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.

[pigdog]

"I need to adjust my retirement spending plan downward by aprox. 20+%"

Before you get too concerned about the claims of the FairTax opponents which are intentional demagoguery to play into a person's worst fears, be sure to use the FairTax Calculator linked in post #784 and find out just what your effective FairTax rate would be.

It will certainly not be the 20+% number that you've been led to believe and it is hugely influenced by your own consumption and/or savings/investing decisions. The Calculator is anonymous and free to use. It is also accurate.

[Skeptic2]

"...how do you account for the 20% increase in the purchasing power of that portion?"

I won't have to if you tax it away from me when I spend it.

[pigdog]

"lobbying" = "lobbying"

[pigdog]

Nope - Always Right doesn't get it either. Better watch out ... he'll call you a liar; of course that's not a personal attack.

[pigdog]

"Always Right" = "lewislynn"

[pigdog]

That's what a sale is - the buying of an item at its price plus the FairTax. A sale is a sale is a sale - not matter your obfuscation attempt.

[pigdog]

No - that's not a black market at all but non-payment of income tax by those in the illegal economy.

[Polybius]

Since under the FairTax a taxpayer pays the tax at the time he makes a retail purchase, I'd be interested in complete detail on what you see as the "black market". Please define and quantify it and provide some links to some definitive studies that characterize it. Just claiming there is one isn't sufficient.

The black economy is made up of two constituent activities: ................1.. Legal activities that are not reported to the tax authorities and the income from which goes untaxed and unreported. For instance: it is not illegal to clean someone's house, to feed people or to drive them. It is, however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of the world, this is a criminal offence, punishable by years in prison. .......2.. Illegal activities which, needless to say, are also not reported to the state (and, therefore, not taxed). ................These two types of activities together are thought to comprise between 15 percent (USA, Germany) and 60 percent (Russia) of the economic activity of a country (as measured by its GDP).

Right now, employers take out taxes before the employee gets his hands on the money. The employer will not risk losing his business for the economic benefit of one of his workers.

With a 23% Federal sales tax, each buyer will have to decide if it is better to buy goods and services "retail" or "under the table" for a 17% savings after the illegal seller gets his 5% cut for selling "under the table".

Governments have been around for something like 6,000 years - since the time of the ancient Sumerians and all governments tax in some manner since they themselves intrinsically have no money ... so what???

Exactly. And for all those years, governments have been battling black market tax evasion. Income taxes, and therefore income tax evasion, is, historically, a recent invention.

If you think that the disappearance of the Income Tax means the disappearance of the Tax Police, you will be in for quite a shock.

The Tax Police hold a news conference in Moscow. Igor Tabakov, photographer.

[pigdog]

They are not taxable.

[Your Nightmare]

That's what a sale is - the buying of an item at its price plus the FairTax. A sale is a sale is a sale - not matter your obfuscation attempt.

Wages are payments for a taxable services under the FairTax.

[Your Nightmare]

They are not taxable.

The purchase of pews are taxable (unless they plan on selling them).

[pigdog]

The items you highlight in red - and in fact most of the content of your post deal with tax evasion (in the form of unreported or underreported income) which is a different matter than black market activities which relates to the unlawful selling of things outside of the tax system.

Your post shows nothing about black market sales nor has any definitive paper ever been presented that delineates the "black market".

Your claim that taxpayers would buy things by bribing a merchant with, say, a 5% bribe holds little credence since the seller would under the law still be liable for the full 23% tax. Why should he risk his business for a measly 5% to help you (or anyone else for that matter) when the 23% is not paid for by the merchant but by the buyer - and the merchant has agreed in writing to collect the tax and is paid to do so. That would be theft of government funds.

Claiming there will be large scale black market activity is all you've done. No one has ever shown this to be a real consideration as most folks are fairly honest and, after all, their effective FairTax rate will be lower than the income tax rates they now pay. Due to that it's far more likely that any black market or any other sort of tax evasion is being done now since it is more profitable to the "doer".

[pigdog]

And wages aren't taxed unless "sold".

[groanup]

Let me put it like this:

IRA: 100,000 dollars. Under current law it's worth 80,000 dollars in purchasing power.

Taxable account: 100,000 dollars

Under current law it's worth 100,000 dollars in purchasing power.

Under a NRST the IRA becomes worth 100,000 dollars and the taxable account becomes worth 80,000.

Of course that's the most basic of illustrations. For one thing, you would have been able to accumulate more money under a NRST because the compounding would have been higher without tax liability along the way. Also, your purchasing power doesn't even kick in until you have paid for life's necessities. And, if you're like most people, you'll buy frugally and often used when making large purchases. Finally, as you spend your nest egg between shuffleboard tournaments at Del Boca Vista, the earnings on it will not be taxed.

[Principled]

So what? The FairTax doesn't tax sales, it taxes "gross payments for the taxable property or service."

What taxable property or service is being sold?
What is being purchased to tax?

Nothing. The "fairtax" is zero on gov't wages. It is a special rule implemented that creates the tax on gov't wages, not a sales tax. Without the rule, gov't would be able to grow by hiring employees for much less than contracting to private enterprise.

Hence the price (including the "fairtax" of zero if you like) is 23% of the wages.

[Principled]

snicker. Welcome (back) to FR.

[lucysmom]

Your claim that taxpayers would buy things by bribing a merchant with, say, a 5% bribe holds little credence since the seller would under the law still be liable for the full 23% tax. Why should he risk his business for a measly 5% to help you (or anyone else for that matter) when the 23% is not paid for by the merchant but by the buyer - and the merchant has agreed in writing to collect the tax and is paid to do so. That would be theft of government funds.

That presupposes the sale is made by a retailer/merchant with more to lose than to gain.

Claiming there will be large scale black market activity is all you've done. No one has ever shown this to be a real consideration as most folks are fairly honest...

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.

...and, after all, their effective FairTax rate will be lower than the income tax rates they now pay. Due to that it's far more likely that any black market or any other sort of tax evasion is being done now since it is more profitable to the "doer".

What is the "doer"?

There you go again - the tax rate is so low, people will pay. Somewhere on this thread some FairTaxer has claimed that having to fork over the FairTax with every purchase will incite "the people" to rise up and force government into responsible reduced spending. Those two positions contradict eachother. If the rates are so low that people will pay rather than seek a tax evading alternative, they are also so low that there will be little interest in reigning in government spending.

To accomplish the FairTax manipulation, the tax has to be sufficiently high to motivate people to action. What FairTaxers can't control is the action people will take.

[Polybius]

The items you highlight in red - and in fact most of the content of your post deal with tax evasion (in the form of unreported or underreported income) which is a different matter than black market activities which relates to the unlawful selling of things outside of the tax system.

The full series of articles deals mostly with Eastern Europe where the selling of untaxed goods is rampant on the black market.

Your claim that taxpayers would buy things by bribing a merchant with, say, a 5% bribe holds little credence since the seller would under the law still be liable for the full 23% tax. Why should he risk his business for a measly 5% to help you (or anyone else for that matter) when the 23% is not paid for by the merchant but by the buyer - and the merchant has agreed in writing to collect the tax and is paid to do so. That would be theft of government funds.

So, a 5% cut for an out of the back of a car trunk sale is too little a cut for you, the seller?

Fair enough.

Let's split the profits of the tax crime 50/50. I, the buyer will pay 111.5% of the sale plus tax price and get an 11.5% profit and the seller will pocket that 11.5% of the price tax free.

And, who is to catch us?

According to the Fair Tax advocates, after the Income Tax dies, there will no longer be an IRS and there will not a be a Tax Police to replace it.

No Tax Police = No enforcement = No risk = Easy $$$$ on the black market.

Don't fool yourself.

With every sale having a total profit potential of 23% to be split however the buyer and seller agree to split it, the "under the table" economy tempatation will be high and the Tax Police will be on it like pitbulls on a pork chop.

[groanup]

Somebody we know? lol.

[lewislynn]

Income tax - any spending of so-called "disposable income" is taxed (again) by the hidden tax costs embedded in prices.

Sorry you lose again, I'm an illegal alien (according to your rhetoric we don't pay embedded taxes) and anyway I only buy imported stuff.

FairTax - untaxed church donations - income, but untaxed.

LOL! That's it? That's the best the Fairtax can do for my taxes (unless I live in a cave, grow my own food or buy someone elses old crap).