The Case for the 'FairTax'

Wall Street Journal Online ^ | March 7, 2005 | Laurence J. Kotlikoff

[n-tres-ted]

Our tax code is a mess for a reason. Special interests pay for special favors. And with 17,000 pages and counting, there's plenty of places for our politicians to hide the kickbacks. Meanwhile, all the exemptions, deductions, exceptions and special provisions reduce the tax base, which means higher tax rates and smaller incentives for individuals and companies to produce income. And whether the tax breaks are set in fine print or spelled out in bold type, they generally favor the rich, making our tax system less progressive than is generally believed.

No tax system is perfect, but ours is so awful that fundamental reform is the only option. Fundamental reform is not just a necessity; it's also an opportunity to stop taxing income and start taxing consumption. My colleagues and I have been studying income and consumption taxation via computer simulations for some time now. We've found that switching from taxing wage and capital income to taxing consumption can significantly improve economic efficiency and growth. What's more, it can make our tax system much more progressive and generationally equitable.

[phil_will1]

"if you don't think that every credit card or debit card purchase is tracked, then you know little about marketing. By allowing the camles' nose of th goverment into the tent of your personal purchase decisions, then you allow their ability to monitor those purchases."

Whoa! You are supporting the retention of the income tax system because it affords greater financial privacy?

Are you serious?

[Diamond]

Resolve the equation by amount earned, divided by hours worked, the regression will be obvious.

The regressivity is not obvious; Who determines "the amount earned" or "the hours worked"?

Cordially,

[expatpat]

If it is incident on the factors of production, then wages and the return to capital will fall but sales tax inclusive prices will not be any higher, on average, than they are today. If the sales tax is fully incident on consumers, then prices will increase by the amount of the sales tax but returns to labor and capital will be higher.

Now we're getting some sanity. There's no free lunch - either prices will go up or gross salaries will go down. The claim that there is enough $ in compliance costs to avoid this is totally wrong.

[numberonepal]

See post 127.

[Petronski]

Apples to oranges? No. This is not a before v. after scenario. I'm talking about a day after you have succeeded in killing the income tax and instituting the 'fair tax.' At that point, I am making a choice between an existing home or new construction.

Taxing the new construction but not the existing home provides a significant disincentive to new construction. I'm guessing you don't work in the trades, or in logging, or manufacturing of construction goods....

[Conservative Goddess]

Retaining any form of income tax, of necessity, would require the maintenance of the IRS, the tracking/reporting/withholding/audit/lien and levy mechanisms. Only the FairTax abolishes this machination.

[Zon]

You lost all credibility when you let it be known that you think it's worse to defend oneself from physical assault than speak an insult to a person.

[ancient_geezer]

If you're paying 23% sales tax for a widget, and you earn $30,000 per year, the sales tax is taking a bigger bite out of your income than if you earn $100,000 per year. That's regressive.

Except for the fact that every legal resident receives a refund of excess tax paid (i.e. that paid on povertylevel expenditure defined by HHS statistical measures locked in by court precident and litigation).

Instead of opening the political and administrative rats nest of excepting specific items or persons from paying the NRST at the cashregister, the Fair Tax Act(H.R.25) provides what amounts to a personal exemption in the form of a demogrant that all legal residents will receive; a monthly amount called the Family Consumption Allowence(FCA) equivalent to the FairTax paid at the HHS defined poverty level of expenditure. The FCA is paid in advance, in equal installments each month by check or electronic tranfer to bank account from the Social Security Administration.

The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate, and paid to all households regardless of income or actual expenditure. The HHS poverty llevel is a well-accepted, long-used poverty-level calculation based on the cost of a healthy diet comprising 1/3 of total family budget value. The povertylevel statistic is fixed in 1969 dollars updated annually for CPI.

The chart below in Figure 1 tepresents the current FCA as it relates to the 2004 povertyline statistic, adjusted pay a fixed amount for each adult in a household to remove implicit marriage penalties.

 

Figure 1: 2004 FCA calculation
Family size	HHS annual poverty level	FairTax annual consumption allowance (single person)	Annual rebate (single person)	Monthly rebate (single person)	FairTax annual consumption allowance (married couple)	Annual rebate (married couple)	Monthly rebate (married couple)
1 2 3 4 5 6 7 8	$9,310 $12,490 $15,670 $18,850 $22,030 $25,210 $28,390 $31,570	$9,310 $12,490 $15,670 $18,850 $22,030 $25,210 $28,390 $31,570	$2,141 $2,873 $3,604 $4,336 $5,067 $5,798 $6,530 $7,261	$178 $239 $300 $361 $422 $483 $544 $605	N/A $18,620 $21,800 $24,980 $28,160 $31,340 $34,520 $37,700	N/A $4,283 $5,014 $5,745 $6,477 $7,208 $7,940 $8,671	N/A $357 $418 $479 $540 $601 $662 $723

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

Under the Fair Tax Act, a family of four, for example, could spend $24,980 per year free of tax because they will have received over the course of the year a demogrant totaling $5,745. $5,745 is the amount of sales tax paid on $24,980 in expenditures. That family spending double the "poverty level" or $49,960per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.

To illustrate examine the tax burden that a family of four will have at various annual expenditure levels as compared to that same family under the current tax law, (NRST Expenditure = income; 2004 individual income tax on wages plus FICA/MC taxes, standard deduction, personal exemptions,child credits, and EITC):

 

H.R.25 "The FairTax Act

Not only does every family receive a FCA based on family size, not income, but they will also receive 100% of their gross paycheck.

[camle]

i doubt that indubitibly, my friend. no corporation faced with a 20-30 percent windfall is going to ignore it's fiduciary responsibility to it's shareholders and pass that blindly on the consumers. in fact, I doubt that there will be ANY price reductions. what there WILL be is dividend increases, profit taking, and stock rising. the rich will benifit, the middle class will get little if anything.

[numberonepal]

methinks the proponents of this proposal might not be the intelligent gentlemen we presumed when we entered this discussion. Gentlemen - absolutely. A gentleman will stand up for his life each and every time. The manner in which he protects himself is of his choosing. Intelligent? That's up for debate.

[CSM]

"In that situation, I want the existing home, because I get to spend the entire $90k on house, not just $72k. I get $18k more house."

Depends on the age and condition of the house. I suspect that in many cases home buyers would chose a newer home that does not require any work and can be customized to their wants/needs. Sort of like today, those that want the new home pay a premium and those that don't buy an older home.

[expatpat]

Of course a used car bought from a dealer is a retail transaction; a retail transaction is any purchase by an indivisual rather than a corporation. Think about it.

when did we start registering cars on a federal level?Did you forget that the NRST is supposed to piggyback on the State collection?

[Petronski]

Nonetheless, the 'fair tax' makes new construction 23% more expensive than existing homes.

[camle]

I agree with most of what you are saying, but there area n awful lot of "IF"s here, and a lot of assumptions that sound good on paper. Gerald Ford thought that if you could hold the line on wages and prices that you would "Whip Inflation Now"> that didn't work either and many lower income people who lose wages back then have yet to fully recover.

remember "Atlas Shrugged"?

[numberonepal]

Stock prices will rise, dividends will rise, and the rich will ger richer.

You have no conception of a free market.

[Conservative Goddess]

Income was not the original basis for raising tax revenue. Only with the rise of Communism did it become a popular foundation for taxation. The Founders believed in taxing consumption, and did not provide for direct, unapportioned taxation in the body of the Constitution. Our current scheme of taxation required an amendment to their brilliant work (the 16th), and it's been a mistake. It's time to end the experiment.

The following is taken from Federalist Paper No. 21, http://federalistpatriot.us/fedpapers/fed_21.html

"...It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ``in political arithmetic, two and two do not always make four.'' If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country. Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment. Either the value of land, or the number of the people, may serve as a standard. The state of agriculture and the populousness of a country have been considered as nearly connected with each other. And, as a rule, for the purpose intended, numbers, in the view of simplicity and certainty, are entitled to a preference. In every country it is a herculean task to obtain a valuation of the land; in a country imperfectly settled and progressive in improvement, the difficulties are increased almost to impracticability. The expense of an accurate valuation is, in all situations, a formidable objection. In a branch of taxation where no limits to the discretion of the government are to be found in the nature of things, the establishment of a fixed rule, not incompatible with the end, may be attended with fewer inconveniences than to leave that discretion altogether at large."

[Conservative Goddess]

"Still launching personal attacks...."

"..all you NRST shills..."

Does anyone else beside me see the irony in this?

YUP.....sure do.

[Conservative Goddess]

"....If you go out into the pasture, find a cowpie, and flatten it, IT IS STILL A COWPIE!...."


HOW TRUE!!!!!!! Loved it!

[phil_will1]

"What's in it for the retailer, large or small, to collect the tax, besides jail if they don't. Will the retailer be able to deduct the cost of accounting?"

They get to keep a small percentage to defray their administrative costs. What is in it for a business today to file a corporate tax return or do payroll taxes?

I think you just unwittingly stumbled onto another benefit of the FairTax.

This would be a lot easier if you reserved judgement until after you have studied the proposal.

[CSM]

No, that is not what it is for, but it is the unintended consequences that result from either policy. I was really hoping you could tell me why a "regressive" tax policy was a bad thing, not trying to goad you. I promise!