FairTax.Org HR25

WWW.FAIRTAX.ORG ^ | Last Week | Thomas Leser

[nsmart]

The FairTax is the non-partisan national sales tax proposal that would replace all federal income taxes. These include personal, estate, gift, self-employment, alternative minimum, capital gains, FICA, and corporate and death taxes.

[OHelix]

"I think it has been established the employees will pocket most if not all of the payroll taxes."

I think the employee portion of the payroll taxes (and personal income tax) being eliminated will result in increased net wages, rather than decreased prices. However, the employer portion will result in decreased costs. Market pressure will determine if the decreased costs result in decreased prices rather than increased profits.

Regardless, to whatever extent the elimination of the existing taxes does NOT allow for reduction of prices by virtue of it being incedent on wages rather than costs, it INCREASE WAGES. Whether it INCREASES WAGES or DECREASES COSTS, it's going to do either one or the other. The only potential for decreasing purchasing power by the wage earner is to what degree the decrease in costs are turned into profit rather than reduced prices, which will still increase SOMEBODY'S buying power.

The net effect is that (if it is revenue neutral), then, overall, purchasing power on average should be the same. There would be some consumers who would be expected to have increased purchasing power, and some to lose some, but over all, it should net out.

However the fact that resident aliens (legal and illegal) and others not currently paying income tax will now pay sales tax should broaden the tax base. This will put those people in the position of having less purchasing power, and have a net benefit to the purchasing power of those who pay taxes, now.

[Always Right]

I think the employee portion of the payroll taxes (and personal income tax) being eliminated will result in increased net wages, rather than decreased prices. However, the employer portion will result in decreased costs. Market pressure will determine if the decreased costs result in decreased prices rather than increased profits.

It will almost have to reduce the price. Adding a 30% sales tax on goods, while perhaps decreasing costs 10% will put heavy pressure on prices. I can't imagine this plan being good for people on fixed incomes who will not have the added purchasing power from the eliminate Payroll Taxes, but will have to be faced with paying more for goods and services.

[OHelix]

It will almost have to reduce the price. Adding a 30% sales tax on goods, while perhaps decreasing costs 10% will put heavy pressure on prices. I can't imagine this plan being good for people on fixed incomes who will not have the added purchasing power from the eliminate Payroll Taxes, but will have to be faced with paying more for goods and services.

I think that is a valid point. However, I think 10% is a low estimate in my judgement, especially in the long run. But I would also like to point out the dynamics involved using your numbers as an example. Even if prices only come down 10%, a $10 item would be priced at $9. Adding 29.87% tax would yield a total cost of $11.69 including the tax.

If your estimate is low, and prices were reduced by 15%, the $8.50 item plus the 29.87% tax would yield $11.04.

Keep in mind they will also receive the credit to compensate for 23% of their purchases up to the poverty level. Also consider how the benefits are calculated. If the cost of living goes up, then the benefits should rise as well.

[nsmart]

Is anyone considering the boon to business with all the corporate headquarters moving back to the US. With the US becoming a tax haven for the rich mucky-mucks... the economy will grow by leaps and bounds. Once that happens, the % of tax can be dropped.

[nsmart]

Perfect example of how the economy REALLY works.

---

Solving Problems in a Free Society

by Harry Browne
February 9, 2005

After I wrote about the Age of Tranquility
http://www.harrybrowne.org/Journal0501.htm#0131
(the period before there were drug laws in America), I received the following email:

A frightening thought - if the clock were to be
turned back, free access to drugs once again.

In earlier times these things simply evolved, no
fuss or feathers. As you say, they were there,
people used them as such (a bit like glue used to be
in my own childhood, something used to stick fingers
to balsa wood; it never occurred to us to sniff it).
Today the mentality is different.

Now there is too much mystique - take the lid off
and the box would explode? If these drugs are as
addictive as claimed, and they suddenly became
freely available ... brrrrrrrr.

I understand the concept of freedom, to destroy
oneself if one chooses; I also believe that the
majority of people are decent and have common
sense. A country with a small population might be
able to absorb such an experiment, but your country
with its unique mindset ("Bomb everybody to make
the world safe") couldn't handle it.

I can see why it would be easy to believe this. Much the same fears were expressed when the repeal of Alcohol Prohibition was being considered in the early 1930s - even though Prohibition had been in force only a little over a decade. There was talk that America would become a nation of drunks - that the people who had been teetotalers before Prohibition would now be tempted to give it a try, and that the old customs that restrained people voluntarily would no longer be respected.

Of course, when Prohibition ended, people celebrated happily for a few weeks - and then life returned to pre-Prohibition normality. The gang wars were over, no one had to risk his life drinking bathtub gin anymore, and police corruption diminished rapidly.
The celebrations were about more than just the availability of legal booze; they cheered the return of peace and freedom.

Planned Economy or Freedom?

A similar situation occurred at the end of World War II.

As the war was winding down in 1945, there was a great deal of hand-wringing over the problem of 10 million GIs coming home from war and looking for jobs. How could the economy handle such a huge, sudden influx of labor? The Common Wisdom predicted another Great Depression. (Actually, the first one had never ended, since very few people saw their standard of living increase during the war).

When the war ended, Congress set to work to create a giant plan to control the transition to a peacetime economy, work the returning soldiers into the labor force without disruption, and generally save us from chaos and destitution.

But, instead, one of those miracles happened that don't come around very often: Congress argued so long over the plan that it was never implemented. So the U.S. economy had to fend for itself - and fend it did. The ex-servicemen found jobs, the economy took off upward, and the Great Depression was finally over after 16 years.

The Congressmen and pundits, never having studied economics seriously, were unaware of Say's Law.
Stated simply it is: Any new supply is accompanied by an equivalent new demand. In other words, any new entrant into the labor force also brings with himself a demand for products and services at least equal to the employment he seeks. So when 10 million more workers were available and seeking jobs, there was now new demand that was equal to 10 million people, requiring 10 million more people to produce the products and services necessary to meet that demand.
In short, a new job for each new worker.

The only problem involved was the matching of new workers to the new jobs that were created by the new demand of people who hadn't been in the market for new refrigerators when they were sitting in foxholes in places like Italy and Wake Island. How was the matching-up going to be handled?

Well - guess what - people who knew how to handle such things suddenly appeared out of nowhere, made their services available for a profit, and the entire transition was over within a year after the end of the war. The economy really boomed for the first time since 1929.

The Principle

The principle here is: Whatever the problem in a free market, it will be a profitable opportunity for someone who knows how to fix it.

Whatever difficulty you think might occur in a free market - people afraid to buy products for fear they're unsafe, no way to raise the money for some huge project, people insecure for some reason - it represents an opportunity for someone to solve the problem and make a profit for himself. The bigger the problem, the bigger the payoff for solving it, and the more people who will turn their attention to solving it - including a lot of very smart people who previously had not had an interest in the subject, especially not before there was a free market to reward them for taking an interest.

The transition to a society of legalized drugs is a different problem from the economic transition after World War II. But the solution is always the same:
more liberty and less government. Free people will sort things out because they have to in order to get what they want; politicians know only how to play political games.

We don't have to know how everything will be handled in a free society. All we have to know is that free people have much more incentive to solve problems than do politicians whose own livelihood and life savings are never on the line.

[ancient_geezer]

. Once that happens, the % of tax can be dropped.

Presuming the Bush Administration is successful in making its tax cuts permanent, the % of tax can be dropped right of the bat. One of the rules of the game laid down by Bush is revenue neutrality.

The Fair TaxAct 23% figure for tax inclusive rate was set for revenue neutrality under the Clinton tax law. Revenue neutrality under current revenue collections targets a somewhat lower NRST rate as indicated by Tax Foundation's measures of effective federal tax rates as a percentage of Net National Product.

 

refer Tax Freedom Day 2004 PDF http://www.taxfoundation.org/sr129.pdf

 

Total Effective Tax Rates by Level of Government Percent Net National Product(NNP)
Year	Federal	State	Total
1997	21.8%	10.3%	32.1%
1998	22.4%	10.4%	32.8%
1999	22.5%	10.4%	32.9%
20000	23.1%	10.4%	33.5%
2001	22.2%	10.5%	32.7%
2002 1	19.7%	10.2%	29.2%
2003 2	18.5%	10.1%	28.6%
2004 3	17.9%	10.0%	27.9%
Notes: Leap day is omitted to make dates comparable over time. Since depreciation is not available to pay taxes, GDP is an overstatement of spendable income for the purpose of measuring tax burdens. Depreciation is netted out of NNP. 0 Last year of Clinton administration when the HR25(Fair Tax Act) rate was estimated 1 Economic Growth and Tax Reform Reconciliation Act of 2001 2 The Job Creation and Worker Assistance Act of 2002 3 Job Growth and Tax Relief Reconciliation Act of 2003 Sources: Office of Management and Budget; Internal Revenue Service; Congressional Research Service; National Bureau of Economic Research; Treasury Department; and Tax Foundation calculations.

[Bigun]

B R A V O ! ! !

[Always Right]

I must stand correct. If ancient_geezer's table in post 626 is to be believe, states will have to add 10% inclusive to the 23% federal tax to get their current level of revenue. That's a 33% inclusive rate, or a 50% sales tax rate. My 35% guess was way too low. Imagine a 50% tax on every purchase! These guys can't be serious.

[phil_will1]

"Do you think a government can pay a tax?"

Given that they do now, I would say that the answer is a definite yes.

[phil_will1]

"Not if they aren't made here....which most aren't."

Correct. We have a trade deficit which is now up to $600 billion/year and continuing to grow. The FairTax would reverse that trend.

[Your Nightmare]

Given that they do now, I would say that the answer is a definite yes.

So you think a government actually pays the tax. Just where do they get the money to pay this tax?

[phil_will1]

"What is proposed, a quarter of one percent? I am not sure too many states will sign on for that."

And if the rate were to be increased, you and YN and LL would be critical of that because it would cause the tax rate to go up.

[phil_will1]

"I can't imagine this plan being good for people on fixed incomes who will not have the added purchasing power from the eliminate Payroll Taxes, but will have to be faced with paying more for goods and services."

There is a lot about the FairTax that you can't envision, based on your posting history. People living on fixed incomes are, for the most part living on low incomes. Regardless of what the sales tax rate turns out to be, all their sales taxes up to the poverty level would be tax-free due to the rebate. That means if prices ONLY decline by 10%, then they would see a 10% increase in their purchasing power up to the poverty level. That sure seems like a benefit to me.

Of course, we will leave alone for now the debate over the magnitude of the price decline. Dr. Jorgenson says 22%, AR says 10%.

[snowsislander]

All these costs on business are a matter of everyday operating expense that businesses incur out of the complexities of the income/payroll tax system and effect the price of goods and services as well as wages to labor and bottom line return to the investor. All together with actual tax paid reflect the ultimate price the household must pay for an inefficient and comples tax system that is the federal income/payroll tax system we have all come to know and gripe about.

Our current system is an embarrassment. I don't understand why we go through so much silliness in order just to fund our government. A simple NRST would be far better.

I personally don't like some provisions of the Fair Tax proposal -- the prebate (which reminds me of McGovern's "negative income tax") particularly doesn't do much for me. It's a major flow of money back that if we didn't do, we could lower the rate from 23% down to something more reasonable; my quick back-of-the-envelope comes to something under 20%. Every point off that 23% will bring more supporters, also; not having the "negative income tax" aspect would help with more conservatives (although, to balance that, it probably has a powerful attraction for the left.)

But if the Fair Tax is our NRST proposal, I will go along with it. It certainly is far better than our current tax regime.

[ancient_geezer]

I personally don't like some provisions of the Fair Tax proposal -- the prebate (which reminds me of McGovern's "negative income tax") particularly doesn't do much for me.

Unfortunately there are issues that must be addressed to make any tax bill politically viable. When it is a choice between DOA and the potential for enactment, I'll take the later. Especially as the alternative of piecemeal exception of goods and services picked by pandering politicians would be a total disaster.

[snowsislander]

Unfortunately there are issues that must be addressed to make any tax bill politically viable. When it is a choice between DOA and the potential for enactment, I'll take the later. Especially as the alternative of piecemeal exception of goods and services picked by pandering politicians would be a total disaster.

100% agreed. A simple, uniform NRST in any form is far better than our current embarrassment.

People that wait for perfect solutions generally get to do a lot of waiting. In this case, I will be glad to see the Fair Tax enacted as it is written in H.R. 25, even if I personally would have liked to see some details done differently.

[OHelix]

I must stand correct. If ancient_geezer's table in post 626 is to be believe, states will have to add 10% inclusive to the 23% federal tax to get their current level of revenue. That's a 33% inclusive rate, or a 50% sales tax rate. My 35% guess was way too low. Imagine a 50% tax on every purchase! These guys can't be serious.

I'm curious where you're getting your 10% figure for states. I would expect it would be higher.

But I'd like to point out that unless the rate is higher than it needs to be for revenue neutrality, we're paying that much tax now and just don't realize it. Better to make it visible so people understand how much money governments waste. The hidden taxes have allowed the socialists to suck vast amounts of wealth from our nation and move it back into the hands of those who will support their agendas.

[lewislynn]

Correct. We have a trade deficit which is now up to $600 billion/year and continuing to grow. The FairTax would reverse that trend.

Only if it reduces employee compensation(s)...Your bosses there at AFT say it won't.

[lewislynn]

all their sales taxes up to the poverty level would be tax-free due to the rebate.

If that's such a good idea,why don't you raise the "rebate" to a level the middle class are untaxed too?...imagine what that would do to the economy.

The truth is the "rebate" is a huge transfer of wealth (at least 19%) tax increase and NOT a windfall for the poor from a money tree...

Of course, we will leave alone for now the debate over the magnitude of the price decline. Dr. Jorgenson says 22%, AR says 10%.

What is AR?

The fairtax rate is tied to the GDP. a 22% drop in GDP would only mean a tax increase...and they wouldn't even have to vote for it. They've already authorized the bureaucrats at Social Security to do that on their own, as they see fit.

[lewislynn]

under current revenue collections targets a somewhat lower NRST rate as indicated by Tax Foundation's measures of effective federal tax rates as a percentage of Net National Product.

What a fraud, that's another clever lie.

That table has nothing whatsoever to do with, nor does it "indicate" any national sale tax rates.

Your bosses at AFT determined the sales tax rates by determining how much was needed to replace the proposed repealed taxes as a percentage of GDP...not "by Tax Foundation's measures of effective federal tax rates".