Posted on 12/05/2005 2:36:33 PM PST by Eaglewatcher
Imagine if all of these trillions of dollars were added back to the American economy. On top of that, imagine saving the $500 billion compliance costs every year. These two things would give a huge boost to the American economy. Fortunately, there is a plan to make this happen, a plan sponsored by Georgia Representative John Linder. The plan is called The FairTax, or H.R. 25. Part II of this paper will describe The FairTax.
Officially called the FairTax Act of 2005, the FairTax would do many things to simplify the way Americans pay taxes, including completely abolishing the Internal Revenue Service. The FairTax would replace many of the taxes Americans pay, including the individual income tax, the alternative minimum tax (AMT), corporate and business income taxes, capital gains taxes, Social Security taxes, Medicare taxes, the self-employment tax, estate taxes, and gift taxes (Boortz 74-5). The elimination of all of these taxes would allow workers to take home all of their paychecks. No withholding and no income taxes. That's right, people would get to choose when they had to pay money to the Federal Government, and that would be at the retail counter. Their money would not be forcibly taken from them.
Notice the word replace in the paragraph above. Many politicians tried using scare tactics in the 2004 election, telling the people that their opponents who supported the FairTax would be adding the FairTax on top of all those other taxes. This is simply not true (81-2). The FairTax would replace all of those taxes. The FairTax is neither a tax cut nor a tax hike, but an alternative method of gathering revenue for the Federal Government (75). Remember the 22-cents-out-of-every-dollar embedded taxes described in Part I of this paper? Take all of those taxes out, and institute a 23-cents-of-every-dollar consumption tax, and the prices of goods and services haven't changed much.
What is the FairTax? The FairTax is a proposed national consumption tax on new goods and services at the retail level. Only new goods are included for two reasons: First, goods should only be taxed once, not every time they change hands and second, taxing only new goods keeps things simple. Imagine the bureaucracy that would be needed for all people to keep track and correctly file their taxes whenever they sold their car, etc. We are trying to move away from all of that complexity!
In Part I of this paper, I mentioned the IRS tax code and how it exceeds 54,000 pages and 2.8 million words (Americans for Fair Taxation). Ordinary Americans do not have the time to interpret this abomination called the tax code. We have to pay others called CPAs (Certified Public Accountants) to do it for us. Think about this: we have to pay people money in order to pay the government money. How ridiculous! With the FairTax, businesses would just collect the consumption tax at the time of purchase, much like they already do in states where there is a sales tax. This saves time, and money. Americans will be paying the same amount of taxes, while not having to pay CPAs. More money in the pockets of Americans (generated by not having to waste time and money with CPAs) means that Americans will have more money to spend on consumer items, and thus will be creating even more tax revenue! Additionally, those 5.8 billion hours (Boortz 43) that I mentioned earlier will be spent on producing. When Americans as an aggregate spend 5.8 billion hours trying to pay the Federal Government money, they are not at their jobs or at home doing anything truly meaningful. They are, in essence, wasting time. With the FairTax, and without the IRS, those 5.8 billion hours would add to the economy, generating more income for people to spend, which would then generate more revenue for the government. Those hours would also allow for more quality of life, giving parents more time to spend with their kids, etc.
While companies are forced to make tax-decisions they are hindered in making economic and capitalistic decisions. Eliminating the income taxes, both personal and corporate, and instituting the FairTax would help businesses. This is especially true of small businesses.
"President Bush recognizes that supporting America’s small businesses is critical to ensuring continued job creation. Small businesses create two-thirds of new private sector jobs in America, employ more than half of all workers, and account for more than half of the output of our economy." (The White House)
Small businesses employ more than half of all workers and generate more than half of our economy. Wouldn't it make sense to help small business owners? Help them out, and what do you get? More employment and an extended production possibilities curve. What kinds of things hinder small businesses? Taxes, and more specifically, personal income taxes and self-employment taxes. Because small businesses are small, the owners typically pay taxes on the personal level or as small corporations. Because they are small, these taxes hit them much harder than they would a larger corporation. Eliminating these costs would allow all businesses, small and large, to focus their attention on producing goods and services, generating wealth for themselves and taxes for the government.
More people would be subject to this tax as well, thus generating more revenue for the government (I keep mentioning more revenue for the government; I know that the government needs to greatly reduce its spending, but that's another argument for another time). Who else would be paying into our tax system? Illegal immigrants and tourists. Think about it, under the current system, neither pay income taxes or Social Security taxes anyway, because illegals don't want to get caught, and tourists don't work here. With the FairTax, they would pay into the system with every purchase they made at the retail level. Some people dislike the idea that foreigners should pay into out system, but I don't and here's why: if they want the privilege of being in this country (whether working illegally or visiting legally), then they should contribute. Don't think for a minute that Americans don't pay Germany their Value Added Tax (VAT) when we buy their products.
The FairTax would also tap the large shadow economy of the United States. Whenever you buy the services of a landscaper, maid, house painter, or hot dog vendor, and you pay them in cash, it is not likely that they are reporting most if not all of that income, and this is known as the shadow economy. That income escapes the clutches of the Federal Government, but is that really fair? If you have to pay taxes on your income as a college professor, but I don't pay taxes on my income as a theoretical house painter, is that fair? The answer is no. Under the FairTax, we both keep all of our income, and pay taxes at the cash register. In his book, which I have cited often in this paper, Neal Boortz cites a 2000 survey claiming that the “shadow economy accounts for more than 10 percent if America's GDP. . .†(93 *). Maybe that kid who mows your grass doesn't pay an income tax on the money earned by his services, but he'll pay the consumption tax when he buys a new video game at Blockbuster.
Many jobs are sent overseas when American companies take their corporate headquarters and manufacturing plants there. Why would they move away? Under the current tax system, businesses are burdened by the regulations and costs associated with compliance. How much money is overseas? “[T]he 2000 Merrill Lynch & Gemini Consulting study World Wealth Report estimates that one third of he wealth of the world's high-net-worth individuals is held offshore. How much would that be? Try $11 trillion - $11 trillion sucked out of the American economy, all of it immune to the tax obligations you suffer every April 15†(Boortz 97). Think about the size of that number. $11 trillion is enough to give 11 million people a million dollars each. This $11 trillion is not in the American economy. This $11 trillion is not producing jobs in this country, nor is it investing in capital or technology in this country.
Let's start putting all of this together, assuming that the IRS has been abolished, and the 16th Amendment has been repealed. People get to take home their whole paycheck every week or two. Their employers can hire more people because they have more money and a higher production possibilities curve. The cost of goods and services stays about the same as before because the 23% consumption tax is about the same as the previous 22% embedded tax (that most people don't even know they were paying). The shadow economy is drastically reduced. Additionally, businesses from overseas begin to come home to this relatively tax-friendly environment, bringing with them even more jobs and capital. Sounding pretty good so far, right? Now for the Grand Finale: The Prebate.
Lyndon B. Johnson launched his War on Poverty in the mid-1960s, and so far, not much has happened. Let's try a new War on Poverty: The FairTax. With this newly implemented FairTax, lower-income workers are already getting to keep their whole paycheck. Most of them never paid any appreciable amount of income taxes, but now they are not having to pay withholding taxes either. They have more money in their pockets. Goods and services cost about the same as before, so already these lower-income workers are doing better than before the FairTax. Let's help them out even further. H.R. 25, or the FairTax, provides for a prebate on the basic necessities of life. A prebate would be a check from the government given monthly to all working Americans to cover their costs of taxes on essential goods and services at the poverty line. That's right, the government would give Americans, and we'll focus on lower income Americans, a check to cover the taxes needed to pay for food and shelter up to the poverty line (Boortz 85).
Think about this for another minute, not only would lower-income Americans have more money in their pockets, but the cost of taxes on goods and services (the bare essentials) up to the poverty line would be eliminated by this prebate. This would essentially lower the prices of these goods needed by lower-income workers. Here's how this all flows out: 22% embedded taxes are eliminated, 23% sales tax is implemented, all Americans receive checks to cover this 23% up to their determined poverty line, lowering the costs yet again. The combination of more income and lower costs would greatly increase the purchasing power of lower-income workers, and would do wonders for the anti-poverty movement.
The FairTax would allow all Americans to keep their whole paycheck, while cutting taxes on goods and services up to the poverty level. The FairTax would eliminate $500 billion of waste every year, putting 5.8 billion hours to better use. The FairTax would tap the purchasing power of both illegal workers as well as perfectly legal tourists. The FairTax would greatly reduce the shadow economy in our country. The FairTax would bring back $11 trillion to our country. The FairTax would utilize all of this to generate more money for the Federal Government. The FairTax would grow the economy and help lower-income Americans. The FairTax is “about making April 15 just another beautiful spring day. . .†(Boortz XV). The FairTax Book by Neal Boortz and Congressman John Linder is a must-read, both informative and entertaining.
Bibliography Boortz, Neal & John Linder. The FairTax Book. New York: HarperCollins Publishers, 2005.
* “Friedrich Schneider and Dominik H. Enste, “Shadow Economies: Size, Causes, and Consequences,†Journal of Economic Literature, 38 (March 2000), pp. 77-114.†Cited in Boortz' The FairTax Book, page 93.
McConnell, Campbell R. & Stanley L. Brue. Economics: Principles, Problems, and Policies. 16th ed. McGraw-Hill/Irwin, 2005. Online. Americans for Fair Taxation. . Online. Tax Foundation. . Online. The White House: President George W. Bush.
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Gee, thanks for your apology. I've read more of aAlan Garner's papers that you will ever find and he still remains a government hack of an economist and is one of those who falsely claims there are only two scenarios for prices with the FairTax - both of which are incorrect.
Since you think that reading guys like this is "research", I'd say you should lose your shirt investment-wise before very long. Perhaps Slumlord Estates is just the ticket for you.
Don't bother giving links to this sort of "economist". His opinions are grounded in orthodoxy and merely rehash what others have already put forth. He hasn't had an original worthwhile thought in years.
I apologize if that's beyond your ken.
i'm not on board with your point of view as i think a nrst would be beneficial in the long term (click my ID for my view) but the more these people try and defend themselves the more they push me into an anti-fairtax category. any real problems get called cherry-picking or, better, "I'll not bother argue with that". there seems to be no understanding of two very important points: existing capital/assets, and the inability for both wages to rise and prices to fall by amounts that can only pull $ from thin air.
Isn't it amazing that we are talking about the privacy compromises of the FairTax, rather than the current system, which are exponentially greater?
Exactly!
I've been so put off or dejected by the invasion of my privacy and the IRS considering me guilty until proven innocent that if given the opportunity to not opt-in, I'll not sign up for the prebate.
yes, of course, there is a third one where prices go down AND wages go up. it's all clear now. the poor get rich, the rich get richer, the government gets fatter, everyone is happy.
admit that prices aren't going down 22% if workers refuse to give up what is currently withheld from their paycheck back to the corporation.
Nonsense, Looey, I've shown several times that there is sufficient room in busines income taxes that become embedded in price for prices to decline regardless of the payroll/withholding tax.
And your misinformation about the "unelected bureaucrats" being able to raise the tax rate is something that has been refuted with you many times. Are you just hoping to fool some newcomers? If they read the entire portion of he bill dealing with it, the meaning becomes crystal clear and not at all as you postulate.
I've never said that prices would go down by 22%, but that they would go down while wages go up. There is plenty of room in the hidden tax structure of cascading, embedded business income taxes that increases the prices of things that we buy - and that's outside of payroll/withholding taxes. In addition there would be some compliance cost savings as well.
I certainly believe that workers will receive their full gross wages AND that prices will fall. Garner, et al never allude to this as even a possibility but it is the most likely outcome of all. Whether the amount of price decline is 15, 20, or 25 (or more) I don't know. But I certainly think this will be the most likely outcome.
The fact that you choose not to believe this actually encourages me that it is correct since you have such bizarre outlooks on many other economic matters. I don't expect workers to give up ANY of their wages. Apparently you do. So that's another error for you since wages are far stickier than you seem to realize.
It is therefore accurate to say that the prebate was developed as the simplest mechanism to administer, as well as the fairest way to ensure that a National Retail Sales Tax would not be regressive.
Amazing isn't it, that people polled would natural arrive at a conclusion that is aligned with the constitution.
Each person has their wants and they cover a huge array of things that can be bought. On the other hand, each person has needs that are the same basic necessities of life. The prebate affords each person their needs without taking food from their mouth to pay for government. Each person treated equal under the law.
Those that assert the prebate is welfare are flat out wrong. The prebate is not "to each according to his needs." The prebate is not a reflection of how much a person has paid for government protection of his life and property rights.. The prebate is each person, thus all persons, regarding federal taxation, treated equally under the law as per the constitution.
In time the prebate will become unnecessary and eliminated.
if i make up a scenario you call in made up. if i give you a real one you call it cherry picked. why can't you defend FairTax? i can defend it better that you've done so far.
here's another made up scenario--- to give you hint: i'm looking for how prices drop while wage increase.
lets say i'm a provider of some service and i charge $50/hr and work 2000 hour a year... for a gross of $100,000. today i pay all my assorted taxes out of that and jump through hoops to make sure as little of it is taxable as possible, which i hate having to do.
now under fairtax i have to charge my clients a 30% tax on my service... $65/hr. if i do that i can keep my full earnings now, all $100,000. my wages went up. thank you fairtax.
--- OR --- (not and)
my clients don't want to pay 30% more i have to absorb it. so now i can only charge $38.5/hr, or 77,000. huh!! look at that... that's about how much i made before, less actually, i was really good at expensing things.
i have to give up the taxes i used to pay the government for the price of my service to remain stable.
before I charged $50 and paid, say $10 of it to the government after all my expenses. after, i charge $50 and give $11.5 to the government as a sales tax receipt -- but guess what? now i have to pay a 30% federal tax on all the things i buy and services i hire too for myself personally. i hope they were all as nice as me to reduce their salaries.
ok now an attempt at your AND scenario... umm, well, i can't -- maybe you can help... show me how to make $100,000 (my original gross income) working 2000 hours charging $38.5/hr.
And until the Sale Taxers are honest about those two points, it is a no go. People on fixed incomes and rely on accumulated assets are screwed, and their analysis on prices and wages are pure fairytales. Those are two of the biggest areas, although many of their other claims are also grossly exagerated. A national sales tax has some promise, but the way they market it is beyond pale.
ok fine. continuing on my 408 rant. let's see how much of that $50/hr fee I as a service provider can reduce and keep w/o affecting my salary.
so i had $100,000 in gross receipts and lets say i was able to expense away a third of it. so now i've got $67,000 to pay social security tax on it -- even though i paid both halves as an independent i'm going to give back the "employer" half to my customers... 7.65% on 67k = 5125.
so now i'm charging $47.44/hr or $61.67 w/nrst.
i'll be generous and trust my expenses will drop that much too and i'll throw in my $250 tax preparation fee for good measure. now my rate drops down to a measly $46.05 or $59.87/hr for my customers.
so i get my full earned income now (or nearly so, minus about 8k), and my customers get and 19.74% increase in the cost of my services
wait a minute if my customers are getting an almost 20% increase in costs for what i provide --- how can i assume my expenses are going down??? hmmm... bad assumption.
yeah, i'm bizarre.
Since you've now completely demonstrated your wish to ignore any of the likely economic results of the FairTax and since you tell me you ".. can defend it better that you've done so far ..." why don't you just go right ahead and do that?
Your assinine hypotheticals are not worth the paper they're printed on anyway. Or, since you refuse to admit any of the probable economic events the FairTax will trigger, why don't you do some research yourself and figure it out??? We've already seen how accurate your "analysis" can be with Slumlord Estates.
A hint for you --- use all three sides of your brain to figure it out. There are several gross errors in your hypothetical (and I do mean gross). I'm done helping such a fool who offers nothing but more nonsense hypotheticals and, like a child, attempts to insult me after requesting my help.
Figure it out - the clues are all there. If you want further help from me you'll have to pay for it since goobers like you are fair game for us service providers, right??? It's astounding that you cannot really divine the answer.
Or perhaps you should ask your hero Alan Garner?
"... yeah, i'm bizarre ...".
Sad but true ... ignorant, too.
i'm not on board with your point of viewIt's not a point of view...it's a fact.
`(d) OLD-AGE, SURVIVORS AND DISABILITY INSURANCE RATE- The old-age, survivors and disability insurance rate shall be determined by the Social Security Administration. The old-age, survivors and disability insurance rate shall be that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 12.4 percent tax on the Social Security wage base (including self-employment income) as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act. The rate shall be determined using actuarially sound methodology and announced at least 6 months prior to the beginning of the Calendar year for which it applies.
`(e) HOSPITAL INSURANCE RATE- The hospital insurance rate shall be determined by the Social Security Administration. The hospital insurance rate shall be that sales tax rate which is necessary to raise the same amount of revenue that would have been raised by imposing a 2.9 percent tax on the Medicare wage base (including self-employment income) as determined in accordance with chapter 21 of the Internal Revenue Code most recently in effect prior to the enactment of this Act. The rate shall be determined using actuarially sound methodology and announced at least 6 months prior to the beginning of the calendar year for which it applies.
`(f) ASSISTANCE- The Secretary shall provide such technical assistance as the Social Security Administration shall require to determine the old-age, survivors and disability insurance rate and the hospital insurance rate.
`(g) FURTHER ALLOCATIONS-
`(1) OLD-AGE, SURVIVORS AND DISABILITY INSURANCE- The Secretary shall allocate revenue received because of the old-age, survivors and disability insurance rate to the old-age and survivors insurance trust fund and the disability insurance trust fund in accordance with law or, in the absence of other statutory provision, in the same proportion that the old-age and survivors insurance trust fund receipts bore to the sum of the old-age and survivors insurance trust fund receipts and the disability insurance trust fund receipts in calendar year 2004 (taking into account only receipts pursuant to chapter 21 of the Internal Revenue Code).
`(2) HOSPITAL INSURANCE- The Secretary shall allocate revenue received because of the hospital insurance rate to the hospital insurance trust fund and the Federal supplementary medical insurance trust fund in accordance with law or, in the absence of other statutory provision, in the same proportion that hospital insurance trust fund receipts bore to the sum of the hospital insurance trust fund receipts and Federal supplementary medical insurance trust fund receipts in calendar year 2004 (taking into account only receipts pursuant to chapter 21 of the Internal Revenue Code)
Price reductions be damned. If the Fairtax is going to attempt to extract 15.3% of the wage base through a sales tax (regardless of what prices are) but the employee/consumer is only paid his/her half, who in "your point of view" would be the loser?
in other words "i can't answer that"
which appears to be the standard response for any real world examples.
you'd much rather stay in your hypothetical world where you can make up numbers.
"Your assinine hypotheticals are not worth the paper they're printed on anyway." ... "gross errors in your hypothetical" ... "nonsense hypotheticals "
that seems to be your standard response to these real world scenarios. can you really not defend fairtax against a real situation?
you claim the prices contain 15, 20, 25% of "cascading, embedded business income taxes" and that will be removed under fairtax. are not most americans employed by small businesses? i'm trying to use myself as an example for you to defend fairtax to me. (you can claim i exist in a hypothetical world all you want, that doesn't change reality.) if i'm an independent contractor making 50 or 75 or 100/hr with no significant material costs to providing those services and i then have to charge 30% tax on them then please show my how i can keep my gross wages and reduce my billing rate by 15, 20, 25%?
same with the real estate investment. calling it slumlord all you want does not change reality -- i live in an area where average rent is $550-$600/mo and houses average in the 190s. my wife is in real estate so blabber on about hypothetical -- it happens day in and day out. her partner has hundreds of properties in the area, most heavily leveraged but he's making a very decent living off of it. that is not an anomoly nor is it hypothetical. and from the research i've done fairtax does present problems for asset holders and people who make money off of assets/capital -- its not very 'fair' to them and many fairtax supporters seem to be willing to admit that.
"Figure it out - the clues are all there."
oh, darn, i forgot to sign up for my voluntary prebate... oh wait, do i have to pass that on to my customers toooo. oh, what does that come out to? maybe about $0.75/hr.
"I certainly believe that workers will receive their full gross wages AND that prices will fall. Garner, et al never allude to this as even a possibility but it is the most likely outcome of all. Whether the amount of price decline is 15, 20, or 25 (or more) I don't know. But I certainly think this will be the most likely outcome."
let me break that down: "I certainly believe", "likely", "I don't know", "I certainly think", "likely"
and i'm the one living in hypotheticals?
if my customer's expenses are increasing by 20% so I can keep my full earned income for services rendered does that not cascade in the same way you claim "embedded business income taxes" to cascade?
you cannot make money out of a revenue neutral system, all you can do is move it.
correction: compliance costs are the only money to be extracted out of a revenue neutral system, all the rest is just shuffled around.
in the end even the compliance costs are just a shuffling -- the millions of salaries that get paid for the sole purpose in aiding compliance is where that money is coming from. (and i'm happy to see it go, it is a millstone around the neck.)
"There is plenty of room in the hidden tax structure of cascading, embedded business income taxes that increases the prices of things that we buy - and that's outside of payroll/withholding taxes."
"Whether the amount of price decline is 15, 20, or 25 (or more) I don't know."
ok then, let's follow your cascading business taxes on a product based business instead of a service business...
we'll track the cost of the product and the amount of tax in the product.
company 1 makes widget X. they sell them to a distributor for $12. the raw materials comes to $8/ea, and $3 of labor goes into each one. on top of that there are other general business expenses that come out to $500k. it is a volume business - they sell a million of them a year. so they expensed $11.5 of the product and pay 30% tax on the remain $500k profit. so at this point X's cost = $12 and has $0.15 of embedded tax (150k tax/1mil units).
company 2, a distributor, obtains 200,000 X's for $12 ea and sell it to retailers for $15. they store/ship etc and move a lot of volume of many products so their profit margin is pretty small $1 ea after cost and expenses. again we'll use 30% tax on that for simplicity. so now X's cost is $15 with $0.45 of embedded tax (60k/200k units + $0.15).
company 3, a retailer, sells 10,000 X's a year obtained from company 2 for $15/ea. they sell them for $20. making $5/ea before expenses. the have asset depreciation, employees, etc., etc. and after taking all of that out for all the products sold by this retailer it can figure that it made $1.50 on each one (i'm being real generous here). $15,000 profit at 30% tax is $4,500 or $0.45 ea. plus the previous $0.45 comes to $0.90/ea.
so the consumer is paying $20 for widget X and it has a $0.90 business tax built into it. let's further assume that tax compliance costs 10% of the tax itself so now we're up to $0.99/ea or 4.95%.
so a product that is $20 and cost $11 to originally manufacture ends up having business taxes and compliance costs of about 5% in this scenario. and i am being generous in the tax amounts throughout the scenario.
of course different types of products are going to be way different than this. this discribes a retail product coming out of a walmart or a walgreens. high profit margin items are going to have higher embedded taxes.
i'd like to see your example where they approach 15% or 20% let alone 25. and show how that could be used to derive an industry average of 15% or better.
"People on fixed incomes and rely on accumulated assets are screwed, and their analysis on prices and wages are pure fairytales."
People with accumulated savings invested in the equities of US companies would do EXTREMELY well under the FairTax. However, we have been through this repeatedly on prior threads and I'm sure you will dismiss that as a "fairy tale".
You have to understand pigdog's idea of cascading. $1 of tax at level one gets multiplies by 30 percent profit at each level, so it becomes about $6 by the time it reaches the consumer. Of course what pigdog is assuming is that each level of business is will to make less money, while at the same time employees are taking home more money and prices are going up. Just more smoke and mirrors to try to make the fairytax look like a fairytale. Once the lid got blown off their 22 percent embedded tax lie, they had to do some rationalization.
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