A Fair Question about Fair Tax

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.

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.

The price drop the FairTax supporters talk about includes the employee's payroll and income taxes. So there is an either/or situation when transitioning to a sales tax. Either we can take home all of our paycheck and prices (with tax) go up or you wages can be reduced so you were taking home and prices (with tax) stay the same. (Note that with both situations, purchasing power doesn't change.) Even the authors of the FairTax agree with this either/or situation. It is safe to say the it would be impossible to reduce nominal wages across the board so the only real option is for prices to go up.

No one can provide you any economist that says your take-home pay will go up and prices with tax will stay the same. Here is a extensive list of quote from economists (including the authors of the FairTax) that describe the either/or situation.

Consumption Taxes: Macroeconomic Effects and Policy Issues

by C. Alan Garner
Federal Reserve Bank of Kansas City
in Economic Review - Second Quarter 2005
Wages and prices. Replacing the income tax with a flat tax poses smaller challenges for wage and price adjustment than either a national sales tax or a VAT. Because the structure of the flat tax is similar to the current income tax, large adjustments in consumer prices or wages would probably not be necessary After-tax and before-tax wages would be similar before and after the tax reform, and nominal prices would be roughly unchanged (Zodrow 2002).
A national sales tax or a VAT, in contrast, would require the average price of consumer goods and services to rise relative to production costs and wages.¹⁵ A national retail sales tax is the simplest case to understand because the tax is imposed entirely at the retail level. Consumers would pay a substantially higher price for goods and services after adding in sales taxes at a rate that could easily be 30 percent or higher. Because wages are a large fraction of production costs, the price paid by consumers would increase relative to the wage rate received by workers. However, in the case of a revenue-neutral tax reform, the decline in the income-related taxes paid by households would offset the rise in consumption taxes, leaving households with the means to purchase the higher-priced goods and services. Under a VAT, consumer prices would increase relative to wages because of taxes imposed at various stages in the production process rather than just the final retail sale.
An important question from the standpoint of short-run macroeconomic adjustment is how the increase in consumer prices relative to wages occurs. One possibility is that the after-tax consumer price level would rise by the full amount of the consumption tax while wages remain constant. Another possibility is the after-tax consumer price level would be constant while wages decrease. Most discussions of transitional tax-reform issues assume the first case.¹⁶ When a VAT has been introduced abroad, authorities typically permitted an upward adjustment in the after-tax consumer price level, although efforts were generally undertaken to ensure that this one-time adjustment did nor become a sustained inflationary process (Tait).
Alternatively, the necessary increase in consumer prices relative to wages could be accomplished by holding the price level constant and reducing the wage level. Many economist, however, believe that wages are "sticky" in the downward direction. Workers are reluctant to take a wage cut, and efforts to reduce the wage rate might cause many workers to leave their jobs. The result could be a large temporary increase in the unemployment rate and lower levels of spending and output. Gravelle cites simulations with large-scale econometric models that do not assume the economy always operates at full employment. In three of the four simulations cited, real output decreased initially in response to fundamental tax reform. Although other economists have criticized such models and might not accept their conclusions, the simulations emphasize the need for further research on the short-run employment and output effects of fundamental tax reform.
Moreover, replacing all federal income taxes with a national sales tax or VAT would require much larger price and wage adjustments than other countries experienced when adopting VATs. Foreign VAT rates have typically been no more than 10 percent because the countries kept other revenue sources, such as an income tax. In most cases, the country also eliminated other consumption-type taxes, which offset some of the upward price-level pressures. Thus, the price adjustments required by fundamental U.S. tax reform would be outside the range of historical experience.

This discussion focuses on fundamental tax reform in which a national sales tax or VAT replaces all federal income and payroll taxes. The adjustment issues would be smaller if a low consumption-tax rate were enacted to replace a small part of the current tax system or to supplement existing revenue sources.
The increase in consumer prices could account for part of the decline in the real value of existing assets during the transition to a consumption tax. Nominal assets such as bonds and bank accounts would lose real value as the price level rose. With no increase in consumer prices, the decline in the real value of existing assets would occur through other channels. For example, the decrease in wealth would fall on equity owners as corporations lost expected depreciation allowances and the prices of tax-free investment goods declined relative to taxable consumer goods and services (Zodrow 2002). In practice, the increase in the price of consumer goods and services relative to wages could occur through a combination of consumer price increases and nominal wage decreases.

Statement of Laurence J. Kotlikoff,

Professor of Economics, Boston University, and Research Associate, National Bureau of Economic Research
Testimony Before the House Committee on Ways and Means - Hearing on Fundamental Tax Reform
April 11, 2000
This sentence and the one preceding it assume the price level will rise with the adoption of the Fair Tax. If the Federal Reserve used its monetary policy to maintain the consumer price level, the adoption of the Fair Tax would entail a decline in the level of producer prices and, thus, the nominal wages and capital income received by productive factors.

Response to William Gale

by Dan Mastromarco and David Burton
[authors of the FairTax]
Memorandum, March 16, 1998
Federal income and payroll taxes either are or are not incorporated into the prices of goods and services. If they are embedded in prices, their removal will reduce prices. If they are not, then their removal will not reduce prices but instead returns to labor and capital will go up. If returns to labor go up, people will see their after-tax wages increase and asset values will increase since the present discounted value of the new, higher returns will be higher.
The replacement sales tax could be incident on the factors of production or it could be incident on consumers through higher prices. It cannot be both. If it is incident on the factors of production, then wages and the return to capital will fall but sales tax inclusive prices will not be any higher, on average, than they are today. If the sales tax is fully incident on consumers, then prices will increase by the amount of the sales tax but returns to labor and capital will be higher.

Criticism of the Sales Tax for Residential Real Estate Isn't Built on a Solid Foundation

by Dan R. Mastromarco and David R. Burton
[authors of the FairTax]
Tax Notes, June 29, 1998, p. 1779
Footnote #13: The degree to which after-tax wages will increase is a function of the incidence of both the sales tax and the repealed taxes. If the income tax and payroll taxes are incident on income recipients and the sales tax is incident on consumers, then after-tax wages and returns will go up quite considerably as will tax inclusive prices. If the sales tax is incident on the factors of production, then after-tax wages and the after-tax return to capital will not go up to any considerable degree (at first) but producer prices will fall and retail prices, even including the sales tax, will remain roughly comparable. The real purchasing power of wages will undoubtedly increase considerably over time because of a larger capital stock (increasing productivity), microeconomic efficiencies caused by a more efficient allocation of scarce resources, and higher productivity from lower compliance costs.

The Price Level

Switching to an indirect tax such as a valued-added tax (VAT) or national sales tax will probably cause a one-time jump in the price level, with no permanent change in the inflation rate. By contrast, any consumption-based tax that levies taxes directly on households will probably have little or no effect on the price level.
A VAT or sales tax is likely to boost the price level because each one collects the tax on labor income from the firm or retailer. That treatment represents a change from the current income tax system, which collects tax on labor income directly from the worker. Because the cost of labor to the firm would include the new tax, real compensation paid to workers would initially have to fall to match the value of their so-called "marginal product" and keep them fully employed.
Real compensation can fall in two ways: nominal compensation can drop or the price level can rise. What happens will ultimately depend on the Federal Reserve. If it fixes the price level, nominal compensation will have to fall--an event that workers might accept because they would no longer have to pay income tax and hence would take home about the same pay as now. Most analysts note, however, that workers have resisted cuts in nominal compensation in the past. Those analysts expect that firms fearing morale problems or facing union contracts will hesitate to make such cuts. In that case, nominal compensation may fall slowly to its new level, leading to higher unemployment rates in the interim. To prevent that outcome, the Federal Reserve is expected to allow the price level to rise. For example, a VAT or sales tax of 10 percent would lead to a one-time jump of 10 percent in the price of consumer products.
Further price increases may ensue if compensation is indexed to inflation. In that case, the price rise will cause a corresponding rise in compensation, and real compensation will not drop enough to maintain full employment, requiring a further price rise--that is, a wage-price spiral. That problem occurred in the United Kingdom when it adopted a VAT in 1979, although the extent of indexing there was greater than it is in the United States.
Source: U.S. Congressional Budget Office. (1997). The Economic Effects of Comprehensive Tax Reform. Washington DC: Government Printing Office.

Setting aside for a moment temporary inflexibilites in contracts for wages, bonds, and so forth (we address these later), whether ther overall level of prices changes or not does not materially affect this story.¹⁶ Even if prices do not rise at all, moving to a consumption tax would cause the purchasing power of both wages and existing wealth to decline by an average of 20 percent relative to a situation with no taxes. Nominal wages would be forced down because firms would be earning 20 percent less, after taxes, from the output produced by workers. The nominal value of existing capital assets - in the form of, for example, share prices - which constitute much of old wealth, would also decline because the output they produce provides 20 percent less in after-tax revenues.

Whether in fact consumer prices would rise in the event of tax reform depends on the monetary policy set by the Federal Reserve Board.

Source: Slemrod, Joel and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, MIT Press: Cambridge, 2004.

Transition Costs and Macroeconomic Adjustments

One of the most difficult issues to address in considering a shift to consumption taxes is the transition from the current system to the new tax regime.⁵ While all shifts to a consumption tax cause some common transitional disturbances and windfall gains and losses, the most serious problems arise from a shift to a national retail sales tax or to a value added tax. In these cases, a tax formerly largely collected from individuals is now collected at the firm level -- either from retailers on total sales or from both final and intermediate producers' value added. Flat taxes avoid this problem but can result in confiscatory taxes on existing assets.
Price Accommodation and Short-run Contractions Under a Retail Sales Tax or VAT
Holding prices fixed, these firms would need to reduce payments to workers to retain profit levels. In fact, many firms would not have enough of a profit margin to pay the tax without something else -- either prices or wages -- adjusting. Consider, for example, a grocery retailer that may have a 1% or 2% profit margin now owing a tax equal to 20% of receipts. This firm simply does not have the cash to pay the tax. If it is difficult to lower wages (and presumably it would be), a significant one-time price inflation, to allow these costs to be passed forward in prices instead, would be required to avoid a potentially serious economic contraction. Note that the price increase, were it possible to implement correctly and precisely, would solve the transition problem because although prices would rise, individuals would have more income to purchase the higher priced goods -- and demand would not fall. It is difficult, however, for the monetary authorities to engineer such a large price change. Moreover, even with the monetary expansion in place to do so, the imposition of such a tax would be disruptive if firms are reluctant to immediately raise prices, again leading to an economic contraction. That is, firms could contract their business, or even close down, until output had contracted enough to raise prices.
These disruptions are not minor in nature -- imagine the difficulties of engineering and absorbing a one-time price increase that is likely to be close to 20% (the level, approximately, that might realistically be needed to replace the income tax).⁶ Even if such an inflation could be managed, there are always concerns that any large inflation could create inflationary expectations -- it's hard to manage a single one-year price increase. In fact, economists who judge a consumption tax to be superior to an income tax may nevertheless be skeptical about the advisability of making the change because of these transition effects.

See CRS Report 98-901, Short-Run Macroeconomic Effects of Fundamental Tax Reform, by Jane G. Gravelle and G. Thomas Woodward for a more detailed discussion of these issues.
The rate would depend on whether and the extent of any family exemption. A 20% tax exclusive rate would correspond to a tax inclusive rate between 16% and 17%.
7 U.S. Congress, Joint Committee on Taxation, Tax Modeling Project and 1997 Symposium Papers, committee print, 105th Cong., 1st sess., Nov. 20, 1997, JCS-21-97 (Washington: GPO, 1997), p. 24.
Source: CRS Report for Congress: The Flat Tax, Value-Added Tax, and National Retail Sales Tax: Overview of the Issues. Esenwein, Gregg A. and Jane Gravelle.

Prices.

Prices for consumer goods and services quickly rise by the amount of the tax, and then some. The portion of the price increase in excess of the tax is due in part to the higher cost of imports (from the weaker dollar) coupled with the ability of some domestic producers of competing goods to hike their price to that of imports. Consumer prices similarly rise 25 percent -- roughly the nominal rate of sales tax, unadjusted for any exemptions or transition rules -- by 2002 and gradually drop from that peak to a level that remains about 18 percent above the pre-change baseline.
Examined on a year-over-year basis, these price increases generally amount to a large, one-time hike in prices as the NRST is imposed, with some moderation of this increase in the longer run. Due to a weaker dollar, merchandise import prices increase by nearly 4 percent shortly after the NRST is imposed and are 6.5 percent over baseline levels in 2010. Merchandise export prices are also above baseline levels. In 2001 and 2002 they are nearly 3 percent above the baseline. However, due to lower interest rates, which reduce business costs, export prices are only slightly greater than baseline levels for most of the remainder of the forecast period. The overall impact on prices is measured by the change in the GDP deflator, which initially rises 20 percent above the baseline price level before settling back to a 13 percent price rise relative to the baseline.
The notion espoused by some that pre-tax prices would drop some 20-30 percent under a NRST (so that after-tax prices would not rise and may even decline) is a peculiar one. This could only happen if all of the personal income tax, the corporation income tax and payroll taxes are currently embodied in retail prices. Tax incidence -- that is, who actually bears the ultimate tax burden -- is an elusive question that has been the focus of many economic papers, because the answer is not clear. However, the general consensus among economists is that perhaps a portion of the corporate income tax may be passed on to consumers in the form of higher prices, but that the majority is ultimately paid by corporate owners in the form of lower after-tax profits and by employees in the form of lower compensation. Most economists concede that personal income taxes and payroll taxes are ultimately borne by labor and are not passed on to consumers in the form of higher prices.
Source: Statement of John G. Wilkins, Managing Director, Barcroft Consulting Group, on behalf of National Retail Federation. Testimony Before the House Committee on Ways and Means. Hearing on Fundamental Tax Reform. April 11, 2000.

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.

The Price Level

When Britain adopted consumption taxation in 1979, the price level rose by the amount of the new tax. This jump in prices caused substantial disruption in the economy, partly because it stimulated further rounds of wage and price increases through indexation formulas that failed to exclude consumption taxes from the measured cost of living. Standard macroeconomic analysis suggests that the underlying cause of such a price effect is the contractual determination of wages in money terms. Under an income tax, the wage is set in pretax terms. Workers finance consumption out of what remains of their wages after paying taxes. Under a sales tax or a value-added tax (VAT), the wage is set on an after-tax basis. Workers use their entire wages for consumption and pay their consumption taxes as they consume. When an income tax is replaced by a sales tax or VAT, the wage bargain should be revised to lower the purchasing power of wages or by raising the prices of consumption goods. As a practical matter, the second always occurs.
One of the advantages of a flat tax or a personal cash-flow consumption tax is that both leave the wage bargain in pretax form. There is no disruptive jump in the price level. Unlike other effects I have discussed, the increase in the price level is not intrinsic to a consumption tax, but is the result of a particular choice about how to administer the tax.
Source: Potential Disruption from the Move to a Consumption Tax, by Robert E. Hall. The American Economic Review.

However, they were predicting that once the current system is eliminated, the prices will go down by the same built in amount.

Some people predicted that John Kerry would win the Presidency. How cna we possibly ever be sure enough about all the consequences- intended and unintended-- of this radical change to make it sane to take such a risk?

I hate the IRS and think it is horrible, but with that said we have created the most prosperous society that the world has ever seen, the envy of the entire world. And we can risk it on predictions of hidden costs? We are playing with fire.

They don't launch a shuttle if there is one thing in a triple redundant system that is not totally within bounds, at a cost of millions to protect the lives of seven astronauts from less than 1% chance of death. And we're expected to tolerate the risk in scrapping the current system for one that has never been tried anywhere just because we hate the present system?

I want to be a believer but I want someone to "show me the money". Where will it come from?

I expect the answer is that the price of goods will go up substantially, maybe this is OK, but the fact that the Fair Tax crowd might not being homest about this scares the hell out of me.

How will they be able to enforce what is and what is not a business expense?

THe same way they do now. How many folks do you know that have a fraudulent Sales Tax Exempt card? Those sales tax guys don't mess around. Sure it can be done. It can be done now. There will always be cheats.

Blip on compliance. Consider the source - but consider the information too.

what would catch the person who cheats the system?

Monitoring certified business by state retail sales tax administrators as is provided for in the legislation, running the FairTax retail sales tax in parallel with state retail sales tax systems.

The "transition effects" would probably be signifcant, but I don't know exactly what they'd be.

Y'all probably know that radio host Neal Boortz has written a book about the Fair Tax *.

A caller today asked Neal a question today that I thought was very interesting and relates to the italicized quote above.

Simply, the guy said, "In the past I have made and saved $1.000,000. The government has taken $400,000 so I have $600,00 in the bank. All taxes have already been paid on this money. I live in a state that has no state sales tax. If I use some of my $600K to buy something for $100, I pay no additional taxes because all taxes have been paid.

"Now the Fair Tax goes into effect and I go to the store and use some of my $600K to buy something that costs $100. And I have to pay the Fair Tax of 23%. Am I not being taxed twice here?"

Neal stated to answer the question by pointing out that once all the embedded taxes are removed from consumer goods that prices will come down about 22%. So there's really only a 1% difference.

The guy said he know that but even with the lowered price he still had to pay the Fair Tax using money on which tax had already been paid.

I thought, OK, this guy's got Neal but good. It will be interesting to see how Neal explains this. And I was very disappointed.

Neal then launched into his usual spiel about the prebate check. And I guess he cut the guys phone connection as the caller added nothing further to the discussion. Neal talked about the prebate for awhile and a couple of other things and then went to a break.

The point is: he never addressed the caller's concern.

Disclaimer: I am very much in favor of the Fair Tax. Wish It had taken effect Jan 1, 2005.

But this appears to be a significant problem.

Anybody have an ideas on this?

*Hmmm... three links in one sentence. Does that win a prize or anything?

National Sales Tax I think would be a better alternative.

Get rid of the IRS

The tax would create more equality.

Illegal activity would still go on, and in some cases the gray market may still thrive, but everyone who benefits from it will find it difficult to go around a national sales tax.

Illegal immigrants will be forced to pay a larger share.

If someone has better numbers I would love to see them.

You can get a similar answer by checking out the total federal take (2004 numbers from the OMB) on corporate income taxes (189.4 billion), employer matching FICA and Medicare (366.7 billion), estate and gift taxes (24.8 billion), all import duties (21.1 billion), federal FUTA and miscellaneous fees (32.6 billion) and all federal excise taxes (69.9 billion).

Without the personal income tax and individually paid Social Security and Medicare, it all comes to about 700 billion out of 2.0 trillion in receipts. Even with a 200 billion dollar savings in "compliance costs" (and that's laughably ridiculous to any business owner or manager), that won't produce even a 10% reduction in prices in a 10 trillion dollar economy.

The fundamental lie of the FAIRTAX shills (or FAIRTAX.ORG) is the supposed 20+% embedded taxes in products - there is no peer-reviewed economic study that shows that number. Period. Ever. Nada. All you have to do is ask for it so you can read it yourself and you will leave the shills sputtering in their place.

How many folks do you know that have a fraudulent Sales Tax Exempt card?

You can only use a sales tax exempt card when you buy goods that you are going to resell.

I am not talking about those types of items, I am talking about business expenses that are incurred as costs of doing business like plane tickets, hotel rooms, meals, copying at Kinko's, office supplies. I pay sales tax on these, then deduct the cost including the sales tax from the profit of my business, effectively not paying income tax on these expenses.

The "cheating" problem is that many of these types of expenses are dual use and could just as well be personal or business. I have been told that I whip out my card at Holiday Inn and say "No TAXES PLEASE". Same for Delta Airlines. And Applebees.

Are you saying that i will have to keep records? And incur "compliance" costs and accountants, etc? Without doing that how do I protect myself? Who am I protecting myself from? (the IRS is gone) Who is paying for my accts?

Monitoring certified business by state retail sales tax administrators as is provided for in the legislation, running the FairTax retail sales tax in parallel with state retail sales tax systems.

So what compliance costs do I eliminate exactly?

I think that the one that isn't true is that prices will remain about the same, I think they will go up by 25-30%.

Ding, ding, ding - that's a winner!

See my last post at number 67 and feel free to look up the numbers yourself.

I also enjoy immensely the thought of IRS being abolished but we have to be very careful and deliberate not to replace it with something worse.

This is a Federal Tax...As like with the recent tax cuts for the rich, that money comes from the coffers that used to go to the States...That's why the States are now doubling and tripling the fees on all types of licenses and permits, cutting funding for State Parks, etc, etc...

Under the fair Tax, the States will lose all funding from the Feds...

You may have a 'fair' Federal tax but you'll pay for it in State Taxes...

They claim a tax rate of 23%, but this bill doesn't do anything about State, County and City taxes. With Washington having a 7.65% sales tax already, this will mean I pay over 30% sales tax for nearly everything.

You got it wrong. The FAIRTAX rate is 29.87%. Your combined tax will be 37.52%.

Under the Fair Tax, since all the savings are coming by getting rid of compliance expenses, and there is no IRS to come after me, what would catch the person who cheats the system?

Not all savings are coming from compliance costs. Compliance costs represent only a portion of the savings. Further, compliance costs won't all disappear. Most estimates are that they will reduce by 90%.

The sales tax authority currently catches sales tax cheats.

I'll say it again, there is currently a compliance mechanism in state sales tax authorities. That mechanism will stay. If you want to know their methods, I suggest contacting them.

If you are not paying income tax, under the fair tax system, why would you get a rebate on expenses? Getting a deduction on expenses is to offset the income tax. Without it, why do you need a deduction?

The point is: he never addressed the caller's concern.

I heard the same exchange today on Boortz as well as the one about the guy with the Roth that he converted from a regular IRA, and now they would both be treated the same. The true answer that Boortz didn't give is that "well a Roth was a good thing back then, but it sure was a boneheaded move to put the money in a Roth in hindsight"

If Boortz is the "expert" he should be able to be honest about the negative aspects of this plan, not to try to smoek and mirror anyone that raises an objection. This is true of the whole FairTax support group IMHO-- they essentially just pull numbers out of the air and say "Trust us, it'll work great and you hate the IRS don't you"

Disclaimer: I am very much in favor of the Fair Tax. Wish It had taken effect Jan 1, 2005.

WIth your very valid questions unanswered, why would you still be in favor of such a risky scheme? If there was ever a program that could be described as a risky scheme it appears to be the Fair Tax.

Note: I have the book it arrive today and I am a third of the way through it, I will finish it tomorrow probably.

Some people predicted that John Kerry would win the Presidency. How cna we possibly ever be sure enough about all the consequences- intended and unintended-- of this radical change to make it sane to take such a risk?

That's a damn good question!

Who do you trust enough to bet the entire US economy on? Anyone?

And how many real economic studies would you like to see? And how many are they offering?

Need I go on?

UHHHH the IRS, evil as it is doesn't have a budget of $1T for operating and enforcement.

While some compliance cost (estimated at ~600B for the whole economy) will be reduced there will still be substantial compliance cost for the businesses that collect the Sales Taxes, given the level of the tax (29% inculsive for federal tax+ state sales taxes), there will be a lot of enforcement cost to deal with fraud. In the long run while potentially better than a flat tax, and better than the current mess. There is no such thing as a free lunch, and the HR25 folks are overselling the potential benefits of their bill and ignoring all potential problems.

I don't understand your question.

"Reign in pork-barrel spending.." - eliminating witholding, and charging 23% sales tax will open the eyes of the sheeple who think "hey, I got back $200 from the IRS this year". Only when the masses realize just how high their taxes really are will they see any need to hold gov't accountable for fiscal abuse of the taxpayer.