Kotlikoff vs. Vance
Lawrence Kotlikoff has responded to Laurence Vance's criticism of the FairTax idea. So that it doesn't get lost in the ever-longer thread here, here it is as a separate post. It seems to me that that his whole response underscores what a great job Vance did. Smoke and mirrors indeed!
Reviewing Laurence Vance’s Book Review
“There’s No Such Thing as a Fair Tax�
Dr. Laurence J. Kotlikoff
Professor of Economics, Boston University
In his Ludwig von Mises Institute December 13, 2005 review of The Fair Tax Book by Neal Boortz and Congressman John Linder, Laurence Vance identifies what he believes are 3 “lies� in the book and 17 “problems� surrounding the FairTax. Being a fan of both the FairTax and Congressman Linder as well as a student of consumption taxation, I offer here a point-by-point response.
First, the alleged lies:
“Lie� #1 – “Taxes would be voluntary under the FairTax.�
Vance argues that everyone needs to buy goods and services and, therefore, everyone is, in fact, forced to pay the FairTax. This is obviously correct. But declaring that Boortz and Linder are “lying� on this point is wrong. The authors were simply saying that the public would have more discretion in the timing and amount they pay in taxes than under the current system. Today, income and payroll taxes are paid as soon as we earn money. Under the FairTax, no tax would be due until we spend what we earn.
Yes, calling the FairTax “totally voluntary,� as the authors do, is pushing literary license, but not beyond common practice. Indeed, the IRS touts the voluntary nature of our current tax system stating that “The U.S. income tax system is built on the idea of voluntary compliance. Compliance is voluntary when taxpayers declare all of their income. Taxpayers also voluntarily comply through obtaining forms and instructions, providing complete and correct information, and filing their income tax returns on time.�
No impartial reader of the book would come away thinking that the FairTax represents, in effect, the establishment of a voluntary charity for the government.
“Lie� #2 – “The FairTax rate would be 23 percent.�
Vance claims that the FairTax’s rate is really 30 percent. He’s both wrong and right at the same time. The tax-exclusive rate we’d pay at the store would, indeed, be 30 percent, but the rate that matters – the tax-inclusive rate – would be only 23 percent.
To see this, consider spending $1.00 under the FairTax on a good or service (e.g., a candy bar) whose price is 77 cents in the absence of the FairTax. In spending the $1.00, one pays 77 cents for the good or service and 23 cents (30 percent of 77 cents) in taxes. Hence, the $1.00, whether it represents a dollar of income or wealth, ends up delivering only 77 cents of consumption and, consequently, is being taxed at a 23 percent rate.
By analogy, the same can be said for the income tax. If wages of $1.00 were taxed at 23 percent, the taxpayer would have only 77 cents left to spend on consumption. Suppose we were to tax everyone’s wages at 30 percent, but also subsidize their wages at seven percent. Anyone looking at such a tax structure would say there is a 23 percent effective tax on wages.
In describing the FairTax rate as 23 percent, Boortz and Linder are quoting the rate in terms that are not only economically honest, but also permit ready and appropriate comparison with our prevailing income and payroll tax rates. Let’s assume taxable income of a sole-proprietor was $72,000, so that that taxpayer pays taxes of 28 percent plus 15.3 percent payroll taxes for a combined tax-inclusive rate of 43.3 percent. Unless Vance wants to refer to the 43.3 percent as actually a 77 percent rate, he really can’t compare that rate to the FairTax.
Vance owes the authors an apology on this one.
“Lie� #3 – “The FairTax would abolish the IRS.�
Vance reiterates what the FairTax legislation states, namely that a federal agency would be required to oversee and ultimately enforce the collection of the FairTax. If one were to call this agency the IRS, the IRS would not, in fact, be abolished. But here, again, the authors are engaging in reasonable literary license in suggesting that the FairTax would abolish the IRS.
Whether or not the tax collection agency retains the initials I, R, and S, it would be completely different from the current enforcement apparatus. For starters, we’d no longer have more than 100,000 government bureaucrats enforcing 17,000 pages of federal tax law. Second, we’d no longer have to file individual income tax returns. Third, the IRS would no longer be in a position to know virtually every detail of our financial affairs. Fourth, tens of thousand of accountants, tax attorneys, and lobbyists would no longer spend their working lives trying to decipher, comply with, modify, and avoid tax laws and IRS regulations.
So the FairTax would abolish the IRS for all practical purposes. And, more importantly, the nation would save $250 billion plus in direct compliance costs and an even larger sum in efficiency costs from eliminating the current federal tax system. Yes, the FairTax would entail collection and efficiency costs, but much lower ones. State governments, most of whom are already collecting and administering their own state sales taxes, would be charge and compensated for collecting the FairTax.
“Problem� #1 – “The FairTax hides the amount of tax being paid.�
Vance claims that the FairTax hides the amount of sales tax being paid. Not so. The receipts one would receive in making purchases would clearly indicate the price of the commodity purchased as well as the amount of FairTax imposed on that commodity. In my $1.00 expenditure example, the receipt would say Snicker’s Bar 77 cents and Tax 23 cents.
In contrast to the FairTax, the current tax system makes it very hard to understand the extent to which we’re being taxed. The current tax system constitutes not one tax system, but four – the payroll tax, the federal personal income tax, the corporate income tax, and the estate and gift tax. The later three tax systems are extremely complex. Even the payroll tax is very hard for most workers to appreciate. How many workers, for example, understand that they are, in fact, paying the employer as well as employee portions of the 15.3 percent FICA tax?
The complexity of our tax system makes it extremely difficult for any of us to understand the full extent to which we are taxed on working and saving. The need, in the end, to guess what incentives we’re facing further distorts economic choices. The costs of these distortions are significant. Indeed, they may far exceed the roughly 2 percent of GDP direct costs of complying with the current tax system.
Thus, Vance has the issue of hidden taxes completely backwards. The FairTax is the most transparent of any tax system. The current tax system, in contrast, is specifically designed to and thrives on hiding its provisions.
“Problem� #2 – “The FairTax is progressive.�
Leaving aside the rebate, the public generally views sales taxes as regressive. They reach this conclusion by comparing sales tax payments with current income. Since someone with zero current income still has to buy food to eat, the ratio of that person’s sales tax payments to his current income is infinite. In contrast, the ratio of sales taxes paid to income in the case of someone with a $1 million in current income is much smaller. So the “poor� person with zero income is paying a much larger share of his current income than is the rich person in sales taxes.
The problem with this analysis is that people don’t pay for their consumption simply out of their current income. (If they did the person with zero current income would starve.) People also pay for their consumption out of their private wealth and out of the welfare benefits, Social Security benefits, unemployment benefits, and other government transfers provided by the government. Indeed, the “poor� person just mentioned might well be billionaire Warren Buffet. How so? Well Warren’s current annual income could be zero because he’s experienced capital losses on his investments during the current year. This wouldn’t prevent him from using his billions in assets to pay for steak dinners over the course of the year in his favorite Omaha restaurant.
Rather than consider progressivity on an annual basis, economists consider progressivity on a lifetime basis by comparing the present value of remaining lifetime tax payments to the present value of remaining lifetime resources. Remaining lifetime resources includes the present values of future labor earnings and government transfer payments as well as the amount of current net financial and tangible wealth.
From a lifetime perspective, a sales tax (with no rebate) is viewed as neither progressive nor regressive, but rather as proportional. The reason is that the present value of a household’s remaining lifetime spending must equal the present value of its remaining lifetime resources. If it didn’t, the household would be able to spend more over its lifetime than it earns.
Because spending equals resources on a present value basis, taxing spending is equivalent to taxing resources. And doing so at a proportional (fixed) rate means you are taxing resources as a proportional rate. This is what the FairTax does. But the FairTax adds in a rebate, making it not proportional, but progressive overall.
So Vance is right. The FairTax is progressive. But this is a plus, not a minus. Unlike Vance, the vast majority of Americans, including the vast majority of the rich, favor a progressive tax system.
“Problem� #3 – “The FairTax is an income redistribution scheme.�
Under the FairTax households with the same demographics will receive the same rebate. But as a share of remaining lifetime resources, the FairTax is progressive, as indicated above. But this is not a problem. Any tax system acceptable to the public must be progressive.
“Problem� #4 – “The FairTax creates new tax collectors.�
Totally incorrect. Today, everyone who files an income tax return, more than 200 million taxpayers, is a tax collector. The number of taxpayers will diminish by more than 90 percent. And they will be the same tax collectors as today. In one fell swoop, the FairTax reduces the number of taxpayers at the same time it vests everyone in the tax system, by making the price of government explicit. Here Vance argues that baby sitters and similar providers of personalized services would need to collect the FairTax and mail it into the government. This is true, but it’s no different under the current system. Anyone who is self employed is required to pay self-employment tax as well as federal income tax above a certain level of income.
Although the baby sitter will go from being a “taxpayer� to being a “tax collector,� nothing real will change. Apart from the change in words, the baby sitter is in the same position of having to mail a check to the government.
“Problem� #5 – “The FairTax creates new taxes.�
Wrong. Today, we tax returns on capital, we tax sales of capital assets, we tax labor earnings, we tax estates, and we tax gifts. All of these taxes are eliminated by the taxation of the final retail sale.
Yes, currently, there are no federal taxes directly levied on the purchase of most final goods and services. But at the same time the FairTax would institute these direct taxes, it would also eliminate direct taxation of the labor and capital income received by American taxpayers. Hence, the FairTax destroys old taxes at the same time it establishes new ones. Depending on how one quantifies labor supply and saving, the FairTax could be said to reduce, on balance, the number of taxes. In any case, counting up the number of distinct taxes seems like a silly and inherently arbitrary way to evaluate the FairTax. The important point is not the number of things being taxed, but the number of rates used to tax those things. Under the FairTax all goods and services will be taxed at one and only one rate – 23 percent.
“Problem� #6 – “The FairTax creates new taxpayers.�
I sure hope so. I hope the 40 percent or so of Americans who pay no income tax today have to pay the FairTax and see that they too are vested in our government. I hope that criminals who have illegally amassed wealth in the past will pay lots of sales taxes when they spend these holdings.
What about churches and other non-profits? Their tax treatment is as it is today. They’ll pay no taxes on their income, and charge no FairTax when those sales are substantially related to their exempt function. On the other hand, if they sell consumer goods or services, they’ll have to charge and remit the FairTax on these sales.
Plus, individuals will be able to donate to their church or favorite charity tax-free.
“Problem� #7 – “The FairTax makes it easier for the government to raise taxes.�
Quite the opposite. Politically, if there is only one tax rate that everyone needs to think about and keep track of, there will be lots of interest in that one rate as well as opposition to raising it. One key objection to the FairTax is that it is too visible, meaning that it exposes the true costs of the government. This is at the same time its major strength and weakness. Exposing the true cost of the government ensures downward pressure on the size of government. But doing so makes politicians who like to hide taxes wary. Moreover, as the public digs in its heels on raising the single rate, as I suspect it would, federal expenditures would have to be restrained to live within the 23 percent rate budget. I.e., the 23 percent FairTax rate has the potential of establishing a global budget for federal expenditures, something that should be wholeheartedly supported by Vance.
Vance suggests that the rate would have to rise over time to adjust for growth in the economy. This is (excuse the pun) off base in that the FairTax tax base will itself rise with growth in the economy. Hence, revenues will keep pace with overall economy-wide growth without requiring a rise in the tax rate.
The major point he also misses is that the FairTax is global tax reform. When the U.S. is the only industrialized country in the world with a zero rate of tax on savings and investment and productive enterprise, other nations will have to follow suit or lose their citizens’ investments to the U.S.
“Problem� #8 – “The FairTax makes it easier for state governments to raise taxes.�
The states may adopt the FairTax’s broader sales tax base, but would likely cut their rates in so doing. What Vance ignores is the competition across states in attracting business and workers. This competition explains why state tax rates are relative low and are likely to remain low.
“Problem� #9 – “The FairTax has unknown and potentially huge Transition costs.�
Saying so doesn’t make it so. There is no reason to expect significant transaction costs. The inventory transition valuation issue raised by Vance can readily be sorted out.
“Problem� #10 – “The FairTax makes exceptions while claiming to have none.�
Totally incorrect. Unlike today, where the tax code is used as an effective second appropriation committee, the FairTax taxes every form of consumption expenditure that can readily be taxed without exception. The FairTax exempts educational expenditures, but educational expenditures are viewed by economists as a form of human capital investment, not a form of consumption.
“Problem� #11 – “The FairTax has a great potential for fraud.�
This is the major concern about the FairTax raised by economists and tax practitioners, but it is not based on rigorous analysis. There is every reason to believe the FairTax would reduce noncompliance from its current $300 billion level.
First, much of the $300 billion stems not from fraud, or the intentional violation of a known legal duty, but rather from mistake. The FairTax eliminates virtually all potential for innocent mistakes, and it makes it much more difficult to claim that noncompliance arises from mistakes; i.e., the simplicity of the FairTax removes the plausible deniability of fraud.
Second, the vast majority of sales of consumer goods and services and all of the sales of expensive consume goods and services is done in retail stores, whose sales tax payments could readily be monitored. As for the other transactions, we’d have the entire IRS or, whatever you’d want to call it, available to enforce this single tax. By setting very high penalties and using ad campaigns to indicate that cheating on the sales tax hurts everyone, collecting the FairTax should be straightforward.
Third, the FairTax reduces the effects of all known factors on fraud. The three factors that economists have shown to affect compliance are marginal rates, likelihood of being caught, and penalties. The FairTax enhances all three:
1) The FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax’s reduction in average tax rates on the working age population reflects the broadening of the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. Consider, as an example, a single household earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 16.2 percent under the FairTax.�
2) The likelihood of being caught increases dramatically when the collection points decrease from 140 million to 20 or so million.
3) The FairTax imposes significant penalties on those who would commit tax fraud.
“Problem� #12 – “The FairTax will turn thousands of Americans into criminals for not collecting the tax.�
Thousands, if not millions, of Americans now cheat on their income taxes. And we have more than 150 tax penalties, several of which are criminal today. But we do perform audits and fine people for not paying. The same would occur under the FairTax. People who cheat would get caught and pay penalties. However, the FairTax has several provisions enhancing taxpayer rights.
“Problem� #13 – “The FairTax does not repeal the 16th Amendment.�
The FairTax cannot repeal the 16th Amendment, which has to be done in a separate piece of legislation. So, Vance’s point is that we must live with the income tax? Not so. The FairTax does repeal Subchapters A and C of the 1986 Internal Revenue Code that implement the income tax. Vance’s concern here is that the income tax will be restored and that we’ll end up with both the income tax and the FairTax. But if the popularity of the FairTax will, I believe, preclude that from ever happening.
“Problem� #14 – “The FairTax doesn’t repeal federal excise taxes.�
True. But not a problem. We want to retain some flexibility to tax goods, like cigarettes, the consumption of which can impose significant costs on society at-large, at higher rates. These taxes serve a different purpose than general revenues. They are in effect taxes on externalities.
“Problem� #15 – “The FairTax doesn’t lower taxes.�
Wrong. The FairTax dramatically lowers marginal rates and completely eliminates the double taxation on returns to savings and investment. And over time, the FairTax will stimulate growth and permit much lower rates of taxation than would otherwise be the case.
“Problem� #16 – “The FairTax doesn’t address the root problem that the government has no fundamental right and should have no power to tax us.�
The government has the rights we the people have given it through the Constitution. This, again, is a Vance problem, not an American problem, but he should read the Tenth Amendment of the United States Constitution, which is part of the Bill of Rights. It states: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. If Vance wants to strike that Amendment, he has a long way to go.
Problem # 17 – “The FairTax makes welfare universal through the prebate.�
Wrong. The FairTax simply declines to tax Americans before they have met their own sustenance in life. Nobody is taxed on the necessities of life under the plan. And nobody is required to pay for the cost of the government until they have met their own needs. I don’t consider that welfare.
Dr. Laurence J. Kotlikoff
Comments (116)
Ga Elons
Dr. Kotlikoff,
Thank you for responding in a very clear way. You have convinced me.
Published: December 20, 2005 8:44 AM
Les Stouder
Dr. Kotlikoff,
While I agree with your rebuttal, it occurred to me that your responses were merely statements of the obvious. I do not know Mr. Vance, nor am I familiar with his politics. However, very shortly after I began reading “There’s No Such Thing as a Fair Tax� it became blatantly obvious that his book "review" was agenda based. Mr. Vance, it would appear, has a vested interest in the status quo.
Published: December 20, 2005 9:10 AM
Aaron S
Wow, a rebuttal now!
A couple things to add:
The IRS IS actually eliminated. Gone, defunded, taken out of the tax code. What enforcing the FairTax are the existing sales tax agency's of the states operating under a good sized budget. The new federal Sales Tax Bureau (the only organization someone could say is the IRS with different initials) ensures that the money from the STATES is correct. No more feds in your lives coupled with the actual IRS elimination makes in fact Mr. Vance’s assertion a lie.
Also, the major difference in the affect standard ‘welfare’ has as opposed to the rebate is that under the FairTax, even the dirt poor are going to be screaming their taxes are too high. HUGE difference.
Published: December 20, 2005 9:16 AM
jeffrey
And here I thought the phrase "FairTax" cult would have been uncharitable. Well, all I can say is: all ye who believe sales taxes are voluntary and neutral, and that a 30 percent tax is really a 23 percent tax, comment away.
Published: December 20, 2005 9:27 AM
Kyle Rose
As a FairTax supporter, even I think the 23/30 rate explanation is begging the question a bit; if nothing else, 30% is more intellectually honest. A nice side effect might be reduced costs in the chain of production, but if the good is 77c + tax, then the tax rate is 30%. Period. Anything else is simply misleading, and casts a shadow of dishonesty on and gives usable ammo to opponents of a great proposal.
Published: December 20, 2005 9:31 AM
PR
This is the third or fourth recent FairTax thread and I still haven't seen a response to the fact that pre-FairTax savings will be double-taxed in the transition. For a plan that claims to encourage saving, that is an awful big slap in the face to savers. Again, I ask why wouldn't a flat income tax be a better choice than FairTax?
Published: December 20, 2005 9:38 AM
Laurence Vance
I said: "the FairTax creates new taxes." He says "wrong." But then in the next paragraph he says "the FairTax destroys old taxes at the same time it establishes new ones." And this guy expects to be taken seriously?
Published: December 20, 2005 9:40 AM
Person
I said essentially the same thing in the other thread after the Kotlikoff comment was posted, so I might as well also post it here. Vance's response to the above will probably be something like,
1) So what? You didn't answer the other arguments against the FairTax I didn't make.
2) You're a statist.
3) Taxes are bad.
Of course, now thanks to Jeffrey's comment, we have:
4) FairTax supporters are a cult (something no one ever accuses Mises followers of being).
5) Apples-to-apples comparisons are dishonest.
Published: December 20, 2005 9:42 AM
Marco
L. Koltikoff disputes Vance's claim that the "fair tax" wouldn't lower taxes, but at the same time the fair tax "Open Letter" claims that FT advocates do not support a reduction in government spending:
The tax reform plan we endorse is revenue neutral, collecting as much federal tax revenue as the current income tax code, including payroll withholding taxes.
So which one is it? You can't have it both ways.
Published: December 20, 2005 10:03 AM
Keith G. Derrick
Oh I understand completely now. Vance points out that the authors are lying about certain points in their book FairTax and Dr. Laurence J. Kotlikoff calls them "literary license." What's the difference?
Vance claims that a problem of the FairTax is that it creates new taxpayers. Dr. Kotlikoff reveals quite a bit by simply saying, "I sure hope so. I hope the 40 percent or so of Americans who pay no income tax today have to pay the FairTax and see that they too are vested in our government." Wow...not only are taxes used to provide money to the government, but also to make people invested in the government! Unbelievable.
This line of thought is continued by Dr. Kotlikoff when he responds to Vance stating that the FairTax does not eliminate federal excise taxes. "True. But not a problem. We want to retain some flexibility to tax goods, like cigarettes, the consumption of which can impose significant costs on society at-large, at higher rates. These taxes serve a different purpose than general revenues." Yes...social engineering.
This is an absolutely horrific rebuttal that reveals much more about the nature of taxes and government. I shudder to think what is being taught in Dr. Kotlikoff's economics classes.
Published: December 20, 2005 10:04 AM
John Shuey
The problem with Mr. Vance's position...as with many of the academic tomes from Mises...is that they are more concerned with how many angels can dance on the head of a pin than with how we might realistically advance freedom and better the system in a way the vast majority of the American people can and will accept.
I favor the Fair Tax over all REALISTIC proposals I have seen to date. If the Mises folks have a better REALISTIC plan...let them advance it. But if your only answer is stop all taxes and privatize all roads, police, and fire departmants, you have nothing real to add to the debate. Stick to counting angels.
Published: December 20, 2005 10:08 AM
Mark
I see disadvantages in the Fair Tax occurring especially if implemented at the local level in dealing with smaller budgets.
One can never be quite sure what a fire dept or police dept budget will be from year to year if funds used to hire personnel and purchase equipment are collected through a highly elastic consumption tax.
I do concur that a consumption tax is the fairest way to tax.
Published: December 20, 2005 10:16 AM
Marco
John: as a libertarian, I favour all proposals aiming to reduce taxes / government expenditures. The "fair tax" just ain't one of them.
Published: December 20, 2005 10:19 AM
George Gaskell
So, Dr. Kotlikoff asserts that because the IRS tells one outrageous lie about the voluntariness of the current tax system, telling such lies is now a "common practice," and it is therefore acceptable to repeat it?
I find that ... rather surprising.
(And I'm only on the first paragraph!)
Published: December 20, 2005 10:27 AM
blueHerring
Seems like it would be more profitable to talk about the merits of abolishing taxes altogether than debating the niggles of this type of policy change. The fair tax debate is starting to feel more like a shell game to distracts us from the important message that ALL taxes are immoral and economically bad.
Published: December 20, 2005 10:38 AM
George Gaskell
Does he owe an apology for the right part or the wrong part?
As I mentioned in the earlier thread, the only justification for using the tax-inclusive rate (the way that we do with an income tax) is that the tax rate on any particular dollar earned over the course of the year depends on the existence and taxable character of every other transaction that the income-earner engages in over the course of that year.
Obviously, some of those transactions are going to be later in time than the earlier ones. Some of the later transactions (e.g., for operating expenses) will be used to offset income earned earlier in the year. But at the time that the (earlier) income is earned, the parties to the transaction have no way of knowing what the later transactions will be.
The system of pre-paying the income tax as a tax-inclusive rate only works if the transactions are more or less stable (i.e., in long-term salaried employment), and where the deductions for operating expenses are extremely limited and therefore more easily estimated (at nearly zero). That's why an employer can, at any point in the year, roughly estimate what the effective tax rate for the entire year will be.
Transactional taxes are calculable (and thus payable) on the spot. The parties to a taxable transaction know everything they need to know -- the sale price, and the tax rate.
Calculating a transactional tax as the add-on rate is open and honest. It is disclosed on the receipt, not hidden in a total so-called price.
I fail to see why an apolgy is called for.
Published: December 20, 2005 10:42 AM
Pat
There's alot of hullaballoo over whether the rate is 30% or 23%. I think the examples are too complicated. Say you make $100 a year and spend it all (consumption taxes work because over time we consume everything, year by year, we save more or less).
You can't spend more than $100 because that's all you have. So a 23% rate means you can only spend 77. That's where the 30% comes in. .3*77=.23*100
All this arguing about whether the rate is 23 or 30 is economically meaningless. Call it a brazijillion if you want, we wouldn't be any worse off in real life.
it's just a number. we could play the same game with income taxes. You make $100, taxed at 23%, leaves you 77 after tax. you need 30% more to get back to $100.
this 23% vs 30% stuff has nothing to do with the rationale for a consumption tax (broad base, little distortion, not double counted)
Published: December 20, 2005 10:54 AM
George Gaskell
This is an overstatement. Even if the four collection-and-compliance costs of income taxation that Dr. Kotlikoff mentions were fully eliminated, the FairTax would not "abolish the IRS" with regard to several important aspects --
(1) the collection of taxes (kind of a biggie);
(2) the distribution of enforcement agents to ensure compliance; and
(3) special agency courts to decide specific cases.
Apparently, the FairTax authors are allowed a considerable amount of literary license.
Published: December 20, 2005 10:55 AM
George Gaskell
this 23% vs 30% stuff has nothing to do with the rationale for a consumption tax
Let's be honest, Pat -- the 23-vs-30 debate has EVERYTHING to do with the PR campaign to sell this proposal to the general public (which is, on average, less than proficient in economics, math or logic).
Calling it 23% is therefore a propaganda tool, designed to make it appear less burdensome than it actually is.
It is the figure that comes across better on television. Pure and simple.
Published: December 20, 2005 11:00 AM
Keith G. Derrick
John,
It's not a matter of "counting angels." It's a matter of principle. For example, the reason to oppose school vouchers is that it brings the government in bed with private schools. However, this does not mean nothing should be done. So a better solution would be to give people income tax credits. This is a REALISTIC approach. Income tax credits would keep the government out of private education, school vouchers won't.
It's the same with the FairTax. Creating a new tax does not move one closer to liberty. Heck...just read the words from Dr. Kotlikoff. "We want to retain some flexibility to tax goods, like cigarettes, the consumption of which can impose significant costs on society at-large, at higher rates. These taxes serve a different purpose than general revenues." So the government starts to pay for healthcare and then they "tax" cigarettes so that future healthcare prices don't rise as much. Why? Because they are now involved in the management of healthcare. Or take the Nixon administration imposing price controls when it was the FED increasing the money supply that caused price inflation.
Government regulations beget more government regulations.
So what's a REALISTIC proposal? How about income tax credits and lower marginal tax rates. This seems to be a better move to liberty than by just creating a "new tax."
Published: December 20, 2005 11:21 AM
Pat
that might be true, but i think the bigger hurdle isn't the number but the idea that the rich don't benefit from consumption taxes. I used to think that way - ie I'm broke and live paycheck to paycheck, the rich can just stash it away - i think once the obvious idea that people save for future consumption gets through to dummies like me, the number isn't that big a deal.
Published: December 20, 2005 11:22 AM
Jim Waddell
On and on, and still none of the Fairtaxers address the point I raised many threads ago.
How often does Congress pass a law exactly as the law's supporters want it written? How often does Congress pass a new law and not change/revise/complicate it in the ensuing years? Examples, please.
IT DOES NOT MATTER WHAT THE FAIRTAX (AS WRITTEN TODAY) SAYS. It does not matter if HR 25 repeals the income tax. Does anyone, anyone at all (names, please), believe HR 25 will be passed intact, exactly as written today?
What matters is what will actually happen in the unlikely event that the Fairtax gets enough popular support to come up for a vote. I'll simply quote my earlier post:
"The Fairtax will never replace the income tax, even if that's what Boortz et al want. By the time Congress gets done fooling with it, we will have an income tax AND the Fraudtax. Can't you see it?
They will plan their own transition period, where we will have both the income and the sales tax. Just temporary, you know. Then some invented emergecy will come along, and they'll have to extend the transition period. People will gradually come to accept having both taxes, and various wasteful programs will come to depend on the revenue (can you say, "Social security and Medicare are in crisis"?) and Congress will realize they can get away with never repealing the income tax. We will then have two awful taxes, thanks to Neal Boortz and the rest of the Fair Taxers who lent their support. They will all say "This is not what we wanted!!". It will not matter. It is what they will get. Call me a cynic, but this is how politicians operate. The Fair Tax is dangerous and a wasteful diversion of energy. Says me, anyway."
I can now add Mr. Kotlikoff's name to the list of those we will have to thank.
Meanwhile, can you imagine if all of the hordes of Fairtaxers out there had instead devoted their considerable energy to reducing government spending? If they were focused and well-organized, they might have made a real difference. Pick any single wasteful government program. Any one. Resolve to kill it. Show the general public how harmful it is. When you win, move on to the next program.
Published: December 20, 2005 11:53 AM
Person
Jim_Waddell: Is there any change in policy you would support, at all? Let's say Ron Paul proposed HR 26, the Government Reduction Act. It would abolish, lets say, six agencies in their entirey. This would be great, right? On that, surely we can all agree.
No, not in Jim Waddell/Laurence Vance world. You would just say things like:
"How often does Congress pass a law exactly as the law's supporters want it written? How often does Congress pass a new law and not change/revise/complicate it in the ensuing years? Examples, please. IT DOES NOT MATTER WHAT THE GOVREDACT (AS WRITTEN TODAY) SAYS. It does not matter if HR 26 eliminates federal agencies. Does anyone, anyone at all (names, please), believe HR 25 will be passed intact, exactly as written today?"
If you're going to oppose every policy on the grounds that it's going to be watered down, you're taking a very different position requiring different arguments. You would need to show how nothing we can do in terms of acts of Congress will ever accomplish anything. If you want to do this, be my guest. But then you need to say what you do think would help. If that's the position you want to take, go right ahead. But please, justify it.
Published: December 20, 2005 12:42 PM
David J. Heinrich
I think that people who fall for the "FairTax" idea are rather dimwitted. This is nothing more than a bait and switch tactic to sock the taxpayers with even more taxes. As I've said before, DiLorenzo has talked about this scam.
Published: December 20, 2005 12:57 PM
Jim Waddell
Person, you propose a hypothetical HR26 whose primary purpose is to eliminate existing agencies. Of course I would support it. The primary purpose of the real HR25, however, is to create something new that had not existed before. Do you see the difference?
I do not oppose the Fairtax because it will be watered down, but because it will create something new that will leave us worse off. Watering down does not cause me to oppose. For example, if a bill that eliminates all Federal gun laws were watered down to eliminate instead only half of them, you bet I'd still support it. With less enthusism perhaps, but still.
Still, you have ducked the question, choosing to attack me instead. Get back to the issue. I challenged you to explain how the income tax will really be repealed. You have not done so.
So, you or some other Fairtaxer, please describe a *convincing* scenario whereby HR gets passed largely intact and the income tax is really repealed. Be sure to include arguments that Congress can use with the public as to why no transition period is required. Tell them also how to respond to charges that this is a massive "giveaway to the rich". Provide rhetoric to be used when Warren Buffet and Bill Gates insist that the income tax not be repealed. Show us doubters how it will really work, inspite of the entire history of Congress. I'm waiting.
Published: December 20, 2005 1:02 PM
Mark Addleman
Criticizing the FairTax because it's still a tax or because the rate is really 30% or that it is, in fact, a new tax fails to employ basic marginal analysis. The question is not whether it meets the libertarian ideal of no coercive taxes, rather the question should be is the FairTax better than the current system?
Unfortunately, I'm not faced with the option of either the current system or Rothbard's pure volunteerism. I do, however, have some influence over the decision between the current tax system and the FairTax. As I've looked at the options, I've decided that the FairTax is a net positive over the current system for a lot of reasons including collection efficiencies, fewer opportunities for gov't distortions of the market and an increase in the visibility of the true cost of government.
Obviously, FairTax supporters don't do ourselves any favors by employing "literary license" when arguing our case to a group whose ethical views are rooted in the principles of self-ownership and non-aggression, but the fight over the FairTax isn't going to be won or lost by libertarians (unfortunately). It's going to be won by average Americans looking at the current system, considering the alternatives and deciding that the FairTax is the better approach. As a libertarian, I look beyond the rhetoric and see the FairTax as a small step away from totalitarianism, toward transparency and ultimately more freedom.
Published: December 20, 2005 1:02 PM
George Gaskell
If you're going to oppose every policy on the grounds that it's going to be watered down ...
Person, your screeching grew tiresome several days ago.
Can you not see the difference between two modes of argument?
On the one hand, there is the theoretical argument -- the one that concerns economics, primarily. This is a good place for arguments base on logic and reason.
On the other, there is the political argument, which takes into account the likely events during the legislative process (the PR campaign, the way that opponents will likely respond, etc.). This side of things is virtually 100% resistant to the application of reason and logic.
It is possible that a proposal could be (economically, theoretically) beneficial while (politically) stupid.
When someone like Mr. Waddell says that proposal X will probably become Y by the time the legislative process is over, that is an argument of the second type -- one addressed to the realities of the democratic political process.
What he is saying is that by the time we get to Y, we will wish we had left well enough alone, because Y sucks.
If you take Rep. Paul's proposal, if it gets altered in the legislative process, Y would still be a good compromise (i.e., better than nothing).
A proposal that seeks to add on HUGE new taxes can easily be "compromised" by the political process to be a new extra tax, not a replacement tax. That is an unfortunate reality of the legislative process, which works in a very specific way -- both sides (for and against) have to give a little to get a little.
If you and your FairTax proponenets begin with a proposal that is barely acceptable, only the tiniest bit better than the current system, the likely outcome is that it will will be "compromised" in the age-old political way, to end up being worse than the status quo.
In politics, you have to propose change that is more than twice as much as you are willing to settle for. Unfortuntely, this FairTax proposal is starting out as barely breaking even, and in some estimations, not even that.
Published: December 20, 2005 1:03 PM
Don Lloyd
David,
I think that people who fall for the "FairTax" idea are rather dimwitted. This is nothing more than a bait and switch tactic to sock the taxpayers with even more taxes. As I've said before, DiLorenzo has talked about this scam.
If you want your ideas to be taken seriously, you have to restrain yourself from demonstrating apparent lapses in judgment and maturity by demonizing people that may disagree with you.
The FairTax and its supporting documents have fundamental economic flaws which make it impossible for all of its claims to be true simultaneously, at a minimum. However, your ascribing of hidden motives to its supporters is well out of bounds.
Regards, Don
Published: December 20, 2005 1:17 PM
Plowman
A point I haven't seen brought up yet: a consumption tax would encourge consumers to spend less and save more. Once they have the money in hand, spending it becomes relatively less attractive. While this seems like an economically beneficial consequence, the problem is that there would never be the political will to implement the Fair Tax.
The GDP (a grossly fraudulent attempt to measure economic activity) is purportedly driven to a large extent by consumer spending. This is of course because of the flawed approach of the GDP, in that it must measure economic activity only a point where there is a monetary exchange, much of which occurs in transactions with consumers. The problem is, under the fair tax plan, consumer spending and thus GDP would take a hit. The mainstream economics/political establishment would never allow this.
This is precisely why attempts at political reform are futile: politicians only care about maintaining power and the status quo, so new ideas are shunned so that power may concentrate. I cannot think of a single political act that did not further political interests at my expense.
Published: December 20, 2005 3:00 PM
Aaron S
"Even if the four collection-and-compliance costs of income taxation that Dr. Kotlikoff mentions were fully eliminated, the FairTax would not "abolish the IRS" with regard to several important aspects --
(1) the collection of taxes (kind of a biggie);
(2) the distribution of enforcement agents to ensure compliance; and
(3) special agency courts to decide specific cases."
So what don't you understand? The IRS IS eliminated. Gone, DEFUNDED, taken out of the tax code. What's enforcing the FairTax are the existing STATE sales tax agencys operating under a good sized budget. The new federal Sales Tax Bureau (the only organization someone could say is the IRS with different initials) ensures that the money from the STATES is correct. No more feds in your lives coupled with the actual IRS elimination makes in fact Mr. Vance’s assertion a lie.
Published: December 20, 2005 3:20 PM
John Christopher
Why would we lose our time on a statist proposal to raise money for government? What will be the rate? 23%? 30%? 50%? The rate will be whatever is needed to pay for government spending! Giving a number is quite a fantastic guess. Around elections, the FairTax rate may go down but overall, don't worry it will go up. Loopholes will grow in numbers along with budget deficit. Ten years later, the same statits that are pitching us today the FairTax will come with a new scheme: the SmartTax, the SunshineTax or maybe the SmallTaxTax. And some of us will fall in the trap. This is the story of bigger and bigger government. The state will never decrease unless we cut spendings. The tax system is largely irrelevant.
Published: December 20, 2005 3:33 PM
AaronS
You still are all on the 23 vs 30%?!! Is there anyone who thinks a different amount of money get taken from American's pockets whether it’s a 23% inclusive or a 30% exclusive tax? I wouldn’t think any economist would be so naïve.
So the question is about delivery? Americans are being asked if they want to replace their (inclusive) income and (inclusive) payroll taxes with a sales tax. What kind of rate calculation do you think they can compare their current tax too? The amount is still the same. AS LONG AS YOU EXPLAIN THE RATE CALCULATION like Boortz AND FairTax.org does (at http://www.fairtaxvolunteer.org/smart/faq-main.html#47 ) it is fine. Both rates take 23 cents out of every dollar out of your pocket, just explain yourself.
The sad thing is, I don’t even know if the esteemed Laurence Vance has a comprehension of the simple differences in calculations. Either that or he is relying on others lack of knowledge in hopes that his lies will go unchallenged. When you look at his denial of the IRS being eliminated (see above), I have my suspicions.
Published: December 20, 2005 3:39 PM
Ken Cherven
The Fair Tax fails to address the real problem at hand - a government that continues to make us poorer through unchecked expansion. Does anyone really believe that a revenue neutral solution is a positive move? Or that the government would choose to abolish other taxes? Leviathan never acts in the best interests of the taxpayers, it only seeks to expand itself. The bottom line is that the only fair tax is no tax - anything else is unwarranted, coercive theft. Bravo to those who are able to avoid taxes under the current system!
Published: December 20, 2005 4:11 PM
Logan
The flat tax is a superior option to the FairTax. First off, the flat tax is a consumption tax just like the FairTax. The difference between them can be illustrated by the making of a peanut butter and jelly sandwich: the flat tax takes away 23% of your sandwich once you make it in your kitchen in the morning, while the FairTax takes 23% of the sandwich when you sit down to eat it for lunch. So, except for the timing of the tax, the flat tax and the FairTax will both take 23% of your income. So why do FairTaxers not like flat taxes? I looked on the FairTax FAQ for their criticisms of the flat tax and I will respond to them.
First, they say the flat tax retains the invasive IRS while the FairTax does away with the IRS. But as it’s been said elsewhere, the FairTax doesn’t get rid of invasive collection bureaucracies. Rather, they would replace the IRS with a Business Inventory and Revenue Service (BIRS, my term, not theirs). The BIRS will have to monitor business inventories and revenues to make sure the right amount of sales tax was collected. The FairTax just shifts the enforcement of tax collection away from the general public and onto businesses. And in response to Aaron S, my home state of Oregon has no sales tax (it's been rejected 9 times for a number of decades), as do some other states. How will the FairTax be collected without an existing state sales tax bureacracy? I guess we will have federal bureaucrats, whoopee! So FairTaxers claim that they’re fixing something when they’re really not. And while the FairTax eliminates the payroll tax, it still collects your wage information for Social Security purposes. So the argument that I hear from FairTaxers that the government will not be in the business of knowing how much you make is just false. And I will come back to how you can make a flat tax that does not require a personal income tax return later in the post.
They also criticize the flat tax because it would retain the payroll tax. But that’s not necessary. Just abolish the payroll tax and raise the flat rate to compensate. Problem solved.
A post earlier in this thread alluded to the double taxation of implementing the FairTax. Go back to the sandwich example. Our current income tax system has been taking its 23% of the sandwich from off the kitchen table for decades. But if you abolish the income tax for the FairTax, you will find that when you get to the lunch room with 77% of a sandwich, the FairTaxer will demand another 23%! So, in the transition, there will be substantial amounts of people paying an average of 40% because they were taxed at the point of production AND the point of consumption. The transition would require a complicated fix and would add another cost to the FairTax, raising its rate. Implementing a flat tax would not include this transition cost because you are not changing the point of taxation, just the base of taxation.
This is from Bruce Bartlett: “Although evasion of state sales taxes is relatively small, that is only because the rates are low enough that it is not worth the trouble. However, where rates are high on things like tobacco, evasion is also high. A vast amount of foreign experience indicates that retail sales taxes cannot be collected much above 10 percent without breaking down.� That’s why most countries have VATs instead of full-blown sales taxes. Yancey Ward has already made this point well also.
Then they level the criticism that the flat tax can “easily revert to a graduated, convoluted mess, as it has many times over many years.� As Person has so many times told us (and I have come to agree with him), you must rely on the proposal’s original merits and worry about future Congresses in the future. Sure, the flat tax and the FairTax might be corrupted at a later date, but you don’t pass up reform because it might be unreformed someday. With that said, I think the flat tax is better anyways because it doesn’t create a new tax like the FairTax does. If the FairTax proposal actually abolished the Sixteenth Amendment, then it would be more palatable. But from a strictly procedural manner, the FairTax bill does not make it harder to re-impose a tax on production. It would still take 218 House members, 51 Senators, and 1 President to reestablish the income tax. If it actually abolished the Sixteenth Amendment, then it would take 291 House members, 67 Senators, 1 President and 37 state legislatures to reestablish the income tax. The FairTax proposal goes wrong not because it could be corrupted in the future but because it does not seek to rein in current procedural routes to future corruption.
Finally, I’d like to offer my own proposal for tax reform. I would institute a flat tax that would take the form of (Business revenues - purchases of inputs from other firms) * 23%. It would be a business tax only and no personal income tax returns would need to be filed. The 23% would be passed down equally to wage earners, creditors, and equity holders. This would be an equivalent tax to the FairTax without the transition costs and retail evasion problems. One criticism of this proposal would be that this would completely hide the taxes in the prices of products. True, it would be “hidden� until you figured it out with a simple math problem. If you bought an Xbox for $400, all you’d have to do to find this “hidden� tax would be to multiply $400 by 23%. So the real price of the Xbox was $308 and the tax was $92, approximately. Now that was simple. If the general public cannot figure it out, don’t blame me, blame government schools.
Some might also say that this would unfairly burden the poor. Well, first, a tax system is there to raise money. If you want to help the poor with their new found plight, either lower taxes/spending (most preferred) or do your redistribution through the budget process. Second, you can just take the wage income of a worker and augment the worker’s salary by a factor of 23%. So, if the worker made $1,000/month, then they would see an extra line on their paycheck for $230 to make up for hidden taxes in the price of goods. The business would pay this amount to the worker and get a credit against his taxes paid to offset. This tax offset could have a maximum amount based on the poverty line. Not that I prefer this type of progressive tinkering, but it would be much better than the FairTax prebate. The prebate system just gives people the maximum check regardless if they reach the poverty line. If the line is $20,000/year, then the check will be for $4,600. A bum on the street would be just as entitled to that check as the person who actually made $20,000. At least the flat tax rebate would be backed up by actual production.
Published: December 20, 2005 4:37 PM
Jim Bradley
Dr. Kotlikoff your assertions that "this will happen" and "this is how it will work" stand frankly on nothing at all, as you have no power whatsoever to make them happen as you wish - no matter how many words or how incisive the argument or how dazzling the rhetoric.
A all political money is unearned by politicians, much of it undeserved by them (being used to violate rights rather than support them), and thus Congress is staffed by less-than-uncivilized looters (they in fact believe themselves superior while stealing which makes them all the more reprehensible) voted into office by secret ballot (by people who retain their anonymity and so cannot be held to task for their illicit and unjust behavior against their neighbors) and intending to grow the power of government with little exception -- what justification can you offer that we should leave it up to them to adopt your proposed change in laws?
And no sir, "we the people" didn't authorize this nonsense. Show me where the "consent" is ... The lack of armed revolt by freedom-loving people isn't "consent" any more that the submission of a slave to his master under threat of separation from his family and what property he is allowed to posses. Consent is a positive act. Where is it? Where are the names of Mises.org people on the document that stipulates "we will submit to the courts in their decisions on what the constitution says as well as to GW and Congress as to their taxation and participate by secret ballot on the election of new masters every election cycle"?
Hence the problem. Perhaps it is better simply to say that Congress should first reduce spending by 25% and then repeal the most onerous portions of the current tax code. If that cannot be done by the majority now, how can you argue that your system will be any fairer or more just? And if it can be done, then why not stick with that and do more, rather than give the power away?
Published: December 20, 2005 5:05 PM
Jim Waddell
Still waiting.
Published: December 20, 2005 5:46 PM
Vince Daliessio
Didn't someone (Lew maybe) claim (credibly I thought) that simply reducing Federal expenditures to 1995 levels would COMPLETELY ELIMINATE the income tax? Let's see a proposal for THAT.
Published: December 20, 2005 8:48 PM
Peter
Don Lloyd says: "The FairTax and its supporting documents have fundamental economic flaws which make it impossible for all of its claims to be true simultaneously, at a minimum. However, your ascribing of hidden motives to its supporters is well out of bounds."
So they're either evil or stupid (or perhaps both). What David suggests is the more likely: most of them are just stupid. He's not ascribing hidden motives to them, just idiocy. Are you suggesting that he's wrong, and most of them are actually evil? :)
Published: December 20, 2005 9:11 PM
Anthony Gregory
"Didn't someone (Lew maybe) claim (credibly I thought) that simply reducing Federal expenditures to 1995 levels would COMPLETELY ELIMINATE the income tax? Let's see a proposal for THAT."
I can't believe anyone here would want to go back to the horse and buggy days of Bill Clinton's first term. I've read about the horrors that that laissez faire atmosphere spawned—workers falling into meat vats, child labor, and poison in the air. Thank goodness for the progress made in the last ten years.
Published: December 20, 2005 9:24 PM
Brian H
Leviathan grows because, in part, people have no idea how big it has gotten. Seeing the cost of the central government on every receipt and bill will swell our ranks.
Compliance costs go down. Period. It's simple to explain.
Right now businesses have to justify for audit every line from the top of their return to the bottom of their return. Dozens of forms and schedules are behind each line. Individuals have to justify every line from the top of the return to the bottom.
Under the Fair Tax, businesses have to justify under audit their top line - revenue. Everything effectively drifts away.
IRS or something will always be there, but they will bug the retailer for their sales receipts and have no interest in his cost of goods sold method.
I loathe the income tax along with the rest of humanity (and I'm a CPA). The 'Fair Tax' recruits more of the huddled masses on our side for starving the cancer while simultaneously gets a hundred million American out from under Mordor's reach. Why are we squabbling about details here?
Published: December 20, 2005 10:44 PM
Glen
On the IRS issue: some must believe that if I change my name, I can eliminate myself.
If we must pay taxes, a better tax system is one in which many people can totally avoid such theft and others can avoid a goodly portion of it.
The best argument for the unFairTax proposal might be the huge blackmarkets it will create. I'd like to think this may at least hamstring our favorite theives but I think they must just look for new ways to do the mugging.
Published: December 20, 2005 11:01 PM
Paul D
Having come into the initial discussion with no particular opinion, it seems to me the UnfairTax supporters are spreading obvious falsehoods (sorry, "literary license") at every turn.
Aaron S writes: "The IRS IS eliminated. Gone, DEFUNDED, taken out of the tax code. What's enforcing the FairTax are the existing STATE sales tax agencys operating under a good sized budget."
I'd like Aaron to tell me which existing sales tax agencies in Delaware, Oregon, NH, and Montana will take over this tax enforcement. I'd also like to know if he honestly expects existing agencies to handle this massive tax with all its enforcement problems without enormous growth in staff, expenditure, and waste.
"The new federal Sales Tax Bureau … ensures that the money from the STATES is correct."
Paraphrase: "when we said we'd eliminate federal tax and enforcement agencies, that was more literary license."
And Glen notes: "On the IRS issue: some must believe that if I change my name, I can eliminate myself."
Excellent comment. :)
Published: December 21, 2005 6:51 AM
PR
Brian H, what makes you think that seeing the cost of central government on every receipt will work any better than seeing it on every pay stub?
Published: December 21, 2005 7:10 AM
AaronS
PR, in part because of shock value, but also the fact that ALL the hidden federal taxes are now on your receipt. Plus, you know how easy it is for Americans to simply plan on what they will have left over after taxes. The FairTax makes them consciencely adjust their plans EVERY DAY due to the cost of big government.
Paul D, for states like Oregon who aren't using a sales tax, they can set up a sales tax bureau to do so or sub out collection to another state or the feds. But the states have the system down. We're not going into uncharted territories.
Published: December 21, 2005 11:16 AM
billwald
Half the U.S. economy is sub rosa and those who work under the table like it that way. This includes plumbers and carpenters as well as politicians and dope sellers.
Published: December 21, 2005 12:36 PM
R.P. McCosker
Kotlikoff writes:
“'Lie' #1 – 'Taxes would be voluntary under the FairTax.'
"Vance argues that everyone needs to buy goods and services and, therefore, everyone is, in fact, forced to pay the FairTax. This is obviously correct. But declaring that Boortz and Linder are 'lying' on this point is wrong. The authors were simply saying that the public would have more discretion in the timing and amount they pay in taxes than under the current system. Today, income and payroll taxes are paid as soon as we earn money. Under the FairTax, no tax would be due until we spend what we earn."
Well, we could stop working and defer income tax liability that way too. (That'd be especially relevant to the self-employed.) I don't see any difference, except that Kotlikoff supposes it'd generally be easier for people to control their purchases. But is that really so true? After all, as I understand, purchases in the furtherance of one's business are subject to these same taxes. A grocery can't defer purchasing perishables. A civil engineering contractor with a contract in hand and a payroll to meet can't defer buying the concrete for a job this week.
Similarly, we can avoid property (land, I'm thinking, for you Georgians out there) tax by selling off our property. So that's good 'n' voluntary too!
This national sales tax obviously is no voluntary than most any other percentage-based tax. To the extent that empirically it might offer somewhat greater flexibility in timing for most people, I can only imagine this is pretty slight.
"Yes, calling the FairTax 'totally voluntary,' as the authors do, is pushing literary license, but not beyond common practice. Indeed, the IRS touts the voluntary nature of our current tax system stating that 'The U.S. income tax system is built on the idea of voluntary compliance. Compliance is voluntary when taxpayers declare all of their income. Taxpayers also voluntarily comply through obtaining forms and instructions, providing complete and correct information, and filing their income tax returns on time.'"
So what Kotlikoff's point here? That Boortz is an okay guy because he only lies the way the corrupt, thieving IRS does?
Of course, this gives away Kotlikoff's game, if not Boortz's. Only an enthusiastic statist would openly pay respect to official IRS propaganda.
"No impartial reader of the book would come away thinking that the FairTax represents, in effect, the establishment of a voluntary charity for the government."
Exactly. So just why is #1 only an "alleged" lie? Kotlikoff has failed pathetically to disabuse us of this and all the other Vance "allegations".
Published: December 21, 2005 4:23 PM
R.P. McCosker
billwald writes:
"Half the U.S. economy is sub rosa and those who work under the table like it that way. This includes plumbers and carpenters as well as politicians and dope sellers."
Admittedly, I haven't read Boortz's book, so I obviously don't know all the implementation details of his scheme.
But, as I understand it, the feds would be refunding various amounts to us based on our spending. That could only mean, I'd think, that the government is keeping tabs on our expenditures.
It's interesting to imagine what this means to those now working in the underground economy. Right now, savings institutions are supposed to report sudden very large deposits and withdrawals. Now, if a plumber or a carpenter over the course of a tax year purchases a lot of plumbing or carpentry equipment, won't the sales tax authorities find this suspicious? Since, in real life, the plan will retain the IRS, won't that same IRS find out about all those purchases and try to estimate the real income of that plumber or carpenter?
Meanwhile, the plumber or carpenter who's been avoiding income tax in the past -- while paying only modest sales tax -- is suddenly hit with absolutely massive sales taxes. Obviously the change is a bad deal for him right off the bat -- not to mention the bad effects down the pipeline once the feds take note of his purchasing patterns.
Published: December 21, 2005 4:38 PM
Karen Walby
Response to billwald: The government will NOT be tracking your expenditures. No income or expenditure information is collected on the application in order for a household to receive the FairTax prebate. The FairTax prebate is based ONLY on household size. To qualify for the prebate each household must file an application with the state sales tax agency which gives names, and valid social security numbers and proof of child custody in case of a divorce. For example, a family of four would get $492 per month. The amount is based on the tax rate times the federal poverty level spending for households of specific sizes.
Published: December 22, 2005 12:23 AM
MLS
Does anyone think that the FairTax scheme will create a cottage industry of low-income high-prebate people buying goods and services and then unofficially reselling them to high-income low-prebate people in a profitable manner. Sounds like the makings of a nice redistribution scheme.
Published: December 22, 2005 12:56 AM
Sasha Radeta
I will provide a point-by-point response to dr. Laurence Kotlikoff. This post will address Kotlikoff's key statements regarding Vance's "lies and problems" critique of the "Fair Tax" book by Neal Boortz and Congressman John Linder.
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“Lie� #1 – “The authors were simply saying that the public would have more discretion in the timing and amount they pay in taxes than under the current system. Today, income and payroll taxes are paid as soon as we earn money. Under the FairTax, no tax would be due until we spend what we earn."
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- Dr. Kotlikoff seems to be confused here. Today, we get taxed only when and if we earn income. On the other hand, a national sales tax would confiscate seller's revenue as soon as they earn it - since sellers are always forced to charge a market price and there is no way to "pass costs forward" (otherwise, no business would ever go bankrupt). If the prevailing market price is above your variable costs, you stay in business. If market price does not allow you to charge above your variable costs, you go out of business.
Dr. Kotlikoff's argument about "more discretion in tax payment" with the "Fair Tax" proposal is even weaker. People can avoid paying any tax if they restrain from voluntary, monetary transactions. If we all stopped selling our goods and services for money (including our labor services and credit), no one would pay any income tax. Likewise, you can avoid paying sales tax if you consume only those goods that you can produce yourself, or goods that you obtain in barter. Either way, taxation cannot be "voluntary" and any "discretion" in timing or the amount paid in taxes is exactly the same in all taxation: all you need to do is to restrain yourself from monetary market exchanges, and you will not get taxed. If you want to avoid both "voluntary" tax schemes, you would have to live a life of a Stone Age hunter-gatherer.
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“Lie� #2 – “Vance claims that the FairTax’s rate is really 30 percent. He’s both wrong and right at the same time. The tax-exclusive rate we’d pay at the store would, indeed, be 30 percent, but the rate that matters – the tax-inclusive rate – would be only 23 percent."
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- This is where both Dr. Kotlikoff and Vance fail to apply law of demand and supply. Market prices are formed in a negotiation process between buyers an sellers. Outcomes of these implicit and explicit negotiations result in such arrangement that ensures that sellers are squeezing the most revenue they can get for a given market supply. If they try to go beyond market prices (or if government impose a price floor), they will get stuck with surplus. If they charge below market prices they will have shortages and lost revenue.
Vance's and dr. Kotlikoff's calculations of inclusive/exclusive tax are wrong because they are based on a premise that a national sales tax is consumption tax that seller pass forward to consumers (that's why they want to even send checks to businesses from Washington, DC for this service). What they don't consider is the fact that market prices are formed in a process separate from a company's balance sheet. Our willingness and ability to buy something (known as demand in economics) has nothing to do with some company's costs, but it determines market prices for a given supply. While it is true that taxes and regulations reduce the aggregate supply (ergo prices), it would be completely nonsensical to suggest that business pass their tax costs to consumers.
This means that all revenue from sales of goods and services will be taxed 23 percent, regardless of profit or losses. This could in fact represent a 100 percent income tax (with an additional confiscation) for those businesses that don't have a pre-tax net profit margin above 23 percent. Similar to income tax effect, the incidence of a national sales tax must fall back onto the incomes of the producers (land and labor), rather than on the consumers (except that consumers are also producers).
Dr. Kotlikoff tried to give a bad example of why inclusive tax rate should be used: "Let’s assume taxable income of a sole-proprietor was $72,000, so that that taxpayer pays taxes of 28 percent plus 15.3 percent payroll taxes for a combined tax-inclusive rate of 43.3 percent. Unless Vance wants to refer to the 43.3 percent as actually a 77 percent rate, he really can’t compare that rate to the FairTax."
This analogy does not hold. Dr. Kotlikoff can say that a sole proprietor’s after-tax income increased by 77 percent will amount to his total revenue, but you cannot say that he paid more than 43.3 percent of his taxable income in taxes.
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“Lie� #3 – “Whether or not the tax collection agency retains the initials I, R, and S, it would be completely different from the current enforcement apparatus."
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- This claim disregards the fact that businesses pay 23 percent tax - not the individuals. If customers are willing and able to pay, let's say $4,558 for a good or service, seller gets to keep only $3,510, after tax is paid to government. Seller now has an incentive to make a deal with a consumer to only charge him, let's say, $4,000 - but not to report this transaction to government. In that case, both sides are benefiting from tax evasion. And since the Fair Tax Act would make purchases of inputs tax free, government would be clueless about the total output of goods and services that can be sold in a black market. In order to control every single seller, government would have to organize something larger than IRS to spy on every single seller in this country.
Not to mention the fact that every single household would receive a monthly check from Uncle Sam for “poverty-line� tax-expenses. There would also have to be a large control apparatus of this system in place in order to supervise every single household.
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“Problem� #1 – “Vance claims that the FairTax hides the amount of sales tax being paid. Not so..."
"The complexity of our tax system makes it extremely difficult for any of us to understand the full extent to which we are taxed on working and saving.�
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- This part of discussion is irrelevant, because consumers do not pay consumption tax. They pay market prices based on their demand for a given supply of goods and services. For sellers, on the other hand, both taxes are equally visible. The only difference is the fact that national sales tax takes 23 percent of every seller's revenue, while income tax only applies to those who make taxable profit.
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“Problem� #2 – “So Vance is right. The FairTax is progressive. But this is a plus, not a minus.
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- Vance and dr. Kotlikoff are equally wrong at this point. Since the "Fair Tax" is nothing but a 23 percent revenue tax, it is a regressive tax. Confiscation of almost 1/4 of someone's revenue has the hardest impact on people who earn little or no profit and those who do not have a lot of wealth accrued. And the negative effect on sellers translates into lower demand for all stages of production, all the way down to labor and land owners.
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“Problem� #3 – Vance: “The FairTax is an income redistribution scheme."
Dr. Kotlikoff: "Under the FairTax households with the same demographics will receive the same rebate. But as a share of remaining lifetime resources, the FairTax is progressive, as indicated above."
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- Vance is right here, even though he used wrong premises. The "Fair Tax" is an income redistribution system, since it provides "rebate" to all consumers based on taxes most of them never paid. Since sellers pay taxes and not consumers, this "rebate" program can only be viewed as an attempt to have a welfare program in advance, due to catastrophic effects that 23 percent revenue confiscation must produce.
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“Problem� #4 – “The number of taxpayers will diminish by more than 90 percent. And they will be the same tax collectors as today. In one fell swoop, the FairTax reduces the number of taxpayers at the same time it vests everyone in the tax system, by making the price of government explicit."
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- Totally incorrect. Every single seller of goods and services will become a taxpayer. According to the "Fair Tax" they will even get paid by government to monitor themselves. They are designated to collect these taxes, because the Fair Tax" proponents incorrectly assume that taxes are actually passed to consumers (ignoring the fact that law of demand and supply deny such possibility, due to shortages or surplus problem of any price that does not correspond with market prices).
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“Problem� #5 – “Today, we tax returns on capital, we tax sales of capital assets, we tax labor earnings, we tax estates, and we tax gifts. All of these taxes are eliminated by the taxation of the final retail sale."
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- True. It is much easier to confiscate 23 percent of every sellers revenue (even if sellers do not make any profit and it drives them out of business), than to bother calculating someone's taxable income. For sellers whose profit margins are 23 percent, the "Fair Tax" would actually be an equivalent of a 100 percent income tax. For those making less than 23 percent profit margin, this tax would be an equivalent of a disaster.
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“Problem� #6 – “I hope the 40 percent or so of Americans who pay no income tax today have to pay the FairTax and see that they too are vested in our government. I hope that criminals who have illegally amassed wealth in the past will pay lots of sales taxes when they spend these holdings."
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- Dr. Kotlikoff neglects the fact that most people who pay no income tax are not criminals. They simply don't pay it, because they didn't make any taxable income. Expecting every seller to pay 23 percent revenue tax, even if a particular seller is just breaking-even, is simply sadistic. But it is also a bad idea, since many of sellers who create jobs and wealth will be driven out of business. And since the "Fair Tax" makes it so easy to hide one's output (unlike with value-added-tax, there is no taxes or records on input purchases) they will be lured straight to black markets, where taxes are collected by mafia. That's why organized crime should be the biggest supporter of the "Fair Tax"
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“Problem� #7 – “One key objection to the FairTax is that it is too visible, meaning that it exposes the true costs of the government."
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- Au contraire! The Fair Tax would not expose true cost of government to most of Americans, since sellers are the only people who pay taxes. And even different sellers would have a different perception of magnitude of this cost. If you have a profit margin of less than 23 percent, you would suffer an accounting loss as the result of government's costs. For those people with higher profit margins or great wealth, the "Fair Tax" would be something that eliminates much of their competition and from their point of view, government costs are something great.
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“Problem� #8 – “What Vance ignores is the competition across states in attracting business and workers."
States are actually in deep trouble with their revenues and deficits. So they will really try to find a way to raise more taxes. Whether they will try supply-side (low tax) or classical approach, it's really not up to us to forecast.
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“Problem� #9 – Vance: “The FairTax has unknown and potentially huge Transition costs.�
Kotlikoff: "Saying so doesn’t make it so. There is no reason to expect significant transaction costs. The inventory transition valuation issue raised by Vance can readily be sorted out."
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Dr. Kotlikoff got confused here with similar words with the same prefix. Transition costs are not the same as transaction costs. Transition costs of the "Fair Tax" are huge and even many of its supporters realize that transition process from income tax to a national sales tax would be devastating to the US firms.
Let's put the factor of time in consideration, and make example as simple as possible:
At the moment of the FairTAx implementation:
- Firms hold products for which they already incurred costs. So these costs include all taxes already paid for workers who participated in production.
- They face some market prices they have no control over. They will have to accept those prices, even if they made a forecasting error building up too much or too little inventory.
- Instead of paying only tax on income, now they will loose 23% of their revenue - which would totally erase income for many companies. Like a 100% income tax, plus some more variable cost that some firms will not be able to recover.
So we would face instant elimination of many businesses, which would lead us to drop in aggregate supply and higher prices. What will be the net effect of drastically lower supply, no payroll taxes, but instead the presence of ruthless 23 percent revenue tax that applies to every good sold, even if you can't recover your average variable costs? One word: monopolization.
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“Problem� #10 – “Unlike today, where the tax code is used as an effective second appropriation committee, the FairTax taxes every form of consumption expenditure that can readily be taxed without exception.
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Totally incorrect. The "Fair Tax" taxes every seller with a brutal 23 percent revenue tax. You cannot impose your costs on consumers. It is their willingness and ability that determines if you will recover your cost of supply.
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“Problem� #11 – “ the FairTax reduces the effects of all known factors on fraud. The three factors that economists have shown to affect compliance are marginal rates, likelihood of being caught, and penalties. The FairTax enhances all three"
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Wrong.
1) The FairTax imposes much higher average taxes on all sellers, by taxing 23% of their revenue at certain market price.
2) The likelihood of being caught decreases dramatically when both sellers and consumers benefit greatly from tax evasion and when government is clueless about the amounts of purchased inputs and produced output.
3) The FairTax penalties do not match devastating effects of compliance to 23 percent revenue tax.
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“Problem� #12 – “Thousands, if not millions, of Americans now cheat on their income taxes."
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Many more would be forced to cheat on the "Fair Tax" in order to survive, so the government would be forced to enhance its controlling apparatus. Unless you have a value-added tax, you simply have no idea how much output is produced and what amount of revenue should you expect.
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“Problem� #13 – “The FairTax cannot repeal the 16th Amendment, which has to be done in a separate piece of legislation. So, Vance’s point is that we must live with the income tax? Not so. The FairTax does repeal Subchapters A and C of the 1986 Internal Revenue Code that implement the income tax."
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Here, dr. Kotlikoff had nothing to say, but he went for it anyway. If the "Fair Tax" Act authors really wanted to remove all income taxes, they would have stated that a national sales tax will take place only after the 16th amendment is repealed. Instead, we will have to trust government that it would not exercise all its "constitutional" powers, when we know that they already extended their powers far beyond Article I, Section 8 of the US Constitution.
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“Problem� #14 – “We want to retain some flexibility to tax goods, like cigarettes, the consumption of which can impose significant costs on society at-large, at higher rates. These taxes serve a different purpose than general revenues. They are in effect taxes on externalities."
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If we respected private property rights, we would internalize all externalities. Cigarettes would not be the government's problem if it stayed with its original, Constitutional purpose, and stopped providing charity by picking up medical bills.
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“Problem� #15 – “The FairTax dramatically lowers marginal rates and completely eliminates the double taxation on returns to savings and investment."
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Wrong. The "Fair Tax" is nothing but a masked 23 percent revenue tax. And this is much higher rate that most of us are currently paying. Negative effects of such tax-attack would be devastating and they would consequently reflect on savings and investment.
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“Problem� #16 – “The government has the rights we the people have given it through the Constitution. This, again, is a Vance problem, not an American problem, but he should read the Tenth Amendment of the United States Constitution, which is part of the Bill of Rights�
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I think Kotlikoff should read the Constitution more carefully and less selectively. How about the Fifth Amendment of the United States Constitution that states:
"... nor shall private property be taken for public use, WITHOUT JUST COMPENSATION".
My earned money is my property. Try to explain how the government-run charity provides me a just compensation.
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Problem # 17 – "And nobody is required to pay for the cost of the government until they have met their own needs."
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Oh, really? The "Fair Tax" would take 23 percent of every seller's revenue even if that seller is not making any profit. How's that for justice and consideration of people's needs? Luckily for us, this taxation scheme could never work.
Published: December 22, 2005 4:15 AM
MLS
Sasha, You are correct in stating that businesses can not shift the costs onto the consumer. However, if the FairTax hits all sellers as you say "Every single seller of goods and services will become a taxpayer" then the laborer of a business will pay a tax to work for the business. So the business will aborb the tax when selling the goods to the consumer, but they will pay less for labor (essentially passing along to them).
This goes along with what Rothbard claims, that all taxes are paid by producers, be they a firm or a free laborer. I can't imagine a situation where a non-producer pays a net tax.
It seems like you understand this concept, but you have contradicted/confused? yourself. Compare #2&4 to #5.
Published: December 22, 2005 4:41 AM
Paul D
"Paul D, for states like Oregon who aren't using a sales tax, they can set up a sales tax bureau to do so or sub out collection to another state or the feds."
I think Aaron for answering my question. It seems that, for the UnfairTax proponents, establishing new taxation bureaux and new enforcement agencies in every single state is not worth bringing up, but the pretence of eliminating the IRS is.
This intellectual chicanery seems endemic on the "pro" side.
Published: December 22, 2005 4:59 AM
Don Lloyd
MLS,
Does anyone think that the FairTax scheme will create a cottage industry of low-income high-prebate people buying goods and services and then unofficially reselling them to high-income low-prebate people in a profitable manner. Sounds like the makings of a nice redistribution scheme.
No, there is no possibility of such a result, except in the case of insanity. The prebate is unconditional, and is completely independent of what you actually buy. There is no sense in giving up part of your rebate by subsequently buying and selling goods at a loss.
Regards, Don
Published: December 22, 2005 5:21 AM
Jim Bradley
Sasha -- not sure you're right in your fundamental assertion about supply / demand. All else is not equal. In fact the spenders will have as much more money to spend as the businesses collect in taxes. So it is a shift of taxpaying from the buyer to the seller in a particular transaction. You are right to the extent that businesses must undergo additional net burdens which cut into their profit (i.e. not all taxes are income taxes so those are not shifted from the buyer and seller in to the transaction but instead are levied on the business from who-knows-where). So profit margins are much less relevant than you assert.
Published: December 22, 2005 7:55 AM
Sasha Radeta
MLS,
Prices of labor (wages) are also formed by forces of demand and supply (not just a will of a particular employer, who has to compete in market for inputs with many other businesses). Tax-attack on businesses does not mean that they can simply "pass their costs". They would simply demand less inputs, including the input of labor. At the day of the "Fair Tax" implementation, certain labor suppply will face drop in demand. Only than we can talk about falling prices. Again, there is no "cost shifting", but changes in supply as the result of government's intervention
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Jim Bradley said: "Sasha -- not sure you're right in your fundamental assertion about supply / demand. All else is not equal. In fact the spenders will have as much more money to spend as the businesses collect in taxes... So profit margins are much less relevant than you assert."
Jim, you're incorrect when you say that "not all taxes are shifted forward". No tax is ever shifted forward. Market process is like a natural selection. At the time of production, a producer is aware of his/er cost surves, but has no knowledge of future demand (he/she forecasts future curves for demand and revenue). Than after that producer offers his goods or services to the market and costs are already incurred, consumers' demand will decide on a market prices. If this market price is close to that MR=MC spot, chances of survival are greater. If market price drops below producers variable costs, chances are that the market will eliminate him/her.
Your demand analysis is also wrong. As Don correctly noticed:
"If the FT is really neutral with respect to government revenues, then its implementation doesn't increase the supply of money or generally reduce the objective exchange value of the dollar.
Rather it partially re-allocates the existing supply of money to wage earners and the demand for new, higher taxed goods to all other goods."
Again, it all comes down in reduction of aggregate supply, due to the fact that many of those who currently don't make 23% over their costs in sales would face an instant trouble. Due to out past costs, negative effect on supply would be instant, and any effects on demand are expected in future.
The real issue here is the order of action and the fact that not all of us can enjoy these tax savings - because government will have to collect its same amount of revenue from someone... It will be accomplished by confiscation of 23% everyone's sales revenue (based on current market prices) - regardless of their current economic performance. This job-killing measure will benefit the few at the expense of many and it would eventually translate into negative movements, first in supply and than in demand.
Published: December 22, 2005 10:34 AM
MLS
Sasha, the free laborer is a producer or seller. Yes, the price of labor is set by supply and demand, but as you said the seller can not shift the additional cost of working on to the buyer. The free labor must pay a tax as well. This tax will be in our case 23% of the price set by S&D. ALL PRODUCERS MUST PAY THE TAX. You must be consistent in your argument.
If the price of your labour is $40K/year, as set by S&D, and your company's only product is $20 per unit as set by S&D. Then you the laborer earn 40K*0.77=$30.8K, while the company makes $20*0.77=$15.4 per unit. Then one can do cost accounting to see if any profits were realized
Don, I guess I misunderstood the prebate. I thought it allowed one to buy at a lower rate (
Published: December 22, 2005 12:20 PM
MLS
Don, I guess I misunderstood the prebate. I thought it allowed one to buy at a lower rate using some sort of government card. If that is not the case of FairTax now, I suspect it will be in practice later.
Published: December 22, 2005 12:23 PM
Sasha Radeta
MLS,
I am consistent with my arguments, but you are failing to make a clear point. Laborer is a seller like every other. When his income tax is removed at the hour of the "Fair Tax" implementation, they will more-less have the same wages as the minute before it was implemented. Therefore, from the day one, businesses will face the same costs of labor, but 23 percent of their revenue will be confiscated.
But more importantly, at the day of the "Fair Tax" sellers will have merchandise for which they already incurred cost of inputs, while income tax as still in effect. This cost of inputs was artificially higher due to the fact that taxes reduce supply. The "Fair Tax" would do nothing to remedy these costs, but instead, it would punish severely everyone who currently (with income tax in place) has a profit margin of less than 23 percent.
Published: December 22, 2005 12:51 PM
Jim Bradley
Sasha -- Not quite.
Now: Earn $100, pay income tax $23, have $77, buy $77 item, gross business revenue = $77. Business pays small percent of taxes as a % of revenue which is based on earnings, call it X.
New: Earn $100, pay $0 tax, pay $100 for formerly $77 item, gross business revenue = $77. Business pays no taxes on their net earnings, but lower margin businesses do have to absorb some (the X) additional burden as revenues are taxed at a higher rate. That is the additional burden to lower margin businesses, not the entire 23%.
You can assert your case only for those taxes that are not now income taxes as those will be applied now to revenues rather than net earnings. So you have a point, but unless I missed something, I believe you overplay it.
Published: December 22, 2005 12:51 PM
Sasha Radeta
Jim,
You got what I call an "economics overdose". Focus on my arguments in your response and tell me what confuses you.
Like I said, price of labor is determined current supply and demand conditions. At the very moment of the "Fair Tax" labor supply and demand will not change dramatically. Therefore, firms will still hold the old merchandise for which they incurred past costs, their price of labor input will not change the same day - but from the day one, 23 percent of everything they earn at a certain market price will be confiscated by government.
With such an attack on businesses, you can expect fall in demand for labor, as businesses become less willing and able to hire. Demand for consumers' good will not change dramatically, and falling prices of labor due to a drop in demand and lay-offs of businesses that currently have a profit margin of much less than 23 percent.
Published: December 22, 2005 1:04 PM
Sasha Radeta
Correction: "...and we would face falling prices of labor due to a drop in demand and lay-offs of businesses that currently have a profit margin of much less than 23 percent."
Published: December 22, 2005 1:06 PM
Sasha Radeta
If you can prove to me that the "Fair Tax" is able to address past business cost (example: employee's payroll taxes during the production of merchandise, before the "Fair Tax" is implemented), only than you can prove that the "Fair Tax" will not be a 100% income tax for everyone with a profit margin of 23 percent, and that those sellers with a profit margin of less than 23 percent would not suffer loss for every item sold. Unfortunately, I don't see such argument.
Published: December 22, 2005 1:11 PM
MLS
Sasha, I'm not talking about the transition period, I'm only speaking of the concept in general. I apologize if you think that I'm attacking your stance on the transition period.
"When his income tax is removed at the hour of the "Fair Tax" implementation, they will more-less have the same wages as the minute before it was implemented. Therefore, from the day one, businesses will face the same costs of labor, but 23 percent of their revenue will be confiscated."
But if one follows the seller concept, the laborer does not get to keep all his wages. The laborer will pay a 23% tax for laboring. Yes the business will still pay them the same amount, but the individual laborer still has to pay the tax. Perhaps not officially, but in principle. No matter how you slice it, the producers are always the net tax payers.
"But more importantly, at the day of the "Fair Tax" sellers will have merchandise for which they already incurred cost of inputs, while income tax as still in effect. This cost of inputs was artificially higher due to the fact that taxes reduce supply. The "Fair Tax" would do nothing to remedy these costs, but instead, it would punish severely everyone who currently (with income tax in place) has a profit margin of less than 23 percent.
"
Yes, you are correct. The FairTax will severely punish all previous individual savers, and business investors. FairTax when implemented will be double taxation. This is true no matter how many FairTax ass-clowns try to deny it.
Published: December 22, 2005 2:06 PM
Sasha Radeta
MLS,
Sellers pay taxes, whether they are sellers of labor services (workers) or if they are sellers of goods (retailers). But the "Fair Tax" chooses not to tax inputs, including labor.
Again, you say you agree with me on everything (even with the fact that sellers are always forced absorb/pay any tax: sales tax, income tax, excise tax, whichever, due to the fact that they have to accept market price or suffer greater cost of surplus or shortages). But you still say that the "laborers do not get to keep all of their wages" (I guess) when the "Fair Tax" is implemented. What do you mean by that?
Laborers will get all their wages without income tax (because the "Fair Tax" does not tax inputs), based on their supply and demand conditions that make their employers to currently pay their pre-tax (gross) wages. But before they ever get their improved paychecks, many of their employers will start suffering losses, due to the fact that government takes 23 percent of their sales - for items produced when income tax was in place (and input costs were artificially more expensive).
In other words, the aggregate supply will sustain a massive attack by government, while aggregate demand would see a little or no improvement. To quote Don: “Even the wage earners with their increased take home pay will not value the marginal money unit that much less. Money is the economic good whose marginal utility diminishes with increasing quantity at a lower rate than any other good. This is because it is so flexible in choosing between almost all different goods, both in the present and in the future.� Also, the aggregate demand will also go down after some of the employers with profit margins lower than 23 percent start laying off some of their workers.
Published: December 22, 2005 2:41 PM
Sasha Radeta
Perhaps, this is where MLS got confused. He said in one of his previous responses:
"ALL PRODUCERS MUST PAY THE TAX. You must be consistent in your argument."
No, no, no... I never said that "producers" must pay tax. I said that if SELLERS (workers, retailers, producers) are included in any type of tax system, they always must absorb that tax as one of their costs, due to the fact that they cannot avoid their prevailing market prices (or what their customers are willing and able to pay for a given supply). Workers are no different than any other seller in this aspect. But as I said before, the "Fair Tax" would not tax sales of inputs, so not all labor would get taxed. Still, this doesn't change the fact that the "Fair Tax" would hurt workers, by hurting most of their employers.
Published: December 22, 2005 2:54 PM
MLS
Sasha, I don't think I will get my point across if you consider labor only as inputs in regard to business. Labor is the output of the laborer, input to the business, just like business output is consumer input. No matter how you slice it is ultimately the one who creates output who pays the taxes.
Yes technically the the FairTax collects only from the businesses. But this does not matter.
Go back to my example of the laborer making $40K/year while the marginal unit of the product costs $20. Are you trying to imply that the laborer still actually earns $40K, while the business earns $15.4 per unit? If that is indeed what you are saying then it follows that from this view the laborer will now retain more cash for himself than my example (40K vs 30.8K), but this cash retained by the laborer will create more demand for goods and services. If the free laborers then demands your company's product (we have to assume that, since my example involves your employer), the price of the good will rise. How much will it rise? Well it will rise to $26. You, the consumer and free laborer will be paying $26, and your employer will be taxed %23, to retain $20 per unit.
This is just another way of looking at the same thing. One way is say the laborer makes $40K/year, and pays $26/unit. The other way is to say that the laborer makes $30.8K/year and pays $20/unit.
Your short term predictions are correct, but in the long term, it is still an even flat tax on all producers, be they laborer, business, or consumer.
Published: December 22, 2005 3:11 PM
Jim Bradley
Sasha -- I think what you're doing is applying the analysis to two incomparable situations - #1 a new tax on business and #2 a shift in taxes from income tax to revenue tax.
I follow you to #4:
#4 But from the day one, 23 percent of everything they earn at a certain market price will be confiscated by government. Check.
#5 Something missing here. If we agree total taxes in a transaction (both buyer and seller) that $X of taxes must be paid, and the seller posits that instead of the buyer paying, the seller will remit that amount by adding it to the price, it's the same transaction to both parties.
Said another way: if buyers keep all their tax money as nominal income and sellers have to remit that tax, can sellers add that tax to their prices? I don't see why not because nominal demand has shifted but real demand has not (neglecting restructuring, buying used goods for tax reduction, etc.)
"Sell me the house for $110K and I'll pay the $10K taxes or sell me the house for $100 and you pay the $10K taxes" what is the difference to the transactors?
Published: December 22, 2005 4:09 PM
Jim Bradley
Sasha -- Last paragraph should read: "Sell me the house for $110K and I'll pay the $10K taxes or sell me the house for $120 and you pay the $10K taxes" what is the difference to the transactors?
Published: December 22, 2005 4:11 PM
Sasha Radeta
Jeez, one by one... Let's see what confuses you:
MLS SAID: "Sasha, I don't think I will get my point across if you consider labor only as inputs in regard to business. Labor is the output of the laborer, input to the business, just like business output is consumer input. No matter how you slice it is ultimately the one who creates output who pays the taxes."
- NO, NO, NO. Again, labor that is used as an input in production of some final good IS NOT taxed under the "Fair Tax" proposal. Fair Tax would only tax final products and tax them brutally (23 percent revenue tax as opposed to current income tax, or tax on profits only), but as I explained, this is not a good news for workers. Why? It’s simple: demand for all inputs (including labor) depends on final goods producers that will be devastated by this labor tax.
MLS SIAD: "Go back to my example of the laborer making $40K/year while the marginal unit of the product costs $20. Are you trying to imply that the laborer still actually earns $40K, while the business earns $15.4 per unit? If that is indeed what you are saying then it follows that from this view the laborer will now retain more cash for himself than my example (40K vs 30.8K), but this cash retained by the laborer will create more demand for goods and services."
- YOU TOTALLY MISUNDERSTOOD WHAT I SAID. Yes, of course that at the day when the "Fair Tax" is implemented, businesses will be forced to pay the same market prices of labor (for demand and supply of that day), just like they would be forced to pay same market price of other inputs. And when the government takes 23% of their revenue and they suffer losses - that's exactly what would drive many of them out of business. Consequently, firms that suffer losses would be unable to buy same amount of inputs, so they would cut down a lot of their labor force. Only then, you would see a drop in wages as the result of reduction in aggregate supply of final products, ergo demand for inputs.
And do you think that this horrible situation implies that aggregate demand would improve because worker's income is no longer taxed? Well, think again.
First of all, demand is not only consisted of wage-earning workers, but also of entrepreneurs and stockholders who would have to pick-up the tax burden. Government will have to raise the same amount of revenue, so for every dollar that someone benefits, there is someone who will be worse-off.
Secondly, many workers would loose their jobs as the result of 23 percent revenue confiscation (a sales tax), that would confiscate all of the income of those firms that currently have a profit margin of 23 percent or less.
Finally, even those workers who keep their jobs will now face a smaller labor demand (less firms) and greater supply and competition for available jobs (due to inevitable lay-offs). And even those workers with special skills who would not suffer as much, would not necessarily increase their aggregate demand, due to the fact that money is the economic good whose marginal utility diminishes with increasing quantity at a lower rate than any other good (in other words, we would not start spending every extra dollar we earn). And that small segment would not be able to remedy the drop in savings that would also occur.
_________________________________________________
Jim,
You are still suffering from your "economics overdose". In order to analyze the effects of national sales we can exam the effects of the same day transition from one tax type to another.
At the very minute of the "Fair Tax" implementation, sellers will have same amount of goods and services supplied, while buyers will still have the same willingness and ability to buy. At the moment of the fair tax, buyers would not all of the sudden get their tax-free paychecks, as you incorrectly assume. And when they get them, this would not shift their demand curve significantly. Why? I already explained this to MLS. Read more carefully, because I don't want to repeat the same posts. Any small positive shift in demand from workers would be accompanied by a negative shift in demand from stockholders, entrepreneurs, producers and laid-off workers that would instantly suffer by 23% confiscation of their firms' revenue.
So, I repeat: at the very minute of the "Fair Tax" implementation, sellers will have same amount of goods and services supplied, while buyers will still have the same willingness and ability to buy. In short, market price would not change. Sellers will have to accept this market price, or otherwise, face total loss of goods unsold. These losses would start a negative chain-reaction through-out all of the stages of production - back to labor and land-owners.
As I explained, businesses pay 23% tax - not the individuals. If customers are willing and able to pay, let's say $4,558 for a good or service, seller gets to keep only $3,510, after tax is paid to government. Seller now has an incentive to make a deal with a consumer to only charge him, let's say, $4,000 - but not to report this transaction to government. In that case, both sides are benefiting from tax evasion. And since the Fair Tax Act would make purchases of inputs tax free, government would be clueless about the total output of goods and services that can be sold in a black market. In order to control every single seller, government would have to organize something larger than IRS.
Published: December 22, 2005 5:05 PM
MLS
Jeez, Sasha, The immediate effects are obvious, some jobs will be lost, some businesses will go bankrupt. This I do not disagree with. In the lond run however the price will go up, and the laborer will pay this higher price, which the business will then turn over to the gov. The business will PAY the official tax, but nontheless, the free laborer and ALL producers and sellers are the ones footing the bill. Stop focusing on labor only as inputs. You confuse yourself. The case of self-employment might make it easier for you to understand.
You are saying: Labor Input (No Tax)-> Business Production + Pay Tax -> Consumer. At least that is what I thought you were initially saying. Your response has been getting more inconsistent.
I'm saying that in the long run: Labor Output + Pay Tax -> Business Production (No Tax) -> Consumer (Same or other laborer). The costs of production are not pushed pushed onto the consumer (I agree with you), but is pulled back onto the labor.
"And do you think that this horrible situation implies that aggregate demand would improve because worker's income is no longer taxed? Well, think again."
Uhm, quite the contrary. The worker is the most taxed.
Published: December 22, 2005 5:39 PM
Sasha Radeta
Folks,
If you want us to continue with a civilized discussion, you will have to restrain from saying that nonsense about the increase in aggregate demand after the "Fair Tax" is implemented. For G-d's sake, even Boortz repeated hundreds of times that this tax is revenue neutral. In other words, it would take exactly the same amount of money from private pockets as our income tax system does. If the same amount of money is missing from total private spending ad saving, and government spending is aimed to stay the same - how can you talk about any increase in the aggregate demand? Even if we abolished all taxes, demand would not go up by the same percentage, and you should all know this if you took the Introduction to microeconomics class.
What is dangerous about this tax is that in fact it is nothing but a 23 percent revenue tax (for most of us, that's a 100 percent or higher income tax) that applies to everyone - and only those firms with profit margins of 23 percent or greater would not suffer a direct loss as the result of this tax. And among those who suffer loss, only those with larger amounts of accumulated wealth would survive. That's just brutal, even for big-business lobbyists.
Published: December 22, 2005 5:40 PM
Sasha Radeta
MLS, my response has not been getting more inconsistent, but you make less and less sense.
After I corrected many of your misinterpretations of my statements, you practically confirmed everything I said, but you still feel a strange need to respond and repeat same pseudo-argument.
I said many times that because of taxation, some of the prices would go up as the result of drop in aggregate supply of goods and services. There would also be a drop in demand as the result of many businesses going bankrupt, etc., which puts downward pressure on prices. So we cannot claim that prices will go up or down - and we cannot say that "cost" of taxation will be passed from employers onto their workers. That's just incorrect. You may present valid arguments why workers would suffer the most as the result of any taxation - but to say that they pay a certain amount of someone else's taxes that is "embedded" in products they purchase is simply nonsense.
If you are trying to metaphorically say that workers "pay" the consequences of taxation, save that for your English composition class. We talk about the science of economics here.
Published: December 22, 2005 5:50 PM
Sasha Radeta
You can only say that demand for all stages of production would go down as the result of the Fair Tax, but its not the same as saying that workers pay final producers' tax.
Let's assume I'm an entrepreneur who currently only makes small amount of income (just above breaks-even point). The "Fair Tax" would take all my revenue, make me unable to pay for my variable cost and drive me out of business, and possibly out on the street.
The consequences of my bankruptcy will pass on all of my input suppliers, since I will not purchase any more of their goods and services. But don't you dare telling me that someone else is actually paying my own taxes, only because they suffer from the fact that government confiscated my property and ruined my business. Not only would that be economically incorrect, but it would also be morally challenged.
Published: December 22, 2005 6:04 PM
Peter
Jim Bradley: Now: Earn $100, pay income tax $23, have $77, buy $77 item, gross business revenue = $77. Business pays small percent of taxes as a % of revenue which is based on earnings, call it X.
But where did the $100 come from? If it came from the sale of a previous $77 item, then it's not $100 that has been earned, but only $23, so the income tax is only $5.29. The businessman now has $94.71, with which he buys another $77 item for later sale. He makes $17.71 profit.
Now the "Fair Tax" comes in. He sells the item for $100, and pays $23 in sales tax. He buys another $77 item for later sale. He makes $0.00 profit.
Now look at another business: his $100 item costs him $85.
Now: sells item for $100. Earns $15. Pays $3.45 income tax, leaving $96.55. Buys new $85 item, leaving $11.55 net profit.
Post-FT: sells item for $100. Pays $23 tax, leaving $77. Buys new $85 item, taking $8 loss. Can't afford to stay in business. Jumps out of 20th floor window.
Published: December 22, 2005 6:23 PM
MLS
"After I corrected many of your misinterpretations of my statements, you practically confirmed everything I said, but you still feel a strange need to respond and repeat same pseudo-argument."
The irony is that is exactly how I feel in regard to your arguments. I think anyone reading your comments can see you stray from your initial point (it happens).
What you have done is essentially create a dichotomy of employers and employees. Yes, my example was simplistic, in that I gave specific numbers. I'm sorry I did not make it clear that it was not a definite prediction.
My claim is more generic in that I claim that all net producers are net tax payers. Can you think of a case where this is incorrect?
"You may present valid arguments why workers would suffer the most as the result of any taxation - but to say that they pay a certain amount of someone else's taxes that is "embedded" in products they purchase is simply nonsense."
I never say such a thing. Answer me this: Do you think that the employer's contribution to FICA is really paid by you or the employer?
"If you are trying to metaphorically say that workers "pay" the consequences of taxation, save that for your English composition class. We talk about the science of economics here."
It would be extremely difficult to discuss the science of Austrian economics without English composition.
Published: December 22, 2005 6:25 PM
MLS
"Let's assume I'm an entrepreneur who currently only makes small amount of income (just above breaks-even point). The "Fair Tax" would take all my revenue, make me unable to pay for my variable cost and drive me out of business, and possibly out on the street.
The consequences of my bankruptcy will pass on all of my input suppliers, since I will not purchase any more of their goods and services."
But your inputs will suffer from the same problem as you. The inputs are their respective outputs. You trace this down long enough and you will eventually get to land & LABOR. Your problem is you are looking at it ass backwards.
It is the lower order of goods that propagates to the higher orders. Hence it is labor that is being taxed, and past savings that is being double taxed.
You don't pass bankruptcies onto your suppliers, just like you don't pass taxes onto your customers. Are you still under the delusion that you are being consistent?
All your problems with the FairTax is that it's the case of double taxation when put in effect. But you know I agree with you on this.
Correction: English composition on this forum, any language composition in general.
Published: December 22, 2005 6:49 PM
Muhlo
MLS,
Your claims are simply wrong and far from economics. Despite your intentional or unintentional misinterpretations, I never falsely assumed that aggregate demand would go up as the result of the "Fair Tax", and I never said that all of the producers would be taxed under the "Fair Tax".
I repeat, input producers (ICLUDING LABOR) would not be taxed under the "Fair Tax", no matter how you play with semantics. This does not mean that workers would not suffer because their employers' property is confiscated and ruined - but it is not them who pay their employer's taxes. In this country we don't believe in a Marxist nonsense that everyone is entitled to their job, and that this job belongs to them. Loss of a job or loss of a raise does not represent a loss in your property (therefore it's not taxation). It can only be viewed as a loss of a customer (employer).
PS
Neil Boortz likes to say that employees actually pay entire FICA contribution, and as in almost everything - he's wrong again. Actually, that could be a good roadmap to you - whenever you agree with Boortz, know that there is a great probability that you are totally wrong.
The employer's contribution to FICA is really paid by the employer, even though I feel negative consequences of that tax burden - which my employer never asked for. Again, market price of my labor is expressed through my hourly wage- and only my hourly wage. I am forced to reduce my taxable income by 10-35 percent, plus 7.65 percent.
Again, employers' demand (willingness and ability for purchase) of labor is negatively affected by their forced contribution to FICA. As the result, workers' market price has to go down. But it would be totally incorrect to say that I pay my employers' share of FICA contribution. The fact that I can't find better customer and higher price due to taxation - does not mean that my property is confiscated (or taxed). That is the significant point!
In order to understand this, you have to go back to my example. It's exaggerated so you can easily see the point I make (if you bother to read my posts, before you decide to reply to them).
Let's assume I'm an entrepreneur who currently only makes small amount of income (just above breaks-even point). The "Fair Tax" would take all my revenue, make me unable to pay for my variable cost and drive me out of business, and possibly out on the street.
The consequences of my bankruptcy will pass on all of my input suppliers, since I will not purchase any more of their goods and services. But don't you dare telling me that someone else is actually paying my own taxes, only because they suffer from the fact that government confiscated my property and ruined my business. Not only would that be economically incorrect, but it would also be morally challenged.
Published: December 22, 2005 7:14 PM
Sasha Radeta
And look at this misinterpretation of Rothbard... MLS said: "But your inputs will suffer from the same problem as you."
YES THEY WILL SUFFER, But since when this suffering from lack of customers or lack of demand - equaled to confiscation of your property, i.e. taxation?
And do you actually think like Neil Boortz- just backwards? Do you think that employers are able to pass their costs backwards to prior stages of production...? But that would be a complete nonsense. If I got slammed by the "Fair Tax" and 23% of my revenue is confiscated - the fact that I will no longer be able to order more inputs, including employing labor - does not mean that I managed to pass my tax costs backwards. My input suppliers just feel negative consequences of my own trouble. It is the suffering of the final goods producer that causes problems to input suppliers.
Again, the fact that they would feel lack of demand from bankrupt or crippled businesses does not mean that they are the one paying tax. Their property is not confiscated with the "Fair Tax" - it is the property (revenue) of sellers.
Published: December 22, 2005 7:25 PM
Sasha Radeta
I don't want to spend any more time on MLS, because he just confirms everything I say, but falsely equates input producers' suffering from lower demand - with taxation (that actually hits final goods producers).
Published: December 22, 2005 7:31 PM
Sasha Radeta
Correction I don't want to spend any more time on MLS, because he just confirms everything I say ABOUT THE EFFECTS OF THE "FAIR TAX" ON INPUTS PRODUCERS (I explained this like hundreds of times), but falsely equates input producers' suffering from lower demand - with taxation (that actually hits final goods producers, UNDER THE "FAIR TAX" ACT).
Published: December 22, 2005 7:45 PM
MLS
"because he just confirms everything I say, but falsely equates input producers' suffering from lower demand - with taxation (that actually hits final goods producers)."
No, I said it hits initial goods producers.
If you don't want to spend any more time with me, how about Rothbard?
"Hence, the seemingly common-sense view that a retail sales tax will readily be shifted forward to the consumer is totally incorrect. In contrast, the initial impact of the tax will be on the net incomes of the retail firms [as you said]. Their sever losses will lead to a rapid downward shift in demand curves, backward to land and labor, i.e., to wage rates and ground rents. Hence, instead of the retail sales tax being quickly and painlessly shifted forward, it will, in a longer-run, be painfully shifted backward to the incomes of labor and landowners. Once again, an alleged tax on consumption, has been transmuted by the processes of the market into a tax on incomes. [As I have tried to say]"
-Rothbard: The Consumption Tax: A Critique
Took me a while to find it.
---
"The employer's contribution to FICA is really paid by the employer, even though I feel negative consequences of that tax burden - which my employer never asked for. Again, market price of my labor is expressed through my hourly wage- and only my hourly wage. I am forced to reduce my taxable income by 10-35 percent, plus 7.65 percent."
Uhm, no. The market price for your labor is the amount the employer pays. You are forced to reduce you income by 10-35% plus 7.65% + 7.65% (that never shows up on your check). Your problem is that you think the hourly wage physically shown on your check is the actual price of your labor in the market. That is just a sham to cover how much you really earn - and how much is stolen from you.
Published: December 22, 2005 7:52 PM
MLS
In regard to the above, I remember the exact integer wage that I was promised, yet for some reason my wage ends in .87. I did the math, and indeed 7.65% was removed.
Published: December 22, 2005 8:03 PM
Sasha Radeta
MLS, are you kidding me?????
Are you drunk, or something?
ROTHBARD CONFIRMED EVERYTHING I SAID:
"In contrast, the initial impact of the tax will be on the net incomes of the retail firms [as you said]. Their sever losses will lead to a rapid downward shift in demand curves, backward to land and labor, i.e., to wage rates and ground rents"
I SAID IT HUNDREDS OF TIMES: YES, INPUTS SUPPLIERS WILL SUFFER AS THE RESULT OF REVENUE TAXATION OF FINAL GOODS PRODUCERS. That is the result of a process that I already described in much detail.
But since when this suffering from lack of customers or lack of demand - equaled to confiscation of your property, i.e. taxation?????
How can you call something taxation, when it does not involve your property confiscation?????
----
MLS SAID: "The market price for your labor is the amount the employer pays."
THAT’s ABSOLUTELY CORRECT! And when you multiply someone's hourly wage (their market price) with a number of hours they worked - you will get an amount THAT DOES NOT INCLUDE EMPLOYER'S CONTRIBUTION TO F.I.C.A.
If the income tax was abolished tonight and all the employees got their gross wages on their paycheck, they would not automatically get additional 7.65% that their employers contributed! Market price (hourly wage) would stay the same at a given labor supply and demand. Different increases in hourly wages (of different percentages) can only happen eventually - when the demand of employers picks up as the result of termination of FICA tax burden. But it would be totally ignorant to say that this increase in demand (willingness and ability) would amount exactly 7.65 percent for everyone.
Published: December 22, 2005 9:54 PM
Sasha Radeta
The sad part of MSL’s posts is not the fact it took him a long time to find Rothbard’s consumption tax critique (it’s the first match when you type in: Rothbard sales tax - in this site’s search engine. Really sad thing is that he even missed the only point where I differ from Rothbard and where I stay true to Carl Menger (the founder of Austrian school of economics and the author of Austrian theory of value).
I only differ from Rothbard in this assertion:
"Surely a sales tax, other things being equal, is manifestly both simpler, less distorting of resources and enormously less bureaucratic and despotic than the VAT. Indeed the VAT seems to have no clear advantage over the sales tax, except of course, if multiplying bureaucracy and bureaucratic power is considered a benefit."
With all due respect, he failed to realize here that a national sales tax, unlike value-added-tax, would have to tax a significant portion of every final G&S seller's total revenue, instead of income - and that due to this extremely high tax (100 percent income tax for most of our firms), as well as the inherent stupidity of a sales tax (they don't record any input purchase, so government is clueless about the total output of goods and services) black market would become such a drastic problem that it would require an enormously more bureaucratic and despotic apparatus than with the VAT or income tax.
On the other hand, in Rothbard's time there was no significant national sales tax proposal, so he didn't have the opportunity to analyze all possible fallacies and problems of such tax. In his work, he spent most of the time rebutting an obsolete Fisher’s proposal that dates back to 1942.
Published: December 22, 2005 10:25 PM
Sasha Radeta
Note that Rothbard never said that sellers of final goods and services could "pass backwards" some share of their taxes. He was a smart man.
He only said that damaging effects of such tax on finall G&S sellers would negativelly affect their willingness and ability to purchase inputs (downward shift in demand curve) and this would negatively affect prices at all stages of production - even back to land and labor.
This drop in demand for inputs cannot be called "taxation of workers" or confiscation of their property. This distinction has an important legal, political, and economic significance.
Published: December 22, 2005 10:45 PM
Peter
Sasha: I think you're misinterpreting Rothbard. A new sales tax may end up being 100% income tax for many companies, but an existing sales tax would not (such companies would not be in business). Rothbard wasn't writing about transitional problems. Also, a sales tax can be designed without the "stupidity" you talk about. (Look at the GST in Australia/New Zealand, for example; presumably that Fair Tax would come to be handled the same way)
Published: December 23, 2005 1:22 AM
Sasha Radeta
I wasn't writing just about transitional problems. I was writing about an inherent problem with every sales tax - it confiscates total revenue, even if it takes all of your income - and some extra money. Rothbard believed in Austrian theory of value, so his comment about the benevolence of a sales tax compared to VAT does not hold. Sales tax actually distorts resources more extremely than VAT, since it strikes final sellers harder, and than the "tsunami" effects goes through stages of production.
As far as stupidity of the "Fair Tax" compared to Australia and New Zealand goes, you failed to mention that their goods and services tax is only 10 and 12.5 percent respectively. In New Zealand if you have a turnover of $40,000 or less – you charge your products tax free. In Australia, following items are tax-free:
• Exports
• Health and medical care
• Education
• Food
• Child care
• Certain activities of charities and gift-deductible bodies
• Religious services
• Sales of businesses
• Water, sewerage and drainage
• Certain transactions involving precious metals
• International travel
• International mail
• Supplies through inwards duty free shops
• Crown land
• Farm land
• Subdivisions of farm land for family residential purposes
• Cars for disabled people
• Certain supplies under contracts made before 8 July 1999
• Certain prepaid funerals
So it is so much smaller and more benign tax… And they still have a problem with non-compliance and they have a significant bureaucratic apparatus in place (considering their size).
Published: December 23, 2005 2:45 AM
Sasha Radeta
In Australia purchases of inputs are recorded - and than some of them are credited. In the case of the "Fair Tax" there is no tax on inputs and no records of these transactions. So that leaves space for manipulation.
By the way, Australian GST system is a mess:
http://www.ato.gov.au/businesses/content.asp?doc=/content/57709.htm&pc=001/003/074/002/006&mnu=&mfp=&st=&cy=1
Published: December 23, 2005 2:58 AM
gene berman
I have followed the exchanges with a single interest: to detect any realization that the matter doesn't matter--not a glimmer, sad to say.
"Unfairness," "onerousness," "inefficiency" of taxation schemes are all outgrowth phenomena of an underlying, irreconcilable conflict, that which we all speak of as "robbing Peter to pay Paul."
Everything else is superficial quibble.
Make no mistake about it. As long as the underlying principle has not changed, no tax-collection regime will prove (except temporarily) more equitable or less onerous. Any gains in what is conceived as "efficiency" (personal and professional inputs to compliance and minimization) will be offset by the complications of transition between regimes and, subsequently, a similarly luxuriant growth of new idiocy will sprout as inequities, "special cases," and previously-unnoticed opportunities for evasion or avoidance.
Just a silk purses cannot be fashioned from sows' ears, so cannot cleverer techniques (and the "cleverer" is very much in question) more than slightly mask intent and actuality.
I'm surprised that the "Fair Tax" people didn't go a step further and advocate the most obvious extension of their thinking: the "No Tax" tax, in which the revenue requirements of the federal government are simply brought into existence through a new power of the Federal Reserve system, added to their accounts, and spent as our representatives felt necessary. Can't get much "fairer"--huh? And none of that messy tax-collecting at point-of-sale, either. Mebbe I should write a book and go on talk shows an' get commented about on the Mises Blog!
Published: December 23, 2005 7:45 AM
Jim Bradley
Sasha -- You are asserting that the OLD market price is also the revenue maximizing price for the new system under "FairTax" -- but that is false. The revenue maximizing price is now higher as the customer has more nominal dollars to spend, but on net the same real income.
Published: December 23, 2005 10:42 AM
Vince Daliessio
Sasha, et al;
Not to quibble, but the 7.65% "employer contribution" of FICA is part of the cost of employing labor. Whether it is also part of the marginal revenue product comprising the wage of the worker in question depends on whether and to what degree the "contribution" affects the profit picture of the business - high-gross profit businesses might prefer to pay the extra money to the worker to reduce turnover or incentivize productivity (possibly as profit-sharing or retirement plan contributions), while low-gross-profit companies might prefer to add it to the bottom line instead.
The point of this is that the "contribution" forces the employer to pay a vig to the government that usually is against both his interests and the interests of the employee. His costs are raised, while his revenues stay the same, reducing available profit.
Just because Boortz claims this money will somehow make it into the wage-earner's pocket doesn't make it so. But absent the FICA tax, at least both employer and employee have a better chance to understand the real profit, loss, and compensation picture.
Unfortunately, this makes me sound like I am in favor of the FairTax, which I am not.
Published: December 23, 2005 10:51 AM
Sasha Radeta
Jim,
You actually confirmed my major argument. The "Fair Tax" would create terrible distortion and widespread forecasting errors of our firms (who are indeed trying to maximize revenue)
You seem to be confused about the concept of revenue maximization (without even going into problem of "Maximization" where potential outcomes are unknown). Students usually don't get it and many professors don't bother to explain... Revenue maximization is not the process in which firms are playing every day with prices, waiting for their customers to knock them in their heads... It is the process of building certain supply (output) IN ADVANCE, based on predictions about the demand.
If the market price is not corresponding with your revenue maximization or profit maximization - tough luck! That only means that you didn't produce right amount of output. Ain't anything you can do about it ex post facto.
Firms cannot do not have control over the market prices - they are only trying to forecast this price and to produce revenue maximizing OUTPUT in advance. Once that output is produced, consumers' demand expressed in prices will tell them if they made a serious forecasting error.
At the moment of production, firms only know their cost curve. They are clueless about future demand and revenue. So they try to forecast revenue and cost curves - in order to set an appropriate amount of output and to create initial price estimate. So once supply is built up, customers' will decide if the price is right.
AND THAN COME THE REAL MARKET PRICES! Firms can charge their products any way they want based on their predictions, but it's the customers with their changing, unpredictable tastes and preferences who decide if they will accept this price. Firms never guess it right, but there are prices at which market tend to approach clearing.
FIRM HAS NO CHOICE BUT TO ACCEPT MARKET SIGNALS ABOUT REAL PRICES. Forecasting errors are common, but force of demand is telling us if we produced too much or too little (with product shortages and surplus). So firms can only listen to market prices - and pray to G-d to forecast it accurately enough to survive.
Ergo, market prices can only be forecasted (and costs arranged accordingly), but customers don't really care about our forecasts and they have a final say about market price. And we have to accept it.
--------------------------------------------------
Vince, even cost of designing break rooms, providing uniforms equipment, complying with OSHA, etc.is the cost of employing labor. But that is not part of the market-price of labor. If during the next hour we abolished the income taxation, employers would not automatically get higher hourly wages… Supply and demand conditions would not allow immediate change in labor price – but smaller tax burden on the US firms would increase their ability to hire more workers… So there would be an eventual increase in demand, but to claim that it would amount to 7.65 percent – for everyone – is simply wrong. Again, it is important to clearly understand the concept of taxation (confiscation of your earned property – on which you have a title). If you have a lack of demand for labor due to the fact that government confiscates employers' property with taxes and cripples their ability to pay higher wages – that's bad for all. But you cannot say that you paid their taxes. To suggest that would be economically, legally, and morally wrong.
Published: December 23, 2005 2:33 PM
Sasha Radeta
Rothbard was right when he said: "in deciding on the quantity of goods to be produced, every producer will always set his output so as to maximize his expected money earnings, ceteris paribus... no one will expand his output, unless he expects marginal revenue to be higher than marginal cost."
That deals with the issue of uncertainty. Firms are trying to play it safe where marginal revenue (MR) is above marginal costs (MC), and not to base their output shooting for some uncertain point of profit maximization where MR=MC. Than market prices act like agents of natural selection, weeding out those who did not happen to be close to this optimal point. Unpredictable force of determines if some firm positioned itself at the right place.
When firms see their marginal costs increasing due to sales taxation at a certain market price, they don't say: "let's increase our prices in order to make an intersection of marginal costs with marginal revenue, so we can maximize profit at our projected demand (which is impossible to guess)".
It happens differently. We don't know about exact demand conditions, we only guess them. Higher costs (lower profitability) actually reduces overall supply by eliminating some of the competitors, which in turn put upward pressure on prices. Surviving firms don't increase their prices as their reaction to their own increase in costs - they do it reacting to drop in market supply (less competition).
On the other hand, once many employers are driven out of business, there would be negative consequences on demand (now downward pressure on prices), but I already analyzed this.
=================================================
AND JIM FAILED TO READ MY POST IN WHICH I SAID:
If you want us to continue with a civilized discussion, you will have to restrain from saying that nonsense about the increase in aggregate demand after the "Fair Tax" is implemented. For G-d's sake, even Boortz repeated hundreds of times that this tax is revenue neutral. In other words, it would take exactly the same amount of money from private pockets as our income tax system does. If the same amount of money is missing from total private spending ad saving, and government spending is aimed to stay the same - how can you talk about any increase in the aggregate demand? Even if we abolished all taxes, demand would not go up by the same percentage, and you should all know this if you took the Introduction to microeconomics class.
What is dangerous about this tax is that in fact it is nothing but a 23 percent revenue tax (for most of us, that's a 100 percent or higher income tax) that applies to everyone - and only those firms with profit margins of 23 percent or greater would not suffer a direct loss as the result of this tax. And among those who suffer loss, only those with larger amounts of accumulated wealth would survive. That's just brutal, even for big-business lobbyists.
Published: December 23, 2005 3:09 PM
Sasha Radeta
So Jim,
It's true that the "Fair Tax" would mess up economic calculation by imposing additional cost - on the existing cost curve that formed when income tax was in place...
But it is incorrect to suggest that the customer has more nominal dollars to spend, but on net the same real income.
"Customers" who are entrepreneurs, stockholders, etc. would have 23 percent reduction in their sales - even before workers get their firs "tax-free" paychecks. There would be no inflation or aditional money with the "Fair Tax" (that's what FED would do, but that's not our topic)...
Revenue-neutral tax is designed to shift the tax load around... For every dollar some worker benefits - there has to be someone who pays that dollar to government. Net effect is designed not to change our demand condition (same revenue to government, means same amount of money taken from private consumption). Even Neil Boortz admits this.
Published: December 23, 2005 3:21 PM
Don Lloyd
Sasha,
Rothbard was right when he said: "in deciding on the quantity of goods to be produced, every producer will always set his output so as to maximize his expected money earnings, ceteris paribus... no one will expand his output, unless he expects marginal revenue to be higher than marginal cost."
That deals with the issue of uncertainty. Firms are trying to play it safe where marginal revenue (MR) is above marginal costs (MC), and not to base their output shooting for some uncertain point of profit maximization where MR=MC. Than market prices act like agents of natural selection, weeding out those who did not happen to be close to this optimal point. Unpredictable force of determines if some firm positioned itself at the right place.
There is little if any additional safety in deliberately trying to operate with marginal cost below marginal revenue. In fact, the closer to the point where the last unit produced is also the last one for which marginal revenue is greater than marginal cost, the lower the sensitivity of results with respect to a given error. That is true even without considering the separate risk of having non-competitive pricing.
Regards, Don
Published: December 23, 2005 4:46 PM
Don Lloyd
Sasha,
In my last comment, the first paragraph was Rothbard, the second paragraph was yours, and the third was mine.
Regards, Don
Published: December 23, 2005 4:48 PM
Sasha Radeta
Don,
Firms have no idea what future demand curve, or revenue curve, looks like - they can only forecast it. They don't want to produce any item that does not bring more additional revenue than cost. More safety does not come from producing items at a projected loss or at no gain.
Firms are trying to be revenue maximizes, but after they already produce output and incur cost, the natural selection of markets favors those firms that happen to be closer to MR=MS point. But that knowledge is ex post facto.
Hoppe's interpretation of Rothbard (I don't have time to explain it now):
http://mises.org/etexts/hhhonmnr.asp
Published: December 24, 2005 3:00 AM
Don Lloyd
Sasha,
Firms are trying to be revenue maximizes, but after they already produce output and incur cost, the natural selection of markets favors those firms that happen to be closer to MR=MS point. But that knowledge is ex post facto.
Thank you for the Rothbard reference. I now have a better idea where you're coming from.
There are several additional things that need to be considered. I will just list them as most of them will be clear to you immediately.
1. All marginal costs, both before and after actual production need to include opportunity costs.
2. After actual production, there still will be some marginal costs, sales and shipping for example, which will drive the proper price above the revenue maximizing price.
3. After actual production, pricing will depend on whether the business is ongoing. If the business is ongoing, then marginal replacement costs must be included. If the product is not perishable, then selling a unit for a price too low to fund its replacement makes no sense, allowing for the time value of money.
4. After actual production, revenue maximizing is ambiguous until it is qualified. If we say that the revenue maximizing price refers entirely to the demand structure, then that price will hold if and only if inventory exceeds that demanded at that price and the surplus must be held off the market, destroyed or salvaged in some manner. If the inventory falls short of the quantity associated with the revenue maximizing price, then the price must be raised into the elastic region suficiently to reduce demand to the level of inventory. This is an alternate definition of a revenue maximizing price, given a limited inventory.
Regards, Don
Published: December 24, 2005 11:10 AM
Sasha Radeta
Don,
1. True. We are talking about all costs, and good accounting instructor will lecture about considering opportunity cost before making decision.
2. Cost curves should include post-production costs.
3. Marginal replacement cost is included and it is part of cost curves for next production process, but for simplicity purposes I didn't get chance to go into new output decisions - and it was not crucial for tax topic.
4. We say that firms aim to "maximize" their revenue. They try to predict future and position their output/price accordingly. But it's buyers' decisions that will determine if those positions were correct. Buyers' demand at this given supply will form market prices. Firms will make errors (shortages or surplus) and in order to correct those errors they will have to make adjustments, attempting to get closer to marker price.
Suma sumarum, firms are trying to forecast their market price for optimal revenue - and than they make their output decisions. Once this output is produced, they have to adjust to actual market price. Firms don't just set whatever price they want based on their tax burden - they can only follow those prices at which buyers are willing and able to clear supply, and that's what confuses the "FairTax" proponents.
Published: December 24, 2005 12:52 PM
Don Lloyd
Sasha,
Suma sumarum, firms are trying to forecast their market price for optimal revenue - and than they make their output decisions. Once this output is produced, they have to adjust to actual market price. Firms don't just set whatever price they want based on their tax burden - they can only follow those prices at which buyers are willing and able to clear supply, and that's what confuses the "FairTax" proponents.
Here is where our opinions seem to diverge slightly.
Once the output is produced, everything in the past is a sunk cost, except for accounting. I don't think you disagree with this.
My claim is that the company has a broader set of options than you have expressed.
In particular, it is under no obligation to make or let the market clear if it is not to its advantage to do so. It can set the price that it is willing to sell for, but it cannot force consumers to buy anything at that price if they don't want to.
For every possible price that it might set, there is some number of units that will be purchased, all the way from zero to a number in excess of the units previously produced and available for sale. The market demand that would result in these sales cannot be precisely known by the company, although it should have a much better idea than it did when it was previously deciding how many units to produce.
The best price for the company to set, even though uncertain, is the one that causes the last unit sold to result in a marginal revenue to the company that exceeds its marginal cost, with the particular marginal cost being the one that is appropriate for the situation at hand.
For the last unit, the marginal revenue to the company will be .77 times the marginal total sales expenditures made by consumers, to allow for the sales tax.
In all of the above, any mention of the company setting the price that it is willing to sell for implies both a pre-tax price that produces company revenue and an after tax price 1.30 times as much that the consumer actually pays if he values the product enough.
The really important thing is to use the proper marginal cost.
If I am liquidating my inventory and going out of business, then no production costs should be included, as they have all been sunk in the past.
OTOH, if I plan to stay in business, then the proper marginal cost must include the marginal replacement cost. There is no point in selling units below what they will cost to replace, assuming that they are not perishable.
In both of the tentative price setting scenarios above, it is assumed that your inventory is exactly sufficient to meet the resulting market demand. If your inventory is less than this quantity, you must increase the price to force the market demand down to clear your inventory.
If your inventory is greater, you must withhold the surplus part of it from the market to prevent depressing market prices to your disadvantage.
I also don't think you would disagree with any of the above once we could agree on the language that we were speaking.
All of the above takes the sales tax into account as it forces an inequality between between consumer prices paid and company revenues.
Eventually, part of the eliminated embedded taxes will cause the company to have a lower marginal cost for its products. This will show up in the marginal replacement costs for an ongoing business. While FT claims that replacing the embedded taxes by a sales tax will leave prices essentially unchanged, this is far from true. Only a part of the embedded taxes eliminated will result in lower pretax prices.
Regards, Don
Published: December 24, 2005 6:08 PM
Sasha Radeta
Don said: "My claim is that the company has a broader set of options than you have expressed.
In particular, it is under no obligation to make or let the market clear if it is not to its advantage to do so. It can set the price that it is willing to sell for, but it cannot force consumers to buy anything at that price if they don't want to."
So what's the alternative? To ignore your variable cost? To let you inventory stay on your shelves, while you suffer total loss, instead of partial cost? You just say to your creditors and people who submit you month-to-month bills: "oh, what the heck - it's just a sunk cost so it doesn't matter, please forgive me". Well, it matters to them, and it would matter to you if you are actual producer rather than hypothetical one. You made all your decision based on those variable costs of production. So like it or not, you would not be able to ignore market prices and you would have to follow them - even if it means that the "Fair Tax" confiscated most or all of your income.
Don also said:
"The best price for the company to set, even though uncertain, is the one that causes the last unit sold to result in a marginal revenue to the company that exceeds its marginal cost, with the particular marginal cost being the one that is appropriate for the situation at hand."
Of course it is. Except, no one knows what price that is until market selection favors those firms who are closer to that point. Firms would never produce an output, for which they would run into losses (considering standard error of their demand forecast, at forecasted MR=MC they would always enter into a large area where costs exceed revenue - and no one wants to produce that kind of output). So they deliberately stay away from MR=MC point that is only a forecast with a significant standard error.
That's why are referred to revenue "maximizing" as trying to play it safe (trying, because we live in an uncertain world).
Published: December 24, 2005 9:23 PM
Sasha Radeta
In short: If you ignore market prices and you don't clear - you decide to suffer total loss on every good unsold, instead of taking what you can take for a market price. Your variable cost cannot be observed as sunk in output/pricing decisions, even if it happens in past and you already paid it off, because by selling quantity of those goods you actually reduce your potential cost - and that's why we don't call that cost "fixed" (many of us would need that money back, and that’s why we go into production of these items ). Your best estimates of future cost curves are your present ones. If you ignore it, and you total revenue drops below your average variable cost, you can forget about next output decision (you won’t have money to finance it) and you can shut-down.
Published: December 24, 2005 9:50 PM
Don Lloyd
Sasha,
Merry Christmas or equivalent.
You shouldn't be disagreeing with me because I am supporting your claim of catastrophic results if previously expended production costs cannot be recovered.
Everything that I have said is an attempt to give the best or least bad result given that reality.
So what's the alternative? To ignore your variable cost? To let you inventory stay on your shelves, while you suffer total loss, instead of partial cost?
If you intend to stay in business and your product is not perishable, then what you keep on the shelf will reduce the amount of inventory build that you need to do for next month, so it's not a total loss by any means. Again, the goal is to make the best of what may be a bad situation.
If you ignore market prices and you don't clear - you decide to suffer total loss on every good unsold, instead of taking what you can take for a market price.
The assumption is that everything that you bring to market will sell at the same unit price. If you bring too much to market, the last units you supply will not only sell at lower prices themselves, but they will force lower prices on all of the previous units supplied. This is why there is a unit price and quantity that produces a maximum revenue for a given market demand schedule, whether it's observable or not.
It may be that we have a difference in assumptions. When you talk about ignoring a market price, my claim would that there is no market price until I decide how much to supply at what price. What already exists and is beyond my control is a market demand schedule of quantity demanded vs price. Given that, I try to do the best I can knowing that my perception of the market demand schedule is uncertain.
The only way that I see that a market price could exist before I decide how much of my post-production inventory to supply at what price is to be working from the basis of some variant of a perfect competition model. All reported prices are merely historical in character and don't necessarily reflect current supply and demand conditions.
Regards, Don
Published: December 25, 2005 11:49 AM
pb
Suppose people faced with a 23/30% consumption tax cut their consumption and increase their savings? If they do this, won't the tax rate have to be increased in order to make the total collections revenue neutral? If the tax rates are raised, that could cause people to cut their consumption even further.
If people reacted to it in the opposite way and cut their savings and increased their consumption, then government revenues would be greater than expected and the rate would have to be cut to leave it revenue neutral. Cutting the rate would then encourage people to consume even more and save even less and raise total taxes once again.
I don't see how anybody can be sure how people would react to be sure that it in fact was revenue neutral.
Published: December 25, 2005 11:56 AM
Sasha Radeta
Don,
Merry Christmas to you and everyone who celbrates today.
You said: "If you intend to stay in business and your product is not perishable, then what you keep on the shelf will reduce the amount of inventory build that you need to do for next month, so it's not a total loss by any means. Again, the goal is to make the best of what may be a bad situation."
So, you're talking about products that can't be spoiled, products that will not be obsolete before next stage of production or have a high obsolesence cost.
But regardless of your future adjustments in cost curves (that will come with past experience, as Rothbard explained), you will have to follow a prevailing market price in order to clear that product and not to suffer a total loss in unsold units.
Don also said: "The assumption is that everything that you bring to market will sell at the same unit price. If you bring too much to market, the last units you supply will not only sell at lower prices themselves, but they will force lower prices on all of the previous units supplied. This is why there is a unit price and quantity that produces a maximum revenue for a given market demand schedule, whether it's observable or not."
Do you assume here that an individual producer's supply greatly determines total market supply - and that producers can adjust prices based on their own individual stock of merchandise (with no close substitutes)? Unfortunately, consumers don't care about your own forecasting errors and they create a market price in interactions with all sellers within a market. If you produce some output greater than optimal (or what consumers determine based on their deman and total market supply of all sellers), you will simply have to follow that market price or suffer a loss.
Don: " When you talk about ignoring a market price, my claim would that there is no market price until I decide how much to supply at what price. What already exists and is beyond my control is a market demand schedule of quantity demanded vs price."
What will also exist is total market supply, in which you only have a fractional contribution and little or no control. Based on that, you will have clearing price that might drive you out of business or make you richer (based on your output).
Don: "The only way that I see that a market price could exist before I decide how much of my post-production inventory to supply at what price is to be working from the basis of some variant of a perfect competition model."
The only way that I see your assumption can exist is a perfect monopoly model. What I described explains how you must behave when you own supply does not control market demand and supply (real world).
Published: December 25, 2005 9:01 PM
Don Lloyd
Sasha,
The only way that I see your assumption can exist is a perfect monopoly model. What I described explains how you must behave when you own supply does not control market demand and supply (real world).
From the Hoppe chapter on Rothbard that you referenced earlier--
MURRAY N. ROTHBARD:
ECONOMICS, SCIENCE, AND LIBERTY
By Hans-Hermann Hoppe
© 1999 The Ludwig von Mises Institute
From 15 Great Austrian Economists
Edited by Randall G. Holcombe, pp. 223-241
Moreover, Rothbard refuted every alternative theory as nonsense, nonoperational, or
false. It is nonsense, for instance, to define a monopolist as someone who has control
over his price (a “price-searcher�). Every businessman has perfect control over his price
(and no control at all over the quantity bought at that price by consumers). Hence, under
this definition, no one exists who is not a monopolist. Likewise, is it nonsense to define a
monopolist as “the only seller of any given good,� for in an objective sense, every seller
of every product is always the only seller of his own unique product (brand). Thus,
everyone is a monopolist with a one-hundred-percent market share of one’s own product.
Yet, this circumstance does not affect in the slightest that each entrepreneur must
compete at all times with every other entrepreneur for consumer spending, regardless
how unique or different one’s goods may be. On the other hand, in a subjective sense, no
seller of anything can ever be established definitely as a monopolist. According to this
interpretation, the term “given good� means “a good as defined by consumers.� Thus, the
determination of whether or not the seller of something is its only seller, or of how large
his market-share is, depends on the consumers’ definition of what this good is; that is, on
their classification of particular physical objects into various groups of homogeneous
goods. Not only can such classifications continually change, but different consumers can
classify the same physical objects differently. Hence, in this sense the term monopolist
becomes practically useless and non-operational, and all attempts to measure a product’s
market share must be considered futile.
The analysis of a single seller good can be implicitly extended to any good by simply encapsulating the difference in the market demand including competition that the seller faces. As you note, it will be uncertain in any case.
Regards, Don
Published: December 25, 2005 9:25 PM
Sasha Radeta
Suppose people faced with a 23/30% consumption tax cut their consumption and increase their savings?
=================================================
People will not face consumption tax. They will face market prices formed by supply and demand, and any tax will only affect future supply (because producers will have to absorb a sales tax).
People's savings depend on their time preference (if they prefer their consumption now or later). Since we don't have knowledge of future tax rate and its effect on market supply (and prices), we don't know that future consumption will be less expensive. Therefore, any short-term change in savings would not be attributable to the "Fair Tax".
PS
With many people laid-off and entrepreneurs going out of business (as a result of a brutal 23% total revenue tax), one might only suggest that savings would eventually go down, along with aggregate supply and demand (stagnation). People with meagre income would spend most or all of their money just to sustain their basic needs. For them, savings would entail a very high cost (higher time preference).
Published: December 25, 2005 9:44 PM
Sasha Radeta
Don, you misunderstood Rothbard.
A single seller does not control market supply. The author actually tried to suggest that everyone is a monopolist and that a notion of "single seller controling a market supply (including substitute" - is just a nonsense.
Published: December 25, 2005 9:47 PM
Sasha Radeta
- Single seller does not control market supply or market prices
- Trying to analyze market price formation using a single seller model is unrealistic.
Published: December 25, 2005 9:49 PM
Sasha Radeta
Hoppe: "Hence, in this sense the term monopolist
becomes practically useless and non-operational, and all attempts to measure a product’s
market share must be considered futile."
Published: December 25, 2005 9:50 PM
Don Lloyd
Sasha,
Let's say you sell a store brand 37" plasma TV.
No one else sells the same thing, but there is certainly no shortage of close substitutes.
For your product, you can set any price you want, and build as many or as few as you want, but you cannot force consumers to buy even one if they don't want to.
The demand for your specific TV is a subset of a larger, more general demand, that might be all TVs between 36 and 42 inches in size, for example.
The price that you set and the quantity that you supply are set by you in an attempt to leave youself in the best possible financial position. This is a highly uncertain process, but the process takes as its inputs the projected state of demand vs price for your specific TV and your projected marginal cost, broadly defined.
The above is true if you are a sole seller, but it is also true when competitive substitutes exist. The only difference is that the demand/price schedule for your specific TV may highly depend on the demand/price schedule and supply of all other 36 to 42 inch TVs.
Regards, Don
Published: December 25, 2005 10:43 PM
Sasha Radeta
Don, your example is not realistic.
There are always competitors, especially for something like "store brand" anything. Market price will form in a process in which you contribute only a fraction and you have almost no direct control. Profit always attracts competition, even if we all have some kind of patent or niche.
Read Rothbard and Hoppe more carefully:
"the term monopolist becomes practically useless and non-operational, and all attempts to measure a product’s market share must be considered futile"
Therefore, you have no way of knowing how much of your own supply contribute to overall market supply. Therefore, clearing price will appear, whether it is convenient for you, or not.
PS
All of you guys in this blog are trying to come up with a world in which no one ever would go out of business. It's kind of funny.
Published: December 25, 2005 10:57 PM
Sasha Radeta
So to give you a final answer:
No, you cannot become an instant monopolist and single seller in your market by artificially narrowing a definition of market in which you compete (Rothbard showed how this kind definition of monopoly is absurd). Your broader market will exist, whether you admit it or not.
If you decide to define the market in which you compete so narrowly and you boldly claim that a separate market exists only for your 37" store brand plasma TV - and if in some weird reality you become a sole supplier of such product and no one else can enter your mini-market - you only created yourself a nightmare. It can only make you feel better before sales figures start to show.
By making your market definition so narrow, you virtually made it impossible to estimate future demand for your planned output. Why? Because one of the determinants of demand are prices of substitutes and complements (and substitute product could be anything - more broadly you define them, you increase chances that you are correct, since people substitute luxury items with those products that don't even seem to be close substitutes...).
So if you decide to have more precision in determining your market supply by declaring yourself a sole supplier - you made your demand almost impossible to estimate, because you increased the number of substitute products' prices to investigate... So you would actually mess up your demand forecast without a good reason. Why do I say that?
Well, even if you only sell your store-brand products for which you have a patent (what a "realistic" scenario for the US economy), you would still not be able to affect prices greatly by manipulating your own output. That's due to prices of close substitutes, which you decided not to account for in your supply analysis. Whether or not you want to accept other sellers as a part of your market, their supply and prices will form a prevailing market price and demand conditions, over which you have no control.
But like I said, your example is not realistic representation of the US sellers - and it is irrelevant for this topic.
Published: December 25, 2005 11:43 PM
Don Lloyd
Sasha,
Rothbard is clearly saying that the word 'monopoly' has no possible consistent and useful meaning. However, he is not placing any limitation on the possible range and refinement of the degrees and gradations of competition that may exist. The only exception is that a totally unique product with no possible substitutes will still face competition from every spending alternative that an individual may have.
What I attempted to describe was a model in which the demand for your specific product combines with your marginal costs to determine the price and quantity which give you the best result. Having a model by itself places no limits on the results. The existent of nearly perfect substitute competition will strongly affect the demand schedule that your specific product faces
and, thereby, the proper price. If you posit a situation in which setting a price as little as a penny above a competitive substitute results in no demand whatever, so be it. The model doesn't care and should be capable of producing that result.
In all cases, for all degrees of competition, the reality is extremely uncertain. As a result, the model may or may not be useful in directly setting a price. However, even if it can't be so used, it may still be useful in suggesting how changes in pricing and quantity may affect results.
Regards, Don
Published: December 26, 2005 4:46 AM
Sasha Radeta
Don,
That model is unrealistic and it is actually implying something that Rothbard refuted. On the top of that, it may actually confuse people into believing that formation of market prices depends on total market demand - and a single firm's inventory. And that's far from reality and useless for understanding full effects of the "Fair Tax" when it is applied on market prices, which firms have to follow if they don't to get suffer loss of unsold goods.
If one strictly interprets Say's law, he/she will reach an interesting conclusion about the real extent of any supply curve. But that's future Radeta's law and will not go into that this time.
Published: December 26, 2005 5:44 AM
Jeffrey Jean
Considering the scenario of the ‘cold turkey’ transisition of the Fair Tax, I see two conditions. First, The transition has some taxes eliminated ( personal and corporate taxes for example). The tax reductions would be more or less dependent upon the existing corporate tax rate. This must mean that unprofitable compaies would have no reduction, as they pay no income tax. In general, this procedure favors companies with tax rates above the mean and harms companies with tax rates below the mean. I do not consider this condition neutral.
Second, personal income and payroll taxes are eliminated on day one and the new ‘Fair Tax’ in now added to balance things out. What about employees that have (somewhat) inflexible pay rates, such as unions. It could take years to reduce the pay rates. Would this not be an increase in real wage and would this not increase unemployment. This would also favor some companies at the expense of others. I see the possibility of great imbalances as production facilities are shifting in the direction of companies these tax shuffles favor.
Why would this not cause one big recession with high employment as the economy shifts things around to compensate for these ‘neutral’ events.
Published: January 5, 2006 3:51 PM