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.
Not only is it more complex than an exclusive tax but it is deceitful AND it calculates a tax on a tax. Plus it has to be back calculated unlike the exclusive tax.
If a $100 item includes a 20% tax of $20 that is saying that the $100 = item +tax = $80 + $20 but the 20% multiplier is multiplied times the TOTAL (item +tax). This is a ridiculous way of calculating a tax and no other tax is done this way. It in no way is more honest or up front unlike the exclusive tax calculation nor does it more clearly show the tax burden.
"You really haven't paid much attention to stock movements have you? If you had you would have noticed that the fastest rising stocks are often those WITHOUT any net earnings. Investors are betting that there WILL be earnings but NOT on the fact that there ARE currently earnings."
I paid a LOT of attention to the movement of stock prices between March of 2000 and March of 2001. During that period the NASDAQ (which is the index most susceptible to the speculative activity that you are pointing out) dropped from a high in excess of 5,000 (it may have exceeded 5,400 at one point) to less than 2,000 (and I think it was closer to 1,600). IOW, using even the more conservative high and low points, the NASDAQ lost more than 60% of its value during that 13 month period. P/Es had risen to ridiculous heights prior to that correction and the more experienced market watchers continually warned that "trees don't grow to the sky" and that a day of reckoning was approaching. The younger investors/speculators insisted that these companies were "new economy", and that they would grow into their P/Es.
Anyway, your contention that profits are totally unrelated to stock valuations is, as I said, incorrect as a general proposition. Are there exceptions? Of course. Do speculation and other factors play a role, also? Of course. That does NOT mean that profitability is unrelated to stock appreciation, especially in the long term. If that were the case, no stock analyst would pay any attention to P/E ratios.
This reminds me of one of my first extended FR debates with Louie several years ago. He tried to deny that price competiton existed in the marketplace, citing his extensive business background selling his partiular product/service for whatever he wanted to charge. Another part of his argument was that benefits and features also played a role in pricing. Since there were other factors involved in product pricing, that proved (in his mind) that price competition did not exist. I cited example after example where price competition did clearly exist. I never did succeed in convincing him that businesses in a free market economy do, in fact, compete against each other with respect to price. I am never going to convince you that there is a relationship between business valuation and profitability.
Let's just leave it at that. You have your opinion and I have mine.
"Disregarding accounting tricks the decision to invest is unaffected by income taxes since 38% is 38% so the key is to select the company with higher gross profits which means the 62% remaining is larger. It will also be larger with 0% IT or with 95% IT.
I never said that IT are 'constant.'"
These two paragraphs seem to be in direct contradiction. First you say that "since 38% is 38%", the key is to focus on higher gross profits. Then you deny saying (or presumably believing) that IT are a constant.
I pointed out two instances (which were representative, NOT exhaustive) in which taxes might vary widely from your presumed 38% effective rate. In fact, in the case of NOL carry-forwards, one could say that there would be a net negative tax rate, IOW the acquired entity would result in taxes being reduced on the new entity's combined earnings which far exceed the taxes due on the acquired entity's earnings. In fact, that is the whole idea behind acquiring defunct businesses which have NOL carry-forwards.
As to your reference to "accounting tricks", let me point out that these "tricks" are the result of a tax system (as codified in the Internal Revenue Code)which brought them into being in the first place. As a professional accountant, I can tell you that most of these "tricks" did not arise from GAAP (Generally Accepted Accounting Principles), but from the horribly inefficient tax system which you defend and support. It seems a bit disengenuous to make disparaging remarks about the process that tax reformers are trying to change while pretending that the system that perpetuates them is sacrosanct.
As regards the income tax it is a deduction from total income whereas a sales tax is an ADDITION to the price. They are completely different and this method ignores that difference.
No, I don't think so. I see fewer transitional difficulties with this tax system that any other - BY FAR - because it is simple in both concept and implementation and has fewer contact points of the bureaucracy with the taxpayer.
What is it that the "army of bureaucrats" you envision might be doing??? And do you think this "army" will be lesser or greater than the current "army" in the IRS - which "army" becomes unfunded BTW?? What is it you believe will need to be interpreted and enforced???
Saying a business must adjust to its demand for items to be sold isn't a big hill for a climber as businesses respond to those uncertainties day in and day out - and quickly, too. I doubt it will be greatly different with the FairTax as there are few actual transitional issues involved.
Much of the tax collecting mechanism presently exists in most of the states - even the establishment of resellers and auditing of revenues. I believe we will see most of the benefits of the FairTax fairly quickly and believe (like many economists)that there will be an upsurge in economic activity that has been unprecedented in recent decades at the very least.
The Greater Fool theory does not change any of my assertions wrt stock trading. It is EXPECTATIONS which determine the trading.
If the conclusions of an economic model are counter-intuitive then one adjusts the assumptions to try and explain them. Actually one should do that in any case in order to more properly factor reality into it. No model can contain ALL the elements of reality and paring it down to one variable at a time is the only method available to get a hand on things. But if, for example, we are trying to determine how much an interest rate change will affect the exchange rate we model it so that only the interest rate is changed.
Should our regression analysis show that there are unexplained changes in the dependent variable after changing the rates then we introduce other changes say, for example, exports minus imports, and continue until almost all the changes in the dependent variable can be associated with independent variables.
Any scientific model assumes all things are held constant initially and changes each variable one at a time. In medical experiments you give only one medication at a time not ten since you could not tell which of the ten caused a change if given all at once.
The total excluding the tax. That's why it's called tax exclusive!
If you "exclude the tax" how does the 25% become a tax rate?
By expressing the tax rate as a ratio of tax paid to dollars remaining. Again, THIS is the way YOU say it must be done!
If my "exclusive income tax rate" is 4% what's my inclusive income tax rate?
It's really easy. If your exclusive tax rate is 4%, you could have kept $100 after earning $104 - the other $4 going to tax. Your exclusive rate would then be 4/100 or 4%. If you want the inclusive rate, simply divide by the total including the tax, or 4/104 = 3.85%.
Not hard. And you don't get it. You are not smart.
DugwayDuke, you remind me of a beaten dog who expects to be beaten everytime someone approachs him.
Your negative opinions about government are to the point where you believe nothing good can be done peacefully. You have lost all good faith with the process of government and think it can only get worse. That way of thinking leads to revolts.
Either method of calculation can yield the correct calculation and neither is really more difficult than the other. Also (in some hands which shall remain nameless) either method of calculation can be used incorrectly to give incorrect results. Either way is honest and up-front but you are merely unused to thinking about it.
Income tax rates are actually stated on a tax-inclusive basis as one can see by doing some simple arithmetic. That is certainly a valid reason for using the t-i statement in the FairTax bill - to see how high your income tax rates are on a comparative basis. That helps put the FairTax rate into a comparative context.
No. The whole point of the method is to compare apples to apples as is so stated by the AFT.
If you only started paying attention at the end of that boom you missed the part where people where making fortunes. Those who wait until the P/Es become rational are not the ones who saw the huge gains. It is also interesting to note that Greenspan's warnings of the bubble came at least two years before any crash. So there were people making fortunes for another two years. Timing is everything in investing not P/Es.
P/E are pretty much irrelevant to large upticks in stock prices. That is repeatedly shown by the fact that the stocks skyrocketing rarely have significant earnings if any.
My preference is gradual reduction in the income tax rates rather than radical changes this in no way implies any love of the current system. Conservatives are generally slow to adopt radical changes based upon dubious theory.
And I don't blame accountants for the tricks you are right as to their origin.
As to your discussion with LL there is some truth to his position as a check of the cereal aisle will show but it is not always true since I wait for a sale before purchasing. But when many competing products have the same price typically you can be assured you are not looking at pure competitive forces at work. But oligopolistic competition.
It isn't comparing apples to apples in any way not even fruits to nuts.
Ah,,, but you see there ar EXPECTATIONS in the Greater Fool THeory, too. they are just a different set. The expectations are that some poor bastared will be a Greater Fool than you and buy from you at a higher price. It has little to do with P/Es, etc. - in fact nothing at all in many if not most cases.
Your dissertation about economic models and their use reminds me that I once asked an economist if he could model the situation where a man had one hand on a hot stove and the other on a block of ice.
The economist said "Certainly I can model that. Clearly, on the average, he's comfortable".
The problem with scientific models is their lack of presience regarding human behavior. Scientific models have their uses as a baseline to begin an experiment but if human behavior is one of the variables that can ultimately affect the outcome or conclusion then the likelihood of reliable predictions based on the model becomes much more remote.
One thing we never seem to debate on these threads is what behavior would be caused by the implementation of the FT.
After studying classic economics in college and being a de facto macro-economist for most of my career I have concluded that most academics look for an "efficient market" while successful investors realize that the greatest misconception about markets is that they are supposed to make sense.
So all the anit's rant about the logic of a FT but ignore the behavior that may be attached to it. The IT is like a ball and chain around the entire economy. Freeing up commerce to the point that those doing business have only one decision to make at the time of exchange, whether to buy and spend the tax or not, can only be stimulative IMHO.
lol.
Two economists were stranded on a desert island with a can of beans. After much discussion they decided to "assume a can opener".
You're certainly right ... excellent point!!
I don't think the Whiskey Rebellion is a good example since the people at the time viewed the whiskey as a type of money as much as anything else and they believed the tax was like taxing their money in that sense.
"So you say. Almost every bill passed by congress requires an army of bureaucrats for it's interpretation and enforcement. You're naive to think this will be otherwise."
That isn't a criticism of the FairTax proposal, it is a generalized concern which could extend to any Fundamental Tax Reform proposal. Taken to its logical extension, one could say that is is useless to propose any improvements at all to the current system, since congress could drastically modify any proposal to the point that it accomplishes few of its supporters' intentions.
That sort of victim mentality (we are here to serve congress and not vice versa) is one that I and thousands of FairTax supporters refuse to accept, even though we are aware that many Americans (of which you are apparently one) are resigned to. Call me an idealist, but I believe in our system of government. I believe that when the American people coalesce around an issue, their elected leaders will follow. The problem is that the American people don't yet understand the issue well enough to exert that kind of pressure on their elected leaders, but that is changing.
One example that I often cite is welfare reform, which passed during President Clinton's first term of office. Congress passed welfare reform legislation twice during his 1st term and he vetoed it twice. Congress then passed it a 3rd time and he signed it into law. Why the change of heart? Glad you asked. Because his pollster told him that the American people were solidly behind welfare reform and that he would pay a political price if he came to be seen as an obstacle in that area. Lo and behold! A welfare reform champion was born!! President Clinton even listed welfare reform among his administration's accomplishments during his later state of the union addresses.
"Just because the bill describes 'inventory credits in transition' is no assurance that there will not be transitional issues. As you point out, even a 'few changes' in the IT code can be traumatic, yet you ignore the fact that the complete abolition of this code can also be traumatic."
I will concede that this is a major change to our economy. I will further concede that, even though the long term economic benefits are not only desirable, but absolutely necessary, there may be some short term "turbulence". However, given that we are removing a huge shackle from around our collective economic necks, I am convinced that the winners will far, far outnumber the losers initially and longer term.
Let's look at this from another perspective. Implicit in any decision of this sort is a comparison between the option of band-aiding the current system a bit more and making the clean break that the FairTax entails. Because the current system has managed to hold together (albeit with horrendous economic costs) for more than 90 years now, there is an underlying assumption that maintaining it is a low risk alternative.
I view that as completely false. The current system is buckling under its own enormous weight and horrendous inefficiency. With globalization sweeping the planet, its deficiencies in the trade area alone warrant its abandonment. The more I learn about what is going on around the planet in this area, the more convinced I am that maintaining our standard of living in this totally new economic environment is one of the two biggest challenges that this generation faces. Unfortunately, few Americans understand what the next couple of decades will bring. The challenges that globalization has presented so far are nothing compared to what we will witness over the next couple of decades.
The Atlanta Journal Constitution just published a front page article in Sunday's edition: "Brazil presents rising challenge to US farmers". Some of the information in there is very alarming. Of course, China is an amazing story in the manufacturing area. What is happening there is going to tremendously change world economics in the years ahead.
Continuing with a tax system which puts our producers at a disadvantage vs their international counterparts as we get further and further into a more globalized world economy than any we have seen before is simply a luxury that we can no longer afford.
There is more. The current system continues to grow like a cancer. According to CCH, it is now more than 60,000 pages and is growing at a rate which will see it exceed 100,000 pages by 2010 or thereabouts. Compliance costs are a huge drag on our economy and a collosal waste of resources. Americans are increasingly seeing it as unfair and unenforcable. Even the IRS cannot answer tax questions with sufficient accuracy.
The question with respect to the current system is therefore: how long can these trends continue without a major "correction" such as we seen in other areas. I already pointed out what happened in the NASDAQ between March 00 and 01 on this thread. Although there are obviously differences between the stock market and our tax system, one lesson should give every American pause - adverse trends can continue for seemingly long periods of time with seemingly negligible consequences, but when the reversals/corrections come, they are likely to be much quicker and more intense than the factors which created them. I would argue that 9/11 is another example of this phenomenon, but I will leave that for another post.
The point that I am making is that the notion that band-aiding the current system for the next few years is a low risk alternative may not, in fact, be accurate. In point of fact, band-aiding the current system may actually be the highest risk option available to us. Viewed from that perspective, the short-term turbulence can be considered a very small price to pay to put us on a path to greater long term economic prosperity and productivity while avoiding the unravelling of the federal system of revenue collection and its resulting economic effects.
Check out pw's post. Bravo pw.
A sales tax is an excise tax but an excise tax is not necessarily a sales tax. It can just tax manufacture and consumption and not sales.
I agree the term excise is the broader definition, covering the non-trade/use cases like as a vehicular tax, and those taxes on activities and events not related to exchanges and sales such as the gift/estate taxes.
Excises pretty much cover the full gambit of taxes associated with an activity, exchange, or events. While the direct taxes are on property and persons in the form of capitations largely lacking distinctions of usage or event associated with them.
It may be that we are talking about two different things when we talk about transitional difficulties. I think you're speaking of the administrative apparatus to collect the tax. I too don't really see any issues there.
When I speak of transitional issues, I'm speaking of the effects on the economy and employment during the four to six months prior to and a couple of years following the change over. Any change as fundamental as this change will have unforseen impacts. Regardless of the merits of this proposal these risks are there.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.