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.
The withheld taxes were NOT deducted from your paycheck, they were deducted from your gross wages and the resulting amount is your paycheck, also called your "takehome" pay.
Your employer counts both your paycheck and the check he writes to the IRS on your behalf as part of the cost of doing business.
Huh? Non-taxed deferred, but taxed before saving?
This makes no sense.
My 401K was all pre-tax; off the top of my gross. It means I was betting on a better tax position when I retire.
Under fair tax, I only pay taxes on that retirement fund, when I spend it on new goods or services.
I figure that's a better tax position.
So we're to leave the old, crumbling, punitive system in place so the (arguably) wealthiest among us can buy golf clubs? Sorry, they can play with mashies and niblicks as far as I'm concerned. Health care? What old geezer pays for his health care? It is all paid for by medicare. I'm supposed to carry a ball and chain and finance their travel? I'd rather they go suck eggs. Are you getting my drift here?
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.
Hardly as one can assume as easily that no change in gross pay need to occur at all, as the difference in result is merely a nominal one, rather than a deflationary one.
I think you have accepted this now, right?
I have accepted that the simplifying assumptions made by Jorgenson was maintaining takehome pay constant rather than gross wage, maintaining real purchasing power in any case.
Jorgenson's model merely addresses changes in tax per-se with no accounting of improvements arising from reductions in tax related overhead costs which provide a large range for reduction in prices acting to maintain gross wages where they are now constant levels with reductions in producer & investment product prices as well.
How do you think that this wage reduction will be managed?
No individual wage reduction need occur at all for the projected economic benefits to be realized.
In fact as Jorgenson himself stated to you in his response to you:
"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."
Thus no reductions need to be managed to realize a real gain out of economic efficiency of which reductions in tax related overhead costs incurred by business is a large component, (deadweight losses on trade being the other).
The net purchasing power of the consumer in "Jorganson's '96 testimony" from his pre-'96 works remains constant. Taking increases in economic efficiency into account provides significant potential for gains in real purchasing power of the household.
In point of fact the above study holds that a net 3% gain in consumer (after tax) purchasing power rising to 10% in the out years occurs taking only changes in taxes per-se into account.
The same as today. Legal transactions result in taxes being paid, illegal transactions don't. The only difference is that under the fairtax, the drug dealer sees the tax on his receipt, under the income tax, the taxes are embedded into the price of the goods. Really. The drug dealer cheats the fairtax system exactly like he does today.
You are a fool. There is no employer in the US who will be able to say to the employees, "Well, since you don't have to pay income taxes and I don't have to pay income taxes, I am just going to keep what you were paying."
Probably so, but that just means according to the fairtax experts that after tax prices go up significantly with the fairtax.
"One of the most horrible pieces of unconstitutional legislation ever passed was the one that threatened the tax exempt status of the churches if they DARED to be involved in politics as they had been since our country began."
Great point. I still don't understand how African-American churches can use the pulpit for political purposes all they want, but other churches can't.
>>>"The same as today. Legal transactions result in taxes being paid, illegal transactions don't. The only difference is that under the fairtax, the drug dealer sees the tax on his receipt, under the income tax, the taxes are embedded into the price of the goods. Really. The drug dealer cheats the fairtax system exactly like he does today"<<<
Exactly what Income Tax did this Drug Dealer pay?
When he buys a car, the drug dealer effectively pays the income tax of every person who sold the car, transported the car, assembled the car, and made parts for the car. The difference with the fairtax is the tax is shown on the receipt. That is what the 23% of 'embedded taxes' are that fairtaxers talk about.
"So if there were to be any loss in American consumption, our exportation of products would still drive demand for workers. Workers in demand drives price up as the supply is reduced."
It's a little more subtle than that. The initial decline in US consumption would have two components:
1. a substantial decrease in the consumption of imports, combined with
2. a smaller magnitude increase in the consumption of US produced goods.
IOW, it isn't just foreign demand for US goods that would increase; domestic demand would go up, also, even though total overall consumption would initially decline.
However, the rate of growth in consumption would be greater after that initial decline, owing to a faster growing economy. By about the 4th or 5th year, total consumption would have caught up to where it would have been under the old system and would be positive from that point forward.
>>>"That is what the 23% of 'embedded taxes' are that fairtaxers talk about"<<<
And the Income Tax that he paid on his "Income" (Drug Dealing) was collected by whom?
The exact same person who the prostitute is going to remit her $23 to when she performs a $100 service. No one. But just like the income tax system, the drug dealer and prostitute get to pocket that $23 instead of send it in to the government. They will cheat the fairtax system just like they cheat the income tax system. Really, really.
"How can both be true? Consumption will fall and income will rise."
"It was not consumption that gave China its miraculous growth rate but investment, which reached an astounding 44 percent of GDP."
p. 61. "Three Billion New Capitalists - the great shift of wealth and power to the east", Clyde Prestowitz.
Prestowitz does a great job of explaining the historical foundation for our economic policies which encourage borrowing, spending and consuming and the dangers we face if we continue with outdated policies in the 21st century.
"9. Companies will start a Company Store for tax-free employee benefits"
Incorrect. Companies purchasing items for personal consumption will be charged the sales tax on them for just this reason.
Trust Fund Babies (folks like Paris Hilton, John Kerry etc)
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