Posted on 08/16/2007 6:10:39 PM PDT by RobFromGa
Fair Tax, Foul Politics
By The Editors
Advocates of a national sales tax to replace the income tax have built an impressive grassroots army. They have given their idea an appealing, if somewhat gimmicky, name: the Fair Tax. And they have managed to get five Republican presidential candidates to suggest that they would sign a sales-tax bill if it reached their desk. Some observers credit the enthusiasm of the Fair Taxers for Gov. Mike Huckabee’s surprisingly strong showing in the Iowa straw poll. Huckabee is the candidate most committed to the Fair Tax.
Former senator Fred Thompson is, however, backing away from the idea. Fair Tax advocates have released a video in which Thompson, asked about the proposal, appears to say he would “absolutely” sign it if elected. On August 10, however, Thompson wrote those advocates a letter that said merely that the Fair Tax was a good starting point in thinking about tax reform. Mitt Romney’s campaign says that the Fair Tax has some attractive elements, but that the candidate would need to see details before making any pledges. Rudolph Giuliani has said that he does not think he would sign any such legislation.
The leading candidates are right to be wary. The tax code needs major reform to become fairer, simpler, and more efficient. The Fair Tax is one instantiation of those goals, but its political impracticality makes it fatally flawed. If conservatives force a choice between a Fair Tax and no tax reform at all, the latter is what they are likely to get.
There is widespread confusion about what the Fair Tax would entail. If you bought $100 of clothing and paid a $30 tax on it, you would probably think you had paid a 30 percent tax. The Fair Taxers say that you paid a 23 percent tax: $30 is 23 percent of the $130 you paid in total. When they say they want a 23 percent tax, that’s what they mean.
Since there would be no more income tax in this system, there would also be no more standard exemption to make sure that the basic necessities of life went untaxed. The Fair Taxers would solve this problem by sending out monthly “prebate” checks to all Americans.
The great, undeniably attractive selling point of the Fair Tax is that it would allow the country to dispense with the IRS. But the sad truth is that if the federal government is going to collect as much money as it currently does—which the Fair Taxers say their system would—its methods of tax collection will inevitably be intrusive. The real difference between the current system and this proposal is that the primary brunt of tax collection will be borne by a smaller group of people: business owners.
Over time, then, enforcement measures could become more draconian than they are today: especially since a massive retail sales tax would create a massive incentive to evade it. That’s why every country that has ever tried to impose retail sales taxes this high has quickly moved to a Value Added Tax levied at every stage of production. Consumers rarely see or keep track of these taxes, and they seem to be fairly easy for governments to raise.
These pitfalls are beside the point, however, since a national sales tax is not going to become law. No presidential candidate could be elected on a sales-tax platform, and no Congress would enact one if he were.
A candidate who ran on the national sales tax would be able to run on nothing else. He would have to spend all of his time defending the idea. Off the top of our heads, we can think of three devastating lines of attack an opponent could use in television ads. One ad could argue that getting rid of the mortgage deduction would send home prices into free fall (something that voters are going to find especially worrisome now). Another could ask why senior citizens, having paid taxes all their lives as they made income, should have to spend their retirements paying taxes on everything they use that money to buy. A third could simply ask voters if they look forward to paying a brand new tax.
There are answers to each attack. But no Republican candidate, especially in the daunting environment of 2008, is going to want to have to make them. Republicans cannot win a national election without the tax issue. If they ran on the national sales tax, Republicans would be taking one of their natural strengths and making it into a liability. Which is why we expect them to say nice things about the Fair Taxers’ passion, and move on.
We just CALL it a Corporate Income Tax!
The FairTax when expressed as a sales tax on goods is 30%. And this rate is too low for several reasons described above in the FairTax Primer post near the top. It would end up between 40-50% in all likelihood.
Who said services too?
The FairTax bill taxes all goods and services, and also all state, local and federal purchases of goods and services including salaries paid to government employees and all of their fringe benefits. (except education)
you fail to mention all of the billions of spending that the underground people will be paying into the system because they will be forced to pay to by their goods.
According to the FairTax arguments, there is 22-23% of embedded federal tax being paid right now by everyone when they buy goods at retail. It just isn't visible. If the "underground people" go to Subway, the embedded tax is collected by the government. If they don't go to Subway, the sandwich isn't needed, the employee isn't needed and the tax isn't collected. So, there is no additional revenue being generated from these underground people.
The main place income tax revenue is lost now is when an employer pays cash for labor services to employees. This is still going to happen in the Fairtax scenario, people who are willing to break the law will still be willing to do so.
I believe the arguments you make are misinformation, but you believe them. Don’t know how you jump from 23% to 30-40%. Folks can come up with any rationalization they want that seems to make sense but the fact still remains that the founders never included an income tax for very good reasons. People have to be forced to pay a wage tax by turning over information about their personal lives which then in turn can be used against them by the IRS, and is done routinley to extract more money. And of course if you don’t pay, you go to jail or your bank account is taken. It flies in the face of the 5th ammnedment and that is a big reason why up until 1913 we never had any income tax at all. Your arguments are speculation and just not accurate. Ie, the underground econonmy...all of those billions that criminals and such spend to buy their stuff is now taxed! Much more revenue! Of course their services and wages are still not touched, but their spending is which will amount to a whole lot of money. Whatever doubts you have, that fact remains true.
Unless one is seeking to compare apples to apples rather than apples to oranges when comparing the proposed tax to the taxes it would replace all of which are commonly expressed on a tax inclusive basis ($.23 of each dollar spent) vs what you have left after the tax is paid (the current top income tax of 35% becomes more than 55% when expressed on that basis).
It's all explained in The FairTax Rate: a 23% tomato or a 30% tomato?
The rest of what Rob says I would take with a VERY large grain of salt as he is in love with the current income tax system.
I think the only way an FT would get passed is if the IT were declared unconstitutional. Don't hold your breath...
I'm in the States again now, was in Europe.
The rate when expressed as a normal sales tax is already 30% (29.87%). The 23% you reference is a misleading way that the FairTaxers represent the sales tax. If an item costs $1.00 before the tax, they the 30% tax is added and the price is $1.30. Since the 30 cents tax is 23% of the total price of $1.30 they call it a 23% sales tax. But in terms of a sales tax this would be called a 30% tax by anyone in the country.
If we had a 100% sales tax-- eg. the item costs $100 and the $100 tax is added bringing the cost of the item to $200, do you know what FairTax math would call the FairTax rate? It would be 50%, not 100%.
Regarding how I got from 30% to a higher number,see post #13 on this thread
There are two major areas where the FairTaxers are wrong-
1) they don't give the government the revenue to pay the FairTax that they expect them to pay so they'll need more revenue which means a hgher tax rate, and
2) they assume that there will be no effect on reported consumption with a sales tax of more than 30%. If there is 15% evasion, legal or illegal, then the tax rate goes up much higher.
There is not now, nor has there ever been a correlation between a proposed bill and actual law.
I was pointing out the two areas where the FairTaxers are wrong on the rate calculation. They are wrong on many other areas regarding 1) microeconomics, 2) macroeconomics and 3) behavioral psychology as well.
Basically they are not living in the real world of business. But coming from a politician Linder, and a talk radio host Boortz, and underwritten by rich lobbyists, I am not surprised. Nor am I surprised that they can get 60 other politicians to go along with them, there is little harm that can some from signing on to a bill that is going no where and it gets you some votes from the cult members.
You probably mean well, but you have fallen for the FairTax misrepresentations hook, line and sinker. You need to do some independent analysis. There are some good links in that post #13 to older threads where many issues are discussed by people on both sides of the FairTax. You should look at them.
Besides, we already HAVE a VAT! We just CALL it a Corporate Income Tax!OMG. Clueless.
Don’t worry about the pro-IRSers. Generally what they want to debate is something like a 40% VAT on top of the existing income tax. And they’re absolutely right - that would be a terrible idea. But fortunately it has nothing whatsoever to do with the FairTax.
The unfortunate part is that the pro-IRSers have on occasion raised issues that should be studied and examined. But rather than discussing these specific points with the goal of fine-tuning the bill, they state that any slight imperfection means we can’t even look at alternatives to our current horrendous tax policies and IRS bureaucracy.
You have no idea what you are talking about. How long have you been posting to FairTax threads? I have never seen the discussion you are describing on a single one.
What is discussed on these threads is the merits and demerits of the FairTax plan, as well as other possible solutions to our tax and spending problems.
And your "pro-IRS" gratuitous snark is a common one which is not based on anything except a lack of substantive argument on the part of FairTax cult members. So, you resort to cheap parlor tricks.
International Burdens of the Corporate Income Tax
Here is the abstract.
This study applies a simple two-country, five-sector, general equilibrium model based on Harberger (1995, 2006) to examine the long-run incidence of a corporate income tax in an open economy. In equilibrium, capital is assumed to be perfectly mobile internationally in the sense that the country in which a real investment is located does not matter to the marginal investor. In addition, each country is assumed to produce at least some tradable corporate goods for which the country cannot affect world output prices. Like the original Harberger (1962) model, the worldwide stock of capital and the supply of labor in each country are fixed. Under those assumptions, the model provides closed form solutions and easily understood predictions about its comparative static equilibria. As with any simplified model, the analysis is silent about some potentially important issues – such as the effect of the corporate tax on savings, growth and other dynamics – that may also have important effects on corporate tax incidence.
The analysis shows how the domestic owners of capital can escape most of the corporate income tax burden when capital is reallocated abroad in response to the tax. But, as in Bradford (1978), capital owners worldwide cannot escape the tax. Reallocation of capital abroad drives down the personal return to investment so that capital owners worldwide bear approximately the full burden of the domestic corporate income tax. Foreign workers benefit because an increased foreign stock of capital raises their productivity and their wages. Domestic workers lose because their productivity falls and they cannot emigrate to take advantage of higher foreign wages. Under basic assumptions of the numerical application, the outcome is also similar to the implications of the simpler model of Bradford in that the full worldwide burden falls on domestic owners of productive inputs. That outcome changes, however, under alternative assumptions.
Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden. Domestic landowners receive a small benefit. At the same time, the foreign owners of capital bear slightly more than 70 percent of the burden, but their burden is exactly offset by the benefits received by foreign workers and landowners. To the extent that capital is less mobile internationally, domestic labor’s burden would be lower and domestic capital’s burden would be higher. Burdens can also be affected by the domestic country’s ability to influence the world prices of some traded corporate outputs. But the signs and magnitudes of those effects on burden depend upon the relative capital intensities of production in the corporate sectors that produce internationally tradable goods.
navel-gazing edubabble.
Typing too fast to read what you yourself wrote on this very thread?
224. "a FairTax and an income tax which is the only logical conclusion"
You wrote that shortly after making a negative comparison to the VAT in Europe. There's also post 268, which says "a credit/invoice VAT is no different than a NRST", referring to several posts claiming "Mexico has exactly what the unfairtax would become". Mexico, of course, has a VAT. I know you didn't make those posts, but you claimed never to have seen anyone make such an argument.
282. "It would end up between 40-50% in all likelihood."
My 40% claim was on the low end, but accurate. Not every poster makes all three claims simultaneously, although most bring them all out eventually. This thread is not unique in that regard; I have seen similar statements in almost every FairTax thread I've read.
And your "pro-IRS" gratuitous snark is a common one
Look, the truth hurts, and I wouldn't want to be called pro-IRS either. But the fact of the matter is that you are by definition pro-IRS. We are discussing a proposal that would eliminate the IRS. You are opposed to that proposal, and have not suggested an alternative or a modification that would also eliminate the IRS. As you post on virtually every FairTax thread you find, you are in favor of "incremental improvements in what we already have"...which is the IRS.
I'm not saying you're marching in the streets for a bigger, more powerful IRS. But there is a side of this debate that wants to eliminate the IRS and a side that does not. You are not neutral and have not suggested another alternative, which puts you squarely on the side of people who do not want to eliminate the IRS. People who do not want to eliminate the IRS will continue to hear that they are pro-IRS, as it is an indisputable conclusion.
The lack of logic astounds me - oh wait... no it doesn't.
We have an income tax system now, which is able to generate the obscene amount of revenue that the government needs to be able to meet its Constitutional needs, as well as to write checks to millions of government workers doing things that are not the role of federal government, as well as many other people who get checks every month for various other un-Constitutional reasons.
The FairTax in my opinion, which I have described in detail throughout many threads, will not be able to generate this amount of revenue and will need to be much higher than advertised. This loss of revenue will cause panic, and the politicians will have to fall back on something that they know works to collect the revenue to keep the old people and orphans from starving and to ensure the Assistant Undersecratary for Feminine Napkin Procurement and his family are able to get their paycheck.
Where will they go to when they need the revenue and they can’t raise the FairTax any more because it will cause more evasion? It is obvious, they will go after an emergency surtax on the incomes of the evil RICH people that make more than $50k or $80k, they can afford it and there is more of us’ns than there are of them. ENTER the income tax again.
It is entirely predictable.
The reason it comes up at all on FairTax threads is as the end game for the failure of the FairTax to generate the revenue. The other possibility that could make the FairTax work would be a police state with obscene levels of government intrusion into every facet of consumption.
When EVERYONE is paying, and feeling the pain of doing so,Increased take home pay,
Pretty painful stuff.
Or is it all a lie?...Or which is the lie?
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