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.

[Your Nightmare]

And wages aren't taxed unless "sold".

Huh? Show me in the bill where it says something has to be "sold" to be taxed. What is taxed is the "use or consumption ... of taxable property or services." And "the rate of tax is 23 percent of the gross payments for the taxable property or service."

[Your Nightmare]

What taxable property or service is being sold?

A taxable property or service doesn't have to be "sold" to be taxed. The tax is applied to "the gross payments for the taxable property or service." Subparagraph A states "The term 'taxable property or service' means ... any service." And "for purposes of subparagraph (A), the term 'service' shall include any service performed by an employee for which the employee is paid wages or a salary by a taxable employer."

The employee performs a taxable service for which the government makes a payment (wage or salary) for.


[Notice how we are using language from the bill and y'all are using language not in the bill.]

[Always Right]

There is no "fairtax" on government wages. There is no taxable sale of a good or service.

Government wages are only not considered taxable wages if they are government enterprise or directly providing education. That would include things like postal employees or teachers. Most government wages are considered a service by the fairtax definition, so they are in fact taxable. Principle's defintion does not matter. The definition in the bill does.

[Always Right]

They are not taxable.

It has been determined that the pews would be taxable, but not the salary. Goods and services purchased by a church are in fact taxable except wages and items bought for resale or export. You may not agree, but that is the proper reading of the bill and consistant with Kotlikoff.

[lewislynn]

My disposeable (sic)income was taxed before I got to spend it.

Your disposable income is what's left AFTER you've paid your taxes.

No matter how much you try to deny it all income is NOT taxable income....But unless you live in a cave, grow your own food and buy someone elses used crap all of your money (not just your income) IS taxable under an NST.

[Always Right]

[Notice how we are using language from the bill and y'all are using language not in the bill.]

And in a court of law, that is all that matters. If the bill says a service is blue cheese, then legally a service is blue cheese as far as anything relating to the fairtax is concerned.

[pigdog]

Sorry; a church pew is certainly something that qualifies as the normal business of a church and as such the church could purchase it untaxed.

[Always Right]

Sorry; a church pew is certainly something that qualifies as the normal business of a church and as such the church could purchase it untaxed.

'normal business' is a term you made up and is not part of the bill concerning what is or what is not taxable. If you want to debate, use the terms with how they are defined in the bill, otherwise it is pointless. You have repeatedly demonstrated little knowledge of how to interpret bills. At this point you are debating what is a undebatable point. But you always do.

[lewislynn]

Of course the states will save the SS tax on salaries.

Don't count on it. That's a battle yet to be fought and government employees are union.

The trust fund revenue pigdog's been lying about specifically calls for a Fairtax rate to extract 15.3% of the SS wage base from sales tax revenues. If employee's 100% paycheck is only 7.65% there's a hidden tax in the Fairtax rate for payroll type employees, unions aren't going to fall for that.

[pigdog]

"The fact that so many people immediately think increased black market activity when they hear the FairTax scheme rates indicates that it is a REAL CONSIDERATION. The fact that you recognize the potential is irrelevant."

It's not me that keeps regurgitating "black market" all the time (like its a furball) as though it were some serious consideration (or REAL CONSIDERATION as you put it). It certainly is not.

To sell legally the merchant must obtain a license to do so and this means the entity is subject to audit and must comply with the terms of the law or suffer the consequences. If he chooses to sell illegally, he's relatively easy pickings for the state tax folks.

Neither you nor anyone else has ever presented a serious study that defines any sort of "black market" activity as being anything but a minor amount financially (if that). And a seller intentionally violating the law will have many tools arrayed against him.

And there certainly aren't "so many" people thinking black market as you claim. The only ones I notice doing so are those like you who are trying to find any sort of tool to bash the FairTax with whether valid or not ... and not doing too well, I might add.

"Those two positions contradict eachother. "

The FairTax effective rate will be low for most people - lower that their income tax rate, but many of these taxpayers - and many of them will not have paid taxes before - will certainly notice the very obvious tax amount and some percentage of those will seek political action. There is no contradiction at all. Both things are true.

[pigdog]

Well how about presenting and serious study you have that shows how this might operate, how the seller can avoid prosecution for very long, and how much total money is involved, Is this 10% of tax revenue? 20%? 0.000000000001% (or less).

What are we talking about here in the way of money. You not only have not characterized the amounts involved but you have made no convincing case at all that such activity could or would flourish.

Unless you have more bee-bees in your gun that that it's hardly worth discussing. So lets see how much we have today under the income tax and show us how that is then likely o increase under the FairTax. Information, please.

So far you've given none.

[Your Nightmare]

"The FairTax taxes non-profits’ sales of goods and services to individuals and their purchases of goods and services that are not sold on to individuals, including capital goods."

Unless they are sold or used to make taxable goods or services, the pews are taxed when the church buys them.

[Polybius]

Well how about presenting and serious study you have that shows how this might operate, how the seller can avoid prosecution for very long, ..............What are we talking about here in the way of money. You not only have not characterized the amounts involved but you have made no convincing case at all that such activity could or would flourish.

This particular discussion started when another poster was celebarating the fact that, with the Fair Tax, the IRS would go away and therefore there would no longer be a U.S. Government Tax Big Brother looking over your shoulder.

I then said, in words to the effect, "Whoah, there!". The Income Tax Police would be replaced by the Sales Tax Police that would be just as bad.

That is when you jumped in to argue both sides of the issue at the same time.

You want to argue that there will be no temptation to cheat and no Tax Police but, at the same time, you want to argue that nobody would dare cheat because there is no way "how the seller can avoid prosecution for very long".

How can the seller avoid prosecution for very long?

In my real world scenario, they can't because, as I said before, "the Tax Police will be on them like pit bulls on a pork chop".

In your Alice in Wonderland scenario where the IRS is abolished and there is no Tax Police to replace it, the seller can avoid prosecution because, DUH!!!, there is no Tax Police to bring them to justice.

So, which is it?

Tax Police or no Tax Police?

Hauling in the tax cheats or not hauling in the tax cheats?

You can't have it both ways.

Are the cheaters going to turn themselves in on the honor system or will the Tax Police have to hunt them down like the Tax Police does today in Russia?

Fair Tax proponents say that the Fair Tax will be revenue neutral for the Government. If that is the case, that would mean that there will be $2 Trillion per year that will have to be turned over to the U.S. Government every year.

$2 Trillion per year that Americans will simply turn over to Uncle Sam without any temptation to cheat?

$2 Trillion per year that Americans will turn over simply on the Honor System?

$2 Trillion per year that Americans will simply turn over without the threat of a Tax Police?

Tell that to this guy the next time you see him:

[Skeptic2]

The sales tax will discourage me from consuming as much as I had planned on. I presume a critical mass of others will feel the same way, creating a recession if not depression -- either that, or a massive black market will spring up, with participants attempting to hide their sales receipts (with great success).

Why not some version of a flat tax (with a big exemption to make it progressive), which is a different form of the consumption tax but without the radical systematic upheaval in the tax collection process? Or the USA tax, which as I recall is slightly more progressive (by Domenici, I think)?

Tracking income is imperfect, but is far simpler than tracking sales slips -- especially in states that don't have a sales tax system in place for the feds to glom onto.

[elkfersupper]

The sales tax will discourage me from consuming as much as I had planned on.

That's the idea.

Congratulations on being self-sufficient.

Where is your farm, oil field and refinery?

[pigdog]

"Tracking income is imperfect"

You think??? And if the income tax doesn't "discourage you" from spending there's certainly no reason that the FairTax would as most people's effective tax rate will be lower under the FairTax than the income tax.

You've fallen for too much spam from the Squirrel lobby.

[pigdog]

You've got it backwards (again). The pews are part of the normal business of the church and would be purchased with their tax exempion - unless they were to be sold at retail to others.

[pigdog]

Ang government non-educational wages are taxed at 23% of the gross wages ... or did you know that???

[pigdog]

You mean how you MIS-use languiage from the bill by spinning it. Just because you can't understand what it says does not mean you can interpret it correctly - in fact just the opposite ... you're intentionally wrong.

[pigdog]

"except wages and items bought for resale or export"

More of your nonsense!!