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.

[Bigun]

An income tax is an anathema to a free people.

Hear Here!

GREAT post Geez! One of your better ones in fact and, in your case, that is REALLY saying something!

[groanup]

I agree with your point that the libs will do everything in their power to institute the fair tax ON TOP of the IC. We just can't let them. Of course it won't be easy but if something were easy then everybody would do it, right?

I think you're over-reaching the Fed's activity and mission. There are 50 PhD economists sitting on the desk of the NY Fed Bank. They have always been there. They are like a ship's rudder. They can turn but it takes a long time.

Greenspan does indeed have clout with words in the short term such as when he admonishes stock pickers for irrational exhuberance for example and the stock market goes down 250 points. But in the long run all he can do is manage short term interest rates and reserves.

This battle is not about Greenspan or the Fed. It is about governing ourselves in a responsible way. The momentum is there. We are on the brink of wiping the IRS off the face of the earth. I want to be a part of it. Hell yes I do.

[Apogee]

I would be for it if necessities were not taxed first, then rebated. i.e. food, personal real property, first vehicle maybe.

[balrog666]

Rent payments already include tax and tax costs that amount to 20-25% of the rent. Rent payments, like other prices, will remain stable under the nrst. The nrst HR 25 is not an additional tax, it's a replacement tax. If you would post some reason for thinking prices will rise, I'd like to read them.

You're obviously not a business owner or a renter. If you were, you could read your lease and find that taxes on rent are the renter's responsiblity.

Thus your rent will go up 30% if the NRST goes into effect. Period.

And as I have told you numerous times before today, you @ss.

[balrog666]

The price of a house will drop for the following reasons:

Let's see.

1. The embedded cost of entity level taxation will be removed from the building materials.

That's about 2% of the total cost - not worth changing your price over.

2. Land is exempt from the FairTax. It's considered a used good.

No change here.

3. The employer portion of FICA and Medicare will no longer be extracted from the general contractor, representing a 7.65% reduction in the cost of labor.

Another 3% - big whoop.

Is that all you've got? Then you lose.

[Diamond]

The government will not know how much you earn, nor will it be reported by your employer. The only thing they will know is how many folks are in your household.

Not true, although I was wrong about everybody's income being known by the government, and wrong about which bureaucracy has the information. Only wages and self-employment income will be reported.

`SEC. 903. WAGES TO BE REPORTED TO SOCIAL SECURITY ADMINISTRATION.

`(a) In General- Employers shall submit such information to the Social Security Administration as is required by the Social Security Administration to calculate Social Security benefits under title II of the Social Security Act, including wages paid, in a form prescribed by the Secretary. A copy of the employer submission to the Social Security Administration relating to each employee shall be provided to each employee by the employer.

`(b) Wages- For purposes of this section, the term `wages' means all cash remuneration for employment (including tips to an employee by third parties provided that the employer or employee maintains records documenting such tips) including self-employment income; except that such term shall not include--

`(1) any insurance benefits received (including death benefits);

`(2) pension or annuity benefits received;

`(3) tips received by an employee over $5,000 per year; and

`(4) benefits received under a government entitlement program (including Social Security benefits and unemployment compensation benefits).

`(c) Self-Employment Income- For purposes of subsection (b), the term `self-employment income' means gross payments received for taxable property or services minus the sum of--

`(1) gross payments made for taxable property or services (without regard to whether tax was paid pursuant to section 101 on such taxable property or services), and

`(2) wages paid by the self-employed person to employees of the self-employed person.

Cordially,

[Your Nightmare]

THANKS AG! That's the one I was thinking of.......

Too bad, like most things from the AFT, it's not very accurate. You can run the numbers yourself.

I took the just-released CBO numbers for 2002. The AFT chart assumes 100% of annual income equals annual expenditures so we will stick with that. There is an issue with the CBO income tax rate numbers in that they assume that the employer portion of the payroll tax is incident on the employee thus they increase the employee's income and Effective Social Insurance Tax Rate by this amount. Since you FairTaxers don't seem to think this is incident on the employee, but rather on consumers, I had to factor it out of the income and the effective rate of the taxes the FairTax replaces (it doesn't replace excise taxes so I removed them from the equation too). I also ran the numbers with the employer portion of the payroll tax incident on the employee (the CBO assumption).

Current Federal Tax Burden vs. FairTax (Employer's portion of payroll tax not incident on employees)
	Income	Total Effective Federal Tax Rate	Effective Excise Tax Rate	Effective Social Insurance Tax Rate	Total Effective minus Excise minus 50% Social Ins.	Adjusted Income (No employer Social Ins.)	Federal Tax Burden	Income plus Family Consumption Allowance ($4,283)	FairTax Paid	Net FairTax Paid	Effective FairTax Rate	Increase / Decrease in Federal Tax Burden
Lowest Quintile	$ 14,400	4.6%	2.3%	8.1%	-1.75%	$ 13,817	$ (242)	$ 18,100	$ 4,163	$ (120)	-0.9%	-50.35%
Second Quintile	$ 33,600	10.8%	1.4%	9.3%	4.75%	$ 32,038	$ 1,522	$ 36,321	$ 8,354	$ 4,071	12.7%	167.50%
Middle Quintile	$ 51,100	14.4%	1.1%	9.3%	8.65%	$ 48,724	$ 4,215	$ 53,007	$ 12,192	$ 7,909	16.2%	87.65%
Fourth Quintile	$ 75,900	18.7%	0.9%	10.5%	12.55%	$ 71,915	$ 9,025	$ 76,198	$ 17,526	$ 13,243	18.4%	46.73%
Highest Quintile	$175,900	26.1%	0.5%	7.5%	21.85%	$169,304	$ 36,993	$ 173,587	$ 39,925	$ 35,642	21.1%	-3.65%

As you can see the middle class gets hit hard with the second quintile's burden more than doubling and the third's increasing 87%. The middle class taking the brunt of switch to a NRST is consistent with other distributional analyzes I have read.

Current Federal Tax Burden vs. FairTax (Employer's portion of payroll tax incident on employees)
	Income	Total Effective Federal Tax Rate	Effective Excise Tax Rate	Total Effective minus Excise	Federal Tax Burden	Income plus Family Consumption Allowance ($4,283)	FairTax Paid	Net FairTax Paid	Effective FairTax Rate	Increase / Decrease in Federal Tax Burden
Lowest Quintile	$ 14,400	4.6%	2.3%	2.3%	$ 331	$ 18,683	$ 4,297	$ 14	0.08%	-95.75%
Second Quintile	$ 33,600	10.8%	1.4%	9.4%	$ 3,158	$ 37,883	$ 8,713	$ 4,430	11.69%	40.26%
Middle Quintile	$ 51,100	14.4%	1.1%	13.3%	$ 6,796	$ 55,383	$ 12,738	$ 8,455	15.27%	24.41%
Fourth Quintile	$ 75,900	18.7%	0.9%	17.8%	$ 13,510	$ 80,183	$ 18,442	$ 14,159	17.66%	4.80%
Highest Quintile	$175,900	26.1%	0.5%	25.6%	$ 45,030	$ 180,183	$ 41,442	$ 37,159	20.62%	-17.48%

Even with the employee paying the employer portion of the payroll tax, the middle class gets hit by a change to the FairTax. With a revenue neutral change in taxes there will be winners and losers, with the FairTax the middle class is the loser.

[Principled]

Rent payments already include tax and tax costs that amount to 20-25% of the rent. Rent payments, like other prices, will remain stable under the nrst. The nrst HR 25 is not an additional tax, it's a replacement tax. If you would post some reason for thinking prices will rise, I'd like to read them.

You're obviously not a business owner or a renter.

You're wrong. I am a business owner. I have also been a renter. How idiotic of you to assert otherwise in your obviously ignorant position.

If you were, you could read your lease and find that taxes on rent are the renter's responsiblity.

Irrespective of today's leases, taxes on rent will be the renter's responsibility under the nrst - not the landlord's. It's today's system that makes the landlord pay tax on his profits. That's why a landlord charges what he charges- to be able to pay expenses and still make the profit he desires. His taxes and his tax costs ore only one of those expenses he recovers in rent. He can't charge whatever he wants - he has to charge a price that both covers his costs AND a a price which a renter is willing to pay. If he fails in either of those, he will fail as a business. He has to compete with othr landlords.

What you seem to be missing, although it's hard to understand that anyone could truly not see it, is that when the existing tax costs are stripped away from the landlord, he will desire to maximize his profits - so he will adjust his price to do so - just as he's doing today.

You're not really this dumb - just pretend so - I'm sure of it.

[lewislynn]

Irrespective of today's leases, taxes on rent will be the renter's responsibility under the nrst - not the landlord's.

Who mails the check to the tax collector?...I thought so.

[balrog666]

Irrespective of today's leases, taxes on rent will be the renter's responsibility under the nrst - not the landlord's. It's today's system that makes the landlord pay tax on his profits.

So, you agree that every renter will have to pay an extra 30% on his rent? And that it is built into the NRST? And that every renter expects he will have to pay that under the NRST? And that none of them will object to fulfilling the requirements of their lease on day 1 of the NRST?

Well good, then. We then agree on 2 out of 4.

[Principled]

Why doesn't the effective federal tax rate for the income tax include any costs paid by consumer in the prices of goods and services? You know, the business taxes and tax costs that are recovered in prices. We disagree on the amount I know... but are you now saying that there is zero price inflation due to business taxes and tax costs?

[lewislynn]

"The fairtax is a tax "of the gross payment" it in fact would tax state taxes and anything else included in the "gross payment", including itself.

This is as grotesquely wrong as many of your assertions.

Only if the meaning of "gross and payment" has been changed.

[Principled]

So, you agree that every renter will have to pay an extra 30% on his rent?

No. That would be stupid to think that.

Renters will pay the same now as under the nrst.

The difference is that today, their rent payment receipt does not indicate the amount of their payment attributable to federal taxes... under the nrst, the payment receipt will break out 23% of the payment as "FEDERAL TAX".

The aggregate payment will be the same as today's.

[balrog666]

No. That would be stupid to think that. Renters will pay the same now as under the nrst.

You are truly a fool - I don't know too many landlords, and certainly no commercial renters, who don't call out sales taxes as additional payments on top of rent and the responsibility of the leasee. You do the math. The renter pays it.

In my buildings the renter will pay it or be evicted. Welcome to the NRST.

[Principled]

Really lewis, you're embarassing yourself.

Look how dumb that idea is....

According to you, a shelf price of say $1000 would be taxed $300, for a total of $1300...but the $300 has to be taxed now, so add $90 more for $1390... but now the $90 has to be taxed $27 for a new grand total of $$1417... but wait... the $27 has to be taxed now another $8.10 - ... and then that $8.10 has to be taxed another $2.43... which has to be taxed another 73 cents... which according to you also has to be taxed another 22 cents... and you say that has to be taxed too for anoter 7 cents.... and then you say that 7 cents has to be taxed another 2 cents... and on and on...

You're wrong Lewis. But keep on saying this!

[lewislynn]

The difference is that today, their rent payment receipt does not indicate the amount of their payment attributable to federal taxes... under the nrst, the payment receipt will break out 23% of the payment as "FEDERAL TAX".

That's an absolutely pathetic statement to make. Have you ever heard of a mortgage payment?

If there ever was a NST you are in for a HUGE disappointment. Even so, none of what you said changes the fact there would be a 30% tax on rent.

[Principled]

I don't know too many landlords, and certainly no commercial renters, who don't call out sales taxes as additional payments on top of rent and the responsibility of the leasee

Me either. But this isn't the topic.

How many landlords or comercial renters call out the amount of increase in the the rent as a result of the income taxes, payroll taxes, and other federal tax costs of the landlord?

It would be a beautiful thing to see...everyone knowing how much the federal take is.

[balrog666]

If there ever was a NST you are in for a HUGE disappointment. Even so, none of what you said changes the fact there would be a 30% tax on rent.

Can you say "instant depression"? Alan Greenspan can and that's why he wants both the IRS and the NRST during any transition, so that rates on both look "low" compared the current income taxes. Then he socks it to 'em on both.

[Principled]

Even so, none of what you said changes the fact there would be a 30% tax on rent.

There already is a tax/tax cost component of rent amonting to 25-33% of the rent.

Some people don't see it. It's those people the income tax scheme is fooling.

[Principled]

Have you ever heard of a mortgage payment?

It would be stupid to think otherwise.

Further, that is not related to the topic.