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.

[Always Right]

I have better things to do than to spend my entire weekend writing an economic paper detailing how the Fair Tax is a house of cards built on a shaky foundation of assumptions.

Very wise. I waste too much time trying to explain basics economic realities to the fairtax supporters. You already seem to have a full grasps of the shortcomings. Conceptually it is a good plan, but there is no way you can just switch over from an income tax to a consumption tax and not throw the entire economy into chaos.

[Always Right]

If it were up to me, we'd have way lower taxes and far less government spending.

Fairtaxers will brand you an IRS-lover for commments like that.

[pigdog]

"I waste too much time trying to explain basics economic realities to the fairtax supporters."

LOL!!!

[pigdog]

"Fairtaxers will brand you an IRS-lover for commments [sic] like that."

You're much too eager to put words in others' mouths.

In fact Lurking Libertarian is pretty much right on with both counts - the lower the FairTax rate the better and the less government spending the better. Sounds good to me.

[groanup]

I waste too much time trying to explain basics economic realities to the fairtax supporters.

I'm saving this post for all posterity. I may sneak it back into these threads from time to time. LOL!!!

The official SQL economic textbook:

[pigdog]

Quite so!!

[Always Right]

Which is far better than the fairy tax textbook...

[groanup]

But in the Sears Catalog you can order what you want. Including economics. LOL.

[Always Right]

Well all you 'guys' need is little pixie dust to make all your fairy tax fantasies come true.

[lucysmom]

Odd though, isn't it, that the tithe was 10% of income rather than 10% added to the price of an item? Why were not investment income, or business profits exempt from the tithe?

And if he were an Income Taxer...

Render unto Caesar that which is Caesar's.

[lucysmom]

Isn't it ironic that FairTaxer's claim their tax will limit political tax favors to special interests who lobby Congress when the FairTax three represent, themselves, a special interest group seeking to end (the ultimate tax favor) the taxation on their businesses and investments and hire Washington lobbyists to help them accomplish their aims?

I guess lobbyists are like lawyers - the good ones help us get what we want bad ones help the other guy get what he wants.

[lucysmom]

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.

Under the FairTax the decision to not pay government is tied to the decision to not make a purchase. If the government doesn't get paid, neither does the business owner, nor the producers of the products and services not purchased.

It is impossible to impact one, without impacting the other. Ultimately, that's all of us.

[xcamel]

Fair Taxers are like diapers - they need to be changed often - and often for the same reason.

[lucysmom]

Question asked: Once again, I ask you, how would you tax the citizenry? On their income or their consumption. What do you want to encourage?

Response: Because the FairTax scheme relies on a consistent level of consumption, I would think the choice for a healthy economy is not either or.

pigdog asks: Please give us the link(s) to the exact phrase(s) where you think you read this. Or is this something you just dreamed up especially for this post?

What I was referring to is the oft repeated claim that the FairTax is a more reliable source of government revenue than the income tax because in good times or bad, spending (consumption) is more consistent (reliable) than income.

Consumption is a more stable source of revenue than income.  A recent study shows that for the years 1959 to 1995, the consumption base was less variable than the income tax base.  Why?  Because during difficult times due to unemployment or an inability to work, there are less wages to be taxed; however, people continue to consume. They use savings and borrow money to buy what they need.

http://www.fairtax.net/faqs.htm#who

What the FairTaxers miss, is that if one's income is reduced, one's taxes are also reduced under the income tax; while the FairTaxers rely on (or at least use as an argument) consumption remaining constant and thus stable tax collection, even if one must borrow or go through savings to continue supplying the government with revenue. One system has the taxpayer handing over a portion of what he actually has and the other paying taxes on what he needs even if he has to borrow to do so.

[xcamel]

You'll notice that over the years of "fair tax debate" [sic] the most important parts of the conversation has not been what was said, but questions posed and points made in nearly every thread that have been avoided like the plague. It's like holding a cross up to Dracula. As they blather and obfuscate and post spammage and hooey from this "source" and that like it's some pronouncement from God's own lips, they purposely avoid the psychology and FUD factor like it's "no big deal".

Using fear and loathing to sell a red herring is a recipe for disaster -- and economic and societal disaster without parallel.

[Always Right]

You obviously are being paid to post this nonsense.

The only people I have known who paid for someone to post on this forum was the fairtax.org.

[Always Right]

Your payers aren't getting their money's worth. You are a failure.

Wow, attacking someone's faith. That is as low as it gets.

[Uriah_lost]

Sorry I misunderstood you.....glad to hear it! I'm just at the questioning stage still.

[GregoryFul]

It is clear to me that you do not want to understand my issue with the FairTax - so have faint chance of converting me with your generous but obtuse argument.