Just What This Downturn Demands: A Consumption Tax
Just What This Downturn Demands: A Consumption Tax
From the New York Times, November 9, 2008
The country is now in the midst of the deepest economic crisis since the Great Depression. But as a new administration prepares to enter the White House, the crisis could end up being a potent ally for change. Without it, political resistance to the steps needed to address our most acute and longstanding economic problems would be almost insurmountable.
Despite broad agreement that the nation needs to increase spending in many domains — including infrastructure, health care, scientific research and clean energy development — no one has forged a legislative coalition capable of raising the necessary tax revenue. But with the country sliding into what promises to be a sharp and protracted economic downturn, it is imperative to increase spending over the short run, regardless of how we pay for it.
Even stalwart conservatives concede the point. For example, Martin Feldstein, the Harvard economist who was an adviser to the campaign of Senator John McCain, recently wrote in The Washington Post, “The only way to prevent a deepening recession will be a temporary program of increased government spending.” Mr. Feldstein suggested that government might need to offset a shortfall of some $300 billion in household spending.
In the long run, though, it will be necessary to raise enough tax revenue to balance the budget. One of the most effective ways to do that is by changing what we tax. Most federal revenue now comes from the income tax. Because a family’s annual income equals the amount it spends each year plus the amount it saves, we are effectively taxing savings. And savings rates have fallen precipitously, often dipping into negative territory as families have used home equity loans and credit card debt to spend more than they earned. Because the country needs to save more, taxing savings makes no sense.
The first reform that Barack Obama should consider is replacing the progressive income tax with a progressive tax on consumption. A family would report its income to the Internal Revenue Service as it does now, and also its savings, as it now reports contributions to retirement accounts. Annual consumption would then be calculated as the family’s income minus its savings. Its taxable consumption would be that amount minus a large standard deduction — say, $30,000 for a family of four.
A family that earned $60,000 and saved $10,000, for example, would have taxable consumption of $20,000. Initial tax rates on consumption would be low, and would then rise steadily with consumption, topping out at higher levels than the current top rates on income.
Such a tax could raise more revenue than the current system, yet would be far less burdensome for families at nearly all income levels. Because of the large standard deduction, middle-income families would pay less than they did before, and high-income consumers could limit their tax increases by saving more.
How painful would that be? Some wealthy families now spend millions of dollars on coming-of-age parties for their children. A steeply progressive consumption tax would encourage them to spend less, which would not be much of a sacrifice, since the main effect would be to lower the bar that defines an acceptable coming-of-age party for people in their tax bracket.
Other changes in what we tax could further reduce the revenue shortfall while producing positive side effects. Energy and climate specialists, for example, have long advocated taxes on carbon. The burden of these levies would be lessened by the resulting reductions in pollution and congestion.
Imposing new taxes is never easy. But recent research suggests innovative ways of making it more palatable. Behavioral economists have shown that the pain caused by a loss is far greater than the pleasure caused by a gain of the same magnitude. This asymmetry, called loss aversion, helps explain why it is so hard to pay higher taxes. Doing so means reducing consumption now — a loss that is immediately painful.
To overcome this hurdle, Congress could vote to increase future taxes — a strategy that happily coincides with current fiscal imperatives. Tax increases are never a good idea when the economy is in the doldrums, but the current downturn will not be permanent. Higher taxes could be phased in gradually, after income growth resumes. As long as each year’s tax increase is smaller than the corresponding growth in income, painful reductions in consumption will not be necessary.
Evidence supporting this strategy comes from “Save More Tomorrow,” a payroll savings program designed by the economists Richard H. Thaler and Shlomo Benartzi. Under this program, workers can allocate a portion of future salary increases to retirement savings accounts. Hundreds of corporations report that their employees began saving at sharply higher rates after the introduction of this program.
It would be quixotic to imagine that losses from the current economic meltdown won’t be painful. But the crisis also opens new doors to policymakers — providing them with options that would have seemed unthinkable just a few months ago.
Don’t get me wrong, I love the FairTax, but raising consumption taxes at a time when the consensus is that we must raise consumption is moronic. Now, I’d love for people to consume less - but then our poor economic crisis would continue (and the politicians won’t have that even if it would be good for us.)
I’m starting to think the Flat Tax might be a better path to take. If we hit up that solution and then work on the FairTax.
Neil,
You are missing the point, or one of the points, of the FairTax. By switching from an income based system, with it’s inherent inefficiencies, biases, and barriers to investment, to the FairTax system, which provides immediate liquidity for the individual, reduces business start up and operating costs, and returns substantial capital (~$13T) to the US economic system, you immediately address the fundamental issues underlying the current financial crisis.
Individuals with more to spend spur the economy.
Businesses with lower cost goods increase sales, both domestic and foreign, creating new jobs and higher profits (for hiring, distribution via dividends, and re-investment)
Greater liquidity (from higher deposits and reserves) means more lending at better rates, spuring business and personal consumption.
No matter how you view it, the FairTax is exactly what is needed. By comparison, all other forms of “stimulation” are, at best, a tickle, or, at worst, counter-productive.
As to the Flat Tax, such a step would, IMHO, be a canard that would soon be transformed into what we have now, plus all the manipulations our “Honorable” Congress-men and -women would work into it. A wise man once said you should take guns away from children, and the power to manipulate the tax code away from Congress. But if you have to make a choice, let the kids keep the guns.... They’ll do less damage.
Steve,
That is a very rosy scenario, imho. Maybe you ought to take another look into your crystal ball after considering the following.
(1) Producer costs should fall by 10%-12%, but after adding the 30% exclusive sales tax, retail prices will rise by 15% - 17%, assuming partial or full monetary accomodation.
(2) If the Fairtax exclusive rate for revenue neutrality turns out to be around 40% as predicted by the Rice study, then retail prices could rise by 25% or more.
(3) Most of that consumer liquidity you hope for will be eaten up by the higher prices. Real prices may remain about the same, but purchasing power will change very little. That is not a formula for growth!
As for that mythical $13 trillion in capital you think will come rushing back to our shores, don’t count on it. I have found three studies about offshore holdings, none of which seem to support the Boortz/Linder statement on page 104 of the first paperback which says that “there is $11 trillion in American wealth sitting offshore”. The Tax Justice Network 2005 briefing paper entitled “The Price of Offshore” shows that of the $13 trillion in offshore wealth, very little is owned by Americans, perhaps $700 billion. The 2007 “Wealth Report” produced annually by Merrill Lynch indicates there are 3 million US millionaires with an average net worth of $4 million each. That’s $12 trillion in assets, but the 2000 report stated that less than one third was parked offshore? And I think it’s safe to assume there are a whole lot fewer millionaires today! The Chamber of Commerce had an article in their June 2008 magazine showing that US owned assets overseas were $13.8 trillion, while foreign investments in the US were $16.3 trillion. These assets are generally not liquid and would be unlikely candidates for relocation.
All in all, I don’t buy into the notion of massive capital returning “home” because home isn’t here. I also question why any business overseas would return to the US with our out of sight union wages. In addition, HR25, Sec. 905 seems to add a 23% tax on gross sales by foreign owned companies operating in the US. That’s not an incentive to relocate to the US, is it?
Steve — Some of your points have been discussed/debated on this forum. Without repeating all of the arguments, let’s just say there is not unanominity on all of those points.
However, I think some of us are curious about one of your points. You say that $13 trillion in capital will return. Where do you get that figure? None of us have been able to find a citation to where this number comes from (other than from a certain talk show host and a congressman), so any light you can share would be appreciated.
Hank,
1) The minimum prices should fall is 18%. This doesn’t include compliance savings, but is the federal burden in our GDP. You may think, incorrectly imho, that wages will stay exactly the same causing price inflation, but the cost of producing products will be 18% cheaper (because the fed will be free as a matter of producing).
2) If you believe the inclusive rate is 40%, then you think the fairtax base is 45% of GDP (not including the prebate).
3) I could be wrong, but I believe Steve was talking of capital liquidity. Under our current system, capital is less liquid than under a tax free system. Capital gets locked in based on tax concerns rather than on decisions of its optimal use. This is especially true, since capital has the standard capital gains tax, plus a not-so-hidden inflation tax. You can actually lose value in your capital and have to pay a capital gains tax. I am sure this is an oversight by Congress, but they seem to understand the concept pretty well when it comes to their own salary.
Andrew,
I must admit I haven’t the foggiest notion what you are trying to say? The maximum prices can fall is 10% based on the removal of the business embedded costs of the income tax system. I have explained previously how the 10% is derived–based on the Kotlikoff/BHI study data, but it is basically 4.5% for payroll taxes, 3% for income taxes, and 2.5% for compliance costs, all based on 2007 actual data. If you don’t agree, please explain where I went off the track.
I did not predict a 40% inclusive tax, it was an exclusive rate based on the Rice study results. And, it will go higher if the federal taxation of State and Local consumption is found to be inappropriate–which it surely will!!!
Specifically, you wrote: “the cost of producing products will be 18% cheaper (because the fed will be free as a matter of producing).” That sentence may make sense to you, but not to me. Please elaborate.
Thanks.
Hank,
I’ll start with the 18%. On average, the Federal government takes about 18% of resources from the private sector in order to fund their activities and they borrow approximately 5% more (although as I am sure you know, that number is on its way up).
As you also know, the federal price to produce products under the fairtax will go from 18% to 0%. In other words, if just produced products without ever selling them, the federal government would recieve no revenue. Therefore, the price of producing goods is 0%. However, the price of selling goods is going to be 23%.
Your 10% is based on how you believe two entities will react to the fairtax, employers and the Federal Reserve. Not being as prophetic as you may be (or knowledgable), I tend to look at the situation from many angles, but, imho, they boil down to falling somewhere between two extremes, no monetary inflation and maximum monetary inflation.
As you know, my preferred approach is also to phase in the fairtax in order to minimize monetary inflation. Real prices, however, will not be altered (except for the prebate) and in order to move towards a more natural state (that is, a state uninfluenced by the tax code, although education will be distorted).
Andrew,
What the heck does the fact that, historically, it has taken 18% of GDP to fund the government have to do with calculating business cost reductions from getting rid of the income/payroll tax. How are the two related? What products does the federal government “produce”? I still am clueless about your input.
Help!
Hank, the relationship is that 18% of GDP represents the tax burden placed on the citizens, which currently is in the form of income taxation. The current figure represents all income taxes. Therefore, if you provide the citizens a windfall as a result of the income tax being repealed, it should approx be that % of GDP being collected.
Morphh,
That is only true if the replacement system has no added costs. The belief that the Fairtax is “revenue neutral” may be flawed if by revenue neutral you mean that the new tax generates exactly the same revenue as the old. And, the Fairtax certainly doesn’t do that! The $600 billion prebate is an added cost, the $600 billion inventory tax credit is an added cost in year 1, and and there is an estimated $100 billion cost for the one time inflation protection provided in Title III, Sec. 303, (assuming at least partial monetary accommodation and a 17% -25% retail price increase).
The Fairtax will be extracting roughly $1.3 trillion more revenue than the current law. What does that do to the historical average of 18% of GDP to fund the federal government?
Hank,
One time costs are generally not factored as the base rate for the first year. Such a cost as the inventory tax credit and inflation protection would be spread over a longer period, such as 10 years and should be factored through some offsetting dynamic analysis for economic growth. I’ve continued to say that the prebate would need to be factored and removed from any return based on the rate. However, we’re not talking about an 18% FairTax rate, but 23% or higher, which factors an offset for the prebate.
The 18% represents the cost of the current tax system and thus the windfall if returned to the public. Then the FairTax can be added onto this, prebate and all, but you still have the reduction of this cost by eliminating the current system. While the prebate will increase the 18% to a higher percentage once implemented, this is also removed. It is returned to the public and thus a wash - it is a redistribution mechanism or similar to a refund, not a cost of government function. Just as the current 18% income tax figure does not take into account the tax deductions, tax preferences, loopholes, credits, etc. estimated at $945 billion by the Joint Committee on Taxation.
Hank,
The 18% has everything to do with the business costs. Income (corporate and personal) and payroll (employer and employee) taxes are all part of business costs. I know it is your belief that the costs of the payroll tax are split between employer and employee. Yes. That is how the government makes employers calculate it and wants everyone to view it, but how money moves within a business cannot be legislated. If employers were all of a sudden required to pay all the payroll taxes, the current salaries of employees would rapidly decrease approximately 7.5%.
You can try and separate these costs into consumer and producer, but it won’t change the fact that removing them reduces the real cost by 18% (which the fairtax makes up for on the sales side by taxing a subset of goods/services at 23%).
Andrew,
So, you are saying that Dale Jorgenson’s 1998 embedded tax study is wrong? He found that the embedded costs you have described, i.e. income (corporate and personal) and payroll (employee and employer) taxes averaged 22% across all producers. The range was from 15% to 26% as I recall. What study are you referencing that shows the embedded costs are really only 18%?
I’m still waiting for a reasonable explanation as to what the fact that the cost to fund the federal government has averaged 18% of GDP for many years has to do with the embedded costs of the tax system? According to the Kotlikoff/BHI 2006 study, income, payroll, and estate/gift taxes were only 16.4% of GDP in 2007. Embedded costs impact prices, not some percentage of GDP it seems to me?
Hank,
I am not claiming that Jorgenson’s study is incorrect because I’ve never been able to figure out exactly where his numbers are coming from. The only thing I’ve ever seen that I thought was his study, only referenced the numbers in a table. I couldn’t find how they were generated, but I could be missing something. I, too, am curious how this number is generated since it is known the federal take is about 18%. One of my guesses was that maybe the 22% included compliance, but hopefully in your response, you can point me to the right place to contradict that. I am also sure this is a coincidence, but 18% expressed inclusively is 22%. Once I see the method for calculation, I’m sure that will go away too. Most likely, the base he is using has to be smaller than GDP.
I don’t need a study for the 18%. It is right here, http://www.gpoaccess.gov/usbudget/fy09/pdf/hist.pdf, in the historical tables for the budget of the federal government. Since GDP is a measure of what is produced in our country for a given time period in dollars and the amount of federal receipts is known (more or less), the federal “cost” is a simple mathematical equation. These two costs are directly related. If the federal government take was 9%, the embedded costs should probably be about 11% (again I’m sure it would depend on exactly how the embedded tax is calculated).
I’m not sure why you use a 2006 study to predict 2007 data, but we know the 2007 data. Income was 11.2% of GDP and payroll was 6.4% totaling 17.6%. In the table I saw excise was 0.5 and “other” 0.7%. I am assuming that estate/gift is all or part of other. 2004 was 16.4%. Maybe those are the numbers they were using.
“Embedded costs impact prices, not some percentage of GDP it seems to me?” That percentage of GDP is the embedded tax.
Andrew,
I certainly agree that the average cost to fund the government has historically been 18% of GDP or so. But that percent isn’t worth much at the moment. For instance, the cost to fund the government in 2009 can be estimated at $4.5 trillion which is 30% of the $15 trillion GDP. What is the point of our discussion about the 18%? Are you trying to predict retail prices?
I read your posts as saying that the 18% will be removed from the cost, and will be replaced by a 23% sales tax. That is not correct. Two thirds of those costs will simply be transferred into higher wages/take home pay. And, the proper percentage to figure out prices would be 30%, not 23%. 30% is the sales tax that retailers will add to their costs to arrive at a retail price.
If retail prices is the objective, then I have shown you a simple way to break them out into business income tax cost savings, business payroll tax cost savings and business compliance cost savings, all of which adds to 10% of retail sales. The 10% is based on hard numbers for sales, divided into income tax receipts, payroll tax receipts, and compliance costs. It isn’t rocket science and I’m quite comfortable in using the 10% until and unless someone does a price impact study. There hasn’t been one done yet, but I think it would be a good idea for AFFT to get involved, unless they want to simply support Congressman Linder’s claims that prices will remain unchanged–according to his economic “experts”? Whoever they are???
As for the Jorgenson study back in 1998, a complete copy is in the Research section of this blog. I might add that it would probably be a complete surprise to Jorgenson that AFFT is claiming the the average embedded costs is 22%. He never makes that claim, although if you take the time to add up his cost saving percentages for all the 35 industry segments he studied, sure enough, it averaged 22%. And I can assure you that he did not include compliance costs in his study!
Hank,
More accurately, the 18% is the historical average post WWII. The fairtax doesn’t attempt to fully fund the government. It attempts to replace the current revenue. So the 30% estimate to funding 2009 has no relevance (to the current discussion of replacing revenue).
“I read your posts as saying that the 18% will be removed from the cost, and will be replaced by a 23% sales tax. ” You read correctly and this statement is absolutely correct. “Two thirds of those costs will simply be transferred into higher wages/take home pay.” This is your opinion (which I fervently disagree with), but it is more about nominal costs than real costs. I believe you are making a statement that someone who now sees $100 as their gross pay will demand to $100 post fairtax. Assuming that is true, it won’t have the same value as we have all discussed here many times. I am assuming you don’t believe the real value of wages will be higher proportionally to the value of prices, business profits, etc. If that’s the case, then we are right back to our argument about inflation which I’d be happy to have again, but, again, it doesn’t have anything to do replacing the current 18% cost of funding our federal government with another revenue source. The real values will shift, but on average remain the same. Nominal values may very well rise as a direct result of this revenue source shift.
Maybe we are talking past each other, but I didn’t actually think that I was saying anything controversial by trying to take the cost of the federal government as a percentage of GDP and compare that to the fairtax base as a percentage of that GDP. Again, GDP represents the value of everything we produce in dollars. It seems like the logical place to start.
Andrew,
It may seem logical but it just isn’t correct to assume that 18% is removed and 23% added. The revenue being generated by the Fairtax is only 16% of GDP according to Kotlikoff/BHI. And the percent of GDP being taxed is only 81%. I just don’t see how you can begin to discuss prices with those percentages as a starting point?
As for your “fervent” belief that our current net pay will be our future gross, you are welcome to your opinion, but you are in the minority. Here are two quotes from the supposed experts:
(1)Neal Boortz/John Linder. Fairtax-The Truth Pg. 143. “Here’s what’s likely to happen: Most employers will give their employees a gross check that includes the dollars that used to be withheld for income and payroll taxes. As Alan Greenspan has told us, ‘Wages are sticky things. People who have agreed to work for a given pay will expect to earn that pay”.
(2) Dr Karen Walby. AFFT Director of Research. “To get his lowest prices, Jorgenson makes the assumption that workers will settle for their current, take-home pay in a post income-tax world. While unlikely, the least pay leads to the lowest prices. However, the real world likely sees people taking home their gross pay. More pay derives lower (not lowest) prices from the real world model.”
Seems pretty clear to me that the experts believe that take home pay will increase, but so will prices. The issue then becomes purchasing power. I agree that many people will have higher purchasing power under the Fairtax, but not all. Many retirees pay minimum income tax and no payroll tax. So their purchasing power is determined by the prebate amount compared to the estimated price increases. Current tax law may prove more favorable to many retirees depending on the actual exclusive Fairtax rate.
Hank,
23% of 81 is 18.6%. This seems like a pretty good replacement to me (of course it does not include the prebate). From the link I provided above, federal government receipts were 16.5(2003), 16.4(2004), 17.6(2005), 18.5(2006), and 18.8(2007). I’m not trying to debate Kotlikoff/BHI. I am just using real numbers. Forgetting about the prebate, excise tax, economic growth, and other things that would change how we spend/produce, if the Feds take (I’ll round the numbers a bit) 20% of GDP and the fairtax base were 50% of GDP, the fairtax rate would have to be 40%. If the base were were 80%, the rate would be 25%. If the base were 60, the would be 33.3%. Excepting any error in calculation, these are facts. Mathematical facts that are indisputable. Do we at least agree on this?
You are now quoting Boortz/Linder/Walbey as experts. Does that mean you fully support the other things they say about the fairtax? It makes no difference to me if I’m in the minority when it comes to speculating about economic issues. I just try to see facts clearly and don’t like to rely on polls. Especially on non-economists. But here is my take. This, http://www.stateofworkingamerica.org/tabfig/01/SWA06_Fig1D.jpg , is a graph of family incomes over about a 50 year period. As you can see, incomes rose and fell, but the one thing they never did was “stick” (maybe in the late 60s a little). In fact, you can actually see that falling income was a leading indicator of the recession periods. Many of those recessions also coincide with tightening of the money supply. You can see that wages/income, while maybe not changing for a single person in a single job, do move up and down overall in the economy.
I don’t disagree with you that some employers will just give their employees the gross, but they won’t do it at their own detriment. This is why I believe a five year phase in could ease this pain (and in turn stop a lot of the necessary inflation). But you seem to operate as if it is a foregone conclusion that all employers will just hand over gross pay. There is no way that ALL employers will do this. It is just a matter of degree. Jobs with high turn over ratios will be able to adjust their wages more rapidly than those with lower turnover ratios. You must at least have to admit that predicting the change in wage/benefit structures is an extremely difficult task. The change in tax treatment of employer health/retirement benefits alone will make business rethink how they compensate their employees.
Andrew — I agree with you that mathematical facts are indisputable. From your graph, the median family income in 2005 was around $55,000. (The mean would be higher, around $62,000) per year. There are around 100 million families in the US.
Since you are a numbers guy, please explain how a 23% tax rate on spending would fund the government (or even replace current tax revenue.)
Thanks.
Hayden,
So you are saying the total amount of income in 2005 was $6.2T? GDP was $12.2T. So there is $6T in GDP that can’t be categorized as income? Can you explain what that money is?
Being a numbers guy, your numbers mean that the federal government levied an approximate 34% effective tax rate on our income. Is that accurate?
I have no idea what the current effective tax rate on our nation’s income is. I am trying to figure out how the FairTax could possibly fund the government (including the prebate) at a 23% rate on spending. The answer appears to be that it cannot (as every independent study has concluded.)
However, I am willing to be persuaded otherwise.
Hayden,
Do you know what the $6T dollars in GDP that is not part of your income calculation actually is? I am assuming that you are suggesting that this money is unspendable. If that is the case, you are correct that .23 * $6T < $2T. Can you show that this other $6T is unspendable (or you really only need to show that it is not taxed under the fairtax, but either way will prove your position)?
My point is that it will be possible to tax 100% of GDP, but the fairtax only need tax 80% at 23% rate to remain revenue neutral (all else equal).
Andrew — Without reviewing makeup of GNP, I would assume that part of the additonal components of GNP come from business spending (which would not be taxed under the FairTax) and part comes from government spending.
While government spending would be taxed under the FairTax, it is axiomatic that the government can only get the money its spend by taxing its citizens (or borrowing money which its citizens will need to pay back through higher taxes.) So, ultimately all of that government spending gets paid by the taxpayers.
Which brings me back to my point, which is there are only 100 million or so families in the country. They are going to have to bear the burden of the tax under the FairTax (plus the cost of the prebate). How much will each family need to spend in order for a 23% tax rate to fund the government?
That’s the threshhold question, which nobody on the FairTax side ever wants to address. (The second question would be how much of that spending would flow to non-taxable transactions?) The only reason I’m picking on you is because you made the point to Hank that “mathematical facts are indisputable.”
Hayden,
The makeup of GNP is essential though. How is the extra $6T eventually consumed if not through somebody’s income? The retail prices of goods/services include all business expenses used to produce the good/service. So what business expense exists that is part of GDP, but not part of the end product/service?
I conceded the math that says you 2T is not 23% of $6T. If you can prove that $6T is the correct fairtax base, I’ll also concede that 23% is too low a number (given today’s circumstances). However, just assuming half GDP is some unconsumed business expense and government spending doesn’t really prove anything.
Quick note: Business expenses are exempt from the fairtax because they will eventually be captured at point of retail (or some sort of end use for government).
Andrew — With all due respect, you are ignoring the question.
How much would the average family need to spend on taxable goods and services every year for the FairTax to work?
Hayden, while I understand your thought, how is this not different than income? Does not the question equally flip to “How much would the average family need to earn every year for taxable income to work?” We’re talking about the same amount of government revenue.
Morph — I was wondering when you were going to weigh in here. I thought maybe you were asleep or something.
First, as a small (or not so small matter) we are not taking about the same amount of government revenue. Under the FairTax, the government has to send out the prebate checks, which will average around $5000 per family. That in itself will add around $600 billion to the cost of government which will need to be made up through increased tax revenue.
Second, to your larger point, which (I believe) is that if the FairTax would need to be 50% or 60% or whatever, then we are currently paying a lot more in taxes than we are led to believe. I would agree with you. One of the problems with the current system is that we have such a hodge-podge of different taxes that it is hard to get a grasp on how much we are really paying, directly and indirectly, in taxes. So I’m all for a unified tax scheme, in part so we can figure out how much we actually pay in taxes.
Third, I would hope to get Andrew (and you) to focus on the fact that the FairTax would require us all (but, in particular, upper income and wealthy people) to spend huge amounts every year on TAXABLE goods and services in order for the FairTax to generate enough revenue.
It’s one thing to think about these things in the abstract, that of course the wealthy will spend tons of money if we switch to the FairTax, but it’s another thing to focus on individual expendtiures. Will that heart surgeon really buy that brand new Lamborghini if he knows it’s going to cost him a hundred thousand dollars in taxes? What happens when he (and others liike him) opt to buy a used Mercedes instead?
Hayden,
I don’t believe I’m ignoring the question. I’m just attempting to have you clarify your premise. I’ve already said, “If that is the case, you are correct that .23 * $6T < $2T.” However, I question that we only $6T in spendable income while GDP is $12T. Up to this point, you have provided no good explanation (with supporting data that is) as to how that is the case (and I can’t come up with anything).
“Will that heart surgeon really buy that brand new Lamborghini if he knows it’s going to cost him a hundred thousand dollars in taxes?” Yes. Excepting anti-tax zealots, when comes time to put down one’s resources for goods, the bottom line is what drives people. It doesn’t matter if 99% or 1% is for taxes. Since the fairtax is revenue neutral (ignoring the prebate), before and after prices will be the same. Therefore, the new Lamborghini to used Mercedes price ratio will remain constant (assuming for a period to get over the economic shock of the switch and to move back to equilibrium). If in the interim more used Mercedes are purchased and less Lamborghinis are, they prices of used Mercedes will go up (because of increased demand) and new Lamborghinis will go down (because of decreased demand).
Personally, I am not necessarily for a unified tax scheme. I kind of like taxes directed for their purposes where possible. Like toll roads, fees for services, etc. That’s one of the reasons why the income tax is so wrong. The only proper role of the government in income is making sure that employment contracts are honored. I can at least justify a consumption tax as a tax used for protection of property. Although I realize the fairtax will be used for much more.
But to regress just a little, are you saying that in 2005 there was only $6T in spendable income available, i.e. income that could be a part of the fairtax base?
Andrew - It is obvious that we are never going to agree, so it’s probably useless to continue this dialog, but I’ll try once more to explain my thought process.
1. Most people who have tried to figure out the required tax rate have done so via what I’ll call a “macro” approach. That is, they start with GNP for a given year, make various adjutments to it, and then try to determine what percentage of spending would be required to equal expected tax revenues for that year under our current system. After all the math is done, they come up with x%.
2. As you know, the economists who’ve studied the FairTax over the last decade have come up with a wide range of numbers to equal “x”. This discrepecy is due, in part, to various assumptions the economists running the numbers must make (e.g., what the non-compliance rate would be; what the deficit would be; whether all “taxable” spending could, in fact, be taxed; etc.)
3. Many of these assumptions are buried in the studies. Moreover, the calculations are so convoluted that no lay-person could possilby follow them and meaningfully opine as to the validity of one methodology versus another.
4. I’ve always looked at the FairTax at the mroe micro-level. For example, I spend about 25% of my income on the purchase of goods and services that would be taxable under the FairTax. Thus, at a 23% rate, my effective tax rate under the FairTax would be around 6% of my income, a dramatic discount from what I’m currently paying. Most of this is a result of the fact that the mortgage payments on my home and vacation home would be tax-free under the FairTax, and I would certainly have no incentive to sell my houses and buy brand new taxable houses in order to pay hundreds of thousands of dollars in taxes. Much of my remaining income goes to savings, investments, business expenses, foregin travel and education for my children, all of which would be tax free under the FairTax.
5. I’m an upper income professional, so I currently pay a lot under our existing tax system. Other similarly situated folks such as myself would make out like bandits under the FairTax. Richer folks would make out even better, as consumption as a percentage of income tends to decline as incomes rise. Moreover, the rich have more assets (e.g., luxury homes, ranches, farms, vacation properties) that would never be taxed under the FairTax system and they would have no incentive to ever sell those assets and buy other similar assets that would be subject to the FairTax.
6. Ergo, when it is clear that upper income and wealthy families (who currently pay the bulk of our current tax revenue) see their tax obligations slashed dramatically under the FairTax, it stands to reason that the numbers simply do not add up. That is, the 23% tax rate cannot be “revenue neutral.” If it were, who would make up the difference?
7. Thus, I tried to calculate just how much an average family would need to pay at a 23% rate to fund the government. Here’s the math:
a. There are 115 million families in the country.
b. The 2008 budget was $3.1 trillion (before the current bail-out craziness). Add $600 billion for the cost of the pre-bate, and the total budge would be $3.7 tirllion.
c. In order to fully fund the government, that would require each family in America to pay an average of $32,000 per year in taxes.
d. At a 23% tax rate, that would require each family to spend an average of $140,000 per year on TAXABLE goods and services.
e. The mean family income in this country is only around $66,000. (All of these figures are from the US Census Bureau, by the way.)
8. Now, you could quibble with the calculations on a number of levels. You could say, for example, that I left out government spending, which would be taxed under the FairTax. But governments must get their money from their citizens in order to spend it, so I look at that as a wash. (I.e., if Georgia spends $1 billion on a road, it had to get the money from Georgia taxpayers). Alternatively, you could argue that we could run a defict under the FairTax instead of balancing the budget. Or, you could argue that we’ll get money from illegal immigrants or from retirees or from the wealthy elite (who would inherit their money tax-free under the FairTax). But no matter how you run the numbers, you will find that a 23% tax rate could not POSSIBLY come close to funding the government.
So, in case you still disagree with my analysis, I will repeat the question: How much do you think the average family would need to spend on taxable goods and services in order for the FairTax to work?
Hayden,
First off, let’s stick to the 2005 data since that’s where you begin. I left you with this question “Are you saying that in 2005 there was only $6T in spendable income available, i.e. income that could be a part of the fairtax base?” I ask this question for clarification, not as a trick. I do believe this is what you are trying to say.
Secondly, I also think it is your belief that a new item that cost $1 today will cost $1.30 under the fairtax (as currently written). I also think you believe if the demand for a used good that cost $1 today goes up under the fairtax that the good will still cost $1. I believe both of these assumptions are patently false. Maybe you do as well, but the emphasis you place on used good replacement and new good taxes tells me that we have a fundamental disagreement over how the fairtax will work economically.
Finally, to answer your question (I wish I could get mine answered) of $2T revenue, government was responsible for approximately 30% (18% federal, 12% state/local). Note: Yes the feds and local governments already contribute through income and payroll (it’s irrelevant that they pay themselves). So assuming all other revenue is through “family spending” that leaves $1.4T. That means family spending on fairtax items would have to be $6.1T. Per family (or 115M) is approx. $53K. Each family will receive $5K, but need to pay $15K (2/3 of their burden) for a net of $10K. So final answer is $68K (but that counts an additional $5K being added per family).
I’ve tried to honesty answer your question. Think you can get mine?
Hayden, the prebate should not be seen as additional government income or an increase in government cost. It is not an cost of government operation as it is returned to the public. It is a tax refund of sorts and like current tax refunds, it is not considered revenue for government. It is a redistribution, returned to the public, and thus not a real cost to the public. If I give you $10 and you give me $2 back, what is the cost - $8 or $10? The cost is $8, and likewise the cost of the FairTax is equal to the replacement of the income tax, not the additional $600 billion you suggest, as this is returned to the public.
Morphh,
I’m absolutely amazed at your response. The prebate is not a tax refund and you surely know that? The prebate is a cash grant entitlement that will be additional income for all registered families, to be spent and taxed as desired. Just look in your checkbook each month.
I don’t really care what you choose to call it, but in truth, it isn’t a tax refund. It is an income supplement from your Uncle Sam,
or whatever, but it is not based on taxes paid, just family size and an AFFT jiggered poverty level.
The prebate is definitely an added cost to the federal government and had the effect of raising the Fairtax rate by 5% or so. The Kotlikoff/BHI study even devoted a section to seeing what the rate would be without the prebate. Where on earth are you coming from?
Hank, I’m not talking about the semantics of how you wish to describe it (cash grant, rebate, refund, whatever....). The increase of 5% is given right back to the people, not used to fund government function. To your point, BHI shows the percentage without the rebate - the percentage with the prebate does not add to revenue for government function, doesn’t decrease the debt. It is turned right around and given back to the public as a progressive measure.
Using an example of government function costing $8. I choose to see it as I described - I giving you $10, and you returning $2. Your method seems more complicated. I give you $10, which you describe as the cost of government, then you give me $2 and this is extra income. So government cost $10 and I earn $12, based on the $2 you gave back.
Government still spends $8 on its function outside of the tax.
Morph — The prebate adds to the cost of government. Think of it this way. What if the government decided to give every American family $5000 per year to help pay for health insurance (which is what McCain proposd). That would obvioulsy be an increase in the cost of government. Thus the federal budget (which is the sum of all federal spending) would increase by $5000 x 115 million families, or around $575 billion.
If, instead, the government gives every American family $5000 per year, and calls it a “prebate” and says it is to help pay for taxes, there is no difference to the cost of government. It still raises the budget by $575 billion.
Andrew — While I appreciate your efforts to address my question, we are still talking past one another. I had originally used the 2005 figures because that was the last year shown in the graph you posted in post no. 18 showing median family incomes. Median family income, however, is always less than mean familiy income (since their are fewer high income family). I happen to be familiar with the figures from 2008, which is why I used them in my last analysis.
I am not sure I understand your calculations in your last paragraph in post no. 30. But if I understand you correctly, you are saying that in 2005 every family would have needed to pay $68,000 per year in order to generate enough tax revenue to match the tax revenue that was otherwise generated from our curent system. I guess I can rest my case right there as that figure exceeds both median and mean family income, which means that if everyone in America spent 100% of his or her income on taxable goods and services, the FairTax still would not be revenue neutral.
But there’s an additional flaw in your argument. You are assuming that 30% of tax revenue would have come from taxing government spending. However, if every family already would have spent every dime they have just to pay for the federal government, where would state and local governments get their revenues from? You would need to subtract state and local taxes from spendable family income. (The issue of the federal goverment taxing its own spending under the FairTax is too confusing for me, so I dont’ think taxing federal spending really counts toward tax revenue.)
As to your question about how much of GNP would be taxable (which is what I think you are asking), I’ve tried to say that I don’t know the answer to this, but that people like Gale, Kotlikoff and Zodrow have tried to calculate that figure in their studies (all of which are available for review in the links in the upper right-hand corner of this blog.) So, you should review those studies to see how they calculate taxable spending under the FairTax.
I’ve tried to point out that those “macro” studies (which is apparently the methodology you want to use) ignore the fact that ultimately the tax revenue under the FairTax would come from spending by families, so wouldn’t it be nice to know how much each family would actually need to spend on taxable goods and services in order for the FairTax to work.
Hayden,
We are definitely talking past one another, but for completeness, I’ll at least respond.
Technically speaking, median income is irrelevant. In a set of x income paying entities, it is what the x/2 entity is paying. Mean is more relevant to use with x.
You quoted $66K as being the number. Plus the $5K average prebate that moves the median income to $71K. I said $68K which would be about 96%. You could stop right there, but your proof is incomplete. In fact, it has a gaping hole. That hole being that $6T is an upper limit on the fairtax base when GDP is $12T (2005). I’ve tried to get you to fill that hole, but I can see it’s not coming. You’ve proved that the mathematical case is close (I am sure less than 95% of purchases would be on new goods, but I believe we actually had a negative net savings rate at least at some point during the early part of the decade, i.e. 100% spending is LOW) based on your assumptions, but you haven’t come close to proving your assumptions are anywhere close to reality. So in response to my rebuttal of your argument, Q.E.D.
Hank/Morph,
I think the best income tax analogy would be a refundable tax credit because you get the money whether or not you’ve paid enough tax to cover it. Again, I am against the prebate, but it is the best type of redistribution, direct cash. Other credits make you perform some task the state deems “good” and distorts the market for that task. Other redistribution mechanisms, like Medicare, actually make the government purchase goods/services for you which really screw up the market. While this money is taken out of the private market, it is immediately returned, so I see how Morph considers it not to be a cost.
Here is a question then: If the prebate is $600B cost, then all current refunds/deductions are also costs. Is the $600B prebate LESS expensive than our current refunds/deductions? This should at least give one side some ammunition.
Andrew — I guess this will (or at least should) be the final post on this topic, since we’ve apparently beat this dead horse to death.
The $66,000 mean family income is for 2008, not 2005. In 2008, the federal budget was $3.1 trillion, to which the cost of the prebate would need to be added. Also, in your “proof” you added government spending to the tax base while ignoring that the government must get its funds from its citizens. So, since numbers don’t lie, I’ll stick to my observation that the FairTax is mathematically impossible at anywhere near the 23% tax-inclusive rate.
Hayden,
Since you ignored the fact that you have failed to even prove your assumptions, let these be the final statements. Government spending is already in the tax base whether it be $2T from 05 or $3T from 08. The fairtax is no different.
Andrew, to your question in post #35 - income tax deductions, tax preferences, loopholes, credits, etc. under the current system was estimated at $945 billion by the Joint Committee on Taxation. Using BHI’s estimate of $489 billion for the FairTax rebate (assuming 100 percent participation), the current system would be $456 billion more than the FairTax would spend to cover each person’s tax expenses up to the poverty level. Also consider it was estimated for 2005 that the Internal Revenue Service was sending out $270 billion in refund checks. I don’t see that the FairTax method is really all that different.
Morphh,
You can’t compare the JCT estimated $945 billion in lost revenue due to “tax deductions, tax preferences, loopholes, credits, etc.” with the $489 billion cost of the prebate. The $945 billion has nothing to do with the poverty level. Apples and oranges, imho. (Perhaps that isn’t what you meant?)
Your comment about the IRS refunds of $270 billion leads me to believe that you still think the prebate is similar to a tax refund. Not true. Under current law, if you overpay the IRS, you would be due a refund. However, your total income for the year would not change. Over withholding and getting a refund is a wash. On the other hand, the prebate adds to your annual income. Just look in your checkbook! Every month you will see a deposit from your job, and a deposit from your Uncle Sam. Call it what you will, the prebate is not a tax refund in any way, shape, or form. It is a cash grant entitlement that can be spent (and taxed) or saved as desired.
It seems that AFFT invented the tax refund description for marketing purposes, and as a result, many Fairtax advocates still believe that (1) the prebate isn’t an entitlement; and (2) the prebate has no net cost, it’s simply a tax refund. Both notions are incorrect!
Hank,
Part of that $270B goes to people that paid no taxes at all (unless they are separating out EITC and refundable tax credits). Can you say that all of that $945B is an entitlement? I don’t think so. Can you say that the EITC and portion of refundable tax credits that aren’t offset by taxes owed are entitlements? Maybe. But that means that everybody who spends above the poverty level in a year receives no entitlement. They receive a refund (just like those people that get money back based on utilizing a tax credit). Everybody that spends less than the poverty level will be receiving a tax refund and (for the portion that doesn’t cover taxable purchases) an entitlement.
To call the prebate an entitlement is correct only if you assume the $945B in credit/deduction/etc are also entitlements. It would be more accurate to describe prebate money as a combination of refund/entitlement (exactly like the refundable tax credit of today).
Andrew,
The EITC and Additional Child Care credits are not entitlements, just refundable tax credits. The prebate is a cash grant entitlement, period! It is not a tax refund.
Hank, since it is part of the tax code and not an independent social program, I don’t see how that is the case. It seems the point is you can get back more than you paid, which can be the case in either situation. This is purely a semantics debate, which seems pointless.
Hank,
I am not sure where you are missing the similarity between a refundable tax credits and the prebate, but I’ll point out one more fact. You rightly noted that the fairtax is higher because of the prebate. Do you also agree that our marginal tax rates are higher because of these tax credits? That’s not to say it proves their the same because deductions and non-refundable credits fall the same category, but it is another similarity. I guess I don’t believe your previous post articulates what you believe the defining difference is between a cash grant entitlement and a refundable tax credit.
O.K.
If it will make you happy, I will agree that the EITC is an entitlement. My problem is that I can’t find any online sources that make that case. Google “entitlements” and you will find SS, Medicare, and Medicaid listed as entitlements. No mention of the EITC. Help!
Our marginal tax rates are certainly higher because of the $59 billion distributed by the EITC. However, the $59 billion pales in comparison to the annual deficit of $900 billion (and rising?). The marginal rates probably need to be higher, but not due to the EITC.
And while we are discussing this issue, the Fairtax prebate is a very bad idea! Where is it written that everyone in our country should not have to pay sales taxes on essentials? Adding $600 billion in annual entitlements would be a federal budget disaster. I have consistently advocated a targeted prebate or simply retaining the very popular EITC. Both cost around $59 billion annually, and both would do the same thing for the working poor.
Returning to the prolonged debate between Hayden and Andrew, which I didn’t participate in, here is my attempt to do a “Jadrow/Diamond” review. Not that I have the expertise of either of those Rice economists, but if they could put to rest a ten year running gun battle between Kotlikoff/BHI and Gale, I have some hope of contributing to our little home grown debate.
The question, as raised by Hayden, is: How much would each family have to spend in order to fund the Federal government under the Fairtax.
Hayden used 2008 data and assumed 115 million families and a $3.7 trillion federal budget. He concluded that each family would have to pay $32,000 in sales taxes which means each family would have to have taxable spending of $140,000 assuming a 23% rate.
Noting that the median family income was $66,000, he believes that there is no way that the Fairtax as proposed could possibly work.
Andrew also assumed 115 million families, but using 2005 data, he assumed a $2 trillion federal budget, he reduced that amount by 30% by claiming that the 30% would be paid by the governments at the Federal, State, and Local levels.
In order to raise the $1.4 trillion from the 115 million families, each family would have to pay $12,000 in federal sales taxes which equates to $53, 000 in taxable spending.
Andrew closed his arguments with this statement: “Each family will receive $5K, but need to pay $15K (2/3 of their burden) for a net of $10K. So final answer is $68K (but that counts an additional $5K being added per family)”.
I must confess that this statement makes no sense to me, but somehow he concludes that family spending would need to be $68,000, his final answer.
$68,000 versus $140,000? Can they both be correct? Now, here comes the Jadrow/Diamond treatment. I call it Hank’s version.
Using the Kotlikoff/BHI data for 2007, and assuming 115 million families, I first determined the revenue needed. The BHI report shows $2288 billion, to which I added $489 billion for the prebate for a total of $2777 billion. ( Don’t worry, I added the prebate here, but accounted for it in my final answer). I did not add the budget deficit as the Fairtax does not propose to balance the budget.
The entire $2777 will come from the 115 million families which means that each family would have to pay $24147 in sales taxes on taxable consumption of $105,000. I do not agree with Andrew that 30% of the needed revenue would come from governments. Governments do not pay taxes, only people pay taxes. Any consumption taxes paid by State and Local governments must come from higher State and Local taxes.
I do not agree with Hayden that the median income is $66,000. Google median household income and you will find that it was $50, 233 in 2007. However, another BLS report states that income is only 80% of the amount a family might spend, the other 20% presumably being the expenditure of accumulated wealth and of course, debt. So, 120% of $50,233 is $60,000, and after adding a $5,000 average prebate, my final answer is $65,000. (I know Hayden, I came up with essentially your number, but got there a better way?).
Bottom line is that there is no way that the 23% sales tax works unless you can find $4.6 trillion ($105,000 - $65,000 = $40,000 x 115million = 4.6T) in additional taxable spending from sources other than families. That is a lot of underground activity, isn’t it?
Another possibility is that the rosy projections for the economy come true, the economy booms, and tax revenues soar. But, in my short analysis, I left out transition costs, inventory credit costs, and the one time adjustment for cost of living increases due to price increases. I also ignored the fact that no study to date has supported a 23% rate as feasible. For example, if the inclusive rate is really 28% as the Rice folks concluded, then taxable spending would only have to be $86,000. The gap is closing, but at what price? Can the country stand a 40% exclusive sales tax on top of the 7%-8% state and local tax burden?
Oh wonder of wonders, I finally agree with Andrew!
Of course, the EITC adds to the income tax rates. As do the myriad of exemptions, credits, deductions in the Code. So does the excess of Social Security taxes that are allegedly put into the “trust fund.”
If we could get rid of the EITC, the credits, exemptions, deductions, trust-fund payments and, possibly, the corporate income tax, maybe we could figure out what our tax liability really is.
Hayden,
It’s good to see that we are not always on the opposing sides when it comes to making logical conclusions. Please remember this moment of brotherly love when I respond to Hank.
Hank,
It should be noted that my numerical responses to Hayden are not a declaration by me that individual families need to spend $68K annually for the fairtax rate to be 23%. That is the number I came up with assuming Hayden’s conditions (which I don’t and is probably why most people don’t engage in these sorts of hypotheticals. They might be taken out of context.) But I strongly disagree with Hayden’s assumptions that only $6T dollars (maximum) were available in 2005 for the fairtax base. GDP was $12T. Where is the other $6T? If this calculation isn’t money that goes into somebody’s pocket (so they can spend it), where does it go? To me, the detailed inputs of the GDP calculation are a little complicated. Can you point out some components that don’t end up in someone’s pocket as money to spend?
The Congressional Research Service seems to think the EITC is an entitlement.
The Congressional Budget Office defines an entitlement as:
It seems the EITC and the prebate meet that definition. They are both entitlements, IMO.
Andrew, You have asked this question many times, but I can’t find where Hayden ever stated that taxable GDP was $6 trillion. You were the one to multiply his median income for 100 million families and arrive at $6 trillion.
After a little research, perhaps I can explain the difference between the $6 trillion and the published GDP for 2005 of $12 trillion. First, we had a population of 300 million, 25% of which is under the age of 20, leaving 225 million citizens with incomes of one sort or another. The average income for all Americans over the age of 20 in 2005 was $35,000. Which means that total income was $7.8 trillion. I also learned that spending is 120% of income, accounting for wealth spending and debt spending, so total spending would be $9.3 trillion. Add $2 trillion to that for inventory on the shelf and you can see we are approaching the $12 trillion in GDP. If you are trying to equate GDP to income or spending, this is the best I can offer. Frankly, I think it would be a mistake to assume that income or spending should equal GDP, but I’m no expert.
Well, whatever you want to call it, if giving it a pejorative label gives you a warm fuzzy... ok. I don’t see much difference between it and tax credits that can reduce the tax owed below zero, and result in a net payment to the taxpayer (such as the earned income tax credit and the additional child tax credit). Milton Friedman’s negative income tax would also fall into this category.
It’s not a pejorative - it’s what, by definition, it is. An entitlement.
Hank,
Thanks. That is the idea of what I was after. The $6T comes from posts way back when Hayden produced $62K as the median and 100 million families. For 2005, GDP was approx. $12.2T. So 12.2 - 6.2 “family income” left $6T unaccounted for.
Using your numbers, $9.3T leaves $2.9T. That’s closer. I’d assume inventory isn’t a factor, since by definition, it has previously been produced. I’d also assume that 120% is either unsustainable (because the money they are spending was once income and over the long run all spent = all earned) or that the income numbers don’t include certain wealth accumulation (capital gains). Maybe part of the left over is certain employer benefits like healthcare, 401K, etc. I guess it all depends on what that average “income” includes.
What I am assuming is that in theory, GDP is supposed to represent what we produce in USD for a given time period. So if a company produces a $1M tank, GDP goes up by $1M. If I hire a gardener for $1K in a year, gardening goes up by $1K. If the government hires someone for $50K/year to sit at a desk and watch old episodes of MASH on the internet, GDP goes up by $50K. Of course, the last thing produces nothing (except good times), but it is still a cost to everything else we produce (since they pay the taxes that pay the MASH fan).
Fred,
Its perjorative nature depends on your perspective. I’d wager that Hank uses it that way. I know I do.
Quick, someone take Andrew up on his wager. Here is the Wiki definition of pejorative:”Words and phrases are pejorative if they imply disapproval or contempt.”
I neither disapprove of or have contempt for the prebate. It is simply a fact that the prebate is an entitlement, and calling it an entitlement in no way expresses disapproval or contempt. What I disapprove of is the continuing argument that the prebate somehow isn’t an entitlement. What do I have to do to end this debate? Anyone got a friend in OMB? I will certainly wager that the prebate will be scored as an entitlement by OMB.
Hank,
You disappointment me. When I use the word entitlement, it is a pejorative, unquestionably. I am glad to see you no longer disapprove of the prebate. What brought you on board?
Of course the prebate is an entitlement. It is a cash grant given to everyone solely dependent on family size. It has nothing to do with that family’s weath, income, spending habits or tax.
As in my previous analogy, if the $5000 per year was designated for use for a family’s health in insurance or housing costs, it would clearly be an entitlement (or “welfare,” to certain talk radio hosts). The fact that the proponents of the FairTax say this new entitlement is to be used for taxes does not change its nature. It’s simply a cash grant given to all families.
Just to drive the point home, Hank and I decide to retire to Costa Rica, we’d still get the prebate every year even if we never set foot in the US again and thus never paid a dime in FairTax. Wouldn’t that be considered an entitlement?
Hayden,
Are you also on board with any refundable tax credit being described as an entitlement?
Andrew,
When did I say that I approve of the prebate? What I said was that I didn’t disapprove or have contempt for the prebate. Therefore, my use of the word “entitlement” isn’t pejorative, just stating a clear and irrefutable fact!
But I sure don’t approve of a $600 billion entitlement which is what the Fairtax prebate really is. As you may recall, I would approve of a targeted prebate or simply retention of the EITC. Both cost around $59 billion and do basically the same thing. Where is it written that no citizen should have to pay sales taxes on essentials? Congress will never spend $600 billion on that idiotic proposition.
Andrew — I think we are agreeing more and more. This is getting scary.
Let me be very clear on my definitions:
Anything someone else gets that I don’t get is an unjustifiable entittlement.
Any tax hike that I don’t have to pay is by definition a fair and just tax.
Any tax increase that I do have to pay is counter-productive confiscatory policy.
All kiddin aside, I would probably consdider all tax credits, deductions, exemptions to be entitlements of some form or other. For example, I have a relatively large mortgage for whcih I can claim a tax deduction. Folks who rent an apartment or who have a very small mortgae cannot take the same deduction, and thus they are subsidizing me just as if the government wrote me a check every years. So, I would have to say that I’m receiving an entitlement. If we removed all of these “entitlements,” all of our tax rates could go down.
Hayden,
Not only do I agree with your characterizations of credits, deductions, etc, I agree with your solution, get rid of them all. I am for a phase out, how about you? That would provide for a smoother transition to equilibrium (just like I feel about the fairtax).
Hank,
“What I said was that I didn’t disapprove or have contempt for the prebate.” “But I sure don’t approve of a $600 billion entitlement which is what the Fairtax prebate really is. ” The opposite of approve is disapprove. I guess indifference is a third option. You don’t approve of the prebate nor do you disapprove. I have a hard time believing you are indifferent. What am I missing?
Andrew,
What you seem to be missing is that it doesn’t matter whether I approve or disapprove of the prebate, it is still an entitlement. Period. It doesn’t matter what any of us feel about the prebate, it is still an entitlement! A simple fact about which we have no control!
(How on earth did we ever go down this blind alley?)
Hank,
It actually started because I was willing to wager that you were using the word entitlement as a pejorative. You then defined the word and said you didn’t disapprove of the prebate. Since that shocked me, I decided to take a walk down the alley. We can go back to the street if you want.
It doesn’t matter how much the tax is, it will incourage a black market the likes that hasn’t been seen since PROHIBITION. Look at what we got out of that, the MAFIA. Quite frankly I’m looking forward to dealing the them; at least they will have better prices
Rick,
I believe you are drawing conclusions that do not follow from the facts. The facts are from the IRS’s own statistics that the current income tax system has over 40% non-compliance. The back market conclusion you draw comes from the national sales tax rate of 56% assumed by the last President’s Commission on Tax Reform because they applied the sales tax to only currently taxable items and then added a prebate on top. That’s not very good logic, you are assuming facts that are not real and drawing conclusions that do not necessarily follow.