SOTU, Testimony, S.13, and other news
The State of the Union speech included an issue dear to our hearts – real and dramatic tax reform.
Even President Obama finally acknowledged what everyone knows – the tax code is a destructive mess and it’s hurting the country.
“…so tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.” – President Barack Obama
Here is a copy of the written AFFT testimony submitted to the House Ways and Means Committee, for the 1-20-11 hearing on tax reform.
Phil Hinson comments,
Excellent written testimony – every FairTax supporter should take the time to read this. I especially liked this statement:
“Our failure to counteract these border-adjusted taxes explicitly encourages consumption of foreign, rather than American, goods. And it converts many of our nation’s retailers into what are effectively tax-free trade zones for foreign produced goods”.
This is a very powerful way to make the case for a border adjustment mechanism in our tax system.
Other quotes were brought to mind while reading this testimony:
“If the U. S. truly repealed its corporate income tax and replaced it with what is essentially a border adjustable consumption tax, the U. S. would be one heck of an attractive place to invest. In fact, the U. S. would be the world’s largest tax haven. We would be better than Ireland. Any foreign company could come here and manufacture and there would be no income tax. Remember that I said that 120 countries in the world had VATs? None of them repealed their corporate income tax. This would get rid of the corporate income tax and put in place this consumption tax, so you can imagine that this would make the U. S. a very, very attractive place to invest and it would undoubtedly lead to international repercussions that would be quite interesting. I think other countries would probably copy.”
Dr. Peter R. Merrill
Director, National Economic Consulting Group
PricewaterhouseCoopers
Former Chief Economist, Joint Committee on Taxation
In other news…
- The FairTax bill was introduced into the Senate as S 13. The Senate Sponsor of the FairTax bill, Sen. Saxby Chambliss [GA], was joined by 5 cosponsors.
- AFFT asks us to “Bomb The Tax” – Sure the media will be all over this “angry rhetoric” that would supposedly have crazies attacking the IRS.
- After many years debating online, Hayden and Morphh finally got together in Atlanta for a couple beers and friendly conversation.
Whoop de doo!
Did the AFFFT claim Obama’s speech as an endorsement of HR 25?
That would be consistent with their superficial marketing schemes to date.
Oh well, we have yet another ECONOMIST who believes in the (unprovable) miracles of a consumption tax. I am under-whelmed!
While I have not bothered to read the rest of AFFT’s comments on tax reform provided to the House Ways and Means Committee, it appears that AFFT is trying to somehow “fix” their perceived “border adnjustment” problem by enacting the entire FT. This is specious and deceptive, as usual.
Europe is nor dumping its goods in America at “tax free” prices. Shipping costs, U.S. retailer mark-ups and State sales taxes likley overcome any pure “tax” differential. Chinese goods are cheap in the US because of labor costs not v=because we are a tax haven.
European manufactured goods are still subjected to European Income Taxes and high labor costs and higher social justice safety-net+ medical and pension benefits.
Also, the economist is saying that if we got rid of our IT manufacturers would come here to produce. Maybe so, but that does not mean we must switch to the FT which would destroy us.
Where did AFFT claim Obama’s speach endorsed HR25? It was an open call for tax reform, and they’re pushing HR25 as their solution.
As for border adjustment, certainly tax systems have different effects on imports and exports – this is a known fact. VAT taxes are used in many countries for this very effect and the problem has been discussed numerous times before Congress, by both sides. I think we even filed some challenges with the WTO. Other countries have a higher tax burden – only part of it is reflected in the income taxes on exports. As for China, there are many things that affect the cost of their goods, from labor, regulations, and taxes, to the fixing of currency.
Morphh,
We should not rush madly into FT just to get a “border adjusted” tax. IF (and that’s a big IF) there is such a problem, it can be solved without the disastrous FT.
Yes, I fear the tax collection method and for very good reason. Common sense gained over 40 years of tax practice tells me that an in-your-face sales-tax of not less than 35-45% (combined federal & state) will destroy our retail-sales-sensitive economy (notwithstanding AFFT’s la-la-land optimism that people won’t avoid the tax and their ridiculously broad tax base will work).
AFFT is very clever, but we do not have to adopt the entire FT just to fix certain aspects of the IT (recall I believe that DRASTIC simplifications should be made to the IT, not as a permanenet solution, but as an interim solution because that is the LEAST IMPRACTICAL approach – dramatic changes to any system are difficult to accomplish and this, while dramatic, is still less traumatic than any other approach).
I didn’t say that border adjustment couldn’t be solved in other ways. I have presented another bill (Border Tax Equity Act) on this blog that would make similar changes to the income tax system. I didn’t make the argument that you should adopt the FairTax for border adjustment. I was debating your argument that border adjustment was a non-issue. It’s a known issue and global tax policies are designed around it. Take a look at “Sec. 2. Findings and Declarations of Policy” in the below bill.
According to MSN Money, the average combine tax is 40%. Is this destroying the labor market, retail market, or any market? Certainly it has an economic impact on the markets, primary based on the amount lost to government. Your argument is one of psychology and the perception, but your conclusion is self defeating. People will avoid the tax because it’s so high.. thus destroying the market? That makes no sense. Any loss to the government is a gain to the private economy, thus boosting the market. It’s government that would see the shortfall through increased debt, which they then correct (if need be). If your assumptions about the human psyche are correct, then it would be the largest economic boost ever seen – essentially equal to a tax cut of the supposed evasion (which you suggest would be massive).
Under this scenario, adjustments afterward (hybrid or otherwise) should be seen for what they are, a way to shift the taxes around to hide them from the people. Whether we see such evasion or not, I do think people will get a reality check to the cost of government, and hopefully demand that it realign itself with the roles outlined in the Constitution and decrease its size.
I said I am not at all sure if “border adjustment” is a problem at all. notwithstanding your Sec 2, above. There are many economic issues/research which enter into this discussion. In any event, IF there is a valid issue, it be be repaired with US tariffs, as your quote suggests – we don’t need the FT.
If I understand your comment that my fear of a bad economy makes no sense, you say that any lost revenues to the govt enrich the private sector and thus are a boom to the economy. The high FT will disrupt the “legal” market of US manufacturers and retailers – it will empower the new and greatly improved US black market.
I find it incredibile that you believe that reduced tax revenues wil force or move the govt to reduce spending. Does the govt currently reduce spending to match revenues? Such an argument holds no water.
I do not understand your last paragraph. I do not want to hide taxes fdrom taxpayers (see YOUR SHARE) – I just don’t want to agggravate taxp-ayers every time they make a purchase (YOUR SHARE is like the rent – you know its there but it does not aggravate you daily).
If “people” have not yet gotten the reality check that the govt spends too much money, they never will. The “poeple” sadly consists of those who pay for it all and many who pay nothing and receive some money from the payers.
Of the 150 plus countries that have a VAT (which averages between 15-25% in Europe), can you show evidence of a large black market? If a large black market were to begin, don’t you think policies would change? Does anyone want to see the legal market “destroyed” and why would everyone sit back if such was happening due to poor tax policy? Adjustments may need to be made, can be made, and should be made if the outcome of a particular policy is found to be damaging.
Stephen, this exact thing is happening right now. Reduced revenue and increased debt is forcing government to reduce spending. This last election was focused on this topic and it was a major shift in the SOTU. How can you say it holds no water? You can turn on the TV right now and see it happening.
I want people to be aggravated daily by the cost of government, until it is reduced. There is a reason tax day is so distant from election day. Government needs constant pressure to be fiscally responsible with tax payer money and reminded often of their constitutional role. People need to know of the cost of government as it self promotes its public service throughout the year. If people will never get the “reality check”, then why would they all of a sudden be shocked by the “in-your-face” total?
Morphh,
I can not speak to the state of the Black market in europe – I am sure there is one. Importantly with retail sales taxes at a MINIMUM of 35-45% the Black Martket will be much more pronounced thatn the Bl;ack Market at 15-25% VAT rates. How can adjustements (I guess ytou mean tax rate reductions) be made is a certain revenue target is to be met.
The last election may well have been impacted greatly by people concerned that Congress should reduce spending, but where was Congresss while we built up debts of;
1) Reported debt $14T
Sorrey – hit the wrong button.
1) recorded debt $14T
2) unrecdorded debt for unfunded SS & Medicare $106T’
3) current budget for spending $3.8T revenues $2.3T
How can you say with a staright face that Congress has either the legal or moral obligation to reduce spending when Congress put us in this hole. The public was asleep when all of this debt was built up and is only now beginni9ng to awake. IMHO it is absurd to think that Congress wil voluntarilt reduce spending (I will bet you Congress will not even balance the current budget in the next 2 years, much less reduce the debt.
Under YOUR SHARE, EVERY CITIZEN (not merely the 1/2 that pay taxes) will know how much govt cost every month when they see the tax debit to their checking accounts which will be enough of an irritant to move people to apply sufficient pressure on the govt to keep costs down to their Constitutional limits. As such, that reminder when they pay their taxes each month is separate from and does not (nor should not) impact their daily spending decisions.
Adjustments could be to instate another form of taxation that is less transparent and “in-your-face” as you say. They apply some level of “Your Share”. They could covert the FairTax to a VAT, which is more difficult to evade. They could change the rebate mechanism, they could create a hybrid (Hank or Hayden’s plan), they could, they could… Point is, if the tax is not working, they’ll change the tax. Such a change does/would have large opposition. If the tax is “destroying” the retail market (as you suggest), people will demand a different system (opponents and past supporters).
“How can I say with a strait face…”? Well, I never said that with any face, strait or otherwise. Debt growth has been exponential with Bush and Obama, so people are waking up. It is the people that are pushing politicians to control spending now. They’re not doing it of their own moral obligation and it’s not voluntary. It’s a fight. The people (a sufficient number to impact change) have realized what’s been going on and hopefully we can control it before we really do destroy our country, through fiscal irresponsibility.
Morph — My good friend, once again you have inadvertantly introduced evidence that shows what a bad idea the FairTax is.
Dr. Peter Merrill’s quote is about replacing the CORPORATE INCOME TAX with a consumption tax. That sounds like a provision in the Ryan Plan to replace the corporate income tax with a 8.5% consumption tax. (Don’t know if that’s tax inclusive or tax exclusive.)
Now, as you know the coprate income tax represents about 15% of total federal revenue. If replacing just the corporate income tax would require a consumption tax rate of 8.5%, that implies that replacing the entire federal tax code would require a rate of at least 56% (and that’s not even factoring in the cost of the prebate).
So, once again, the FairTax numbers just don’t add up.
By the way, since Merrill was once the chief economist of the Joint Committee on Taxation, why doesn’t AFFT (or Morph) ask him what he thinks of the FairTax and why the JCT haven’t done any analyses since 1998.
Morphh,
If I understand your argument, if the FT destroys the econo0my they will change it to another form of taxation. Well, I think it will destroy the economy so lets dispense with the economy’s destruction and just move on to a better tax system. You allude to something like YOUR SHARE – tell me more.
A VAT is less transparent (at the pre-retail level so I am not in favor of it. I am not an expert on VAT. I know the UK VAT applies at the retail level (so it is just as susceptible to evasion as any retail slaes tax) but I think it also applies at all levels of production (in which case, over 100% of production is subjected to VAT).
I do not disagree with these comments on spending, but I disagree wholly with your point that either leaving the HR 25 rate at 30% when BHI now says it needs to be 35.1% or in general people getting angry will FORCE CONGRESS to reduce spending is specious. CONGRESS to date has not been FORCED. Even with people now up in arms over spending, just how fast do you think that even the current budget will be balanced – I say not for many years. CPONGRESS does not listen (only 1/2 of the people are screaming, i.e., the ones that are paying the tax). But under YOUR SHARE, EFVERYONE WILL BE SCREAMING AT CONGRESS TO REDUCE SPENDING (the half that is still winning under HR 25 is calling for bigger Prebates rather than general spending cuts.
Morphh,
While you are posing Hayden’s questions to Merrill, ask him why Europe, which has a border adjusted VAT, has not already eliminated its coprprate income taxes so as to become a tax haven and therby defeat the US.
Hayden, I don’t believe the tax base is as broad for the 8.5% VAT, which explains the difference. The narrower the tax, the higher the rate. Not sure about Merrill.
Stephen, Europe’s tax burden (per GDP) is much higher than the US, which makes it more difficult to remove a revenue stream. As for my argument, it is that the FT wouldn’t destroy the economy because if we started to see the signs of the doom you suggest, we would do a course correction. Learn and adapt. Of course, I think the entire scenario is ridiculous to begin with, but if it did go down that road, we’d quickly change direction. Your scenario assumes an extreme worse case and then assumes we do nothing.
Not sure a VAT is less transparent, it’s just harder to evade. A VAT is applied at each level of the supply chain, so most of the tax cost is already embedded at the point of retail. It is charged at retail, but percentages don’t cascade (the tax collected with a VAT on all production is the same as a sales tax at retail), so the purchaser ends up covering all tax costs.
BHI’s rate study is not dynamic, which they state in the paper. BHI has also done additional research on the economics and estimated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%. This can provide the additional tax revenue for neutrality and with enough pressure on fiscal constraint, hopefully reduce the national debt.
FYI, I compared the Fair Tax Act of 2009 to the Fair Tax Act of 2011 and there was only one notable change separate from dates and punctuation. `SEC. 305. CHANGE IN FAMILY CIRCUMSTANCES. (c)(2). The age limitation was removed.
Fair Tax Act of 2009
`(2) the Social Security number of each family member 2 years of age or older who shared the qualified family’s residence on the filing date of the revised registration,
Fair Tax Act of 2011
`(2) the Social Security number of each family member who shared the qualified family’s residence on the filing date of the revised registration,
Morphh,
At the very least, those of us who believe the economy would collapse, would like to see clear alternative tax plans to become effective when the economy does collapse, along with markers that trigger the switch out of the FT, long before we reach the poiunt of collapse. In any event, the FT is way too scary a scenario to contemplate – its like taking crack cocaine with a stand-by emergency medical team THAT YOU WILL NEED. It is beyond reckless to take such a gigantic risk.
BTW, although VAT is less less obvious, I do not believe that is s agood thing. That is, I want the tax to be obvious (YOUR SHARE) just not agitating you every time you need to buy something.
European VAT: You say it is apookied at every stage of production and is then ALSO CHARGED INFULL at retail. Thus, by defeinition, every product is taxed more than one full time by VAT (i.e., 100% at retail – there is no credit for prior VAT paid up to the pointg of the retail sale – plus whatever VAT was paid from manufactur to retail).
BHI, nor any other economist can guarantee any results. They can only make uncertain economic predictions based upon economic assumptions. So did John Meynard Keynes and Karl Marx.
Stephen, so this doesn’t continue on.. I’ll let you have the last word and leave the first part be.
Please read up on how a VAT works. You’re incorrect – it is not double taxed. Percentages don’t cascade. A 10% VAT is equal to a 10% sales tax, no matter how many levels of production.
Example
1. $10 initial cost – 10% – $9
2. $1 value add – 10% – $.90
3. $1 value add – 10% – $.90
4. $1 value add – 10% – $.90
5. $1 value add – 10% – $.90
6. $1 value add – 10% – $.90
Total – $15 normal cost, $13.5 savings cascade
Total percentage reduced 10%
At each level of production, the next person in line is paying the prior persons tax cost until it reaches the consumer and he pays the retailer. The burden is ultimately laid at the final consumer, but at each level the tax is embedded in the cost. The retailer can’t see the item “tax free” because they’ve already paid the tax through the supply chain. The consumer must reimburse them. The percentages don’t cascade and the final consumer pays 10% of the total cost, just as if it were a retail sales tax. Disadvantages are more points of collection (increased administration and enforcement costs).
Again, I do not claim to know how VAT works in Europe, but using your illustration above.
First producer pays 10% VAT on $10 or $1.00
2nd -6th pay 10% of value added total .50
Retail consumer pays 10% of $15 1.50
Total VAT paid by all 3.00*
*= 20% of the retail price of the goods or 10% on 200% of the price.
I do not understand your subtractions.
Stephen, the government doesn’t get $3.00; it only gets $1.50. The $1.50 paid by the consumer goes to the retailer, not the government, to reimburse him for the prior and value add tax costs. When it got to the final retailer, he had already paid $1.40 of the tax, which is why it didn’t make sense for the final retailer to help the consumer “evade” the tax. The retailer would only have saved $.10, not $1.50, because he’s already incurred the cost. He submits the additional $.10 to the government (total government take $1.50), for his value added, and pockets the $1.50, reimbursing him for the tax cost. The retailers purchase in the B2B supply change reimbursed the prior tax cost of $1.40 to that seller, and his purchase, the reimbursement of $1.30 to the B2B transaction before that. Each level adds a value added tax cost of 10% and the buyer reimburses the seller for that cost, until it reaches the final consumer. Through the process, the government gets a total of 10% and all levels of supply are reimbursed for the tax they applied and incurred.
Stephen,
See Wikipedia for an explanation of VAT (http://en.wikipedia.org/wiki/Value_added_tax) .
They use the following example
Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows, the term “gross margin” is used rather than “profit”. Profit is only what is left after paying other costs, such as rent and personnel.
Without any tax
* A widget manufacturer spends $1.00 on raw materials and uses them to make a widget.
* The widget is sold wholesale to a widget retailer for $1.20, making a gross margin of $0.20.
* The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30.
With a North American (Canadian provincial and U.S. state) sales taxWith a 10% sales tax:-
* The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer.
* The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.
* The retailer charges the consumer $1.50 + ($1.50 x 10%) = $1.65 and pays the government $0.15, leaving the gross margin of $0.30.
So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren’t consumers.
With a value added taxWith a 10% VAT:
* The manufacturer pays $1.10 ($1 + ($1 x 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10.
* The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 x 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20. ($1.32 – $0.02 – $1.10 = $0.20)
* The retailer charges the consumer $1.65 ($1.50 + ($1.50 x 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 – $0.03 – $1.32 = $0.30).
With VAT, the consumer has paid, and the government received, the same as with sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.
The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.
John Bailey
Thank you. Your excellent example illustrated the piece of the puzzle that I was missing.
Also, I now see that the VAT is just as transp-arent as the retail sales tax. The problem is that it is TOO transparent and the tax must be outrageously high.
I am sure that Europeans have learned how to avoid paying VAT, even though it seems more difficult to avoid than a pure retail sales tax. Higher tax rates will motivate people to find ways avoid it.
Stephen,
You’re welcome.
If I recall the VAT in some countries is around 17% or so. I’m sure it’s easy to find such information on the internet. However, the problem for those countries is that they do not only have a VAT, but also have income tax.
John,
They have all those taxes to support their Socialist visions of Social Justice.
If the federal govt got out of the safety-net busines AS THE FF DIRECTED, w could lower taxes.
Stephen,
Agreed.
Morphh,
I still can’t pull up Dr Walby’s testimony, but would really like to read it. I have always believed she is a straight shooter and, as I send off letters to the W&M Committee members, I’d like to know what the current AFFT claims really are? Can you add it as Research, or perhaps add a different link?
Thanks!
There is a vague general perception that the real purpose of this idea is to make poor people pay more tax and let rich people get off from paying much tax. On the other hand the idea of eliminating the IRS was attractive and I couldn’t immediately fathom that paranoia against the Fair Tax. That is, until I thought about the so-called Flat Tax and how that contrived to exempt the wealthy.
If the fair tax is really going to be fair it has to include ALL the things that rich people buy. Stocks, corporations, houses, businesses, and we have to stop treating corporations as people for “free speech” purposes unless they, too, pay tax on EVERYTHING they buy.
Including politicians, corporate offices, influence.
Tell me when somebody proposes THAT Fair Tax. Then we’ll talk.
Neil,
I do not see where you get the ide4a that the FT was designed to make poor people pay tax – see my Illustration of the PREBATE in my {Paper, Replacing the Income Tax posted under Fair Tax Related Research on this site).
The :IRS” is not eliminated – see my 4 Supplelemts explaining why.
How does a fl;at tax exempt the wealth ??????????
Paying tax on everything you buy is not fair at all – it inhibits freedom. We all need to pay our “fair share” of (essentially) the military – which is basically all the federeal govt shopuld be doing for us. Income and spending have nothing whatsoever to do with determining that “fair share”.
If the Fair Tax can eliminate the Federal income tax, then i have to be for it. The Federal income Tax structure we currently is definitely a nightmare and any change will be a good one.
If the Fair Tax can eliminate the Federal Income Tax then i have to be for it. The income tax system we currently have is definitely a night mare.