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]

What difference is there wrt purchasing power between a 23% income tax and a 23% nrst yn?

[Polybius]

The IRS has extraordinary police and confiscatory powers. 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.

The way to cheat under the current system is to play games when you record your income and when you fill out your 1040 Form to avoid paying income taxes.

The way to cheat under the Fair Tax is to play games by purchasing goods and services on the black market to avoid paying sales taxes.

Yes, the IRS will be gone.

However, a new Government creature, the Fair Revenue Tax Service (FRTS....Pronounced "Farts") will take its place to ensure that you can prove that everything that you own, from your car to your Fruit-of-the-Loom underwear, was not bought on the black market.

FRTS will have extraordinary police and confiscatory powers. It will be able to paralyze any citizen overnight, right or wrong, and it will take decades to straighten out their wrong decisions.

Meet the new Boss. Same as the old Boss.

"FRTS Police! Show me your papers to prove that you paid Fair Tax when you bought that banjo!"

[Your Nightmare]

Same as today YN...with tax.

So if a person making $26,400 can buy all his necessities for $26,400 (ti), why does the government send him an additional $6,072? So he can buy $4,675 more than his necessities?

No. The answer is, the $26,400 worth of necessities does not include taxes. The idea of the "prebate" is that by spending it, that person can purchase all their necessities (although there is an error in the way the FCA is calculated that doesn't allow this person to do that).

[Your Nightmare]

What difference is there wrt purchasing power between a 23% income tax and a 23% nrst yn?

The government doesn't send everyone a $6,072 check with the income tax.

[Polybius]

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.

I am one of those people who assumes that Social Security will not be there for me when I retire and I am also a high income/frugal lifestyle type of guy that has accumulated far more money in after-tax savings and investments than in tax deferred retirement accounts.

On these threads, I am told that my double taxation concern is a non-issue since people such as I don't exist and nobody under the present system has enough after-tax savings to bother about.

[RobFromGa]

I also assume that I'll never see a penny of social security unless it is partially privatized.

I think that getting control of this out of control entitlement spending (Social Security, Medicare) before we drive the bus off the demographic cliff is the fiscal challenge facing our generation. Like the War on Terror, it is up to us to face this challenge before it is too late to avoid inter-generational chaos that is sure to come if we fail to act.

[Principled]

So if a person making $26,400 can buy all his necessities for $26,400 (ti), why does the government send him an additional $6,072?

To refund his tax on necessities. Remember that li'l detail?

[Principled]

What difference is there wrt purchasing power between a 23% income tax and a 23% nrst yn?

Will you answer it?

[Principled]

On these threads, I am told that my double taxation concern is a non-issue since people such as I don't exist and nobody under the present system has enough after-tax savings to bother about.

Oh my! Who told you that?!

[Your Nightmare]

What difference is there wrt purchasing power between a 23% income tax and a 23% nrst yn? Will you answer it?

None. What does that have to do with what we are talking about.

[Bigun]

Try as I might, I do not understand your objections.

LOL! That is because his objections are nothing more than the mad ramblings of a traveling salesman from Georgia who fancies himself smarter than the economists who wrote the paper at the beginning of this thread!

[RobFromGa]

100% personal attack

[lucysmom]

IN your dreams. Only shortages get "bid up". IOW, the efficient market will take over, as has been argued all along.

How will the market create a supply of used products to meet demand?

I bought a new car that was so bad, my daughter bonded with owner of the garage where I took it for repairs. Before buying my next car, I did a lot of research, identified a car I wanted to buy used and began searching. Unable to find one with less than 100,000 miles in reasonably good shape, at a reasonable price, after months of looking, I decided it was more cost effective to buy new. Demand created a scarce market and high resale value.

Even today, it is difficult to find That particular car (later model, of course) for sale, used at any price. What happened to market efficiency?

[Bigun]

100% truth! Which is, to you, as daylight is to Draculla!

[groanup]

Market efficience relies on the ingenuity of the participants.

[RobFromGa]

another personal attack. you can't argue against what I say so you resort to calling me untruthful without basis.

[Bigun]

My opinions only. No personal attacks involved and, beyond that, what you say is completely taken apart by the actual economists who wrote the paper that is the subject of this thread so there is no need for me to do so as it is there for anyone who chooses to read it. Further all your trash has been refuted here at FR many times by many posters and I am, at this point, perfectly willing to let others decide for themselves who is right and who is wrong.

[Always Right]

LOL! That is because his objections are nothing more than the mad ramblings of a traveling salesman from Georgia who fancies himself smarter than the economists who wrote the paper at the beginning of this thread!

Oh boy, drag $100 through a trailer park and get yourself an economists.

[RobFromGa]

no you aren't perfectly willing to do that, you feel the need to state your opinion of me personally, rather than refuting my arguments. That is a personal attack whether you think so or not.

[elkfersupper]

Because I don't think it would be gone, just renamed.

You have a point there.

I guess I would just like to see a major change, and don't really care what form it takes. The Fair Tax just seems to be one of the better alternatives.