Tax Reform Panel Picks Apart FairTax Proposal

Tax Analyists ^ | 5/12/2005

[Principled]

CC didn't say the report was biased. You did.

[THEUPMAN]

The Joint Committee on Taxation estimated that it would take as much as a 57 percent (tax-exclusive) rate to be revenue-neutral.

this says a mouthful ...


but I have a question...
will there be a difference for "business" purchases or will every transaction be taxed?

the wholesale chain , you know?

How would that be handled? I'm really trying to get a little info here.
thanks

[kevkrom]

Only retail sales are taxed. Business-to-business sales or resale of previously taxed goods would not be taxed.

In general, tax everything, but only once.

[Principled]

Business to business purchases are not taxed... thereby eliminating the existing cascading of hidden taxes in prices.

Quick FAQ.

[ancient_geezer]

"The Joint Committee on Taxation estimated that it would take as much as a 57 percent (tax-exclusive) rate to be revenue-neutral."

Basically an eye-opener showing us just how bad we're taking it in the shorts through seen and 'unseen' taxes!

We are taking in the shorts that is for sure, even if the JCT that owes it very existence and purpose to that sameInternal Revenue Code that would be repealed under HR25, just adjusted their assumptions in favor of maintaining the status quo, hidden taxes and all.

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

 

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".

[Your Nightmare]

CC didn't say the report was biased. You did.

She didn't say "Their bias should be obvious to all but those who are so blind that they refuse to see"?

[Principled]

Sure she did. But you asked her to indicate where the report was biased. THat's not what she said.

[numberonepal]

It would remove much, if not all, of their power to parlay favors for cash, perks, off the books stuff.

I know, I know. You are the Goddess for a reason. My main complaint (coming from someone who writes quarterly checks) is that folks have arbitrary police powers to deprive me of my life and property at the point of a gun. Don't they know this is America. They need to learn the rules.

[Principled]

From the link I provided:

No tax on used goods. The amount you pay to fund the government is totally visible.
With the FairTax you are only taxed once on any good or service, the sales tax is charged just as state sales taxes are today. If you choose to buy used goods - used car, used home, used appliances - you do not pay the FairTax. If, as a business owner or farmer, you buy something for strictly business purposes (not for personal consumption), you pay no consumption tax. When you decide what to buy and how much to spend, you see exactly how much you are contributing to the government with each purchase.

[Paul C. Jesup]

Don't worry, I don't think anybody even watchs CSPAN for the most part.

[ancient_geezer]

but I have a question...
will there be a difference for "business" purchases or will every transaction be taxed?

the wholesale chain , you know?

Purchases by businesses for the conduct of their businesses are not taxed. Only the retail level of sales is subject to collection of the NRST.

It is a National Retail Sales Tax, not a tax on business purchases that would just get passed on buried in prices.

 

H.R.25

Fair Tax Act of 2005 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

---

 

`SEC. 102. INTERMEDIATE AND EXPORT SALES.

`(a) In General- For purposes of this subtitle--

`(1) BUSINESS AND EXPORT PURPOSES- No tax shall be imposed under section 101 on any taxable property or service purchased for--

`(A) a business purpose in a trade or business, or

`(B) export from the United States for use or consumption outside the United States, if, the purchaser provided the seller with a registration certificate, and the seller was a wholesale seller.

`(2) INVESTMENT PURPOSE- No tax shall be imposed under section 101 on any taxable property or service purchased for an investment purpose and held exclusively for an investment purpose.

`(3) STATE GOVERNMENT FUNCTIONS- No tax shall be imposed under section 101 on State government functions that do not constitute the final consumption of property or services.

`(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business' means purchased by a person engaged in a trade or business and used in that trade or business--

`(1) for resale,

`(2) to produce, provide, render, or sell taxable property or services, or

`(3) in furtherance of other bona fide business purposes.

`(c) Investment Purposes- For purposes of this section, the term `purchased for an investment purpose' means property purchased exclusively for purposes of appreciation or the production of income but not entailing more than minor personal efforts.

 

Tax once but only once is the bottom line rule for the FairTax NRST:

 

H.R.25

Fair Tax Act of 2005 (Introduced in House)
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.25:

---

 

`SEC. 1. PRINCIPLES OF INTERPRETATION.

`(a) In General- Any court, the Secretary, and any sales tax administering authority shall consider the purposes of this subtitle (as set forth in subsection (b)) as the primary aid in statutory construction.

`(b) Purposes- The purposes of this subtitle are as follows:

• `(1) To raise revenue needed by the Federal Government in a manner consistent with the other purposes of this subtitle.
• `(2) To tax all consumption of goods and services in the United States once, without exception, but only once.
• `(3) To prevent double, multiple, or cascading taxation.
• `(4) To simplify the tax law and reduce the administration costs of, and the costs of compliance with, the tax law.
• `(5) To provide for the administration of the tax law in a manner that respects privacy, due process, individual rights when interacting with the government, the presumption of innocence in criminal proceedings, and the presumption of lawful behavior in civil proceedings.
• `(6) To increase the role of State governments in Federal tax administration because of State government expertise in sales tax administration.
• `(7) To enhance generally cooperation and coordination among State tax administrators; and to enhance cooperation and coordination among Federal and State tax administrators, consistent with the principle of intergovernmental tax immunity.

[Paul C. Jesup]

Correct. TaxAnalysts provides resources to the 'industry.' Their bias should be obvious to all but those who are so blind that they refuse to see.

Amen to that.

[Your Nightmare]

Sure she did. But you asked her to indicate where the report was biased. THat's not what she said.

So you don't believe she thinks the report is biased? I guess she was just mentioning that they have a bias for grins and that it doesn't apply to the topic of the thread.

Jeez, you people...

[Principled]

So you don't believe she thinks the report is biased?

Irrespective of my thoughts, she didn't say what you said.

[Principled]

It would be less of a problem if you didn't have a history of... embellishing.

[Your Nightmare]

It would be less of a problem if you didn't have a history of... embellishing.

uh huh. OK. Any specifics?

[Your Nightmare]

Irrespective of my thoughts, she didn't say what you said.

Exactly what do you think I said?

[Principled]

Go back and read it yourself.

[socialismisinsidious]

My thoughts exactly!

[Your Nightmare]

Go back and read it yourself.

No, you're a big kid. You made a statement now back it up. You said "she didn't say what you said." What did you mean?