The Fair Tax Fraud
Although the FairTax would eliminate the filing of all individual tax returns, the FairTax turns every business into a tax collector. Every small service business and every Internet business that does not currently collect state sales taxes will have to collect taxes for the federal government. Every doctor will now have to charge sales tax on his services. Where will this end? Is this really a step toward freedom? FULL ARTICLE
Comments (65)
speedwell
I've been trying for years to get the Fair Tax people to tell me how they propose to calculate the "necessities" that their "rebates" are predicated on. I can't get anyone to show me how they intend to distribute "rebates" without keeping exhaustive, intrusive databases on all taxpayers, taxpayer purchases, and taxpayer residences. I can't get them to explain what happens to people who can't receive rebates (dead, non-citizens, homeless, victims of database error, etc.).
The local office just hangs up on me when I ask. What gives?
Published: May 18, 2005 9:40 AM
iceberg
"The "underground economy" that income tax advocates complain about will certainly increase under the FairTax system. Even if the highly dubious claim that there will be an "average producer price reduction of 22 percent for goods and services in just the first year after the adoption of the FairTax" is true, not having to pay a 23 percent tax on an item is a tremendous incentive to make a purchase in the "underground economy."
Umm, and what exactly would our objection to the underground economy be? Wouldn't us non-interventionists be pleased that a healthy, non-meddled market economy is in place?
"Although the FairTax would eliminate the filing of all individual tax returns, the FairTax turns every business into a tax collector."
Every business is already a tax collector, so how could the proposal make things worse? Secondly, only businesses which sell goods or services directly to consumers would continue to collect taxes; companies which service or provide goods (manufacturers, wholesalers, distributors, etc.) to other companies would not collect any taxes, nor would they pay any income taxes!
Thirdly you object to the underground economy of babysitters and lawnmower who wouldn't pay the FairTax; I say more power to them! Why would you object to having private citizens having the opportunity to remove the scrutiny of the U.S. government from their lives?
But to be sure, I object to all taxation, I'm just pointing out that the FairTax isn't worse than the system in place.
Published: May 18, 2005 9:50 AM
iceberg
Speedwell, you're right. I wish the proponents would eliminate the rebate boondoggle from the proposal. It would indeed make things worse, not better.
Published: May 18, 2005 9:53 AM
Steve
May 15, 2005
FOR IMMEDIATE RELEASE
CONTACT: Peter Hendrickson
phendrickson ‘at’ losthorizons.com
WHILE LATE-FILERS STRUGGLE WITH TAX FORMS
READERS OF NEW BOOK REALIZE THEY OWE $0
COMMERCE TWP, MI. Scores of readers of a new book entitled Cracking the Code: The Fascinating Truth About Taxation in America have come to realize that the federal income tax does not apply to them. They have requested – and received – full refunds for all the money withheld from their pay-- including Social Security “contributions?. The total so far is well over $260,000.00, and is growing rapidly. And that just includes the refunds Cracking the Code author, Peter Hendrickson, knows about because of grateful correspondence from readers.
“The reason most people are confused about their legal obligations,? says Hendrickson, ?is that they use the everyday meaning of such terms as ‘income, wages, employer, employee,’ and others. In fact,? he adds, “these terms have narrow, legal meanings within the tax law.?
How narrow? Hendrickson says they only apply to certain privileged activities, such as holding or administering a government office, or working in one.
“Although the tax statutes make perfectly clear that, for instance, language describing the obligations of ‘employees’ – and the taxes to which ‘employees’ are subject – only apply to a small minority of American workers, the distinction is artfully concealed in the IRC representation of the law. It is never forthrightly acknowledged in any IRS publication,? he says. “An elaborate system has been created which causes many people to whom the tax laws do not otherwise apply to naively declare themselves to be among the persons to whom those laws do apply.?
The IRS is, of course, perfectly happy to take them at their word. And to take their money.
The government’s response to all of this – aside from providing full refunds when confronted – has been an attempt by the IRS to suppress publication of the book as “promoting an abusive tax shelter.?
“I’m not helping, or even advising, anyone to ‘shelter’ anything,? responds Hendrickson. “Nor am I claiming, like others have, that the income tax is unconstitutional. It isn’t. The only thing I’m promoting is a book that tells the truth about the tax code.?
The US Justice Department apparently agrees. It recently informed the IRS that it would not proceed with any legal actions against Hendrickson.
Published: May 18, 2005 9:58 AM
Brian Moore
I just want there to be less taxes, fair, flat or otherwise. :(
Published: May 18, 2005 10:51 AM
Tom Anderson
I agree that the rebate idea is absurd. If they wanted to make a simpler, smaller-government progressive consumption tax, they'd simply make some "essential" items exempt from tax, as most state sales taxes currently do. Trying to force people to record all of their purchases and calculate their rebate on a monthly basis is just plain stupid.
Notwithstanding that, I believe that the Fair Tax is a very good idea. Not only is it more constitutional given Congress's power to levy unapportioned indirect taxes and excises (which the income tax is certainly not), but because it eliminates withholding. Withholding is probably the action most conducive to unbridled government spending, because the people never even see the tax they pay. They only see their "take home" pay, so it's as if they're not even being taxed. By eliminating withholding, people will see a direct affect on prices of goods whenever Congress raises taxes. You say that selling "a penny for progress" will be easy for them, but I don't think it's so easy as raising withholding taxes. I can, however, see how this might just be lumped in with inflation (another hidden tax).
Far better would be a direct, apportioned tax. When Congress needs money, they'd have to ask the states, and the states would collect from the people directly in one lump sum. This would surely make the obscene government spending a very large issue in the minds of all Americans, and we might finally get some fiscal responsibility as a result.
Published: May 18, 2005 11:35 AM
Jeanna Adamo
Shoot the messenger syndrome..... Americans for Fair Taxation are not trying to excuse the size of government, but are trying to spotlight it. When everyone can see the amount taken, when it is shown at the bottom of each receipt for a new item purchase, then outrage will allow you and all Americans the ability to demand a reduction in spending.
How often does the Federal government raise the gasoline tax? It is a very visible tax that generates huge and loud protests whenever it is raised.
Businesses already have time consuming, and extensive accounting systems in place to meet the demands of the federal and state govt's tax schemes. Imagine what relief every Human Resources manager will enjoy when they don't have to figure payroll tax deductions any more. Not only will the Fair Tax greatly reduce current burdens, but under the Fair Tax, businesses can spend more time generating sales and building product.
The "Prebate" will be calculated by the size of the household and the HHS defined level of poverty spending for that household. It will be sent each month to the head of household for everyone holding a valid Social Security card. If you don't want to be on file, and you don't need the monthly rebate check for the taxes on the poverty level of spending, then you don't have to participate.
Why protect the income tax? It destroys our privacy, allows Congress to distort and hide levels of taxation, pits Americans against each other and is too costly to maintain, and too complicated to understand.
Published: May 18, 2005 12:08 PM
speedwell
"If you don't want to be on file, and you don't need the monthly rebate check for the taxes on the poverty level of spending, then you don't have to participate."
REALLY? I don't have to participate? Yippee!! Then how do I convince the people I buy stuff from that I'm not participating?
"The "Prebate" will be calculated by the size of the household and the HHS defined level of poverty spending for that household. It will be sent each month to the head of household for everyone holding a valid Social Security card."
You mean, the exhaustive, intrusive personal database with (at minimum) information about everyone's household size, residence address, and name of the household's head (whether that person will actually disburse the money or not). And naturally this database will be perfect. And of course all the unclaimed money from the dead, tourists, and the homeless will be well accounted for. Cool. Can I quote you?
Published: May 18, 2005 12:24 PM
dave
Check out Steve's post re Hendrickson's book. It's all true: virtually nobody actually owes income tax LEGALLY.
As for the "fair tax" sales tax, it is -- and can only be -- an EXCISE tax. Excise means PRIVILEGE. The tax would be unconstitutional if applied against anyone engaging in ordinary freedom of purchasing anything, because that's a right, and you cannot tax rights. The govt cannot convert rights to privileges just by calling them privileges so that they can then be taxed -- although they'll try, with fraudulent legalese just as they now do with the "income tax." Keep on keeping them on a short leash.
Published: May 18, 2005 12:43 PM
Michael A. Clem
Correct me if I'm wrong, but the IRS doesn't have to go through the Justice Department to audit your taxes or seize your bank accounts for taxes that they claim you owe. Any appeal by the individual about taxes must go through the IRS system first. And of course, they claim you need to pay the disputed taxes anyway, and if you prevail then they'll give you a refund.
Published: May 18, 2005 1:59 PM
Cornelius van Vorst
History reveals otherwise. Small, frequent bites into a taxpayer's wallet are far less apt to foment outrage than large bulk payments.
While it is true that increases in the gasoline tax spur complaints, it is the increase (coupled with media attention) that is the trigger. Conversely, property taxes could stay constant, and the semi-annual check to the state would still cause an awakening sting.
If the true aim of the AFT was to spot light the profligate spending of the Federal Government, it would do far better to draft a bill eliminating withholding taxes, and require all income taxes to be paid annually, with a single check.
Published: May 18, 2005 2:33 PM
tz
Given our shift to a Consumption based economy, taxing that is probably what they want since incomes are likely to be tanking (barring a weimar style hyperinflation). And the economy does look like it is in the middle stages of multi-drug resistant Tuberculosis. The credit drugs have stopped working.
OTOH, if you tax something, you get less of it, why don't we tax infectious and degenerative diseases?
Published: May 18, 2005 3:04 PM
Larry Ruane
Did you catch this bit of flim-flam on the FairTax home page:
Sure, if you don't buy anything, then you don't have to pay taxes. But by that way of thinking, the current system is also voluntary, since if you don't work, you don't have to pay taxes.
Published: May 18, 2005 4:12 PM
Charlie Keith
"Fair Tax" is a pretty blatent oxymoron. Even if this new tax scheme were implemented, does anyone really think the federal government will throw out the old scheme? Income taxation won't go away. Once any government has made a power grab it'll be hell-bent to keep hold of it. The US will have a national sales tax as well as the income tax if this goes through, I think.
Published: May 18, 2005 6:00 PM
Charles Elkins
The flat rate of the "fair tax" would have to be accompanied with an equal tariff on imports in order to prevent all remaining domestic suppliers from moving offshore. Otherwise smart shoppers in this increasing global economy would be buying cases of tax-free Colgate from Costco's new Bermuda store.
Published: May 18, 2005 6:57 PM
Eric
One issue nobody mentions is the "unfairness" to those just about to retire. All their lives they pay income taxes and plan for a retirement where they can live on social security, only to find that now they have to pay taxes on spending. Anyone who saved for retirement will lose because they saved. All savings will in effect be taxed by the 23% or higher level. On the other hand, those that had not saved, and spent spent spent, would benefit. And what about those who work and later want to leave the country. Will they have to pay 23% on everthing they try to take out of the country?
The only answer to all of this is Harry Browne's proposal to get rid of the income tax and replace it with nothing. Then sell off the federal government's assets and buy lifetime anuities for those on social security and close down that boondoggle too.
Published: May 18, 2005 7:44 PM
Kirk
I see a lot of uninformed comments here. Let me see if I can address a few.
Yes, the FairTax is a tax. Yes, FairTax supporters would love lower taxes and less governement.
[The flat rate of the "fair tax" would have to be accompanied with an equal tariff on imports in ] ... actually, since American producers all pay and embed their paiyroll taxes and income taxes into their prices, there is already 20 - 30% hidden taxes in American-made goods. So American-made goods could fall in price by that amount WITHOUT REDUCING PROFIT. So if an American-made good is currently retailing for $1 and competing with a foreign-made good retailing for a $1, what happens after the FairTax is implemented ? The retail price of the American-made good drops to 80 cents, while the foreign-made product is still $1. After adding the sales tax, the American-made good is now $1.04 and the foreign-made good is $1.30. That will be a magnet for businesses to produce in America.
[Sure, if you don't buy anything, then you don't have to pay taxes.] ... actually, with the prebate, you wouldn't be paying taxes on anything up to the poverty level -- over $9K for a single, $25K for a family of four. Beyond that, buying a used car, used home, etc, you could avoid the tax. Why would you, though, when the after-tax cost of new items will be no higher than today's prices ?
[And of course all the unclaimed money from the dead, tourists, and the homeless will be well accounted for.] ... If you are dead, why would you deserve a prebate ? It isn't a rebate, returned after-the-fact. It is a PRE-bate -- you get the money at the BEGINNING of the month. And tourists don't get a prebate. Just like visiting Europe, you have to pay their VAT. Just like when you travel, you have hotel taxes. It's part of the cost of visiting another country -- foreigners have been getting a pass when visiting the US until now. If homeless people have a valid SSN and want to register to receive their prebate, it can be sent to a shelter, or sit at the post office for general delivery and pick up. I can't believe you are so unimaginative.
[If they wanted to make a simpler, smaller-government progressive consumption tax, they'd simply make some "essential" items exempt from tax, as most state sales taxes currently do. Trying to force people to record all of their purchases and calculate their rebate on a monthly basis is just plain stupid.] ... there is no need to keep track of what you spend money on. The prebate doesn't care what you spend it on. If somebody thinks cigarettes or caviar are "essential", who are you to argue with their lifestyle choices ? Trying to calssify things as essential would lead to a rat's nest of people lobbying to get their product or service declared "essential" and untaxed. Let people spend their money on whatever they want -- the first xx amount will have the tax offset by the prebate.
I think the prebate is the best solution for what the FairTax is trying to accomplish -- progressvity. The poor are largely viewed as not paying taxes now. It would be politically infeasible, and degenerate into class warfare arguments, to make no gesture to keep them from feeling the tax burden.
That said, I also think it is absurd. Government exists to apply force to people, and this is not something anybody should want more of. Therefor, making government "free" to a large group of voters is a really bad idea. Without the prebate, the rate would be 17% instead of 23%. I'd like that. And I'd like the pressure it would put on those currently untaxed voters to give a little thought to the cost, size, and intrusiveness of government.
Published: May 18, 2005 8:50 PM
Theirn
There is much to take issue with in this article, not the least of which is the inability of libertarians to accept any "incremental" idea that moves liberty forward if it doesn't pass the ideological purity test. I consisder myself libertarian, but I'm not so dogmatic that I can't accept ideas, however flawed, that help move the country toward liberty.
However, it is absolutely correct concerning the 16th Amendment. I once heard Represenative Linder answer this question a couple of years ago. I don't recall it verbatim, but it went something like, "Once the Fairtax is passed and becomes law, its success will insure the repeal of the 16th Amendment as it will be politically impossible to not repeal it; such will be the overwheming will of the people."
The repeal of the 16th Amendment is my biggest concern. The only thing worse than the income tax is a sales tax AND an income tax. I'm not one to take things on faith and am by nature a pessimist, but I believe the FairTax is the single greatest policy implementation we can take to advance liberty in this country. I believe it will work and the economic boom it will produce will guarantee the passage of the Consititutional Amendment that would effect the repeal of the 16th Amendment.
Published: May 18, 2005 9:18 PM
Tom
“[A]ctually, since American producers all pay and embed their paiyroll taxes and income taxes into their prices, there is already 20 - 30% hidden taxes in American-made goods.?
Not true at all and rather poor economic thinking. This is a question of tax incidence (who pays a tax) and tax shifting. The above suggests that the employer’s share of the payroll tax is shifted forward on to the consumer in the form of higher prices. In actuality, the employer’s share of the payroll tax is paid by the employee. A profit-maximizing firm will tend to set the marginal cost of labor equal to the marginal revenue production of labor. Therefore, the marginal cost of a worker (the wage, the employer paid benefits and taxes) will equal the marginal revenue product (the value of the output generated by the employee). No firm will pay more than the MRP. So, the employer share of the payroll tax is actually paid by the employee through a reduction in take home pay. All other income taxes are also paid by individuals and not simply shifted forward on to the consumer.
For your assertion to have merit, (that income or payroll taxes are shifted forward on to the consumer) you would have to show how an income tax causes the price of a good to rise. Remember, cost does not determine price. Price is determined by supply and demand. The income tax would have to somehow either cause a reduction in the supply of the good produced or cause an increase in the demand for the good in order for its price to rise. The income tax would do neit
Published: May 18, 2005 10:55 PM
Tom
Wait for it........
The income tax would do neither.
Published: May 18, 2005 10:59 PM
Larry Ruane
Theirn: "I believe the FairTax is the single greatest policy implementation we can take to advance liberty in this country."
Really? How about a "policy implementation" such as . . . oh, I don't know . . . eliminating the 90% of what the government does that's unconstitutional? Or (my preference) getting rid of coercive government entirely?
But anyway, you have not addressed the main point of Laurence's article, which is that liberty is mainly a function of total spending by government, not the details of how the state confiscates the wealth of its citizens.
(It's true that liberty is not only a function of government spending; the state might regulate to a greater or lesser extent with a given level of revenue; but these other factors are independent of how the revenue is collected.)
Published: May 19, 2005 12:21 AM
Tom Howe
Nobody's going to claim that the NRST (a.k.a "FairTax") is a libertarian ideal. But Mr. Vance's objections seem to imply that no change -- none whatever -- can be contemplated by libertarians.
Vance's first objection, the "fraud" bit, is just silly. He doesn't like the NAME of the group that supports the reform. Well, isn't that special!? Okay, Mr. Vance, I'll support the reform under the name NRST; I agree that no tax can be fair. Can we talk about substance now?
Surely the elimination of the 16th Amendment cannot be accomplished by a bill. The bill, however, can and should prescribe a date certain, after which the tax code reverts to its current form unless the 16th is repealed. I'm sure that's something all the supporters can relate to, since our loathing of the income tax is at the foundation of our support for reform. That provision and the other language already in the bill will create enormous pressure on Congress to follow through.
At one point, Mr. Vance asks, " Can Congress be relied on..." Ha! The only thing that Congress can be relied on for, is to work to re-elect the incumbents. Don't ask silly questions. As for automatic increases, please pay attention to the current scheme just a little: if bracket creep is not bad enough in this regard, there is the monster called the Alternative Minimum Tax clawing its way into the middle class. Huge tax increases are headed your way now! The best feature of the Fair... excuse me, the NRST, is that is makes the tax rate more visible. The customer sees the price; the customer pays more; the customer writes the congresscritter. That's the only way to control the tax rate: broad political pressure.
I, too, hate the fact that businesses are required to be tax collectors. But to object to NRST on these grounds is to ignore the fact that every business with employees is already a tax collector. The NRST changes their bookkeeping, not their status. But NRST does get the prying eyes of the IRS out of every citizen's pocketbook. That's a huge improvement over the current situation. And don't forget that people who buy used goods will pay no NRST at all.
No, the NRST does not compare well with utopia. But utopia is not an option. NRST does compare very well with the current situation. It's a thing worth working for.
Published: May 19, 2005 10:11 AM
Paul S.
The FairTax is the only reasonable solution to the taxation issue. A taxless society is unreasonable and unsuportable as we all benefit from at least some of the federal programs - defense, health, safety, protecting or freedom, etc. Anyone who thinks that the elimination of all taxation is possible has his/her head in the sand. Who wants to live in a country without the "luxury" of freedom and homeland securitye? Not I. Tax me, but do if fairly, with each and every citizen (and foriegn visitor) paying his/her fair share based upon consumption.
Published: May 19, 2005 12:53 PM
Laurence Vance
To Paul S.--1. The state that you want to support with tax dollars is the greatest enemy of freedom and security. 2. "Each and every citizen" won't pay "his/her fair share" under the FairTax since "the poor" will receive a transfer payment that may even be greater than the tax they pay. 3. How can you say that "a taxless society is unreasonable and unsuportable" when we had no permanent income tax in this country until 1913? 4. What makes a tax on consumption a "fair tax"? Because you FairTax people say it is? If we have taxes (which I am against), I would rather have a very low income tax than a 23% flat tax. The problem is the amount of the tax, not how it is collected.
Published: May 19, 2005 1:36 PM
Kirk
Tom,
I would not refute any of what you've said about who actually bears the burden of the employer side of payroll taxes.
But you have lost sight of the forest and are buried in the trees.
Whether an employer attributes payroll taxes as a labor cost or a tax cost is immaterial. The point is that to a producer, all of these are just costs -- labor, materials, rent, taxes, etc. The bottom line is that a business must show a return or its owners will not engage in that business. So every cost is a factor is setting the MINIMUM price for their goods or services. While there are businesses that enjoy a virtual monopoly and can set their prices based solely on demand, this is not generally true. Every business decides whether the profit it receives makes it worthwhile to engage in that business. If the market will not bear a price that yields a profit, they will not engage in that business. The corollary in a competitive marketplace is that they must be able to compete against others who are willing to settle for a lower profit.
Do income taxes affect pricing ? How could they not ? A global marketplace means and free trade means that each country is free to tax their producers at whatever rate they please. This increases or decreases the cost to produce the product. Costs dictate the MINIMUM price the producer will accept for a product. The alternative is chosen by thousands of businesses every year -- they go out of (that particular) business and do something else.
The MAXIMUM price is dictated by competition with those willing to accept the MINIMUM price. So if Ford sees their costs drop by 20% and attempts to capture GM's market share by lowering retail prices by 20%, GM cannot ignore this and attempt to keep their own cost reductions as higher profits.
The above assumes free trade and competition. You could argue that does not exist, but that is a different argument. I consider both to be essential libertarian values.
People question the 20% to 30% figure, but it is very reasonable. Remember this is not at every stage of production. It is the compounded effect by the time an item hits retail. I've done reality checks based on the income statements from a few publicly traded companies, and it is easy to get to 20%.
If you looked up Bank of America, you'd find they paid $7B income tax on $63B revenue ($21B net profit) last year. They had over $11B in wages, which means their side of the payroll tax was another $700M. So you have directly remitted taxes that total 12% of their revenue. Their revenue is the interest charged on loans. But BofA has other expenses besides taxes and wages -- $30B worth. If we assume the suppliers of those expenses realize the same level of savings from elimination of taxes, those expenses would fall by another $3.6B. So BofA's costs are now $11.4B lighter = 18.5%. But that was based on only allowing for a cost reduction in expenses of 12%. Iteratively, we should have figured 18.5% reduction for the expenses -- $5.5B. Which would make BofA's costs lighter by $13.3B = 21%.
Obviously this cannot go on forever, but you see how easily it happens on even a single level of supply chain ? If BofA passes this savings along to their borrowers -- and they must or somebody else will -- then interest charges for those borrowers would drop by 21%.
For GM, who made almost no profit last year, but has a much longer supply chain, the effect is similar. GM has been in the news a lot lately. GM cars reportedly include an average of $1500 of health-care costs, and health-care costs are reportedly 20% of GM's total labor costs. From that we could figure that labor averages $7500 per vehicle, payroll being $6000, and therefor employer-side payoll tax of $450 per vehicle. If an average retail price of GM vehicles is $20,000 ($12,500 other expenses + $7,500 labor), then the payroll tax component is 2.25%. GM made only $1B last year on $187B revenue. But they paid $9B in debt payments on $270B of debt. How they manage so little interest must involve zero-coupon financing that will bite them later, but even $9B of debt reduced by the figure we arrived at for cost-of-money reduction above for BofA, means a reduction of almost $2B.
So the FairTax implies a cost reduction for GM at this topmost level totaling 3.5% or $700. For a company that made virtually no profit last year and paid virtually nothing in income taxes.
My company is part of the GM supply chain, and my guess is that a vehicle typically has at least 7 levels of supply. Most actually make a profit, and having 30% of your revenues as labor costs is usual. So that means employer-paid payroll taxes composing 2.25% of the cost to the next level are also pretty usual. Income taxes of 2% are also pretty usual. Compounding this 4.25% cost reduction through seven levels of supply chain means GM's $12,500 other-expenses-per-vehicle would reduce to .9575 ^^ 7 = 0.74 * 12,500 = $9,200 = $3,300 savings. Add the $700 cost reduction above, and GM's costs have lightend by $4,000 per vehicle -- which means the retail price could fall by 20% of the original $20,000 without changing GM's profit at all.
There are a lot of assumptions above, but they are reasonable assumptions, not pie in the sky.
This is obviously not an in-depth analysis, it is just my own reality-check when I saw these numbers quoted at FairTax from the Dale Jorgenson Harvard Econ study. Embedded prices are real. And 20% - 30% is probably pretty close.
Published: May 19, 2005 2:16 PM
Kirk
Laurence,
[The problem is the amount of the tax, not how it is collected.]
While I am all for smaller government, I disagree with you on this. The problem really IS how the tax is collected.
1) The income tax and payroll tax hide in the prices of goods and services. Without visibility, people erroneously assume those prices are "real" and do not count it as a cost of government.
2) The income tax requires intrusive record keeping and threat of imprisonment for individuals. In this regard, a NRST would remove this burden from 100 million individuals. How many stories have we heard of the IRS confiscating people's property or levying huge penalties against people that failed to pay their taxes ? With a NRST, the individual is off the hook as soon as the transaction is complete. Tax is paid, life moves on.
3) Having an NRST that is defined as a single rate, and without exclusions, like the FairTax, means that the power of lobbyists would be greatly reduced. Maybe this could be done with a Flat Tax, but the 1986 tax reform eliminated a lot of deductions and exemptions and had only two rates -- yet look where we are again after only 20 years.
Published: May 19, 2005 2:41 PM
Paul Edwards
Theirn's quote "Once the Fairtax is passed and becomes law, its success will insure the repeal of the 16th Amendment as it will be politically impossible to not repeal it; such will be the overwhelming will of the people" strikes me as wildly improbable. I would argue that those in favour of less taxation are wise not to advocate additional forms of taxation in the hopes the latter will achieve the former. Am i being too radical?
Published: May 19, 2005 2:51 PM
Tom
“Whether an employer attributes payroll taxes as a labor cost or a tax cost is immaterial. The point is that to a producer, all of these are just costs -- labor, materials, rent, taxes, etc. The bottom line is that a business must show a return or its owners will not engage in that business. So every cost is a factor is setting the MINIMUM price for their goods or services.?
Firms are trying to maximize profits not prices. At the very least, a firm will be trying to minimize its losses. The firm pays its costs upfront before it receives its revenue for the product it produces. The economic profit it receives, if any, is the residual amount after its costs are paid.
If the firm’s costs are excessive because of high wages paid to farm workers, and an ear of corn on the market sells for $.50, it will do no good for the firm to set a MINIMUM price that is above the market price, say of $.75. This will only increase the firm’s losses because the quantity of corn sold for $.75 will be (near) zero if it can be bought for $.50. This firm with excessive cost will try to minimize its losses buy selling the corn at the market rate of $.50.
“While there are businesses that enjoy a virtual monopoly and can set their prices based solely on demand, this is not generally true. Every business decides whether the profit it receives makes it worthwhile to engage in that business. If the market will not bear a price that yields a profit, they will not engage in that business.?
Unfortunately, as stated above, the firm does not know before hand whether it will earn a profit. Its costs are paid upfront and only later will it know if it has earned a profit. It will do no good for a firm to try and increase its price to generate more revenue because it has high costs. The costs have already been generated and it must at least try to minimize its losses. The firm with high cost is not able to simply raise its price. But if firms were able pass the high costs on to the consumer, then no firm would have to worry about efficiency and cost cutting.
A firm’s costs may increase, but, only if the supply of the good is reduced will the price rise. The amount a firm supplies may be so small compared to the industry total that any reduction in supply by the firm will have no effect on the price. An industry wide tax that increases the costs to all firms, however, could have an effect on supply and therefore price.
“Do income taxes affect pricing ? How could they not ? A global marketplace means and free trade means that each country is free to tax their producers at whatever rate they please. This increases or decreases the cost to produce the product. “
An income tax or a payroll tax on an employee will not affect the price of the good he is producing. But an excise tax will? I think you are mixing these two taxes. An excise tax is a tax on a percentage price of the good; say a ten percent tax on wine. This ten percent tax on wine will cause marginal firms to leave the industry and other firms to cut back on the production of wine. As the quantity of wine produced falls, the price of the wine rises. Who pays the ten percent tax (the producer or the consumer) will depend on the elasticity of the supply and demand curves.
“Costs dictate the MINIMUM price the producer will accept for a product. The alternative is chosen by thousands of businesses every year -- they go out of (that particular) business and do something else.?
Again, you have got the cart before the horse. The producer is interested in a price that maximizes profit. Firms that try to sell above the market price will find few buyers.
“The MAXIMUM price is dictated by competition with those willing to accept the MINIMUM price. So if Ford sees their costs drop by 20% and attempts to capture GM's market share by lowering retail prices by 20%, GM cannot ignore this and attempt to keep their own cost reductions as higher profits.?
But the way Ford will lower the retail price is by producing more cars, trying to capture GM’s market share, as you say, increasing the supply of cars on the market, thereby causing a fall in the price. Again, it is the interaction of the quantity supplied and the quantity demanded that would determine the reduction in price.
Published: May 19, 2005 6:17 PM
Kirk
Tom,
I think you are bogged down in the micro-economics. Of course, no producer knows with surety that he will be able to make a profit on any particular transaction or overall in the short term. On a macro-economic level, however, he must be assured of a profit or abandon the business.
On a macro level, any taxes will broadly affect all producers within that tax jurisdiction -- making it a much more common component of the total cost of producing an item than the efficiency or raw materials costs. That is where a producer must compete as long as the taxes his competitors must pay are equal to his own. As long as all producers are taking the same advantage of one cost component, they must compete in other areas. Would you agree ? This is not the case when producers belong to different tax jurisdictions -- the tax component is not the same, which means it becomes a cost component that can affect price competition.
"Again, you have got the cart before the horse. The producer is interested in a price that maximizes profit. Firms that try to sell above the market price will find few buyers. "
There is no substantive difference here. If you assume that a market sets the price, then costs are the limiting factor on profit. If costs are too high, profit turns to loss, and the business folds. So, obviously, the producer cannot try to sell at a price without regard for costs. The way you say it, it sounds like it is some big mystery when the market leaves some profit left over. Like a business owner has no ability to forecast what the selling price will be. Someone that inexperienced in his industry will not last long enough to affect things on the macro level.
"But the way Ford will lower the retail price is by producing more cars, trying to capture GM’s market share, as you say, increasing the supply of cars on the market, thereby causing a fall in the price."
Absolutely false. What you are describing would require growing the market to absorb the additional qty. Or being the only supplier in a market. Taking existing market share away from a competitor is all about reducing your costs or settling for lower profit, or both. Retaining market share against those price pressures requires lowering your prices. If you cannot accomplish that while making a profit the owners are willing to accept, then you cede the market share to the competition.
"An excise tax is a tax on a percentage price of the good; say a ten percent tax on wine. This ten percent tax on wine will cause marginal firms to leave the industry and other firms to cut back on the production of wine. As the quantity of wine produced falls, the price of the wine rises."
You are supposing that the demand for wine has high elasticity. This excise tax will have no direct effect on how much wine producers choose to produce. The demand for the wine dictates how much wine will be produced. If the excise tax has no effect on the demand for wine, the increase in price is paid by the consumer and the producer is unaffected. At some point, the tax will affect demand, which will affect production. But if a tax applies to an entire industry, the industry's first attempt to deal with it is to pass it on in prices.
Currently, an American wine producer competing with a Chilean wine producer is not in this position. If the Chilean has no income or payroll tax, all other production costs being equal, his costs will be lower. He can enjoy a profit margin that the American producer cannot, while selling at the same price point. What would prevent him from increasing his market share and his total profit by reducing his prices ?
Taxes on producers are costs of production. They can either be marked up and passed along to consumers just like any other cost, or they can't. If they can't then they must reduce profit margin. Reduce profit margin enough -- so low they equal a safe passive investment return, they don't need to fall to zero -- and that capital will shift to the passive investment.
Published: May 19, 2005 7:20 PM
Rob
One aspect that has been overlooked is the psychological effect of consumers not only receiving their whole paycheck (essentially a minimum 25% raise for those of us who don't work under the table) but also receiving a check from the government each month. This means that the money will immediately be under the control of the individual that actually earned the money instead of the federal government. Who would you rather control your money? This means the money will not be viewed as a sunk cost, but as "extra" money to be invested, donated, or spent (paying taxes) according to the will of the individual. This may seem outrageous to some people, but this is a blog for "economists" so hopefully that point should receive some support here.
As for the feared underground economy, another point that needs to be made is there is currently an underground economy that is out of control as far as fair taxation goes. Think of all the illegal aliens, drug dealers, and average Americans working under the table who do not currently contribute any income taxes. They will now be paying the same form of tax that the law abiding citizens of this nation pay. Foreign tourists will also be sharing the tax burden at the same level during their stay, and given the anticipated drop in the prices of many products, may be spending even more during their stay.
The psychological effects of a dramatic increase in take home pay along with the the feeling of sharing the tax burden with more individuals will surely cause different behavior in each individual, but the bottom line is that each individual will have more freedom of choice, and isn't that what we all want?
Published: May 20, 2005 10:01 AM
Tom
Kirk,
“I think you are bogged down in the micro-economics.?
I am applying economics; you, on the other, hand tend to ignore it.
“On a macro level, any taxes will broadly affect all producers within that tax jurisdiction -- making it a much more common component of the total cost of producing an item than the efficiency or raw materials costs.?
Economics shows the share of the employee payroll tax that is paid by the employer is actually paid by the employee by reducing the employee take home pay. You say that the share of the employee payroll tax that is paid by the employer will affect the price of the good produced. Please, demonstrate your unfounded conclusion.
What I have done is simply and consistently apply the most basic lesson of economics, which is that price is determined by supply and demand. You say price is determined by cost. Please, demonstrate your unfounded conclusion.
“That is where a producer must compete as long as the taxes his competitors must pay are equal to his own. As long as all producers are taking the same advantage of one cost component, they must compete in other areas. Would you agree ??
Not all taxes are equal. Excise taxes on all industries raise the marginal cost of each firm by the amount of the tax. This causes firms to leave the industry or cut back on production. The cut back on production causes the price to rise. The amount the price rise is generally less than the amount of the tax, depending upon the elasticity of the supply and demand curves. The tax causes an increase in cost to the firms in the industry, but it is the reduction in supply that causes the price to rise. Without a reduction in supply the price does not rise and the tax would have to be shifted backward on to the firm.
“Absolutely false. What you are describing would require growing the market to absorb the additional qty. Or being the only supplier in a market. Taking existing market share away from a competitor is all about reducing your costs or settling for lower profit, or both. “
I am afraid you do not know what the definition of market share is. Market share is the percentage of the total sales of a given type of product or service that are attributable to a given company. Increasing market share means increasing output.
“You are supposing that the demand for wine has high elasticity.?
That is completely wrong. In fact, the higher the elasticity of demand the less the price increase and as the demand becomes perfectly elastic the price will not rise at all. The case of a perfectly elastic demand, which I was not talking about, is a case where increase cost cannot be passed on the consumer.
“This excise tax will have no direct effect on how much wine producers choose to produce. The demand for the wine dictates how much wine will be produced.?
Wrong again. With a highly elastic demand, an excise tax will shift the supply curve to the right reducing supply but leaving price unchanged.
“If the excise tax has no effect on the demand for wine, the increase in price is paid by the consumer and the producer is unaffected. At some point, the tax will affect demand, which will affect production. But if a tax applies to an entire industry, the industry's first attempt to deal with it is to pass it on in prices.?
This is, again, very poor economic analysis. An excise tax will affect the supply curve not the demand curve. I think I have explained many times the economics of an excise tax, but at this point I think I would be better if pick up an elementary economics textbook and read the section of excise taxes.
“Currently, an American wine producer competing with a Chilean wine producer is not in this position. If the Chilean has no income or payroll tax, all other production costs being equal, his costs will be lower. He can enjoy a profit margin that the American producer cannot, while selling at the same price point. What would prevent him from increasing his market share and his total profit by reducing his prices ??
Now you need a book on international trade. His costs may be lower, but without any reference to productivity one cannot say if Chilean has a comparative advantage producing wine.
Published: May 20, 2005 10:38 AM
Salvius
A friend of mine asked my opinion of the "Fair Tax" recently. Part of my response:
There is a risk with the "prebates" they talk about, that people will view it as just another government handout, and agitate to increase the size of the check they get.
Also, according to the way it's set up (according to their FAQ), it's not actually true that people below the poverty line pay no net tax. See, for example, on their chart, one person making $9310 or less is below the poverty line. They get a rebate totaling $2141 per year. The problem is, because this is a sales tax, that person pays tax when they spend that $2141, too. At 23% sales tax, this person pays net $492 per year in tax, which is just over 5%. That's preferable to 23%, but you're still talking about a system in which the people living below the poverty line, the poorest people in the country, lose 5% of their meager income to federal taxes. Frankly, I find it a bit disturbing that the people proposing this system haven't recognized this. It doesn't say much for their understanding of economics.
Published: May 20, 2005 3:31 PM
Sunnye
> Easy, "Speedwell". Perhaps you haven't heard of the social security office? Run by the US government? That's where the database is. The rebate is a simple, monthly mail out. What local office are you calling? It's obviously not FairTax. They have only one office and it's national.
> Well, according to the IRS, that underground economy costs you $2,000 a year out of your own pocket. And the total is $350 BILLION a year -- all money that would go straight into government coffers, along with additional taxes from drug dealers, illegal immigrants and 40 million foreign tourists who buy souvenirs here every year. Can't you think of something better to do with that $2000 than giving it to the IRS to pay for someone else?
You who think the rebate is a boondoogle may contribute yours to my son. He is 40 years old, severely retarded with autistic tendencies and temporal lobe epilepsy. Otherwise he's a loving, dear person. But his income is less than $12,000 a year (yes, a YEAR) and his upkeep is immensely expensive. The rebate he, his father and I will get will help a lot, thank you.
There's a big, broad world beyond your comprehension, gentlemen and gentleladies. You are among the blessed of the world. But you are also among the saddest -- and you don't know it.
FairTax is simple: keep 100% of your paycheck to do with as you please. Pay a tax only on new goods and services, whose prices are lower so that you pay no more. Get an additional $178 a month so you didn't pay tax on anything up to the poverty level. And government programs are fully funded.
Enjoy a booming economy because the USA is the only country in the world that doesn't tax productivity and tax evaders are pouring the $350 Billion into the tax base.
If you're wealthy and you don't want to pay so much tax, don't buy Kate Spade purses and Vera Wang dresses, sell your mansions and buy a small house, trade in your Jags and limousines for Chevys and Toyotas.
If you'll study the actual fairtax bills (S 25 and HR 25) you'll see that only tax evaders and idiots could oppose it. Even lobbyists who understand economics will be delighted with this one because the government will have more money for their programs.
Published: May 20, 2005 4:42 PM
Laurence Vance
The FairTax people are taking this debate to a higher level: "Frankly, I think you have to be either a tax evader or stupid not to support
the FairTax." How much "fairer" it would be to just cut taxes and spending by 90% and be done with it!
Published: May 20, 2005 4:43 PM
Larry Whittington
Sorry Laurence but your last remark was just as inane as your original article.
It is patently ridiculous to suggest that cutting taxes by 90 percent would be "fairer" (if that's what you were actually suggesting.) As patriotic Americans, we must all do our part to fund our government. As patriotic Americans, we must all do our part, as well, to insure we have the most sane system of taxation.
If you wish to be taken seriuosly, please provide a point by point refutation of what FairTax provides.
More hyperbole, obfuscation or attempts to mis-direct from the points will only bring you much, much more well-deserved derision.
If there's something wrong with FairTax please explain exactly what it is.
Larry Whittington
Published: May 20, 2005 5:50 PM
Laurence Vance
Larry, you have got to be kidding: "As patriotic Americans, we must all do our part to fund our government." Why would any patriotic American want to fund this wasteful, warmongering, oppressive government? Your statement shows once again that the FairTax supporters have no problem with the size of the federal leviathan. You want me to show what is wrong with the FairTax? Read the article again. If you won't hear me then hear Murray Rothbard: "The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax." If you won't hear Rothbard then hear Lysander Spooner (1852): "If the government can take a man's money without his consent, there is no limit to the additional tyranny it may practise upon him; for, with his money, it can hire soldiers to stand over him, keep him in subjection, plunder him at discretion, and kill him if he resists." If you won't hear any of us then read Frank Chodorov or Sheldon Richmond on the evils of taxation (not just the income tax). Do something but tell us that the government is entitled to a 23% cut on everything we purchase.
Published: May 20, 2005 6:15 PM
Kirk
Tom,
I understand your point of view, and we may just have to agree to disagree.
Your concept of pricing, however, is contrary to my own experience in the electronics industry over the last 15 years. You seem so adamant, that I posed the question to a half dozen other business associates -- representing dozens of different businesses over their careers. Possibly we are all wrong, but our experience uniformly suggests that a reduction in production costs for an item results in price reductions.
I've gone looking for an objective source you might accept, and not found anything ideal. But this:
http://facweb.furman.edu/~dstanford/mecon/d6.htm
describes our collective business experience very well. And it is why I still insist that the FairTax would result in reduced prices.
From the article above:
"Non-Marginal Decision Criteria
Real-world business managers rarely use the economist's ideal decision criteria, marginal revenue and marginal cost. Aside from the possibility that they may not be acquainted with the correct decision criteria, such criteria employ information which is not directly observable. Although marginal revenue and marginal cost may be inferred, estimated, or computed from observable information, the process of capturing an adequate amount of such information and generating the required decision criteria becomes progressively more difficult the more complex is the decision setting. For example, a wholesale distributor of hardware (tools, nails, screws, pipe fittings, hinges, locks, etc.) may carry 20,000 or more different items in the warehouse. It would be an heroic task to gather the required data for estimation of demand and cost functions for each and every one of the warehoused items so that marginal revenues and marginal costs could be computed.
Business managers usually respond in questionnaires that they employ an alternative pricing procedure to determine price, then sell as much of each item as they can at the set price. The alternative procedure is a rule-of-thumb approach variously known as cost-plus (variable cost plus an overhead cost/profit contribution), mark-up (from manufacturer's price), mark-down (from a "suggested retail" price), add-on, or full-cost pricing. The usual procedure is to
(a) select a normal rate of production as some moderate proportion of plant capacity, usually between 70 and 80 percent;
(b) estimate the per-unit direct (or variable) cost of producing the item at that production rate (for a distributor, it is the price from the manufacturer plus shipping expense); and
(c) add a standard markup-up as a "profit contribution" which will cover overhead expense and allow for a net return.
This standard mark-up may have emerged as a matter of experience over an extended period of operation. It is likely to be in the neighborhood of a conventional mark-up level used throughout the industry, but small differences may persist among competing firms. Indeed, the mode of competition in a highly-competitive industry may settle upon the percentage rate of mark-up rather than upon price per se. For example, in the wholesale hardware industry, it is conventional to add between forty and fifty percent to the manufacturer's price to get the wholesale price which is offered to retail vendors. The mark-up then must cover all of the other direct and overhead costs and allow a profit margin. But competition among wholesalers will tend to whittle the mark-ups down to the lowest level which can be sustained and allow them normal returns on their invested capital (the warehouse, handling equipment, delivery trucks, etc.). Retail vendors typically add something in the neighborhood of 33 to 40 percent to the wholesaler's price to get their retail prices. Small variations of retail prices among competing retail vendors who buy from the very same vendor can be accounted for by their differential mark-ups applied to the vendor's price.
A variant of this approach which is more appropriate to manufacturing than to wholesale or retail distribution is "full-cost" pricing. The objective here is to fully allocate all overhead costs to the various items in production. This is no problem in the single-product firm: all overhead (i.e., fixed) costs go to the single product, and are then "spread" across all of the units produced. However, in a multiproduct company, since there is no objective way to allocate overhead expenses among the company's product lines, the allocation process becomes highly arbitrary. A typical approach is to use as allocation shares the percentage of the company's gross revenues accounted for by each item.
To illustrate how full-cost pricing is accomplished, suppose that the direct production cost for a particular item is $4.17 per unit, and that the item's share of overhead expense (however arbitrarily allocated) divided by the number of units of the item produced (the method of "spreading the overhead") is $6.37. The sum of the per-unit direct and overhead expenses is thus $10.54. Then, an additional mark-up to allow for profit, say 25 percent or $2.63, is added to establish the final price of $13.17. The manager then may "psychologically price" the item at $12.99 or $13.49.
An extension of this mark-up pricing approach may illustrate the satisficing hypothesis advanced by Herbert Simon ("Theories of Decision Making in Economics and Behavioral Science," American Economic Review, volume 49, number 3, June 1959, pp. 253-80). According to Simon, many business managers don't attempt to maximize profit in any absolute sense. Rather, they try only to realize a satisfactory level of profit, usually expressed as a target rate of return (TROR) on invested capital. In the previous example, the 25 percent mark-up to allow for profit was stipulated only arbitrarily. Suppose that the company has $1 million dollars invested in its plant and equipment for producing the item, and expects to produce 50,000 units of the item per year at 75 percent of capacity. If the company targets a 10 percent return on investment, then it must realize a profit of $100,000 per annum, which when divided by the 50,000 units means that the mark-up allowance for profit should be $2 per unit. The price which will then satisfice with respect to the TROR requirement is $12.54. "
Notice that real investigation of what price the market would bear is not usual. Cost-plus is usual. Reduce the cost by eliminating taxes and the real-world manager will arrive at a lower price.
Published: May 20, 2005 6:43 PM
Kirk
Salvius,
"See, for example, on their chart, one person making $9310 or less is below the poverty line. They get a rebate totaling $2141 per year. The problem is, because this is a sales tax, that person pays tax when they spend that $2141, too. At 23% sales tax, this person pays net $492 per year in tax, which is just over 5%."
Your hypothetical person today:
Income: 9310
Spends: 9310
* value = 9310 * 0.78 = 7262
* embedded tax = 9310 * 0.22 = 2048
With FairTax:
Income: 9310 + 2141 = 11451
Spends: 11451
* value = 11451 * 0.77 = 8817
* sales tax = 2634
So the important part is the "VALUE" line. He received more goods and services than in the past. He not only did not pay any net taxes, he was actually able to go out and buy more "stuff" than he was before.
This also assumes he spends everything on NEW goods and services. If he spends some of it on used goods (used car, used bike) or education, then the "sales tax" line would be less and his "value" received would be even higher.
Published: May 20, 2005 7:00 PM
James Kleitz
Tom Anderson,
You write: "I agree that the rebate idea is absurd. If they wanted to make a simpler, smaller-government progressive consumption tax, they'd simply make some "essential" items exempt from tax, as most state sales taxes currently do. Trying to force people to record all of their purchases and calculate their rebate on a monthly basis is just plain stupid. Notwithstanding that, I believe that the Fair Tax is a very good idea. "
It sounds like you support the FairTax wholeheartedly, because the rebate is not as complicated as you proclaim. Actually, far from it.
The rebate, is simply based on figures already posted by the Health and Human Services. It's called the poverty level. No individual will have to calculate a thing. All they will have to do is apply for the rebate with a socialist insecurity number. I'm sorry, I mean a social security number. With technology and the fact that the Social Security Administration distributes millions of checks already, this process will be simple. Much simpler than distributing refund checks, 1040 forms, and 1099s, that is for sure. Technology will allow most distributions to come in the form of wire transfers.
Nobody will have to record what they purchase.
Exempting certain items promotes unfairness by creating a price hike on certain items and not others. Also, wealthier people statistically spend more on food and medicince than poor people could. Creating certain exemptions just creates an unnecessary imbalance.
Sounds like you're in Tom. Talk to your congress and tell them to get on board.
For all the naysayers, this plan is not perfect. But, nobody could possibly argue that any other plan already conceived is any better. Forget less government spending as the answer, we have to think in reality, no matter how much I would love that.
James
Published: May 20, 2005 9:29 PM
James Kleitz
Iceburg,
You would like to eliminate the rebate. I hate redistribution of wealth as much as the next guy. However, we have to compromise with liberals some way. The rebate is what makes a flat, sales tax progressive. It is the same amount for everybody. So, at least the government won't be stealing from one class and giving it away in earned income credits.
Published: May 20, 2005 9:33 PM
James Kleitz
Tom,
About your price reduction comment. You said that employers decrease wages to offset tax increases.
I say that you are absolutely correct, although not 100%. Some employers, and some portions of tax increases will increase prices. It's not always going to be wages. But, I regress, because you make the true assertion that wages will decrease (although you presented it in a negative light).
So, not matter what, whether it's a reduction in the price of goods and services or a increase in take home pay, it is still an increase in buying power. Quit focusing so much on the trees. There's much of a forest out there.
Published: May 20, 2005 9:47 PM
Theirn
Larry Ruane: "But anyway, you have not addressed the main point of Laurence's article, which is that liberty is mainly a function of total spending by government, not the details of how the state confiscates the wealth of its citizens."
--------------------------------------------------
I'm in favor of smaller government...90% reduction is fine with me. However, as difficult as passing the FairTax will be, reducing government spending by 90% is virtually impossible. When the people can quantify how much government is costing them perhaps then they will take action to reduce government. The transparency of the FairTax is a good first step in that direction.
Published: May 21, 2005 1:04 AM
Paul Marks
I see the situation as follows:
All taxes are damaging and the more government takes the more damage it is likely to cause.
It is true that some forms of taxation are slightly more harmfull than other forms so it is possible that a switch in the form of tax (say from taxes on income and capital gains to a tax on spending) might mean less damage - BUT the reduction of damage is of such a minor nature (considering the overall damage that the weight of taxation causes) that it is hard to see why there is such a massive dispute over the FORM of taxation, and hard not to conclude that this is a diversion from the question of the WEIGHT of taxation (i.e. how much the government takes).
There are also some odd things about the "fair tax" thing itself. One of the supposed advantages of a sales tax is that it makes clear to the poor that government spending costs them money (making them less likely to vote for big spending politicians) "rebates" for the poor negate this advantage.
Lastly I suspect the whole thing is a trick to get people to accept a Federal Sales Tax ON TOP OF the income tax not INSTEAD of it.
Published: May 21, 2005 10:17 AM
billwald
It isn't a sales tax. It is a sales receipts tax. The difference? about 30% higher tax.
Published: May 21, 2005 10:57 AM
Larry Whittington
Your opening remark that government taxes should be eliminated altogether puts the rest of your remarks into question. Nobody likes taxes but I'll gladly pay my fair share rather have to live as a hunter-gatherer or as a reclusive militant in the distant mountains.
Your statement that FairTax is a fraud because it proposes a new system of taxation is as ludicrous as your opening remark.
Your next statements about the state of the income tax are quite lucid. It really is a mess. I agree.
You state that the IRS code runs about 54,000 pages. Then you list under "problems with the FairTax" that it took a full 59 pages of your printer paper to print out the FairTax. I really don't understand how you perceive 59 pages versus 54,000 pages as a negative.
You provide a snippet of the FairTax as an example of the complexity involved. Please print out the 54,000 pages for a real eye-opener for examples of complexity.
You mention Ron Paul, Congressman from Texas. You wonder loudly why he is not a co-sponsor of HR 25. I agree with that. I wonder too. He should be. But then, all Senators and Representatives should be co-sponsors. Methinks the politics involved in the process are just as complicated as the IRS code. As the FairTax grassroots effort continues it's exponential growth, all politicians will figure out just how good an idea it really is.
You state that repeal of the 16th Amendment is not part of FairTax. You ignore the fact that FairTax includes the repeal of those parts of 16 that specify an income tax or allow for any payroll deductions. You ignore the wisdom of that plan. The repeal of any Constitutional Amendment requires ratification by three quarters of the 50 states. By only eliminating the most troublesome parts of the 16th Amendment, FairTax can be passed and implemented without requiring such ratification.
In your next lapse into whatever, you complain that every retailer in the country will have to become a tax collector. You ignore the fact that sales tax is already collected by every retailer in almost every state in the union. The NRST presents a minimal change in that process.
In an abundance of kindness I will ignore completely your "question" about sales tax per gallon of gasoline.
You state that it will be easier for politicians to raise taxes with FairTax. In reality, raising taxes would be more difficult than ever before. With FairTax, every purchase will tell voters instantly if their taxes have been raised. Politicians would risk voter wrath by even considering raising the rate.
Your remark about the increase in the underground economy completely escapes me. I would respond but you provide no argument to counter. What I am sure of is that a whole lot of people that now pay nothing in taxes, social security and Medicare would be required to participate.
In yet another abundance of kindness, I will skate over your remarks about the cost of postage.
Your closing complaints about government spending belong in some other debate.
I hope my remarks have been of some help. FairTax represents a paradigm shift. Please consider it in light of the beneficial changes it will bring. Make the shift. Please consider it from a new perspective.
Published: May 21, 2005 1:29 PM
billwald
It will never pass because half the U.S. economy is under the table and that's the way people want it.
Published: May 22, 2005 10:57 PM
David
My concerns with the ‘FairTax’ relate to the repeal of the 16th amendment and the possibility of it becoming a VAT.
First, the 16th amendment. How about adding a clause that requires the 16th amendment to be repealed and the IRS to be abolished BEFORE the FairTax can begin to be implemented.
Second, the VAT. As I understand it (I have not read the bill), the FairTax will be applied only at the retail level. What is to stop the congress from later making it a VAT with the tax being applied at every level of ‘value added’ in the production line. An example: Starting with mining of ore, making steel coils or wire, forming steel parts (washers, nails, blanks for panels in autos, etc.), plating steel parts, assembling parts to make subassemblies, assembling subassemblies into final products. And on and on. Also, the ore miners would pay the VAT on the tools they use. The manufacturers of those tools would pay VAT on the tools they use. You can see how this could be a tax upon a tax upon a tax. . . . ad infinitum.
In Indiana (and probably other states) a business does not pay state sales tax on purchases for resale in the business. However, the business owner must keep track of any items purchased for use in the business and if sales tax was not paid to Indiana, they must pay an excise tax (equal to the sales tax) to the state. If they paid a sales tax to another state and it was equal or higher than the current state sales tax, they are free and clear. However if they paid no sales tax or a lesser tax to a different state, they must pay the difference to Indiana. Under the FairTax, if items were purchased from a foreign distributer, would the business have to pay the FairTax on those items?
I, too, favor the drastic reduction of government but don’t see it coming soon (if ever). It does seem that a ‘simple’ tax would not require 59 pages of text.
As far as the tax being increased, I don’t think the business as usual politicians will have any problem doing it. They will most likely switch it to a VAT or find other ways to make it apply to more than just the retail level and/or they will raise it 5% by making only 1% effective the first year and stepping it up each year after that.
Billwald
What is the difference between a sales tax and a sales receipt tax? Why is it 30% higher?
Published: May 23, 2005 5:34 PM
Sunnye
Billwald:
Is that the way YOU want it?
"Those who say it can't be done should get out of the way of those doing it" Chinese Proverb
See my response to Vance's latest at http://www.us4fairtax.blogspot.com
Published: May 29, 2005 10:23 AM
David
May 30, 2005 - This post was originally sent to this blog one week ago. It was never posted, so I am resubmitting it:
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My concerns with the ‘FairTax’ relate to the repeal of the 16th amendment and the possibility of it becoming a VAT.
First, the 16th amendment. How about adding a clause that requires the 16th amendment to be repealed and the IRS to be abolished BEFORE the FairTax can begin to be implemented.
Second, the VAT. As I understand it (I have not read the bill), the FairTax will be applied only at the retail level. What is to stop the congress from later making it a VAT with the tax being applied at every level of ‘value added’ in the production line. An example: Starting with mining of ore, making steel coils or wire, forming steel parts (washers, nails, blanks for panels in autos, etc.), plating steel parts, assembling parts to make subassemblies, assembling subassemblies into final products. And on and on. Also, the ore miners would pay the VAT on the tools they use. The manufacturers of those tools would pay VAT on the tools they use. You can see how this could be a tax upon a tax upon a tax. . . . ad infinitum.
In Indiana (and probably other states) a business does not pay state sales tax on purchases for resale in the business. However, the business owner must keep track of any items purchased for use in the business and if sales tax was not paid to Indiana, they must pay an excise tax (equal to the sales tax) to the state. If they paid a sales tax to another state and it was equal or higher than the current state sales tax, they are free and clear. However if they paid no sales tax or a lesser tax to a different state, they must pay the difference to Indiana. Under the FairTax, if items were purchased from a foreign distributer, would the business have to pay the FairTax on those items?
I, too, favor the drastic reduction of government but don’t see it coming soon (if ever). It does seem that a ‘simple’ tax would not require 59 pages of text.
As far as the tax being increased, I don’t think the business as usual politicians will have any problem doing it. They will most likely switch it to a VAT or find other ways to make it apply to more than just the retail level and/or they will raise it 5% by making only 1% effective the first year and stepping it up each year after that.
Billwald
What is the difference between a sales tax and a sales receipt tax? Why is it 30% higher?
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Some additional questions have come to mind since the original attempt to post the above: Would the states now charging sales tax but exempting food and services follow the federal pattern and tax everything? Would states currently with an income tax but no sales tax now implement a sales tax to replace the income tax? Would insurance companies require the consumer (patient) to pay all of the consumption tax so the patient would be paying a co-pay plus 23% of the original bill?
Published: May 30, 2005 2:12 PM
Kirk Ellis
David,
The FairTax is before Congress as HR25. It DOES require elimination of funding for and elimination of the Department known as the IRS. It cannot repeal the 16th Amendment all by itself. Constitutional Amendments are a special breed of laws. They require passage by 3/4 of the States via their legislatures. Congress cannot directly repeal the 16th Amendment.
This is really a formality. The 26th Amendment swept through the States in less than a year. So it is not a difficult passage for a popular measure. Likewise, the 16th Amendment did not REQUIRE an Income Tax -- it merely enabled one. Even with the 16th in place, nothing says an Income Tax MUST be a part of Federal Taxation.
As far as the FairTax becoming a VAT, it is really a clear distinction. A VAT is a Sales Tax that is collected at every stage of production -- crediting back the tax that was paid at all previous levels of production. This is a grossly inefficient process, and the only reason for anybody to prefer it is if they distrust the ability of the tax revenue agency to collect the tax at retail. Theoretically, the tax collected is the same. In practice, the tax collected via a VAT is much less than the cost built into products. In essence, what we currently have is a VAT embedded in the cost of all American-made goods and services. Each layer of production paid an income tax on their profits -- essentially the same layering effect that a VAT would have. The result is that prices are increased by 22% -- according to studies from Harvard Economics and MIT -- while the government receives revenues of only 9%.
This ineffiency is what the FairTax promises to eliminate. The prices of goods and services in America has been increased $1.8T and the taxes collected from businesses are less than $750B (corporate + small-business income taxes + employer payroll taxes).
There is over $1T being lost to inefficiency and unproductive activities -- mainly tax accountants and lawyers. That is almost equal to the entire Income tax collected from individuals and businesses. Is it any wonder that the FairTax could be implemented, cause post-sales-tax-prices to remain almost exactly the same, raise the the same revenue, and make every American richer ? This is the American way. Find a better way to do something, and reap the rewards.
Few people realize that most of the world has adopted VAT taxes -- but they rebate them back to the producer if the item is exported. How can American producers compete when their tax burden is built-in to their cost structure ?? The General Agreement on Trade and Tariffs (GATT) which governs world trade, anti-dumping, etc. does not allow for any sort of "Rebating" of income and payroll-type taxes. A VAT or Sales Tax can be rebated, and a Sales Tax doesn't need a rebate for exports because -- by definition -- it hasn't been sold at Retail yet. This would finally put American producers on an equal footing with the rest of the world. Maybe they still can't compete, due to higher wages. So be it. But at least they will not be attempting to compete with a ball and chain shackled to their feet.
As far as Congress increasing the rate, why would they ? All Congress cares about is that they have enough to fund the spending programs that will get them re-elected. Removing the tax burden and the inflated costs from American businesses will do three things: 1) It will make America a gold-rush country for a business to set up shop, hence providing a huge bonus of jobs, wages, and spending. 2) It will provide such a surplus of revenue due to all the new spending, that politicians will be taken by surprise and not know how to spend the surplus. 3) The single rate for everything and clearly defined exclusions (investment, education, savings, charitable giving) will mean that any attempt to change it will be immediately apparent to all Americans on every Sales Receipt -- Americans painfully aware of what the complexity of the Income Tax ultimately cost them -- and people will fight tooth-and-nail against special rates for special items and all the other BS we've seen in the past.
Changing the rate -- specifically, increasing the rate, will be a political death sentence.
Published: June 8, 2005 11:32 PM
David Deedon
Kirk,
You are more trusting of government than I am. I realize that HR 25 does require elimination of funding for and the elimination of the IRS. And, of course, I know that a bill cannot repeal an amendment to the constitution. However, it does not matter how quick a popular amendment can be passed, it cannot be sent to the states until two-thirds of each house proposes it (or until two-thirds of the state legislatures call for a convention to propose it). A majority may vote for HR 25 but that does not assure that the necessary two-thirds will propose the repeal of the 16th. As long as the 16th still exists, there is nothing to stop congress from reversing the elimination of the IRS and it’s funding in the next oversized budget bill. My suggestion is a clause in HR 25 require that if HR 25 becomes law, it will go into effect on the same day that the repeal of the 16th amendment becomes effective and if that does not occur within 5 years of the passage of HR 25, then HR 25 is automatically repealed.
Also, note that having the FairTax, with the name of sales tax, in most states, has not kept most of these states from having an income tax.
You taught me something on the VAT tax. I did not realize it was rebated as you described. I still don’t trust our government to not change the formula so they get more income from it (if they were to switch it to a VAT). Also, government seldom will choose the efficient way to do a thing if they can find a less efficient way.
I agree that the FairTax, as proposed in the current bills, would be a better way to collect the taxes. I just don’t trust our congress persons to stay the course.
“This is the American way. Find a better way to do something, and reap the rewards. “ It may be the American way, but it is never government’s way.
There is a saying that the more storage space you have (be it hard drive space or closet space) the more you will find to put in it. Then you will always find you need even more space. The same goes for government spending. The more of our money they have to spend, the more they will spend. Then they will find they need even more money. Allowing them to have much more money, as you state they will have with the FairTax, will only allow government to grow. We need to reduce the size and budget of government so they will be less intrusive in our lives.
Competition will require any company with the reduction in their overhead (less spent on taxes and processing tax returns) to reduce the sales price of their products and services somewhat. However, most companies will not reduce them as much as the savings unless forced to do so (by competition). This is especially true if the company (and perhaps the industry) is having a tough time making profits before the change takes place.
As far as it being political suicide to raise the rate, don’t believe it. If a $1000.00 item has $310 added for sales tax (if the rate is 23% and the state has an 8% sales tax) the price to the consumer will be $1310.00. If the FairTax goes up 2% the $1310.00 becomes $1330.00. That won’t be enough to keep most consumers who would have purchased the product to change their minds. Incremental increases could be added regularly without it hurting the political life of the congress people.
People won’t fight against special rates, they don’t now with the income tax. And they will want the special rate if it is something they purchase.
So, I repeat, you are more trusting of government than I am.
Of course, the real answer is reduce the size of government. Get it back to the limits of the constitution. Then cut government cost and let the taxpayer keep most of what now goes to the government.
David
Published: June 11, 2005 5:55 PM
Bill
The 16th amendment was never legal, they want your money so the government lies and takes it.
What a dream they are suddenly going to get honest.
Than if the fairtax is leagelly adopted the government will finnly have a law on the books that is legal.They screw us with an illeagle law
(16th amendment)Who thinks they will not screw us with a law that is legal
Published: November 2, 2005 10:30 AM
Dale Smith
"I agree that the rebate idea is absurd. If they wanted to make a simpler, smaller-government progressive consumption tax, they'd simply make some "essential" items exempt from tax, as most state sales taxes currently do. Trying to force people to record all of their purchases and calculate their rebate on a monthly basis is just plain stupid."
You obviously don't understand the "rebate idea". No one has to provide any records to justify the amount of the rebate. The rebate is based on family size and the poverty level which is set annually by the Department of Health and Human Services. The only records required are those to prove that you and your family members are legal residents or citizens of the U.S.
Starting down the slippery slope of exemptions should be avoided at all costs. If "essentials" are exempted instead of using the "rebate idea", the wealthy will benefit more than the poor. The wealthy tend to spend much more money on "essentials" than the poor. Take for example, a wealthy person who organizes a party with $5,000 worth of food. If food is exempted as an "essential", the wealthy person would be able to avoid taxes on the total purchase of $5,000. Under the "rebate idea", they would only be reimbursed on expenditures UP TO the poverty level. Everyone would be reimbursed the same amount for the same sized family.
Published: May 24, 2007 4:02 PM
Dale Smith
"If you don't want to be on file, and you don't need the monthly rebate check for the taxes on the poverty level of spending, then you don't have to participate."
REALLY? I don't have to participate? Yippee!! Then how do I convince the people I buy stuff from that I'm not participating?
You misunderstood. You don't have to participate in the rebate program. But you will be charged the tax at point of sale.
"The "Prebate" will be calculated by the size of the household and the HHS defined level of poverty spending for that household. It will be sent each month to the head of household for everyone holding a valid Social Security card."
You mean, the exhaustive, intrusive personal database with (at minimum) information about everyone's household size, residence address, and name of the household's head (whether that person will actually disburse the money or not). And naturally this database will be perfect. And of course all the unclaimed money from the dead, tourists, and the homeless will be well accounted for. Cool. Can I quote you?
How is this any different under the current system? The FairTax doesn't claim to be the be-all-end-all of tax reform, but it is vastly superior to what currently exists.
Published: May 24, 2007 4:10 PM
Dale Smith
“[A]ctually, since American producers all pay and embed their paiyroll taxes and income taxes into their prices, there is already 20 - 30% hidden taxes in American-made goods.”
Not true at all and rather poor economic thinking. This is a question of tax incidence (who pays a tax) and tax shifting. The above suggests that the employer’s share of the payroll tax is shifted forward on to the consumer in the form of higher prices. In actuality, the employer’s share of the payroll tax is paid by the employee. A profit-maximizing firm will tend to set the marginal cost of labor equal to the marginal revenue production of labor. Therefore, the marginal cost of a worker (the wage, the employer paid benefits and taxes) will equal the marginal revenue product (the value of the output generated by the employee). No firm will pay more than the MRP. So, the employer share of the payroll tax is actually paid by the employee through a reduction in take home pay. All other income taxes are also paid by individuals and not simply shifted forward on to the consumer.
For your assertion to have merit, (that income or payroll taxes are shifted forward on to the consumer) you would have to show how an income tax causes the price of a good to rise. Remember, cost does not determine price. Price is determined by supply and demand. The income tax would have to somehow either cause a reduction in the supply of the good produced or cause an increase in the demand for the good in order for its price to rise.
Actually, businesses do not pay income taxes. They collect it from 3 sources and pass it along to the fed. The income tax burden on businesses is recouped by raising prices, lowering wages, or reducing dividends to stockholders. Or a combination of the three. Your assertion that the income tax liability of a business can not increase consumer prices is patently false. It allows for the increase in consumer prices because all businesses have to pay the tax and all businesses will increase prices to recoup it. This has no effect on supply and demand which still functions but with the embedded tax included in the price.
Published: May 24, 2007 4:17 PM
Dale Smith
To Paul S.--1. The state that you want to support with tax dollars is the greatest enemy of freedom and security. 2. "Each and every citizen" won't pay "his/her fair share" under the FairTax since "the poor" will receive a transfer payment that may even be greater than the tax they pay. 3. How can you say that "a taxless society is unreasonable and unsuportable" when we had no permanent income tax in this country until 1913? 4. What makes a tax on consumption a "fair tax"? Because you FairTax people say it is? If we have taxes (which I am against), I would rather have a very low income tax than a 23% flat tax. The problem is the amount of the tax, not how it is collected.
If we do away with taxes, who is going to maintain the roads that you'll need to drive on to get to your job? Who is going to defend our shores from invading armies? Get real. No society can function fully without taxation. The goal should be REASONABLE government spending and the lowest tax rate to support that. While the FairTax isn't that, it's a step in the right direction.
Published: May 24, 2007 4:28 PM
Dale Smith
Not true at all and rather poor economic thinking. This is a question of tax incidence (who pays a tax) and tax shifting. The above suggests that the employer’s share of the payroll tax is shifted forward on to the consumer in the form of higher prices. In actuality, the employer’s share of the payroll tax is paid by the employee.
So the employee is NOT a consumer? Then why is he earning money? To save it indefinitely? The only true consumer is the end consumer who has no mechanisms for recouping part of his cost. Anything that lowers the ability of an individual to spend is a burden to the consumer. Higher prices, lower wages, and reduced dividends all qualify as "shifting" to the consumer.
Published: May 24, 2007 4:36 PM
Dale Smith
One issue nobody mentions is the "unfairness" to those just about to retire. All their lives they pay income taxes and plan for a retirement where they can live on social security, only to find that now they have to pay taxes on spending. Anyone who saved for retirement will lose because they saved. All savings will in effect be taxed by the 23% or higher level. On the other hand, those that had not saved, and spent spent spent, would benefit. And what about those who work and later want to leave the country. Will they have to pay 23% on everthing they try to take out of the country?
The only answer to all of this is Harry Browne's proposal to get rid of the income tax and replace it with nothing. Then sell off the federal government's assets and buy lifetime anuities for those on social security and close down that boondoggle too.
News flash. Retirees pay taxes now. They pay the embedded taxes included in consumer prices. In addition, they pay income taxes on their social security stipend. Under the FairTax, the embedded taxes would go away and be replaced by the 23% retail sales tax (almost a complete wash) and then the retiree would collect his social security stipend FREE of income tax. Plus the interest income generated by his savings would also be FREE of income tax. Retirees would be one of the categories of individuals to benefit greatly from the FairTax.
Published: May 24, 2007 4:49 PM
Dale Smith
Theirn's quote "Once the Fairtax is passed and becomes law, its success will insure the repeal of the 16th Amendment as it will be politically impossible to not repeal it; such will be the overwhelming will of the people" strikes me as wildly improbable. I would argue that those in favour of less taxation are wise not to advocate additional forms of taxation in the hopes the latter will achieve the former. Am i being too radical?
The FairTax Act could alleviate your fears by simply adding the following statement at the end of the bill: "the FairTax becomes null and void as soon as any new income tax is enacted." This would remove the necessity of repealing the 16th amendment in order to avoid two tax systems; however, the repeal would ultimately be desired to avoid any new income taxes. Consumption taxes have historically been less of a drag on an economy than income taxes.
Published: May 24, 2007 5:02 PM
Dale Smith
An income tax or a payroll tax on an employee will not affect the price of the good he is producing. But an excise tax will? I think you are mixing these two taxes. An excise tax is a tax on a percentage price of the good; say a ten percent tax on wine. This ten percent tax on wine will cause marginal firms to leave the industry and other firms to cut back on the production of wine. As the quantity of wine produced falls, the price of the wine rises. Who pays the ten percent tax (the producer or the consumer) will depend on the elasticity of the supply and demand curves.
Trust me the producer will NEVER pay the tax. If the market cannot support a price increase, the producer will lower the wages of its employees. If the market will not support a wage decrease, the producer will reduce dividends to its stockholders. If stockholders do not accept the reduces dividend payments, they will sell off their stock in a chain of repeated selling until there are no buyers of the stock and the producer will go out of business or the remaining stockholders who cannot sell their stock will bear the cost of the tax. A producer (business entity) can never bear the cost of a tax because the profit of the business at some point belongs to an individual or group of individuals who are also consumers. So, as you can see, there really is no such thing as a tax on business since the cost of the tax is ultimately born by an individual.
Published: May 24, 2007 5:18 PM
Dale Smith
Without a reduction in supply the price does not rise and the tax would have to be shifted backward on to the firm.
Absolutely false, if every producer in a particular market has to pay the same income tax on its profits, every producer can raise prices to recoup most or all of that cost. There will be a median price that all producers will be able to add to their price without affecting their market share. If there is an overall reduction in market demand, then each producer would have to reduce the price to compensate for the reduced demand. If the require reduction, in this case, prevents the producer from recouping all of the income tax burden, then the producer will attempt to lower wages. If the market doesn't support a lower wage, then the producer will reduce dividends to stockholders. If the market will not support the reduced dividends, then the stockholders who are unable to sell their stock will have to eat the cost of the income tax if they can still remain in business or go out of business. Bottom line. Individuals pay taxes, not businesses.
Published: May 24, 2007 5:40 PM
Dale Smith
A friend of mine asked my opinion of the "Fair Tax" recently. Part of my response:
There is a risk with the "prebates" they talk about, that people will view it as just another government handout, and agitate to increase the size of the check they get.
Also, according to the way it's set up (according to their FAQ), it's not actually true that people below the poverty line pay no net tax. See, for example, on their chart, one person making $9310 or less is below the poverty line. They get a rebate totaling $2141 per year. The problem is, because this is a sales tax, that person pays tax when they spend that $2141, too. At 23% sales tax, this person pays net $492 per year in tax, which is just over 5%. That's preferable to 23%, but you're still talking about a system in which the people living below the poverty line, the poorest people in the country, lose 5% of their meager income to federal taxes. Frankly, I find it a bit disturbing that the people proposing this system haven't recognized this. It doesn't say much for their understanding of economics.
Excuse me? With a consumption tax, increasing someone's income by issuing a prebate check has no effect on tax paid. Only an increase in consumption would do that. In your example, the person making $9310 and spending $9310 will pay $2141.30 in taxes IF all expenditures are for new goods and services. If the government gives this individual 12 prebate checks totaling $2141.30 thereby increasing his income to $11,451.30 and the individual's expenditures remain the same, he is still going to pay $2141.30 in taxes. $9310 minus $9310 result in no remaining income. However, with the prebate $11451.30 minus $9310 leaves $2141.30. So the prebate check is indeed 100% income.
Published: May 24, 2007 5:55 PM
Dale Smith
A friend of mine asked my opinion of the "Fair Tax" recently. Part of my response:
There is a risk with the "prebates" they talk about, that people will view it as just another government handout, and agitate to increase the size of the check they get.
Also, according to the way it's set up (according to their FAQ), it's not actually true that people below the poverty line pay no net tax. See, for example, on their chart, one person making $9310 or less is below the poverty line. They get a rebate totaling $2141 per year. The problem is, because this is a sales tax, that person pays tax when they spend that $2141, too. At 23% sales tax, this person pays net $492 per year in tax, which is just over 5%. That's preferable to 23%, but you're still talking about a system in which the people living below the poverty line, the poorest people in the country, lose 5% of their meager income to federal taxes. Frankly, I find it a bit disturbing that the people proposing this system haven't recognized this. It doesn't say much for their understanding of economics.
Excuse me? With a consumption tax, increasing someone's income has no effect on tax paid. Only an increase in consumption would do that. In your example, the person making $9310 and spending $9310 will pay $2141.30 in taxes IF all expenditures are for new goods and services. If the government gives this individual 12 prebate checks totaling $2141.30 thereby increasing his income to $11,451.30 and the individual's expenditures remain the same, he is still going to pay $2141.30 in taxes. $9310 minus $9310 result in no remaining income. However, with the prebate $11451.30 minus $9310 leaves $2141.30. So the prebate check does indeed cover 100% of the tax burden. Granted, when the $2141.30 is spent it only has a real value of $1648.80, but rememeber this would be spending ABOVE the poverty level and would not be reimbursed. It could be argued that the $2141.30 from one month would not be spent in subsequent months because the individual would continue to spend $9310 and get 100% reimbursement of the taxes paid. So this person could begin to accumulate a savings that would be increased by $2141.30 plus interest every month as long as spending held at current levels! What a boon for the poor! This might actually allow some of the poor to pull themselves up by the bootstraps and become middle class.
Published: May 24, 2007 6:06 PM
Walt D.
Fair Tax is an oxymoron - like Military Intelligence.
Remember the old saying;
If someone comes over for dinner and talks about tax fairness, count your silverware before they leave!
Published: May 24, 2007 10:58 PM
Apok the Hippie
The problems i have with the "FairTax" are more political than economic (but since politics and economics are married I will give it a shot here).
I will ask questions and you FairTaxers try to answer honestly.
1. Who will be the first politician to suggest the prebate ought to be measured on the standard of living costs in particular areas? This will make politicians from big cities very popular. This will also increase gov't bureaucracy and spending.
2. Who will be the first politician to suggest that some items are dangerous and should be taxed at a higher rate than other items (for example guns, ammo, SUV's, private jets, anything Al Gore or other global warming alarmists say pollutes the earth)? Social engineers will love this tax system and the power to influence people's lives on the most basic level.
3. Who will be the first politician to suggest that the 23%INCLUSIVE rate (30% Exclusive rate)is not enough to cover their new spending plan? Maybe Hillary will raise the rates to pay for national health care.
4. Who will be the first politician to suggest that the poor should have more prebate money and it is not fair that the rich get as much prebate as the poor? I have several in mind.
5. Who is the first person to open a black market/organized crime syndicate? Okay i have seen your defense on this issue and it stinks. Black marketers (and other criminal types) will by from other black marketers, thereby avoiding this tax, NOT PAY IT. Your assumption that a person's crime habits stop with only one criminal action is very naive. Drug dealers, illegal immigrants, pirates and other criminal minds will find ways to avoid this tax too. Where there is a will there is a way. Stopping these ways creates bigger government and more intrusive agencies.
6. Who will be the first judge to rule that police and other law enforcement agencies have a perpetual warrant to search your home because there is perpetual probable cause you might have illegal items (untaxed items) in your home? To prove you paid the taxes on each item you must have your receipts for that item on hand, forever (right down to the smallest item). There are ways to stop this endless shoe-box of small papers: every item could have a stamp on it (and an entire bureaucracy to design and make unforgeable tax stamps). Or the government could just institute a cashless society to control your every purchase. If you think this is a fairy tale scare tactic teh fairtax.org website says outright that more audits will be held to keep people honest. That just proves my point in this question.
7. Who will be the first politician to suggest that used items ought to be taxed along with the new items?
8. Who will be the first politician to suggest, in a time of national emergency, that an income tax is necessary along with the sales tax? If you think the 16th Amendment will ever be repealed you dont understand the nature of government. Besides the 16th did not create an income tax or make one legal. All it did was remove a ban on the method of collecting the revenue of an income tax (subject to a census ...to... no census needed) and to remove the necessity that the proceeds be apportioned among the states. We will have both taxes, guaranteed. I have an issue of the constitutionality of a national sales tax but i will let the court decide that matter.
9. After the IRS is gone which Alphabet Agency is gonna replace it? As much as the IRS is hated there has to be an agency of accountants to track the money and enforce the laws of the tax code. You would be getting rid of a purple monster and replacing it with an equally vicious green monster.
10. Who is the first politician to suggest that politicians get a free ride on the tax thing?
11. Are foreign airlines taxed too? If not, say bye bye to domestic airliners. And all the supporting industries like Boeing and Pratt & Whitney. Buy stock in Airbus and British Air. If foreign carriers are to be taxed that will be a policy nightmare.
12. On that line of thought what about foreign based services and markets.
13. Are stock purchases taxed? Think of the implications if politicians get to meddle with stock prices.
14. What about churches and religious orgs. or non-profit orgs? Current law says they are not taxed (nor should they be as separation of church and state dictates). Do they get special cards for no taxation (and how do you stop people from organizing under these umbrellas to avoid taxes). And if they get special cards will their purchases be tracked and logged?
15. Who is the politician that will suggest tracking purchases made by every consumer and making the database? This is inevitable to enforce the tax laws and curb black markets. If your family stops buying toilet paper for months the government has cause to search your home for toilet paper (the database gives probable cause), if you have TP but the database says you havent bought it in months you are guilty of tax evasion. Since there is no expectation of privacy in this area of life the government can track everything about you. If they implement the cashless society then gov't power is total. If you say that the TP is not enough to send one to jail then you admit the FairTax is unconstitutional because you cannot enforce it, it you say throw the bum in jail you are making a criminal out of the ridiculous.
16. Here is the million dollar question: Under the FairTax how are we going to stop gov't from the unmitigated growth it seeks to curtail? If you stop buying new items, they will tax used items to compensate, if you buy black market you go to jail, if you go overseas there is a 23% income tax on your paycheck (SEC. 905. (a) IN GENERAL- All persons, in whatever capacity acting (including lessees or mortgagors or real or personal property, fiduciaries, employers, and all officers and employees of the United States) having control, receipt, custody, disposal, or payment of any income to the extent such income constitutes gross income from sources within the United States of any nonresident alien individual, foreign partnership, or foreign corporation shall deduct and withhold from that income a tax equal to 23 percent thereof.) AN INCOME TAX BUILT RIGHT INTO THE FAIRTAX LEGISLATION!!! Yeah, they're gonna repeal the 16th hahahahahahahaha. Do you really think politicians read your angry e-mails? Do you think they care about what you think? Try emailing your congressman about something. All i get are form letters (and i'm lucky if they are even close to the subject i write about).
17. Who will be the first politician to suggest taxing business to business transactions? That will open up new and wondrous ways to tax businesses just as much as they are taxed today (maybe more). If they do get taxed will it be 23% or 34% or 50%?
18. Please explain one more time why they want to tax essential items like groceries? Dont give me the line about lobbyists, they are already there in DC and we see no evidence of these lobbyists in state houses trying to get products tax free. Besides once the ice is broken from amending the tax all hell will break loose (and i dont think the amendment has to pass either for the lobbyists to gather). Why not NOT TAX FOOD. Well that would eliminate the need to track you and your family via the prebate registration process.
19. Speaking of religion and prebates, what about those American citizens that believe the SSN or other ID number is against their religion? Do they just eat the tax? That sounds like religious discrimination to me. How is discrimination fair?
20. "But Apok, the FairTax is only 57 pages long while the current tax code is over 3000 pages long." Well given that the current income tax started just as simple and ended with 3000 pages 80 years later doesnt foretell a good future for the fairtax in 80 years of accumulated amending (and it will be amended, repeatedly).
How do you stop it, really? The only true way to stop the gov't is to vote, run for office yourself, or both. Changing the tax system is not the answer.
Every clear thinking American should never trust government. Always look at every proposal under its worse possible scenario (because it is likely to end up that way). Ask yourself: "What will Hillary Clinton do with this tax system?" "How would Al Gore manipulate this system?" Because in the end, Nothing is written in stone and everything can be changed.
Oh, Dale Smith check your last post about the 2141.30 being monthly. You start out saying the guy makes 9310 per year from income and 2141 per year in prebate then end with both amounts being monthly numbers. If a guy makes 9310 per year that prebate check is not gonna be put in a savings account that i can guarantee. And if he makes 9310 per month he is hardly strapped for cash. In this case the rich get richer (as they can afford to invest that 2141 per month instead of buying needed supplies) and the poor barely get by (only breaking even in the tax prebate). I just thought i would call your attention to your mistake.
Published: July 11, 2007 9:39 PM