Would the FairTax Raise or Lower Marginal and Average Tax Rates

National Bureau of Economic Research ^ | December 2005 | Laurence J. Kotlikoff

[ancient_geezer]

Looks like a new economic report specifically about the FairTax legislation has been published.

[ancient_geezer]

A Taxreform bump for you all.

If anyone would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:

• search: "national sales tax" OR "national retail sales tax" OR "fairtax"

[SolidSupplySide]

The FairTax’s effective marginal tax on labor supply is 23 percent.

Oh. The Fair Taxers won't like this! Someone is admitting that the FairTax is effectively a 23% income tax! This is because a sales tax and and income tax can be structured to be "economically equivalent".

[SolidSupplySide]

Someone is admitting that the FairTax is effectively a 23% income tax!

23% of GDP is a whole lot of money!

[ancient_geezer]

This is because a sales tax and and income tax can be structured to be "economically equivalent".

Ahmmm, "economically equivalent" just means they bring in the same amount of revenue to the govenment.

Any tax system can be made economically equivalent to any other tax. It just needs to be designed to be revenue neutral.

[SolidSupplySide]

Ahmmm, "economically equivalent" just means they bring in the same amount of revenue to the govenment.

This is false. "Revenue neutral" means bringing in the same amount of revenue to the government. "Economically equivalent" means they impact the economy in the same exact way.

Any tax system can be made economically equivalent to any other tax. It just needs to be designed to be revenue neutral.

I suppose any kind of tax can be "revenue neutral". A city can reduce property tax and raise sales tax so that there is no change in revenue. But there will be economic effects of reducing property tax and raising the sales tax. Property ownership becomes more desirable. Economic activity becomes less desirable. Our "revenue neutral" changes in property tax and sales tax are not "economically equivalent".

[KarlInOhio]

Is that supposed to have been a surprise? If I make $1 and spend $1 more under the FairTax, I pay 23% of that to the feds. If I decide to save it, the feds get nothing now.

On the other hand if I make $1 more now I pay $0.3265 more to the feds, plus my employer pays another $0.0765 for a total tax rate of 40.3% whether I spend or invest it.

[Recon Dad]

What happens to the present sales taxes we pay on purchases imposed by cities and counties?

[ancient_geezer]

23% of GDP is a whole lot of money!

True, 23% of GDP may be a lot of money.

However neither Federal revenues, nor the FairTax is 23% of GDP. Both are lower than 23% of GDP.

A nice try as misdirection however.

[ancient_geezer]

"Revenue neutral" means bringing in the same amount of revenue to the government.

It means bring in the same amount of money to government as the tax law it replaces would.

If government gets the same amount of money as it would under the tax law it replaced, the economy gets the same as it would as well. That is revenue neutral and economically equivalent.

[SolidSupplySide]

However neither Federal revenues, nor the FairTax is 23% of GDP.

This is true. In recent years, federal revenues have be 21% of GDP.

See table 4

This is the amount that the FairTax is intended to generate. It is a little less than the 23% rate due to the quirky rebate scheme. (The rebate scheme serves no economic purpose. It exists only to make the rate progressive.)

Notice that in recent years that the federal share of GDP has decreased. That is the result of the Bush tax cuts. We are getting more revenue on a lower percentage because the economy has grown. FairTax proponents have not adjusted their claim to 21% of GDP. In effect, the adoption of the FairTax would be a tax increase over today's rates.

[willyd]

Well...of course that would stay...as would some part of our income tax as well. Any money saved by disbanding the IRS would of course not be passed along to us in savings. Instead it will be spent by politicians to benefit the greater good. Of course the rate would need to increase over time. At least it would finally provide a way for our government to finally tax frequent flier miles.

[ancient_geezer]

What happens to the present sales taxes we pay on purchases imposed by cities and counties?

The FairTax legislation is a replacement for federal income and payroll taxes. As federal law, it cannot address state or local govenment.

As far as impact, the only factor changed is when federal tax dollars are taken from you, before you can spend today, or when you spend under the FairTax.

A retail sales tax gives you the first option of using your money, save and invest without tax, or spend and pay tax.

And income tax takes the dollar before you can save or invest.

[SolidSupplySide]

If government gets the same amount of money as it would under the tax law it replaced, the economy gets the same as it would as well. That is revenue neutral and economically equivalent.

You seem to be caught in static analysis. You cannot see that reducing property tax and increasing sales tax will affect the decisions of economic participants.

A flat income tax and a sales tax will certainly change the behaviors of economic participants over today's income and wealth tax. But in steady state, a flat income tax and a sales tax will affect economic participants in the same exact manner. The only difference is that a sales tax has destructive consequences at transition due to the necessary increase in money supply.

[ancient_geezer]

Notice that in recent years that the federal share of GDP has decreased. That is the result of the Bush tax cuts. We are getting more revenue on a lower percentage because the economy has grown. FairTax proponents have not adjusted their claim to 21% of GDP. In effect, the adoption of the FairTax would be a tax increase over today's rates.

 

As the bill stands at present, you are correct. As the true revenue neutral rate should be closer to 19% taking the Bush tax cuts into account. Howerver, since the Bush tax cuts have not been made permenant and they all expire by 2010 the bill has not been adjusted for obvious reasons.

I would suggest you get on the ball and make sure those tax cuts are made permanent. To do so will drop the FairTax rate considerably.

 

The 23% rate is based on pre-1999 tax and NIPA/GDP data when the legislation was first introduced, refer to the CATO's description of Calculating the Tax Rate.

A more current calculation based on current tax law (Bush tax cuts in effect 2003) is provided below:

 

http://www.fairtaxvolunteer.org/smart/tax_system.html

 

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%

[Recon Dad]

Oh, and that's when we would be offered deductions!

[SolidSupplySide]

As the bill stands at present, you are correct. As the true revenue neutral rate should be closer to 19% taking the Bush tax cuts into account.

Thank you for recognizing that the FairTax is not revenue neutral. It is a tax increase.

[willyd]

Right...it's like a shell game...give me $30 and I give you back $5...now give me that $5 and I'll give you back $2...now give me that $2 and I will give that to someone else.

[groanup]

GDP includes busines investment and inventories. Neither are taxed under the NRST.

http://www.colorado.edu/Economics/courses/econ2020/section6/GDP-components.html

[SolidSupplySide]

GDP includes busines investment and inventories. Neither are taxed under the NRST.

You are misinterpreting your link. GDP only includes economic activity, not assets such as inventories. Your link clearly shows that GDP includes CHANGES IN inventory. If businesses push more inventory out the door than it receives, that is an increase in GDP, and a sales tax will capture it.

A flat income tax does not tax inventories or business investment either. That's why I said a sales tax and a flat income tax are economically equivalent.