The Fraudulent Tax

The Mises Institute ^ | October 9th, 2006 | Laurence M. Vance

[Always Right]

"Private consumers would receive lower (gross) wages under the FairTax, because producer prices fall."

Yeah, tell that to my workers. And tell that to union workers who are under contract, or any employee under contract for that matter. It is not possible for producers to ring out all these costs. The extra money goes into the pockets of the workers, and we are immediately hit with a 15-20% rise in prices the day the fairtax take effect. Try running that through the models.

It's cute what they assume in their models (higher state taxes, lower gross wages) but never talk about in their little propaganda papers.

[Dimples]

FairTax supporters always focus on the wrong aspect of the concept of the Federal Government taxing itself: they focus on the market-price-competetiveness part of the concept. They are indeed correct that failing to tax itself would create a market price disparity biasing consumption toward public sector goods and services over private sector goods and services. That aspect, however, has never been the problem.

The central problem with the FairTax on Fed Govt consumption is NOT that it taxes itself ... that is necessary to avoid the price disparity problem ... it is the fact that taxing itself generates NO NET TAX REVENUE on a portion of the tax base that is supposed to generate positive net tax revenue!

I'm sure we'll keep hearing about how "necessary" it is for the Fed Govt to tax itself; but the silence regarding the missing net tax revenue is deafening.

[pigdog]

No - you misread what is said and intentionally extract that single sentence as though it states the entire position. At that point he is illustrating, in effect, what would happen under the Jorgenson assumptions.

Kotlikoff et al throughout the paper actually take the opposite position that wages remain the same and prices rise by the full FairTax amount. Actually, neither assumption is probably going to be correct in the long run since what will most likely occur is that prices will fall a certain amount with the elimination of the income tax and then be raised by the overall effective FairTax rate for all taxpayers combined.

IOW, this price rise will be much less that the marginal 23% FairTax rate just as the effective FairTax rate is much lower than the marginal.

The more important point, though, is not the action of prices per se, but purchasing power. As has been shown repeatedly on these threads by actual examples, for a given level of income the taxpayers purchasing power (disposable personal income) is usually greatly increased under the FairTax as opposed to the income tax.

[pigdog]

">"Private consumers would receive lower (gross) wages under the FairTax, because producer prices fall.""

That's not what the paper says overall or means. That's merely the technique of the Out-Of-Context quotation to barf up a strawman. The paper actually takes the position of wages staying the same and prices rising by the FairTax amount - which as I've just explained isn't too likely IAE.

For more information about it, check post #323.

[Your Nightmare]

The infamous "unelected bureaucrats raising taxes" ploy you've continually tried (unsuccessfully) to use isn't correct and never has been. They merely determine the split of tax revenue required to fund the S/S entitlement as required by S/S law

They also would determine what the FairTax rate would be every year.

[Your Nightmare]

Actually, neither assumption is probably going to be correct in the long run since what will most likely occur is that prices will fall a certain amount with the elimination of the income tax and then be raised by the overall effective FairTax rate for all taxpayers combined.

Prices are going to rise by the effective rate? Really...

[Dimples]

Yep. In reality, the implementation of the FairTax, using Kotlikoff's reasoning, but more realistic assumptions, means that either:

Monetary inflation must occur (thereby devaluing the purchasing power of asset holders)

or

Real Income must shrink (thereby devaluing the puchasing power of current income earners)

or

some combination of the two.

As Kotlikoff repeats: MV=PY.

[pigdog]

"They also would determine what the FairTax rate would be every year."

Nice pipe dream. You income tax lovers DO so love to warp and misstate.

HR25 neither says nor means any such thing. Any change in the overall FairTax rate would have to be done by Congress, not some "unelected bureaucrat". Your statements are, simply, incorrect.

[pigdog]

The assumption in the Kotlikoff paper being discussed is that prices will rise by the FairTax amount.

My belief is that prices will first be reduced by some amount and after that will rise but by an amount far less than the marginal FairTax rate of 23% ti. The most they would rise would be at the overall effective FairTax rate for all taxpayers combined which would be much less than the marginal FairTax rate. IOW Kotlikoff's assumption of prices rising by the marginal rate is far too pessimistic and will not happen. In fact, prices cannot rise by that much overall and due to the effects that will show up in dynamic scoring, they won't.

[pigdog]

Even more important than prices though - as I've said - is the comparative purchasing power of he taxpayer which certainly increases under the FairTax.

Does that mean that prices will be higher than at present??? Not necessarily, but purchasing power will certainly increase for most taxpayers.

[Your Nightmare]

Nice pipe dream. You income tax lovers DO so love to warp and misstate. HR25 neither says nor means any such thing. Any change in the overall FairTax rate would have to be done by Congress, not some "unelected bureaucrat". Your statements are, simply, incorrect.

You are kidding, right? You didn't know the FairTax rate would change every year!?!

`SEC. 101. IMPOSITION OF SALES TAX.

`(a) In General- There is hereby imposed a tax on the use or consumption in the United States of taxable property or services.

`(b) Rate-

`(1) FOR 2007- In the calendar year 2007, the rate of tax is 23 percent of the gross payments for the taxable property or service.

`(2) FOR YEARS AFTER 2007- For years after the calendar year 2007, the rate of tax is the combined Federal tax rate percentage (as defined in paragraph (3)) of the gross payments for the taxable property or service.

`(3) COMBINED FEDERAL TAX RATE PERCENTAGE- The combined Federal tax rate percentage is the sum of--

`(A) the general revenue rate (as defined in paragraph (4), and

`(B) the old-age, survivors and disability insurance rate, and

`(C) the hospital insurance rate.

`(4) GENERAL REVENUE RATE- The general revenue rate shall be 14.91 percent.

`SEC. 904. TRUST FUND REVENUE.

...

`(d) Old-Age, Survivors and Disability Insurance Rate- The old-age, survivors and disability insurance rate shall be determined by the Social Security Administration. The old-age, survivors and disability insurance rate shall be that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 12.4 percent tax on the Social Security wage base (including self-employment income) as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act. The rate shall be determined using actuarially sound methodology and announced at least 6 months prior to the beginning of the Calendar year for which it applies.

`(e) Hospital Insurance Rate- The hospital insurance rate shall be determined by the Social Security Administration. The hospital insurance rate shall be that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 2.9 percent tax on the Medicare wage base (including self-employment income) as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act. The rate shall be determined using actuarially sound methodology and announced at least 6 months prior to the beginning of the calendar year for which it applies.

[Your Nightmare]

The assumption in the Kotlikoff paper being discussed is that prices will rise by the FairTax amount. My belief is that prices will first be reduced by some amount and after that will rise but by an amount far less than the marginal FairTax rate of 23% ti. The most they would rise would be at the overall effective FairTax rate for all taxpayers combined which would be much less than the marginal FairTax rate. IOW Kotlikoff's assumption of prices rising by the marginal rate is far too pessimistic and will not happen. In fact, prices cannot rise by that much overall and due to the effects that will show up in dynamic scoring, they won't.

You're not making sense [shock!]. It's obvious you didn't understand what Kotlikoff was saying.

[Dimples]

Hmmm... again according to Kotlikoff:

...if, as seems likely, the Federal Reserve fully accommodates the introduction of the FairTax and permits consumer prices to rise by roughly 30%...

While his derivation of a Revenue Neutral tax rate eschews monetary accommodation, Kotlikoff admits that full monetary accommodation will likely occur. Such occurrence would indeed allow prices to rise by the full amount of the MARGINAL rate of the FairTax: 30%.

So again, Kotlikoff proves us right: the likely outcome of implementing the FairTax is a 30% rise in consumer prices and a devaluation of held assets (through "monetary accommodation" also known as "inflation") with its attendant reduction in the purchasing power of those assets.

[pigdog]

Nope - not kidding at all. You miss the fact that under the FairTax the economy will expand and so greatly increase revenue. Certainly there will be some increase in wages earned (which is, of course, just the opposite of what you and your colleagues have been claiming in this very thread), but overall there will be a sizable increase in tax revenue.

The key phrase is not the one you highlight, but is: "... that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 12.4 percent tax on the Social Security wage base ...". Since the wage base will increase more slowly than the total economic activity, this means that the rate so derived will actually provide the funds to match the 12.4% amount mentioned in the bill but that the proportion of that wage amount in the total 23% will actually fall from its present 27.43% to perhaps 25% (of the 23% rate) or possibly even less depending upon the increase in economic activity. This would actually free up more funds for the general revenue rate which would rise after 2007 from the 14.91% figure to, say, 15%.

That result would bring about a hue and cry from taxpayers to lower the rate from 23% (if it in fact starts at that level - which is too high). I suspect that even you and your friends would bitch to high heaven about having the rate "too high".

In other words, you've ignored the simple fact that the rate 23% (or other %), composed of the two entitlement rates that total into the overall 23%, are more likely to decrease from their current proportion of the total. That is FAR more likely that the results that you keep pushing with your nonsense "unelected bureaucrat" business. The FairTax will certainly boost economic activity - every single real economic study that has been done shows this. Pretending otherwise ignores what is obviously the truth of the matter.

"You are kidding, right? You didn't know the FairTax rate would change every year!?! "

The fact that the rates in question CHANGE is not the issue but that they are undoubtedly going to FALL rather than RISE.

[Your Nightmare]

The fact that the rates in question CHANGE is not the issue but that they are undoubtedly going to FALL rather than RISE.

Whether it falls or rises wasn't the question. You said: "HR25 neither says nor means any such thing. Any change in the overall FairTax rate would have to be done by Congress, not some 'unelected bureaucrat.' Your statements are, simply, incorrect." But HR25 clearly states that "unelected bureaucrats" in the SSA would determine the rate every year. You were wrong. Maybe, for once, you will admit it.

[pigdog]

Indeed, he shows that "quantity theory" equation in the study. You seem, however, to misinterpret what it says. All four of the terms are variables - that's why they are shown by letters rather than by some fixed amount.

Being variables, this means that any or all of the four can change whereas your evaluation of the equation insists that only two of the terms change and in a direction consistent with your own biased assumptions for which you have shown no valid economic assessment or derivation - as Kotlikoff et al do.

In fact with this many variables there are many different combinations that might arise. Your two possibilities have not begun to do more than scratch the surface of the possibilities - including that several may change with no overall different outcome. But the real point is that there are certainly other possible (and even more likely) outcomes than the two you note.

The assumptions used in the paper - as stated - are that V and Y remain unchanged and while you may not agree, the footnote on that page says that Y would in fact increase. With a given wage level and no monetary accommodation as the paper assumes, V - the velocity of money - would increase. The meaning of that is there would be increased economic activity (which is what all genuine economic studies of the FairTax have shown).

So you're welcome to your assumptions but they are probably not as "realistic" as you seem to think. I believe I'll stick with the analysis of the economist in this instance ... and I believe his analysis actually understates the effects and benefits of the FairTax if anything.

[pigdog]

"You're not making sense [shock!]. It's obvious you didn't understand what Kotlikoff was saying."

Well, ONE of us doesn't understand the paper all right ... but it's not me.

[pigdog]

"... taxing itself generates NO NET TAX REVENUE on a portion of the tax base that is supposed to generate positive net tax revenue ...!"

And that is the same situation as today when the government "taxing itself" generates a net of zero also merely transferring funds from one account to another. So your observation about the price disparity problem is both correct and appreciated since that is certainly the larger problem of the two.

Shuffling of funds from one account to another is something the government is quite good at and any FairTax "paid out" is certainly returned to them within a month or so with the upshot being that the revenue involved is not a material amount in the big scheme of things.

[pigdog]

"In the Private sector this would amount to a 29.87% tax on top of the employee's full paycheck. To ensure parity with the private sector, the government must do the same. "

Not so!! the government need only pay the 23% excise rate on the employees' gross wages - and the definition of "gross wages" is the same as at present.

The FairTax is certainly not "revenue short" any more than the present tax system nor does it inflate the cash needs of the government to pay workers

"Since there is NO FairTax in actual wages paid to an employee (government or otherwise) the wages are "grossed up" by the amount of the FairTax (29.87% of the wages or 23% of the wages + FairTax) and the FairTax is "withheld" by the taxable employer and remitted to the government as tax revenue. "

Your evaluation misses the point (among others) that there is NO "grossing up" (as you put it) of the 23% excise paid on gross wages of government noneducational employees. It is merely 23% of the gross wage amount. If the government employee has a gross salary of $100,000 defined as at present, the revenue generated will be $23,000 in tax (period). In fact this amount would be reduced since the $7,650 ER FICA portion would no longer be involved so that the net would be $15,350 less, in fact, some allowance for reducing the amount further by the ER FICA portion no longer paid on the government educational employees. If those employees wages represented, say, 20% of the government consumption expenditures the additional reduction allowance would be substantial.

Your analysis seems to be going in the wrong direction, if anything.

[pigdog]

Please provide a link to each of the 2 sources you mention that you believe demonstrate your claim since 23% of gross wages of noneducational employees with government as a taxable employer is the correct figure.