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Tax Reform Panel Picks Apart FairTax Proposal
Tax Analyists ^ | 5/12/2005

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.


TOPICS: Business/Economy
KEYWORDS: fairtax; flimflam; scientology; snakeoil; taxes; taxreform; taxscam
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To: Principled

There is no "exclusion" of real world cases by me. You, otoh, believe your "real world" experience is definitive.


1,181 posted on 05/24/2005 11:12:17 AM PDT by justshutupandtakeit (Public Enemy #1, the RATmedia.)
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To: Bigun

If you can't understand an argument it looks circular I presume. I have argued in no such way. Don't accept others' versions of what I have said.


1,182 posted on 05/24/2005 11:14:20 AM PDT by justshutupandtakeit (Public Enemy #1, the RATmedia.)
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To: Your Nightmare

As I said it is worse than I thought. There is a mathematical fallacy involved in it which I haven't time to figure out at present.


1,183 posted on 05/24/2005 11:15:44 AM PDT by justshutupandtakeit (Public Enemy #1, the RATmedia.)
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To: phil_will1

I have not claimed anyone said the WTO would reward for converting to the FT. Nor do I agree with you about the disadvantages to US exports under the current regime.


1,184 posted on 05/24/2005 11:18:13 AM PDT by justshutupandtakeit (Public Enemy #1, the RATmedia.)
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To: justshutupandtakeit

Whatever you say is fine with me.


1,185 posted on 05/24/2005 11:46:16 AM PDT by Bigun (IRS sucks @getridof it.com)
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To: Your Nightmare

Depends on how you l;ook at it. The "price" of something is what you pay for it - including tax. Paying $50,000 in the one case or $129.87 in the other is merely lising the total price you pay.

The tax in either case is 23% t-i (or 29.97% t-e). It is the same amount of tax in either case for the particular item. Are you 6 feet tall or 72 inches tall??

Instead of the odd example you gave you could have just divided $100 by (1-0.23) which gives 29.97% directly. Same result. The amount you p[ay is the same also - $129.87 for your example.


1,186 posted on 05/24/2005 11:48:32 AM PDT by pigdog
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To: pigdog
Depends on how you l;ook at it. The "price" of something is what you pay for it - including tax. Paying $50,000 in the one case or $129.87 in the other is merely lising the total price you pay.
It's not the total price I pay because I also pay state sales tax. So what's the point of using the inclusive rate again?


The tax in either case is 23% t-i (or 29.97% t-e). It is the same amount of tax in either case for the particular item. Are you 6 feet tall or 72 inches tall??
I'm 6'2", and if I grow 10%, how tall would I be.


Instead of the odd example you gave you could have just divided $100 by (1-0.23) which gives 29.97% directly. Same result. The amount you p[ay is the same also - $129.87 for your example.
Let's see. I could either figure the tax by:
price * exclusive rate = tax
or by:
(price / (1 - inclusive rate)) - price = tax
Gee, tough choice.
1,187 posted on 05/24/2005 12:07:53 PM PDT by Your Nightmare
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To: justshutupandtakeit; Conservative Goddess; pigdog; Principled; phil_will1

Terms of Trade = "The conditions under which a nation carries on foreign trade, with reference particularly to the question whether such conditions are favorable or unfavorable." Dictionary of Economics.

Yep if one is negotiating such.

A change in internal tax system is hardly an item for negotiations where sovereign nations are concerned. Especially in the removal of an impediment to competitive pricing of one's exports through replacing a tax system that disfavors one's competitive stance for a tax system that treats all products alike, domestic manufacture as well a imports.

Such a replacement requires no negotiations or agreements under GATT/WTO or any other agreements.

You are speaking of changing those conditions by making them more favorable.

Not at all, modifying a nation's internal taxes are a matter of sovereign right, in doing so if a nation remove a trade impediment against its own interests which happens to assures equal treatement of all parties there is no "more favorable" it is merely a byproduct yielding a more competitive capability to trade on equal basis instead of from a self-imposed disadvantaged basis.

Your excerpt should be read throughly with particular attention to the admission that elasticities will determine the effect of a FT. It does not support your view as much as you might hope.

The elasticities involved that yield anything at all interms of moving net exports towards balance in the particular situation work against the importer not the U.S. I suggest you analyse the situation abit more carefully as to what is actually being stated. For the elasticity to work to any advantage to an importer an increase in import volumes must occur to close any net export deficits, importer must decrease their tax included price to get anywhere at all, anything else they remain at disadvantage to domestic manufacture.

Sorry but your arguments operate only on the bare margins and at that yield no substantive change in the results of the anlysis of our nation going from an origin-based tax system(e.g. income/payroll taxes) to a destination based tax system (e.g. border neutral consumption taxes) that result in net gain to the U.S. when it undertakes such a transition.

1,188 posted on 05/24/2005 1:26:37 PM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: Principled
You think there's no such thing as tax exclusive rate, and you insist on using the tax exclusive rate.

Not for income tax. An "exclusive tax rate" on, of, or against income isn't possible.

Shall I continue?

Continue making a fool of yourself over this nonsense? Who's stopping you?

1,189 posted on 05/24/2005 1:32:37 PM PDT by lewislynn ( Is calling for energy independence a "protectionist" act?)
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To: Your Nightmare

Dale Jorgenson of Harvard who predicts that prices will drop in the 14 or so business classifications he did an ecomnomic model for.

From memory, he expects prices to drop by 20 to 25 percent as a result of a tax like the FairTax.


1,190 posted on 05/24/2005 1:32:54 PM PDT by pigdog
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To: justshutupandtakeit

No, it isn't - we still have IT components embedded in prices which cannot be border-adjusted ddownward. The VAT countries have already done that downward adjustment.


1,191 posted on 05/24/2005 1:36:32 PM PDT by pigdog
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To: Your Nightmare

Why wouldn't a property tax be the fairest tax of all? The more property, the more taxes.


1,192 posted on 05/24/2005 1:37:49 PM PDT by JoeGar
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To: justshutupandtakeit

You should look up the ecxonomic model done by Dale Jorgensof of Harvard. It shows price reducions with a tax like the FairTax of 20 to 25% if memory serves.


1,193 posted on 05/24/2005 1:38:20 PM PDT by pigdog
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To: pigdog
Dale Jorgenson of Harvard who predicts that prices will drop in the 14 or so business classifications he did an ecomnomic model for.
That wasn't from the corporate income tax, that was from all taxes. Jorgenson's model allowed for nominal wages to drop.
1,194 posted on 05/24/2005 1:44:32 PM PDT by Your Nightmare
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To: pigdog
You should look up the ecxonomic model done by Dale Jorgensof of Harvard. It shows price reducions with a tax like the FairTax of 20 to 25% if memory serves.
You probably should. The misunderstanding of this paper is the genesis of the price drop myth.

The Economic Impact of Fundamental Tax Reform
1,195 posted on 05/24/2005 1:48:47 PM PDT by Your Nightmare
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To: Your Nightmare

But it IS the total price you pay with respect to the product cost and the federal sales tax - state sales tax was never part of the discussion. I repeat - the price is what you pay for the item, including the tax.

Gee - a real mind-bender there ... lessee; would you be 10% taller? That'd be either was you meansure it BTW.

You could also just divide your $100 by 0.77 and that would give $129.97. We were trying to arrive at the purchase price, not the tax.


1,196 posted on 05/24/2005 1:51:55 PM PDT by pigdog
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To: justshutupandtakeit; Conservative Goddess; pigdog; phil_will1; Principled; groanup

A "sales tax" taxes a sale. Hence the tax is on the price of the article, this is a tax on an article and a tax on a tax no matter how you cut it.

Such spin.

A tax rate is what one applies to calculate the amount of a tax, always.

One uses a tax inclusive rate to calculate the amount of tax that is presumed included within final payment for goods or service such as that amount that must be tendered by the consumer in order to perfect his claim on products he receives.

One uses a tax exclusive rate with regard to price that has no tax included )e.g. the producers price) to determine the amount of tax to add on to obtain the final tax included payment to be tendered for the product by the consumer.

Either way the amount of any given final payment tendered to receive ownership of goods sold, includes the tax as well as the value of the base untaxed item is the same for any given product in an excise tax situation wether that exise be on goods or services.

In fact that is the forla; relationship between consumer price and producer price of a supply/demand equilibrium with an excise levied, which you, who claim to be trained in economics should well know.

 

Algebraic Solution of Linear Supply and Demand Models
R. Wigle
Director Masters Program in Business Economics
Wilfrid Laurier University
May 9, 2001

http://info.wlu.ca/~wwwsbe/faculty/rwigle/ec238/ref/pe-algebra.pdf

1 Market Equilibrium

In a market equilibrium with no taxes or subsidies, two things are true. First the producer price is the same as the consumer price, and the quantities supplied and demanded are the same. ***

2 Taxes and Subsidies

Now suppose that instead of the market equilibrium we are looking at a case with a tax or subsidy. In these cases, we can again solve for an equilibrium. In this case things are a bit trickier. ***

2.1 Tax

When a tax is present, there is a difference between the price the consumer pays and the price that the producer receives. In simple terms, the consumer pays the producer price plus the tax. ***

2.2 Subsidy

When a subsidy is present, there is once a again a difference between the price the consumer pays and the price that the producer receives. In this case the producer gets what the consumer pays plus the subsidy. ***

 

A more graphical explaination of the relationship between excises imposed, the price received by sellers (i.e. the producer), and the price paid by consumers(total cost to consumer for goods or service) can be found here:

 

http://www.economist.com/surveys/PrinterFriendly.cfm?Story_ID=850962

The hidden cost of taxes
Sep 18th 1997
From The Economist print edition



THE first diagram shows a demand curve and a supply curve for some hypothetical good. Usually, as the price of a good comes down, the quantity demanded increases; the demand curve therefore slopes downwards from left to right. Usually, as the price of a good goes up, the supply of it rises too; so the supply curve slopes upwards. With buyers and sellers free to trade, a balance of supply and demand will be established at the point where the two curves cross—point X, where the price is P and where the same quantity, Q, is both demanded and supplied. That point of equilibrium gives the market’s answer to how much of the good will be traded and at what price.

 

 

Turning to the second diagram, the shaded area between the demand and supply curves, to the left of the point where they cross, has a special significance, because it represents the net addition to social welfare that is created when the good is bought and sold at the market price.

If you divide the area into two, the upper part, A, represents the so-called consumer surplus. Every unit of the good sold when supply equals demand—the whole of the quantity Q in the diagram—is sold at the market price, P. But smaller quantities of the good could have been sold for more than P. Only for the last (or marginal) unit sold is P the top price the consumer would be willing to pay. In effect, therefore, all but that last unit have been sold for less than they are worth to the consumer. The area A adds up all these surpluses, unit by unit, showing the value of all the transactions to consumers over and above the price they paid.

By the same logic, the lower part of the area between the demand and supply curves in the second diagram, B, represents the producers’ surplus. Only the last unit supplied costs its producer exactly P. Other producers would have been willing to supply at a lower price, enough to deliver some smaller quantity of goods to the market. When these not-on-the-margin units are sold at the market price, their producers are paid more than they would have been willing to accept. The area B adds up all the producer surpluses.

The third diagram shows what happens when a tax is imposed, raising the price paid by consumers from P to Pc, and lowering the price received by suppliers to Ps. At these new prices, Qt is demanded and supplied. The amount of the tax (the difference between Pc and Ps) multiplied by the number of units sold (Qt) gives the revenue raised for the government (area C in the diagram). Both the consumer surplus, A, and the producer surplus, B, are accordingly smaller than before.

That was to be expected. The point is, though, that the two surpluses, added together, have shrunk by more than the amount taken away in tax. Now that the quantity of goods supplied has fallen to Qt, the triangle D has disappeared: it is not part of the government’s tax yield, and it is no longer part of the economic surplus; it has simply vanished. This part of the reduction in the surplus is a pure loss to the economy, known in the jargon as the deadweight cost of the tax. The implication is that if the government raised the area C in taxes and then handed the money straight back as lump sums to consumers and producers, the economy would still be poorer than before because the area D would still be missing.

 

In the last diagram the tax is twice as big as before. The price to consumers has increased once more, and the quantity supplied has fallen further. The consumer and producer surpluses are also smaller. The government’s tax revenue, C, may quite possibly be smaller too, despite the higher tax rate, because of the smaller quantity traded. The deadweight cost, however, has increased fourfold.

If the demand and supply curves were indeed curves rather than straight lines, the relationship between tax rise and pure economic loss would not be quite so simple. But the basic point would be the same: in general, the deadweight cost of a tax rises exponentially as the tax goes up.


1,197 posted on 05/24/2005 2:00:48 PM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: pigdog
But it IS the total price you pay with respect to the product cost and the federal sales tax - state sales tax was never part of the discussion. I repeat - the price is what you pay for the item, including the tax.
So it's my total of what I pay except for the other stuff I pay. Look up total.
1,198 posted on 05/24/2005 2:03:38 PM PDT by Your Nightmare
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To: ancient_geezer
P.S. "forla" = "formal" on those days during which I type on the keyboard with my fingers tangled.
1,199 posted on 05/24/2005 2:04:31 PM PDT by ancient_geezer (Don't reform it, Replace it!!)
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To: ancient_geezer; justshutupandtakeit
This gets my vote for the most irrelevant post of the day! Way to go, Geez!
1,200 posted on 05/24/2005 2:11:06 PM PDT by Your Nightmare
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