New FairTax Web Commercials
February 4, 2009 · Filed under: Uncategorized
Here are some new commercials from FairTaxHub.
Lunch&Taxes: Less
Lunch&Taxes: Collected
Lunch&Taxes: Her
Lunch&Taxes: How it Works
Lunch&Taxes: How Much
210 Responses to “New FairTax Web Commercials”
These commercials make my point!
Under the FairTax, people will consume less, which means that tax revenue will decline, which means the rate will need to increase. It’s a vicious cycle.
And, of course, they are totally deceptive. “Your bring home every penny [of your income.]” Sounds great! Except they leave out the fact that your income will be less. Don’t get me started.
Hayden,
A tax on production lowers production. A tax on consumption lowers consumption. However, removing the tax on production makes the price cheaper and consumption goes up. Re-apply the tax and consumption goes back down, but does it go lower than when the tax was on production? I’m sure we can all debate this for hours.
Hear is a theory (some of you may disagree): Since our current tax system puts a heavy cost on labor, businesses have an incentive to produce things that use less labor. I think most agree with that. However, since our progressive income tax structure puts a heavier cost on more expensive labor, businesses have an incentive to produce things that use cheaper labor. Therefore, our progressive income tax brings down the “natural” state of high paying jobs. In other words, under the fairtax, more people will be able to afford lawyers.
hayden….there’s nothing in the bill that dictates what pre- and post- FT income will be.
nothing says that your post-FT paycheck has to be equal to your current net, or your current gross, or anything else.
your paycheck will be whatever you and your employer negotiate it to be….just as it was when you took the job in the first place.
you’ll negotiate for your current gross, your employer will negotiate for your current net, and either way you either have as much to spend or more than you currently have.
if you don’t like the results of that negotiation, you always have the option to negotiate with another company.
“under the fair tax people will consume less.” do you have anything other than your own bias to base that statement on?
if i have more purchasing power (which nearly every study concludes i will, regardless of nominal values) after the FT, what mechanism would cause me to spend less?
If you want to know why people would consume less under the FairTax, just watch the FIRST commercia abovel. The FairTax “explainer” says that in order to pay less taxes you just need to consume less.
For some reason that is totally unfathomable to me, some of you seem to believe that people are not going to consume less (or at least buy fewer TAXABLE goods and services) under the FairTax than they do now. Yet that is precisely the FIRST selling point that the commercials make. (“Hey, you want to lower your taxes under the FairTax, just don’t buy so much.”)
I am merely pointing out one of the many inconsistenceies of the FairTax advocates. On the one hand, they try to sell their plan by saying you can easily save taxes by buying less. When its pointed out that NONE of the FairTax models take into consideration the fact that folks will consume less, they then turn around and say that folks won’t consume less under the FairTax.
I’ve already explained several times how easy it will be to avoid buying taxable goods and services under the FairTax, particularly for wealthy and high-income folks, so I won’t go over this again. I’ve already pointed out the numerous studies showing that the FairTax rate would need to be 50% of higher, so I won’t go over that again.
If you don’t want to believe any of that, that’s your right to believe whatever you want to believe, but it is unfortunate that so many FairTax advocates, from John Linder, to Neal Boortz, and now whoever produced these commercials, will be totally dishonest in how they present it.
Justin,
I agree that HR25 leaves the pay issue up to the employer and employee/unions. Unlike Hayden, I believe the vast majority of workers will keep their gross pay. To do otherwise would break every worker contract in existence and keep “legalman” in business for decades. Everyone works under a contract, be it union or government negotiated contracted or a simple handshake by your employer setting your gross or hourly pay. I’ve never seen an employment contract that is based on some sort of net pay calculation. The withholding amounts belong under contract to the employee, not the employer. Any business that tries to keep the employee’s withheld amount would face legal consequences, imho.
Asking (or telling?) employees that their pay would be cut 25% so that businesses can (maybe) lower their prices is a non starter. I think the burden of pricing rests with the business owners, not the employee. As you pointed out, real prices won’t change much, so I think everyone will want their gross pay and leave price decisions to businesses. Would you really trust businesses to do the right thing?
As for consuming less, I think that is a real possibility. My favorite example is my personal car buying habits. I buy a new car every two years, but under the Fairtax, I might be inclined to purchase an extended warranty and drive the car for ten years in order to avoid the 30% sales tax. If millions of folks did that, what would happen to the consumption base, as well as the car makers/dealers? I guess my bias is based on the favorite saying that if you tax something, you get less of it. Why doesn’t that apply here?
Fairtax and Freedom. It’s like milk and cookies. Can’t wait!!!
Andrew — As to your theory that our current tax system discourages businesses from uisng expensive labor, I would argue the opposite.
The “business” side of Social Security and Medicare taxes are a direct cost of a company to hire U.S. workers, but Social Security taxes phase out at around $100,000 per year. So, from a tax perspective, a company would rather hire one US employee at $200,000 per year, than four US employees at $50,000 per year each. So I would argue that our Social Security tax penalizes companies for using cheaper labor rather than expensive managerial and professional help.
In any case, I would agree with you that our Social Security and Medicare tax system is bad, counter-productive, and unfriendly to both business and working families.
Hayden,
The math in your example is correct, but what you leave out is that to hire someone at $50K, you could only get about $45K worth of work (the government gets the rest) and at $200K you get $160K. That would be $166K (I put back the $6K is SS savings) vs. $180K. The four less expensive workers provide more (using my numbers). This is same place where Hank and I part ways. He’d rather have a $200K job with a 50% income tax than a $150K with 0%.
Hank,
You are right that if you tax something, you get less of it. That’s why production is unnaturally low right now. Remove that tax and you’ll get more production, hence the prices of the products will go down. If you add back in the fairtax, the price goes back up. We just debate if the back up is more than the go down.
Andrew,
I’ve repeatedly showed you my calculations that says it’s down 10, up 30, for a net up 17. What is your position and how do you justify that position?
hayden:
i agree that one can lower their personal tax rate by spending less under the FT. however….there is a bottom to how little someone will spend. people seem to like their lifestyles, and the current personal credit issues indicate that people have no issue spending money they don’t have to maintain those levels of lifestyle.
i am not concerned that, because of the FT, people will suddenly start spending responsibly. nothing in history suggests they will. if i’m wrong….well, a country full of responsible spending can’t really be that bad of thing.
besides…right now i can save taxes by working less….in fact, if i don’t work at all, i can make money off the government……
yet i still see people complaining about a lack of jobs….not a lack of welfare. it seems as tho people want to pay taxes….it must be the patriotic thing to do.
Hank:
i agree, i don’t think people are going to take an across the board ‘paycut’ (even tho it will not impact their spending money), but you cannot honestly suggest that net pay doesn’t come into the equation when one is negotiating their wages. when I got the job I have now, the wage was supposed to be $9/hr. I told them I couldn’t afford to take the job at $9/hr. how did i know that? cuz i knew how much of that $9/hr i would actually get to spend, and i knew that the leftovers would not cover my budget. Since we’ve all lived with withholding for our entire working careers, it’s ingrained into us. we don’t really think about it, it’s just second nature. you say “i’m going to pay you $10/hr” and i hear “I’m going to get about $8/hr in take home pay.”
but, yeah….i’ll agree with you that most employees are too ignorant to understand that “old net=new takehome” is not a pay cut….they still have exactly as much in their pockets to spend before as after.
hopefully, you’ll be willing to agree that those same employees are also too ignorant to understand that getting an across the board increase in wages (old gross=new takehome) will directly result in inflation (regardless of the tax implications on nominal prices) that will devalue the dollars they currently have saved.
if everyone gets a 30% raise…..prices of most goods will go up 30%…the dollar will lose value. four hours of labor still buys a cart of groceries…but the nominal value of that cart and those hours have gone up….the nominal value of the savings account did not.
i understand what the old-gross=new takehome will do to the dollar, and the wise move would be to invest those savings dollars in something that will move with the inflation (gold, property, more-stable currencies).
Andrew — I finally get it. You are a supply-sider. You believe that if you tax producers (or high wage workers) they will produce (or work) less.
Once again, I think that might make sense on the macro/theoretical level, but not in reality. If my marginal tax rate goes from, say, 35% to 40%, I’m certainly not going to like it, but that’s not going to make me work less hard than I currently do. In fact, I might work even harder in order to take home the same pay I took before.
People have al sorts of incentives — financial, professional, status — to be as financially successful as possible regardless of what their tax bracket is. Now, maybe at 70%-90%, it might be a different story, but not at 35%-40%.
On the other hand, just about everyone has an incentive to save money, which is why they would consume less (or less taxable goods and services) if consumption were taxed. The money they save would go right into their pocket.
So, the bottom line is, we have a fundamental disagreement on the whole supply side argument, but that probably explains why we are so far apart on so many issue regarding the FairTax when, in fact, we actually agree on many of the problems with our current tax code.
Justin,
Actually, for a single guy making $10 per hour, with two weeks vacation at no pay, gross income would be $20,000, withholding would be $1260 from income taxes and $1530 for payroll taxes, for a total of $2790 in taxes. Your effective tax rate would be 13.9%, and you would take home $8.60 for every hour worked. But who’s counting? Actually, when state and local taxes are included, plus any other deductions for union dues or whatever, your 20% rough estimate might be about right?
You are quite right that the average worker won’t understand that if he fights for his gross pay, which is guaranteed under contract, that prices will have to go up. That is, they won’t understand unless someone puts the issue on the table. And I haven’t heard word one from AFFT, Linder/Boortz, or any other blog except this one, about this nitty gritty detail. My whole point is that workers shouldn’t have to be responsible for retail prices, business should. Would you rather scrap your employment contract, take a cut in hourly pay of 14%, and hope prices remain about the same, or keep the $10 and let businesses worry about prices? I don’t trust businesses to do the right thing. Workers could wind up getting less gross pay and prices might still go up. There are other competing demands for those payroll cost savings such as increased profit margins, business expansion, debt retirement, increased shareholder payments, and even payroll increases. Competition will drive those decisions over time, but meanwhile, workers get less pay and pay higher prices. Bad idea and I’m sure workers unions will be smart enough to figure it out. Most experts, including the AFFT Director of Research, believe that workers will keep their current gross and prices will rise. And so do I!
A few days ago I put together a list of common claims about the Fairtax that can be found in video’s and writings by Fairtax advocates:
(1) HR25 abolishes the IRS and the IRC.
(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.
(3) A sales tax inclusive rate of 23% would be revenue neutral.
(4) The after tax price of retail purchases will be about the same.
(5) The “prebate†is a tax refund paid in advance.
(6) Your dollars will purchase more under the Fairtax.
(7) You choose when and how much tax to pay.
(8) Everyone will be economically better off under the Fairtax.
(9) Interest bearing investment and debt instruments are not taxed.
(10) There is $10-$15 trillion of US owned assets in offshore accounts.
(11) Buying “used†goods, (tax previously paid), eliminates the tax costs from the sales price.
(12) A national sales tax would have no impact on State and Local governments.
I believe all these claims are false, and would be happy to explain any of them. How many of these claims can be found in the five video’s presented here? (I found four).
There seems to be a growing grass roots effort by blogs such as Zapthe IRS, FairtaxNation, and others that promote false claims such as these. Perhaps not intentionally, it just flows from drinking the Kool-Aide and not doing proper research. I recall the outpouring of distress, when the DNCC produced their political ads against Saxby Chambliss, that the Fairtax would add a 23% sales tax to everything. Actually they were off. The Fairtax would add 30%. but they didn’t go on to say that costs might go down due to eliminating the income/payroll taxes. Was that any worse than making any of the twelve claims listed above?
False, misleading or disingenuous claims will only come back to bite you when/if the Congress takes a look at this tax reform proposal!
Hayden, you said:
“On the other hand, just about everyone has an incentive to save money, which is why they would consume less (or less taxable goods and services) if consumption were taxed. The money they save would go right into their pocket.”
Just about everyone has that incentive now. yet…for some reason people still go into debt to buy things they don’t need.
hell, some people are trying to buy houses they can’t afford or not need just to get a $7500 tax credit (which is actually a loan). it doesn’t make any sort of fiscal sense….but that doesn’t seem to stop some people from doing it.
you are trying to suggest that people will stop buying new cars in order to lower their tax burden. in most states, the excise tax and license fees on a new car is HUGE compared to used cars and most other goods. yet…people continue to buy new cars.
maybe people will stop buying new houses because of the tax? well, property taxes are typically higher on new construction…and renters don’t pay property tax at all. yet, until recently people were buying all the new houses they could get financing for.
considering every major study shows that the FT does not negatively impact purchasing power (even those that are against the FT still concede that the labor=goods ratio will not go down), i’m at as loss as to why you think enough people would suddenly stop buying enough goods to seriously lower the amount of tax revenue generated.
hell, if we can keep inflation in check, purchasing power should go up. why would i buy less than i do now when i have more to spend?
oh, and you statement about people working not working less to keep from paying taxes is blatantly false in several cases. i know of many people who stop working each year so that they do not overrun the EIC limits. they work from january to about september then take a three month vacation. when they do their taxes, they’ve earned just less than the EIC cutoff, and they get a giant (relative to the $0 tax burden they have) ‘refund’. if they can time it right, they pop out a kid in mid september…and quit for maternity leave.
there are thousands of welfare brood-mares that play this game every year. they can’t get the welfare without doing some work in most states, so they work just enough to get the state welfare…and quit just before they disqualify themselves from the federal EIC.
sure, it’s not a manager trying to stay under the 36% cap….but for every manager than looks at his new raise as another hit in the gross….there are several dozen people who are about to quit.
Hayden,
Your analysis of our differences is quite accurate. And yes, it’s going to be hard for us to agree if you don’t believe in macroeconomics. If they raise your marginal tax rate and you don’t produce less, that just proves that you aren’t at the margin. But then you go on to estimate where you would work less. That just proves the point. This may also explain why you (and now I think Hank) don’t see how lowering the input cost of production (through lowering taxes) will actually boost production and make goods cheaper. It’ll boost production because there are some people at the margin who aren’t producing because the risk is too high for them. If they start producing (because the reward increases) those that accepted the previous risk/reward ratio will continue to produce and just accept more profit.
Hank,
I’ve repeatedly stated that I believe the 22% will mostly be removed and the 23% will bring things back to even. I just concede that this is hard to nail down (due to employee/employer relations). That’s why I’m for the phase in. Employers can adjust for the difference in raises over a number of years.
Andrew,
Just tp be clear, you are saying that costs will go down 22% and after tax prices will go up 23%? If that’s what you really mean, then retail prices will fall to 96% of current prices. (1.00 x .78 x 1.23 = .96). Didn’t you really mean that costs would go down by 22% and the sales tax of 30% would mean prices would go up 1.4%, or just about a wash. The misuse of inclusive/exclusive tax rates creates lots of confusion. Remember, the retailer has to add 30% to his costs to arrive at a retail price. Even AFFT agrees with that!
Hank:
making assumptions about things you read on the internet probably accounts for at least half of the issues you have with the FT.
i don’t make $10 per hour, nor do i work a 40 hour week, and i don’t get two unpaid weeks of vacation….
so, using those assumptions to prove me incorrect is about as foolish as one can get.
since i can look at my actual paycheck and verify my numbers, is it logical that you can look at your assumptions and prove me wrong?
as for your list of 12….might i suggest you offer that as its own post to the blog? i think i can knock down a couple of those assumptions as well.
Ok I really need someone to explain to me how the Fair Tax is revenue neutral. I’ve been pondering this one for a while an no matter how I crunch the numbers it seems to me that the Fair Tax would come up way short. Let me explain my logic…..
First off, I know the Fair Tax plan starts with GDP and works its way down to the Fair Tax base and then figures 23% or so would be enough to be revenue neutral. But when you do the math on an individual basis…using that tax rate, it turns out the EVERYONE would be paying less in taxes. Not just a little less buy WAY less. Lets look at someone making $50,000 a year.
Under the current tax system the total taxes paid to the government per employee is the Federal Income Tax + Social Security and Medicare payroll taxes + Employer contributions to those plans. So we have :
50,000 Gross Wages
– 8,950 Standard and Personal Deductions
– 2,500 401k contributions
———
38,500 Taxable Income
Applying the taxes gives us.
6,061 Income tax
+ 3,100 Social Security Tax
+ 725 Medicare Tax
+ 3,881 Employer contributions
————–
$13,767 Total Federal Taxes collected from this employee.
Now the Fair Tax. Just a note, I’m not sure if the Fair Tax taxes health care benefits paid by the employer, but I will do it anyway. If I’m incorrect, the Fair Tax base for this employee would be even lower and the deficit would be larger.
50,000 Gross Wages
+ 3,500 Health Care Benefits
– 2,500 401k savings
– 3,000 Education expenditures
———–
48,192 Fair Tax Base
*.23 = 11,084 Fair Tax
– 2,440 Prebate
———
8,644 Net Fair Tax
Now if you eliminate the employer contribution an additional 3,825 would be available to be spent in the economy, most likely wages would go up by that amount. So you apply the 23% tax to that too and you get $892.
So the total Fair Tax paid to the government is: $9,501 which is $4,266 less than the amount paid under the current system. That’s a 31% reduction in taxes!!!!! That’s a huge amount.
Now you figure the combined corporate tax rate is currently 35% + 15% for dividends or capital gains for a total of 44.75%. Under the Fair Tax it would only be 23%. Thats a 48.7% reduction of that tax as well!!!
And I know I only used an example of someone making 50,000 but its the same no matter what your income is. Some making 15,000 a year pays a ton less as do people making 1,000,000 a year.
So if everyone is paying way less…where does the extra money come from?
It seems to me that we are assuming that the extra money will come from taxing the under ground economy, closing tax loopholes, and taxing foreign travelers to our country.
That can’t possibly make up for all that can it? There would easily need be something like $5 Trillion in untaxed money currently in the economy for that to be possible.
Can someone explain this to me?
Justin,
Whoa up, son. You were the one who raised the $10/hour worker believing that he would get only $8/hour after taxes. I couldn’t care less what your specific situation might be. What I was trying to show was that the 20% is really 14% for my example. Sorry if you were somehow personally offended.
As for the list of twelve, it’s up to Morphh what he wants to do with my post, but it seemed to fit here what with all the factual errors in those five videos. If you feel I’m wrong about all of them being false, blaze away. I’d welcome any input anyone might have.
Hank,
I don’t want to get into semantics, but since you are. I didn’t say go up by 23% because you’re right, the result of removing the embedded taxes will go up by 30%. I referred to them as “the 22%” and “the 23%” to represent the embedded taxes and fairtax rate, respectively. I was being consistent to use the inclusive rates because it I believe it illustrates the point better. I think if you said to a lot of people, we are going to lower a price by 22% and then raise it by 30%, they’ll think “It’s going to cost 8% more”.
Andrew,
As long as you agree that retail merchants will add 30% to their costs in order to set the retail price, I’m happy. Unfortunately, as you know, that 30% rate never appears on the cash register receipt. I guarantee that will cause some arguments at the checkout counter. Talk about confusion, how will retail merchants explain that?
Chris,
You will probably get several explanations, but here is my best shot. You are struggling with the notion that 23% is supposed to be revenue neutral, but everyone seems to get a tax reduction, so where does the tax revenue come from.
(1) $2 trillion of federal, state, and local consumption will be taxed. Therefore, governments are expected to carry over 21% of the load. But governments don’t pay taxes, only people pay taxes. So, you should understand that a good share of the revenue neutral amount is effectively hidden in higher state and local taxes of all kinds. Is that transparent? I don’t think so!
(2) 23% is not revenue neutral. There isn’t one study that supports the 23% contained in HR25. The closest anyone has come is the 23.8% that Kotlikoff/BHI came up with in 2006. But, their study had a significant flaw in that they included federal government consumption in the base, but did not add offsetting revenue. The 23.8% should have been 26.5% as noted in the Diamond study done in 2008. I believe that Larry Kotlikoff agrees with that revision? And the Diamond study made other corrections which resulted in a proposed 28% rate. What might that do to your analysis. (An additional 5% rate would raise over $450 billion in revenue from all of us.)
(3) Let me also suggest that as you do your Fairtax calculations, you should add the prebate to other income and then apply the tax. The prebate is a cash grant entitlement which can be spent (and taxed) or saved as desired.
(4) By the way, net foreign traveler consumption is already included in the Fairtax base.
There may be other reasons, but these are a start. Good luck!
Chris,
There is a link to the BHI study (as well as the Dimond study) if you follow the link on the top right to FairTax related research. I disagree (as does BHI and Kotlikoff) that they excluded federal government consumption in the base – they deny that charge and I think have explained it well enough. The difference in the studies is primarily State and Local taxation and what is defined as “exempt” from the FairTax.
Morphh,
Maybe I missed it, but where did you address the subject of federal government consumption taxation? The complaint isn’t that they excluded federal consumption, it is that they did include federal consumption but did not add any offsetting revenue to balance the consumption taxation. Taxing the federal government has to be a zero sum game, I think. As the Diamond study reported, this oversight meant that the 23.8% should have been 26.5%, and I thought they said that Kotlikoff/BHI agreed?
Comments?
Hank,
The only error I remember the pro-side admitting to was that they assumed full accommodation somewhere and zero elsewhere. Is there someone arguing that federal revenue needs to go up to make up for taxes? Because that is wrong. The federal government already has a tax burden. Today. In our current system. They pay both payroll and income tax. When they purchase goods, the embedded taxes are already in them. Just like you and me, the federal governments paying of taxes will shift from paying them via these measures to paying them as the fairtax (although being the final “point of sale” they will still pay some as almost an income tax).
Chris — Welcome to reality. Some of us discovered a long time ago that there are very many unanswered questions about the FairTax, particularly involivng how they came up with their tax rate in the first place.
Without rehasing the debates that are regularly done here, I suggest you start with the wikipedia article on the FairTax (Morph is an editor there) and the Research tab on the top right of the page on this blog. That will get you started on trying to answer your questions.
The best research paper supporting the 23% rate is the one done by Laurence Kotlikoff and the Beacon Hill Institute in 2006. The best (or, at least, the easiest to follow) done opposing the FairTax was done by William Gale in 2005. There’s also a later one done in 2008 by Zodrow and someone else.
Justin and Andrew– We’ll never agree on the rate of tax avoidance under the FairTax, so there’s no point in debating it. But I will cite you to this link of a debate that the American Enterprise Institute had on the FairTax, featuring Laurence Kotlikoff and, to a much lesser extent, William Gale. Jane Gravelle of the Congressional Research Service participated, mainly to discuss tax avoidance. You can listen to the entire presentation, or look at the her summary here:
http://www.aei.org/docLib/20070302_GravellePresentation.pdf
Essentially, Dr. Gravelle looked for stuides of tax-avoidance and tax-evasion (which she collectively referred to as “non-compliance”) under various sales tax systems. The two most comprehensive studies were done on the State Minnesota (which, I believe, has a sales tax of around 8%) and the UK (which has a VAT of around 20%). For Minnesota, the non-compliance rate was between 10%-15%; for the UK, the non-compliance rate was 14.6%.
Now, two points to consider. Under a best-case scenario, the combined federal/state/local tax-exclusive rate under the Fairtax would be around 37%. (That is, a 30% federal rate plus a 7% state/local rate.) That 37% is, obviously, far higher than either Minnesota’s state sales tax or the UK’s VAT. Second, VATs are considered much easier to collect than the FairTax would be. (If you don’t believe me, read Boortz/Linder’s second book.)
Thus, the non-compliance rate under the FairTax, even under the best-case-scenario in terms of the tax rate, would be much, much higher than for either Minnesota or the UK. How high would non-compliance be? 20% 30% And what would that non-compliance do to the required tax rate? Obviously, it would push the required tax rate even higher.
Now, from the Zodrow study of 2008, the best-case-scenario for the federal FairTax rate (assuming zero non-compliance) is really 40%. And, since state and local government spending is taxed under the FairTax, state and local taxes will need to rise as well, at least to a combined rate of 10%. So, under a best case scenario, the combined federal/state/local tax rate would be 50%.
So how much non-compliance would there be under the FairTax? A lot.
Humm.. Using the fairtax calculator, I would have an extra $700 a month (between the prebate and no tax on my paycheck.) I think I would spend it!
While I could save it, we are a nation of spenders. I would have more money under the fairtax and the price of goods would basically be the same. Why would consumption go down?
Hank, I believe the difference between 23.8% and 26.5% was projected 2007 numbers vs. real data from 2006. They used the exact formula of BHI, just plugging in updated or real figures. As far as the suggestion that they did not add any offsetting revenue to balance the consumption taxation, this has been rejected and refuted by both BHI and Kotlikoff. Let me know if you find the line in the Dimond study that “makes this correction” as I have never seen it. The major difference is 300 billion for state and local education.
Morphh/Andrew,
I base my position on the following quote from page 6 of the Diamond/Zadrow study of May 2008:
“Because HR25 assumes that virtually all federal government services are subject to tax, it effectively increases the revenue required by the amount of the tax – but this increase in required revenue is not taken into account in the calculations of the 23% rate. Both opponents (Gale) and proponents (Kotlikoff) now agree that under a properly constructed revenue neutral national retail sales tax proposal, the tax rate should be independent of whether federal expenditures are taxed or not, as any revenues so gained are fully offset by the increased expenditures needed to achieve real revenue neutrality.”
Later on in the study report, the Kotlikoff rate is revised from 23.8% to 26.5% based on the correction described above.
Seems clear to me, but I could be missing something? It is sometimes difficult to interpret all this economic jargon?
Hank, they are talking about the old AFFT studies (which everyone now admits), not the new ones. Gale, BHI/Kotlikoff, and Diamond/Zadrow did include this. BHI based its model on Gale’s, and Diamond/Zadrow on both Gale and BHI. Your quote is actually referring to the fact that BHI / Kotlikoff now agree (as defined in their 2006 paper). Gale and BHI described this as “the mistake†in earlier studies. Don’t make the error of thinking their methodology was the same as older studies just because their rate was close to 23%. Gale jokes about this in a discussion… they got 23% before the mistake and 23% after… BHI laid out their methodology in their 2006 paper, which does not include the “mistake†you describe. I believe BHI and Kotlikoff both debate this point in a rebuttal to Bartlet’s highly inaccurate Tax Notes article.
I don’t see where it states the change from 23.8% to 26.5% was based on the correction that you describe. It is based on the 2006 figures vs the projected 2007 figures that BHI used in their study. Gale’s rate was also adjusted. I’m pretty sure they say the didn’t change Kotlikoff’s or Gale’s methodology.
A clip from an e-mail between BHI’s David Tuerck and I from 2008. Tuerck states:
Hayden,
I agree that the evasion (illegally not paying taxes) will have to go up, relative to illegal consumption purchases. Right now it is impossible to buy goods without the embedded taxes (except of course for under the table labor), so adding the tax at retail does provide for more opportunity to make purchases without reporting. Avoidance (legally not paying taxes), however, will be negligible. Real prices are going to stay the same on average as long as the federal government charges the same rate for its services. If a new car cost $12K in 2009 dollars without the fairtax, that is what it is going to cost with the fairtax (assuming 2009 dollars). People who make the decision to buy new or old now, will have the exact same monetary incentive. If you don’t change real prices, this ratio will not change. It doesn’t matter if 23% of the cost is via embedded taxes or a retail sales tax.
You might also note that both Minnesota and the UK are taxes on top of taxes. Minnesota is 8% on top of the 22% federal taxes. The fairtax 23% is based on the cost of sale without federal tax charges.
Andrew — Kotlikoff, BHI, Boortz, Linder, AFFT (and even Morph!) have all conceded that prices will have to go up under the FairTax relative to today’s prices. I have no idea why you still claim otherwise, but it’s a free country.
Hayden,
I’d be interested in a citation of any of the above that state real prices (not nominal) will go up under the fairtax. If you need, I can try to explain the difference again.
Morphh,
I’ll have to go reread the Bartlett rebuttal, but I can’t agree with your version of the issue. No one was talking about the 2003 Karen Walby base/rate study, which by the way claimed that the inclusive rate was 19%, 23% exclusive. (When she went off to Boston to assist BHI, they changed her mind it would seem?)
The Rice study uses the 2005 Gale study and the 2006 BHI study. The quote I provided applies to the 2006 BHI study, not some earlier version. Just take a look at page 18 of the BHI study. Back on page 9, 2007 revenue from the individual income tax, corporation tax, social insurance and retirement receipts, and estate/gift taxes totaled $2288 billion. This $2288 was adjusted on page 18 for the EITC and IRS savings, resulting in a revenue neutral goal of $2228 billion. If an appropriate revenue offset had been included as you claim, wouldn’t there be an entry here for around $210 billion? Kotlikoff keeps claiming “it’s in there”, but I don’t see it anywhere. BHI put $916 billion in federal consumption in the base, but nothing in the revenue as far as I can tell. Had they included around $210 billion in the revenue amount, the rate would have been 26+%. Which is what thye Diamond study used to compare to Gale.
I hate to keep at this, but the numbers don’t lie. If someone can show me where the federal revenue offset is, I’ll die happy! Until then, this is an open issue as far as I’m concerned.
Morphh, why don’t you just email Kotlikoff and have him show you specifically where the missing $210 billion is?
Hank,
If the federal government collected $2.2T in revenue that they used for purchases (including labor) in the no accommodation model, that is exactly the same price they’ll need to pay under the fairtax. I seriously think you’re mixing up nominal prices (which we argue here a lot) with real prices. I’ll admit I’m a little confused. I had looked at these calculations months ago (maybe a different study) and thought government consumption in the base was $2.2T. Now you talk of $916B (so about $1.3T is not in the base). I’m curious as to why it is left out.
Hank,
Prior to the BHI study, AFFT stated that research at Stanford University, the Heritage Foundation, the Cato Institute, and Fiscal Associates had calculated revenue-neutral rates between 22.3% and 24%. They stated that Jim Poterba of the Massachusetts Institute of Technology estimated a rate of 23.1% and Laurence Kotlikoff of Boston University found a rate of around 24%. Dale Jorgenson purportedly estimated the revenue-neutral rate to be 22.9%. These are the studies to which they are referring. The tax panel made the same statement, which came out in 2005 before the BHI study. Gale made the statement in his 2005 work in Tax Notes.
So does it make much sense that with all the critics saying that this was missing in early research, using Gale’s 2005 methodology as their model, that the team of economists involved would then fail to include it in their 2006 analysis? They have stated several times that this is not the case and that they did factor it. Gale debated BHI at AEI… this was not brought up as an issue with their study, in fact it was referenced as a mistake in past studies that was corrected in both Gale and BHI’s studies. I don’t think you’ll see it as a line item, but it is included in the math PPft = PP07 (1-T)(1-alpha) which describes the accommodation factors.
Andrew,
Government consumption in the 2006 BHI study for 2007 was around $2 trillion. But the issue here is federal government consumption which was $916 billion. The $1.1 trillion for state and local consumption is in the Fairtax base, and the study suggested that state and local governments could reduce services or raise taxes to offset the federal sales tax on their consumption. It has also been suggested that state/local governments could “tax the tax”, meaning that the sales receipt would show the state/local tax last and would apply to the price including the national sales tax.
Morphh,
I’m a simple guy (and getting simpler with each passing year), so if you think the missing $210 billion is contained in that formula, please tell me what each of the symbols mean? Or, direct me to the source and I’ll figure it out for myself. Needless to say, it isn’t intuitively obvious how accommodation factors can account for the missing $210 billion?
As a practical matter, the rate is simply the revenue needed divided by the base. If I take out federal taxable consumption of $916 B from the base, then I must be able to take out $210 B from the revenue side in order for the rate to remain the same. But I don’t see the $210 B in the BHI study chart where they determine the revenue required? The revenue in that chart is a fixed amount representing the various federal taxes paid in 2007. Where is the $210?
Hank,
They’re using a non-accommodation model. Producer prices under the FairTax (PPft), are given by PPft = PP07 (1-T)(1-alpha) where PP07 are current producer prices (i.e. the prices that producers charge, before sales tax is applied), T is the rate by which the producer price would fall under the FairTax if there is no monetary accommodation, and alpha is the increase in prices that results from accommodating monetary policy. They show that alpha is irrelevant to the determination of the spending-neutral FairTax rate, so let’s keep things simple by setting it to zero.
The important point here is that producer prices (but not consumer prices) would then fall under the FairTax. This is essentially because income taxes would go under this model. Suppose an employee who makes $60,000 pays $10,000 in income and payroll taxes, and thus has take-home pay of $50,000. With the FairTax, the employer would now only have to pay $50,000, and this translates into lower producer prices. The employee still gets $50,000 in take-home pay. But the prices s/he faces will not fall; the FairTax has to be levied on top of the producer price. So for most people, this will not represent much of a change.
Now let’s apply this idea to government spending on goods and services – mainly salaries in fact (teachers, diplomats, etc.). They assume that government spending on these services would essentially not change in dollar terms under the FairTax (except for perhaps some saved tax collection costs). Why? On the one hand, the government can now pay net rather than gross salaries, so its expenses should fall; on the other hand, they assume it “taxes itself” by levying the FairTax on such payments.
Now, when they work through the algebra they begin with a budget balance, and eventually get formula 24 (listed in the 2006 study). The (1+alpha) terms here all cancel, so let’s concentrate on the rest of the equation. The left hand side shows revenue, including t.G07 which is tax revenue on government spending. The right hand side also has G07 (which is government spending on goods and services under current rules; and they argue would purchase the same quantity of real goods and services under the FairTax). One can use this equation to solve for t, the FairTax rate that would ensure that revenues + deficit cover costs, and real spending is maintained. Now suppose government does not tax itself. Remove the t.G07 from the left hand side, and subtract t.G07 from the right hand side. The resulting tax rate is unchanged, and gives the 23.8% figure that they report.
Thus, according to BHI, it is not correct to say that the approach keeps taxable federal spending in the base without increasing the revenue required by the same amount. They keep tax-inclusive federal spending in the base; revenue has to be enough to cover this, and they make sure that it is. Government employees pay income taxes (plus the payroll taxes); without these taxes, government could pay lower gross (but not net) wages, by an amount that they believe would be broadly equivalent to the FairTax.
Hank,
I did technically include the increased state and local taxes in my little calculation up there.
50,000 Gross Wages
+ 3,500 Health Care Benefits
- 2,500 401k savings
- 3,000 Education expenditures
———–
48,192 Fair Tax Base
The 48,192 Base includes your personal consumption as well as taxes paid to the state and local governments, all of which would be taxed. So in my example this tax payer would pay 31% less despite paying the fairtax on state and local taxes.
And as for the prebate….I subtracted the 2440 off at the end because that is the total *net* that you would get back from the government (assumig a poverty level of 10,600 for an individual). The real prebate would be 3180, which you would pay taxes on leaving you with 2440. I could’ve included 3180 into the base, but i just chose to do it the other way. At least that is my interpretation.
Either way it comes out to be way less money.
Now the Fair Tax website says the Fair Tax base is $11.467 trillion while the current income tax base is $9.706 trillion. Which is only 18.1% more. In most calculations I make people would pay like 30% less.
I would love to see a Fair Tax but I’m worried 23% wouldn’t be enough.
Chris, According to Dr. Kotlikoff, the FairTax gets a significant portion of revenue from wealth, not working income. It shifts some of the burden from the working class to wealthy seniors. This is also why Hayden’s quest of average income FairTax estimates will always come up short.
Morphh,
OK, I’ve read the 6 Tuerck rebuttal to the Bartlett criticisms. I think I now understand that the Fairtax rate is independent of both prices and whether or not we choose to tax the federal government consumption. Given those facts, here is a little quiz. It doesn’t require a PHD in math or economics, just a hand held calculator.
Let’s start with the rate calculation done by BHI/Kotlikoff in 2006. the revenue neutral amount needed was $2228B, the amount collected from the taxes the Fairtax would replace. The consumption base was $9355 B, and the rate was therefore 23.82%. 2228/9355 = 23.82%
Now, if everyone agrees that it doesn’t matter if we tax the federal government or not, let’s remove the $916B in federal consumption from the base. That gives us 2228/8439 = 26.4%. Ooops! The rate changed. Something is wrong? In order to keep the rate at 23.82%, I would need to also remove $218 from the revenue side of the equation, but I can’t because that wouldn’t allow me to replace the $2228 in current taxes. What to do?
How about if I add $218B to the revenue side resulting in revenue needed of $2446B divided by the $9355B base means the rate would be 26.1%. Now I can remove federal consumption and revenue from the equation and the rate will remain the same.
If you agree that it doesn’t matter whether or not federal consumption is taxed, the rate will remain the same, then what is wrong with my arithmatic?
Morph — Kotlikoff says that wealth will “eventually” be spent, either by the current owners of that wealth, or their heirs, or their children’s heirs, etc. , and thus, under the FairTax system that wealth will eventually be taxed.
Now, let’s pretend I marry Paris Hilton, and she stands to inherit $1 billion.
Under our current system, she’d need to pay 45% of that in estate tax, or $450 million.
Under the FairTax, she’d get the entire $1 billion tax-free, and if she (or we) spent the entire billion dollars on taxable goods and services in the United States, we’d pay $230 million in taxes.
Let’s see, which would I prefer . . . . ?
Hank,
If the federal government no longer pays taxes then $2228B becomes $1738B (2228 *.78). Why? Because $1738B is the amount of revenue the government needs to collect to provide the same $2228B worth of “services” it provided before the fairtax.
Hayden, to be honest, I’ve never really been opposed to a transfer tax for the super wealthy. An incentive for them to consume during their lifetime and limit dynasties.
Hank, just what Andrew stated. The math for what revenue is required (revenue neutrality) changes as the cost of government decreases. You have to adjust for purchasing power changes – real revenue neutrality, not nominal revenue neutrality.
Andrew,
The $2228 isn’t negotiable! That is the revenue neutral amount the Fairtax claims to be collecting at 23.82%. It has nothing to do with prices, imho. However, you raise a good point that I don’t remember we have discussed before? (maybe bad memory?).
I will agree that the $916 billion the federal government spends today can be reduced by 10% (not 22%) and provide the same services it does today if the federal government does not pay taxes. They would be in the same category as businesses, and BTB transactions aren’t taxed. So, maybe the federal government might then have an additional $91B to offset other expenses? No big deal!
This raises another issue in that GDP is going to decline by the same 10% across the board, unless the government starts including taxes in their GDP calculations. As I understand it from Larry Kotlikoff, taxes are not included in GDP today?
I might add that under your scenario regarding prices, the GDP would decline 22%, a pretty massive change with lots of unintended consequences. Any thoughts on that issue?
Hank,
You asked about a hypothetical in which the federal government doesn’t pay the fairtax. Reducing the $2228B has nothing to do with negotiations, it is what would actually happen if your hypothetical became reality. The revenue neutrality is based on real value. If it weren’t, the fairtax people could calculate the rate using the full accommodation model and lower it to about 18% inclusive (based on about 30% inflation). That’s because $12T GDP would become about $15.6T. Assume the same 80% GDP fairtax base and you need about an 18% inclusive rate to get $2228B. Do you believe this is what they are after when they proclaim revenue neutrality?
Andrew,
What I know is that Larry Kotlikoff assured me that taxes are not included in GDP. Your belief that GDP would rise by 30% under full accommodation is just a bit speculative, imho. What is the basis for your comments about GDP? And, since you seem to believe in the “no accommodation model”, it seems to me that you also will have to believe that GDP will fall 22% unless taxes are included?
Morph — I’m glad to know you believe in the estate tax. I always knew you were a good liberal at heart!
Hank,
As far as taxes and GDP, when our government buys a product or service, I do believe that it is counted towards what we produce. I seem to remember you previously stating this and I had a reason Kotlikoff’s statement could be correct as well as mine, but I can’t recall it.
There is absolutely nothing speculative in what I said. If the value of the dollar is inflated by 30%, GDP will reflect that, it’s a fact. Check out some comparisons of GDP. Often times they say something like 2000 dollars. The reason for this is that GDP expressed in current year dollars is not directly comparable to other years because those numbers include inflation.
I find it funny that some of you (I won’t name names) are making a big deal over what the actual interest rate will be for the FairTax. It’s funny because of the alternative: the income tax. Think about what is calculated when congress decides to exempt $XXX amount of income for Y. For example, what if they decided that everyone should have a dog and would give a $100/year tax credit for dog owners. But if you have a family, with 2 or more children, you get a $125 credit. Married filing jointly you get a $115 credit. Do you think the estimates of lost tax revenue made by Congress’ tax experts are within 10% of actuality? I have my doubts….
My point is that the FairTax rate will likely be changed many times during the transition phase from the income tax in order to determine to a good balance of revenue generation and demand. You can argue till your blue in the face about the necessary rate required to be revenue neutral, but take in all the factors of the FairTax and compare them to the current income tax system. If you still think that the income tax is a better, more efficient, more fair way to collect revenue, then so be it. But you’re wrong.
you’ve missed the point of the detractors, steve.
most of them will agree that the FT is better than the current system.
they believe that the FT is not perfect, however.
that lack of perfection, then, tells them they ought not support it until it has been perfected.
others feel that any sort of taxation that funds spending above a certain level should not be supported, since it’s not the government’s job to spend money on certain budget items.
so, half the anti-FT people are against it because they think it won’t collect enough money, and the other half the anti-FT people are against it because they think it collects too much money.
it’s sorta like Limbaugh saying he doesn’t support the FT because it’s not popular enough (“it’s a good idea, but it won’t ever get enough support to pass”). well, as long as people hear him actively not support it…its popularity *will* suffer…this isn’t rocket science.
I see….
But no tax system is going to be ‘perfect’. Or perhaps the current one is ‘perfect’. It just depends on who you ask. And the idea that people are debating the tax based on the amount of revenue it collects, and furthermore into the amount of revenue it needs to collect to support whatever size of government they deem appropriate, doesn’t make sense. Government spending and funding are almost two completely different dilemmas. I mean, look at our current situation. Or the ‘Bush Years’ for that matter. We didn’t exactly collect the amount of revenue we spent.
Personally, my favorite aspect of the FairTax is the limit it places on government power. I’m sure that, over time, that benefit would go away. But, it seems to me that the FairTax is the sweeping measure we need to take government out of our lives for the betterment of all. The current system is broken and needs a complete overhaul rather than more ‘advancements’.
Justin — I believe you might have misunderstood the arguments of those who oppose the FairTax. Most of us who do not support the FairTax do not think it would be an improvement over the current system. If we thought it was, we would support it. Based on my discussions with the various economists, politicians, advocacy groups, and ordinary folks who oppose the FairTax, their arguments generally fall into the following categories:
1. The tax rate would need to be much too high.
2. It would be too easy to avoid.
3. It would shift the tax burden onto the middle class.
4. It would destroy whole sectors of the economy.
You might not agree with those arguments, but it’s not correct to say we oppose the FairTax because it’s not quite “perfect.”
I understand that Hugh Hewitt (who I’m no fan of) is writing a book on the FairTax along with an accountant friend of his. He is calling the book something like “Fraud” or “The Fraud Tax,” so you know where he’s coming from. So far, his arguments on the air against the FairTax have been less than persuasive, but it will be interesting to see what he puts in the book.
You could also read “100 Million Unnecessary Returns” by Michael Graetz of Yale Law School if you were really interested in understanding some of the arguments against the FairTax.
I have not seen enough mention about the efficiency gains with the Fair Tax. The current system is complex and impossible to enforce to 100% of owed taxes. 1) We miss ~15% or $300B of owed taxes, 2) the gov’t spends over $250B to run the IRS, and 3) companies spend hundreds of billions in compliance costs to run their businesses.
1) With the Fair Tax, compliance will be very high. Consider that 85% current compliance is for nearly 160 million tax payers (140M individual and 20M businesses). With the Fair Tax, the number of tax payers is only 20M businesses. Not only that, enforcing 125 pages of Fair Tax code is much simpler than enforcing >65,000 pages of current tax code. Also, to replace the current 85% tax compliance, the Fair Tax would only need to collect taxes from the top 100,000 companies (in sales revenue). It would be very difficult for Walmart and other large retailers to cheat on their taxes since the same revenue and expense figures they report to their stock holders would be the very information that is used to compute their tax owed.
2) The gov’t would not need to spend hundreds of billions to collect 2 trillion in tax revenue. The tax code is simple and easily computed.
3) Companies could make simple decisions about what is best for their business without worrying about depreciation expense or any other tax impacts.
All of these efficiency gains easily add up to greater than $500B in overhead that would simply disappear! Also, we would have many new tax payers with the Fair Tax that have not been contributing up to now. As has been stated countless times, the income from illegal activity and illegal immigrants would now be taxed when used to purchase new goods. In addition, foreign visitors would contribute taxes when they buy things in our country. This results in an overall lower tax burden on most honest citizens.
As for the jobs that would be destroyed… If a job does not contribute to real economic output, we should look for enhancements that do away with those jobs. We see this in businesses today. For example, in the past most companies had mail and secretarial overhead. However, in the digital age many of those jobs are gone. We need to be gone with the IRS, tax lawyers, lobbyists, and all others that do not contribute to true output.
Al G,
While I agree that income tax collection is generally inefficient due to compliance costs, one of your numbers is incorrect. The IRS budget is roughly $10 billion annually, not $250 billion as you wrote.
I don’t agree that you can compare the 135 pages of HR25 to the supposed 67,000 pages of the IRC. Apples and oranges. You should know that the original 1913 income tax legislation was only 38 pages. And, according to the Tax foundation, the entire income tax code plus the implementating regulations will fit on 15,000 pages. If you want to save trees, double side it and it only takes 7500 pages. I believe the rest of the stuff, if indeed there are 67,000 pages, are tax rulings by the various courts. And those rulings have very little value to the average family trying to file a return!
As for expanding the base, I’ll let Hayden address the illegals, etc., but I will point out that net foreign (tourists) consumption has already been factored into the Fairtax base/rate studies.
Finally, I wouldn’t just assume that everyone will have a lower tax burden under the Fairtax. For workers, getting their full gross pay plus the prebate will certainly offset any price increases. But for retirees, the only income increase would come from savings from their income tax plus the prebate. That may not offset the sales taxes paid in many cases. As the resident “gray hair” on this blog, too often the Fairtax impact on seniors is ignored. There are 37 million AARP members and we tend to vote early and often!
Hank,
Thanks for correcting my numbers regarding the IRS budget. In any case, the current system is very inefficient, not just for the gov’t enforcement, but also for the overhead it places on business just to collect taxes needed to support essential services. I stand by my statement that we need to eliminate inefficiencies where we can in order to save money for us all. Since businesses do not pay taxes, but only collect them, we need to make this as efficient as possible.
The way to fix our system is to reward what we desire, which is work. The current tax system penalizes work with payroll and income taxes. There needs to be incentive for the lower rung to go out and work rather than simply draw welfare. Also, by not penalizing investment, there will be capital for new business, which will result in more jobs, higher wages, and a healthier economy, which will better support social security. And, if you happen to have a pension from a company, a better economy will help ensure that business stays solvent and can continue to pay retirement benefits.
As for the effect on retirees, I will not say that I know the Fair Tax would have no impact. However, as you admit, retirees would receive the prebate like everyone else. Therefore, you would not be taxed on the basic necessities. Furthermore, Social Security and Medicare are not nearly covered in future years with our current system. The only way to fund these entitlements is to fix how they are funded. The Fair Tax is the best proposal I have seen, given the assumption that we want government to do this rather than leaving everyone to provide for themselves.
I do not believe that prices would rise substantially under the Fair Tax. Any net increase should be minor. But, I admit that prices could go up some amount. I understand your worry about this increase as a retiree. However, you would no longer pay income taxes on retirement benefits and investments. Also, whatever wealth you are not able to consume before you leave this Earth you would be able to pass to your heirs without Uncle Sam taking his cut.
In the end, you may be right that seniors would not benefit as greatly as others. However, is this a good reason not to support the Fair Tax? Would you rather have a slightly lower seat in a big boat, or a higher seat in a sinking boat? The country is headed in the wrong direction. One very good thing about the Fair Tax is helping to expose the cost of government to the masses. I would hope that Congress would be less willing to waste money with greater scrunity from the people. They would not be able to play favorites in the tax code, because there are no deductions (that is spending) with the Fair Tax. All spending would be above board, and we can hold them accountable.
Thanks for sensitizing me to the concerns of senior citizens.
Hayden @ 53…
I’ll not attempt to argue the FairTax rate with you, so I’ll pass on the first point of your list. The second point is one that I have heard raised numerous times, but this one simply doesn’t make any sense to me. The argument that evasion will “too easy” seems totally absurd to me.
The VAST majority of retail business in this country is conducted by “big box” stores such as WalMart, Best Buy, etc. As someone pointed out, these organizations are going to be reporting revenue in their stockholder reports, and the penalties for cheating here would greatly outweigh the return. I would think that compliance amongst these major retailers would be incredibly high, as in 98%+. I completely agree that your mom & pop stores will be able to avoid collection and payment, or collect and keep the tax as extra profit, but this is no different than tax evasion today. I think the net effect is that avoidance/evasion will be MUCH less than under the current system.
You third point is that it would shift the tax burden onto the middle class. I don’t think this would be much of a shift actually. I always that the opposition argument was that the elderly were the ones who got the raw deal here? Or is it now both the elderly AND the middle class?
You may have a point on number 4. I agree that H&R Block would take a beating, and similar accounting companies that generate a large chunk of business on tax returns. Ooh, and let’s not forget all of the tax attorneys who will now have to focus on a new area of law and maybe do some actual good, or we will have just flooded the courts with a who new army of ambulance chasers. Yes, this change will create some shifting in some market segments, but you know the whole making a cake without breaking a few eggs. I think you exaggerate the scope here by saying “whole sectors of the economy”.
I’m not going to throw out the ridiculous statement that “anything” would be an improvement over what we have now, but that’s not too far off the mark. The FairTax is obviously not perfect, but I absolutely feel that it is a VAST improvement over the current system.
Hi Scott — Thanks for your comments. Let me try to respond to your argument about tax-avoidance to try to show why there will be a much larger non-compliance problem than the more vocal FairTax proponents will admit.
As you know, we currently have a tax-avoidance (and evasion) proplem under our current income tax system. In total, there is about a 15% non-compliance rate. But when you break that down, you find some amazing statistics. For the vast majority of returns, there is 100% compliance (or, 99% or so.) That’s because most returns rely on “dual reporting.” That is, your employer reports your income to the government, and you report your income on your tax return. If it doesn’t match, you get a letter for the IRS.
There’s also dual reporting on bank interest, brokerage accounts, 1099′s, etc. So, for the vast majority of returns, there is dual reporting and very high compliance.
The problem comes where there is not dual-reporting, such as self employed individuals, privately-held companies and funds held in entities that do not report to the goverment. There is an estimated 50% non-compliance among these entities.
So, fast-forward to the FairTax. There will be no dual-reporting under the FairTax. That is, when you buy something at Wal-Mart or a Mom-and-Pop, you don’t report the transaction to any government agency. So though the Wal-Marts won’t necessarily cheat, the non-Wal-Marts will have a strong incentive to under-report their sales. (As you indicate.)
But, what about they guy who buys from Wal-Mart? I could buy a big-screen TV from Wal-Mart and say it’s for my business (and thus tax-free). There’s no way Wal-Mart is going to know whether it’s for my business or not. So, I can still avoid paying the FairTax by purchasing from Wal-Mart without Wal-Mart doing anything wrong.
What about restaurant meals? A new car? Gasoline, maintenance and auto-insurance. As long as I can allege the meals and the car are related to my business, how is the government going to be able to prove otherwise?
Finally, the Wal-Marts and big retailers might sell 80% of goods purchased, but the FairTax also applies to services. Many, if not most, services are purchased from smaller, independent contractors rather than the giant retailers.
Those are reasons that studies have shown that the non-compliance rates in states and countries with high sales taxes are quite high. (England, with a VAT of around 20%, has a non-compliance rate of 15%.) Under the FairTax, even if the tax-rate were only 23%, you would still need to add state sales taxes to the over-all rate, which would push it over 30%. (In reality, as we’ve discussed endlessly on this board, it would probably need to be much, much higher than that.) If England has a 15% non-compliance rate at a 20% tax rate, wouldn’t you expect us to have at least the same rate of non-compliance at a 30% rate. (And, of course, this non-compliance would push the required rate up even higher.)
Now, those are just some of the ways someone could illegally evade paying the FairTax. But, as I’ve argued endlessly, there are a million ways to avoid the FairTax without doing anything illegal. Just buy a used car instead of a new car. Take a ski vacation in Canada rather than Colorado. Retire to Mexico rather than Arizona. Buy a yacht in the Bahamas rather than Flordia. All of that would be perfectly legal under the FairTax, yet would all be free of the burden of paying the FairTax.
Al,
Glad to be of service. Let’s discuss some more things that I believe you may need to think about.
(1) I don’t want to appear to be supportive of the income tax-I absolutely think that replacing the income tax with a national sales tax would be good for the economy. But, there is already in place some tax incentives that encourage work rather than welfare. The refundable EITC and Child Care credits are very popular programs and cost around $59 billion annually. For any national sales tax plan, I would prefer a targeted prebate or just retain the EITC instead of the Fairtax $600 billion plan to pay the sales tax on everyone’s spending up to the AFFT revised poverty level. Where is it written that no one should pay tax on their consumption of necessities?
(2) The future of Social Security is not as bleak as you suggest. In the early 1980′s, a group including Alan Greenspan revised the SS plan and made it solvent for another 50 years. And, I suspect that in the next ten years or so, the plan will be revised again. Unless you want to believe that the federal government will go bankrupt, then there is no difference between paying benefits from the general fund in either case. The Fairtax does nothing to improve the viability of the SS plan, just uses general fund dollars sooner than would otherwise be necessary.
(3) I don’t know what price increase you might think is insignificant, but many members of this blog (not all) agree that workers will receive their full gross pay, tax cost savings for businesses will range from 10%-12% on average, and retail prices will rise by 15%-20%. Higher if the Fairtax rate turns out to be higher than 23% as suggested by recent studies. Of course, these price increases will be offset by the increase in income from the prebate and getting gross pay. So, “real” prices won’t change very much. However, retirees may not benefit as much because many currently pay no income tax or payroll tax, so the prebate would have to offset the national sales tax for seniors to “break even”.
Here is an example to help understand the impact on retirees. Assume a married couple, both over 65 and drawing $2400/month in SS payments, no mortgage and no car loans. They also supplement their pensions with income from a $200,000 nest egg saved over the last 45 years drawing 5% annually. So, their total annual income would be $41,200, and they pay absolutely no income tax (or payroll tax) on that amount! Their purchasing power is $41,200.
Now, implement the Fairtax, and their income goes to $45,984 due to the prebate. If they spend it all (including the “prebate”) on new goods and services, (an extreme case), then they would pay $10,576 in sales taxes. Their purchasing power drops to $35,408, some $5800 less than under current law. So, under which plan are they better off financially?
(4) To make matters worse, under the Fairtax, the interest on that $200,000 nest egg will also be taxed. This is covered under Section 801-806 of HR25. Basically, if the long term Treasury rate is 6%, and the rate being paid on the $200,000 investment is 5%, then the implicit tax would be $200,000 x .01 x .23% = $460/year. Sort of adds insult to injury?
(5) As for estate taxes, current law exempts $600,000 or so from estate taxation. And, gift taxes can also be used to reduce the estate value. Most folks won’t have to worry about estate taxes—except maybe Hayden?
Hayden,
When it comes to business purchases, there will be an audit trail under the Fair Tax. If you buy a big-screen TV from Wal-Mart for your business, you either will have to produce your registration certificate to Wal-Mart or pay the tax to Wal-Mart and take a credit on your return to the state taxing authority. Either way the intermediate business credit taken on the sale is documented.
~Jim
Yet another argument that I don’t think can be easily won by either side. I will agree that you have a point about single reporting, and my walking into WalMart to buy a flat panel TV and not paying the tax. However, under today’s system of sales tax individuals that have a business must provide a tax ID number (at least in Texas) to get the items tax free. This means that there is a record of all tax free purchases. Granted this is once again only one way reporting, but I know that I would think twice about scamming something under this system knowing that I’m in essence giving the government a paper trail with which to track me down.
Additionally, I believe that the FairTax legislation defines what a business is. I think it is basically that you must show a profit for like 3 of 4 years. This means that I’m not going to go out and file for a tax ID number just to get around paying the tax. The vast majority of individuals are a) not going to be wise enough to figure this out, and b) if they do figure it out are not going to want to go thru the hassle involved to scam the system. This is especially true the smaller the gap between price increases and take home pay increases.
You may have a point on the services side, but I really don’t think so. Thinking of the services that I regularly use, most of them are provided by large companies. For instance, my utilities such as electric, phone, satellite TV, etc. Smaller service say for your home like pest control, the A/C repair man, etc. could simply be tracked based on the status of the address to which the service is being provided. I doubt that the local exterminator is going to want the enforcement office going thru his records because he decided to skim the tax from half of his residential customers.
Will there be evasion and avoidance? Absolutely. Some people will always try to game the system. My contention however is that it will at worst be no more than under our current system and I think more realistically the collection rate will be much better. Add to this the portion, and yes I say only a portion here, of the underground economy that does get captured and I think this more than makes up for any avoidance/evasion shortfall.
Scott — I agree that this argument cannot easily be won by either side. It’s really a matter of opinion. But you seem like a pleasant enough guy so I’ll continue this discussion a little longer.
You are correct that you will need to show a business license or similar certificate under the FairTax to get the rebate or credit. (As I understand it, if you are buying something for your business, you would pay the tax at purchase, and then either apply for a rebate or take a credit on the tax you subsequently remit off your own sales.) And there are standards for what constitutes a business based on profitability.
But this opens up another whole host of worms. What about start-up companies that don’t show a profit for years? Surely they don’t need to pay taxes on their purchases? And, if businesses need to show a profit in order to be exempt from the FairTax, doesn’t that fly in the face of the whole “you won’t need to keep records” anymore argument that the FairTaxers like to make?
Anyway, I agree that you could do the same thing under our current system (i.e., deduct a purchase as a business expense even if it was for personal use), so I certainly do not believe there will be more illegal tax evasion under the FairTax, though I do believe there will be a lot more legal non-compliance for the reasons I mentioned.
As to the undergournd economy, we’ve debated that endlessly on this blog, but here’s the deal. Under our current system, when a drug dealer sells his drugs, he’s supposed to pay income taxes on his sale. We know he won’t. That’s the “underground” part of the transatio. Later, he goes out and buys a new Cadilac. That’s the “above ground” transaction. Under the above ground transaction, the car dealer will pay income taxes on the sale, the salesman will pay income taxes on his commission, the manufacturer will pay income taxes on the sale,, payroll taxes will get paid, etc., etc. That what the so-called “embedded taxes” are, and they supposedly add up to 22% of the purchase price of the Cadillac.
Under the FairTax, the drug dealer is supposed to collet the FairTax when he sells his drugs, and remit the tax to the government. He obviously won’t do that, so that transaction will stay underground. When he buys the Cadillac, however, the car dealer will collect and remit 23% of the sale price to the government as the FairTax. That’s the above ground part of the transaction.
So, what’s the economic difference between the two systems? The underground transaction doesn’t get taxed under either scenario. The above ground transaction produces 22% of tax revenue under our current system, and 23% revenue under the FairTax (assuming the rate was really 23%). So, there’s no material difference. And, of course, under the FairTax the drug dealer would get the prebate, so the net result might be even less tax revenue generated.
Scott, I guess my point is that we could (and do) discuss this endlessly. I certainly do not like our current system and desparately want tax reform. Obviously, a lot of intelligent, well-informed folks support the FairTax despite its flaws. That’s fine. But what bugs me to no end is when the self-proclaimed advocates of the FairTax — e.g. Neil Boortz and John Linder — will make these sweeping pronouncements about its supposed merits — the tax rate will be 23%, it will tax the underground economy, it will cause the return of $13 trillion in cash held in foreign accounts, etc. etc — which are debatable at best and out and out lies at worst.
The fact is that there’s no panacea when it comes to tax reform. There are no easy answers and there are plenty of plusses and minuses of any tax system. Unfortunately, in their zeal to promote the FairTax (and their virtual monopoly on and public debate), Boortz and Linder have promoted as “facts” so many questionable, if not impossible, claims that a fair discussion of the pros and cons of the FairTax is almost impossible (at least, anywhere other than this board.)
Hank,
(1) The pre-bate is a central component to the Fair Tax in order to un-tax our lowest income. In order to make this Fair to everyone, each family is entitled to the same benefit for un-taxed necessities. It will be easier, and likely overall less expensive, to provide everyone with this pre-bate rather than implement the overhead of a cut-off or graduated scale, which then needs to be managed. This pre-bate is part of the calculations that result in the 23% inclusive Fair Tax. You are quoting this $600B “expense” without acknowledging that the 23% Fair Tax rate is revenue neutral WITH this spending. If the pre-bate were means tested, then perhaps the $600B is now $400B (including overhead) and the effective rate is now less than 21%.
One of the reasons we have the problems we have today is lack of personal responsibility. EVERYONE needs to contribute to the running of gov’t, otherwise they have no incentive to question its spending. When personal spending exceeds poverty level, each citizen makes a conscience choice to pay taxes when they make purchases. They will also clearly see the cost of gov’t, which hopefully, will force Congress to be more accountable.
(2) As for social security, Madoff is in big trouble for essentially the same ponzi scheme. I hope social security is there when I retire in 20 years, but in any case, we need to treat it like any other entitlement and break this illusion that benefits received have anything to do with contributions made over a person’s career.
(3) Fair Tax studies indicate that imbedded taxes make up something like 15-28 percent of the cost of goods and services. I need to study the detailed studies for myself, but it is clear that the costs of goods and services will go down.
Your example was not apples to apples. You were attempting to compare purchasing power vs the amount of taxes paid. If we look at the amount of taxes paid, the retiree in your example is not paying zero taxes. He is paying the imbedded tax in everything he buys. As for the purchasing power, you calculated $10,576 sales tax and implied that less the pre-bate resulted in a loss of $5800 in purchasing power. However, you forgot to discount the base price of those goods. If prices increase about 11 percent, then the amount of goods you originally purchased for $41,200 would now cost $45,732, which is a little better than break even.
Another savings is the option to purchase used goods, which would have no Fair Tax.
(4) You are way off on this point. No investments or savings are taxed with the Fair Tax. Only spending is taxed. If your retiree does a little better with more pension, distributions from IRAs, and interest and dividend income, then he WILL be paying income tax. Again, he will not be paying payroll taxes, so will not see as much benefit as others. But, if everyone is doing better, and the economy is MUCH more productive, and gov’t is more transparent, then what is the problem?
(5) I will likely never have to suffer from estate tax consequence. However, I have a fundamental problem seeing how the gov’t has a right to a single dollar just because someone has died? That person spent their life accumulating wealth to pass on to their heirs. In the end, this is up to the 4th time that a gov’t has taken a piece of the same dollar. The Fair Tax eliminates multiple taxation.
As I mentioned previously, everyone will not benefit to the same degree, but I contend that nearly everyone will be better off, and the benefits to the economy will benefit everyone.
Hayden,
I have to comment on your statements regarding compliance. First, no one gets to leave Walmart with tax free merchandise under the Fair Tax. We don’t ask retailers to make this determination. Everyone, even businesses, will pay the Fair Tax to Walmart. That business will get credit for this Fair Tax paid to Walmart when they deduct that as expense before paying their own Fair Tax owed.
A better example is a home builder. Consider that Joe the builder makes purchases from Home Depot, same as me. We both pay sales tax to Home Depot. However, when the builder sells the new $100,000 house, he owes $23,000 to the gov’t less whatever sales tax he paid for materials put into that house.
We don’t ask the retailer to decide if someone should pay tax or not. If a business is registered, then they will have to file a tax return showing sales less their sales tax for business expenditures. Once they are registered and file a return, there is an audit trail, which will make it difficult to cheat. This is the double reporting you desire. I have to list that I paid sales tax to company A, B, and C. Assuming those itemization have tax ids, it is a simple calculation across all returns for a given tax id. It will certainly be easier for the small guys to cheat, however, the top few percent of businesses that make up the vast majority of sales will have too much to lose. Also, many of those companies are publicly held and fudging those numbers would hurt their stock prices. If a company reports too many expenses to avoid paying sales tax, their stock will drop because they will be saying they are not as profitable.
Al — Thanks for reminding me how the sales taxes with businesses work. I had read that before, but forgot. And, as I’ve said elsewhere, I don’t think there will be as much ILLEGAL tax evasion (i.e., cheating) going on under the FairTax than under our current system, but I do believe there will be a lot more LEGAL tax avoidance (i.e. shifting consumption to tax-free items.)
But your post brings up some issues I’ve wondered about. How do start-ups and businesses that don’t sell to consumers deal with the tax credits? A hi-tech or bio-tech start-up might go years without ever having any sales. Surely it doesn’t need to pay sales taxes in the interim. What about buying a rental property? Surely you don’t need to pay the FairTax on the purchase and take a credit on your rental income. That could take decades to recoup those taxes. (I seem to recall there is a formula for rental properties, which is very complicated and would require extensive record-keeping for 30 years or so.)
You seem knowledgeable about this issue, so I’d appreciate it if you could enlighten me.
Thanks.
Hayden… You persist in arguing about shifting spending habits to purchasing “tax-free” items. I agree that some segment of the population will choose to legally avoid paying the tax by purchasing a used car rather than a new car, or hitting garage sales to find a used lawn mower. I disagree with you however in the assumption that this behavior will be so extensive as to undermine the effectiveness of the FairTax. I would counter that for a significant majority of our population it simply won’t matter enough.
I have two examples regarding this particular argument. First off, let’s take a reasonably large purchase like a new TV. Joe Shmoe makes $75k per year and he has really had his eye on a nice new Sony plasma TV at Best Buy. He’s done the comparative research and this is a really great TV. It’s a 50″ 1080p, the best brightness rating, and all the other cool things he wants. Top that off by the fact it’s on sale for $1500 (bear in mind that this advertised $1500 price tag already includes the FairTax component). Joe is a pretty sharp guy though, and he figures that the FairTax piece of this TV is about $345. What to do… He searches the papers and Internet for a used TV, but doesn’t find this new model to be had. He finds a used model that is relatively comparable on E-bay for about $1000, but it’s only “48 and doesn’t have one or two of the nifty whiz-bang features he wanted. At this point, it’s up to the consumer to decide whether to spend the extra money and buy the TV he really wants and pay the FairTax, or avoid the tax and hit E-bay hoping that he doesn’t need the warranty that Best Buy would offer.
Let me be the first to admit in my example above, there are a number of people who would purchase the used set and simply do without the couple of features. I would also argue that there are loads more people who are going to walk into Best Buy and drop the cash on what they really want. More specifically, most of these people are going to put the purchase on their Best Buy credit card. Many of these people are going to be buying the warranty because they are not going to spend that kind of money without that warranty. And, quite frankly, many of these people simply aren’t aware of the fact that they can avoid the tax by purchasing a used set.
The next example is much simpler… Jenny Shmoe needs to go to the grocery store. She needs all the usual stuff like milk, bread, laundry detergent, and of course Cookie Crisy for little Jimmy because it’s his favorite. Do you really think for a minute that she is heading somewhere other than her local grocery store? She’s going to be paying the FairTax on all of these purchases and never even think twice about it. In addition to that, on the way home she zips thru the McDonald’s drive thru to grab lunch for her and little Jimmy. And to round out her little excursion she swings by the dry cleaners to pickup Joe’s suit for her sister’s wedding next week. That reminders her that she needs to make their plane and hotel reservations for the wedding next month.
Everything I mention here is typical everyday spending that consumers are going to be doing without ever thinking twice about the FairTax. I would argue that this is the bulk of American spending. Yes, some people are going to avoid the tax on a few big ticket items every year, but this will be a small percentage of their total spending. By the way, let’s throw into the mix Jose and Maria who are illegal immigrants from Mexico. They too are going to be making that grocery store trip, and gas for the car and McDonald’s. With over 10 million illegal immigrants in this country spending a mere $5k per year on taxable things like gas and groceries that would amount to over $10B in FairTax revenue.
Will there be evasion under the FairTax? Absolutely yes. Will there be avoidance? Even more so than evasion, I’ll agree with you there. Will this be enough to significantly diminish the benefits to be gained by the FairTax? That is a question for each individual to decide for themselves. I for one, think not.
Scott — You are actually making my point! The FairTax is totally unfair to middle class who will be stuck paying it everyday on their ordinary purchases. Of course, middle class people will continue buying new TVs and groceries, whether they are subject to the FairTax or not.
But the FairTax implicitly relies on the rich buying high-dollar items and thus generating tax revenue from such purchases. It is those purchases of high-dollar items that are most likely to be avoided or substituted under the FairTax.
Let’s take the example of a yacht that’s manufactured in the United States and would sell for $3.9 million under the FairTax (excluding state sales tax). Out of that $3.9 million selling price the FairTax component is $900,000 (i.e., 23% * $3.9 million =$3 million).
Now, being a good capitalist, a NY hedge-fund manager interested in buying that yacht would like to avoid paying $900,000 in taxes. How can he do so?
1. Buy a used yacht FairTax-free.
2. Buy the yacht for his business FairTax-free (he needs some place to entertain his clients, after all).
3. Buy the identical yacht in the Bahamas FairTax-free.
Let’s say he choses option number 3. While he buys his yacht, he might also decide to buy a brand-new ocean front villa in the Bahama’s FairTax-free to stay in while he rides around in his yacht. And, since he needs to travel back and forth from the Bahamas, he buys a private jet down there FairTax free. Since he’s been putting on a bit of weight, he has some liposuction down there from one the new plastic surgeons who’ve moved down there to offer FairTax-free services and also gets some breast implants for his girlfriend, who looks so good after her sugery that he buyes her a new diamond necklace FairTax free (alas, she can only wear it outside the US, or it would be subject to customs duties, but, since they travel around the world on their yacht and private jet, that’s not really a problem.) The hedge-fund manager then decides to throw a $10 million birthday bash to celebrate his girlfriend’s 20th birthday. He holds it in Morrocco (as Malcolm Forbes did several years ago) and uses his tax savings to fly all his friends in on his private yet.
The point is, Scott, that it’s the middle class who would be stuck paying the FairTax, which is reason number 46 that it’s a lousy idea. The rich, who you claim hire a legion of acountants and lawyers to avoid our current income tax system, would have a million ways to avoid paying the FairTax on almost all of their high-cost luxeries, and they wouldn’t even need to hire one lawyer or accountant to do so! So, again, it’s the middle class who would get stuck with the tab.
Oh, and your example about illegal aliens? If the FairTax were to generate $10 billion per year from them, that would be nice, except that the federal budget is over $3 trillion! (Plus, illegal aliens currently pay payroll taxes, which would be eliminated under the FairTax. So, at best, it would be a wash.)
Scott,
I think Hayden and I have had the discussion about avoidance through the purchase of tax free items before. Imho, there will be no shift (except for the shift that occurs from taking away the current tax advantages of politically powerful groups, e.g. real estate industry’s home mortgage exemption). Since real prices will remain the same, on average, then the current ratio of the cost of new-to-used goods will remain the same. Therefore, people will make the same buying decisions that they did pre-fairtax (again conceding shifts as we move to more tax “fairness”).
Paris Hilton could currently go to Morocco now to avoid paying our “embedded taxes”. Or she could claim her parties now as business expenses. So maybe her wealth does allow her to avoid her tax obligations, but neither system currently has any advantage over the other in that regard.
Hayden,
Why did Malcom Forbes throw his party in Morocco? Was he avoiding the fairtax?
Andrew — Forbes threw the party for his 70th birthday in 1990, not to avoid any tax (although I’m sure it was a consdered a business expense), but simply because he could.
I like to use that example because Larry Kotlikoff used that same example in his excellent book on our future problems with Medicare (The Coming Generational Storm) in which he claimed that a 30% National Retail Sales Tax (i.e., the FairTax) would have taxed the cost of Forbes’ lavish party.
After finishing the book, I emailed Kotlikoff to congratulate him on a great book, but that he was nuts to support the FairTax. He called me about 15 seconds later, we had an hour-long conversation and exchanged several lengthy and pleasant emails about the FairTax over the next several months (at least until Leo Lindbeck told Larry that he couldn’t bill AFFT anymore for the time he spent emailing me!) Kotlikoff is clearly a lot smarter than I, and a very nice guy to boot, but I still believe he’s dead wrong on the FairTax.
Anyway, I told Kotlikoff that he used absolutely the worst example possible in his book because none of the cost of Forbes’ Moroccan extravaganza would be subject to the FairTax since it took place in a foreign country. Kotlikoff agreed, but said that the FairTax could be “modified” to tax foreign expenditures by wealthy Amercans. I asked what would prevent wealthy Americans from simply renouncing their US citizenship, and he said we would need to have a hefty penalty to keep folks from doing so. Finally, I asked him about the over-all regressive nature of the FairTax, and the fact that people who already owned substantial assets (e.g., multiple mansions, yachts, ranches, ect.) would never be taxed on thos assets. He agreed that the FairTax was regressive in this respect, and that it would need to be further “modified” to tax the “imputed rent” on those types of assets. In other words, if you own a $10 million mansion, you would be taxed on the the estimated rent would would have paid if you had rented the mansion. (As you know, rents are taxed under the FairTax.)
That’s when I realized what one of the main appeals of the FairTax is. Since it is compete fantasy, everyone can change it in their own minds however they wish to make it fit with their own view of the world and simply wish its many flaws away. A liberal like Kotlikoff can believe the FairTax will be a mechanism to tax “accumulated wealth.” Libertarians can believe that they can finally escape federal income taxation by simply picking and choosing what they buy. The John Linders of the world can believe that prices of goods and services will not go up under the FairTax and that all of our incomes will rise. Boortz can claim that $13 trillion dollars will be repatriated from foreign countries. The the Mike Huckabee’s can believe the cost of the FairTax will be borne by the illegal aliens and the “underground economy.”
When critics point out that the FairTax simply won’t do these things (usually by pointing to cold hard numbers), proponents simply assume that the problems with the FairTax will be fixed somewhere along the way to the FairTax nirvana. It’ makes for a nice fairy tale, but it sure ain’t reality.
Hayden,
Thanks for the info. I knew there was some logical reason for it. I just couldn’t come up with it.
On your “point” about the delusions of fairtax supporters, it helps illustrate a common reason that two sides of a political argument often talk past each other. Each side usually believes they point to “cold hard numbers” while the other side simply ignores these indisputable “facts”. The ironic part is that both sides are usually correct about certain aspects of the numbers and the facts. It is their failure to be intellectually honest enough to admit that their position may have negative aspects and that it is really the relative superiority of their idea that should be the driving force behind their support and not its assumed perfection.
There are some fairtax opponents that believe people work for their gross, that avoidance will be a major problem even though real prices stay the same, and that a tax system that can’t be figured out by the former senate majority leader or the current treasury secretary is somehow superior to a system that simply taxes almost all products and services at 23%. Talk about fantasyland.
Andrew,
Bravo! I don’t think anyone has tried to argue that the Fair Tax is perfect. But, it is vastly superior to our current system! Discussion continues regarding the merits of Fair vs Flat tax, and tweaking each to come up with the optimal plan. No matter what we choose, there will always be efforts to avoid taxation, either legally or illegally. I believe the Fair Tax is the simplest proposal with the least potential for cheating.
Hayden,
I understand the desire to tax accumulated wealth. However, this is against the premise of the Fair Tax, to tax a dollar once and only once. Remember that all currently owned assets have already been taxed via the imbedded taxes of our current system. If we chose to implement a low property tax to cover accumulated wealth, say 1% per year, just to generate more revenue, we would be leaving a window open to for politicians to raise this rate in the future. There is no rate that would be safe to impose because of this exposure. As we all know, the original income tax started as a small tax rate on only the very highest incomes. And see where we are today.
We need the Fair Tax now to reduce the power and corruption in Congress. In the end, we need every American to have a share of the cost of gov’t. It needs to be progressive, but as we move closer and closer to having a majority not share in this cost, we allow politicians to continue to buy votes from these citizens with ever increasing socialism. Socialism is not how we became the most successful country in history. I don’t want to see a system of everyone for themselves. We need to help people help themselves. But, those that refuse to try are not deserving of more and more help just because they vote for people that will give them more and more.
Andrew — I wholeheartedly believe that you are correct in what you say below.
“A common reason that two sides of a political argument often talk past each other. Each side usually believes they point to “cold hard numbers†while the other side simply ignores these indisputable “factsâ€. The ironic part is that both sides are usually correct about certain aspects of the numbers and the facts. It is their failure to be intellectually honest enough to admit that their position may have negative aspects and that it is really the relative superiority of their idea that should be the driving force behind their support and not its assumed perfection.”
I would add one thing. Both sides of a political debate (and I am certain guily of this) often impute dishonest motives to the other side, which makes frank and honest discussion difficult, if not impossible. If one thinks the person on the other side is a lying no-good scoundrel, it certainly does not lead to any give-and-take discussion.
If I’m somewhat jaded, it is in part because I was trashed on the air for hours on end by Neal Boortz for pointing out flaws in the FairTax. He refused to allow me on his show to defend myself or to debate the points. And, in fact, if you’ve ever heard his show, he will dismiss critics as either being politicians who want to retain “power of us” or tax accountants who have a vested interest in maintaining the income tax. He ignores that fact that the vast majority of critics of the FairTax, whether academics like Dale Jorgenson Michael Graetz, editorial boards like the Wall Street Journal and the National Review, or ordinary citizens like me and Hank, loath our current tax system and desparately want change. But, as I’ve said endlessly, we need to look at tax reform proposals objectively and not just accept the statements made by those who have their own vested interests in furthering those proposals.
Al — It is Linder and Kotlikoff claim that the FairTax is a tax on accumulated wealth, not me.
I agree with you that every American needs to share in the cost of government. That’s why I would prefer an income tax with no deductions, credits, or exemptions. Let everyone begin paying taxes on the first dollar they earn. (Actually, they already do pay Social Security and Medicare taxes on the first dollar earned.) If someone receives government assistance, they should pay on the first dollar they receive. Everyone should have an incentive to keep government spending as low as possible; if everyone has to pay taxes, they’ll be more likely to keep vigilant on government spending.
I also generally agree that we cannot have a system where people can vote benefits for themselves and expect other people to pay for them. (Although, I’m for universal health care, but that’s a debate for another blog.)
One of the benefits of the FairTax would be its transparency. But I do not understand why we cannot have the same transparency under an income tax system. If we got rid of all of the exemptions, credits and deductions, our income tax system would be far more transparent and, presumably, fairer than it is now.
Hayden… I tend to both agree and disagree with you regarding reforming our current tax system. I agree that it could be made MUCH more transparent than it currently is by getting rid of entire volumes of tax code (whether this is hundreds or thousands of pages, I don’t really care). I also agree that this could make the system much more fair than it currently is. I’ll even go one step further and propose that this approach could yield one of the FairTax benefits (one I don’t think you dispute) in the it could significantly reduce business compliance costs and the estimated cost to individuals in time and resources for keeping up with and filing taxes each year.
However, I have serious disagreements with this approach. First of all, this has been tried before and while it works for a period of time congress is really good at mucking up the system yet again. I believe that Regan made great strides in simplifying the tax code in the ’80s, but look where we are now. Additionally, I agree with the philosophy that you tax behaviors that you want to restrict. Taxing income is discouraging to some degree towards work.
Unfortunately, I think that the most likely MAJOR tax reform that we will see in the near future will be a cleaning up of the existing system. The best case scenario we can hope for from this approach is a much simpler and transparent income tax system, for a few years or maybe even a decade or two. If we can’t have the FairTax, or something similar in ideology to it, then I would be in support of at least pairing down and cleaning up the current system.
I believe in the FairTax, though I will admit that it is not a perfect system as if anything can be. I think you are grossly over-estimating it’s weaknesses and belittling it’s strengths, but that is my opinion. At least we can agree that the current system is in desperate need of repair/replacement.
On the subject of taxing wealth, there is another side to that coin. I suspect that everyone here believes that the lower income families come out way ahead under the Fairtax. Sorry folks, but that just may not be true!
I recently came across some BLS study data on consumer spending. I’m lousy at links, but just google “consumer spending” and find the BLS 2007 study data. Basically, BLS surveyed 120 million families and reported that spending as a percent of after tax income was as follows: $5K-10K = 200%; $10K-20K =150%; $20K-30K = 120%. Between $30K and 40K, spending and after tax income were a wash. The implications of this study data are huge.
Clearly, as we all know, families in the lower income levels are spending way over their means. For the retirees, they are drawing down their accumulated wealth, or at least living on the interest derived from their nest egg in addition to pensions and Social Security. For young families, their lifestyle is based on income, credit, and gifts (from dear old Dad?).
Fairtax advocates are fond of claiming that the poor will be untaxed due to the prebate. While it is true that the prebate will offset sales taxes up to the artificial AFFT poverty level, that doesn’t mean that the poor will pay no sales tax. If the BLS data is correct, the poor will pay much higher sales taxes than income taxes.
Here are a few examples to think about. The table below is based on three income levels for both single and married families. I assumed that spending would remain the same, and that the prebate, a cash grant entitlement which is basically an income supplement, would simply allow for a decrease in borrowing for the poor and a decrease in spending the interest from capital investments for retirees. Take a look at the tax comparisons.
Single: (Income tax/Fairtax)
$10K- $871/$4600
$20K-$2790/$6900
$30K- $5055/$8280
Married:
$10K-$765/$4600
$20K-$1741/$6900
$30K- $3508/$8280
Note: Income tax includes FICA amounts. 2008 IRS software used to determine income tax with standard deductions and exemptions.
Fairtax rate assumed to be 23% inclusive.
Now, it can (and will?) be argued that not all income will be spent on taxable consumption under the Fairtax. However, in the lower income brackets, it is unlikely that there will be mortgage payments, charity contributions, tuition payments, and gifts. Any sales tax exempt purchases will still cost relatively the same as under current law after the initial transition period.
If these numbers are correct, the Fairtax will put an immense tax burden on the lower income families.
Comments?
It sounds like you are saying that the poor are managing to live the most beyond their means. Personally, I’m not going to have much pity on those who may end up with a higher tax burden simply because they choose to live grossly beyond their means. This is not an argument against the FairTax, to me this is actually an argument for the FairTax. Too many people in this country, myself included at times, are spending well beyond their means and purely for luxury items.
This is a free country, for now, and people make choices as to their lifestyle wants and needs. Living within your means is the fiscally responsible thing that we all need to learn how to do. It sounds like you are saying that the FairTax will encourage everyone to adopt this behavior. This sounds like a win for the FairTax to me.
Scott,
I’m not saying it, the Bureau of Labor Statistics study makes that quite clear. So, there are at least two possible outcomes as regards the Fairtax. (1) If it’s true that you get less of what you tax, then the lower income families that are living on credit might change their ways. As for retirees living off investment income, that is their right, and they are living within their means. It’s just that their investments are being double taxed, once when earned and once when spent. Is that fair?
Or (2) The 50 million families with incomes at or below the AFFT defined poverty level income could decide the Fairtax is not for them. They are economically better off under current law, so there would have to be some other pretty powerful reasons to support HR25. And, since self interest always trumps the common good, don’t look for any support for the Fairtax from this group. Good luck on trying to change everyone’s lifestyle choices!
Hank,
I agree with Scott. I have little sympathy for those living beyond their means. The Fair Tax will allow them to keep 100% of every dollar they earn. The pre-bate untaxes basic necessities. Once they begin spending for extra things, they will pay their fair share. They have 2 options to avoid paying taxes. 1) They can purchase used items, or 2) they can choose to not spend. While they are minimizing their spending, they will accumulate savings without taxation. Their interest on savings will not be taxed either. So, they will be able to save much more quickly. The Fair Tax encourages folks to be more responsible in their spending. Though we need to fix the problem of credit being too easy as well…
As has been pointed out previously, everyone needs to contribute to the cost of gov’t. With a highly visible sales tax, everyone will know this cost, and we can only hope that we will get the additional support we need to hold Congress accountable for responsible spending.
I don’t understand the tables you listed? For a single person earning $10K, you show his income tax burden as $871 and his Fair Tax burden as $4600? 1) The Fair Tax on 10K is 2300, and 2) it does not deduct the pre-bate, right?
As for the poor and middle class paying more taxes, I see your point to a degree. For the upper class, it is unlikely they would spend the same percentage of their income/wealth on taxable purchases, so at first glance it would seem they are not paying their share. However, let’s not forget that without taxes on investments, there will be business opportunities and associated job growth that will help pull the lower and middle classes higher.
I appreciate your different perspective, and have come to understand much better some of the real and perceived down sides or limits of the Fair Tax proposal. However, I strongly believe that the Fair Tax is vastly superior to our current system due to its transparency and efficiency. It removes the hidden taxes passed on by business, and levels the playing field by applying equal taxes on imported and home grown goods and services. I freely admit that some will be worse off, but I think most will be better off.
I believe we should continue to discuss the issues with the Fair Tax in order that we can find better solutions. However, criticizing the Fair Tax in comparison to our current system makes no sense to me. The current broken system has helped to get us where we are today. As an overall solution, I have not seen an alternative that seems to work better than the Fair Tax.
Al — The prebate will not cover the tax on basic necessities. The prebate for a family of four is approximately $6000 per year.
Now, let’s assume that the FairTax is only 30% on a tax-exclusive basis. (As has been discussed repeatedly on this blog, the true tax rate will undoubtedly be much higher.)
The average health insurance premium for a family of 4 is $12,000 per year. (Since businesses will lose their current tax deduction for paying health insurance costs, the entire cost of health insurance will be born by employees.) The FairTax on a year’s health insurance premium will be $3600. Deductibles and co-payments will obviously increase this amount.
Assume the family rents an apartment at $1000 per month (which would be dirt cheap in most cities.) The FairTax on the rent will be another $3600 per year.
Utilities — heat, electricity, water, phone (forget cable TV and internet service)– Let’s say $300 per month. That’s another $1080 per year. Food at $500 per month. Another $1800.
That’s over $10,000 per year in the FairTax, not including insurance, auto expenses, gasoline, clothing, furniture, dental expeneses, eye glasses, repairs, etc., etc., etc.
Can anybody possibly argue that the prebate would realy pay the taxes on the basic necessity of living?
Hayden,
Your numbers are a little off. Again, real prices will stay the same. So the more accurate way to calculate the tax burden is to use the 23% number, which yields $7728 vs. $10080. This is coincidentally about a 30% overstatement of your theoretical tax burden.
On health insurance, the employee currently bears the cost via lower wages. Both health insurance (which is distorted by the employer’s tax break) and rent (which is distorted by the mortgage interest deduction, yet bears no benefit to the renter) will be lower.
I live in a city, so I wouldn’t say it would cover the cost of living here, but isn’t the cost of living in a lot of America much cheaper. Say rural Kentucky. It kind of illustrates why the Federal government shouldn’t come with things like poverty level, minimum wage, etc. They will always either overstate or understate for some part of the country.
Hayden,
The other problem is that you are not comparing apples to apples… Regardless of how much you have or have not overstated the burden of Fair Tax, the problem is that you have NOT included the same IMBEDDED taxes from our current system. You are trying to point out that the Fair Tax would be a large penalty on the lower income, but you fail to recognize our current hidden taxes, which is exactly what our leaders are counting on. As long as Congress taxes business a little here and a little there, apply usage fees for this and for that, apply income tax, payroll tax, capital gains, etc, etc, etc… no one can possibly know their current tax burden. I have no doubt that lower income would have most of the tax burden you list under the Fair Tax. However, you are trying to imply that under the Fair Tax that family would not be able to afford those things, when in fact, that family cannot afford those items under our current system.
You are attacking the Fair Tax, which I believe is a good thing to help identify areas we may need to try to improve. However, you fail to acknowledge the problems in the current system, and you don’t offer alternatives that are better than the Fair Tax.
As for comments regarding the arbitrary line for the poverty level, and thus the pre-bate… Each person makes choices that affect his standard of living. Living in rural Kentucky would have a much lower cost of living than NYC. The gov’t shouldn’t be getting in the middle of personal choice. We should set the pre-bate, and the rest is up to the individual.
With risk of sparking a fire, I feel that everyone needs to do a better job covering their own needs with much less assistance from the nanny state. If you want to eat, go get a job so you have money to buy food. If it means you start in a menial job, so be it. Hard work will allow you to rise in the long run. If you don’t like your job choice where your are, then get training, education, or move to increase your options. The Fair Tax would be investor and business friendly. Therefore, there will be more jobs to be had and less reliance on gov’t assistance. In my opinion most everyone will be much better off in the long run.
Hayden… You can be incredibly frustrating. You persist in claiming as factual that the FairTax rate will “undoubtedly be much higher” than the 23%. I would be forever in your debt if you could prognosticate me some winning lottery numbers. You obviously have some kind of vision into the future that is apparently infallible in your mind.
I’m not going to argue that the FairTax rate will absolutely be 23/30% (take your pick inclusive/exclusive). This is the rate as written in the current legislation, so if I disagree with this number I’ll state that I disagree in such a manner as is clear that it is my opinion that the legislation is incorrect. The horse that you keep beating is dead, turned into glue, sniffed by some delinquent, and he has long since been dead and buried.
Maybe Morphh can allow us to have signatures that display at the bottom of our posts so we can all see every single time you post anything that you think the rate will “undoubtedly be much higher”. This way, we can read your argument without having to be constantly reminded of your opinion on this matter.
Sorry for the rant, it’s just a tiring reminder. Hayden’s argument is at best weak in my opinion and his presenting this as a forgone conclusion that it is factual and accurate is annoying. I really enjoy having Hayden’s view on the FairTax because it makes me question aspects of it. Keep poking holes there Hayden, but please lay off trying to present your opinion of the rate as fact.
Al, #78
I don’t know where to begin, but you are making a couple of obvious misstatements. First, you still don’t seem to understand that both interest bearing investment and debt instruments will be taxed. Please read HR25, sec.801-806 for the details about implicit taxes. I would also argue that there is nothing transparent about the Fairtax when 15% of the federal tax revenue is hidden in higher State and Local taxes, or alternatively, reduced State and Local services.
As for my little exercise using the BLS study data, you may have missed the point. For many of the low income folks, it isn’t a matter of living beyond their means, it is a matter of double taxation on wealth. Prior to this, I have consistently complained about double taxation, but with the BLS data, I can now put some numbers on the impact, and as shown, the Fairtax will place much higher tax burdens on the low income families. The prebate income is included in the tax numbers by simply adding it to other income. The prebate reduces the draw down on wealth for seniors, or reduces borrowing for younger families. Understand that the total sales tax is based on the BLS consumption figures. If a family with $10,000 after tax income spends $20,000, then the Fairtax is $4600 as shown.
My conclusion remains that you are going to have a difficult time convincing lower income folks to support the Fairtax. Individual interests will always trump public good, imho!
Scott — I’m sorry you find my statements about the tax rate frustrating, but I assure you I base all of my statements on actual evidence. In this case, I rely upon the studies/reports of (a) the Joint Committee on Taxation, (b) the President’s Tax Reform Panel, (c) the Institute for Tax and Economic Policy, (d) the William Gale study, and (e) the Zodrow study. As far as I know, those are the only independent stuies/reports on what the FairTax rate would need to be in order to be revenue neutral. If you are aware of any others, I would genuinely be interested in reading one (as I’m sure other posters on this board would be as well.)
The Beacon Hill/Kotlikoff study (which is the only study I’m aware of that generally supports the 23/30 percent rate) was paid for by AFFT, so it can hardly be considered independent, but even that study could not quite get the rate all the way down to the 23/30 percent level and, as has been pointed out several times, that study did not account for tax evasion/avoidance and was premised on what was then the highest projected deficit of all time. So I do not believe that most objective observers would consider that study to be particularly strong evidence that the tax rate would be only 23/30%.
I can appreciate that you might not agree with any of the studies/reports that are critical of the FairTax, but I can assure you that I certainly am not trying to deceive any one. You seem like a pretty fair-minded guy, so I am guenuinely curious, do you get equally frustrated when you hear Mr. Boortz claiming, without qualification, that 23/30% tax rate would be revenue neutral? After all, he claims an audience of six million people, while, alas, I doube if there are more than 4 or 5 of us who regularly read this blog.
In all candor, what frustrates me are the claims that Boortz, Linder and other proponents of the FairTax make that they know are speculative at best and outright lies at worst. Linder still claims that prices will not rise under the FairTax, yet we’ll all get a 50% raise in pay since taxes will no longer be withheld. (See the CNN “debate” from August of last year.) Boortz routinely claims that $13 trillion will be repatriated when the FairTax is enacted, without offering a shred of evidence as to why this would be so. Both Boortz and Linder will claim with a straight face that they have “never seen a study on the FairTax” that claims the rate would be higher than 23/30%. When the Gale study is mentioned, Boortz will claim that Gale exempted home prices, food and health care from his study, which, if you actually read the Gale study, he clearly dd not. Time and time again, when you examine what Boortz and Linder say about the FairTax and compare their claims with the actual facts, you will find that the facts just do not square with the statements they make.
Now, I am not claiming that you necessarily believe everything that Boortz, Linder and AFFT say, but there are clearly many, many people who do. So I would respectfully hope that you might cut me at least a little slack if I write something that you do not necessarily agree with. I really try hard to get my facts straight. My point that the FairTax does not “exempt the basic necesities from life” from taxation was not to argue that the prebate should be increased, but to point out that — yet again — here is another claim that Boortz and Linder routinely make about the FairTax that just isn’t so.
Quote Hayden: “Under the FairTax, people will consume less, which means that tax revenue will decline.”
I don’t know these kind of matter enough to say it’s true or not but let’s assume it’s true. Given what’s exposed by the current financial trouble how is consuming less not good for us all?
Scott,
You have to realize Hayden’s version of independent studies means anything that wasn’t funded by AFFT. Opponents of AFFT, the fairtax, or anything that may be considered “non-progressive†are still independent under this line of reasoning. “(a) the Joint Committee on Taxation, (b) the President’s Tax Reform Panel,†are obviously political committees that have a vested interest in the political power that the current tax system provides (along with a political fear in rocking the boat). “(c) the Institute for Tax and Economic Policyâ€. Here, http://www.itepnet.org/itepdesc01.htm, is there about page. Seems pretty reasonable. Then click on the funding and Board of Directors links. Tells a whole different story. “(d) the William Gale studyâ€. William Gale is from Brookings. Brookings is center-left at best and is currently headed by a former deputy secretary of state in the Clinton administration. And finally, “(e) the Zodrow study.â€. Here is a quote from page two of that study, “We would like to thank the national association of home builders, which commissioned this report, for their generous support of this research.†Now here is quote from a recent Washington Post article, “The National Association of Home Builders, one of the top 10 corporate donors to politicians, has stopped contributing to congressional candidates after it failed to get what it wanted in recent anti-recession legislation.†The home mortgage interest deduction may only be second to the employer’s health insurance deduction when it comes to market distorting tax policy (not to mention the $250/$500K capital gains exemption).
I think to call any (not even considering all) independent is at best misguided. That doesn’t mean that I suggest you ignore their research. I think the work done here to attempt to understand these sorts of things can only help figure out the correct answer to our tax situation. However, these studies shouldn’t be given any more weight than any one commissioned by AFFT or any other pro fairtax organization.
It should also be mentioned that many of these studies (if not all), “aren’t the fairtax†as Hayden often likes quote Boortz. One of the Washington studies assumed all kinds of exemptions and, correct me if I’m wrong, has refused to release the methodology used to come up with their results. And at least one other study, assumes the EITC will remain. Since he likes to still group all these in the same category, I’ll let Hayden sort out which is which. But as far as I know, to date, no one has come up with a reason as to why the data used in the AFFT study is wrong. For example, did the numbers somehow use exports, even though they’ll be untaxed? Did they forget to carry a one? Something other than saying they didn’t account for avoidance, evasion, inflation, etc. That’s attacking the assumptions (which is legitimate), but doesn’t point out any inaccuracies given those assumptions. I believe in an earlier study, someone pointed out that somewhere full accommodation was assumed and another place no accommodation was assumed which drove the rate down. This was legitimate and the author’s have since corrected the error.
As to Hayden’s quote, “Under the FairTax, people will consume less, which means that tax revenue will declineâ€, this is again Hayden’s opinion. Adding a tax to consumables in a vacuum will absolutely lower consumption (given the tax increase is sufficient). Of course, under the fairtax, this won’t be done in a vacuum. The tax added is removed from another source, production. Removing a tax from production in a vacuum will absolutely raise production (given the tax decrease is sufficient). Raising production, of course, reduces costs of what is produced while also giving people more for the production. The question is will this increase in production lead to more consumption than having a tax on the consumption will remove. I’m sure most supporters that have thought of this say yes, and most opponents say no.
One final personal note: it is irrelevant to me what the rate is. My reasoning is that whatever the revenue neutral rate is, that is what we are paying today, just using a different manner to pay (one more economically and socially destructive, imho).
Hayden,
Without deciding what will need to be the rate for the Fair Tax, let me ask a few simple questions.
1) Do you recognize that businesses do not pay taxes, but only collect them? This cost is passed on to the consumer in higher prices, the employees in lower wages and benefits, and the owners/stockholders in lower returns.
2) Do you recognize that compliance costs for business for our current system are much greater than would be required for the Fair Tax? The Fair Tax is simply sales tax collected less sales tax paid that were for business expenses. In addition to being simpler, a company can focus on running their business based on their needs rather than evaluating the tax consequence of option A vs B.
3) Do you agree that our current system is very inefficient? We tax income on >160 million individuals and businesses. Also, the tax code is over 67,000 pages. How can the Fair Tax not be simpler and more efficient? 125 pages of legislation for taxation of 20 million businesses must be easier. Also, the tax on the top 100,000 businesses would provide the same 85% compliance I have seen estimated for our current system.
I hope you will agree that most citizens are not aware of his tax burden? When some people respond to the question “how much tax do you pay?” and get a reply “None. I got a refund this year.”, they clearly do not understand how the system works, which is clearly what politicians want. This response does not even count the tax that most people don’t understand is hidden in everything we buy. We need a single consumption tax to make it clear to everyone the cost of our gov’t.
As for consuming less… I agree, and hope, that folks will consume less. One of the reasons we are where we are today is that many folks live above their means. We all need to spend more responsibly and hold our gov’t to the same standard.
It is clear to me that the Fair Tax is more efficient that our current system. With less “waste” the gov’t would need to collect less tax overall. When we also factor in that much of the underground economy would now be taxed, I contend that most people should see a lower tax burden, when compared to our current system.
Without any discussion of the specific rate (for now), tell me how a fair apples to apples comparison of the Fair Tax to our current system does not
result in the Fair Tax being superior?
After we agree the Fair Tax is superior to our current broken system, we can now begin discussing the rate we desire for the Fair Tax. This would be dependent on what level of gov’t spending we wish to allow. We could also begin discussing modifications that would improve the Fair Tax.
This is somewhat off-topic,
but I read an interesting study one time about how people perceive things. You can have a group of Republicans and Democrats in the same room, watch the same newscast, and they will come away with completely different opinions. The Republicans will discount anything that could be interpreted as a slam against Republicans, and Democrats will do the same thing with respect to anything against Democrats.
So, the bottom line is that it’s not merely that they read different newspapers or watch different news channels (though they clearly do in many instances) that that they actually perceive things differently. It’s as if they are wired differently, or have different internatl filters.
That’s the way people seem to be about the FairTax. Just about everyone I’ve ever spoken to about the FairTax is either pro-FairTax or anti-FairTax; I don’t think I’ve ever met anyone who is genuinely neutral on the issue.
Anyway, after having discussed the FairTax with folks for years now, I’ve concluded that the pro-FairTaxers and the anti-FairTaxers we just perceive things differently. I used to believe that the pro-FairTaxers were simply ignorant of the facts, having heard about the FairTax through Neal Boortz and the like.
So I naively believed that if I could just point them to the Gale study, or point out the flaws in the BHI study, or explain that a 23% tax/inclusive rate is really a 30% sales tax, or walk them through the amount of per-family spending that would be required for the FairTax to work, that a light bulb would suddenly go off in their heads and they’d realize that they’d been had and immediatly call up the Neal Boortz show to point out his many misrepresentations. Yet that is clearly does not happen.
Instead, people like Andrew will point out (a) what to him must be obvious biases in the anti-FairTax studies, (b) why “real” prices will not rise under the FairTax, and (c) how the FairTax will generate so much economic growth the small errors in calculation don’t really matter. In other words, we might read the same studies or reports, but we perceive them completely differently, as if we have different filters.
Anyway, that’s the only way I can describe it. I think it is impossible to turn an anti-FairTax person into a pro-FairTax person, or vice versa, just as it is impossible to turn a partisan Republican into a Democrat. It happens from time to time, but it’s usually a slow process that takes place within. (For example, I used to be a Republican who found Rush Limbaugh to be refreshing; now I’m pretty much a hard-core Democrat who can’t listen to Rush for more thatn 30 seconds without changing the channel. Yet I can’t really pinpoint when or why I changed my political views. It just happened over time. Bill Bennett used to be a Democrat; Arianna Huffington used to be a Republican. It just happens.)
Anyway, it would also be very interesting if we all abandoned this board for a couple of years, and then reappeared one day to see what our variousl viewpoints were at that time. In other words, if some of us morphed from pro-FairTax to anti-FairTax or vice versa, and try to find why and when the change occurred. In the meantime, I would love to meet someone who is truly impartial about the FairTax to find out what he or she thinks of the various arguments pro and con (but I won’t hold my breath on that one.)
Hayden,
I actually agree that the AFFT is a biased source. I just disagree that the five you mentioned (which just happen to fit your perception of the fairtax) are independent. They all have biases. But yes, “real” prices will not rise. And I don’t seem to remember stating there were small errors in any calculation that were OK because of so much economic growth via the fairtax. In fact, I seem to remember posting growth as a question. Maybe the problem isn’t so much the ability to convince, but the need to listen.
Hayden,
You did not answer my questions??? I was trying to make an honest comparison of the Fair Tax to our current system. Since you did not agree with my statements, does this mean you favor our current system?
I agree to a large extent your statements about trying to change people’s minds. However, I have personally gained a greater understanding of some of the issues you and others have pointed out about the Fair Tax. I first learned about the Fair Tax only last January. One of the things I have tried to do is search for counter arguments in order that I can make my own decision. So far, I have not found any compelling reasons to keep our current system.
Whether it is the Fair Tax, Flat Tax, or something else, our current system must go. Do you agree, at least, the Fair Tax is better than our current “For Sale” system?
Hayden makes a good point here. I remember an album/song by a band in the late ’80s or early ’90s. I believe the group is Extreme and the title of the song/album is Three Sides to Every Story. The premise is that the three sides are “Yours”, “Mine”, and “The Truth”. I think this is the case with many arguments and this is true of the FairTax also.
Personally, I think that Hayden makes strong arguments in many of his postings. However, I think that his view is more than just slightly pessimistic in exacerbating the negatives. I have no illusions that passing the FairTax will be the singular solution to all our economic woes and injustices. Liberals and Conservatives will not suddenly become best of friends and cats and dogs will not live happily together.
The truth of the FairTax most likely lies somewhere in between. Will there be evasion, yes. Probably less than what Hayden portrays as rampant and everyone who buys anything other than groceries evading the system, but probably more than what I think would be very minimal with only those very determined to cheat the system getting away with it. The rate may start at the 23/30%, but it is quite likely that this will increase over time. There are numerous other areas where the anti/pro opinions vary greatly, and the Truth will probably lie somewhere in the middle.
I think most of us tend to agree on one very basic principle, and that is the fact that our current system is broken and in desperate need of repair. Its in the details where we tend to disagree. This is where the real work has to happen. The only thing we can do now is keep talking and stirring the pot in the hopes that something good will rise to the surface. Personally I think the FairTax is that something good, but I will concede that it is not perfect and anything that improves upon it is a welcome addition in my mind.
Al — I did not see your post #87 before I posted # 88. so I will try to answer your questions.
1. In general, I agree with the proposition that businesses do not pay taxes, that the taxes ultimately come out of profits to shareholders and, to a lesser extent, wages and benefits.
But, think for a minute. Under out current Tax Code, businesses pay taxes on PROFITS. Many businesses, particularly start-ups, do not earn a profit. Those that do ean a profit earn a profit on around 10% of revenue. At the MAXIMUM 35% tax rate, that means that most profitable businesses pay taxes of approximately 3.5% of their total revenue. (I.e., 35% x 10% 3 5%.)
Now, to that you would need to add 7% of employees’ salaries for payroll tax. If 50% of a company’s revenues are used to pay salaries (which would be on the high side), then you would need to add another 3.5% for taxes (i.e. 50% x 7% = 3.5%). Thus, a profitable business currently pays around 7% of total revenue in taxes.
In contrast, under the FairTax, any business that sells products to consumers will need to collect and pay 23% of its REVENUE in taxes. Note, profit is irrelevant under the FairTax. Unprofitable start-ups will need to pay the same 23% tax rate on revenues that mature, profitable businesses do.
So, which will be a larger burden on businesses? Our current system or the FairTax?
2. I certainly agree that compliance costs under our current Tax Code are onerous, particularly for businesses. That’s why I am generally in favor of eliminating corporate income taxes altogether. But note that this does not mean you would need to scrap personal income taxes, we could simply tax capital gains and dividends as ordinary income. Thus, we could make our businesses more competitive and still keep a progressive Tax Code. It’s not an all-or-nothing thing. In other words, just because the corporate income tax is bad does not mean that the FairTax is the only solution.
3. I agree that our current tax system has many flaws and should be reformed. If I understand the studies correctly, there is about a 15% non-compliance rate under our Tax Code. But note, for most of us the Tax Code is extremely efficient. Due to dual-reporting of income (e.g., the employer reports wages paid and the employee reports his wages on his income tax return), for the vast majority of Americans there is a very high rate of compliance.
The bulk of non-compliance comes where there is not a dual-reporting of income, such as from sole proprietors. Under the FairTax, there will be NO dual reporting of spending. Thus, many economists believe that non-compliance would increase under the FairTax. As I’ve previously pointed out, Dr. Jane Gravelle produced a report stating that the non-compliance rate of the VAT in England was around 15%, which is about the same as the non-compliance rate under our income tax.
It is generally agreed that VATs would be easier to collect than the FairTax. (See Boortz and Linder’s second book; even they agree with that proposition.) Moreover, the VAT in England is around 20%. Under the FairTax, the combined federal and state tax rate would be a minumum of 30%, even if you use a best case scenario (i.e. 23% FairTax; 7% state and local taxes), so I do not agree with the proposition that we will have a higher compliance rate with the FairTax than we do with the income tax.
Yes, I agree with you that most people are not aware of their federal income tax burden. Now, be honest, how many people have a clue as to how much they pay in state sales taxes every year? So what makes you think they are going to know what they pay under the FairTax each year?
I’ve already discussed the underground econoomy issue many times. The answer is no, I do not believe the FairTax will increase tax revenue from the underground economy. If you listen to the AEI discussion between Kotlkoff and Gale on the FairTax, I think you would probably agree.
So, the bottom line is that even though I believe our current Tax Code is inefficient, unfair and, in many cases, counterproductive, I do not agree that the FairTax is supoerior to our current system.
If you are truly interested in tax proposals that I believe would be more efficient than our current system, you could start with Michael Graetz’s tax plan. Morph has a brief discription of it in Wikipedia. I also liked Dick Gephart’s altermative to the Flat Tax that he proposed several years ago. There are also some good general books on tax policy and tax reform proposals that you could on Amazon. The real problem is that none of the serious tax reform proposals have a talk radio host promoting them every day, so even though academics and economists might find them attractive, they don’t get any traction with the public. It’s a pretty sad commentary on our society that talk radio hosts have more influence over public debate over tax policy than do economists, but that’s just the way it is.
Hayden…
You seem to be double dipping on your first point. You indicate that corporations are going to be subject to 23% federal tax on everything they sell under the FairTax. This however is simply money they are collecting from the purchasers and not a component of their production costs. This is the difference between the embedded taxes in the current system and the simple collection under the FairTax. The point here is that if Widgets-r-Us produces a Wonder Widget for $1, and their business model says they need to make $.20 profit on every widget then their price per unit to Walmart will be $1.20. Walmart will then mark up the item to make their profit margin and then include the 23/30% FairTax. The FairTax is NOT a piece of either Walmart nor Widgets-r-Us’ revenue any more than current state or local sales tax is. (Not having any background in economics, I looked up “revenue” on Wikipedia and it specifically says, “Sales revenue does not include sales tax collected by the business.”)
I’m not going to argue point 2 in that this makes complete sense to me. I’m definitely open to other ideas concerning tax reform, it’s just that the FairTax is the best sounding plan I have heard of to date.
On point 3, I think you are falling back on what I believe has been an adequately debunked argument. You say that the FairTax has no double reporting and therefore rampant evasion will take place. I believe earlier in the post someone pointed out that the FairTax does indeed have double reporting. The seller reports the sales of goods and taxes collected. The purchaser then has a credit that he can claim against his taxes owed from the sale of his goods/services when he remits his collected taxes.
You also dispute revenue from the underground economy. I will agree that you are going to have a much higher level of evasion from those involved directly with the underground economy, but I still believe that the FairTax will capture a significant portion of this economy. Certainly it will capture more than the current income tax system does. I’m sure that people will find ways to scan the system, or simply buy purchasing stolen or used goods to avoid the tax. However, the simple fact is that the illegal immigrant is still going to be going to the grocery store and McDonalds and in doing this will be paying the FairTax on these purchases. This is capturing input to the tax system that he currently pays nothing based on our current system because his employer pays him cash under the table and therefore no income tax is collected.
You say it’s a sad commentary on our society about talk show hosts having more influence on tax policy than economists… Without the studies behind the FairTax and the economists who support the FairTax or something similar to it, I don’t think that Boortz would have a leg to stand on. I think the most that can be said about economists and the FairTax is that there is concern that the rate MIGHT need to be SLIGHTLY higher. Personally, I’m willing to pay a slightly higher rate than the 23% for the proposed benefits to be obtained by the FairTax.
Scott — As I noted earlier, there are pro-FairTax people and anti-FairTax people, so we will never agree. But I am compelled to respond to your points.
1. Whether you call the FairTax “revenue” or not is totally irrelevant. If we enact the FairTax, that means that WalMart will need to remit 23% (using your numbers) of every item it sells to pay for taxes to the federal governemtn. So, if it sells an item for $100, it needs to pay $23 in federal taxes.
Under our current system, if WalMart sells an item for $100, it will pay approximately $7 in federal taxes (assuming that it makes a 10% profit margin and that its labor costs equal 50% of its revenues.)
I contend that the FairTax will be more burdensome for the WalMarts of the world than is our current income tax system because it will either need to raise prices (and lose sales), squeeze its employees (and lose employees) or suffer lower profits (and lose shareholders).
3. There would only be dual reporting under the FairTax if and when goods are sold to other businesses, who would then take the credit on the taxes that they are required to collect and remit. There would not be any dual reporting on goods purchased by consumers, because they would not need to collect and remit taxes under the FairTax.
You say that “certainly” the FairTax will capture more than our current tax system does. I thought you had previously chastise me for making sweeping statements like that. What you really mean is that you BELIEVE that the FairTax will capture more than our current system because you don’t believe that people will take full advantage of the seemingly endless ways to avoid paying the FairTax.
Most (though certainly not all) illegal aliens are employed by legitimate businesses who withhold payroll taxes from their paychecks. (The only way a business can deduct the cost of paying an employee is by reporting the wages on the businesses own tax returns. It can’t deduct under-the-table cash payments.) So we already collect substantial amounts of federal taxes from illegal aliens. All of that would be lost under the FairTax. And, even though illegal aliens would not qualify for the prebate, if you do the numbers (which I’ve shown several times already) the total taxes we’d receive from illegal aliens under the FairTax would be less than 1% of our federal budget (which is less than we get from them now in federal withholding taxes.)
If Boortz relies on the studies and economists who support the FairTax, then why doesn’t he cite any in his books? Wait. He did. He cited Dale Jorgenson of Harvard in his first book, though forgetting to mention that Jorgenson opposes the FairTax. He cited Jim Poterba of MIT in his second book, and likewise forgot to mention that Poterba opposes the FairTax and sat on the President’s Tax Reform Panel that trashed the FairTax. He also cited Laurence Kotlikoff in his second book, but neglected to mention that Kotlikoff was paid by AFFT. My point is that since talk radio hosts can selectively pick and choose whatever “facts” or studies they want to support their positions, ignore any facts or studies that don’t support their positions, I would think that most independent thinkers learn not rely on them for tax or economic policy.
Finally, you say that “the most that can be said about economists and the FairTax is a concern that the rate MIGHT be SLIGHTLY higher” than 23%. With all due respect, you either haven’t read any studies or reports on the FairTax by independent economists or you are grossly distorting their conclusions. You might start by reading the President’s Tax Reform Panel’s report (Chapter 9). Its a very easy read and lays out most of the arguments against the FairTax in a very simple, concise format. You might not agree with those arguments, but you will realize that their concern is not that the FairTax might be “slightly” higher than the advertised rate.
Hayden,
You continue to underestimate the amount of hidden taxes under our current system. I agree that we would not see our entire paychecks AND see prices remain approximately the same with the Fair Tax. However, you only consider the first level of taxation, that is payroll and corporate income tax, amounting to 7% inclusive. You forget about the hidden tax in the goods and services that a Walmart acquires to resell to its customers. You also forget about the hidden cost of compliance. The Fair Tax is a very simple tax, which does not need teams of lawyers and accountants to manage. While this is probably a low percentage compared to sales for Walmart, it is increasingly burdensome for smaller businesses that do not have the large gross sales to offset this cost.
As for the dual reporting… The Fair Tax definitely has dual reporting that a very simple program can flag anomalies. Publicly held companies will report gross sales and expense for their stockholders. Those figures will be the same numbers that are reported for Fair Tax calculation. Since a relatively few large businesses account for the majority of sales, we will have a much smaller task to ensure the same level of compliance compared to our current system. As the “audit” system becomes more sophisticated, we should have greater compliance.
I would like to see the raw numbers for your analysis of the tax from illegal aliens? I find it hard to believe that a substantial portion of 15 million illegal aliens have payroll taxes sent to the gov’t by their employers. First, no where near all of those 15 million are actually working. Second, the reason they are being employed is due to the lower overhead for the business. Finally, while I challenge the amount of tax revenue collected from their labor, it would be difficult to argue that much of their consumption would be captured under the Fair Tax.
Again, I am not claiming the Fair Tax is perfect, and I do not specify the tax rate we should use for the Fair Tax. I only claim that:
1) The Fair Tax is better than our current system with lower overall burden per family for the same amount of usable revenue to the gov’t.
2) Since the Fair Tax is much more transparent, it will be better for the country because it will help more people see the true cost of gov’t.
3) As a more efficient system, it will help eliminate waste in gov’t and compliance cost in business.
4) As a simple tax without the large number of loop holes built in for special interests it will be more fair across the board.
5) It will remove the imbedded tax on US goods and services, making us more competitive in the global market, while applying the same tax burden on imported goods, making our products more competitive here as well.
6) Without tax on investment, it will help drive additional economic growth.
etc…
While I appreciate that you point out real or potential sticking points for the Fair Tax, I would like to see you apply the same rigor to our current system. Can you list any way our current system is better than the Fair Tax?
Actually, I recognize that you and Hank have identified the effect on retirees as an issue for the Fair Tax. We would need to quantify this effect and weigh it against the overall better solution with the Fair Tax. Also, as I have said, the Fair Tax is not perfect, so perhaps we can figure out a way to tweak it to make it better for retirees.
Al,
Not just on retirees, but on all lower income families. For me, this is a fairly recent revelation, brought on by a Bureau of Labor Statistics survey which showed that lower income families spend much more than they earn. This spending comes in two flavors: debt, or borrowed spending for the younger families, and accumulated wealth spending for retirees. According to the BLS survey for 2007, at incomes of $10,000, spending is double, $20,000 is 150%, and $30,000 spending is 120% of earnings.
Applying these percentages to total taxes under both current law and the Fairtax results in these comparisons for single and married families:
Single (Income tax/Fairtax)
$10,000 $871/$4600
$20,000 $2790/$6900
$30,000 $5055/$8280
Married
$10,000 $765/$4600
$20,000 $1741/$6900
$30,000 $3508/$8280
As you can see, the Fairtax would be a huge tax burden on these lower income families. A couple of other points. This simple analysis assumes that the prebate reduces the amount of borrowed wealth needed for the younger families, and reduces the draw down on accumulated wealth for the retirees.
Also, the income tax numbers include FICA deductions.
If the BLS survey is correct, it is not correct to say that the Fairtax untaxes the poor. The large difference in tax burden is due to the fact that neither borrowing or wealth spending is taxed under current law, but is taxed at the same rate as earnings when spent under the Fairtax.
Is there a way to reduce the impact of the Fairtax on lower income families? Any suggestions would be appreciated.
Hayden… You seem to have missed the point below.
There would only be dual reporting under the FairTax if and when goods are sold to other businesses, who would then take the credit on the taxes that they are required to collect and remit. There would not be any dual reporting on goods purchased by consumers, because they would not need to collect and remit taxes under the FairTax.
How do you figure that dual reporting is even an issue? EVERYTHING sold, no matter to who is sold at the full price with the FairTax. I guess I am missing your point here. I thought the argument was that Joe Blow walks into Walmart with a bogus tax exempt document and evades the tax. I guess I made the assumption that this was the manner in which you envisioned a significant piece of your massive evasion assumption.
I would in fact contend that collection and remittance of the FairTax would be even easier that collection and remittance of state sales taxes for exactly the reason above. Companies don’t have to worry about fraud at the point of sale since everything sold is sold for the FairTax included price. This is a more transparent collection method than sales tax, and in that regard should equal a higher compliance rate.
My argument about the FairTax “certainly” collecting more than our current income tax from the underground economy I think is still justified. I agree that some illegal immigrants work for legitimate businesses and those businesses collect income taxes. However, my argument is that there are also plenty of illegals who get paid cash. For instance, day laborers who mow lawns or paint houses, or anything else. These people deal almost exclusively in cash under the table. These people pay nothing under our current system. I’ll even concede the point that maybe these people shop exclusively at garage sales and other means to avoid the tax. However, I’m not going to believe that these people don’t hit McDonald’s and fill up their cars with gas. They will be contributing to some degree in those expenses where as currently they pay nothing in income taxes.
This also applies to those engaged in illegal activity to derive their income. Drug dealers, pimps, etc. will probably we buying stolen good and evade the tax on much of their expenses but they are going to be going to McDonald’s the same as the illegal alien. These are the reasons I say that we would “certainly” capture more activity with the FairTax than under our current system. I suppose the real argument is whether this increased tax base more than offsets your position of rampant evasion. You believe obviously it will not, whereas I believe it will.
Scott — I think you are right about the fact that everyone (both businesses and consumers) will need to pay the FairTax at the point of sale, and that only the business needs to worry about seeking a credit. I had forgotten about that, which make the issue of dual-reporting less relevant.
The issue with collecting tax revenue from illegal aliens and the underground economy, however, is a red herring. Here’s why. According to FairTax supporters, when the illegal alien or the drug dealer buy something from a legitimate business under the FairTax system, that business is supposed to remit 23% of its sale to the government as the FairTax. Under our current system, however, the business is supposed to pay income taxes on the sale, the salesperson pays income tax on his or her salary or commission, the manufacturer pays taxes on its sale, etc., etc. That’s what the so-called “embedded taxes” are, and they are supposed to add up to 22%.
So, the government (supposedly) gets the same amount of tax revene from the illegal aliens and drug dealers under our current income tax system as it would from the FairTax. The only difference is that the drug dealer would get the prebate under the FairTax while the illegal alien would not.
So, if the FairTax advocates are correct, that the “embedded taxes” equal 22% of every transaction (on average), the the 23% FairTax is not going to generate any more tax revenue from the underground economy or illegal aliens than our current system does. On the other hand, if I am correct and the FairTax rate will need to be 50% or higher, then, yes, the FairTax will generate more tax revenue from those sources than does our current system.
Hank,
I have little sympathy for the so called lower income group that live better than the middle class of some countries of the world. Certainly there are exceptions, but too many of these lower income citizens feel entitled to luxuries that they have not worked to obtain. We need to reduce entitlements, as well as easy credit, so that more folks have added incentive to pull their own weight. The current administration is working hard to move us in the opposite direction to put more people on assistance in order to secure their control of office. Unfortunately, this cannot continue forever. Rather than the benefits of a Trickle-down economy, where everyone in the boat rises with the tide… we will all suffer the consequences of Tricle-up poverty, which seems to be the way that socialism attempts to make everyone equal by dragging the top. down. But, I digress…
You post the same comparisons from the last time you tried to make this point. Again, you have compared the observed out of pocket taxes for our current system vs the Fair Tax. You did not include the higher product costs from imbedded taxes, and do not include the prebate in the calculations.
I see no way the lower income are worse off? Rather than work with the numbers you provided, let me offer the following example for you to pick apart.
Let us assume:
A) a family of 4 has an income equal to the defined poverty level. (For simple calculation purposes, let us say this is 27,000.)
B) the family spends all their income.
C) with the FairTax, real product costs go up 20%.
Now, our results are:
1) With the current system, the family spent about 25,100, which is what they had left after ~7% comes out for payroll taxes.
2) With a 20% rise in product costs, the family must now spend about 30,100 for the same goods.
3) However, the family now has their entire paycheck of 27,000 + ~6,000 in pre-bate for these purchases.
This family is 3,000 ahead. And, this does not take into account that FairTax can be avoided by purchasing used goods. If we assume this family already purchased used goods to stretch their 25K net income, then their FairTax product cost is less than 30K. In any case, I don’t see how this family does not come out ahead with the FairTax? What am I missing?
I trust that your table is real data. However, I would appreciate if you could show it in similar terms to the example I created. I am not understanding your comparisons, and feel they are likely not apples to apples.
Al — In your post No. 95 (it’s a little difficult to follow all of the back and forth in these posts; poor Morph is doing the best job he can to try to post them in order), you asked whether there was any way our current system was better than the FairTax.
Wel, yes. Despite all of its flaws, our current system is basically progressive.
http://gregmankiw.blogspot.com/2009/01/progressivity-of-tax-system.html
To me, that is the strongest argument in favor of our current system. And, despite all the rhetoric about how “socialistic” our tax system is and how we “punnish the successful”, less than one percent of us pay more than 25% of our total income in federal taxes, and even the top one percent pay less than 32%. Like most Americans, I thinkthe progressive nature of our tax system is very important to our democracy and should be preserved.
Obviously, the complexity of our tax system leads to inconsistent results. Warren Buffet, who makes most of his money in capital gains, is taxed mostly at a rate of 15%. Oprah Winfrey, who makes most of her money as ordinary income, is taxed mostly at a rate of 35%. Middle class individuals pay different effective tax rates depending on whether they have a mortgage and how large it is, etc.
So, clearly we need simplification and consistency in our Tax Code; however, all in all I would prefer a progressive Tax Code than the FairTax, which despite the claims to the contrary, will certainly be regressive.
Al,
I’m going to ignore your inane digression about the poor, except to note that it would seem that you have never been poor, never maxed out a credit card, and certainly have never been retired. We aren’t talking about buying luxury items here, but simply trying to have reasonable housing, good food, and maybe even private transportation. The great American dream is purchased on credit for many Americans. And take away credit, and the Fairtax will surely crash as the GDP declines. Some may think that’s good, but I don’t.
The BLS survey has some data for $30,000 earnings which I would prefer to use for simplicity rather than your $27,000. At $30,000, the survey says that families are spending 120% or $36,000. Keep that number in mind as we work through this example.
For a married working family with 2 kids earning $30,000, their income tax would be $513, and payroll deductions would be $2295 for a total deduction of $2808. Purchasing power would therefore be $27192. Adding about $6,000 in borrowed income won’t change their tax burden at all, but will raise their after tax purchasing power to $33192.
Under the Fairtax, the sum of earned income and the prebate would be $36,000, so no borrowing would be required to maintain their standard of living. Total sales taxes, assuming all income is spent on taxable goods and services would be $8381 compared to $2295 under current law. However, Fairtax purchasing power would be reduced by 20% which was your assumed price increase. Purchasing power would be $29152 compared to $33192 under current law.
So, no matter whether you compare tax burdens or purchasing power, the Fairtax is not as economically attractive as current law for the lower income families.
In order for you to understand where I’m coming from, I think you need to also think about a couple of key issues. (1) there is no such thing as an “embedded tax”, just embedded costs of the income tax system. The embedded costs impact only consumer prices. Not one dime in revenue goes to the federal government today as a result of a retail sale. And prices determine purchasing power as I have shown (2) The prebate is not a tax rebate paid in advance. You may think of it any way you wish, but it is actually an income supplement that can be spent and taxed, or saved as your budget allows. In the example above, the prebate took the place of borrowed income. (3) Buying “used” changes nothing except no revenue flows to the federal coffers. After a very short transition period while the existing inventory is being depleted, prices for used goods will return to the price relationship we are familiar with today. Think about it as the “embedded cost of the Fairtax”. By the way, I reviewed my 2008 budget and couldn’t find one used purchase.
Hayden… You have an interesting pint here pertaining to the FairTax capturing basically the same tax revenue as the “embedded tax”. I might be missing something, but on my first read of this I don’t find any fault with your logic. I have to say that the extra $10-30B that the FairTax would collect (based on the estimated size of the undergournd economy and the 1% difference between embedded taxes and the FairTax) is disappointingly small.
There is another issue here though. Right now I get hit with income tax, and it’s no small number. In addition to that, I also pay all of the same “embedded taxes” that the drug dealer pays. Assuming that the FairTax is 23%, I figure all Americans who are working legally in this country and paying income tax are going to realize a significantly reduced tax burden based upon your argument.
This also seems to further the idea that the FairTax is indeed “fair”. Those of us working legally will realize a significant increase in take home pay, I don’t think you will disgree with that. Prices will obviously rise by some degree with the addition of the FairTax to all goods and services. The illegal getting cash under the table though will not get the same increase in take home due to the FairTax, or will most likely see less of an increase. This puts a proportionally larger burden of the new tax change on his shoulders than that of the legal worker.
Maybe I’m grasping at straws here. I don’t like your argument, and I’m big enough to admit that it has everything to do with not being able to pick it apart. I honestly hope that someone smarter than me can point out the fallacy in this.
Congratulations. I have to concede this point to you at this time.
Al,
The BLS survey has some data for $30,000 earnings which I would prefer to use for simplicity rather than your $27,000. At $30,000, the survey says that families are spending 120% or $36,000. Keep that number in mind as we work through this example.
For a married working family with 2 kids earning $30,000, their income tax would be $513, and payroll deductions would be $2295 for a total deduction of $2808. Purchasing power would therefore be $27192. Adding about $6,000 in borrowed income won’t change their tax burden at all, but will raise their after tax purchasing power to $33192.
Under the Fairtax, the sum of earned income and the prebate would be $36,000, so no borrowing would be required to maintain their standard of living. Total sales taxes, assuming all income is spent on taxable goods and services would be $8381 compared to $2295 under current law. However, Fairtax purchasing power would be reduced by 20% which was your assumed price increase. Purchasing power would be $29152 compared to $33192 under current law.
So, no matter whether you compare tax burdens or purchasing power, the Fairtax is not as economically attractive as current law for the lower income families.
In order for you to understand where I’m coming from, I think you need to also think about a couple of key issues. (1) there is no such thing as an “embedded taxâ€, just embedded costs of the income tax system. The embedded costs impact only consumer prices. Not one dime in revenue goes to the federal government today as a result of a retail sale. And prices determine purchasing power as I have shown (2) The prebate is not a tax rebate paid in advance. You may think of it any way you wish, but it is actually an income supplement that can be spent and taxed, or saved as your budget allows. In the example above, the prebate took the place of borrowed income. (3) Buying “used†changes nothing except no revenue flows to the federal coffers. After a very short transition period while the existing inventory is being depleted, prices for used goods will return to the price relationship we are familiar with today. Think about it as the “embedded cost of the Fairtaxâ€. By the way, I reviewed my 2008 budget and couldn’t find one used purchase.
Hank Van Gieson · Mar 18, 2009 at 9:13 am · Permalink
Hayden,
I have an issue with your response to Scott. You say that the gov’t gets the same revenue from drug dealers and illegal aliens in the current system as compared to the Fair Tax? I understand and largely agree with your statement. The gov’t gets ~22% imbedded tax, or it gets 23% Fair Tax, which would seemingly be a wash, but this is not the point. The important point is that now the illegal has been taxed under the Fair Tax, vs the legit citizen taking the burden under the current system. Why would you argue in favor of having law-abiding citizens carry their own share of tax, plus that of the illegal. Under the Fair Tax, we no longer try to chase income (legit or otherwise), and we tax the easier to trace consumption.
Hayden,
Let me address your response 92 specifically, item by item:
1) I am glad we agree that businesses do not pay taxes, but only collect them. Why then, do you immediately question the effect of the Fair Tax on business? Remember that if a business is not profitable, it means his expenses outweigh his revenues. For the most part, this will mean he will not be paying Fair Tax. Also, the Fair Tax will level the playing field with other business, foreign or domestic. It is also designed to ensure that gov’t does not have an unfair advantage in the private sector. All are subject to the same Fair Tax.
2) I see we agree here as well. I have stated previously that my primary interest is replacing our current system in favor of something simpler and more fair. Your proposal is more or less the Flat Tax favored by many. This would certainly accomplish the same initial goals. However, I favor the Fair Tax because it would close the option for Congress to manipulate the tax code. The day after a Flat Tax is passed, there would be lobbyists lined up to petition Congress to implement a tax break for their employers. Also, I desire the Fair Tax to make it painfully clear to a greater portion of our society the true cost of gov’t.
3) You come around in post 99 that dual reporting in Fair Tax should drive higher compliance. When a business makes a sale, it has no idea whether the purchaser is a business that will report this as an expense, or if it is an end consumer that will not report the sale. Therefore, most businesses would simply pay their Fair Tax owed without trying to cheat. This would certainly be true for larger businesses, which would be at higher risk of audit. Since Fair Tax on the top 100,000 businesses (in revenue) would replace the tax revenue from 85% compliance of our current system, we should expect greater revenues under the Fair Tax.
—
VAT tax:
The problem with the VAT tax proposal is the same the as Flat Tax issue from above, in that it leaves open the same holes for Congress to manipulate the way they have done with our current system. Also, it leaves in place the inefficiencies of our current system, and adds new compliance overhead for gov’t and business to pay the new tax.
—
Underground economy:
As I point out in 101, the issue with the underground economy is not so much the amount of tax revenue to the gov’t, but who is paying it.
—
I agree that most people are not aware of their current tax burden. I contend that more people will be aware with the Fair Tax, which will help to hold Congress accountable for their spending of OUR money. With all the hidden taxes, many people pay tax at a rate in excess of 50%.
—
You agreed that our current system is “inefficient, unfair, and in many case, counterproductive”, and you disagree that the Fair Tax is better. However, you fail to explain why?
—
Finally, I think it is obvious I am truly interested in a better tax system. I freely admit that a Flat Tax is better than what we have today, and I would fully support a Flat Tax. However, I believe the Fair Tax is better than a Flat Tax. Therefore, I will continue to push for tax reform in general, but the Fair Tax specifically, for the many reasons I have argued.
Hank,
In your post #102, you make my point. Without any borrowing, the example family had a purchasing power of 27,192. Under the Fair Tax with an assumed 20% rise in prices, the family has purchasing power of 29,152, or 2,000 more!
I have agreed with you that prices are unlikely to stay the same, and will rise by some amount. I believe that 20% price increases are not realistic, and they will really be lower. However, even with this very high assumed price increase, I have shown that this example family is better off.
You continue to ignnore the imbedded cost of our current tax system. In your example, you show 2,808 as the tax burden on this family. However, you forget to include the imbedded tax cost. If we use the 22%, we have nearly 6,000 of hidden/imbedded tax in their 27,192 of spending, or 7,300 if you want to use their borrowed spending to 33,192. Even if we assume a lower imbedded rate of 15%, These numbers are still 4,000 to 5,000 dollars of imbedded taxes, for a total taxes on this family of 7,000 to 10,000 depending on the imbedded cost rate and how much borrowing.
For the Fair Tax, this family paid 8,381, but received 6,000 in pre-bate, which means they only paid 2,381 in taxes. This is not completely apples to apples, because there was a slight offset in purchasing power with price increases. However, this family was still at least 2,000 ahead. Even if they were to spend above their income, they would be 2,000 less in debt! And, as I have pointed out, with the Fair Tax, this family chooses to pay taxes when they buy new goods. If they wish to not pay as much tax, they can buy used items. There is simply no way this family does not come out ahead with the Fair Tax.
1) As for my understanding of the current tax system, I am not confused about how much ends up as usable tax revenue vs tax compliance overhead (for the business and for the gov’t). I have been very critical about this inefficiency since I began posting. These are all costs associated with the current system. They contribute to the final cost of the product, even though they cannot be “seen” by the buyer. Therefore, they are absolutely hidden costs associated with taxation, and can be called hidden or imbedded taxes.
2) I agree with you that the pre-bate is an income supplement. However, it is a recognition that gov’t does not need to tax those that are struggling most to acquire the very basic necessities.
3) I strongly disagree with you about buying used. Smart shoppers recognize the value of used goods, with or without the Fair Tax. With the Fair Tax, used goods have an increased value. The Fair Tax could be viewed as a “green” platform, since it extends the useful life of many goods, meaning they will not end up in landfill so soon.
I apologize for my rant about the poor living beyond their means. I know this is not true for many. However, I am certain there are plenty of folks that live beyond their means, mostly due to poor choices. Again, they should stop comparing themselves to the upper class and what they don’t have, and look at other parts of the world and appreciate what they do have.
I am not suggesting that we eliminate credit, just ensuring that it is used more responsibly. It has not been used responsibly up to now, and we have TRILLIONS in bank bailouts and stimulus spending to show for it. This “easy” credit that ends up being absorbed by the gov’t, along with the expansion of other socialism is putting my children and grandchildren far into debt, jeopardizing the very stability of this country.
The financially irresponsible in and out of gov’t are stealing from us responsible citizens (and our children) in order to pay their bills.
Al,
You are correct that, with no borrowing, the Fairtax would be more favorable to our $30,000 family of four. No argument there from me. But the whole point of this blog was to examine the impact of borrowing, or in the case of retirees, drawing down savings. The issue was triggered by the 2007 BLS consumer spending survey which showed that families with $30,000 earnings were spending 120% of earnings or $36,000. So, please add $6,000 to the family spending under current law (borrowed, inherited, etc.) and $6000 to family spending under the Fairtax (the prebate) and tell me what happens to both tax burden and purchasing power? You see, under current law, the added income does not raise the tax burden one dime. Under the Fairtax, the 23% rate applies. So, the income tax burden for $36,000 is $2808 versus $8281 for the Fairtax, and purchasing power is $33192 under current law, and $29252 under the Fairtax. Setting aside the issue of borrowing, who is better off economically?
We are still miles apart as to what the prebate really is. Step back and look in your checkbook. The prebate is simply an income supplement. The only reason you think of it as a rebate of sales taxes is because AFFT wants you to believe that myth. The prebate will be spent and taxed by our lower in come families.
Also, there is no such thing as an embedded tax, just embedded costs which affect only prices. The claim that under current law, we are paying embedded taxes as well as income taxes is another myth. Not one dime goes to the federal government upon a retail sale under current law. If you want to talk about the embedded costs of the income tax system, then you need to talk about prices. Current prices being the baseline, and prices under the Fairtax will be much higher. I think 20% may even be too low, but that’s because I don’t believe the Fairtax would ever be revenue neutral at 23%. No study supports thge 23%, although the AFFT bought and paid for analysis comes close.
I’m not clear on the buying used issue. We both agree that used prices will rise, and I agree that used stuff may stay around longer at least initially. I would purchase a six year extended car warranty rather than buy a new car every two years. Where are we in disagreement?
I couldn’t agree with you more that fiscal irresponsibility and run away federal government spending is the real problem.. But I don’t see that the Fairtax does anything to curb spending, in fact it may facilitate increased spending if the long term estimates about increased growth with increased revenue come true?
Scott and Al — I suppose we have kicked these points around enough. Both of you are clearly rational, intelligent, fairminded folks and I apologize if I’ve appeared overly obnoxious and overbearing.
I guess my my main point of all my rambling is that the people pushing the FairTax are (in my opnion) doing a terrible disservice by making claims that are speculative, at best, and dishonest, at worst. Yet, they will make these claims with such vigor and certainty as if they have been thoroughly vetted and agreed to by every economist under the sun.
It’s only when you stop and start examining some of these claims that you begin to realize that such-and-such claim isn’t quite so. And then you realize that if this claim isn’t quite right, then that claim can’t be quite right, or that some of the claims are mutually impossible. Eventually, you might take the time to look into some critical studies and reports about the FairTax and wonder why it is that the more vocal proponents will simply ignore these criticisms.
Frankly, the FairTax system would benefit me tremendously because my personal tax obligations would be dramatically reduced (at least, until Congress had to start confiscating property to make up for the lack of tax revenue). So I’d be thrilled if Congress enacted the FairTax tomorrow. However, I would want to make sure that the citizens really understood what their representatives were voting for.
Each of you knows enough to be skeptical of the claims you hear both for and against the FairTax. You might still support it; you might prefer something else; you might want a hybrid. (I, for example, would like to have a consumption tax to replace the Medicare tax, but I’d keep a simplified personal income tax as well).
I would be very interested in learning your reactions the next time you hear a talk radio host make some emphatic claim about the FairTax that sounds good on the surface, but seems just a little too good to be true. I would love to hear what you uncover when you do a little investigating. Maybe you will report your experiences here on the blog, and then you’ll understand what Hank and I (among others) went through when we started asking questions and digging below the surface. Warning: Expect lots of hate mail if you start asking too many questions. It comes with the territory.
hayden, i’ve run the numbers for my own personal situation for the last two years, and when i do my taxes this weekend, i’ll post them up as well.
and in every case, every time, my wife and i (a married couple making about $50k a year in 4 jobs) come out ahead.
why?
because we don’t take on massive debt to live our lifestyle. we don’t save much, but we don’t spend 120% of our income, either.
so…people who live beyond their means (debt spending, not wealth spending) are punished by the tax system for doing so….and the problem with that is what?
and compared to the current system that punishes people who are trying to better their means, it’s a ton better.
feel free to dig up my post from year on FTG, and see if you find the flaw in my math.
or, after i do my taxes this weekend, i’ll make a post for this blog, and we can go thru all this same old crap again.
Justin — Of course you come out ahead under the FairTax. EVERYONE comes out ahead under the FairTax at a 23% rate. My own taxes would drop by 90% if we switched to the FairTax. That’s because the 23% tax rate is completely bogus.
Now, go back and calculate your FairTax liability at a 50% rate, and increase your state tax liability by 50% (since state government spending is taxed under the FairTax) and let me know if you still come out ahead.
(By the way, I would still come out way ahead at a 50% FairTax rate, as would almost everyone who has an upper middle-class or higher income, which is why a 50% FairTax rate would still be too low to work. But at least it’s closer to reality and the problems of the FairTax become more evident when you use a rate that is at least somewhat more realistic than the magical 23% rate.))
Hayden,
I somewhat agree with you. The Fair Tax would be better if it contained other sources of revenues and the rate on consumption were lower. However, I would completely abolish all forms of income tax and payroll tax. I would keep capital gains and estate taxes and/or raise the current stock and commodities markets transaction tax from the current .004% to 5%. This would not only increase federal revenues, it would lower the consumption rate to a more reasonable rate.
Justin,
You may have been targeting your post at me since you referred to the BLS 120% figure. In any event, I am sure you will come out ahead under the Fairtax-assuming the 23% is valid- which it isn’t!
Family of two earning $50,000 would pay an estimated $7841 in payroll deductions and income tax withholding. That’s a 15.7% effective tax rate the way I figure it, (and 24.4% the way Morphh does it?). Under the Fairtax, you would have a total of $54784 in income including the prebate, and if you spent it all on taxable goods, (unlikely), your effective tax rate would be 23%. Purchasing power under current law would be $42159, and under the Fairtax, assuming a 17% price increase, your purchasing power would be $45470. You would have around $3000 in added purchasing power under the Fairtax. Keep supporting the FT plan, but keep an eye on the projected rate/prices.
My point was that at earned income less than $30,000, families are borrowing or drawing down savings in order to support their lifestyle. And, using the BLS survey, the net result is that lower income families would pay a lot higher Fairtax than that under current law. Reason being is that the additional wealth spent is not taxed currently, but would be taxed at 23% under the Fairtax. It’s not my place to judge younger working families that borrow to stay afloat, but I certainly don’t support the double taxation that would apply to retirees. Very unfair, imho!
Hank,
The 23% may not be valid because there is an assumption that all current federal taxes except excise taxes would be replaced by the Fair Tax. This may not be totally accuate. What if the final bill were to just replace income and payroll taxes and leave the rest in place? Maybe even adding new excise taxes or increasing the rates on existing taxes, like the transaction tax on stock and commodity market transactions (currently .004%), would effect the final version of the Fair Tax. I believe that this is a very likely senario. The Fair Tax is not very palatable to the majority of voters because it untaxes the investor class completely. This would need to be addressed to get final passage.
RMForbes,
I like your thinking, but how about we just replace the dreaded income tax and leave all the rest in place? The national sales tax rate would then be 12% provided we: (1) removed all exemptions, (2) went for a targeted prebate for the poor at a cost of $59 billion rather than the Fairtax prebate costing $600 billion annually, (3) discarded the crazy idea of having the federal government tax not only their own consumption but also taxing State and Local consumption, and as the clincher, (4) phase the whole thing in over five or ten years. Doesn’t 12% sound better than 30%?
I don’t agree that the Fairtax “untaxes investors”. I’m referring to HR25, Sec. 801-806 provisions that lay on an implicit tax on both investment and debt instruments. And of course, when investors spend their ill gotten gains, they will pay the 23% sales tax.
Because the payroll taxes are just income taxes disquised as benefit programs so the wealthy do not have to contribute over the $102,000 income level. The working poor have to pay this very regressive tax on the first dollar they earn. The benefits earned are not directly held for the individual but instead payroll taxes are paying benefits for the previous generations benefits. It’s a social welfare program and should be understood as one. The wealthy derive just as much benefit from the social safety net as the wage earner but the wage earner get saddled with the bill. This is why Reagan added the earned income tax credit to help make up for the very regressive nature of these taxes.
Hank,
Agreed the Fair Tax does have provisions to tax the investor class but they are still getting a far too favorable rate. In 1895 when the Supreme Court ruled that the several sectons of Income Tax of 1894 were in violation of Article 1 Section 9 of the Constitution. The federal revenues dropped by over 50%. This was a result of losing the revenues from what we now call capital gains and estate taxes. I beleive we can get the consumption tax down to your 12% or even lower if we treat capital markets as any other market. They should not get such a special deal as they have over the last hundred years. I suggest raising the transaction tax on these capital markets for the current .004% to 5%. Then reform the capital gains and estate tax to a progressive scale that will protect the long term investor or the retary from being over burdened when cashing in their stocks or IRA’s to fund their retirement or childs college education. Short term speclative gain sould be taxed at a much higher rate. Once the rates are set and functioning they sould be tied together so the congress cannot raise/lower one without proportionally raising/lowering the other. So we do not end up with the same broken system as we have currently.
I believe that the State and Federal governments should partner in this plan and be totally controlled at the state level. So when the congress passes a law that requires the state to act the state can directly deduct the amount from the revenues collected. The current system is very inefficient the feds collect taxes and send it back to local or state jurusdictions. Since WWII the federal government has been involved in many things that are not explicitly mandated by the constitution and have usurpted many state functions. This needs to be corrected and the easiest way is to give the purse strings to the states. My state of California has already rules in place that exempt government agencies from taxation, I have no problem letting these rules stand.
I don’t understand why you believe we need to slowly phase this in. The present system is broken and not functioning anymore. We need to reform the system as fast as possible. The slower we act the bigger the problem. The effect of removing all federal payroll deductions would create an immediate stimulus to the economy. As the economy grows this will generate more revenues for the federal government than any other idea I’ve seen and has a far better chance of digging ourselves out of the fiscal hole we’re in.
I agree with Mr. Forbes that phasing the Fair Tax in gradually is dangerous. I’ve seen the best-laid and best-intentioned government plans stall. We cannot afford to end up with both a sales tax and an income tax.
~Jim Bennett
Jim,
A phased transition to a national sales tax would be not only better able to deal with the unk-unk’s that are sure to arise during transition, but would be much more politically acceptable. Congressman Jim Saxton, the former chair of the Joint Economic Committee, wrote in February 2006 that, “The US Government is institutionally conservative, resistant to change, and generally supports the status quo. They need incremental change, not wholesale reforms.†‘Nuff said?
If you could point to any other nation that has funded their federal government with only a sales tax on essentially all goods and services, it might be less risky to transition over night, but you can’t.
Our nation took five years to adopt the 16th Amendment, the income tax has been in force for ninety-five years, and taking five years to get rid of it doesn’t seem unreasonable to me.
One more time, Jim, please tell this old man just what would be wrong with having multiple taxing systems? What is that paranoia all about? Most of the States have both income taxes and sales taxes, and they seem to be working OK even during times of stress such as we are currently experiencing. You are advocating putting all the eggs in one basket, which might have led to a revenue disaster during the current crisis with the GDP dropping 6% in the last quarter. Is that really a good plan?
John Linder replied to my suggestion to phase in the Fairtax by stating that he wanted all Americans to enjoy the benefits of the Fairtax immediately. Sorry, but I don’t agree, and I don’t think the Congress would either! Stay tuned!
Why should the FairTax be phased in?
Uh, what if it doesn’t work?
Sorry Hank, but you just hit one of my hot buttons…
Why in the world does the US need to sit back and follow anyone? This country was founded by pioneers and leaders. Our representative democracy had never been successful anywhere else in the world, but it has survived rather nicely for the past couple of centuries. We were the first country to put a man on the moon. We developed the microprocessor, the light bulb, mass production processes resulting countless industries like the automobile, flight, and the list goes on and on and on… The argument that we can’t do it because nobody else has ever done it before to me is truly the most worthless argument I have ever heard anyone make against the FairTax.
OK. I’ll take a deep breath and step down from the soapbox now.
I definitely have concerns with a phased in approach to the FairTax, but I’m willing to give it a shot. I agree that ending up with a FairTax AND an income tax would be bad, in fact I think that would be worse than our current situation. The reason being that you would keep much of what’s wrong with the current system plus you would add the weaknesses of the FairTax on top of that and maintaining an income tax of some kind greatly reduces many of the benefits of the FairTax.
I share Jim’s concerns that a phased in approach could put us in a position to have a consumption tax AND an income tax that gains us only fractional benefits from the FairTax. This is purely conjecture on my part, but I almost think that phasing in the FairTax might do more harm than good. My fear is that with a phased in approach popular support for the idea would be very strained since people don’t see the dramatic change of increase to their paychecks to offset the price increase at the register. Plus, wouldn’t this greatly increase the transition cost as you are annually making significant changes to tax rates and compliance laws?
Hayden…
What if it doesn’t work? Let’s assume that you are correct in all of your negative arguments against the FairTax. Let’s assume that avoidance/evasion of the FairTax is say 30%. Additionally, there is a net wash on additional revenues generated from capturing a portion of the underground economy. Businesses by and large simply pocket the vast bulk of the compliance cost savings leading to an insignificant drop in prices. No foreign investment moves into the US to take advantage of the favorable tax code, and no domestic businesses move overseas operations back here for the same reason. To cover all of these shortcomings the government determines it needs to raise the rate from the originally proposed 23% to 55%. Is that a sufficiently realistic picture in your mind (I’m asking honestly, not being sarcastic)?
Assuming the FairTax were to be a complete and utter failure, then we ditch it completely as a failed experiment and go back to the income tax model. Personally, we might be better off in this case anyway. Hopefully reverting to an income tax model will at least result in a much less complicated income tax system. Additionally, I’m sure that some useful lessons would have been learned along the road to failure, so this reverting to the income tax system might even yield extra unforeseen benefits. I don’t think that is completely out of the realm of possibility.
I agree Scott. Why should we listen to the morons that messed up the old system when we are trying to fix the mess they got us into.
Scott — I can appreciate that you are not trying to be sarcastic, but here is the problem.
First, assume that our current Tax Code is repealed on, say Jan. 1, 2010 and replaced with the FairTax (which, obviously, would need a majority of the House, at least 60 votes in the Senate, and a President willing to sign the legislation into law.
Second, assume that the fears of the FairTax opponents come true. The FairTax generates only half the revenue we were expecting, whole industries collapse as people stop buying new cars or homes, massive amounts of tax avoidance takes place, etc.
Third, by June, government bonds yields soar as our deficit explodes and its clear that we’ll never be able to generate enough tax revenue to meet the governments oblgiations. This drives up corporate bond yields, mortgage rates, etc., which further depresses the economy.
Fourth, by August, clear majorities in both houses of Congress finally decide to act, but Sean Hannity and Neal Boortz rally enough support in Southern states to convince 41 Senators to block the repeal of the FairTax urging that “we need to give the FairTax a chance.”
Fifth, by Jan., 2011, a filibuster-proof majority emerges to repeal the FairTax, but Congress can’t decide what to replace it with. Some want the 2009 Tax Code, some want the Flat Tax, some want to keep the repeal of the Estate Tax, others want to eliminate the Corporate Income Tax. Some want a replacement tax to be retroactive, others want it prospective only.
Sixth, debate rages on until the government is on the verge of collapseing. Finally, in January 1, 2001, the FairTax is repealed and replaced with the 2009 Tax Code.
Result, we’re now several trillion dollars further in debt. Our auto industry is gone foreever. Housing and retail have been wiped out. Unemployment is well into the teens. Meanwhile, the wealthy have taken advantage of the repeal of the estate and gift tax to transfer trillions of dollars tax free to their heirs. Owners of closely held businesses sell the businesses to relattives free of capital gains taxes, and then buy the businesses back. Holders of stock have sold their shares free of capital gains tax. Owners of real estate with massive capital gains via 1031 Exchanges sell their real estate free of any capital gains. Etc., etc. All of that potential tax revenue is lost forever.
Thus, the 2009 tax rates do not generate anywhere near enough revenue to fund the government, and tax rates are raised to confiscatory levels. Estate taxes are imposed retroactively. Wealth taxes are imposed. And we have a far worse and economically devistating system than we have today.
Frankly, I believe that is exactly what would happen.
Hayden,
I thought there was one point where we could all agree, that the current system is totally corrupted, broken, kaput. You don’t agree?
I would say that the only thing worse than trying a new system that doesn’t work as planned is do nothing at all.
Hank,
I’m not far behind you in age, and I sometimes have learned attributes of human nature along the way. For example, imagine a refrigerator with ice cream in it. If I know there’s ice cream there, it will not take long for me to make the ice cream disappear. Unfortunately the results in my case show.
Now transpose the ice cream image to sources of tax revenue, and transpose my image to Congress – collectively. The more sources of revenue Congress knows are in the “refrigerator,” the more quickly Congress will find ways to consume them. With several sources of tax revenue, people will not always catch Congress with its spoon in the good stuff.
Now bring in the Fair Tax. With the Fair Tax there is only one supply source for the ice cream, which people will see. People will admonish Congress to eat more sensibly.
As it is with ice cream, so it is also with Congress. If you give Congress a consumption tax, for goodness sake take away the IRS-administered taxes immediately before the collective minds of our Congressmen again show their true nature.
Limiting the ice cream to a single source may have risks. But the only risk that is greater is to continue as we are.
~Jim
I am a supporter of the fairtax, but believe that a phase-in (maybe 5 year) would be superior to an instantaneous switch. The main cons to a phase-in are an uptick in compliance costs during the phase-in (although that could be mitigated by making sure income tax laws are locked during the phase-in), it would be easier (politically) to just stop during the phase-in (rather than resurrect the income tax after being dead), and taxing consumption is superior to taxing income (so all benefits of the superior plan would be realized sooner.
Here, on the other hand, are the pros to a phase-in. The economic shock would be mitigated. By that, I mean the overall inflationary effects of the fairtax (especially our oft debated shock in the labor market and how that could keep pressure to put more dollars into our economy). With a five year phase-in, employers could plan ahead and at least limit raises to account for the shift in the labor market. Paying for the inventory tax credit could also be spread out over five. It would also be possible to have the rate mathematically figured (although I’m not holding my breath that politicians will give up that power), so that the rate can go up or down based on economic growth, avoidance, etc. with a goal of revenue neutrality.
Overall, I believe the potential negative side effects of an instantaneous switch outweigh those of a phase-in.
Now that I’ve defended Hank, let me respond to “Most of the States have both income taxes and sales taxes, and they seem to be working OK even during times of stress such as we are currently experiencing.†Really? That is a bold statement. The states are getting an unprecedented $229 B cut of the “stimulus†bill because they are doing exactly the opposite of “OKâ€. 36 of our 50 states are facing deficits in 2009, even though 49 of the 50 have some sort of legal requirement for a balanced budget. It doesn’t matter how many baskets they have, they all need more eggs.
Furthermore, our current federal baskets are quite lopsided. Using 2008 numbers, the income/payroll taxes account for 93.6% of federal revenue. We’d just be switching to a better basket, imho, and add 1% for the estate gift taxes.
Back to the phase-in, here is a potential way it could work (it’s long winded, so it won’t hurt my feelings if you skip it):
Each year for 5 years, add 20% of the base rate until the full rate is reached. At the same time, subtract 20% from current income tax rates for each year. For example, assume the fairtax rate is 20% (for ease of mathematics and to send Hayden into a frenzy) and let’s use the lowest personal income tax bracket 10%. Year 1 would have the fairtax be 4% and our example income tax be 8%. Year 2 would be 8% and 6%. Year 5 would be 16% and 2%.
Now comes the adjustment. This is a little more complicated, but nothing an excel spreadsheet can’t handle. We’ll know exactly how much the fairtax was supposed to provide for revenue neutrality (adjusted for inflation) and how much the fairtax actually produced. Take a ratio based on the latter divided by the former to get the fairtax adjustment ratio. So, for example, if the fairtax produced 20% more revenue we would get 1.2 and if it produced 20% less we would get 0.8. If you divide the original fairtax rate by this ratio, you’ll get the new rate.
Since I’m a proponent, let’s use the 20% increase. The new rate would be 20%/1.2 = 16.7%. That means in year 2 (where 40% of the fairtax rate is to be applied), the rate would be 6.68% (as opposed to 8%).
There is still the issue of redistributing the extra revenue (or making up for the lost), but this can easily be adjusted for over the next x years.
While were on the subject of things a fairtax supporter is against, I am also against the prebate (although I understand the politics) and the education exemption.
Hayden,
“Frankly, I believe that is exactly what would happen.” Really? With dates and everything. With all due respect (and I do respect you), that post contains a lot more imagination than it does the probable occurences based on sound economic analysis (which is of course, completely within your rights). Maybe even demagoguery.
Andrew — I actually agree with you that if we were to enact the FairTax, we should have a phase-in along the lines that you suggested,the pre-bate should be eliminated and there should not be an educational exception. Will wonders never cease!
Also, clearly the dates in my Post No. 124 are purely speculative, but the point (that I believe you would agree with) is that once the Genie is out of the bottle it’s not easy to put back in.
Whether it’s the Iraq War (if you’re a liberal) or Social Security (if you’re a conservative), once the government commits to something, there is no way to revert back to the status quo ante, and it always gets more complicated and expensive than expected to fix the mess we ourselves created.
By the way, in my adopted state of Georgia, the legislature has just voted to phase out the corporate income tax, which I agree with. Theoretically, the corporate income tax doesn’t add any tax revenue because the same revenue should be capture via taxes on capital gains and dividends. In fact, there should be increased tax revenue from increased economic development in the state by more businesses moving into the state. It will be interesting to see how it plays out. (Alas, the phase out will occur, if at all, over a dozen years or so.)
Hayden… (Now for some sarcasm)
I’m so glad you pointed out the fact that “once the government commits to something, there is no way to revert back”. So, when do you think the fed is going to come bust the gas station down the street, or the grocery store, or dare I say the liquor store I regularly shop at? Or, should I keep picking up my booze at any of the above and just keep an eye out for the coppers?
You can’t just go off and say that the government can’t revert back after a failed attempt at some specific change. Prohibition is exactly that and even on the same scale, Constitutional law that is, as the FairTax would be.
I would argue that IF the FairTax were ever passed and implemeted immediately or phased in, there would be plenty in Congress just waiting for it to fail. I’m sure that in the event of failure, there would be plenty of alternatives to choose from. And your point about “All of that potential tax revenue is lost forever.” I think you greatly underestimate the confiscatory powers of our federal government. Just look what they are doing to the AIG execs. Taxing their bonuses at 90% after these have already been paid out.
Your outlook for the FairTax is so bad, you could make a one armed leper who just had the winning lottery ticket stolen by his wife who ran off with their gardener look happy. I have maintained a healthy respect for your arguments and found some of them to have merit. This post about the implementation of the FairTax seems to me that you see absolutely no benefits to the proposed system. This doesn’t seem to be reasoned argument if this is truly what you think might happen, this seems more like extreme prejudice.
another possible phase in (and perhaps a way to forestall congress eating all my tubs of ice cream)
trade a portion of the FT for a specific tax.
first up would be the little one: the medicare portion of the payroll tax (MCPT), both sides goes away, a FT to fund Medicare and its associated prebate comes in. Medicare doesn’t have the ‘third rail’ stigma of social security, and it’s a system that is quite definitely going to die an unfunded death quite soon.
we know how much revenue that tax collects, we know how much consumption happens, we can quite easily figure out the rate at which that consumption should be taxed to replace the medicare revenue. the DHHS tables still exist, the prebate is much smaller, and the MCFT would be selfsustaining (collects enough revenue to match current MCPT collections and the MCFT prebate)
write the legislation to trade one for the other, and include a 5 year sunset provision, and a ban on medicare tax reinstatement (in fact or by proxy) for that 5 years. allow for a rate adjustment after three years to even out any projected or actual over- or under-production (compared on a revenue neutral basis).
run it for a couple years, employees have a little more in their pocket (possibly better than the 2009 stimulus ‘tax cut’), employers have a little more breathing room in their payroll budgets.
this will leave the social security, income, corporate, estate, and investment tax structures in place for probably at least 4 years, until the time comes that each piece of the current system can be replaced with a specified and corollary bump in the collective FT rate.
eventually, if the proponents are right, the increase in consumption (and the resulting revenue generation) will cause each ‘next step’ to be smaller than it would have been if the jump were taken all at once. if the opponents are right, the drop in consumption (and the tax revenue) will be easily noticed, we can go back to the original failing method.
or…should both sides be wrong, we’ll have a tax structure that doesn’t work any better than the current one does….but is simpler to decipher, and raises just as much money.
Justin — I couldn’t agree more! Use a consumption tax to fund Medicare.
We wouldn’t even need to prebate, so it would be simpler, cheaper and the rate could be kept as low as possible. (Since we would be replacing one regressive tax with another, the prebate should be less of an issue.)
Tax avoidance will obviously be much less of a concern than under a full FairTax. Businesses will see their payroll costs decrease (albeit, only slightly). The tax base will be expanded, mainly to retirees, but that won’t have the same devistating effect of the full FairTax.
And, who knows, if it works the way the FT advocates claim it will, it could be expanded. (The corporate income tax would be next on my list.)
Will wonders never cease! I’ve agreed with both Justin and Andrew in one week!
Justin,
Not a bad idea and one Hayden would certainly sign up for, I guess. I did a little calculator work when he first raised the idea of setting up a national sales tax to cover Medicare, and it looks like a 2% national sales tax would be revenue neutral using the BHI 2007 data base. Closer to 3% if you insist on some sort of a prebate?
However, once again you are forgetting about us old folks. We have already paid into the Trust Funds for 45 years or so, and the government agreed to provide Medicare upon reaching a certain age with no more contributions.. Under your proposal, all retirees would be forced to resume paying for Health Care with our sales tax dollars. Doesn’t seem fair to me?
Hank,
Social Security trust fund? Do you really believe that myth? It never existed!!
Social Security is a very good social welfare program funded by the payroll deduction which in reality is just another income tax. The reason it’s done this way is to keep the tax regressive so the wealthy would not have to help pay for it over a specific level.
Removing the prebate would kill the Fair Tax and make it unpassable. The prebate covers the cost of the tax on basic needs and makes it a progressive tax code. Removing it will make it totally regressive just like the current payroll taxes. If you want to lower the consumption tax rate and maintain the progressive nature of the Fair Tax just keep the capital gain and estate taxes. Then increase the capital markets transaction tax from the current .004% to 5%. This would more than cover the lower revenue rates and would be truly fair and progressive.
hank said:
“However, once again you are forgetting about us old folks. We have already paid into the Trust Funds for 45 years or so, and the government agreed to provide Medicare upon reaching a certain age with no more contributions.. Under your proposal, all retirees would be forced to resume paying for Health Care with our sales tax dollars. Doesn’t seem fair to me?”
i haven’t forgotten about the old folks.
first of all, medicare is currently underfunded by the payroll tax, so the shortfall is made up by general revenues, which is still money out of everyone’s pocket (either directly or embedded). at worst, the MCFT wouldn’t fund medicare any better than the MCPT does, so the impact to you is negligible to non-existent. (since the prebate will fund your MCFT spending).
since medicare is underfunded currently, the point will come where it is completely insolvent, and the program will have to go away. those who ‘have paid in for 45 years’ and gotten some benefit will still fare better than those who paid in for their entire working careers and got nothing but a debt to show for it. when the program dies, do you think the government is going to feel a need to honor that ‘contract’?
and, i still find it interesting that you rail against the prebate, and then complain that you are being forced to pay the tax. by accepting the prebate, you are relieving yourself of the greater portion of the tax burden.
currently, you are a retiree spending a portion of every dollar in embedded taxes
with the FT in place, you are a retiree spending a portion of only those dollars above the poverty level in taxes.
i cannot understand why one seems perfectly acceptable, and the other is horrendous.
RMForbes,
Your opening comment about the Social Security Trust Funds falls into the same category as your frivolous comments about the legality of the income tax. Pure BS!
The 2008 Annual report of the Trustees of the SS and Medicare Trust Funds shows that (1) Medicare annual assets will fall below expenditures in 2013 and the Trust Fund will be exhausted by 2019. (2) The SS Trust fund will see expenses exceed annual income by 2017, and the Fund Reserves will be exhausted by 2041. At that time, annual revenues will only support 78% of entitlements unless changes are made to the program. (3) A 2003 Act requires the Administration to submit a restructuring plan for Medicare in the event of two consecutive fund warning reports. The 2008 report is the second such consecutive warning and Obama should have proposed a Medicare fix in his 2010 budget. It remains to be seen what happens in Congress. The 2008 report was signed by the Secretaries of Treasury, Labor, and HHS, plus the SS Commissioner.
As for the prebate, I am not advocating doing away with the prebate, only reducing the cost by an order of magnitude by targeting it to the lower income families. Alternatively, we could retain the EITC program at the same cost as a targeted prebate and help the same families.
The prebate does not make the Fairtax progressive, it only moves the point of regressivity from zero to the AFFT defined poverty level. Commonly accepted definitions of regressive relate it to income, not spending, although this could change. If you want to try to reeducate 300 million Americans, be my guest. I think you are swimming upstream!
Hank,
Your medicare numbers are a bit off. Medicare currently runs a deficit. Part A (Hospital Insurance) may be covered, but parts B and D (Supplementary Medical Insurance) are not. Depending on how you want to look at it, the dedicated sources of medicare revenue (payroll tax, beneficiary premiums, and state payments) do not cover the current annual costs. Those uncovered costs are paid for through general revenue. I think the 2013/2019 dates refer to part A only.
The funding warning is generated when, for two consecutive years, the trustees determine that within 7 years, the percentage of that general revenue funding will exceed 45%. 2014 is expected to be that year. Last year the trustees issued there first warning and Bush responded with HR 5480 (which proposed medical malpractice reforms and the raising of premiums for higher income seniors), but congress did nothing with it.
I’m curious about how long Obama has to respond.
I do see RMForbes point. If you borrow money from me, I can make a reasonable assumption that you will make a good effort to repay me in the future. If I borrow money from myself (which is what happens when the trust fund is filled with treasury notes), what does that even mean. Maybe I borrowed from my Beer fund to buy some pretzels, so I can track how much money in the future that was to be spent on pretzels should now be spent on beer, but it is a self-contract. I can dissolve it at will. The congress can dissolve your trust fund at will (legislatively speaking).
“We have already paid into the Trust Funds for 45 years or so, and the government agreed to provide Medicare upon reaching a certain age with no more contributions.” You were the government. What the previous generation tried to do was to obligate the next generation to provide a future service. That involves one party signing up another party to a contract without consent. That doesn’t seem right to me.
Andrew,
Thanks, you are correct that part B/D depends on funding from the General Revenue Fund as I understand it. I believe that the 2003 Act requires Obama to submit a Medicare “fix” in his 2010 budget. Stay tuned!
I’m not sure just what you are agreeing with that RM may have written, but the notion that Congress would “dissolve the Trust Funds at will” seems ludicrous to me. Oh well, I guess anything is possible, just not very probable.
Finally, I don’t agree at all with your last comment that ” You were the government. What the previous generation tried to do was to obligate the next generation to provide a future service. That involves one party signing up another party to a contract without consent. That doesn’t seem right to me.” You continue to forget that the SS plan has been in existence for 75 years or so. It is simply a federal government sponsored insurance plan that provides a safety net for the ill and retired families. Those so called payroll taxes are in reality premiums on the insurance plan. The original actuarial projections didn’t hold up, so in 1983(?), the premiums were modified to put the plan back on track for another 50 years. It now appears that at some point in the near future, the Medicare portion will need another correction, and the same for the SS portion at some later date. My generation had nothing to do with committing your generation to some sort of contract. Blame it on FDR if you wish, but it isn’t right to characterize Social Security as a Ponzi scheme, or a social program that is somehow unnecessary. The darn thing works, needs funding corrections, mostly to account for our increasing longevity, and AFFT made a huge mistake in trying to get rid of the IRS and the SSA at the same time.
Hank,
You go on and on about how the Fair Tax is unfair to retirees. However, what about what your generation and mine have done to our children and grandchildren and perhaps many generations beyond. We have allowed our politicians to have deficit spending, sometimes with huge deficits. This spending was to fund programs we may or may not have benefited from directly, but this debt run up has occurred on our watch. Therefore, we don’t get to cry foul, or unfair just because we may not benefit quit as much as others. I believe I have shown that you are better with the Fair Tax than with our current system. If you are better off, why does it matter that some others get more benefit? My point is that we are nearly all better off, and the country is in better fiscal and political condition.
Back in #108, you asked me to consider the case of a family spending $36,000, when they only have $30,000 income. With the Fair Tax, this family is borrowing nearly $1700 less with an assumed 20% price increase, which is 2/3 of the 30% exclusive consumption tax. Why is this not better when the family is borrowing only $4,300 with the Fair Tax vs your assumed $6,000 borrowing under our current system. Also, I pointed out this is the upper bound, and the family could save even more if they purchase used goods, which will 1) be cheaper, and 2) not be subject to the Fair Tax. The price increase would have to be 25% exclusive for this family to break even vs the current system.
Al,
You wrote: “With the Fair Tax, this family is borrowing nearly $1700 less with an assumed 20% price increase, which is 2/3 of the 30% exclusive consumption tax. Why is this not better when the family is borrowing only $4,300 with the Fair Tax vs your assumed $6,000 borrowing under our current system.” I don’t understand your point? Would you please provide more detail?
My point for this family was that under current law, they pay $513 in income tax and $2295 in payroll deductions, leaving purchasing power of $27192 plus $6000 in untaxed “borrowed wealth” for a total purchasing power of $33192. Under the Fairtax, their income would rise to $36440 with the prebate, and if all income was spent on taxable goods and services, they would pay $8381 in sales taxes, leaving their purchasing power at $28059. $2259 versus $8381 in taxes, and $33192 versus $28059 in purchasing power? Whoiis better off?
We can argue about what spending might be for mortgages, charity, tuition, and gifts, all of which would reduce the sales tax burden. But I don’t think this family’s income would support much of that type spending? Or at least it shouldn’t? One other point–if the “borrowed wealth” troubles you, let’s change that to “accumulated wealth” which would produce the same result?
As for buying used, this may be the most cruel Fairtax myth of all. I agree with you that used goods would be cheaper than new goods, but that is no different than the new/used prices relationship today. You seem to imply that by not having to pay a sales tax, there would be an additional dollar saving? This just isn’t true, imho. Think about it as the “embedded cost of the Fairtax”. Surely you don’t think that when owners of a new car go to resell it, they will forget about the 30% sales tax? That isn’t going to happen. The only outcome of buying used is that no revenue goes to the federal coffers, but there won’t be any “windfall” savings
Remember, there are no “used” services which make up around half of the family budget, no used groceries, no used restaurant meals, no used heating oil, no used petrol for your car, nothing used at Wal-Mart, etc. etc. There is practically nothing used in the family operating budget, and only when durable goods such as cars, boats, appliances, etc. are purchased is used an option. But writing that used goods are cheaper and they wouldn’t be subject to the Fairtax is sort of redundant.
Laying a guilt trip on my generation for the mess we are currently in won’t work. You may forget that in my working years, the top income tax rate was 91%, and I was in the 70% bracket in some years. I paid my dues!
This argument about supporting the Fairtax to help future generations just won’t sell. Private gain trumps the public good every time, and that applies to individuals as well as States. Our original federal government formed under the Articles of Confederation failed after ten years for just that reason. So, I don’t expect much action, just a lot of nice sounding rhetoric on this subject. (I hope I’m wrong!)
Change the name to “National Sales Tax”, find a way to prevent double taxation of my after tax savings, and make good on the federal contract terms for Social Security and I might be more supportive of a NST. I’ve shown you how to do just that, but Fairtax-Lite has generated no interest. Too bad!
Hank,
To believe social security is insurance is to believe it unconstitutional. At least that is the reasoning used in Helvering v. Davis. Of course, we all know the constitution was thrown out the window after FDR’s first term, so I’ll accept that any reasoning used after that period is flawed. I think even FDR thought social security was unconstitutional before he was president.
I probably shouldn’t blame your entire generation for the obligations they forced upon the next. It is more the politicians that your generation elected. People that voted for politicians that respected freedom, especially cross-generational, are not to blame. But, on the other hand, people who supported politicians that were perfectly happy putting off current obligations for future generations so that they could maintain political power are quite responsible. It doesn’t matter which generation started the practice, each generation that continues it is just as much to blame. Don’t feel bad. My generation isn’t doing a very good job either (doubled the debt under Bush and going to double it again under Obama).
Hank,
I have seen your comments on a number of FairTax articles over the past few months and I think I am finally beginning to understand where you are coming from. Can I sum up your position this way?
1. I am retired.
2. I have already paid taxes on my retirement savings.
3. I don’t want to pay taxes again when I spend my savings.
It would be helpful if you could be concise.
Andrew,
I haven’t read Helvering recently, so what did the SC find that would make a federal insurance plan unconstitutional? After all, there are government enterprises that run the postal service, Amtrac, TVA, etc., so what is wrong with a federal insurance government enterprise? Doesn’t all this stuff come under the protection of the “general welfare” clause?
Hank,
Our federal constitution doesn’t explicitly limit things and implicitly allow everything else. It works in just the opposite fashion. It implicitly limits the federal government from doing anything it’s not explicitly allowed to do by the constitution (or at least that is how it was supposed to work). So the question, imho, shouldn’t be “what did the SC find that would make a federal insurance plan unconstitutional?†It should be “what did the SC find that would make a federal insurance plan constitutional?†And the answer to that was nothing. So they had to basically say that the government had a payroll tax that they could impose based on their general ability to tax. They also had a program to help those that would suffer from indigence in old age, a national problem that congress could address under the “general welfare†clause. Although FDR’s administration had actually argued just the opposite when promoting social security (that it was insurance), the supreme court said there was no evidence of that and therefore the tax and the service were both constitutional.
“there are government enterprises that run the postal service, Amtrac, TVA, etc.†Yes. And only one of those is constitutional. The post office is explicitly allowed under Article 1, section 8 of the constitution. And in my opinion, allowing the post office was a mistake. Federal express and UPS offer much better service.
When it comes to the “general welfare†clause, I’ll just paraphrase James “The father of the constitution†Madison. If the general welfare clause gives congress unlimited power, what was the purpose of enumerating those powers in Article 1, section 8 of the constitution?
In my view, the 1930’s (or at least late 30’s) were the beginning of the end for our constitution. The progressives changed their strategy from trying to destroy the constitution to just ignore it. The government came in and caused the great depression (rather than just allowing a cyclical recession), everyone got scared, and the government said “the free market has done this to you, we’ll rescue youâ€. They did the same thing with the housing/credit market (Fannie/Freddie/CRA/Federal Reserve leads to TARP) and they’re doing the same thing with our health care system (“they already directly pay 44% of all health care/distort the market with employer only tax breaks/FDA/no interstate insurance competition†leads to national healthcare).
Hank,
I admit I was trying to use the guilt trip a little to make my point. Allow me a little flexibility here… I was trying to make the point that if you are better off with the Fair Tax by 5%, but others are better off by 10%, what is the issue?
I do understand that your generation has made significant contributions to the country and to the world. We have had incredible advances in medicine and technology. Later generations build on those advances and our technology improvements continue to accelerate. My point was that we as voters put people in power that twisted the system to advance their own political careers/agendas. Those politicians spent us into huge debt, and we share some of that blame because we voted for them. Our children and grandchildren did not vote for them, but they will be saddled with this debt, which will lower their standard of living.
As for the example… I will try to simplify my comparison:
— current system —
Family income: $30,000
payroll tax (7.65%): -$2,295
income tax: -$513
Net spendable income: $27,192
borrowed capital: $6,000 <= your assumed borrowing
Net total spent: $33,192
— Fair Tax —
First, I need to work in reverse to compute the purchasing power. Assuming 20% price increase, this family will need $39,830 available to acquire the same goods and services (33,192 + 20%).
Family income: $30,000
prebate: ~$6,000
net spendable: $36,000
total spent: -$39,830
Total borrowed: -$3,830.
This family is over $2,000 less in debt with the Fair Tax than under our current system. Tell me what I am missing?
Al,
First let me tell you how much I appreciate your willingness to participate in my numbers game. Just to review, you have written that (almost?) everyone will be better off under the Fairtax. I would have agreed with you until recently when I found the Bureau of Labor Statistics 2007 survey that showed me that lower income families are spending much more than they earn through borrowed wealth or drawing down accumulated wealth. I now believe that as many as 50 million lower income families may not be better off economically under the Fairtax. The output of my number crunching is both in terms of taxes paid and purchasing power.
While we both could be right in our approach, my calculations used a different method from yours. Basically, you tried to back out an equal purchasing power, while I just let purchasing power be a result.
Here is my 2 +2 family results with $30,000 basic income and 20% additional spending from borrowing or drawing down accumulated wealth.
Under the income tax, we are in complete agreement. The family has $33192 to spend. Taxes are $2808 and purchasing power is $33192.
Under the Fairtax, the prebate replaces any borrowing and the family has $36,000 + to spend. Sales taxes would be $8381 assuming all purchases are for taxable goods, and the adjusted purchasing power would be $29152 assuming a 20% net retail price increase.
So, $2808 versus $8381 in taxes, and $33192 versus $29152 in purchasing power. $5500 more in Fairtaxes, and $4000 more purchasing power under current law. However, borrowing $6000 to create $4000 more in purchasing power doesn’t seem like such a good deal? A point for your side!
However, let’s now assume the family is retired, still with two dependents. Their income tax is still $513, but their payroll taxes are now zero. Bottom line is that purchasing power under current law without borrowing would be $29487 versus $29152 under the Fairtax, a $300 difference. Pretty much a wash and if $36,000 was the required budget amount to sustain a certain lifestyle, borrowing would be required in both cases. Seems to me that borrowing under current law would be $6500 with no change in taxes, and under the Fairtax, closer to $7500 in view of the 20% price increase.
You also need to understand that the $30,000 income families that spend 20% additional are your best comparison case. At $20,000 earnings, BLS claims that they are spending 150% or $30,000, and at $10,000 in earnings, they are spending $20,000. Not at all favorable for the Fairtax!
I conclude that there will be millions of lower income families that would not be better off under the Fairtax, providing the BLS survey is accurate.
Hank,
Again, you are making basic assumptions that are not valid. You completely discount the embedded costs of compliance in the current income tax side and then maximize the posible price increase on the Fair Tax side, of course the numbers will not be favorable in that situation. The current income tax system can never be accurately compared to the Fair Tax because they are completely different. The income tax is a excise tax on the profit from just wages and salaries, it does not tax overall wealth. As an individual becomes wealhier the less they rely on wages and salaries as defined by the IRS for consumption and lower the percentage of revenues they contribute. The Fair Tax taxes consumption with a prebate to untax the basic needs of the individual household. The Fair Tax is better at taxing wealth because the individuals with the higher resources consume more and contribute more to tax revenues. Those with low resources will be completely untaxed by the Fair Tax. The real tax rates with the current system will always be higher because the income tax is paid by a much smaller group and based only upon profit.
We are being short changed by both the income tax system and the payroll tax system. They both favor those with the highest resorces and place the heaviest burden upon those of us below. The Social Security program is a very valuable program but it is not an insurance benefit program as it was sold to the American public. It is a social welfare program. The costs should be paid by all Americans not just the wage earners. If the cost were spead over everyone the programs would not be on the edge of failure.
Hank,
I contend there can be no other comparison other than equal purchasing power. In the end, we are trying to show the family is at least as good or better with the Fair Tax. I have shown in your initial example that this family is better off with the Fair Tax. They have the same purchasing power with lower debt incurred.
For your new example for the retiree. You upped their spending to $36,000 vs the previous example of $33,192. But, I will go with you here… In your example, the retiree borrows $6,500 under the current system to reach $36,000 in spending. With a 20% price increase, the retiree would need to borrow about $7200, or $700 more with the Fair Tax (36,000 + 20% = 43,200). However, the break even is a price increase of 18%.
We have assumed that imbedded taxes are 15-28% inclusive. This is of course the reason that many believe product costs will not change significantly under the fair tax, because 15-28% will come out and be replaced by 23% fair tax. I believe there may be some amount of double counting going on between keeping your whole paycheck vs prices being about the same. This is why I give you the 20% price increase as a worst case starting point. For example, let’s assume that the company only takes out 1/2 of the low end 15% imbedded cost, which is made up of the company portion of payroll taxes, corporate income tax, plus compliance overhead. On a $100 product the cost is now $92.50, which results in a product that costs about $120 with the Fair Tax included. This should be close to the low end of the savings. For industries that have higher imbedded tax burden and/or greater than 1/2 cost recovery, the price increase could be less than 10%, with an average somewhere in the middle. Therefore, I believe 20% price increase is a conservative estimate, meaning the retiree is likely to be at least neutral, and much more likely will come out a ahead under the Fair Tax.
As for taxes paid, I need to point out again that you are not making a fair comparison of tax burden between the two systems, where tax burden is the observed taxes paid plus compliance/overhead/hidden tax of our current system. It is very difficult to estimate the tax burden to families in our current system. I think you will have a very difficult time convincing anyone that the family’s only tax burden is payroll and income taxes. In the end, this comparison is not very important anyway. It has no effect on the family other than the effect on their purchasing power, and we have already discussed that.
I like the Fair Tax for the lower overhead and higher expected compliance, which will mean lower prices and less taxes needed to be revenue neutral. For instance, in addition to corporations saving their portion of payroll taxes, they will also save due to lower compliance costs, meaning the price rise with the Fair Tax should be only moderate. With higher compliance, the Fair Tax rate can be only 23% in order to be revenue neutral. Also, ALL persons in this country will be paying Fair Tax, no matter if they have reported their income or not.
Maybe I’m a little tired this morning, but I’m still confused about the retiree argument. I’m quite clear on the fact that retirees have paid income tax on earnings for the past however many years. I fully understand their desire to not be double taxed on their accumulated wealth by having to pay sales tax with every one of these already taxed dollars spent. However, the part of the argument that I don’t understand is, how do retirees think they aren’t paying taxes now?
Unless you completely discount the idea of embedded taxes, everyone is paying taxes currently with every purchase they make. The FairTax simply puts a precise number to this tax component of consumed taxable goods. Seems to me the only way that a senior supporting this argument would be happy is for every product produced to have a senior discount rate that would remove all embedded taxes from the cost of the good. This would be the only way to ensure that retirees never have to pay taxes with accumulated wealth that has already been taxed. I think it’s pretty safe to say that this is never going to happen.
Enter the FairTax… I will agree that seniors are going to see the least benefit from the system. Seems to me though that Al has done a good job in illustrating how they will still reap some benefit from this system. Personally, I’m still 25 years from retirement (that’s depressing in and of itself) but I would feel good reaping less benefit for myself to know that the system being passed on to my son is better than what we have currently. For those retirees without descendants, this argument obviously doesn’t work, but let’s face it you can’t please all of the people all of the time.
Scott,
Hank has a valid point about perceived double taxation. His point is that payroll taxes fund Social Security and are only collected on wages. Now that he is retired and no longer earning a wage, he is not continuing to fund social security, only drawing from it. With the Fair Tax, payroll taxes go away and Social Security will be funded using a portion of the Fair Tax collected. Therefore, he will be funding it at the same time he is drawing it.
Al/Scott,
Al, thanks for your clear, concise explanation of the unfairness of the Fairtax to retirees as regards Social Security.
Scott, as I have written frequently, I do totally discount the idea of “embedded taxes”. There is no such thing as an embedded tax, only embedded costs of the income tax system. Not one dime in federal taxes goes to the federal coffers under current tax law in the event of a retail sale! Embedded costs impact only producer costs and eventually, retail prices. So, if you want to say that embedded costs raise retail prices, I’m in complete agreement. But if you want to increase my taxes paid by railing against “embedded taxes”, I certainly can’t agree.
If you want to limit the discussion to prices, then have at it, but a good many folks now believe that retail prices will rise by 15-25% or more under the Fairtax. The issue of “embedded taxes” has been used and abused by Fairtax advocates, which I find disingenuous in the extreme.
Doesn’t the employer pay something like 7.65% as the employer contribution for SS and Medicare? If so, this cost is simply passed along to the consumer in the price of the goods and services. Therefore he is still paying into SS via embedded taxes under the current system. Furthermore, he would in all likelihood continue paying under a cleanup/revision of the income tax system.
I understand the dislike of this aspect of the Fairtax, but portraying this as a negative of the FairTax alone is a bit inaccurate is it not? This is of course assuming that I’m not out in left field with the SS being funded from the payroll taxes.
OK Hank… Let’s call it “embedded potatoes”. I don’t care what you call it, the fact remains that the producer of an item pays the employer portion of the payroll tax. This payroll tax IS the Social Security funding. The producer needs to make a certain profit on each unit sold, and that profit is based on selling the item for more than the total cost to produce the item. This includes things like raw materials, equipment to manufacture said good, salaries, and the EMPLOYER PORTION OF THE PAYROLL TAX. This means that he has to raise the price of the good to cover this cost just like he raises the price of the good to cover the raw materials, equipment, electricity, etc.
Everything you buy, including services, that was legally produced and/or sold in this country has a very small portion of it’s price dedicated to paying the payroll tax. So, let’s call it “embedded potatoes” for all I care. The FACT of the matter is that everything you buy all the way down to a 5 cent piece of chewing gum has some portion of that retail price slated to wind up in federal coffers to pay the payroll tax. If this wasn’t the case, then there would be no Social Security or Medicare.
Hank,
I explained your perception of double taxation. However, I disagree with that assertion. Payroll taxes are just another means of the government to collect revenue that goes to pay all Federal Expenses. There is no “lock box” where my payroll taxes are being put for safe keeping until I draw Social Security. When the system was first put in place there was 30, 40, or even 50 to 1 payees vs collectees. The ratio has continued to go down until now where the ratio is like 3 to 1 and still declining. Therefore, although you believe that you paid your share, you are closer to the top in this pyramid scheme. Those of us closer to the bottom do not have the same base to support our eventual Social Security entitlement.
Al,
It seems to me that we are getting my two concerns all mixed up. Social Security under the Fairtax will be paid from the general fund which will receive a percent of the sales tax revenue. There, as I think you wrote, I object to having the federal government renege on their agreement which had me paying into the system for 45 years, and now allows me to collect benefits for the rest of my life with no more payments. Under the Fairtax, I will just keep on paying and paying. Not fair!!! It is the same as you purchasing and paying on a life insurance policy with your wife as beneficiary, and when you die, having the life insurance company inform your wife that she will get the monthly payment agreed to, but she will have to keep on paying the monthly premiums. How would you feel about that?
The other concern I have is what I call double taxation. Here, all my after tax life savings will be taxed again when spent under the Fairtax. And that’s what we have been nattering about lately. Taxing wealth that has already been taxed seems to me to be very unfair, particularly for lower income retirees as I have shown. Imagine how a retired couple would feel if they had accumulated $200,000 in assets over a lifetime, were living on Social Security plus the interest from their investments, paying zero federal taxes, and you come along and tell them that the Fairtax is better for them? Nonsense. They would be much better off under current law! Just run the math for this couple who get $26,000 from two SS checks and add $4,000 for interest on that $200,000 at 2%.(very safe) Their purchasing power is $30,000 versus an estimated $24627 under the Fairtax. (26,000 + 4784 x .8 = 24627). Are they really better off under the Fairtax? Add insult to injury by telling them that they will still get their SS checks, but they will have to resume paying for their benefits with their sales tax dollars. Don’t count on their enthusiastic support for your national sales tax scheme!
Hank…
um, please reconcile these two viewpoints for me:
“As for buying used, this may be the most cruel Fairtax myth of all. I agree with you that used goods would be cheaper than new goods, but that is no different than the new/used prices relationship today. You seem to imply that by not having to pay a sales tax, there would be an additional dollar saving? This just isn’t true, imho. Think about it as the “embedded cost of the Fairtaxâ€. Surely you don’t think that when owners of a new car go to resell it, they will forget about the 30% sales tax? That isn’t going to happen. The only outcome of buying used is that no revenue goes to the federal coffers, but there won’t be any “windfall†savings”
“I do totally discount the idea of “embedded taxesâ€. There is no such thing as an embedded tax, only embedded costs of the income tax system. Not one dime in federal taxes goes to the federal coffers under current tax law in the event of a retail sale! Embedded costs impact only producer costs and eventually, retail prices. So, if you want to say that embedded costs raise retail prices, I’m in complete agreement. But if you want to increase my taxes paid by railing against “embedded taxesâ€, I certainly can’t agree.”
you suggest that an embedded fairtax will exist in the price of used goods, but will not accept that an embedded payroll tax currently exists in the price of all goods?
and, for your guaranteed contract with the federal government about your SS money…
The Supreme Court has established that no one has any legal right to Social Security benefits. The Court decided, in Flemming v. Nestor (1960), that “entitlement to Social Security benefits is not a contractual right”. Therefore, since no one has any legal right to Social Security benefits, Congress can cut or eliminate benefits at any time.
Justin,
If I confused you by writing that “there are only embedded costs of the income tax system”, and didn’t spell out that those costs included income tax, payroll tax and compliance costs, please forgive me. I figured that by now everyone understands that the income tax system includes all such costs. Payroll taxes are indeed a portion of the embedded costs.
My main point, which some seem to think is nit picking, is that there are no embedded taxes which somehow should be added to my existing tax burden. Yes, we pay a higher retail price due to business taxes, but not higher taxes, imho.
Good catch on the 1960 SC finding that there is no contractual obligation for payment of SS benefits. However, I think you will agree that Congress isn’t about to cancel this entitlement? They may raise the payroll deduction in order to get by the hump caused by the “boomers”, but I don’t look for them to end the program.
what i cannot understand is why you feel that paying an explicit sales tax on top of your legacy income/payroll is double taxation that you just cannot stand for, but paying an implicit income/payroll tax for current employees on top of your legacy income/payroll does not qualify as double taxation…and even if it did, you are cool with it.
you have good arguments and some of them are even based in solid logic, but like the SS concern you noted, upon closer inspection they tend to fall apart.
my biggest issue with all of your math posts is that you insist that people will spend 100% of their consumable funds on new retail goods and services. that dramatically inflates their total tax burden. artificially inflating the burden, then complaining about that high number, is not a good start for your position; in fact, it throws everything else you have to say out the window.
While I will agree that some people live beyond their means, and some people do not practice a financially responsible lifestyle, the ridiculous majority of people do not spend 100% of their consumable funds on new goods and services. i’ve laid out my finances time and again…while I spend 100% of my consumable income each year, almost 1/3 of it is spent on loans (house, car, and bike). that’s 1/3 of your math’s expectation of my tax burden gone. and, sure…i’ll have a FT burden on the service portion of my loans, but that’s no where near the 23% of 1/3 of my income that i’ll not be spending on new goods and services.
since we like real numbers, just for fun, i’ll throw some together to prove my point.
my wife and I make $52,800 a year ($4400 a month)
2009 income tax rates say we’ll be taxed at 15% plus $1670 = $9590.
2009 payroll taxes will take another $4039.20.
After taxes we’ll have $39170.80 to spend ($3264.23 a month)
your math says that means we’re going to spend $750.78 in FT each month…and what a terrible burden that is going to be.
however, i remind your math of some other numbers:
we spend $1000 a month on the mortgage.
we spend $250 a month on her car loan.
we spend $100 a month on my bike loan.
after we pay those three bills, we have 1914.23 left to spend each month.
if we spend every nickel we have left on retail goods and services, we’re going to have a FT burden of $440.28.
lets assume that the servicing fees on those loans are a foolishly high 10%, or $135…the FT burden on that is $31.05.
so…at the very, very worst, my monthly FT burden is $471.33. (and….i’ve not even considered the prebate…this is just an apples to apples comparison between your foolish assumptions and real life)
and every dollar i spend on non-FT spending, or every dollar i save and don’t spend at all, is 23 cents I can take off that worst case FT burden.
for instance…i rent shop space for $200 a month from a guy that has a big building behind his house. OH NO!!!! the specter of black market tax avoidance raises it’s ugly head.
so…you can keep your opinions about double taxation, and 120% spending levels, but they make your arguments appear lacking.
Hank,
I am not mixing things up. I am just of the opinion that payroll taxes being used exclusively for SS is an illusion. It should be treated as general revenue, just like all other taxes.
Also, it is an unfair pyramid scheme. Because it was originally set up with many more payees vs collectees, your generation did not have the same burden to benefit ratio. Therefore, I am not very sympathetic to your desire to not continue to fund this program now that you are a collectee. I did not say get rid of it, but as just another entitlement, it needs to be funded from general revenues.
Al,
I’ve got no problem with funding SS out of the general fund, although that begins to sound like rank socialism. At least with the payroll contribution to the Trust Funds, it has some semblance to a federal contributory insurance plan, although I now know the SC doesn’t want me to call it insurance! (Thanks, Andrew.)
So, tell me how you propose to make the switch to funding the benefits out of general revenue without major transition problems. I’ve already contributed the max and now expect to get the benefits as promised. The Fairtax plan grants an inventory tax credit for one year. Where is the credit for those of us that have already paid in full for our health care and pension benefits. You solve that one and I’ll get off my soapbox in opposition to the Fairtax. (Well, sort of?)
Nicely argued Justin. I really don’t know what more to day to that.
I especially liked your questioning of the inconsistent logic regarding the “embedded taxes” and the “embedded cost of the Fairtaxâ€. Seems to me that Hank is wanting to use his argument against “embedded taxes” while at the same time reversing this argument to create this new “embedded cost of the FairTax”. Sorry Hank, but you can’t have it both ways, especially within the same post.
I’ve also always found these arguments about consumers spending 100% of their income on retail goods and services to be highly questionable. Then comes along this argument about people spending 120-200% or more of there income. Me thinks that these individuals are going to be having much more serious problems than the FairTax, retirees excepted from this.
Justin,
Well, I’ve got good news and bad news for you regarding your tax situation. First, the good news. (You really need professional advice, or just let your wife do the taxes?). On gross incomes of $52,800, your income tax would be $4436, not $9590 as you wrote. Your total income taxes and payroll deductions($4039) amount to just under $8500 or an effective tax rate of 16%. (Want to give me a commission on the $5000 I found for you?)
The bad news is that you don’t seem to understand the implicit taxes laid on in HR25, Section 801-806. I can’t figure your actual implicit taxes on your three loans without more specifics, but as a wild guess, here is my estimate. Assume your home mortgage is $150,000, car loan $20,000 and bike loan $10,000 for a total of $180,000 at an average interest rate of 7%. (You can do each using actual interest rates and loan amounts.) Assuming the loans are mid to long term loans, the current Treasury rate is 2.5%, so your monthly implicit taxes would be: $180,000 x .045 x .23/ 12 = $155. Add that to your explicit bank service charges and see what you get.
I’m assuming that you are a frugal family and don’t carry any credit card balances forward each month. Pity the poor folks that max out several credit cards. Their implicit taxes might be increased by quite a bit. For instance, A $10,000 balance with interest of 18% (bad credit history) would have to pay implicit taxes of $10,000 x .155 x .23/ 12 = $30 each month in addition to any other explicit service charges. Percentage wise, that would be a significant tax hike.
By the way, I have never “insisted” that every one will spend 100% of their income. It’s just impossible to generalize otherwise because every family situation is different. In general, all purchases of new goods and all services will be taxed with the exception of loans, charity, tuition, gifts, and “used” stuff. I would imagine that as income drops to the poverty level, there isn’t much spending on the first four, and as I’ve noted before, buying used stuff doesn’t save a family any additional dollars over what they would save under current law. Yes, no revenue flows to the federal coffers, but there are no windfall savings from buying used. The price relationship between new and used will be quickly restored to that experienced today. Supply and demand!
Hank,
Are you committing to only draw what you put in, and no more? I am guessing not. Therefore, where are those extra funds coming from? Even with a modest return on your “investment” you will likely being drawing more than you put in.
Again, this was not setup as a true investment. It was setup like insurance where many covered few. But, now that life expectancies have increased, along with opening the coffers to many other SS collectees other than just retirees, how are we supposed to cover those folks that never contributed a dime? Why is that only my problem, and not also yours? This is why I propose treating it just like any other entitlement.
Al,
Trying to figure out how much I paid in versus what my pension benefits alone have been, is way beyond my meager math skills. I’m not anal enough to be able to find my tax returns for the last 55 years, and I sure don’t know how to convert everything to either present value or then year dollars. The fact that the Trust Fund has been running massive surpluses ever since the last “fix” in 1983 makes me suspect I was paying in too much, but maybe not. Without converting to constant year dollars, a very rough estimate of my last ten work years and the subsequent 12 years of drawing SS indicates I’m still a long way from breaking even. It will be different for everyone in that some die young and others live way past the average life expectancy.
Who is drawing SS pensions but have never contributed a dime?
Scott,
If you will give it a nanosecond of thought, you will understand that there is nothing inconsistent with my embedded cost position. What I’m arguing about is the mistaken belief that there are embedded taxes that should be added to my basic tax burden. How many times have you seen Fairtax advocates try to come up with effective tax rates by adding income tax brackets to the 7.65% payroll deductions and then adding the 22% embedded taxes per the Jorgenson study? Makes no sense to me!
The embedded costs of the income tax system impact producer costs and retail prices only, and the embedded costs of the income tax system and the embedded costs of the Fairtax are identical in that they both impact prices. What is inconsistent about that?
Hank,
“How many times have you seen Fairtax advocates try to come up with effective tax rates by adding income tax brackets to the 7.65% payroll deductions and then adding the 22% embedded taxes per the Jorgenson study?” I’ve seen this about as much as I’ve seen opponents say that embedded taxes don’t exist, but the underground economy is already paying them. Both sides say contradictory things.
“The embedded costs of the income tax system impact producer costs and retail prices only” What is the only for? Are you leaving out labor wages and producer profits? Embedded taxes impact producer costs. This is true. Producer costs impact producer profit, labor wages, and product cost.
Maybe being called inconsistent is a product of people not understanding how you feel about embedded taxes (by any name). I’ll be honest. I’m a little confused about where you stand myself. I used to think your belief was that product prices weren’t affected at all by income/payroll taxes. Then I thought you believed that the employer portion of payroll and corporate income tax affected prices a little bit (hence the 17% minimum increase in “prices”). So maybe that’s it. You believe prices are only altered based on what the producer pays directly. But, of course, the producer pays wages, so that affects prices. Do you believe that the wages paid to labor are irrelevant to the taxes labor must pay on those wages?
Since it is my belief that on average real prices will be exactly the same under the fairtax (as long as the federal government still takes about 18.5% of GDP), I think that retires with tax deferred retirement will fare the best under the fairtax (assuming the inflation issue is handled well). People currently earning wages will soon have those wages brought into market equilibrium. People with tax deferred savings, however, will have earned those wages with the assumption that at some point those wages would be taxed before being used to purchase products. Under the fairtax, they will no longer be taxed (at that point).
If you believe that taxes are really embedded in the price of goods/services, then your effective tax rate is basically 18.5% period (based on GDP). If on the other hand, you believe you’d accept the same salary you make now even if the government taxed you at 90%, then get out your tax return, do some math, and hope that Obama’s promise to “make the rich pay their fair share” becomes reality.
Andrew,
“I used to think your belief was that product prices weren’t affected at all by income/payroll taxes. Then I thought you believed that the employer portion of payroll and corporate income tax affected prices a little bit (hence the 17% minimum increase in “pricesâ€). So maybe that’s it. You believe prices are only altered based on what the producer pays directly. But, of course, the producer pays wages, so that affects prices. Do you believe that the wages paid to labor are irrelevant to the taxes labor must pay on those wages?”
I don’t know of anything I have written that could be construed as believing that prices weren’t affected by income/payroll taxes. Everyone understands that prices reflect costs plus profit, and costs include employer and employee tax costs as well as compliance costs. Jorgenson’s embedded cost study, the source of the 22% average embedded cost across 35 producer segments, clearly took into account payroll and income tax costs, although he didn’t include compliance costs.
What I don’t believe is that the employee portion of those tax costs will be removed under the Fairtax. The income tax withholding and the payroll contributions belong to the employee, not the employer. So, because employee tax costs amount to 60% of the total embedded costs including compliance costs, only 40% of the embedded costs are in play. That’s the basis for my saying that only employer embedded costs of around 10% will be available to reduce costs, or increase shareholder payments, or expand the business, or pay off debt, or etc. etc. Best case would be if all employer cost reductions were used to reduce prices, which would result in a 17% retail price increase. But you are correct to note that “real” prices will be about the same. Take home pay plus the prebate should at least offset price increases, although not as much for retirees.
I still don’t understand why you believe my effective tax rate would be a reflection of government cost as a percent of GDP? Are you talking about the Fairtax scenario or current tax law? Seems to me that if you add 5% for the prebate to the historic 18.5% average cost of government as a percent of GDP, you would get 23% alright. But does that mean that if the Federal government suddenly costs 40% of GDP (as may be the case with Obama and his out of control spending proposals), then the Fairtax rate would have to be 45% rather than 23%? Scary!
Hank… In response to your statement below.
Scott, as I have written frequently, I do totally discount the idea of “embedded taxesâ€. There is no such thing as an embedded tax, only embedded costs of the income tax system. Not one dime in federal taxes goes to the federal coffers under current tax law in the event of a retail sale! Embedded costs impact only producer costs and eventually, retail prices. So, if you want to say that embedded costs raise retail prices, I’m in complete agreement. But if you want to increase my taxes paid by railing against “embedded taxesâ€, I certainly can’t agree.
I suppose that you are agreeing with my position on “embedded taxes”, you are just choosing to call it something else. You seem to be in denial about this simple fact of life. If the “cost” to the producer is taxes, and he must price his product to cover this “cost” the consumer is in essence paying this “cost” aka tax. You choose to lump all producer costs together and view everything that goes into producing a product as mere gray matter.
I have a question for you. Let’s assume that “Cap and Trade” gets passed, and electric rates rise by 50%. I suppose you simply assume that the electric company is sticking it to you since everything that goes into delivering electricity to you is simply gray matter. In this example, virtually 100% of the price increase will be a direct result of this new tax policy, but this price increase won’t be taxes passed on to you by the electric company to cover this cost. I would also assume that you would not be outraged by this in the slightest and would not seek to elect representative who would repeal this legislation. If you disagree with my assumptions here, please explain to me how if your rise in electric bill is not simply an “embedded tax”?
Hank,
I think I’m starting to understand what you believe. The taxes paid by labor aren’t really embedded into the price of goods, but the overall labor wage is. So if the government had decided that employees pay 100% of the payroll tax way back when, that employers would have been that much wealthier and employees that much poorer. Or, if on the other hand, they decided that employers pay 100%, that employees would have been that much wealthier and employers that much poorer. This is, I believe, the mainstream American view on the subject, but not the mainstream economic view. It fits your view that the labor market is driven by gross rather net pay. Another view that is out of the economic mainstream (as I see it, but I spend a lot of time reading the libertarian side).
This is what I believe mainstream economists believe (but by no means unanimously). The income and payroll taxes paid by labor are compensated by higher wages. This makes them essentially a tax on business (or the employer), or really just another cost of doing business. They do give businesses incentives to produce using less labor, so they are detrimental to labor, but they are not a direct cost of labor (this does not include the fact that raising business costs reduces production meaning less labor is needed therefore lowering wages). You must admit that a 100% labor tax wouldn’t produce much labor. Even if the employer offered $1M. The reason is the employee is working for the dollars that can use to afford housing, food, entertainment, etc. Whatever is leftover after taxes is what is used for that stuff. Therefore if taking home (meaning net) $2000/month meets your needs, it doesn’t matter if you have a 0% tax rate or a 90% tax rate.
Hank,
As a retiree I will be better off under the FairTax. A portion of my SS check (with emplyee retirement and investment income) is included for income tax. Is this double taxation? By your measurements yes and under the FairTax I would also pay sales tax on my SS income but I get a rebate. I would be better off.
And by the way there is no “FAIR” share that you paid into SS. You do not want to call this an insurance policy but that is the government version of exactly what it is.
Marty, no personal attacks. I’m removing the offending statement. Consider this a warning.
Marty,
Morphh beat me to it, but just for the record, I’m a retired Air Force officer and pilot who was shot at and missed in two wars defending your right to say and write anything you wish (subject to moderator approval!)
You may indeed be better off under the Fairtax depending on your income level. Other wealthy members of this blog (I’m not one of them) have written that they would be much better off under a national sales tax, but they still oppose the Fairtax as written in HR25 after getting into the details of the legislation.
I can assure you that most lower income families will be better off under current law, assuming the consumption levels are as described in the 2007 Bureau of Labor Statistics Survey. I might add that the primary reason you may be economically better off is due to the prebate, a cash grant entitlement that doesn’t stand a snowball’s chance in Hades of ever being approved by the Congress!
Have you determined just what the implicit taxes on your investment income might be? Read HR25, Section 801-806 for an explanation.
Hank,
You are still in denial about the embedded costs of the current income/payroll tax system giving the advantage to business owners at the expense of the wage earner. Currently every bussiness owner is a tax collector not a taxpayer. Even their personal income taxes are covered by their profit margin. If the Fair Tax were in place the business owner could reduce his current profit margin by an adverage 25% and still maintain his current purchasing power.
The current income tax system holds people down restricting upward mobility. I just went through a perfect example of this; I worked 19 hours overtime the payperiod before last. The overtime kicked my entire check into the next tax bracket. I ended up paying more in federal withholding taxes than I received for working my arse off for those 19 hours. It was totally not worth it.
There are currently millions of under the table workers in America that can not afford to become legal and file their taxes because if they did they would not be able to feed their family. The Fair Tax would instantly remove this major barrier to upward mobility. Try telling them that the current system is better for the poor. I guess you would have to experience this first hand before you believe it exists.
RMForbes,
I’m sorry, but I find it difficult to believe that your entire paycheck was gobbled up by withholding. Yes, those two weeks with overtime would have been annualized by your timekeeper or whoever, but even so, how could going from say 15% tp 25% or 25% to 28% tax brackets eat up your entire check for federal taxes? What else was impacted by your increased pay?
Of course, if you don’t work any more overtime, you will get a nice refund next Spring, and if you continue to work overtime hours, you can adjust your withholding to reduce over withholding. I’m no expert, but I can’t understand how the federal government withholding rules for income taxes could take your whole paycheck. Was that kind of an overstatement, or can you explain specifically what happened? Maybe your bookkeeper made an honest mistake? Very puzzling?
RMForbes,
One postscript to my previous post. Is it possible that your bookkeeper, after annualizing your increased income for those two overtime weeks, then used your new withholding rate and applied it retroactively to all other pay periods for Jan,Feb, and March? That could explain your negative earnings, but I don’t believe that’s the right way to keep score? Just a thought?
Hank,
You misunderstood, I said more than half of the overtime went to additional taxes. Working harder and major time away from my family for an extra $120 out of the additional $260 gross pay because my entire check was taxed at a higher rate. The same thing happens to anyone on the lower end of the income tax scale that is trying to get ahead. They work overtime or take on a second or even third job only to receive deminishing returns. The current income tax code is advantagious for only those at the top end of the scale because they can either defer their taxes onto others or are paying little or no income taxes on wages and/or salaries. They are primarily paying the much lower rates on the profit from income derived from property, i.e. capital gains. The Fair Tax would remove these roadblocks to upward mobility and remove the ability of some deferring their taxes to others.
RMForbes, I feel your pain here. Personally, I have not been in this particular situation in at least the past 10 years, but I have a similar story about a friend of mine. A few years ago, he received his annual salary increase which was a pathetic 2 or 3%. His “raise” kicked him into the next higher tax bracket and his actual take home due to this went down by like $20 per pay check. I don’t have exact numbers because this happened maybe 5 years ago and I only remember his complaining about it.
This kind of problem would obviously never happen with a consumption tax. When you get a raise, you would get the entire raise (minus any saving plan based on percentage that your employer might take out for you). Just another strength of the FairTax. Never worry again about getting a raise and seeing your actual paycheck go down because of it.
Scott and RMForbes –
There is plenty wrong with our current tax system, but it is mathematically impossible for one to get a raise and then have a lower take-home pay duing to being pushed into a higher tax bracket.
The higher tax bracket only applies to MARGINAL income, which would mean the additional income received from the raise. Thus, if the raise was $1000 per year, and that pushed you into the 39.6% tax bracket, you would pay $396 in additional tax, but you would keep $604 (less any state tax, 401k contributions, etc.). Sheesh!
Having said that, one of the related problems with our current system is when a spouse wants to work at a relatively low-paying job, such as a teacher. If the other spouse is in a high tax bracket, the newly-working spouse will find himself or herself in the same high (or even higher) tax bracket. When you factor in the cost of day-care, commuting, meals, etc., it becomes uneconomical for the second spouse to take a job. That is one of the many legitimate criticsims of our current system.
Your right about it working out in the long run but when you live at the lower end of the scale as I do you have a tendency to live hand to mouth. The immeadiate entire paycheck is impacted when overtime kicks you up to the next bracket, believe it or not. My last $.50/hr in 2007 raise resulted in a whooping $10/week extra take home pay. I don’t know what happens in your income range but at the lower end, when around half of any increase goes to the government through withholding, it is a real damper to upward mobility.
Hayden, how exactly is this impossible? Let me admit that I could be completely missing something here, but this is exactly what my friend told me happened to him a few years ago.
For example… Let’s say you work in IT (my friend), and you make $67,500. This puts you in the 15% tax rate on income tax and would be $10,125 annually. Let’s ssay you contribute 5% to a 401k, and then take out the 7.65% for payroll tax. To keep it as simple as possible, let’s say no state/local income tax (reality since I live in TX), and no other deductions like healthcare, etc. This would break down to an annual tax burden of $15,288.75. We were being paid twice a month, so divide this by 24 for a take home check of $2175.47. I’m probably doing something wrong here, but I’ll let you people correct me.
Now, let’s say you get a 2% raise (woohoo). This raises your base salary to $68,850. This puts you in the 25% tax rate on income tax which would be 32.65% with payroll tax. The income tax on this new salary is $17212.50 in income tax or $22479.53. The same twice a month take home check would now be $1932.10. Looks to me like you can end up taking a serious pay cut when you cross the border from a lower to a higher tax bracket.
Now, please show me what I have missed here. I’m not being sarcastic, but I really do think that it does occur where someone can get a raise and end up with less take home.
RMForbes — Believe me, I have been in your shoes for much of my life, so I can certainly empathize. And you do have a point that I missed. At lower income levels, an increase in wages might kick a worker out of eligibility for the Earned Income Tax Credit, so that a modest increase in wages would result in a much higher tax bite than one would expect. And, I completely agree, that is unfair.
Scott — I think you are confusing AVERAGE tax rates with MARGINAL tax rates. The average tax rate is percentage of one’s total income that he or she pays in taxes, which for most people is quite low.
The MARGINAL tax rate is what one pays on each extra dollar they earn. That is what is commonly referred to as the “tax brackets.”
As an example (ommitting social security and medicare taxes for simplicity), if you earn $50,000 per year, you might be in the 25% marginal tax bracket, but you do not pay 25% of your total salary in taxes. First, you subtract your personal exemptions, deductions, etc, and get your taxable income, which might be, say $40,000. Then you pay 10% of the first $10,000 or so,18% of the next $20,000 or so, and then 25% of anything thereafter. (I have no idea what the actual tax brackets are, but you get the idea.) But your AVERAGE tax rate would be much, much less than 25%.
So, an increase in one’s salary from $50,000 to $55,000 might push him into a higher MARGINAL tax bracket (with resepct to the extra $5,000), but not really push up your AVERAGE tax rate (except negliably).
Hope this makes sense.
Hayden-
Then do you agree that there is a whole class of under the table workers that are kept in poverty by the current income tax code because they can not get past the treshhold to becoming a legal productive taxpayer?
Scott,
Please don’t be insulted, but your post makes the most compelling case I have ever seen for mandatory income tax classes at both high school and college. Here is what you are missing in your example
First, income of $67,500 puts him in the 25% tax bracket, not 15%. Assuming he is married and no kids, after deducting the 5% contribution to a 401K, and using standard deductions and exemptions which total $17,900, his taxable income is $46,225 and his income tax is $7900. Adding the $4224 payroll tax gives him a total federal tax of $12,124. Note that this is a 17% effective tax rate including the payroll tax, and is over $3000 less tax than you claimed due to improper calculations.
Adding $1350 to his income due to the magnanimous pay raise would increase his income tax by $137 and his payroll tax by less than $100.
So he would increase his net pay by $1113.
You need to take another look at marginal tax brackets because you don’t have a good handle on this subject. Here is a simple example of how crossing a tax bracket will impact you:
Assume a couple make $53,000 gross. After deducting the 5% 401K and the standard deductions/exemptions, taxable income is $32450 and income tax is $4466. FICA withholding is $4054 for a total withholding of $8520.
Now, lets give them a 3% raise of $1590 which would put some of their income in the 25% marginal tax bracket. Please understand that only $1490 of that amount is in the 25% bracket which starts at $32550. So, $100 dollars are taxed at 15%,($15) and $1490 at 25% which comes to $387 total. Payroll taxes on the extra $1590 would be around $120, so the total tax increase would be $507 on the $1690 payraise. Still over $1000 ahead in take home pay.
Hope this helps, but please ask questions. There is a big difference between gross pay and taxable income, and only the amount in the new tax bracket is taxed at the higher rate.
Scott,
My abject apologies. After assuming that your friend was married, I used the 2008 Single tax tables, so the specific tax info is incorrect. But the main points are still correct. Hayden missed on the tax brackets, but he made the case much clearer than I. Sorry to confuse things. Maybe the income tax really is incomprehensible???
Hank and Hayden… Don’t worry about insulting me for my lack of understanding on income tax. I really appreciate the explanation about average and marginal tax rates. These are terms that I have heard numerous times in the past, but never had any understanding of. I definitely see your point that it is extremely unlikely for a person to receive a raise and see a reduction in take home pay based solely on that raise. That said, according to my friend, this is exactly what happened. This makes me wonder if he changed his exemptions a month before and it went into his check at the same time as the raise, or something similar.
Anyway, thanks for the explanation about the terms and how to apply them. This does however serve to prove the point that our existing tax code is definitely too complicated. I am by no means saying that I don’t now understand the explanation, but your statement that tax education should be mandatory in high school speaks volumes. I honestly think that I could explain the basic concept of the FairTax to a 10 year old, but our income tax system so ridiculously complex that I now hear that IRS agents even have difficulty explaining it consistently.
Then again, I think both of you would agree that our system needs simplification and reform.
I too think income/payroll taxes should be taught in schools at all levels. As part of history class.
Hank and Hyden,
That’s all well and good but you are ignoring that the withholding happens each payday. On payday the wage earner can and many times does receive only a small part of any raise or overtime because the entire gross amount of the check is used to calculate the payroll deductions on that check. It’s great that the wage earner will get that back with their refund but we live in the present and ussually live hand to mouth. What good does it do to work overtime if you have to wait several months to get half or more of your pay. You don’t get interest.
Rick — Hank and I certainly agree with you that our current income tax system is severely flawed. And I agree that it sticks if you kill yourself working overtime and only see a small increase in your take-home pay due to increased taxes. I know you think it would great if there were no income taxes under the FairTax and you could keep 100% of your overtime pay.
But think of the flipside. Under our current income tax code, if you lose your job, you won’t pay any (federal) taxes because you won’t have any income. But under the FairTax, you would still need to pay taxes on everything you buy, even if you have no income.
And (as I’ve previously discussed many times), the pre-bate ain’t gonna save you, as the taxes on just your health insurance premiums and rent will more than exceed the prebate.
The bottom line, under our income tax system, you are penalized if your income rises, but under the FairTax, you would be penalized if your income declines. Neither may be fair, but I would prefer the former.
Hayden, you really think someone who lost their job is still going to have health insurance premiums to worry about? I guess if they end up picking up Cobra benefits, and those are so outrageously expensive I think personally I would rather just risk not having coverage regardless of the FairTax.
Besides, under the FairTax at least you would have something coming in to maybe pay that rent with. I’m not sure if unemployment benefits are taxed as income or not, but they definitely wouldn’t be directly taxed under the FairTax. Plus, are you a big proponent of rampant evasion? If there are all of these wonderful evasion schemes out there, seems to me that someone who just lost their job should be doing pretty good under the FairTax. They get the prebate, and then get to avoid paying most of the FairTax.
Of course when you are on the bottom there is nowhere to go but up. Removing the roadblocks to upward mobility would stimulate the entire economy and create a better job market. Business owners and self-employed defer their taxes to their customers in the current system, so I can see why you, as a lawyer, might perfer the current system. I see no advantage in it to me.
Rick — Again, I respectfully disagree with you.
As flawed as our current tax system is, it is basically progressive, in that those with lower incomes pay a smaller percentage of their income as taxes than do those with higher incomes. The FairTax — even with the prebate — is regressive. Those with lower incomes will pay a higher percentage of their incomes as taxes than those with the highest incomes. (Even if you believe that the pre-bate “untaxes the poor,”, it just shifts the bulk of the tax burden up a notch to the lower middle class.)
Thus, the FairTax would be a far greater burden for the average family (particularly a lower income family) to acquire wealth than would our existing tax system be for the simple reason that their tax burden would be greater. It’s only when you get into the upper income range that the tax burden under a consumption tax system would start to decline.
You say those on the bottom can’t be any worse off than they are now. Sure they could be. Imagine if you got cancer or had to send a relative to a nursing home. Besides the $100,000-plus expenses, you would need to pay the FairTax on top of those expenses.
But nobody mentions that everyone will be paying taxes not just the citizens and middle class people that don’t have tax breaks . Even the illegals will pay tax on every thing they buy visitors from other countries anybody that buys something will be paying taxes so the individual taxes could be lower and the Gov. would still have as much money the only thing every one would pay the tax they can afford not what the Gov. thinks they can afford . If you can buy a million dollar yaht you pay tax on it or you can buy a row boat you pay tax on that . I think it would be great Im ready
Hayden… I have an honest question. This is not trying to set you up for some clever retort or trap.
Under our current system, doesn’t lower middle class America currently get saddled with the greatest tax burden as a percentage of their income now? I say this based upon the fact that the lower middle class income range is probably where most people don’t qualify in the way of exemptions/loopholes to reduce their tax obligation. This means that this income group is truly paying closest to the actual tax scale. The higher up the income ladder you go, the more options seem to exist in ways to reduce the tax liability.
I really don’t think that moving to the FairTax is going to appreciably change the burden place upon the lower and lower-middle income brackets. I do however think that the higher income brackets are going to end up paying more. If they choose to live in the US, then they are going to be purchasing goods and services here that they are going to be paying the FairTax on. True, the multibillionare may choose to throw his daughter a birthday party in France, but her new Porsche is probably going to be bought back home in the US since this is where she will be driving it. And, if it’s not purchased here, I’m sure that there will be some kind of customs charge for having it shipped in from Germany. My point is the rich will most likely end up paying a greater percentage under the FairTax than under the current income tax system, as a general rule.
Hayden,
How is that any different than under the current system. If I get sick and need to go to the hospital, my bill will include the embedded costs of income/payroll taxes in the bill as well. In the current for profit hospital system the profit is also inflated to cover the taxes. If you remove the income/payroll taxes their costs will go down as well. If you have been following my post you are aware of compromises that I suggested to the Fair Tax that would lower the rate on consumption much lower that the 23% currently proposed. By increasing the transaction tax on capital and commodity market transactions, keeping and reforming the capitol gains and estate taxes to a highly progressive scale the Fair Tax would be far more progressive than the current system. Understanding of course that the terms progressive and regressive only apply to income and cannot be accurately applied to consumption as Hank already pointed out.
Scott — I would say that it is the upper-middle class that gets screwed the most under our current system. That is, people who make relatively high incomes and are taxed at the highest tax brackets.
In addition, once your income exceeds a certain level, the various deductions, exemptions and credits “phase out,” so that you start losing the benefit of the home mortgage deduction, personal exemptions, etc. Lower middle class families are in lower tax brackets and can take full advantage of the various deductions and exemptions available.
In contrast, the truly wealthy (e.g., the Warren Buffetts of the world) make make most of their money from capital gains and dividends, which are taxed at 15%, plus they don’t need to pay payroll taxes on that income (Social Security taxes phase out at around $100,000 of annual income, but Medicare taxes are not capped under “ordinary” income).
A good book that makes this point is called “Perfectly Legal” by David Cay Johnston, a NYT reporter who writes on tax and economic issues. The reason for this is that the upper middl class have neither the numbers nor the wealth to really affect tax policy, so most tax breaks are given to either the great masses or the really wealthy, and the upper middle class gets screwed.
Republicans tend to forget that under the Reagan tax cuts of the 80′s, capital gains, dividends and ordinary income were all taxed at the same rates. The point was to treat income as income, and tax it the same, whether you were a hedge-fund manager or a ditch-digger. When you hear Republicans evoking Reagan’s name for tax cuts, they always tend to leave that bit out.
Finally, regarding your question about whether the rich will pay more in taxes under the FairTax, if you look around under the internet (maybe even under Wikipedia), you will see that high income families tend to spend a lower percentage of their incomes than do lower income families. Thus, even putting tax avoidance aside, under the FairTax the tax burden would tend to be higher for those on the lower end of the income scale than the higher end.
RMF — I agree with you that we should keep capital gains taxes and estate taxes. I also agree that would lower the required rate under the FairTax and make the plan more progressive. But I can guarantee you that you would NEVER be able to get the folks behind the FairTax to go along with that.
Scott/Hayden,
Presently (and for the past 30 years), the rich always pay a higher percentage of their income in taxes than poor. At least when you break it down by income quintile (plus top 10% 5% 1%). Here, http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456, is a table with data from 1979 to 2006.
I’ve heard that perhaps the uber rich might pay less than the just under uber rich, but the top 1% pay more taxes (as a percentage of income) than those below them.
Of course, since I believe taxes are embedded in the price of goods, the federal tax burden is a lot more distributed among the population than these numbers show. But for those of you that believe one’s demand for labor is based on what they earn before taxes, this shows that the rich pay more as a percentage.
Andrew ??,
The bottom chart showed the adverage tax paid by top income earners in 1996 was 29.8%, and fell steadily to 17.7% in 2006. Which I would believe because the wealthy earn most of their income through their property and are taxed at the flat 15% capital gains rate for that income. Some do receive income from wages/salaries and end up paying the higher rates there but most have learned how to tranfer wage/salary income to capital gains. Now how again are the rich always paying higher percentages as the poor?
RM,
I have no idea what you are referring to. The bottom chart is the federal tax burden through excise taxes. There is no 29.8% number on that chart. The top chart (which is overall federal tax burden) has 28.9% for the top 10% in 1995, but the top quintile as a whole paid less than that and all lower quintiles paid less in the appropriate order. That same top 10% paid 27.5% in 2006.
If you examine the second chart, you’ll see that the wealthy pay a much higher percentage when it comes to income taxes (with the lower quintiles negative), but the third chart shows the bottom 4 quintiles pay more for payroll taxes.
I noticed when I clicked the link it took to some generic page. I had to paste it in to get my charts. Perhaps you are examining an alternate set of charts.
Income tax
Tax year Number of Top 400 Average
returns in the Amount Average In 1990 Total for all returns’ percent tax rate
top 400 dollars [2] returns of total (percent)
1992 400 4,936,897 12,342 4,601,023 476,238,785 1.04 26.38
1993 400 5,437,295 13,593 4,916,180 502,787,806 1.08 29.35
1994 400 5,275,239 13,188 4,651,887 534,856,339 0.99 28.57
1995 **400 6,088,571 15,221 5,221,759 588,419,030 1.03 29.93
1996 **400 8,309,376 20,773 6,924,480 658,244,750 1.26 27.81
1997 **400 8,991,855 22,480 7,322,358 731,321,399 1.23 24.16
1998 400 9,731,299 24,328 7,760,206 788,541,979 1.23 22.02
1999 **400 11,900,254 29,751 9,333,533 877,401,489 1.36 22.23
2000 **400 15,507,223 38,768 11,765,723 980,645,201 1.58 22.29
2001 400 11,981,382 29,953 8,842,349 887,973,968 1.35 22.85
2002 **400 9,522,648 23,807 6,920,529 796,986,268 1.19 22.88
2003 **400 10,250,277 25,626 7,280,026 748,017,488 1.37 19.53
2004 **400 12,550,332 31,376 8,685,351 831,976,333 1.51 18.16
2005 **400 15,599,966 39,000 10,441,744 934,835,769 1.67 18.23
2006 400 18,086,563 45,216 11,729,288 1,023,920,139 1.77 17.17
Andrew, it didn’t copy well but I think you’ll be able to understand it. I did make an error in my post however, it was 1995 that had 29.93% overall rate. By 2006 it had declined to 17.17%. These are the overall numbers not just income taxes from wages/salaries that your numbers are referring too. When you take into account all effective federal taxes the middle gets hit the worse but even the low end have higher rates than the the very highest.
RM,
Could you provide a link to these numbers (just copy and paste)? Copy and paste my link. I think you went somewhere else. My link contains overall federal tax burden, as well as being broken down into other categories. But it is already in percentages.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=260&Topic2id=48
Andrew,
I totally understand that many at the upper end of the scale want us to believe they are truly paying their fair share. Of course, they want to treat Capital Gains as a totally separate thing, totally outside of income taxes. But to leave Capital Gains out of the “overall federal tax burden” goes too far.
The numbers are quite different when Capital Gains is added to the mix. Your “overall federal tax burden” does not include Capital Gains and other incomes that apply to special rates. See what happens when they are added into the calculations. The effect of embedded costs of federal taxes in all products and services consummed in America is left out of both charts because it would show the overall rates higher for the lower end of the scale. The lower to middle use near 100% (or more) of their income to consume so that adds at least 10% to their total tax burden. The wealthy use much less of their income to consume so their percentage is many times less. These embedded cost are not evenly dispersed as you previously stated.
Hayden,
The Fair Tax people are not the problem. They have already marginalized themselves by their associations with the likes of Hannity, Joe the not really a plummer, and the rest of the far right Tea Bagging wingnuts. My target group is the people currently in power. This group is better educated and can understand a logical argument. The current income tax system is already under attack and starting to falter. As more people become educated to the facts of the current situation, a compromise version of the Fair Tax will become more attractive.
RM,
I’m not sure what gives you the impression that capital gains aren’t included in the overall federal tax burden, but they are. They are absolutely part of the income tax.
The table you are looking at is for only the top 400 taxpayers. I’m not sure why you are focusing on them, but the top 1% pays more than the top 5%, the top 5 more than 10, and so on down the line.
Are you attempting to make the claim that the top 1% pay a smaller percent of income towards the federal tax burden than the lower 99%? If so, the evidence I presented directly contradicts this and you have yet to provide any evidence otherwise.
As far as embedded taxes goes, one either believes that the federal (income/payroll/gift/estate) tax burden is paid directly through what the government takes from salary/wages/inheritence, indirectly through embedding in the price of products/services, or a combination of both.
Based on being directly paid, the tables I provided show that the “rich” (at the very least defined as the top 1%) pay a bigger percentage of their income taxes than everone else. If, however, one believes most of the money is indirectly paid by having these taxes embedded in the price of products (as I do), then the distribution is much more even. In fact, it’s possible that the lower end of the income scale pay more of a price (but that can only be shown by studies and in theoretical discussion).
Personally, I think capital gains should be completely untaxed. The free flow of capital makes for a more efficient market. Under the current system, capital exchanges are more than the product of deciding who can best utilize the capital, but must take into consideration the tax as well.
Andrew,
You can sure spin, but it does not change the facts. The top 1% pay an adverage of 19% of their total income to federal taxes. This fact was given by Steve Forbes of Forbes magazine during an interview on one of the sunday news shows a couple of weeks ago when he was promoting his Flat Tax proposal. How can your Brookings “overall tax burden” be anywhere close to 30% when the top income tax rate is only 36% on wages/salaries and the capital gains rate is a flat 15% on profit derived from property. It just makes more sense that the overall rate would be closer to 15% than 36% because the truly wealthy receive much more of their income from capital gains than wages/salaries. Even the Brookings Institute showed when adveraging the very top earners tax returns that the overall tax rate is down around 18%, which makes sense. Spin it as you will, the truth is the very wealthy are getting a much better overall rate than we are.
How much of the total income of the top 1% goes to consumption to maintain their life-style and how much goes back into investment to generate more income? Your saying that they pay the ebedded cost of federal taxes in products in services at a higher rate than the rest of us? How can this be? You may be able to argue they pay higher amounts but there is no way they pay higher rates when many at the lower end consume with 100% (or more) of their income. That’s fairly simple math. 10% of even 90% of total income is 9% and 10% of 100% is 10%.
Of couse you want to completely untax capital gains because that’s the mantra of trickle down Reganomics. That would certainly allow the top income earners to get their taxes down to well under 10% by shifting their income farther away from wages/salaries. Personally I would suggest reformming the capital gains to a flexable and progressive scale that would totally untax the retiry cashing in their IRA for retirement or the parent cashing in stocks for a childs education while still taxing capital gains on pure speculative investment at a top rate of 40% for gains over $2 million. I would also increase the existing capital market transaction tax and expand it to commodities as well, to reduce the rates on the retail markets. Why should some markets be completely untaxed while the retail markets are taxed at increasingly higher rates?
RM,
I’m not sure what you think “spin” is, but quoting actual numbers that support my arguement is not spin. In fact, it is just the opposite. You really should look at the tables I’ve presented as evidence. The second table shows that in 2006 the top 1% paid 19% in income taxes (which again, includes capital gains). It’s possible that that Mr. Forbes mispoke. They paid a full 10% in corporate taxes. That’s where most of the additional money comes from.
“Your saying that they pay the ebedded cost of federal taxes in products in services at a higher rate than the rest of us?” I never said any such thing. In fact, I left open the possibility that exactly the opposite could occur.
Untaxing capital gains would definitely be part of Reaganomics, but it’s not only supply-siders that see this. I think even some progressives can see that maximizing the efficient use of capital helps everyone. But of course, some do not.
Andrew,
Your actual numbers are what I call spin. how can you cite the 10% in corportate taxes and then assume the income tax includes capital gains. It can not be included because the rate is way too high. Capital gains is a major source of the upper tiers income group if it were included as you say the rate would be much closer to the 15% capital gains rate. How come the corporate taxes are shown separately, are they not income tax that is taxed at the same rate as wages/salaries. If they were lumping items together wouldn’t it make more sense to include corporate taxes and income tax together. They did not want to include capital gains because it would not support their contention that upper income individuals are paying much more than the rest of us. If you start with a conclusion and mold the facts to fit, that is spin.
RM,
You are way off base. Brookings is a progressive leaning institute. They aren’t trying to spin anything to help my cause. Corporate taxes are NOT taxed at the same rate as wages and salary. The corporate tax rate (federal) is 35%. Capital gains are very much calculated as personal income. They are on schedule D of your personal income tax. The upper income tax rate is close to 15%. It is 19%.
I’m not exactly sure what you’re trying to argue, but the rich (top 1%) pay more of their income (percentage wise) in federal taxes than the poor do. You can argue the numbers I’ve presented all you want, but it might help if you had some numbers of your own to counter. Just assuming the perfectly valid numbers I’ve presented are erroneous because they don’t fit your predetermined conclusions is not a very strong argument.
No, that’s not my point. If you remember back a few days, someone mentioned that 40% of Americans pay no income taxes at all. My point was that is only true if you totally discount payroll taxes and the embedded costs of income taxes in the price of products and services. The bottome 40% are really paying significant percentages of their income to federal taxes even if they are getting a 100% refund on the wages/salaries portion of their income tax. I then used the example that many very top earners could also fit into the 40% group if capital gains were discounted like they had payroll and embedded costs for the bottom group. Many of the uber rich receive no income from wages/salaries which are taxed at the highest rates. They mostly (adverage of 64.14% of adjusted gross income in 2006) receive income from profits on property, capital gains which is still taxed at a much lower rate.
Andrew,
You were right, I was way off base. Capital gains was not the reason the numbers were not making sense for the top chart, it was corporate income taxes that made the difference. But that skews the numbers as well because all corporate taxes are considered costs so the corporation defers the taxes to their customer. They are collecting the taxes from their customers and passing them onto the goverment. The corporations are getting credit for paying the taxes while their customers pay the bill and receive no credit in this particular chart.