Posted on 02/08/2006 5:07:55 PM PST by voletti
The President aims to end estate taxes for the wealthiest Americans. He also wants to scrap a $255 death benefit for the poorest The contrast in President Bush's new budget could not be more stark. On one hand, he wants to eliminate what he likes to call the "death tax" -- a levy imposed on a handful of the nation's biggest estates. On the other, he wants to end Social Security's lump sum death benefit -- a $255 check that the families of many of the nation's poorest use to help pay for their funerals.
There is a lot more in Bush's $2.77 trillion budget than that, of course. He'd boost spending for homeland security and the Pentagon, trim many popular domestic programs, and control the growth of Medicare by boosting premiums for high-income seniors and freezing or cutting payments for health providers, such as doctors, hospitals, and hospices. At the same time, the President asked Congress to make most of his first-term tax cuts permanent.
ESTATE PLANNING. That includes permanently eliminating the estate tax, or what conservatives like to call the death tax. Like most of what happens these days in the tax world, the story is complicated, but it goes like this: Starting in 2001, Congress began to gradually increase the size of an estate that would be exempt from tax. By 2009, estates of $3.5 million or less ($7 million for a couple that does the smallest bit of planning), would be tax-free. By 2010 all estates would be exempt from the tax, but only for one year.
So President Bush wants to permanently free all estates from the tax starting in 2011. The estimated annual cost: in excess of $50 billion in 2012, rising to more than $70 billion by 2016.
(Excerpt) Read more at businessweek.com ...
Your explanation makes perfect sense. Was this relationship between the missing portions of taxable bases directly included in one of the "Rebuttal" papers at AFFT ?
No, I think they missed the boat on that one. Even economists don't always remember the methodology in the statistics they base their calculations on. It is a very easy point to overlook.
It didn't really dawn on me until I read this description of GDP:
http://spruce.flint.umich.edu/~mjperry/Unit10.html
WHAT COUNTS IN GDP?:
1. Only FINAL goods and services purchased by final users. Only retail sales count, not intermediate (wholesale) goods or transactions. When GM buys steel, tires or transmissions, those transactions don't count because it would be double counting since those expenditures will be accounted for in the final retail price of the car. For example, suppose GM spends $15,000 for a car and sells it to a dealer for $16,000 and the dealer sells it for $17,000. We only count the $17,000 for the final retail sale. We can't count $15,000 + 16,000 + 17,000 = $48,000. Only the value of the final output is counted, and the value of the inputs are not directly counted since their value is reflected in the final purchase price.
See Example, page 158. Bread example.
2. Only goods and services produced during the time period are counted. Only new production is counted, not secondhand sales. Example: sales of used cars and used houses don't count. They were already counted as new production in the year built. Resale doesn't get counted in current GDP. Commissions on used cars or houses would get counted, because they are current services.
3. Financial transactions and income transfers are excluded. Example: stock or bond purchase is just a transfer of money from one individual to another, it does not involve current production of a good or service. Commissions would count, as a current service (income) provided by the broker. Gifts and income transfers (Social Security, welfare, veterans' pmts, etc.) also don't count, since no current production of goods or services is involved.
4. ONLY Domestic Production is Counted, regardless of who provided the labor. Foreign citizens working in the U.S. count toward U.S. GDP, since their labor contributed to "domestic production." U.S. citizens working temporarily overseas does NOT count in U.S. GDP, since their labor does not contribute to "domestic production."
GDP vs. GNP - GDP measures domestic production within the 50 states, regardless of who provided the labor or capital, US citizens or foreigners. GNP measures the production of US "nationals," U.S. citizens regardless of where they are working.
*** SNIP ***
PROBLEMS WITH GDP -
1. Nonmarket production - Nonmarket production is excluded from GDP because there is no way to accurately measure it. Only actual "market transactions" get counted in GDP. Nonmarket production includes household production like fixing your own car, repairing, fixing, painting your house, working on your garden, growing your own food, cooking, the work of a housewife/househusband, etc. Estimated to be 10-15% of GDP, or about $1T/year.
Example: If you eat out a restaurant, the value of the meal counts in GDP since it was a market transaction. If you eat the same food at home, only the value of the food counts and your "nonmarket production" (cooking) is NOT counted in GDP. If you hire someone to clean your house, it adds to GDP. If you clean your own house, it doesn't count for GDP.
Official GDP might understate the output of developing countries compared to developed economies. Example, in Mexico there is more household production that is not counted compared to the U.S. Mexican families are more likely than American families to grow their own food, prepare their own food, do their own laundry, provide their own child care, build their own houses, fix their own cars, etc..
A comparison of official GDP over time would also be distorted, since many households have gradually substituted market transactions for household production, which would overstate GDP in the later years compared to the earlier period. Households are more likely now than 30 years ago to eat out (increase in fast food), use dry cleaning services, hire a lawn service, get oil changed at Rapid Oil, hire house cleaning service, etc.
2. Underground economy - could also easily be another $1T, or 10-15% of GDP from prostitution, drug trafficking, gambling, smuggling, illegal gun sales, tax evasion, etc. Also unreported cash income from cash business - taxi drivers, waiters/waitresses, bars, craftspeople, carnivals, fleas markets, illegal immigrants, etc.
Underground economy is even higher in S. America (heavy regulations) and Europe (heavy taxes).
Evidence: There is about $500B of currency in circulation, for about 250m people, that means there is $2000 currency outstanding per person x 4 persons per average household = almost $8000/family in CASH!!
and started looking into how the NIPA data series is constructed by the Bureau of Economic Analysis.
No need to adjust as what the government pays today include taxes of the suppliers and all upsteam producers. Since the entire income and payroll tax system is replaced by the FairTax system, the gross (tax plus price) paid by govenment remains constant with what is paid today.So, you are assuming everyone will take a pay cut to facilitate this price drop? Your assumption that producer prices will drop has been blown out of the water.
Actually it looks like the economists figure for a takehome pay increase greater than 20% when only the employer's half of SS/Medicare tax is accounted for in price decreases.
Kotlikoff figures a real wage increases on the order of 19% in excess of the base income/payroll tax case.
I'm talking about transactions that are now IN the PCE (and counted IN the FairTax base) but will shift OUT of the PCE because of the FairTax.
As an example of a Legal Avoidance transaction now in the PCE that will disappear from the PCE under the FairTax:
Under the income tax, an individual may choose to donate a used car to a charity. He likes the idea of getting a tax break and he wants a newer car. The value of the used car is used to offset taxable income and thereby avoid paying income tax on that amount. After donation, the individual buys a new car (the new car purchase is in the PCE under the income tax system.)Under the FairTax, donating the used car to the charity is not tax advantaged, AND, the value of his used car rises in response to market forces driving up the value of used, untaxed goods. Instead of donating the car, he sell the car, makes a cash donation, equal to the value his donated car would have realized to the charity under the income tax system then chooses to purchase a newer, but still used, car (though he could afford a new car, he still likes the idea of avoiding the payment of tax; he's exercising his voluntary choice not to pay tax.) He invests the money left over in now tax-free investments (all the rage now.) This purchase replaces a purchase that would have been in the PCE under the Income Tax system.
As an example of ILLEGAL evasion that will alter the PCE under the FairTax:
Under the income tax system, a person uses his under-the-table wages to purchase a new laptop computer. The transaction is counted in the PCE.Under the FairTax, that person asks his employer to purchase the laptop for him and pays the employer's cost. Since the employer used to pay him under the table anyway, he's quite confortable with idea; after all, who's going to inventory his equipment? and even if they do, he'll just say the laptop is for business use. That purchase shifts OUT of the PCE.
The AFFT Tax base calculations MAKE NO ALLOWANCE FOR THESE SHIFTs OF PURCHASING BEHAVIOR, despite what ancient_geezer claims.
The AFFT claim of avoidance and evasion staying the same incorrectly assumes that 100% of avoidance and evasion of reported taxable income is reflected directly by the current PCE ... it is not. Common sense will tell you that currently untaxed (even uncounted) income does indeed purchase legitimate goods and services now counted in the PCE. The incentive to avoid and evade income taxes are not present in current consumption; the incentive is to minimize reported taxable income then freely consume.
Under the FairTax, the incentive to avoid and evade shift from a focus on income to a focus on consumption. This shift will NECESSIARILY cause the PCE to change as formerly counted, taxable purchases, are avoided or evaded in order to avoid or evade paying tax.
Claims that the PCE already accounts for this are are entirely unfounded and wholly an invention of the FairTax mind.
Not in even the vaguest terms. As I attempted to get ancient_geezer to admit earlier, the AFFT rebuttals do NOT directly address ANY contentious issues regarding the makeup of the tax base. Their rebuttals consist of simply restating the aggregate size of their base (as a % of GDP), the size of the tax revenue needed (as a % of GDP), and dividing.
They use the "because I said so" rebuttal.
There is NO discussion (rigorous or otherwise) of factors that Gale and others claim will impact the base and reduce it. ancient-geezer may babble on about how Gale is wrong, but NONE of what he says comes from the AFFT rebuttals, tutorials, or any other AFFT explanatory material that I've seen.
Gale's discussion of the size of the base relative to the real size of government was quite rigorous and demonstrated an algorithmic error in the AFFT calculation of the size of the tax base. There has been no rigorous response to Gale's analysis; just the "because I said so" rebuttal.
Average take home increase for SSI, Pension and other transfer or annuity recipients = 0% ... with a range of 0; median of 0.
Average after-tax price increase = 23.5% ... with a range of 15% to 30%.
As always, your mileage will vary; you net gain/loss depends on who you are and what you buy.
Oh, and even Kotlikoff says that old-capital owners, and short-remining-life individuals get screwed.
Under the income tax system, a person uses his under-the-table wages to purchase a new laptop computer. The transaction is counted in the PCE.
Tax revenues are not generated under the evasion of the income tax lowering the numerator of the rate required for revenue neutrality.
Under the FairTax the new lap top is taxed and thus is legitimately counted for the FairTax accounting towards revenue neutrality of a number less than what would exist were the income tax not evaded.
In the fair tax tax revenue would be collected on purchase of the laptop offsetting the tax not collected in income taxes, but counted in PCE where the tax would be collected on the purchase. The situation is a wash.
You are overlooking the fact there is two sides to the tax ledger, revenues collected vs tax base that combine to make a rate commensurate with a given level of revenues targeted.
Under the FairTax, that person asks his employer to purchase the laptop for him and pays the employer's cost. Since the employer used to pay him under the table anyway, he's quite confortable with idea; after all, who's going to inventory his equipment? and even if they do, he'll just say the laptop is for business use. That purchase shifts OUT of the PCE.
Under the the income tax that laptop is purchased as a business expense of the employer and not declared as part of PCE thus counted exactly the same as the situation that arises with the retail sales tax of the FairTax, PCE (the denominator) is reduced thus evasion is properly accounted for as equivalent in both tax systems.
Your examples merely demonstrate the point that similar business tax fraud occurs in both systems and the rates based on revenue collected vs PCE reflect the assumptions of the same amount of tax evasion in each case.
The AFFT Tax base calculations MAKE NO ALLOWANCE FOR THESE SHIFTs OF PURCHASING BEHAVIOR, despite what ancient_geezer claims.
The allowence is inherent in the NIPA data series used, shifts in behaviour are in method of the perpetrator and action to effectuate the evasion but not overall amounts and are reflected in the numerator (tax revenues collected) and the tax base denominator of PCE, rendering a rate commensurate with the static methodologies in current use by OMB & Treasury.
Under the FairTax, the incentive to avoid and evade shift from a focus on income to a focus on consumption. Under the FairTax, the incentive to avoid and evade shift from a focus on income to a focus on consumption. This shift will NECESSIARILY cause the PCE to change as formerly counted, taxable purchases, are avoided or evaded in order to avoid or evade paying tax.
The shifts in behaviour merely reflect methodology of avoidence and are reflected in both denominator and numerator. The assumption of similar rates of evasions yield the appropriate rate for use in the FairTax rate required to achieve revenue neutrality.
A nation with a 2,700 billion dollar budget (JFK's last budget was 99 billion) and 60 trillion dollars of future obligations is going to pay lots of taxes-lots, and lots, and lots of taxes.
You ain't seen nothing yet.
Kotlikoff figures a real wage increases on the order of 19% in excess of the base income/payroll tax case.AFTER 100 YEARS! That's one of those details the AFT (and you) seem to forget to include. The first year, Kotlikoff shows a real wage decline. And these are the closed economy results (no foreign capital), the last I checked the U.S. was an open economy. The open economy results show real wages increasing 11% by 2100. The first year they decline 1% and after 16 years they are only 5 percent larger.
"In implementing the FairTax we also impose an 18 percent permanent cut in government purchases of goods and services starting in our 2004 base year."
There is NO discussion (rigorous or otherwise) of factors that Gale and others claim will impact the base and reduce it. ancient-geezer may babble on about how Gale is wrong, but NONE of what he says comes from the AFFT rebuttals, tutorials, or any other AFFT explanatory material that I've seen.I'm getting a strong feeling that most these people have never actually read an AFT "rebuttal." I guess they see the AFT has posted something called a "rebuttal" and assume it actually rebutted what they say it did. To call the AFT's response to Gale a "rebuttal" is just another AFT lie.
The allowence is inherent in the NIPA data series used, shifts in behaviour are in method of the perpetrator and action to effectuate the evasion but not overall amounts and are reflected in the numerator (tax revenues collected) and the tax base denominator of PCE, rendering a rate commensurate with the static methodologies in current use by OMB & Treasury.You can always tell when AG doesn't know what he's talking about. He starts using big words and tortuous sentences to try and obfuscate the fact that he is full of it.
This author is a moron. More than a few people have had to sell the family farm to pay death tax.
How True! $255 was a respectable sum back in 1965 when I worked for the Social Security Administration..., it is worth only $42.80 in "constant dollars" today (using a web-based inflation calculator which, since it uses federal CPI figures, UNDERSTATES the dollar's decline!).
I would not doubt that it costs the SSA more than $255 (overall) to pay the benefit! You would probably be shocked (maybe not) to find out how many times various relatives FIGHT for their "Right" to the lump sum death benefit!
To jump through the administrative and legal hoops to determine who gets the funds is VERY COSTLY (in staff time and resources) whenever there is ANY dispute concerning who is entitled to this small sum!
The shifts in behaviour merely reflect methodology of avoidence and are reflected in both denominator and numerator. The assumption of similar rates of evasions yield the appropriate rate for use in the FairTax rate required to achieve revenue neutrality.AG, the "numerator" is actually revenue, which is the base (income) times the rate. The rate has been adjusted up to account for the reduced base due to evasion/avoidance. Revenues haven't gone down because of evasion/avoidance, the rate has gone up. The "denominator" shows no effects of evasion/avoidance (someone who claims a deduction on their taxes that they aren't eligible for still buys stuff at BestBuy).
Nightie is even apparently carping about the fact that the Koltikoff paper is a long range study when, in fact, it was intended for that purpose all along. And let's also look at the selectively-extracted quote he gives with almost no context. Here's the entire paragraph:
"To accommodate the FairTax’s insulation of the real purchasing power of Social Security benefits, we raise the size of these benefits by 30 percent, which is the FairTax retail sales tax rate. In implementing the FairTax we also impose an 18 percent permanent cut in government purchases of goods and services starting in our 2004 base year. This may seem like a substantial reduction in discretionary federal spending, but one needs to bear in mind that such spending has increased by 22.2 percent since 2000 measured as a share of national income."
While we're at it, let's also look at some of the other "tidbits" in the paper (where the term "welfare" is used to mean economic well being), to wit:
= snip = In addition to imposing, in almost all cases, much lower marginal taxes on working and, in all cases, dramatically lower marginal taxes on saving, the FairTax imposes lower average taxes on low- and middle-income working households than does the current system. It does so, in part, by broadening the tax base from what is now primarily labor income to the sum of labor income and current wealth and, in part, by reducing non-Social Security real federal expenditures to help pay for the FairTax rebate. In particular, the reform implies a real reduction in federal purchases of goods and services, which many Americans many view as desirable. In this regard, it should be noted that federal purchases of goods and services, measured as a share of GDP, have. risen by over one fifth since 2000. = snip = Low income households who are initially alive at the time of the reform, whether they are young, middle age, or old, all experience welfare gains ranging from 8.3 percent to over 20 percent. Who pays for these substantial welfare gains? The answer is hardly anyone. The initial rich elderly and middle aged as well as some middle age middle-income households are made worse off, but their welfare losses are quite small compared to the welfare gains experienced by the current poor and future generations. One reason the FairTax offers such significant welfare improvements for winners and such small losses for losers is that it significantly improves economic incentives, particularly the incentive to save, and, thereby, reduces economic distortions; i.e., excess burden. = snip = X. Conclusion The aging of the U.S. coupled with its high and growing pension and old age health care benefits augers much higher payroll taxes, with potentially damaging effects on the macroeconomy. This prognosis is supported by our base case simulation, which generates more than a doubling of the payroll tax rate as well as a modest, but significant long-run capital shortage. This crowding out of capital gradually reduces real wages per unit of human capital by 5 percent. In combination with the long-run 12 percentage point rise in the payroll tax, the model’s predicted long-run reduction in worker take-home-pay is 17 percent. The FairTax offers an alternative to this dismal economic future. The FairTax proposes to replace the federal payroll tax,personal income tax, corporate income tax, and estate tax (not modeled here) with a federal retail sales tax plus a rebate. In switching from taxing income to taxing consumption and adding a highly progressive rebate, the FairTax introduces many progressive elements into our fiscal system, removes one very regressive element (the payroll tax), and provides much better incentives to work and save. According to our model, switching to the FairTax would raise long-run capital intensity, raising long-run real wages by 19 percent compared to the base case alternative. The reform also generates major welfare gains for the poorest members of society, including those now retired and those yet to be born. The remarkable finding of this study is how small are the transition costs associated with this reform. Yes, some initial high- and middle-income households are made worse off, but their welfare losses are minor compared with the gains available to future generations, particularly the poorest members of future generations. The economic and welfare gains from switching to the FairTax are somewhat smaller if one models the U.S. economy as fully open to international capital flows. But these gains are nonetheless large and very significant. While our model is highly stylized, it suggests that the FairTax offers a real opportunity to improve the U.S. economy’s performance and the wellbeing of the vast majority of citizens. The winners from this reform, primarily those who are least well off, experience very major gains, and the losers experience only minor losses. "Under the current U.S. federal tax system, total effective marginal tax rates on labor supply higher than 23 percent for almost all American households. Indeed, as shown in Kotlikoff 2005), typical middle-aged and middle-income earners face total effective federal marginal tax rates on working of roughly 30 percent. For these and most other households, the FairTax would dramatically improve labor supply incentives.
Right now I pay my income taxes (the numerator) and the computer I just bought is in the PCE (the denominator).
Ahmm, you missed the issue, Dimples is talking about the person who evades the payment of the tax under the income tax system.
As an example of ILLEGAL evasion that will alter the PCE under the FairTax:
Under the income tax system, a person uses his under-the-table wages to purchase a new laptop computer. The transaction is counted in the PCE.
There is no revenue collected on such evasion. If it were collected revenue the (numerator) would be higher. Revenue neutrality is in regards only to revenues actually collectible under a tax system.
After the income tax, I start a "business" and buy that same computer tax free.
Which was my point, such a computer purchase is not entered in PCE now, and thus not part of the denominator yielding a higher computed tax rate not a lower one. Thus the rate computed represents an upper boundry for the revenue neutral rate given equal amounts of tax evasion/avoidence incomparison with the income/payroll tax system.
The estimated annual cost: in excess of $50 billion in 2012, rising to more than $70 billion by 2016.
"The estimated annual cost:"?? What on earth is this putz talking about?
I also don't like Bush's plan of "boosting premiums for high-income seniors". Does he want to place a target on the backs of people who worked their behinds off their whole lives and made success stories out of themselves? Sounds like something the scumbag socialist Democrats would propose.
"To accommodate the FairTax’s insulation of the real purchasing power of Social Security benefits, we raise the size of these benefits by 30 percent, which is the FairTax retail sales tax rate. In implementing the FairTax we also impose an 18 percent permanent cut in government purchases of goods and services starting in our 2004 base year. This may seem like a substantial reduction in discretionary federal spending, but one needs to bear in mind that such spending has increased by 22.2 percent since 2000 measured as a share of national income."And what additional text did you post that added to the point? None.
While we're at it, let's also look at some of the other "tidbits" in the paper (where the term "welfare" is used to mean economic well being), to wit:Yeah, if we could get the government to cut it's spending 18% I would imagine there would be good for the economy. So which of Kotlikoff's results are due to the FairTax and which are due to cutting government spending 18%. We can't know unless he reruns his simulations with the FairTax being truly revenue neutral.
Ahmm, you missed the issue, Dimples is talking about the person who evades the payment of the tax under the income tax system.No, you missed the point. That was just an example. There are many more examples.
I meant to say "after the FairTax" (you couldn't figure that out?). After the FairTax, I start a "business" to buy my computer and it's is no longer in the PCE. Your denominator is reduced.After the income tax, I start a "business" and buy that same computer tax free.Which was my point, such a computer purchase is not entered in PCE now, and thus not part of the denominator yielding a higher computed tax rate not a lower one. Thus the rate computed represents an upper boundry for the revenue neutral rate given equal amounts of tax evasion/avoidence incomparison with the income/payroll tax system.
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