Posted on 05/14/2006 1:59:13 PM PDT by RobFromGa
FAIRTAX: A Primer Now that the author of the bill, John Linder, admits in his co-authored book "The FairTax Book" that there in no such thing as "Keep 100% of your paycheck, while prices stay the same", let's examine where that leaves the FairTax:
WAGES: It has been made clear by many proponents of the FairTax that they are expecting 100% of their current gross pay, and that many employer/employee wage relationships, including those for government workers are controlled by contract. So, we'll assume every wage earner gets to keep 100% of their current gross pay. Everyone can figure out for him or herself what that gives them in terms of a take-home pay increase.
BUSINESS COSTS: If we assume that businesses get to keep their half of the payroll taxes (7.65% of all payroll costs up to first $95k per employee), plus taxes on corporate profits (average <2% of Cost of Goods sold) and some tax compliance savings (being generous we'll call this 1% savings), this gives the business about 8% of cost savings with which to potentially reduce prices.
PRICES: For domestic goods, if we assume that the entire 8% is passed along to the consumer, this means that pre-tax prices will be 92% of present day prices. That $10 twelve pack will now be $9.20. Of course, the twelve pack of imported beer is still $10 pre-tax. Once the 30% FairTax is added, the price of the domestic beer will be $11.96 and the price of the imported beer will be $13.00 even. So, domestic prices will go up about 20% and imported item prices will go up about 30%.
GOVERNMENT EXPENSES: Since the government expects this plan to enable them to purchase the same things they purchase now, they will need to raise sufficient revenue in order to achieve purchasing power parity. Since they will be paying the 30% FairTax on every item, we can assume that for stuff they buy, they will see the same 20% price increase on domestic items and 30% increase on imported items as other end consumers. So they will need to increase their dollar intake by this 20%+ to enable them to buy the same amount of stuff. And, of course all government salaries will have the 30% FairTax paid on the salary, less the employer half of the payroll taxes, so this is a net 22.35% increase in the cost of the entire payroll of the US government (and states too, but that is another can of worms).
ENTITLEMENT COSTS: Since the social security payments are linked to CPI, when this 20%+ price rise slams through the economy all the social security checks will have to be raised to cover this massive FairTax caused inflation. They will rise by at least 20%, and a litle more because the basket of goods will include some imported items like oil. Medicare/medical expenses will have the FairTax added, for a 20%+ increase.
GOVERNMENT PURCHASING POWER PARITY: with the cost of Payroll, plus everything they buy, plus the entitlements, all going up 20% plus we can assume that the governement will need to collect approximately 20%+ more of the new inflated dollars in order to buy what they are today with today's more stable dollars.
FAIR TAX RATE: Assuming nothing else changes regarding purchasing behavior, size of the government, etc. this means that the 30% FairTax would need to immediately raised 20% (to 36%) just to bring in all the inflated dollars that are required to fund the govt at present level. The price of domestic beer is now $12.50 and the import is $13.60.
SAVED MONEY: All dollars that are post-tax savings would be devalued by the FairTax inflation by 20% in terms of what they can buy with their hard-earned and saved money.
Does this sound like a utoia to anyone? Isn't it very likely that a 36% sales tax will cause consumption to suffer and/or transactions driven into a barter system or the black market where they cannot be taxed. And every dollar that is taken from the legitimate economy is another increase that is needed in the FairTax rate in order to feed the government the amount of money it needs.
Isn't is likely that we will end up with an income tax again on top of the FairTax when this all plays out?
MOST consumer purchases have an emotional component to them (Starbucks or Folgers, Sierra Nevada Pale Ale or Bud, Loaded with Options and in Red or base model in white ???) Even in highly competitive markets. Since most won't do the math, they'll never figure out whether the higher FairTax price is justified or not ... that's why most "rebates" never get claimed.
In competitive markets, prices fall to the lowest price that provides an acceptable investment return after all costs have been covered.
Tell that to GM.
Heck, even the absentee owner can choose to keep the PIT portion of his profits ... that's his income. Isn't he entitled to maximize his purchasing power? If he gives it back as price reduction, his purchasing power declines substantially!
The problem with your thinking is that for the FairTax to work as advertised, EVERYONE has to agree with you AND all situations have to be alike. EVERYONE has to subscribe to your code of fairness and ALL situations demand uniform behavior. EVERYONE has to forgo their profit motive so they can be "fair" and ALL situations have to maintain a constant "percent of disposable income" outcome.
That just won't happen.
[Lower interest on public debt (Fed savings $120B/yr, State & Local $80B/yr)
Interest on public debt is already contractually locked in. If interest rates do decline, NEW debt might decline, but CURRENT debt will remain as pre-FairTax Interest Rates. ]
Really ? There is no 'call' feature in existing public debt ? Maybe you should check again.
[State & Local taxes lowered by adoption of FairTax and tapping underground economy
The FairTax does NOT tax the underground economy; it merely shifts the tax bite from the point there money ENTERS the underground to where money EXITS the underground. States and localities must now pay 30% FairTax on consumption purchases and salaries; nowhere in all the FairTax propaganda nor in the ramblings of its proponents is this fact EVER acknowledged. States and localities will need to RAISE tax rates to compensate. ]
Nobody currently taxes the underground economy. An income tax would have applied to both the legal-income purchaser and again to the income of the illegal recipient. A homeowner pays income taxes but then hires an illegal contractor that doesn't report the money he receives as income, and doesn't pay tax. The PIT and Payroll taxes are based on an assumption that those dollars will be taxed twice, but it is only taxed once -- on the legal income side. Under the FairTax, the overall taxes collected will be higher as the illegal contractor spends the money at retail.
On the state & local employee issue, I've seen it confirmed many times and I've agreed here on FR myself. Of course, you do need to remove all the salaries of people directly involved in education, which is a big chunk of state & local salaries, and you do need to credit the 7.65% ER side of payroll taxes for ALL employees including the teachers. So it is incorrect to say that state & local salary expenditures will increase by 30%. Closer to 12% would be my guess.
[Avoidance and evasion limited to 15% of total retail sales purchased outside of large retailers
This fails acknowledge inevitable shifts in purchasing behavior. Avoidance over the ENTIRE base will increase as used goods become favored over certain new goods. This fails to acknowledge inevitable changes in black market purchase levels. The current FairTax base/rate calculations fail to take even you limited avoidance and evasion into account.]
Well, the 'used goods' argument is false. Take a used vehicle. The price differential between a used vehicle and a new vehicle is based on the total cost 'out the door' for both. If a new vehicle goes up in total cost by 15%, because people have more disposable income to afford 15% more, then the used vehicle will also go up. The relative value of the two vehicles will remain constant, therefor the 'out the door cost' relationship between the two will also remain constant.
The 'black market' argument is also false. It will remain very small because catching it will be so much easier.
[Huge increase in personal consumption as individuals see larger paychecks and lower interest rates
Well, this one is just flat out false. ALL the economic models of consumption taxation predict significant DROPS in consumption in the early years of implementation (and ALL of them hold prices AND purchasing power constant - neither prices nor take home wages rise. ]
"ALL" of them ? Really ? Can you point to one that was not funded by Retailers, and that also included a reduction in interest rates and an FCA ? I don't know of such a study, but I do know human nature. Americans spend every dime they've got and then borrow more.
[Expansion of economy by 10% brings in additional $230B/yr
Well, the question is whether the FairTax will allow such expansion. The models used to predict such a windfall hold prices constant, take home pay constant, and purchasing power constant (for ALL). ...]
It isn't necessary to have everything constant for every person. In the aggregate, I think the model's conclusion is correct. If anything, it under-estimates the euphoria and spending spree the switch to the FairTax would cause. I personally worry more about inflation when the consumer demand skyrockets. Of course that will further enlarge the FairTax base, but then the inflation will damper the initial high emotions amongst consumers.
Well, now, let's see Dimp-Dimp you say that
"... ALL of them hold prices AND purchasing power constant ..." when you're claiming that there is universal prediction of drops in consumption and then
"... hold prices constant, ... and purchasing power constant ..." when you argue that this is the reason for a "windfall".
It really must be comforting to you to have such a flexible set of economic standards that you can use the same set of circumstances on each side of the argument to try to "prove" that different things are caused by them.
Some people take that to mean you don't know what you're talking about - or that you believe you can befuddle all us little wage-earning simpletons that are beneath your ken.
Go back and re-read the posts. It isn't me that's confused about the difference.
[There is neither a family nor a company on the planet which will engage in the analysis you suggest for the pricing of a flat panel LCD.]
Oh, ye of little faith !
These decisions are made intuitively by every consumer with every purchase. Every purchase contains a subconcious evaluation of the price of a product relative to all other items they could purchase. That's what a market IS -- consumers choosing and dictating the prices by their choices.
Do you honestly believe that a consumer doesn't look at two items -- even completely unrelated items -- and decide which one gives them the most bang for their buck ? Do you think people look at a restaurant menu and decide what to eat solely based on what sounds good ? So if they are in the mood for a steak, they will never be swayed to something else based on the price differential ?
What a strange world you must live in.
It truly flat out amazes me that these guys (the SQL squadron) keep bringing up the SOS (Same Old "Stuff") repeatedly despite the fact that there have been many refuations of the "Stuff" in the past - e.g., the non-taxed illegal aliens (or only equally taxed) under the FairTax nonsense. Almost anyone can grasp that the illegal economy contributes almost nothing to the tax coffers presently but will do so greatly under the FairTax.
And there are many other similar bits of nonsense. I can only presume they think enough mud thrown on the wall will stick with some newcomers.
It is not contrived. If a business owner has not investigated what it would cost to hire an employee rather than himself, then he is a poor businessman. The key to expansion, and therefor higher income, is to leverage the work of others, not do everything yourself.
[Heck, even the absentee owner can choose to keep the PIT portion of his profits ... that's his income. Isn't he entitled to maximize his purchasing power? If he gives it back as price reduction, his purchasing power declines substantially!]
Certainly, if he can maintain his competitive position and keep all his old PIT, then he is welcome to it. The free market will dictate otherwise, however.
Didn't say there wasn't. What I am suggesting is that it will likely NOT be used. Imagine the upheaval as $5 Trillion of Federal public debt is refinanced at a lower interest rate. First, the "call risk" on bonds skyrockets making bonds fall in price, and become less attractive investments. Second, incomes previously derived from the existing interest rates face decline in the face of rising consumer prices (related purchasing power decreases.) Third, it only saves 120B per year. That's well within the threshold of tolerance for long term deficit spending.
In short the political pressures to leave the debt in place would be SUBSTANTIAL.
Again you're confusing what COULD happen with with will likely happen.
Both systems (supposedly) raise the same amount of tax revenue. Revenues will NOT, as you say: ... be higher as the illegal contractor spends the money at retail. Only the payee will change ... but, using your logic, the illegal contractor will raise his prices to mainting constant purchasing power; ultimately the person who hires the illegal will foot the tax bill through higher prices.
You apparently do not realize that it is the same situation as at present where the Federal government taxes states by forcing them to pay employees more to compensate the employees for paying federal income tax (as well as state).Sorry, your example is crap. First, a tax on an individual is not a tax on the source. Second, the state employee would pay FairTax on their purchases. (According to your logic, the state government employee could be exempt from paying the FairTax and the state could pay them less.) In addition to the employee paying taxes when they spend their wages, the state pays the FairTax on the wages it pays the employee No other employer besides government has to do this. This is not the same situation as it is at present.
Giving a tax-free advantage to any government entity is a really, really, really poor idea. In fact, it's a non-starter. Apparently you really DON'T grasp the significance of that.That's irrelevant to my point. The point is that state and local taxes would have to be raised to pay this tax. People should know that under the FairTax they would be paying a very significant portion (much larger than today) of their federal
I didn't say ALL expenditures would increase by 30%. So we then agree in principal: states and localities will have to raise MORE tax money than they currently have to pay their FairTax prices. Nowhere in the FairTax propaganda is that noted.
Well, the 'used goods' argument is false.
So then you are suggesting that there will be no net shift in buying behavior, no new "choices" for people to make.
In other words, the notion that the FairTax allows you to pay as much or as little tax as you wish is really a red herring.
In any event, the FairTax base does NOT allow for ANY avoidance or ANY evasion from current retail purchase behavior. That is simply unrealistic.
On your imported vs. domestic beer example, you miss the obvious market issues. If both are currently selling for $10 a 12-pack, then the consumer has already assigned equal value to them. The total cost for the imported 12-pack must stay the same as the domestic beer or it will lose market share. So both domestic and import beers will fall to $8.86 before tax and $11.50 including FairTax. A 15% price increase overall.Would you like to play my game theory simulation?
Certainly all of the ones cited here on FR do.
Can you point to one that was not funded by Retailers, and that also included a reduction in interest rates and an FCA ? I don't know of such a study, but I do know human nature.
I guess you haven't been paying attention. The Jorgenson study, funded by the AFFT, does (and even includes the prebate!) The Kotlikoff studies do as well ... Have you read them??
If ANYONE deviates by maximizing their own situation under a new, untested tax regime, then BY DEFINITION, prices MUST rise higher than the levels that you claim.
It is not me living in the stange world ... I EXPECT people to behave outside the parameters of the plan.
Exactly. And when he does, aggregate prices MUST be higher than you predict.
And you never answered the question: Isn't he entitled to mainting his purchasing power as well?
You seem to be implying that the tax burden SHOULD be shifted more heavily on small business owners; that they SHOULD suffer losses in personal purchasing power. What's "Fair" about that?
And you never answered the question: Isn't he entitled to mainting his purchasing power as well?On a microeconomic level, if the FairTax is truly revenue neutral, across the board real prices (purchasing power) can not change. If overall take home goes up, overall prices go up the same amount.
Hell, DImp-Dimp, you're only projecting what YOU thing might happen. Then again what you assume won't happen could very well happen. In fact, it seems more likely to me.
ASfter all, your primary scenario is based on substantial price increases and disposable personal income falling which are very unlikely to happen. With the removal of ER payroll taxes, consumption costs, and the well-known embedded tax costs that also artificially boost prices it is eminently likely that prices will decline as most people can understand. With those things removed and more money in taxpayers' pockets the outcome outlined by Kellis91789 is far more likely than yours.
And there's certainly no reason for an "upheavel" in bond or any other prices since there will be many months of leeway as the economy adapts to the FairTax ahead of time.
You are the misrepresenter here Dimp-Dimp. The illegal money spent for taxable things will be fully taxed under the FairTax while at present it generates almost nothing in the way of tax revenue.
The discussion is not, was not, and never has been about taxing illegal income, but is IS about obtaining the sales tax from the things purchased by that illegal income. Nor do both systems presently raise the same amount in tax revenue since the illegal economy pays almost nothing in income tax eiher on the things they purchase or on the illegal income itself.
Your argument is inapplicable and certainly the person in the illegal economy derives his income by ignoring any economic rules anyway so your trying to apply some sort of economic justification to the situation is gilding the lily and absolutely erroneous to boot.
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