Posted on 01/11/2006 11:59:10 AM PST by Eaglewatcher
There are essentially three tax reform proposals being considered by Congress. There’s Rep. John Linder’s (R-GA) FairTax, the flat tax, and the politically (though not popularly) preferred method of incrementalism.
Before we dwell on the differences between the flat tax and The FairTax Book co-authored by John Linder and myself, let’s acknowledge one political reality illustrated by the success of both The FairTax Book and Steve Forbes’ Flat Tax Revolution: the people of the United States are ready for bold and decisive tax reform NOW. They don’t want the incremental approach. The FairTax Book would not have debuted No. 1 on the New York Times Bestseller List if people were disinterested in wholesale tax reform.
Pleasantries aside, let’s illustrate the superiority of the FairTax plan over a flat tax. Flat tax advocates propose a flat 17% tax on all earned income with just a few allowable deductions. Nice try, but we’ve been there --- done that.
In 1986 Congress passed what was essentially a flat tax. The main difference between the 1986 effort and that proposed by Dan Mitchell, Steve Forbes and others was that the earlier effort set forth two flat tax brackets: one at 15% and the other at 28%. It’s now 2005, some 19 years after this attempt at a flat tax … and the tax code has been amended nearly 10,000 times.
A flat tax leaves politicians room to tinker, to manipulate the tax code for the benefits of large campaign donors or specific constituencies. As we’ve seen, with a flat tax it is all too easy for the political class to decide to add just a “small” surcharge to high income taxpayers; after all, the surcharge will only affect a small percentage of taxpayers, and the money can be used to buy votes from an even larger percentage! Under the FairTax, the national retail sales tax, there is no way to raise the tax rates on the rich, or to favor any one particular business group. The FairTax treats each and every citizen exactly the same, playing no favorites among people or business entities. You can’t raise the rate without raising it for everyone, nor can you offer one particular product a break since the tax is applied universally. Nobody, rich or poor, has to pay the FairTax on the basic necessities of life, because the prebate* is applied universally.
The FairTax would constitute the largest transfer of power from government to the people since the Revolutionary War. The flat tax takes no power from government. The FairTax is a revolution. The flat tax is an idea that’s been tried before, and found wanting.
*Prebate? Read The FairTax Book … you’ll love this idea.
No. Examples are drug companies. Really any company with a good patent or copyright. Movies. Songs. Books. Software. Photos. Impressionist art. Also natural monopolies. Also to a limited extent, satellite radio (duopoly).
Actually, I would like to see an "art tax" on paintings sold over 1 million.
See the following:
Who Bears the Burden of the Tax? Joseph Salerno
Also see Rothbard in Power and Market:
The first law of incidence can be laid down immediately, and it is a rather radical one: No tax can be shifted forward. In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer. Below, we shall see how this applies specifically to excise and sales taxes, which are commonly thought to be shifted forward. It is generally considered that any tax on production or sales increases the cost of production and therefore is passed on as an increase in price to the consumer. Prices, however, are never determined by costs of production, but rather the reverse is true. The price of a good is determined by its total stock in existence and the demand schedule for it on the market. But the demand schedule is not affected at all by the tax. The selling price is set by any firm at the maximum net revenue point, and any higher price, given the demand schedule, will simply decrease net revenue. A tax, therefore, cannot be passed on to the consumer.
It is true that a tax can be shifted forward, in a sense, if the tax causes the supply of the good to decrease, and therefore the price to rise on the market. This can hardly be called shifting per se, however, for shifting implies that the tax is passed on with little or no trouble to the producer. If some producers must go out of business in order for the tax to be “shifted,” it is hardly shifting in the proper sense but should be placed in the category of other effects of taxation.
A general sales tax is the classic example of a tax on producers that is believed to be shifted forward. The government, let us say, imposes a 20-percent tax on all sales at retail. We shall assume that the tax can be equally well enforced in all branches of sales.[10] To most people, it seems obvious that the business will simply add 20 percent to their selling prices and merely serve as unpaid collection agencies for the government. The problem is hardly that simple, however. In fact, as we have seen, there is no reason whatever to believe that prices can be raised at all. Prices are already at the point of maximum net revenue, the stock has not been decreased, and demand schedules have not changed. Therefore, prices cannot be increased. Furthermore, if we look at the general array of prices, these are determined by the supply of and the demand for money. For the array of prices to rise, there must be an increase in the supply of money, a decrease in the schedule of the demand for money, or both. Yet neither of these alternatives has occurred. The demand for money to hold has not decreased, the supply of goods available for money has not declined, and the supply of money has remained constant. There is no possible way that a general price increase can be obtained.[11]
It should be quite evident that if businesses were able to pass tax increases along to the consumer in the form of higher prices, they would have raised these prices already without waiting for the spur of a tax increase. Businesses do not deliberately peg along at the lowest selling prices they can find. If the state of demand had permitted higher prices, firms would have taken advantage of this fact long before. It might be objected that a sales tax increase is general and therefore that all the firms together can shift the tax. Each firm, however, follows the state of the demand curve for its own product, and none of these demand curves has changed. A tax increase does nothing to make higher prices more profitable.
The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed wage increase can be shifted forward to higher prices, thereby “causing inflation.” There is no way that the general array of prices can rise, and the only result of such a wage increase will be mass unemployment.[12]
Many people are misled by the fact that the price the consumer pays must necessarily include the tax. When someone goes to a movie and sees prominently posted the information that the $1.00 admission covers a “price” of 85cents and a tax of 15 cents, he tends to conclude that the tax has simply been added on to the “price.” But $1.00 is the price, not 85cents, the latter sum being the income accruing to the firm after taxes. This income might well have been reduced to allow for payment of taxes.
In fact, this is precisely the effect of a general sales tax. Its immediate impact lowers the gross revenue of firms by the amount of the tax. In the long run, of course, firms cannot pay the tax, for their loss in gross revenue is imputed back to interest income by capitalists and to wages and rents earned by original factors—labor and ground land. A decrease in the gross revenue of retail firms is reflected back to a decreased demand for the products of all the higher-order firms. All the firms, however, earn, in the long run, a pure uniform interest return.
Here a difference arises between a general sales tax and, say, a corporate income tax. There has been no change in time-preference schedules or other components of the interest rate. While an income tax compels a lower percent interest return, a sales tax can and will be shifted completely from investment and back to the original factors. The result of a general sales tax is a general reduction in the net revenue accruing to original factors: to all wages and ground rents. The sales tax has been shifted backwards to original factor returns. No longer does every original factor of production earn its discounted marginal value product. Now, original factors earn less than their DMVPs, the reduction consisting of the sales tax paid to the government.
It is necessary now to integrate this analysis of the incidence of a general sales tax with our previous general analysis of the benefits and burdens of taxation. This is accomplished by remembering that the proceeds of taxation are, in turn, spent by the government.[13] Whether the government spends the money for resources for its own activities or simply transfers the money to people it subsidizes, the result is to shift consumption and investment demand from private hands to the government or to government-supported individuals, by the amount of the tax revenue. In this case, the tax has been ultimately levied on the incomes of original factors, and the money transferred from their hands to the government. The income of the government and/or those it subsidizes has been increased at the expense of those taxed, and therefore consumption and investment demands on the market have been shifted from the latter to the former by the amount of the tax. As a consequence, the value of the money unit will remain unchanged (barring a difference in demands for money between the taxpayers and the tax consumers), but the array of prices will shift in accordance with the shift in demands. Thus, if the market has been spending heavily on clothing, and the government uses the revenue mostly for the purchase of arms, there will be a fall in the price of clothes, a rise in the price of arms, and a tendency for nonspecific factors to shift out of clothing and into the production of armaments.
As a result, there will not be, as might be assumed, a proportional 20-percent fall in the incomes of all original factors as a result of a 20-percent general sales tax. Specific factors in industries that have lost business as a result of the shift from private to governmental demand will lose proportionately more in income. Specific factors in industries gaining in demand will lose proportionately less, and some may gain so much as to gain absolutely as a result of the change. Nonspecific factors will not be affected as much proportionately, but they too will lose and gain according to the difference that the concrete shift in demand makes in their marginal value productivity.
The knowledge that taxes can never be shifted forward is a consequence of adhering to the “Austrian” analysis of value, i.e., that prices are determined by ultimate demands for stock, and not in any sense by the “cost of production.” Unhappily, all previous discussions of the incidence of taxation have been marred by hangovers of classical “cost-of-production” theory and the failure to adopt a consistent “Austrian” approach. The Austrian economists themselves never really applied their doctrines to the theory of tax incidence, so that this discussion breaks new ground.
The shifting-forward doctrine has actually been carried to its logical, and absurd, conclusion that producers shift taxes to consumers, and consumers, in turn, can shift them to their employers, and so on ad infinitum, with no one really paying any tax at all.[14]
It should be carefully noted that the general sales tax is a conspicuous example of failure to tax consumption. It is commonly supposed that a sales tax penalizes consumption rather than income or capital. But we find that the sales tax reduces, not just consumption, but the incomes of original factors. The general sales tax is an income tax, albeit a rather haphazard one, since there is no way that its impact on income classes can be made uniform. Many “right-wing” economists have advocated general sales taxation, as opposed to income taxation, on the ground that the former taxes consumption but not savings- investment; many “left-wing” economists have opposed sales taxation for the same reason. Both are mistaken; the sales tax is an income tax, though of more haphazard and uncertain incidence. The major effect of the general sales tax will be that of the income tax: to reduce the consumption and the savings-investment of the taxpayers.[15] In fact, since, as we shall see, the income tax by its nature falls more heavily on savings-investment than on consumption, we reach the paradoxical and important conclusion that a tax on consumption will also fall more heavily on savings-investment, in its ultimate incidence.
Here's the best comparison & contrast that I have seen with respect to the flat tax and the FairTax.
http://www.geocities.com/cmcofer/confess.html
"The major effect of the general sales tax will be that of the income tax: to reduce the consumption and the savings-investment of the taxpayers."
Wow, that's really amazing. That is the first source that I have seen say that under a sales tax, BOTH savings/investment, as well as consumpton would decrease.
That begs the question: what would people do with the money they earned - burn it? I thought that there were only two things that you could do with money - save/invest or spend. What is the third option?
"No. Examples are drug companies. Really any company with a good patent or copyright. Movies. Songs. Books. Software. Photos. Impressionist art. Also natural monopolies. Also to a limited extent, satellite radio (duopoly)."
I don't think that economists would consider those monopolies because there are substitutes. Don't want to watch a certain copywrighted movie? Fine, watch another, perhaps an older one that has an expired copywright. Same with songs. Don't want to listen to XM or Cerious (sp?)? Listen to broadcast then.
As I said before, utilities are a better example.
Either of them would be converted to a Value Added Tax so fast it would make the head swim..
By this Congress.. OR the next.. Either would no doubt in my mind INCREASE federal revenue..
Congress is not fit for more money.. it fuels the corruption..
"Do you want to tax the consumption of education? Or do you want the education sector to be untaxed?"
Sure, if you can show me any education that is being consumed, I would be happy to tax it.
Note that this consequence is relative to a prior situation with no tax; not to a situation with a prior income tax that raised the same revenues.
That begs the question: what would people do with the money they earned - burn it? I thought that there were only two things that you could do with money - save/invest or spend. What is the third option?
Have it taken by the government.
"Either of them would be converted to a Value Added Tax so fast it would make the head swim.."
Last time I checked, there were about 46 states with sales taxes. So far, none of those have been converted into a VAT. Any idea why?
Are you really that dense? Look at any elementary school, college or trade school.
As you observed, a flat tax and a sales tax can be made equivalent. Assuming a sales tax does not tax the consumption of education, the same result could be made by exempting teachers, professors, school administrators, school construction, etc. from taxation under a flat tax. Supporters of a flat tax are serious about not wanting to pick the winners or losers in the economy. There are no such proposals coming from the flat taxers.
Sales tax advocates are not serious about not picking winners and losers in the economy. Sales taxers are willing to place their policy preferences in the tax code. This is evident by the effort to exclude the education sector from taxation.
Yeah.. because they(States) have license fees, tolls, property tax, driving taxes, gas tax, bonds, and a zillion other kinds of assessments which are just taxes, not to mention interest on CAFR funds, there's no end to State, County and City taxes.. and if needed and they could get away with it there would be, and will be even more types of taxes for those venues..
Thats WHY?... The feds have a few (various taxes) too but not anywhere near what the states have.. Income and FICA (which is nearing to be a wash) are mostly all the feds have for the BIG MONEY.. And the Feds(democrats and big government republicans) are all about BIG MONEY.. Can't even get a line item veto for the President and a balanced budget amendment thru Congress.. With a totally new fed. tax like sales tax.. it would be expanded to whatever "national Security" demanded.. AND be advised national security issues would come up.. even if they had to be "created" i.e. invented.. to raise the "whatever tax"..
Must've HURT when you fell off that turnip truck.. Get over it, and shake it off.. Get your head screwed on right.. remember a widely known moron Al Gore very nearly was elected to the Presidency in 2000.. by half of eligible votes minus the massive voter fraud that republicans could literally care about.. changeing the corruption we know for the corruption we don't know, NOW, is foolish..
If you trust this Congress with ANYTHING you're worse off than I expected.. The ONLY way a Fed. Sales Tax COULD EVEN GET thru this Congress, IS IF, there were riders(caveats) that allowed further hanky panky with the tax code.. or do you live on a different planet.. We couldn't or wouldn't even indite Sandy Burgular for espionage or sedition even.. and thats with REPUBLICANS in the majority..
"Assuming a sales tax does not tax the consumption of education, the same result could be made by exempting teachers, professors, school administrators, school construction, etc. from taxation under a flat tax."
That isn't an apples to apples comparison. The FairTax does not exempt teachers, professors, etc. from paying the sales tax on their consumption. It exempts students from paying a sales tax on their tuition.
Does your flat tax proposal (and you still have not clarified which flat tax proposal you support) tax grade schools, high schools, etc?
You are grasping at straws, trying to find a flaw that does not exist.
"If you trust this Congress with ANYTHING you're worse off than I expected.. The ONLY way a Fed. Sales Tax COULD EVEN GET thru this Congress, IS IF, there were riders(caveats) that allowed further hanky panky with the tax code.. or do you live on a different planet.. We couldn't or wouldn't even indite Sandy Burgular for espionage or sedition even.. and thats with REPUBLICANS in the majority.."
Who said anything about trusting congress? Last time I checked, they worked for us, not the other way around.
I still recall how welfare reform got signed into law. Congress passed welfare reform 3 times; Clinton vetoed it the first two times. The third time his pollster told him that the American people were solidly behind welfare reform and if he continued to veto it, he would pay a political price for it. Lo and behold, a welfare reform champion was born! He even listed it among his administration's accomplishments during his later state of the union messages.
Your perception that elected officials simply do whatever they want and are indifferent to the wishes of the voters does not square with my observations.
“I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accept it. Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power. Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.”
Alan Keyes “The Power of the Purse”, WorldNet Daily, August 27,1999
For the record, as a student of economics, I prefer the Hall-Rabushka Flat Tax. Calling other things a flat tax is placing an inaccurate label on things.
Yes, the flat tax captures education. As I observed, teachers, professors, school administrators would be subject to the flat tax. Constructions firms that build schools and their employees would be subject to a flat tax. Suppliers (paper, electricity, busses, school lunches) to school districts would pay a flat tax. A flat tax does not treat education any differently than any other sector of the economy.
That isn't an apples to apples comparison. The FairTax does not exempt teachers, professors, etc. from paying the sales tax on their consumption. It exempts students from paying a sales tax on their tuition.
Sometimes I wonder how serious you are regarding this discussion. There are two ways to tax consumption. The producer can pay it (flat tax) or the consumer can pay it (sales tax). It doesn't matter which way the law says, the effect is the same. If you don't tax education through a sales tax, it is the same exact thing as exempting teachers, administrators, school suppliers etc. from the flat tax.
".. and if needed and they could get away with it there would be, and will be even more types of taxes for those venues.."
Ahhhh, IF they could get away with it. There's the operative phrase.
Whose job would it be to make sure that congress could not get away with complicating a very simple and straightforward proposal?
Joe Six Pack hasn't a clue what he is paying in Federal, State, Real Estate and Local taxes, and fees. Airline fares, telephone, cell phone, car rentals... the list is endless.
"I prefer the Hall-Rabushka Flat Tax"
What is the bill number?
"Calling other things a flat tax is placing an inaccurate label on things."
So neither the Burgess bill in the house nor the Shelby bill in the senate is truly a flat tax. That is interesting. Try telling that to Mr. Burgess or Senator Shelby ... LOL Now you can see why I find the statement: "I support a flat tax" so meaningless.
"As I observed, teachers, professors, school administrators would be subject to the flat tax."
I repeat: teachers, professors, school administrators would be subject to the FairTax.
"Constructions firms that build schools and their employees would be subject to a flat tax. Suppliers (paper, electricity, busses, school lunches) to school districts would pay a flat tax."
So the cost of the tax system would be imbedded into educational costs and passed along to the end of the supply chain. This is certainly a difference between (this version of a) flat and fair tax. The FairTax is only levied at the final end point of the sales cycle and that treatment is consistent across industry segments. As previously explained, education is not considered a consummable item.
"Sometimes I wonder how serious you are regarding this discussion."
You are entitled to your opinion. :-)
"There are two ways to tax consumption. The producer can pay it (flat tax) or the consumer can pay it (sales tax). It doesn't matter which way the law says, the effect is the same."
Conceptually that may be true, but there are two problems with trying to modify an income tax so that it is no longer a tax on income:
1. compliance costs are much, much higher, and
2. because of the imbedding process at each stage of the production chain, taxpayers don't see their true tax burden and US produced goods are less competitive than they should be in a global economy. With globalization sweeping the planet, that is a biggie.
In addition, we have not even talked about payroll taxes. I don't know about Hall-Rubishka, but the other flat tax proposals don't touch SS and Medicare taxes. If we stick with a payroll model to collect those taxes, the demographics are a killer. If we convert to a broader based tax on the entire economy and succeed in doubling the size of the economy over the next 15 years, then we double the base from which to collect these taxes. There is no way that happens if we stick with a payroll tax system.
"If you don't tax education through a sales tax, it is the same exact thing as exempting teachers, administrators, school suppliers etc. from the flat tax."
Once again, your analogy is flawed. It is the STUDENTS who are given the "tax break" (if you want to call it that) under the FairTax, not the teachers, etc. This isn't nearly as difficult as you are making it.
Hmmm.. yup you did just fall off the turnip truck..
Pity too.. you sound quite virile and exacerbated..
Bet you can handle a piece too.. d;-)~.'.'.'
Oooo.Oo..Ooo.Ooo..Oo.. (persona: Horshack from Welcome back Cartier)
The HANGMAN: after a few were HUNG for TREASON..
That is precisely the point. The entire education sector is exempt under the Fair Tax. The Fair Tax picks winners and losers in the economy. It exempts, what, 5-10% of the economy. Why not exempt the health care sector, too. That is at least as much of an "investment" as education.
This is the philosphical difference I have with sales tax proponents. I believe as Reagan said, broaden the base and lower the rate. Consequently, I believe that we should tax all economic activity only once at a very low rate. It is not a matter of opinion whether education is consumption or investment as you suggest. If you don't tax it as consumption, you are not taxing an entire sector in the economy. Therefore, the taxes on all other sectors must be higher.
To some degree Fair Tax proponents recognize the problem they face. That's why all government activity is subject to the Fair Tax. Otherwise the government sector would have preferential treatment. Why aren't highways, the military and public health not investments? They are considered consumption by the Fair Tax. I don't know the test Fair Tax proponents apply, but flat taxers apply an objective and fair test: Tax everything once at a low rate.
By magically declaring education to be an "investment", Fair Tax proponents show that they will exempt entire sectors in the economy from taxation. Special interests will demand that their pet public policy goals enjoy the same exemption. Picking the winners and losers in the economy is as bad as the progressive system we have today.
There are two ways to look at the sales tax. (1) Is my consumption taxed? Under this test, everyone is treated the same. Consumption is taxed except for education. The other way to look at a sales tax is to consider (2) Is what I produce subject to tax? Under this test, eveyone's production is subject to the sales tax except those that produce for the education sector. That is picking the winners and losers.
FWIW, the Hall-Rabushka flat tax treats everyone the same under both of the above tests. That is one reason the flat tax is superior.
You really need to take the basic micro-economics class at your local community college. Your understanding of economics could use a little improvement. Please consider it.
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