Replies

Except the paper still fraudulantly insists that governments can raise money by taxing themselves.

Please explain. The gov't taxes itself now in that it taxes the wages it pays its own employees. How does the gov't currently raise money from its own employees? Please explain.

Simply put, In addition to the money sucked out of government employee's hands from the Fairtax when they spend it (it's a replacement tax, remember?), "any government" employee's wages salaries and benefits would also cost 30% more under the "Taxable Employer" clause.

If taxing government is a good idea for raising revenue, why not just tax government?

The gov't taxes itself now in that it taxes the wages it pays its own employees...

Actually, it doesn't tax itself, it taxes its employees and directly withholds the money from them. If the tax rate was 10%, instead of paying a $100 wage to an employee, the Federal government only has to pay $90 though it accounts, on the books, the full $100. In effect, it pays a discounted actual wage and inflates both the "wage paid out" and the "tax received in" entries in the Federal books by the same amount: the amount of the tax. In doing so it generates no net revenue. The actual spending burden it only 90% of the accounted burden. The tax out/in exactly balances and is, in effect a virtual accounting gimmick.

For simplicity, let's assume that under the FairTax, the magnitude of the tax base is the same, and the revenue requirements are the same. In essence, the $100 income that used to generate $10 of tax still needs to generate $10 of tax.

Working under the "keep all your paycheck" scenario, the government has to pay the full $100 wage, in cash, to the employee. That alone raise the cash required to operate by 11%. Of course, since the FairTax used the "virtual tax received" under the Income Tax to set the rate, you'd think: "No problem the tax rate is sufficient to generate the additional cash the Federal Government didn't need before because of the accounting gimmick." Well, if the tax base was entirely in the private sector, you'd be right.

The problem arises because that $100 wage is part of the FairTax base but is "consumed" in the public sector. "Revenue neutrality" demands that the $100 still generate $10 of tax ... it's part of the tax base. But, NO MATTER WHAT THE TAX RATE, the $100 generates NO net tax revenue to the Federal Government ... just as before. If the Rate is 10% (exclusive) the government pays the $100 out, pays an additional $10 in tax, and receives the additional $10 as tax: NO NET TAX REVENUE!

That is why the FairTax is flawed from a Revenue Neutrality perspective.

BTW, the problem is a bit different at the state and local level, but Kotlikoff, in the very paper cited above, agrees that S&L governments will need to raise their own tax rates to collect enough money to pay their FairTax.