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?
In competitive markets, prices fall to the lowest price that provides an acceptable investment return after all costs have been covered.Prices in a competitive market are not directly related to costs. The price is where the supply curve meets the demand curve (the equilibrium point). If a producer can't make a profit at the market price, they will eventually leave the market. This reduces supply, shifting the supply curve to the left, and, thus, raises price. But note, the remaining supplier's costs did not change.
Nobody, but nobody would disagree that the current system is deeply flawed, but why throw out the whole house along with the baby and the bathwater? A Fair, Flat Tax is the answer. Some will crow "we tried that", as we tried democracy and failed, and came up with a constitutional republic, and made it better. We've made bad ideas good, we've torn the union apart and put it back together even better. "Everybody" was "for" prohibition.. we know how all that worked out.
Fix the code, flatten the tax, use what others have succeeded at, and make it better.
I should have pointed out that since the FairTax is removing the same amount of taxes from the economy, you are not changing supply or demand. The real price would not change.
Right, in aggregate; but locally, the distribution of changes is non-uniform. Some will experience increases in purchasing power, some will experience decreases, some will experience no change.
Kellis seems to be arguing that because the aggregate shows a net zero change, that each of its components should individually show net zero change.
On a microeconomic level, the FairTax is not "individually" revenue neutral ... it can't be because some pay higher income tax rates than others yet buy the same jug of milk at the grocery store at the same price. Prices may rise or fall equally for all; but take-home pay will not. Individual purchasing power effects will be widely varied.
No wonder you don't understand the difference between an employee and a business owner.LOL! You noticed too.
Go back and re-read the posts. It isn't me that's confused about the difference.Like your skewed numbers it works only in your mind not in reality.
[So then you are suggesting that there will be no net shift in buying behavior, no new "choices" for people to make.]
Oh, they can still choose to buy used, and they will pay lower taxes by doing so. But it will be mostly a protest against higher taxes, not a reason to get more bang for their buck.
OK, I'll bite. Must be a catch in here somehwere ...
If I drop my price from $10 to $9.50 I get all your 50 customers, don't I ? So my sales go from $500 to $950, my profit goes from $100 to $150 and you are out of business.
The price of beer has dropped 5%.
Knowing you will have to start your price at $9.49 to re-enter the market, you either stay out, or the price falls even further. It continues until neither of us is willing to accept any lower profits -- price stabilizes at our costs + return on investment.
Nope, haven't read them. Feel free to provide a link.
[For your scenario to come to pass, EVERYONE must have perfect trust, perfect foresight, perfect capital mobility and perfect fairness (and that's what the simulations expect, by the way.) ]
Nonsense. I don't rely on vendors to have trust or foresight. I rely on their desperation to hold market when faced with consumers that punish them for not underbidding their competitors.
It's a dynamic process that happens automatically every day in a free market. It is not something that relies on central planning, foresight, agreement, or trust.
[And when he does, aggregate prices MUST be higher than you predict. ]
Not in a free market. There will always be a competitor that will lead prices lower, forcing him to follow, until they both end up with the same purchasing power as they had before.
[And you never answered the question: Isn't he entitled to maintain his purchasing power as well? ]
My example answered this question. He didn't retain all of his PIT, and yet his purchasing power WAS maintained. To retain the full PIT would have given him a windfall in purchasing power.
So will there be a net shift in buying behavior or not?
Yes, this is true. This is the conclusion that Principled and I generally agree on. Relative purchasing power cannot change by very much.
There is a small overall gain expected by removing the unproductive activities required by an income tax, and freeing all that well-educated tax-compliance staff for more productive uses.
Overall, however, there will not be any huge gains like zero overall price change and simultaneous huge increase in take-home pay. The increased take-home pay will be needed to pay the taxes on the purchase.
The monetary gains will be small for most people in the short term. The more productive environment and effect of savings and increased capital available will grow the economy, however. That will pay off in the longer term.
I have pdfs not links. You supposedly get the Jorgenson study from the AFFT by request. Kotlikoff you might have to pay for.
This may shock you, but I'm not an economist. I know economists use terms very specifically, and perhaps I've mis-used the term "competitive markets". It's been 20 years since I opened an Econ text.
My intent was to define a market where entrance and exit was easy, there are too many sellers for any one to make a significant impact on supply or prices, and demand is highly elastic. Only the actions of the aggregate over significant time periods affect the price of the item.
In a market of a thousand sellers where productions costs are essentially identical, the choice to enter or exit the market will be based on the difference between costs and selling prices. That difference must exceed the return on other investments by the amount of risk involved.
OK, I'll bite. Must be a catch in here somehwere ...No catch. It's a classic game theory example.
If I drop my price from $10 to $9.50 I get all your 50 customers, don't I ? So my sales go from $500 to $950, my profit goes from $100 to $150 and you are out of business.I'm not out of business so quick. I drop my price to $9.50 so we both sell 50 and make $75 (down from $100 each). Your profits have gone down.
Knowing you will have to start your price at $9.49 to re-enter the market, you either stay out, or the price falls even further.Why would I have to come back at $9.49?
It continues until neither of us is willing to accept any lower profits -- price stabilizes at our costs + return on investment.The point is that we are both better off not dropping prices to start. If you thought you could drop your price to $9.50 without me responding, you would do it. But you know I would respond. That's game theory. Why would we race to the bottom when we are both better off standing pat?
[Fix the code, flatten the tax, use what others have succeeded at, and make it better.]
That wouldn't bother me if we could really 'fix' it. By that I mean remove the ability of Congress to ever change it, create exceptions, loopholes and exemptions, start it at the first dollar of income, and remove the fallacy that businesses can pay a tax without passing it along in higher prices to customers. Oh, and find a way to tax the imports just like the producing companies are taxing our exports by adding the VAT to them.
I don't know of any Flat Income Tax proposal that offers to do all that. Usually, they want to give people a big fat exemption, continue to tax people a second time by taxing businesses, and giving trade advantages to foreign producers by not rebating the business taxes on exports.
Some, not much.
How's that for an 8-ball answer ?
Like the way Exxon/Mobil is being punished in the marketplace?
There are few markets where "lowest price" always wins ... perhaps you can explain the bottled water phenomenon? Or the Designer Sunglasses market??? $250 for a couple of cents of plastic and two hinges?
Yeah ... punishment ...
We don't live in a retail-price-driven economy; we live in a perceived value economy. That's why marketing works so well. We create the perception of value in the mind where none exists in practice. You don't have to lower your price if you can convince the buyer that the goods are worth the price ... even if your "competitor" is less expensive ... can you say iPod?
[I'm not out of business so quick. I drop my price to $9.50 so we both sell 50 and make $75 (down from $100 each). Your profits have gone down.]
That isn't the way you laid out the rules for your game. If I drop my price to $9.50 all at once, I get all your customers. You don't get any back until your price is below my price.
Or did you mean that we took turns -- I drop a penny, then you drop two pennies to get your customer back, then I drop two pennies to get him back to my side ... and so on until we've both hit the lowest price we are willing to go ?
Having only two competitors in a market is not realistic in terms of the 'competitive market' where I think prices devolve to the lowest level.
The reason we would embark on this race to the bottom is because we never know the intentions of all the competitors in the market. There is always the chance that they are just trying to capture the market and expect to be able to raise prices after you've been eliminated. If the market has easy entrance and exit, then this never works. The competitor they eliminated is just replaced by a new entrant.
New entrants fail all the time because established competitors are willing to underbid them to keep them out of the market. If there is a large pool of potential new entrants, the result is perpetual low prices.
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