A Battlefield for Tax Reform - Vanity

vanity | 9/17/06 | Principled

[Principled]

A Battlefield for Tax Reform

There are a few significant battlefields in the war for tax reform. One of them is Free Republic. What makes the Free Republic battlefield significant is that the debate is at the cutting edge. The debate on Free Republic is the most current and most knowledgeable. It is a year ahead of other significant battlefields (radio talk shows, political town-hall meetings, conversations among neighbors and coworkers.)

The trend on Free Republic with respect to tax reform is going to show up in the real world. Free Republic is a tiny segment of the world, albeit a more educated, more politically motivated, more affluent segment than most. Perhaps those are a few of the reasons that Free Republic predicts what will happen in the real world – the world of radio, newspapers, network television, and most importantly - elections.

The choices are

Keep the status quo and continue with our graduated income tax
Eliminate the income tax and implement a flat income tax (although this option has negligible support)
Eliminate the income tax and implement a national sales tax

There are no other options. We are going to have taxes. The only choice is deciding the best way to have them.

Whichever choice you prefer, one thing is clear. The opponents of tax reform on Free Republic will stop at nothing to protect the status quo. Here’s what’s happening on Free Republic (remember it’s a predictor of what will happen in the real world.)

Opponents of reform randomly select perceived problems, however insignificant, and say that’s the reason this reform cannot work. For example, attackers of HR 25 (the “Fair Tax”) have alternately said the rate is too high and then the rate is too low. Whatever seems to get traction is what they stick with. Is it no wonder the perception is that these anti-reformers are not being honest with the reason(s) they oppose the reform. This is why so many question the motives of the anti-reformers. What are they hiding?

The anti-reformers try to make the reform threads so unpleasant that people choose not to participate in them (what does this predict about the real world?)

An anti-reformer may be taking advantage of the positions he he was entrusted with by the site (modertor). By taking sides in threads, berating and belittling pro-nrst posters, by deleting threads, by locking threads, and by moving threads from news/ACTIVISM to “Bloggers and Personal” and to “Smokey Backroom”, the mod(s) in question are taking away from the greatest site on the internet. Sometimes, threads are moved to bloggers and then moved to SBR or vica versa.

Pro-nrst posters are suspended for things that don’t make sense. Anti nrst posters are not suspended for things that should require it - comes to mind the picture of a dog copulating with a pig with the comment “screw you pigdog”… “I found a picture of your parents”. Noteworthy is that the poster of said graphic and phrase were not suspended but rather the recipient of it was suspended for complaining about it.

What does this predict about the real world?

Suffice to say that the debate about tax reform is won by the reformers. The proof is that when educated about the three reform options, the general public chooses the nrst over 70% of the time.

The only question is whether the dishonesty of the anti-reformers will slow the progress of reform in the real world. This is NOT to say that all anti reformers are dishonest - but it is the dishonest ones who are tainting the others.

The good thing about the debate is that the nrst is the most thoroughly investigated alternative - each and every point is debated in complete detail. Problems have been identified and some changes have been made. That's a good thing. And as debate continues, the level of knowledge of any lurkers continues. As I said, I predict over 70% will choose the nrst.

[Principled]

Can you get some html thangs happening and put up a graph of income vs effective rates that will overlay income tax rates by income AND nrst rate by spending?

[ancient_geezer]

Only thing I have readily on tap is the AFFT FAQ enteries discussing the effective tax rate of the FairTax as it regards a family of 4 FAQ#5:
http://www.fairtaxvolunteer.org/smart/faq-main.html#5

Is the 23% FairTax revenue-neutral rate higher or lower when compared to income and Social Security taxes people pay today? Most people are paying that much or more today – much of it is just hidden from view. The income tax bracket most people fall into is 15 percent, and all wage earners pay 7.65 percent in payroll taxes. That’s 23 percent right there, without taking into account the 7.65 percent employer matching! On top of that, you have to add in the business taxes and associated compliance costs passed on to consumers in higher prices.


Effective tax rates vs. stated tax rates
Because the 23-percent FairTax rate of $0.23 on every dollar spent is not imposed on necessities, an individual spending $30,000 pays an effective tax rate of only 15.5 percent, not 23 percent. That same individual will pay 17.3 percent of his or her income to federal taxes under current law. See effective tax rates for a family of four at various spending levels in Figure 2.

 

And AFFT's discussion of comparative rates regarding a situation of married with no childern FAQ#14:
http://www.fairtaxvolunteer.org/smart/faq-main.html#14

Is it fair for rich people to get the exact same FairTax rebate from the federal government as the poorest person in America? Let’s look at a billionaire under the FairTax – if he spends $10,000,000 dollars he pays a tax of $2,300,000 and gets a rebate of $4,508 (assuming he is married and has no children). His effective tax rate as a percent of spending is 22.95 percent.

Now, let’s look at a middle-income married couple with no children under the FairTax – if they spend $40,000, they pay $4,692 net of their rebate for an effective tax rate of 11.7 percent. The effective tax rate increases as spending increases, but never exceeds 23 percent!

Figure 4: Comparison of effective tax rates
FairTax Income tax

	FairTax	Current Tax
Expenditures = income	$40,000	$40,000
Net tax	$4,692	$5,870
Effective tax rate	11.7%	14.7%

In contrast, if this same couple earns $40,000 in wages today under the current tax system, they pay $2,810 in income taxes and $3,060 in payroll taxes for a total of $5,870 in taxes (14.7 percent). In addition, their employer pays another $3,060 in payroll taxes. Most economists agree that the employer payroll tax is actually borne by employees in the form of lower wages. Looked at this way, this couple is paying $8,930 (22.3 percent) in taxes today, which doesn’t even include the hidden taxes they pay every time they make a purchase.

Finally, let’s look at a low-income couple under the FairTax – they pay no net FairTax at all. Today, under the income tax system, they not only pay 15 percent in payroll taxes, but they also pay hidden taxes – arising from corporate taxes, private sector compliance costs, and payroll taxes passed on to consumers and embedded in the price of everything they buy.

[Taxman]

Ping

[lucysmom]

Why don't you go get the information? Maybe you could get a more recent expenditure report.

The BLS acknowledges the rather large difference between reported income and expenditures. It relies on self reporting when gathering information and admits a significant margin of error.

[Principled]

Why would someone mis-report to BLS?

Do you think there is a similar mis-reporting to the IRS?

How would you reconcile the fact that the IRS shows 20% less in earnings than we spend in the aggregate?

[Principled]

Oh yeah- and when the tax is on spending instead of earnings, how will capturing that previously mysterious (untaxed) 20% affect collections?

Could some of it be the illegal economy?

[Principled]

Which is one reason the rate will be lowered in future years.

That ALL individuals (obviously to include all voters) benefit from a rate reduction puts all individuals (and obviously all voters) united in favor of a tax cut. That's not the situation we have now under the income tax.

Also, under the nrst when ALL individuals pay the same marginal rate, all individuals will be united in opposition to any increase. That's not the situation we have now under the income tax. Now, it's "tax him" or "tax the other guys"...

[lucysmom]

How would you reconcile the fact that the IRS shows 20% less in earnings than we spend in the aggregate?

From the tax panel report For the portion of income from which taxes are not withheld and there is no third-party reporting, income tax evasion rates are estimated to be around 50 percent.

The FairTax makes ALL tax collection points self reporting.

[ancient_geezer]

It relies on self reporting when gathering information and admits a significant margin of error.

Hmmm, ever wonder why large groups of people would not tell the government how much they make in income?

 

Table 2. Income before taxes:
Average annual expenditures and characteristics, Consumer Expenditure Survey, 2001

Complete reporting of income a/

Item	Total complete reporting	Less than $5,000	$5,000 to $9,999	$10,000 to $14,999	$15,000 to $19,999	$20,000 to $29,999	$30,000 to $39,999	$40,000 to $59,999	$50,000 to $69,999	$70,000 and over
Households (thousands)	88,735	4,100	6,829	8,099	7,014	12,075	10,508	8,737	12,480	18,892
Income before taxes b/	$47,507	$1,666	$7,675	$12,380	$17,282	$24,494	$34,456	$44,418	$58,943	$113,978
Income after taxes b/	$44,587	$1,528	$7,678	$12,388	$17,086	$23,924	$33,047	$42,362	$55,572	$104,685
Average annual expenditures	$41,395	$20,517	$16,625	$20,642	$25,028	$28,623	$35,430	$40,900	$50,136	$76,124
Net change in total Assets & Liabilities	-$3,853	$436	-$1	-$675	-$1,174	-$868	-$2,020	-$3,110	-$12,805	-$5,912
Net Change in total Assets	$4,144	$2,299	$2,746	$696	-$263	$2,665	$2,966	$5,656	-$238	$11,962
Net Change in total liabilities	$8,002	$1,863	$2,748	$1,371	$1,371	$3,533	$4,985	$8,766	$12,567	$17,874

 

Never mind, that's just a rhetorical question in a thread about reforming the income/payroll tax system ;O)

[Principled]

From the tax panel report For the portion of income from which taxes are not withheld and there is no third-party reporting, income tax evasion rates are estimated to be around 50 percent.

But there is 3rd party reporting under the nrst. Did you forget that?

Retailers will have a registration that allows them to purchase tax free and allows them to be paid for remitting the tax.

They aren't simply asking retailers to please be honest! They'll be checking.

[Jim Noble]

The choices are Keep the status quo and continue with our graduated income tax Eliminate the income tax and implement a flat income tax (although this option has negligible support) Eliminate the income tax and implement a national sales tax There are no other options.

Au contraire, mon frère - there is a fourth option and it's the one the politicians will choose.

4) Keep the graduated income tax and ADD a national sales tax.

[lucysmom]

They aren't simply asking retailers to please be honest! They'll be checking.

What you are suggesting is an audit, not third party reporting.

Third party reporting would mean requiring the consumer to retain his receipts and report his purchases, the sellers and tax paid to the government.

[Principled]

HTML king - nice job.

People DO spend up to the poverty level - even if they don't report near as much in earnings.

What does that say about the number of people who have negative tax rates under the income tax compared to the number that will have negative tax rates under the nrst?

Seems that the nrst will greatly reduce redistribution.

[Principled]

What you are suggesting is an audit, not third party reporting.

Audits of business will take place, but that is not what I was suggesting.

That registration numbers are used to purchase tax free for business purposes allows a third party - the tax authority - to trace taxes they're expecting.

Surely you don't think that the bill simply asks retailers to be honest with nothing but audits to catch them, do you?!

[ancient_geezer]

The FairTax makes ALL tax collection points self reporting.

Actually since the taxpayer in a retail sales tax system is the purchaser of goods and services a retail sales tax system assures that the one paying the tax is not the one held liable for accurate reporting of the taxes due. For every transaction taxed, there are more than two persons aware of the tax collectors existence, the purchaser, the seller, the suppliers to the business selling and the government issuing business certification providing tax exemption for purchasing in production or aquisiton of products for ultimate retail sale.

Lots of potential witnesses, and lots of oppertunity for government to monitor 90% fewer tax collection points than exist today, less than 20% of which carry more than 80% of the total retail dollar volume. A max risk for little gain for the tax collecting point.

OTOH, under the income tax system the payer of the tax and the reporter thereof is one and the same person. Making an income tax/payroll system totally dependant upon self reporting, begging to be violated and cheated.

[lucysmom]

You don't understand what self reporting or third party reporting means.

[Principled]

Hello Jim. Actually I don't see that as a new choice - it's always been around. It could happen tonight in DC. But why do you think they haven't implemented a sales tax on top of our income tax yet? It would only take a vote in Congress!

Nobody wants both taxes (except socialists).

Provided we can prevent both until the passage of HR 25, we will be MUCH safer.

HR 25 defunds the IRS, destroys existing income tax records (save those delinquent at changeover), eliminates withholding, and erases the entire income tax code.

Those things make it much, much harder to put an income tax back on.

Sure some politician could introduce a bill to RE fund the IRS. Sure, some politician could introduce a bill to force all businesses and individuals to create and save documentation wrt income and payroll taxes, and of course some politician could introduce legislation to RE implement withholding.

These things are unlikely to be sure. And if they happened, they'd have to be passed by folks expecting our votes!

In addition to the obtacles stated above, how long would it take to write and negotiate an entire income tax code?... (and WHO would propose it?)

It would be a nightmare to have both. IMO passing HR 25 makes it much less likely.

[RobFromGa]

It would be a nightmare to have both. IMO passing HR 25 makes it much less likely.

IMHO passing a national sales tax makes it much MORE likely we will end up with both. Obviously passing a national sales tax is one of the steps to ending up with both, we already have the income tax half. So your can claim that passing a national sales tax, which does not eliminate the 16th Amendment as a prior requirement for passage, will somehow make it less likely that we end up with both, is just backwards.

[Principled]

What is the purpose of 3rd party reporting?

Isn't that accomplished under the nrst (even if you choose to call it something else?)

Yes it is.

[Jim Noble]

IMHO passing a national sales tax makes it much MORE likely we will end up with both.

Dingdingdingding... We have a winner!