The FairTax Discussion Thread

[WTF]

Originally Posted by CJ7

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

It has restored my faith in the Tooth Fairy!

[CuteOldGuy]

Originally Posted by CaptainMidnight

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. yes. That would need to be explained more clearly, for sure. We have to get past this jealousy of wealth. The lower incomes will be better off, as well. They will get to keep their entire paycheck. lFairTax 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. i understand that point, as well. However, rich people don't hide their money, especially if their is no tax on savings and investment. This will free up much more money for those purposes. Interest rates will fall naturally due to increased money to lend. There will be no need to hide money offshore. The best investments will be in the US. This will create more jobs, and a greater demand for goods and services. This will, in turn, lead to full employment, and if growth is to continue after full employment, wages will have to increase, which will cause demand to increase. Which will cause investment to be more attractive. And the cycle continues. The tide will rise raising all boats.

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. Again, good point. But since the 40% are already not paying taxes, the increased purchasing power will cause them to be better off as well. And if the market pushes wages up further, better yet!

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! i addressed this in an earlier post.

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:



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. Yes. 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. Only if they didn't understand that the price level would remain the same. A $30,000 car before the FT would still cost $30,000 after the FT. 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. Not necessarily. In fact, people may postpone their purchases until after the FT, because they will have more money to spend. 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. Well, the sales of new vehicles may likely decline in the near term, because used vehicle prices will drop, while new vehicle prices will remain static. However, car manufacturers will not experience a slowdown, because their vehicles will experience a dramatic increase in sales overseas, since they will be able to undercut foreign manufacturers prices by 23%. The FT is not collected on goods exported from the US.

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." it's not a burden. Their taxes won't increase. Their benefits won't decrease. They will likely be much better off as well. 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! The FairTax is still a good idea for the future. We can't stop progress just because some may be hurt, which I think won't happen. Should we not have pursued the automobile because it put the buggy whip industry out of business?

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. politically practicable. That's the key. Politicians and lobbyists would lose a hell of a lot of clout, and donations.

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. That you did!

Thanks!

[Texas Contrarian]

Any analysis of the FairTax (or any other type of tax reform) must consider the way in which tax incidence is reapportioned and redistributed after shuffling the deck and starting over with a fresh deal. The precise end result is often dependent on a number of variables -- and in some respects is not likely to be entirely clear or predictable -- but for the sake of discussion, let me just offer a few observations.

First, consider this excerpt from a post made by Chica Chaser last May in the long FairTax thread:

http://www.eccie.net/showpost.php?p=...1&postcount=58

Key excerpt:

In our view (and that of many economists), the true measure of the fairness of a tax is not what the rate may be but rather how much wealth each income segment, at different periods of life, has left to spend on itself after taxes are paid. By this measure, the FairTax is the only tax proposal that actually increases the purchasing power of every income segment while delivering the greatest improvement to the poor, the second greatest improvement to those in the middle class, and the smallest – but still significant – relative improvement to those at upper-income levels.

(end of excerpt)

That was from a rebuttal offered by fairtax.org in response to factcheck.org's criticism of the plan. The FairTax supporters clearly claimed that under their tax plan, everyone would be better off, while no one would be worse off. Yet supporters also claim that the plan is "revenue-neutral;" this is, it would raise the same amount of revenue as the existing federal tax system.

But you cannot reasonably claim that all those things could be simultaneously true without using a significant amount of legerdemain. Where is it?

Well, for starters:

Originally Posted by CuteOldGuy

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.

Estimated by whom, and upon what basis?

It looks to me like someone advising the FairTax campaign figured out how to arrive at an estimate for invisible "embedded taxes" priced into the stuff people buy that exactly matches the "tax-inclusive" (23%) FairTax paid by the consumer at checkout time. How convenient! But does it make any sense?

FairTax supporters seem to accept this without question in furtherance of the claim that workers get to keep their "entire paycheck," while at the same time not bear any of the burden of the FairTax. That's because after the elimination of all personal and corporate income taxes, the removal of embedded taxes will supposedly result in a very large (23%) across-the-board drop in prices. That's tantamount to claiming that virtually the entire federal tax burden (income and payroll) will be removed from middle class workers and other taxes will not be levied on them in a different way, while the disappearance of taxes "embedded" in products and services causes the prices of everything they buy not to rise -- even after taking into account that consumers would then pay a 30% sales tax at the time of final sale. Do you not see a problem with these assumptions?

Please re-read this excerpt from my prior post:

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.

How does someone come up with such an astonishingly high estimate of embedded taxes?

I'm not sure, but believe I can make a pretty good guess. Economists of various stripes create mind-numbingly complex, virtually incomprehensible models that purport to show one thing or another, and many are designed in such an obfuscatory manner that no one can say with any degree of certainty just exactly what the hell they say. But they may still be used to serve a particular purpose.

In other words, you can design a model that says almost anything you want it to say. That's how we get all the nonsensical stuff that allows politicians, pundits, and various left-wing economists to claim that things like political payoffs to favored constituencies are great "job-creating programs," since they produce fiscal "multipliers" of something near 2.0.

As you can see, the claim is clearly that the middle class would be much better off under the FairTax. And, of course, the poor would be doing well largely due to the "prebate." Finally, the plan would represent a very large tax cut for the affluent, and I don't think that's remotely arguable.

I do think FairTax supporters make some very good points in one respect, though. The corporate income tax is a very poorly-designed clusterfuck that either needs to be radically reformed or (preferably) eliminated in favor of another form of taxation. Even many liberal economists such as Jason Furman are in general agreement with that sentiment.

But at the end of the day, whatever tax system we adopt has to be saleable as well as efficient and not economy-impeding. In the case of the FairTax, supporters rely on analysis done with quite a few extravagant claims and sleight of hand in what seems to me a forlorn effort to make the numbers work.

[Texas Contrarian]

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. i understand that point, as well. However, rich people don't hide their money, especially if their is no tax on savings and investment. This will free up much more money for those purposes. Interest rates will fall naturally due to increased money to lend. There will be no need to hide money offshore. The best investments will be in the US. This will create more jobs, and a greater demand for goods and services. This will, in turn, lead to full employment, and if growth is to continue after full employment, wages will have to increase, which will cause demand to increase. Which will cause investment to be more attractive. And the cycle continues. The tide will rise raising all boats.

CM: I agree that there could be some dynamic effects resultant from the FairTax -- at least up to a point. That, of course, depends on a number of other variables, as this stuff doesn't just take place in a vacuum. But you're going to run into huge resistance from progressives here -- this sounds too much like the talking points offered by Art Laffer and many others over the last 30-35 years. They'll say something like, "Haven't we seen this movie before? This is just old wine in a new bottle -- cut taxes on the wealthy, and they'll save, invest, and create millions of new jobs." The "Progressive's Handbook of FairTax Talking Points" would virtually write itself. Supporters will have to sell the plan to those who aren't conservatives and libertarians. That's going to be a tough one!

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. Yes. 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. Only if they didn't understand that the price level would remain the same. A $30,000 car before the FT would still cost $30,000 after the FT.

CM: But that assumption rests on a rather large fallacy, as I pointed out in my previous post.

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. Not necessarily. In fact, people may postpone their purchases until after the FT, because they will have more money to spend.

CM: Why? People would be strongly incentivized to make large purchases before they would be subject to the FairTax, and in most cases could finance them.

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. Well, the sales of new vehicles may likely decline in the near term, because used vehicle prices will drop, while new vehicle prices will remain static. However, car manufacturers will not experience a slowdown, because their vehicles will experience a dramatic increase in sales overseas, since they will be able to undercut foreign manufacturers prices by 23%. The FT is not collected on goods exported from the US.

CM: Why would the prices of used vehicles drop? I think the reverse is the case, since to at least some extent, late-model pre-owned vehicles compete with new ones -- which after the implementation of the new tax would increase substantially in price.

But I do agree with you, at least up to a point, that elimination of the U.S. corporate income tax would increase the competitiveness of auto exports. It's just that the effect wouldn't allow prices on the international market to drop by more than a small fraction of 23%. That's simply not the way the math works.



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." it's not a burden. Their taxes won't increase. Their benefits won't decrease. They will likely be much better off as well.

CM: It will not seem like a burden only if you fail to consider that the 23% "embedded taxes" claim is wildly exaggerated, to say the least.

And I think it clearly is.

[CuteOldGuy]

So you're concerned about the 23% figure, right CaptainMidnight? I will get some foundation for that for you. The FairTax is the most researched and vetted tax plan in history.

http://www.fairtax.org/PDF/Tax%20Not...0FT%20rate.pdf

[Texas Contrarian]

Originally Posted by CuteOldGuy

So you're concerned about the 23% figure, right CaptainMidnight? I will get some foundation for that for you. The FairTax is the most researched and vetted tax plan in history.

http://www.fairtax.org/PDF/Tax%20Not...0FT%20rate.pdf

Please note that there are two discrete "23 percents" germane to discussion of the FairTax.

The one I challenged the validity of earlier refers to FairTax supporters' claims regarding the cost components attributable to "embedded" taxes, and thereby the percentage that prices will supposedly drop after the elimination of embedded personal and corporate income taxes. The other, which is addressed by the link posted above, concerns the "tax-inclusive" FairTax rate claimed by supporters to be consistent with revenue neutrality when compared with the present tax code. They refer to two completely different issues, and the only thing they have in common (rather conveniently, I might add) is the 23% number. And just for the record, I don't believe for a minute that the proposed plan would be "revenue-neutral" in practice.

The link posted above does not address the issue of "embedded" taxes, and I have seen no evidence appearing on fairtax.org, or anywhere else, that anyone promoting the FairTax has researched or vetted any of this stuff. The website makes a number of disingenuous and inconsistent claims and insinuations. As I noted before, much of the stuff posted on the site simply doesn't stand up to the most rudimentary level of scrutiny.

The math doesn't work and the logic doesn't work, so consequently the whole idea doesn't work

[nevergaveitathought]

Originally Posted by WTF

It has restored my faith in the Tooth Fairy!

what do you think of the 9-9-9 plan

[WTF]

Originally Posted by nevergaveitathought

what do you think of the 9-9-9 plan

Makes me hungry for a pizza.

[blue3122]

From Econ 101.
In a zero sum game, the definition of "Fair" is More for me, less for you.
In a positive sum game, the definition of "Fair" is More for me, I don't care about you.


So unless we all agree on "Fair" this is a pointless argument.

[nevergaveitathought]

Originally Posted by WTF

Makes me hungry for a pizza.

they told me you were anti Italian

I guess i should have believed them

[Texas Contrarian]

Originally Posted by nevergaveitathought

what do you think of the 9-9-9 plan

Is that the plan that includes a little booklet of expired Godfather Pizza coupons attached to every information packet?

[Yssup Rider]

another stupid fucking thread.

[CuteOldGuy]

As I have said before, the FairTax is the most researched and vetted tax proposal in history. I've read the books, studied the website research, read many objections, and I think it is rock solid. CaptainMidnight, you can accept or reject the research, as you wish. I can't demand you accept the research. And you may very we'll be right. We won't know for certain unless it is implemented. I think it's worth it, you obviously don't. Cool.

I am impressed with the restraint you've shown in this thread, CaptainMidnight. I misjudged you. You're an all right guy, and I apologize for pissing you off earlier.

For the rest of you, I recommend searching FairTax on Amazon. You will find several books explaining how great the plan is, and several taking the opposite side.

Keep the discussion going! This is fun. I'm researching the embedded tax and compliance costs for the Cap'n!

[WTF]

Originally Posted by blue3122

From Econ 101.
In a zero sum game, the definition of "Fair" is More for me, less for you.
In a positive sum game, the definition of "Fair" is More for me, I don't care about you.


So unless we all agree on "Fair" this is a pointless argument.

Two slice's for me and half a slice for nevergivesitathought.

[Texas Contrarian]

Originally Posted by CuteOldGuy

As I have said before, the FairTax is the most researched and vetted tax proposal in history. I've read the books, studied the website research, read many objections, and I think it is rock solid. CaptainMidnight, you can accept or reject the research, as you wish. I can't demand you accept the research. And you may very we'll be right. We won't know for certain unless it is implemented. I think it's worth it, you obviously don't. Cool.

If the FairTax has been rigorously researched and vetted by a credible and unbiased source, and who doesn't have a dog in this hunt, please let me know, as I'd be very interested in taking a look at the material. I have not read any books on the topic other than the original Boortz-Linder bestseller that hit the shelves around the middle of the last decade. But like the FairTax.org website, it's full of fallacious nonsense. I read that they followed up a couple of years later with an updated edition in paperback that supposedly corrected some mistakes, but I have not read it. In any event, it certainly appears that the FairTax.org website is "sticking with the story," no matter the facts.

Let me make it clear that I have no dog in this hunt, either. My intention is not to reflexively do a demolition job on the FairTax, but rather to simply note the challenges you're going to face if the idea ever starts to go anywhere in the arena of public policy debate. In fact, one might reasonably believe that I would "have a dog in this hunt," since the FairTax would save me a shitload of money. The same is undoubtedly true for most others in my category, too. That's not even a remotely close call.

Since the poor would be at least as well off (if not better off) under the FairTax, that only leaves one possibility. That is, if the plan is to be revenue-neutral as claimed, the middle-class is necessarily going to have to get soaked big-time. You can slice and dice this any way you want, but there's no way around that.

There have long been debates over the apportionment of corporate income tax incidence. People have been writing theses and dissertations on all this stuff for decades, with no clear consensus. But most agree that the bulk of the burden falls on labor and consumers, not shareholders. Whatever the case may be, you clearly cannot have a situation where the removal of embedded taxes causes prices to drop by 23%, while at the same time workers can "keep their whole paycheck," as is claimed by the FairTax.org website:

Keep Your Entire Paycheck

For the first time in recent history, American workers will get to keep every dime they earn. By eliminating federal income taxes and payroll taxes, your salary or hourly wage is exactly what you'll deposit in the bank.

______________________________ ______________________________ ______________________________ ______________________________ ___


But how does that square with the claim that prices won't go up, even after the FairTax is added, because all the previously embedded taxes would disappear? The problem is that at the end of the day, someone actually has to remit checks to the Treasury totaling close to $3 trillion at an annual rate. If not, the plan isn't remotely close to being revenue-neutral. All the sleight of hand implies that money must somehow be created out of thin air by the FairTax. (Yet only the Federal Reserve can do that!)

It's clear that FairTax supporters make up a rather fervent group, but I think they would be better served by taking a little more care to clear up some of the inconsistencies presented on the website and contained in their talking points.