The Fraudulent Tax

Advocates of replacing the income tax with the FairTax — a consumption tax in the form of a national retail sales tax (NRST) on new goods and services — regularly point to the complexity of the tax code, the millions of hours and dollars wasted on compliance costs, the evils of the withholding tax, and the abuses of the IRS to bolster their case for the FairTax.

The twin truths that taxation is theft (no matter how the money is collected) and that the US government should never be given a budget that is in the trillions (no matter how the money is collected) are concepts that FairTax proponents have never grasped.

The FairTax is intended to be revenue neutral; that is, the federal leviathan and all of its programs will receive exactly the same amount of funding as under the current tax system. Federal spending will remain at the same obscene level that it is now. This means that, although conceivably some people might pay the same amount in taxes under the FairTax plan that they do now, some will pay more and others will pay less.

Or, if we accept without reservation the claim of FairTax supporters that tax evaders, tax avoiders, workers in the underground economy, and others who don't pay their "fair" share will now be "caught," therefore increasing the tax base, we can, for the sake of argument, say that some people might pay the same amount in taxes, many will pay less, and the few that will pay more are the ones who were paying little or no taxes to begin with.

But even though the things that FairTax proponents say about the tax code, compliance costs, the withholding tax, and the IRS are certainly true, what most people care about is the bottom line. If an individual's taxes were lowered but the prices of all goods and services were at the same time raised, lower taxes might actually be a curse instead of a blessing.

The question is therefore not one of paying higher or lower taxes, but instead: Will I have more money remaining from my paycheck to save, invest, or spend on vacations and luxury items under the FairTax plan after I pay my bills and make my necessary purchases?

Under the FairTax proposal, there will no longer be Social Security and Medicare taxes, withholding taxes, corporate taxes, gift taxes, estate taxes, capital gains taxes, and personal income taxes. However, these will all be replaced with a national sales tax on all new goods and services. But never fear, says the FairTax advocate, even with this sales tax, the prices of most goods and services will still be about the same.

As talk show host Neal Boortz [1]claims in The FairTax Book: "The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax." The embedded costs of taxes in all consumer goods and services drive up prices because they increase the costs of doing business of manufacturers and service providers. As Boortz explains about suppliers of goods and services:

When you buy that loaf of bread, you're paying a portion of all of the bills, including tax bills, of every person or business entity that had anything to do with that bread, from before the wheat was planted up until the loaf of bread ends up in that plastic bag in the back seat of your minivan.

Have you thought about how much your doctor pays into the payroll tax system to augment his or her employees' Social Security and Medicare taxes? And what about all the embedded taxes your doctor paid when purchasing all of that sophisticated equipment, not to mention the endless monthly outlay for cotton swabs and tongue depressors?

Compliance costs are also "costs that are ultimately embedded in retail prices paid by consumers." Boortz's coauthor, Congressman John Linder (R-GA), in his November 5, 2003, testimonyin behalf of the FairTax before the Joint Economic Committee on " Rethinking the Tax Code," stated that "because of the tax component incorporated into prices under the current income tax code, we are already paying the equivalent of the FairTax!" This must include the prices of all goods and services, for Boortz maintains that "like retail goods, new homes won't be any more expensive, even with the FairTax added."

The rate of the NRST under the FairTax is supposed to be 23 percent. But as I have already shown in my first article on the FairTax (" The Fair Tax Fraud"), that is just the initial rate — it will be adjusted upward every year. And as I have already shown in my review of Boortz's book (" There Is No Such Thing as a Fair Tax"), the stated rate of 23 percent is really 30 percent — the new math used by FairTax proponents figures the rate inclusively (the tax is included in the price of the product) rather than exclusively (the tax is added to the price of the product).

To offset the full amount of this sales tax, retail prices would have to fall by a like amount if the prices of most goods and services are to "remain essentially the same." This is exactly what Boortz asserts will happen after the FairTax plan is implemented:

One of the beauties of the FairTax is that the price of consumer goods and services in our economy will go down by roughly the same amount as the proposed FairTax rate of 23 percent. This very nearly makes everything a wash.

Consumers of all incomes will be paying at least 20 percent less for virtually everything they buy, including the basics of food, clothing, shelter, and transportation.

And how does Boortz know that this will happen? Why, Dr. Dale Jorgenson said so — or at least that's what Boortz claims. Back in 1997, Jorgenson, the former chairman of the Harvard Economics Department, authored a report for Americans for Fair Taxation (AFT) entitled "The Economic Impact of the National Retail Sales Tax." [2]Before writing his 1997 report for the AFT, Jorgenson had testified before the House Committee on Ways and Means in 1995 on "The Economic Impact of Fundamental Tax Reform" and in 1996 on "The Economic Impact of Taxing Consumption." [3]

Referring to this study, Boortz says: "On average, Jorgenson concluded, 22 percent of the price paid for a consumer product represents embedded taxes. That means that for every dollar you spend on a loaf of bread, twenty-two cents ends up being passed on to the government somewhere along the line in the form of taxes." Congressman Linder also referred to this report in his 2003 testimony before the Joint Economic Committee: "The FairTax plan creates transparency within the tax code. It eliminates the hidden tax component from the prices of goods. According to a Harvard study, the current tax component in our price system averages 22 percent."

Boortz believes that prices will fall because "if these embedded taxes were to disappear — that is, if the tax burdens of all the corporations, businesses, and individuals involved in the manufacture, marketing, and sale of these items were to be removed — these businesses would experience an immediate increase in their profit margins that would roughly equal that 22 percent." Then, once profit margins increase, Boortz presumes that "competitive market pressures" would "force prices down to a level where corporate profit margins are pretty much where they were before the passage of the FairTax." Linder likewise testified that competition would "bring prices down an average of 20-30 percent."

But this isn't all that Boortz has promised, for under the FairTax system everyone will get a raise because everyone will be able to keep his whole paycheck:

Once the FairTax takes effect, you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes.

The poor — along with everybody else — will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.

We all get virtual raises, since payroll taxes are no longer siphoned from our checks.

But as we shall presently see, these four statements turned out to be lies and were subsequently altered or omitted in the new paperback edition of The FairTax Book.

Boortz's first misrepresentation concerns the rate of the FairTax. He maintains that in order to be revenue neutral the tax rate would have to be 23 percent figured inclusively or 30 percent figured exclusively. But here is what Jorgenson actually said:

The imposition of the NRST would produce a sharply higher tax rate on consumer goods and services, but the tenth chart shows that the initial consumption tax rate would be twenty-three percent at both federal and state and local levels or only 18.4 percent at the federal level. This would gradually rise over time, but remain below thirty percent or 23.8 percent at the federal level.

Unlike Boortz, Jorgenson does not give us any baloney about inclusive and exclusive tax rates. But note that Jorgenson's rate of 23 percent includes federal, state, and local taxes. This is because of one of Jorgenson's assumptions:

Since state and local income taxes usually employ the same bases as the corresponding federal taxes, it is reasonable to assume that substitution of NRST for taxes at the federal level would be followed by similar substitutions at the state and local level. For simplicity I consider the economic impact of substitution at all levels simultaneously.

Boortz's rate of 23 percent (which is actually 30 percent) includes only the NRST. To this would have to be added any state or local sales tax rate. This means that in some areas of the country where the combined state and local sales taxes average 10 percent, consumers will pay a whopping 40 percent tax on all of their purchases. No wonder Jorgenson says that "as a consequence of the elimination of taxes on capital income, individuals would sharply curtail consumption of both goods and leisure."

But in Jorgenson's 1996 testimony at the "Hearings on Replacing the Federal Income Tax" held by the House Committee on Ways and Means he said that "the consumption tax rate required for replacing existing revenues from individual and corporate income taxes at both federal and state and local levels would be around fifteen percent. This would gradually rise over time reaching twenty-one."

The initial "revenue neutral" tax rate has already gone up twice and the FairTax hasn't even been implemented yet.

Other economists believe that the rate of a NRST would have to be much higher than 30 percent to be truly revenue neutral. This has been pointed out several times by Bruce Bartlett, and most recently by William Gale, an economist with the Brookings Institute, in his May 16, 2005, article " The National Retail Sales Tax: What Would the Rate Have To Be?"

Gale estimates that "a federal sales tax that maintains real federal revenues under current law and real federal noninterest spending over the 10-year period of 2006 to 2015 would require a tax-inclusive rate of 31 percent, or a tax-exclusive rate of 44 percent." This latter rate would actually climb to 49 percent by 2015. And these rates are assuming that there is no tax evasion or legislative erosion of the tax base.

Boortz's second misrepresentation concerns the amount that prices could fall once the cost of embedded taxes is removed from goods. He maintains that the price of consumer goods will fall by roughly the same amount of sales tax that will be added under the FairTax plan. But again, here is Jorgenson:

Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart, would fall by an average of twenty percent.

In the long run producers' prices, shown in the eighth chart, would fall by almost thirty percent under the NRST.

He is saying that producers' prices will fall by about 20 percent in the short term and about 30 percent in the long term. Producer prices are not consumer prices. That is why the government has a Producer Price Index (PPI) and a Consumer Price Index (CPI). So, in order for a price increase from a national sales tax and a price decrease from the removal of the cost of embedded taxes to balance each other out, a much higher tax rate will be required since it is not consumer prices that will be 20 percent lower.

There are, of course, three other problems with any talk of a decrease in producer or consumer prices.

First, how does Jorgenson know for sure that producer prices "would fall by an average of twenty percent"? Why, an economic model that he created says they will, that's how.

And even if producer prices did fall by about 20 percent, we still have the same problem: How does anyone know for sure how much consumer prices will fall? There is one thing we know and one thing we don't know. We know that consumer prices will increase by 30 percent under the FairTax plan; we don't know how much they will decrease because of the elimination of "embedded costs" in the price of goods.

Second, saying that because costs will fall by x amount that prices will likewise fall by x amount is a grave economic fallacy. Not only does this ignore the basic laws of supply and demand, it is based on the fallacy that the costs of inputs in the production of a good determine the price of the output they produce. As Ludwig von Mises has said about prices:

The ultimate source of the determination of prices is the value judgments of the consumers. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of market prices. But the larger the market is, the smaller is the weight of each individual's contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct. What is called a price is always a relationship within an integrated system which is the composite effect of human relations.

Prices are determined between extremely narrow margins; the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying.

And third, the question of tax incidence — who actually bears the burden of a tax — is an elusive one that economists still debate. For example, many economists would argue that although a portion of the corporate income tax may be passed forward to consumers through higher prices, the majority of the tax comes out of after-tax profits and employee wages. Boortz is assuming that the full amount of all taxes paid by businesses are embedded in the costs of the goods they sell.

And what about the prices of imported goods? They would have no reason to drop at all.

Boortz's third misrepresentation concerns the reason that prices could fall once the cost of embedded taxes is removed from goods. He maintains that it is the removal of the embedded taxes in the cost of goods that will account for the price reduction of those goods. Let's revisit an earlier statement of Jorgenson:

How would workers no longer paying taxes on wages lead to a fall in prices? Workers currently have deductions from their paychecks for federal income tax, Social Security tax, and Medicare tax. Although employers remit these taxes to the federal government, the money does not come out of their profits — it comes out of each employee's gross pay. Jorgenson is saying that prices will fall because of two factors, not one.

Producers costs would be lower because not only would they no longer have to pay taxes on their profits, they would no longer have to remit their employees' deductions to the federal government — they would pocket them.

When Jorgenson testified on the subject of "The Economic Impact of Taxing Consumption" before the House Committee on Ways and Means in 1996, he made essentially the same statement that was quoted above from his report for Americans for Fair Taxation:

Since producers would no longer pay taxes on profits or other forms of income from capital and workers would no longer pay taxes on wages, prices received by producers, shown in the fifth chart, would fall by an average of twenty percent.

After an inquiry by a citizen [4] who was concerned that the FairTax proponents were misrepresenting his conclusions, Jorgenson made his position perfectly clear:

A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers' prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increased economic efficiency.

Boortz is double counting. The portion of the worker's paycheck formerly sent to the government for taxes that will be now returned to him so he can collect "100 percent of every paycheck" is the same portion that producers will now pocket to help them lower their costs. This is because Boortz originally maintained that the embedded taxes that drive up the costs of goods and services are "in addition to the money taken out of your check in income taxes and payroll taxes." He has since changed his tune.

From his Nealz Nuze, here is Boortz on what will really happen to "100% of your paycheck":

On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck.

We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So … what does this mean to your paycheck after the FairTax becomes law?

When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay — the amount you can put into your bank account — will not decrease, and may actually increase.

On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax.

Because of Boortz's epiphany, he had to make some significant changes in his new paperback edition of The FairTax Book. Gone is the statement on page 55 that embedded taxes which drive up the cost of goods by 22 percent are "in addition to the money taken out of your check in income taxes and payroll taxes." Here are the other changes and omissions:

Once the FairTax takes effect, you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes — and you'll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.

Once the FairTax takes effect, you will be in complete control of your paycheck as nothing will be withheld — and your purchasing power for t-shirts and all other goods and services will be almost exactly what it was before the FairTax.

When we all start controlling 100 percent of our earned income in our paychecks.

Being in "complete control" of your paycheck no longer means keeping 100 percent of it.

Remember that the poor, along with everyone else — will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.

Remember that the poor, along with everyone else — will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. If employers leave this money in paychecks instead of taking it out of price, most of those we categorize as poor would see an immediate 25 to 30 percent increase in their take-home pay.

Now the increase in take-home pay is tied to the generosity of the employer. Prices cannot be reduced and take-home pay increased at the same time.

When you factor in the lower prices caused by the disappearance of the embedded taxes, you'll see that the total price paid for consumer goods will remain very nearly the same.

When you factor in the combined lower prices/higher take-home pay caused by the disappearance of the embedded taxes, you'll see that the total price paid for consumer goods will remain very nearly the same.

This again shows that the fall in prices that may result under the FairTax is due to two factors, not just the removal of the embedded taxes.

In the "Time for a Quick Review" chart on page 111 of both editions, there are some substantial alterations:

We all get virtual raises, since payroll taxes are no longer siphoned from our checks.

The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.

Our purchasing power for buying consumer goods and services remains essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.

Do these corrections mean that Boortz is no longer guilty of misrepresenting Jorgenson? Perhaps. But consider the following:

* The new edition of Boortz's book still states (on pp. 84 & 160) that people will take home 100 percent of their paycheck under the FairTax.

* The website of Boortz's coauthor, Congressman John Linder, still maintains that one of the results of the FairTax is that it "allows you to keep 100 percent of your paycheck, pension, and Social Security payments."

* The Americans for Fair Taxation website still claims that the FairTax "enables workers to keep their entire paycheck."

Boortz is very naïve to think that once the FairTax plan is implemented that employers will be able to lower employee wages just because the net amount an employee receives might be more than his current take-home pay. Not only will workers be extremely reluctant to take a pay cut, wage contracts will in many cases prevent an adjustment downward.

And consider the case of two workers who currently make the same gross pay but each with a different take-home amount because they claim a different number of exemptions. Under the FairTax plan, if wages are lowered to current take-home amounts, one employee would end up making less than the other and certainly cry foul. Can you imagine the number of workers who will, on the eve of the implementation of the FairTax, rush to change the number of their exemptions on their W-4 forms so as to increase their take-home pay before their employer has a chance to take it away?

Boortz's fourth misrepresentation concerns Jorgenson himself. Although Boortz quotes Jorgenson to give weight to his FairTax proposal, Jorgenson is not a devotee of the FairTax — he supports an income tax plan called the Efficient Taxation of Income. That's right — an income tax. That means an IRS and a 1040 form, not a sales tax.

In his 1996 article, "The Economic Impact of Fundamental Tax Reform," [5] Jorgenson states: "Changing the federal tax base from income to consumption is an idea whose time has come. This change will create important new opportunities for growth in the standard of living of all Americans." But that was 1996, long before Boortz wrote his FairTax book. Since then Jorgenson has written quite extensively about his income tax plan. Here are just three examples.

In his 2002 article for the Financial Times, Jorgenson called his Efficient Taxation of Income plan "A Smarter Type of Tax," and explained that

Efficient Taxation of Income is a new approach to tax reform that would introduce different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 per cent, while property-type income would be taxed at 30 per cent.

Also in 2002, Jorgenson testified yet again before the House Committee on Ways and Means on the subject of taxes. But instead of advocating a consumption tax like the FairTax, he presented his Efficient Taxation of Incomeproposal. Under Jorgenson's plan: "Income would be defined in exactly the same way as in the existing tax code."

In 2003, Jorgenson wrote an article for Harvard Magazine on the subject of — you guessed it — the Efficient Taxation of Income:

Efficient Taxation of Income is a new approach to tax reform based on taxation of income rather than consumption. This would avoid a drastic shift in tax burdens by introducing different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 percent, while property-type income would be taxed at 30 percent.

Besides the misrepresentations of Professor Jorgenson, there are other reasons the FairTax should be called the Fraudulent Tax.

The FairTax does not abolish the IRS. Changing the name and some of the functions of the IRS does not mean that it will go away. The FairTax simply exchanges one federal agency for another. If there were no IRS or other enforcement bureau to enforce the collection of a national sales tax, then why would anyone bother paying or collecting the tax? Actually, the Fair Tax Act of 2005 sets up a "Sales Tax Bureau" in the Department of the Treasury. With a bureau comes an army of bureaucrats. And what Jorgenson said in his report on "The Economic Impact of the National Retail Sales Tax" shows that these bureaucrats will still have plenty of work to do:

Any definition of a consumption tax base will have to distinguish between consumption for personal and business purposes. On-going disputes over exclusion of home offices, business-provided automobiles, equipment, and clothing, and business-related lodging, entertainment and meals would continue to plague tax officials, the entertainment and hospitality industries, and holders of expense accounts. In short, substitution of the NRST for the existing tax system would not eliminate all the practical issues that arise from the necessity of distinguishing between business and personal activities in defining consumption.

The FairTax will abolish the IRS in the same way that it will abolish the income tax — by replacing it with something else.

The FairTax is not cosponsored by Congressman Ron Paul (R-TX). Every month or so since I began writing against the FairTax I have received an e-mail insisting that Congressman Paul is a cosponsor of H.R. 25, the "Fair Tax Act of 2005." Although there are fifty-eight cosponsors of this bill, Ron Paul is not one of them. Why is it that no one bothers to mention the names of the actual cosponsors of the FairTax bill?

FairTax supporters know that it is Dr. Paul who consistently votes to lower or abolish federal taxes, spending, and regulation. His support for the FairTax bill would further their cause more than any number of cosponsors or anything Boortz could ever say or write. The Americans for Fair Taxation website lists Congressman Paul as a " supporter" of the FairTax. This is strange since Dr. Paul has not taken an official position in support or opposition to the FairTax. His priority is reducing government spending and taxes, not getting sidetracked in debates about which type of tax we should have. As he has made clear: "The real issue is total spending by government, not tax reform."

So what about these cosponsors of the FairTax bill? Are they interested in reducing total spending by government? Out of the fifty-eight cosponsors, forty-four of them voted for the Medicare Prescription Drug and Modernization Act of 2003 — the largest expansion of the welfare state since the Great Society. Only six voted against it [6] (eight cosponsors were not members of Congress at the time of the vote. [7]) The sponsor of the FairTax bill, John Linder, also voted for the Medicare Act. No wonder the FairTax has to be revenue neutral now with adjustments every year! How else will the government come up with the billions of dollars it will need to pay for all these prescriptions?

The FairTax is not a voluntary tax. Calling the FairTax a voluntary tax has got to be the most ridiculous thing ever said about it. Boortz maintains in his book that "there is nothing coercive about the FairTax." In Congressman Linder's testimony before The Joint Economic Committee on "Rethinking the Tax Code," he stated: "The FairTax plan is a voluntary tax system. Every citizen becomes a voluntary taxpayer, paying as much as they choose, when they choose, by how they choose to spend."

Well, could we not also say that the current tax system is a voluntary tax system? Every citizen becomes a voluntary taxpayer, paying as much as they choose, whey they choose, by how they choose to work. Under the present system, if someone doesn't work then he doesn't pay any income tax. Sounds voluntary to me. Rather than being voluntary, the FairTax is a "permission-to-live" tax, as Murray Rothbard has described consumption taxes.

We know that retail prices will increase by 30 percent under the FairTax plan; we don't know how much prices will decrease because of the elimination of "embedded costs" in the price of goods. Because it is embedded with fraud, the FairTax plan is not the answer.

The income tax should be repealed, not replaced. The IRS should be gotten rid of, not renamed. Tax reform should reduce taxes, not be revenue neutral. Government theft of the wealth of its citizens should be abolished, not adjusted. The FairTax should be called the Fraudulent Tax.

Laurence M. Vance is a freelance writer and an adjunct instructor in accounting at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Send him mail. Comment on the blog.

[1]Congressman John Linder (R-GA) is Boortz's coauthor, but since Boortz has previous writing experience and his name appears in larger letters on the book's cover, I will refer to Boortz as the author of The FairTax Book.

[4]Rob Northrup, to whom also I am indebted for bringing to my attention the new paperback edition of The FairTax Book.

[5]This appeared as chapter 11 of Frontiers of Tax Reform, edited by Michael J. Boskin (Hoover Institution Press, 1996), and was reprinted by the economics department of Harvard University as part of its Reprints in Economic Theory and Econometrics.

[6]Dan Burton (R-IN), Jeff Flake (R-AZ), Jeff Miller (R-FL), Charlie Norwood (R-GA), Mike Pence (R-IN), Thomas Tancredo (R-CO).

[7]K. Michael Conaway (R-TX), Dan Boren (D-OK), Thelma Drake (R-VA), Michael McCaul (R-TX), Ted Poe (R-TX), Michael Sodrel (R-IN), Lynn Westmoreland (R-GA), Tom Price (R-GA).

If only all this were true.

And if only being "revenue neutral" was a virtue.

The tax system in this country is broken, but the damage is not limited to the federal government. The most damaging aspect of the tax system is that it has to support spending habits that are completely out of control.

The easiest way to reduce federal spending is to eliminate all transfer payments to the states. But that would push the deficits down to the states, and start a whole series of crises in states which pretend they balance their budget by using federal money with strings attached to provide services that most governments are not authorized to provide, let alone required by law or God.

There are three rules of taxation you have to memorize. Somebody is always changing all the rest of them, so you might as well not commit them to memory.

1. The only fair tax is the tax that taxes you and not me.

2. When in doubt, deduct it.

3. Who's gonna know?

If the employer is going to hand Joe the whole $117.95, then that implies that Joe's gross annual income remains the same as before. All the taxes passed to the government on Joe's behalf are in his paycheck. The employer has no net savings in his labor costs (wages and salaries) except the cost of tax compliance. The employer can't reduce his prices as he must maintain the same revenue to pay Joe at the agreed rate. The asking price for the product doesn't change, but the taxation becomes the NRST + state sales tax + local sales tax.

Seriously, do you understand the payroll tax at all? For every penny taken out of the employee's paycheck for FICA, the employer has to contribute an additional penny -- for employees earning less than the Social Security cutoff (what is it, about 90k these days?), the employer is actually paying 107.65% of what the employee's stated salary is, when you include the "employer's share" of FICA taxes.

The example uses the numbers being thrown around by the NRST detractors that if employees keep their entire paycheck, that pre-tax prices could be expected to drop by about 8%. But what the detractors fail to show, and what I show in my example, is that this means there's more money in the individual's pocket too, which offsets, give or take a percentage point, the NRST added to the pre-tax price.

And that's comparing the income/payroll tax's effective rate to the NRST marginal rate. When you actually figure in the NRST effective rate, even under Rob's numbers, "Joe" is paying less for that item in the post-NRST world than he was in the pre-NRST world.
Joe does not live by bread alone.

Paying an additional 30% on government services as well as

30% ON all government employee's (local, state and federal) wages salaries and benefits as well as 30% tax on their purchases(local and state taxes would have to be increased for the NEW federal tax they'd pay).

30% tax on interest (paid or earned),

30% more for anything imported (how many products do you buy that aren't?),

30% tax on fees, exises and other taxes included in a "gross payment" tax,

30% more for rent, gasoline, utilities, car repairs, insurance (Insurance coverage would have to increase 30% to cover the new tax then another 30% on that for the insurance "service" fee (premium)...

That's to name only a few that would NOT be an increase in purchasing power nor do they improve any marginal or effective tax rates.

OK.

First, lets start with ANYONE who derives a substantial portions of their income from non-wage income. For low to middle income earners, payroll tax is the larges component of Federal taxation. People who do not receive wage income do not pay payroll tax. Elimination of payroll tax puts exactly ZERO extra dollars into their hands under the FairTax to pay for increased prices.

Who are these people?

-- People who derive their income from investment activity or assets (retirees, for example)

-- People who derive their income from Government Transfer payments (SSI, for instance) Note that for a single retiree, as long as 1/2 their SSI plus their modified AGI is under $25K, their SSI is untaxed ($32K for married.)

-- low income wage earners receiving EITC (essentially a refund of payroll tax.)

Note that over 15% of all tax returns filed had no salary/wage income ... these 20 million tax filers paid NO payroll tax.

Note that almost 17% of all tax returns filed had EITC income ... and that this 17% is a DIFFERENT set of tax filers than the 15% above who had NO wage income. We're now talking about 32% of all tax filers (over 42 million filers.)These people receive little to NO income benefit from the repeal of the payroll tax and, therefore will have little to NO additional "money to start with" in their pockets from payroll tax repeal to pay for inflated FairTax prices.

While I don't have exact figures, of the 15 million tax returns with SSI benefits, roughly half fall into the AGI range that would render their SSI as non-taxable.

As for the Income Tax component, roughly 32% of all tax filers paid no tax ... primarily owing to losses from investment or business activity. Roughly 60% of all tax filers had AGI under $25K and therefore paid little to NO income tax. So, somewhere from 40 million to 80 million tax filers will have little to NO additional "money to start with" in their pockets from income tax repeal to pay for inflated FairTax prices.

Now having said all that, I am NOT suggesting the status quo is either fair, or proper. What a AM saying is that a change to the FairTax has a FAR DIFFERENT impact on a FAR LARGER portion of the population than you and other FairTax advocates suggest. Far more people will experience a significant DROP IN PURCHASING POWER from the FairTax than you let on: they will see little to NO increase in disposable income yet be faced with substantially higher prices. MOST of these people are low income.

Enough numbers?

Small business owners who pay themselves using business profits rather than a salary or hourly wage. This a common tactic among small business owners.

Business profits are taxed.

People who derive their income from investment activity or assets (retirees, for example)

Investment income is taxed.

People who derive their income from Government Transfer payments (SSI, for instance) Note that for a single retiree, as long as 1/2 their SSI plus their modified AGI is under $25K, their SSI is untaxed ($32K for married.)... low income wage earners receiving EITC (essentially a refund of payroll tax.

These folks have incomes so low, their effective NRST rate is well under 10%.

My point, which YOU asked me to quantify, is that there are a substantial number of taxpayers who will derive NO additional spendable income if the FairTax were to be implemented. This additional spendable income concept appears central to your assertion that rising prices are immaterial because people will pay the higher prices with higher income.

As I have just shown you, using real data, a substantial portion of the population will derive NO additional income to pay for inflated FairTax prices if the PAYROLL tax is repealed AND a substantial portion of the population will derive NO additional income to pay for inflated FairTax prices from the repeal of the INCOME tax.

No matter how you spin it, these folks will NOT enjoy the benefit of higher take-home pay to offset higher FairTax prices ... contrary to your central thesis.

I find it curious, but not surprising, that your reply is neither responsive nor quantitative. Especially since you make it clear you were interested in numbers rather than assertions.

These folks have incomes so low, their effective NRST rate is well under 10%.

Immaterial, and frankly, a mere assertion. You continue to avoid the fact that "these folks" also have a combined tax burden under the Income Tax regime of well under 10%.

My point remains unrefuted: a substantial number of individuals will NOT enjoy higher take home income to offset their FairTax burden (prebate included). Now again, whether or not we agree that the situation is good, or "fair," your denial that it exists and is significant flies in the face of the facts. Your unwillingness to engage in an in-kind debate on the topic (responsive, quantitative, and on-anecdotal) suggests I have probably hit the proverbial nail squarely on its head.

You're not reading very carefully. Context is important. Neither business profits nor investment income is subject to PAYROLL tax. That whole section of my response to you was about PAYROLL TAX. PAYROLL tax represents the lion's share of savings for low to moderate income taxpayers. My point, which YOU asked me to quantify, is that there are a substantial number of taxpayers who will derive NO additional spendable income if the FairTax were to be implemented.

Read what you're saying. You shift the discussion from total in-pocket dollars to payroll tax. Sorry, but that doesn't fly. Payroll taxes are but one source of taxes paid under the current system that go away under the NRST, and which affect spendable income.

The entrepreneur paying himself out of corporate profits is paying himself out of money that has been taxed by the federal government at somewhere between 15% and 35% (USC 26.A.1.A.II.11.b.1). Under the FairTax, he would have at least 17.65% more money in his pocket than he would have under the income tax.

The investor pays between 15% and 25% taxes on capital gains (I think, that is... USC 26.A.1.A.I.1.h is pretty convoluted on the capital gains definition). For retirement savings, the vast majority of income drawn from that investment is capital gains, not principal. Again, we're talking about someone who will see 15% or more money in hand after the NRST enactment due to the elimination of federal income taxes.

Immaterial, and frankly, a mere assertion. You continue to avoid the fact that "these folks" also have a combined tax burden under the Income Tax regime of well under 10%.

No mere assertion. A couple with an income of $25k gets an FCA of $4,508 (23% of $19,600). If they spent their entire $25k income on taxable goods and services, their effective tax rate would be 4.97% (total taxes of $5,750, minus FCA of $4,508 for a net tax total of $1,242, divided by $25K spent equals .0497).

If they spent their FCA as well, bringing their spending total to $29,508, the effective tax rate becomes 9.12%.

The lower the income, the lower the effective NRST rate would be, again, assuming the entire income is spent on taxable goods and services.

Fine, then the replacement revenue for the employer's contribution to FICA falls on the employees. If they don't buy enough, the NRST rate will have to be increased to accomplish the revenue neutral requirement.

This underscores one of the central problem with the economics of the FairTax. You, Myrddin, are correct: the FairTax calculus requires the employee to shoulder at least a portion the burden of paying the formerly employer paid portion of payroll tax (other consumers, who were NOT employees, must also shoulder some of the burden.) To do so, two things MUST happen, and happen FULLY:

Second, consumers must INCREASE their level of consumption in proportion to the magnitude of the aggregate transfer. No amount of said transfer can be diverted to investment nor savings. 100% of it MUST be consumed or the FairTax falls short of revenue neutrality.

Of course this contradicts one of the most touted predictions of the FairTax: that the elimination taxation of investment will create an irresistible incentive to invest rather than spend.

This also flies in the face of another FairTax prediction: that consumption will be sharply curtailed in the early year of implementation (see Jorgenson, et.al.)

While were at it, this need (to increase consumption to cover taxes formerly paid by employers) also undermines an "advantage" of the FairTax: that you can "choose" how much tax you want to pay by choosing the nature and level of your consumption. Of course, to stay revenue neutral, everyone must either "choose" to to increase their consumption as describe above, or must hope someone else will "choose" to take up the consumption slack one leaves behind by "choosing" to consume less or consume differently (in a non-taxable way.)

The same problem exists for sums available from the repeal of the Corporate Profit Tax.

For retirement savings, the vast majority of income drawn from that investment is capital gains, not principal. Again, we're talking about someone who will see 15% or more money in hand after the NRST enactment due to the elimination of federal income taxes.

Money in a 401K is subject to ordinary income tax when withdrawn. Most of it is pre-tax contributions, some is actual capital gain. None of it has been taxed. I don't think the politicians will allow that pot of gold to remain untouched. The forced distributions at age 59 1/2 are evidence of that policy. Fortunately for most people, their annual income and tax brackets are much lower by the time the forced withdrawals begin. They pay less tax than if the withdrawals were lumped on top of an active employment income. Of course this assumes you are actually unemployed at the time the forced withdrawals start. I hardly expect to be retired before about age 70, so my 401k is going to get nailed pretty hard.

Savings accounts are mostly filled with principal from after tax income. It's pretty easy to discern the principal vs capital gain elements. Those savings are going to be double taxed. Savings account rates have been very low for the past 10 years. It's going to be mostly principal and whacked severely in value by NRST.

You shift the discussion from total in-pocket dollars to payroll tax.

I did nothing of the sort. I quantified the magnitude of taxpayers who would receive little to no benefit from the repeal of payroll and income taxation. Payroll taxes represent the majority of taxes for low to moderate income taxpayers.

The entrepreneur paying himself out of corporate profits is paying himself out of money that has been taxed by the federal government at somewhere between 15% and 35%

Your source notwithstanding, your assertion is incorrect. The vast majority of small business owners are not corporate entities subject to your citation. They are proprietorships, partnerships and S-corps that pay individual income tax on distributed profits and NO payroll tax. As such they pay anywhere from a negative tax rate (if recapturing prior losses) to a top rate of 35%. Within that range are indeed individuals who will have little to no additional available income from the repeal of the current tax code ... in fact, some will experience a net LOSS of spendable income from the inability to recover prior losses.

For retirement savings, the vast majority of income drawn from that investment is capital gains, not principal.

Well that is truly an unsubstianted assertion if I ever saw one. Retirees live from government transfer payments, previously taxed savings and investment, pensions (subject to income tax but not payroll tax) and, principally from living frugally. Yes, capital gains do indeed contribute to the retirement pot, but a substantial portion, perhaps even a significant majority of capital gains are tax exempt: home ownership gains.

You continue to evade the point: there exists a substantial portion of the population who will NOT see sufficient increases in spendable income to offset inflated FairTax prices.

If they spent their FCA as well, bringing their spending total to $29,508, the effective tax rate becomes 9.12%.

There you go with anecdotes again ... useless since I'll just give you a counterexample. But before I do, note a couple of problems:

(fairtaxcalculator.org)

You also failed to compare that to the Couple's current tax situation (I can guess why :-)... but I'll take care of that below.

A Single with an income of $25K: $12K from SSI and $13K from other sources, gets and FCA of $2,254. If she spent her entire $25k income on taxable goods and services, her effective tax rate would be 14% (total taxes of $5,750, minus FCA of $2,254 for a net tax total of $3,496, divided by $25K spent equals .1398).

If she spent her FCA as well, bringing her spending total to $27,254, the effective tax rate becomes 16.06%.

Under the income tax, this Single paid $0 in payroll taxes and $1,000 in income taxes for an effective tax rate of 4%. Clearly she is at a significant disadvantage under the FairTax.

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