63rd co-sponsor signs on to FairTax Act of 2007

Americans For Fair Taxation ^ | July 20, 2007

[camle]

a VAT of money is exactuly how the politicians view this. too bad people are so stupid as to beleive that it will make things better. it won,t.

[Taxman]

One mind at a time!

[eraser2005]

Great idea!

We’ll all go out and buy up anything we can on the open market.

That’ll drive the prices up, and we’ll all be saved!

And what happens when everyone, all at the same time, makes a run on their bank to get their money out to finance this absurd scheme?

[RobFromGa]

DEBUNKING THE FairTax:
A Fair Question about Fair Tax
OPEN LETTER TO BOORTZ/LINDER (FairTax)
JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)
Fair Tax - Straightening Out Some Confusion
FAIR TAX BOOK- 2nd Ed. Revisions
A FAIRTAX PRIMER

What Will Happen Under a 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. This assumes no evasion and no reduction in spending by consumers on new goods and services when the large sales tax is imposed. (an unrealistic assumption by the FairTaxers)

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 after-tax money.

Does this sound like a utopia to anyone? Isn't it very likely that a 36% sales tax (or much higher like 50%) 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?

And once people either stop buying, or buy used, or barter for services, or buy on the black market, or funnel purchases through their businesses for a tax exemption, it is very likely that the FairTax inclusive rate would be 33%-- which is an exclusive rate of 50%, making the problem worse.

What will the Real FairTax Rate Be? [Hint: much higher than the 29.87% they claim]

The FairTax plan makes the false ASSUMPTION that 23% inclusive will be enough to fully find the government at today's level.

FairTaxers generally agree that the FairTax will cause higher prices and FairTaxers think that these will be ok because the purchasing power is what matters. Wage earners will receive a pay increase with their 100% paychecks to compensate for the higher prices.

Domestic prices will rise about 18-25% after a small (max 8%) price cut and then the 30% FairTax is added-- and rise the full 30% for foreign items.

Stick with me here for just one more minute. The government will also need a "raise" to pay the higher prices (because the government pays the FairTax on everything too), and it will take the form of additional revenue that needs to be raised. That additional revenue can ONLY be raised by increasing the FairTax rate, there is no other source to generate revenue. So, the 23% rate when multiplied by 1.18 is now 27.1% inclusive, which is 37.2% exclusive.

And that assumes no reduction in the base. If we assume just the very minimum that the base reduces 8% due to reduction in shelf prices-- ie. no reduction in unit volume of sales, just an 8% lower price for everything, then we need to divide the 27.1% by 0.92 to get a new inclusive rate of 29.5%, which is 41.8% exclusive. And this assumes ZERO evasion, and the same exact level of unit sales as now.

Most recently the FairTax commission found that the FairTax Rate was grossly understated by the FairTax people and that the actual rate would have to be MUCH HIGHER than 29.87% exclusive due to 1)government paying itself tax and 2) erosion of the taxable base due to all factors. Just a 15% erosion in base, coupled with a Federal government costing 20% more than presently (the cost with the FairTax added) makes the rate 33% inclusive which is 50% exclusive.

The FairTax people need to go back to the drawing board and plug in the new reality where prices go up 18-25% and stick that in their models and see what somes out the other side. It won't be pretty is my expectation.

OK, FairTax opponent, if you're so smart, what do you think we should do to fix the problem?

I want to see elimination of corporate taxes, elimination of death taxes, additional reductions in the marginal income tax rates until we find that we are the Laffer optimal point.

In addition I want to see Social Security privatized, and I am willing to pay extra money to pay for those who were promised this benefit, and never receive a penny of it myself. I also want to see Medicare reformed from top-to-bottom. I also want to see Tort Reform to reduce the exorbitant costs of insurance on our medical costs. And we need to reduce the scope of the Federal Government to its constitutionally mandated responsibilities and get rid of the rest. The Golden Goose that is America is way too fat and needs to be put on a severe diet.

These are what we need to do, incremental improvements in what we already have. This is already working and we should keep at it...even Boortz seems to think so. Boortz (9/20): "...the economy continues to go like gangbusters. We are right in the middle of an historic economic boom. Don't let the mainstream media or the Democrats tell you otherwise...we've never had it so good...

[RobFromGa]

Here where I am right now, in Austria, there is a 19% VAT on everything, plus over 50% on gas, plus they have an income tax of almost 50%, plus the employer pays more. And they also have property taxes, and they have a “fuel consumption surcharge” on cars that makes a SUV that would be $45k in the states cost about $80k (55-60k euros).

[Cobra64]

For a Barry Goldwater and Margaret Thatcher supporter, you didn't learn too much.

Reagan and Thatcher believed in free-enterprise, least government, no taxes.

Taxing a business is a ruse... smoke and mirrors. Taxes paid by a corporation are a cost of doing business. To cover these costs, businesses raise their prices in order to maintain a profit margin.

The corporate tax accountants and lawyers are business overhead and they produce nothing. They are a necessary evil employed to reduce the Federal government from confiscating earnings. Just as you tax preparer is an expense to you.

The increased selling prices to cover taxes are passed along to the consumer. Meaning YOU pay corporate income taxes.

Read Thomas Paine, Alfred Marshall and take an accounting class.

"When are people going to understand that it is capitalism, not socialism that has made America what it is today?"

[R.W.Ratikal]

The politicians will go down fighting on this one. The Fair Tax Act is the decisive battle between the ruling elite and the American people. Careful note should be taken of when politicians in Congress decide to sign on and which are holdouts.

For those who have not studied the Fair Tax should do so. They will immediately be in favor it it becauser it is in their self interest.

[lentulusgracchus]

Spare me the self-serving sophistry.

Leave my savings the hell alone.

[lentulusgracchus]

My IRA is already 80% in precious metals mining stocks and 20% in overseas mutual funds, and my 401(k) is in inflation-protected securities (closest I could get, from among the options offered). So I've been looking out.

I still don't need a third or fourth bite at the apple from the feds, especially since passing a Fair Tax will, practically speaking, just result in another layer of taxation when Congress "forgets" to abolish the income tax.

NEVER EVER EVER EVER EVER pass a new tax. EVER.

[lentulusgracchus]

BTTT.

Everybody pay attention to what Rob is telling you about European taxes. DO NOT add another tax to the federal tax structure.

[RobFromGa]

The corporate tax accountants and lawyers are business overhead and they produce nothing. They are a necessary evil employed to reduce the Federal government from confiscating earnings. Just as you tax preparer is an expense to you.

90% of this work is necessary for management to operate the company and for shareholders to have the proper data to invest wisely. There would still be almost all the accounting and lawyering.

And as to socialism, the FairTax puts every American man, woman and child on the federal dole. With the likelihood that future politicians would manipulate and means-test this socialist welfare check for vote buying schemes.

Simple question-- Do you think that the monthly welfare check would make Americans More or Less dependent on government?

[BlabItGrabIt]

The dollar is getting gutted as we speak, because we’re on fiat currency and because we’re getting softened up for the Amero.

ovrtaxt, the dollar is getting gutted strictly to get Chairman Bernanke to lower rates. Nothing complicated nor any eggheaded analysis is needed by any experts.

Your "Amero" answers alot of "how come?" and "Why?" questions average Joe and Janes are asking.

Again, combine our taglines for some simple Truths, and S. R. Vaughn is Stevie Ray Vaughn.

[RobFromGa]

I’m just glad to be coming home from Europe tomorrow. THis place is a government and tax-collectors paradise. With the FairTax in excess of 30%, we will end up with the emergency income tax in short order. NO THANKS.

[ovrtaxt]

It’s a nightmare, isn’t it? I was in Switzerland a few years ago, the VAT was insanely high. And the Swiss are usually a lot more common sense than that.

[RobFromGa]

It’s the liberal vision for America. High taxes, government provided healthcare, subsidation of everything, more government workers than private (almost). And both a sales and income taxes. No thanks.

[ovrtaxt]

Well, we agree on the outcome, I just trust the psychologial effect of a sales tax to make destructive headway into the government dependence mindset. I see it working on a state level in FL every day.

[The Pack Knight]

I want to see elimination of corporate taxes, elimination of death taxes, additional reductions in the marginal income tax rates until we find that we are the Laffer optimal point.

Dr. Laffer's firm conducted a Macroeconomic Analysis of the FairTax Proposal last year. It's a long, dry read, and commissioned by Americans for Fair Taxation, which no doubt will invalidate it in many eyes here, but it's still interesting. The executive summary is on the firm's own site, and both links are to PDFs, so Acrobat Reader is required.

[EternalVigilance]

Awesome!

[Turbopilot]

Whoever wrote this analysis started off pretty well, but he made a couple mistakes that started compounding themselves, and ended up in a world nothing like the FairTax.

At the start, prices rise, but by less than the increase in purchasing power. I expect that some non-contract and non-union employers will actually see a reduction in gross wage (but an increase in take-home pay), so you might see an aggregate drop in prices of more than 8% pretax, although it averages out to the same purchasing power since those workers will not receive 100% of their pre-FairTax gross pay. In any case, this is as expected.

But then the author makes some weird assumptions about the effect of the tax on government. He talks about government costs going up 30% (exclusive) because they have to pay the FairTax - but the government is the organization that collects the taxes! Their actual costs don’t go up, because they’re just paying that money to themselves. If I were to start putting $100 a month into a savings account, my costs haven’t gone up by $100 - I still have that money. I’m just paying it to myself.

Then he goes on to claim that government salaries would go up by 30%. The author appears not to understand just what the FairTax covers. It is a retail tax on goods and services at the point of sale. There is no tax on income, savings, investments, etc. So the government doesn’t have to pay the FairTax on its employees’ salaries - although of course even if it did, it would “pay” to itself, thus resulting in no net change in costs.

The author uses those two mistakes to claim that the revenue-neutral tax rate would therefore be higher than the FairTax studies indicate. He then uses that percentage increase, multiplies it by his erroneous beliefs about the government taxing itself, and ends up with an even higher rate.

The author also neglects the positive effects on the economy. He claims prices of foreign goods will rise 30% - but with no taxes on corporations or capital investment, hundreds of billions of dollars of foreign investment will rush to the U.S., resulting in a large current account surplus and revaluing the dollar to historic highs. Based on the author’s assumptions, I’d wager that $10 foreign beer would cost less than the $10 domestic beer, because of the increased value of the dollar. For this reason, the CPI will grow less quickly than the author assumes, because the real dollar cost of foreign goods in the CPI basket will increase less than the real dollar cost of U.S. goods. Of course, the growth in the U.S. economy will also grow the tax base for the FairTax, resulting in increased collections at the same marginal rate.

It’s good to see the FairTax receiving attention and critical thinking. It’s a shame that this author made the errors he did, because his analysis began logically enough, and with the correct facts he could have written a very compelling pro-FairTax piece.

[RobFromGa]

I wrote this, and you are the one with the incorrect assumptions. The government does pay the tax and they counted the revenue but not the cost. There is a 30% tax in the FairTax bill on every single government salary, and benefit. And this is for state and local as well. (Except education). I suggest you read more about the bill and read some of the other linked threads in my post.