Posted on 09/28/2005 12:14:25 PM PDT by hripka
A change in a tax affects that area of the economy . . . and beyond. Taxes hurt whatever is taxed. Income taxes hurt income (production). Sales taxes hurt sales (consumption). Higher rates have higher effects.
After having read "The FairTax Book: Saying Goodbye to the Income Tax and the IRS" by Neal Boortz and Congressman John Linder, I realized that the 'FairTax' proposed by Boortz and Linder would change EVERYTHING. The 'FairTax' is not tax reform, it is tax upheaval. Since it taxes consumption instead of income, consumption WILL fall, and incomes WILL rise. All of the incentives (and penalties) enacted into the current tax code would, at least be neutralized, or perhaps go into reverse.
A frugal person might be in favor of a 'FairTax' (National Retail Sales Tax, NRST) because the United States is consuming too much and needs more income. Considering our multiple deficits, (federal budget, international trade, consumer debt, etc.) cutting consumption and increasing income might not be a bad thing, but only to a point. However, the 'FairTaxers' assume minimal transition costs. They are VERY mistaken. The day of the change itself would be minor, but then the 'FairTax' would change EVERYTHING.
A list (in no particular order) put together by an amateur, not a tax professional:
List of those who would benefit under the 'FairTax' plan:
1. Business/production in general
2. All income-producing activities that were previously taxed, dividend payers, capital gains, etc.
3. Savers. Thrift and frugality will now be rewarded.
4. Activities that were formerly penalized: Alternative minimum tax payers, estate tax payers, gift tax payers, etc.
5. Corporate bonds, as compared to government bonds
6. Cash and bartering transactions
7. eBay for handling used transactions, also flea markets, second-hand stores, rummage/garage sales
8. Current owners of houses, cars, clothes, household goods. The answer on pg. 162-163 ignores existing houses. It states that *new* houses will decline in price, but go right back up again due to the 'FairTax'. And existing houses?
9. Companies will start a Company Store for tax-free employee benefits
10. Home-based activities: sewing, knitting, cooking, fruit and vegetable gardening at home, home repair, do-it-yourself, self reliance
11. Refurbishing of standing 'used' real estate
12. Smuggling, especially of portable high-value goods
13. Warren Buffett, who doesn't sell due to capital gains taxes which are now eliminated
14. Indian tribes could offer tax-free stores, and their casinos aren't affected
and others ? ?
List of those who would be hurt under the 'FairTax' plan:
1. Consumers/spenders in general
2. All retail establishments
2a. less impacted: those catering to home-based activities such as groceries, home improvement, etc.
2b. Internet-based retailers
2c. most impacted: portable high-value goods such as stamp, coin, jewelry dealers which might even close due to smuggling
3. Federal Government temporarily, due to initial tax simplification
4. IRS employees, tax accountants and lobbyists, HR Block, Intuit, etc.
5. Government bonds, (no longer tax-advantaged) as compared to corporate bonds
6. Roth IRA account holders (despite pg. 120-121 that a principle of the 'FairTax' that everything should be taxed only once)
7. Charitable donations to charities and churches, due to loss of tax deductible giving
8. All currently tax-exempt organizations, their comparative advantage is reduced.
9. Home real estate in general due to loss of tax deductible interest, a major selling point.
10. New real estate developments - especially near cities with old housing
11. Residents of states that don't currently have a sales tax, those states will enact their own sales tax
12. Taxpayers living in states or cities with high income or high property taxes, which are no longer deductible
13. Anything currently tax-advantaged through credits and deductions, i.e. conservation efforts, high medical bills, victims of casualty and theft losses, child and adoption tax credits, capital losses, etc.
14. Tax-advantaged 401k's, no reason to have them ? though savings in general will increase
15. China, Japan, etc., countries that currently export to us
16. All non-Indian casinos and lotteries. Casinos have to pay in effect a 23% income tax on gross profits (gross receipts minus payoffs and other taxes)!? My reading of Section 702(e).
and others ? ?
Remember, this is a list put together by an amateur, not a tax professional. Are there others affected, positively or negatively? Where am I wrong? Read my tagline.
A tax hurts what is taxed. That is how I came up with this list.
Believe it or not this whole debate does not gravitate around an e-mail you got from Dale Jorgenson. If he is the guru around here then he should be believed for his other opinions as well. Such selective opining has no place here.
Your assertion that there would be a mutiny among retirees is also selective. Millions, the vast majority, will be unburdened. In my business I actually see too many people with sizeable qualified savings and too LITTLE taxable savings. That is a big flaw under the current system. We are constantly moving people out from under the IRA, 401(k) ball and chain. THAT big problem would become much smaller under the fair tax.
You repeatedly state that 'there is nothing to discuss' yet you continue to do so. Make up your mind. The rest of us are here to debate.
I think that if wages were reduced, there would be a mutiny. I think that if wages were kept the same, and takehome increased, and prices went up by the amount of the FAIRTAX (30%) or a little less, then there would be a mutiny by the retirees and everyone with savings. So I don't really see a workable FAIRTAX world.
I think the whole idea of millions of employees willingly accepting lower wages with the full knowlege that their employer is pocketing the difference is beyond ludicrous. THAT is not debateable IMHO. What is debateable is the fact that millions of employees will have 20-30% more money in their pockets. The debate: What will they do with it?
Well what other assumption is there? What is your assumption? You and the rest of the anti's (notice I didn't say SQL's because, G-d forbid I wouldn't want to offend anyone) have been running around with a big "gotcha" painted on your foreheads because DJ sent Rob an e-mail. ALL economic studies are based upon assumptions unless they are based upon historical data and draw a conclusion as such.
The really screwy part about 'embedded taxes' is Boortz and Linder's claim about the government paying a 'FairTax'. That will be a true 'embedded tax'. No one has seriously tried to answer my 3rd question (in post 1 (repeated on post 56) about the government paying itself.
Regarding my 1st question: There is debate whether purchases abroad are taxed or are sales-tax-free. If they are sales-tax-free, Smugglers will have a field day. If they are sales-tax-free, No one has commented on my prediction about stamp, coin and jewelry dealers going out of business.
No one has touched question 2 regarding investment real estate. This is seriously important, especially during the current housing bubble.
Of course the employer would not pocket the difference, it would allow prices to drop through the operation of competition which is what sets prices now. I don't think employers will be able to reduce wages because there won't be a guarantee that prices will drop.
You repeatedly state that 'there is nothing to discuss' yet you continue to do so. Make up your mind. The rest of us are here to debate.
I said there is nothing to discuss about the details of a FairTax implementation and what effects it would have on the economy unless the very basic idea of what will happen to wages and prices is settled. As one example, the relative advantage that domestic producers will have compared with foreigners evaporates if we just allow all domestic costs to stay the same. The advantage for US companies cited for economic growth relies on US business costs dropping which relies on wages dropping (takehome the same).
Wouldn't you agree that wages and prices are about as basic as it gets? If we don't know what is going to happen to prices and wages then the whole plan is way too mysterious to ever implement. You apparently think that prices and wages are mere details, I think they are by far the most important and basic questions.
LOL, we who pay taxes are all losers. We need to all become the new term, INFORMAL WORKERS. They pay NO taxes, and operate under the guise as unemployed and probably collect unemployment and/or welfare benefits.
Who are the stupid people, the ones who pay taxes, didn't some Liberal ugly woman say that back in the 80's. My memory escapes me on her name.
In some cases, but not all. Maybe not all that many. You're assuming that 65 year old geezers are going to be buying the latest IPod. They won't. Marketers target ages 14-45 for a reason.
I don't think you understand what is meant by "accumulated wealth." It's wealth that's accumulated before a transition to a NRST.
Look. The bottom line is that in one instance you have a person trying to acquire wealth. How does he do it? He works, puts a portion of his money away and compounds his investment return.
The IRS has put the big ball and chain around that effort. First, the labor is taxed. Second, the compounding is taxed or will be at withdrawal.
The heiress, such as Heinz-Kerry, Dodge, Forbes, Rockefeller, DuPont need only put their vast fortunes into municipal bonds and NEVER pay a red cent into the black hole of government. At least let's level the field.
Is that socialism? Not at all. The heiress can decide when and where she wants to spend money.
We don't need to have our own assumption in order to debate the existing study. We can just debate the one that FairTaxers have been using to sell their plan.
On a related topic, we don't need to have an alternate tax proposal to replace the IRS in order to discuss the pros and cons of a given plan like the FairTax. That is a red herring that often gets tossed around in these threads.
I don't love the IRS, but I do love the US economy-- the best and most properous one in the world that has dramatically helped hundreds of millions to realize their economic dreams. And I wouldn't risk it all on a plan that we can't even agree on what will happen to wages and prices.
Whether an item is "Food" or not has nothing to do with the prebate.
What leg do you expect Boortz to stand on once his TWO have been chopped out from under him? Of course he will talk about the really unprovable long-term gains now that his whole short-term Free Lunch has just been thrown in the trash bin by his own economist.
We can't even figure out GDP growth rates for 2006 with a lot of accuracy, I certainly wouldn't bet the whole farm on a Boortz projection into the future. He's the one who apparently doesn't even understand economists and their reports.
No, I just pulled out the part where he admitted his misrepresentation. When someone makes such an admission, they aften surround it with platitudes and gobbledygook to try and save some face. This is no different, I am sure there was a "Come to Jesus" meeting before he ever committed this admission to print.
And according to the Money magazine writer, Boortz said he would change to book text to correct his errors in future printings (if they ever need another one).
LOL. NO way. If you work for an hourly wage or even if you're on a salary and the IRS suddenly stops collecting witholding there ain't no way in hell employees are going to accept the same paycheck they had before with some vague promise that the employer will drop prices and everything will be hunky-dory. That is not going to happen.
You apparently think that prices and wages are mere details, I think they are by far the most important and basic questions.
The American consumer will live up to his income. Period. 99% of the people who get a raise this year will not save the difference, they'll spend it. So any affect on prices will be absorbed sooner or later by the consumer. From 1972 until 1980 the cost of a loaf of bread more than doubled while the stock market got cut in half in the early part of those years. The effect was that we fired a president but everybody made money on their home equity. If the consumer has more money in his pocket he'll spend it creating a higher velocity of that money and generating higher economic activity.
GO BRAVES!!!!
Your analysis is rather simplistic.
For example your number 1 in the benefit section are producers, yet your number two in the loser section are retailers.
Retailers sell stuff that producers produce, so how can one benefit and not the other, or vice-versa?
There are a lot of subtle ramifications in this proposal, and it's not totally obvious who the winners and losers are going to be. Overall though I think it will result in a truer market economy, without the artificial sticks, carrots and confusion inherent in the current tax system.
finally we agree on something- GO BRAVES!
And we also agree that employees won't allow their wages to be reduced without a fight (esp now that the most rabid FairTax supporters are looking forward to the 20-25% increase in purchasing power on Day 1 of the FairTax). So where does that leave the FairTax?
Should we start a new thread where everyone agrees that takehome wages will rise 20-25% AND domestic goods and services will rise 20-25%, and foreign goods will rise 30% (the amount of the Fairtax)? And debate how that will work?
Please provide a link to Jorgenson's claims of financial bonanza.
http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf
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Revised April 12, 1999. This paper was prepared for presentation at the page 21: In Hearings on Replacing the Federal Income Tax (1996), held by the Committee on Ways and Means in June 1995, testimony focused on alternative methods for implementing a consumption tax. The consumption tax base can be defined in three alternative and equivalent ways. First, subtracting investment from value added produces consumption as a tax base, where value added is the sum of capital and labor incomes. A second definition is the difference between business receipts and all purchases from other businesses, including purchases of investment goods. A third definition of the tax base is retail sales to consumers. The three principal methods for implementation of a consumption tax correspond to these three definitions of the tax base:
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. PDF page 25-27: 2. Figure 4 compares the consumption tax rates for revenue-neutral substitution of the Armey-Shelby Flat Tax (FT) and the National Retail Sales Tax (ST) for existing income taxes. The Flat Tax rate is 25.1 percent in the year 1996 and remains virtually constant through the year 2020. The National Retail Sales Tax rate rises from only 15.7 percent in 1996 to 21.4 percent in the year 2020. Only the Flat Tax includes a system of personal exemptions, so that the tax rate is considerably higher, especially at the initiation of the tax reform. Second, the consumption tax base for the Flat Tax grows at nearly the same rate as government expenditures, while the tax base for the Sales Tax grows more slowly, reflecting the increased importance of investment. 3. Figure 5 compares the impacts of the Flat Tax and the Sales Tax on GDP. Under the Flat Tax the GDP is only 0.6 percent higher than the Base Case in 1996; the impact of this tax reform on GDP gradually rises, reaching 1.3 percent in 2020. Under the Sales Tax the GDP jumps by 13.2 percent in 1996, but the impact gradually diminishes over time, falling to 9.0 percent in the year 2020. The short-run differences between these two tax reforms are due mainly to the impacts on labor supply, while the long run differences also reflect the impacts on capital accumulation. 4. Figure 6 compares the impacts of the two tax reform proposals on consumption. The impact of the Flat Tax in 1996 is to increase consumption by 3.5 percent, relative to the Base Case. This impact gradually diminishes over time, falling to 1.3 percent by 2020. While it may seem paradoxical that consumption increases with a rise in the consumption tax, the marginal tax rate for low-income taxpayers is reduced to zero, stimulating consumption. By contrast the Sales Tax curtails consumption sharply in 1996, resulting in a decline of 5.6 percent, relative to the Base Case. However, the level of consumption overtakes the Base Case level in 1998 and rises to 5.5 percent above the Base Case in 2020. 5. Figure 7 compares the impact of the two tax reform proposals on investment. The impact of the Flat Tax in 1996 is to depress investment by 8.6 percent, relative to the Base Case. Investment recovers over time, eventually reaching a level that is only 1.7 percent below the Base Case in the year 2020. Substitution of the Sales Tax for existing income taxes generates a dramatic investment boom. The impact in 1996 is a whopping 78.5 percent increase in the level of investment that gradually gives way by the year 2000 to a substantial increase of 16.5 percent, relative to the Base Case. 6. Figure 8 compares the impacts of the tax reforms on exports, while Figure 9 compares the impacts on imports. It is important to keep in mind that net foreign investment, the difference between exports and imports in nominal terms, is exogenous in our simulations, while the exchange rate is endogenous. The Flat Tax results in a very modest decline in exports of 0.5 percent in 1996, relative to the Base Case, but exports recover rapidly and exceed Base Case levels in 1997, rising eventually to 4.6 percent above these levels in 2020. Imports initially rise by 2.0 percent, relative to the Base Case, in 1996, but this impact declines to only 0.3 percent by 2020. The Sales Tax generates a substantial export boom; the level jumps to 29.2 percent about the Base Case level in 1996, but declines by 2020, reaching 18.9 percent of this level. Imports in 1996 exceed the Base Case level by 2.5 percent, but fall to 1.3 percent below this level in 2020. 7. The inter-temporal price system provides the mechanism for re-allocations of resources in our simulations. Figures 10 and 11 give the impacts of the tax reforms on the prices of investment goods and consumption goods and services. Under the Flat Tax the price of investment goods drops by more that 6.8 per cent in 1996 and the price decline continues, falling only modestly to a little over six percent by 2020. The Sales Tax produces a reduction in investment goods prices exceeding twenty percent in 1996, rising gradually to between twenty-five and thirty percent over the period 2000-2020. Under the Flat Tax prices of consumption goods and services decline by more that 4: 5 percent in 1996, but this price reduction falls over time to around three percent in 2020. The Sales Tax reduces the price of consumption by a little over three percent in 1996, but this price decline increases to more than ten percent by 2020. 8. The implied subsidy to leisure time is equal to the marginal tax rate on labor income and would drop to zero when the individual income tax is abolished. Individuals sharply curtail consumption of both goods and leisure under the Sales Tax. Figure 12 shows that labor supply (and demand) jumps initially by thirty percent in 1996. This labor supply response recedes to a level of around fifeen percent by 2020. By contrast the Flat Tax generates an increase in both consumption and labor supply. The labor supply response is only two percent in 1996, but gradually rises to more than five percent by 2020. 9. Since producers would no longer pay taxes on profits or other forms of income from capital and workers would would no longer pay taxes on wages, prices received by producers under the Sales Tax, shown in Figure 13, would fall by an average of twenty percent in 1996. Figure 14 shows that prices received by producers would fall by an average of twenty-five percent by 2020. The impact of the Flat Tax on prices received by producers is much less dramatic. Prices decline in the range of six to eight percent for most industries in 1996 and five to seven percent by 2020. |
For anything in this study to happen or have any meaning, you need to accept the assumption that gross wages need to fall to current takehome levels for the price drops to materialize. I think you have accepted this now, right?
How do you think that this wage reduction will be managed?
YES. Because that is what will happen. Except that, I believe, the numbers will actually be beneficial not just break even. The real debate should also include what we are allowing congress and its buddies on K-Street to do to us.
The wealthiest among us are large corporations whose budgets include millions of dollars for lobbyists to BRIBE congress to give them preferential treatment. Strip the bastards of the tax code and they have nothing much to bribe congress for.
There are none so blind as those who refuse to see. Just because my employer's name is on the check (BTW, the money in the account was deducted from MY paycheck) doesn't make it an expense seperate from my salary. My employer counts my entire paycheck as part of the cost of doing business.
Believe it or not, my employer pays income taxes, too. His reduction in costs will come from HIM not paying income taxes, having to match my SS and Mediscare, and not having to keep up with all the IRS bullshit.
You are either refusing to see or deliberately misleading people.
In some cases, but not all. Maybe not all that many. You're assuming that 65 year old geezers are going to be buying the latest IPod. They won't. Marketers target ages 14-45 for a reason.I wasn't aware that only iPods were taxed. I thought it was also stuff like travel, golf clubs, health care, etc. You know, stuff old people consume.
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