Posted on 09/08/2005 4:48:28 AM PDT by Your Nightmare
A bestseller advocating radical tax reform contains a critical flaw that misleads readers, according to a report in the October issue of MONEY Magazine.
...
While consumers would pay a federal sales tax on purchased items, the authors argue that prices at the store would stay the same. The reason: everyone involved in the process of production would no longer be paying taxes, so they could charge less for their goods and labor.
If true, that would mean a dramatic increase in Americans' purchasing power.
But, according to the MONEY report, the book fails to make clear that, in order for pre-tax prices to fall so sharply, companies would also have to cut wages they pay.
"Sure, you'd get to 'keep 100 percent of your paycheck,' as Boortz and Linder repeatedly write, but it would be a smaller paycheck," MONEY senior editor Pat Regnier writes. "That's kind of a big thing to leave out."
(Excerpt) Read more at money.cnn.com ...
you'd know 3 percentage points was exactly what I meant.And an 18.5% tax increase to pay for your 3 percentage points is exactly what I meant.
Then facts about who wins and who looses, and the consequences to the economy could be presented and considered, rather than speculation and soap.
My material purchases would drop by tens of thousands of dollars quarterly if state and local sales tax were not embedded.
The Fairtax is federal only...maybe you knew that.
Is there some reason you can't make tax free business purchases...Maybe from another state?
It would be nice if that could be done. I think the models done at Heritage, MIT, Stanford, and Harvard have done those things. I've only seen very broad summaries of how various groups are affected.
Then again, the CBO and the Joint Committe for Taxation in Congress are charged with doing this sort of analysis and historically are never even close. These are the people that projected a tax-revenue increase from the luxury tax and instead destroyed the yacht-building industry and had a net loss in revenue. They are also the ones that expected a revenue loss from the Bush tax cuts and instead we've had a revenue increase such that the deficit is $100B less than projected.
I don't have much faith in these estimates.
It also begs the question: Is a tax a "good" tax for somebody just because it mean a lower tax for that person ? This is the game that has been played with the income tax -- one group is singled out as prey for a tyranny of the majority. The next year it is a different group. Government gets bigger and bigger as long as a majority thinks they won't be paying for the increase.
Why can't we decide based on the philosophical approach ?
If you want to plug your own numbers -- or any hypothetical person's -- into a calculator, there is one available at:
http://www.salestax.org/FairTaxCalculator.htm
And this is a comparison of various tax plans including tax rates by income group:
http://www.pafairtax.org/resrcs/FlatTaxFairTaxComparison.pdf
I have no doubt that some groups can put together very poor simulation models - I've seen government created software, and I have little faith in it. But I expect that there are professional groups that can put models together that are back tested and verified to be good at predicting the outcome of an econometric change such as this, and at low cost compared with the potential cost of failure and disruption in this radical change in taxation method.
You're selling this as a "Fair Tax", I assume that you mean that everybody currently being taxed will not see a significant change in their tax burden. I do not believe that. I would like to see some verifiable scientific proof of that claim, not a philosophical blow job.
Actually, I think the current tax system is icredibly unfair. So having everybody come out the same is not a priority of mine.
I like the FairTax for the philosophical reasons. Honesty, fairness, and removing the lobbyist factor from the revenue process.
If Fair Tax proponents have made an error in interpreting Dr. Jorgenson results, perhaps you can point out where Jorgenson has indicated which direction wages trend in his papers...Though I may have missed it, I never saw anyone respond to this request of yours. I was re-reading Dr. Jorgensen's paper, The Economic Impact of Fundamental Tax Reform, and came across this sentence at the bottom of page 11:
"... Finally, the income of the household sector is the sum of incomes from the supply of capital and labor services, interest payments from governments and the rest of the world, all net of taxes, and transfers from the government.This would seem to confirm that Dr. Jorgensen did indeed specify a definition of wages as being net of taxes.
(emphasis added)
The reason I ask, is that in describing the Armey-Shelby Flat Tax, the authors take pains to describe the employed system of exemptions that adds progressivity to the proposal, effectively reduces the low-income tax rate to zero, and reduces the effective tax-base. This mechanism is credited as a reason the Flat Tax rate is higher than the NRST (since both use the same tax base.)
However, no such reference is made to the so-called "prebate" mechanism employed by the FairTax. It, too, adds progressivity, reduces the low-income tax rate to zero, and reduces the effective tax base.
Further, there appears to be no mention of the prebate mechanism anywhere in the paper. It makes one wonder whether the "revenue neutral" tax rate for the NRST (initially 15.7% rising to 21.4% 24 years later), as modeled by Jorgenson, took the prebate into account.
Do you mean THIS "Armey-Shelby" (-Forbes) flat tax???
http://www.ctj.org/html/forbesny.htm
This would seem to confirm that Dr. Jorgensen did indeed specify a definition of wages as being net of taxes.
I agree that appears to indicate all household income to be net of taxes.
Unfortunately, I can find no indication of the direction that household income (i.e. net takehome) takes in that or any other study that Jorgenson has done for retail sales tax implementations. That is key to understanding whether or not the environment is overall beneficial to the household.
If there is a net increase in the real purchasing power of the individual, as total price the consumer pays indicates, falling 3% first year and by 10% by the end of the simulation period, then the result is much more positive than the assumption that one only has their current takehome pay would indicate.
Jorgenson's statement to RobFromGA as regards his 1996 Ways & Means testimony (pre-FairTax) was:
"A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers' prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increase economic efficiency. "
Indicating some gains could be expected arising out of economic growth and higher productivity indicated in the the study.
Perhaps you can point me to where the parameters of the NRST used in Jorgenson's simulations are described. Curiously, I found no citation in the bibliography to any obvious source for such parameters.
The NRST in that study is a comprehensive single stage retail tax with a tax base the same as the Armey Flat Tax.
| http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf Page 24 Simulation Results We have simulated the impact of implementing two different versions of a consumption tax at the beginning of 1996. The first is the Armey-Shelby Flat Tax. The Armey-Shelby proposal levies taxes on the difference between business receipts and the sum of business purchases and business payrolls. Labor income is taxed at the individual level. An important feature of the proposal is the system of personal exemptions at the individual level that we have described. The second proposal we have considered is the National Retail Sales Tax. The tax base is the same as in our simulations of the Flat Tax. However, the method of tax collection is different. The Arrney-Shelby Flat Tax preserves the existing structures of the corporate and individual income taxes, but alters the tax base. The National Retail Sales Tax eliminates corporate and individual income taxes; retail establishments would collect the taxes. This would require a broad definition of these establishments to include real estate developers and providers of services, such as medical, legal, and personal services. Most important, no personal exemptions are provided. |
The consumption tax base is described on page 20 as essentially PCE. The tax in both the Flat Tax case and the NRST case replaces only income taxes, SS/Medicare is left in place for both.
Further, there appears to be no mention of the prebate mechanism anywhere in the paper. It makes one wonder whether the "revenue neutral" tax rate for the NRST (initially 15.7% rising to 21.4% 24 years later), as modeled by Jorgenson, took the prebate into account.
The Baker study above was of a comparison between the Armey Flat Tax and a pure retail sales tax, replacing only the income taxes. It was not a study between Flat Tax and the FairTax act which replaces SS/Medcare taxes as well as implements a sales tax rebate.
If you want a study that looks at the FairTax provisions alone I suggest you contact AFFT and request a copy of Jorgenson's Final Report to Americans for Fair Taxation. They send it to any who requests it.
Its revenue neutral tax rate results are, 18.6 percent at the federal level rising to 23.8% in the twenty-fifth year. That study is expressly for the Fair Tax provisions replacing both income and payroll taxes and implementing a demgrant rebate based on the HHS poverylevel.
It shows a 20% decrease in producer prices, going to 30% by 2020 with rising production throughout.
| Jorgenson Testimony 1996 ====== FULL TEXT ====== This statement was prepared for presentation at the Hearings on Replacing the Federal Income Tax, before the Committee on Ways and Means, U.S. House of Representatives, 104th Congress, Second Session.
THE ECONOMIC IMPACT
INTRODUCTION AND SUMMARY [1] In this testimony I consider the economic impact of substituting a tax on consumption fro corporate and individual income taxes at federal, state, and local levels, beginning January 1, 1996. I limit my analysis to a revenue neutral tax substitution -- one that would leave the government revenues unchanged. Finally I focus on the impact of fundamental tax reform on economic growth, leaving progressivity of the resulting combination of taxes and government expenditures to be determined by adjustment of expenditures. I have summarized my conclusions in a services of eight charts appended to the text of this prepared statement. These were generated by stimulating future U.S. economic growth with and without the change in tax policy. Further details are provided in an Appendix to this statement.
IMPLEMENTATION OF A CONSUMPTION TAX [2] In Hearings on Replacing the Federal Income Tax, held by the Committee on Ways and Means last June, testimony focused on alternative methods for implementing a consumption-base value added tax. This is economic jargon for a consumption tax, where value added is the sum of capital and labor incomes and subtracting investment form value added would produce a consumption tax base. An alternative and equivalent definition of this tax base is the difference between business receipts and purchases from other businesses, including investment goods. A third definition of the tax base is the total of retail sales to consumers. [3] The three principal methods for implementation of a value added tax correspond to the three definitions of consumption as the tax base:
[4] All three alternative methods for implementing a consumption tax could be based on the same definition of the tax base. This greatly simplifies the tax economist's task, since the economic impact would be the same for all three approaches. This leaves important issues to be resolved by other tax professionals, including, especially, tax lawyers who would write the legislation and the implementing regulations and tax accountants who would translate the laws and regulations into accounting practice and advise economic decision-makers about their implications. [5] From the economic point of view the definition of consumption is straightforward; a useful and commonly accepted point of departure is Personal Consumption Expenditures (PCE) as defined in the U.S. national income and product accounts. However, the taxation of services poses important administrative problems reviewed in a U.S. Treasury (1984) monograph on the value added tax. First PCE includes the rental equivalent value of the services of owner-occupied housing, but does not include the services of consumer's durables. Both are substantial in magnitude, but could be taxed by the "prepayment method" described by the Hon. David Bradford(1986). In this approach taxes on services would be prepaid by including investment rather than consumption in the tax base. [6] The prepayment of taxes on services of owner-occupied housing would remove an important political obstacle to substitution of a consumption tax for existing income taxes. At the time the substitution takes place all owner-occupiers would be treated as having been prepaid all future taxes in the services of their dwellings. This is equivalent to excluding not only mortgage interest from the tax base, but also returns to equity, which might be taxed upon the sale of residence with no corresponding purchase of residential property of equal or greater value. Of course, this presumes that homeowners would refinance to take advantage of the altered tax treatment of mortgage lenders. [7] It is essential to include housing and consumer's durables in the tax base in order to reap the substantial economic benefits of putting household and business capital on the same footing./4/ This raises politically sensitive issues and it is important to be clear about the implications of prepayment as the debate proceeds. Under the prepayment method purchases of consumers' durables by households for their own use would be subject to tax. These would include automobiles, appliances, home furnishings, and so on. In addition, new construction of owner-occupied housing would be subject to tax, as would sales of existing renter-occupied housing to owner-occupiers. Together with the exclusion of rental values of existing owner-occupied housing, this would maintain the asset values for housing. [8] Other purchases of services that would be especially problematical under a consumption tax include services provided by nonprofit institutions, such as schools and colleges, hospitals, and religious and eleemosynary institutions. The traditional, tax-favored status of these forms of consumption would be defended tenaciously by recipients of the services and even more tenaciously by the providers. The argument can be made that educational services represent investment in human capital rather than consumption. [9] Finally, any definition of a consumption tax base will have to distinguish between consumption for personal and business purposes. On going disputes over home offices, business-provided automobiles, equipment, and clothing, and business-related lodging, entertainment and meals would continue to plague tax officials, the entertainment and hospitality industries, and holders of expense accounts. In short, substitution of a consumption tax for the federal income tax system would not eliminate all the practical issues that arise from the necessity of distinguishing between business and personal activities in defining consumption. However, these issues are common to both income and consumption taxes.
CONCLUSION [10] Under any one of the three approaches to implementation of a value added tax, substitution of a consumption tax for existing individual and corporate income taxes would be the most drastic change in federal tax policy since the introduction of the income tax in 1913. It is not surprising that the economic impact summarized above would be truly staggering in magnitude. It is easy to foresee that as Americans become more fully apprised of the manifold ramifications of fundamental tax reform the Gucci Gulch/5/ will be transformed into the political equivalent of the Grand Canyon. [11] The coming debate over tax reform is both a challenge and an opportunity for economists. It is a challenge because the impact of fundamental tax reform would involve almost every aspect of economic life. Economists who have spent their lives pre-occupied by the latest debating points in journals read only by other economists will suddenly find that the fine points that dominate scholarly discussion will be subjected to the refiner's fire of public scrutiny. [12] The debate will be an opportunity of economists because economic research has generated a wealth of information about the impacts of tax policy. Provided that the economic debate can be properly focused, economists and policy makers will learn a great deal about the U.S. economy and its potential for achieving a higher level of performance. I am personally very gratified that the Joint Committee on Taxation under the leadership of Chief of Staff Kenneth Kies has taken the initiative in channeling the professional discussion. In my remaining testimony I will outline my own recommendations for the initial ground rules. [13] The first issue in the debate will be the economic impact of the federal deficit. Nearly two decades of economic disputation over this issue has failed to produce any resolution. No doubt the dispute will continue well into the next century and preoccupy the next generation of fiscal economists, as it has the previous generation. An effective rhetorical device for insulating the discussion of fundamental tax reform from the budget debate is to limit consideration to revenue neutral proposals. This device was critical to the eventual enactment of the Tax Reform Act of 1986 and is, I believe, essential to progress in fundamental tax reform. [14] The second issue to be debated is fiscal federalism or the role of state and local governments. Since state and local income taxes usually employ the same tax bases as the corresponding federal taxes, it is reasonable to assume that substitution of consumption for income taxes at the federal level would be followed by similar substitutions at the state and local level. Since and important advantage of a fundamental tax reform is the the possibility, at least at the outset, of radically simplifying tax rules, it does not make much sense to assume that existing rules would continue to govern state and local taxes, even if the federal income tax were abolished. [15] The central issue in evaluating the economic impact of fundamental tax reform is its impact on economic growth. A serious barrier to focusing attention on growth is that the main apparatus for policy evaluation employed by both the Congress and the Administration consists of distributional tables for policy impacts. So far as I am aware, the methodology I have employed in preparing this testimony - comparing time paths of U.S. economic growth with and without a change in tax policy -- has never been used by either the Joint Tax Committee or the Office of Tax Analysis of the U.S. Treasury. Public discussion of tax reform will be crippled until this analytical gap is overcome.
FOOTNOTES /1/ The advantages and disadvantages of the invoice and credit method for implementing the value added tax are discussed by the U.S. Treasury (1984). /2/ A subtraction method value added tax has been proposed by Ranking Minority Member Sam Gibbons of the Committee on Ways and Means. If no business receipts were excluded and no deductions and tax credits were permitted, the tax return could be reduced to the now familiar post card size, as in the Flat Tax proposal of Majority Leader Dick Armey and Senator Richard Shelby(1995), Economists will recognize the Flat Tax proposal as a variant of the consumption-base value added tax proposed by Robert Hall and Alvin Rabushka (1995). /3/ A national retail sales tax has been proposed by Chairman Bill Archer of the Committee on Ways and Means and Senator Richard Lugar /4/ See for example, my testimony before the Committee on Ways and Means of June 6, 1995. /5/ Few readers of this testimony will be unaware of this colloquial expression for the corridor outside the hearing room of he Committee of Ways and Means. The expression appeared in the title of the definitive account of the Tax Reform Act of 1986 by Jefferey H. Birnbaum and Alan S. Murray (1987).
The simulations of U.S. economic growth summarized in the charts appended to this testimony are based on an intertemportal equilibrium model of the U.S. Economy that I have constructed with Peter J. Wilcoxen. The details of the model and more than a dozen applications are summarized in our survey paper, "Energy, the Environment, and Economic Growth," published in 1993. The model of U.S. economic growth is disaggregate4d to the thirty-five industries listed in the final four charts in my testimony. In addition the model distinguishes among 1344 types of households, disaggregated by family size, age and gender of household head, region of residence, race, and urban versus rural location. The model is built around sub-models of investment and saving based on rational expectations. The price of investment goods in every period is based on expectations of future capital service prices and discount rates that are fulfilled by the solution of the model. In order to analyze the economic impact of changes in tax policy, we simulate the growth of the U.S. economy with and without changes in these policies. The first an most difficult step is to generate a simulation based on current tax policy. We call this the BASE CASE. We then produce and alternative simulation based on a consumption tax. This represents the alternative case. Finally we compare the base case with the ALTERNATIVE CASE in order to assess the effects of the substitution of a consumption tax for the existing income tax system. The3 most difficult part of tax policy evaluation is to project U.S. economic growth under the existing tax system. For this purpose I have introduced the characteristic features of U.S. tax law into the cost of capital, distinguishing among assets employed in three different legal forms of organization -- households and nonprofit institutions, non-corporate business, and corporations. Income from corporate business is subject to the corporate income tax, while distributions to households are subject to the individual income tax. Income from unincorporated businesses -- partnerships and sole proprietorships -- are taxed only at the individual level, while income from equity in household assets is not subject to the income tax.
REFERENCE Armey, Dick, "Freedom and Fairness Restoration Act," Washington, D.C. 104th Congress, First Session, 1995. Birnbaum, Jefferey H., and Alan S. Murray, Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform, New York Random House, 1987. Bradford David, Untangling the Income Tax, Cambridge, Harvard University Press, 1986. Jorgenson, Dale., and Kun-Young Yun, Tax Reform and the Cost of Capital, New York, Oxford University Press, 1991 U.S. Department of the Treasury, Tax Reform for Fairness, Simplicity, and Economic Growth, Washington, U.S. Government Printing Office, 1984. _____, Taxing Business Income Once, Washington, U.S. Government Printing Office, 1992.
[CHARTS OMITTED] |
(scary, isn't it ;-)
As for wage direction over time, I believe there is too much aggregation in Jorgenson's simulation to make any specific predictions. Though there is high aggregate growth, one of his observations is a large increase in labor supply as workers trade leisure for work. A large increase in the labor supply would tend to have a depressive effect on wages ... at least initially.
All in all, there is little to be gained for attempting to glean such information from this study, since there appears to be no indication wage dynamics were modeled.
All in all, there is little to be gained for attempting to glean such information from this study, since there appears to be no indication wage dynamics were modeled.
The you hit the nub of it, not even Jorgenson has quantified what wages would do in any of his models as an output.
The best we can infer from his models is that given the GDP & investment growth generated by the model, the purchasing power of the household in terms of investment and consumption levels must increase overall. Jorgenson's models show an initial decline in consumption with large growth in investment, consumption catches up and surpasses the base income tax case within two years and investment increases moderate as time advances.
Overall the net I see is strongly positive, especially when one notes his models only implements tax change per-se, and apparently does not take the additional step of trying to estimate the gains from reduction of business overhead costs related to the current tax system. At least none where I have been able to find in the IGEM description or in anything he has stated in his implementations.
Correct me if I am wrong, but if you live in a state that has an income tax, that would not be eliminated. So in other words " $129.87 + State sales tax + local sales tax + city sales tax + state income tax.
"As much as I like the idea of ending the IRS's rein of tyranny over John Q. Taxpayer with the adoption of a consumption tax it'll never, ever happen. There simply is NO WAY the political elite are going to give up their single greatest power over the masses. A million people could picket on Capital Hill and absolutely nothing is going to happen. Mark my words. The point is moot."
“I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accept it. Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power. Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.”
Alan Keyes “The Power of the Purse”, WorldNet Daily, August 27,1999
"I've dealt both with IRS and our state's tax agency, and I'll take IRS any day."
I have been through income tax audits and sales tax audits and sales tax audits are trivial compared to income tax audits. In addition, individuals will no longer be subject to audits, only busineses, The number of points of enforcement/compliance will be dramatically cut.
Under the FairTax, most states will probably conform their tax laws to the FairTax as a practical matter.
The effects of this are quite a bit more beneficial to the taxpayer since it would take in aat least state sales taxes and state income taxes. the picture is altogether better for you than the example you offered.
There is a wealth of good information on this matter here:
http://www.fairtaxvolunteer.org/smart/tax_system.html
If I gross $ 1,000 per week, I presently take home about $ 750. My employer is required to pay what was withheld from my check ( $ 250 ) PLUS additional taxes of almost $ 80 to the government. If FAIR tax gets enacted, will I be paid:
a. $ 1,000
b. $ 750
c. $ 1,080
I just want an answer to that one question.
Money whould have you believe that the $250 now being withheld will simply evaporate.
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