The FairTax Discussion Thread

[LexusLover]

Originally Posted by TheDaliLama

I remember when I was in college we'd go down to the sperm bank and leave a sample for $40. That 7 grand came in handy.

........

Your sister sorority paid you 40 bucks a pop?

Damn. Must have been a professional sorority.

[CuteOldGuy]

Why is it hard to believe that everyone would be better off? The tax base would be expanded. It would be much more difficult to scam the system, since being paid under the table would no longer have a tax benefit attached to it. Illegal income would no longer escape taxes. Expanded manufacturing would increase wages and consumption, increasing the tax base. Market forces would drive the economy, not tax policy drafted by lobbyists, special interests and cronyism. Employment rates would dramatically increase, driving up wages, even at the lower levels. Exports would increase, since products could be manufactured here at lower cost, and retain that that lower cost when exported, giving American goods more advantage overseas.

You can't single out one section of the FairTax and compare it as if the rest of the economy remains static. It won't. The overall effect of the FairTax must be considered. The overall effect is a dramatically rising tide, lifting all boats.

A couple questions for you, Captain Midnight: Do you deny that the cost of taxes and tax compliance are embedded in the price of goods and services? And, if not the FairTax or the income tax, what alternative would you support?

[Texas Contrarian]

Originally Posted by CuteOldGuy

Why is it hard to believe that everyone would be better off?

Because if you give a very large tax cut to the affluent, offer lavish "prebates" in order to avoid penalizing the poor -- while at the same time maintaining revenue neutrality -- you'd have to tax the hell out of the middle class. There's no way around that. (Although, again, I don't believe the FairTax would even come close to being revenue-neutral in its proposed form.)

The tax base would be expanded. It would be much more difficult to scam the system, since being paid under the table would no longer have a tax benefit attached to it. Illegal income would no longer escape taxes.

Receiving off-the-books sales and services would allow small merchants and service providers to evade taxes just as they do today. In fact, the FairTax rate is actually higher than the marginal income tax rate paid by most small merchants and service providers, so the incentive to cheat would be, if anything, even greater.

Expanded manufacturing would increase wages and consumption, increasing the tax base.

How could the FairTax possibly expand manufacturing, personal income, and consumption? For starters, it would knock the hell out of the auto and homebuilding industries, which are significant components of the domestic economy. It would obviously also put a damper on domestic sales of all sorts of other high-end new goods as well, since their prices to the end consumer would spike dramatically after the kickoff date of the tax.

Market forces would drive the economy, not tax policy drafted by lobbyists, special interests and cronyism. Employment rates would dramatically increase, driving up wages, even at the lower levels. Exports would increase, since products could be manufactured here at lower cost, and retain that that lower cost when exported, giving American goods more advantage overseas.

Regarding that last matter, FairTax supporters actually have a point, at least with respect to our poorly-designed corporate income tax -- although I think they wildly exaggerate the possible resultant effects. There's general agreement on the view that our corporate tax code places some of our industries at a relative disadvantage. But the fact is that most of the big, politically well-connected players are able to finesse the issue and game the system so that their own disadvantages are minimized relative to those suffered by their smaller domestic competitors. That's why there's less appetite than one might expect for effective reform or elimination of the corporate income tax -- it's just one more in a long line of "crony capitalist shuffles." Many of the very biggest corporate players simply keep huge sums of money offshore, since they'd have to pay taxes on it if it were "repatriated." Although it's fair to say that all of this shuffling creates distortions that probably have negative import for our economy, it's impossible to meaningfully model or quantify the net effect.

You can't single out one section of the FairTax and compare it as if the rest of the economy remains static. It won't. The overall effect of the FairTax must be considered. The overall effect is a dramatically rising tide, lifting all boats.

This is reminiscent of arguments offered by advocates of what came to be known as the "supply-side" view over the last 30-something years. The usual claim is that if you dramatically reduce the burden of taxation on capital, you'll usher in a new investment-driven boom. That may work at certain times and under certain sets of circumstances, but I am aware of no serious analyst making the claim today that investment and production are suffering because of an insufficiency of capital available for investment in a promising arena. In fact, the last half-decade has been a period featuring a nearly unprecedented liquidity preference. Enormous increases in global capacity have significantly outstripped aggregate demand in recent years.

Yet since one of the most obvious things about the FairTax is that it would be a very large tax cut for the affluent, that seems to be the argument its supporters are making.

The simple fact is that you have to actually collect taxes from someone (although as I noted earlier, that "someone" may not always be the person(s) who write the checks, depending on the actual incidence of the tax). If you collect less tax from the affluent, then you necessarily have to shift some of the burden to the middle class -- thus sucking demand potential from the economy. The FairTax is neither the Federal Reserve nor any other type of "money-printing" machine, so you can't just conjure up dollars from thin air.

A couple questions for you, Captain Midnight: Do you deny that the cost of taxes and tax compliance are embedded in the price of goods and services?

I never said that. Please refer to my statements in post #25, where I indicated that embedded taxes weren't remotely comparable to the amount of FairTax that would be applied, and in fact were miniscule in comparison -- probably something like one-twentieth of the amount of the sales tax. And although the costs of compliance are obviously not zero, they, too, are a tiny percentage of total sales.

And, if not the FairTax or the income tax, what alternative would you support?

Before advocating for or against a particular tax system, I think you need to remember that it doesn't exist within a vacuum, and no tax system can be evaluated without considering how much revenue would be raised, whether it's efficient and how much deadweight loss it imposes on an economy, whether it can reasonably be considered "fair," and what distortions might arise.

FairTax supporters obviously believe their proposals would usher in a new world of explosive growth, just as advocates of tax cuts have done at other times in modern history. But I believe it would risk destabilizing the economy by blowing an additional multi-hundred billion dollar hole in the annual deficit run rate. We spend close to 23% of GDP at the federal level, and there seems to be little more than the tiniest bit of will to cut that any at all, let alone drastically enough to finance an enormous new tax cut.

In a world characterized by liquidity preference and financial repression, we've been able to get away -- at least so far -- with far more deficit spending than most people imagined possible a few years ago. But few observers believe we'll be able to get away with that forever.

Although some type of tax reform is desperately needed, no plan is a "magic elixir" that cures all ills. There are a number of other messes that have been created by our political "leaders," and no one is even talking about cleaning them up. There are simply too many "feelgood" ways for political hacks to get TV face time without actually offending key lobbyists and contributors too much.

If you have a V-8 engine that's running poorly because all the plugs are fouled, you probably can't make it run all that much better by replacing only one or two of them.

[CuteOldGuy]

No, a tax plan does not exist in a vacuum. How would the FairTax "tax the hell" out of the middle class? You only pay tax when you buy a new good or service, and the amount of the tax is designed to raise the price level from what it was before. Certainly there will be market forces driving prices, but that is how it should be.

And yes, any tax system will have its evaders. But I don't see how the evasion of the FairTax could even begin to compare with the evasion of the income tax. I was listening to NPR, and an economist there said that the underground economy is in the trillions of dollars. None of which is reported for income tax purposes.

I think it's fair to say your mind will not be changed about the FairTax, which is fine. No problem. I wanted a civil discussion, and that has been the case. Thank you. But I'm still curious what you would support, given an ideal world where it could be enacted. I'm sticking with the FairTax. What do you support, Captain Midnight?

[Texas Contrarian]

Originally Posted by CuteOldGuy

No, a tax plan does not exist in a vacuum. How would the FairTax "tax the hell" out of the middle class?

Consider the rather axiomatic statement that if the FairTax were to achieve anything close to revenue-neutrality (which its supporters claim it would), and if it offers a very large tax cut to the affluent (which it obviously would), the revenue is going to have to come from someone. It won't just materialize out of thin air. And who do you think that "someone" is?

The FairTax proposes to tax all personal consumption expenditures, save for the purchase of pre-owned items. This means that apartment rent, food, medical services, clothing, lawn care, haircuts, and just about everything else would be taxed at a 30% rate. For non-affluent households that can't save and invest much, that's a pretty heavy hit. Consider that their current effective federal tax rate (including both the employee's and employer's portions of the payroll tax) generally lands well short of 30%. But many people in the more comfortable portion of the middle class would probably be better off under the FairTax, especially if they're not credit addicts who live high on the hog.

Originally Posted by CuteOldGuy

And yes, any tax system will have its evaders. But I don't see how the evasion of the FairTax could even begin to compare with the evasion of the income tax. I was listening to NPR, and an economist there said that the underground economy is in the trillions of dollars. None of which is reported for income tax purposes.

The economist who made that claim on NPR is undoubtedly correct. There's widespread agreement on that, and with the estimates that what's called the "tax gap" (the amount legally owed but not timely paid) may be 2.5% or more of GDP.

However, I don't believe for a minute that the FairTax would reduce illegal tax evasion at all, let alone significantly. Everyone now practicing illegal evasion would be able to continue doing so, and in exactly the same way -- by underreporting sales or revenues. And I think small merchants would be even more tempted to evade taxation, since reporting processes would not involve statements of such things as labor costs and cost of goods sold, as well as other cost inputs. As it stands now, a merchant or small service provider might have some explaining to do if costs don't seem to at least somewhat reasonably square up with gross sales. But if all they have to report is the top-line sales number, many people might be tempted to cheat on an even larger scale. The FairTax.org site claims that businesses and service providers would be less tempted to cheat because their "reward" for doing so would be less, since the tax rate would be lower. But that's not true, either. Add in state and local sales taxes, and many evaders would pocket about 36-38 cents for every dollar of sales simply by letting some receipts take a detour around the cash register, just as they do today. Since that's a much higher rate than the effective income tax rates paid by most very small businesses, sole proprietorships, and service providers such as hair stylists, manicurists, and lawn care services, the incentive to cheat would be -- if anything -- greater, not less.

Yet an astute reader will note that the analysis supporting claims of the FairTax's revenue neutrality not only assumes a tax base that's actually larger than most estimates of aggregate consumption as a percentage of GDP, but that illegal evasion will be virtually non-existent or minimal as well. Otherwise the numbers simply don't even come close to working.

Few people doubt that a better, more efficient tax system would reduce one of the impediments to economic recovery and growth. But there's already a sizeable disconnect between the current level of federal government spending and the capability of the current tax system to finance it. One of my primary concerns is that blowing an additional multi-hundred-billion dollar hole in the deficit would be very destabilizing to the world's credit markets, and therefore to our economy.

[CuteOldGuy]

Yes, I understand your position, CaptainMidnight. I disagree. Now, what alternative tax proposal would you support?

[Whirlaway]

I am jumping into this discussion late so if this has been covered just tell me to buzz off........


But if you consider ALL federal revenue paid by the middle class (excise fees, user fees, gas taxes, airline ticket taxes, yada yada), doesn't the middle class pay more to the treasury than the "affluent"?

[Texas Contrarian]

Originally Posted by CuteOldGuy

Yes, I understand your position, CaptainMidnight. I disagree.

You disagree with what, exactly?

Isn't that statement evocative of the sort of general denial that you attorneys typically serve up with your initial response to a plaintiff's pleadings, no matter how credible they may be?

If you want to be an effective advocate for the FairTax, you're going to have to come up with some convincing rebuttals of the myriad points I've made in this thread.

[CuteOldGuy]

Captain Midnight. I disagree with the idea that the tax will not be revenue neutral. I disagree that tax evasion under the FairTax will equal or exceed what currently exists under the current system. I disagree that the FairTax will not cause an initial drop in prices, and that the price level will not level out at or near the current level. I disagree that the FairTax will not result in a resurgence of manufacturing in the US.

I think all those things will happen. Less evasion (MUCH less evasion), more stable prices, increases in manufacturing, rising exports, full employment at higher wages, every level of society doing better, less government prying into our personal habits, more responsible government since there will no longer be tax breaks sold to the highest bidder, and open and transparent tax policy so each taxpayer knows what they are paying in taxes to support the government.

It's a winner all the way around. The reason it won't pass is not because it isn't effective. It is. But it also takes control away from the politicians, and puts it in the market, where it belongs. Politicians love their control, and their endless supply of perks from lobbyists. If Congress cared about the people, we wouldn't have the income tax. We'd have the FairTax, or another less invasive and more transparent system. But as I have stated before, Congress and the Emperor, er, I mean, the President don't give a damn about you. And that includes many past Presidents and Congresses.

Now, CaptainMidnight, what alternative do you support? Flat tax? 999? Or are you happy with the current system?

[Texas Contrarian]

CuteOldGuy, it looks like you overlooked one key word in my previous post.

To wit:

Originally Posted by CaptainMidnight

convincing

Got that?

The simple fact is that you're going to need to offer a convincing rebuttal to the points I made if you hope to convince an unbiased observer that the FairTax would be fair, workable, and effective. Yet your last post was tantamount to simply stating that you accept as gospel all the disingenuous nonsense proffered by the Boortz-Linder book and the FairTax.com website. That dog won't hunt.

Sorry, but for any economic or tax plan to be acceptable, the math has to work. Inconvenient, I know. But some of us are picky about such things. "Faith-based economics" just doesn't work for us, whether it's of the pseudo-Keynesian variety, or mixed with Kool-Aid of another flavor.

The rhetoric served up by the more zealous FairTax authors and website purveyors bears a much stronger resemblance to religion than to science. Anyone capable of critical thinking should be able to see that quite easily.

[Texas Contrarian]

Originally Posted by Whirlaway

I am jumping into this discussion late so if this has been covered just tell me to buzz off........


But if you consider ALL federal revenue paid by the middle class (excise fees, user fees, gas taxes, airline ticket taxes, yada yada), doesn't the middle class pay more to the treasury than the "affluent"?

Non sequitur.

In the aggregate, of course they do. But don't forget that taxpayers in the top 1% pay about 40% of all income taxes. So the current federal tax system is progressive, whereas the FairTax would obviously be very regressive. That's probably the most obvious reason that the latter could never be sold as "fair" to people who aren't well off. Relative to the current tax system, it would be a huge gift to those of us in this little universe of guys who can afford escorts and SBs.

[CuteOldGuy]

I think it is quite convincing, Captain Midnight. More economists and financial experts have worked on the FairTax than any other plan. You will not be convinced no matter what I post, which is fine. You've raised good points, but I think they have all been answered by the available research. You are not alone. There are many scholarly people who think like you. I'm not upset if someone disagrees with me, especially when they have put some thought behind their position, and can support it. Even when I was teaching I told my students that they would receive no extra points if they agreed with me. In fact, they stood a better chance if they disagreed with me, and could support their reasoning.

You've obviously given this some thought, and I appreciate that. I don't agree with you, but you aren't just a knee jerk negative. Thank you for the discussion. I'd still like to know what tax plan you would support, but you appear unwilling to share that. It's your choice. I've promised to be respectful in this thread, and I will continue that way whether or not you answer that question.

[Texas Contrarian]

Originally Posted by CuteOldGuy

I think it is quite convincing, Captain Midnight. More economists and financial experts have worked on the FairTax than any other plan. You will not be convinced no matter what I post, which is fine. You've raised good points, but I think they have all been answered by the available research.

What economists and financial experts, and what "available research" are you referring to?

I've seen nothing on the FairTax.org website that can credibly undergird arguments rebutting any of the points I've made. Maybe it's there somewhere and I just missed it. If so, would you mind offering a link to it, or otherwise directing me to it? Or if you're referring to a new book (or books), please advise. Being the curious sort that I am, I'd love to take a look. I would, of course, prefer to see the work of those who are not only non-ideological, but whose opinions aren't likely to be colored by any biases related to their possible financial, political, or other stake in this issue.

Originally Posted by CuteOldGuy

I'd still like to know what tax plan you would support, but you appear unwilling to share that. It's your choice. I've promised to be respectful in this thread, and I will continue that way whether or not you answer that question.

It's not that I'm "unwilling to share" opinions on what tax plan I would support, but rather that I am neither an advocate for, nor an opponent of, any particular tax plan.

Nevertheless, I'd be happy to toss out a few ideas of what I think might be some reasonable guiding principles and talking points, though, if you have any interest in a further tax discussion. Although I'm not a tax professional and have no particular ax to grind one way or another, I do find this topic interesting.