An Inconvenient Tax
Due out in 2009, An Inconvenient Tax explores the history of the income tax and the causes of its many complexities. The film follows the tax through wars, economic booms, and significant presidencies in U.S. history. Noam Chomsky, Steve Forbes, Joseph Thorndike, Mike Huckabee, Charles Rossotti, David Walker, Neal Boortz, Michael Graetz, Daniel Shaviro, Leonard Burman, and others discuss not only the problems America faces in the tax code, but also give insights on how to move forward. In a time when many Americans are concerned about the future of the economy, rising deficits, and unfair tax treatment, An Inconvenient Tax attempts to provide a crucial, honest look at the income tax.
114 Responses to “An Inconvenient Tax”
Hmm… This sounds interesting, but I’ll have to reserve judgment until I can take a look at the site in detail from home. Sure would be nice to have a neutral opinion on tax policy and comparative advantages and disadvantages of each. I guess the real problem there is that too many people have a vested interest in either the status quo, the FairTax, the Flat Tax, or something else.
Morphh,
Huckabee, Boortz and Ken Hoagland continue to claim that there is $13 trillion in American owned offshore assets that would come rushing back to the USA and stimulate our economy if the Congress would only pass HR25.
Ken Hoagland has checked in on this site from time to time I believe, and I’m asking you as the site Admin to invite Ken to tell us what his sources are for that claim. Inquiring minds want to know!
I’d don’t have Ken’s e-mail.. I’ll see if I can find it online. To clarify, I don’t consider myself an admin of the site. I just help moderate the posts and Josh gives me the permissions to post new entries. Unfortunately, I haven’t had much time to check the site recently. And since no one else is posting anything, the blog has someone died. I hate feeling like it’s my job to keep it alive. As you’ve seen over the past few years, my ability to engage in discourse has been somewhat random. As for the FairTax, tax reform in general has taken a back seat in this political climate, so I don’t have a lot to post. If others have info, feel free to e-mail me or contact Josh.
Maybe we should rename it: The Fair Health Care Blog.
Then maybe we’d get a few more hits.
Morphh,
Ken’s email is or was txhoagies@aol.com. I understand that activity on the blog is kind of slow, but you certainly have much more influence and clout than any of us. A request to Ken from you might produce results?
To remind everyone, the current claim by AFFT is that there is $13 trillion in offshore wealth that would come rushing back to the US if the income tax was replaced by the Fairtax. Elaborations on this theme claim that the influx of investment dollars would make the current Obama stimulus activity look small by comparison. Etc. etc.
I’ve spent a lot of time trying to figure out where this claim originated, and here is what I think I know:
(1) The paperback version of the first Linder/Boortz book stated on page 97 that the 2000 World Wealth Report indicated that 1/3rd of the wealth of high net worth individuals was located offshore and that meant that there was $11 trillion offshore at that time. (The World Wealth Report that made that statement was actually the Merrill Lynch 1998 report, but that’s certainly a minor error by Boortz/Linder).
(2) On page 104 of the same paperback, the authors state that there is $11 trillion in American owned wealth held offshore. That is the cause for my concern. While there may be $11 trillion offshore, it isn’t owned by Americans. (The fact that the $11 trillion is measured in dollar denominations may have confused Boortz/Linder?)
(3) The Tax Justice Network, an international firm that tries to track offshore holdings, reported in 2005 that there was $11.5 trillion in offshore wealth. $1.6 trillion was owned by North Americans, but there are 23 sovereign nations in North America. The actual amount of US owned wealth offshore isn’t known, but is surely less than $700-800 billion.
My conclusions are that there is nothing like $13 trillion in American owned wealth parked offshore, and the claims in the Boortz/Linder book are a gross exaggeration or perhaps a simple mistake. If AFFT, through Ken Hoagland want to continue to claim that there is $13 trillion in offshore wealth, he should recognize that it isn’t American wealth we are discussing but world wide wealth. That in turn should lead to a discussion of HR25, Section 905, that lays a 23% (or whatever trade treaties allow) income tax on income generated in the US by foreign owned companies. The idea that foreign owned wealth might be invested in the US under the Fairtax seems unlikely in view of the tax penalty. I might add that Fred reported that in 2004, Congress passed legislation aimed at encouraging the repatriation of wealth by offering tax amnesty for participants. I imagine that any individual or firm that wanted to relocate to the US did so at that time. And, I can’t find any similar amnesty provision in HR25?
Morphh, my hope is that you can get Ken to provide the basis for his claim because I can’t find it anywhere. Any help you can provide would be appreciated.
Hank,
Here is my original link discussing where the number came from and here is your reply agreeing on the number. The link in my original post is tracking the value of US-owned assets abroad. In 2005, that totals $11.5T ($13.7T in 2006). That is $11.5T of wealth owned by US citizens or corporations.
You didn’t dispute this claim back then. Are you disputing it now? $11.5T in US owned foreign assets is $11.5T in offshore wealth (if speaking as an American). Where is the disconnect?
Morph,
While Hayden’s post may be for humor, I still like the idea you had a little while ago about expanding the breadth of this site. I’d be up to discussing broader political/policy issues with the fine commentators here. Anyone else up for it?
I’ve sent a few e-mails off regarding the 13 trillion. We’ll see what they say if they respond.
I think it would be good to expand it to some degree with a focus on taxation, debt, deficits, excess spending, and overall tax policy and fiscal responsibility. Would this stay in the spirit of the blog? Thoughts on scope?
Morphh,
Thanks for taking the time to try to clarify the $13T issue. I’m waiting with bated breath for any sort of response!
If we seem to have worn out the Fairtax, and thoroughly examined HR25, (thanks to James Kidd!), I think a case can be made for expanding the scope of Fairtaxblog.com to include the 800 pound gorilla in waiting. Sometimes called “Phase 2″, we might concentrate on how to reduce the size and cost of the federal government? Boortz’s 10th Amendment Commission comes to mind, as well as the nature of the coming federal budget train wreck. Frankly, I’m appalled that the President is wasting his time on issues such as health care reform and cap and trade, while Rome is burning. An excellent 2008 book entitled “Where Does the Money Go?” by Scott Bittle and Jean Johnson, provides a guided tour to the federal budget crisis. Worth reading, but kind of depressing, at least to me.
Andrew,
I’m not disputing your number, just the applicability to the FairtaxBoortz original claim of there being $11.5 trillion in US owned wealth which is parked offshore to avoid taxation. There may well be $13 trillion in US investments around the world, but there are many reasons other than tax policy for those investments. I’d like AFFT to simply clarify where they got their numbers, and then we can try to understand what applies and what doesn’t.
Andrew,
I would favor keeping the site to the single issue of the Fair Tax. I, as the head of the New Jersey organization, have become a FairTax cop. When people in my group post a or a partisan or non-germane message, to our New Jersey Yahoo Group, I do not let it go through.
I also pay attention to our relations with other offices and organizations, no matter how friendly. The rule is simple. They can endorse us, but we can’t endorse them. Example: we can’t endorse Mike Huckabee even though Mike Huckabee endorses us. Mike Huckabee has positions about other issues that have nothing to do with the Fair Tax, and we cannot be seen as tied to them.
We also are careful about Tea Parties. Our members go to them to recruit supporters because Tea Partygoers are receptive to the FairTax message. FairTax, however, is not there to oppose Obamacare. Our speakers have positioned themselves as the solution to the problems that upset the Tea Partygoers, and the message resonates.
I see many of the same issues with this site. If we stray into other issues, it will lose its identity as a wildcat FairTax site. If someone wants to write about health care, he or she should be able to post it here, but only if the piece is tied into the Fair Tax and says how the Fair Tax addresses that issue – as the Fair Tax indeed does!
~Jim Bennett
Summit, NJ
Morphh,
I think this piece is worth reading, and may illuminate some Canadian lessons learned for those supporting the Fairtax?
View From Canada: The National Sales Tax
By Ian Austen
Update | 2:57 p.m. Ian Austen responds to some reader questions about the sales tax system in Quebec.
This is the fifth in an occasional series about how Canada regulates its economy.
The decision by Canada’s Conservative government to introduce a national sales tax over 18 years ago was widely seen as a major factor in the party’s near-death experience in a subsequent election.
The Conservatives eventually recovered, and Canadians have apparently grown to accept, but not love, the Goods and Services Tax. But after several quiet years, the G.S.T., as it’s commonly known, has again become a source of political tension.
Last weekend, thousands of people rallied at 15 demonstrations in British Columbia against that province’s plan to integrate its sales tax with the federal system. The speakers condemning the decision ranged from Bill Vander Zalm, a former premier who led the very much right-of-center Social Credit party, to Carole James, the current leader of the left-of-center, union-backed provincial branch of the New Democratic Party. Ontario, the country’s most populous province, has also agreed to a similar sales tax integration beginning next year.
Although the United States Treasury Department has occasionally studied the idea, the United States remains something of an oddity internationally with its lack of a national sales tax. The potential for a $9 trillion deficit over the next 10 years has revived some talk of federal sales tax. In that debate, Canada’s experience as a relative latecomer to the federal sales tax world could provide some guidance.
Beyond the political complications, Canada’s government was forced to grapple with several difficult issues. Not least of them was finding a way to make a sales tax system comparatively progressive by not overly affecting low-income earners.
While most Canadians were not aware of it, the Goods and Services Tax replaced another federal tax: the 13.5 percent Manufacturers’ Sales Tax, which was charged at the wholesale level on goods and excluded the service sector of the economy. (The G.S.T. also replaced an 11 percent telecommunications tax.)
The G.S.T. followed the value-added tax model used by most of the world, rather than the basic retail sales tax system generally found in American states and Canadian provinces.
Simply speaking (though the actual operation of the system is at times anything but simple), the value-added system works like this in Canada: A manufacturer pays G.S.T., currently at a rate of 5 percent, on all the goods and services the company purchases to produce its products. When it sells those products, it adds 5 percent G.S.T. onto the price it charges, to, say, a wholesaler. But here’s where the difference with sales taxes comes in. The manufacturer gives the government only the difference between the G.S.T. it collected from the wholesaler and the G.S.T. it paid in purchasing supplies and services. (Sales out of the country are exempt from the tax, so companies with large export business usually get refunds.)
That process continues on through the wholesaler and the retailer. Ultimately, consumers pay the full 5 percent but, unlike the businesses earlier in the chain, are unable to deduct or claim any of that amount.
While it may seem complex, there is a widespread assumption that these systems are an efficient way to collect taxes, assuming the payment-refund chain remains unbroken and that the refund system does not fall victim to extensive fraud. (A working paper published by the International Monetary Fund in 2007, however, raised some questions about those efficiency assumptions.)
Many business groups, like the British Columbia Chamber of Commerce, argue that by effectively taxing retail consumption rather than production, value-added taxes like the G.S.T. free up money for investment in new equipment and machinery and prevent consumers from paying taxes on taxes. Critics, however, argue that many businesses simply pocket any gains.
When Brian Mulroney brought Canadians the G.S.T. as prime minister, he also introduced a variety of measures to offset the impact of the tax on low-income people who are disproportionately harder hit by consumption taxes.
A few categories of products, notably basic groceries, were exempted from the tax. More importantly, low-income earners receive quarterly, tax-free payments to offset the G.S.T.
Then what explains the current outcries in British Columbia and Ontario?
Businesses have long pushed the provinces to incorporate their sales taxes with the G.S.T., thereby creating what the federal government calls a “Harmonized Sales Tax.†Not only does the step reduce paperwork, the single tax also allows businesses to recover provincial sales taxes on inputs as they now do with the G.S.T.
But with the exception of Quebec, most large provinces had been reluctant to take that advice until now.
That’s mostly because it’s not an easy sell to voters. To increase its efficiency, the G.S.T. taxes far more products than provincial sales taxes do and it also include services, an area largely untouched by current provincial sales taxes. Because of that expanded base, a report prepared for the Ontario Chamber of Commerce estimates that combining the two taxes boosts inflation by about 0.01 percent to 0.02 percent a year. The Toronto-Dominion Bank, however, estimates there will be an initial 0.7 percent rise in prices after the two provinces merge with the federal system and a 0.4 percent increase over the long term.
But both the bank and the chamber of commerce agree that the impact on consumers will fall over time as companies pass along the savings they gain from recovering provincial sales taxes.
H.S.T. opponents, however, offer voters a less subtle argument that is arguably more compelling on a political level. The New Democrats in British Columbia, for example, call that province’s plan, which will introduce an H.S.T. with a rate of 12 percent, a “$4 billion tax hike that will kill jobs and make life more expensive just when middle-class families need a break.â€
In Ontario, Dalton McGuinty, the Liberal premier, has been somewhat successful at muting that sort of political opposition by turning combined tax, which will have a rate of 13 percent, into a windfall for the majority of the province’s residents. Families with taxable incomes of under 160,000 Canadian dollars (about U.S. $148,464) will get a 1,000 Canadian dollar transition payment, which is tax-free, and individuals will receive 300 Canadian dollars. Both provinces have also proposed additional measures for low-income earners.
Neither Ontario’s nor British Columbia’s government faces imminent elections. And both are presumably hoping that the backlash against tax harmonization will wither before the next campaign.
But the controversy generated by merely modifying Canada’s existing federal sales taxes will likely give pause to anyone in Washington considering the merits of launching such a scheme from scratch.
Hank,
The Canadian federal and provincial governments seem to do a better job than we do in balancing their budgets. I think the VAT may have played a role.
Lately Canada has been buffeted by the same economic winds as we, but read this quote from Canada’s Global News:
“In the fiscal year that ends next March, the deficit will rise to $55.9 billion from the $50.2 billion forecast in June, the government said. The deficit for last year was $5.8 billion. BEFORE THAT, CANADA HAD ENJOYED A LONG SPELL OF SURPLUSES. (Emphasis added).”
We south of the border can only dream. The transparency of the VAT just may have had a hand. Remember, however, that Canada also has income taxes, which the FairTax would do away with.
~Jim
PS: I still say no thank you to Canada’s single-payer healthcare system. The FairTax addresses part of that problem, too.
Morph,
I would prefer not to see this site expand too much. I don’t see a problem with questions or some discussion of other topics (healthcare, etc.) as long as they have some association with taxation. But if this site grows to be a site about healthcare, taxes, war, education, politics, etc, then I think it dilutes the discussions of the pros/cons of the Fairtax, which is the purpose of this site, no?
Besides that, the name of the site would have to change wouldn’t it? << attempt at humor
John
Morphh,
As luck would have it, Ken Hoaglands latest email asking for funds to run some sort of Fairtax lobbying campaign repeated the claim of $11 trillion parked offshore, and used as a reference the Global Policy Forum.
After digging through tons of GPF studies and major policy papers, I found one under a Tax Haven category entitled “No Safe Haven”, dated March 18th, 2009. The following is a direct quote from the policy paper:
“With estimates of between $1.7 and $11.5 trillion in assets held in the so-called offshore financial services industry, the OECD is unequivocal in its position: “Tax havens deprive governments of revenues needed for vital infrastructure, and undermine the confidence that citizens have in the fairness of their tax laws. Countries must take firm action to stop this loss of revenue.”"
If this is indeed the reference supporting the AFFT claim of $11 trillion, I think the claim lacks credibility. Perhaps marketeers have to put data in the best possible light, but the range presented here by the GPF seems pretty broad. In another GPF reference, the GPF praises the Tax Justice Network study entitled “The Price of Offshore”. You may recall that the TJN determined there was $11 trillion offshore, but only $1.6 trillion was owned by North Americans, and the likely US owned wealth offshore was estimated at less than $1 trillion.
Until AFFT provides details supporting their claim, this whole story about trillions rushing home seems to be largely a myth. Stay tuned!
Hank — Thanks for looking into this. In your quote from the March 19, 2009 report, was the GPF saying that there is between $1.7 tillion and $11.7 trillion held in offshore accounts from all sources? Or was that amount just from U.S. citizens?
Hayden,
All sources, that is, world wide wealth ownership. And, it wasn’t too clear if that was a GPF estimate or an estimate from the OECD that was being quoted, but it probably doesn’t matter. I would still put more credibility in the Tax Justice Network data.
By the way, I suffered through the nine minute Fox interview of Mike Huckabee and counted at least eight misstatements. (If he wasn’t such a nice guy, I might be tempted to call them lies! But a liar needs to know he is lying for something to be a lie, and I think Huckabee is more ignorant of Fairtax details than a liar.) Once again he stated that there is $13 trillion in US owned wealth parked offshore to avoid US taxes. Wrong on at least two counts. (1) There is no data supporting the claim that the $13 trillion in offshore wealth is owned by US citizens; and (2) There are many reasons other than tax avoidance to operate offshore, including access to raw materials, access to markets, cheaper labor, and offsets as part of a sales contract just to name a few.
I still don’t know for sure if this GPF paper is the source Ken is using, and am still hoping he will clarify?
Hank,
“There is no data supporting the claim that the $13 trillion in offshore wealth is owned by US citizens.” You readily admit there is evidence in post 9. “There may well be $13 trillion in US investments around the world, but there are many reasons other than tax policy for those investments.”
So there is very well data supporting $13T in offshore wealth owned by US citizens. The reasons for this are varied as you point out, but no one knows how much of that is for tax avoidance versus what you state. Any single decision is most likely a combo of at least two of things you mention or tax avoidance (plus cheaper labor has a tax component in it). If in the first year $3T came back would that qualify as “rushing”? Does the statement indicate that all $13T must return? Where the $13T comes from is settled. What isn’t settled is how much will be returned. You seem to arguing their use of the phrase “come rushing back” rather than the $13T.
Andrew — Based on the link you cited, there is more foreign money in the United States than American money held overseas. How do you explain that?
who cares if 13trillion comes rushing back, or it takes a decade? who cares if it’s $13trillion or $3 trillion?
a trillion dollars working in this economy next year that isn’t created by a government tax burden on the as-yet-unborn labor class has got to be better than the current plan.
for every argument we see about the FT system, i fail to find any evidence that it’s worse than the current system.
sure, it’s not perfect, but it’s a hell of a lot better than most (and the current) alternatives.
failure to act is still action; failure to make a decision is also a decision.
Hayden,
Are you suggesting that a nation’s tax policy can be judged based on the difference between foreign owned domestic assets and domestically owned foreign assets? Even if one accepts this hypothetical situation, the judgment shouldn’t be made on a dollar for dollar basis, but more on a percentage basis. If two tax jurisdictions are considered equal along with all other factors, then the amount of foreign investment should be a percentage of wealth rather than a dollar value (otherwise you wouldn’t see the growth throughout the years of both domestic and foreign investment. In other words, that would indicate the tax situation has been getting both better and worse.)
So based on what I could find (wikipedia 2000 wealth distribution of about 35% for Canada/US), the break even point would be about a 2-to-1 foreign to domestic ratio for the break even point. Since it is much closer to being 1-to-1, in this hypothetical world, the US actually appears to worse. But, again, this is only in the hypothetical world.
However, I personally believe that the US is quite good, being that we have strong property rights, sound money, etc. But the fact is, since the fairtax would help a businesses bottom line (based on production), it would only increase US investment. That means both foreign owned US assets and domestically owned US assets would increase.
Some time ago, Fred reported on a 2004 Tax Amnesty bill that passed Congress and became law. Recently, Neal Boortz has seized on the tax amnesty idea as a way to get his $13 trillion back home. Here is a June 2009 study by the NBER which shows what happened:
Friday, June 05, 2009
New evidence on Bush’s tax amnesty
From the NY Times:
“It was called the “Homeland Investment Act,†and was sold to Congress as a way to spur investment in America, building plants, increasing research and development and creating jobs. It gave international companies a large one-time tax break on overseas profits, but only if the money was used for specified investments in the United States.”
This was a measure enacted by the administration of former U.S. President George W. Bush in 2004 that gave a tax amnesty to multinationals who had been keeping money, tax-free, offshore: it allowed them to bring back that money, and pay a tax rate of 5.25%, instead of the normal 35% corporate tax rate. The idea was that they should use that money to build things in the United States, and the law specifically said the money could not be used to raise dividends or to repurchase shares. About $300 billion whooshed back into the United States through the loophole. It was pushed by a spooky-sounding group called the Homeland Investment Coalition which forecast that the measure would help the US economy by “increasing domestic investment in plant, equipment, R.& D. and job creation.”
Guess what happened.
“About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends.”
The new report, entitled “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” is the most detailed analysis of what happened, and was produced by three leading economists, one of whom was a Bush administration official involved with the original plan. As the NY Times explains:
“’Repatriations did not lead to an increase in domestic investment, employment or R.& D., even for the firms that lobbied for the tax holiday stating these intentions,’†concluded the study. . . The restrictions on how the money will be spent seem to have been completely ineffective.”
It gets worse:
“One fact found by the study indicates that some of the repatriated money was not even really returned to the United States, contrary to the intent of the law. Companies knew of the tax holiday in 2004, and many of them chose to “invest†money that year in foreign subsidiaries that had profits subject to American taxes if they were brought back to the United States. They then brought the profits back in 2005, getting the tax break while not reducing the continuing foreign investment. Ms. Forbes said about $100 billion left the United States and came right back, in a process the paper calls ’round-tripping.’”
Stay tuned!
Andrew – Based on your thoughtful posts, I am fairly certain that if you were a talk-show host or the communications director of AFFT you would be able to articulate a reasonable basis for an increased in domestic investment if the FairTax were enacted.
Instead, the most prominent FairTax advocates make simplistic (and unprovable) statements to the effect that $13 trillion of dollars held overseas will come rushing back to the US as soon as the FairTax is enacted. And they make these claims so often and so forcefully that many people believe them.
I believe that even you agree that this claim is patently false for a whole host of reasons (most of which Hank has painstakingly uncovered). Now, you might argue that the merits of the FairTax still exceed its faults and make many sound arguments in favor of the FairTax (including that it would lead to an increase in domestic investment.)
Unfortunately, you are in the minority of FairTax supporters in that you take the time to analyze these claims for yourselff. Most do not and, instead, will simply parrot what Boortz and AFFT say, which makes it extremely difficult to have a rational discussion about the FairTax with the average FairTax supporter. Thir heads are full of so much misinformation that it’s almost impossible to sift through it all to get to the real issues.
You might think that the $13 Trillion issue is relatively minor, except that it’s part of a consistent pattern of claims those guys make that just ain’t so.
Hank,
First of all I take exception to the statement “About $300 billion whooshed back into the United States through the loophole”.
From dictionary.com: Loophole – a means of escape or evasion; a means or opportunity of evading a rule, law, etc.
So it isn’t a loophole..it’s lawful.
Perhaps one of the failures of the Act is due to the fact that the tax situation is not permanent. It was only for a single year and thus gave those taking advantage of the amnesty an incintive to not follow the intent of that act.
Also, I don’t think it’s fair to blame the lack of investing in the US on the Act itself unless it’s for lack of and enforcment mechanism to ensure compliance. This just goes to show how incompetent our legislators are.
Something to consider regarding the benefit of repatriating those dollars…the US dollar was in a steady decline relative to the Euro since 2000…with the exception of 2005 where you see a steady rise in $ value from early 2005 to the end of 2005, then going back into a steady fall until 2008 (when all hell breaks loose and we have a world wide economic problem). So one way to strengthen the $ again would be to encourage the $ to come back to the US.
Is it a bad thing to allow companies to use the repatriated $s to pay dividends? Doesn’t the investor then have to claim those dividends as income and pay taxes on them? Even if that’s not true, what will said investor do with those dividends? Isn’t it reasonable to assume they will buy stuff (helping the consumption driven economy – if that’s a good thing?) or reinvest it (which is the desired goal of the Act to begin with). I’m not sure what the effect of repurchasing shares would be and why that would be good for the company to do or why it should be inhibited. I’m not saying it’s right or wrong that companies would do so, but just that I don’t understand the ramifications either way.
Couldn’t Congress turn around and tax those repatriated funds if the corporations did not infact follow the Act and reinvest as they were supposed to? For instance, we will let you bring those $ back to the US and only require you pay 5.25% tax (as opposed to 35%) so long as you reinvest in a certain manne. If the corporations don’t…then tax them.
I guess I don’t see this as having any bearing on changing the tax laws to allow companies to not have to pay corporate taxes. On the surface, yes, it seems they won’t reinvest in the US. But I think that’s because their is no long term reason for them to do so. If/when the FT is passed, then there will be a long term reason. There will be less of a reason for them not to.
John
Hayden,
It’s not that I consider the $13T minor. I just think it’s inaccurate to say there is no source that states there are $13T is US owned foreign assets. There is one that nobody seems to dispute.
I’ll agree that the statement “there are $13T domestic dollars that will come rushing back” is both nebulous and unprovable (If 1 of the $13T comes back really fast are we satisfied, or do all $13T have to come back? And what if they come back, but at a rate that can’t be considered “rushing”?). That, however, is a function of politics, not fair tax supporters. As an example, Mr. Obama has stated that the new healthcare policies “won’t make anyone lose the coverage they have.” His own staff have to state that the statement “shouldn’t be taken literally”, yet he continues to make the claim. Unfortunately, this tactic works. And instead trying to get people to stop using a tactic that works, I’d prefer to educate the people the tactic is working on.
That’s why I’d be perfectly happy for proponents and opponents alike to look into the $13T and the overall ramifications the fairtax would have on domestic investment. I believe my side would come out far ahead.
Andrew,
OK, I’ve been thinking about the issue and would like to try to examine your $13T and see what’s in the sack?
I think where you and I differ is in the use of the word “offshore” to describe just what $13T we are discussing. Your data source is talking about US investment worldwide versus foreign investment in the US. I have no argument with the numbers you presented. However, at least to me, the term “offshore” refers to offshore banking facilities which are organized to shield investments from US taxes. I believe there is a significant difference in what we are talking about.
Let’s start with offshore funds avoiding taxes. The Tax Justice Network seems to have a good handle on the size of the problem and US owned funds amount to less than $1 trillion as best I can tell. And those assets would likely be subject to criminal penalties if they were relocated to the US. There is no amnesty in HR25 and it doesn’t seem that the 2004 amnesty law was very successful. I don’t think any of those shielded funds would relocate, but who knows?
Next, how about US owned assets located all over the world–that’s your $13 trillion. I’ll repeat that businesses locate in foreign countries for a variety of reasons including access to cheap labor, access to overseas markets, access to raw materials, and even offsets in order to win a sales contract. In 2007, corporations paid income taxes amounting to 3% of gross sales, and I just don’t believe that is much of an incentive to come rushing back home should the income tax is eliminated. The number one reason to locate in foreign countries is probably labor costs, and, under Obama, it looks like the unions are on the rise? US labor costs are certainly not going to go down any time soon. Is there a $10/hour minimum wage in our future? Stay tuned!
So, how about foreign owned corporations that you believe might relocate to the US? Here, I think Section 905 in HR25 creates a major roadblock. As I read it, it lays a 23% income tax (or whatever trade treaties allow) on income from foreign owned companies located in the US. Why would any foreign corporation pick up and move here under those terms? In fact, isn’t it likely that the current imbalance ($16 trillion versus $13 trillion) might be reduced as foreign owned companies flee the country should the Fairtax become law?
One thing is certain–the Boortz claim that there is $13T of US owned assets in offshore accounts in order to avoid US taxes just doesn’t make any sense. But it may become the centerpiece of Ken Hoaglands marketing campaign which is due to kick off this month? Talk about bad timing? The federal Government seems headed for a VAT, and Ken may be spending $250,000 of Fairtax advocate’s hard earned money on misleading advertising about a multi- trillion dollar stimulus scheme. For shame!
Hank,
As far as term offshore goes, I think you hit the nail on the head. You interpret it as “offshore banking”, which is the use of foreign banks rather than domestic, i.e. offshore from US soil. I believe the claim being made is about offshore assets, i.e. US owned foreign assets. Wasn’t the phrase “offshore wealth” used? That certainly encompasses non-banked assets. I don’t disagree that the reasons for this are varied. Nor is any $1 necessarily held offshore for a single reason. I’m sure there are many foreign investments that depend both on the tax system, labor pool, and price of resources, where any one of those losing its domestic advantage would make the investor rethink their decision.
The fairtax would decrease our labor costs by at least 20% (as I have indicated earlier). That’s not going to be enough to make us the leading producer of shoe laces, but it will come a long way toward making our labor pool more attractive to foreign and domestic investors alike.
And the corporate income tax will also be eliminated (at the federal level). This is a 35% tax on profits. I’ve heard a lot of talk that the effective rate is really much lower because of loopholes and such. But guess who’s getting all the loopholes. Politically powerful corporations. So this will level the playing field for all corporations, no matter their political pull.
“One thing is certain–the Boortz claim that there is $13T of US owned assets in offshore accounts in order to avoid US taxes just doesn’t make any sense.” I have to be honest that I have not heard how this claim has been presented. But if it is like you stated, it is false.
Andrew,
The hour is late and I’m not getting any younger, so memory sometimes fails. Please remind me how you concluded that labor costs would decrease by 20%?
In 2007, according to the data in the Kotlikoff/BHI study, labor cost savings from eliminating the business share of FICA amounted to 4.5% of sales. What is the other 16%?
Thanks!
Andrew,
P.S., the Boortz quote in question is on page 104 of the first paperback book. In case you haven’t got a copy, here is the exact wording.
“Remember, right now about $11 trillion in American wealth is sitting in banks and accounts in Europe, Asia, South America, the Caribbean, and elsewhere. This is money that is not working in the American economy. This is money that is not creating jobs and driving economic growth in our country. This is money that has fled our punishing tax structure, and that would come flowing back home if the income tax, both personal and corporate, were to be eliminated and replaced with a simple and fair consumption tax: the Fairtax.”
That, my friends, is one heck of a fairy tale, imho!
Hank,
You are mixing labor cost and sales. I state at least a 20% reduction in labor costs (very rough 15% for payroll and 5% for income). Sales includes labor, but is made up of other things, so you can’t take the 4% from my 20%. Additionally, it serves no purpose to divorce employer/employee payroll tax (it makes no difference in the cost of labor).
As far as the Boortz statement goes, I see how you can take issue with its implications. However, as a political statement, it is definitely defensible (in does technically sit in accounts, at least a portion of it has fled because of the tax structure, and at least some would come back given the fairtax). I guess my point is that the source of numbers ($11T, $13T) is obvious given the links I’ve provided. You just seem to argue with how that data is being presented (which you feel is at least intellectually dishonest).
Andrew — Again, most FairTax proponents are not anywhere near as thorough as you in doing their own research. And the exagerations of Boortz and Linder go farther than what they put in the book.
For example, during our CNN debate, they insisted that there was $13 trillion in “dollar denominated accounts” that would come rushing back to the US if the FairTax were enacted. That is not just a misstatement; it’s a lie. From your links, there might be $13 trillion of INVESTMENTS by US individuals and firms made abroad, but that’s a far cry from $13 trillion in CASH just sitting in dollar-denominated accounts to avoid US taxes.
The problem with Boortz and Linder, as Hank and I have pointed out over and over, is that they start with a kernal of truth, then expand and exagerate their claims so that the claims no longer have any rational basis in fact. Yet the vast majority of folks who hear these claims assume that they are true.
Now, as you’ve pointed out, “a portion” of overseas investments or cash held abroad is probably due to the US tax structure, and “at least some” would come back if the tax structure was changed. But that is a far, far cry from the claims that the FairTax advocates make.
And, of course, it ignores the counter argument, which is that investment capital might very well flow OUT of the United States if consumption is taxed in the US via the FairTax. I believe it is far more likely that investment dollars would flow to countries were consumption would be increasing, rather than where it would decrease due to the FairTax. (It’s a fundalmental principle of conservatives that when you tax something you get less of it. )
Again, my point is that we can have rational discussions as to whether the FairTax would increase or decrease investments in the US, but the sweeping claims being made by the Fairtax advocates do nothing to further real discussion of the pros and cons of the proposal.
Andrew,
O.K., now I remember that you are the one in 300 million who believe that every pension and paycheck will be reduced to the current net in order for businesses to reduce their costs under the Fairtax. Sorry, but I think you are wrong, and here is why.
First, you have frequently asked if I worked for my gross pay or my net pay. That’s a Hobsons choice and the real answer is I worked for both, and so does everyone else. We work for a contractual gross pay and we try to minimize withholding in order to maximize net pay. The contract can be anything from a handshake to a 50 page employment contract, but everyone has some sort of contract, and all contracts deal with gross pay, not net. Never saw a net pay contract, have you? And, some of us try to reduce withholding by under withholding by up to 10% which is legal, but probably requires one to write a check on April 15th. Others seem not to mind giving the government an interest free loan by over withholding and may get some of their money back in April. Everyone withholds differently.
I firmly believe that almost everyone will continue to receive 100% of their gross pay under the Fairtax, and that means that businesses can only use business income taxes, the business share of FICA, and business compliance costs for cost reductions, business expansion, increased payments to shareholders, debt retirement or even pay increases. Competition will determine what each business actually does.
Why will we all get our gross pay or pensions? For contractual and fairness reasons. Contract pay provisions may not seem very binding to you, but I think there would be chaos if businesses tried to discard contract pay provisions, particularly for large union shop businesses. Another legal contract is the binding legislation called the minimum wage law. Do you believe that minimum wages would be reduced by the amount of tax withholding (if any) or FICA contributions? Wouldn’t that require a change to the current legislation?
The fairness argument revolves around the fact that everyone withholds differently for various reasons. An employer has no idea what income taxes are actually paid by each employee, so, how would an employer deduct income tax withholding amounts from their payroll? It can’t be done fairly, and I guarantee that if the Fairtax ever got off the ground, there would be a mad rush to submit revised W-2′s in an effort to protect as much of your gross pay as possible. More chaos!
Perhaps the bottom line argument is that the American worker isn’t stupid. Given a choice, workers would choose to keep their gross pay, and let the businesses adjust their prices upward in order to pay the national sales tax. Do you really believe that any worker would say in effect– “Boss, take my withheld amounts, pay me my net pay, and I trust you to use my money to reduce costs and eventually retail prices?” Andrew, that isn’t going to happen, imho. Much more likely would be workers saying–”Boss, pay me what you contracted for, and you raise your prices as necessary to pay the new Fairtax”! The burden of choice should be on the business owner, not the worker.
Back to your post. I’m not mixing up sales and payroll as you wrote. Payroll will only be reduced by the amount of the employer share of FICA, and that amount represents 4.5% of sales. I don’t agree with you that payroll can be reduced 20%, and neither should anyone else.
P.S. There is nothing defensible about the Boortz myth!
Hayden,
I’ve already agreed that the political wing of the fairtax support tends to exaggerate to the point of making misstatements, just like all political wings, including fairtax opponents (it was Bill Bennett, right?). Are you attempting to claim that this political tactic of over-exaggeration (even to the point of being misleading) is a phenomena unique to fairtax proponents?
Hank,
I do believe that eventually equilibrium will be reached in the labor market if that’s what you mean by “every pension and paycheck will be reduced to the current net”. I not giving a time frame (I think I’ve detailed before how I believe it would work in general terms). And believe me, there are a lot more than one in 300 million. The vast majority of economists for one. But I do believe more people think they are working for their pay, but that is out of ignorance (I use the term to denote “a lack of knowledge”, not as an insult. I am quite sure that my general ignorance is much higher than yours).
Workers won’t choose to get net. The market will dictate that. Any individual can say they won’t work for less, but since the market already accommodated the resources for labor exchange previously established, there is no reason to think that it would change. You are correct about the minimum wage, however. It will be a defacto raise for those currently receiving it. That will lead to less jobs than would otherwise be, but that’s a whole different argument.
I was referring to payroll and you removed a percentage based on sales. That is a mix up. 20% payroll minus 4.5% sales is 16% nothing. If, as an example, payroll is 50% of sales, it would yield 5.5% of sales or 11% of payroll.
We have said before that somewhere between $11-15 trillion trillion dollars could be attracted to our economy with passage of the FairTax. Contrarian Hank is ready to pounce on an unjustified claim and waits with baited breath. This being an important purpose of Hank’s life, I’m happy to oblige although I try to avoid the quicksand of trying to convince someone who will not be convinced because he so loves the argument itself.
This is a best guess based on a number of findings–the wealth held offshore by Americans and American businesses, the Princeton Econometric Study commissioned by Bill Archer years ago that found that more than 80% of 500 polled foreign corporations would either move their headquarters here or at least a major subsidiary, and the results for Ireland and other nations that lowered corporate tax rates there and the immediate effects of that. Part of it is a reasoned guess based on common sense and an incomplete picture of offshore holdings.
When the United States becomes the largest economy in the world to eliminate corporate taxes entirely, lift taxes from manufacturing and erase the tax cost of every new hire, we believe that the “magnet-effect†of having the wealthiest consumer economy and the best tax structure will not only attract foreign corporations but convince many American businesses to relocate some foreign operations or investments here. The same goes for personal wealth now held offshore. How much exactly? That’s pretty hard to nail down although $11-15 triliion seems a reasonable estimate given that so much wealth (foreign and American) today lies fallow on the sidelines waiting for economies to improve.
But as you will see above, this and other reasonable arguments will never, ever bring Hank or Hayden along. When his own lowball estimate of less than a trillion dollars is challenged with a research source he shifts from challenging the figure to wanting to know what Neal Boortz wrote about and sticks with his own personal estimates of what this means for our economy even though there has been no claim of advanced degrees in economics, dedicated studies to this subject or experience with the federal budget. That’s his right, he likes the contrarian role on this issue. I find his less than constructive purpose in life to be tiring but different strokes…
Same thing on “inclusive vs. exclusive†on how much people can take home in their paychecks and on his estimation of what the American public can do to push Congress once millions of voices are engaged. The 23% tomato and 23% tomato article about different ways to calculate the FairTax on the front page of FairTax.org (for thye last year or two) won’t stop Hank from charges that the campaign is trying to mislead on the actual rate. The prebate is another expensive entitlement to Hank but the much larger amount that is credited, exempted, deducted and “loopholed†out of the income tax code is not. “Taking home your whole paycheck†will probably not include the employer’s share of FICA taxes to the employee, just a paycheck substantially bigger when there is no federal withholding and no FICA employee tax–to Hank that is somehow proof of another deception. Geez.
Even if Neal, myself, the $22 million of research and all others have it all wrong on these figures, the FairTax still comes out better than what we now have. This fundamental point is always lost on Hank who revels in why we can’t instead of why we should try. There are those who try to build and those who try to tear down. We’re working our hearts out to build something better and have plenty of proof how broken is the current system. Not good enough for some. Let me say it once more–it’s not perfect, just far better, far simpler and far more honest when it comes to the cost of government.
Even when positing that people will no longer have their taxes hidden from them in payroll withholding and payroll taxes, Hank still manages to discount the value of this arguing that it will make little difference. I strongly disagree and believe that the most powerful virtue of the FairTax is restoring the role of the citizen to finally bring a “check and balance†to unrestrained federal spending. Today those promises of spending, the massive borrowing and the federal expenditures themselves are seen by most as “free moneyâ€. It’s destructive and dangerous and is leading us down a path of back breaking taxes on still unborn American generations–I call THAT “taxation without representationâ€. When federal taxes come out of every purchase (and are seen), the attitude of people across the political spectrum will change for the better and we will all have to be convinced with a “cost/benefit†argument for new spending instead of just being the victims of emotional baiting of citizens against each other.
Elsewhere on the web Hank likes to call FairTaxers “cult†members or simply “liars”. His pose here is thoughtful and concerned but after years of substantive answers making no difference whatsoever to him, I’ve tired of it. We raised and pent $22 million on peer reviewed research and have sen several articles in scholarly “Tax Notes” answering the distortions of the distributional effects but no number of scholarly studies or “proofs” ever changes a single argument of a few who rail against the idea. They are simply not in it for the fair exchange of ideas.
Beyond all the questions and doubts and endless dialogues about whether Hank is right about the constitutional right of the federal government to exact taxes on state and local governments (Like Social Security tax payments for state and local employees), finally it comes down to the heart of the matter–not the distractions. The FairTax shifts federal taxation away from what goes into the economy–work, saving and investments–to what comes out of the economy–consumption. The more you spend, the more tax you pay. Our earnings belong FIRST to us and then to the government when we choose to make purchases subject to the FairTax and beyond the recompensation provided through the prebate. That’s just basically fair. The poor are protected, the middle class benefits, the wealthy invest more in growth and the economy is unleashed. The Congressional corruption of the tax code ends and the enforcement needs become much smaller when 120 million personal tax returns become a bad chapter in our national history. No criticism levied here has changed these fundamental virtues of the FairTax.
Did I forget to add that millions of illegal immigrants become taxpayers overnight as consumers (Hank’s cue to low ball the tax revenues from this), that the underground economy becomes greater part of the tax base (cue already embedded taxes paid) and that foreign producers, selling here, no longer enjoy a USA tax system produced price and production cost advantage (cue Hank to reverse his argument and low ball the effect of embedded taxes).
There Hank, that should be enough to keep you engaged right up to the day we win enactment. Hey, but then you’ll have seven years (the Constitutional amendment ratification time) to try convince people taking home paychecks free of all federal withholding and payroll taxes that they really should go back to a tax system that hides our taxes from us, kills off the Made in America label and gives preference to those with a tax lobbyist. The new jobs created hand over fist (Source: my own guess what will happen when billions of dollars of new investment arrive here) might make it a hard sell but what’s that to a true contrarian?
The “cult†insults, the “ah-ha†moments, the hours spent niggling away at the passions of those trying to do something constructive serve very little purpose. After years of research, years of debate and years of such questions we have a sound, if not perfect, proposal that actually enjoys growing public support and Congressional sponsorship. I am ready to hear something better that has come as far against the fortress of self-interest that has always protected the income tax system in Washington.
Most of us are working so hard because we think it will help the country and our kids. That’s quite different from working so hard to tear something down without any acknowldgement of how destructive the current tax system really is–or any better or as well-researched idea. If you are not a part of the solution Hank, you are part of the problem. Please change hobbies and work instead to strengethen the idea and help us win passage.
Ken Hoagland · Oct 26, 2009 at 1:04 pm · Permalink
I have been following a number of forums where Ken and Hank have gone toe to toe on the FairTax. Hank, you might as well give up. Ken is a clear cut winner. The only perfect tax system is none at all. But since this is not realistic, the FairTax is as close to perfect as you’re going to get.
In one post Hank wanted to take five years to phase his version of a consumption tax. In his version he would keep our current tax system. Each year we would increase the consumption tax as we decrease the revenue collected under our current system. This would be like giving an addict a little bit of cocaine while allowing him to keep taking heroin. He will end up taking both. The only way we are going to be able to wean our addicted government off of government spending is to have a single controlled substance that is as transparent as possible and that is the FairTax.
Let’s see.
Neal Boortz, John Linder, Ken Hougland and other FairTax advocates repeatedly claim that $13 Trillion held abroad will be returned to the United States upon the passage of the FairTax.
This claim is repeated over and over at FairTax rallies, in pro-FairTax blogs, in letters to the editors, etc., etc.
Hank and I ask a very reasonable question: Where did that figure come from?
As you can see from Ken’s response, the answer is THEY JUST MADE IT UP!
Glad we’ve cleared that up.
Well I cited the same study cited above, said that was only a part of the calculation, cited the Princeton Econometric Study and the real world record of what happened in Ireland when they slashed their corporate tax rate.
Hayden says this amounts to making things up. One could find no more obvious evidence that no study, body of research, expert or reasoned opinion will ever change the discordant tune. Nothing ever changes their scripts. These critics live for the argument not the exchange of ideas. It’s a lifestyle choice.
It’s also, obviously, a complete waste of time. Thanks Hayden for proving my point.
Hayden, why do you and Hank keep harping on this $13 Trillion dollar prediction? Even if $1 Trillion flows back into the US economy, that is a plus for the FairTax. With all the corporations throughout the world that said they would pursue the possibility of expanding to the US or even moving their head quarters here, I could see how trillions of dollars would flow into our economy.
I was of the understanding that this blog did not permit character attacks, but it seems I was wrong. From Ken’s post, I learned that I am a contrarian, less than constructive, revel in why we can’t, not in it for the fair exchange of ideas, a niggler, and part of the problem, not the solution.
folks, I’ve been shot at and missed in two wars, defending Ken’s right to write any fool thing he wants to, but his assessment of my motives and character is utter nonsense.
By the way, the British definition of a contrarian includes three examples of famous contrarians; (1) Saint Augustine, a Christian bishop and theologian; (2) Sir John Marks Templeton, investor, mutual fund manager, and philanthropist; and (3) John McCain, an American politician. Maybe being called a contrarian isn’t such a bad thing after all???
As for my qualifications to wax eloquent about the Fairtax, I’m an MIT alumnus, have an advanced degree in economics from the University of Nebraska, and spent ten years on Capitol Hill representing a major Aerospace company. Please tell us, Ken, what are your qualifications for marketing the Fairtax?
The good news contained in Ken’s missive is that he finally told us what the source of his $10-15 trillion in offshore wealth claim was—it was a wild ass guess! I would certainly put more credence on the Tax Justice Network study which indicated US owned wealth was less than $1 trillion.
Ken also tried to make the case that the precedent for having the federal government tax State and Local consumption was the collection of government employee FICA. Sorry, Ken, but the only way Social Security payroll contributions could be legally collected from State and Local government employees was to give them a choice to set up another plan and opt out of the federal SS plan. What choices are available in HR25? The answeer is zero. It’s kind of strange that the Texas tax lawyers that created the Fairtax understood that States had to be given a choice to opt out of acting as the federal tax collector, but nothing was done about the proposal to force the States to pay a sales tax on $1.1 trillion in taxable spending. State and Local taxes are going up!!
I’m also not quite clear just where Ken’s growing support in Congress is? In the 110th Congress, the Fairtax had 72 House co-sponsors. In the 111th, so far, there are 58. I have a bet with a New Jersey Fairtaxer for #10.00 that the number of cosponsors won’t get to 72 in the 111th. Maybe Ken would like a little easy money?
I’m getting up in years, but I will continue to put forth my ten major criticisms of the Fairtax scheme in the hopes that some positive changes might be made. Unlike most critics, I have offered a slimmed down version of the Fairtax which would have a much better chance of Congressional consideration. Stay tuned!
For a fellow who rails so pasionately against what he sees as unsupported claims, you might take a moment for self examination. There are currently 64 co-sponsors to HR 25, not 58. You and Haydon widely and consistently describe FairTaxers as “cult” members and liars elsewhere on the web so please save the phony indignation at being defined as a contrarian. I am also a military veteran so save that guff, too. The FairTax was designed by economists across the country based on consumer research, not by “Texas tax lawyers”, as you know but continue to distort. The potential for incoming investment in our economy is based on BOTH research and common sense and includes American AND foreign investment–and the debate over just how much will finally come here is obviously all positive for us. Finally, embedded federal tax costs will simply shift from being hidden to out in the open in the case of state and local taxes–it’s a wash Hank–as you also know perfectly well but distort to advance your argument.
As for me, I also worked in DC for 12 years but for grassroots causes (senior citizens and Nader) and always pushing Congress, not cozying up to get taxpayer dollars for a private interest. I believe Congress should exist to advance the citizens’ interests–not the other way around. My knowledge of the FairTax is based on what real experts have written and concluded over the years based on peer reviewed academic research.
Your criticism certainly makes you pretty popular in your old stomping grounds and in certain powerful Congressional offices, in particular. Given the tactics already employed by DC interests against this idea I think it is fair to ask, for the record, do you write about the FairTax on behalf of the Ways and Means Commitee, Senate Finance Commitee or the Joint Commitee on Taxation or any individual Congressional member, interest group or tax lobbyist either for fees or as a volunteer?
The FairTax proposal is sound and desperately needed and the income tax system is so obviously broken nothing you’ve ever written has taken away from either truth. And that’s all the time this this year arguing with a fellow who lives to argue.
FairTax Co-Sponsors
1
Rep Akin, W. Todd [MO-2] – 1/6/2009
2
Rep Alexander, Rodney [LA-5] – 1/6/2009
3
Rep Bachus, Spencer [AL-6] – 1/6/2009
4
Rep Barrett, J. Gresham [SC-3] – 6/8/2009
5
Rep Bartlett, Roscoe G. [MD-6] – 1/6/2009
6
Rep Bilbray, Brian P. [CA-50] – 1/6/2009
7
Rep Bilirakis, Gus M. [FL-9] – 5/21/2009
8
Rep Bishop, Rob [UT-1] – 3/12/2009
9
Rep Bonner, Jo [AL-1] – 9/9/2009
10
Rep Boren, Dan [OK-2] – 5/14/2009
11
Rep Brady, Kevin [TX-8] – 1/6/2009
12
Rep Broun, Paul C. [GA-10] – 2/24/2009
13
Rep Brown, Henry E., Jr. [SC-1] – 1/6/2009
14
Rep Brown-Waite, Ginny [FL-5] – 1/6/2009
15
Rep Burton, Dan [IN-5] – 1/6/2009
16
Rep Carter, John R. [TX-31] – 1/6/2009
17
Rep Conaway, K. Michael [TX-11] – 1/6/2009
18
Rep Crenshaw, Ander [FL-4] – 1/23/2009
19
Rep Culberson, John Abney [TX-7] – 1/6/2009
20
Rep Deal, Nathan [GA-9] – 1/6/2009
21
Rep Duncan, John J., Jr. [TN-2] – 1/6/2009
22
Rep Fallin, Mary [OK-5] – 1/6/2009
23
Rep Fleming, John [LA-4] – 3/12/2009
24
Rep Franks, Trent [AZ-2] – 1/6/2009
25
Rep Gingrey, Phil [GA-11] – 1/6/2009
26
Rep Granger, Kay [TX-12] – 10/6/2009
27
Rep Graves, Sam [MO-6] – 2/25/2009
28
Rep Hall, Ralph M. [TX-4] – 10/6/2009
29
Rep Hensarling, Jeb [TX-5] – 1/6/2009
30
Rep Issa, Darrell E. [CA-49] – 1/9/2009
31
Rep Jenkins, Lynn [KS-2] – 2/24/2009
32
Rep King, Steve [IA-5] – 1/6/2009
33
Rep Kingston, Jack [GA-1] – 1/6/2009
34
Rep Kline, John [MN-2] – 3/12/2009
35
Rep Lamborn, Doug [CO-5] – 1/6/2009
36
Rep Lucas, Frank D. [OK-3] – 1/6/2009
37
Rep McCaul, Michael T. [TX-10] – 1/6/2009
38
Rep Mica, John L. [FL-7] – 1/9/2009
39
Rep Miller, Gary G. [CA-42] – 1/14/2009
40
Rep Miller, Jeff [FL-1] – 1/27/2009
41
Rep Moran, Jerry [KS-1] – 1/13/2009
42
Rep Myrick, Sue Wilkins [NC-9] – 1/8/2009
43
Rep Neugebauer, Randy [TX-19] – 1/6/2009
44
Rep Olson, Pete [TX-22] – 1/26/2009
45
Rep Pence, Mike [IN-6] – 1/6/2009
46
Rep Poe, Ted [TX-2] – 1/6/2009
47
Rep Posey, Bill [FL-15] – 1/27/2009
48
Rep Price, Tom [GA-6] – 1/6/2009
49
Rep Roe, David P. [TN-1] – 4/21/2009
50
Rep Stearns, Cliff [FL-6] – 1/6/2009
51
Rep Sullivan, John [OK-1] – 1/6/2009
52
Rep Thornberry, Mac [TX-13] – 1/6/2009
53
Rep Tiahrt, Todd [KS-4] – 1/6/2009
54
Rep Wamp, Zach [TN-3] – 3/12/2009
55
Rep Westmoreland, Lynn A. [GA-3] – 1/6/2009
56
Rep Whitfield, Ed [KY-1] – 2/3/2009
57
Rep Wittman, Robert J. [VA-1] – 1/6/2009
58
Rep Young, Don [AK] – 1/6/2009
59
Rep Linder, John [GA-7]
60
Sen Burr, Richard [NC] – 5/5/2009
61
Sen Coburn, Tom [OK] – 1/22/2009
62
Sen Cornyn, John [TX] – 1/22/2009
63
Sen Isakson, Johnny [GA] – 1/22/2009
64
Sen Chambliss, Saxby [GA]
OK, Ken — I’ll bite.
This is an actual quote from one of your recent emails:
“Economists have estimated that at least $11 trillion will “come home†to the U.S. which is currently in offshore banks and investments—put there to avoid personal, corporate, capital gains and estate taxes.”
You seem to take great offense when anyone questions that claim. But here are the obvious problems with your statement:
1. What economists have made that estimate? I suspect the answer is none. (Unless you count that notable economist Neal Boortz.)
2. Hank has shown in the Tax Justice Network study that there is less than $1 trillion in US private wealth held abroad. You haven’t refuted that.
3. Andrew (a FairTax supporter) has provided a link to the Global Policy Forum showing that while total US foreign INVESTMENT totals $13 trillion, foreign investment in the US totals $15 trillion. If the $13 trillion is invested abroad to avoid the punishing US Tax Code, how do you account for the $15 trillion invested here? You can’t, because investment decisions are made on the basis of markets, raw materials, labor costs, infrastructure, diversification and a whole host of reasons that have nothing to do with the US Tax Code.
So, again, the evidence indicates that your claim is simply made up. Sorry if you find that offensive.
As to your other points:
The Princeton Econometric Study
Do you have a link to that study. As far as I know, no such study has ever been produced. Unless an actual study is produced, it is impossible for you or anyone else to show what assumptions were made, what questions were actually asked, and what the conclusions actually were.
Ireland
Ahh. The famouns “Irish Miracle.” (Let’s ignore the fact that Ireland is currently an economic basket case, but they did have a good run for a while.) You claim that Ireland’s economic growth is due to Ireland having reduced their corporate income tax rates to 12.5% several years ago.
Funny how you fail to mention that Ireland has other taxes as well. The personal income tax rate is 41%, payroll tax rate is 16.5% and their VAT (which, as you know, is a consumption tax) is 21.5% on goods and 13.5% on services. (Food is exempt.) http://en.wikipedia.org/wiki/Taxation_in_the_Republic_of_Ireland
If anything, the Irish example shows why the FairTax won’t work. It is impossible to generate sufficient revenue from a consumption tax (whether a VAT or the FairTax) to replace other taxes, particularly at a 23% rate. Which, of course, is precisely what evey independant study of the FairTax has concluded. But, of course, you already know that.
Ken — I (and Hank) actually do enjoy the exchange of opinions, which is why I, for one, am delighted to see that you’ve taken the time to post on this board. For example, I’m certainly in favor of eliminating, our corporate income tax, which, of course, the FairTax would do. What is frustrating, however (for me, at least), is that so many opinions being presented about the FairTax by its proponents are based on claims that cannot be substantiated. The $13 Trillion allegedly held in “foreign dollar-denominated accounts” (as Boortz refers to them) is just one such claim.
But there are far more significant claims about the FairTax that AFFT has never been able to substantiate despite the the $22 million in research that AFFT claims to have spent (another claim that can never be substantiated, by the way). When one examines these claims one by one, not only are they often unsubstantiated (or, at the very least, highly questionable), they are many times mutually exclusive.
But, who knows, I remain optimistic. Perhaps your upcoming book will have some actual evidence. I look forward to pre-ordering from Amazon.com as soon as it’s available!
Hank, there you go again on the offshore wealth clam. What ever offshore wealth that returns or is created by the FairTax is a plus, so why do you keep using this as an argument against the FairTax?
I wondered when Hank was going to brag about what he believes qualifies him to rag on the FairTax; he has done so in every forum he has participated in. When he constantly talks about his ten years on Capital Hill, I thought he had an important position in Washington. It turns out he was another lobbyist who tried to confiscate tax payer money for an Aerospace company. Hank, you should have left that part out and just stuck with your 10-years on Capital Hill.
Good point Steve. Tell us Hank, which aerospace company was that? Did you manage or work on development projects in the Air Force before you became an aerospace company lobbyist? Did you lobby for the same projects you had responsibility for in the Air Force? Were there cost overruns? We’ve all read about the revolving door producing good career opportunities for Pentagon officers which commonly leads to taxpayers footing the bill for $800 toilet seats and such. Which projects did you work on? You’ve asked many such questions before Hank and even posted personal e-mail addresses, how about you answer a few?
This thread is quickly showing why it is so difficult to have a serious discussion of the pros and cons of the FairTax. For some reason, debates over the FairTax always seem to devolve into personal attacks.
As someone who’s followed the FairTax for about 15 years (Bill Archer was my Congressman, and I went to some of the initial rallies for the FairTax in Houston), I can attest that AFFT has made great strides over the last few years in trying to substantiate many of their claims. Even though I believe the pro-FairTax studies are fundamentally flawed, at least they are out there and posted on the FairTax.org website for all to see. (For the first decade or so, AFFT apparently didn’t have any studies to post.)
One thing AFFT has not done, however, at least in my opinion, is get out there and publicly debate critics of the FairTax, whether over the internet, on the radio or in person. Instead, they tend to hold rallies where they preach to the converted and where none of their claims are seriously challenged. That might be smart marketing and, in fairness, AFFT might be constrained financially to consolidate its support among the truebelievers before taking on the critics, but I honestly hope that one day soon there will be some actual, reasoned discussions out there on the pros and cons of the FairTax.
Again, maybe when Ken’s book gets published he’ll have the opportunity to do so. Who knows, maybe we’ll all learn something.
Ken, you wrote “For a fellow who rails so pasionately against what he sees as unsupported claims, you might take a moment for self examination. There are currently 64 co-sponsors to HR 25, not 58.’
Ken, you need to change your brand of scotch? I wrote that there were currently 58 co sponsors of HR25 and I stand by that number which is 14 fewer than in the 110th Congress. There may be an additional 6 cosponsors of S296, the Senate version, but I hope I don’t have to tell a fellow lobbyist that all revenue bills have to originate in the House, specifically the Revenue subcommittee of the House W&M Committee. It’s quite irrelevant how many Senators are onboard
Of the 14 members of the Revenue subcommittee, only Linder is a cosponsor, and the ranking member, Pat Tiberi also supports HR25. There are no Democrat supporters. On the full 41 member W&M Committee, Linder, Brady, and Brown-Waite are cosponsors and Tiberi and Boustany also support HR25. Eight of the top ten ranking Democrats on the Committee have come out in opposition to HR25.
Progress is hard to discern?
Steve/Ken,
I’m quite proud to report that I was a lobbyist working on behalf of the Boeing Company. My most significant achievement in that regard was to successfully lobby the Congress to approve the selection of the B747 over the DC10 as a replacement for the two aging 707′s which were known as Air Force One!!! I still get a thrill out of watching the President land in those B747′s, knowing it was the best and safest aircraft for the Pres to fly around the world in. I also worked on environmental issues–you would be surprised at what it takes to paint an aircraft in an environmentally safe way. And, no, I wasn’t a lobbyist for any projects I may have worked on during my Air Force career.
Ken, as one of Nadar’s Raiders, were you ever a registered lobbyist? Just wondering, because if you were you might have taken umbrage at Steve’s very ignorant depictions of lobbyists. Someday I’d be happy to explain the difference between a registered lobbyist and an “influence peddler”. In short, lobbyists get in the door based on what they know, whereas influence peddlers get in based on who they knew. Big difference! And honesty and integrity count heavily for lobbyists, because the competition will be coming in right behind you, and woe to any lobbyist caught shading the truth!
Hayden,
I wonder if you might have any way to get a copy of the study report Princeton Econometrics did for Bill Archer many years ago. I wrote to Archer but didn’t hear back, and now have a query in to PE, but no luck so far. It doesn’t seem to be part of the AFFT study literature they claim to have paid $22 million for? Maybe I missed it?
In view of the gross misrepresentations of the Fairtax study activities of my fellow MIT alumnus, Jim Poterba, I would like to understand just what the PE survey questions might have been? I don’t question the study outcome as reported by AFFT, but the survey questions asked might make a world of difference? It’s those pesky details that matter.
Thanks!
Hayden,
P.S., sorry, I missed your post #40 or I wouldn’t have asked for your help in #46. I’ll keep on searching, but suspect nothing was ever published for public consumption?
I’m glad you are willing to spend your hard earned dollars for Ken’s forthcoming book. Maybe you will do a book review like the last one you did?
Cheers!
So typical Hank. These are the sponsors for the House and Senate FairTax bills that I even listed by name and numbered for you. You have managed to split hairs to say it “a’int true” once again with your own brand of yes, contarian, never admit an error, reasoning that you claim to so hate. By any reasonable count, the support for the FairTax bill is just as I said–and listed– and counts those in the House and the Senate where a FairTax bill is pending.You’ve proved my point about you so effectively Hank.
I guess I can conclude that this hair splitting is preferable to you to answering the questions about whether Congress’ general hatred of a change that eliminates the role of tax lobbyists is in any way related to your work as a lobbyist? Are you being paid to attack the FairTax Hank? Did you trade an Air Force development job on a particular project for a lobby job? Come on Hank, you routinely demand answers of me and others–come across now with answers to these simple questions.
And Hayden, I know from your web ads that Bill Archer was your Congressman when you once lived in Houston working as a bankruptcy lawyer up until you moved to Atlanta where you found a degree of fame challenging Neal Boortz and the FairTax, writing as “Georgia Lib”. I fully expect the same treatment from you with my book although you will find no slams against liberals that are not equally aimed at Washington conservatives protecting the income tax system. I can assure you Hayden that there will still be bankrupcies for your practice after enactment of the FairTax but probably fewer among the once large companies you now represent. You will, however, find new opportunities to gain notice tearing down the growing campaign and my new book. That’s life–if not justice– I suppose.
You are apparently polite and I would appreciate that and return it in kind if I had not read elsewhere your descriptions of FairTax supporters as cultists, liars and zealots. Like Hank, you wear a different face on this group but you’ve been “outed”. I keep saying it but this time I’ll follow through–I’m done communicating with you two. You’ve both proved what a waste of time it is by denying the most obvious facts with lobby and lawyer diversions.
Well, Hank — It seems we’ve both been dissed.
It’s good to know, however, that Ken believes we have acheived a “degree of fame” in our efforts to shine the light on the claims of the FairTax proponets.
Of course, I suspect that some would use even less flattering languange to describe us.
Hayden,
Yeah, some of his comments seemed to attribute much too much influence to you and me?
I’m actually very sorry Ken chose to back off from further debate. Ken doesn’t really know what he doesn’t know, and we might have gotten into some Fairtax details once the name calling subsided.
In sporadic exchanges on other blogs, I was surprised at his lack of understanding of some basic details. For instance, he took me to task recently for writing that AFFT jiggered the HHS official poverty levels, but that is exactly what happened. I think everyone now understands that AFFT increased the official HHS poverty level for couples by 25% to eliminate a supposed marriage penalty. Seems that AFFT doesn’t agree with the HHS position that two can live cheaper than twice one.
It also puzzles me that having written that there were 58 House cosponsors of HR25, Ken chose to respond by accusing me of never admitting an error, contrarian, etc. It beats me what that was all about, but if it would make him happy, I’d certainly agree that there ar 64 cosponsors in the Congress. Does anyone really care how many Senate cosponsors there are? I’ll repeat, all revenue bills must originate in the House, specifically the Revenue subcommittee of House W&M where Fairtax support is currently in short supply.
Fairtax supporters should take heart though, because John Linder is predicting a Republican takeover of the House in 2010, in which case, he would chair the Revenue subcommittee. And pigs will surely fly!
Hank, Wow, it only took you 10-years to persuading Washington to purchase two airplanes and ease govern restrictions on the paint Bowing used on their aircraft.
I’m not saying all lobbyists are bad. There are lobbyists for the Boy Scouts and Girl Scouts. You can’t call them bad people. Unfortunately most lobbying is done by large corporations for their special interests and not for the interest of the American taxpayer.
One other point; lobbying is not transparent enough. Every lobbyist visiting a member of Congress or the executive branch to influence official action should first be required to sign in on an online, real-time computer that can be viewed by any other member of congress who wishes to observe the meeting as it happens. Information to be disclosed before the meeting should include the lobbyist’s name, the client represented, the amount paid by month or year for lobbying, the specific purpose of the meeting, the position to be taken by the lobbyist, the legislation to be discussed, the action to be requested and the amount of current and prior campaign donations made by the client, the lobbyist and relatives associated with both.
Every time, every meeting. It’s as simple as that.
By the way, who is paying you to lobby against the FairTax.
Steve,
Your snide and sometimes insulting remarks aren’t worthy of you or worthy of any response. Perhaps you should check your attitude at the door so we can get back to discussing Fairtax issues in a courteous and respectful manner??
So far, I can’t tell if you are just another Fairtax cheerleader or if you have spent the time and energy necessary to understand the details of the Fairtax scheme and HR25. Tell you what, let’s see just how much you really know about the Fairtax,. Here is a simple true/false quiz that deals with commonly heard descriptions of the Fairtax. Please tell me how many are false, and which ones?
(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.
(13) FICA payroll deductions are a tax.
(14) The Fairtax will save Social Security.
(15) The Fairtax is progressive.
Good Luck!
Sorr, I just have a problem will most large corporate lobbyist, and their methods of persuasion.
(1) HR25 abolishes the IRS and the IRC.
No it doesn’t
(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.
It depends on who you talk to and how many words per page you use in your estimate. I have heard estimates ranging from 2500 pages to 67,000. I’m sure it is somewhere in-between. I know one thing, it is a ridiculous number. Plus there are around 1300 different tax forms. I suppose you can give me the exact number of pages.
(3) A sales tax inclusive rate of 23% would be revenue neutral.
At the time it was established, it would have been revenue neutral. Since government receipts are down nearly 30% in 2009, this figure could be much lower.
(4) The after tax price of retail purchases will be about the same.
The elimination of all current taxes and the huge reduction in compliance costs will affect each product and service differently. Prices will go up, but it is anyone’s guess as to how much. My guess is in the beginning they will go up from 15% to 20% and within one year it will drop to between 10% and 12%. Again this is a guess. I suppose you know what the exact figure will be.
(5) The “prebate†is a tax refund paid in advance.
No, it is payment, extra income, an entitlement or what ever you wish to call it. But, its main purpose is to cover the tax on spending up to the poverty level and create a progressive tax.
(6) Your dollars will purchase more under the Fairtax.
No, but you will have many more to spend.
(7) You choose when and how much tax to pay.
No, you will still be paying tax on many unavoidable necessities; food, utilities, etc. At least you will have more control than under our current system.
(8) Everyone will be economically better off under the Fairtax.
Not everyone, tax lobbyists, tax accountants, illegal aliens, tax cheats, and all those who profit from the underground economy will be much worse off.
(9) Interest bearing investment and debt instruments are not taxed.
They are not, but their fees are.
(10) There is $10-$15 trillion of US owned assets in offshore accounts.
There you go again. Why do you keep bringing this up again and again. I have already given my opinion on this subject. You and I know the FairTax will encourage American’s with offshore accounts and foreign corporations to invest in the US.
(11) Buying “used†goods, (tax previously paid), eliminates the tax costs from the sales price.
No, the tax was part of the original price when it was sold new, and will affect the market value when sold as used. That is why a new tax is not added to used items. It has already been taxed and the original tax affects the used price.
(12) A national sales tax would have no impact on State and Local governments.
Of course it would, they will be paying taxes on their purchases just like every one else.
(13) FICA payroll deductions are a tax.
No, it is insurance
(14) The Fairtax will save Social Security.
Since the FairTax will create a much greater base, it will have a much better chance of servival than under our current system.
(15) The Fairtax is progressive.
Yes, the prebate makes it progressive.
Let me repeat the first sentence of last post without all the errors.
Sorry, I just have a problem with most large corporate lobbyist, and their methods of persuasion.
Steve — If you’ve got such a distaste for lobbyists, then I suppose you would be disappointed to learn that the first thing AFFT did when it created the FairTax was to hire the D.C. lobbying firm Patton Boggs to promote it in Congress.
Steve,
As a former corporate lobbyist, I’d like to discuss your concerns in more detail. Please tell me what you believe to be “their methods of persuasion” that you have such a problem with?
Congratulations on your quiz answers. Unlike most Fairtax supporters, you certainly understand the truth about some of the claims being made. We only differ on four of the questions, so here are my reasons for believing those four are also false. (In case you haven’t figured it out, in my opinion, all fifteen claims are false).
(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.
False! According to The Tax Foundation, as of 2005, the entire code and supporting regulations could be printed on 18,000 double sided pages using normal legal paragraphing and assuming 250 words per page. Based on the average growth rate since 1975, the code and regulations can be printed on less than 20,000 double sided pages as of the end of 2009.
(8) Everyone will be economically better off under the Fairtax.
False! The largest group of citizens to be adversely impacted by the Fairtax would be lower income retirees living on Social Security pensions plus interest income from their life savings. For example, a retired couple living on $30,000 SS pensions plus $18,000 in investment income would pay no income tax under current law. Under the Fairtax, assuming that only 80% of income is spent on taxable consumption, sales taxes paid would amount to $8832 annually. It is noted that the $5000 prebate would effectively reduce the dependence on investment income from $18,000 to $13,000.
(9) Interest bearing investment and debt instruments are not taxed.
False! Section 801-806 of HR25 mandates an implicit tax on both investment and debt instruments based on the differential between the interest rate paid or received on debt/investment instruments, and the applicable Treasury rate. For instance, a short term $100,000 CD paying 2% would be charged a monthly implicit tax of $28.75 if the short term Treasury rate was 3.5%. ($100,000 x .015% x .23 / 12 = $28.75). A maxed out credit card with a balance of $10,000 charging 18% interest would be charged a monthly implicit tax of $27.79 if the mid term Treasury rate was 3.5%. ($10,000 x .145 x .23/ 12 = $27.79). These implicit taxes would be in addition to any normal service charges.
(15) The Fairtax is progressive.
False! “Regressive†is an economic term with a very precise definition found in all business dictionaries – when a tax is regressive, the higher one’s income, the lower the proportion of that income that actually goes to paying the tax – and vice versa. Either a tax is “regressive” or it isn’t. The FairTax is regressive. The Fairtax “prebate†simply increases gross incomes and does nothing to change the regressive nature of sales taxes.
Hank,
I’d like to take your quiz:
(1) HR25 abolishes the IRS and the IRC.
Only as we know them.
(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.
This one I’m not sure. All is I know is that a former Senate Majority Leader, the current Treasury Secretary, and the current chairman of the House Ways and Means committee couldn’t get it right. Since you revere politicians so, there must be no other explanation than an overly complicated tax system.
(3) A sales tax inclusive rate of 23% would be revenue neutral.
Based on when the claim is made if 80% of GDP is taxed and everything else is held constant, then yes, 23% is revenue neutral.
(4) The after tax price of retail purchases will be about the same.
No. They will actually be lower. If compliance costs remained the same, then those prices would stay about the same. But the fact that compliance costs are going to go down means that real prices will be lower. It’s a consequence of improved efficiency (via method of tax collection). Quick question: If you have an advanced degree in economics, why did you make me explain the difference between real and nominal prices? Were you testing me? And if you were testing me, how did I do?
(5) The “prebate†is a tax refund paid in advance.
The prebate is the equivalent of a refundable tax credit (imagine a credit targeted at breathing) paid in advance.
(6) Your dollars will purchase more under the Fairtax.
If you believe that the taxes are priced into the product (as I do), your dollars will purchase more domestically produced products (even foreign dollars purchasing our exports). Your dollars will buy less imports because that is where the major tax shift occurs (from our exports to our imports). Of course, the economic growth will give people more dollars. This will at least help with the purchase of imports.
(7) You choose when and how much tax to pay.
Yes, but if you believe in embedded taxes, you can already do this.
(8) Everyone will be economically better off under the Fairtax.
False. Politically powerful entities will have to completely change their strategy for getting favor via the tax code. So those that can throw their weight around Washington will at least have to come up with new ways to shift the tax burden to less powerful political entities.
(9) Interest bearing investment and debt instruments are not taxed.
I’ll go with Steve’s answer that only the services needed to administer those are taxed.
(10) There is $10-$15 trillion of US owned assets in offshore accounts.
There is approximately $13T in US owned offshore wealth. I don’t think it necessarily means that is in an account.
(11) Buying “used†goods, (tax previously paid), eliminates the tax costs from the sales price.
Since the price of used goods is relative to new goods, there is no way to eliminate this tax from affecting the used goods price.
(12) A national sales tax would have no impact on State and Local governments.
If they employ people or purchase products, it will have an effect. It won’t cost them any more expense though (if you believe products already have tax included in them, as I do). The tax free municipal bounds may take a hit though (as they should).
(13) FICA payroll deductions are a tax.
Absolutely, 100%. Especially if you believe SS is constitutional. This was just a softball right? You don’t believe the payroll tax isn’t a tax, right?
(14) The Fairtax will save Social Security.
Nothing will save SS.
(15) The Fairtax is progressive.
Against annual income? No. Against spending? Yes.
After enough people have responded, could you produce the key? I’d at least like to debate my low grade.
OK. I’ll join in.
(1) HR25 abolishes the IRS and the IRC.
Technically false, but clearly the intent is to abolish the current Tax Code. So I’d consider this a trick question.
(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.
Another trick question. No how many pages are in the IRC, we can all agree that it is overly complex, cumbersome and confusing.
(3) A sales tax inclusive rate of 23% would be revenue neutral.
Ah, now we get to the main point of contention. Of course it’s not revenue neutral. But we’ve discussed this endlessly and can each point to studies that support our respective conclusions.
(4) The after tax price of retail purchases will be about the same.
False. Even if the 30% tax exclusive rate were revenue neutral, prices would still have to rise if people were to get “100 percent of their paychecks.” (See the 2005 BHI study.) If, on the other hand, the required tax rate was 50% or greater, prices would need to rise that much more.
(5) The “prebate†is a tax refund paid in advance.
No. It’s merely a cash grant that could be used for anything — health insurance for example. The fact that the FairTax folks say it should be allocated to taxes is irrelevant. And, of course, since the cost of the prebates will increase government spending by an equal amount, the cost of the prebates will be borne by the taxpayers.
(6) Your dollars will purchase more under the Fairtax.
This depends more on what the Fed does to the money supply, but this is almost certainly false. Again, see the BHI study.
(7) You choose when and how much tax to pay.
True for discrectionary items, such as new homes and new cars (which can be substituted with existing homes and used cars), but false for such essential goods and services such as food, clothing, health care, insurance, utilities, rent, etc.
(8) Everyone will be economically better off under the Fairtax.
False. High income folks will be much better off due to the dramatic reduction in their income taxes. Those who stand to inherit large fortunes will be much better off due to the elimination of the estate tax. The very poor might end up roughly the same due to the prebate, but the middle class and, in particular, middle class retirees will suffer the brunt of the FairTax and see their tax liabilities sky-rocket to make up the difference.
(9) Interest bearing investment and debt instruments are not taxed.
I don’t completely understand this question. Credit card interest expense will be taxed, as will a portion of home mortgage interest. Business debt will not be taxed.
(10) There is $10-$15 trillion of US owned assets in offshore accounts.
False. See the discussions earlier in this thread.
(11) Buying “used†goods, (tax previously paid), eliminates the tax costs from the sales price.
Again, this is sort of a trick question. Since the FairTax will not reduce the pre-tax price of new goods and services (see answer to question no. 4), it doesn’t matter what the so-called embedded taxes were previously paid for used goods.
The FairTax will only apply to new goods, new homes and services that are bought in the US for personal consumption. It won’t apply to used goods, existing homes, items purchased abroad (unless brought into the US) and business consumption. I don’t know how else to answer this question.
(12) A national sales tax would have no impact on State and Local governments.
At a 50% tax-exclusive rate, the FairTax would increase the cost of all non-educational expenses of state and local governments by 50%. So it depends on how much a state spends on education and how much revenue it generates from its own sales tax (versus, say state income taxes and property taxes.) But, I think it is safe to say that the FairTax would drive up state sales tax rates by at least 50% (from, say 7% to 10.5%).
If on the other hand, states eliminated their own state income taxes (as they presumably would if the FairTax were adopted), then state sales tax rates would have to incease significantly to make up for the revenue lost from the elimination of their income taxes. So, state sales taxes could zoom to 20% or so (which, of course, would be in addition to the federal FairTax.)
(13) FICA payroll deductions are a tax.
I consider it a tax. You have to pay it or risk going to jail.
(14) The Fairtax will save Social Security.
Even if the FairTax were revenue neutral, it could not “save” Social Security (or Medicare) any more than we could save it under our current tax system using our current tax rates. In my opinion, a VAT will need to be implemented in addition to a modified income tax system in order to fund Medicare and, possibly, Social Security.
(15) The Fairtax is progressive.
Of course not. Higher income earners tend to spend a smaller portion of their incomes on goods and services than to the middle class. Thus, a smaller portion of their incomes would be taxed under the FairTax.
Take Warren Buffet as the most extreme example. Even though most of his income is taxed at the 15% capital gains rate (as opposed to the 35% maximum rate for ordinary income), he would still realize a tremendous tax savings under the FairTax for the simple reason that he spends only a small portion of his income.
If he earns $1 billion per year, under our current Tax Code he might pay $150 million in annual taxes. But under the FairTax (assuming the 23% tax-inclusive rate were accurate), he would only pay 23% of his personal spending, which is probably less than $1 million per year. So his total annual taxes would drop from $150 million to less than $230,000.
You and I would need to make up the difference.
Here is why I disagree with anyone who claims the FairTax is not progressive.
First of all, no matter how much you earn, eventually you or someone else will spend those earnings, and they will be taxed under the FairTax.
Let’s look at three different families of four. The first family has an annual income of $30,000. The second family has an annual income of $60,000 and the third family has an annual income of $100,000
The first family’s actual spendable income would be $30,000 plus the prebate of $6702 for a total of $36,702. The tax on $36,702 would be $8441. When you deduct the prebate, the effective tax would be $1739 or 4.74%.
The second family’s actual spendable income would be $60,000 plus the prebate of $6702 for a total of $66,702. The tax on $66,702 would be $15,341. When you deduct the prebate, the effective tax would be $8639 or 12.95%.
The third family’s actual spendable income would be $100,000 plus the prebate of $6702 for a total of $106,702. The tax on $106,702 would be $24,541. When you deduct the prebate, the effective tax would be $17,839 or 16.72%
Recap
$30,000 income ~ tax rate 4.74%
$60,000 income ~ tax rate 12.95%
$100,000 income ~ tax rate 16.72%
Steve,
I believe your analysis, on which you base your opinion that the Fairtax is progressive, is faulty for at least two reasons.
(1) The prebate is a cash grant entitlement that can be used for any purpose. You prefer to think of it as an offset or rebate of sales taxes paid, but as Hayden pointed out on the quiz, others might think of it differently. I, for instance, might think of it as an alimony offset; retirees might think of it as an alternative to drawing down investment income; younger families might view it as an alternative to borrowing. But it doesn’t matter how the prebate is perceived. It’s still a monthly government check that increases gross income only. The prebate check does not change the amount of tax you paid at the cash register one dime. Don’t believe me, just add up your sales receipts. And, when the prebate gets spent, your total tax burden goes up. (Are you aware that everyone would pay at least 5.3% in sales taxes assuming the prebate gets spent? (.23 x .23 = 5.3) There is no added prebate to cover the tax on the prebate when spent.)
The bottom line is that you should not subtract the prebate amount from your sales tax burden when calculating effective tax rates. That is really fuzzy accounting!
(2) Your analysis assumed that everyone would spend all their income on taxable goods and services, which is just not accurate. The 2008 Consumer Expenditure survey showed that your $30,000 family would have spent 102% of their income on consumer goods and services; the $60,000 family would have spent 86% of their income on consumer goods and services; and the $100,000 family would have spent 68% of their income on goods and services.
After making these two corrections to your analysis, the effective tax rates are 23% for the $30,000 family, 19.8% for the $60,000 family, and 15.6% for the $100,000 family. Looks pretty regressive to me?
I think Andrew hitn the nail on the head in his response to the quiz question about the progressive nature of the Fairtax. He pointed out that in terms of income, the Fairtax is regressive, but in terms of spending, the Fairtax is progressive. He is correct, but I can’t find a single definition of regressive/progressive that measures against consumption in any business dictionary. Regressive taxes are defined in a fairly rigid way related to income. I have no objection to using a marketing statement such as “the more you spend, the more sales tax you pay”. But it is absolutely incorrect to label a sales tax as progressive.
Hank, I feel like I am talking to a brick wall. I know the prebate is an entitlement, extra income, what ever. But, regardless of how it is spent, it ultimately reduces the affective tax rate. You have to look at the net affect regardless of what it is used for.
The only thing I didn’t consider in determining the affective tax rate is any earning spent on college tuition. All other income will be spent at some point by someone on taxable goods and services. If not spent by the one earning the income, it will be spent by someone else in the future.
I would like you FairTax bashers to answer the following.
John currently earns just enough to pay his monthly bills. He has a daughter who will be going to college in couple of years so he decided to take on a second job to save for her education. Will he be better off under our current tax system our under the FairTax?
Another example for the FairTax bashers:
Retired couple: Total annual S.S. earnings $24,000 pension $10,000. The best way to compare our current tax system to the FairTax it to determine how much after tax spendable income they would have under each plan. Under our current system, they will have no income tax liability, but they do pay embedded taxes and compliance cost. I’m going to be conservative and say 12%. I personally believe this percentage is around 15%, but I will give the FairTax bashers a break and say embedded taxes and compliance costs represents just 12% of the purchase price. Reducing their income by 12% results in spendable income of $29,920. Under the FairTax their spendable income would be $34,000 minus tax of $7820 plus the prebate of $4982 or $31,162. Now how does the FairTax hurt a retired couple living on S.S. and a small pension?
Steve — As I believe you previously indicated, the “FairTax bashers” will never see eye-to-eye with the “FairTax kool-aid drinkers,” so there’s no real point in trying to convince one another of the errors of our respective views. It would be like a hard-core Democrat trying to convince a hard-core Repbulican to vote for Obama. It just ain’t gonna happen.
Your examples demonstrate the inability we always have in bridging this gulf. In my opinion, the weight of the evidence shows that the required tax-exclusive rate for the FairTax would be at least 50% (in addition to state/local taxes, which would necessarily increase) and that the after-tax price of new goods and services would increase by around that amount. Therefore, I would naturally conclude that each of the families in your examples would be worse off under the FairTax.
You, on the other hand, seem to believe that the tax-exclusive rate under the FairTax would be 30%, and that after-tax prices of goods and services would stay more or less what they are today, so, naturally, you believe that those families would be better off under the FairTax.
You are certainly entitled to your beliefs (which are generally shared by most of the folks who have contributed to this board over the last few years), but therein lies the intractable problem. Since we can’t agree on the underlying facts regarding the FairTax, we can never agree on what the ultimate outcome would be if the FairTax were ever adopted.
Steve,
Now I feel like I’ve been talking to a brick wall! As I have written repeatedly, there is no such thing as an embedded tax! There are embedded costs which impact retail prices, but your retired couple’s spendable income is still $34,000. No income tax burden and no payroll tax contributions. Compare that to your $31,000 and it’s easy to see why retirees at that income level, or even higher to $48,000 or so, would be hurt by the Fairtax.
Hank,
Not to nitpick, but 0.23X0.23 does not equal 5.3. Try it on a calculator. It equals 0.0529. There is no way the product of two positive numbers less than 1 can equal a value greater than one. What I believe you meant was 0.23 x 0.23 = 0.0529 or 5.3% (and you did state 5.3% in your previous sentence).
John
John,
Good catch, sloppy writing on my part, I guess. I’d be more interested in your take on whether or not the Fairtax is progressive, and if so, why?
Steve,
You wrote: ” I know the prebate is an entitlement, extra income, what ever. But, regardless of how it is spent, it ultimately reduces the affective tax rate. You have to look at the net affect regardless of what it is used for.
The only thing I didn’t consider in determining the affective tax rate is any earning spent on college tuition. All other income will be spent at some point by someone on taxable goods and services. If not spent by the one earning the income, it will be spent by someone else in the future.”
Please explain exactly how a government supplement to your income affects your effective tax rate. If the prebate isn’t spent on taxable consumption, then the increased income would decrease the effective tax rate a little. If the prebate is spent on taxable consumption, then the effective tax rate would remain the same. What else do you have in mind?
And there is more than education expenses which are not taxed. According to the AFFT calculator, non taxed deductions from gross income include mortgage payments, charity, cash gifts, State and Local taxes, and the purchase of used (tax previously paid) goods. The higher the gross income, the greater the amount of non taxed spending might occur.
Hank and Hayden, I give up! I will never convince you that the world is not flat. You remind me of two drowning men who refuses to clime into a life raft because is doesn’t quit conform to their life raft requirements or it is not quite inflated to full capacity. You are like someone who sees a $5.00 bill on the sidewalk and refuse to pick it up because they may see a $10.00 bill a little further down the street.
One thing for sure, regardless of all the FairTax bashers, each day the FairTax is gaining more and more ground. Two or three years ago I did a FairTax Google Alert. In the beginning, I would receive, on average, one email per week. The number of emails has steadily increased. Today I receive five to ten emails each day.
Hank, when you start receiving your prebate, you could send it back to Washington; better yet, you can send it to me.
Hank states “As I have written repeatedly, there is no such thing as an embedded tax! There are embedded costs which impact retail prices.â€
So what do you call the taxes that will no longer impact the retail price? I guess you call them embedded costs. This is just like your prebate argument which is just a play on words. If you have two buckets of water and you use a ladle to empty one bucket and you just turn the other bucket upside down, the results are the same; you have two empty buckets.
I guess you had ho answer for my example of the father who must take on an extra job to pay for his child’s college education. I guess it hurts you to see that the FairTax will actually benefit some people.
Hank has been pushing that “No such thing as an embedded tax” for a long time. I could see it if he was saying that taxes aren’t embedded in the price of goods. But to say that taxes are embedded, but they are “embedded costs” not “embedded taxes” is, with all do respect, completely lacking any bit of logical reasoning.
Steve,
You didn’t provide enough info for me to even take a shot at comparing tax systems for the father that takes an extra job to save money for his daughters education. For instance, family of four earning $20,000 pays no income tax, gets $4553 EITC refundable tax credit, and pays $1530 in FICA. Net purchasing power is $23,000. Under the Fairtax, the family income plus prebate of $6702 amounts to $26702, but the 17% price increase reduces purchasing power to $22172. The family is $850 better off under current law.
Now the father takes a second job that pays $4000 annually. The family, with income of $24,000, still pays no income tax, receives an EITC supplement of $3711, pays $1836 in FICA for a net purchasing power of $25875. Under the Fairtax, total family income including the prebate is $30702, reduced by the 17% retail price increase for a net purchasing power of $25482. The family is still $400 better off under current law.
I’m sure that other family units with different income might result in being better off under the Fairtax. It just depends on the actual assumptions. What is your point?
Andrew,
With all due respect, I’m saying that embedded costs only affect retail prices. Not one dime in taxes goes to the federal Treasury in the event of a retail sale today. I object to Fairtaxers trying to increase my individual tax burden under current tax law by those “embedded taxes”, which are really just costs that drive up the retail prices. You want to discuss retail prices, have at it. But there is no such thing as an “embedded tax”. What is illogical about that? It may sound like I’m picking nits, but if you would call income taxes, payroll contributions, and compliance costs “embedded costs”, any confusion should clear significantly.
Hank,
A tax is a cost. The tax on labor (income and payroll), profit, gas, or any other tax paid in order to get the retail item to the point of sale is embedded in the price. It’s not the event that fills federal coffers, it’s the anticipation of the event. The vast majority of the costs embedded in products don’t occur “in the event” of a sale. It’s perfectly legitimate to indicate specific embedded costs within the price of a product. You could call the labor cost in a product “embedded labor costs”. Are going to claim there are no embedded labor costs, there are only embedded costs? You are literally stating that specific costs don’t exist because the general cost does. 100% illogical.
If you (erroneously) believe that the fairtax will increase your tax burden because embedded taxes won’t come out of retail prices, then you (and any other opponent, Hayden, etc.) need to admit that the fairtax will start taxing “the underground” economy. I personally think that anyone buying products that haven’t been stolen are already contributing to taxes. They are paying the embedded taxes. If you remove those taxes, the retail prices will go down. I think even Paul Krugman (famous economic contrarian) will admit that’s true.
I understand opponents have issues with proponents trying to have their cake and eat it, too (when it comes to embedded taxes), but I’ve never got straight where you and Hayden come down on this. Do you believe taxes are embedded in the price of goods (so everyone’s tax burden will remain essentially the same), or are they not (so the fairtax will start taxing hookers and drug dealers)?
One additional note on payroll taxes: If you don’t believe they are taxes, what does your business dictionary say (specifically the one that defines progressive taxation)?
Come on Hank, do you actually think a family of four who earns $20,000 can save for college even if they take on a second job that pays $4000.
Let’s be a little more realistic and look at a middle class family of four who has a shot at earning enough to send a child to college. Let’s look at a family who earns $50,000 and takes on an extra job that pays $6,000. Under our current system, $50,000 with a standard deduction would leave a net income of $43,209. Of the $6000 additional earnings, they would pay an additional $1359 in income and payroll taxes. Now their total net income is $47,850. If they put $6000 into a college fund, they would end up with purchasing power of $41,850.
With the FairTax, they would have $56,000 plus the prebate of $6702 or $62,702. Putting $6000 into a college fund leaves $56,702. Using your 17% price increase to reduce their purchasing power, they would end up with $47,063; which is over $5000 more purchasing power under the FairTax.
Under the FairTax they could put $6000 in a college fund without taking on a second job, and still end up with more purchasing power under the FairTax. $50,000 + $6702 Prebate = $56,702 – $6000 college fund = $50,702, reduced by 17%, leaves $42,083.
“With all due respect, I’m saying that embedded costs only affect retail prices. Not one dime in taxes goes to the federal Treasury in the event of a retail sale today. I object to Fairtaxers trying to increase my individual tax burden under current tax law by those “embedded taxesâ€, which are really just costs that drive up the retail prices.â€
I could not believe what I was reading in the above statement by Hank. Hank, if the retail price includes the cost of a merchant’s utilities, are you saying you are not helping to pay for those utilities. Utilities, insurance, taxes, compliance costs etc. drive up the retail price; when you pay that price, you help pay those costs. Your thinking is not logical!
Steve/Andrew,
You both missed my point, and it seems as though we are just talking past each other, as usual?
Of course there are embedded costs such as labor, utilities, insurance, taxes, compliance costs, etc. All of that plus profit is what sets the retail price as influenced by competition. What I’m saying is that none of those costs add to my individual cost burden. Business insurance costs do not add to my insurance costs, business labor costs don’t change my pay, business utility costs don’t change my electric bill one thin dime, and business taxes don’t change my individual tax burden at all.
All of the costs you mention are just that –costs, and they impact only prices. What is illogical about that? You want to argue about prices under the Fairtax? Fine, but stop the illogical claims that my individual tax burden is somehow increased due to “embedded taxes”. That my effective tax rate is impacted by those pesky “embedded taxes”. That is what is illogical!!!
Andrew, you make a good point about the definition of payroll “taxes”. However, I’m sticking with my opinion that FICA contributions are premiums, not taxes. As you know, FICA stands for Federal Insurance Contribution Act. It is a federal insurance program and the payroll deductions are premiums. You wouldn’t consider your auto insurance premiums a tax, would you? Or your home insurance premiums, or your life insurance premiums, or your boat insurance premiums? Premiums aren’t taxes! The premiums paid into the Federal flood insurance program aren’t called taxes, so why would the FICA contributions/premiums be called taxes? Does the fact that the payroll contributions are mandatory somehow change the definition? Beats me, but I’ll go on thinking of payroll contributions as premiums, not taxes. Not a very important issue in the overall scheme of things, but I think it was a big mistake for AFFT to include FICA on the list of “taxes” to be replaced. That “third rail of politics” is still deadly!
In your list of questions you asked if FICA was a tax; I said no because it is an insurance program, actually it should be called FPCA Federal Ponzi Contribution Act. But bottom line, a tax in the amount of 15.3% is levied on gross income to pay the premium for this program. Even the Social Security administration refers to the funding of S.S and Medicare as a tax. Regardless, of what you want to call these embeded cost, the FairTax would eliminate them resulting in reduced prices of goods and services.
Hank states ~ “Of course there are embedded costs such as labor, utilities, insurance, taxes, compliance costs, etc. All of that plus profit is what sets the retail price as influenced by competition. What I’m saying is that none of those costs add to my individual cost burden. Business insurance costs do not add to my insurance costs, business labor costs don’t change my pay, business utility costs don’t change my electric bill one thin dime, and business taxes don’t change my individual tax burden at all.â€
Let’s take an electric bill. Of course when you purchase an item it doesn’t directly affect your personal elect bill. But indirectly you are helping to pay the electric bills of everyone involved in the manufacture and sale of the item you purchase. The important point is the FairTax will eliminate the taxes and a huge portion of the compliance cost that drive up retail prices.
Steve,
We are in agreement it seems to me. I would prefer that you use the phrase “costs” when talking about the Fairtax impact on producers, and “retail prices” when talking about what you pay at the cash register. The Fairtax reduces producer costs, and results in increased prices after adding the sales tax at the cash register. Just don’t try to add the business embedded costs to my individual tax burden. That is misleading at best, imho.
Andrew doesn’t agree that retail prices will rise, and he is somewhat correct when he writes that “real” prices will remain about the same. I say somewhat correct because it isn’t clear to me that the combination of increased take home pay and the prebate will always offset the 17% average retail price increase I anticipate. His minority view that prices will not rise requires us to accept the notion that all gross pay and pensions will be reduced to our current net after taxes. That position requires him to explain how employment contracts can be thrown out completely, unions just lie down and die, and minimum wage laws get repealed. None of that is going to happen, and most economists agree, including the AFFT Director of Research.
As I was reading the different comments, I noticed Steve’s post on a family of four trying to save for a college education. When I read this, I thought he was talking about me.
I posted the below response on another forum where someone said the Fair Tax was only for the wealthy.
I have two children. My current salary is $55,400 per year. A little over a year ago I took on a second job so I could start savings for my kid’s college education. I earned an extra $5850 working a night shift at Wal-Mart.
Not too long ago a friend of mine said it was too bad the Fair Tax was not our tax system. He said if it were, you could save the same amount without working my second job. My friend is an accountant, but I still told him he was crazy. He said lets set down and do the figures; boy was I surprised.
My taxes and FICA withholdings for 2008 amounted to $9131. Of that amount $1024 was attributed to my additional $5850, Wal-Mart earnings. Even so I was able to put $6010 into a college fund for my kids. When you deduct the taxes and savings from my total income, I had $46,109 left to live on.
Then we figured what I would have had left under the Fair Tax if I did not have my second job. He said every family, depending on their size, would receive a prebate at the beginning of each month. This prebate is figured by taking 23% of poverty level income that has been established for each size family. Since we are a family of four, we would receive a prebate of $6702. When you add that to my $55,400 salary, I would have had $62,102. Putting the same $6010 into a college fund, I would have $56,092 left to live on.
My friend said prices will go up because the price of everything will include the 23% sales tax. He said some promoters of the Fair Tax say prices will remain the same due to the elimination of embedded taxes and compliance costs, but he believed prices will still go up by 12% to 15%. If they go up by 15% the buying power of my $56,092 would be reduced to $48,197. This is almost $2,000 more than under our current system and that is not counting the extra $5850 I earned working my second job. I am just a middle income American and I say GOOOOOOOOOOO Fair Tax!
Hank,
I have given the topic of progressive/regressive a lot of thought. Here are some of my thoughts. While you may not be able to find a business dictionary that measures against consumption, the first entry I found on the internet searching for ‘Progressive Tax definitions” is:
any tax in which the rate increases as the amount subject to taxation increases (wordnetweb.princeton.edu/perl/webwn ).
So lets begin with definitions:
If the definitions are:
progressive tax: “any tax in which the rate increases as an individual’s income increases”
regressive tax: “any tax in which the rate decreases as an individual’s income increases”
Then the Fair tax is not progressive. But is it regressive? the rate is based on spending, not income…hmmmm if i spend my entire salary on taxable items, my rate won’t change so should it be considered at least non-regressive?
or if the definitions are:
progressive tax: “any tax in which the rate increases as the amount subject to taxation increases”
regressive tax: “any tax in which the rate decreases as the amount subject to taxation increases”
Then the FairTax is neither as the amount subject to taxation is always taxed the same (23% inclusive).
Or if the definitions are:
progressive tax: “any tax in which the tax paid increases as the amount subject to taxation increases”
regressive tax: “any tax in which the tax paid decreases as the amount subject to taxation increases”
Then the FairTax could be considered progressive depending on how much a high wage earner spends.
I think in the end the definitions don’t really matter. I don’t care if some millionaire is paying more taxes or a higher tax percentage than I am. I don’t care if those making a fraction of what I make pay more or less in dollars or percent than what I do. What matters is are the people better off based on purchasing power. I think it was Morph who brought this up awhile back. Sure it’s possible to find individual cases where low income or even middle income may be worse off under the FairTax when you only consider their income level and tax liability (Federal, SS, and Medicare vs. the FairTax).. Much of what is talked about and projected is based on assumptions. One assumption is that prices will rise by ‘X’ percent where x is 0, 10, 12, 15, 17, etc. Another factor that clouds the issue is the fact that the current tax system goes way beyond being progressive; it actually provides welfare to the poor. I am not opposed to helping those less fortunate. I personally think even the poorest should have to pay something to contribute to running the government, however, I do have compassion and don’t object too much if they are relieved of tax obligations. For this discussion I’m calling Social Security and Medicare a tax as it’s not something I can get out of paying unless I stop earning money. I don’t agree with equating them with car or home owners insurance as I can choose to avoid car insurance….I don’t have to own a car, I can choose to avoid home owners insurance by either not burdening myself with a mortgage or by owning it outright. As far as I know, the only reason people are forced to carry home owner’s insurance is to protect the mortgage holder.
So instead of talking about tax percentages vs. tax dollars owed by the various tax payers, let’s talk about purchasing power. I’ll use the 17% price increase of taxable items that you believe will occur.
The following analysis below is based on simplified estimates of income and liabilities. It does not take into account every possibly scenario otherwise this post would be a wee bit longer (as if it’s not long enough). I am not claiming my numbers are 100% accurate either, but I have spent a fair amount of time trying to account for reasonable deductions, credits, etc.
Let’s look at 9 incomes (AGI) groups ($5000, $10,000, $15,000, $20,000, $30,000, $50,000, $80,000, $120,000, $500,000) all family of 4 taking the standard deduction (in this case $10900). These groups were chosen to have a fine resolution in the low end yet some representation of middle class and wealthy. In my spreadsheet I have a much greater resolution, but to save space I have not included them.
How many items worth (or widgets) could they purchase at $100/widget under the current tax scheme? How many could they purchase under the FairTax assuming a 17% price increase of widget ($117/widget)? Total Tax represents Federal, SS and Medicare. WP100 = Widgets purchased at $100 each, WP117= Widgets purchased at $117 each with AGI+Prebate
AGI Total Tax Net Income WP100 WP117
5000 -1627 6627 66 97
10000 -3245 13245 132 139
15000 -3568 18568 186 182
20000 -2210 22210 222 225
30000 750 29250 293 310
50000 4787 45212 452 481
80000 11582 68417 684 738
120000 23026 96973 970 1079
500000 153068 346932 3469 4327
Out of this, the only income group that loses purchasing power is the group at 15,000. If the assumption of prices going up 17% is changed to 15% that group breaks even and everone else does better. If the same assumption goes from 17 to 19%, the $20,000 group begins to lose purchasing power. If I change the family size so that it’s larger or smaller (more than 2 kids or less than two), the results are that purchasing power increases for everyone with a 17% price increase. A single parent raising 3 kids gives similar results to those above however the loss of purchasing power is around $25,000 (as opposed to $15,000). The worst situation appears to be a single parent raising 2 kids there is a slight loss of purchasing power (2-5 widgets) for the income range from $10,000 to just under $20,000.
Please keep in mind that these examples are based on spending 100 on new items (widgets). In reality it’s doubtful that everyone would spend 100% on taxable items. Certainly those at the lower income levels will spend a greater portion of their income on taxable items, but will it really be 100%? Can they not buy clothes second hand? My family does already. If they eventually have to purchase a car, do you really expect it to be new? Of course not…they don’t buy new now. I don’t and I can afford to.
While there are some who may be worse off, I think the vast overwhelming majority will be better off and the FairTax will encourage better habits by consumers as well as do something to limit the politician’s control over our lives. If you want to get hung up on the progressive/regressive aspects, that’s your business, but I would prefer to look at ways to get the government out of our lives as much as possible and encourage people to be more self-reliant.
I apologize for the display of the table comparing incomes in post 79. It didn’t look like that when I typed it in. Let’s see if this is more readable.
Hank,
I have a different point of view regarding whether the prebate offsets taxes or whether it should be considered income or an entitlement. Is it money that wasn’t earned? Yes so it is somewhat of an entitlement but I doubt it should be considered income. Regardless, it’s extra money that a family has that was not part of the earned income and therefore they can spend it. If it was handled a different way though, what if at the register, you paid for your goods, and as the bag boy was bagging your groceries, the cashier gave you back the taxes you just paid (based on a card you hand her during the check out phase and only up to the level of poverty for your family size)? How would that be considered? Is that not a rebate of the taxes paid? Would that get calling it income or an entitlement?
The way I see it, the prebate has three functions:
1) To offset taxes for spending up to the poverty level, inessence untaxing the poor. You may say they still pay taxes because they then spend the prebate and have to pay taxes…well if they are at the poverty limit, that prebate check gives them money above the poverty level, so like everyone else above the poverty level, they don’t get a free ride.
2) To assist those who are below (not just at) the poverty level, so it’s essentially welfare as a family earning 1/2 the poverty level gets more than a return of the taxes he paid, he gets twice as much. Good deal for them. And while I’m not too in favor of federal government provided welfare it’s not so bad that I object.
3) To provide fairness to those above the poverty level. Why should poor people get something from the government that isn’t available to all? There are many who don’t think the government should help the poor at all. The reason being is that it’s forced. It’s only fair to those who are not having money they earned taken from them and given to someone who hasn’t earned it. Someone may not want to help the poor…he has a right to think that way. It’s a topic that I struggle with. As I am compassionate and don’t want to see anyone struggle. But does it really help them in the long run if they don’t have to provide for themselves? I would much rather see the government give incentives for charities to increase their assistance levels. I think it is better for society as a whole. That way you don’t have people resenting the poor or less fortunate because they are forced into supporting them by threat of incarceration by the federal government. I don’t really like to interject religion into the the discussion, but I am going to anyway. I’m a Christian and taught to love my fellow man (woman too). However, caring for your neighbors should be voluntary and from your heart, not given with resentment. The way our current system work (Fed Gov taking my money and giving it to whoever they deem deserving) destroys the good that comes from giving freely. To parphrase something I heard, if I freely give my sandwich to a beggar on the street who is hungry, I will most likely feel better for helping him, he will have his hunger satisfied by my good deed and is probably more likely to do a kind deed to someone else at some point. However, if someone comes along and takes my sandwich and gives it to the beggar, I will not be happy and it’s very unlikely that the beggar will see the gift as a gift and less likely to do a kind deed to someone else. Which scenario promotes a better society?
You have also opined that the FairTax does not do anything to relieve those spending more than they make (i.e. someone earning $20,000 but spending $30,000). One scenario is that a family (or person for that matter) is truly poor (no assets to speak of) and is living beyond their means. I don’t understand that complaint. If a family is living year after year way beyond their means, then shame on them. It seems to me giving them welfare (via tax refunds on taxes they haven’t paid) only serves to encourage a continuation of such behavior). Under the FairTax they can continue to spend more than they earn. That’s their choice.
A second scenario is that the individual is living off of savings, social security and low income. In that such a case, how different their situation would be under the fair tax depends on a few things, such as the size of their savings, how much they get in SS and what their income level is. As I understand it (which perhaps I may not), SS payments are tied to inflation so that if the price of goods go up 10, 15, or 17% their payments will go up so there is essentially no loss in the purchasing power of their SS checks. Then to that you add the prebate so they actually have $4696 ($2348 if they are single) a year above their previous purchasing power. In the end, if present day seniors are truly adversely affected, I would not be too upset if a phased out program was implemented to essentially grandfather in all seniors on SS at the time the FairTax went into effect. But the key is it would need to be be phased out (essentially not taking on new seniors). As the years go by, fewer and fewer would covered by that plan, as individuals age, becoming seniors and receiving their SS benefits which will be based on existing economics. Personally, I’d prefer to see us do away with SS as it is structured today and go to a plan similar to what Koltikoff layed out in his book “The Coming Generational Storm…” If I’m not mistaken he lays out 11 or so features and I don’t recall the details of them off the top of my head, but one had to do with getting away from funding SS as it’s funded now and moving to a more personal and transferable retirement savings.
Steve/Hank,
For the record, I believe “real” prices will not rise on average. In fact, they will go down (due lower compliance costs). I also believe that the Fed (who are the ones that will control what happens to nominal prices) are at least competent enough to keep a 17% inflation from happening. 17% being Hank’s personal calculation based on his belief that employers will just keep their half of the payroll tax (or contribution as Hank may like to call it) plus the corporate income tax. Of course, what Hank doesn’t seem to realize is the labor market isn’t driven by the fact that employees pay half the payroll tax and employers pay the rest. It only cares there is a 15.3% tax placed on payroll.
Hank also erroneously believes that people work for their gross, not their net. I’ll ask you Steve: I’ll offer you a $200K/year job with a 50% tax and a $150K/year job with a 0% tax. The one you accept will tell me whether you work for gross or net. Hank thinks the $200K looks awful sweet.
Hank also somewhat misrepresents how I believe labor wages will reach equilibrium. I’ve already agreed that minimum wages will become even more of a job killer than they currently are (unless the laws are changed of course). Unions only account for 12% of the current labor market (7% private, 38% government) and the typical length of contracts, according to http://www.iww.org/organize/laborlaw/contract1.shtml, is about 1 to 5 years. Don’t get me wrong though. Unions will use all their power to maintain wages, even if it cuts their own throats. I’m not sure if Hank is referring to any other type of employment contract, but not only can most businesses decrease your salary or wage at will, they can terminate your employment altogether (say with two weeks notice). This is the main reason I advocate for a 5 year phase in myself. To ease the labor market into the adjustment.
To say SS is insurance is like saying the government is a charity. Neither charity nor insurance is something people can be forced to support. Once force enters the picture, it is just theft. So yes, Hank, the mandatory part does make it a tax. The MA health insurance mandate? Tax. The CA auto insurance mandate? No such thing. CA doesn’t actually mandate auto insurance to drive a car. They require proof of liability for the damage your car may do. Most people just happen to use insurance.
So basically Hank does believe that people will be able to take 100% of their current gross pay home. He doesn’t believe that the Fed will be able to keep our dollar from inflating 17% just by the enactment of the fairtax act. I disagree, but not because of my overwhelming faith in the Fed (they are just men. They could create 17% inflation without the fairtax being a thought on their mind. Think current recession). My disagreement comes basically with how Hank believes the market works. If embedded taxes are removed, real prices go down. If a consumption tax is placed on those, they go back up. If the federal government is taking in the same revenue, real prices, on average, have to stay the same. Those things are fixed. Not debatable. How the Fed is going to react and therefore affect the value of the dollar? Completely up in the air.
I know Hank is not going to agree with any of this, but for those of you who don’t believe the world is flat, I hope you can see why the petty arguments against the FairTax are just that, petty arguments.
The main objectives of the FairTax are to create a fair and simple plan that is transparent and revenue neutral.
I believe most people believe the FairTax is a good replacement to our current system, but what they object to are some of the unsubstantiated claims many promoters make.
For example, many promoters claim that prices will remain the same. No one can say exactly what the ultimate affect will be on prices. But what all will agree on is that prices will come down. This is a plus for the FairTax so to use pricing as an argument against the FairTax is not justified.
The tax rate should not be an argument against the FairTax because it is designed to be revenue neutral. If the rate needs to be 50% to create neutrality, that is not a FairTax negative, it is a government spending negative. If it needs to be 50% is just shows how much tax is hidden in our current system and that should be a negative against our current system.
Many promoters claim $16 or $17-trillion of offshore wealth will flow into the US as a result of the FairTax. Again, this is a guess and can not be substantiated. However, everyone has to agree that the FairTax will encourage investing and wealth will flow into the US economy. Again, this is a plus and the argument as to how much offshore wealth will flow into the US should not be a negative argument against the FairTax.
Now, let’s talk prebate one more time. Again, Hank won’t agree with this because he can’t see the forest for the trees. As I mentioned, two of the objectives of the FairTax are simplicity and fairness. The prebate creates both. Every legal American will receive the prebate. It can’t be anymore fair than that. I don’t care if you think Warren Buffet and Bill Gates don’t deserve the prebate, it is still fair. Now look at simplicity; we could create a long list of taxable and nontaxable items. For example food could be nontaxable, but would this be fair to the low income American who can only afford hamburger while Bill Gates buys stake. You could make clothes nontaxable, but would this be fair for the low income American when Warren Buffet buys his Canali suits. Making the prebate the same for every American, makes it fair and it simplifies the taxable nontaxable issue.
Steve,
You wrote: “For example, many promoters claim that prices will remain the same. No one can say exactly what the ultimate affect will be on prices. But what all will agree on is that prices will come down. This is a plus for the FairTax so to use pricing as an argument against the FairTax is not justified.”
If you meant that producer costs would come down, then I agree with your statement. But retail prices are going up! Confusion over costs and prices just muddy the water, imho.
The following is my list of “petty” arguments against the Fairtax scheme as presented by AFFT and HR25. Petty they may be in your eyes, but the devil is in the details.
A Ten Count Indictment of the Fairtax
(1) HR25 proposes that the federal government tax State and Local purchases of new goods, and tax all State and Local employee payrolls as representative of services provided. This would be inappropriate, if not unconstitutional, under our republican form of government. And, if allowed by the Courts, 15% of the revenue raised by the Fairtax would be hidden in higher State/Local taxes. That is hardly the transparent tax that Fairtaxers claim.
(2) By including payroll contributions (FICA) on the list of costs to be replaced, retirees would be forced to resume paying for their earned pension and health care benefits with their sales tax dollars. Hardly fair!
(3) After tax savings accumulated under current law would be double taxed when spent under the Fairtax. Is that fair?
(4) Although Fairtaxers claim that the “prebate†is similar to a tax refund, it is no such thing. The prebate is in fact a cash grant entitlement which would cost $600 billion annually at a time when other entitlements are squeezing out discretionary spending, including Defense discretionary, in the Federal budget.
(5) One of the most egregious Fairtax claims is that retail prices would remain about the same. Unless you choose to believe that everyone’s current net pay after federal withholding would become your future gross under the Fairtax retail prices have to rise substantially. And, a reduction in gross pay isn’t going to happen for fairness and contractual reasons. The AFFT Director of Research and other expert economists have written that the most likely scenario would be that everyone would get 100% of their gross pay and retail prices would rise. My best estimate, based on 2007 actual revenue data, is that business tax costs of 10% could be removed and retail prices would rise by 17% on average.
(6) Despite repeated claims by Fairtaxers that investments wouldn’t be taxed, Section 801-806 of HR25 lays an implicit tax on both interest bearing investments, and debt instruments such as mortgages and credit cards.
(7) HR25 provides for an inventory tax credit which would add about $600 billion to the federal budget deficit in the first year of implementation.
(8) HR25 proposes to implement the national sales tax “cold turkeyâ€, despite the fact that no other country successfully funded their central government with a sales tax. According to a former chairman of the Joint Tax Committee, Congress is institutionally conservative and much prefers evolutionary change to revolutions such as the Fairtax. A five to ten year phase in period would allow corrections to be made without endangering the entire US economy.
(9) There is no data supporting the AFFT claim that there is $13 trillion in US owned wealth located offshore to avoid US taxes. According to the Tax Justice Network, an international organization which tracks offshore wealth, there is $1.6 trillion in offshore wealth owned by North Americans, and there are 23 sovereign nations in North America. The best estimate for US owned wealth offshore is $700-800 billion. And, lacking some sort of amnesty provision from IRS penalties in HR25, it is unlikely that any of that wealth would come “rushing homeâ€!
(10) No list of Fairtax issues would be complete without including the disingenuous claim that the revenue neutral Fairtax rate would be 23%. In terms all Americans understand, the rate is actually 30%. Fairtaxers claim that the rate needs to be expressed in inclusive terms in order to make comparisons with the current income tax system. There is no way to compare competing tax systems unless an effective tax rate is calculated for each system. It makes no sense to try to compare a 23% inclusive sales tax to a 28% income tax bracket.
Hank, this is what I was getting at. Opponents of the FairTax keep repeating the same petty arguments.
Steve,
Petty or not, what we have here are constitutional issues, fairness issues, risk issues, federal budget issues, and a few accuracy/integrity issues. Until someone shows that I am wrong, you will continue to see this litany of complaints, and so will every Congressman who is even contemplating endorsing the Fairtax.
Hayden/Steve/Andrew,
Thanks for taking the time to provide your answers to my 15 question quiz. Only our Atlanta lawyer got them all right, although I had to assume that if he understood #11, he would have agreed that it was false. I also had to eat a little crow on #13 in that I am now convinced that FICA is a tax. All definitions of “tax” seem to say that if the government is doing the taking, it’s a tax. So, rather than all 15 being false, one was true, and I’m throwing that one out and substituting another phrase for your consideration as follows:
#13. The GDP will increase by around 10% in the first year of Fairtax implementation.
True or False?
John,
Re: #81, As far as the progressive/regressive issue goes, I would only add that there is a fairly heated debate going on over at the FairtaxNation blog site as to whether the terminology should be replaced by some descriptor less controversial. Check it out if you wish.
Good work on the purchasing power spread sheet, but I can’t seem to replicate some of your data? For instance, looking at the $20,000 numbers, under current law, the family pays no income tax, pays $1530 in payroll contributions, and gets a $4564 refundable tax credit (EITC) for a net tax burden of -$3034 and spendable income of $23034. That buys 230 widgets at $100 versus your 225 under the Fairtax. It’s just a nit, but I’d like to know where our difference is? (My hand held calculator is kind of balky, so the fault could be mine?)
John,
Re: #83. I’m unable to understand your reluctance to call the prebate “income”? Just look in your checkbook the first of each month and there it is. And it doesn’t matter one bit just how the federal government provides you with the prebate, it’s still an entitlement. It could be a monthly check, an automatic deposit to your checking account, a sales tax credit card, or whatever, but the method of payment doesn’t change the fact that it is an entitlement under the law.
You may say “shame on young families that are living beyond their means through borrowed wealth”, but isn’t that the great American way of life? Buy it today and pay for it tomorrow? Frankly, I’d rather that wasn’t the case, and I believe that our economy has been driven by excessive consumer debt purchases, and the recent crash was partly caused by too much debt. However, until budgetary sanity returns to all of us, I still maintain that the Fairtax would not be helpful to start up families.
As Morphh has pointed out, you are correct to assume that any inflationary price increases would be offset by increased SS payments. Us old folks will see an increase in our SS pensions to offset inflation per HR25. But, as is the case for other Fairtax features such as the inventory tax credit, no provisions to pay for the increased costs or reduced revenue have been made in HR25. The result will be higher annual federal deficits or increased sales tax rates, a real Hobsons choice?
By the way, I think your phase out suggestions are worth thinking about. Find a way to credit retirees for their previous payroll contributions, and find a way to get rid of double taxation of accumulated wealth and Seniors might be more favorably inclined towards the Fairtax?
Hank,
In reply #88 you state “what we have here are constitutional issues, fairness issues, risk issues, federal budget issues, and a few accuracy/integrity issues.”
While that may all be true, can it not be said of our current tax system and to more of an extreme in most cases?
John
Hank,
Re: # 91. It’s not that mind calling the prebate income or calling it an entitlement. I can see it being considered both. My objection is in you turning that around and saying it’s not offsetting the tax liability of the reciepent. Using your example of looking in my checkbook at the beginning of each month, if the prebate was in fact a rebate, and every month I purchased taxable “stuff”, sent in a rebate coupon and the government sent me a check would you consider that income? Or getting back money already paid? In the case of a the working poor at exactly the poverty level income, they would get back every penny they spent on taxes (assuming they spend their entire paycheck on taxable “stuff”. Those over the poverty level of income would get back their taxes on all but what was purchased over the poverty limit. The only ones getting back more than their taxes would be those living under poverty level income, so the difference in what they paid in taxes and their rebate (or prebate) check would be income, not a return of their taxes. That’s one way of looking at it. No? Is there something wrong with that point of view?
I do not like the idea of entitlements and would actually prefer if no such thing existed in the FairTax. However, is there a simplier way to untax those living in poverty? As mentioned previously on this topic, targeting groups to determine if they deserve tax rebates creates another complexity that has to managed and can lead to abuse. The prebate keeps things simple which to me at this point outweighs the negatives.
Regarding the prebate, it costs $600 billion…so if it were eliminated completely, what would the tax inclusive (or exclusive if you like) rate be? I am sure I’ve seen that figure somewhere, but I spent some time yesterday looking for it and couldn’t find it.
John
Hank,
Re: #91 You say “but isn’t that the great American way of life? Buy it today and pay for it tomorrow”
I think that’s a poor excuse for encouraging bad fiscal behaviour and if anything the recent financial woes at the federal level ought to be a wake up call to change such behaviour. I’m currently living in Korea on a temporary work assignment. It’s amazing how many 20-30 year olds still live with their parents. You know why? Because they can’t afford to live on their own. They don’t commit themselves to being slaves for the rest of their life just to have a home or nice car or whatever. I’m not saying I prefer Korea to the US by any means, but not so very long ago, if you could not demonstrate an ability to repay a loan or credit, you were not given the loan or credit. So what’s wrong with the government refusing to support living beyond one’s means?
John,
If the prebate was really a tax rebate, the check for your refund would not be considered income by the IRS or anyone else. Only the prebate increases your gross income. Tax rebates do not!
I realize that lots of folks will continue to think of the prebate as a tax rebate paid in advance because that is what AFFT wants everyone to believe. But it isn’t! As I wrote earlier, it is simply an income supplement and could be thought of as an alimony offset, an alternative to borrowing against credit cards, an alternative to drawing down one’s nest egg, or for a myriad of other purposes. Call it whatever pleases you, but don’t try to make the case that your sales taxes paid are somehow less than what you actually paid due to the prebate. Fuzzy accounting, imho!
The simplest way to untax those living in poverty would be to retain the current EITC. Think of it as a targeted prebate that would cost one tenth of the Fairtax prebate or around $59 billion. It works and is a very popular program. And the Fairtax rate would drop to an inclusive 18%. Looks better already, doesn’t it?
If you want to play around with various adjustments to the Fairtax base/rate, I recommend using the 2006 Kotlikoff/BHI study report data. Simply stated, their Fairtax base after paying for the prebate was $9355 billion and the revenue neutral goal was $2228 billion. Divide revenue by the base and you have an inclusive rate.
Hank, we are making a little headway with you, 1 out of 15 is a start. Now let’s work a little more on the prebate.
Where would the money come from to make it possible to pay a prebate? Since the sole source of federal income is taxes, I believe it would be taxes. Since the only money available to pay a prebate is tax money, how can you say it is not a type of tax refund.
If I earned $5000 and I decided to give $1000 back to my boss, good luck on that one, I would be refunding part of my earnings. Any money that goes directly back to a taxpayer, NOTICE; I said taxpayer, S.S., Medicaid, Medicare is a refund of taxes. It may be a refund of taxes paid by someone else, but it is still a tax refund. You can call it an entitlement, income whatever, but it is money created by taxes and paid back to taxpayers, so it is a tax refund. Bottom line, it really doesn’t matter what you call the prebate; its purpose is to off set taxes on purchases up to the poverty level and to simplify the tax system by eliminating the necessity to create a taxable and nontaxable list.
Hank,
Re: # 90. I appreciate the nit pick as I don’t want to be guilty of intentionally or unintentionally misrepresenting information.
For your numbers are you using 2008 tax tables? I’m using 2007. I have not updated the spreadsheet to 2008 (or 2009). The actual tax tables themselves are not too difficult to keep up to date, but the EIC table is a pain.
Despite possibly using different years I did find an error in my EIC table at $20,000 which changes the EIC to $4161, bringing the total tax paid to -$2631 for a total spendable income to $22631 and purchasing 226 widgets at $100 vs. 225 widgets at $117 under the FairTax.
My EIC table is semi-hand entered. I can’t bring myself to dedicate the time (a few hours) to enter the data by hand, but I have no problem spending the time to trying to fine tune my algorithm for generating the table. Unfortunately, it’s not perfect and I have to manually enter data points here and there to keep it tracking the actual EIC table. If I see more than a $2 difference between my table and the IRS’ table, I update mine. I only spent a short time looking for an equation similar to what’s used for the tax tables, but haven’t found one. If you are aware of what it might be, I’d be happy to incorporate that into my spreadsheet.
John,
That explains our small difference. I used 2008 date. My wife is an AARP volunteer tax preparer, so we have the latest IRS software available for such exercises. AARP provides a free tax prep service for everyone. Over 2 million folks helped last year, I think. Good way to save hundreds of bucks when tax time rolls around if there is an AARP operation in the area.
Hank,
I am a little confused (again) at this statement: “If the prebate was really a tax rebate, the check for your refund would not be considered income by the IRS or anyone else. Only the prebate increases your gross income.” Your gross income (as defined by the IRS) doesn’t increase with the prebate. In fact, if the prebate exists (by enactment of HR25) then an IRS definition of gross income does not. Right? Doesn’t HR25 eliminate the income tax and any legal definition (by the federal government) of gross income.
I guess states that retain their own income taxes will be able to decide for themselves. Some states will consider it income and some won’t. I guess technically we could say those that don’t tax just don’t consider it taxable income. If you get a rebate on a product you purchase, do you consider that income? I guess one reasonably could. Can’t we consider the tax rebate income as well? So it is a rebate and income both. I guess we’d have to skip the first month to change from “prebate” to rebate. Can you at least admit it is a function of the fairtax rate? If the rate goes up, it goes up. Rate goes down, it goes down. What you spend it on is irrelevant.
Hank,
Re: #95 You say “If the prebate was really a tax rebate, the check for your refund would not be considered income by the IRS or anyone else”
I’m not following you. Who says that the IRS considers the prebate as income? And who is the ‘anyone else’? It seems that you are one of the few who consider it as income.
My point is that under the fair tax, it doesn’t really matter, does it? You can think of it as income, you can think of it as an alimony offset. I don’t see how it makes AFFT or Boortz or anyone on this site guilty of misrepresenting the prebate. What the individual does with that money is their business regardless of what you call it. If no prebate existed, an individual at the poverty level spending his entire paycheck would have a tax burden that’s equal to 23% of his paycheck. Introduce the prebate, he can buy more stuff as the tax he would be paying this month is given to him in advance. Yes, when he walks into the store to buy a loaf of bread he has to then pay for the bread and the tax. But he can buy more bread as he has his paycheck’s worth of tax given to him up front. Is that income? I can understand that perspective. But don’t make the FairTax supports out to be engaged in slight of hand because we are considering it as an offset to taxes.
Hank,
again Re: #95 you say “The simplest way to untax those living in poverty would be to retain the current EITC. Think of it as a targeted prebate that would cost one tenth of the Fairtax prebate or around $59 billion. It works and is a very popular program. And the Fairtax rate would drop to an inclusive 18%. ”
I’m not sure how we would retain the EITC within the FairTax. Or are you talking about just tweaking the existing tax code? Someone would have to then track your income, provide the table and individuals would have to fill out a tax return. How does that help? Seems like starting the bueauracracy all over again.
Here’s an idea: Eliminate the prebate completely. Those who want a reduced tax liability must apply for it much the way one applies for welfare or other government assistance. The government provides you with a card you use when purchasing taxable items, it has an amount available in accordance with your income level. At the end of the specified period if you don’t use it all, the amount gets added to your next card. Once you have used up the alotted amount, you have to wait until your next card comes in.
While typing this up, I realized a flaw. How does one prove they have no income? That takes us back to W-2s and some IRS equivalent.
Hank,
Funny you should mentioni BHI, I was just reading through the BHI 2006 study. Where do you get 18%? I see that on page 672 table 5 shows the prebate to be $2.112 T. If you remove that (or add it back in so to speak), you get 2228/11467 = 0.194 or 19.4%. That’s still better than 23.
However, if there is going to be any assistance to those in poverty, then someone has to pay it. And that will have to be included in what is collected. If it’s a targeted prebate (which is something I think you advocate) then that certainly reduces what needs to be collected. I have two objections (though not necessarily strong ones) with targeted prebates. One is that I think it adds complexity to the system (meaning how does the government collect and administer with low enough compliance costs to make it worthwhile). And two is that it then ceases to be truly fair – everyone is not treated the same.
John,
Rather than add to the base, I subtracted the current prebate cost of $600 billion from the revenue required, added the $59 billion back in for the targeted prebate, and came up with 18%. Probably not mathematically sound, but I’m not a math major. Your way is fine for 2007, but the cost of the prebate has risen since then. No big deal!
As for the complexity to implement a targeted prebate, the SSA will know your earned income and family size, so providing a monthly check to those that qualify shouldn’t be too difficult?
The definition of “fair” is a sticky subject. Where is it written that no one should pay sales taxes on spending up to the poverty level? Whose idea of fair is that? I think it would be fair to offset sales taxes for the really poor, but would Bill Gates object to paying the tax on all of his taxable spending as being unfair? Color me skeptical, but the prebate concept begins to smell like a bribe to me. Several Fairtaxers have written that without the humongous prebate, the Fairtax would lose the support of the middle and upper classes? Why is that? Isn’t a consumption tax better for the country than an income tax with or without the prebate? Is self interest going to trump the public good again? Stay tuned!
John/Andrew,
Sorry I caused the confusion. What I was trying to say that under current law, a tax refund isn’t considered income by the IRS or anyone else. Any government check, be it for welfare, Social security pension, payroll, or whatever, is income. It just may not be taxable income. The prebate is a government check and it’s income. It adds to your gross income, whereas a tax refund does not.
None of this is particularly important. Call it what you wish, but it is still a cash grant entitlement, and that is what bothers me about the all up prebate. Adding another $600 billion entitlement to the federal budget can only accelerate the looming budget train wreck, imho.
John, I totally agree with you. The prebate needs to be totally fair to everyone regardless of income. That is the problem with our current system. What if the price of everything was based on your income? Just because your income might be twice that of your neighbor, do you think your should pay double per kilowatt of electricity? When you buy a gallon of milk, should the price be based on your income? I can’t think of anything other than our income taxes that are priced according to your income.
I live on S.S. and a small pension but I have never believed in a tax system that punishes success.
Hank,
That’s good to hear. In that case, you should throw your full support behind the FairTax so we can ditch the current system. Then once we have a more equitable taxation system in place, you can work on tweaking it to eliminate the particulars that you don’t like.
Hank/Steve,
Sorry about my previous post, I did not notice it was from Steve. I should have known better. My apologies.
The issue of the prebate is certainly controversial, and perhaps needn’t be? Here is my suggestion to end the controversy and allow us to move on to other issues.
First, the “prebate” should be called the Family Consumption Allowance (FCA) as described in HR25. I believe that the AFFT Marketing group invented the cute and misleading term “prebate” which is a non word that can’t be found in the English dictionary. Call it what it is in the legislation and most of the confusion and controversy goes away.
I have absolutely no objection to Fairtaxers describing the FCA as a federal government allowance which can offset taxes paid up to the AFFT redefined poverty level. (AFFT increased the HHS official poverty level by 25% to eliminate a perceived marriage penalty). I would object to phrases such as “no one pays taxes on spending up to the poverty level”, or the “Fairtax completely untaxes the poor”, etc. etc. Everyone pays a sales tax on all taxable spending. Those taxes can be offset by the FCA.
In return, I would hope that none of you would object to my added definitions? The FCA is a federal allowance that; (1) can be used to offset the anticipated higher retail prices; (2) can provide an alternative to borrowing in order to maintain current lifestyles; and (3) can be used as an alternative to drawing down accumulated wealth in order to maintain current lifestyles.
Put them all together and a useful description of the FCA might be: ” a federal government allowance that can be used to offset taxes up to poverty level spending, offset anticipated higher retail prices, and can provide an alternative to borrowing or drawing down savings in order to maintain current lifestyles.”
There should be little argument that the FCA is an entitlement, but in the event some still believe otherwise, here is the WIKI definition of an entitlement: “Entitlement is a guarantee of access to benefits because of rights or by agreement through law.” HR25 entitles everyone (that is qualified and applies) to the FCA. Once put into law, the FCA need not be reauthorized by Congress annually, and like other entitlements, it is protected from inflation.
We can discuss the merits of a targeted FCA after the shock of this post wears off?
Hank,
You say “Color me skeptical, but the prebate concept begins to smell like a bribe to me.”
I won’t pretend to know what was actually said during Fairtax development. But it is not far fetched to think it went something like:
1. How can we efficiently, fairly and simply collect revenue for federal use? Consumption tax
2. But that adversely affects to low income earners more than the high income earners as they spend a large (if not all) of their income on basic necessities (food, clothing and such). .
3. How do we address this? Give them back the taxes they pay
4. How can we give some people back taxes paid and still be fair? And how do we determine who gets taxes returned? Give everyone back taxes paid on a certain amount of taxable purcases.
I’m not naive enough to think it may not have been that way either. But as we know, to get any legislation passed requires some compromise. If the FairTax was written with no prebate, it would never pass as it would be considered overburdening the poor. The idea of untaxing basic necessities a pay off to wealthy? I don’t think they really care, but perhaps individuals in the $50,000 to $120,000 might. Is it a bribe? No more so than a politician promising to vote in favor of minimum wage is a bribe to those below minimum wage, or promising to do something that he believes will get him elected.
If using SSA income to dish out tax offset funds is efficient, then I would probably not object much if the prebate was only provided to those making below some defined level.
But I would caution that only untaxing basic necessities can tempt politicians. Elect me and I’ll raise how much you poor people get. If everyone (based on family size) gets the same amount, there is less that congress can do to manipulate and play favorites with.
Hank,
No objections to FCA and your description in post #108.
Hank, guess what? I finally agree with you on something. Family Consumption Allowance (FCA) is a much better name than Prebate. I also agree with your explanations of how it can be used. Since the FCA will offset anticipated higher retail prices; and since it will provide an alternative to borrowing; and, since it will be an alternative to drawing down accumulated wealth in order to maintain current lifestyles, does this mean you are leaning a little more towards the FCA?
Hank,
You stated “Any government check, be it for welfare, Social security pension, payroll, or whatever, is income.” So you consider people that recieve any income tax refund to be getting income? It does come via a government check you know.
You also quote WikiPedia: “Entitlement is a guarantee of access to benefits because of rights or by agreement through law.†The child tax credit is a guarantee of access to benefits by agreement through law. For that matter any tax credit or deduction falls under the same category.
The prebate must under no circumstances be a check.
The prebate must be in the form of a tax credit card, usable at the time of purchase, good for the FairTax only, not for any purchase, covering the tax up to the poverty level of expenditures.
If it is in the from of a check, it could be spent for Pepsi and lottery tickets.
The prebate must in the form of a Fair Tax credit only, not spendable as cash. The prebate could be in the form of a credit card, like the Food Stamp credit cards now.
The credit could be used to pay for only the Fair Tax portion of the total cash register checkout bill. The credit could not be used to pay for any portion of the goods being purchased.
Once the poverty level of expenditures was reached, the credit on the card would be zero, and the family would have to pay the Fair Tax as well as the base price of the things they bought.