The FairTax Discussion Thread

[Doove]

Originally Posted by CuteOldGuy

Actually, Doove, the FairTax will replace all individual and corporate income taxes and estate tax.

I understand that, but as JC points out, the net result in your example is that we end up with what is currently the roughly 23% corporate tax, while eliminating the personal income tax. Not to mention SS and Medicare taxes.

[Doove]

Originally Posted by CJ7

thus the middle class is paying more tax than the upper class does

The government is going to get what it needs and wants. Any form of tax reform is going to do nothing but change how we divvy up where that comes from. So ultimately, no matter how COG cuts it, there are going to be winners and there are going to be losers.

I wonder if he'll be as outraged on behalf of the losers in his tax reform plan as he seems to be on behalf of the losers in Obama's health insurance reform plan.

[BJerk]

Originally Posted by CuteOldGuy

Ok. Not a bad start. BL is probably right, it won't happen because it takes a lot of power out of the hands of the elite.

However, I will address the 23% sales tax issue. The economists who have helped draft the FT have determined that embedded in the price of every good or service we buy, is the cost of tax and tax compliance. Tax and compliance costs are included in the overhead of all business people which have to be recouped in order for the business to be profitable. On average, this was calculated to be about 23% of the price of the G or S.

What the FT proposes is to eliminate those taxes and compliance costs, effectively reducing the costs that have to be recouped, so that on average, the price of the G or S can be reduced to 77% of the original price. The FairTax would then add a tax equal to 23% of the total price, effectively keeping the price level constant.

One argument offered in opposition is, "What if the business refuses to lower their price?" Of course, a business could so choose, but that opens the door to competitors who see a profit to be made by entering the market and undercutting the greedy company. For example, say that a can of Coke and Pepsi each cost $1.00. After the FT, the price needed to make the same profit is now $0.77. Let's say Coke drops its price to $0.77, and the FT is added, the resulting cost at checkout is $1.00. Then suppose PepsiCo decides to reap megaprofits by not reducing their price. A can of Pepsi would cost $1.23. Since Coke and Pepsi are easily substituted for each other, Pepsi would experience a significant drop in sales, and Coke a significant increase. Pepsi would have to reduce its price in order to regain market share.

Granted, these are generalities and averages. Overall, the price level would remain constant before and after the implementation of the FairTax. Some products and services will experience greater price fluctuations than others. But overall, it will remain the same. Add to that the fact that people will no longer have federal withholding taken out of their pay for income tax, SS, and Medicare, actual purchasing power will increase.

And for the record, I oppose the prebate. But it's not a deal breaker for me. I'd rather see no tax at all on groceries and prescription medicines. I think that would accomplish the same thing as the prebate, without the government knowing where you are. But they do, anyway. The prebate is the weakest part of the program.

So profitable businesses could keep their prices 20% above their cost and lose a little to starve out the competitors then raise their prices? There is a reason to tax on profit not revenue.

[Jackie S]

Originally Posted by Doove

The government is going to get what it needs and wants. Any form of tax reform is going to do nothing but change how we divvy up where that comes from. So ultimately, no matter how COG cuts it, there are going to be winners and there are going to be losers.

I wonder if he'll be as outraged on behalf of the losers in his tax reform plan as he seems to be on behalf of the losers in Obama's health insurance reform plan.

+1 on that. It takes "X" number of dollars to run the Government. All of this talk of abolishing the income tax and instituting something else is just that, talk. Whatever, or however, the Government collects the taxes, the amount that individules cough up will still be roughly the same.

[CJ7]

account for the deductions an average family with children, student loans, and a mortgage will lose and a 23% tax rate becomes excessive ..

being unable to deduct a mortgage lends itself to renting ...

that should do wonders in an already failing housing market, and that helps the economy how?

[JohnnyCap]

Originally Posted by Doove

The government is going to get what it needs and wants. Any form of tax reform is going to do nothing but change how we divvy up where that comes from. So ultimately, no matter how COG cuts it, there are going to be winners and there are going to be losers.

I wonder if he'll be as outraged on behalf of the losers in his tax reform plan as he seems to be on behalf of the losers in Obama's health insurance reform plan.

Originally Posted by Jackie S

+1 on that. It takes "X" number of dollars to run the Government. All of this talk of abolishing the income tax and instituting something else is just that, talk. Whatever, or however, the Government collects the taxes, the amount that individules cough up will still be roughly the same.

Without disagreeing with you and Doove, I cannot agree we should just accept X. X has to be challenged and amended constantly, and requires more manpower than money in the ideal scenario.

If the government is going to get what it wants, all is lost. Taxes are inevitable, and the distribution will vary. But to just say have at it, you get what you want is asking to be abused.

[CuteOldGuy]

Originally Posted by Doove

I understand that, but as JC points out, the net result in your example is that we end up with what is currently the roughly 23% corporate tax, while eliminating the personal income tax. Not to mention SS and Medicare taxes.

Doove, all personal and corporate income taxes would be eliminated, along with the gift and estate tax. The FairTax would replace them all. Social Security and Medicare would become general budget items, which, essentially, is what they are now.

The FT also would only apply to purchases of NEW goods and services. Used items would not incur the tax. So a person could avoid paying much of the tax. Who buys the most new items? Who pays more for services? The rich, of course. They will be paying lion's share of the tax.

And yes, the rich are better off under this plan, but so is everyone else. Your purchasing power will increase, while the price level remains constant. If the price level increases, it will do so as a result of market forces, not government.

Ok, what happens to wages under the FT? Wages would feel pressure to increase, due to the resulting economic boom that would occur. What boom, you ask? Well, consider this. The FT only applies to goods and services purchased in the US, whether or not it was manufactured in the US. Think of how attractive the US would become for manufacturing? A company could build a product here, with no tax or compliance costs, and could severely undercut competitors who do not manufacture in the US when marketing overseas. Think of what Boeing could do if they could reduce their prices overseas by 23%? Detroit could start building cars here again. All of this pushes wages upward, unemployment downward, and prices, domestically downward in many markets.

The FairTax has been vetted by more economists and financial professionals than any other tax proposal in history. The 23% is believed to be the rate needed to find the government at our current level of funding. That means Congress will still have to quit spending so much.

Any tax increase will be apparent. No hiding increases in legalese deep in thousand page bills. No special treatment for any group, or friends of Congressmen. No complicated forms, or fear of the IRS. AND, businesses get to keep a small portion of the tax the collect to compensate them for their time and trouble in collecting and submitting the tax.

It's beautiful in its simplicity. I know I've left something out, but I'm sure one of you will remind me what it is.

[Whirlaway]

If a revenue neutral alternative exists, that can replace the current corrupted system....then I am all for it.

[Guest040616]

Originally Posted by Whirlaway

....then I am all for it.

"Trendy" Trendaway's endorsement carries with it the "kiss of death."

Who will ever forget Trendy's repeated claims that:

WISCONSIN (and AMERICA) ARE BOTH "TRENDING" ROMNEY?

[Texas Contrarian]

This is a very interesting topic, not just because of the FairTax debate itself, but because the discussion centers around what a convoluted clusterfuck our current tax system is -- and what might be a better plan that's more efficient and doesn't impose as much of what is referred to as "deadweight loss" on the economy.

However, as I stated in another thread, I don't think there's a ghost of a chance that the FairTax will ever be enacted in anything like the form described by its supporters.

Big Louie noted that political hacks are not about to loosen their grip on the opportunity to pass out favors to their contributors, voters, and other supporters. While true, I think an even more fundamental impediment to the FairTax's creation is that in this era of rapidly increasing income and wealth disparity, a regressive tax plan that would dramatically cut the effective tax rate paid by the affluent would be a very hard sell, to say the least. FairTax supporters claim that the tax is progressive because of the "prebate." Although that's true within the lower ranges of the income distribution, progressivity fades away as you rise within the distribution, and then regressivity begins to occur and gradually increases. That's simply because average consumption as a percentage of household income tends to fall as income rises.

The plan also depends on the repeal of the 16th Amendment. Since a majority of taxpayers in the lower income ranges undoubtedly are in favor of loading about 40% of the income tax burden on the top 1%, that strikes me as one of the longest of long shots.

And let's get another thing clarified straight away. The FairTax rate is 30%, not 23%. I know it's characterized as a 23% tax by the creators of the fairtax.org website, but that's simply sleight of hand. If considered in the same way that state sales taxes and various excise taxes are viewed, the rate is 30%. But it's certainly understandable that the issue is presented this way, since a 23% tax certainly sounds a lot more palatable than a 30% tax!

From the outset, I'd like to note that philosophically and in principle, I believe that a simplified consumption tax is far better than, for instance, the payroll tax. I view the latter as a very bad form of taxation, and that it would be good policy to replace it and as many other poorly designed taxes as possible with a transparent, simply-applied consumption tax that was crafted in such a way as to leave workers no worse off when the entirety of their tax burden is considered.

But I have some concerns about how the FairTax plan was designed and is presented.

To address just a few:

Originally Posted by CuteOldGuy

However, I will address the 23% sales tax issue. The economists who have helped draft the FT have determined that embedded in the price of every good or service we buy, is the cost of tax and tax compliance. Tax and compliance costs are included in the overhead of all business people which have to be recouped in order for the business to be profitable. On average, this was calculated to be about 23% of the price of the G or S.

What the FT proposes is to eliminate those taxes and compliance costs, effectively reducing the costs that have to be recouped, so that on average, the price of the G or S can be reduced to 77% of the original price. The FairTax would then add a tax equal to 23% of the total price, effectively keeping the price level constant.

Perhaps the methodology and a description of the models used to arrive at this number are presented somewhere in the publications offered by FairTax supporters, but I am not aware of them. I am highly skeptical of these claims, to say the least.

Apparently it's assumed that embedded taxes and tax compliance costs could be reduced by enough to fully cover the FairTax paid on finished goods.

But let's back up and consider just a couple of points. The issue of "embedded taxes" mentioned here largely has to do with what is referred to as "tax incidence." Although I mentioned that term in another thread, I may not have been very clear about its implications. A naturally arising question involves exactly whom a particular type of tax is incident upon -- in other words, who actually bears the burden of the tax. (It's very often not the same entities or persons that actually write the checks to the Treasury.) In the case of the corporate income tax, it's now generally considered that the burden primarily falls on consumers and workers rather than capital, whereas a few decades ago most economists seemed to believe that the reverse was the case. So with respect to corporate income taxes, you can look at the corporation as largely a sort of tax collector, or "pass-through" vehicle.

To carry this a little further, let's look at the amount of corporate tax actually paid (although primarily not incident upon the corporation itself) and compare that with the aggregate amount of the proposed FairTax on final sales. The first thing to note is that corporate taxes are paid on profit margins, which in the case of many manufacturing companies are in single digits as a percentage of sales. And since the effective corporate income tax rate is considerably lower than the FairTax rate, it's easy to see that any portion of "embedded taxes" arising from the elimination of the corporate income tax would be a very small percentage of the FairTax burden borne by consumers, and in any case considerably less that 10% of the latter in most instances.

But what about the employer's contribution to the payroll tax? There's general agreement that the employers' portion is actually a tax that's primarily if not fully incident upon workers, not capital, and it's hard to see how any shift associated with the implementation of the FairTax would significantly affect any analysis of embedded taxes.

Compliance costs such as tax preparation and legal fees, although not trivial, cannot possibly add up to more than a very small percentage of net sales, so I have a great deal of trouble believing that prices would fall noticeably as a result of the FairTax's enactment.

One argument offered in opposition is, "What if the business refuses to lower their price?" Of course, a business could so choose, but that opens the door to competitors who see a profit to be made by entering the market and undercutting the greedy company. For example, say that a can of Coke and Pepsi each cost $1.00. After the FT, the price needed to make the same profit is now $0.77. Let's say Coke drops its price to $0.77, and the FT is added, the resulting cost at checkout is $1.00. Then suppose PepsiCo decides to reap megaprofits by not reducing their price. A can of Pepsi would cost $1.23. Since Coke and Pepsi are easily substituted for each other, Pepsi would experience a significant drop in sales, and Coke a significant increase. Pepsi would have to reduce its price in order to regain market share.

Granted, these are generalities and averages. Overall, the price level would remain constant before and after the implementation of the FairTax. Some products and services will experience greater price fluctuations than others. But overall, it will remain the same. Add to that the fact that people will no longer have federal withholding taken out of their pay for income tax, SS, and Medicare, actual purchasing power will increase.

The creators of the FairTax site seem to be making the argument that after the smoke clears, almost everyone will be better off while no one will be worse off. The reader is left with the impression that employees would be able to "keep their whole paycheck," and at the same time not have to pay higher prices for goods and services even after the tax is added on. But both conditions cannot simultaneously exist. At the end of the day, someone is going to be burdened with the tax. Assuming otherwise depends on fanciful analysis or some form of double-counting. While I agree that a well-designed consumption tax imposes less deadweight loss on an economy than many other types of taxation, the effect would not be so vast as to offer a huge free lunch for almost everyone.

And for the record, I oppose the prebate. But it's not a deal breaker for me. I'd rather see no tax at all on groceries and prescription medicines. I think that would accomplish the same thing as the prebate, without the government knowing where you are. But they do, anyway. The prebate is the weakest part of the program.

Although I can certainly understand principled opposition to the "prebate" structure, it seems to me that it might be a smart way to present the idea for purely political reasons, since lower-income households love to get direct cash payments from the government. They probably view them as a little less nebulous than the tax-exempt status of things like groceries, which in any event already exists.

Additionally, substantial unintended consequences would arise from the issues of "new vs. used" and "old vs. young."

The FairTax would apply to new large-ticket purchases such as cars, trucks, and boats, but not to pre-owned items. One obvious effect would be to spike the demand for such things during the period immediately prior to the tax's implementation, as many people considering such a purchase would likely rush to complete it in time to avoid the tax. But then new vehicle demand would fall thereafter and possibly for an extended period of time, since sales that would otherwise occur at some future date would take place within a near-term and short-duration window. Additionally, demand for good-quality pre-owned vehicles would climb and would result in their revaluation following the increased price of new ones subject to the FairTax. And it's hard for me to see how sales of new vehicles would be likely to recover to previous levels anytime soon.

Most people who are retired or nearing retirement would probably consider the FairTax a pretty raw deal, since in most cases they spent a lifetime paying income taxes and feel that they've long paid their "fair share," and thus shouldn't be burdened with another big tax increase as they enjoy their "golden years." And whatever else elderly folks may have trouble doing on a frequent basis, there's one thing they can be counted on to do just about as often as they get a chance -- vote!

Discussions of the FairTax come up from time to time, and a number of people have long expressed an interest in investigating the issue and finding out whether this plan could work in practice. Back in the ASPD days, there were a couple of long threads on the issue in Austin's "Bat Cave" section (equivalent to ECCIE's "Sandbox").

The current tax system is an abomination, and I as much as anyone would love to see something that's transparent, fair, efficient, and politically possible. (Perhaps more than most, since I had a run-in with the IRS about ten years ago that involved threatening to take them to Tax Court. They backed down after apparently determining that they didn't have a good case, but not before costing me a lot of money, time, and frustration.)

But I just don't think the FairTax is politically practicable.

I tried to pose a few questions and raise a few issues that need to be addressed in a convincing fashion by FairTax supporters. Whether you agree or disagree with anything I wrote, I hope that I have at least offered some food for thought.

[CuteOldGuy]

Excellent, excellent points, CaptainMidnight. I will attempt to address them in the hours and days ahead. And your post is impressive enough that I will apologize for setting you off in our prior discussions. This is a lot more fun, and your questions are a challenge!

One thing I totally agree with you on is that government will never give up the control they have through the income tax.

Thanks, Cap'n! (I use Cap'n as a respectful abbreviation. If you prefer CaptainMidnight, I will go back to that.)

[JohnnyCap]

I agree with everyone that I don't see things changing through conventional methods.

A couple things occurred to me, mostly from a naysayer point. For one, this emphasis on new goods may actually make this tax more regressive, for the wealthy are able to buy higher quality items that last longer. Sure they would pay more that one time, but there's a good chance they'd average out less, especially if repair services weren't taxed. Would electricity and non-petrol fuel bills be taxed? If so, more expensive, higher efficiency machines would tip the scales again towards those that can afford them.

And the boom that may occur should this plan make U.S. products more viable would take substantial time to develop? Is there a transition plan? Sure, it seems far-fetched to think to need one, but it's a necessary part of the sale.

[CuteOldGuy]

My understanding is that repair services, electric service, and non-petrol fuel services would all be taxed.

And to briefly address the 23% v 30% issue: It has been estimated that the average embedded cost of tax and tax compliance built into everything we buy is 23% of the total price. The FT promoters use that figure to illustrate that the FT is replacing what consumers are already paying for. If calculated like we calculate state sales taxes, then the tax is, as CaptainMidnight says, around 30%. It's the same amount, just calculated differently. And it equals what is already in the cost of the purchase, so, on average, there won't be an increase in price. If something cost $10 before the FT, it will cost $10 after.

But I agree with CaptainMidnight on one item. The FT promoters get too excited when someone says "It's not 23%, it's 30%!" So what? It's the same thing. Relax about it.

[JohnnyCap]

This has been a good discussion and I hope most become this civil but I'm tapping out on this concept. The present system is extremely flawed, that is indisputable, but the concepts behind FairTax don't sit well with me. I have many thoughts as to why, some more clear than others, but the one that breaks it for me is that the idea to keep 100% of one's income probably comes from persons with an abundant income who are also very savvy with finance and banking, and I don't trust those persons.

I remain open to new ideas but this one has too damaged a foundation to build on.

Good talk.

[CJ7]

civil adult debate, lack of childish name calling is refreshing.. all threads should go this route