Posted on 08/26/2004 11:05:33 PM PDT by n-tres-ted
Two weeks ago a man stood up at a George Bush campaign appearance in Florida to ask about a piece of legislation known as HR25. Many, including myself, were pleased to hear Bush respond with some positive thoughts about the Fair Tax plan, a movement to replace the federal income tax with a national retail sales tax.
Washington is a city of inertia, and right now the inertia belongs to our present method of funding the operations of our government, the income tax. Politicians will not easily surrender a funding mechanism that lends itself so well to political demagoguery and which can be used to reward political allies and punish enemies.
The Fair Tax plan deserves a thorough public examination and debate. John Kerry seems dedicated to making sure this doesn’t happen. Soon after Bush cited the national retail sales tax as something worthy of further exploration, Kerry stepped forward with the typical class warfare rhetoric of the left. Acting as if he actually knew what was he was talking about (he didn’t), Kerry announced that the Fair Tax would amount to the largest increase in the tax burden on poor and middle income Americans in our history.
John Kerry was wrong. He was either speaking out of ignorance, or he was deliberately lying about the Fair Tax proposal in order to gain a political advantage. A politician lying in order to gain political advantage --- imagine that.
This column is lengthier than the norm, but I promise you that if you will invest the time it takes to read it you will be well on your way to becoming yet another rabid supporter of the Fair Tax plan. You will know that the poor and middle income Americans would be the prime beneficiaries of the proposal. You may even organize your own neighborhood march on Washington to demand that HR25 receive a fair hearing. In the next two minutes I’m going to turn you into a HR25 Fair Tax zealot. Read on:
First … the briefest of overviews: Simply put, HR25 would provide for the repeal of the 16th Amendment (the income tax amendment) and the dismantling of the IRS. All personal and corporate income taxes would end, as would all payroll taxes. There would not be one cent of federal taxes of any nature taken out of your paychecks. No more Social Security taxes. No more Medicare taxes. You earn $2,000 a payday; you get $2,000 a payday. The federal government would be funded through a national sales tax on goods and services sold at the retail level. No taxes on investments. No taxes on savings. You only get taxed on what you spend at the retail level. Store your earnings in a shoebox if you wish. They won’t be taxed.
When originally proposed, calculations showed that the sales tax would have to be in the area of 23%. A complete economic study is now being completed that is expected to bring that total to under 20%. For the purposes of this column, we’ll stick with the 23% figure.
OK … let’s put on our sensitivity hats for a few minutes here and think of the consequences of the Fair Tax Act on our nation’s poor, poor, pitiful poor. After all, they can hardly afford a 23% sales tax when they’re living paycheck-to-paycheck in the first place, right?
Bear in mind that for the most part those whom we define as “poor” aren’t paying any income tax anyway. In fact, many of them are getting checks from the government; a form of outright income redistribution. The absurdly named Earned Income Tax Credit, for example. How can these people survive going from a no-tax situation to paying a 24% sales tax on all their retail purchases?
The implementation of the Fair Tax would fail in short order if, as the question presupposes, nothing were to change except that all of us would be paying today’s prices for a gallon of milk or a loaf of bread, plus a 23% sales tax. But … that’s would be far from the reality under the Fair Tax. Under the Fair Tax the poor won’t only survive, they’ll positively thrive! The Fair Tax could turn out to be the best poverty-fighting tool devised in this country since the concept of hard work.
Let’s begin by considering two realities.
First, remember, please, that 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 the poor this means an immediate 12 to 15% increase in their earnings.
Second. Don’t forget the 22% in imbedded taxes. These embedded taxes exist in virtually everything poor Americans or any other Americans have to buy. These embedded taxes represent all of the corporate and business income taxes and payroll taxes that the companies involved in the production, manufacture, marketing, distribution and sale of the goods and services must pay in the course of business. As soon as these taxes are gone, and after the competitive forces of the free market work their magic consumers, including the poor, will be paying at least 20% less for virtually everything they buy. This includes such basics as food, clothing, shelter and transportation. Yes... they’ll have to pay the new national sales tax, but 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 in terms of real dollars will fall or will remain very nearly the same.
So … just considering these factors, the Fair Tax delivers a winning hand to people living in or near to what we call poverty. They get every penny they earn on payday, amounting to a 12 to 15% pay raise, and when you factor in the Fair Tax and the lower prices, they’re actually end up spending less of their money for a retail purchase than before. What John Kerry calls the greatest increase in the tax burden on the poor in the history of our country is, in reality, their greatest tax reduction.
You need a clearer picture? Pull out your calculator. Let’s say that a single mother with two children spends $45 a week on groceries. The removal of the 22% embedded tax would bring the price of those groceries down to $35.10. The sales tax at 23% would be $8.07. This brings the total price to $43.17. That’s less than would have paid under today’s tax system. This single mother, whom we’ll consider “poor,” has just received a 12% to 15% increase in her weekly paychecks, and she’s paying less at the grocery story for her basic necessities.
So far, so good. At this point you should be thoroughly convinced that the Fair Tax would actually benefit, rather than harm the poor. But, then again, maybe not. Here’s the convincer. Brace yourself for the knockout punch.
The Rebate
Under the Fair Tax plan every consumer, rich and poor alike, will receive a check or an electronic credit to their bank account from the federal government every single month equal to the sales tax that person or that family would be expected to pay on the purchase of the basic necessities of life for that month. The size of the monthly payment will be based on the government’s published poverty levels for various sized households.
Here’s an example of how the rebate payments would have worked in 2003.
Let’s say you’re a married couple with two children. The Fair Tax Act sets forth a formula for computing the poverty level, based on government figures, which negates any marriage penalty. If the Fair Tax Act had been law in 2003 you would have been granted an annual consumption allowance of $24,240. This is what the government would assume you would have had to spend during that one year to buy the basic necessities of life for your family. The sales tax on this amount would equal $5,575. The government would have rebated this amount to you in 12 equal monthly installments of $465. What about a single woman with one child? Her monthly rebate in 2003 would have been $232. The lowest payment would be to a single person with no dependents. That person would have received $172 per month.
Now … bear in mind, this rebate isn’t only paid to the poor. It is paid to everyone, rich and poor alike. The purpose here is to make sure that no American has to pay the Fair Tax sales tax on the basic necessities of life. Unlike the present income tax system, the Fair Tax treats each and every person in this country exactly the same. This, of course, presents somewhat of a problem to politicians who like to use the tax code to foment class distrust or outright warfare.
OK … let’s add it up for America’s lower income citizens:
1. They get their entire paycheck. 2. Even with the sales tax, and considering the drop in prices, they’ll be paying essentially the same or less for everything they buy. 3. They get a check from the federal government every month to rebate any sales taxes they had to pay on life’s basic necessities.
Are you beginning to see just how far off-base John Kerry was with his intemperate criticisms?
Though most of the poor don’t have what we would call complex tax returns, let’s also include the time these they (all of us, really) will save by not having to keep tax records or file tax returns.
If you’re looking for some reason to oppose the Fair Tax plan, you’re going to have to find a better excuse than its effect on the poor. John Kerry might find it politically expedient to demagogue the issue for votes, but now you know enough to know what he’s up to.
For more comprehensive information on The Fair Tax you can visit http://www.fairtax.org.
Neal Boortz is a lawyer and nationally syndicated radio talk show host.
©2004 Neal Boortz
"btw do you have link/source for the 22% 'embedded' tax?"
I think the ancient one does.
What they really need to do is cut spending, cut the social welfare programs, get the federal government out of education and healthcare.
Still at least with a sales tax, it won't be only American workers getting the brunt of the tax burden with a very high income tax and Chinese getting all the benefit because there is no income tax cost on Chinese goods. It would equalize the goods produced here with those produced elsewhere --- the sales tax replacing the income tax would make American labor costs far far cheaper.
i have looked at their site and see that figure but i can't yet find a link to it... that doesn't mean it's not there, just that havent' found it yet...
as to producer versus consumer... i would suppose producer prices are prices paid by producer and that consumer prices are prices paid by consumer... or is it wierd?Nope, it's that simple. The reason I ask is that you are going to be given a quote by one economist (as if one economist makes it so) that says there would be a 22% drop in producer prices with a NRST. The FairTax supporters have led people to believe this equates to a 22% drop in consumer prices.
Ping
btw do you have link/source for the 22% "embedded" tax?
The 22% number is an average over time of the impact of repealing the income tax and replacing it with a revenue neutral retail sales tax would would have on producer prices.
As such it is not a reflection of just the removal business income taxes from producers per-se, but the cumulative sum of all cost factor reductions and improved efficiencies reflected in prices received by producers.
The basic studies from which this claim is based are by Dr. Dale Jorgenson:
PDF: The Effects of Fundamental Tax Reform and the Feasability of Dynamic Revenue Estimation
http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf
, in Joint Committee on Taxation, Congress of the United States, The Modeling Project and 1997 Tax Symposium Papers, Washington, U.S. Government Printing Office, November 20, 1997 (with P.J. Wilcoxen), pp. 130-151.PDF: The Economic Impact of Fundamental Tax Reform
http://www.economics.harvard.edu/faculty/jorgenson/papers/208.pdf,
Frontiers of Tax Reform, Stanford, Hoover Institution, 1996, pp. 181-196; reprinted in Joint Economic Committee, Congress of the United States, Roundtable Discussion on Tax Reform and Economic Growth, One Hundred Fourth Congress, First Session, 1996, pp 98-112.
The older study forming a foundational basis from the later one which treats an NRST in detail in comparison with an equivalent Flat Tax and 1996 tax law as baseline. The older study looking at consumption taxes in the form of VATs and the Flat Tax in light of 1987 tax reforms and other studies, with a 1996 baseline.
The conclusions and results of those studies and Jorgenson's General Equilibrium Model provided the essential economic basis on which the FairTax NRST was designed by the AFFT economists and legal beagles.
Looking over its content we find some interesting effects of a retail sales tax applied to imports and domestic products equally.
| ftp://ftp.usitc.gov/pub/reports/studies/PUB3110.PDF PDF page 33 Finally, Hines (1996b) argues that exchange rates move to reflect international differences in goods prices. Thus any increase in export competitiveness caused by a move to destination basis would ultimately be offset by appreciation of the U.S. dollar. Another line of reasoning is that countries use receipts from exports either to import immediately, or to make investments abroad which ultimately provide income to pay for a larger volume of imports in the future. Both of these arguments are based upon the observation that strong economic forces keep a country’s trade in approximate balance regardless of what other policy changes it may undergo. The likelihood that the change from an origin-based system to a destination-based system would in fact generate incentives to export and disincentives to import ultimately depends on the strength with which the long-run tendency toward balanced trade in fact operates. Grubert and Newlon (1995 and 1997) point out that a destination-based consumption tax does create an incentive for cross-border shopping, if goods can be reentered tax free, and for consumption abroad through travel or emigration. Finally, the ultimate effect of a flat consumption tax on the price of particular goods will depend on demand elasticities. Those goods for which demand is relatively inelastic may be able to pass through a larger price increase (tax inclusive) to purchasers than those with elastic demands.29 Whether this would happen in specific cases would depend, among other things, on the price behavior of production inputs and competing products. |
From what the paper you found has to say about the effect of a flat sales tax hitting both domestic manufacture and imports equally we would see
- an appreciation of the dollar (expanded purchacing power, e.g. lower prices) and
- an influx of investment from abroad in US industry,
to return trade balances back towards equilibrium over the long term after an intial surge in exports in relation to imports to the US..
Thus substantial benefit to the US economy and American standard of living arising from the implementation of retail taxes in place of the current income/payroll tax can be expected.
Strange, just what Jorgenson's results indicate should happen.
And supporting that survey Bill Archer references
Honestly, the number of pages is completely meaningless. Red herring. And besides, I'm completely in favor of cleaning up and simplifying income tax, and that starts with electing the right people to do this. But I haven't read one lucid argument yet why we need to completly scrap in favor of a theoretical one. We're talking about very serious business here.
Many uninformed Americans assume that it is.
Yeah, you know what? Spare me your 'subtle' insults in the future, ummkay?
>>HR25 would provide for the repeal of the 16th Amendment
A Repeal of an Amendment needs to be an Amendment as well. Can't be legislation.
True, but if you can sell an item for $20, it really doesn't matter whether it cost $0.02 or $.25. Or $5.00.
..." as to producer versus consumer... i would suppose producer prices are prices paid by producer and that consumer prices are prices paid by consumer... or is it wierd?"
======
Nope, it's that simple. The reason I ask is that you are going to be given a quote by one economist (as if one economist makes it so) that says there would be a 22% drop in producer prices with a NRST. The FairTax supporters have led people to believe this equates to a 22% drop in consumer prices.
===
please explain the differences between producer prices and consumer prices with respect to the 22%....
please explain the differences between producer prices and consumer prices with respect to the 22%....
Producer prices are what businesses pay for products used or sold in the conduct of business.
Consumer prices are what persons pay to aquire products for final use or consumption.
Thus the retailer and other businesses would pay 22% less for the products they purchase to conduct their business.
that's what i thought - and that much seems obvious... the other poster indicated that there is something insidious about the difference... see above a few posts to read what he said...
can you elaborate on his pov?
that is, 354 and 372
can you elaborate on his pov?Because a company producing widgets gets the materials they use to produce those widgets for 22% less does not mean the final retail price would go down 22% - there are the company's production costs, wholesale, distribution, and retail costs among other things. But we are led to believe by the supporters of the FairTax that consumer prices would drop 22%.
Well said. And add to it that items previously untaxed by sales taxes (namely food, drugs, etc ) will now be taxed.
can you elaborate on his pov?
I prefer to let Willies posts speak concerning his pov:
His preferred tax system:
Reason for opposition to the NRST
The NRST is an inherently regressive form of taxation that is truly despotic.
Long term, it would result in a two-tiered socio-economic stratification of our society.
It is not disimilar to a 21st Century eco-feudal system where the corporate aristocracy invest and expand their property holdings completely tax-free, while the serfs are overburdened with the excessive taxation on consumption and persuaded that it's supposedly "fair" because the consumption taxes are redistributed through the formal social welfare system.
Posing as "tax reform", the NRST (HR 2525) also represents a "land grab" where business interests are favored over individuals purchasing for their own use:
This a significant inequity between individuals trying to buy their own new homes and landord/investors looking to buy the same single family dwelling as a rental investment. This disparity has long term implications affecting the distribution of private property. The American tradition favoring individual property rights is reversed. The NRST would discourage individual "consumption" of real property.
- A family purchasing their own new home for $200,000 pays NRST at a tax-included 23% rate. This means that of the $200,000 paid, $154,000 goes to the seller, and the Gov't receives $46,000 in tax.
- A landlord/investor can exploit the business exemption of NRST and purchase the same new single family dwelling tax free as a rental investment for only $154,000. Tenants pay NRST on rent and Landlords act as tax collectors for the government
- The $154,000 vs. $200,000 purchase price advantage that landlord/investors enjoy over individual personal homebuyers can be expressed two ways:
- Landlord/investors enjoy a 23% discount compared to the individual personal home buyer.
- Individual personal home buyers must pay 29.87% more than landlord/investors.
"A home is NOT an investment, W/G, but merely a place to live."
Posted on 03/26/2001 16:27:50 PST by pigdog
To: pigdog, Willie Green
It's amazing how many people view a home as an "asset," as well. It's a frickin' LIABILITY.
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