WHY THE FAIRTAX WON'T WORK

NCPA ^ | 2/15/2008 | NCAP staff

[xcamel]

One solution to the nation's long-term fiscal problems that has gained support in recent years is the idea of replacing all federal taxes with a 23 percent national retail sales tax called the FairTax. Unfortunately, the administrative problems inherent in this proposal make it impossible to take seriously, says Bruce Bartlett, former deputy assistant secretary for economic policy at the U.S. Treasury Department.

For example, under a FairTax scheme: A worker now netting $800 per week would immediately get a $200 raise and start taking home the full $1,000 gross wage that he is paid; instead of paying income and payroll taxes, workers would pay their taxes when they buy things.
The FairTax would impose a 23 percent tax on all goods and services (this is not really correct, but for now we'll accept it at face value for analytical purposes).

Whether he is better off or not depends on what his effective tax rate is: Assuming he spends all his income and no more than that, he will be no worse off if he now pays 23 percent of his income in taxes. That is, his effective tax rate is 23 percent; in this case, the FairTax is a wash, the worker is no better off or worse off in terms of taxes than he is now.

But what if the worker is now paying less than 23 percent of his income in federal taxes? In this case, he is clearly worse off, says Bartlett: The prices of the things he buys will rise by more than his income rises from the elimination of income and payroll taxes. Conversely, if one is wealthy and in a tax bracket above 23 percent, that person would be much better off. His income and payroll taxes would fall by much more than the prices of goods and services he consumes would rise.

Source: Bruce Bartlett, "Why the FairTax Won't Work," Tax Notes, December 24, 2007.

For text:

Full PDF report

For more on Taxes

[xcamel]

3...2...1...

“Time for the nasty poster hour....”

[tyke]

I’ve read the books. Both sides. The math doesn’t work. But that’s not what I was arguing. Even *if* the math worked, the proposal would never gain enough support from the public. Once they know the sales tax would be 30%, then they will reject it out of hand. That’s why it’s a non-starter.

[GeorgiaDawg32]

ROFL...he’ll fix health care, solve all wars, learn the secret to keeping women from fainting, cure worldwide poverty and have us all holding hands singing kumbaya..

and on the 7th day, he’ll rest..

[CindyDawg]

I was jut thinking about that it would be nice if the tax was included in the price but then on second though...let’s see what happens when a person buys 100 dollars of groceries and the receipt shows 30% tax. Burying the tax in the product makes it not so unacceptable:’(

[NavVet]

This article misses the major point of the Fair Tax. Prices would not go up right now the tax the company pays is embedded in the cost of the goods, that embedded cost would go away.

[GeorgiaDawg32]

well, you believe 30%, I believe 23%..but what we believe is irrelevant in any case..it’s a non-starter because, until attitudes in congress change, the DC establishment will be absolutely unwilling to give up the power of the IRS..

[xzins]

Good point.

I like the fair tax idea for a couple of reasons that really don’t have anything to do with the tax rate.

I do like the end of the IRS.

I do like the taxation of the underground/criminal economy.

I do like the taxation of foreigners.

I do like the ability of an individual to determine the tax he pays by determining what he buys. (For example, I’m sure this will bring back “victory gardens.)

There are other things.

Also some things I don’t like.

I don’t like the idea at all if the 16th amendment is not gone BEFORE this is implemented.

I don’t believe the notion that companies will lower the price of goods due to the cost of taxes built into prices. They won’t.

Given the above, I don’t believe that companies should be exempt from paying sales tax on their purchases.

I don’t believe that mortgages should be exempt.

I don’t like that states will still have their host of taxes: income, property, etc., etc.,

I do think states and fed will increase fees AND charge sales taxes on them.

[coloradan]

30,000 IRS employees will suddenly find themselves having to look for productive work at real jobs.

[gondramB]

I don’t see how anybody could oppose the Fair Tax

Since every group, low medium and high income will pay less taxes and yet the total revenue to the government will not go down its free money. How could anyone object?

[Normal4me]

This is such a stupid argument anymore. Just be a sheep and let the governmant dictate how much of YOUR money they seize every week and keep voting Republican...

[tyke]

wrong..if milk costs $1 now, it will cost $1 under the fair tax, only the tax is included in the $1..

That would never happen. You think manufacturers and middlemen are going to reduce their prices that much just because a chunk of their expenses have been eliminated? That would be naive in the extreme.

Every time a government fiddles with the financial system in such a major fashion, the consumer always ends up getting shafted. I lived through decimalization in the U.K. and that's exactly what happened, as has happened when countries went to the Euro.

[xcamel]

Already been proved over and over again that ‘embedded taxes’ account for less than 8% of the average “retail price”.

[eleni121]

see #45

[GeorgiaDawg32]

23% is currently buried in the cost of the item..so removing it, and replacing it with the fair tax would result in the same $100, only the receipt would show

“purchase $77”
Tax $23

Total $100

While a good argument is that companies wouldn’t reduce the cost of their items to increase their profit margins, the free market would kick in and prices would fall..

[Always Right]

wrong..if milk costs $1 now, it will cost $1 under the fair tax, only the tax is included in the $1..

Only in a fairytax world.

that’s how I understand it..and I’ve read the book..can you show me where you learned it’s added on and from what source?

What's the difference? If a $1.00 item has $.30 added on or if a $1.30 item has $.30 included? The item has 30% added to the price from taxes.

I’m not tryin to be a bugger here, just want to debate this and see where you are gettin ur facts..

Well according to the person (Dr. Dale Jorgenson) who actually did the study for the fairtax.org, the only way possible for prices to stay the same after the fairtax is if everyone takes a pay cut in the amount of taxes they paid under the income tax. Since that won't happen, prices will go up.

[xcamel]

covered it.

[K-oneTexas]

... People will not accept a 30% sales tax ..."

What I don't hear people saying or realizing is that with an income tax you have that %age taken out of your income before you see it.

Lets look at 2008 rates:

Medicare is 1.45% (up to $102,000)

Social Security is 6.25% (up to $102,000)

Income tax (under current statute, personal income tax, not corporate or capital gains taxes)

the Federal tax brackets for a single (unmarried) person are:^[1]

• 10%: from $0 to $7,825
• 15%: from $7,826 to $31,850
• 25%: from $31,851 to $77,100
• 28%: from $77,101 to $160,850
• 33%: from $160,851 to $349,700
• 35%: $349,701 and above

So lets say your income is $50,000 the percentage taken out before you see it is:

Medicare     1.45%

S.S.               6.25%

Income         25.00%

Total Rate    32.70%

If you are self-employed you must add in your portion of the S.S. wich is 6.25%. If employed the employer pays this 6.25% (which could be a factor in lower pay scales for working). Then the total is 38.95%

If you make more you get more taken out - a higher percentage.

If you make less,  10% + 1.45% + 6.25% = 17.70%

We could go on and would still have debate. Some people will be happy at 30% cause it is less than what they have taken out now. Other would have more and be unhappy. Then you look at the prebate, etc.

I would rather chose when the government gets my tax dollars ... instead of them chosing.

IMHO, you can't make a flat statement that "people will not accept it", cause some will be happy.

Also, the 23% vs. the 30% is necessary to use if you are comparing anything you must compare likes and speak in like terms.  Apples to apples, not apples to oranges So, compare  Income tax to income tax, not Income tax to Sales tax. Would you actually compare something like, spending time with your wife or lover to going down to Auto Zone and buying oil?

 

[Always Right]

23% is currently buried in the cost of the item..so removing it, and replacing it with the fair tax would result in the same $100

That 23% includes all taxes paid, including those by workers. How are those costs removed if workers keep all of their pay? Workers will take home more pay, but costs will not come down as the fairtax advertises. Fairtaxers are playing bait and switch with their analysis.

[CindyDawg]

Well..whether it will work or not...whether they will let us have it...I’m voting for Huckabee. No more IRS...what a campaign issue.

[Normal4me]

You sell something for $100 to someone and tell them that includes taxes. Then turn around and sell them the same thing for $100 and tell them that they didn’t pay taxes on it and see their reaction. They will think they got a better deal no? Embedded taxes are the same thing.