Would the FairTax Raise or Lower Marginal and Average Tax Rates

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

[lewislynn]

Back to that again are we? Who has no clue?

China is set to be world’s ‘fourth largest economy’

It must be a result of them buying all that stuff we're manufacturing.

[groanup]

http://www.census.gov/indicator/www/m3/

http://www.management-issues.com/display_page.asp?section=research&id=2795

http://www.deloitte.com/dtt/research/0,1015,sid%253D2222%2526cid%253D100752,00.html

http://www.epinet.org/content.cfm/briefingpapers_bp144

[groanup]

You could look up all this stuff yourself but I thought I'd share it with everyone.

[PubliusMM]

There is a calculated (Lindner and Boortz)income tax component in all new goods and services transacted in the US domestic marketplace. Granted, a healthy portion of those goods or services may have their origin outside of the US. However, they are imported, they are warehoused, they are subsequently wholesaled and distributed; generally by US enterprises. Each step in that supply chain is a commercial endeavor planning to make a profit. In addition, they employee staff and employees to one degree or another. The economic planning that sets prices, AT THE RETAIL LEVEL, then, by default bears the burden of passing along all those costs (mostly labor costs)to the end consumer. By taking out ALL of the income tax implications, we have an immediate 'cushion' in the pricing structure of approximately 20% to 26%. This is reflected in all goods and services transacted in the marketplace.
Interestingly, the Fair Tax plan is specific, and is collected only at the point of final sale to the end user. It is important to note that the Fair Tax is not a VAT. The implication, obviously, is that there is NO tax paid/collected on goods that represent 'raw materials'. However, the office supplies used in business, the utility services, and so forth, would be subject to the FT.
I mentioned benevolent greed in my earlier post. That mechanism is one of the prime movers in pricing structures. No business person in their right mind would pass up a chance to snag market share by dropping prices. That pressure, alone, would be sufficient to drive prices back by the amount of the currently included income tax burden embedded in all the raw materials used in the business, once the FT is in place.
It seems to me that the end result of enabling the Fair Tax would be a very short bubble during which prices would be in flux, while businesses work through existing inventories and incorporate the new model into pricing structures. Subsequently, prices would stabilize over another short period of time; to an equilibrium point.
Another point of your post discusses the international sources of many of the goods in our economy. We must believe that there is some economic benefit to businesses to locate manufacturing outside the US, or to source goods from beyond our shores. Of course, that benefit is net landed cost into the US, compared to the cost of manufacturing the same goods domestically. The Fair Tax, by removing the income tax burden built into current business models would represent an immediate 20-26% improvement to the cost structure, compared to the current cost of those same imported goods. While not every industry that currently imports would see immediate dollar for dollar comparability. I believe that the FT would, in fact, go a long way to making US goods more competitive in the world marketplace. The upshot would be better competitive strength of domestic goods, globally.
Another plus, here, is that the money that is currently being pushed offshore to avoid income taxes would, in great measure, now be returned to the US. This would soften the money markets, bolster investment capital, and reduce interest rates. A large portion of these returning funds would be dedicated to research and development of new products and whole new industries. Perhaps, even, we could ultimately develop alternative energy sources that would reduce our dependence on foreign oil, with all the attendant downside.
You mentioned service industries, too. Service industries work on pricing structures, just like hard goods industries. In the service sector, though, the single largest component of cost is the labor paid to make the service available to the market. Current service employers are burdened with the 7% FICA tax (also paid by the employee), plus the anticipated 15% or more in anticipated income taxes to be paid on 'profits'. By removing these components, the Fair Tax would allow the employer to better plan at lower cost, which would yield lower cost to the consumer, ahead of the embedded Fair Tax, which would take the cost (to the consumer) back to near current levels, but with no income tax to be paid on profits (until the business spends some money on new goods and/or services, anyway).
You wrote: "If a domestic manufacturer/business strips away "the income tax implications of the current commercial economic model" s/he would then have to deal with the 30% sales tax implications (price increases) at the other end...simply manufacturing something cheaper only to be heavily taxed at the other end is hardly a solution."
Stated simplistically, your argument looks valid. However, if you also realize that ALL the other goods and service you consume are on the same level playing field, and we get past the 'bubble' I mentioned earlier, you would see that you will be paying very close to the same as you are paying currently, with the added benefit of no income tax on your profits (or the full boat FICA, over 14%). So your notion of "heavily taxed at the other end" doesn't well hold up to closer examination.
The Fair Tax model addresses your very real concern.

[groanup]

I'm going to read your post, believe me but I think I'll format it first.

[groanup]

I missed this one:

Here's what I know based on the law. From day one I would have to remit "23% of the gross payments" to the government and then I'd have to pay another 23% of what's left when I want to spend it on new stuff.

If you have a service business then the 23% that you "claim" you'll pay is not an obligation of you at all. It is an obligation of your clients. Your obligation is to collect it and remit it. Your net is unaffected.

The 23% of what's left would be up to you to spend. As it stands now, you have no choice. The blood is sucked out of your income without any choice on your part.

[phil_will1]

"A sales tax and a flat income tax (at the same rate with the same deductions) are 'economically equivalent'."

That is one of the more misleading postings that I have seen on FR recently. Here's why.

First, a sales tax and a flat income tax are forms of taxation, not specific proposals. You cannot measure the impact on the economy of a taxation form, except in the most general conceptual way. Once you define the specific proposals, then you can compare their impact on the economy.

Secondly, although sales tax supporters have generally coalesced around the FairTax proposal (HR & S 25), the same cannot be said for flat taxers. In fact, if you ask many flat taxers what version of the flat tax they support, many cannot answer because they aren't familiar enough with the subject to understand the differences between the various flat tax proposals. The leading flat tax proposal in the house, for example, is the Burgess bill, which I believe is what Steve Forbes advocates. The Burgess bill does not replace a single line of the current mess we have now; it simply superimposes a flat tax option on top of that mess (for individuals only, I believe). I don't know how you could estimate the economic impact of that proposal, since no one knows how many people would elect the flat tax option. Even if you could, there is no way that proposal would duplicate the economic impact of the FairTax. Even Rep. Burgess, when testifying before the budget committee a year ago, said that he didn't know if his bill was revenue neutral or not.

In addition, some of the FairTax's main economic benefits are certainly not matched by any of the flat tax proposals that are out there. For example, by eliminating payroll and corporate income taxes, the FairTax would create price shifts which would make US produced goods more in demand both here in the USA, as well as overseas in foreign markets. No flat tax proposal I am familiar with eliminates those imbedded taxes and therefore would not shift consumer preferences to the degree the FairTax would. Also, because of the migration of SS and Medicare taxes from a payroll base to a broad general tax on the entire economy, the FairTax would address the biggest problem with those programs, which is the demographic time bomb. If we double the size of the US economy over the next 15 years (as Tom Delay has proposed as a goal with tax reform being a cornerstone of that), then we double the base from which we draw SS and Medicare taxes. There is no way that happens with a payroll based system.

Those are just two of several ways that the FairTax is clearly not economically equivalent to any of the flat tax proposals which are out there now.

[phil_will1]

"As I suspected, this is bought and paid for research by the Americans for Fair Taxation."

In the past, your criticism has been that the sales tax studies weren't published in respected economic journals and therefore were't subject to peer review. I guess you have to shift your attack mode now, huh?

So how is the Nightmare Tax coming now? Any economic reports coming out that we can look for? I'm sure they won't be paid for by supporters of the Nightmare tax.

[phil_will1]

"Think maybe CSR and KMEF are in cahoots too?. Looks alot like an international conspiracy to me."

LMAO!!

[phil_will1]

"Even more paid for results. I guess if the honest economists aren't giving the results you want, buy your own."

Now he is attacking the integrity of the economists who are publishing peer reviewed studies in reputable economic journals. I suppose the economists who reviewed the articles prior to publication are disreputable, also. The SQLs are getting desperate. There is a conspiracy everywhere they turn.

[phil_will1]

"Relatively speaking almost nothing is manufactured here anymore,"

"No one said anything about a dead or even stagnant industry..."

LOL ... right, LL, whatever you say.

[phil_will1]

"If you have evidence to suggest otherwise I'll be glad to consider it."

How noble of you.

[Your Nightmare]

Now he is attacking the integrity of the economists who are publishing peer reviewed studies in reputable economic journals. I suppose the economists who reviewed the articles prior to publication are disreputable, also. The SQLs are getting desperate. There is a conspiracy everywhere they turn.

I don't think this paper has been published in a peer-reviewed journal, let alone a reputable one. It's a working paper. This what the NBER has to say about working papers:

"NBER Working Papers have not undergone the review accorded official NBER publications; in particular, they have not been submitted for approval by the Board of directors. It is intended to make results of NBER research available to other economists in preliminary form to encourage discussion and suggestions for revision before final publication."

You FairTaxers just can't help lying.

[lewislynn]

For example, by eliminating payroll and corporate income taxes, the FairTax would create price shifts which would make US produced goods more in demand both here in the USA,....

Yea there's nothing like a 30% price increase at the register to increase demand for your product.

[lewislynn]

LOL ... right, LL, whatever you say.

How noble of you.

Thanks, when the rebuttals are personal it validates my point(s).

[lewislynn]

Now he is attacking the integrity of the economists who are publishing peer reviewed studies in reputable economic journals.

I wasn't aware that economists lost integrity by accepting pay to do a study....Paying an economist to study your own plan however is questionable because...well, you're paying him to study your plan.

In all honesty, without coming out and saying it he proved the 23% rate is NOT revenue neutral because of the "cost" of the progressive rebate. Which is really funny because the tax "cost" of the progressive rebate is a result coming from the same phoney group who wrote the plan claiming to eliminate "tax costs".

[lewislynn]

Seeing as FairTax.org are the authors and originators of the bill would you expect Kotlikoffto to request information from them

I hope not if this is the kind of (false) information he's given from Karen Walby the Fairtax research director....

I find it interesting that Jane Gravelle of the Congressional Research Service and and Alexi Sluchynsky from the Kosovo Ministry of Economy and Finance were involved as well. That is good information to know.

Maybe they're Scientologists too.

[ancient_geezer]

Interesting comment, it says more about you than the FairTax legsislation.

Better keep a guard dog around, might be a scientologist under your bed too, Along with all the other things that go bump in the night.

[phil_will1]

"Yea there's nothing like a 30% price increase at the register to increase demand for your product."

Yea boy, there's nothnig like a deliberate distortion to convince people that we have a terrific tax system already, huh, Louie?

[AmusedBystander]

But given that government needs to exist and spend some amount, it needs a way to collect taxes.

If the government ever gets around to passing your tax, you can bet it will raise revenue for the government higher than what they realize now. They'll always find a need for a surcharge to the base rate or a deduction or an exemption and pretty soon it will be worse than the present system.

Why encourage the government to find another way to tax us?