TAX REFORM COMMISSION? YEAH ... RIGHT.

Neal's Nuze ^ | Oct. 12, 2005 | Neal Boortz

[pigdog]

TAX REFORM COMMISSION? YEAH ... RIGHT.

The president's so-called tax reform commission telegraphed its intentions several months ago when members stated that they were not going to recommend a full reform of our federal tax system, rather they were going to recommend some incremental reforms. The The FairTax Book hit the book stores and debuted at No. 1 on the New York Times Bestseller's list. Politicians and other Beltway denizens told co-author Congressman John Linder that the success of The FairTax Book was a certain indication that the people of this country were in the mood for wholesale reform. Who knew?

Now we're starting to get an indication of what the tax reform commission is going to recommend. It's very simple. Tax increases, not tax reform.

[pigdog]

Once the FairTax becomes law, the tax inclusive rate will probably be something like 19-20% which makes the tax exclusive rate 23-25% rather than 30.

The efffective tax rate under the FairTax is always less that the quoted rate in the bill - no one pays the full rate due to the prebate.

[pigdog]

You are merely demonstrating your lack of reading the FairTax bill. Those things are clearly not allowed under the bill and would be illegal activities.

[pigdog]

More claptrap from you Looie.

Co read some of the responses from your fellow AAmericans to the Tax Panel.

Here:

http://www.freerepublic.com/focus/news/1501413/posts?page=1

and here:

http://www.freerepublic.com/focus/news/1504262/posts?page=1

You'll see there are many, many people who disagree with you.

[ancient_geezer]

Are you telling me that the 'FairTax' rate doesn't solve the budget deficit?

A tax bill never solves budet defict problems.

Only spending discipline imposed on Congress can do that.

You want spending controls on Congress, you had better get to work on an amendment to the Constitution, nothing less (if that) is going to do that job.

Is the federal spending number wrong? Is the GDP number wrong? Is the consumer spending portion of GDP wrong? Which is it?

Wrong measures. NNP is the measure that most nearly reflects the FairTax tax base of annual retail level production in the NIPA data series and from which federal revenue neutral tax rate for a comprehensive NRST can be estimated:

 

refer Tax Freedom Day 2005 report PDF: Special Report No.134, April 2005

 

Total Effective Tax Rates by Level of Government Percent Net National Product(NNP)
Year	Federal	State	Total
1996	21.3%	10.4%	31.6%
1997	21.8%	10.3%	32.1%
1998	22.4%	10.4%	32.8%
19990	22.5%	10.4%	32.9%
2000	23.1%	10.4%	33.5%
2001	22.2%	10.5%	32.7%
2002 1	19.6%	10.2%	29.8%
2003 2	18.8%	10.1%	28.9%
2004 3	18.4%	10.2%	28.6%
2005	19.0%	10.1%	29.1%
Notes: Leap day is omitted to make dates comparable over time. Since depreciation is not available to pay taxes, GDP is an overstatement of spendable income for the purpose of measuring tax burdens. Depreciation is netted out of NNP. "Overall, NNP provides the best statistical representation of the common notion of “spendable” resources. In 2004 NNP was $10,371.6 billion. Like GDP and PI, NNP is a component of the National Income Product Accounts (NIPA). These accounts are computed and compiled annually by the Commerce Depart-ment’s Bureau of Economic Analysis (BEA)." Tax Foundation Special Report No.134, April 2005 0 First year introduction of HR2525(Fair Tax legislation). 1 Economic Growth and Tax Reform Reconciliation Act of 2001 2 The Job Creation and Worker Assistance Act of 2002 3 Job Growth and Tax Relief Reconciliation Act of 2003 Sources: Office of Management and Budget; Internal Revenue Service; Congressional Research Service; National Bureau of Economic Research; Treasury Department; and Tax Foundation calculations.

[hripka]

Earned Income Tax Credit = current tax system loophole for poor taxpayers.
Prebate = ?FairTax? loophole for poor taxpayers.

Attempts to "manipulate" the prebate cannot succeed since the rate it is based upon is used throughout many of the the government's programs and any alteration would create havoc in far more than just the FairTax. It would also meet huge political resistance.

Hasn't stopped Congressional tinkering so far, has it?

I doubt any would enjoy having their tax rate raised.

Enjoy? Maybe not. Tax rate raised? Happens all the time.

That amounts to 20-25% of the income tax revenue now collected (and does not count avoidance, other evasion, or illegal income) and there are no studies that show anything like that non-compliance level of evasion with the FairTax let alone the truly massive amount now evaded (but not mentioned) with the illegal economy.

Your source for the 20-25% income tax avoidance?

The Tax Reform Panel REJECTED the 'FairTax' due to its high sales tax rate, which has never been attempted anywhere due to Massive Evasion. See also Bruce Bartlett on this at nationalreview.com .

HR25 hasn't passed yet. Who knows what loopholes will be in it.

KEY QUESTION: How do you think we got into this tax mess? There is a reason.

[hripka]

I understand how the 'FairTax' is supposed to operate.

Since you are in favor of the 'FairTax', I ask AGAIN: Which one of "those who would benefit" do you disagree with?

[hripka]

Regarding the FairTax: Assume I am purchasing an illegal item (drugs, prostitution, etc.)

1. Under a FairTax I don't pay tax on my income.

2. I don't think that the dealer/prostitute will be collecting ANY sales tax.

3. When the dealer/prostitute spends my money, then it will be taxed. But remember, I wasn't taxed in step 1, so wouldn't it be the same as now, just taxed at a later step?

[hripka]

You are merely demonstrating your lack of reading the FairTax bill. Those things are clearly not allowed under the bill and would be illegal activities.

You didn't answer the basic question: What is a corporate expense?

I understand that the 'FairTax' doesn't tax ANYTHING at a corporate level, only at final retail sales.

Are you telling me that supplies and meals provided by an employer are taxable under the 'FairTax'?

[hripka]

NNP is the measure that most nearly reflects the FairTax tax base of annual retail level production in the NIPA data series and from which federal revenue neutral tax rate for a comprehensive NRST can be estimated:

The Government can't even accurately calculate inflation!! See http://bigpicture.typepad.com/

While I don't trust US economy estimates down to the tenth of a billion, I went to the NNP website you refer to. For this example I will use their/your number, not quite understanding them.

For 2004, NNP is 10,352.8 billion. Federal spending is 2,500 billion. 2500 divided by 10352 is 24.2%

Again, using your numbers. BUT not counting the cost of the 'prebate' !

[ancient_geezer]

Federal spending is 2,500 billion. 2500 divided by 10352 is 24.2%

Sorry an invalid estimate, as spending is not the criteria, "revenue" received by the federal govenment is the criteria for "revenue" neutral calculations.

Revenue neutrality is with respect to replacing the taxes received by government under the tax law being replaced. It has nothing to do with how much government may have spent time.

For our proxy estimate of the revenue neutral FairTax rate in 2004, the following should be used.

Total fed revenues are used as they tend to offset for the additional amount that the FCA sales tax rebate would add beyond merely replacing income, payroll, and gift/estate taxes the FairTax legislation actually replaces.

Total federal revenues collected for 2004 were 1,974.8 billions
The estimation of fair tax rate using NNP and all government receipts in 2004 works out as.

1,974.8/10,352.8 = 19.1% tax inclusive
expressed as a tax exclusive rate that is 23.6%

 

An example for 2003 that we can check against an actual analysis:

Total federal revenues received amounted to 1868.6 billions,
NNP = 9,708.0 billions

1868.6/9708.0 = 19.2% tax inclusive,
expressed as a tax exclusive rate that is 23.8%

 

---

 

An example full analysis for 2003 can be found at the end of the following paper.

Tax inclusive rate (with rebate) works out as 19.3%,
expressed as a tax exclusive rate, that is 23.8%

I would say the estimated proxy rate, as compared to a full analysis rate with rebate is a fair approximation myself.

As can be seen, the estimated rate above is quite close to that of an actual accounting based on NIPA/GDP data series with all factors accounted for. Similar comparisons with other years hold up quite well as well, thus indicates total federal revenue divided by NNP is a useful proxy for estimating and demonstrating the relative change in fairtax revenue neutral rates with time:

 

http://www.fairtaxvolunteer.org/smart/tax_system.html at end of the page:

 

Table two: national FairTax rate calculation: 2003
Line	Description	FairTax base	Source
	Taxable item	Billions
1	Personal consumption expenditures	$ 7,760.9	NIPA Table 1.1.5, line 2
2	Purchases of new single-family homes	$ 310.6	NIPA Table 5.3.5, line 20
3	Purchases of new mobile homes	$ 7.1	NIPA Table 5.4.5B, line 40
4	Improvements to single-family homes	$ 132.0	NIPA Table 5.4.5B, line 42
5	Less: imputed rent on owner-occupied housing	$ 859.6	NIPA Table 7.4.5, line 3
6	Less: imputed rent on farm housing	$ 11.9	NIPA Table 7.4.5, line 5
7	Additional financial intermediation services	$ 83.1	Financial & risk Intermediation greater than NIPA definition
8	Foreign travel by U.S. residents	$ 39.6	One half of NIPA Table 2.5.5, line 110
9	Less: expenditures abroad by U.S. residents	$ 6.6	NIPA Table 2.5.5, line 111
10	Less: food produced and consumed on farms	$ 0.5	NIPA Table 2.5.5, line 6
11	State and local government consumption	$ 1,058.5	NIPA Table 3.10.5, line 47
12	Gross purchases of new structures	$ 213.4	NIPA Table 3.9.5, line 24
13	Gross purchases of equipment	$ 51.5	NIPA Table 3.9.5, line 25
14	Federal government consumption	$ 658.6	NIPA Table 3.10.5, line 12
15	Gross purchases of new structures	$ 15.5	NIPA Table 3.9.5, line 9
16	Gross purchases of equipment and software	$ 78.1	NIPA Table 3.9.5, line 10
17	Less: state and local government sales taxes	$ 343.9	NIPA Table 3.3, line 7
18	Less: government education expenditures	$ 414.7	Table 255, SAOUS 2003
19	Less: private education expenditures	$ 151.7	NIPA Table 2.5.5, lines 105 & 106
20	Expenditures in U.S. by non-residents	$ 86.7	NIPA Table 2.5.5, lines 112
21	Travel to U.S. by non-residents	$ 33.3	One half, SAOUS 2003 Table 1280
22	National retail sales tax base	$ 8,740.0
Revenues to be replaced
23	Income tax	$ 927.7	Dept. of Treasury; derived from Table B-81 ERP 2004
24	Estate and gift tax	$ 22.4	Dept. of Treasury; derived from Table B-81 ERP 2004
25	Payroll taxes	$ 717.8	Dept. of Treasury; derived from Table B-81 ERP 2004
26	Excise taxes	$ -
27	Total	$ 1,667.9
Revenue-neutral rate calculation
28	Tax exclusive rate (no rebate)	19.1%
29	Tax inclusive rate (no rebate)	15.9%
30	Base reduction equivalent for rebate	$ 1,746.1	Total consumption allowance for 109 million rebate units
31	Net tax base	$ 6,993.8
32	Tax exclusive rate (with rebate)	23.8%
33	Tax inclusive rate (with rebate)	19.3%

 

Personally I find the TaxFoundation data to be very useful in estimating the change of revenue neutral rate for the Fair Tax with rebate with time. For a quick and dirty estimate as a proxy for comparative purposes it does quite well.

[pigdog]

The prebate is hardly a loophole but integrated into the FairTax bill and it is avvailable to all. that is quite unlike the EITC which is only available to a few and therefore can be (and is) easily manipulated by politicians. My comments about the difficulty of manipulating the prebate - or even the FairTax rate itself still apply since they apply to all taxpayers rather than a few.

The source for the 20-25% non-compliance is the IRS themselves. I suggest you check with them. The tax panel ignored the FairTax since it is a politically motivated and crafted body heavily staffed by Treasury Dept. workerbees which Dept. has an $11 Billion budget for the IRS on the line. Perhaps you can't see that, though.

Loopholes??? Very few. I think it will pass in pretty much its present form - justifiably so.

I notice that you have no alternative to the FairTax but - like many of the other Status Quo Lovers - merely seek to attack it. It's actually shameful that you like the present tax system so greatly. Actually we got into this mess because of guys like you who are fixated on their own little perceived bene of the present system and cannot see beyond the tip of their nose as to how benefits could accrue to the entire country and not just yourself.

[pigdog]

I've told you before that almost all you have posted in that ridiculous win-lose list is utter nonsense. Go back and look up my posts; I've answered you more than once do you may as well stop repeating the same question - just read a bit.

[pigdog]

That's cute ... but wierd. All you have demonstrated is that the FairTax actually taxes the illegal economy more heavily (than does the income tax) by those in it spending the money you squandered with them.

You'll still pay just as much in FairTax when you buy your normal consumption unless you plan to cut back on your normal consumption so that the drug dealer can profit (illegally). You've gained nothing at all you see (except a life-threatening habit) while you and your dealer now pay much more in tax revenue that you ever did combined under the income tax.

No one ever said you had to be too bright to oppose the FairTax ... and you certainly aren't.

[pigdog]

Read the bill, pal ... I'm not about to sit here and interpret every half-vast scenario you can dream up. It's in the bill so make your own decision.

[hripka]

Why do 'FairTaxers' have this idea that THEIR idea is immune to change by Congress? How did we get into this mess that we have?

How can you accuse me of liking the current tax system? I have repeatedly said that the 'FairTax' will change everything since there will be different incentives.

[hripka]

Wow. My list was an attempt to very fair to the 'FairTax' argument. Now you are telling me that my list of WINNERS under the 'FairTax' is wrong?

There are winners and losers under ANY tax system. And I still have seen VERY LITTLE from 'FairTax' advocates about the very real danger of us having TWO tax systems, one on income and a new one on sales.

[hripka]

That's cute ... but wierd.

I see then that you have no answer to that one.

My point is that the current tax system taxes me under step 1. The 'FairTax' will not tax me under step 1, but there will be a tax paid during step 3. Since you say that you are against double-taxation, what is the real difference, especially in relation to the government?

The last time I posted that item about how the 'FairTax' taxes illegal activity, someone else started making funny comments about my habits, when I was only trying to make a point. He/she couldn't answer either.

And now you are lowering yourself to personal attacks? What's the matter, tax facts are too difficult for you??

[hripka]

Thank you then for agreeing with me.

[hripka]

That is an interesting table.

I am not sure how "imputed rent on owner-occupied housing" even applies?

Isn't an NRST on "Line 11 State and local government consumption" a circular event? Doesn't even the current system NOT have a level of government tax another level of government?

[ancient_geezer]

I am not sure how "imputed rent on owner-occupied housing" even applies?

It is part of the GDP calculations that must be removed for accuracy as that is not a part of retail sales, nor part of any tax base for that matter.

Isn't an NRST on "Line 11 State and local government consumption" a circular event? Doesn't even the current system NOT have a level of government tax another level of government?

The current tax system taxes government government consumption through contractor and employee compensation for services consumed by government.

We tax government today, and would under the Flat Tax, to not do so under a NRST, would provide a very large windfall to government on which it would use to increase its spending and size relative to the private sector. A condition that government has shown it is more than able, willing and infact determined to do.

 

Relative Shares of Economy
pre-1930	post WWII (1947)	TODAY (2004)

 

A fairly comprehensive discussion of the issues involved in an NRST not levied on government consumption (as an issue raised by the JCT) can be found in this PDF:

 

==>Prepared for Americans For Fair Taxation
By David Burton and Dan R. Mastromarco
The Argus Group: February 4, 1998

This report responds to Ken Kies’ letter to Chairman Archer of January 12, 1998. In his letter Mr. Kies propounds several objections to the Americans for Fair Taxation (AFFT) FairTax plan (FairTax) as raised by the Joint Committee on Taxation (JCT) staff. This memorandum addresses those objections with respect to three basic issue areas. They are:

•the revenue neutral sales tax rate,
•compliance and evasion issues, and
•the economic impact of replacing the current tax system with a sales tax.

Page 14-16

 

C. Government Value Added Should be in the Tax Base The Same As It Is In the base of the Income and Flat Tax Schemes

 

In the absence of a special rule, a sales tax would fail to tax government value added at any stage. In the absence of a tax on government payroll, therefore, the tax base would be much smaller than under either the income tax or the flat tax schemes. Assuming spending were held constant, this would effectively increase the relative size of government by the proportion of revenues relative to wages and government purchases that are foregone. The JCT may be incorrectly and inadvertedly increasing the size of the government.

 

We anticipate that one possible source of confusion on the part of the JCT is the tax treatment of government output. How should such output be taxed, if at all?

The GDP includes, of course, both government value added and private value added. Government value added is included at “cost”, which is primarily the wages paid to its employees. The income tax taxes income whether the source is government or the private sector, and by doing so, taxes government output. While the government pays its employees a gross amount and then withholds the income tax from their paychecks, we could, of course, just pay government workers a lower tax-free wage. This would accomplish the same objective. However, we choose not to do this: with the result that we have higher spending (from paying pre-tax wages) and higher tax revenue (from the income tax on those wages).

And it is important to note that the flat tax does tax government (and non-profit) output because government (and non-profit) wages are included in the tax base. To be consistent, the AFFT FairTax does so as well.

A pure subtraction method VAT (aka a business transfer taxes) would not typically tax government value added. The Hall-Rabushka flat tax variant is an exception, however. Unlike a normal subtraction method VAT, the flat tax allows a deduction for wages and then taxes wages at the individual level. In doing so, it also provides the mechanism for taxing government wages (while a normal BTT only taxes business wages by taxing receipts and denying the deduction for wages). Thus, the flat tax base is much larger than the base of a normal BTT (i.e. larger by the size of the government wages).⁶²

So today, both the income tax and the flat tax tax government output.

However, a sales tax, in the absence of a special rule, would, like a pure BTT, not tax government value added by employee wages. In the absence of a tax on government payroll, therefore, the tax base would be much smaller than under either the income tax or the flat tax schemes. Assuming spending was held constant, this would effectively increase the relative size of government by the proportion of revenues relative to wages and government purchases that are foregone. The FairTax taxes government value added in order to maintain the relative size of the government to the private sector, rather than increasing the size of the government.

Another way of looking at this problem is to examine it from two different perspectives: incidence forwards and backwards.

If we assume that consumption taxes are fully incident on the factors of production, then the return to capital and the return to labor will decline by the amount of the tax. As noted earlier, under this incidence assumption, tax-inclusive prices would not be higher but the return to workers and capital would decline. Thus, in the absence of a special rule, government workers would experience a windfall. Their consumption prices would not go up and their wages would go up by the amount of the repealed income tax but, since government value added is not taxed, their wages would not appear to be subject to downward pressure.⁶³

Taking the alternate incidence assumption, namely that the FairTax would be fully passed forward and borne by consumers, government employees would pay the tax just like private sector workers, since tax-inclusive prices would be higher by the amount of the FairTax. Government workers would, of course, have higher pre-tax wages, but the costs of purchasing goods and services would be higher by the amount of the FairTax. However, the inequity in our alternative incidence assumption redounds to the beneficiaries of government who would now be consuming a level of government services that is enlarged by the removal of the wage taxes formally imposed. We collectively would be getting the benefit of government (the Armed Forces, the Consumer Product Safety Commission, National Public Radio, or the JCT on Taxation) free of tax. Those who disproportionately benefit from government would disproportionately benefit from this effective increase in government spending. Or, put another way, we would have legislated a huge increase in the size of the government that is paid for by the private sector.

Another way of addressing this problem is to simply take the National Income Product Accounts and start calculating the tax base under the various consumption taxes. If one goes through this exercise to demonstrate the oft-repeated equivalence of the various consumption tax plans, it becomes clear that in the absence of a special FairTax rule regarding government, the flat tax has a broader base because it taxes government wages. Similarly, a pure income tax is broader not only by the amount of unconsumed capital income but also by the government wages amount.⁶⁴

In the context of a sales tax, then, an employer payroll tax on government wages simply achieves parity with the income tax and the flat tax. Failure to impose this tax would exempt government value added from tax for the first time and constitute a dramatic incentive to consume through the medium of government. The JCT seemingly recognized this in their pamphlet “Impact on State and Local Governments and Tax-Exempt Organizations of Replacing the Federal Income Tax,” p. 57-58, May 1, 1996. A sales tax should also be imposed on government purchases from the private sector to fully reflect the opportunity cost of that purchase.

Government enterprises (e.g. Amtrak, the Post Office) are a separate case. They can easily be put on equal footing by taxing their sales and exempting their inputs as if they were a private enterprise. If government (and non-profit) enterprises are not subject to tax, they will have a huge relative price advantage over private companies through cross-subsidization.

 

---

62. Even a normal BTT, however, taxes government purchases of goods and services from the private sector since the private revenues from those sales are includible in the taxable base.

63. Eventually, with free market forces, private sector workers and perhaps political pressure would bid the government salaries down. However, given the rigidity of government pay scales and rules against exchange this may take many years (i.e. government wages may be “sticky”). In the interim, the relative size of government will have increased.

64. Since the sales tax does not tax the “return” to government investment (i.e. later government consumption scored as government capital consumption in NIPA), using a tax prepayment approach that is equivalent in present value terms to taxing the returns is appropriate.