Replies

....Never mind the fact the joint committee on taxation claims it would have to be 57% to be "revenue neutral"

Of course such an estimate would have nothing to do with the fact the JCT that owes it very existence and purpose to that sameInternal Revenue Code that would be repealed under HR25,

==> Title 26 Internal Revenue Code Subtitle G - The Joint Committe on Taxation.

and JCT may have slightly adjusted their assumptions and estimates totally outside anything representing the the FairTax legislation as proposed, in favor of maintaining the status quo, hidden taxes and all.

Prepared for Americans For Fair TaxationPrepared for Americans For Fair Taxation
By David Burton and Dan R. Mastromarco
The Argus Group: February 4, 1998

This report responds to Ken Kies’ letter to Chairman Archer of January 12, 1998. In his letter Mr. Kies propounds several objections to the Americans for Fair Taxation (AFFT) FairTax plan (FairTax) as raised by the Joint Committee on Taxation (JCT) staff. This memorandum addresses those objections with respect to three basic issue areas. They are:

•the revenue neutral sales tax rate,
•compliance and evasion issues, and
•the economic impact of replacing the current tax system with a sales tax.

I. The Revenue Neutral Rate

The JCT, through Mr. Kies’ letter, posits that the FairTax would be revenue neutral only at a 30 percent tax-inclusive rate and a 42 percent tax-exclusive rate, and possibly higher (if other factors are considered (see pages 1-2)).

AFFT’s analysis of the revenue neutral rate has been generally confirmed by many of the leading public finance economists in the country.

However, the JCT estimate goes against the weight of authority and is difficult to explain on analytical bases. Not only AFFT but many highly regarded researchers disagree with the JCT’s opinion. For example, Dale Jorgenson (Harvard) has found that the AFFT plan is revenue neutral at 22.9 percent.¹ Jim Poterba (MIT) has found that the AFFT plan is revenue neutral at 23.1 percent.² Laurence Kotlikoff (Boston University) found that the revenue neutral tax rate was 24 percent.³ Researchers at Stanford, the Heritage Foundation, Fiscal Associates and the Cato Institute have reached similar conclusions (22.3 percent to 24 percent).

This memorandum demonstrates why the JCT analysis is incorrect and why the Jorgenson, Poterba and AFFT analyses that the AFFT plan is revenue neutral at an approximately 23 percent tax-inclusive rate.

A. From a Macroeconomic Perspective, the JCT Calculation of the Rate Is Substantially in Error.

A comprehensive consumption tax that taxes all consumption of any type does not have a tax base equal to only 59 percent of GDP as the JCT is claiming and it certainly does not have a tax base equal to only 42 percent of GDP as the JCT is implicitly claiming in its tax-exclusive rate calculation. Given the absolute breadth of the AFFT consumption tax base (no exceptions, no exclusions, all consumption spending is taxed) such claims are patently implausible. They are particularly implausible in view of the fact that the AFFT plan taxes both private and government consumption and uses a tax prepayment approach on government investment and investment in owner-occupied housing.

One way of viewing the revenue neutral rate needed under the FairTax replacement plan is to consider the effective rate to be equivalent to the following:

Federal Taxes That Must Be Raised / GDP
Tax base / GDP

The proportion of the taxes raised under the FairTax should bear the same ratio to GDP as the taxes to be replaced by the FairTax bear to GDP.

To arrive at our numerator, the taxes to be raised are the AFFT-repealed taxes; namely, the payroll taxes, income taxes, self-employment taxes, corporate income taxes, capital gains taxes and transfer taxes (death and gift). These replaced taxes, for fiscal year 1998, account for 17.8 percent of GDP. ⁴ That is because Federal receipts, as a percentage of GDP, are approximately 19.1 percent, and the FairTax plan would repeal 93 percent of current federal taxes and fees. ⁵ As for the denominator, since investment accounts for 14.6 percent of GDP, the FairTax base can be estimated to be about 85.4 percent of GDP.⁶ 17.8 percent divided by 0.854 is 20.8 percent, the required revenue neutral AFFT tax rate (before the rebate is considered).⁷

From this aerial view, the conclusion reached by the JCT is clearly off target. In order for the JCT’s 30 percent tax-inclusive rate to be correct, the AFFT tax base would need to fall to 59 percent of GDP. In other words, the correct base would be about 31 percent less than the base we estimate. Likewise, in order for the JCT’s 42 percent tax-exclusive rate to be right, the AFFT tax base would need to fall to 42 percent of GDP.⁸

B. Detailed Analyses:

1. The JCT Estimate is Flawed Because it Fails to Add the AFFT-repealed Taxes Back Into the Economy And Assumes Inconsistently That Both the Pre-Tax Prices Will Fall but That the Purchasing Power of Gross Returns Will Remain Constant.

*** Snip ***

2. The JCT Therefore Assumes the Economy Shrinks by the Amount of the Taxes Replaced.

*** Snip ***

3. The JCT Should Have to Explain Why the Base of the FairTax is So Much Less Than the Base of the Flat Tax When the Two Bases are Theoretically Comparable

And continues for another 36 pages of detailed analysis of errors both factual and procedural of the JCT "analysis".

"...were you saying something about it has to be "revenue neutral" to pass muster?

Hmm seems you missed that news in #166 above. But that's understandable, not everyone manages to keep up with the fast pace of changes going on in Congress now days.

Seems the way Bush got his tax cut past the Dims, is the Repubs allowed PayGo rules and the Budget enforcement act expire. Guess what, neither have been re-instated in any form much less the original:

Ersatz Congressional Budgeting
Jack Kemp, June 14, 2004

And since the Fair Tax estimates of revenue neutral rate were made before those Bush tax cuts, well golly, that 23% NRST rate may actually be abit too high and not be "revenue neutral" anymore afterall, especially if Bush manages to get any of his taxcuts made permanent, as he seems well on his way towards doing. Lets see Gift/Estate tax headed out the door, 10% lower bracket rates even them Dems love ....

Taxcuts means lower rates on a larger tax base as the economy grows. Even for an NRST the current revenues collected by government.

refer Tax Freedom Day 2005 PDF: http://www.taxfoundation.org/sr134.pdf

Total Effective Tax Rates by Level of Government Percent Net National Product(NNP)
Year	Federal	State	Total
1997	21.8%	10.3%	32.1%
1998	22.4%	10.4%	32.8%
1999	22.5%	10.4%	32.9%
2000⁰	23.1%	10.4%	33.5%
2001	22.2%	10.5%	32.7%
2002 ¹	19.6%	10.2%	29.8%
2003 ²	18.8%	10.1%	28.9%
2004³	18.4%	10.2%	28.6%
2005	19.0%	10.1%	29.1%
Notes: Leap day is omitted to make dates comparable over time. Since depreciation is not available to pay taxes, GDP is an overstatement of spendable income for the purpose of measuring tax burdens. Depreciation is netted out of NNP. 0 Last year of Clinton administration when the HR25(Fair Tax Act) rate was estimated 1 Economic Growth and Tax Reform Reconciliation Act of 2001 2 The Job Creation and Worker Assistance Act of 2002 3 Job Growth and Tax Relief Reconciliation Act of 2003 Sources: Office of Management and Budget; Internal Revenue Service; Congressional Research Service; National Bureau of Economic Research; Treasury Department; and Tax Foundation calculations.