Posted on 12/19/2004 1:40:29 PM PST by Remember_Salamis
Uh what is your current income tax rate?I thought the FairTax was a sales tax? What's your current sales tax rate?
Too much of what?
In the mean time, while you answer that, I'll tell you what I have been doing too much of, reading posts from people who vilify anyone who dares to do anything less than agree with them 100%.
What you don't hear is that you are already paying an equivalent amount when you spend today - and that when those existing amounts are removed and the nrst is added, prices will be right where they are today.Right after Tinkerbell goes around to all the stores and sprinkles her magic dust on everything!
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.
To see how much you would spend do the following:You seem to be forgetting that people would be paying tax on a portion of the interest they are charged.
Mortgage payments are made with after payroll tax and after income tax dollars. Only mortgage interest is paid with pretax dollars.Not true. They would pay some tax on the mortgage interest (it's a taxable service), so the amount applied to the interest and principle would be after tax.
Under the fair tax, mortgage interest is still paid with pretax dollars - but the principal payments get to be paid with pretax dollars too - along with everything else.
Once again, the VAST majority of seniors' investment wealth is inside retirement plans and NO INCOME TAX HAS BEEN PAID ON IT. Seniors start taking that money out when they retire and are REQUIRED to start taking it out when they turn 70 1/2. The NRST would eliminate the tax on those distributions which are the single largest source of income for seniors in the next few decades. Otherwise those distributions will be taxed up to the maximum bracket. Seniors should love the NRST.But what rate are they currently paying on it when they take it out? It's not anywhere near what they would pay under the FairTax. Also, seniors still have a lot of savings in after tax money, some in accounts, but some other in equity in their homes and other items of value. The FairTax would reduce the value of their current wealth by 23%.
I would turn that around and ask you how one can create wealth when there is a punitive tax on the income one must have to create that wealth?
Careful, you are probably going to be accused of being selfish and unAmerican if you don't sign on.Been there, done that...and a lot worse! :-)
All income withholding taxes are double counted in their analysis. I currently pay someone a gross $1000 and they get to keep around $750. I am not talking about my matching portion of 7.62%, but just their withholdings. In order for me to pass on the 'savings' from the eliminated payroll tax to the customer, I would actually have to reduce salaries. Otherwise I am still paying the employees the same amount, and they are pocketing all the savings. ALL your experts tout how my costs are reduced and how all the employees get to keep more money. It is plain fraud. You can deny it all you want, but they double count a huge portion of the savings.
On the surface that would seem right. However the first 10 or 20 thousand (poverty level) of purchases would be tax free. Also you statement assumes no decline in the overall price level of goods and services who's providers are now rid of a 35% corporate tax rate.
True, but the vast, vast majority of it is in qualified accounts. The fair tax as detailed at fairtax.org would give them a huge windfall.
I would turn that around and ask you how one can create wealth when there is a punitive tax on the income one must have to create that wealth?That's a different issue. We were talking about seniors today.
I am a home builder. And no matter how I figure, I really don't see anyway the sales tax is going reduce my costs by 30% in order for me to charge a 30% sales tax on a new home. They can give me their experts, but their analysis is seriously flawed, and I would even argue fraudulant. I been over their numbers dozens of times, and their numbers are full of counting things twice. The only way this system works is if employees take a pay cut in the amount of payroll taxes paid. If employees pocket all the eliminated payroll taxes, there simply is not enough money anywhere for me to come up with a 30% savings. It just is not possible, no matter how pointed headed their experts are.
Enforcement will even be easier when the government outlaws cash transactions.
What a slippry slope to 1984.
On the surface that would seem right. However the first 10 or 20 thousand (poverty level) of purchases would be tax free.OK, I'll buy that. The amount of reduction is something less than 23%.
Also you statement assumes no decline in the overall price level of goods and services who's providers are now rid of a 35% corporate tax rate.That's because I don't believe there will be a significant price drop. And, btw, that 35% corporate tax rate is on profits, not revenue.
You are comparing apples to oranges.
If you take a set amount and apply a percentage to it, it is easy to calculate.
But the bottom line is- why do we need to discuss this 'tax inclusive' rate - why not just call it 'adding 30%' to the price of a product?
I thought the FairTax was a sales tax? What's your current sales tax rate?
The NRST as proposed will replace the income tax thus to properly compare it, it should be in the same inclusive or exclusive mode that is currently used in order to compare them on a similar basis....it is not a lie...
But the bottom line is- why do we need to discuss this 'tax inclusive' rate - why not just call it 'adding 30%' to the price of a product?A: because the "tax inclusive" rate is lower [it's marketing].
The reason we use the tax inclusive rate is because the current income tax and payroll tax rates are tax inclusive. On our 2003 tax return, my wife and I had an effective tax inclusive rate of 24.27% when you include income tax and our share of the FICA tax. We had a tax exclusive rate of 32.05%. That is taking our gross adjusted income and subtracting the taxes and then dividing the taxes by that result. According to http://www.fairtaxvolunteer.org/smart/faq-main.html#48 , my tax inclusive effective tax rate under the Fair Tax would be somewhere between 17-20%, and that's if I spend every penny I make on taxable purchases, which I won't because I have debt I have to pay off. That compares to the 24.27% rate mentioned above. There's no deception, just trying to compare numbers in a consistent way. We realize the current tax rate at the register would be approximately 30%.
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