Taxing Sales under the FairTax – What Rate Works?

Boston University ^ | September 2006 | Laurence J. Kotlikoff et al

[pigdog]

As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level.

Bill Gale (2005) and the President’s Advisory Panel on Federal Tax Reform (2005) suggest that the effective (tax inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23% rate. This study, which builds on Gale’s (2005) analysis, shows that a 23% rate is eminently feasible and suggests why Gale and the Tax Panel reached the opposite conclusion.

This paper begins by projecting the FairTax’s 2007 tax base net of its rebate. Next it calculates the tax rate needed to maintain the real levels of federal and state spending under the FairTax. It then determines if an effective rate of 23% would be sufficient to fund 2007 estimated spending or if not, the amount by which non-Social Security federal expenditures would need to be reduced. Finally, it shows that the FairTax imposes no additional real fiscal burdens on state and local government, notwithstanding the requirement that such governments pay the FairTax when they purchase goods and services.

[lucysmom]

No "leap of faith" is required as the Fairtax bill is, without question, the most throughly researched bill EVER introduced in congress.

Yes! And the president's tax panel along with other research agrees with me. The FairTaxers just ignore that little factoid.

Show me, where in the bill, budget restraints are mentioned. How about illegal aliens? The underground economy?

[xcamel]

Only if one makes the FairTax leap of faith.

Or takes a fairly heavy drug dosage...

[Bigun]

When the Executive pays the illegal gardener under the table, he pays him from fully taxed income.

Under the FairTax, the executive's UNTAXED income will pay the illegal gardener (and no, he won't pay any FairTax on that transaction.)

I have no quarrel with that as far as it goes but we are not talking only of the executive's income.

What of the income of that illegal worker under the current system?

Does HE pay ANY income or payroll taxes?

Would he pay the sales tax on his legitimate purchases under the Fairtax?

What about the local dope dealer who derives his entire income from selling his illegal products down on the corner? What about the prostitute who derives all of her income from plying her trade in that same neighborhood? Do those folks currently pay ANY income or income or payroll taxes?

Would they pay at least SOME tax under the fairtax?

[Mind-numbed Robot]

if you are in the income strata that qualifies for the IETC, then it is highly likely that your effective tax rate will decline under the FairTax.

I have not read your complete reply yet because I couldn't get past this. Does that mean that my prebate will be greater than the EITC? Possible I suppose. However, what about things I buy over the prebate, which is intended to cover the taxes on essentials? The tax on that will be taxes I otherwise would not have paid, since I pay none.

Under the present system I get an undeserved "

Unlikely.

Does that mean you think I am lying?

The FairTax out-Marxes the current combined Federal Tax burden when it comes to progressivity.

Progressivity is only part of the Marxist aspect of the income tax. Fact is, the bash-the-rich liberals always create a back door for the rich to slip out of the taxes they impose. The real Marxist part of it is the ability of central control over who gets what and it seems to more frequently punish the success of the middle class entrepreneur, the backbone of free enterprise, and reward the non-producers, the victim groups. Central to it though, is what it taxes - income. Though they pretend to champion the workers they instead exploit them by taxing the fruit of their labor.

No, your premise is false: there no tax cut. I DO believe in tax cuts. The problem is that the FairTax is not a tax cut: the same amount of money is extracted from the private sector under either scheme. There is no tax cut.

The similarity is in the principle, not the cut. Each gives the individual all or more of their own money with which to do as they please. That would include spending it on either taxable or non-taxable items, saving it, investing it, giving it to friends or relatives (no gift tax with the FT), or giving it to charity. (Does it not bother you that giving your money away is a taxable or deductible event depending on the recipient, as under the present system?)

All of those choices will eventually end up in the private sector before it ends up in the government's pocket, expanding the economy and increasing revenue to the government.

I consider entitlement funding to be hidden for the same reason that you want to end withholding, because it is largely ignored and unseen. Few analyze their pay stubs and just look at what the can put in the bank.

In short, the FairTax cannot realize your philosophical desires; don't be fooled!

I am of the impression that you think the FT is a scam. If so, please answer my previous question as to motive and which special interest is being served. It seems to me that there are many special interests who support the present system and strenuously resist the FT. The only ones I see benefitting from the FT is, .... well, everyone!

[xcamel]

"the most throughly researched justified by wishful thinking, rationalized, tweaked, twisted, obfuscated, concocted, B$ laden bill EVER introduced in congress."

There. Fixed it.

[Mind-numbed Robot]

Show me, where in the bill, budget restraints are mentioned. How about illegal aliens? The underground economy?

Yes, the FT demands a balanced budget, expels all illegal immigrants, and outlaws the underground economy. Of course, that is tongue in cheek! In the kindest way I can say it, mom, that may not be the dumbest thing ever said about the FT, there have been many, but I would surely rank it in the top ten.

[xcamel]

Bottom line is when the vast majority pays a basic federal income tax rate of 15% or less, nobody gives a flying fig about the FT except politicians using the half-truths and buzzwords when addressing "the masses" just to get reelected.

[Bigun]

Yes! And the president's tax panel along with other research agrees with me. The FairTaxers just ignore that little factoid.

That is just factually WRONG! Fairtaxers have repeatedly addressed ALL of that and more!

For example, the President's tax reform panel did not analyze the Fairtax at all but some concoction of their own making. You DID kow that didn't you?

Such as Show me, where in the bill, budget restraints are mentioned.

They aren't and they aren't under the icome tax code either but I can tell you that when every person in this country sees what they are paying with every purchase bugetary restraint WILL begin to occur. That certianly has NOT happened with the current system.

How about illegal aliens? The underground economy?

Already addressed elsewhere on this thread and more specifically in the paper this thread is about.

[xcamel]

You forgot the '72 virgins' ....

[goldstategop]

The only state that does NOT have a sales as well as an income tax is New Hampshire.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[Bigun]

Progressivity is only part of the Marxist aspect of the income tax. Fact is, the bash-the-rich liberals always create a back door for the rich to slip out of the taxes they impose. The real Marxist part of it is the ability of central control over who gets what and it seems to more frequently punish the success of the middle class entrepreneur, the backbone of free enterprise, and reward the non-producers, the victim groups. Central to it though, is what it taxes - income. Though they pretend to champion the workers they instead exploit them by taxing the fruit of their labor.

B R A V O ! ! ! Well said! Well said indeed!

The Income Tax: Root of all Evil by Frank Chodorov

[goldstategop]

If you invest and save money, it would not be taxed. If you take it out and spend it, then the bill really comes home doesn't it? We can always exempt food, basic medical care, clothing and gas from the tax - a life basket of essential goods and services and tax everything else at a higher rate.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[goldstategop]

Exactly! With the Fair Tax, people know the true rate of what government costs them and they have to decide if all those programs are worth paying for. Under the current income tax system, voters are not consumers. The price tag of government is kept hidden from them and politicians are able to keep the true cost out of sight and out of mind. With the Fair Tax, the upper rate would be 40%. Raise it any higher and people will negate attempts to raise it higher simply by cutting back on their spending and changing their consumption habits. In short, whereas the income tax empowers the government, the Fair Tax will empower the people.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[goldstategop]

The politicians will never eliminate withholding. As for the notion people don't know much sales tax they pay, of course we do. Its upfront in the price of every good since its tacked after the price is set. At that point, one decides if an item is worth getting even with the tax. If its too onerous, one can simply refuse to buy. Therein lies the beauty of the Fair Tax. The power to supply government with increased revenue rests with you and your decision on whether or not to make a purchase. You refuse, the government doesn't get paid. Whereas in contrast under the income tax, you have to pay regardless of the state of the economy or you don't like what happens with the money. The power belongs to the IRS and its jack-booted goons. If we're discussing true accountability, no question in my mind at all - the Fair Tax is the way to go.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[Mind-numbed Robot]

Bottom line is when the vast majority pays a basic federal income tax rate of 15% or less, nobody gives a flying fig about the FT except politicians using the half-truths and buzzwords when addressing "the masses" just to get reelected.

Isn't that contradictory? If few care how could it be popular enough to get one elected?

It seems to me that the FairTaxers are the ones swimming against the tide, those with a vested interest in the present system are resisting any change.

[goldstategop]

That is the point. If you live in a state with no income tax, your purchasing power keeps taxes low and the government honest. They can't increase spending willy nilly because there is a limited amount of money to go around. For conservatives, the key to limiting spending is to eliminate the income tax system that makes runaway spending possible in the first place.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[goldstategop]

As I said, a life basket of essential goods and services could be exempt from the tax altogether. So no one would be deprived of the necessities of life. A consumption tax can be structured fairly to protect people's livelihood. An income tax can't.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus

[FreedomCalls]

I suggest you read the paper with understanding and realize that the income tax, its laws, its people (the IRS) and its records are ALL eliminated by the FairTax.

No, it just substitutes one agency for another. Or are you claiming that retail sales figures and tax remittances thereon will never be audited?

[xcamel]

Not really contradictory, because the lie that has become the truth is that the "IRS" et al and the "tax code" are more evil than Satan himself, and only a fast talking pol can save them from personal economic apocalypse, and or the black-helicopter, jack-booted, gun-totin tax gestapo.

[Mind-numbed Robot]

Thanks for the great link.