Posted on 05/12/2005 7:46:54 PM PDT by Your Nightmare
Members of the President's Advisory Panel on Federal Tax Reform on May 11 expressed concerns over the FairTax national retail sales tax, a plan that has emerged as an alternative with a major grass-roots push.
Panel chair Connie Mack, vice chair John B. Breaux, and other members worried the plan would be difficult to enforce, would be regressive, and would require a high rate in order to take in enough money to fund the government.
Breaux raised concerns that the proposed 23 percent (tax-inclusive) rate would not be sufficient to raise the revenue necessary to fund the government. The Joint Committee on Taxation estimated that it would take as much as a 57 percent (tax-exclusive) rate to be revenue-neutral. Further, Breaux said he thought exemptions that would be carved out to make the sales tax progressive would also complicate it.
Mack, who raised concerns similar to his fellow panelists', said he was "intrigued" by the plan. "But if it's such a great idea, why haven't other political entities around the world pursued it?" he asked.
Americans for Fair Taxation Executive Director Tom Wright emphasized that the plan emerged after "thorough academic research" and "thorough polling" The strong grass-roots push has resulted in some of the group's 600,000 members appearing at each of the panel's hearings and has inspired a large comment-writing campaign to the panel in support of the plan.
Sales tax advocates were among the 20 witnesses who gathered before the panel for a full day of testimony on tax reform proposals. Although the group has held several other hearings in Washington and around the country, the May 11 meeting was its first hearing on specific reform plans since Bush appointed the panel in January. The panel has been charged with identifying tax reform proposals that are progressive, encourage charitable giving and home purchases, and are revenue-neutral. The proposals are due by July 31.
Among the tax replacement and reform plans presented to the panel were the value added tax, consumption-based tax, and the flat tax, as well as proposals that would use the current income tax as the foundation.
Witnesses generally claimed that theirs was the fairest, simplest, most flexible, most transparent revenue-neutral proposal that would improve economic growth and savings while meeting the president's criteria of encouraging charitable giving and home buying. Witnesses presenting consumption-based plans praised their overhaul as taking millions of low-income taxpayers off the rolls, being easy to transition to on a worldwide basis, and including safeguards to prevent new loopholes that would result in increased complexity down the road.
Tax reform panel members, who agree the current tax system needs to be fixed, grilled witnesses without revealing whether they will ultimately endorse a consumption- or income-based tax or a different mixture of the two.
I think you may be wrong here. If there is more foreign investment in the U.S., our trade balance (merchandise) would be further from balance, not closer.
The whole rationalization of adjusting currency exchange rates is toward trade balance.
If there is no adjustment toward balance, US export goods merely become even more competitive in foreign markets increasing or volume and profits received in trade.
| ftp://ftp.usitc.gov/pub/reports/studies/PUB3110.PDF PDF page 33 Finally, Hines (1996b) argues that exchange rates move to reflect international differences in goods prices. Thus any increase in export competitiveness caused by a move to destination basis would ultimately be offset by appreciation of the U.S. dollar. Another line of reasoning is that countries use receipts from exports either to import immediately, or to make investments abroad which ultimately provide income to pay for a larger volume of imports in the future. Both of these arguments are based upon the observation that strong economic forces keep a country’s trade in approximate balance regardless of what other policy changes it may undergo. The likelihood that the change from an origin-based system to a destination-based system would in fact generate incentives to export and disincentives to import ultimately depends on the strength with which the long-run tendency toward balanced trade in fact operates. Grubert and Newlon (1995 and 1997) point out that a destination-based consumption tax does create an incentive for cross-border shopping, if goods can be reentered tax free, and for consumption abroad through travel or emigration. Finally, the ultimate effect of a flat consumption tax on the price of particular goods will depend on demand elasticities. Those goods for which demand is relatively inelastic may be able to pass through a larger price increase (tax inclusive) to purchasers than those with elastic demands.29 Whether this would happen in specific cases would depend, among other things, on the price behavior of production inputs and competing products. |
From what the paper indicates about the effect of a flat sales tax hitting both domestic manufacture and imports equally we would see, and removing tax burdens from exports:
- an appreciation of the dollar (expanded purchacing power, e.g. lower prices) and
- an influx of investment from abroad in US industry,
to return trade balances back towards equilibrium over the long term after an intial surge in exports in relation to imports to the US.
Thus substantial benefit to the US economy and American standard of living arising from the implementation of retail taxes in place of the current income/payroll tax can be expected that goes with the increasing purchasing power of american dollars in foreign markets that increase the attractiveness of U.S. investments that earn those appreciating dollars.
The whole rationalization of adjusting currency exchange rates is toward trade balance.When people say "trade balance" they usually mean the balance of trade in goods and services. Is this the what you mean when you say "trade balance"?
The hand wringing over the trade deficit is another left wing talking point to make the economy look bad. Our exports are now at a record level. So more jobs must be related to exports than ever before unless capacity utilization and productivity are also at records. I don't know.
I do know that a hell of a lot of jobs are required to import all the stuff we do: the importation and distribution infrastructure is huge.
We're wealthier than they are so we are buying more of their stuff than they are ours. The NRST will make us much wealthier. That alone will expand our imports. What will expand our exports? Maybe more plants relocating here because of our tax haven status.
The ability to lower pricing in foreign markets initially. But you are right the reaction to lower initial pricing in foreign markets (other than china which tags its currency to the U.S. dollar) of our exports will cause currency exchange rates to depreciate foreign currencies in relation to the dollar, making it cheaper for us to buy their goods in our dollars and equalizing their ability to purchase our goods in their dollars to something approximating the price they pay for their own domestic manufacture.
In the attempts to offset our lower prices in their markets, they can only inflate their own currencies relative to world markets inducing more foreign investment into this country to preserve their financial asset values.
China becomes and intresting case, because it fixes its currency to track with the dollar. If it maintains that policy it will be to its detriment in that our products sold there will become more affordable in their markets and stay that way.
Short term .on the order of a decade, we would see an upswing in our exports relative to where they are today, closing the gap we currently experience. In the long run I would expect that equilibrium will be reached where the product volume imported into this country increases in foreign attempts to aquire more U.S. dollars and to push downward the tax inclusive price of their products here to a level near or below our own domestic retail pricing.
Remember with an NRST, retail prices of both domestic and foreign products are hit equally, intially that would tend to increase the price of foreign imports to some level above that of our own domestic prices reducing our demand for their products here, shifting demand more towards our own domestic manufacture where it is available.
Longer term, equilibrium state would be at a gap nearer to what exists now percentage wise but with higher product volume flows both in our exports and thier imports reflecting the increased purchasing power of the dollar in foreign markets, and the entry of more manufacturers relocating into the U.S. which becomes essentially a taxhaven for any industry resident here.
As far as I see it, that results in a net overall gain to the U.S. economy from the changeover from the current federal income/payroll tax system to a National Retail Sales Tax system both from short term effects as well as the longer term ones that come with the relocation manufacturing and capital asset investments attracted to the U.S. by an appreciating currency as well as tax favored status of manufacturing relative to foreign treatment, especially as regards nations burdening their industries with corporate income taxes and the regulatory burdens of VATs.
Is this the what you mean when you say "trade balance"?
I refer to trade balance as the net exports represented in NIPA/GDP data series, such as the economists cited in Reply #1,061 do, i.e. exports of domestically produced goods and services sold to foreigners, less foreign produced goods and services purchased domestically by consumers, business or government.
Perhaps you forget the consfiscatory rates which Kennedy abolished. They were practically at that level. During that period prices were very stable compared to today so that is inexplicable in your view of the income tax. Now that those levels have dropped to 38% we have more inflation another inexplicable irony.
In reality I never said that income taxes are irrelevent to business but they are not part of the price formation equations. They affect other aspects of business such as private initative and risk taking.
Taxes are collected based up the price of the purchase. Thirty cents on the dollar is 30%. My tax rate in Chicago is 9% in places not 7.367. Trying to get away using such an intellectually dishonest calculation is another killing blow against the FT. Twenty nine percent is not as easily understood and worked with so I use Thirty.
I don't have to lie since I have Truth on my side.
Actually after thinking about it a little more Time Value of MOney measures the Opportunity costs of Intertemporal Consumption. Giving it up today costs I+r.
I haven't tooted anything though I have hooted at most of your friends' theories and understanding of price formation. Any mention of me or my qualifications to speak on these matters has been to correct erroneous accusations or answer a question thereof.
To some people merely reciting your resume is "tooting your own horn." Particularly those without much of one.
True "book knowledge" does not exclude "real world" knowledge. There is only ONE form of knowledge. If the book does not apply it is NOT knowledge. That is why Economics continually tests theory with data drawn from the real world. Theories which fail to explain that data are rejected.
Sometimes working in a particular situation does not allow one to see the General picture or the Whole. The latter is a specialized labor like the former.
One reason for impossibility is the difficulty of calculating the tax. Tables would have to be used.
Another is that the tax will rarely come out even if you try to back calculate it.
That question was a good one and I dealt with it above.
When we export we are selling dollars. There is greater demand for dollars thus the currency APPRECIATES not deprecitates. I think you are trying to describe import effects.
If you remove non-income tax taxes from exports the other countries will remove their VAT taxes which will leave you with no change.
You are postulating a price effect on exports from income taxes which I do not believe exists. Other taxes, representing a true cost of production, do cause export prices to be higher.
If you replace "exports" with "imports" the sentence is correct.
Balance of Payments = Trade Account + Capital Account. The independent variables must move in opposite directions if the BoP is constrained to remain the same. And the rain in Spain stays....
My belief is that the income tax effect approaches zero.
I agree with the rest of your post. There is no way of calculating an effect from the CNIT since there is no theory that explains how it is a cost. This has been one of my concerns here.
When we export we are selling dollars. There is greater demand for dollars thus the currency APPRECIATES not deprecitates. I think you are trying to describe import effects.
True, but is not the issue, the discussion is what is the effect of increasing one's competitive advantage in world trade through reduction of domestic tax burdens on a business by going to a tax sytem that is border adjustable that is does not export taxes into foreign markets such as a VAT that rebates taxes at the border and most certainly a retail tax system that does not burden upsteam businesses to begin with.
I describe the what the markets respond with pushing trade balances toward natural equilibrium point in such cases.
Refer #1061, for the economic basis of that description.
You are postulating a price effect on exports from income taxes which I do not believe exists. Other taxes, representing a true cost of production, do cause export prices to be higher.
Retail Sales taxes do not affect export prices, as exports are not burden with retail taxes.
Going from a income/payroll tax system to a retail tax system removes costs and tax burden from a export businesses and their upstream suppliers which provides the advantage of being able to export at lower costs than would otherwise exist creating a advantage in foreign trade markets relative to the income/payroll tax case.
One reason for impossibility is the difficulty of calculating the tax. Tables would have to be used.Another problem is, since the inclusive rate in effect taxes itself, some funny math starts to appear. Funny math that could be used to mislead the public (as the FairTax supporters are already doing). Example: if you raise the FairTax rate 10%, the revenue taken from the population rises 13.3%. This is obviously a 13.3% tax increase since that's how much more I am paying, but a politician could advertise it as a 10% increase.
Another is that the tax will rarely come out even if you try to back calculate it.
One reason for impossibility is the difficulty of calculating the tax. Tables would have to be used.
Never heard of tax inclusive pricing? Tax rate times tax inclusive payment = amount of tax.
Furthermore, you can't read a receipt? Where the sales tax amount is recorded today, and will be required to be recorded by law under the NRST.
H.R.25Fair Tax Act of 2005 (Introduced in House)
SEC. 510. TAX TO BE SEPARATELY STATED AND CHARGED.`(a) In General- For each purchase of taxable property or services for which a tax is imposed by section 101, the seller shall charge the tax imposed by section 101 separately from the purchase. For purchase of taxable property or services for which a tax is imposed by section 101, the seller shall provide to the purchaser a receipt for each transaction that includes--
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But the same is true of a light bill or a copier bill. That doesn't make it impossible to include amounts in prices to cover light bills and copier bills.
Tax rate times tax inclusive payment = amount of tax.LOL! But what's the inclusive payment? Try figuring it out without using the exclusive rate. That's what JSUATI was asking.
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