Posted on 10/19/2006 5:11:50 PM PDT by 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.
(Excerpt) Read more at people.bu.edu ...
Cash transactions will be taxed, and we already have the "army". They're called "retailers".
The 29.87% rate is artifically low, the actual rate will be much higher to begin with, if the plan is to be purchasing power neutral to the FedGov. The actual rate will be closer to 50% on every purchase of new goods and services.
People can avoid the tax in many ways- buy used, don't buy, fix what they already have, barter, buy with business exemption (good for plane tickets, hotels, restaraunt meals, office (school) supplies, car rentals, baseball tickets, gasoline, auto repair, automobile purchases, office furniture, computers, etc.), buy overseas, or buy underground. There are proably other ways I haven't mentioned.
And a 40-50% sales tax will cause these things to happen, and the more this happens, the higher the required tax rate, and the more it happens. And then we have an income tax. And I won't be happy saying I told you so because mine and every other business will be wrecked.
Just a bad idea all around. We need to fix what we already have.
From my home page:
I want to see elimination of corporate taxes, elimination of death taxes, additional reductions in the marginal income tax rates until we find that we are the Laffer optimal point.
In addition I want to see Social Security privatized, and I am willing to pay extra money to pay for those who were promised this benefit, and never receive a penny of it myself. I also want to see Medicare reformed from top-to-bottom. I also want to see Tort Reform to reduce the exorbitant costs of insurance on our medical costs. And we need to reduce the scope of the Federal Government to its constitutionally mandated responsibilities and get rid of the rest. The Golden Goose that is America is way too fat and needs to be put on a severe diet.
These are what we need to do, incremental improvements in what we already have. This is already working and we should keep at it...even Boortz seems to think so. Boortz (9/20): "...the economy continues to go like gangbusters. We are right in the middle of an historic economic boom. Don't let the mainstream media or the Democrats tell you otherwise...we've never had it so good...
WAGES: It has been made clear by many proponents of the FairTax that they are expecting 100% of their current gross pay, and that many employer/employee wage relationships, including those for government workers are controlled by contract. So, we'll assume every wage earner gets to keep 100% of their current gross pay. Everyone can figure out for him or herself what that gives them in terms of a take-home pay increase.
BUSINESS COSTS: If we assume that businesses get to keep their half of the payroll taxes (7.65% of all payroll costs up to first $95k per employee), plus taxes on corporate profits (average <2% of Cost of Goods sold) and some tax compliance savings (being generous we'll call this 1% savings), this gives the business about 8% of cost savings with which to potentially reduce prices.
PRICES: For domestic goods, if we assume that the entire 8% is passed along to the consumer, this means that pre-tax prices will be 92% of present day prices. That $10 twelve pack will now be $9.20. Of course, the twelve pack of imported beer is still $10 pre-tax. Once the 30% FairTax is added, the price of the domestic beer will be $11.96 and the price of the imported beer will be $13.00 even. So, domestic prices will go up about 20% and imported item prices will go up about 30%.
GOVERNMENT EXPENSES: Since the government expects this plan to enable them to purchase the same things they purchase now, they will need to raise sufficient revenue in order to achieve purchasing power parity. Since they will be paying the 30% FairTax on every item, we can assume that for stuff they buy, they will see the same 20% price increase on domestic items and 30% increase on imported items as other end consumers. So they will need to increase their dollar intake by this 20%+ to enable them to buy the same amount of stuff. And, of course all government salaries will have the 30% FairTax paid on the salary, less the employer half of the payroll taxes, so this is a net 22.35% increase in the cost of the entire payroll of the US government (and states too, but that is another can of worms).
ENTITLEMENT COSTS: Since the social security payments are linked to CPI, when this 20%+ price rise slams through the economy all the social security checks will have to be raised to cover this massive FairTax caused inflation. They will rise by at least 20%, and a litle more because the basket of goods will include some imported items like oil. Medicare/medical expenses will have the FairTax added, for a 20%+ increase.
GOVERNMENT PURCHASING POWER PARITY: with the cost of Payroll, plus everything they buy, plus the entitlements, all going up 20% plus we can assume that the governement will need to collect approximately 20%+ more of the new inflated dollars in order to buy what they are today with today's more stable dollars.
FAIR TAX RATE: Assuming nothing else changes regarding purchasing behavior, size of the government, etc. this means that the 30% FairTax would need to immediately raised 20% (to 36%) just to bring in all the inflated dollars that are required to fund the govt at present level. The price of domestic beer is now $12.50 and the import is $13.60. This assumes no evasion and no reduction in spending by consumers on new goods and services when the large sales tax is imposed. (an unrealistic assumption by the FairTaxers)
SAVED MONEY: All dollars that are post-tax savings would be devalued by the FairTax inflation by 20% in terms of what they can buy with their hard-earned and saved after-tax money.
Does this sound like a utopia to anyone? Isn't it very likely that a 36% sales tax (or much higher like 50%) will cause consumption to suffer and/or transactions driven into a barter system or the black market where they cannot be taxed. And every dollar that is taken from the legitimate economy is another increase that is needed in the FairTax rate in order to feed the government the amount of money it needs.
Isn't is likely that we will end up with an income tax again on top of the FairTax when this all plays out?
And once people either stop buying, or buy used, or barter for services, or buy on the black market, or funnel purchases through their businesses for a tax exemption, it is very likely that the FairTax inclusive rate would be 33%-- which is an exclusive rate of 50%, making the problem worse.
The FairTax plan makes the false ASSUMPTION that 23% inclusive will be enough to fully find the government at today's level.
FairTaxers generally agree that the FairTax will cause higher prices and FairTaxers think that these will be ok because the purchasing power is what matters. Wage earners will receive a pay increase with their 100% paychecks to compensate for the higher prices.
Domestic prices will rise about 18-25% after a small (max 8%) price cut and then the 30% FairTax is added-- and rise the full 30% for foreign items.
Stick with me here for just one more minute. The government will also need a "raise" to pay the higher prices (because the government pays the FairTax on everything too), and it will take the form of additional revenue that needs to be raised. That additional revenue can ONLY be raised by increasing the FairTax rate, there is no other source to generate revenue. So, the 23% rate when multiplied by 1.18 is now 27.1% inclusive, which is 37.2% exclusive.
And that assumes no reduction in the base. If we assume just the very minimum that the base reduces 8% due to reduction in shelf prices-- ie. no reduction in unit volume of sales, just an 8% lower price for everything, then we need to divide the 27.1% by 0.92 to get a new inclusive rate of 29.5%, which is 41.8% exclusive. And this assumes ZERO evasion, and the same exact level of unit sales as now.
Most recently the FairTax commission found that the FairTax Rate was grossly understated by the FairTax people and that the actual rate would have to be MUCH HIGHER than 29.87% exclusive due to 1)government paying itself tax and 2) erosion of the taxable base due to all factors. Just a 15% erosion in base, coupled with a Federal government costing 20% more than presently (the cost with the FairTax added) makes the rate 33% inclusive which is 50% exclusive.
The FairTax people need to go back to the drawing board and plug in the new reality where prices go up 18-25% and stick that in their models and see what somes out the other side. It won't be pretty is my expectation.
About the only escape from the 30% "FairTax" rate would be savings, for the period that those savings were held. And ultimately, for most individuals, the only value of savings is for future spending.
And you can escape taxation on savings now! Just buy tax efficient mutual or index funds. Or a diverse group of Blue Chips - and hold. Look ma, no tax! And you do not have to be a moneyed interest to do this, for the investment of a few cartons of cigarettes you can get started!
I make 100,000 dollars I keep it all. The amount I can spend is only 75,000 dollars because I will pay a 23% (or 30%) tax rate.
That's a hand-to-mouth analysis. Lots of us are not in that situation. And we will have to again pay taxes on after tax savings, when we spend it, and so will see an immediate, costly reduction in the utility value of our savings. Those in the hand-to-mouth mode do not appreciate this.
It can paralyze any citizen overnight, right or wrong, and it takes decades to straighten out their wrong decisions.
I cannot fathom why any rational human being would not want to see it gone.
People afraid of starving the federal government of revenue are afraid of freedom.
Try as I might, I do not understand your objections.
If the FairTax stimulates domestic manufacturing, it will be because imported goods cost more due to the tax added, rather then tax savings reducing the cost of domestic products.
A rational plan to reduce government spending and pay down the debt is essential and urgent. To force change by creating a crisis (starve government) is suicidal.
Because I don't think it would be gone, just renamed.
People afraid of starving the federal government of revenue are afraid of freedom.
The FedGov is not going to allow itself to be starved of revenue, and I am one of the people that they will go after to collect the shortfalls after the FairTax is enacted. They are doing so now, but at least I have an idea of how they are confiscating the money and I can plan for it. Under the FairTax, which won't work, they will come up with new and different rules.
Try as I might, I do not understand your objections.
You probably have a much larger hatred of the IRS than I do, I see them as an enforcement arm with the task of collecting the income tax and catching people who try to cheat, most FairTaxers think it is evil personified.
You probably also haven't really studied the FairTax and how much of what they are selling is pure smoke and mirrors. The 23% FairTax rate which is really 29.87%, which will really be much higher when you factor in government having to pay tax, and evasion, is only one aspect of the smoke and mirrors.
Interesting information on the debt here, read down a few articles, there is a lot of good stuff here:
As I told you - the $24,600 worth of purchases which are tax inclusive under the FairTax ... but I thought you knew that.I get that. But if the $24,600 tax-inclusive purchases are all his necessities, WHAT IS THE PREBATE FOR? Why do you need to refund his taxes if he was able to purchase all his necessities and pay the tax?
Come on, if a business couldn't deduct its cost of doing business, it could not be in business.
Come on yourself. The whole nine yards wouldn't be necessary if there were no income tax. Do you realize what you are saying here?
LOL. I get dinged and post 461 sits untouched. LOL. What's going on around here?
the price of the used item will be bid up by other market participants, until it is, utility wise, priced the same as if it had been taxed at the "FairTax" rate? To not understand that basic economic fact is to suffer from a delusion.
IN your dreams. Only shortages get "bid up". IOW, the efficient market will take over, as has been argued all along.
And you can escape taxation on savings now! Just buy tax efficient mutual or index funds. Or a diverse group of Blue Chips - and hold. Look ma, no tax! And you do not have to be a moneyed interest to do this, for the investment of a few cartons of cigarettes you can get started!
And who is going to pay the taxes on your capital gains distributions, your dividends, the tooth fairy? You should read a book about mutual fund investing before giving out bad tax advice on a public forum.
Yep. :-)
It also means that all of the money that you have already saved after paying Federal income taxes on it will be taxed yet again with a 23% Federal tax once you decide to spend it. :-(
If you now live paycheck to paycheck and haven't saved much, it's a great idea.
If you have already saved serious after-tax money during your lifetime, it's a horrible idea unless the Fair Tax proponents address the double taxation issue instead of sweeping the double taxation issue under the rug by telling you all reasons you should not mind the fact that you were taxed once by the Feds once at 33% when you earned and saved that money in 2005 and will be taxed yet again by the Feds at 23% when you spend that saved money under the Fair Tax in 2009.
You are absolutely wrong. This is the basis of your misunderstanding.
An item with a price tag of $100 costs MORE than $100 of earnings. Precisely, it costs your effective federal tax rate more.
Again....
If I earn $100 in income, I only keep $75 of it. Guess what? That isn't enough to buy the $100 item.
In order to buy the $100 item, I'd need to earn income of $133. That would leave $100 after tax.
You are actually saying that the nrst casues a reduction in purchasing power but that the income tax doesn't!
Ever look around and see you're the only one saying this? You need to learn quickly that any tax reduces purchasing power.
The reduction in purchasing power is the effective rate of tax.
OY!
It is too funny that they think one of the big selling points is that the plan promotes savings and investement, as opposed to consumption, yet....
those who are savers and investors under the present system are the ones that get hammered the worst by the FairTax.
The FairTax is a complete fraud, and that is obvious by the lying tactics of those who are trying to sell it to a gullible population.
Nope. They got 26400 worth of stuff. And they had to pay tax on it, just like now - that's why they say "tax inclusive".
Supposing I had a 23% fed effective tax rate, my 26,400 in spending would've been 20,328 goods and 6072 tax. What's 20328 + 6072? Why it's 26400!
There is no difference between today's 23% income tax and a 23% nrst with respect to purchasing power. You somehow think that the income tax does not reduce purchasing power?!
Nope. They got 26400 worth of stuff. And they had to pay tax on it, just like now - that's why they say "tax inclusive".So do their "necessities" cost $26,400 with tax or $26,400 without tax?
Same as today YN...with tax.
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