tax base of $9355 billion, the rate would be 1.75%. And you are right, probably no need for a prebate, etc.
But I don’t agree that changing the way we collect Medicare taxes would have any impact on run away cost increases. All you have done is facilitate paying for higher costs. The rate would have to go up every year unless some fundamental changes in the health care delivery system are made.
Stand by for Hillarycare II under the direction of Tom Daschle?
Hank — Actually, my preference would be for a consumption tax to pay for universaal health insurance (i.e., for us idle rich as well as you old geezers), but I figured that’s a discussion for another blog.
Hayden,
Agreed!! And, would you mind checking in on my email. You seemed to have moved, and I have a question for you about the letter to the President from those 80 economists? Thanks!
Hank — I switched lawfirms so my email address has been changed. If you google my name, I suspect you’ll be able to find my new email address.
I know I should give up on this FairTax stuff, since in the scheme of things it doesn’t really matter a hoot, but I feel like tax reform is one of the most important issues facing this country over the next few years and if we don’t get it right we’ll all lose bigtime.
Anyway, I signed up for a debate on the FairTax at http://www.debate.com. It appears that it will be a very civil debate (as, of course, takes place on this blog.) There are a total of five rounds. You can comment on the debate and either root me on or throw rotten tomatoes.
When are you or Morph or one of the other folks going to make it to Atlanta so I can take you to lunch?
It’s been a while since I’ve been down that way, but I’ll be sure to give you a ring if I’m in town. Let me know if you ever make it to Charlotte.
Hey Morph –
Did you read Ari Fleischer’s proposed tax plan in today’s ( 4/13) WSJ?
What does it remind you of? How about “The Kepner Tax Plan” that you posted a couple of years ago on “Wikipedia?
See — I’m ahead of the curve!
I haven’t read it yet, but I’ll put it on my list.
I’m also trying to track down a story that was confirmed by Senator Shelby that there is a plan somewhere to add a national sales tax on top of the income tax. Possibly to pay for Medicare??? I think the Kepner plan would make more sense!
That does very closely describe your plan! He probably read your Kepner Tax Plan on Wikipedia. haha
Another Tax Reform Commission?????
http://thoughtfulideas.blogspot.com/2009/03/what-another-tax-reform-commission-how.html