Posted on 12/01/2004 8:25:22 AM PST by Tumbleweed_Connection
...President Bush and House Speaker Dennis Hastert (search) have both said the idea of a national sales tax deserves a serious look. For many, the idea of a world without the Internal Revenue Service is very seductive.
"We spend about $400 billion a year complying with the tax code. We spend $200 billion a year just filling out IRS paperwork," said Rep. John Linder (search) , R-Ga., who has proposed a bill that would create a national sales tax.
Proponents have spent millions on research and have concluded that a national sales tax can replace the income tax, payroll tax, estate tax and corporate tax. Advocates say the new tax would lower the cost of manufacturing and job creation and attract foreign investments, among other things.
"If we were to get rid of the sales or the income tax and the payroll tax and all compliance costs, we would be so ferociously competitive in a world economy that corporate America would not be competed with unless foreign corporations started building their plants in America," Linder said.
Proponents seek a 23-cent national sales tax on all retail goods, everything from groceries to clothes, cars to electronics. Everyone would pay the same rate, which critics argue is part of the problem.
"If you consume $40,000 a year and you make $50,000 a year, would you feel it is fair if a guy who made a half a million dollars a year but spent $40,000 a year paid the same tax you do? I think you wouldn't feel it's fair," said Buck Chapoton, former assistant treasury secretary.
(Excerpt) Read more at foxnews.com ...
The power to lay and collect taxes. Initially this was done mainly by tariffs. A tax on income briefly appeared during the Civil War. It was later ruled unconstitutional by the Supreme Court. To bring it back, Congress and the States amended the Constitution.
Who are "most economists"?Most economists
Explain the fundamental difference between tax costs and other production costs that would explain the difference in their incidence, please. Or are you suggesting that all production and operating costs are borne by investors and workers, too?A company can produce things without paying income tax. It's not an operating cost or a cost of production. It's only when they finally make a profit on their products do they pay income tax.
According to fans of big government (liberals, socialists, academics, etc.) the purpose of taxes is to redistribute wealth. Money is taken from productive people and given to less productive people in the form of entitlements. Leftists accept this approach because they believe that all property, including financial property such as income, inherintly belongs to the government.
The conservative approach is this: the federal government must provide for the common defense. In order to do so, it needs money. The employees at McDonnell-Douglas don't build F-18's for free. Therefore the federal gov't lays and collects taxes to pay for national defense. I don't have a problem with this. I do have a problem with waste, pork, and programs that aren't the government's business (NEA, NPR, Dept of Education, airport screeners).
Yes, the market sets the price. And taxes and compliance are part of the market, as it's currently constructed.
My tax and accountant bill is worked into the cost of my product. So is every other businessman's.
You mean the flat INCOME tax, don't you? More precisely, the flat income tax mimics a consumption tax in some respects, but is still at its foundation a tax on INCOME. In addition, history teaches that it won't stay flat for long.The flat tax is a consumption tax. Just like the NRST taxes income you consume (spend at retail). Sorry if you don't understand this.
History teaches that consumption is a more stable tax base than income.History doesn't have an example of a 30% NRST, does it?
Since most of the stuff sold on ebay is used and used goods are not taxed under the FairTax, that is highly doubtful.You obviously don't use eBay much. Most stuff bought on eBay is new. I've purchased about half a dozen new items on eBay this year, and no used ones.
He certainly is .... serious as a heart attack. Stick around these threads for a while. You would not believe the mental gymnastics that the FairTax bashers go through to avoid acknowledging its benefits. YN would have you believe that tax costs work in an entirely different way in business economics than other costs to operate and produce goods. It gets hilarious at times.There are none so blind...
(sigh) No, they won't be 30% more expensive, they will be 20 - 25% LESS expensive. Business inputs are not taxed and the imbedded costs of the current system will be removed from the pricing model relatively quickly.
Only if wages go down that much
Transitional Issues in Tax Reform
Price Level Effects
Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.
In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.
Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.
The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.
Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax…would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level…and no change in payments to workers in nominal terms."
Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.
Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.
Monetary Implications of Tax Reforms
Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.
And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.
But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.
Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.
"Sorry, I don't think I understand your scenario completely. I assume that both of the houses must be new, because otherwise the Fair Tax wouldn't be involved -- it doesn't tax the sale of used property."
Correct.
"If I buy a new home after the Fair Tax is implemented, I have to pay 30% sales tax on the transaction. If the house is priced at $250,000, I must also pay $75,000 in Fair Tax, for a total of $325,000."
My $250K figure was an after-tax price. When you remove the current tax system, competition drives that cost component out of the pricing model. Economists have estimated that, on average, 22% of the price of our domestically produced consumption goes to cover the income and payroll taxes (as well as the enormous compliance costs which it extracts from all of us) which cascade up through the system as materials move from each step in the production chain to the next. The biggest difference, then, in the before and after FairTax home purchase will be that the tax component will be broken out and visible after the FairTax is enacted. The total (after-tax)price will be about the same (give or take a few percentage points). Actually, that 22% average is probably low for houses, which, as I recall, have slightly higher imbedded taxes than products with a shorter supply chain.
Of course, that process will hold true for domestically produced goods only. Imports may have some minor savings in distribution costs inside this country, but it won't be nearly on the order of magnitude of domestically produced goods, which typically go 5, 6 or more levels deep in the supply chain. Therefore, imports will go up in price relative to where they are now, and domestic production will stay about the same. Of course, houses aren't imported..... LOL.
What we are NOT doing is introducing a preference in favor of our producers into our tax system. We are taxing imports identically to the way we are taxing domestically produced goods. We are eliminating a preference that exists in our current tax system for foreign producers. This is one of the major reasons that we have a huge and growing trade deficit which Chairman Greenspan recently pointed out is unsustainable.
The economic studies have shown that, although there will be a slight initial overall decrease in consumption as we stop punishing savings and investment in our tax system, but the more significant shift in consumer behavior will be an increase in the demand for US produced goods at the expense of goods produced in other countries. Within 4 years, total consumption is back to where it would have been under a continuation of the current system and savings and investment is much higher because of the much faster growth in the economy during those 4 years. From that point forward, consumption is higher under the FairTax than under a continuation of the current system.
Have you ever heard of the elasticity of demand? Businesses exist to maximize profit, not to maximize price. With elastic products in a competitive marketplace, sales volume goes up when prices go down. Equilibrium will be reached when prices fall to a point where sales price exceeds cost just enough to achieve a reasonable profit margin.Elastic products? Does this example only work if you're selling Silly Puddy?
But you'd have the reader believe that your predictions are better than a man that can run circles around you.I don't believe I've made any predictions. My point has been that no one can predict the economy.
"That's one of the big disadvantages of the Fair Tax is that it penalizes the purchase of new goods, particularly large purchases such as home and automobiles, over the purchase of used goods."
As posted above, it doesn't penalize the purchase of new homes and cars (relative to the current system), as long as they were produced in the USA. The much, much bigger impact on consumer behavior is that it eliminates the bias in our current tax system in favor of foreign producers. Foreign producers from VAT countries often remove their tax burdens from their goods before they leave their shores, then send them to the USA to compete against our products which have the enormous costs of our tax system (including our crippling compliance costs) imbedded in their prices.
The removal of this bias IN OUR OWN TAX SYSTEM for foreign producers cannot be overemphasized and has enormous implications for our future economic well being. It is important for everyone to understand - this competitive disadvantage isn't something that our trading partners have done to us - we have (inadvertently) done it to ourselves. If there is one major trend that we are in the midst of, it is the globalization of our economy. Continuing to ignore this major impediment to our competitiveness globally is a luxury we can no longer afford.
No person, group or government may initiate force or threat of force against any person. The right to life, liberty and pursuit of happiness. The FairTax is the only tax scheme that doesn't violate a person's life and property rights.You for got this:
Hard to believe that you could further discredit yourself but you continue to do just that. Here's the biography of the person you assert would have only empty words. He has a mountain of credibility compared to you. Which is why you must try to tear him down -- trademark of the pipsqueak.Asking for research that supports his claims is not tearing him down, it's called the scientific process. Someone develops a theory, tests it, and presents his result. Others try to verify those results independently. We have no verification of his results (he even states they are probably unrealistic). But you are willing to bet the farm on one line in one paper by one (two, actually) economist.
I think that implementation of a NRST on houses (and cars) would have an effect on prices of existing property. Right now, there is a 5 or 10% premium on a new house versus a comparable "used" house. If all of the sudden this premium jumped to 30-35%, demand for "used" houses would jump, therefore raising prices. Likewise, when a "new" house is bought, it automatically increases in value, because the tax on it doesn't need to be paid again.
And taxes and compliance are part of the market, as it's currently constructed.We are in a global market.
My tax and accountant bill is worked into the cost of my product. So is every other businessman's.You wouldn't have an accountant if it weren't for taxes? And is your tax and accountant bill 22% of your revenue?
"Non-compliance to a 23% sales tax would be so pervasive that an IRS replacement would have to be set up to apprehend the black marketeers."
You raise a valid point. However, let's remember that we are dramatically decreasing both the number of collection points and the complexity of the system being enforced. Also, research has shown that the overwhelming dollar volume of retail sales takes place at the level of the large national and regional retailers, such as Wal-Mart, the large grocery chains, Target, Home Depot, etc. The risk reward ratio for these organizations to cheat the sales tax just isn't there. In fact, if a black market competitor pops up around the corner from one of them, who do you think will be the first to turn them in?
Bear in mind, also, that evading the sales tax would require collusion between buyer and seller whereas with the current system anyone preparing his/her own income tax return can evade.
If you have a concern about compliance/enforcement that is objective and even handed, you should strongly support getting rid of the current system, which is a disaster from that perspective. Money magazine ran a test of the tax system annually for about 10 - 12 years, ending with the 96 tax year, I believe. They submitted the same set of hypothetical tax data to professional tax preparers around the country and asked them to prepare tax returns based on that data. Of the 47 1040s they got back for the 96 tax year, guess how many answers relative to the taxes owed they got? 47!! That result BTW wasn't that much outside the norm for the previous years of results. That is probably why they stopped doing it - they had proved their point. Interestingly enough, the tax system has grown enormously in complexity since 96, as measured by the number of pages.
I think it is more accurate to say that, although a sales tax certainly presents a different set of compliance challenges than an income tax, they would not appear to be more formidable and, in fact, we could in all probability get a higher level of compliance with a lower level of enforcement resources. Anyone who claims that he supports a continuation of the current system based on concerns about compliance issues with the replacement either has a warped perspective or a hidden agenda.
I don't believe I've made any predictions.
You've made predictions. That you don't believe you have is moot. Though it does further validate the mental disability explained in post 427.
So here's a question for everyone. Who here thinks the labor supply can increase 30% in one year?
Why that question? Why does that matter?. Did you say that if X happened you predict that the "labor supply" would have to "increase 30% in one year"
You're a hoot!
Asking for research that supports his claims is not tearing him down,
Of course you wouldn't think making reference to a man with Dr. Jorgenson's stellar credentials as "empty words by some one (hired) economist"442 as an attempt to tear him down. It's astounding how much you miss. Almost as though you were trying to make it appear that you didn't notice. Here's a prime example -- one of many:
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To: Your Nightmare
You've made predictions. That you don't believe you have is moot. Though it does further validate the mental disability explained in post 427.
Why that question? Why does that matter?. Did you say that if X happened you predict that the "labor supply" would have to "increase 30% in one year" You're a hoot! |
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