Was Mitt Romney right about the FairTax?

June 15, 2012  ·  Filed under: Education, Mailbag

FairTaxer @ WordPress has an interesting post regarding Romney’s comment on the FairTax discussing a paper “A Comparison Of Governor Romney’s Middle-Income Tax Proposals Vs. The FairTax Legislation”.  Hank asked us to post it for discussion. :)


During the 12 September 2011, Republican Presidential debate, Governor Romney made the following statements in response to a question about the FairTax.

“But the way the fair tax has been structured it has a real problem and that is it lowers the burden on the very highest income folks and the very lowest and raises it on middle income people. And the people who have been hurt most by the economy are the middle class. And so my plan is for middle income Americans, no tax on interest, dividends or capital gains. Let people save their money as the way they think is best. We’re taxing too much, we’re spending too much and middle income Americans need a break and I’ll give it to them.”

The claim made by Governor Romney, that the FairTax would lower the tax burden on the lowest and highest incomes while raising it on the middle-income wage earner (current tax code implied), is inconsistent with the preponderance of information that may be accessed from multiple sources comparing the FairTax with the current tax code. That being so, I will refrain from further comment on this point made by the Governor and defer to the reader to present argument to the contrary. As to the Governor’s implication that his tax proposals will be less of a burden on the middle-income earner than that anticipated with the FairTax legislation, I have not, as of this writing, discovered a study that would either directly support or discredit the Governor’s claim. Therefore, it will be the intent of this document to present the specifics of the Governor’s proposals with that of the FairTax legislation for the purpose of conducting a comparative analysis that will either substantiate or refute the Governor’s claim.

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58 Responses to “Was Mitt Romney right about the FairTax?”
  1. FAIRTAXER appears to be simply an arm of the AFFT which is spewing out volumes of economic fog in an effort to sell us the “Fair Tax”.

    This is voodoo economics. The true impact on different economic groups will depend upon a number of future realities, the effects of which which are impossible difficult to predict with any degreee of reliability.

    More importantly, the impact on different economic classes is not relevant. Our tax system should not seek to reallocate wealth nor to make only a few people pay the entire burden of govt. Its purpose must be to fairly allocate the cost of govt to all citizens. The Republic cannot survive when 1/2 of the people pay no income tax, but yet they can vote.

    I take issue with Romney’s objection to reducing taxes on the wealthy – THEY PAY MOST OF THE INCOME TAX. He admits to being a wealth redistibutor. Actually, Romney’s comments are more complex than that.

    Stephen C. Eldridge  ·  Jun 16, 2012 at 8:35 am  ·  Permalink
  2. Stephen is sort of correct when he writes that “The Republic cannot survive when 1/2 of the people pay no income tax, but yet they can vote”. But at least all workers contribute to FICA under current tax law, whereas under the Fairtax, millions of lower income workers would pay no net federal tax due to the prebate feature, yet they would still receive full retirement benefits. I believe that is a major step in the wrong direction. And that is part of what Gov Romney is complaining about.

    Repeating the Governor’s statement, his problem with the Fairtax is that it lowers the tax burden on the very highest and lowest income folks, and raises it on the middle income people. The author of this study writes that he has seen no information to support Romney’s claim. But, is there any doubt by any of you that the entire federal tax burden disappears under the Fairtax for lower income people? And, is there any doubt that the very wealthy are favorably treated under the Fairtax? I recall that Hayden certainly believes that to be true? The only part of Romney’s claim that may be in doubt is his belief that the net federal tax burden would be increased for the middle class. I can’t speak to the working middle class, but I can assure everyone that all retired middle class folks would see a significant increase in their federal tax burden. So is Romney at least half right?

    The author of this study, Mr Bowers, spends six pages trying to show that the Fairtax is slightly more favorable to a middle class family of four in terms of effective tax rates. But, that should not be the issue. I believe the question should be “Does the Romney tax plan cause everyone, rich or poor, to make some contribution to the cost of the services provided by the federal government?” Any other comparisons are irrelevant, imho.


    Hank Van Gieson  ·  Jun 18, 2012 at 11:36 am  ·  Permalink
  3. I can’t say that I agree with your assurance regarding all middle class retirees, which depends on many factors. It also would change significantly if we’re talking about future retirees and lifetime tax burdens. If I recall, after adjustments to social security / COLA, purchasing power shifts, and tax free spending – I thought you ended up with the most tax relief of anyone on our blog.

    In any case, I’m not all too sympathetic to retirees if they do get a tax increase. They’ve left massive debt for their children to pay off. In the words of Thomas Jefferson:

    “The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

    We should have to pay our debts and balance our budget, which failing to cut spending should force tax increases. People need to live with the choices, and politicians need to learn they can’t promise stuff they can’t reasonably pay for.

    As for the paying zero tax, I agree with the sentiment. Having a sector of our society not paying into it can be destructive to a democracy. However, I think under the FairTax, it would be an unlikely scenario when looking over the lifetime of the tax payer. Most individuals move in an out of such levels as they progress through life – tends to be a bell curve (income wise, less so on spending as retirees spend accrued savings). I guess it would be destructive if politicians were using a certain group which currently paid zero tax to buy votes, which is certainly a possibility – they do it today. I expect that the current tax system would be worse for this though.

    Morphh  ·  Jun 18, 2012 at 1:53 pm  ·  Permalink
  4. Hank,

    I hope that when you said ‘at least they now pay SS tax” you meant only as a favorable comparison the the FT (where the poor will likely pay NOTHING for their SS/Medicare), and not as a counter to the fact that they might be viewed as paying some tax today (SS?Medicare Tax is a specific payment for a specific benefit – it does not pay its ownb way, nor does it pay any share of the general burden).

    I tend to agree that Romney is concerned that the midle class will be hurt most by FT, but I object to his pandering top to the left by appearing to object to lowering taxes on the wealthy. We should not be apologetic about lowering taxes on those who pay all the taxes.

    I agree with your point that Romney shouold be concerned that ALL pay some share of the total burden – the FT makes even more of the poor pay no tax.

    Stephen C. Eldridge  ·  Jun 19, 2012 at 8:08 am  ·  Permalink
  5. Morphh,

    You ignore the fact that seniors will likelyt be double/triple taxed (pay FT on income/assets previously subjected to Income/Estate & Gift Taxes. But then again, it is impossible to accurately determine results by economic class.

    We should not be attempting to punish any group, except to insure that all contribute and that we try to prevent having our children pay for our mistakes. That is a difficult problem to solve – the culprits are Congress who don’t have enopugh money to pay. The bis issue there is Medicare and beneficiaries must pay for the $200,000 excess of lifetime benefits-over-premiums/tax paids (no private insrer would do that – they would raise premiums each year).

    Paying people (the PREBATE) does not at all guarantee that people will eventually move out of poverty and pay some FT – that is a segment of the Ft fantasy. Such policies encourages people NOT to succeed -as is heard frequently from the poor, “why work for it when some bleedinh heart liberals pay you”. Victimization, entitlement, vote-buying all result in the enslavement of the poor -it does not help them. We conservatives want to provide meaningful help to the poor – we want them top become eduicated, wealthy and invoilved, which will strengthen and save the republic..

    Stephen C. Eldridge  ·  Jun 19, 2012 at 8:21 am  ·  Permalink
  6. Stephen, I find it odd that you’re telling me what I’m ignoring when I haven’t presented anything. Obviously any assessment would include the new tax obligations. Any proper comparison would look at the current and future taxation burden in relation to the alternative tax system.

    I’m not trying to punish any group. I’m assessing the contributions of the group in relation to the costs. Kotlikoff had a good book on it – The Coming Generational Storm. The problem with paying for the prior generation is when the proportions are unequal. If I buy a $25 meal for the guy behind me, then eat a $2500 meal myself to be paid by the next guy – the next guy in line should be saying.. hold on there. The idea that you paid for the last generation only make sense if the cost is relatively the same counting inflation.. otherwise, the next guy is getting screwed. All I’m saying is you can’t pay $25 and expect to eat a $2500 meal, leaving your kids to foot the bill without the kids being apathetic if someone asks dear old Dad to pony up.

    I never said the prebate would guarantee that all people will eventually move out of poverty. I never even mentioned the prebate, and I never said that all people would move out of poverty. What I said is what the research shows – that most people start out in poverty (young and inexperienced) and then progress out of poverty as they get older.

    Morphh  ·  Jun 19, 2012 at 9:19 am  ·  Permalink
  7. Gentlemen,

    I’m working on some data to prove that middle class retirees would see a significant increase in their federal tax burden under the Fairtax scheme. But in the meantime, with regard to working one’s way out of poverty, it seems to me that many millions of lower income workers will never contribute one dime to the cost of the federal government. That is true because the prebate, which created the millions of non contributors, is inflation protected. That simply means that workers who get just a cost of living increase each year still pay no federal tax because the prebate also rises with inflation. It’s a wash.

    Hank Van Gieson  ·  Jun 19, 2012 at 11:43 am  ·  Permalink
  8. True enough Hank, but inflation / cola is not what moves people out of poverty, so I’m not sure of the point. Most move out of poverty by getting better paying jobs as their skills progress.

    In your assessment, make sure to present this using purchasing power in real dollars (since you’re likely changing the value of the dollar). I’d like to see widgets please. This post might help: http://www.fairtaxblog.com/20080502/purchasing-power-the-forgotten-factor/

    Morphh  ·  Jun 19, 2012 at 2:49 pm  ·  Permalink
  9. Good article that discusses the point I mentioned above about generational burdens.
    Here’s Why Younger Generations Need to Embrace Austerity:

    The frightening thing about these figures is what they represent: retiring generations sticking younger (and yet-to-be-born) generations with massive bills. Because of the spending habits of today, the generations of tomorrow will have to find ways to pay for everything — and it’ll either be through higher taxes or massive cuts in public spending.

    Ferguson argues that the best way to approach the problem of unsustainable debt is to restore the “social contract,” as Edmund Burke referred to it, between generations. See, the contract is not just between citizens here and now but it’s also a contract with those who came before us and those who will come after us. What we see in these massive national debts is, as Ferguson writes, “a shocking and perhaps unparalleled breach of precisely that partnership.”

    Clearly, this must change. One generation cannot rob from the next, otherwise the entire contract, the whole purpose of coming out of Hobbes’ “jungle,” falls to pieces. Strong leaders must attempt to reign in this “generational theft.”

    Morphh  ·  Jun 20, 2012 at 12:55 pm  ·  Permalink
  10. O.K., here is an analysis of the impact of the Fairtax on middle class retirees. The study results need no discussion of widgets or future prospects. It does what AFFT never did with their Fairtax Calculator. Over the years, I repeatedly criticized the Calculator for not being applicable to retirees, but nothing was ever done by AFFT. Perhaps my results are why?

    In order to support my claim that middle class retirees would see a significant increase in their federal tax burden, I compared the net Fairtax impact to the 2011 income tax results. For my retired couple, I assumed that middle class spendable incomes ranged from $30,000 to $100,000 of which $24,000 came from Social Security and the rest from savings/investment income. I did the calculations for five income levels of $40,000, $50,000, $60,000, $80,000, and $100,000, and used standard deductions and two exemptions throughout for the income tax.

    For the Fairtax, I assumed that each of the five spending levels would be reduced to 75% of the gross as an estimate of taxable spending, and subtracted the prebate from the final tax amount in order to arrive at net federal taxes paid.

    Here are the five results:

    (1) At $40,000, net income tax was zero, and the net Fairtax was $1,900.

    (2) At $50,000, the net income tax was $1,000, and the net Fairtax was $3,625.

    (3) At $60,000, the net income tax was $$1,640, and the net Fairtax was $5,350.

    (4) At $80,000, the net income tax was $4,310, and the net Fairtax was $8,800.

    (5) At $100,000, the net income tax was $11,600, and the net Fairtax was $12,250.

    Is there any doubt that the Fairtax significantly increases the federal tax burden on middle class retirees? Questions on methodology would be appreciated.

    Hank Van Gieson  ·  Jun 20, 2012 at 1:18 pm  ·  Permalink
  11. I’m having a hard time following the income tax side – can you point to where you gathered your assumptions? Thanks

    Morphh  ·  Jun 20, 2012 at 3:32 pm  ·  Permalink
  12. Morphh,

    What assumptions are you talking about? For the income tax portion of the comparison, I assumed a retired couple living comfortably on a mix of Social Security and savings/investment income.(wealth). The five total income levels represent the entire spectrum of what is generally understood to be middle class income. At the higher levels, using the standard deduction probably penalizes the income tax results, but it was simpler to just stick with the standard deduction. The amount from Social Security is below the medium, but is probably in the ball park. (I ran an excursion where only one check for the average/medium amount was available and the rest made up of other income. Same results.)

    Hope this helps? And if you want widgets, my widgets are $1.00 each.

    Hank Van Gieson  ·  Jun 20, 2012 at 4:46 pm  ·  Permalink
  13. So I assume… Married filing jointly and all non-ss income is untax (already taxed)? I can’t recall, what’s the base for SS taxation on this?

    Morphh  ·  Jun 20, 2012 at 5:32 pm  ·  Permalink
  14. Morphh,

    First, I was responding to your comment to the effect that that you felt no sympathy for seniors because they leave such a large debt (for their children to pay). My point is that they would be punished by the FT in that there after-Income-tax savings would be taxed again as they spent it which i submit is an unfairness brought about solwely by Congress (for which you have no sympathy).

    sadly, the entire mess we are in is the fault of Congress but they do not enopuigh enpough OF THEIR OWN MONEY to fix the problem. We have never properly funded our own health insurance. If current benefits are $300,000 (lifetime) and current tax + premiums are only $100,000, the correct answer is for EVERYONE to pay $300,000 (AND NOT JUST A FEW PAYING FOR ALL THOSE WHO CAN’T AFFORD TO PAY).

    IMHO, it is superficial and specious for the FT sellers to claim this panacea will cure all of our economic ills and generate an Obama-type “fairness”.

    Stephen C. Eldridge  ·  Jun 20, 2012 at 6:36 pm  ·  Permalink
  15. Hank,

    The Prebate (along with its inflation adjustment) will always be a much mopre attractive package to the poor than having to work. It is an evil narcotic.

    Stephen C. Eldridge  ·  Jun 20, 2012 at 6:38 pm  ·  Permalink
  16. Morphh, re # 8

    You ecomomists can produce dazzling mathematical dsemonstrations.

    What if prices don’t go down by 10%?

    What about diminished purchasing power from 1) FT’s 2nd, discussed above, 20 future State taxes to pay its FT, 3) Future Fed taxes to pay its FT,
    4) future Fed taxes to pay for the higher SS COLA.

    Stephen C. Eldridge  ·  Jun 20, 2012 at 6:59 pm  ·  Permalink
  17. Morphh, re # 9

    I agree, we must get SS/Mewdicare on a sound FUNDED basis (no one should pay the benefits of the prior generation).

    However, thewre is a total debt at the date of any chenge to a fujlly funxded system where we pay for our own benefits. That debt must be shared by all, siomply because it is too great for any one group to pay it (even though the next generation is the least culpable).

    Stephen C. Eldridge  ·  Jun 20, 2012 at 7:03 pm  ·  Permalink
  18. Hank & Morphh,

    I agree that you do overstate the IT by assuming the SD at higher income levels. Also, tyou understate the FT by assuming 25% savingas at all levels (and absolutely because that 25% wioll be spent at some time and so the FT must be added).

    Morphh, I don’t understand your issue in # 13. Hank assumed that seniors’ income was passive and thus not subject to the SS/Medicare tax. Your comment seems to ask about the SS/Medicare tax base, which is irrelevant due to hank’s assumptions.

    Stephen C. Eldridge  ·  Jun 20, 2012 at 7:13 pm  ·  Permalink
  19. Stephen,

    I’m not necessarily understating the Fairtax costs because my 25% reduction represents untaxed spending, not savings. There is no way that 100% of income can be taxed under the Fairtax. 75% may b e off, but I can’t think of a better way to estimate taxable spending. Remember, half of all family spending is for services, and there are no untaxed services. There are no untaxed groceries, restaurant meals, gas for the car, heating oil or gas for the home, nothing untaxed at Wal-Mart, etc. etc. Anyone that believes they can continue to exist and not pay any sales taxes is nuts, imho.

    Surely we all know that seniors make no more payroll contributions?? If you get comfortable with the Social Security worksheet, you can figure out how much of one’s SS income is taxable. It runs from zero to 85% depending on gross income.

    As you can see from my results, as gross income approaches $100,000, the Fairtax begins to be a better deal. Confirms that the Fairtax benefits the wealthy, doesn’t it?

    Hank Van Gieson  ·  Jun 20, 2012 at 9:08 pm  ·  Permalink
  20. Hank,

    I now understand your 75%. Yes, you and I agree that there will be tax avoidance but Morphh and others believe that will NOT happen because they believe that 85% of retail sales will CONTINUE to be made by Wal-mart which won’t cheat. Thus, they must add that 25% back so that FT bwecomes even worse.

    My sense is that the FT hurts the wealthiest. You can create different tax scenarios where the rich are taxed at different rates depending upon the nature of their income.

    Stephen C. Eldridge  ·  Jun 21, 2012 at 9:08 am  ·  Permalink
  21. Stephen,
    #14: I did not say that I felt no sympathy for seniors in this regard. Please stop putting words in my mouth. I said “not all too sympathetic”, which to clarify, I feel sympathy that they’ve been, for the most part, deceived. I truly believe that the vast majority of seniors have no idea of the generational robbery they’re a part of and the true extent of the debt they’re asking their children to pay. They’ve been lied to. They are unwitting accomplices to a theft in which they are the recipients. They think all is normal and moral, so any fraction of righting the injustice will be seen as being “unfair” to them, like we’re stealing from them. It’s truly tragic.

    #16 Prices going down by 10% was part of the assumption in that example, which is supported by the research and at the time was agreed upon by most of the users on the blog. It was not a statement of proof – just as Hank’s 75% taxable spending is not proof – it’s an assumption we can start with to facilitate the example. I’m not sure I understand your #1 point. As for your 2,3,4 – they’re all myths, which have been proven false.

    #20 I do believe there will be avoidance – we’re Americans and we’ll cheat. Again, stop putting words in my mouth. What we disagree on is how much. Assumptions already include a certain level of avoidance/evasion and offsets and you correctly point out the focus of collection points.

    Morphh  ·  Jun 21, 2012 at 9:20 am  ·  Permalink
  22. Hank,
    Your assessment looks accurate using your assumptions. I’m not sure how common it is to suggest that all non-ss income is tax free. As I stated earlier, middle class retirees could gain, stay the same, or lose depending on their situation, savings, investment, spending, other income, etc. I don’t know what the average scenario is… Also, I wouldn’t call $100,000 “the wealthy” – that’s still middle class per your figures. The income tax is progressive to a point – SS taxation becomes flat, different sources of investment income are taxed differently – I believe it’s at this curve point where the FairTax would collect a higher degree of revenue from wealth.

    Morphh  ·  Jun 21, 2012 at 9:39 am  ·  Permalink
  23. Kotlikoff did a study on this, which I believe supports Hanks argument. See from our Research List: Kotlikoff, Laurence; Rapson, David (November 2006). “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation” (PDF). Boston University.


    In addition to imposing, in almost all cases, much lower marginal taxes on working and, in all cases, dramatically lower marginal taxes on saving, the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.


    Third, since the elderly have very little labor income and own roughly two-thirds of the nation’s wealth, switching to a consumption tax lifts some of the burden of taxation from today’s and tomorrow’s workers and shifts it onto retirees. While current and future workers are still effectively taxed on their labor earnings when they spend them on consumption, the effective tax rate on those earnings is lower than under the existing system. This is thanks to the base broadening arising from the switch to consumption taxation, viz., the inclusion of existing wealth to the effective tax base.
    Many would think that hitting the poor elderly with a higher tax burden is unfair and immediately discount a consumption tax on that basis. But under our current Social Security system the poor elderly, whose income comes almost exclusively from that source, would be totally unaffected by a consumption tax. The reason is that the system’s annual inflation indexation guarantees the real purchasing power of recipients’ benefits. To see this, consider what would happen were a retail sales tax adopted. Any increase in prices associated with the sales tax would lead to equal percentage increases in Social Security benefits.

    Morphh  ·  Jun 21, 2012 at 10:37 am  ·  Permalink
  24. Morphh,

    I do not mean put words in your mouth nor misstate what you say. My “no sympathy” was not literal – it was in response to your “not all too sympathetic” which to me on balance means you are net “unsympathetic”.

    To the heart of the issue, i agree with your explanation that current seniors are burdening their children and feel entitled, EXCEPT that I believe they are in-part entitled BUT they (me) are NOT entiotled to a medical insurance policy with lifetime claims of $350,000 whiole paying medicare tax + annual premiums totalling only $100,000. ALL seniors (noit just the rich) must pay more for their medicare, as they would if they had private sector insurance.

    As to my points in 16. # 1 relates to the 2nd/3rd tax on on seniors’ income/inheriotance that was subjected to Income/Estate & Gift Tax and will now againb be subjected to FT.

    As to points 2,3 they are only a “proven myth” in the minds of FT “true believers”. The added costs of the FT to state & fed govt’s is proven by Dale Jorgensen’s (Harvard-AFFT) later “statement” that prices will go up and that added cost does not disappear via the economic magic you claim of “nominal” versus “real” dollars.

    As to point #4, I fail to understand how you can call that a “proven myth” when Sec 303 of the FT statute clearly and deliberatly INSURES that the price increases (which the FT sellers understood would happen on day one, even before Jorgensen made his later “statement”) will result in increased COLAs. where is the money to pay for that budget increase going to come from – more magic of “nominal” dollars.

    As to # 20. I have not gone back to the BHI illustrations, but I do not recall finding ANY allowance for tax evasion. I will have to go back again to research that. In any event, all other non-AFFT economists and others that i have read belive that tax avoidance will increase geometreically as the FT rate rise,

    Overall, economic theories and illustrations PROVE NOTHING. One can demonstrate almost anything. It still only an unproveable theory.

    Stephen C. Eldridge  ·  Jun 21, 2012 at 10:52 am  ·  Permalink
  25. Stephen, Dale Jorgensen’s statement regarding prices does not prove your incorrect conclusion. Economists from Gale to Kotlikoff all agree that price changes have no effect on the FT rate. If prices go up then the government gets more revenue, by the amount that prices went up. So if prices go up 17%, then government revenue will also go up 17% (since the tax base just increased), which covers the additional 17% expenditures that government would pay on its consumption, SS benefits, and COLA adjustments. As for “economic magic”, inflation is basic economics taught to any freshmen.

    If it’s all unprovable theory, why not stop trying to disprove it with your own unprovable theory.

    Morphh  ·  Jun 21, 2012 at 11:06 am  ·  Permalink
  26. On evasion, let me help you out. Here is part of the conclusion:

    Our analysis has made no direct mention of tax evasion, an issue of considerable concern to FairTax critics notwithstanding (a) the fact that the overwhelming majority of purchases of goods and services occur in major retail outlets that will surely comply with the FairTax and (b) the fact that the federal government would be able to concentrate its entire tax enforcement efforts on a single tax – the FairTax.
    But the fact that we have not explicitly considered tax evasion does not mean that we have ignored it. On the contrary, we have implicitly incorporated a significant degree of tax evasion in our calculations simply by using National Income and Product Account-based projections of household consumption expenditures in forming the FairTax tax base (Easton, 2001).
    The National Accounts already understate total household consumption because they make no adjustment for either underground income or the underground consumption it supports. For example, the National Accounts do not impute the income earned by drug dealers and include it as part of national income. But the income earned by drug dealers comes by way of an unrecorded retail commodity sale, which is omitted from the National Accounts measure of household consumption.
    To state this point differently, if our FairTax rate calculations are biased downward due to failure to incorporate tax evasion, it is not because we are leaving out retail sales that are now unreported or that we are leaving out other sales that would go unreported, but rather because the National Accounts recorded sales we assume will be reported will, in fact, not be reported. This seems highly unlikely given that large retailers would most surely continue to account for the vast majority of retail sales.27
    The extent of potential tax evasion under the FairTax and its implications of the FairTax tax certainly deserve careful study, but concern about the omission of tax evasion with respect to this study’s findings must be set against two other omissions that militate in the opposite direction.
    The first is the major capital gain that the federal government stands to accrue if, as seems likely, the Federal Reserve fully accommodates the introduction of the FairTax and permits consumer prices to rise by roughly 30%. This would reduce the real value of nominal U.S. government debt in the hands of the public (many of whom are foreigners) by about $1 trillion. Although this is a one-time windfall, it is a very large one and could certainly offset a significant amount of revenue loss from tax evasion, were such losses actually to occur.
    The second omission that biases upward our estimate of the real revenue-neutral FairTax tax rate arises from the partial equilibrium nature of our analysis. Because we have considered no economic feedback (general equilibrium) effects, we have failed to incorporate the significant expansion of the FairTax tax base that would, over time, likely arise. Kotlikoff and Rapson (2006), Kotlikoff and Jokisch (2005), and Tuerck et al. (2006b) document the major improvement in work and saving incentives and the major potential for enhanced economic growth associated with the FairTax. These interrelated findings suggest the potential for significant reductions in the FairTax rate over time for a fixed scale of federal expenditures.

    So like I said, supporters believe there will be evasion. The question is how much and if it is enough to exceed the offsets to any large degree.

    Morphh  ·  Jun 21, 2012 at 11:14 am  ·  Permalink
  27. Morph — No offense, my friend, but the ” we have implicitly incorporated a significant degree of tax evasion in our calculations” claim in the BHI study was later shown to have been incorrect. If fact, the NIPA data used in the BHI analysis had been revised to assume zero tax evasion.

    You probably recall that several years ago the American Enterprise Institue hosted a “debate” between Larry Kotlikoff and William Gale about the FairTax and it was agreed that the BHI study did NOT incorporate any tax evasion. There was a disagreement as to exactly how much that changed the analysis, though it was clear that the revenue-neutral rate would need to be higher than the 31.25% tax-exclusive rate found in the BHI study once tax evasion was factored in. (I believe that Kotlikoff thought that would raise the revenue-neutral rate by two percentage points, though Gale clearly disagreed.)

    I just checked the AEI website and could no longer find an audio of the debate or the underlying charts and exhibits, though it used to be on their website.

    And one of the presenters at the AEI event showed that levels of tax evasion at even relative low rates of sales tax we quite high. The clear implication from her analysis was that the level of tax evasion (and tax avoidance) under the FairTax, which, as we all know, would be in ADDITION to state and local taxes, would be astronically high.

    Just think about it a minute. Even assuming the BHI analayis was correct, the tax-exclusive rate at the federal level would be 31.25%. And even assuming that state and local sales taxes would not increase under the FairTax, the combined federal, state and tax sales tax rates would be at least 38.25% (assuming a state/local tax rate of 7%).

    Are you honestly saying there would not be massive amounts of tax evasion, tax avoidance and just plain old cutting back on purchases when people faced sales tax levels that high?

    Hayden Kepner  ·  Jun 21, 2012 at 1:04 pm  ·  Permalink
  28. Hayden, I agree that it was adjusted, but your memory is foggy on the percentage discussed at AEI. It was not zero; the NIPA figures included something like 2-3%. My effort was only to make available what Stephen was looking for since he “did not recall finding ANY allowance for tax evasion”. Again, my point was that there are offsets. The NIPA was just one of them – I didn’t want to get into a history lesson. And yes, I do believe that tax evasion suggestions by critics are highly exaggerated, but that’s an old and well worn discussion that I rather not repeat. I was only rebutting the statement that FairTax advocates believe evasion “will NOT happen” – clearly there will be and we can continue to disagree on how much.

    Morphh  ·  Jun 21, 2012 at 1:59 pm  ·  Permalink
  29. This has been a useful discussion, reminiscent of the “good old days” when this excellent blog was far more active. Before we get too far off track, I wonder if the moderator would agree with the following summary with regard to the Fairtax impact on middle class retirees and candidate Romney’s public position on the Fairtax.

    “The Fairtax throws senior middle class retirees under the bus by (1) double taxing all after tax savings/wealth when spent; (2) forcing current retirees to resume paying for their government retirement benefits with their sales tax dollars; and (3) increasing their federal tax burden significantly when compared to current tax law.

    Mitt Romney was at least half right when he stated that the Fairtax increases the tax burden on the middle class, and lowers the tax burden on the wealthy and the poor.”


    Hank Van Gieson  ·  Jun 22, 2012 at 4:49 am  ·  Permalink
  30. Am I the moderator? I don’t do much moderating.. Haha

    Lead) I think the facts support the conclusion that seniors are already throwing workers under the bus (oblivious as they run them over), so I see it as pulling our children out from underneath it. I’d rather not continue to push a false perception at their expense.

    1) Depends on the spending, which might just go to pay the mortgage or something. The prebate also untaxes a degree of taxed spending. 2) makes an assumption as to the revenue spending – if we consider all payment part of general funding, then is this not already true? Today we make some distinction based on a false perception – it’s all one pot to them. 3) While “significantly” will depend on the retiree, on average I expect this is probably true.

    I’d agree to this as a general statement regarding the classes:
    The FairTax significantly increases the federal tax burden on upper and middle class retirees when compared to current tax law as investment income and after tax savings are subject to further taxation.

    Agree, Romeny was half right. So, let’s discuss what he is putting forward, since that is more likely to see the light of day than the FairTax. Created a new post: Mitt’s Plan

    Morphh  ·  Jun 22, 2012 at 7:42 am  ·  Permalink
  31. Gentlemen,

    Before moving to the new discussion, here are a few final comments.

    I will send this in pieces because I was almost finished and lost the whole thing.

    Morphh, I am a little confused by your # 25.

    I did not say Jorgenson said prices (pre-FT) said he later said prices (pre-FT)
    won’t go down. If anything, FT will cause a decline in prices (pre-FT) primariuly due to consumer rebellion at the FT in adition to a small decline for “embedded taxes”).

    If FT calculated its revenues assuming prices (pe-FT) go down to 77% then the FEDERAL (not State) gov will have higher revenues IF prices (pre-FT) drop to only 95% (i.e., 30% x an unanticipated 18% price differential.

    That i believe is where we got the 117% (i.e. 95% x 1305 = 117%).

    Stephen C. Eldridge  ·  Jun 23, 2012 at 1:35 pm  ·  Permalink
  32. Gentlemen,

    As I made to sophomore year, I did learn about inflation, but not that it cuired the common cold.

    I still fail to see how inflation enables State & fed govts to pay their FT (which $ inflate as underlying prices increase for inflation), higher SS COLAs (which inflate by definition) as well as seniors’ 2nd tax.

    You submit economic theories, I submit economic realities;

    1) Fed & State govts would pay FT – which i berlieve we all agree causes total prices including FT) to rise, thus causing an added marginal outlay requirement.

    2) SS COLA’s must rise requiring higher fed govt expenditures.

    3) Seniors will pay Income Tax AND FT on the same earnings.

    These are not THEORIES, your “inflation cures all” is.

    Stephen C. Eldridge  ·  Jun 23, 2012 at 1:51 pm  ·  Permalink
  33. Gdentlemen,

    lastly, as to Tax Avoidance, I guess i was correct that BHI did not explicitly
    make an allowance for it.

    As to BHI’s initial comment that it did so im plicitlyt because underground sales were omityted, they make the grossly u8nrealistric assumption that Tax Avoidance under the FT will be identical.

    As to your further analysis, I defer to your superuior intelligence and patience. My tired old brain refuses to get drawn further into that quagmire when I already believe to be Ostrich-like to assume the undergrouynd economy will get no worse that it is today.

    Stephen C. Eldridge  ·  Jun 23, 2012 at 1:57 pm  ·  Permalink
  34. Perhaps the fact that well educated people do not accept what you know and declare that we are “just wrong”, should alert you to the possibility that perhaps your theories do not solve the real-world problems raised.

    Even Jorgenson (and AFFT does not really dispute him) agrees that prices (post-FT will rise); th0ere can be no disputre that the FT insures a compensatory COLA; there can be no dispute that senbiors’ will be taxed twice.
    I don’t understand these realities.

    Our difference is that yopu belive the magic of inflation somehow cures all the real-world problems. I have heard your THEORY is difficult to teach, even to Economics PHDs. Even if those PHDs eventually “get it”, it remains a THEORY not a reality.

    If you had the time and the patience to teach it to me, I might understand your THEORY, but then again, it would still be just a THEORY.

    Stephen C. Eldridge  ·  Jun 23, 2012 at 3:01 pm  ·  Permalink
  35. Sorry, I deleted that comment before I saw your message. In hind site, it was a little rough. My economics are fine – I just don’t have the time to teach them and you’re not the easiest student. I don’t believe inflation solves all problems – again, words in my mouth. I think inflation (price increases) alters the tax base, since the tax base is retail sales. If prices increase, government revenue increases (it’s not a windfall though – they get increased expenditures). Every economist that has published a study on the rate has concluded that the “accommodation level” (price changes) have no effect on it.

    I’ve read Jorgenson’s work and statements, and you’re putting words in his mouth as well. What he stated was that his work includes income taxes in the embedded tax estimations. The economist that I have read state that prices increasing or staying the same will depend on the Fed accommodating the tax or not, and to what degree (essentially – how much of employee gross pay / employer payroll will employees get to keep). But again, price changes are not relevant to the rate – that’s the point. Ugg… I don’t have time for this right now.. Sorry gotta go, will try to pick it up later.

    This is why I stopped my discussions on this blog – it sucks your life away in pointless debates about a plan that will likely never see the light of day.

    Morphh  ·  Jun 23, 2012 at 3:18 pm  ·  Permalink
  36. Morphh,

    I agree with you that FT will likely never see the light of day, but it does disturb me that the AFTT maintains a lobby office in DC and continues to work on Congress to sign onto it with co-sponsorships. Further, Herman cain is still trying to market his pizzas (“9-9-9′) which he tells you (if you look for it) that
    Phase II of the plan is the FT.

    I agree to diagree with you over “economic theory versus reality”, so we will likely disgree on other tax plans that utilize those theories to support them.

    Stephen C. Eldridge  ·  Jun 23, 2012 at 3:44 pm  ·  Permalink
  37. What is your economic reality regarding price increases effecting government revenue? Do you believe if prices increase (which is your tax base) that government will see no increase? How is that an economic reality? If the tax base increases, then the government will see an increase equal to the base increase. Increased revenue pays for increased expenditures.

    Tax base $1000
    23% of $1000 is $230

    Now if prices rise (we’ll use 17%) to make the tax base equal to $1170
    23% of $1170 is $269

    Government has the 17% more revenue that it will take to pay a 17% increase in COLA and a 17% increase in government consumption. I don’t see how this is theory while your assumption is reality.

    Morphh  ·  Jun 23, 2012 at 4:02 pm  ·  Permalink
  38. Morphh,

    I commented on this in # 31, above.

    First, the States have no revenue increase with which to pay their FT.

    Whether the fed gov has a revenues increase to pay its FT will depend upon the economics of the FT. That is, asssuming its (IMHO, overly optimistic) assumptions come to pass, IF its collections were based upon Jorgenson’s original claim that prices go from 100 down to 77 and the govt will add (collect) 23, the (IF pre-FT prices decline to only 90, then FT collections will be 27 – 4 higher, assuming all other assumptions are correct.

    I am also trying to get my head around the problem that if the gov collects more, then we have to pay more (more than current tax payments), unless somehow the gov pays its FT which then gioves the gov $ to pay its FT.
    But wait (the late hour + wine are dulling my old brain), the FT needs that revenue in order to be revenue neutral, which undermines the FT’s revenue neutrality claim. Thus, I think FT is moving the pea among the shells.

    The fed gov also needs more revenue to pay the much higher COLA.

    Stephen C. Eldridge  ·  Jun 23, 2012 at 6:28 pm  ·  Permalink
  39. I’m not trying to complicate things with the state at this point. I’m just trying this one step at a time. Jorgenson never claimed prices would go up or down. His study measured the overall tax cost embedded into goods and services, which included income tax cost. We only use that to assess different levels of accommodation. If pre-FT prices decline to only 90, it is based on the measure that employees take home gross pay. This is where the government would get that extra revenue. Getting gross pay doesn’t equal a windfall to the employee – it goes back to the government in the form of that increased tax base.

    Morphh  ·  Jun 23, 2012 at 6:45 pm  ·  Permalink
  40. Revenue neutrality exists when the government doesn’t gain or lose any purchasing power, neither does the citizen. Every year more revenue is collected, but we don’t see it as a tax increase because such an assessment is adjusted for inflation. Even if you were to take the income tax today and replaced it with the exact same income tax next year as a “revenue neutral replacement” it would collect more nominal dollars. So if there is inflation based on price and income changes, the cost will be relative to that change.

    Morphh  ·  Jun 23, 2012 at 7:08 pm  ·  Permalink
  41. Morphh #39,

    There is that “accommodation” word again. My qualifications to discuss monetary accommodation and the Fairtax retail price increases is limited to common sense and a smattering of Econ 101 recall. For years, the economists such as Larry K have maintained that retail prices won’t rise under the Fairtax plan unless the Fed adopts a monetary accommodation policy. Which means in simple terms, the Fed would have to print more money for retail prices to increase, or at least lower credit requirements to facilitate more borrowing. I just don’t get it!

    From Econ101, I recall the time tested formula MV=PQ, where Prices can only rise if Money increases. I guess it’s written on clay tablets somewhere, because that is the basis for Larry’s claim. But, under the Fairtax, we seem to agree that production costs would go down 10-12% and after adding the 30% sales tax, retail prices would rise by 15-17%. But, why does the Fed have to do anything?

    Under the Fairtax, using 2007 data, consumers would get around $2.1 trillion in added spending power by taking home the income tax withholding ($1.1T), and payroll contributions ($435B), previously sent to the federal government plus the $600 billion annual cash grant entitlement known as the prebate. So, the consumers are able to pay higher retail prices without any action by the Fed. The Federal government would be run on sales tax revenue rather than income tax revenue. If the Fairtax is revenue neutral, there would be no problem for the federal government. And, retailers would have to raise retail prices or go out of business. It just seems to me that retail prices have to rise no matter what the Fed does, and the claim that retail prices won’t rise without Fed action makes no sense to me.

    Am I wrong?

    While you are puzzling this one, I have also spent some time wondering just what would happen to businesses as the Fairtax kicks in. Isn’t it possible that the retail price increase might be held off for a while by the financially sound businesses in the hopes that the marginal business would fail, thus removing competition? I can foresee a huge price war where the big boxes survive and the “mom and pop” businesses go out of business. What is to prevent that from happening?

    Hank Van Gieson  ·  Jun 24, 2012 at 7:04 am  ·  Permalink
  42. Hank, I’ll try to explain it in another post. It takes a little bit of thinking to properly lay it out. It’s sort of like the missing dollar riddle. If you think of it one way, it doesn’t make sense, but given the proper math order and presentation it figures out. We can easily see it from a revenue stand point, the government has more nominal dollars and prices / take home wages have increased. It’s just following that missing dollar, which is in the business side. Anyway.. I’ll try to post more on it when I have time later.

    As for the second though, if they had that capital available, they could do that today.

    Morphh  ·  Jun 24, 2012 at 10:51 am  ·  Permalink
  43. Gentlemen,

    It is interersting to follow your descent into the murky world of economic theory and mathematics – while I admire your scholarship, I have a very healthy wariness of economic theory and mathematics, which are thoroughly unprovable (even if generally agreed-to by economists). Economic theor and mathematics do not PROVE anything to me – they suggest a possible truth.

    I agree with Hank’s comments on “accomodation”. Recall my view that prices can rise even if the Fed does not accomodate – spending will shift from fully discretionary to less discretionary.

    As to Hank’s 2nd point, Wal-Mart might lose that retail war, as smaller stores will sell for cash and avoid the FT & state sales taxes.

    Morphh, the only point i was trying to make about Jorgenson, is that i believed he was the initiator of the original premise that retail prices go down from 100 to 77 (because embedded taxes are eliminated) and then prices rise back up by 23 FT to the prior 100.

    I think I understand your # 40, that inflationary impacts on the nominal $, must be taken iunto account – I just still fail to see how inflation solves the problems of added State & federal FT payments and COLAs.

    Morphh, you noted earlier that you think FT uses a 2-3% Tax Evasion factor. I have heard anecdotal reports of 15% tax evasion unsder the IT. Asuming that 2-3% is correct, are you suggesting that tax evasion will be significantly LOWER under FT?

    Stephen C. Eldridge  ·  Jun 24, 2012 at 12:14 pm  ·  Permalink
  44. Morphh #42,

    “As for the second though, if they had that capital available, they could do that today.”

    But they don’t have it today. I’m assuming that current business plans have things screwed down pretty tight, and there is some sort of equilibrium as regards pricing.

    Comes the Fairtax and all of a sudden, businesses have to send off massive tax revenue to the tax collector. That revenue can only come from higher prices, (after adjusting costs), and I think marginal businesses will fail. And the big boxes might decide to divert capital from shareholders or wherever in order to tighten the screws. The inventory tax credit might also favor the big boxes for a short while in this scenario? Looks like chaos squared to me.

    Hank Van Gieson  ·  Jun 24, 2012 at 3:54 pm  ·  Permalink
  45. Hank, don’t forget the inventory credit. If anything, small businesses will be more quickly able to adapt. In addition, big box retailers get more of their inventory from non-US sources, thus will not be subject to the same cost reduction.

    Morphh  ·  Jun 24, 2012 at 6:12 pm  ·  Permalink
  46. Fellows,

    Its late – please refresh me on the “inventory credit”.

    Stephen C. Eldridge  ·  Jun 24, 2012 at 6:24 pm  ·  Permalink
  47. Any product in inventory when the FairTax goes into effect is not subject to remittance of the FairTax when the item is sold, since it is already consider to have been indirectly taxed via the current tax system (embedded costs).

    Morphh  ·  Jun 24, 2012 at 6:58 pm  ·  Permalink
  48. That seems vaguely familiar. Thank you.

    Stephen C. Eldridge  ·  Jun 24, 2012 at 7:35 pm  ·  Permalink
  49. Hank #41,

    re: “I recall the time tested formula MV=PQ, where Prices can only rise if Money increases. ”
    Did you fail Econ 101? 😉 Oh wait, maybe they taught that in Econ 101, but that result doesn’t fit mathematically.

    According to: http://www.investopedia.com/articles/05/010705.asp#axzz1zDqamKQ9

    P (average price level) can go up if the money supply, M, increases, or if the velocity of circulation of money (V) increase or if the volume of Transactions of Goods and Services (Q) decreases.
    One common assumption is that in the short term, V and Q are constant. But not everyone agrees with that assumption. The arguments point out that the velocity of circulation depends on consumer and business spending impulses, which cannot be constant.

    John Bailey  ·  Jun 29, 2012 at 4:19 pm  ·  Permalink
  50. John,

    Having passed Econ 101 SOLELY because they graded on a curve (20 = a D), your comments make sense to me.

    It appears to me that your explanation of V encompasses my practical point that people will shift from discretionary to non-discretionary spending. Do you agree?

    Stephen C. Eldridge  ·  Jun 29, 2012 at 6:55 pm  ·  Permalink
  51. Stephen,

    I’m not sure I follow what drives people to go from discretionary to non-discretionary (or the other way around) in your scenario. Certainly, if the same dollar gets spent 10 times more often this year than it did last year, prices will go up (if M and Q did not change).
    I think the equation, while simple to look at and explain, is misleading. The problem is that V is not truly independent of M and i’m not sure if any of the others are either. I would expect one to be the dependent variable. The equation is an attempt to simplify an extremely complex set of factors in an economy. V will change for a number of reasons (some predictable, some not). If it does, some other parameter in the equation must change (or maybe all 3 others do).
    Perhaps the theory is not so good for looking at the short term…..maybe the short term is driven more by current day emotions…..much like the stock market.

    John Bailey  ·  Jun 29, 2012 at 7:47 pm  ·  Permalink
  52. John,

    Sorry, i meant Q, not V.

    In countering the argument that prices can go up ONLY if the fed accomodates, my point was that even if the fed does not expand the money supply (with the FT’s price rise) that people have not only their raises from Income-P/R tax reductions, but if they still experience a cash shortfall, they would reduces discretionary spending in order to fund the higher cost of their necessities – thus,the fed need not accomodate.

    Would not a sharp drop in consumer confidence cause Q (the volume of transactions) to contract without regard to M?

    Stephen C. Eldridge  ·  Jun 29, 2012 at 8:08 pm  ·  Permalink
  53. Stephen,

    Well I suppose some people would try to make up the difference by going further into debt. That happens today with a large percentage of the population. In fact, even some sacrifice non-discretionary things for discretionary. Or vote to get the government to give them more.

    But yes, Q may likely go down some and I suspect so would V if people are being more careful with their spending.

    John Bailey  ·  Jun 30, 2012 at 7:13 am  ·  Permalink
  54. Issues never honestly and solidly answered by fair tax advocates.

    First if taxes on B2B transactions are really not going to happen. They claim there will be none. I do not question their intentions they want none. I claim there is nothing in the bill that permanently identifies and exempts B2B transactions.

    This is important because of the supply chain issue. The FT bill makes it clear that once an item is identified as such – a shirt – it will be taxed only once. This is clear. But the supply chain has companies that make items that go into the shirt but are not the shirt. There is nothing in the law that shows those companies will not have to charge a tax. There are lots of statements by advocates they don’t want to, but there is nothing in the law that identifies how a company is registered as exempt from charging a tax,

    Second – Price Neutral. The argument of the advocates of the FT is that because companies in the supply chain and their employees pay no federal income or payroll tax, that there is a tax component in the price that we can expect will go away.

    Oh no we can’t. The largest component are the employee income and payroll tax. But those employees will have to pay a 25% fair tax on anything they buy. They will not be able to afford a cut in pay.

    More evidence of this brings us to another bit of dishonesty. All these employees will be getting a prebate. First, if they need a prebate they certainly will not be able to afford a cut in pay. You can’t advocate swapping a sales tax for an income tax and then say the savings from the elimination of the income tax will be passed as a cost savings, unless you also eliminate the sales tax.

    Last point of the prebate. Why is it there? The reasons for a thing is usually not the justifications offered. The prebate is justified for the poor among us when actually a lot of the middle will need it so they won’t be behind the 8 ball.

    Philosophical Issues
    The advocates say that current prices have a tax component. Are they saying that will end? I go into the market and look today to buy a $400,000 house. Under the FT the house is $500,000. I live in the house for twenty years and sell it. What price do I get? Forgetting appreciation or depreciation. Do I get $400,000 or $500,000. If I get $500,000 then $100,000 in tax is being passed on each time the house subsequently is sold.

    Advocates say there is no double taxation. If I buy that $500,000 house I pay the tax of $100,000 out of twenty years. In each of those twenty years income I also need the income to pay the sales tax on anything I buy. Is this not taxing my money twice?

    Under our current tax regime I pay income tax on my income for the year after which I never pay income taxes on that money again. The Fair Tax puts claim on all future income as a result on an expense in any single year.

    Lawrence in New York  ·  Jul 31, 2012 at 9:22 am  ·  Permalink
  55. Lawrence,
    The law does identify and describe the B2B transactions as well as the application of retail sale. Statements such as in ‘SEC. 102. INTERMEDIATE AND EXPORT SALES.

    (a)‘(1) BUSINESS AND EXPORT PURPOSES- No tax shall be imposed under section 101 on any taxable property or service purchased for a business purpose in a trade or business.

    (b) Business Purposes- For purposes of this section, the term ‘purchased for a business purpose in a trade or business’ means purchased by a person engaged in a trade or business and used in that trade or business–‘(1) for resale,‘(2) to produce, provide, render, or sell taxable property or services, or‘(3) in furtherance of other bona fide business purposes.

    To your second thought, you appear to be mixing gross pay and net pay. Spendable income under the current system is equivalent to net pay, not gross. If spendable income were to stay the same (although it’s more likely you would receive gross pay), costs would drop due to the removal of tax costs, which would have the effect of maintaining the same approximately after tax prices (costs go down, prices stay the same after the tax component is added). There is “savings” to consumer – the tax burden is still maintained. There is no windfall when replacing one tax system with another. I expect you’re confusing cost savings that reduces pre-tax cost, with post tax prices, which would remain consistent in that scenario.

    The prebate is not based on income, it’s based on family size and would be available to all legal residents of the U.S. It is there in order to untax spending up to the poverty level for all and add progressivity to a consumption tax. It is equivalent to a flat tax with a standard deduction.

    You sell a house for what the market will take for it, which includes a tax component as one of the factors of production. I don’t get your example of taxing your home equaling double taxation because you purchase other taxable items. All new retail consumption and services is taxed once. Whether you pay it off on day one, or extend the payment for many years, it makes no difference. You yourself put a claim on future income when you purchase a home and accept the payment of the mortgage – tax is just one component of that cost (as it is today – this plan just makes it visible).

    Morphh  ·  Aug 10, 2012 at 1:11 pm  ·  Permalink
  56. Greetings,

    The purpose of this message is to respectly request Mr. Eldridge and Mr. Gieson to present their proposals for federal taxation.

    Best Regards,

    Kerry Bowers  ·  Aug 11, 2012 at 1:03 pm  ·  Permalink
  57. Romney is essentially publicly agreeing with economists like William Gale of Brookings. Gale may be right, may be wrong. However: what Romney is doing is effective politics for someone that wants to get elected from a state like Massachusetts. I personally see Romney as someone that will differentiate himself from centrist orthodoxy only when there is clear reason to do so(like becoming “right to life” to get the GOP nomination).

    The real issue: Fairtax hasn’t really become a bipartisan or ideologically neutral proposal. I happen to like the simplicity and low overhead costs associate with fairtax. The thing is: we have a lot of rational, competent people out there that are concerned that Fairtax could make the problems of distribution of greater concentration of wealth/assets we’ve seen the last 30+ years in the US _worse_. Saying that isn’t going to happen-so it is nothing to worry about isn’t really going to cut it as game plan for those for whom that is a primary concern-or those wanting to be “centrist” politically.

    Randall Burns  ·  Sep 29, 2012 at 2:50 am  ·  Permalink
  58. Sorry for the late response. It should be realized that when Mitt claimed that the FairTax would lower the burden on the rich, he was lying. He knew full well that a FairTax 23% inclusive rate would be substantially higher than his own tax rate at the time, which was around 14%. (See http://www.cnn.com/2012/09/24/opinion/mccaffery-romney-tax/index.html ). This rate was probably typical for the rich at the time, since the top rate on capital gains and qualified dividends was 15%.

    Since 2013, this rate is now 20%, plus a 3.8% Net Investment Income Tax (for Obamacare). Of course, under the current system, rich people can still avoid showing income by the well-known buy/borrow/die strategy, among others. Even without that, since tax is only paid on capital gains when they are realized, a long holding period makes the effective capital gains rate lower than if it had to be paid each year. So even today, the rich would still pay more under the FairTax. (The fact that the tax is only paid when the wealth is consumed is irrelevant – eventually, all wealth is consumed, and delaying that by investing just increases the amount which is eventually consumed and taxed. Therefore it’s perfectly legitimate to compare the income tax rate with a consumption tax rate, as long as the two numbers are either both inclusive, or both exclusive.)

    Since the tax burden is almost entirely split between the middle class and the rich, if the rich pay more, then the middle class would pay less. Evading the sales tax would be harder for high-value items, so to the extent there is evasion, it should make the burden on the middle class even lower.

    Andre  ·  May 6, 2014 at 3:22 am  ·  Permalink