Posted on 08/25/2007 9:11:11 PM PDT by gpapa
Does adding 30% to the price of every house sold sound like a good idea to you?
Former Arkansas Gov. Mike Huckabee's unexpectedly strong second-place showing in the recent Iowa Republican straw poll is widely attributed to his support for the FairTax.
For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war (at the time the IRS refused to recognize it as a legitimate religion). The Scientologists' idea was that since almost all states have sales taxes, replacing federal taxes with the same sort of tax would allow them to collect the federal government's revenue and thereby get rid of their hated enemy, the IRS.
Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.
(Excerpt) Read more at opinionjournal.com ...
The 30% or Whatever the rate would be is already added into everything anyway.No it isn't. You ever bought anything on sale? 50% off? What happened to all that tax that was added in?
If NJ fired all their state workers they could not close the annual budget gap. The health fund shortage was caused by the state when they stop funding the fund in 1994 due to other pressing spending needs. Result is the fund is short and by law this is a contract between the state and the state workers that cannot be brokened (unlike federal social security which is not a contract but a legislative entitlement). If the state cannot raise the taxes it can declare bankruptcy to avoid the contract obligations. My town tax assessor told me that my property tax could rise 12 percent just to cover the initial payments for the state worker/teacher health fund shortfalls.Speaking of increasing property taxes and shortages. The Fairtax taxes "any government" employee's wages, salaries and benefits an additional 30% (not 23%), where do you think that extra money would come from?
FairTax, Flawed Commentary
August 25, 2007; Page A7 WSJ
by Bruce Bartlett (hereinafter called BB, with apologies to BB King, a true great)
Hit piece.
BB:”It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service”
Me: This seems like a scientific approach to the review of FairTax; Scientologists are kooks, the FairTax must be a kooky idea.
BB: “In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.)”
Me: Hmmm, I wonder what income tax rates begin to look like, if calculated, “externally” - as a percentage of what’s left of taxpayers’ income? Care to tell us THAT, BB?
BB: “This is only the beginning of the deceptions in the FairTax.”
Me: Oh, like their website, FairTax.org, hasn’t already thoroughly debunked most of these “straw men” that have been floated (all, that is, except this newest Scientology angle - and I doubt that they’ll spend much time on that one - preposterous).
BB: “the federal government would have to pay taxes to itself”
Me: The idea here is to prevent government from competing with the private sector. But why even mention this, when later you say, “but its tax collection will also be ... higher.”
BB: “The FairTax rate, however, is not high enough to finance the higher spending it imposes.”
Me: Didn’t do your research: “...The Beacon Hill Institute at Suffolk University and Laurence Kotlikoff, Professor of Economics at Boston University, have teamed up to provide a sound methodology for estimating the FairTax base and computing the FairTax rate. Their paper demonstrates that the 23 percent rate specified by the Fair Tax Act (HR 25) is eminently feasible and suggests what led Gale and the President’s Advisory Panel on Federal Tax Reform6 to reach the opposite – and incorrect – conclusion. (Paper available at http://www.fairtax.org/PDF/TaxingSalesUnderFairTax.pdf .)” See also: http://snipurl.com/taxpanelrebutted + http://snipurl.com/ftgalerebuttal
BB: (Regarding the blanket 30% increase attributed in multiple places in your article, “tanks,” “newly-constructed homes,” the added amount that would be paid by “state and local governments.”)
Me: Nowhere do you point out the price efficiencies that would be gained under FairTax. Kotlikoff and associates found that these ranged from 20% - 30%, and averaged them to 22% across the economy. Thus, we’re ALREADY PAYING an embedded 22% in our retail prices. If you believe in market competition (do you?), then you must allow for the elimination of these embedded taxes - which means relative price stability (due to lower costs of doing business - for every business entity contributing at every stage of production). Thus, representing an add-on of 30% is blatant demogoguery.
BB: “Aside from the incredible complexity and intrusiveness of tracking every American’s monthly income — and creating a de facto national welfare program — the FairTax does not include the cost of this rebate in the tax rate.”
Me: The only purpose for tracking income, is for social security payouts. That “incredible complexity and intrusiveness of tracing every American’s ... income” - last time I checked - is what the current income tax system, and theIRS, are all about. FairTax bases “prebates” on family size. Prebates are sent to ALL American families to untax the necessities, thus eliminating wasteful bureaucracy,and corruption-producing tax code rules and regulations.
BB: “the FairTax does not include the cost of this rebate in the tax rate.”
Me: Somebody told ya wrong - like Prego spaghetti sauce, “It’s in deah.” That extra 5% you then introduce is the amount that Kotlikoff DEDUCTS from the 23%.
BB: “Rejecting all the tricks of FairTax supporters...”
Me: Hey, you calling me a trickster?
BB: “...professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.”
Me: Then, why hasn’t William Gale, and the president’s Tax Panel, delivered their economic methodology (substantiating higher quoted tax rates) to Kotlikoff or FairTax.org? Hmmm?
BB: “Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits.”
Me: Huh? What’s to deceive? Individuals do not file income tax returns. Businesses don’t either; businesses will file basically an expanded state sales tax return. Individuals would keep financial records, but not for the purposes of filing a return. And working families would not be subject to audit unless they ran a business.
BB: “the idea of making April 15 just another day, this seems to be a major selling point for their proposal”
Me: Duh. Like that’s bad to get out from under the thumb of an intrusive government that has been proven arbitrary in the manner in which it administers the current tax code?
BB: “In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.”
Me: Sorry, BB. Your commentary is to bad to be credible. Next time, at least familiarize yourself with the research and rebuttals to the demogoguery that is sure to assail it.
Readers should expect these assaults on FairTax to increase as this eminently workable - in fact, URGENTLY REQUIRED - tax plan gains adherents.
It was paid by all the people who bought other stuff that wasn't on sale!
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.
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.
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...
Final Report
Chapter 9 excerpt:
Box 9.2. Comparing the Treasury Department’s Revenue-Neutral Rate Estimate with Estimates Made by Retail Sales Tax Proponents
In their submission to the Panel, proponents of the FairTax claimed that a 30 percent tax exclusive sales tax rate would be sufficient not only to replace the federal income tax, but also to replace all payroll taxes and estate and gift taxes and fund a universal cash grant. In contrast, the Treasury Department concluded that using the retail sales tax to replace only the income tax and provide a cash grant would require at least a 34 percent tax-exclusive rate.
Some may wonder why the tax rate estimated by FairTax advocates for replacing almost all federal taxes (representing 93 percent of projected federal receipts for fiscal year 2006, or $2.0 trillion) is so much lower than the retail sales tax rate estimated by the Treasury Department for replacing the income tax alone (representing 54 percent of projected federal receipts for fiscal year 2006, or $1.2 trillion).
First, it appears that FairTax proponents include federal government spending in the tax base when computing revenues, and assume that the price consumers pay would rise by the full amount of the tax when calculating the amount of revenue the government would obtain from a retail sales tax. However, they neglect to take this assumption into account in computing the amount of revenue required to maintain the government’s current level of spending. For example, if a retail sales tax imposed a 30 percent tax on a good required for national defense (for example, transport vehicles) either (1) the government would be required to pay that tax, thereby increasing the cost of maintaining current levels of national defense under the retail sales tax, or (2) if the government was exempt from retail sales tax, the estimate for the amount of revenue raised by the retail sales tax could not include tax on the government’s purchases. Failure to properly account for this effect is the most significant factor contributing to the FairTax proponents’ relatively low revenue-neutral tax rate.
Second, FairTax proponents’ rate estimates also appear to assume that there would be absolutely no tax evasion in a retail sales tax. The Panel found the assumption that all taxpayers would be fully compliant with a full replacement retail sales tax to be unreasonable. The Panel instead made assumptions about evasion that it believes to be conservative and analyzed the tax rate using these evasion assumptions.
snip...
the Panel concluded that a number of features of the retail sales tax would make it difficult to administer and enforce at the high tax rate necessary to be revenue-neutral. A federal retail sales tax assessed at a rate of at least 34 percent, added on to state retail sales taxes, would provide a substantial inducement for evasion at the retail level. Retailers and shoppers could use a number of techniques to evade a retail sales tax. For example, unregistered cash sales to a consumer would allow a transaction to escape taxation. Retailers facing a high retail sales tax might also misapply exemption criteria, whether intentionally or unintentionally, and fail to tax goods that should be taxed. Or, the retailer might collect the tax from customers, but keep the money rather than remit it to the government. At high tax rates, the gain to retailers from evasion is high.
Empirical evidence suggests third-party reporting substantially improves tax compliance, particularly when tax rates are high. 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. There is no third-party reporting in a retail sales tax. Retailers would add their retail sales tax to the pre-tax price for their goods and would remit that amount to the government, but shoppers would not separately report what they bought, and at what price, to the government. The government would rely on retailers alone to report their own taxable and exempt sales.
To obtain exemption from tax, retail purchasers might try to fabricate exemption certificates or otherwise masquerade as tax-free buyers of retail products. For example, individuals might create “paper” businesses solely to obtain business exemption certificates and avoid taxes on purchases for personal use. A related problem involves individuals with legitimate businesses using their business exemptions for personal purchases or for goods or services to give to employees in lieu of cash compensation. Using their business purchase exemption would provide a discount equal to the retail sales tax rate.
With a retail sales tax, retailers would have the responsibility to determine whether the ultimate use of a good or service would be for a business purpose, and therefore would be deserving of the business purchase exemption. Retailers are often ill-equipped to carry out this role. State experience suggests that abuse of exemptions is common, in part because distinguishing between business and individual consumer purchases of so-called “dual use” goods and services – goods and services that are commonly purchased by both businesses and final consumers, such as a plane ticket – can be difficult and costly.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
Maybe you haven’t looked at the FairTax bill which automatically ratchets up the required FairTax rate each year to generate the income required. In the case of Social Security/Medicare spending this is achieved automatically without a vote. The payroll information is still sent into the government and at the end of the year they total how much payroll taxes would have been paid under the present system, and they look at what the taxable base is expected to be for the next year, and they use that to determine that component of the FairTax rate each year.
I agree with you BTW that the bloated government is the main problem we face. It is the FairTax people who wrote the bill to be tax revenue neutral. Actually, the tax collected needs to be substantially more than that collected now, to pay for the huge socialist prebate scheme which puts a fresh government check into the hands of every American man, woman and child at the start of each month. Sort of an “allowance” from Mommy Sam.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
Maybe you could throw out the report as biased, but everything they say is correct. You need to look more closely yourself at the plan. They don’t factor in the higher cost of everything to the government (they have to pay the 30%+ tax on all salaries, fringe benefit payments, and items they purchase (except education). And they don’t factor in any evasion— legal or illegal— of the very high tax. This is fraudulent.
In order to collect the staggering sum that they currently collect, there needs to be an aggressive enforcement mechanism with teeth. And there needs to be redundant reporting, like happens now, to catch cheaters.
Meet the new beast, same as the old beast.
If by "we all" you mean people on Free Republic, you might be close to right. If you mean "we all" to be the voting public at large, you are WAY OFF. The voting public at large wants all their perks, and even more like universal health care, and the only FairTax is one on the other guy.
Since the small minority of highly productive are already paying the bulk of the tax burden, any plan will have to shift to burden more heavily on these folks to have any chance of getting the votes to pass. No thanks.
Silly FairTax ping.
>>Any tax reform that doesn’t do anything to curb the outrageous way money is spent in D.C. is worthless, even if it ultimately eleminates the IRS.
That is patently not so.
A huge problem with the current system is lack of transparency. The Fair Tax would solve that problem in a BIG way.
While curbing spending is no doubt a huge issue, that doesn’t mean that eliminating the IRS and the enormous compliance costs associated with the current system, and replacing it with a much lower cost system, would be “worthless”.
From what I've seen, those who oppose such sweeping tax reform in favor of our current, Byzantine tax code fall into two categories:
1) Those who, for whatever reasons, pay very little (in some cases no) income tax currently. This often includes wealthier folks who have tax lawyers and CPA's who know how to game the system better than us peons.
2) The larger group: Leftists/Socialists who see the tax code as a tool for social engineering; IOW, power over our lives. It's always about power with these people, something we're loathe to forget. The tax code "rewards" behavior they want to encourage and "punishes" behavior they feel is "wrong" or otherwise runs counter to their worldview.
Just my humble opinion.
Well I’m neither of your two options, so I think your opinion is flawed.
There needs to be at least a #3 to cover me:
3) Those who are knowledgable about business and how it works, who have looked at the Fairtax plan carefully, and who think it has major flaws that make it unworkable as written;
Have a blast, go down to your local restaurant, ask the owner/operator of the sole family location how much he's increased prices to cover the hidden cost of taxes.
Now, once you're done getting past the 'huh?' 'whuh?' and 'eh?' it might just be entertaining to look at say.. Staples. $4.7 billion in sales. Talk about a horribly strong company, it's increased profits by 11 percent to $179 million dollars... Wait, wait.. That must prove your point, look at those numbers, most of it must be in hidden taxes! If only that were the case. Employee overhead for Staples is eight percent. Even if every penny of employee compensation was forced into a box that would subject it all to SSI, you're talking 14% of 8% of $4.7 billion. That's 1.2% of their sales. Even if every penny of the reported profit was subject to the highest tax rates, you're still talking about a total tax bill of under 2%.
And this is wanted to be replaced with a complicated (and as anything government, fraud rich) prebate system, and a false implication 23% inclusive tax which is really a thirty percent retail tax rate.
So please, let's stop this incessant argument about 'hidden taxes' that will suddenly disappear and make all the prices go back to the way they are now. Start talking straight - this will make the prices of imported goods go up through the roof, and make it attractive for businesses to return to the United States. It will encourage savings as you don't get penalized for earning money, only spending it. It'll revitalize the used product industry, and repair industry, since labor and used items will not be subject to this tax. Flipping new homes will become a thing of the past as there's a thirty percent requirement of equity just to break even off the taxes.
It's a revolutionary concept, and one that actually could work in the United States with some moderate modifications. Oh, and forget this nonsense of it being an 30% tax. If this passes, pretty much could guarantee that every state would switch to the same process from sheer inertia, bringing the counter price on a dollar item to a buck fifty.
Small price to pay to get your full paycheck, true. Plus your home just became a heck of a lot more attractive to buy than putting a new one on that hillside over there, and renters are in for a thrilling surprise when they find leases subject to taxes.
When you get down to it, the miser will find reason to value that old TV, get the computer fixed, not move out of the family home. That growth explosion in many parts of the country will screech to a halt, and you're probably going to want to keep that old car for at least another two years, even though it's value just went up. And for many, this is a desired result. But these are the type of behaviors that need to be honestly discussed, not buried behind the curtain of 'reduced prices by eliminating invisible taxes.'
Hope all is well with you FP! I think you might be overstating this point.
The vast majority of accounting type work done for business is done for other reasons besides taxes:
Business planning and analysis;
Cost accounting and pricing;
Collecting receivables;
Paying bills;
Expense reports for employee reimbursement;
Payroll processing;
SEC filings;
Cash flow management;
I think that the FairTax system where I have to file a monthly report to get all my business related FairTax payments rebated to me is likley to be more intrusive and more complex than anything I have to do now regarding taxes so my compliance costs would likely increase substantially.
And make no mistake: to collect the amount of money they consume, there will be an enforcement arm with teeth and the full power of the government behind them.
Excellent points.
The FairTaxers make many assumptions about human behavior that are deeply flawed.
If you’re already running a general accounting system, said report should be pretty automatic.
And yes, there will still be a compliance arm of government, but the simplicity of the system, vs. the current Byzantine monstrosity that is the Income Tax Code, is where the cost savings accrue.
Hey, my wife is a CPA who primarily does tax and planning consulting. The current system is *very* profitable for us, personally. But it’s the wrong thing for the country, overall.
We ALMOST had a flat tax under Reagan , just 2 income tiers in the income tax ,, in the very beginning the income tax WAS a flat tax ,, 1% only on the highest incomes... the problem is that if you don’t kill the monster the politicians will just bring us back to where we are now ,, sooner rather than later.
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