Taxing Sales under the FairTax – What Rate Works?

Boston University ^ | September 2006 | Laurence J. Kotlikoff et al

[pigdog]

As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level.

Bill Gale (2005) and the President’s Advisory Panel on Federal Tax Reform (2005) suggest that the effective (tax inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23% rate. This study, which builds on Gale’s (2005) analysis, shows that a 23% rate is eminently feasible and suggests why Gale and the Tax Panel reached the opposite conclusion.

This paper begins by projecting the FairTax’s 2007 tax base net of its rebate. Next it calculates the tax rate needed to maintain the real levels of federal and state spending under the FairTax. It then determines if an effective rate of 23% would be sufficient to fund 2007 estimated spending or if not, the amount by which non-Social Security federal expenditures would need to be reduced. Finally, it shows that the FairTax imposes no additional real fiscal burdens on state and local government, notwithstanding the requirement that such governments pay the FairTax when they purchase goods and services.

[pigdog]

See post 864 yourself.

[RobFromGa]

you must have me confused with another poster.

[Always Right]

PIGDOG:  Not at all. as you have amply demonstrated on this and other threads, you're merely too ignorant to grasp what has been said ...

Wow, again with the lame retort.  Pigdog, can you at least pretend to make a point when you throw about your insults?

PIGDOG:  When do you start the multi-colored "liar, liar, pants on fire" personal attacks on Principled?

Sorry pigdog, you are the only liar on this thread.  Principled might have been mistaken on the point, but that is different from lying.  Lying is knowingly saying something that is false.  Lying is what you do when you are shown to have said something incorrect, but to insist you did not say that even though you clearly did. Lying is when you then try to say it was taken out of context when it clearly was not. You are a pro at lying.

[Always Right]

Maybe this time it is for good.

[elkfersupper]

Interesting how a crisis manufactured by politicians can cause so many people to radically modify their behavior rather than just get rid of the problem.

It's like moving out of your house because of an insect infestation.

Seems to me it would be easier to just get rid of the insects.

[Principled]

It really is $23 due on $100 gross wages of noneducational employee.

[Always Right]

It really is $23 due on $100 gross wages of noneducational employee.

Since 'gross wages' is not even in the bill, what are you basing that on? It is possible, but if government wages are considered 'services', which it appears, then they will be treated at 23% inclusive like any other service. I just don't see how you make the case.

[Always Right]

First, stop with the names. OK?

Consider it stopped.

[phil_will1]

"Second, as families change, so does the status of the rebate. Out of work, new job with much higher pay, etc."

Irrelevant to the rebate - it isn't tied to income.

"Who monitors this?"

No one; don't you love the simplicity of the FairTax?

"And I would assume that fraud will still happen. Don't kid yourself, it will happen. Everyone is assuming that there will be no black market"

I don't know who "everyone" is, but certainly I am not among them. What I assume is that with a dramatically simplified system and an enormous reduction in points of enforcement/compliance, as well as a big concentration of sales dollars (and thus sales tax dollars) among the mega retailers, resources allocated to enforcement will go much, much further than they do now.

Bottom line:
We will get much, much higher levels of compliance than we do with the current system with lower levels of resources committed.

Will the FairTax eliminate tax cheating? Of course not, but if that is your benchmark, then we will never have anything except the current dysfunctional system. That is, until one of the major economic problems that our tax system contributes to causes an economic crisis of some kind.

[phil_will1]

"No Tax system is designed to reduce spending although The Fair Tax will abolish the IRS and eliminate the billions spent to run it."

As well as save hundreds of billions in wasted compliance costs.

[phil_will1]

"[And I'm still waiting for the text from the bill that describes 'gross wages.']"

And I'm still waiting for ANY text from your bill at all.

What has it been now 4 or 5 years?

[phil_will1]

"I am talking about when they reinstitute the income tax on top of the sales tax due to massive revenue shortfalls with the FairTax plan."

I think this is the point in the thread in which I ask about your qualifications in the area of economics and you acknowledge that you have none, but then deny making any economic forecasts.

That saved a lot of back and forth posting, didn't it?

[groanup]

Just go read the previous threads, it is all there.

Just so you'll know I have read virtually every FairTax thread for about two years now. You have recently made the claim, and you make it continually, that the FairTax will create instant inflation of 30%

Since that piece of startling information would be welcome fodder for any and all resistance to the FT, I thought it would be helpful to see the opinions of some economists, such as Gale who is very much against the idea, expressing the disastrous results of such inflation.

Immediate 30% inflation is your claim. That is big news. To an economist, it would be the equivalent of meltdown at the Federal Reserve.

Since it is is such an extroadinary number and would have the effect of taking America to third world status immeditately, I thought surely that some anti FT economist would have been all over it.

That is why I asked you to back it up.

So far the only place it has been mentioned is in your posts. Aside from the sound of crickets chirping is there anything else?

[Bigun]

Consider it stopped.

You are a REAL hero aren't ya! When you cannot counter the opposition's arguments cry to the mods loud and long!

Yeah! Real hero!

[groanup]

First, stop with the names. OK?

So how come this didn't get pulled (461)?

[Bigun]

Or this (462)?

[RobFromGa]

Well I'm an engineer and we study feedback, and in this particular system there is a lot of feedback. There are several nasty things that happen when the FairTax rate goes up:

1. The cost of all levels of government go up: federal, state, and local. This is because all of these entities are required under the bill to pay the full FairTax on each and every one of their non-education related purchases, salaries and employee benefits.

2. The cost of the "prebate" goes up because it is just the TaxRate multiplied by a fixed basic spending allowance.

So, the higher the FairTax rate is, the more money that the government needs to spend to maintain purchasing power neutrality. This means extra FairTax revenue is needed by the government as the FairTax rates goes higher.

The other thing that happens when the FairTax rate goes up is:

3. After-tax prices for new goods/services will rise proportionally with the FairTax rate, and human behavior being what it is this will lead to a reduction in the consumption of these taxed items. This reduction can take many forms: people buy used, people fix what they have, people do without, people buy cheaper items, people barter for items, people use business exemptions to make the purchases tax-free, people make black market/underground transactions.

So, the higher the FairTax rate goes, the more depressed that taxed consumption base becomes, so FairTax rate increases will likely NOT bring in the additional revenue that is expected, but only a fraction of the predicted increase in revenue, and possibly a decrease in revenue.

To sum it all up, raising the FairTax rate causes the government to need more money to remain purchasing power neutral. This requires the FairTax rate to go up even higher. And raising the FairTax rate also causes the taxable base to shrink, which requires the FairTax rate to go up even higher. Very bad feedback in this system.

Not a pretty picture of a working system, the only thing you can do is to find the point of optimal collections, and lve with that amount of revenue, or increase the collections it through much tighter enforcement, or supplement it with other taxes, like the emergency income tax that I think would happen on the productive...

I can't prove this will happen, but it very well could, and there is no way you can disprove it either. It is too big of a risk.

Can you imagine the hoarding of items that would occur jsut prior to this being enacted? Can you imagine all the business people and owners deferring all their income possible into future years when it won't be taxed by an income tax? Transistion would be another disaster.

[Bigun]

Or how many hundreds of others might we find?

[Always Right]

You are a REAL hero aren't ya! When you cannot counter the opposition's arguments cry to the mods loud and long!

Sorry, but it was not I who cried to the mods. I was just making an observation that it had been taken care of. In fact I missed most of the posts that were removed. I was in the middle of making a response to one and the next thing I see is 'puff', he was gone.