Economist Bruce Bartlett has recently published an excellent article debunking the "Fair Tax," a proposal to replace the federal income tax with a 23% sales tax that has been endorsed by Republican presidential candidate Mike Huckabee and a few other conservatives. As Bartlett explains, some prominent Fair Tax supporters falsely claim that it is what he calls a "double free lunch." Against both empirical evidence and basic economic theory, they claim that people will get to keep all the money they would now pay as income tax without experiencing any increase in the prices of goods and services they purchase (even though the latter would now have a hefty new sales tax attached to them).
In addition to Bartlett's many well-taken objections, there is another serious problem with the Fair Tax and other schemes to replace income taxation with sales taxes: they makes the true cost of government less visible to voters. For all its flaws, the income tax system at least gives taxpayers a fairly clear indication of what their total income tax liability is: every April you have to calculate it, or hire an accountant to do it for you. In a sales tax system, by contrast, you don't really know how much money you're paying the federal government in all. To be sure, you can calculate the amount by keeping close track of all your purchases and then multiplying by 0.23 at the end of the year (assuming the proposed Fair Tax rate of 23% is the one enacted). However, given that most voters are "rationally ignorant" and have little incentive to keep close tabs on government policy, it's unlikely that many will do so. Moreover, as Bartlett explains, Fair Tax supporters intend to supplement their basic proposal with a complex system of rebates that would make the total tax burden even more difficult to calculate. The net result of the Fair Tax would be to make the true cost of government less visible to voters. That, I would argue, has been one of the effects of the somewhat similar value added tax (VAT) by which many European countries raise a large part of their revenue.
I'm not suggesting that this effect is Huckabee's objective or that of other Fair Tax supporters. The libertarian in me is a bit suspicious of Huckabee's motives, given his simultaneous support for high levels of government spending and "nanny state" regulation. A political leader with Huckabee's views has an obvious interest in establishing a tax system that would reduce public awareness of the costs of the many government programs he advocates. However, I don't doubt that there are many people who support the Fair Tax in good faith, and perhaps Huckabee is one of them. Whatever their motives, however, the potential harm caused by the enactment of the Fair Tax is likely to exceed any benefits.
UPDATE: It's worth noting, as Bartlett points out in his article, that the 23% Fair Tax rate is misleading. If one were to calculate the FT tax rate the same way we normally describe income taxes and state sales taxes, the true FT rate would be about 30%. The 23% figure is arrived at by calculating the tax's percentage of the total price of a good, including the tax, as opposed to the conventional method of calculating the tax's percentage of the pretax price. If you want a more detailed explanation of this point, see Bartlett's article. For the purposes of this post, the bottom line is that the misleading way Fair Tax advocates calculate their proposed tax rate is likely to make it even more difficult for taxpayers to figure out how much they are actually paying to the government each year.
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Things like:
Which advocates, and how often do they make this claim? Can't actually say? Sorta puts your arguments on the uphill slope when you pull silly junior high debate club crap like that.
He also sticks with the "23 percent" number as hard as he can, when the Fair Tax folks I've talked to have repeatedly mentioned that the final percentage could be something completely different.
There's also the simplification of taxes issue, which would (under even conservative estimates) save tens of billions of dollars in bureaucracy costs every year, not to mention time and money spent on tax shelters.
Generally, not so much a "debunking" as a series of straw men and incomplete arguments. I'm not completely sold on the Fair Tax thing, but this article is nothing like a decent rebuttal.
Elliot, that isn't true at all. It's quoted as 23% because it is proposed as a replacement for income taxes which are ALL quoted as inclusive rates. This makes it simpler to compare the fairtax rate to the current tax rates system (apples to apples).
Here, let me translate a few of the inclusive tax rates we currently pay:
FICA: 7.65% (inclusive), 8.3% (exclusive)
Long-term cap gains: 15% (inclusive), 17.7% (exclusive)
28% bracket: 28% (inclusive), 39% (exclusive)
35% bracket: 35% (inclusive), 54% (exclusive)
Now who's fudging the tax numbers to make their rate look lower?
Sean, the "prebate" is the component of the fairtax that eliminates the regressiveness of the tax for the poor. And in keeping with making everything "fair," this prebate would be available to all tax payers.
It would be an opt-in system. Unless the family / head-of-household applied for it the prebate would not be sent.
Plus, somehow the Social Security administration gets tens of millions of checks sent out without too much trouble. Modernizing this with a debit card would make it even simpler and less prone to delay.
The passage of the fairtax bill would likely be coupled with a "sunset" provision which would eliminate the fairtax as law if the 16th Amendment were not repealed within some reasonable time period. This criticism of the fairtax as law is pretty much a non-starter.
One salient point made by Roger Hedgecock, among others, is that unless the Fair Tax was paired with a repeal of the 16th Ammendment, all it would accomplish would be to add a sales tax on top of the pre-existing income tax.
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The passage of the fairtax bill would likely be coupled with a "sunset" provision which would eliminate the fairtax as law if the 16th Amendment were not repealed within some reasonable time period. This criticism of the fairtax as law is pretty much a non-starter.
But since that has about as much likelihood of happening as I have of being elected President (and I'm not even running), if we have to have either a burdensome income tax or burdensome sales tax, I'll take the latter. Here's why:
A sales tax, paid on the spot and with no need for documentation sworn under penalty of perjury, would deprive the IRS of the ability to go snooping around in anyone's financial affairs that they take a fancy to snoop around in. There is a huge cost to liberty in having an income tax because the only way to enforce it is by giving the IRS carte blanche to make inquiry into everyone's income. Even as I understand the need for the government to have SOME revenue, I am deeply offended at the idea that in a supposedly free society there is no aspect of my financial affairs that is private.
That plus the amount of records a person has to keep to comply with the income tax laws is horrendous. I own a business; last year my federal income tax return was 36 pages and took me half a day (with the help of an expensive accountant) to complete. My business costs would drop by a quarter to a third if I didn't have to maintain records for the benefit of the IRS.
*Much more useful is the percentage of their income people would pay net of prebate. That would go way down for high earners, and way up for the bulk of lower-income people, who currently pay nothing or less (thanks to the EITC) in income tax.
As an example, suppose John's total Federal income tax burden is currently 28%, inclusive. Suppose that we're looking at a "Fair" Tax rate of 23%, inclusive. Now, on the day the tax changes, let's assume that John's wages don't change (he has a $50k salary before and a $50k salary after), and the retailer's portion of the cost of goods and services doesn't change (in other words, retail prices increase by the exact amount of the tax - a $1.00 widget becomes a $1.30 widget). As far as John is concerned, his take-home pay has increased by 28%, and the cost of goods and services has increased by 30%.
A person can argue, quite reasonably, about other details like the ultimate disposition of the employer's FICA match, the actual impact on retail prices, and the like, but the fact is that when comparing an existing tax to a new one, the inclusive rate does best describe the savings from the elimination of the old tax, and the exclusive rate does best describe the burden of the new tax. It's only really fair to compare inclusive vs. inclusive or exclusive vs. exclusive if we're deciding which of two new taxes to impose.
Illya, I think I agree with your thinking generally but a sales tax is quite visible and the taxpayer is constantly reminded (unlike a Value Added Tax, which is largely concealed). I live in a high sales tax state and I can testify that a sales tax 0f around 9% is a good reminder of how much government costs.
Regarding the issue of a 23-30% sales tax adding to the cost of living, of course it does but then so do both a corporate and personal income taxes add to the cost of living. I would guess that the government tax take, whether by income taxes, sales taxes or VAT, burdens the individual and the economy generally in proportion to the total taxes collected and that the real issue is one of (1), fairness and, (2), efficiency of collection.
It's tempting to think that the "Fair Tax" would be an improvement but it's a very complicated choice. There would probably be a whole universe of unintended consequences.
Trouble here is, with a national sales tax, there would be an awfully compelling incentive to evade the tax by executing transactions off the books - especially for services: The plumber does a $100 job and thus should charge you $130. What's to keep him from charging you $115 cash instead, so you and he each end up with $15 more than you would have had otherwise?
And so the outcome one must reasonably expect would be a substantial underground cash economy which undermines the projected revenues of the sales tax. At that point the government would absolutely have to either jack up the rate - which would strengthen the incentive to evade the tax; or else start monitoring transactions to catch evaders - which would end up looking an awful lot like the IRS; or else supplement the sales tax revenues with money from another source.
Either of these is more visible than a VAT-style tax that is incorporated into the prices of goods (as gasoline taxes are). An "invisible" tax, noticed only by business owners, is the absolute worst for low-tax advocates. The more visible the tax is, the easier it is to make the case for reducing it.
If my plumber is in the 30% bracket (not hard to imagine) then the same temptations exist.
I imagine the fair tax or sales tax system would keep all of the accountants and related businesses employed.
After all when you realize that everything from your income, IRA, 401K, college fund, health fund, etc., etc., etc, there is no end to what you have to explain for. If we were actually free there would be a lot more homeless people.
NI said: "would deprive the IRS of the ability to go snooping around in anyone's financial affairs that they take a fancy to snoop around in. There is a huge cost to liberty in having an income tax because the only way to enforce it is by giving the IRS carte blanche to make inquiry into everyone's income."
I can personally vouch for how much they know, if you took an course at any place that receives government money, they know how much you paid, how you paid and the course(s) that you took. If you went to any hospital emergency room they know the same. You have no idea the extent to which they have your number. You carry a social security number, imagine having it tattooed on your arm.
One day I will tell you a scary story.
The Fair Tax has two huge benefits (among others that I won't address right now).
1) There is only one number that the government can change when changing taxes. No more of the 'We're only going to tax the ___ (fill in the black) and not the rest of you'.
2) The IRS and the fortune we spend each and every year trying to comply with out crazy tax system would be automatically and immediately saved.
As for the supposed huge task of sending out prebate checks. The amount to be sent would depend on how many people are in the household. How hard would that be? Fraud, you might say, would be a problem. Guess what, it's a lot easier to catch people who are lying about how many children they have than it is to catch the cheaters under the current system.
One final question. Why is it that opponents of the Fair Tax proposal use the argument that the tax percentage would be 'too high'? If our government would need to take 23%, 25%, 50% or 99% of all transactions of servies and new goods, what difference does that make? The fact is they're already taking that amount of money from our society, right now, today. How would it hurt, in the long run, to have the number out there in the open? I really wish someone would answer that question for me because so far I have been greatly disappointed.
Good point. But is it any different than the restaurant owner who takes in cash and fails to report it on his income tax return. Whatever tax system you set up, people will figure out ways to cheat. Right now, the plumber who ordinarily charges $120 for his service might charge less for payment in cash, so that he can hide the transaction both from sales tax, and from the IRS. So that cheater probably would cheat under both systems. There are probably people who are now cheating who would have to pay sales tax under the proposed plan, and other people who now pay tax who would get an incentive to cheat. How they all balance out? I don't think anyone can say for sure.
After taking tax courses in law school and paying lots of money to our cpas, the abolition of the 16th amendment (that did not include a percentage because the advocates could not believe that a rate over 10% could ever be used) and the reassignment of IRS agents to something more useful (border guards in the southwest, maybe) coupled with the end of preferences (and end of some of the congresssional pimping?) is most appealing.
and then CCH would not kill so many trees for the code and regs books.
Are things like food and clothing exempt? Would industries endlessly be petitioning the government to add their products to the exempt list too?
I have a couple grand saved in the bank, all of it money that I earned by working. That money is what is left over after the federal government taxed my wages. If a VAT is put in place, I'll have to pay taxes to the Federal government again when I spend it. Sure, any new money that I earn will only be taxed once, but all my savings will be retaxed.
I gotta disagree here, simply because of the existence of income tax withholding. If every April you had to actually cut a check to the government, then it would be on the forefront of every American's mind how much the feds cost them that year.
But with withholding, that's flipped upside-down, so that many if not most Americans are PLEASED upon the completion of their income tax returns, as they see how big their "rebate" will be. The government takes your money before it's truly due, holds it for up to fifteen months or more, and then gives the excess back to you without compensating you with any interest for the time they held it.
(On the other hand, fail to make enough advance payments, and the IRS will not only charge YOU interest for keeping your own money until you've calculated what you owe, but they'll slap you with additional penalties too.)
The end result is that around tax time, people talk a lot more about the size of their rebate than the size of their tax bite.
To its credit, the FairTax proposes that all sales receipts identify the amount of tax included in the sale price, so that buyers are continually reminded of the cost of government. To its detriment, that's not as conspicuous as a tax that's added at the register, and, as already pointed out, most people wouldn't keep track of the taxes paid over an entire year.
You appear to ignore the main argument for the fair tax: That it will increase the national savings rate, which increases GDP growth.
This is a problem. Many have made long-term financial decisions based on the existence of an income tax. Removing the income tax would make some of those decisions very costly.
If a VAT replaced the income tax, would the government refund the taxes paid on money put into Roth IRA's? Or would people who put money in regular IRA's and 401K's get a windfall?
Another problem would be the mortgage and state/local tax deductions. Given the number of people who are teetering on the edge of foreclosure, losing the ability to offset those expenses against taxes paid could force some people out of their home.
People who give to charity would find that their gifts cost them 10-35% more than under the current tax code. So charities could take a real hit.
Changing to a VAT would create some real transition problems. My guess is that enough people would be hurt (or fear that they would be hurt) that a VAT will never replace the income tax.
Not really. Don’t you think that business passes along some of the tax they pay as increases in the price of goods? Of course it’s not dollar for dollar as the amount of their tax that business can pass on depends on the elasticity of demand. We have the same problem with the FICA tax. Employees would make more in salary if their employers didn’t have to pay FICA. Again it would not be dollar for dollar.
The current income tax system is anything but transparent with regard to how much tax you actually pay. On the other hand, a national sales tax would be extremely transparent. True if you wanted a tally for the year you would need to keep records, but you have to do the same thing for your income tax.
The big benefit in having a sales tax replace the income tax is an increase in savings. Tax work and you get less. Tax consumption and you get less. We need less consumption and more saving.
I don’t like Huckabee, but I’m with him on the income tax.
But even a flat tax results in the vast majority of taxpayers' tax liability being dramatically smaller than the cost of their share of government services.
real reason to consider it is because it is much simpler. As long as we're thinking seriously about replacing the income tax with something much simpler, may I humbly suggest that we seriously consider the simplest method of all for the government to raise money: PRINT IT. Yes, I'm sure there are many problems with this (especially inflation). But it is so simple, we should take it at least as seriously as the "fair tax".
The Fair Tax would be a boon for someone like me, who saves a large portion of his check. I don't know whether it would repeal the corporate income tax, but that would lower the cost of capital.
Similarly, on the tax side, I'm sure there will be armies of lobbyists assailing congress with arguments why their particular good or service should be exempted: food, health care, housing, etc. The types of exceptions will change, but the basic political forces that have turned the tax code into a byzantine mess are still there. Even a radical overhaul of the tax system won't change that.
You're right. There is still the potential for abuse...just like there has, is, and will always be with government. At least part of the point is (or should be) that the Fair Tax would be a chance to 'reset' the system. 'They' would have to start all over being corrupt dirtbags.
You did not, however, address my second point regarding the savings in terms of complying with the current tax code.
For those who think that products/services would be more expensive, consider that the entire supply chain the contributes to the creating of services and new goods would be freed of all federal taxes. Competition would bring those savings to the consumer in short order.
2. AZ has a sales tax that exempts food, medication, and a few other things. This at least makes it less regressive -- might even be slightly progressive. It *might* be possible with further tweaking and exemption of things which are a disporportionate share of lower-income folk's spending, to make it more progressive. Altho I suspect there is a practical limit here.
It gives taxpayers an idea of what their personal liability is, but it doesn't do much for informing them about the cost of government. Based on personal laibility, millions might think government if free.
You could burn some. Neither spent nor saved.
How about a gift. If I give a dollar to someone, did I spend it or save it?
Also, as I wrote above, there would be an increase in revenue from people who do not now report their income. But the tax will also probably generate new kinds of cheating -- right now lots of people already take cash for goods and services to avoid paying sales/use tax. These people would almost certainly cheat the fed income tax as well. I don't think anyone has a really clear idea of what the balance of cheating between the two systems would be.
Eh, I take it bothering to read the section of the pay stub that says how much was withheld isn't typical?
What Immediately Happens to Prices?
Will it all work that smoothly? As the link points out, it will take a few years, but equilibrium will occur.
I hate to plug another blog, so Ilya please remove this if you want... There are some really great discussion threads about the FairTax on www.fairtaxblog.com with people both pro and con debating it very civilly. They even get into pretty serious debates over what the rate would have to be to remain revenue neutral. There's also a section-by-section discussion of HR 25.
And what about the toll the current tax system has on the U.S. economy? Imagine what would happen if the Fair Tax were implemented. The U.S. would become the greatest "tax haven" in the world. Corporations based in the U.S. would pay no taxes whatsoever. No payroll taxes. There would be a huge influx of businesses and industry from foreign countries to the U.S, and the U.S. economy would grow dramatically.
As for the "complex system of rebates": describing the Fair Tax "prebate" system as complex is not only misleading, but utterly laughable. Here's how it works: the government already designates a "poverty level" of income. If the Fair Tax level is 23%, then every individual gets a monthly check (or direct deposit, etc.) for 23% of the poverty level. Families get a lower fraction for each dependent. How this can possibly be considered "complicated" compared to the current system of tax deductions, for example, is beyond me. Anyone making the poverty level pays no tax. Anyone earning less actually earns money from the Fair Tax, similar to your choice of social program. The more you earn, the less significant the prebate becomes to you, but everyone gets the same amount.
As for calling the Fair Tax a "double free lunch" scheme is also irresponsible. Fair Tax supporters claim that despite the 23% sales tax, prices would remain pretty similar to what they are now, and government revenue would be equal to that under the current system. At first this may seem impossible by a simple "in=out" analysis. But this is an over-simplification. The day the Fair Tax is instituted, prices will of course go up due to the sales tax (but so would your paycheck, by a roughly equal percentage). But over a short period of time, corporate profits would go up - because corporations would no longer pay taxes. The hidden cost of tax compliance would be eliminated (i.e. business decisions would no longer be based in part on the tax repercussions, but instead only on what makes the best business and economic sense), and competition in the market would quickly result in lowered prices. Furthermore, tax evasion would be practically eliminated, and the "underground economy" would become part of the tax base (i.e. criminals would pay the Fair Tax when they spend their illegally-obtained income), the economy would grow (for the above-mentioned reasons), and tax revenues would increase. Soon the government would be able to lower the tax rate to below 23% (assuming we responsible citizens don't simply allow them to pocket the extra revenue). In the end, it is probable that retail prices would level out to what they are currently.
Finally, this argument against the Fair Tax really annoys me: that politicians would try to work in loop-holes, try to exempt certain retail goods and services from taxation, or mess around with the prebate system to allow "deductions" similar to what we have now. This would not be the Fair Tax! Don't criticize a proposal by first changing its terms and then criticizing it. The Fair Tax is almost ridiculously simple, and it allows no room for weaseling by politicians, lobbyists, or special interests. All retail goods and services are taxed equally, and everyone with a social security number gets the same monthly prebate (except dependent kids of course who naturally get a lesser amount). It's as simple as that, no room for mucking around.
As for the difficulty or complexity of implementing a sales tax: it's been done for ages by states and communities, and nobody's ever complained about the burden these taxes place upon the state. Its implementation would be simple, straight-forward, and seamless, especially in this age of computers. Unlike a certain other tax system we all know and love.
2. require the individual income tax to be paid each month, in person, in cash.
What if we just go to a property tax system implimented from your county. They tax you and pass the money upstream, swimming upstream is always good exercise, plus you know who taxed you and where they live.
These are good arguments, but they don't address my biggest concern: how do we avoid retaxing savings that have already been taxed?
I have $10,000 in the bank. It wasn't originally $10,000. It started out as $12,000 in wages. Then the IRS told me I had to fork over $2,000. Okay, fine. At least I have $10,000 to spend now in December 2007.
But in January 2008, along comes a 23% VAT, and suddenly that $10,000 isn't really worth $10,000. $10,000 won't buy me the same amount of food, clothing, or automobile that it would have bought me in December 2007.
A 23% VAT is really a 23% wealth tax on money in savings accounts. But it's actually worse than that. The wealth tax applies to all of my assets! Here's why:
Last year I bought a car for $20,000 with cash that had been taxed. Today the private party resale value is about $10,000. So I sell the car and get $10,000. What happens next? Well, I have $10,000, but $10,000 doesn't buy what it used to because of the VAT.
Every single possession you own, including your real estate, is subject to the VAT wealth tax. If you can figure out a way around it, great. Otherwise, no thanks.
Oh yes. That quarterly thing is breathtaking.
But then I realized that passage of the "Fair Tax" would be a windfall for the superrich because they only spend a tiny fraction of their annual income. Further, the poor would be exempt from a baseline amount of sales tax, as they are exempt from paying income tax now. To make the "Fair Tax" revenue-neutral, the tax rate would have to go up. If everyone carefully considered each purchase, sales volume would fall, meaning tax rates would have to go up. Having to actually buy something would be like losing a game of musical chairs. The brunt of the tax would fall on ordinary Americans in a way it hasn't up to now.
Consumers would have more money to spend because they don’t pay federal income tax, so the sales tax would not be a burden. But I think you are right, sales volume would go down. But it has to go down because consumers are spending borrowed money. As a country we have to save more and spend less. The government also has to spend less.
“But then I realized that passage of the "Fair Tax" would be a windfall for the superrich because they only spend a tiny fraction of their annual income.”
It would be a windfall. But the super rich are investing and not spending the windfall. Don’t we want investing? Perhaps you think they don’t invest wisely.
First I'll address the simplest of your issues. The resale value of your car. You bought your new car for $20,000, prior to the Fair Tax. Now (assuming that retail prices would not return to pre-Fair-Tax levels), the resale value of your car, post-Fair-Tax, would be determined by the cost of a new car, post-Fair-Tax. Just as the market value for all used goods is determined by the depreciated <i>current</i> values of corresponding new goods, regardless of what those values were in the past. If the cost of a new $20,000 car becomes roughly $26,000 after the 23% Fair Tax, then you'll be able to sell your used car for more, regardless of the fact that it was purchased prior to the Fair Tax.
As for the value of savings "in the bank". That's slightly more complicated, again assuming that prices wouldn't stabilize at pre-Fair-Tax levels after some time. I'm not sure what conditions are in the bill (HR25), but there are various proposals to deal with such transitional issues. One is that, for investment accounts with special tax status, people would be issued a one-time check to compensate. That gets kind of complicated, but it's definitely do-able, since it would be one-time only. In many cases, like a simple savings account (with no special tax status like other investment accounts), you'd just be out of luck. You'd have to decide for yourself, what would you prefer: the possibility that your $10,000 savings might not buy you as much as it would previously, but you'd earn the rest of your income "tax-free" for life, and have a vastly superior and simplified tax system, a stronger economy, less corruption, etc... or stay with the old system but buy a little more with your $10k.
First I'll address the simplest of your issues. The resale value of your car. You bought your new car for $20,000, prior to the Fair Tax. Now (assuming that retail prices would not return to pre-Fair-Tax levels), the resale value of your car, post-Fair-Tax, would be determined by the cost of a new car, post-Fair-Tax. Just as the market value for all used goods is determined by the depreciated current values of corresponding new goods, regardless of what those values were in the past. If the cost of a new $20,000 car becomes roughly $26,000 after the 23% Fair Tax, then you'll be able to sell your used car for more, regardless of the fact that it was purchased prior to the Fair Tax.
As for the value of savings "in the bank". That's slightly more complicated, again assuming that prices wouldn't stabilize at pre-Fair-Tax levels after some time. I'm not sure what conditions are in the bill (HR25), but there are various proposals to deal with such transitional issues. One is that, for investment accounts with special tax status, people would be issued a one-time check to compensate. That gets kind of complicated, but it's definitely do-able, since it would be one-time only. In many cases, like a simple savings account (with no special tax status like other investment accounts), you'd just be out of luck. You'd have to decide for yourself, what would you prefer: the possibility that your $10,000 savings might not buy you as much as it would previously, but you'd earn the rest of your income "tax-free" for life, and have a vastly superior and simplified tax system, a stronger economy, less corruption, etc... or stay with the old system but buy a little more with your $10k.
State sales taxes, as they are now, would be completely separate from the federal Fair Tax. They would be calculated based on the value of the goods/services including the Fair Tax, since the Fair Tax is set up as an inclusive tax, just like the income tax is now. Actually, what's likely to happen is that, after seeing how well the Fair Tax works, the states would decide for themselves to also abolish their own income taxes and replace them completely with sales taxes.
If the super rich pay less tax and the poor continue to pay zero tax, then to maintain federal tax revenue, who will have to make up the difference? You and me.
To keep him paying the same amount in taxes, I want Bill Gates to buy a Gulfstream a week, frankly. Maybe even a Boeing -- he lives close to the factory and could pick out the colors and options while they're putting it together.
With the Fairtax, if you want to know how much it is, JUST LOOK AT THE RECEIPT.
Also the cost of an employee just dropped by about 6-7%
Incidentally, unless FairTax people plan to outlaw good public relations practices by businesses, everyone is going to see it as 30%, not 23%. If I'm a retailer, I list the price of the item as $77, and the receipt shows the price as $77 plus a 30% FairTax of $23. No retailer is going to helpfully hide the cost the way FairTax people want them to do by using "tax inclusive" prices.
I suspect that the Fair Tax would have very little direct effect on government's penchant for making people 'do good' at their own expense, but successfully changing the current tax system might encourage the voters to do something about these hidden costs as well.
The paperwork would pretty much already be done for state/local sales taxes in most places. In fact, the states could function as agents for the federal government and collect the Fair Tax for it, which would not only simplify the paperwork but encourage the states to adopt a Fair Tax of their own.
Sorry, folks, but recommending that severe a cutback in consumer spending will send hundreds of thousands of businesses (small and large) into a tailspin towards bankruptcy. They'll start slashing workers and wages, leading to an economic tailspin. I have a feeling that the economic shock brought on by a complete "fair tax" overhaul would make the Great Depression look good in comparison.
The dollar given away is either spent, saved or given away endlessly.
"After some time"? I don't have "some time" to wait around while prices stabilize. If my car breaks, I need to pay for repairs now. I need to buy gasoline now. I need to buy birthday presents for my family now. What am I supposed to do, sit on my savings and consume nothing until the invisible hand pushes prices back to where they were before the tax?
Even assuming that prices will eventually stabilize, the tax will create a deadweight loss. Whatever today costs $100 will still cost $100 when prices stabilize, but that price includes the government's cut. So the government taxed my earnings, and it taxes me again when I make a purchase. Uncle Sam gets an additional $23. That doesn't appear out of thin air! Sure, I don't see the additional tax because it's absorbed into the price, but the manufacturer does. Now he only gets $77 for something that he previously would have received $100 for, so he can't bring as many units to market as he could before.
I can tell you exactly how much tax I paid last year. TurboTax puts the amount at the bottom of the page. I have to calculate how much tax I owe every April, so I'm aware of it.
But I have no idea how much sales tax I paid last year, because I don't keep the receipt from every single purchase I made in 2006. Do you know anyone who does?
I don't like withholding for the same reason that many people don't: it breaks up the tax bill into managable chunks, making high taxes easier to swallow. But I'd rather have a withholding system that takes out hundreds of dollars every week than a system that nickel-and-dimes taxpayers when they buy a hot dog or pair of shoes. That breaks up the tax bill into even smaller easy-to-swallow chunks.
"The blind lost their special exemption! Add a special fix for blind people or we'll run adds come next election that portray you as hating the sight-impaired."
Can you imagine that the Realtor associations wouldn't lobby for preferential tax treatment for homeownership?
Do you think sugar beet farmers will be willing to give up their tax incentives in the name of fairness/flatness/reform?
Additionally, and this is specific for the fair tax, there is one tax break I wholeheartedly support: The mortgage deduction for owner-occupied homes. The social benefits of an ownership society outweigh any loss of income; I want there to be significant financial incentives to home ownership like the mortgage deduction and the exclusion of capital gains on primary home sales.
I'm willing to be convinced: I dislike the current system tremendously.
Fairtaxophiles, please educate me: how would the fair tax prevent future Congressional "tweaking" at the behest of interest groups?
Is it possible to encourage home buying in a fair tax system?
It's there and everyone knows it, but the tax is well hidden.
I don't know if it's legally possible, but I'm willing to bet that as soon as we had a federal sales tax, Congress would start the push to force the States to abolish their income taxes (loss of homeland security grants anyone, no more highway money?) and have the lost revenue replaced with a share of the FEDVAT. Further power grab by Washington - merely the continuation of the trend.
There's something to be said about transparency - but that isn't your argument, your argument is that even a transparent system wouldn't be painful enough to get rid of taxes you don't like.
Note: there are good reasons to be against the fair tax - yours just isn't one of them.
lowest quintile will increase by 1.4%
second quintile will increase by 5.3%
middle quintile will increase by 6.7%
fourth quintile will increase by 6.1%
highest quintile will decrease by 19.1%
These figures seem to be drawn from figure 9.3 of the President's Advisory Panel on Federal Tax Reform's final report.
So whatever it's other virtues, the FairTax will lead to a fairly massive shift of the tax burden from the wealthy to the middle class.
blind beet farmer"home owner".Since home owners receive no direct benefit from the mortgage deduction, it doesn't seem likely to encourage home ownership. "Bank" ownership of homes, on the other hand, does seem to be encouraged by the mortgage deduction. Considering how many people choose to actually relinquish ownership of parts of their homes to a "bank" when they want some cash (presumably factoring the mortgage deduction into that decision), it seems to discourage home ownership. Overall, it seems that it mostly drives housing prices up, delaying first time home buyers from entering the market and subsidizing home builders and the like. In my experience, many middle class families "buy as much house as they can afford" after factoring in the tax deduction on the mortgage which allows home prices to raise to a higher level.
The cap gains deduction also should be repealed. Reimplementing a rollover shelter provision (probably a bit more flexible than it has been in the past however) while removing all "step ups" in basis on inheritance seems reasonable however.
The FairTax will reduce consumer spending, but that’s already here because consumers have spent more than their income for the last 5 years. They did this by using credit and refinancing their homes. The party is over. The retail industry is hitting the wall—look at the plunge in the S&P retail index (^RLX) since July 2007. Check out this Bloomberg interview with Howard Davdowitz, consultant and investment banker for the retail sector, “it’s ugly out there.”
Absolutely. The change from the rollover exemption to the current law has fueled rampant speculation and cheating.
Most businesses do this already for state and local sales taxes. How many incidents have you heard of in which a business was targeted for suspicion of cheating on a state sales tax? Probably none, right? The operation of a business necessitates recording the total amount of sales done each day/week/month. Since every business does this already, there would be no additional "detailed business records" required under the Fair Tax.
No retailer is going to helpfully hide the cost the way FairTax people want them to do by using "tax inclusive" prices.
I hate using Europe as an example, but retailers have done just this in European countries for a long time. Plus, it will be the law to require prices to be listed "tax inclusive", so businesses will have no choice. Of course, there's nothing stopping them from reporting exactly how much of that price was due to the Fair Tax on the receipt, as a convenience to their customers.
The "tax inclusive" policy is not meant to hide the tax from the people. It is done for one reason: economics. Tax inclusive pricing will facilitate the drop in retail prices predicted to occur after the Fair Tax is implemented (you'll have to ask an economist to explain this). Also, since the Fair Tax is replacing the income tax, which is also inclusive, it must be inclusive as well, in order to more smoothly and transparently balance the effect of dramatically increased personal incomes.
Also, since only goods sold at retail are taxed, it is necessary to promote a "level playingfield" in terms of new vs. used goods. If businesses keep advertising the prices of retail goods "tax exclusive", it will be more difficult for sellers of used goods to raise their prices by the appropriate 30% (23% on an exclusive basis). Sellers of used goods cannot claim that 23% of their price goes to the Fair Tax, because their goods are not taxed. However, economics dictates that if the cost of new goods is increased by a certain percentage from the Fair Tax, the price of used goods should increase by the same percentage. Exclusive reporting would make this more difficult, simply due to public perception - they would see new prices advertised as lower than the true cost (i.e. without the Fair Tax), while used prices would be advertised as the full true cost.
Yes the day after the Fair Tax goes into effect, prices will probably go up. However, if businesses are smart, they'll calculate ahead of time their projected savings under the Fair Tax, and lower their retail prices accordingly, to obtain a competitive advantage. So in reality, prices won't increase as much as you'd think on that first day. As those savings become more real for businesses, they'll drop their prices even more.
As for people not buying things: so let's say prices go up by 20% on that first day. But at the end of that week, people will get their full pay check for the first time in their lives - no deductions for income tax, social security tax, etc. Average personal income will go up by about 20% as well. So what happens? People will buy the same items they'd normally buy, with the extra cost of goods balanced by their extra income. The only change will be the point at which the taxes are collected: instead of being deducted from income, taxes will be collected when that income is spent.
Of course this is a slight over-simplification, but even so, the point is that there will be no cutback in consumer spending.
The irony, of course, is that the plan as proposed would create a gigantic federal bureaucracy to distribute regular checks to low-income households which would dwarf FICA, AFDC, Medicare, etc. Is this a "conservative" plan? Is Eugene the Pope?
Just like the 23%/30% ruse, calling this plan "conservative" is (to paraphrase Eliot Reed above) so severely misleading, to the point where I'd just call it a "lie".
I won't further waste everyone's time by debunking what's already been thououghly discredited.
I would think that undeniable. If one of the benefits claimed for it is that it encourages investment rather than spending, necessarily it must move tax burden away from those who invest larger portions of their income (i.e., have income left over after meeting the necessities) and toward those who invest less (i.e., those who have less left over after buying necessities of life). Hard to both reward investment and avoid regressivity.
I forgot to mention, it's my feeling (and that of most Fair Tax supporters) that retail prices will begin to drop in a matter of weeks, not years. Before the Fair Tax goes into effect, businesses will of course try to calculate the projected financial impact. They will know a ball-park figure for how much they'll save (e.g. from reduced cost of compliance), and they'll lower their prices accordingly on the very first day of the Fair Tax, to gain competitive advantage. Within 2-4 weeks, as consumers start taking advantage of their higher incomes, and the business savings become more real, prices will drop further and soon level off at pre-Fair-Tax levels.
This is another common misconception. The Fair Tax doesn't create a new federal bureaucracy. It replaces the IRS with a new, dramatically smaller, and simplified federal service to do three things: keep track of revenues (much easier than with the current system), monitor compliance (easy - it's just a sales tax), and distribute the monthly "prebates". I'll address this last task in detail. Compare the distribution of a single, fixed amount of money to every adult with a social seciruty number (with a single, smaller amount per dependent child) under the Fair Tax, to the current system employed by the IRS: a system of tax refunds with deductions so complex no single person understands it completely, with every american getting a different amount, with rampant fraud that necessitates an endless cycle of audits and recalculations.
As a final point of argument, the prebate checks are distributed to everyone, not just low income households.
I don't understand how detractors can make such misleading comments about the Fair Tax, to say that it would increase the complexity and buraucracy of tax collection, when the fact that it would do just the opposite is so obvious.
The reason FairTax gets so much opposition on this score seems quite simple and obvious to me. As much as fiscal conservatives and libertarians hate the IRS, they hate entitlement programs even more.
So supporters of the Fair Tax argue that people will simultaneously:
Quite a trick. It's almost as good as self-financing tax cuts, and about as realistic.
Exactly.
I'm sure a lot of people will realize this if the FairTax were actually implemented. I foresee a huge binge of credit fueled purchases in the weeks and months before the tax goes into effect, followed by a huge dropoff in consumer spending for a year or more afterwards as everyone pays off their pre-transition purchases. That sort of post-transition spending slump could wreck the economy and would lead to a huge first year budget deficit as the government doesn't get the sort of sales tax revenue it expected.
The FairTax supporters seem to be envisioning a 'transition day' when everything would change all of a sudden. However, if nothing else, this discussion has convinced me that FairTax (or any radical change to our tax system) would probably best be implemented through a more gradual transition than all at once. For FairTax I'm envisioning something like a national sales tax that goes up one percent per quarter for 7.5 years with commensurate reductions of income taxes and a gradual phase in of the payments.
Heh!
Actually, I'm a farmer who opposes farm subsidies - I think the free market would do preserve more family farms than guvmint-teat-sucking-agribusiness.
But I am a homeowner - and part of my drive to buy my first (and subsequent) houses was the knowledge that homeownership was a favored investment. The government mortgage deduction makes the actual cost of borrowing money cheaper, so that the monthly payments for ownership compare more favorably with renting. The knowledge that you can cash out capital gains tax-free if you downsize is also a solid motivator. I could be wrong, but my understanding is that the pro-homeowning policies of the government have contributed to the fact that we have the highest homeowning percentage in the world.
The reasons I support the continuation of the homeownership deductions is not because it is convenient for me or for other current homeowners. Homeowners are better for society. They are more involved in the community, likely to join the neighborhood watch, support the local schools, etc. Hopefully some of that participation is altruistic, but there is a real financial incentive: your major investment will be worth more if it is located in a pleasant community with low crime and good schools.
As evidence that I'm not just supporting
blind beet farmershomeowners out of personal financial incentive, allow me to note that I am totally opposed to the landlord deductions which I currently enjoy. If tax policy didn't subsidize land (slum?) lording, I'd sell my rental property. Then the home would be owned by an occupant and society would reap the benefits. If more rentals went on the market for sale to owner-occupants, the price would fall slightly (again favoring purchase by potential homeowners), and rents would go up - again pushing people toward the financial security of homeownership.You may not agree with my pro-homeowning policy predilection, but if you want me (and like-minded people) to support the fair-tax, you have to convince me that we are not going to harm home ownership rates.
If so, since business income tax is computed on profit rather than revenue, wouldn't we need to know 1)total national sales, and 2)total business income tax? That would tell us what percentage of revenue went for business income tax. That would be the maximum amount of embedded tax available for elimination. Is there some reason to think it s 23%?
In my family, we'll pay $2.50 for a 12-pack of soda when it is on sale, but we'll be damned if we'll buy even a single 12-pack for $2.99, the normal price. Too damned expensive. I know a lot of people are that way about product prices: X amount and no more or I'm not buying.
The more I hear about the Fair Tax proposal the stupider it sounds.
First, as to the "prebate" being simple and hard to cheat on. Who are you kidding? I worked with a guy who claimed 10 children and a wife as dependents. He had zero children. Extra dependents are easy to claim. And you have the problem of allocating the "prebate" between mom and dad in shared custody arrangements. I know Mike Huckabee would like to pretend it's all nuclear families out here, but it just ain't so. And I'm really shocked on a law blog that no one has mentioned this 85 + comments in
Second, the way to cheat around the Fair Tax is simple...set up a business. If I set up a business cutting my neighbor's lawns, I can buy all necessities for that business, and all my personal expenses, under that business name and avoid paying taxes. What??? You don't think ice cream is a necessary business expense for lawn care??? Welcome to an IRS style enforcement regime, and there go all your savings. Plus, as always, the rich will have both the best incentive, and the greatest ability to cheat. Why pay sales tax on the cost of your butler and you food? Pay the butler to set up a "complete home needs" business where he does all of your shopping for you, and charges it to you as a business expense.
Third, the notion that businesses will immediately reduce their prices by 23% or so. This has got to be the one thing that shows how little thought was put into this proposal. Walmart already has warehouses full of stuff they paid full price for. Their shelves are full of stuff they paid full price for. They CAN'T reduce prices by 23% unless they're willing to take losses for the amount of time it takes them to empty their warehouses. If this defense is the best you can come up with, it makes me question the entire idea of a Fair Tax.
With income tax, calculate withholding for each employee (luckily, I'm the only employee), pay monthly. Different rules on that, BTW, depending upon total income tax liability (usually it's 15th of the next month, but go above a certain level and it's within x days of the paycheck).
Then you do a quarterly report, breaking it all down between income tax, SSI, Medicare, and by the month. And if you have low-income employees, accounting for that negative tax, I forget what it's called.
Then you do an annual report.
Then repeat the process for the State.
Then at end of year you do annual reports, adding up the quarterlies, State and Fed, and file a W-3 and W-2s with the Social Security Admin, showing total withheld for all employees, plus W-2s to each employee.
Mind you, all this COULD be cut down. If you filed four quarterlies, why file an annual, too? And why not just have IRS give its data to the SSA? For that matter, since this State anyway says you just withhold 19% of your federal income tax withholding, why shouldn't the state accept the federal form plus a check for 19% of the federal withholding? In short, it could all be reduced to four federal quarterlies, I think.
Under the FairTax, goods that are currently in inventory (e.g. all the stuff in WalMart's warehouses) when the tax goes into effect are to be sold tax free. So that solves one of your concerns.
Second, the way to cheat around the Fair Tax is simple...set up a business.
This is part of the FairTax that I'm less familiar with. From my understanding, the only goods that are not taxed are those sold at wholesale. This is to prevent double-taxation. All services are taxed. So if your butler sets up a business, buys all your groceries as a business expense, he'd still pay the FairTax on the groceries, and you'd pay the FairTax when he bills you for his services. Even the government will have to pay the FairTax on its purchases of goods and services.
The only way I can see to cheat the FairTax is for a company to abuse the wholesale system, for example by purchasing items wholesale but not reselling them. If someone knows of how the FairTax system will address this, I'd love to be informed. My thought is that there'd have to be some enforcement mechanism. But monitoring and enforcing this one issue should be trivial compared to the task the IRS has now, with our current tax code providing endless opportunities and methods for cheating the system.
Is there any mechanism in the Fair Tax that would make it difficult for Congress to raise the initial 23% to 24%, then to 29%, then to 37%, then to 51%?... It sounds just like the UN's ravenous World Tax [aimed directly at U.S. taxpayers] -- which would begin at ''only'' .7% of our GDP, and continue up, inexorably and forever.
Human nature being what it is, that 23% is simply the starting point. You see, there are homeless children who need our help! And blind beet farmers, etc., etc., etc., ad infinitum.
Who represents the average taxpayer?? Anyone?
Here in AK just about everybody uses the sales tax exemption. All you have to do is show your business license. Stores have no real incentive to check that the person's purchases are the sort that they would use in their business, and every incentive not to (since refusing to give the exemption would just send their business to their competitor).
m4cph,
The problem with your plan is what was pointed out by CDU, whether you are buying "wholesale" or "retail" (for sales tax purposes) is not controlled by what store you go to, but rather by what you claim you are using the goods for. In other words, either the system is set up so the butler can get the tax exemption, or that a restaurant can't, but you can't really set up the system to charge the butler and not charge the small business man.