Posted on 09/15/2005 7:03:21 AM PDT by groanup
THE FAIRTAX --- STRAIGHTENING OUT SOME CONFUSION
When Congressman Linder and I were busy researching and writing The FairTax Book we knew full well that it would one day become the focal point for those opposed to this tax reform idea. We tried, therefore, to make sure that our numbers and claims were correct and consistent with the research that went into the drafting of HR 25.
On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck. Those who have much to lose if the FairTax were to become law will focus on these areas in an attempt to undermine support, so let's put their objections and distortions to rest by addressing those matters here and now.
We explained in the book that the FairTax plan was revenue neutral. By this we meant revenue neutral for everyone ... the government, businesses and individuals. You can't put more money in the pockets of one without taking money out of the pockets of another. The harsh reality is that politicians would not support the FairTax if it meant less revenue for the federal government; business leaders would not support the FairTax if it meant a decrease in corporate earnings and profits, and the people would most certainly not support the FairTax if it meant a decrease in their income. Taking an snapshot view of our economy, an increase in income in one of these sectors would necessarily mean a decrease in another. This is why the FairTax was designed to be absolutely revenue neutral – leaving everyone pretty much where they are in terms of income or revenue. To put it more bluntly, there is no free lunch in the FairTax plan. There is no "something-for-nothing."
This brings us to the question of embedded taxes in the cost of consumer goods and services, and your paychecks.
As explained in The FairTax Book, there are taxes embedded in everything we buy. Every entity which provides a product or service in the design, production, marketing, distribution and sale of every consumer good or service will incur some tax liability as they perform their particular function. This tax liability will be incorporated into whatever these individuals or business entitles charge for their services, and will all passed through to become a part of the final cost of the product or service.
Now here's what we didn't explain well in the book.
Every employee of any company involved in American commerce is also a provider of a service, and, as such, the employee incurs a tax liability as a result of his or her work. This tax liability is incorporated into what the employee charges the employer for their services, and is eventually incorporated into the final retail cost of the employer's product or service. Each employee is essentially a separate business entity providing a product, be it physical or mental labor, to the employer.
The extensive research behind HR 25, The FairTax Bill, shows that the average embedded taxes in every consumer product or service is about 22%. In some industries, such as leather goods, the embedded tax is smaller. In other industries, such as homebuilding and construction, the embedded tax is higher, but it averages out to somewhere between 22 and 23%. With the passage of The FairTax Bill, those embedded taxes disappear. These embedded taxes include the combined tax burdens of all entities involved in bringing those goods or services to market, and that includes you, the employee, and the taxes you incur as a result of your employment.
We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So ... what does this mean to your paycheck after the FairTax becomes law?
When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay – the amount you can put into your bank account – will not decrease, and may actually increase.
On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax. Once again, a zero-sum, revenue neutral game.
Now, let's elaborate on the "keep 100% of your paycheck" line that appears in The FairTax Book. It is certainly true that after the FairTax becomes law there will be no more withholding from your paycheck for any federal taxes. What you earn is what you get. This is not to say that your gross pay will equal what it was before the FairTax. This will depend on what your employer does when the embedded costs represented by the tax burden you have passed on to your employer disappear. One thing is certain: You will suffer no decrease in real or net earnings --- the amount of each paycheck you deposit into your bank account every other week. The "keep 100% of your paycheck" concept can more easily be applied to those who either change jobs or come into the labor force after the implementation of the FairTax. A new worker will negotiate a wage with an employer knowing that the amount negotiated will be the amount that worker receives every two weeks ... no deductions. Likewise, when you change employers you, too, will negotiate a wage that will not be subject to withholding, and you will get 100% of your wages in each paycheck.
Some of you reading this amplification of the principle's of the FairTax may have come to a rather interesting and accurate conclusion. The reality is that in America we're already operating our federal government off a consumption tax. A convoluted and impossible to understand consumption tax, but consumption tax nonetheless. We say this because ultimately all taxes paid by businesses or individuals eventually make their way through our economic system until they are embedded in the cost of some consumer item or service. In other words, taxes, like that other stuff you've heard about, roll down hill. At the bottom of that hill we find the retail sale and you, the ultimate consumer.
As we said in the book, and as we repeat here, the FairTax is not a "something for nothing" scheme. It was designed to be and, in fact, is revenue neutral. Having said that; the non-government economists who studied the FairTax play are nearly unanimous in their agreement that the implementation of the FairTax will lead to unprecedented economic growth in the United States. We will see economic growth in our economy of such magnitude that it will, sooner rather than later, lift all boats ---- including yours.
I am sure Ditto will or has answered this better than I can but, as he said, any invested money is quickly spent. You know when you put money in a bank, in an insurance policy, or in any investment, that the institution you gave your money to can't just sit on it and still pay you for the privilege. They must put it to work. They lend it or invest it themselves in some money making opportunity. Those who take the money must themselves do something with it and all along the way it is getting spent. A large portion of that enters the tax base of the Fair Tax.
BS. Why would they care who paid the tax as long as the revenue was reported correctly? There is no reason to track this. None. The current system requires it to ensure that each individual is paying "their share".
C'mon. Joe has to buy a new carburetor doesn't he? He has an unexpected expense this month that takes 300 bucks out of his monthly budget. Does he have the opportunity to call the IRS and ask for a tax holiday? No.
What if we adopted the NRST? What if he was looking at a new driver for his golf bag? 300 bucks plus sales tax: 390 bucks. Well, he just might go to "Play It Again, Sports" and buy a used driver for 150 bucks. Or he may just wait. He has that option.
I know what you're going to say, what's to keep everyone from buying used all the time? Well they will at first. Pretty soon though we'll run out of used stuff. You and I both know that sooner or later Americans want the newest, best, shiniest they can get.
Of course on all transactions, and on all of its details. If you are the government, you aren't just going to collect the tax. The *new* IRS will record the price before the tax, the price after the tax, the date, the location, the item, the seller, the buyer, etc. etc.
What is just another field on a government spreadsheet?
Another thing that just makes me laugh about this 'fair tax' drivel is that supporters think that the IRS will go away. There is ALWAYS an administrative agency to collect and record taxes.
Under your system, the IRS *might* disappear. But a STIC (Sales Tax Information Commission) will appear. Believe it!!
No one is saying that at all. Right now drug dealers deal in cash. Cash from the junkie, cash to the store selling the leather jacket. Nowhere in that pipeline is the dealer paying taxes (except embedded which everyone pays). Under the NRST the dealer pays taxes when he buys the jacket.
1. House resolutions do not overturn amendments.
2. There WILL be a transition period. Then comes a CRISIS and oh so sorry, but we need money for this or for that. There is debate now regarding future tax cuts because of Katrina. And Katrina wasn't on the map (literally) a month ago. WHO KNOWS what the next *dire* federal need will be?
3. See my earlier posts. ANY tax system requires administration, including this idea.
You must have entered the conversation late. If someone entered a store to buy a loaf of bread, that would be a transaction in the legitimate economy. We're talking about transactions in the underground economy. Drug deals and prostitution can't be taxed by a sales tax.
Which is kind of odd since none of that appears in the text of the legislation. In fact, it repeals the current reporting requirements.
Or did you conveniently miss that? Or are you just lying about it?
I'm a big FT supporter but I think Boortz is dancing with a hyena here.
Unfortunately much the bottom line of the message of economic improvement is being lost in this statement in Boortz' dance from one extreme to another, for it focuses solely on tax collections per-se without acknowledging the gains in productivity and efficiency to be realised in going to a consumption tax system that arises from its lower marginal tax rate incident on the individual, and lower overhead costs on business upstream from retail sale.
More efficient utilization of business resources means higher production/sales volume at lower costs above and beyond the savings of taxes extracted by government.
The release of manufacturing from federal tax requirements of the income/payroll tax system provides a tax haven from the perspective of international trade. A clear incentive to reverse the flow of manufactures leaving the U.S.
The net result to the individual is sustained and rising income in a stronger economy not a loss as is constantly portrayed by consumption tax opponents.
The room for improvement to the economy and benefit to the individual household is very large and well beyond the taxes exctracted by government in the current tax system. The federal income/payroll tax system is a destructive burden that must be removed from this nation to remain a competitive player in international trade, as well as provide for a high standard of living for our future generations.
http://www.heritage.org/Research/Taxes/hl565.cfm
An American Economic Review study found that every dollar of taxes could impose as much as $4 of lost output on the economy, with the probable harm ranging between $1.32 and $1.47
Edgar K. Browning, "On the Marginal Welfare Cost of Taxation," American Economic Review, Vol. 77, No. 1 (March 1987), pp. 11-23."Another study in the Journal of Political Economy estimated that the corporate income tax costs more in lost output than it raises for the government."
Jane G. Gravelle and Laurence J. Kotlikoff, "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, Vol. 97, No. 4 (1989), pp. 749-780.
Economic Burden of Taxation
William A. Niskanen
Presented October 2003
Friedman Conference
Federal Reserve Bank Dallas page 6.
www.dallasfed.org/news/research/2003/03ftc_niskanen.pdf"Given that the elasticity c implicit in recent U.S. fiscal conditions is about 0.8 and the average tax rate is about 0.3, the marginal cost of government spending and taxes in the United States may be about $2.75 per additional dollar of tax revenue. One wonders whether there are any government programs for which the marginal value is that high. Given the estimate of the long-term elasticity c from the U.S. time-series data, the marginal cost of government spending and taxes may be as high as $4.50 at the current average tax rate. "
This burden on the nations productivity is greatly reduced under a single stage consumption tax allowing for increased growth with an overall gain in purchasing power and standard of living for the individual household.
To pretend going to a revenue neutral single stage consumption tax is a net detriment to the economy or to individual households is just plain wrong.
Because drug dealers don't buy bread. Or if they do, they get is from the pimp down the street.
And there will be many many others that won't be taxed after this looney idea is pased.
By the way how are flea markets treated? There are new items and there are used items.
I am sure Ditto answered this better than I, but as I just said to sitetest, all that money has to eventually go to work somewhere and when it does it gets spent. Even money that is invested in money eventually ends up somewhere else. In addition there are taxes on services that will pick up some of this. All those organizations also have thousands of employees who are spenders and I as I said elsewhere, those earners are often spending for non earners, children, etc., so that also is captured where it is not now.
I note that the 16th Amendment is very short. But look what we have now!! The current system has sub-clauses that are longer than the original enabling legislation!!!
Repeals the current reporting requirements? HR25 is lying to you. ALL tax systems require administration (and reporting). You just can't get away from that. How else are you going to prove that you paid the tax??
The supporters of this oxymoronic 'fair tax' have this crazy idea that IF passed, Congress will just leave it alone!! Ha Ha Ha HA Ha H Ha Ha.
If the Fair Tax is passed there will be some pain but it will almost certainly be worth it in the long run.
True the drug/prostituution deals wont be taxed but all there spending on mercedes and furs and vacations will be!
Now they pay no taxes!
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