Check yourself:

[shiny!]

Re: Check yourself:

2

A single male with no children making $20k per year would be entitled to a $2,509 rebate under the fair tax. But he would pay $6,000 in sales taxes. There's a gap of $3,491 there. That's his tax liability.

Under the current system, his tax liability is $1,672. The fair tax !!!!!CONFISCATES!!!!! $1,819 more from him. (That is the last time I'll use the word. We all should stop. If Ben Franklin knew we'd always have to deal with death and taxes, you'd think we'd get over it 300 years later).

This means it costs the single dude with no kids who makes $20,000 per year $1,819 more per year under the "fair" tax than under the current system.
If he had four or more children, the same dude would pay nothing under the fair tax. He also pays nothing under the current system.


3


Think of it like this: You basically get $200 per head per month for grown-ups and $100 per head per month for children no matter how much money you make in a "pre-bate." That's it. Do you spend more than $600 per month? Then screw you. You get to pay the fair tax.

Keep in mind, if $600 seems like a lot, that you've got rent and gasoline, and oil, and electricity, and water, and trash, and car repairs etc., and phone and every other bill to pay by yourself.

And now your $1,000 rent costs $1,300. And your $50 tank of gas costs $65. And your $800 car repair bill costs $1,040. In fairtax land, spending $600 per month is like spending $450 per month in normal land.

That's a bit over $100 per week. You will spend at least twice that. Even eating ramen and living with roommates (hence my $20k dude example).

You make some excellent points, dcarrigg, the road to Hell being paved and all... You're also much better with numbers than I am (my dog is better with numbers than I am). So how does the Fair Tax eliminating "personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes" change the equation? Without those paycheck deductions, corporate expenses should go down, cost of goods should go down, and paychecks should go up. Proponents of the Fair Tax say that this will more than make up for higher sales tax.

More snippets from the Fair Tax FAQ. It sounds great, but what am I not seeing, what are they not saying? Does the bad outweigh the good?:

How does the FairTax affect wages and prices?

Americans who produce goods and earn wages must pay significant tax and compliance costs under the current federal income tax. These taxes and costs both reduce after-tax wages and profits and are then passed on to the consumers of those goods and services in the form of price increases. When the FairTax removes income, capital gains, payroll, and estate and gift taxes, the pre-FairTax prices of these goods and services will fall. The removal of these hidden taxes may also allow wages to rise. Exactly how much prices will fall and wages will rise depends on market forces. For example, in a profession with many jobs and too few to fill them, wages will likely increase more than in fields where there are too many employees and not enough jobs.

How are state tax systems affected, and can states adequately collect a federal sales tax?

No state is required to repeal its income tax or piggyback its sales tax on the federal tax. All states have the opportunity to collect the FairTax; states will find it beneficial to conform their sales tax to the federal tax. Most states will probably choose to conform. It makes the administrative costs of businesses in that state much lower. The state is paid a one-quarter of one percent fee by the federal government to collect the tax. For states that already collect a sales tax, this fee proves generous. A state can choose not to collect the federal sales tax, and either outsource the collection to another state, or opt to have the federal government collect it directly. If a state chooses to conform to the federal tax base, they will raise the same amount of state sales tax with a lower tax rate -- in some cases more than 50 percent lower -- since the FairTax base is broader than their current tax base. States may also consider the reduction or elimination of property taxes by keeping their sales tax rate at or near where it is currently. Finally, conforming states that are part of the FairTax system will find collection of sales tax on Internet and mail-order retail sales greatly simplified.

Can Congress just simply raise the rate once the FairTax is passed into law?

Yes, of course Congress can raise the FairTax rate just as it could raise the flat tax rate or can and does raise the income tax rate. And if we in the grass roots allow them to do it, shame on us!
However, the FairTax is highly visible. And because there is only one tax rate, it will be very hard for Congress to adopt the typical divide-and-conquer, hide-and-disguise strategy employed today to ratchet up the burden gradually, by manipulating the income tax code. Ultimately, the tax rate will be dictated by the size of government. If government gets larger, higher tax rates will be required. If government shrinks relative to the economy, then the tax rate will fall. Federalist 21, by Alexander Hamilton, is a great read on the futility of government raising a consumption tax too high, and thus reducing revenues.

How will this plan affect compliance costs?

It is estimated that Americans spend at least $265 billion a year to comply with the tax code -- nearly $900 for every man, woman, and child in America. That is greater than the current federal deficit ($205 billion). Billions of dollars in compliance costs are wasted each year, and we have nothing of value to show for this expenditure -- not one single productive service or product is added to our nation’s wealth. It is estimated that the FairTax dramatically cuts such compliance costs, perhaps as much as 95 percent.

Will corporations get a windfall with the abolition of the corporate tax?

Corporations are legal fictions that have not, do not, and never will bear the burden of taxation. Only people pay taxes. Corporations pass on their tax burden in the form of higher prices to consumers, lower wages to workers, and/or lower returns to investors. The idea that taxing a corporation reduces taxes on, say the working poor, is a cruel hoax. A corporate tax only makes what the working poor buy more expensive, costs them jobs, lowers their lifestyle, or delays their retirement. Under the FairTax Plan, money retained in the business and reinvested to create jobs, build factories, or develop new technologies, pays no tax. This is the most honest, fair, productive tax system possible. Free market competition will do the rest.

How does this affect U.S. competitiveness in foreign trade?

Because the FairTax is automatically border adjustable, the 17 percent competitive advantage, on average, of foreign producers is eliminated, immediately boosting U.S. competitiveness overseas. American companies doing business internationally are able to sell their goods at lower prices but at similar margins, and this brings jobs to America.

In addition, U.S. companies with investments or plants abroad bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment.
And at last, imports and domestic production are on a level playing field. Exported goods are not subject to the FairTax, since they are not consumed in the U.S.; but imported goods sold in the U.S. are subject to the FairTax because these products are consumed domestically

[dcarrigg]

Re: Check yourself:

You make some excellent points, dcarrigg, the road to Hell being paved and all... You're also much better with numbers than I am (my dog is better with numbers than I am). So how does the Fair Tax eliminating "personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes" change the equation? Without those paycheck deductions, corporate expenses should go down, cost of goods should go down, and paychecks should go up. Proponents of the Fair Tax say that this will more than make up for higher sales tax.

More snippets from the Fair Tax FAQ. It sounds great, but what am I not seeing, what are they not saying? Does the bad outweigh the good?:

Hi Shiny! I hope all is well with you and yours. You may not be good with numbers, but you are always good at reminding us of what is really important. And as someone who gets lost in this stuff too easily, I truly appreciate it.

I'll take a crack at explaining my thinking on this. I'm sure there'd be some who disagree, but such is always the nature of tax discussions. In the end of the day, economic thinking is religious in a way. You pick your school of thought and place your faith in it.

I just don't like how disingenuous some of the FairTax folks can be.

POP QUIZ:_______If someone told you there was a 23% sales tax on a $100 item, what would you pay?
FairTax Answer:__$130.

I know the FairTax rate is 23 percent when compared to current income taxes. What will the rate of the sales tax be at the retail counter?
30 percent. This issue is often confusing, so we explain more here...

Now how can that be, you wonder? Well, it's because it's a 30% sales tax.

I guess to continue I'll break it up by numbers again:


1

Many of the taxes it eliminates don't effect most people.

Since estate tax doesn't kick in until you've got a $10M nest egg to leave your kids, most Americans will never pay it. Ditto for gift. Most people as it stands now don't pay AMT or capital gains either. Social Security and Medicare are a different beast entirely. I'm pretty sure that if you abolished the trust funds, they'd both be gone, and they're real benefits for lots of Americans (If you live long enough, you get back at least what you paid in).

Besides, they say they do not want to reform Social Security, but how could that possibly be? Right now you have an account set up for you that keeps track of what you pay in and a trust fund that the money goes into to pay out benefits that are calculated based on your account. If you got rid of the payroll tax, how do you keep track of any of that?

Corporate taxes are an interesting case. You have years where Exxon Mobil pays 0%, for instance. Ditching it would probably be a plus for the smaller businesses, but not matter much for the big guys in the niche industries that pay nothing as it is. This could potentially be a good thing, depending on how it's executed.

But the FairTax folks make the supply side argument that eliminating these taxes will lower the price of consumer goods. Yet I think that there are important problems with saying that corporate expenses should go down, the cost of goods should go down and paychecks should go up.


2

Commodity markets are globalized.

Dropping a few accountants off the roles at Exxon-Mobil will not change the WTI-Cushing spot price on a barrel of oil. So even if they save $4,000,000 per day by firing accountants (which I'd doubt - they operate internationally and still need them for foreign transactions), that's only a 1 cent drop in the per gallon rate given US daily consumption of 400 million gallons.

But a 30% tax on a gallon of gas will be passed on to consumers. There might be a dip in demand on the American side, but that'd conceivably just make gas relatively cheaper in China etc. and be their gain rather as much as ours.

So a $4.00 gallon of gas would be hit with a $1.20 per gallon tax, but would probably only drop a penny or so, if at all. And that drop would be shared by worldwide consumers, not just Americans.

And then there are the owner-operators. A farmer who buys a $100,000 tractor in Mexico will now get to compete with a farmer who buys the same tractor for $130,000 just over the border in Texas due to the fair tax mark-up. I don't think that the Texan in this scenario will be able to produce food more cheaply than the Mexican.

So if commodity markets are global, then the same goes for food. And the housing market probably wouldn't benefit from this. So if food, energy and housing costs don't decrease, but are now taxed at 30%, how much does it matter for average Joe? That's where 2/3 of his paycheck goes. In fairness, average Joe will keep his whole check. So that'll offset a good piece of it. The break-even point with the current system is wherever you get to a point that you save/invest/speculate more than you spend (usually that's in the neighborhood of $200k/yr). Below that, you pay more under the fair tax, no matter what their graphs say. In fact, a married couple making $60k per year who didn't invest any of it would probably pay about $2,000 more under the FairTax per year (15% bracket + 6.5% payroll + exemptions vs. 30% sales tax + prebates).


3

Labor markets are globalized.

So even if food, energy and housing don't go down in cost, at least other consumer goods should, right? Well, I'm not so sure. Because other consumer goods are almost all imported from countries with cheaper labor. So your Levis made in China probably won't get too much cheaper.

And this begs the question: Why should wages go up? Will employees be more expensive in China or India because we change the tax code here? What incentive would any business owner have to raise wages just because corporate taxes disappear?

In business you hire the number of people you need, not throw more folks on the payroll just because you're turning a bigger profit.

In fact, at least in America, lowering corporate taxes has never been statistically correlated with increased hiring or increased wages (although I wish it were, then there'd be an easy answer, and I'd be on here babbling about why we have to repeal it).





4

More "hot" money might not lead to good results.

Eliminating capital gains and taxes on financial products and insurance combined with a 30% sales tax on real goods will probably have the effect of shifting more money into markets of all sorts. Something has to be there to absorb it (either government debt in the form of treasuries, equities, other bonds or commodities). Whatever that something is will get more expensive due to increased demand. This is not necessarily a bad or a good thing. But there may be unforeseen consequences as a result.

Furthermore, dumping U.S. exports on other countries for 30% less than they are sold domestically and imposing a 30% tax on all imports purchased here would amount to an utter and complete breach of all U.S. trade agreements, a violation of World Trade Organization rules, and in all likelihood, a trade war of epic proportions. So we'd have to figure that one out.


5

Elimination of tax compliance costs for businesses simply shifts the costs to government.

A huge new administration will be needed to verify monthly sales tax returns, investigate claims of businesses not collecting the tax, investigate claims of people importing property from other countries (buy your stuff online from Canada, or buy software online and claim another address, etc), and create a national infrastructure for collecting tax at point of sale from every store in the country (probably based on the Fed's ACH system).

This problem also exists for setting up a VAT, which is another tax option that is often talked about.


6

As always, the devil will lie in the details.
How will this administration will be funded and set up? Nobody has laid out those nitty-gritty details yet. Will states enforce the tax, then kick the money up to the feds? Would the state police or revenue agencies be responsible? Will the FBI be stuck doing the investigations? Will revenue be collected daily, weekly, monthly, quarterly, or what? What forms would have to be filled out by businesses submitting their revenue to the states and or federal government? How complicated would they be? Would they have to include an inventory list of sold items and costs, or would they just ask for a bottom-line number? If they just ask for a bottom-line number, how can they prove the business isn't fudging it? Would the IRS still audit? What documentation would have to be on file in case of an audit, even though the documentation might not be required with an annual tax submittal?

If it sounds too simple to be true, it probably is. The reason tax compliance is so complicated is that people lie. That won't change. So we'll need proof and consequences. And then comes the complexity.

(Many advocates for the FairTax say they'll create 50 "State Sales Tax Administering Authorities" to handle this. Woo Hoo! Now instead of the IRS we have the state SSTAAs. But wait. The IRS would still make the rules for the SSTAAs. And the IRS would do the job of the SSTAAs if states chose not to create SSTAAs. Plus, where would states get the money to do this once they are taxed 30% for everything the state buys? Again, is it even constitutional for the federal government to tax state and local governments? Who knows. They never answer these questions.)


7

Even without the details, the political left will create a devil out of it.

Whether you believe it is good economics or not, giving Wall Street an explicit 0% tax rate on every product they sell, but taxing a small business at 30%, is bad PR. Can you imagine the commercials?

I'm afraid that any new tax system we create in America will have to take into account what the talking heads on MSNBC and FOX will say, and they'll have to give each of them just enough sugar so that they swallow their medicine. That's the nature of pragmatism and compromise.

This plan offers the left nothing. So it will never happen.

[shiny!]

Re: Check yourself:

Very interesting, dcarrigg. Thank you for fiddling with the numbers for me. I always wanted to be a theoretical physicist but it's hard when you need cheat cards to do math beyond long division. Calculaters are no help because I can never remember how to enter the equations. Stupid learning disorder :-(

So what do you think of a Flat Tax? As I understand it, our current income tax started as a flat tax on income, not wages, but got tweaked so many thousands of times that it turned into the current mess. I don't know if that's true or not. Well, the tweaking part's true...

What's a good solution? Could the Fair Tax be structured differently so that it would actually be more fair? I still like the privacy and simplicity it offers over the current system.

[lektrode]

Re: Check yourself:

Very interesting, dcarrigg.

+1
yes, dc is one of The Best when it comes to this sort of analysis and putting it into words that a non-lawyer, politician, policy-wonker can make sense out of...

What's a good solution? Could the Fair Tax be structured differently so that it would actually be more fair? I still like the privacy and simplicity it offers over the current system.

+2
but as they say, the devil and details (something most of the beltway zealots seem to fergit most of, esp the 'unintended consequences'...)

[shiny!]

Re: Check yourself:

+1
yes, dc is one of The Best when it comes to this sort of analysis and putting it into words that a non-lawyer, politician, policy-wonker can make sense out of...




+2
but as they say, the devil and details (something most of the beltway zealots seem to fergit most of, esp the 'unintended consequences'...)

At this point I'm so jaded, I don't know if the unintended consequences are actually unintended or disingenuously deliberate. Because they never randomly hurt the financial elite, only the poor and middle-class.

[flintlock]

Re: Check yourself:

I can rip the fair tax apart and explain why it's awful off the top of my head without even mentioning how many extra solid gold helicopters Bill Gates would get for Christmas if it passed:

I'm no proponent of the FAIR tax, but where do you get a single male paying $6000 in sales tax under the plan? Isn't this a retail sales tax? How does someone only making $20,000 spend enough retail purchases to pay $6000 tax at a 30% rate. I have a family of five and I don't spend $20,000 year retail. A single male needs what? Food, Beer, some condoms, a few gadgets? Unless he's living at the local Motel Six, he's spending maybe $10,000 on retail purchases, or $3000 year in sales tax under the FAIR tax. The fact is most "poor" will continue to pay no net tax, just like in the current system. At least according to the proponents.

Most critics also ignore the concept of "embedded" costs that the plan should help reduce with the reduction of paperwork and complexity of the current system. So prices should go down, further reducing our single male's tax. That is really the heart of the plan according to its proponents, and the most ignored by its critics.

Also, its my understanding, this plan replaces the payroll taxes that are generally regarded as hitting middle and low income wage earners the most. Our single male is already paying 15.3% in payroll taxes, or $3060. Or half that if you buy the notion that employers actually pay half. I don't. They take it out of what they would have paid you. I'm an employer, I know. Under the Fair Tax this goes away.

If you lived in Atlanta like I do, you'd hear countless times on the Neal Boortz( co-author of the Fair Tax) radio show most arguments shot down. Almost never do you hear an informed critic. Most have an inkling, have skimmed over, or have read a little about it.Most have not read the book.

AND.....

That's part of the problem I have with it. Any tax "reform" that is this difficult to explain to people will stand no chance of passing into law. I am one of those who has not read the book. Why? Because it won't happen so why bother? NO WAY Congress is going to give up the special interests possible with the current system. NO WAY they won't just add taxes on top of this at some point. And NO WAY IN HELL anyone in Congress has the attention span to understand it. Almost no one is behind it. For a reason.

And what happens with State taxes? Local taxes. A lot of these were based on Federal returns.

Black market would go wild. Nobody will pay 30% if they can help it. Of course they hope to make this up on the existing tax dodgers paying sales tax I suppose.

Who enforces the collection? I thought the idea was to eliminate the IRS? Sure it may reduce the paperwork and bureaucracy, but it will always be with us I'm afraid.

Now where I really agree with you is that someone would not be behind this if they didnt see an angle to benefit them.( you have other good points also!) The uber wealthy would have to benefit greatly. But I'm not one of those with a knee jerk response anytime someone advocates changing the tax code. If a system can be developed that adds net value to the economy and benefits everyone, I could care less what Warren Buffet pays in tax, if any. Billions are wasted complying with the idiotic code we have now. It distorts our political process. It allows Congress to pick winners and losers, and leads to corruption. But some will always clamor for the rich to pay higher taxes, even if it means making their own lives hell. They just want the rich to suffer a little along with them. But I have news, they won't suffer a bit, with or without higher taxes. They'll just pass along the cost to the end user, the people.

[flintlock]

Re: Check yourself:

Thailand has a simple tax code. (I have no idea about how pervasive tax evasion is.) Basically, you pay 10 % on the first 500,000 baht, 20 % on the next, and 30 % on everything after that. Income from dividends, rental property, and wages are all treated the same.

In the US, taxing the wealthy at the same rate as the middle class would go a long way towards wiping out the national deficit.

A 50 % tax on inheritance over three million seems very fair to me.

But, in the end it’s not the amount of money extracted from the rich that matters. It’s the political influence the tax code allows when they are paying next to nothing.

The Thailand system is along the lines of what I imagine as a better system. Tax all income equally, eliminate special considerations and you eliminate a lot of the corruption and influence peddling. Reducing paperwork would be an added benefit. Accountants might not like it though.

[flintlock]

Re: Check yourself:

At this point I'm so jaded, I don't know if the unintended consequences are actually unintended or disingenuously deliberate. Because they never randomly hurt the financial elite, only the poor and middle-class.

That has been the way for thousands of years. We just have better communication now so we are more aware of what is happening. Most economies are Capitalistic. Those with control of the Capital call the shots. When things get out of hand, the usual way this is remedied is war and mayhem. So take your pick. War or continue getting the shaft. Its a rare time that an equilibrium is struck.