Thank you for your answer. It was very helpful and makes a lot of sense. I was involved in this thread early on, but now it has balloned to over 900 replies and there's no way I'll be able to catch up on all of them.
Another question I had (and it may also have already been answered) had to do with the economic impact of the changeover. I understand that the decreased cost of tax compliance will have a positive economic impact. Over time, this will generate wealth and have an ultimately positive effect on the economy.
In the short term it seems to me that much of the impact will be felt rather harshly. In other words, the positive effects of the change will filter down over time, but the negative effects of the change will be felt immediately. Am I incorrect in this?
I would expect so. I certainly don't have my mind wrapped around the macroeconomic dynamics as well as some here do, but I think it's pretty reasonable to expect a period of adjustment.
From what I understand, the primary issue involved in that adjustment is when a company who was accustomed to paying 15% of their gross receipts in corporate and payroll taxes, suddenly has that tax burden eliminated, how will they respond? Will they lower their prices by 15% or will they try to keep the prices the same and boost profits or increase wages?
I think the general consensus is that market pressures will eventually tend to force prices down. I think common sense would suggest most things would go down quickly (the things they sell as Wal-Mart, Home Depot, and grocery stores) because that portion of retail is so competitive and generally run on business models that attempt charge the lowest price possible and still achieve their profit goals.
The low-competition sectors will be more likely to convert the loss of the existing tax burden into more profit or higher wages rather than lower prices.
Retailers will have a harder time reducing their prices than their vendors, because they will also have to collect the tax. This is where Your Nightmare, I think, says that it would not be possible without wages being reduced. I expect Wal-Mart will be pretty influential in making sure it's vendors suck it up, and don't try to profit from the adjustment so it can keep it's prices as low as possible.
"In the short term it seems to me that much of the impact will be felt rather harshly. In other words, the positive effects of the change will filter down over time, but the negative effects of the change will be felt immediately. Am I incorrect in this?"
Quite the contrary. The most extensive economic study was done by Dr. Dale Jorgenson, former chairman of Harvard University's economics dept. His economic model shows that GDP growth would be over 10% in the first year, declining slightly each year after that. That first year, consumption would show a net decline. That decline, however, would consist of a significant decrease in the consumption of imports, partially offset by an increase in the consumption of US produced goods. The big increase in economic growth is primarily a function of two factors:
1. Price shifts which would make US produced goods more competitive in our own market, as well as foreign markets, and
2. enormous savings in unproductive compliance costs.
Consumption growth after year 1 would be faster than under a continuation of the current system because of faster economic growth. Total consumption would catch up to where it would have been under a continuation of the current system by about year 4, would be higher from that point forward and would be much more heavily skewed toward the consumption of US produced goods.