The Fair Tax game begins.

    This is an FYI post.

    Guess what book is the second bestseller at Amazon.com:  Neal Boortz and John Linder's The Fair Tax, beaten only by the latest Harry Potter.

    Kind of scary, isn't it.

    Also today Boortz launched his book tour on Hannity and Colmes.  Here's the tour schedule.

    Looks like a full court press has begun.   I've been seeing local letters to the editor both for and against for several weeks now so the conversation is heating up.  I'm going to work on finishing mine now.

    Later...


    Comments

    I gotta say, much as I loathe consumption taxes and flat taxes, as much as I believe that the progressive income tax is the right way to go (and that we're currently too flat, too tough on the middle class and too easy on the rich... I'm about to pay an accountant $700.  Had to file an extension because I didn't have the money for his fee in April.  I do think that's a problem.  And, sure, I could file more cheaply on line, but... The results between my doing my taxes with a simple thing like TurboTax an him doing them are... wildly different.  And, nobody's cheating.  It's all about his superior knowledge.  I really shouldn't need to hire a specialist just to file my taxes.  So, something's gotta be done.


    I agree the current system way too complicated and not really fair either but I don't like the one Linder is proposing.  It really rewards wealth over work.  It is an administrative nightmare waiting to happen.  And, it would be too easy for unscrupulous business people to game the system. 

    There are other options.  I want to know more about a transaction tax. 

    Here's a link to several Congressional Research Service reports for more information on different ideas.

    ...


    I think the best way to respond to this book and concept is to act as though the "fair tax" is one where the wealthy pay more.  In a "fair tax" system, shouldn't the highest earners pay a greater share of their income back to America in exchange for belonging a system that allows them such prosperity?  Including "unearned" income from investments?  


    And then if someone describes the "fair tax" as the consumption tax advocated in the book, ask, "what's fair about that?"  That folks who spend every dime they earn on food, clothing and shelter for their family pay 23% of their hard-earned pay, and people who make so much money they can't possibly spend it all don't bear nearly as great a tax burden? And if you have income simply by virtue of owning investments that you didn't work a lick to improve, and you roll that income back into more investments, you pay no tax at all?  


    What's fair about that?  


    Thank you, Emma!


    That folks who spend every dime they earn on food, clothing and shelter for their family pay 23% of their hard-earned pay, and people who make so much money they can't possibly spend it all don't bear nearly as great a tax burden? And if you have income simply by virtue of owning investments that you didn't work a lick to improve, and you roll that income back into more investments, you pay no tax at all? 

    I'm not familiar with this particular proposal, but based on the brief Amazon blurb, it appears to be a flat-rate "national consumption tax" repackaged as a "fair tax."  If so, to be fair (no pun intended), everyone shares the exact same 23% burden, rich or poor.  Sure, some people will have "unearned income" in the form of capital investments, but unless they just like leaving the money on paper and applauding their clever investment decisions, they will eventually spend that money on golf clubs and yachts; and when they do, they'll pay a 23% tax the same as everyone else.

    Unless you regard money as somehow intrinsically valuable (rather than as a means to the end of consumer purchases), then everyone bears the exact same 23% tax burden on the money they actual derive use from.


    Unless you regard money as somehow intrinsically valuable (rather than as a means to the end of consumer purchases), then everyone bears the exact same 23% tax burden on the money they actual derive use from.

    And, of course, the people at the lowest end of the income scale suffer disproportionately, for a wide variety of reasons -- not least, the fact that those with lower-incomes often have to pay higher out-of-pocket costs for essentials. (Barbara Ehrenreich's 'Nickel and Dimed' covers this in some detail.)

    The 'fair tax' is a soak-the-poor tax with pretty makeup.


    And, of course, the people at the lowest end of the income scale suffer disproportionately, for a wide variety of reasons -- not least, the fact that those with lower-incomes often have to pay higher out-of-pocket costs for essentials. (Barbara Ehrenreich's 'Nickel and Dimed' covers this in some detail.) The 'fair tax' is a soak-the-poor tax with pretty makeup.

    Could you provide a brief summary of the points supporting your assertions?  I assume they are all in "Nickel and Dimed," but it would be very helpful if you could give me a brief overview so I didn't have to purchase and read a book just to follow your argument.

    On the flip-side though, I think under the current tax system, there are many ways for the rich to avoid paying their share of taxes unavailable to the poor—especially through highly paid tax accountants and attorneys.  If this new system levelled the playing field on that front, it might result in a more equitable situation overall.

    Further, if the government actually starts collecting 100% of the taxes it should be collecting and eliminates the huge bureaucratic cost of running the IRS, it might lead to an across-the-board tax reduction.  It might still be argued that the burden falls too heavily on the poor, but if their overall burden under the more efficient system is less than under the old, less efficient system, wouldn't this still be a gain for working-class families?

    I don't have the numbers to support this, so perhaps it is a completely incorrect line of thought.  However, you can expect Republicans to use it to bolster political support for the Fair Tax movement, so opponents should be prepared to respond to such assertions.


    This begins to explain why the Republicans are so against everything French. 
     
    Several hundred years ago the French came up with a permanent solution to Greed in the Rich.  This solution was invented by Mr. Guillotine and solved much of the inequity of that period.  It was in fact the only permanent cure they could find, as other solutions seemed to dissipate once the pressure to be fair was gone. 
     
    The Republicans must fear that if we continue to consort with the evil French, sooner or later this technology might be rediscovered.


    I'll throw some way too prosaic examples out there, and, admittedly, you'll have to trust me that things slike this add up, but:

    Paper towels:  One roll for 99 cents, 3 for $2.50.  If you can buy three rolls right now, you get 50% off the third roll.  If you only have money for one roll, you don't get that discount.

    Credit:  The less you need the credit, the less of a risk you are to the lender.  Say you keep a credit card "for emergencies."  Say you're honest about that, you really don't buy dinner out on the thing, you really don't even use it.  A poor person can expect, of course, to pay a higher interest rate on carried balances.  But, also... they can expect to pay a $6 a month "membership fee" or some such nonsense.

    Services you don't think about:  Say you're well off, you bought a new car recently, and it breaks.  It's got a warranty.  You take it the dealer.  The apologize profusely.  They fix the thing.  While they're fixing it, they get you a rental car.  You're a AAA member and AAA gave you a free tow to the garage.  You're inconvenienced, but not out much but time.  Same thing happens to a poorer person:   You drive a used car, no warranty.  Nobody comps you a rental car.  There's no spare car at home for you to use.  You just shelled out for a tow.  Maybe, you'll pay extra for a rush job on your car, you need it to get to work.  Oh, did I mention it's a used car?  The mechanic says he hasn't seen one like this in awhile.  And that means he needs to order parts....


    Destor23,

    I appreciate your thoughtful post; it certainly addresses how the poor can face increased costs-of-living solely by being poor.  On the other hand, while I admit this places a financial burden on them, I'm not sure how much a change in the tax system from an income tax to a consumption tax actually worsens the situation.

    If we assume our one-roll-of-paper-towel-guy spends 100% of his yearly income on consumption goods, then it doesn't really matter whether x% is taken out of his paycheck at the beginning or x% is added to the cost of his goods throughout the year.  He bears the same dollar amount tax burden either way.  In fact, the people promoting the fair tax system claim that the costs of goods wouldn't increase at all; I'm skeptical on that point, but if they turn out to be right (or even partially right), then that would amount to a net tax burden reduction for our man.

    Further, if our hypothetical person doesn't spend 100% of his yearly income, he comes out even further ahead.  Say he saves 10%; under the old system he paid x% tax on 100% of his income regardless of how it was used.  Under the new system he pays x% tax only on the 90% of his income he spends and 0% tax on the other 10% of his income that he saves in an interest-earning account.  This reduces his overall tax burden and provides both an incentive and means to save.

    Your example of the car raises another important point—the purchase of used goods is untaxed under the fair tax sheme.  The poor (I would reasonably assume) purchase more used goods than the rich.  Under the fair tax scheme, all of the money that a poor person uses to purchase a used vehicle is essentially received tax-free.  On the other hand, the rich person pays a hefty 23% tax to buy his new Mercedes.

    I don't disagree with you that the poor face increased costs for basic living expenses through some of the various mechanisms you described.  But to the extent that they do face those costs a) I don't see that the method of taxation worsens the situation and b) there seems to be some cases in which it actually improves it.

    I think too much of the debate is going to focus on comparative tax burden between the rich and the poor, rather than (I think) the realistic result that however the relative burdens compare, the poor will probably face a lower amount of money "wasted" on taxes under the new system than the old one.  That is not even taking into account indirect benefits that might help the poor such as eliminating the huge cost of the IRS, removing the need to pay tax specialists, incentivizing business growth (which would be especially affected in low-skill areas that primarily employ the lower-class), etc.


    One more point to note on the poor vs rich equity issues with a Consumption Tax; all the proposals with which I am familiar include an exemption or rebate of the tax on the first $20,000 (or so) of spending.  That reduces the relative burden on the poor and working class quite substantially.


    Quickly now, which economic group do the people serving in the armed force in Iraq come from?  Before I go on to something else, what kind of compensation do they receive from the good ol' USA if their small businesses go bankrupt because of this?  You just know I could go on and on with how we treat soldiers, their families and vets.

    Now so far, what I've seen in this thread in favor of this "fair" tax assumes that it is fair that this economic group also pay the same tax as those people who actually profit from the war, but steadfastly refuse to contribute materially.  One example.

    A second:  the FAA, federal support for airlines and airports, the whole industry is very much tax supported.  The actual workers are seeing their pensions disappear rather than an incompetantly run company going bankrupt to fund those pensions, which in turn will be backed up by you know who.  Now how many times have you sat in you assigned seat, looked across to the other side to see a welfare mother with two kids going "somewhere"?
    A third:  come on  people, you can think them up.  It's not that hard.

    People ought to pay for what they receive.  It's an old conservative principle.  And the only way to achieve that is with a graduated tax on INCOME. 

    wprothwell:  I'd buy your argument about how it needs to be spent at some point if you're willing to support an inheritance tax.  You see, I am interested in what this money is spent on after it has been accumulating.  Money is power, and the imperfect government we see with the likes of DeLay and others makes me think that having a bigger voice simply because you have more money has been counterproductive.  This is simply another example of where the less well off are not getting their 23.1778% share.

    dc


    Democrats need to answer this crap with the best arguments available, but unfortunately, most of them are ignorant of the arguments that defend the Progressive Income Tax as the ideal method of taxation.

    They will find those arguments in The Progressive Income Tax: Theoretical Foundations at www.taxwisdom.org

    Democrats have some great opportunities available to them but they don't even know it...


    The Republicans must fear that if we continue to consort with the evil French, sooner or later this technology might be rediscovered.

    Paraphrasing the Queen of the Right, Ann Coulter: The rich have to learn that they can be killed too.


    On the face of it, a transactional tax (or whatever you want to call it) sounds fair... everybody pays the same whenever they spend.

    But for many reason, the burden decreases substantially as wealth increases. I know that for many of you the below example is obvious and basic, but it is not to everyone, so somebody need explain!

    Lets just assume the flat transactional rate is 25%

    if one is living pay check to pay check making $20K, that person spends every dollar they have twice a month. So without a doubt that person loses 25% of the money they work for every year. $20K becomes $15K

    Say someone else makes $200K a year but only spends half of it (they are rich, and can afford to invest/save half their income). So that $100K gets taxed at 25% but the other $100K gets taxed at 0%. This means the person loses 12.5% of the money they work for every year. $200K becomes $175K.

    The tax is not flat at all assume some people SAVE ANY of it.

    That is only part of the story. Someone mentioned that people will spend their saved money one way or another eventually, so "unless money is intrinsically valuable" at will all be even in the end.

    Not only is money intrinsically valuable to many, but money begets more money. That rich person who invested/saved that $100K is most likely earning interest on it, thus increasing their wealth.

    This form of taxation would be the ultimate gift to the truly wealthy. What percent of his income do you think Bill Gates spends per year. If it is 1%, than under a transactional tax he could end up losing just a quarter of a percent to taxes


    Left out of the above comments are the inevitable steps people will employ to avoid the new tax. I refer specifically to bartering. Services and labor will certainly be traded. I am buying a house to rehab and sell and plan on installing a new bathroom. My contractor needs my services in a different matter. In a "fair tax" system 23% may get paid on all the materials involved but you can bet we'd trade each other's labor heads up, no charges either way. As to that bathroom, will my contractor have to pay 23% on everything he buys to build it? Then he resells it to me within the billing for the work and I pay ANOTHER 23%? Then I resell the home shortly thereafter and charge the buyer ANOTHER 23% on the entire home, therefore collecting 23& a third time on the materials in that bathroom?


    I did a quick excel worksheet to compare the income tax with the consumption tax. I won't bore you with all the calculations, but here's the bottom line.


    Assumptions


    Tax rate: 30% (under both tax systems)

    Taxed income: $100 per year for 10 years

    Taxpayer 1 (poor): Spends entire $100 each year to meet living expenses.

    Taxpayer 2 (wealthy): Invests $100 each year and spends it all at the end of 10 years on new yacht.


    Results


    Taxpayer 1 with both consumption and income tax: Pays $30 in taxes each year and has $70 left over to spend. Government gets $30 per year in cash flow. [Essentially, there's no difference between an income and consumption tax for someone who spends all their money.]


    Taxpayer 2 with income tax: Has $978 to spend at end of 10 year period, after having paid a total of $419 to the government. Government had cash flow of between $32 and $53 per year over the 10 year period.


    Taxpayer 2 with consumption tax: Has $1,095 to spend at end of 10 year period after paying $469 to government. Government cash flow was $0 for first 9 years and $469 at end of 10th year.


    What do we learn?


    For someone who spends all their income, consumption and income taxes are the same.


    For someone who can save, consumption taxes are better (i.e., the wealthy do well under a consumption tax). But for the government, consumption taxes potentially reduce cash flow (though resulting in a larger tax collection at the end of the period). A key issue therefore is how does the government adjust to the potential loss in cash flow? Would the government end up raising taxes to restore cash flow? If this is the case, the consumption tax would be a disaster.

     


    Since someone mentioned the French revolution and Madame Guillotine, it worth noting that highly regressive taxation was one of the proximate causes of that event often noted by historians.
     
    Over the few previous centuries, the French aristocracy had managed to cull privileges which exempted it from almost all taxation.  The clergy was also exempt.  So the only way for the crown to finance its wars and palaces was to squeeze the urban working and middle classes with high taxes.  This contributed mightily to the eventual buildup of resentment against the ruling classes.  

     


    One clarification to my earlier post. I, of course, made the assumption that the wealthy taxpayer would spend all the money. Proponents of a consumption tax generally make this assumption--arguing that while the wealthy may defer taxes by saving, they eventually will have to pay up when they spend the money.


    However, very wealthy people may invest huge sums and live off the interest, never touching the principal. If they live frugally (and many wealthy people do), they will pay low taxes under a consumption tax. Is this really fair given that they are sitting on huge sums of money? Shouldn't our tax system be able to tap this wealth at least occasionally (either when the money is earned or when it is passed on to heirs)?


    Oh, and I used an 8% interest rate assumption for those who want to check my numbers


    Well, you make a god point too and, as I posted elsewhere, I am sympathetic to the simplifcation argument.  I guess, to me, a consumption tax rewards saving money.  Anything you put in a bank account and don't touch is a "tax deferred."  The mroe disposable income you have, the more you can save and not pay taxes on.

    It's true that, absent any exemption for the first chunk of income, if 2 people spend $20,000 a year, they pay the same tax under this scheme.  BUt, if all you make is $20,000, I don't see how you get ahead under a consumption tax.

    I gather what you're saying is, "But, Destor23, I don't see how the $20,000 a year wage earner gets ahead under the current scenario, either."  I'd have to admit that you're right.  But, remember, our current system, which is somewhat progressive but not so much and offers huge incentives to hire a good accountant is a little messed up.  No fair if I have to defend the current system in order to criticize a consumption tax!

    The tough issue for the working class, under this system, is that it really encourages you to buy higher quality, longer lasting goods, pay out a little more now to avoid getting cut a thousand times replcing substandard goods throughout the year.  I do see your point -- that problem exists now, too.  This just brings the problem into the realm of tax planning. 


    Sad to say but not so surprising, but the Democrats are not prepared for this 'Fair Tax' onslaught.  To anyone with wingnut friends its been obviously in the works for the past couple of years.  I was talking to one of my GOP friends the other day about the trade deficit, and his answer was 'flat tax'.  This is going to be the big issue for the GOP in 2006.  I guarantee it.

    Here are some proposals for talking points:

     1)  So they're going to eliminate the mortgage interest deduction and at the same time raise the price of a new house 23%?  Say goodbye to your equity!  The housing market is driving the economy and the GOP wants to kill it.

     2)  So the rich will pay less and the poor will pay less, they say, but there's no plan to reduce government spending.  It's simple math then that this is just a tax increase on the middle class.

    3)  Are business to business sales taxed?   If they are then that will be the end to small suppliers.  It will lead to complete vertical integration of the economy.   And if business to business sales are not to be taxed, then a huge amount of personal use property is going to be redicated for 'business purposes.'  I guarantee it.  No small business person will ever actually own their own car again.  People who don't own businesses will have to pay more tax to make up the difference. 

     4)  The big losers are going to be the middle class elderly.  They've been paying income taxes their whole life, and just when they get to the reduced income taxes of retirement, the Republicans pull the rug out from under them and change the tax code to sock it to them again.


    Here's the issue as I see it. A consumption tax creates an incentive to save. This is generally good, but what happens when the wealthy actually start saving more? Tax receipts drop (at least temporarily). So how does the government meet it's obligations? Either it borrows more (god forbid) or it raises taxes. And who pays the raised taxes under a consumption tax? People who are spending--i.e., the people living paycheck to paycheck. For all the theoretical reasons a consumption tax might be good, I think in practice it will simply result in the tax burden being transfered to the poor.


    "A key issue therefore is how does the government adjust to the potential loss in cash flow?"


    Since the economy has already reached a  "steady state" condition, there is already an existing cash flow from savings to consumption that would be taxed in place of the lost tax revenue from current savers.  So, the startup cash flow loss shown by you spreadsheet would not exist.


    The technical term for this is "screwing people with current savings".


    How is the rebate or exemption handled?  Do you still have to file a return?

    And who or what agency will actually collect the consumption taxes?


    "However, very wealthy people may invest huge sums and live off the interest, never touching the principal. If they live frugally (and many wealthy people do), they will pay low taxes under a consumption tax. Is this really fair given that they are sitting on huge sums of money?"


    One can easily make the case that those who save and invest their income and live frugally are doing a service for the rest of us by making the fruits of their labor available for additional production rather than a more extravagant life style.  


    So, the debate isn't one of "fairness", but rather a question of how much of the economies capital investment the government should take to spend on public goods.


    And how do you have an EITC under a consumption tax regime? The EITC is a major component of our current anti-poverty efforts, meager as they are. It’s also the one anti-poverty program that is popular across the partisan spectrum (it harks back to a proposal from none other than Milton Friedman) and is rarely criticized save only by the most hardened far right ideologues. Get rid of the EITC and poverty rates will explode.


    Since the economy has already reached a  "steady state" condition, there is already an existing cash flow from savings to consumption that would be taxed in place of the lost tax revenue from current savers.  


    I don't think this is really true, Robert, for two reasons:

    1. I assume that money that has already been taxed when earned (under the income tax system) would be exempted from a consumption tax when spent (unless we want to tax it twice). So at transition, "old" money coming out of savings wouldn't be taxed and neither would "new" money going into investment.

    2. If a consumption tax really does what its proponents say it will do--provide an incentive for Americans to increase savings--then savings will increase and (at least temporarily) more money will be sheltered from immediate taxation.

    One of the very clever things the Republicans have done was equating a progressive tax with a confusing tax.  The tax code is so complicated because of the difficulty in defining income and then the various cut offs and limitations for deductions.  These these could be taken out of the tax code making it simpler rates lowered but there still being different rates at different income levels.


    One of the things Bush has done that does not get nearly enough attention was to shift the tax burden from people who get interest and dividends to people who earn a living.  If he succeeds with his social security destruction plan and eliminating the estate tax the ability of the already wealthy to amass wealth generation after generation will be scary for our democracy.  There is a reason why Steve Forbes an inheritor of great wealth is so supportive of all these tax changes.


    Hyping a book on Amazon's lists is relatively easy and inexpensive, as this book marketer demonstrates.  I don't question there are wackos out there buying the book--but I wouldn't put it past Boortz to be buying the books himself on-line and stashing them in a trailer for give-aways.


    The New York Times list, while not perfect, at least discloses reports of bulk sales when made by booksellers.  Boortz isn't even on the current list's top 35.


    Emma,

    Not having read this specific book, I can't say with certainty how it is handling the rebate/exemption issue.  The most common proposal is to set some "base rate" of spending, which has usually been based on the poverty level, and to send everyone a rebate of (base spending)*(tax rate).  Thus, if you spend less than the base rate, you get a rebate larger than the taxes you actually paid.  Since the rebate is the same for everyone, it is very simple to administer, and the effects are highly progressive.


    This is Orwellian language at its finest.  "Flat tax" didn't fly, so they call it "fair tax" to disguise the fact that it is anything but fair.  


    Agreed.
    And will the tax be applied when it is spent on influencing the government through donations (legal, shady or illegal) to candidates in order to pesuade them that your share ought to be a little less?  Gets a little sticky here.

    dc


    "And how do you have an EITC under a consumption tax regime?"


    I suspect workers and employers  would still be required to report income to some government agency to determine eligibility for any number of income based benefits.  EITC could easily be transferred to some other agency than the IRS.


    Right on! 

    The movement from taxing income to just wages is insidious.  Here's a war cry:

    Income taxes not just wage taxes. 

    Nearly all the excuses to not tax total income comparably to wage income are specious.  Lowered taxes have yet to show real increases in the economy.  Even the present alleged increase in GDP is not correlated with the tax cuts.  It is merely the token recovery toward a long term trend.

    The recovery, if it exists, is slower than historical recoveries and has yet to involve anyone but the wealthy. 


    The first lie with the so-called "fair" tax is that the tax rate is 23% - it is actually 30%.


    Sales taxes are always specified as an exclusive rate added on to the purchase price while the so-called "fair" tax rate is an inclusive rate contained in the purchase price.  An item costing $100 before tax would cost $129.87 with a 23% "fair" tax.  This corresponds to a 29.87% tax rate to which must be added any applicable state and local sales taxes.  In some states consumers could be facing sales taxes approaching 40%.


    In opposing the so-called "fair" tax we should NEVER use the phony 23% rate and ALWAYS use the actual rate of 30%.


    "1)  So they're going to eliminate the mortgage interest deduction and at the same time raise the price of a new house 23%?  Say goodbye to your equity!  The housing market is driving the economy and the GOP wants to kill it."

    If you want to debate the Fair Tax you need to understand how it works.  The price of a new house will not be raised 23%.  Once all other federal taxes are removed the cost of constructing a new home will drop by around 23%.  Add back in the FairTax of 23% and it is pretty much a wash.  The price will stay the same.

    This is the same for all new goods and services.  Consumers already pay the taxes that corporations pay on their goods and services.  The FairTax removes those.

    "2)  So the rich will pay less and the poor will pay less, they say, but there's no plan to reduce government spending.  It's simple math then that this is just a tax increase on the middle class."

    The FairTax is supposed to be revenue neutral.  The aim is not to increase or decrease federal spending but to rework how taxes are paid by citizens to a simpler, less intrusive form.


    JScott74 wrote:


    The price of a new house will not be raised 23%.  Once all other federal taxes are removed the cost of constructing a new home will drop by around 23%.  Add back in the FairTax of 23% and it is pretty much a wash.  The price will stay the same.


    Your first error is to assume that house builders will pass tax savings onto consumers in the form of reduced prices instead of pushing the savings to their own bottom line.  Your second error is using a tax rate of 23% rather than the true rate of almost 30%.  A house for sale at $100,000 will cost the purchaser $129,870.


    Curiously, old houses will not be subject to the so-called "fair" tax.


    2)  So the rich will pay less and the poor will pay less, they say, but there's no plan to reduce government spending.  It's simple math then that this is just a tax increase on the middle class.

    This is not entirely accurate.  There is a substantial reduction in government spending because the government doesn't have to pay for the IRS.  There is also, supposedly, a substantial increase in tax revenues because all of the loopholes that allow the rich to avoid paying taxes are closed.


    It's true that, absent any exemption for the first chunk of income, if 2 people spend $20,000 a year, they pay the same tax under this scheme.  BUt, if all you make is $20,000, I don't see how you get ahead under a consumption tax.

    I gather what you're saying is, "But, Destor23, I don't see how the $20,000 a year wage earner gets ahead under the current scenario, either."  I'd have to admit that you're right.  But, remember, our current system, which is somewhat progressive but not so much and offers huge incentives to hire a good accountant is a little messed up.  No fair if I have to defend the current system in order to criticize a consumption tax!

    I'm not suggesting that you have to defend the current system; I just mentioned several ways in which the change WOULD help the poor get ahead.  First by making more funds available for saving than would be available under the old scheme.  Second by not taxing the use of funds to purchase used goods (of which the poor are disproportionately large consumers).  Third by indirect benefits such as removing the need for the poor to pay tax specialists and incentivizing businesses to come back to America (especially those that employ low-skill workers).

    So I guess what I'm saying is not that I don't think they can get ahead under either system, but in fact that they CAN get ahead a little better under the consumption system than the income system. 


    There are various different proposals for a consumption tax out there. Under most of the more likely scenarios, the IRS wouldn't go away. And it's not clear all existing loopholes would be closed either. (Remember who will be writing the legislation changing the tax code--congress not economic theorists.)


    In any event, a huge new "loophole" will be opened, since the wealthy could reduce their taxes simply by saving more and consuming less.


    I'm pretty sure the flat tax and the fair tax are  two different systems.  The flat tax is the Steve Forbes dream of having one flat 17% income tax across all income brackets.  The fair tax is the above-discussed 23% consumption tax.


    Are you actually saying that the complexity (& cost) of filing income taxes is so great, it could temper your opposition to the Republicans' push to bestow further blessings on the Rich?  That is probably the silliest thing a person could ever say.

    The "simplification" arguments the Republicans are throwing around are utterly worthless.  It is possible to make the income tax system just as simple as a sales tax by simply (A) eliminating all loopholes, and (B) let the government do all of the calculating.  Since the government is getting reports of all legally earned income anyway, just let them do all the calculations and send us a report on how much we owed, how big our refund check is, and how it was all calculated.  Witholding issues would be peripheral, just as they are now.

    Even if we don't want to do this for some reason [and even if we do] we could still dramatically simplify the tax filing process by eliminating all loopholes.  If the income tax were applied to Gross Income, period, most of the complexity of the tax code would be wiped out.  It would not be necessary for us to abandon those who have become quite accustomed to receiving special tax breaks.  They are nothing more than money gifts from the government, anyway, for people who are believed to have a legitimate need for financial assistance.  If these breaks are justified, then they are justified.  But there is no reason why Congress must give these breaks through the tax code.

    If Congress believes that certain individuals or interest groups deserve more money in order to meet their expenses, or in order to create incentives for certain kinds of behavior, it can help them directly.  If you want one of the special breaks offered by the government, you could submit an application to the Department of Human Compassion.  If you are worthy, the DHC could instruct the Treasury Department to issue you a check.  Means-testing would, of course, be involved.

    That
    is when the complexity would show up, but at least the headaches of filing would be associated with an opportunity to obtain a government grant, instead of being associated with the chore of figuring out how much money you have to give up to the government.  One would think that professional politicians would see the value of this approach.

    It is certainly possible and desirable for Congress to increase the progressivity of the current tax code (maybe a top rate of 50-60% for billionaires?) and at the same time, make the "experience" of income taxes no more complicated than hearing how much sales tax you need to pay in order to make a purchase.  Let's not give the Republicans any ground whatsoever on the issue of tax simplification.

    http://www.taxwisdom.org 

    .



    Ah!  There's those words again: "revenue neutral"   Simpler and less intrusive to whom?
    The IRS will go away?  Tell me, are religious organizations going to be exempt?  Who tracks this?  Are political donations exempt?  Who will track this?  The first $20,000 is tax free?  Who tracks all the sales as well as the income levels to establish exemptions?  What about privacy and the availablitiy to government of all this information?  Again, I can go on and on, as well as anybody could.
    Every time I hear these guys come out with some "flat"  "simpler" "consumption" tax, they always go on about how it it more fair.  They then drone on about percentages being the same for everybody and how that defines fair. I hear - "If you want to debate the Fair Tax you need to understand how it works."  How it works is amply evident by who supports it.  I want somebody to explain to me how this gets the rich, who benefit much much more under our system, to pay for the privledges they enjoy over those of the middle and lower classes.  Let's make the talk about fairness global, not just the percentages.


    I claimed that because a national consumption tax would decrease the taxes of the rich and also, supposedly, the poor.  This means it is a tax increase on the middle class.  This was your reply:

    "The FairTax is supposed to be revenue neutral.  The aim is not to increase or decrease federal spending but to rework how taxes are paid by citizens to a simpler, less intrusive form."

     You have taken one of the preconditions of my argument, revenue neutrality, and you are pretending that this is a rebuttal, when the only possible rebuttal would be to say that the consumption tax does not mean a tax cut for the rich when, of course, it does.  Your manner of argument is typical of a political operative.  I can tell that you respect language only insofar as you can use it as a tool of manipulation. 

    That's really no way to live. 

     


    The first $20,000 is tax free?  Who tracks all the sales as well as the income levels to establish exemptions?

    The way this works is fairly simple.  Let's assume the consumption tax is 23%.  At the beginning of every year, the government sends everyone in the country a check for $4,600.  Thus, if you spend $20,000 your tax burden is 0%; the marginal tax rate on consumption over $20,000 is 23%.

    This provides a fairly easy method to make the consumption tax more progressive—raise the consumption tax rate as well as the "free level."  If you want a relatively ultra-progressive tax, double the consumption tax rate to 46% and raise the "free level" to $100,000 by mailing everyone a $46,000 check at the beginning of the year. 

    There is nothing inherently more regressive about the consumption tax, as long as you set the "free level" above the yearly income of the people you'd like to protect and then raise the tax rate to compensate for the lost revenues. The consumption tax is as regressive or progressive as the value given to the tax rate and "free level."


    In this scenario, the IRS I guess would still exist to mail out checks--and also to be sure that the 23% is actually collected at the point of sale. (I assume businesses would tack on a 23% tax every time they make a sale--is this right?) The IRS would need to exist to enforce this . . . And what happens if I make all my purchases overseas to avoid paying the tax?  Is the IRS policing imports?


    In this scenario, the IRS I guess would still exist to mail out checks--and also to be sure that the 23% is actually collected at the point of sale. (I assume businesses would tack on a 23% tax every time they make a sale--is this right?) The IRS would need to exist to enforce this . . . And what happens if I make all my purchases overseas to avoid paying the tax?  Is the IRS policing imports?

    I'm sure some agency would have to exist to make sure the 23% is actually collected, but it certainly wouldn't have to be something as big or expensive as the IRS.  Obviously most of the 50 states have a method in place for making sure that their local sales taxes are charged, so it can't be too difficult.

    I'm sure somebody would police imports just as they are already policed now.  I'm not sure exactly how it works in America, because I haven't imported anything, but when I lived in England and imported a Dreamcast videogame system, I had to pay customs duties to account for the VAT I avoided by ordering from the US.

    So I agree that some level of infrastructure would be needed (though much of it is already in place), but it seems far less than the current bureaucratic monstrosity that is the IRS.  In fact, I expect that the single, biggest, concentrated point of resistance to this entire "fair tax" push will be from the tens of thousands of people employed a) by the IRS, b) by tax firms (like H&R Block), and c) tax attorneys all of whom stand to lose their jobs as a result of a change to a consumption tax.


    But wouldn't a simplified income tax (without deductions and other exceptions) accomplish about the same thing? What makes the current tax system complex isn't that it's an income tax, it's that it treats all sorts of wealth differently and has lots of exceptions and deductions.


    I guess I don't understand what's so inherently good about taxing money when it's spent rather than when it is earned. It seems to me like it comes down to a Puritan ethic about saving rather than consuming. But the economy is driven by both consumption and investment. Neither is inherently "better." It is true that middle class and poor Americans don't save as much as they should--but I don't think that's caused by the tax system (it's caused by having too little income to meet living expenses). And the rich already save and invest a lot. I'm not sure they need incentives to invest even more, particularly if that transfers more of the tax burden to those poor and middle class people who are already struggling to get by.


    What makes the current tax system complex isn't that it's an income tax, it's that it treats all sorts of wealth differently and has lots of exceptions and deductions.

    This is what makes it complex for individuals; as bad as the situation is for individuals though, it is an absolute nightmare for businesses—not only in the complexity of the taxes they pay, but also the overhead costs of employing people to ensure tax code compliance.  One component driving businesses to other countries is the cheaper price of labor, but another huge component is the burden of corporate taxes, payroll taxes, etc.  If we eliminate that component, essentially allowing businesses to operate tax-free, there is a huge economic incentive to come back to America.

    I guess I don't understand what's so inherently good about taxing money when it's spent rather than when it is earned. It seems to me like it comes down to a Puritan ethic about saving rather than consuming. But the economy is driven by both consumption and investment. Neither is inherently "better." It is true that middle class and poor Americans don't save as much as they should--but I don't think that's caused by the tax system (it's caused by having too little income to meet living expenses).

    You are right that the upper-class probably doesn't need any more incentives to save.  However, I believe that the lower- and middle-class also don't need any more incentives (I think most understand how important saving is), but they do need the ability to save.  Under the current system, there is no tax break on the income that the lower- and middle-class want to devote towards savings.  By removing the taxation on the income they would like to save, we enable them to save more.

    Further, I think the consumption tax system would also make more money available for savings; see my post below (#10) where I provide a few examples such as not taxing the money used to purchase used goods.

    To provide a solid example, imagine that a poor family wishes to purchase a used car and will use $10,000 of income to do so.  Under the income based system, all $10,000 will be taxed leaving (let's say a 20% tax rate), $8,000 left with which to buy the vehicle.  Under the consumption based system, the poor family can take $8,000 to purchase the same vehicle, pay NO taxes because it is a used good, and now has a residual $2,000 left to put into a savings account unavailable under the income-tax model.

    I'll be honest, I'm not sure how the tax burden will shift around as a result of the fair tax plan (though as I argued above in #47, it is easy to adjust the fair tax to make it more or less progressive).  However, I doubt that family that now has $2,000 to put into savings that they didn't have before will care about macro-economic theory.  On an individual, family-by-family level, I think the average lower-income individual will be better off under the fair tax plan than the income tax plan.  And if that's the case, who cares whether or not the rich are doing better or worse?


    Wprothwell . . .


    First, a sincere thanks for all the thoughtful analysis . . . it's very interesting and helpful as we all try to make sense of a very complex subject.


    I'm still not convinced that the consumption tax is a good idea, however.  Just a few points and questions:

    1. I agree that corporate taxation is currently a mess and have often argued for just getting rid of it and taxing exclusively at the individual level (corporations generally avoid much of the tax, anyway). However, there's no need to switch to a consumption tax to eliminate the corporate tax. You can do this just as well while preserving an individual income tax.

    2. The exemption for used goods might be helpful for poorer people, although plenty of rich people buy used things too. Would used goods include those purchased from businesses? For instance, if you bought a car from a used car dealer or a couch from a used furniture dealer (or dealer in fine antiques) would you pay no tax?  Or is it only "private" sales that are untaxed. How about homes, art, collectibles, etc?

    3. I question the assumption that lower and middle income people will save more if their savings are exempted from taxation. Remember, lower and middle income people already have the opportunity to protect their savings from taxes (with IRAs or company 401(k)s) and they don't avail themselves of those opportunities at anywhere near the maximum level currently.

    4. I don't think anyone has satsifactorily addressed the cash flow issue I described in an earlier post. Essentially, we are changing the timing of tax collection with a consumption tax--deferring the taxes from the time wealth is created to the time it is spent. During the deferral period, how does the government meet its obligations? Does it borrow more? Or does it raise tax rates to compensate for the cost of deferring collection?

    Why do you work? Isn't the reason for work to gain wealth?


    And how do you have an EITC under a consumption tax regime?

    That's an "Earned Income Tax Credit". Would it not be better to simply not tax income? Why pay a tax to get part of it back?


    A consumption tax creates an incentive to save. This is generally good, but what happens when the wealthy actually start saving more? Tax receipts drop (at least temporarily). So how does the government meet it's obligations? Either it borrows more (god forbid) or it raises taxes.

    Actually, one thing to note is that over time, (or at least for as long as they've measured the two) consumption has always proven to be a more steady/reliable index than income.    People buy what they want when they want it.  If you want a reliable tax base, we should tax based on consumption.


    But for many reason, the burden decreases substantially as wealth increases.

    The FairTax proposal provides for a prebate, which un-taxes consumption up to a certain point- say it's the first $20k and your prebate is worth $4600 (I got these numbers by multiplying the amount spent by .23 to get the ).  What this means is there's a progressive curve to the FairTax:  If you spend less than $20k over the course of the year, your tax rate is negative. If you spend $20k, your tax rate is zero.

    spend -->tax - prebate => tax paid, percentage
    ==================================
    $20k --> 4600 tax -4600 prebate = zero tax paid, 0% tax rate
    $50k --> 11500 tax - 4600 prebate = 6900 tax paid, 13% tax rate
    $200k --> 46000 tax - 4500 prebate = 45,1000 tax paid, 22% tax rate
    infinite --> 23% of infinity - 4600 prebate = 23% of infinity, 23% tax rate

    Thus, the more one spends, the higher their tax rate becomes as a percentage of consumption, up to a theoretical maximum of 23%.  This builds in protection for poorer people by actually un-taxing them, something that doesn't happen under the current system (check out the payroll tax, our most regressive).

    True, this way of measuring tax progresivity doesn't correlate to income, except insomuch as income creates a natural cieling on one's spending- meaning that the very wealthy *could* use this to decrease their tax rates relative to their income.  ...but if you think about it, they already do that in other ways under the current system, and if the very rich don't spend their money, they save or invest it, which is also good for the economy.  (also note: income-based taxation also doesn't correlate to wealth).

    Something else that's missing from this conversation is an accounting for what percentage of the cost of goods we buy today is the seller's income tax.  It's estimated by the actuary team that calculates the Cost-of-living indexes for the IRS that between 20 and 30% of the sticker price of most goods is the rolled-in tax incurred in the production and sale of that item.  ...meaning that income tax levied on businesses (plus all the costs involved in accounting, tracking, managing 401ks, complying with current code, etc) translates into a price increase of goods and services, which is then paid by consumers regardless of their income tax rate.  A switch to a consumption-based tax model would reduce most of these costs.


    How is the rebate or exemption handled?  Do you still have to file a return?

    No, you don't need to file a return.  You register your household for the prebate, you get a check in the mail at the first of each month.

    And who or what agency will actually collect the consumption taxes?

    Just like today's sales tax, (and like today's income tax, if you think about it) sales tax will be collected at the point of sale.  The IRS would then collect from businesses.

    http://www.fairtax.org has more info.


    Your first error is to assume that house builders will pass tax savings onto consumers in the form of reduced prices instead of pushing the savings to their own bottom line.

    I suspect that prices will continue to be set by the same forces that set prices today- supply, demand, and competition.  If the cost of doing business goes down for everybody, I think you can expect prices to go down because there's competition for your dollar.

    Your second error is using a tax rate of 23% rather than the true rate of almost 30%.

    If that's the case, then it should be noted that the income tax rates we're comparing them to are stated in the same manner: using a tax-inclusive method of caluclation.
    When income tax rates are quoted, they are expressed as a tax-inclusive quote: If you paid 23 percent last year, that would mean that for every $100 you earned, $23 went to Uncle Sam. You'd have to make $130 to have $100 to spend. That’s a 23-percent tax-inclusive rate.
    It's appropriate to compare the FairTax to income taxes, quoting the rate the same way, because the FairTax is intended to replace them- that way we're comparing apples to apples.

    The major source of confusion here is that traditionally sales taxes are generally quoted tax-exclusive: A $77 shirt costs that same $23 in sales tax. This is a 30-percent sales tax.
    As you accurately note, they're the same thing: 23% inclusive equals 30% exclusive.  Where I think we disagree is in motive: you seem to suggest that it's all spin, designed to deceive, and thus the whole plan is not to be trusted.  I, on the other hand, think it's only sensible to compare the rates expressed in the same way.


    ChrisJ wrote:


    Where I think we disagree is in motive: you seem to suggest that it's all spin, designed to deceive, and thus the whole plan is not to be trusted.  I, on the other hand, think it's only sensible to compare the rates expressed in the same way.


    The use of a 23% consumption-tax rate instead of the actual 30% rate is spin meant to deceive an unsuspecting public.


    You assert that an inclusive rate is the appropriate way to discuss this consumption tax because that allows easy comparison with income taxes.  However, comparing income tax rates with consumption tax rates is comparing apples with oranges since two separate quantities are being taxed.  Consumption taxes are ALWAYS specified as exclusive rates regardless of whether they are sales taxes or value added taxes.  Consequently, quoting an inclusive rate for the so-called fair tax is spin.


    The current tax system undoubtedly has flaws, many of which could be fixed were there  political will.  Moving to a consumption-based tax will undoubtedly increase the fiscal burden of ordinary Americans and decrease that of wealthy Americans.  That, of course, is the desired intent of those who advocate the consumption tax.


    The IRS will go away?
    No, the IRS will collect sales taxes from points of sale.
     
    Tell me, are religious organizations going to be exempt?
    To the extent that all businesses are, yes.

    Who tracks this?
    Because there's no distinction to be drawn between religious and non-religious organizations in a sales tax code, it becomes moot.  Nobody needs to track this.

    Are political donations exempt?
    Under the current system, you can deduct qualified donations from your income tax.  Under the proposed system, all donations are done with pre-tax money.

    Who will track this?
    Again, tracking is unnecessary- a transaction is either taxable or it isn't, and under the sales tax model no donation is taxable because all money you've got in your hand is pre-tax money.  Under the income tax, tracking is necessary in order to say which dollars should be counted as taxable.  This is a problem with taxing based on income- we don't know which income is a taxable event.  Because a consumption tax would tax at the sale and the nature of the sale would determine whether it's a taxable event, compliance with taxation will be substantially simpler than it is today.

    The first $20,000 is tax free?  Who tracks all the sales as well as the income levels to establish exemptions?
    The un-taxing of that first ~$20k is accomplished by means of a prebate- registered households would recieve a check for the amount of money equivalent to subsistence-level consumption.  Doing it in the form of a prebate makes tracking irrelevant- you get your check, you pay your taxes, and everybody pays the same at the till.

    What about privacy and the availablitiy to government of all this information?
    By using a prebate, the only information the government needs to know about you is how many people are in your household, as that's a factor in the size of your prebate.  Thus, the FairTax will greatly reduce the intrusiveness of the government into your life, because the Federal government just won't need that information in order to calculate your taxes.  it's 23% at the till, just like everyone else, on a per-transaction basis.  After the prebate, that means the more you spend, the higher your effective tax rate.

    Again, I can go on and on, as well as anybody could.
    Yes, you could go on and on, but let me recommend that you first become more familiar with the proposed plan- most of your concerns are about problems that this plan won't cause.
    For more info, go to http://www.fairtaxvolunteer.org/smart/faq.html


    And, of course, the people at the lowest end of the income scale suffer disproportionately, for a wide variety of reasons -- not least, the fact that those with lower-incomes often have to pay higher out-of-pocket costs for essentials.

    Interestingly, the FairTax (unlike the current system) will completely un-tax the poor in terms of direct taxation, and it will substantially un-tax the poor in terms of the indirect taxation they pay- meaning that the above assertion ironically describes the status quo better than it does the proposed legislation.

    We all pay indirect taxes when we buy a good or a service; whatever it costs a business to pay or comply with tax regulations today is passed on to the consumer in terms of higher prices.  The folks who do the cost-of-living-index math come up with between 20 and 30% of the price of most goods being some form of tax related expense.  Switching away from income-based taxation will reduce the cost of most goods by that much, which will impact everybody, especially the poor, positively.  Put another way: income tax on businesses translates into an indirect tax on their customers.

    Another thing that the FairTax legislation would do is repeal the regressive payroll and medicare taxes, in addition to the income tax.  It would replace these taxes with a flat-rate sales tax with a monthly prebate for registered households that make your effective tax rate a function of what you consume: it is possible to pay less in tax than the rebate you get from the IRS, meaning it's possible to have a negative effective tax rate, and that depending upon how much you spend over ~$20k/yr, your tax rate would increase progressively toward a theoretical maximum of 23%.

    Thus, the proposed tax will do what the current 'progressive' tax system will not and cannot: it will un-tax the poor completely, while taxing the middle and upper classes progressively.

    Another thing it will do that the current system cannot is tax wealth effectively: income and wealth do not correlate as well as wealth and consumption do.  A consumption tax will target the affluent, regardless of their income, as they spend- but will not target savings or investment (which would be disastrous for the economy).  Savings and investment makes more capital available for job creation, which is really good for everybody.
    A consumption tax will also not disproportionately tax those with large one-time income events, such as the profitable sale of a property, or an inheritance, or exercising stock options.  This will tax wealth more consistently, and encourage responsible/productive management of wealth, which is good for everyone.


    And how do you have an EITC under a consumption tax regime?

    The prebate for the FairTax is the analogous mechanism you're looking for: to get it, a family or household must simply register for the prebate, and it shows up as a monthly check to offset tax expense incurred at the till.

    Get rid of the EITC and poverty rates will explode.

    I disagree.  The EITC currently provides a solution to the problem created by income-based taxation: today, even with a progressive income tax, we still have many regressive income-based taxes in place that hurt the poor.
    The Payroll tax is 7.5%, and is charged against the first dollar a worker earns.  Additionally, the worker's employer is charged an additional 7.5%, and most economists agree that this cost is borne by the employee in the form of lower wages, so the payroll tax really comes out to be a 15% hit.  Add the Medicare tax (another lovely regressive income-based tax), and by the time tax day rolls around, the very low-income earning folks NEED a credit against their income tax or they're screwed.
    The FairTax solves this problem by truly un-taxing the poor 100% up front.

    Additionally, with no income tax withholding, all purchases (whether taxable or not) will be made with pre-tax dollars- meaning that people will have more say in how/where their money goes.


    But wouldn't a simplified income tax (without deductions and other exceptions) accomplish about the same thing? What makes the current tax system complex isn't that it's an income tax, it's that it treats all sorts of wealth differently and has lots of exceptions and deductions.

    A simplified income tax would be by definition simpler, but unless it incentivizes the kind of behavior we want to see (investing, saving, starting small business, etc) what we'll end up with is a very simple wrench in the works of the economy.  It would probably correct itself out in the end, but it wouldn't be able to correct for all the problems we currently see due to income-based taxation.
    The reasons we treat different kinds of income differently is so that the government can incentivize certain kinds of activity:  for example, buying a home, saving for retirement, investing, farming, etc.

    Another thing that a simpler income tax could not address is the phenomenon of 'indirect' taxation- where the cost of tax payment and compliance is passed on to consumers in the form of higher prices- and this form of tax is always regressive.

    The most major problem I can see with a 'simpler' income tax, however, is that ours started out simple and turned into what we have today.  My concern is that a simpler income tax would simply become (again) what we've got now- that is, a tool for politicians to buy re-elections, a place for congress to hide its pork, a tool by which idealists seek to reward or penalize those whom they favor.

    I favor a consumption tax precisely because it takes most of that power out of the hands of politicians and puts it back in the hands of everybody who spends their money.  A consumption tax would incentivize saving, investing, owning property, working overtime, starting small business, creating jobs, and all the rest of those things that make individuals self-reliant, productive, and free.


    ChrisJ wrote:


    My concern is that a simpler income tax would simply become (again) what we've got now- that is, a tool for politicians to buy re-elections, a place for congress to hide its pork, a tool by which idealists seek to reward or penalize those whom they favor.


    It is naïve to believe that there will not be enormous pressure on Congress to provide relief to industries following a change to consumption tax.  Once car buyers balk at paying 30% over invoice, Ford and GM lobbyists will be all over Capitol Hill seeking some kind of relief.


    ChrisJ continued:



    I favor a consumption tax precisely because it takes most of that power out of the hands of politicians and puts it back in the hands of everybody who spends their money.


    The reality is that the consumption tax is less about taking power out of the hands of politicians and is more about increasing the fiscal burden on ordinary Americans and lowering it on wealthy Americans.


    I claimed that because a national consumption tax would decrease the taxes of the rich and also, supposedly, the poor.  This means it is a tax increase on the middle class.

    there is no mechanism by which the FairTax would somehow gouge the middle class. 
    The assumption seems straightforward: if the poor pay less and the rich have the opportunity to duck out and they all do so, AND it's revenue neutral, (meaning that the game is zero-sum in all respects) then somebody's got to be stuck with the bill. 
    Fortunately, that's not how it works.

    You assume that because the wealthy could avoid taxes under a sales tax, that they will.  ...and this would be true if taxes were the only factor involved- but taxes are only one factor.  Consider: the 9% sales tax in my state doesn't keep me from buying stuff, because I want what I want when I want it, and I'll pay what I'm willing to part with in order to get it.  It's factors like this that make consumption a more reliable index than income, even with a sales tax in place.  It's just a marginal cost that's added into the cost/benefit analysis involved in any purchase.
    This is different from an income-based taxation largely in that a person derives NO added utility from paying a higher rate- thus, the wealthy are highly motivated to avoid income-based taxation, simply because they get no value out of it, and they get a lot of potential value (like the ability to buy the stuff they want) out of paying accountants to shelter their money.

    Tie the taxable event to the realization of value and you'll see people paying their taxes in accordance with their lifestyle choices.  If you're worried that the government will go broke because all the rich people will avoid paying, have a look at wall street: all those trillions of dollars changing hands each day are incurring millions and billions in fees.  Does that put a halt to the works?  No, because the wealthy understand that in order to play, you pay the cost of doing business.


    Once car buyers balk at paying 30% over invoice, Ford and GM lobbyists will be all over Capitol Hill seeking some kind of relief.

    I'm sure there will be all sorts of pleas for handouts from everybody who can afford a lobbyist, but one thing a sales tax uniquely enjoys over an income tax is that it's transparent: visible for all to see.  This will make it harder for politicians to hide their pork.
    I'm also pretty clear that these same companies will enjoy the repeal of the income tax even more than they'll dislike the sales tax, because it's expensive above and beyond the tax payment in a way that no sales tax is.

    As a nation, we spend upwards of $225B every year just to comply with the current tax code- that's money spent each year just to know that we're paying the right amount, paid before we pay our first cent in tax.  That's almost a third of what we pay in actual taxes, added on top.  This burden is borne disproportionately by the middle class and small business, but is felt by everyone.

    These costs are passed on to consumers in the form of higher prices- and with the repeal of the income tax, we'll see a correction of the price of retail goods to reflect this, as everyone's cost of doing business goes down. 

    ...meaning that the actual cost of a car, minus the hidden taxes, plus the sales tax, will be pretty close to what it is now- in other words, not much to complain about.   ...and considering that their customers will be shopping with their whole paycheck (instead of having a third of it withheld) we'll find that shifting the tax event over to the consumption side will pretty much make the sales tax a non-event.
     
    I believe that a sales tax, by virtue of its transparency, will be better protected from political meddling than the income tax.


    That folks who spend every dime they earn on food, clothing and shelter for their family pay 23% of their hard-earned pay, and people who make so much money they can't possibly spend it all don't bear nearly as great a tax burden?
     
    Hm- this would be a fair comment if the FairTax somehow did that, but it just doesn't.
    First of all, these folks who spend every dime they earn on food, clothing, and shelter will be (unlike the current system) getting their whole paycheck- that is, they'll have more money to work with.  What's more, they'll be getting a prebate- a monthly check to offset the tax that everybody pays at the till.  The net result is that the poor people today will pay very little tax- mathematically, it's impossible for someone to spend less than ~$20k/yr and pay taxes under this proposal.  Thus, if their tax burden is high, it means they're spending well above subsistence levels (for more info, look at their explanation, here- there's a chart outlining the prebate schedules about halfway down the page)
    Second, the FairTax taxes those who have more to spend at a higher rate.  This is accomplished by virtue of the prebate.  Moreover, it taxes the wealthy in ways that the income tax cannot- the wealthy consume more reliably than they realize income.

    And if you have income simply by virtue of owning investments that you didn't work a lick to improve, and you roll that income back into more investments, you pay no tax at all?

    This is misleading.  There's a kernel of truth to it, to be certain: under the FairTax, income is not taxed, therefore the wealthy will not pay income tax (just like everybody else won't, either).  However, to suggest that they will pay NO tax right after you've outlined the heavy burden the poor will pay for their consumption is disingenuous at best.  The wealthy will buy their nice homes, expensive clothes/services/etc. because unless they spend it, they're paupers with a pile of worthless paper.

    Moreover, we WANT the wealthy (actually, we want everybody) to invest.  This puts capital into circulation, fuels business, creates jobs and opportunities, lubricates the economy, and creates win:win situations for everybody involved.  This creates wealth, grows the economy, and broadens the tax base, which always increases revenue... which is the point of a tax program.


    Ironic, that a post which dismisses so much as spin, is largely made up of counterspin. ;-)  We'll have to disagree on the subject of what's the appropriate way to present the rate- inclusive or exclusive.  The difference is ultimately semantic, and the only reason you're excited about it is that you think it's evidence of malfeasance.  ...and if you can't see the circular logic at play there, you'll want to look again.

    The current tax system undoubtedly has flaws, many of which could be fixed were there  political will. 

    Moot argument.  We've been fixing the current system for 91 years, with plenty of political will on both sides, and we've got what we've got.  It's nice that you're hopeful and all about fixing it, but I don't share your hope.  I support a radical change in tax implementation to mitigate problems that are inherent to income-based taxation.

    Moving to a consumption-based tax will undoubtedly increase the fiscal burden of ordinary Americans and decrease that of wealthy Americans.

    Can you support this with evidence or research?  I'm clear that you have no doubts in the matter, but they also didn't doubt that the world was flat, or that the earth was the center of the universe, either.  I'm clear from my own experience that my own doubts in the matter often don't correlate accurately to reality; I invite you to consider the same, or at least, to  back your statements with data. or studies.

    That, of course, is the desired intent of those who advocate the consumption tax.

    This is a long reach, and is probably the basis of your prior conclusion, considering the impossibility of knowing another's intentions.  As an advocate of the consumption tax, I've done my research, looked at what I spend annually, looked at what I pay today in income tax (I'm middle class, btw) and in the end the FairTax won't change my tax burden substantively.  For me, this doesn't have anything to do with shifting burdens or class warfare.
    For me this is about simplicity, transparency, and efficiency.
    What it will mean for me is that I won't pay an accountant to do my family's taxes, nor will I need to spend 40+ hours to prepare for that each year (this is average, btw). 
    The United States as a whole won't spend >$250B annually just to comply with tax regulations (an additional 29% on top of what we pay as tax). 
    It means that the taxes I'll pay will be transparent, instead of being rolled, invisible, into the price of everything I buy.  It will mean that the federal government doesn't need to intrude into my household to the extent that it now does, and that anybody will be able to clearly see how much tax they really pay.
    It will mean that I have access to all the same tax-reduction strategies as the very wealthy do.  It will mean that the tax-dodging strategies now available only to the wealthy will disappear.

    You can call that spin all you want, but until you provide data to back your assertions up, all you've got is an opinion (and spin of your own :-).


    This twaddle by chrisJ shows just how out of touch the "fair" tax people are:


    The wealthy will buy their nice homes, expensive clothes/services/etc. because unless they spend it, they're paupers with a pile of worthless paper.


    The rich will buy their nice homes, etc but they will still be able to save significant quantities of money.  Bill Gates is not a pauper even though he owns $40B of "worthless paper."  The fact is that the "fair" tax privileges one group of Americans - those with an ability to save.  An American earning $1M a year could easily live off 10% of his income while saving the rest- a feat totally impossible for someone earning minimum wage.  In fact, someone on minimum wage is unlikely to be able to save anything.


    An easy way to quantify the benefit to wealthy people of the "fair" tax is to compare it with a flat income tax rather than a progressive income tax.  Compare the fortunes of an individual earning $1M under a 20% flat tax and a 20% "fair" tax (on an inclusive basis).  Assume that the savings ratio increases linearly from 0% on the first dollar to 50% of the last dollar.  Under a flat tax this individual would have a tax burden of $200,000 while under the "fair" tax the tax burden would be only $150,000.  Since the change to a "fair" tax is supposedly revenue neutral the cost of these "savings" would be transferred to others and, in particular, to those who are unable to avoid the tax because they do not earn enough to save.


    The primary beneficiaries of the "fair" tax are those Americans with the ability to save money - i.e. high net-worth or high income Americans.  The losers are ordinary working Americans whose insufficient earnings mean that they will see little benefit from the savings effect.  The truth of this latter statement can be seen in the low uptake of 401(K) and other tax-beneficial savings schemes.  Wealthy Americans, of course, have the ability to max out all of these tax-beneficial savings scheme and would love to be able to make all their investments on a tax-free basis.  This is, of course, the primary intent of the "fair" tax - it has absolutely nothing to do with any concept of fairness as ordinary Americans understand the term.


    The "fair" tax is essentially a flat tax with an unlimited investment deduction.  Although it may appear fair and simple on a superficial level the comparison above demonstrates that it compares unfavorably with a flat tax and, in consequence, with a progressive income tax.


    If we are to believe the "fair" tax advocates the (inclusive) tax rate of 23% has been carefully calculated to be revenue neutral.  But how careful can this calculation be when the same rate has been used in bills presented to Congress during the last four congressional sessions even as the budget has swung from surplus to deficit.


    H.R.2525 - Fair Tax Act of 1999

    In the calendar year 2001, the rate of tax is 23 percent of the gross payments for the taxable property or service.


    H.R.2525 - Fair Tax Act of 2001

    In the calendar year 2003, the rate of tax is 23 percent of the gross payments for the taxable property or service.


    H.R. 25 - Fair Tax Act of 2003

    In the calendar year 2005, the rate of tax is 23 percent of the gross payments for the taxable property or service.


    H.R.25 - Fair Tax Act of 2005

    In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.


    The rich will buy their nice homes, etc but they will still be able to save significant quantities of money.

    That would be a tragedy. Look at what happens when we allow the wealthy to keep their money:  they do terrible things like employ tens of thousands of people and form philanthropic foundations that do such irresponsible things as cure disease and fund education.  We should put a stop to this.

    Seriously, the idea that allowing the wealthy to save money is in any way bad is... well, silly- and for several reasons:
    First of all, what people like Bill Gates do with their money is invest it in activities that create TONS of taxable consumption.  He employs literally tens of thousands of conspicuous consumers, in addition to being one himself.
    Second, the notion that taxing the wealthy more heavily benefits the poor is just plain shortsighted- it's literally like killing the goose who lays the golden eggs.  We WANT the folks who are effective with money and business to have money in their hands- they expand the economy, generate more taxable activity in the economy, create more opportunities, and employ more people.  We do the poor no favors by taxing high productivity disproportionately.
    Third, saved money doesn't sit under a mattress- it's invested and turns into other peoples' paychecks.

    Since the change to a "fair" tax is supposedly revenue neutral the cost of these "savings" would be transferred to others
     
    This is an imaginative, but inaccurate assumption.  The FairTax contains no provision by which to transfer tax burden to anyone.  The only people paying this tax will be the people consuming, and they'll be paying the tax proportionally to their level of consumption.  Consumption levels have always been a more stable and predictable index than income, and thus they make a superior basis for taxation.
    It might be confusing if you're conditioned to thinking in terms of class warfare, but this tax has no way to discriminate based on class.  It works simply based on how much consumption occurs in the economy, not by targeting this set of people or that.

    and, in particular, to those who are unable to avoid the tax because they do not earn enough to save.

    Those who do not earn enough to save will pay no tax in the first place, so this argument is misplaced.  :-) Those that earn enough to pay tax will be able to save money- the prebate un-taxes subsistence-level consumption, and varies according to family size.  to the extent that all spending above subsistence level is elective, no american will be stuck without the ability to save because of taxation.


    If one sentence demonstrates how little you understand the "fair" tax it is:


    The FairTax contains no provision by which to transfer tax burden to anyone.


    This is utter baloney.  Any revenue-neutral change to the fiscal code MUST alter the payment pattern.  Those with an ABILITY to save benefit from the fair tax because income that would have been taxed under an income tax will now go untaxed.  Revenue neutrality demands that someone pay the tax that they will no longer pay and that will primarily be those who are unable, not unwilling, to save.  You confuse a theoretical ability to save of ordinary working Americans struggling to make ends meet in jobs that haven't had a pay raise in five years with the practical ability to save of wealthy Americans.  It is far easier to save 90% of your income if you earn $1M than if you earn $100,000.


    The fact is, Mr. Jones, you have contributed nothing to this discussion other than a set of talking points you clearly do not understand.  I will end the discussion here and would encourage you to do your "fair" tax trolling elsewhere.  All of us here hope for more from a thread than a bunch of half-baked talking points for a thoroughly undercooked idea.


    The fact is, Mr. Jones, you have contributed nothing to this discussion other than a set of talking points you clearly do not understand.

    I'm very sorry you feel this way.  My own impression was that I was adding the other side to a conversation being held by people who honestly don't understand the tax being proposed.  I don't pretend to be an economist, but I do understand enough about the proposed legislation to point out the misapprehensions of others.

    You've taken my earlier comment out of context- my point was not that nobody's tax bill can change (that would not be accurate), but rather that the FairTax, once enacted, cannot target particular taxpayers- meaning that your concern(that the poor would be somehow forced to pay more or pay a higher rate) is impossible under the proposed legislation.  It is specifically worded to be blind to the individual, and to tax behavior instead.
    It is also designed to tax only consumption above the poverty index- meaning that unless you've got more than that to spend, it's literally impossible for you to pay tax.

    What this means is that if/when there is no more income tax, the choice of what to do with your money becomes truly yours.  It sounds like you're so against allowing the wealthy to have this choice that you'll argue against letting the poor and middle class have the same option, and I can respect that (even if I disagree).  As someone who started out poor, I have a different view.  I think I understand your perspective: SOMEBODY has to be compelled to pay, and unless the wealthy are compelled to pay a higher rate than all the rest, others will be forced to.  I disagree with your conclusion, however, because I don't see the premise as being supportable.  It's not like consumer demand of the wealthy will suddenly be diminished.  If anything, the spending habits of the wealthy just might increase if they suddenly have more of their paychecks to work with.

    As a fundamental value, I am disturbed by the practice of voting on who gets to keep the money another earned, or how much of it- and on some level, that's what this conversation seems to really be about.  I hold the view that the more we put this power in the hands of each individual, the more free we all become.

    btw: my name isn't jones. :-)  What I've contributed is my view, in honest good faith.


    H.R.25/S.25, `CHAPTER 1, `SEC. 101. IMPOSITION OF SALES TAX, paragraph `(1) states, “`(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.” In other words, a 23% inclusive tax rate.

     

    23% inclusive = 29.87% exclusive. I hope you are not suggesting that the law be revised to read "..30 percent of the gross payments.." 

     

    Sales taxes approaching 40%! Wow! The Fair Tax is a replacement tax. It will collect the same total federal tax that we are paying today. So, what are you suppressed about? The fact that we have to pay 40% or the fact that you did not know that before. 

     

    To compare either inclusive or exclusive rates, take a look at: http://www.flfairtax.net/faqs/fair-tax-faqs/is-the-fair-tax-23-or-30.html 

     

    Use whichever rate you prefer -- just be consistent whey you compare the rates to current income tax rates. Also, don't forget about the FICA rates, Fair Tax eliminates all federal income based taxes.

     


    Twenty-three percent is the proposed rate. FairTax.org can do all the studies they want and could update the rate by a tenth of a percent or so every year, but that would not matter. The Ways & Means committee will run the proposed rate through the OMB to get the actual number that will go in to effect.

     

    Do I think that after six years, the number should be recalculated? Yes. We should get an updated number. Lack of such updated numbers, however, does not erode the value of the legislation.

     

    Your argument is also very near-sighted. State sales taxes stay the same year in and year out, even when they run a surplus or deficit. 


    Correct. The earned income credit was created to offset the payroll taxes.

     

    Also, the Family Consumption Allowance will give the poor money each month--even if they don't work.  The poor will really come out ahead on this.


    The Fair Tax plan is, in my opinion, much fairer than the current system.  If a person doesn't earn much, then they don't spend much and they end up not paying much in taxes.  If you earn a lot and live high on the hog, then you pay a lot of taxes.  Yes, the wealthy can avoid taxes by saving more and spending less, but that option is available to everyone.  If someone is willing to live at a poverty level, they pay nothing!  Ha - that will show us!

     

    The Fair Tax plan is created to put taxation in the limelight - what you are paying to the government is present on every receipt.  If your tax rate changes, you know it.  And everyone pays the same rate based on their consumption, with the two basic assumption that 1) people living at or below the poverty level pay nothing, and 2) the more you earn, the more you spend.

     

    But here's the threat - if Congress changes the wording to introduce loopholes (an idea that appears nowhere in the current bill), then we're all doomed.  And why wouldn't they?  Their ability to introduce loopholes unbeknownst to us is one of the greatest powers they hold.  They can currently make us pay the missing taxes of some favorite constituent (thereby cheating us all), and we are none the wiser.  If the Fair Tax Plan goes into effect, they can no longer use that stick.

     

    And that's why the Fair Tax is doomed from the start.  It would take nothing short of the threat of a revolution to get rid of the current system.

     

    If you are of the mind to hear the other side of the story, go to
    http://www.fairtaxvolunteer.org/smart/faq.html


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