[Yes the would be a brain dead assumption and one that AFFT does not make, as all such illegal evasions occurs today and go unreported today in the NIPA data set. The assumption is that there will be no more evasion than is currently done under deduction fraud and illegal asset conversions in business today to avoid payroll and business income taxes.
Current consumption levels contain NO significant distortions from federal taxation.
LOL, current consumption levels and measure by GDP have no reports on which to increase the PCE component for such activity.
Indeed current PCE is fully compensated for the tax avoidance and evasion going on to get around the income and payroll taxes. It is presumed the same folks (e.g. small and single proprietor businesses) will continue the same pattern by declaring personal expenditures as business expenses thus not included as part of PCE and thus fully discounted in computing a reasonable estimate for taxbase and rate to be expected under the FairTax national retail sales tax.]
Thanks for this insight. The fact that the FairTax rate is based on an already-reduced tax base wasn't really clear to me. I always suspected the NIPA and GDP figures would have no way of including the portion of the income and consumption bases that were off-book. I wish the AFFT materials I've read would have made it clearer that this missing portion of the FairTaxable base basically makes allowance for evasion.
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 ?
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.
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.