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?
The Fairtax by your/it's own admission lowers interest rates.
Yes, it does. Do you disagree?
Anyway, the yield will remain nearly constant. After tax, the same amount of money will be available to spend. It's nothing more than a swap for tax paid on investment for a tax paid at retail consumption.
Interest rates today are inflated by costs of our income tax system. When those costs are removed, the rate can fall near or to the tax free level.
It's not hard. People still pay taxes, just at a different time (if they're paying any tax now Lewis).
Like the price thing you're hung on... nominal prices may change, but real prices won't. Purchasing power remains constant. Yet you seem to think prices could rise without a corresponding change in wages. You are myopic in your emotional hatred of tax reform. It makes you look silly - that along with your problem with numbers makes you an entertaining poster.
No, you made that up. That prices may change is immaterial until you take the corresponding change in wages into account. Real prices will remain stable (for the first year or two). Purchasing power will remain stable. Ask someone you trust.
I guess you guys took an anti-reform seminar telling you to harp on price increase - but omit the part about corresponding increases (in wages or roi) that force purchasing power to remain stable.
I think you really wonder why some doubt your word. Either you intentionally leave that part out, or you are ignorant of it. I can't say which -
Why don't you ask someone away from this board about it? Someone who you'd trust? Or ask someone on this board you trust!
What you'll get from me and what you've gotten is that purchasing power will remain stable. Your "say it loud and often" is recognized by everyone on FR. FR is not a bunch of idiots. That's du.
If prices rise by x while my spending money increases by an amount sufficient to pay those prices, then purchasing power has remained at least as before.
Why do you omit that part?
What indicates that 19% isn't true?
Further, the tax is replacing taxes that already exist in nearly the same amounts. So the amount of tax remains nearly constant. In that sense, it's not new. It is only "new" in the sense that the bill would have passed more recently than the tax it replaces.
Honesty is the best policy lewis. That goes for paying your share of the income/payroll tax burden too.
So many people have a negative income tax rate. The vast majority of those same people would have a positive nrst rate.
Yes, part of the reason is that it's easier to cheat the income tax by underreporting income than it is to evade sales tax.
Look at this. It shows that even those who report FAR less than the poverty level actually spend up to the poverty level. That means they're cheating the income tax to get "welfare" in the form of tax refunds/credits by underreporting income. It also shows that those same cheaters would not gain from the rebate - they spend up to the poverty level.
I don't know that there is a single group in the data that will gan from the rebate.
The group reporting 0- 5k in income spends over 20k.
The group reporting 5-10k in income spends over 16k.
The group reporting 10-15k in income spends over 20k.
The group reporting 15-20k in income spends over 25k.
The group reporting 20-30k in income spends over 28k.
All those people you think will have a negative sales tax rate don't exist.
Hey - you got that right! Congrats.
Can you even name a country whose sole source of domestic tax revenue is a VAT?
Can you even name any country whose VAT began as something other than a VAT?
Get a googling!
All those people you think will have a negative sales tax rate don't exist.Of course. We all know there's no one living in poverty in the whole United States.
Yes, it does. Do you disagree?I do because I know tax rates, income or otherwise, don't dictate interest rates...Do you disagree?...Oh wait I'll bet you think the Fairtax interest is tax free...well get back to me when you go to spend your lower interest gain.
Anyway, the yield will remain nearly constant. After tax, the same amount of money will be available to spend. It's nothing more than a swap for tax paid on investment for a tax paid at retail consumption.Your self contradiction doesn't confirm why the rate would be lower...where's the "swap" from high to lower?...both are taxed.
What indicates that 19% isn't true?What indicates 23% isn't...not the bill.
As for purchasing power, if you happen to be a high wage earner, your take-home will rise MORE than the average (and your purchasing power may INCREASE); if you happen to be a low wage earner, your take-home will rise LESS than average (and your purchasing power may DECREASE); if you happen to live off of something other than wages, you're probably screwed.
In aggregate it should all balance out, but there there will be winners and losers ... something generally hidden by the FairTax crowd.
You see, back in the day when FairTax supporters pretended after-tax prices would remain unchanged, EVERYBODY was a made out to be a winner. In reality even then to maintain prices constant meant take-home wages had to remain stable. ONLY THEN was the purchasing power effect normalized across the population.
The reason the price effect is a big deal is because there is a very different calculus for determining individual purchasing power circumstances depending on whether prices rise or not (with corresponding wage behavior.) The fact that wages and income taxes are non-uniform coupled with with the return of these non-uniform taxes to wage earners alters the distribution of purchasing power. While the aggregate is a net-zero delta, your INDIVIDUAL mileage WILL vary.
I just want people to know that up front.
Unless you are on a fixed income, and fixed after-tax savings and don't have wages.
Further, the tax is replacing taxes that already exist in nearly the same amounts. So the amount of tax remains nearly constant. In that sense, it's not new. It is only "new" in the sense that the bill would have passed more recently than the tax it replaces.LOL!
You'll have to learn to pay closer attention. This simple plan of A NEW tax ON government wages, salaries and benefits is apparently very confusing for you Fairtax clowns.
As the bill dictates, it would be a new tax ON government employee's wages, salaries and benefits. The "replacement" tax is the tax government employee's pay at checkout like the rest of us...
All those people you think will have a negative sales tax rate don't exist.Yet.
They exist on the AFFT website, that's where I found out about them.
According to the AFFT graph here the Fairtax pays out even more than the income tax, or are you calling Karen Walby Director of Reasearch at AFFT a liar?
Honesty is the best policy lewis. That goes for paying your share of the income/payroll tax burden too.Hypocrite.
The states are taxed now Looey and the subset (you do know what that means, don't you?) of W&S employees affected is actually pretty smallYea, there aren't many people employed by or retired from local, state and federal governments...An additional, new 30% tax ON their wages salaries and benefits wouldn't amount to that much at all. < /sarcasm >
After adjustments, $914 Billion would be taxable under the FairTax. Of that, $501 Billion would be taxable Compensation.
Total FairTax due on that spending at 19.3% (inclusive) is $214 Billion of which $79 Billion could be paid by cost reductions (repealed FICA tax, pre-tax cost reductions) for a net Deficit of $135 Billion. Of the total FairTax due, $119 Billion is due to Taxable Compensation alone (as compared to the $37 Billion paid today as ER payroll tax.)
If States and localities reduce spending to balance the budget, the Federal government doesn't collect enough FairTax to be revenue neutral.
Otherwise State and Localities will have to raise their taxes by 10% to 12% to make up the difference.
Of the total FairTax due, $119 Billion is due to Taxable Compensation alone (as compared to the $37 Billion paid today as ER payroll tax.)That's a 320% increase. BTW, I'm not so sure employers would get to retain the employer paid half of FICA. That would be a battle to be fought and I think employers would lose that one. The bill calls for adjustments in the sales tax rate to equal 15.3% of wages and self-employment income. Without the employer half, the wage earner would only be getting his 7.65% but paying the hidden 15.3%...that's another (hidden) tax increase.
If States and localities reduce spending to balance the budget, the Federal government doesn't collect enough FairTax to be revenue neutral.Either way you look at it the Fairtax is a state AND local tax increase.Otherwise State and Localities will have to raise their taxes by 10% to 12% to make up the difference.
Total FairTax due on that spending at 19.3% (inclusive) is $214 Billion of which $79 Billion could be paid by cost reductions (repealed FICA tax, pre-tax cost reductions) for a net Deficit of $135 Billion.According to the AFT's own "revenue neutral" calculation for 2003, states would pay $271 billion in FairTax.
$ 1,058.5 state and local government consumption
+ 213.4 gross purchases of new structures, state/local
+ 51.5 gross purchases of equipment
- 414.7 government education expenditures
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$ 908.7 billion
x 29.87%
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$271.4 billion in FairTaxOf course, in typical AFT fashion, there is an error - and it just happens to be in their favor [gasp].I'll say there is. Not just an error but an obvious, intentional omission, because, unless I missed something in that laundry list, there are no employee wages, salaries and benefits included.
I'll say there is. Not just an error but an obvious, intentional omission, because, unless I missed something in that laundry list, there are no employee wages, salaries and benefits included."State and local consumption expenditures" includes "compensation of general government employees."
In my calculations I also lowered the total amount of State and Local spending due to savings from the repeal of FICA taxes and reduced non-compensation pre-tax costs. This both lowers the FairTax base and the total spend, but given your note that most education spending is actually taxable I reduced the total spent too much.
Revising the Calculations:
After adjustments, $ 1,112 Billion would be taxable under the FairTax. Of that, $655 Billion would be taxable Compensation.
Total FairTax due on that spending at 19.3% (inclusive) is $265 Billion of which $79 Billion could be paid by cost reductions (repealed FICA tax, pre-tax cost reductions) for a net Deficit of $186 Billion. Of the total FairTax due, $156 Billion is due to Taxable Compensation alone (as compared to the $37 Billion paid today as ER payroll tax.)
If States and localities reduce spending to balance the budget, the Federal government doesn't collect enough FairTax to be revenue neutral. Otherwise State and Localities will have to raise their taxes by over 12% to make up the difference.
Total FairTax due on that spending at 23% (inclusive) is $332 Billion of which $79 Billion could be paid by cost reductions (repealed FICA tax, pre-tax cost reductions) for a net Deficit of $253 Billion. Of the total FairTax due, $195 Billion is due to Taxable Compensation alone (as compared to the $37 Billion paid today as ER payroll tax.) State and Localities will have to raise their taxes by over 17% to make up the difference.
Either way, a rather significant State/Local tax increase is in the cards with the FairTax.
By the way, the SAME problem exists for the Federal Government: its cash flow turns negative under the FairTax "revenue neurtal" rate leaving an operating deficit. While the Balance Sheet may show revenue neutrality, the cash flows don't balance.
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