A Fair Question about Fair Tax

August 3, 2005 | RobFromGa

[RobFromGa]

A simple question...

So, under the FairTaxI get to keep my whole paycheck, prices for everything I will buy will stay the same even with the taxes included, and I get a prebate check from the govt every month. And businesses pay no taxes.

Where is the extra money coming from...

What is wrong with this reasoning below?

1. Right now the government collects $X in the form of all taxes.

2. All taxes are really paid for by consumers in the end result, either directly, or in the cost of their purchases which allow businesses to collect money in order to pay taxes. Companies do not really pay taxes they jsut collect them and pass them on.

3. The FairTax will collect the same $X per year in the form of taxes but using a different method.

4. Under the FairTax, the price paid for goods will not rise because getting rid of all the taxes built into goods will cause the prices to drop, then the FairTax will add onto the new lower price, resulting in the same price paid by consumers.

5. So, for a given taxpayer, shopping (consumption) will be revenue neutral. Ie. Prices are the same as before.

6. And each given taxpayer will get a "prebate" check every month that they are not getting now.

7. And each taxpayer will pay no taxes on capital gains, or on savings.

8. And, each taxpayer will no longer pay any taxes on income, or payroll taxes.

9. And, there will be no Fair Taxes on any purchases made for a business.

Are these all true so far?

Again, I get to keep my whole paycheck, prices for everything I will buy will stay the same even with the taxes included, and I get a prebate check from the govt every month.

Where is the extra money coming from???

[beavus]

First, let's clear up some misnomers:

1) There is no such thing as a "fair" tax. Extortion and consfication from innocent people is ALWAYS unfair. It is the acceptance of the possibility of a fair tax that leads to frivolous uses of taxpayer funds on things like TV stations and art exibitions.

2) The "flat tax" proposals we've all heard are not really flat taxes, but flat rate taxes, or proportional taxes, above some positive income. They are also progressive taxes, since with the "flat taxes", higher income earners pay a higher percentage of their total income in taxes.

Unless you are going to opt out of the economy, and become a hermit, it is almost impossible not to take some hit with ANY kind of tax. You just need to see where that hit will be. If the money isn't taken directly from you, then the hit will be in higher prices or few product choices.

With that said, the biggest problems with any national sales tax are:

1) It is harder for people to keep track of how much the government is taking from them. A monthly tax bill for each individual citizen would be far better politically, for controlling government avarice.

2) It is complicated and puts the entire burden of compliance upon the minority of people involved in retail sales. How would it collect from foreign merchants? Would the burden be on UPS and FedEx? Currently online sales are often free of sales tax. The "fair tax" would have to close that loophole, and that would have a very chilling effect on one of the biggest market innovations in centuries.

[groanup]

That's what I'm doing. I'm trying to understand the plan. And if the Fair Tax supporters can't convince someone like me of the sense of the plan, who is pre-disposed to want to eliminate income tax, then they will never succeed in convincing the general public to go along with it.

I understand and I think you are being very fair about this. How do you sell someone on a concept that changes tax law? You know what they say, you don't sell the steak you sell the sizzle. We aren't trying to sell sizzle we are trying to sell steak. There is no sizzle other than what we all take for granted, the concept of freedom. Freedom to pay taxes when and if we want to, freedom from government intrusion into our finances.

The fair tax people have been around for years and their initial investment in this project was 20 million. The investment paid for research, economectric models, economists, alternatives, etc, etc. I am sorry if you can only form an opinion by what others tell you. You aren't really that shallow because I know you from way back. YOU have to investigate it.

Sure, we can all get on this board and make fantastic arguments about the fair tax, it really isn't that hard because all of the data is there. YOU, on the other hand, are not worth spit if you can be convinced one way or the other by the propogandists on this board. This is Free Republic. We are about the truth. But the truth isn't lazy.

[lewislynn]

What did you think about the closing of offshore banks and the corporations reconsidering their overseas relocations?

Does it give the names of the banks and corporations?

[hotshu]

I also heard this caller today and was not totally satisfied that Neal answered his question adequately.

The caller's argument was that he had alsready paid his INCOME taxes on the money he had invested in his Roth and that under the Fair Tax he would essentially be paying that same income tax when he spent the money. Those people who have taken advantage of the traditional, or "tax-deferred", IRA's would not be paying that double INCOME tax.

The Fair answer to the caller's question is: Yes unfortunately under the oppressive income tax system we suffer, some forms of tax relief were conceived to allow people to plan for their retirement in a tax advantageous way. This plan does not address those concerns.

I think this is one of the transitional consequences and will be a tough sell to those, like myself, who have invested at least some money in Roth's.

[Paul C. Jesup]

groanup: You know what they say, you don't sell the steak you sell the sizzle. We aren't trying to sell sizzle we are trying to sell steak.

Actually the selling points of steak you advertise is the cut of the beef and the grade/quality of the beef. Which is what is being done with Fair TAx/NRST and the book "Fair Tax" number 1# on the non-fiction top sellers list on Amazon.com proves the message and movement is selling.

[hotshu]

Not to be nosy, but why on earth would you as an individual buy a ton of steel unless to make it into a product to sell to someone else?

[KarlInOhio]

Not to be nosy, but why on earth would you as an individual buy a ton of steel unless to make it into a product to sell to someone else?

The actual item doesn't matter. I'm trying to point out that there are some items which can be used by business (untaxed) or for personal use (taxed). If it will make you feel happier substitute "ream of paper" for "ton of steel".

[hotshu]

One of the basic tenets of the Fair tax is that it is a national RETAIL sales tax. Most bulk purchases ie tons, reams, barrels, etc. are not conventionally considered retail.

The taxes on those items will be collected when they have been manufactured into retail items - cars, books, gallons of gasoline.

[phil_will1]

"...if there are no taxes taken out how do we know the consumption tax will raise enough revenue to run the country? How can they tell for sure how much revenue will come in each year? What happens in years where sales are down and people aren't spending?"

Historically, consumption has been a MORE stable tax base than taxable income. COnverting to a consumption tax will provide more assurance of adequate revenue during economic downturns, not less.

[phil_will1]

"I really want to get behind this FairTax but it just doesn't make sense to me.

Can someone who understands this proposal please explain where the money is coming from?"

I think that one of the biggest pieces that is missing, Rob, is that imports will increase in (after-tax) price. When Neal explains it in a brief form for the media, he only has a short timeframe and he glosses over that. That is because, unlike goods which have supply chains in the USA, there won't be as much savings from the removal of the current system to pass along to consumers.

This will, in turn, shift consumer preferences more toward US produced goods at the expense of imports, which will mean more US jobs. A similar process is going on with our exports, as we will be able to ship them abroad at lower prices, still with reasonable profit margins, and be more competitive. That will also increase jobs here in the USA. Over time, a greater percentage of the goods you buy will be domestically produced, since the supply will increase to meet the demand.

All that is WAY too much detail to go into in a brief broadcast.

[phil_will1]

"That's higher than mine. I want to meet this business that is paying 30% of their gross in compliance costs."

I don't know where you got 30% of your GROSS, unless it is just typical SQL exaggeration.

I can tell you that one company I consulted for lost $2.3 mill 4 or 5 years ago and when I examined their financials, I found that they had paid their Big 5 accounting firm a little over $500K in tax consulting fees. Without that expenditure, they would "only" have lost $1.8 mill.

[SALChamps03]

Many who are currently hiding income and avoiding taxes will not be able to do so with a national sales tax. Foreigners who shop in America will also pay the tax. Those to scenarios equal extra money. Also, the size and scope of the IRS will be greatly reduced, or the IRS eliminated altogether. That is a money that can be reallocated to other things.

[phil_will1]

"I don't get why we don't just put duties or tariffs or whatever on imports. We import a lot of cheap shite. And wouldn't that basically be a consumption tax paid by foreigners? Works for me! Why not cut into THEIR bottom line for a change? Why invent a new scheme?"

Several reasons that would not work, not the least of which is that if you levy a tax with a rate high enough to replace a significant amount of the the current revenues, it would put the brakes on imports, which would drive up the cost of stuff that we buy. While that might not be all bad, it would fail in its objective of raising revenues.

Of course, if one believes Your Nightmare, currency adjustments would offset that process and we would still import the same amount. However, no serious economists believes that currency adjustments would be enough to totally offset; YN just says that to deny one of the FairTax's main benefits.

The FairTax would go a long way toward your approach, however, by taxing imports exactly as we tax US produced goods. No more preference toward foreign produced goods. This would benefit US producers (and job seekers) enormously. In addition, unlike with imposing import tariffs, we could point out to the WTO and our trading partners that we are not discriminating against them, we are taxing their goods exactly like we tax our own.

[phil_will1]

"Its not the illegal underground economy I am talking about... its the above ground economy thats perfectly legal but only accessable to the rich."

That is one of many problems with the current tax system that the FairTax would address. The myriad of loopholes that the wealthy avail themselves of is a disgrace. As a matter of fact, that is the very term that Jimmy Carter used to describe our tax system during the 1976 Presidential campaign and now, just under 30 years later, it is far worse in that regard.

[goldstategop]

Yes, all of its true. Its basically a national sales tax and would tax consumption and spending instead of investments and savings. You would ultimately pay lower prices since all the hidden taxes that are factored into the costs of goods and services will be done away with. The FairTax has two things going for it: its transparent and easy to pay your taxes and there's no need for the IRS and its mountain of complicated and confusing paperwork. There's no tax evasion since every one, the rich included, do buy something. All of this removes an enormous drag on our economy and would make us an attractive place to invest and to hire workers. Its an idea whose time has come.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

[RobFromGa]

Many who are currently hiding income and avoiding taxes will not be able to do so with a national sales tax. Foreigners who shop in America will also pay the tax.

One of the premises is that there is 22% taxes already embedded into the present price that is paid for goods. They are simply taking those hidden taxes, eliminating them, and bringing them out in the open and collecting it as a retail sales tax. So, anyone buying things now is already paying the taxes, foreigners or Americans.

That is the crux of my question-- if the taxes are already embedded how does bringing them out in the light raise any additional revenue to replace the income taxes that are lost?

[kevkrom]

if the taxes are already embedded how does bringing them out in the light raise any additional revenue to replace the income taxes that are lost?

I'm not sure the question makes sense: How does a tax that replaces the income tax replace the income tax?

The NRST would bring the taxes "out in the light", but they would still be collected -- whether through the income tax or through the sales tax, it's basically the same amount. So why would there need to be "additional revenue"?

[listenhillary]

23% rate came from

15% average income tax bracket and the 7.65% "withheld" for social security and Medicare.

The 7.65 matching that the employer is forced to submit to the government goes away. You can look at the freeing of that 7.65% anyway you want. A forced tax that an employer pays for the privilege of hiring is how I would look at it.

Corporate taxes go away along with all of the energy and effort expended in making that tax bite less.

It still blows me away that posters on FR want their IRS security blanket.

Is the Fair Tax perfect? I don't know. I know what we have now sucks. It sucks the life out of our economy and our potential. The current tax code that is the boot of the government on the necks of our entrepreneurs and businesses. The code that demands all individuals present any and all of their papers at the whim of an unelected bureaucrat. The refusal to comply will bring down men with guns to seize your real property and assets.

It's big business to legally thwart the current tax codes. The buying of politicians, the million dollar lobbyists, the multi million dollar legal firms, the hiding of income. I'd rather these people produce something of value other than new ways to thwart a tangled mass of tax code.

It's time for something different. If we do nothing, we are so totally f*cked. We have become a nation that is well down the road where we equate the boot of government on our necks as security.

[phil_will1]

"Agreed. But this is also the part of Boortz' plan I don't understand. Currently 'poor' people pay very little tax, and with the gadgets in the current code, they can actually get money 'back' that they never paid into the system.

Some of that would be offset because they won't be paying Socialist Security Tax or Medi-Scare anymore."

I think you answered your own question. At the low end of the economic spectrum, US citizens pay more in payroll (primarily SS) than in income taxes - sometimes a LOT more. SS and Medicare are the most regressive elements of the current tax system.

[RobFromGa]

You would ultimately pay lower prices since all the hidden taxes that are factored into the costs of goods and services will be done away with

These hidden taxes are now going to the government, and they will be replaced by the NRST. They are asserted to be about equal, the amount in hidden taxes is 22% the amount of NRST will be 23%. So, how does this "create" the additional revenue needed by the government to offset the loss of income tax, payroll tax, cap gains tax etc?