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.

[Principled]

A $1 item....

Under the worst assupmtions (provided by anti fairtax folks), the price of this item would fall pre tax to .91 - due to elimination of existing tax costs.

To determine how much would need to be earned to buy the item under the nrst, add the nrst effective rate to .91- say 13.5%.

That would be $1.05.

Golly.

If more people had analytical abilities, this wouldn't have to be done on these threads ocntinuously. Sheesh.

[Principled]

I brought up the issue - you bring up many more issues

You're wrong.

You brought up the issue of net gain or loss after nrst implementation. Your position was ignorant to the exclusion of pretax savings, pretax investments, capital investments, estate taxes, among others.

These are not "many more issues", gregoryful. They are parts of the issue you claim to be your deciding issue.

It is preposterous to believe that you would make this a deciding issue without including all components affecting the outcome.

I suppose you're just blowing smoke.

[Always Right]

Personally, I see this scheme as a way for the "going broke fast" government to exploit the retirement savings of the baby boomers, who will be spending their lifetime of savings, and get marginal benefit from the elimination of income tax.

Pointing out real flaws in their fairytale is not allowed. So what if retirees have to pay taxes again on savings that have already been taxed. They have economists who they pay to spin this so it is a good thing. Why don't you believe what their paid for shills tell you? The fairytax has no flaws.

[Always Right]

It is preposterous to believe that you would make this a deciding issue without including all components affecting the outcome.

He is probably an IRS agent who has just been pretending to be a freeper since 1998 as cover. Them IRS agents are a cleaver bunch.

[GregoryFul]

OK, a multiplicity of enumerated and declared issues is a single issue. I get it.

[GregoryFul]

You are right - no matter which way you slice it, the individual is the ultimate payer of the government burden.

But when you change the way you slice it, there are winners and losers, it is obvious. Changing from taxing income to taxing consumption makes losers of any holding a high net worth, and winners of those who have little net worth but are expecting lots of future income. So the typical 20 year old benefits greatly, but the middle class 60 year old is totally screwed by this plan.

[Mom MD]

reducing my taxes is very important to me and it is one of the things that makes me a fan
But honestly it is just as important to me that even if the fair tax did not reduce my taxes, at least everyone else would pay taxes at the same rate. I'm tired of soaking it to the "rich" - most of us who really aren't

And even when it comes to the truly rich - my view is consistent. THey should be able to keep what they earn as well. Just because they have a lot of money, they are not responsible to give it to everyone else.

I have often said that if I could use the wealth that the IRS redistributes from my paycheck, I could give it to agencies that would actually do some good. I think with the overall generosity of the American people, if wealth redistribution stopped, there would be more social welfare, not less. THe churches and other organizations are far more caring and efficient at taking care of people that the IRS

[Principled]

Wow. You don't see how including all things that affect net position as being part of determining net position?

[GregoryFul]

But it could be corrected - if only the flaw was acknowledged and accommodated. But I see here that proponents of the FairTax don't want to go there. It could be the trillions of dollars in after tax wealth that they don't want to compensate for, that would make their scheme unaffordable.

It has become common in this country to ignore freedom and justice and cloak outright blatant theft of rights, freedoms, and property in deceptively comforting words, "for the children", "FairTax", "Social Security", "Medicare", "Patriot Act", "Medical Privacy Act", etc.

Unfortunately, there is an ignorant hoard out there that falls for this cynical pretense.

[xcamel]

Now you're beginning to see the light

[RobFromGa]

That's why Linder calls the FairTax the "tax on accumulated wealth" and he and Boortz don't understand why liberals aren't all for it. Your problems with the FairTax are all valid points.

Don't be expecting the FairTaxers to listen to anything logical though, logic exposes the FairTax for what it is, a double-counting scam.

[Principled]

I have acknowledged that after tax savings will be taxed when spent. While this is obviously not attractive to those with after tax savings, it is by no means an indication that those with after tax savings will have reduced purchasing power. That's the leap you're making - which is in error.

That there may be some who do indeed have reduced purchasing power isn't in question. Some will. An obvious category or two of folks who will have reduced purchasing power are all illegal immigrants and those who cheat on income taxes by underreporting income, over reporting expenses, or by not reporting the income at all,

You have not established (although you've been asked to do so) that there will be any legal participant in today's income tax scheme who will suffer a net loss in purchasing power. You have only stated that after tax savings will be taxed when spent. We all know that.

We also know that pretax investments will exprience a large gain - so will any capital asset gains - so will any earnings.

You choose to look at one aspect of purchasing power to the exlusion of others. That's ignorant.

That would be like focusing on what happens to 401k money without inspecting what happens to anything else. Let's see - my effective rate at retirement will be about 15%. So according to your "logic", my net posiiton will be 15% better.

What makes it funnier.... you assert that the other things that affect my net purchasing power are "unrelated"!

LOL.

[xcamel]

In a nutshell - Everyone who has already been taxed at the highest rates, managed to accumulate some 'wealth' in liquid assets, and collectively pay nearly 95% of the current tax burden on income, obviously have a propensity and a greater capacity to spend (consume) to maintain their lifestyle. This is exactly what the FT is banking on. Talk about an out-of-control wealth redistribution plan...

50%-60% of the after-tax wealth spent by the upper income levels goes toward reinvestment in businesses that create and maintain jobs and payroll for those 'working their way up'.

Once, Twice, Three times screwed.

[GregoryFul]

I like to focus analysis on a single issue at a time. I know, it's not Zen, but it helps me understand. Of course my before tax savings (under 401K, etc.) may not be significantly affected by the change - I haven't really considered the implications of that asset class, the value would apparently be compensated in that now I don't have to pay income tax on the funds, but I would have to pay sales tax - just another form of taxation for those funds from a cursory glance.

But at my point in life I've acquired lots of after tax assets. If our tax system is changed to a sales tax system, I will not be able to buy as much stuff with those assets - I say that is not fair at all - it is theft of my property. Acknowledge and compensate me for that reduction in value, I might be able to move on to support this kind of gross change in the way we fund government.

I would suggest easing into such a change, because the dislocations and personal rearrangements that would result from an instant gross change of this sort would send violent shock waves through our economy.

[xcamel]

This is why going back to the original flat tax plan is much better on a socio-economic basis.

[GregoryFul]

I have acknowledged that after tax savings will be taxed when spent. While this is obviously not attractive to those with after tax savings, it is by no means an indication that those with after tax savings will have reduced purchasing power.

You are acknowledging that after tax savings will not be able to buy as much stuff if the FairTax is implemented, and say it is obviously not attractive to those with after tax savings (Why?). Your last assertion is completely contrary to your understanding of the issue in light of your concessions.

[lucysmom]

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.

Exactly! The manipulative nature FairTaxer arguments is a red flag.

[GregoryFul]

Talk about an out-of-control wealth redistribution plan...

And they advertise it as being even more progressive than our current system. So perhaps those who have been able so rise above the hand-to-mouth, government dependent, S/S crowd will be shouldering 100% of the tax burden. Good plan, eh? Destroy productivity and make everyone a pauper.

[Always Right]

http://www.fairtaxcalculator.org/ ....found it above.

First time I have seen this new 'calculator'. What a pile of dung! Let's see how many lies I spot.

1. The fairytax calculator says principle on your home is tax free. Not true at all. If you buy a new home with a pre-tax price of $200,000, the fairytax adds $60,000 so your principle is $260,000 minus your downpayment. How is that taxfree???? It is not. Fairytax manipulator lie #1.

2. The fairytax calcultor says interest is tax free. Patently untrue. While not a straight-forward calculation, it is taxed at a 30 percent rate above some government determined index rate. So there will be tax on all interest payments unless you are some sub-prime borrower. Fairytax manipulator lie #2.

3. It says payments to churches and non-profits are untaxed. Like the income tax, these payments are not taxed. But unlike the income tax, the fairytax taxes these organizations. So if your church pays your minister $30,000, under the fairtax the church will now have to send the government a $9000 check. The fairtax does tax your 'taxfree 'donation, just not when you give it but when they spend it. You must give more money under the fairytax to do the same work. Fairytax manipulator lie #3.

4. Saying student loans payments are taxfree is a lie too. Nothing in the bill says anything about interest on these loans. The interest on these student loans would be tax just like all other interest payments are taxed. Fairytax lie #4.

5. Saying taxes paid to the state is taxfree is a lie too, because under the fairtax states now have to pay the fairytax on all their expenditures. Even the latest paper by the fairytaxers agree that state taxes will be higher to compensate for these new taxes on the states. So you will be paying more in state taxes to pay these. Remember, you state does not pay these taxes, they pass them on to you!

6. The whole concept of an 'effective' fairytax rate is a fraud too. If you buy a new pretax $20,000 car, there is a $6000 fairytax on it. Period. Trying to create some fictious rate based on your income is a cute concept to manipulate the facts. Besides their calculation is fraudulant since many items they claim are taxfree, aren't taxfree at all.

The whole damn calculator is full of errors.

[Mojave]

Figures don't lie, but liars (Fair Taxers) figure.