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Taxing our patience? Not by a long shot

OK, I'm finally getting off my can and tackling the "Katrina Auction" pieces. The first up is Zach Stover's, who wanted my opinion of the Fair Tax proposal.

I've looked into the Fair Tax proposal, and I like it. It's simple, it's sensible, it seems "fair" (which is an incredibly loaded word), it's elegant, and it's practical. Which makes it even more of a damned shame that it's simply not gonna happen.

There are two great forces in American society, and in the case of the Fair Tax, they are united in opposing it. Those are enlightened self-interest and inertia. Or, to put it another way, selfishness and greed.

For all the people being nibbled by the current tax structure, there are others who benefit greatly from it. The system, as convoluted and confusing and chaotic as it is, did not randomly evolve. Every single twist was created by someone with a very specific purpose in mind -- to reward or punish an individual, a group, or a corporation. Every single outrageous aspect of the tax code has its defender.

Moreover, an entire industry has grown up dependent on the tax structure staying exactly as it is. Lawmakers, who view passing laws as their way of showing their constituents that they are doing their job. Bureaucrats, whose job is to oversee, administer, and interpret the tax code. Lobbyists, who justify their salaries by getting the lawmakers and bureaucrats to shape the laws and interpretations for the benefit of their clients. Tax attorneys (much like my own Senator, Judd Gregg), whose whole livelihood revolves around rescuing people from the tentacles of the tax code. Tax preparers, who charge hundreds or thousands of dollars to wring the most money they can back from the government and into the hands of those who paid it. Tax software publishers, who figured out how to replace the above folks with a CD-ROM. And even con artists, who sell people on plans to "opt out" of the supposedly "voluntary" income tax, or convince them that they are exempt from taxes as part of "slavery reparations" or a zillion other scams.

They might not have the numbers, but they have the motivation. Toss in the factor of "withholding," where people never see the money they pay in taxes, but rejoice every year when the government might deign to give them back a portion of THEIR OWN MONEY (a category I ashamedly fall into), and you have a classic case of the old "boiling frog" urban legend -- where, it is said, that if you put a frog in a pot of room-temperature water and then slowly heat it to boiling, the frog will happily sit there and boil to death.

In favor of the flat tax, a few highly-motivated activists. Against it, dozens of large corporations, hordes of bureaucrats, lawyers, and politicians. I might not like the answer, but I know which side I think will win.

Screw that. I definitely don't like the answer. The Fair Tax plan deserves a Fair Shake. Unfortunately, I don't see it happening. Tthe race may not go to the swift, nor the battle to the strong -- but that's the way to bet.


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Comments (67)

Yes,But you've for... (Below threshold)

Yes,

But you've forgotten the group who will be MOST opposed to changes in the current tax structure: the people who don't pay.

Literally 10s of millions of Americans who make significant sums of money pay ZERO tax under the current system, but would be FORCED TO PAY under the Fair Tax plan.

Which, let me tell you, that's what MAKES it a Fair Tax plan in the first place; but what will ensure that it never sees the light of day.

That's why there's a 'preba... (Below threshold)

That's why there's a 'prebate' in the FairTax plan. Spin it so that these folk see it as a 'GIFT' from the government and you'll get their support.

J.

I have two concerns with th... (Below threshold)
jpm100:

I have two concerns with this plan:

1) If your income is from the US, but you live and purchase abroad which could be Canada or Mexico (usually from luck of geography or you're rich), you can dodge paying a large portion of these taxes. You benefit from the US economy but escape taxes.

2) The concept of a 'rebate' could be easily perverted into a wealth redistrobution program from the left.

Essentially the middle class gets boned again, possibly.

There's nothing inherently ... (Below threshold)

There's nothing inherently 'fair' about this proposal.... there's nothing inherently 'unfair' about it either.

For example, there are pros and cons to basing a tax system on consumption as opposed to income. Advocates of a progressive system would hate it as the rich - who spend less of a percentage of their income than the poor - would 'escape' tax on a significant portion of their income.

And a consumption tax can be made just as complicated and convuluted as our existing tax code, depending on how much Congress decides to fiddle with it to reward/punish certain behavior and/or interest groups. For example, they could exempt housing costs from the tax... which would lead to a thousand or so pages defining and/or limiting the definition of housing costs. They could exempt food purchases... but some Democrat would want to make sure that the rich Republicans who ate at fancy restaurants didn't have a 'subsidized' 3-martini lunch... so there'd be another 500 pages defining and limiting exempt food purchases. And what about investments, are they a 'purchase' on which tax should be levied?

Such a system can be gamed as well by those seeking to avoid tax. Just as barter is used now to avoid paying sales/income taxes, so too can it be used in a consumption tax to help escape taxes. Purchases can be made under the table to avoid taxes.

Finally, there would be all sorts of transitional problems. For example, I have already paid income tax on the money in my checking account - should I have to then pay a consumption tax when I decide to spend it? The housing market would take a hit as home prices would fall as a result of the loss of the mortgage deduction. The job market would be affected as all those currently engaged in the tax game needed to find themselves new jobs (all of you non-tax accountants reading this: what happens to your wage base when tax accountants start offering to do your job for less money than you now make?).

I'm not writing this to knock such a proposal... just to point out that it - along with every other system to amend/revise our tax code - isn't such a no-brainer as its advocates would like us to believe.

Just in the comments that h... (Below threshold)
docjim505:

Just in the comments that have been submitted so far, we can see why tax reform is so hard: everybody's got a dog in the fight. Some people fear that one class will bear an "unfair" burden, while others want to make certain that some other group "pays its fair share".

The fat cats who created and profit by our current system must love to see this kind of fragmentation.

Whether it happens or not i... (Below threshold)
schwerv:

Whether it happens or not is entirely up to us. We can sit here a type all day about whether its not going to happen. If we gave a tenth of the amount of time to write our congressmen/women, they will not be able to ignore that. Just look at the pandering resulting from the illegal aliens having a couple block parties. Did you think that would ever happen?? All politicians need is to know where the voters are. The more you let them know where you are on this, the more likely it will happen. I think wizbang would do a great job starting such a campaign.

But you may be right. Let just continue to sit around and B(^CH about it, claiming they wont listen to us.

and JPM,
Your first concern is called smuggling, it already happens. The Fair tax would not create this behavior nor will it do anything to stop it. Besides, even if it did, the overall benefits of the fair tax far outweigh the costs of that loss. These rich people get around paying taxes anyway.

and the second is the left. Again, the left already uses federal programs as wealth distribution programs. Another big benefit of the fair tax is people will feel the cost of government. the liberals will have a much harder time raising taxes no matter how perverted they make the system look.

Another big benefi... (Below threshold)
Another big benefit of the fair tax is people will feel the cost of government. the liberals will have a much harder time raising taxes no matter how perverted they make the system look.

Long before they try, they will have finagled so many loopholes and exemptions into the Fair Tax that they'll once again be able to portray the tax hike as "soaking the rich."

They'll have to re-define "rich," but Clinton once pushed a tax hike by defining "rich" as anyone making in the neighborhood of $60,000 a year.

1) If your income is fro... (Below threshold)
MikeB:

1) If your income is from the US, but you live and purchase abroad which could be Canada or Mexico (usually from luck of geography or you're rich), you can dodge paying a large portion of these taxes. You benefit from the US economy but escape taxes.

The goods from Canada (or elsewhere) will cost no less than the goods here in the U.S. The taxes in our current system, as with most other system, are embedded in the cost of the item so it's easier to hide the cost of the tax or to delude yourself into believing its not there. So, what's the motivation for buying them there ?

Let's take an example... say you buy a new widget from the local store for $100. Let's say that the store's net cost for the item is $90, so there's $10 is net profit. (Assume a tax rate of 40% for round numbers). That means the store gets $6 and the government gets $4. The retail store bought the widget from a distributor for say which paid $80 for it. Again, the government gets $4 in taxes from the distributor. The manufacturer of the item has $70 in cost in the item. Again, the government gets another $4 in taxes from the item. The materials supplier has $60 in cost in the item. Again, another $4 in taxes from the item.. And so on....

The point is that the current system taxes an item along every step of the way... which embeds taxes in the cost of the item and embeds the cost of compliance at each step along the way. So while the sticker price doesn't break the price down into 'material & labor cost' and 'embedded taxes & cost of compliance', it's all there in 'price'. If you remove the 'cost of compliance' at every stage and simply incurr it at the final stage (retail), it removes a LOT of redundant costs and should therefore reduce the total cost of the item.


The job market would be affected as all those currently engaged in the tax game needed to find themselves new jobs (all of you non-tax accountants reading this: what happens to your wage base when tax accountants start offering to do your job for less money than you now make?).

If it's a good thing that these people who currently make a living because they know the intricacies of the current system, would it be a good idea to make the system more complex so that more people could make a living from this ? Obvoiusly, the answer is no. Why ? Because we need people working to _create_ wealth (e.g. advancing medicine, semiconductor technology, fuel technology, etc) not working as overhead. Besides, thanks to "No Accountant Left Behind" (aka Sarbanes-Oxley) the market for accounting/finance jobs seems to be booming.

There are certainly some logistical hurdles, but there are workable solutions.

- MikeB

I pay lots of federal taxes... (Below threshold)
Mac Lorry:

I pay lots of federal taxes and probably would come out better under the fair tax system. However, I find the fair tax has several flaws.

Checking the FAQs, number 16 talks about retirement savings. The answer is definitely the output of a spin doctor. To be fair, after tax savings should be 100% exempt from the fair tax. You should get an exemption certificate in the form of a credit card equal to the value of any withdraw times the fair tax rate. You could use this credit to pay the tax portion on any purchases.

Number 21 of the FAQs is about the home mortgage deduction. One of the principles of the fair tax is that it applies only to new purchases, but there seems to be no application of this principle to home purchases. The original buyer should pay the tax on the full price of the home. Subsequent buyers should pay the tax only on the increased value, not the full price.

Number 22 of the FAQs is about charitable giving, but nothing is said about purchases made by churches. Under the 1st amendment, churches have been exempt from paying all taxes other than payroll taxes. Passing the Fair Tax law won't repeal the 1st amendment, so I smell a big loophole here. For example, a church can purchase a vehicle, have an employee drive it for a week and then sell it to one of its members as a used vehicle, and thus, free from the fair tax. Remember, the investigating and enforcing activities of the IRS will be gone. If they have to be implemented somewhere else, the benefits of riding ourselves of the IRS won't be realized.

Number 25 of the FAQs is about how are state tax systems affected. Most state income tax returns require sending a copy of the federal tax return. Without a federal return, state income tax returns are likely to get much more complicated. If states implement their own fair tax, the total tax on new purchases could be 40% or more.

Under the current system, it's difficult for employees to avoid paying taxes, but the fair tax is likely to spur the growth of a large black market with all kinds of schemes for avoiding or minimizing the consumption tax. The idea that the investigating and enforcing functions of the IRS can be done away with are naive at best, and without their investigating and enforcing functions no one would object to the IRS. The Fair Tax needs lots of work to make it both fair and effective.

Mac -Are the folks... (Below threshold)

Mac -

Are the folks who are trying to evade the tax suddenly going to stop buying groceries? The tax is there if they do. Are they going to not buy consumer goods? The tax is there if they do. Go across the border and buy it? You'll pay tax when you bring it into the States.

As far as state tax being more complex - why would it? The state already sets a tax rate that's a percentage of the gross pay - why would that change?

You really ought to buy Boortz's FairTax book and READ it. FAQs are all well and good, but the book goes deeper.

I don't want to see the current tax system 'reformed' - that just means some SOB can get his fingers into it and twist it for his own advantage. Sometimes the best thing to do is scrap a badly-working system and start fresh.

J.

I think McGehee is right in... (Below threshold)
Steve L.:

I think McGehee is right in his thinking. How many people here believe that the current tax code looked anything at all like the original tax code? As time passes, Congress will add more and more crap to right this wrong or that wrong or to pander to this group or some other group. Eventually, we will be right back where we started.

I'm not defending our current system. I'm just pointing out that there is no perfect, magical system where everyone else pays more taxes and you pay less.

You can call it "fair" or "... (Below threshold)
kbiel:

You can call it "fair" or "flat" or "progressive" or "regressive" or anything else, but it will always be screwed up as long as the politicians can easily tinker with it. I personally prefer a flat tax, but I could live with a consumption tax if there is a constitutional amendment to tie congress' hands. That amendment would authorize either an income tax or consumption tax and outlaw the other. Then it would forbid any deductions, credits, or other changes that effectively changes the tax rate for any individual. Finally, the rate would be set by a normal bill in congress, but would take a simple majority (50% + 1 vote of a quorum) to lower the effective rate and a super majority (either 2/3 or 3/4) to raise the rate.

It's the most ridiculous pr... (Below threshold)
Starboard Attitude:

It's the most ridiculous proposal I've seen.

One major flaw (if somebody already mentioned this, I missed it) is that it would kill the economy! It creates incentives to hoard cash rather than re-injecting it locally.

I'm shopping for a 40 to 48-foot sail boat right now. If the US government is going to tax that purchase at a rate high enough to replace what they would have recieved through income tax, what am I going to do? What would the tax on a $400k boat be? $175k? Do you think I'll be coughing up that tax so I can purchase a Valiant from Texas or a Pacific Seacraft from California? Hell no! For the extra dough, I'll buy a Baltic or a Nautor Swan from Finland! Sorry US shipyard workers, but my self-interest is more important than yours!

Also, I really enjoy the bit about "reimbursement" for necessities. Anyone wanna think about the process by which "necessities" will be defined? How often will it be re-defined? Where will one go to look up those definitions? Will a $500-per-plate Japanese meal qualify?--how about Denny's? What about medical expenses? Boob jobs? Prescription drugs? Antibiotics following a facelift? Who will track all this? How onerous will it be to obtain "reimbursements?"

What about real estate? Is a house a "necessity?" What about a multi-million dollar house? Sure, we could cap a tax-free amount at... what? In Kansas, a decent house might be had for less than $100k. Here in Southern California, median house prices are probably in the low $400k's right now. In my modest neighborhood (3-bedroom, 2 bath homes around 1800 to 2200 sq. ft. on 75x120 foot lots) house prices have been hovering around $1,000,000, give or take $200k. So from a Federal perspective, my necessity would be outrageously excessive. How do we deal with that? Different scales for different zip codes? More decision-making processes? More regulations?

This "fair tax" farce would fuck the economy, it could potentially screw the low income people, it would screw those who live in areas with higher costs of living, and it could not possibly simplify the tax code, personal record keeping, or tax preparation. It is moronic.

JLawson,It doesn't... (Below threshold)
Mac Lorry:

JLawson,

It doesn't sound like you read my post, and least not in detail. What about taxing savings on which people have already paid the full income tax, do you think that's fair? Churches could abuse the system by purchasing expensive items and reselling them as used goods to members free from tax. Do you really think the supporters of the Fair Tax have enough clout to repeal part of the 1st amendment? How are you going to stop such abuse without recreating the investigative and enforcement functions of the IRS. If those functions are needed, then what was the point of getting rid of the IRS?

The reason state income (not sales tax) gets complicated, assuming states keep their income tax system, is that current state tax systems get most of their information from your federal tax return. If there is no federal tax return, then states will have to gather the same information you used to provide the federal government. There's no simplification here, just moving the burden from the federal tax return to the state tax return.

States that do away with their income tax system in favor of a fair tax will likely see combined federal and state rates of 40% or more on the purchase of new goods and services. Such an high rate will spur the growth of a large black market where small producers will sell goods directly into the black market off the record and without tax being collected. Others will set up barter systems where no money changes hands. Every tax schemer in the current system will operate in the fair tax system. You will find that the full investigative and enforcement functions of the IRS will still be required along with the record keeping and reporting functions that go with the investigative and enforcement functions. It's just pie in the sky to think otherwise.

After a brief and topical r... (Below threshold)
LJD:

After a brief and topical review, my first impressions included very little positive aspects.

Initial thoughts are:

*Some states already pay sales tax. This could take the 23% well over 30%.

*Some states (NH) cannot pass sales tax legislation because of the role of cross border trade in the economy of the state.

*What about Roth investments? Seems like the plan gives a big windfall to traditional IRAs while crewing the ones that planned ahead.

*Do they expect that people will really pay 23% more for goods? Will this push a new car purchase beyond a person's approved finance limit?

I guess the important thing... (Below threshold)
schwerv:

I guess the important thing here is to make sure we talk ourselves out of making a change.

Look, these issues already exist. If they dont, The government can make them exist at any time they feel like. The fair tax simply replaces the existing system and, more importantly, the IRS and all its lousy forms and intrusions into our privacy.

The economic reason I'm am for this system is that it makes the people that really pay the tax anyway, know they pay the tax and know how much tax they paid. Then they can see if what they paid for is really worth it.


The rest of this whiney "I have a saving account" BS is just that. If you think you are in a tax shelter, think again. Just wait for the Hillary health care system. just wait for the Kerry... whatever the hell he said he would, would not, would do. Wait for the Gore Global Warming Defence Package... Not to mention having to fix the mistake of not telling George W that the LOWERING the natinal debt is what we are trying to do. See how long your tax shelter lasts then when these things start biting into federal revenues. I bet they dont give a hoot about your pre-tax savings what nots.

Lets not talk ourselves out of this because we are scared of what they might do. Lets move forward. lets make them know what we want. Lets make them know how we want it.


LJD,Please read th... (Below threshold)
schwerv:

LJD,

Please read the book. These are covered in great detail. There are other more pressing reasons to be concerned than to be tripping over the easy stuff.

OK, I just read some of the... (Below threshold)
Starboard Attitude:

OK, I just read some of the FAQs, which would have had me slightly modify some of the things I said above. But overall, the FAQs strengthen my points. It is asinine!

Since only new goods are taxed, I think I'll postpone upgrading my home theater system this week because what I have is working fine. Why pay $230 tax on every $1000 item when it can wait another year?

I'd really like to buy a new car, but 23 percent of the $50,000 Volvo SUV I was eyeing would be $11,500! Hmmm, but there's a nice used one available for only $40,000 and no tax penalty! What would you do?

Getting back to my sailboat, a 5-year-old boat is as good, if not better, than brand new in many instances--especially with cruising boats. Should I pay $92,000 in taxes for a new one? --or avoid the tax and save another $20-$50k on the purchase price for a better-outfitted boat? Duh.

The poverty level/necessities thing is unworkable unless it varies geographically. The truly impovershed who pay $2000 rent in Los Angeles would get screwed, while those in Missouri who pay only $200 could live like kings.

This whole scheme is incredibly naive. I have dual degrees in Economics and Political Science. As an undergrad, I concentrated on public finance and expenditure, which essentially revolved around government revenue schemes. For years I was looking for alternatives to the income tax structure that was gouging me to death, and sought to replace or augment it with other forms of taxation. Following that, I went to one of the best tax law schools in the country, and I took every tax law class offered. While some of you might think the process indoctrinated me, that would just reveal a chunk of ignorance about the academic process. What my training and experience has prepared me for is to evaluate this plan with an open mind, and immediately conclude it is not only unworkable, but it would tank the economy rather than stimulate it as it naively claims. It is truly moronic.

I'm shopping for ... (Below threshold)
MikeB:


I'm shopping for a 40 to 48-foot sail boat right now. If the US government is going to tax that purchase at a rate high enough to replace what they would have recieved through income tax, what am I going to do? What would the tax on a $400k boat be? $175k? Do you think I'll be coughing up that tax so I can purchase a Valiant from Texas or a Pacific Seacraft from California? Hell no! For the extra dough, I'll buy a Baltic or a Nautor Swan from Finland! Sorry US shipyard workers, but my self-interest is more important than yours!

Read my reply above. You're already paying a significant portion of those taxes... they're simply embedded in the 'price'.


Also, I really enjoy the bit about "reimbursement" for necessities. Anyone wanna think about the process by which "necessities" will be defined? How often will it be re-defined? Where will one go to look up those definitions? Will a $500-per-plate Japanese meal qualify?--how about Denny's? What about medical expenses? Boob jobs? Prescription drugs? Antibiotics following a facelift? Who will track all this? How onerous will it be to obtain "reimbursements?"

If you'd have read the details, you'd find that the 'reimbursement' is not based on specific expenditures, but rather set based on what a family of size X can expect to spend on basic necessities. Everyone then gets that same amount whether you're working at McD's or your name is Bill Gates.

What about real estate? Is a house a "necessity? ..snip

Newly constructed houses are taxed as they are new goods. There are no exemptions for housing.

This "fair tax" farce would fuck the economy, it could potentially screw the low income people, it would screw those who live in areas with higher costs of living, and it could not possibly simplify the tax code, personal record keeping, or tax preparation. It is moronic.

This is a good example of why we're screwed into sticking with the currently broken tax system. You've already put more thought into it than the average person would and yet without researching the topic enough to even reply coherently, you've already reached a verdict.

- MikeB

Starboard Attitude -<... (Below threshold)

Starboard Attitude -

You missed the major point - that the 23% is NOT tacked ONTO the price, but already EMBEDDED in the price, the manufacturer's COST of which will be about 23% LOWER because of the elimination of taxes paid by the manufacturers. So - 23% cheaper for the manufacturer to produce at the same profit levels makes it possible to embed a 23% tax, and have the price come out the same.

If the price with tax were the SAME as what you were planning to pay anyway - and you had MORE money in your pocket - would you buy the boat you had your eye on? Or would you buy something larger? And all the bells, whistles and associated doo-dads?

(And perhaps you can remind everyone here what happened when the Luxury Tax was passed in 1990? What happened to the small aircraft industry? To Beechcraft and Cessna?)

If this were 23% ABOVE what we're paying now - I wouldn't support it. But it's not.

As far as the prebate goes... sigh. The last time I saw misrepensentation of the ideas like that, it was in the review columns on Amazon for Boortz's book. There isn't anyone stupid who posts on this blog, no matter what your persuasion politically. Throwing up things like boob jobs and facelift antibiotics shows that you not only haven't read about the Fair Tax, you don't have any real interest in finding out about it.

FairTax - Thumbnail Sketch
Americans take home their whole paychecks.
Not only do more Americans have jobs, but they also take home 100 percent of their paychecks (except where state income taxes apply). No federal income taxes or payroll taxes are withheld from paychecks, pensions, or Social Security checks.
No federal sales tax up to the poverty level means progressivity like today's tax system.
To ensure no American pays tax on necessities, the FairTax plan provides a prepaid, monthly rebate (prebate) for every registered household to cover the consumption tax spent on necessities up to the federal poverty level. This, along with several other features, is how the FairTax completely untaxes the poor, lowers the tax burden on most, while making the overall rate progressive. However, the FairTax is progressive based on lifestyle/spending choices, rather than simply punishing those taxpayers who are successful. Do you see how much freer life is with the FairTax instead of the income tax?
If you want things to STAY AS THEY ARE, with only token efforts at repainting the tax code a different shade of theft, then that's fine. For all I know, you're making shitloads off of the current structure and you don't want to see it changed. And I can't blame you for that - nobody wants to see their job go away. But for every lawyer making big bucks off the tax courts, you get a hundred thousand people who are screwed by the tax system. And most of us don't realize how screwed we are - judging how sucky or successful the tax system is by how large a refund you get each year. (Kind of like you don't realize how bad AM/FM is until you get satellite radio.)

Mac -

As far as your objection about churches goes - I don't know. And I don't care. Do church exemptions amount to $350 billion? Or maybe $700 billion, which is an estimate of both compliance costs AND untaxed revenue from various sources?

FairTax - Thumbnail Sketch
Tax criminals - don't make criminals out of honest taxpayers.
Today, the IRS will admit to 25 percent noncompliance with the code. FairTax.org will be generous and simply take the position that this is likely a conservative estimate of the underground economy. However, this does not take into account the criminal/drug/porn economy, which equally conservative estimates put at one trillion dollars of untaxed activity. The FairTax does tax this - criminals love to flash that cash at retail - while continuing to provide the federal penalties so effective in bringing such miscreants to justice. The substantial decrease in points of compliance - from every wage earner, investor, and retiree, down to only retailers - also allows enforcement to concentrate on following the money to criminal activity, rather than making potential criminals out of every taxpayer struggling to decipher the current code.
Guys - I'm suggesting that instead of throwing up all sorts of objections (real or made up) to this that you go ahead and READ THE BOOK. Read all the information on the plan, including the repeal of the 16th Amendment.

It makes more sense to me than what we've got.

J.

Starboard Attitude.<p... (Below threshold)
schwerv:

Starboard Attitude.

First, people are not going to stop buying things. You say you will wait to upgrade your system, but you won't. I know, I just up graded mine and paid thousands for a television that was only 2 inches bigger than my last one. Call it stupid, sure... A great example of this is gas being at near 3 bucks and SUV sales are only slightly lower. Truck sales are actually higher. Three times the cost of fuel and people still buy the gas guzzlers. Honda is actually considering cancelling the accord hybrid model due to low sales.

What is important for everyone to look into is the embedded tax issue associated with the current tax system. Not only does the fair tax only tax new items, It also only taxes consumer goods at a retail level. That means businesses and corporations pay no tax at all. WHICH THEY DONT ANYWAY. As an economist, you know that businesses treat taxes as an expense that gets passed down to prices of their goods and/or services. This means YOU reimburse them for the taxes they paid when you buy their goods. As such, your 50,000 dollar Volvo is no longer 50,000 dollars. A 2000 dollar TV is no longer 2000 dollars. It is considerably less. I believe the current estimate is between 22 to 26% less. I.e. this is almost a wash. READ THE BOOK!!!

Also to your point about waiting. Would it not be a great thing that YOU get to decide how much you pay in taxes?? If you want to wait, then you pay less taxes. But you won't... Your an American. So am I and I bought a television that I only recently found out was made in France which is another point.

These embedded taxes are what make American goods too expensive to the international market. We cannot sell out cars to Europe, not JUST because they hate us and wont buy them, but because they are not cost competitive with the embedded taxation. Eliminate the taxation, and the US becomes an exporter again.... Goodbye to the days of tens of billions of dollers in trade deficits.

All this is in the book. The FAQ is ok, but your missing out on all the juicy details.

MikeBRead my secon... (Below threshold)
Starboard Attitude:

MikeB

Read my second post. I did do some belated research and changed some things. I was off on the details, but my conslusions are much firmer now than they were initially. The plan sucks.

As for the claim that "significant portions" of the taxes are already embedded in the price of new goods, we need to define "significant." Theoretically, prices could be reduced for some types of goods, but not all, and probably not by much.

The biggest impact would be from the immediate feedback received by the consumer--like a telephone pole up the butt! When you tax at the moment of purchase, especially at such a high rate, it's like aversion therapy--it's like hooking an electrical charge to a monkey's genitals, and zapping it every time he eats a banana. It won't take long for the banana industry to go belly up!

For the banana industry to survive, it's gotta jack the prices so high that revenue from the few slow learners will cover the fixed costs. More likely, that's not possible and the industry will die.

Since I've got bananas on the brain, I should mention that the banana industry would be more better off than other industries--primarily because there is no market for used bananas!

What happens to the electronics industry? Automobiles? Boats? Any durable goods? Manufacturing will die, workers will be unemployed, and the few manufacturers who survivve will have to jack prices through the stratosphere to cover R&D and fixed costs, since their market has shrivelled.

THE BOOK DEFINES SIGNIFIGAN... (Below threshold)
Schwerv:

THE BOOK DEFINES SIGNIFIGANT... READ THE BOOK!!!

Also, you are underestimating the competitive side of business. You think that Best Buy will not lower their prices immediately to get an advatage over Circuit City, and Visa Versa?? and NEWEGG will just keep their prices the same and loose sales to the aforementioned?? People are more price conscience now than ever...

Also in the BOOK, is the idea of inclusive taxation. The consumer will not see a price with 23% tax added on to it. What they will see is a 2000 dollar tv costing 2000. The tax is included in the price and the seller sends 22% to the gov and keep 1% for it's trouble. So this monkey balls-banana with the zapping battery thingy is not going to happen.

This can go on forever... PLEASE READ THE BOOK. these things are covered in great detail. Is it perfect?? Nothing is. Is it astronomically better than the current system?? Absolutely... READ THE BOOK.

JLawson and schwerv:<... (Below threshold)
Starboard Attitude:

JLawson and schwerv:

Unless you're cherry picking from some bizarre portion of some obscure industry, I can assure you that embedded taxes to NOT comprise 23 percent of retail prices!

For 8 years in the '90's, I was the in-house General Counsel for a multi-national product manufacturer. During that period, I was emmersed in corporate strip searches by the International Trade Commission, Department of Commerce and the Department of Justice concerning international trade issues related to pricing. I've seen our numbers. I've seen our competitors' numbers. I've seen numbers for the industry as a whole. I've seen numbers from different industries. While taxes are *a* factor, they are no where near 23 percent--in fact, they're usually much closer to zero.

Every time you read some consumer publication, I suggest you pay attention when somebody says factor X comprises Y percent of the retail price of a good. Product liability costs are x percent. Real estate is x percent. Workers compensation is x percent. Compliance with environmental laws are x percent. It won't take long to recognize that the percentage points quickly add up to more than 500 percent--and that's before materials, labor, and R&D is factored in!!

Come on, get real.

Guys - I'm suggest... (Below threshold)
Mac Lorry:
Guys - I'm suggesting that instead of throwing up all sorts of objections (real or made up) to this that you go ahead and READ THE BOOK.

That's a dodge. If the Fairtax lobby want's to gain support, the complete details of their plan should be on their web site, not in some $30.00 book. In fact, it looks like the plan is fully documented on the web site.

It's disingenuous for Fairtax proponents to claim there will be no need for the IRS. The agency might be called by another name, but as I pointed out, the investigative and enforcement functions now provided by the IRS will still need to be done under the Fairtax. I have given the example of tax cheats using a church to avoid tax on large ticket items such as cars and there are lots more schemes to avoid this tax. In states that implement the Fairtax in place of their income tax the rate could be over 40%. With every consumer having the ability to cheat to a degree they never had as an employee paying income tax through payroll deduction, there will be a large black market. For example, every retail business writes off lost inventory. Some of that lost inventory is due to theft, but there's also damage and spoilage. The IRS keeps a close eye on these rates and investigates where there seems to be an excess. Under the Fairtax system as it's articulated, there is no IRS, so a business can simply sell some of it's goods at 20% over the marked price, but off the books. The consumer saves 20% and the business makes and extra 20%. It's not rocket science and without record keeping requirements, there's little risk of getting caught.

Under the Fairtax, the number of people with a real opportunity to cheat big will be many times what it is now. As a result, the compliance costs of the Fairtax will be higher than they are for the current Income tax and there will be no reduction in reporting or required record keeping, not on individuals and not on businesses. It's pie in the sky. The one true advantage of the Fairtax is that voters will see just how much of their money goes to the government and that likely will force a reduction in tax rates.

Is there a 30% markup on th... (Below threshold)
LJD:

Is there a 30% markup on that book? :-)

O.K. here's another
What about the mortgage interest and property tax deductions? Are they included in the fair tax proposal? Without simulataneously restructing our state tax system, I would lose my house.

I understand the point that... (Below threshold)
Starboard Attitude:

I understand the point that the price of goods will not change, and the consumption tax would simply replace imbedded corporate income (and payroll?) taxes at the existing rate. I disagree with that, but I understand the over-simplified concept. In theory, the consumption tax will not cause an additional hit to the consumer.

But what about revenue lost by abolition of the personal income tax? It seems the consumption tax only replaces the corporate contributions (which I've argued for years should be eliminated anyway). Surely the book doesn't suggest the economy would be so hyper-stimulated that revenues would be recouped through volume?

No, I will not pay $30 to read the book!

As for neutrality, this system doesn't have it. People who must consume a greater percentage of their income pay a disproportionately higher percentage of their income in taxes--and the "necessities" exlusion does not necessarily remedy that. This affects not only the impovershed, but young families who are buying their first cars, houses, furniture, etc. It also disproportionately hits those who keep the economy moving, while rewarding the slugs who do not.

The current income tax system is far from perfect, and I hate it (although it is much better for everyone since 2000). But I would hate the consumption tax far more. It has some superficial appeal if you buy into all the assumptions behind it (and so does communism for that matter), but the assumptions are whoppers, and the plan seems ill-advised and harmful (as were real-world attempts at communism).

Don't buy the book!

Its not a dodge. Its "Do y... (Below threshold)
schwerv:

Its not a dodge. Its "Do you own research" All the concerns you have here are addressed in the book. The website is not the book because the book proceeds finance the movement. So if you dont want to help finance the movement, buy it used, read a friends, just read it. If you still dont like it, then fine but your relying on heresay at this point. 30 bucks is pretty cheap to fully understand a system that just might make you loose your house. Dont you think??

To expand on my original comments, This is a system that effectively eliminates the intrusive IRS. This is a system that illustrates the cost of government on the people who really pay the taxes anyway. This is of the utmost importance. This government will continue to expand exponentially as long as the taxpayers dont think they pay taxes. Can the US compete in the global economy with the current system?? no, and as a result, manufacturing will be lost, Services will be lost. Its happening now. The US needs a system that allows business to be competitive in the emerging global economy and the current system will not allow that to happen. I.E. China will soon be the world economic power. They just overtook 4th place from UK.

The notion that consumption... (Below threshold)
Mac Lorry:

The notion that consumption is more stable than earnings is pure poppycock. The economist bribed into claiming this says that in an economic downturn people who are laid-off don't pay income tax, but they still consume goods and services by spending their savings. Even so, laid-off workers buy just the essentials, the very things they are getting payments to offset the tax on, and thus, the net tax revenue is minimal if any. Look at the unemployment numbers. They are less then 5%, yet more than 50% of consumers feel the economy is not good. When people are worried about the economy they cut back on discretionary spending and the number of people cutting back far outweighs the number actually losing jobs. Net result is that every time the MSM starts reporting only bad economic news, and consumer confidence goes into the toilet, so will tax revenues.

People strive to earn as much as they can as soon as they can in spite of the income tax, but people will hold onto their money longer if there's a high tax penalty. The cost of used goods will increase as well. If you have to pay $2,800 for a new gizmo under a combined federal and state Fairtax of 40%, no one is going to sell a slightly used gizmo for even $2,000, which is the retail price of the new gizmo. More likely a slightly used gizmo would go for maybe $2,300. As a result, some of the Fairtax will be passed onto subsequent owners. Families who make ends meet now by shopping at garage sales will find higher prices than under the current system. The implications of the Fairtax are far more complex that it's proponents let on.

schwerv,But it is ... (Below threshold)
Mac Lorry:

schwerv,

But it is a dodge. You say the book has all the answers, so I can assume you have read it, otherwise you're just BSing. Well, what about the many issues I have raised, what does the book say about preventing abuse using churches. What does the book say about preventing business from selling some part of their inventory on the black market? How does the book say the government can determine what's legitimate inventory shrinkage and what's not without reporting requirements? If you don't remember what the book says on such subjects, what makes you think the book even address them? Is it selective memory?

Don't buy the book!<... (Below threshold)

Don't buy the book!

The Fairtax book - Hardcover from $7.99 to $15.72.

Paperback from $8.99 - hasn't reached the discounters yet.

Don't buy it, guys. Mac and SA wouldn't like it. Don't read it, either. Don't examine the info in it. And above all, don't trust your own judgement on this. Far better to pay attention to the opinions of folks who have a vested interest in keeping things as they are.

After all, when you're a tax lawyer the boat's gotta get paid for somehow - right?

J.

The notion that consumpt... (Below threshold)
MikeB:

The notion that consumption is more stable than earnings is pure poppycock.

Really ? Through what method did you arrive at this conclusion ? What percetange of total consumer expeditures are discretionary and suffer during a recession ? What percertage of total consumer spending is non-discretionary ?

People strive to earn as much as they can as soon as they can in spite of the income tax, but people will hold onto their money longer if there's a high tax penalty.

So the purpose of the income tax code is to encourage people to spend their money ? And this is what makes the economy grow ? Consumer spending ? Or perhaps is it the consolidation of wealth pooled into ventures that 'create wealth' by making products that people will be willing to exchange their wealth ? Our economic cycle is at it basis shift between stashing cash back to feel safe to spending it because we're comfortable with our currentl level of safety. Human nature rarely changes.

If you have to pay $2,800 for a new gizmo under a combined federal and state Fairtax of 40%...

What is your total current tax burden ? I'm willing to wage that you don't know do you at this moment ? You haven't bothered to calculate it and that's what beauracrats love. Let's see.... if I made $150k/yr (neglecting compensation taxes 'paid' by my employer). My effective Federal tax rate is about 18%. For my state, my effective tax rate is around 5%. That's 23% of what I earn. Then there's an ~9% sales tax on what I spend.

So let's buy that $2000 gizmo that you're complaining would cost $2800 under a consumption tax. Well, the total bill for the current system is $2000 x 1.09 = $2180... so I need to take home $2160. Let's see to take home $2180... I need to make $X*(1-0.18-0.05) = $2180 or $2831 pre-tax to have $2180 to spend post-tax. Under a purely consumption based system, I had to earn $2800 to spend $2800 ($2000 + 40% tax). So, under your example, I'd come out saving $30 under the consumption based plan.

This is another problem to overcome. (1) People have no idea what the current tax burden is and (2) they don't understand that rates calculated inclusively vs exclusive are very different (23% inclusive is aboue 40% exclusive).

- MikeB

Fine. Don't buy the book. ... (Below threshold)

Fine. Don't buy the book. Check out FairTaxGroups. Or even better (for Mr. Economist/PoliSci man), go READ THE ACTUAL LEGISLATION. H.R. 25. It's not hard to find the actual text.

Or go to the library. They're free. You can check out the book there.

It's obvious that S.A. knows absolutely nothing about the FairTax, because he's arguing against things that are no feature of the FairTax.

Mac- You will find some of your answers in the book and legislation. As for enforcement, it's true that the whole "End the IRS!" thing isn't exactly a fair representation. They say the tax will be collected by state sales tax agencies, but I do think we'll need an enforcement body. But the reporting requirements are pretty in-depth. When you read the actual legislation, you see that reporting is about as cumbersome as a VAT, but the tax is only charged at the final sale. Since reporting requires a chain of people from start to finish, if the government sees the chain breaking in the middle, it's a lot easier to spot than if I do some cash work on the side and don't claim it on my income tax.

Jlawson,No need to... (Below threshold)
Mac Lorry:

Jlawson,

No need to insult me by insinuating I'm a tax lawyer. I only pay taxes and do my own personal and business returns, so I have learned a bit about the current system and why it's like it is.

You keep saying the book has all the answers, so you must have read it, right? So what's the big secret, why wont you explain what the book says about the many issues I have raised? Just telling people all the answers are in the book without sharing any of those answers makes it look like one of two things. Either you're making a profit off that book or you're a bull shitting everyone. Could it be that you have no idea what the books says about the issues I raised or even if it addresses them?

JLawson: I'm not a tax law... (Below threshold)
Starboard Attitude:

JLawson: I'm not a tax lawyer, and never have been. I found litigation far more entertaining just before graduating from law school, and that's what I've done with most of my professional time. Now, I'm retired. Either way, I don't have an interest in protecting the system--only my own personal tax burden.

Nice try, though. Ya gotta love the ludicrous arguments that those who are trained and experienced in a given field are untrustworthy because of their indoctrination or vested interest in the current system, but the naive and over-simplified arguments of lay advocates for some revolutionary alternative are to be better trusted.

Oh, but they trot out paid "experts" who never hold up to a decent cross-examination--but they're good enough to attract the non-thinking masses. GIve me a break.

Brad: Except for my first post, what non-existent features have I been arguing against? Oh, and care to tell me where the lost revenue will be regained?

Mac,I have read th... (Below threshold)
Schwerv:

Mac,

I have read the book. The book does raise these issues. My point is these issues are not important in terms of the overall picture. The church cheaters pale incomparison to the economic losses as a result of trade deficits, government money printing, and a host of other ways this system costs us. Our inability to compete on an international market will bankrupt the USA. China understands capitalism (what liberals call new socialism), and this is why they are the fastest growing economy in the world. And as long as we have a trade deficit with them, we, (you and I) are paying them to do it. So go ahead with your dilly dallying with insignifigant issues. It will cost us all in the end.

And dont listen to me, I cant change your mind anyway, only you can do that. Go buy the book, you are responsible for your ignorance. If you have any reasonable sources for counter Fair tax, please let us all know.

S.A.,"Where the lo... (Below threshold)

S.A.,

"Where the lost revenue will be regained"- You have assumed that this tax only replaces corporate taxes (your 3:16 PM post). It replaces corporate taxes, personal income taxes, as well as payroll taxes.

That right there is a huge difference. You've been arguing that the embedded taxes couldn't possibly be as high as we're saying, because you don't count the personal income taxes and payroll taxes that employers are withholding from their employees.

The reason we keep telling you to read the book (or the legislation, or one of the many pro-FairTax web sites) is because the arguments you're bringing up have very little to do with the FairTax. It's a strawman. You're arguing against what you think the FairTax is, when you haven't done enough research to know what it will do.

MikeB Rea... (Below threshold)
Mac Lorry:

MikeB

Really ? Through what method did you arrive at this conclusion ? What percetange of total consumer expeditures are discretionary and suffer during a recession ? What percertage of total consumer spending is non-discretionary?

Consumer confidence is a key factory in discretionary spending. Do you want to argue about that? The more money a person has the more their spending is discretionary. The Fairtax uses the poverty rate to set the repayment rate, so lets use the Fairtax system's own numbers. For a single adult the number they give is $9,800. So any adult making lets say $25,000 per year will spend most of their money on discretionary items as defined by the Fairtax proponent's own numbers (25,000 - .9,800 = 15,200). Do you agree or do you think most single adults in the U.S. make less than $25,000 a year, or do you think the numbers the Fairtax proponents use are bogus? Of course if most people saved a significant part of their income that would effect the numbers, but in the U.S. the savings rate last year was less then 3%. If 50% of consumers think the economy is doing badly and cut back even 15% on their discretionary spending that will offset the 5% of unemployed who continue to consume and pay taxes from their savings. That's why the notion that consumption is a more stable tax revenue stream than earnings is pure poppycock.

So the purpose of the income tax code is to encourage people to spend their money ?

I don't know how you could get that out of what I wrote. People earn as much as they can as soon as they can. Do you disagree? Do you think people avoid making money to avoid paying income tax? I understand there are special circumstances where it's advantageous to move paying income tax into the future, but I'm talking about the typical rank and file taxpayer not the unusual case. You missed the basic premise of my statement so the rest of your response missed the mark.

What is your total current tax burden?

That's not the point! The point is that under the Fairtax, it's likely that used items will sell for more than the retail price of new items. That's because the tax is collected on the new item, but not on the used item regardless of what the current true tax rate is. The result is that used items will increase in price with the effect that buyers of used items will be paying a portion of the Fairtax, regardless of the specifics of the law. It's a predictable unintended consequence. What I'm concerned about are the unpredictable unintended consequences.

Schwerv,Please not... (Below threshold)
Mac Lorry:

Schwerv,

Please not with the ignorance stuff. You're the one saying go buy the book, that it answers all the questions, that you have read it and yet you can't articulate any of it's answers to the points I raised.

You say that part of our tax burden is in the price of the goods we ship to other countries, but under the Fairtax, that won't be the case. That means the tax that other countries were paying as part of the price of U.S. goods would be shifted to U.S. consumers. We may be more competitive, but we will also be paying taxes that are now paid by consumers in other countries.

The U.S. competitive position with China is only marginally effected by our tax system. U.S. auto makers pay on average $60 per hour in wages and benefits to U.S. workers. The rate for Chinese auto makers paying Chinese auto workers is $3.50 per hour. There are many reasons why there's such a disparity and claiming the Fairtax will make U.S. goods competitive with Chinese goods is disingenuous at best.

That's not the point! T... (Below threshold)

That's not the point! The point is that under the Fairtax, it's likely that used items will sell for more than the retail price of new items. That's because the tax is collected on the new item, but not on the used item regardless of what the current true tax rate is. The result is that used items will increase in price with the effect that buyers of used items will be paying a portion of the Fairtax, regardless of the specifics of the law.

In some ways, you're right. However, the "retail price" (as you use the term) will drop due to the elimination of embedded taxes. The true cost to the end user, if you believe the FairTax guys, won't really change. If you believe me, they end price to consumers will likely rise a little, but the increase in income (since income and payroll taxes go away) combined with the prebate will mostly take care of that.

This may increase the demand for used items, raising the price. Especially with big-ticket items. So let's look at the $2000 TV. As I say in the above link, let's assume a 10% price increase due to the FairTax (which takes into account embedded taxes disappearing, dropping the price, then adding the FairTax. Now, the TV costs $2200 at the store. Now, the same TV, used and 18 months old, is going on eBay for an average price of $1300. After the FairTax, that might increase a little (up to $1400-1500 maybe?). But the people buying that TV now have no taxes withheld from their paychecks, and they have the prebate.

Are used goods really going to be that competitive?

Brad Warbiany,S.A.... (Below threshold)
Mac Lorry:

Brad Warbiany,

S.A. has already said he checked the web for more information and my first post on this topic give the FAQ question numbers from the web site Jay Tea linked to along with my specific concerns. Yet all I'm getting from Fairtax proponents is what amounts to "drink the kool aid, you'll see the light when you drink the kool aid, here have some kool aid."

Brad Warbiany,<blockq... (Below threshold)
Mac Lorry:

Brad Warbiany,

However, the "retail price" (as you use the term) will drop due to the elimination of embedded taxes.

Can't you see that it doesn't matter if the retail price drops. All that matters is the relative difference in the price of new verses used. With the Fairtax someone wanting to sell a $2,000 item that they just paid maybe $2,800 for is not going to want to sell for less than the retail price of $2,000 as they would do under the current system. Part of the $800 tax (assuming a combined fed and state rate of 40%) will be passed on to the next purchaser. This is not intended in the Fairtax law, but it's a predictable consequence. It's the unpredictable consequences I'm concerned with.

Mac,What the hell ... (Below threshold)
schwerv:

Mac,

What the hell are you reading?? Corporate taxes increase the costs of producing goods. eliminate those costs, and our products become more competitive in the international markets. Your not arguing that are you??
The automotive labor expenditures include pension payments to retirees and more importantly, employment taxes. Get rid of those and cost of goods goes down and thus we become more internationally competitive. Also as China's population becomes more generally wealthy, this 3.50/hr will go up. It already is.

Dont take ingnorance as a bad word. Its ok to not know. Its not ok to be stupid and I did not call anyone stupid. But if you think Im going to try to convince you... I got better things to do. Go do you own homework.

Instead of arguing over whe... (Below threshold)
Matt:

Instead of arguing over whether or not the Fair Tax Proposal is fair, how come nobody is arguing whether or not it is JUST?

Any personal income tax system that affects some people more than others is not just. Any system that rewards sloth, and punishes success is not just.

Personally, I am against personal income taxes regardless of the system used to extract them from me. Instead of pushing to "reform," a difficult, complicated, untrustworthy system, the effort needs to go to abolishing it.

The total sum of personal income taxes paid is a relatively small amount of the federal budget. All it seems to do is enrich the federal reserve, a banking entity, not owned by the U.S. Government.

The U.S. Government doesn't need income taxes to function. They would have to reduce spending, which is easy to do without cutting internal social programs, although congress lacks the integrity to do so.

schwerv,In support... (Below threshold)
Mac Lorry:

schwerv,

In support of the Fairtax you specifically brought up competition with China and the trade deficit, which means primarily manufactured goods. You said "And as long as we have a trade deficit with them, we, (you and I) are paying them to do it." My point is that the price of manufacturing in the U.S. includes many burdens, not just taxes and that even if we eliminate the taxes, we still won't be competitive with China. Part of the problem is the Chinese artificially link the value of their currency to the U.S. dollar to keep the prices of their goods low in the U.S. even when the dollar would ordinarily fall relative to the Yuan. Another factory is the cost of environmental, and safety regulations as well as litigation expenses. The biggest source, however is that the standard of living in China is much lower than in the U.S., and thus wages are much higher here. None of that except taxes has anything to do with the Fairtax, nor does the fact that wages will go up in China over time. Because of that I wrote that "claiming the Fairtax will make U.S. goods competitive with Chinese goods is disingenuous at best." Nothing you stated has changed that. Do your homework and stop making ignorant claims for what the Fairtax will do.

WOW... you are arguing that... (Below threshold)
schwerv:

WOW... you are arguing that lowering manufacturing costs will not make US products more competitive. By the way, nowhere did I say the fair tax would ELIMINATE the trade deficit. No where did I say that embedded taxes are manufacturings only costs. And you wanted me to take the time so articulate the fair tax book. I was right to not waste my time. Good luck with yourself.

If I were in the Big Chair,... (Below threshold)

If I were in the Big Chair, I'd push for the Fair Tax, as proposed by Americans for Fair Taxation, in a New York minute for one reason.

Thanks to progressivity, withholding, and corporate taxes hidden in the prices we pay, we have a majority of people in this nation who have very little clue about the tax burden they are carrying, both individually and collectively.

That's a lot of "uninformed" voters, who have little obvious incentive to say, elect people who would remove government from areas where it is structurally incapable of acting effectively and/or efficiently.

Now ... even for those at the poverty line, who would be paying zero taxes effectively ... the cost of governance would be apparent, every time they went through a checkout line.

The Fair Tax would result in a better-informed body of voters.

schwerv,W... (Below threshold)
Mac Lorry:

schwerv,

WOW... you are arguing that lowering manufacturing costs will not make US products more competitive.

Nowhere did I make such a general statement. You're trying to sidestep what you said. You specifically brought up China and claimed the Fairfax would make an impact on the trade deficit with China. I pointed out how the Chinese cheat with their artificial monetary policy. I also gave a specific example of just how uncompetitive U.S. wages are with equivalent Chinese wages in a key manufacturing sector. These and other structural inequalities are far more than any tax savings from the fairtax can compensate for, and thus, I have said that your claim that the fairtax would reduce the trade deficit with China is disingenuous. I have said nothing about competing with Europe and other nations, so don't claim I have made a general statement when I have not.

You're free to retreat from the discussion at any point. You're not the first nor are you likely to be the last.

MacI did not say t... (Below threshold)
schwerv:

Mac

I did not say that China does not cheat with their monetery policy nor did I say that the fair tax would do anything about it. I also did not say anything about uncompetitive US wages or make a claim that the fair tax would do anything about that either. And you did not offer any evidence that the tax burden on US manufacturing would be neglible, even if just compared to those other important issues. The fair tax book has presented such evidence. I have not heard, read or seen any evidence to contradict the estimates collected by the fair tax organization. All I ever hear is people misunderstanding what the fair tax is (because they wont read the book), or misunderstanding what the fairtax is proposed to do and/or out and out lying about its functionality (mostly politicians worried about how much power they will loose over our lives). Or better, bringing up issues that have nothing to do with the fair tax like China' monetary policy. Even better, things that happen under the current system like the "rich can get around paying taxes" or the "government can raise the sales tax rate" as if they cant raise your taxes now.

This is why I say to everyone to PLEASE READ THE FRICKEN BOOK. the proponents of the Fair tax have collected this information and damn if they didnt put it in the book. READ THE BOOK and you will have all the evidence and numbers that prove the proponents points. You dont have to like it, or believe in it, But you can at least have an intelligent conversation about it. If you have evidence that the numbers presented by the book are false, beyond your opinion, please share it with us. But until then, I really have a hard time arguing with someone that refuses to educate his or herself. So again, please, read the book. It wont kill you. and please with the line about retreating, are we still in High School??

I find it amazing that thos... (Below threshold)
Duane Neighbors:

I find it amazing that those so well educated and supposedly so familiar with the internet are not aware of thomas.loc.gov. The entire text of all currently pending legislation is fully available. The Fairtax bill is HR 25. It is 300+ pages so reading it should not test the capabilities of those who so knowingly comment in a vacuum.

I have one question about a... (Below threshold)
Steve L.:

I have one question about all this. How in the world do withholding taxes contribute to the cost of a product other the the cost of a person to do the paperwork? The only payroll taxes that the company is responsible for is one half of socail security and medicare (7.35% up to the limit.) I don't see where the Fair Tax is changing any of that.

More importantly, can anyone here honestly (and I do mean honestly) envision a system where there would be NO corporate taxes? Of course you can't. The issue of taxes as a part of the cost of goods sold will not go away.

It seems rather a large lea... (Below threshold)
Chris:

It seems rather a large leap of faith to presume that corporations would reduce prices by the exact amount of the taxes they are saving. Do you really think that every company would automatically reduce prices 23 percent? Or that the market would work so efficiently that competition would force everyone to reduce prices? And no, I'm not going to READ THE BOOK. Neal Boortz is an idiot. Anyone who says Katrina survivors should turn to prostitution rather than getting Federal assistance, or who can't decide who's more dangerous to our country, Osama bin Laden or Kerry voters, isn't getting a dime of my money. That's like me telling most of you that you're not qualified to comment on race unless you've sent Al Sharpton $30 for his book.

That's not... (Below threshold)
MikeB:



That's not the point! The point is that under the Fairtax, it's likely that used items will sell for more than the retail price of new items. That's because the tax is collected on the new item, but not on the used item regardless of what the current true tax rate is. The result is that used items will increase in price with the effect that buyers of used items will be paying a portion of the Fairtax, regardless of the specifics of the law. It's a predictable unintended consequence. What I'm concerned about are the unpredictable unintended consequences.

Actually, that is the point. You're comparing apples and oranges. On the one hand, you're citing the price of an item with tax excluded from the picture ("the item now cost $2000") and on the other hand you're citing the price with tax including ("the item will cost $2800 under the FT").

In the "$2000" price scenario, you're paying for that item with POST-TAX money. In order to have $2000 in POST-TAX money you must earn approximately $2800 in PRE-TAX MONEY.

In the "$2800" price scenario, you're paying for that item with PRE-TAX money. Under the FT, you're not paying income tax. So, when you earn $2800, you have $2800 with which to pay for something. Under the current system when you earn $2800, you have about $2000 for which to pay with something.

You're comparing apples to oranges. Re-read it.

- MikeB

Re MacLorry:<br... (Below threshold)
MikeB:

Re MacLorry:


Can't you see that it doesn't matter if the retail price drops. All that matters is the relative difference in the price of new verses used. With the Fairtax someone wanting to sell a $2,000 item that they just paid maybe $2,800 for is not going to want to sell for less than the retail price of $2,000 as they would do under the current system. Part of the $800 tax (assuming a combined fed and state rate of 40%) will be passed on to the next purchaser. This is not intended in the Fairtax law, but it's a predictable consequence. It's the unpredictable consequences I'm concerned with.

Actually, it is an intended consequence. I'm replying to this as well in hopes to drive the point home. Under the current system, you're paying with POST-TAX money. Under the FT, you're paying with PRE-TAX money.

I'll write it as an equation for simplicity.

Under the current system:
MoneyEarned - Taxes = ValueOfItem

$2800 - $800 = $2000

Under the FT:
MoneyEarned = ValueOfItem + Taxes

$2800 = $2000 + $800

These two equation essentially sum up what the FairTax is proposing to change.

For your example, ValueOfItem is $2000, taxes are rougly $800, and MoneyEarn is $2800. You're neglecting the fact that under the current system you're exchanging (MoneyEarned - Taxes) for ValueOfItem but acknowledging the fact that under the FT you'd exchange (MoneyEarned) for (ValueOfItem + Taxes).

That's the point I was attempting to make by asking if you knew what your current tax burden was. People typically miss that their purchasing power has already been diluted under the current system and then complain when they see their purchasing power being diluted under the FT. Oddly, most seem more content to not have to see it. I'd rather have it fully visible.

- MikeB

schwerv,I... (Below threshold)
Mac Lorry:

schwerv,

I did not say that China does not cheat with their monetery policy nor did I say that the fair tax would do anything about it. I also did not say anything about uncompetitive US wages or make a claim that the fair tax would do anything about that either.

I never said you said any of the above. What are you going to do, list all the things you never said? What you did say is the following:

China understands capitalism (what liberals call new socialism), and this is why they are the fastest growing economy in the world. And as long as we have a trade deficit with them, we, (you and I) are paying them to do it.

In supporting the Fairtax you made a specific claim about China and the trade deficit we have with them. My point is that China is a special case and that due to a number of reasons I have already enumerated, it's far beyond the ability of the Fairfax to resolve. No first world nation has been able to compete regardless of their tax structure. I understand it's important to fix the trade deficit, but replacing our tax code with one that raises an equal amount of tax is not going to do it.

Given an unmanipulated market, the value of the dollar would drop relative to other currencies due to our trade deficits. This decline makes U.S. goods cheaper on the international market. However, when nations like China cheat, it keeps the price of U.S. goods high in their country. In addition, investment in the U.S. by other nations cause the dollar to rise which makes U.S. goods more expensive abroad. Check out this government document if you want to understand more about the reasons for the U.S. trade deficit. Taxes are only a small part of it.

MikeB,But Mike, it... (Below threshold)
Mac Lorry:

MikeB,

But Mike, it was my example in the first place, and I didn't misunderstand my own example. In my example I'm comparing the price of new verses used goods under the fair tax system, not between tax systems. In my example the tax rate of the current system is irrelevant. In my example all that counts is the relative price of new verses used goods.

If you want to make a point about how the rates compare between the current system and the Fairtax system make up your own example, don't hijack mine and then tell me I'm wrong.

As far as the current tax rate, I pay 52.3% on the money I make in my business. That includes federal and state income tax, both halves of FICA, state unemployment tax, and the FUTA tax. For an employee I get to deduct half of FICA, but I then pay for worker compensation insurance. Once I have paid all the above, as a person I still have to pay state sales tax, property tax, vehicles license tax, and federal and state tax on gasoline. And that's not the end of it, if you consider tax on your phone and cable TV bill. I have a good idea that I pay way too much tax, but I also understand enough about business to know that the Fairtax will still require an agency like the IRS to keep people from cheating, and I'm not taking about insignificant amounts.

MacLorry:<blockquote... (Below threshold)
MikeB:

MacLorry:


But Mike, it was my example in the first place, and I didn't misunderstand my own example. In my example I'm comparing the price of new verses used goods under the fair tax system, not between tax systems.

From your post above,


Families who make ends meet now by shopping at garage sales will find higher prices than under the current system. [emphasis added]

You're comparing across tax systems. You can restate your argument if you like, but what you've argued is documented above. Your argument is flawed, wrong, or nonesense. You can pick your term, but either you're trying to pretended you said something you didn't or you don't understand your argument.

The problem with your argument is that you're comparing PRE-TAX money with POST-TAX purchasing power.

Your argument, as cited, is basically that _price_, in post-tax dollars, would be lower under the current system than it would be in pre-tax dollars under the FT.

If you buy a used widget now for $1700, you must still earn more than $2k to get that $1700. You've stated that since "Families ... shopping at garage sales will find higher prices than under the current sytsem" as if this indicates some new burden that wasn't there before and that's BS.

- MikeB

Mac, My point on th... (Below threshold)

Mac,
My point on the TV example is that a $2000 TV won't cost $2800 when the FairTax is enacted. I personally think costs will rise (although Boortz glosses over it in the book), but not by the full 23% of the FairTax.

Let's assume (keeping numbers rough) that the embedded taxes component of the TV is 20%. That means that due to competition, what you call the real non-tax price of that TV is really $1600, and $400 is eaten across the supply chain in taxes withheld from the employees. Now, you add the 23% FairTax (multiplying by 1.3), and you have a TV that costs $2080. As I said, most employees will fight to have their withheld taxes given to them (at least partly), so the true pre-FT cost won't drop to $1600, it will drop to maybe $1750. Which means a slightly higher cost, maybe $2200. *NOT* $2800 as you suggest.

And that's just the immediate answer. Over 5-10 years, the economy will reach an equilibrium where those embedded taxes will drop out of the cost of goods, as peoples' wages reflect the true elimination of embedded taxes.

Remember that the FairTax is not added to other taxes, it replaces other taxes. In a perfect world, the price of products won't change *AT ALL*, because the embedded taxes will all disappear immediately, being replaced by the FairTax. The transition not being entirely smooth, the price of goods will rise some, but not 30-40% by any means.

Mac,Regarding Chin... (Below threshold)

Mac,

Regarding China, there's never going to be a point where some American industries will be competitive. America will never again control the textile industry, for example, because our people *WILL NOT* work for the wages necessary. What will happen, though, is that we will become much more competitive than we are today. And with many businesses in high-tax areas like Europe fleeing there for here, as Boortz says, the US will become the world's largest tax haven, all the while continuing to have the stability and rule of law that other tax haven nations won't have.

Let's look outside the prices debate for a second. What will the FairTax do to our economy? All of sudden, products we export will have no embedded tax component. Essentially the export price will drop 20-25% (depending on the industry), making our products competitive in foreign markets they're not competitive now. And since the US will impose the FairTax on imported products, other countries with high income taxes will find their products less marketable in the US. Right now, they are using things such as a VAT to allow their exports to compete more efficiently, we'll take that idea and crank it up a notch.

Does that mean we'll be able to manufacture things as cheaply as China? No. Wages are too high here. When you discuss goods that require much unskilled manual labor, you go to places where unskilled manual labor is cheap. But there are a lot of manufacturing jobs that require skilled equipment operators, or competent product QA/inspection people, and thus the advantage of China or India is much smaller. And at the margins, those companies will stay here. It won't solve outsourcing, but it will make it much less attractive.

The FairTax is the best thing that could happen to the American economy. It would make us the most attractive country in the first world to operate a business. And with those business come jobs.

MikeB,Well Mike yo... (Below threshold)
Mac Lorry:

MikeB,

Well Mike you don't know what you are talking about. A families who makes ends meet now by shopping at garage sales doesn't pay any income tax under the current system. In fact they may be getting the Earned Income credit, which puts them in the negative tax bracket. Your example assumes the price of goods will go down because producers will pass their tax savings along to customers. Even if that's true for U.S. produced goods, it's not true for imported goods. A family who makes ends meet now by shopping at garage sales is likely to be buying clothing, 90% of which are imported, and won't be effected much, if any, by the fairtax. Under the fairtax, the price of used goods will reflect the price of the new item plus the consumption tax. The effect is that such families will be paying some portion of the fairtax in the cost of used goods. The fairtax hurts the people who are least able to pay. It might be fair, but it's not just.

Mac, Regarding your... (Below threshold)

Mac,
Regarding your last comment, those very poor people will be getting a raise in the form of the Prebate. If you assume they currently pay no income tax (although if they work, they are paying payroll taxes), they'll still be coming out ahead.

Mac,I'll try to ta... (Below threshold)

Mac,

I'll try to take on some of your questions about the FAQ (comment yesterday 10:34 AM):

#16 - Retirement Savings: If these are a 401K, they were already done with pre-tax money. If they were saved from post-tax money, the holder will not have to pay any income tax or capital gains tax from the gains they've made on those savings. It may not be what you'd consider to be the fairest system, but assuming the embedded taxes, it's hard to say most of them would be worse off.

#21 - Home Mortgage: You will be charged the FairTax on new homes. Subsequent buyers will be charged *NO* tax on homes, as it is now a used item. They're not charged tax on the increased value or the full value. The home mortgage deduction goes away, but remember, the taxes you're deducting those costs against doesn't even exist. Again, as I've said before, the transition may be rough. But since you're not paying the FairTax on an existing mortgage, it seems like it doesn't change the calculus too much.

#22 - Churches: See this link. It should answer the questions. As to whether a church could purchase something tax-free and then resell a week later as used, a business could do the same thing. It will come down to the enforcement agency to look out for patterns of this nature.

#25 - State Taxes: Yes, it is thought that most states would consider switching their tax systems, as they would either have to create their own reporting requirements (instead of piggybacking on the feds), or would have to do away with it altogether. However, your 40% number only applies to the currently tax-addled states such as CA, IL, MA, etc. If a state currently has a high income tax and high sales tax (like CA), it could mean they need to create a 10%+ state FairTax rate. But let's face it. People in those states are already paying for their bloated, inefficient state governments. CA already has a 7%+ state sales tax. People and jobs will still be fleeing CA and MA for more tax-friendly shores, no matter how they try to fund their enormous tax burdens. Low-tax states (such as the states who currently *ONLY* have a sales tax) won't be affected that much, and the FairTax rate they would have to institute wouldn't be excessively high, as their current rates aren't excessively high.

To your last point, about getting rid of the IRS, you're right. But we won't have any government agency with the ability to step in and investigate our incomes at will. The regulatory agency that will take its place will be more focused on retailers and businesses, who in most states already have to comply with sales tax collection anyway. It can easily be argued that whatever replaces the IRS won't be the monster that the IRS has become, and that the simpler tax code will be much easier to enforce than the behemoth we currently have.

Brad Warbiany,I ap... (Below threshold)
Mac Lorry:

Brad Warbiany,

I appreciate your thoughtful responses. As for the TV example, you would do better picking a different item as all TVs sold in the U.S. are imported. I have the last Zenith model made in the U.S. and it's getting old. The point is that the fairtax won't reduce the price of items like TVs because there's no signigicant U.S. tax burden in such products. With no U.S. TVs available, there's no market pressure from cheaper U.S. goods to drive the price down. It seems like most of the manufactured goods you find in department stores are imported, so I'm skeptical that such prices will drop much under the fairtax system.

I agree with much of what you said about China. China is a special case, but it's an important case as the U.S. ran up over an additional 200 billion dollar trade deficit with China just in the last year. The Chinese use that money to purchase U.S. treasury bonds, so in effect they are buying America itself.

Right now, they are using things such as a VAT to allow their exports to compete more efficiently, we'll take that idea and crank it up a notch.

The only problem is that the VAT is the only tax allowed under international trade treaties. We could implement a VAT ourselves, but applying the full Fairtax (which is not a VAT) to imported goods will likely be opposed by European trading partners under existing treaties. You are likely aware that treaties have the same legal weight as the Constitution itself, so no enacted federal law can supercede them. It would be a good idea to renegotiate the treaties anyway, but we can't just impose whatever changes we like.

My main concerns about the Fairtax are that it won't eliminate or even reduce the investigative and enforcement functions of the IRS, nor the record keeping required by those functions. The fairtax won't substantially reduce the price of imported goods, which make up a substantial part of what most people buy. The fairtax removes the government's ability to promote good ideas, such as home ownership, energy savings, and investment in R&D. The fairtax unjustly double taxes money people have in current savings, money they have already paid the full tax on. The fairtax also places the burden of special taxes on the general public, such as the extra tax people who smoke pay, and the gas tax for those who drive. All these user fees would be rolled up into one consumption tax under the fairtax. The elderly would be taxed at the same rate as working people. As it is now, when you stop working you stop paying most income tax and all payroll tax, but under the fairtax, there's no reduction in tax burden when you retire. Proponents claim that the reduction in the cost of goods and services will offset this, but as I have pointed out, imported goods won't experiences much reduction. I'm skeptical of many of the claims being floated by proponents.

Brad Warbiany,<blockq... (Below threshold)
Mac Lorry:

Brad Warbiany,

Regarding your last comment, those very poor people will be getting a raise in the form of the Prebate. If you assume they currently pay no income tax (although if they work, they are paying payroll taxes), they'll still be coming out ahead.

The prebate will be consumed paying the consumption tax on items that can't be purchased used such as food, utilities, gas, and insurance. While people who work pay 7.65% FICA tax, they also receive the Earned income credit, which can be a lot if they have kids. The earned income credit for a family of 4 making $28,000 is about $4,000. With the standard deduction and four exemptions they pay nothing in and get $4,000 back. That's a tax rate of -14.2%, and most states also give such families a negative tax rate. This is the redistribution of wealth people talk about, but it goes to working people, so I feel it's much better than standard welfare. The Fairtax removes the ability of government to target social problems and favor positive factors in our society such as work, home ownership and energy savings.

The underlying premise in a... (Below threshold)
Mac Lorry:

The underlying premise in a lot of examples given above is that goods will become significantly cheaper under the Fairtax then they are now, but I'm skeptical for several reasons. Much of that skepticism comes from my own experience running a subchapter S corporation. In FAQ 33 on the site Jay Tea linked to it states that "Businesses need answer only one question to determine the tax due: 'How much was sold to consumers?'" Apparently that means that a wholesale business pays no taxes, but what about business purchases? FAQ 33 also says "The roughly 90-percent reduction in filers enables tax administrators more narrowly and effectively to address noncompliance and increases the likelihood of tax evasion discovery" The first bullet on the home page exclaims that the Fairtax "Abolishes the IRS", so unless that's just smoke and mirrors the statements from FAQ 33 must be referring to the type of administration typical of sales and use taxes. Currently, businesses are exempt from such taxes only for purchases of goods and services directly related to the "cost of goods sold." That term has a specific meaning and it excludes most other business expenses I'll use in the following example.

Subchapter S corporations are restricted to non-public tightly held (few shareholders) corporations. There's no size (income) restriction, but often these are small to medium size business, you know that ones that employee most Americans, so anyone saying this is not an important part of our economy is full of it.

Subchapter S corporations pay NO income tax at all under the current tax system. I pay a bit less than 9% of my gross payroll in federal taxes (FICA and FUTA), and payroll is less than a third of my expenses. I'm not talking about the cost of goods sold, but expenses. I have to light and heat my building and pay for water, sewer and garbage collection. I get to use pre-tax dollars to pay for all of these, but under the Fairtax it seems I would be paying the 22% consumption tax on such expenses. I also pay a lot for advertisement, insurance, office supplies, equipment and employee training materials. All these would require I pay the 22% consumption tax under the Fairtax. I also get to expense anything relate to the business under section 179 including speculative R&D costs (I get to decide where to spend these dollars). The only limit is that the deductions are restricted to profits and a cap ($105,000 in 2005). I would have to pay the 22% consumption tax under the Fairtax for these purchases. I also get to depreciate other property, like the cost of the building itself over 39 years. On a million dollar property, that's over $25,000 per year. Under the Fairtax, it looks like I would have to pay the %22 tax on the price of the building, but even if that's not the case, I certainly wouldn't get to deduct $25,000 per year. All of these deductions, including wages, cost of goods sold and payroll taxes, get subtracted from the gross income. What's left is the net income, which is divided between the shareholders who than pay the income tax as individuals.

A few quick calculations and I discovered that the profits paid to shareholders would be almost 25% less under the Fairtax than under the current system. Yes, the shareholders wouldn't have to pay income tax on that profit under the Fairtax, but they will have to pay the %22 tax one everything they consume. Given typical shareholder gross income is over $75,000 the Fairtax rebate reduces the effective rate to a bit over 19% for a single person. The result is that these individuals pay an effective rate of 39% under the Fairtax rather than the 28 to 33% they pay under the current system. To keep the shareholder's real income the same, I'll have to raise the price of our products. Having grown up as a farm kid, I can tell you the family farm gets lots of tax breaks that will likely go away under the Fairtax, so agricultural products are also likely to increase under the Fairtax.

In summary, the price of imported goods won't go down substantially under the Fairtax, and the price of small business and agricultural products are likely to increase. The Fairtax is pie in the sky being promoted by a few wealthy people who will benefit greatly by transferring their tax burden to those less able to pay it. There's nothing fair about the Fairtax.

MacLorry:<blockquote... (Below threshold)
MikeB:

MacLorry:


Well Mike you don't know what you are talking about.

Says the man who arguments conflict his own prior statements....

Your example assumes the price of goods will go down because producers will pass their tax savings along to customers

Actually, the argument I presented didn't rely upon any such presumption. The argument I presented to counter your generalization was that the price of goods does not go up, because you were confusing pre- and post-tax dollars.

It might be fair, but it's not just.

Really ? By what standard of justice are you making this pronuciation ?

- MikeB

Just a note.Since th... (Below threshold)
Ashford Schwall:

Just a note.
Since the post by Jay Tea Apr 17, 06, the FarTax Act H.R. 25 has gained momentum. There are now 67 co-sponsors and 6 presidential candidates for it. Top economists agree it is the best way to un-tax the poor and grow the economy.
I love Jay's comment: "There are two great forces in American society, and in the case of the Fair Tax, they are united in opposing it. Those are enlightened self-interest and inertia. Or, to put it another way, selfishness and greed."

It has been my experience that those against the FairTax have their pockets lined by the income tax; career politicians, lobbyists, tax lawyers, tax accountants, the non working rich, IRS agents, and illegal aliens.

Just ask:

• WHY DO WE PENALIZE LABOR AND PRODUCTION WITH THE INCOME TAX?
• WHY DO WE PENALIZE WORKING AMERICANS FOR WORKING?
• WHY DO WE PENALIZE WORKING AMERICANS BY TAXING OVERTIME?
• WHY DO WE PENALIZE WORKING AMERICANS BY TAXING SAVINGS?
• WHY DO WE PENALIZE WORKING AMERICANS BY TAXING INVESTMENTS?
• WHY DO WE PENALIZE WORKING AMERICANS FOR BUILDING WEALTH?
• WHY DO WE PENALIZE WORKING AMERICANS BY PASSING ON BIZ TAXES AND COMPLIANCE COSTS EMBEDED IN THE PRICE OF A PRODUCT?
• WHY CAN'T WE SET WORKING AMERICANS FREE BY PASSING THE FAIR TAX ACT?
www.fairtax.org support H.R. 25
Ashford Schwall [email protected]




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