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.
YOU are not that dim. You are just baiting. THINK. The way it is now the cheaters NEVER pay. With the fair tax they do. C'mon.
"Unless government is talking about cutting the budget, the average tax burden is going to remain the same."
That ignores the enormous savings in compliance costs and inefficiencies of the current system.
"Saving $390 (or my marginal income tax rate amount) reduces the impact of my giving the $1000. It sure affects my thinking when I write out a check to a charity. And Boortz pooh-poohs this? It must affect others as well."
The purpose of the charitable contributions deduction is so that you can donate pre-tax dollars. However, there are many limitations imposed by the IRC. With the FairTax, all donations are made with pre-tax dollars, and are not subject to any government limitations. For example, less than 40% of US tax filers itemize. With the FairTax, you don't need to itemize.
Probably so, but that just means according to the fairtax experts that after tax prices go up significantly with the fairtax.
Actually Jorgenson found after-tax purchasing power of the consumer increases 3% in the first year, rising to 10% by 2020 in replacing and accounting for income tax alone, and not replacing payroll taxes at all, as the FairTax legislation does do as well as provide an offsetting sales tax rebate.
Jorgenson's statements in his 1996 testimony before House Ways & Means Committee did not address the FairTax legislation at all, but rather addressed consumption taxes generally (i.e. Armey/Luger Flat Tax, VAT, and the Archer/Luger version of an NRST), all of which only proposed to replace income taxes alone.
By the way, here is a transcription of that 1996 testimony to which he refers, in his statement to RobFromGA.
It is generally well to refer to the actual information that is addressed by Jorgenson in his communication with RobFromGA in order to assess the differences between that and the FairTax Act HR25 that is being proposed:
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 for 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] |
Will it become harder to sell a home? Will there be more renters?
LOSERS
You left out illegal immigrants, who would move from a tax advantaged position to a tax disadvantaged one.
WINNERS
You also left out the unemployed, since job growth would be immense.
You also left out anyone depending on Social Security and Medicare, since both will face major upheaval if we stick with a payroll tax revenue base.
"Our current tax codes have tons of loop holes. They are there for a reason."
Indeed they are - so that lobbyists in DC can command six (and in some cases seven) digit compensation packages.
Also, so that our tax system can be the most complex and have the highest compliance costs in the world.
Would the value of a house go down? Would more people rent?
Oh you c'mon. You argue that there are 23% embedded taxes today. When a drug dealer buys goods he is paying those taxes in the form of higher prices. You argue out of both sides of your mouth. You only think about embedded taxes when it is convenient for your argument. Be honest for once in your life.
"A consumption tax will really hurt our economy."
You should read the Prestowitz book referenced above. He explains how the US got into this mindset that massive consumption is necessary for our economy to prosper. It is very much outdated thinking and if we don't get a handle on it soon, the results will not be pretty.
We are in uncharted waters right now, with a trade deficit which is growing and is already well in excess of $600 billion/year. At the rate we are increasing, we will be at $1 trillion by around 2010. That is FAR scarier to most economists than a reduction in consumption (which is the same as an increase in savings).
Wrong. According to the man who did the research for the fairtax organization, Dr. Jorgenson, he absolutely did include YOUR income tax to come up with that 23 percent number.
"If everyone saves everything they earn starting tomorrow, then how long would the economy stay afloat?"
How long do you realistically think that Americans would go with zero consumption under the FairTax?
Would the value of a house go down? Would more people rent?
With nothing really changed, same amount of taxes "revenue neutral" collected (but with greater economic efficiency), higher overall and increasing incomes and growing GDP why would the value of assets like homes fall? Why would people be more inclined to rent than they would today?
Seems to me with a better economy and greater incentives for investment and savings, demand for home ownership should increase maintaining real values of homes not lower their value.
"BTW, there is no incentive to save under the consumption tax like there is with an income tax."
So BOTH savings and consumption would decline under a consumption tax? What would Americans be doing with their money?
"BTW, there is no incentive to save under the consumption tax like there is with an income tax."
So BOTH savings and consumption would decline under a consumption tax? What would Americans be doing with their money?
Oh, and Hripa says that charitable contributions will decline, also. That just about covers the waterfront as far as what one can do with money, doesn't it?
Everything that you can do with money will decline under the FairTax, correct?
Whatever. I tried to explain it to you but if you think that the money to pay YOUR taxes just appeared out of no where and had no impact on your employers cost structure then you should patent your payroll system. You just keep looking more and more wrong to anyone who understands basic business math. Keep digging and calling other people fools, that really makes your point.
It makes as much sense as the "keep all your paycheck, prices will all stay the same" FairTax promise that has been exposed as a misrepresentation.
Positive, he meant all the taxes paid as a cost of employment-- payroll and income. He confirmed it to me in an email and then to the Moeny magazine reporter a couple of weeks later. Links to those threads are up above or search FR for "fair tax myth"
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