Free Republic

Lewislynn, in your math you forgot the final step. You said you would "play the silly price game" but then forgot that there would be no additional net tax on the final consumption. Your example shows the landlord reducing his rent by 25% pre-tax but prices on the goods going up by 23%.

In other words, if he had $750 after tax currently to spend, and 25% of the costs of his goods and services is the cost of the embedded system, his pre-tax FairTax costs for those same goods would only be $562.50 and his after tax cost approximately $732. He doesn't lose purchasing power in that example.

If you're going to use an assumption, you need to follow through on it.

I'm not sure what point you're trying to make here. The taxes included as part of the utility bill under the FairTax would be pretty cut and clear. There would not be several hundred thousand pages of deductions, exemptions, etc. for them to hide behind. Even under a flat income tax, business taxes would be applied to income minus expenses and wages and many corporations will look for avenues to lower what ends up taxable to them for an advantage.

Are you saying that under a flat tax, there will be no cheating by corporations? No corporations looking for an advantage over the others and no representatives looking to change the flat income tax code to help certain constitutient industries have an advantage? Remember, our current tax code started out as flat with 4 total pages including instructions. Here is what Richard E. Byrd, speaker of the Virginia House of Delegates warned about that system:

"A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . . . The law will of necessity have inquisitorial features, it will provide penalties, it will create complicated machinery. Under it men will be hailed into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of Federal inspectors, spies and detectives will descend upon the state . . . Who of us who have had knowledge of the doings of the Federal officials in the Internal Revenue service can be blind to what will follow? I do not hesitate to say that the adoption of this amendment will be such a surrender to imperialism that has not been since the Northern states in their blindness forced the fourteenth and fifteenth amendments upon the entire sisterhood of the Commonwealth."

Meanwhile, Professor Seligman argued for the "FLAT" income tax stating that Americans value their freedom far too much to allow it to deteriorate into one that asked when you purchased a stock, for how much, and for how much and when it was sold.

It is hard to make an argument that any income based tax could be consistent with the definitions of a free society, even the one that existed in the "progressive" era of the early 1900s

I certainly understand what you're talking about, but it makes no difference. The point is that on the margins, a 23% income tax (inclusive) is equal to a 30% NRST (exclusive), and the total flat tax burden on labor, including payroll tax is greater than 23%.

I never said they weren't taxed, however it is disingenuous for some to act like the final cost is goin g to go up by the amount of the FairTax. And since the entire bill is paid today (and also will be under the flat income tax by the way) with after tax dollars, those excise taxes and other taxes on the bill are effectively taxed under both those systems.

So the FairTax is certainly no worse than today or than the flat income tax in this regard. And in fact, since the total tax burden on that labor is less than either of those systems, I'd have to say it is better.

However, it does leave the control of tax burden in the hands of each citizen. Under any income tax, the government applies a filter to every dollar...even those under the the deduction. Under the FairTax, the value of a citizen's labor is put in his hands first and the level of taxation is determined by his own habits.

Pre-tax utility prices would drop. Federal and State income taxes are part of the bill you pay today. Here is part of an article from David Cay Johnston on this issue:

Oregon Hearing to Look at Utility's Charging for Taxes It Didn't Pay
By DAVID CAY JOHNSTON

PORTLAND, Ore., June 9 - A state judge has ordered a regulatory hearing into whether Portland General Electric, a unit of Enron, fraudulently collected more than $665 million from ratepayers to cover corporate income taxes that Enron never paid.
Because utilities are legal monopolies, the prices they charge are set by state utility regulatory boards, federal and state corporate income taxes are some of the expenses to be included in rates paid by customers.

This is a silly argument. So, I'll just agree with you; tax inclusive is silly but even flat tax supporters use them. Most flat tax proposals call for a 19% tax on the individual, a 19% tax on business profit and retention of payroll taxes at a total of 15.30%. Ignoring the business profit tax which IS a tax collected by business FROM someone else, the 19% individual income tax and 15.30% total payroll tax adds up to a total burden of $34.30 on every hundred dollars on an INCLUSIVE basis. In other words, for every $100 an employee takes home, his pre-tax earnings was subject to a 34.30 total tax burden.

Using your same chart, someone who takes home $100 after being subjected to a 34.30% inclusive flat income tax/payroll tax (both replaced by the FairTax) has to generate a value to the business of $152.20 in exchange for his labor to be able to purchase $100 in goods and services. In other words, the inclusive rate of the flat income tax could also be expressed throughout your chart as a 34.30% tax upon a tax until you get to the total of $152.20. Verifying that: $152.20 minus 34.30% in tax burden equals $100. So what's your point...that the flat taxers are deceptive?

Your chart shows that under the FairTax an individual could provide a value to the business of $129.86 in exchange for his labor and buy just as much in goods and services for his family. Whether the difference between $152.20 and $129.86 comes to the worker in the form of increased earnings, lower prices at the store, higher dividends on his investments or some combination he and the country are still ahead.

This advantage doesn't even include the fact that businesses will not pay the business input taxes under the FairTax (compared to 19% on profits) or the reduced compliance costs.

Sometimes it seems flat tax supporters on here argue that business taxes aren't passed on to others (consumers/laborers/investors). The only thing I've ever seen debated is where the incidence of corporate taxation falls. Corporations are things...artificial entities. Increased expenses in any area of the business, is money that has to be diverted from other areas.

As you mentioned, today you deal with the State and the IRS. Under the FairTax, it will only be the State. These are records you are kkeping now most likely in the course of business...if you are in business. Every business keeps an inventory list for example, otherwise, how would you even know if your employees were stealing from you? You keep sales receipts, bank statements, etc.

States are very likely to adopt a broad-based sales tax that piggy-backs on the FairTax to replace their current income tax/sales tax schemes, meaning a lower State rate with a broader base minus all the hodge-podge of rules and exemptions. This reduces the complexity of that system as well.

The savings mentioned for ACME include both compliance and corporate taxation through multiple levels. This includes corporate income taxes and payroll taxes. As simple as a tie is, it goes through several levels of production like most products. Those printing the tie didn't usually make the material or print the ink for example. They also didn't make the machinery that is used to manufacture the tie. Even inside of there own operations, they don't provide their own utilities and possibly contract out maintenance. All of these entities pay business income taxes, payroll taxes and compliance costs in either paying the current income tax or trying to avoid as much of it as possible. These costs are either passed through to the consumer, passed back to the laborer, or over to corporate investors. Today, with global markets, the competitive pressure is for consumers, which means in most cases this savings will be passed forward. There are too few good paying jobs and too many workers chasing them which prevents workers from advancing. This under supply of demand for workers versus the supply results in less pressure to pass the savings to workers.

However, the FairTax also brings with in tremendous growth in the economy. GDP is estimated to be in the range of 10.5% the first year alone (average of Professor Kotlikoff and Jorgenson studies) with capital investment a whooping 76% increase in the first year. Exports are expected to increase by 26% and even imports to grow by 3% the first year. All this means new opportunities for those workers. As the growth spreads across the economy, the supply of workers available will shrink and demand will increase will will raise wages. Because of the increases capital investment, inflation is held down as productivity is also increased.

The reason I went through that refers to your last question. Taxes and compliance costs are embedded in the items you buy today. You pay those hidden costs with already taxed dollars. Even with after-tax savings, you are paying additional taxes as your savings earn interest.

The hidden costs are estimated to be 22% for goods and 25% for services (labor-intensive occupations have the greatest payroll tax costs.) As I stated above, these costs are driven out of the price of the goods and services you buy under the FairTax and interest earnings are no longer taxed at all. If you have qualified money from a 401k or IRA for example, those withdrawals will not be taxed unless spent for new goods or personal services.

The only transition rule in the FairTax currently is an inventory credit for business. Cince the products currently sitting on their shelves or in their warehouses were made under the current system, taxes are already embedded in their costs. The FairTax gives a credit equal to the value of inventory times the tax rate as each product is sold during the first year. That allows businesses to lower prices immediately.

A final note, even flat tax supporters such as Dick Armey agree these embedded cost are included today in the prices of goods and services. They agree it keeps America from being as competitive as it should be. For some of those supporters on here to suggest otherwise is disingenuous. What Dick Armey and others would suggest is that the FairTax savings would not be as great as stated. At any rate, they would be significantly greater than the flat tax. The flat tax retains a 19% tax on business profit AND the payroll tax. While simplier than today, it retains compliance with both an income tax system (federal) and a sales tax system (state) in most States.

The FairTax removes all business input taxes and significantly reduces compliance costs through simplicity.

Yet the greatest benefit in my eyes to anyone who calls themselves a "Freeper" is the personal freedom of controlling your own tax burden through your buying choices. Your money will no longer run through a government filter before you get it regardless where you are on the income scale.

Muni bonds give you an example of which direction rates would go. Their yield is about 25% less than similar duration corporate bonds. The difference is tax risk. Corporate bonds must pay more to overcome taxation (as ordinary income today) and compete with bonds. When taxation is removed, rates drop.

Last night I mentioned this was per an economist at the Federal Reserve Bank of St Louis. It was John E. Gobb at the Federal Reserve Bank of Kansas City and also in a paper by Martin Feldstein. You can find those references in the footnotes here: http://www.fairtax.org/pdfs/interestrates.pdf and information on how bondholders might be effected with footnotes to research here: http://www.fairtax.org/pdfs/bondholders.pdf

Just like today, it you are going to take advantage of a tax exemption, you will have to keep records to verify usage. If you claimed you were going to use it for business for 3 months and only used it for one, you would have to make an adjustment in the tax. If you truly had it available for use, but just didn't have anyone interested, your records would show it hadn't been used and you had advertised it for charter. The point is there is nothing wrong with a legitimate exemption, but you will have to have records to back up your claim.

Unlike today, there would be 90% fewer collection points which means more focused auditing and a much simpler system to audit.

So, you keep good records and pay as you're supposed to. The system is fair. It taxes everything one time only, applies the same rate to all and gives every family the prebate based only on family size. It makes the cost of government clearly visible under the bright lights of the retail register and perhaps best of all, puts the money in the citizens hand first where he gets first choice of his/her tax burden. A tax on income is simply inconsistent with a free society...specifically the 4th and 5th amendments.

By the way, your point about State collections is a good one many people miss. Those strings held over the States heads today to get some of their citizens money back for highways or whatever else will probably start to disappear in my opinion as the States will have the money first and are likely to begin asking, "Why are we forwarding this money to the feds just to get it back with admin costs subtracted and strings added?"

You'd get a proportional exemption equal to your business usage. In this case, it sounds like the exemption would be 1/52nd of the total.

You would collect the FairTax on your charge for the charter, retain 1/4 of 1% for yourself (your fee for collecting the tax) and forward the balance to the State Taxing authority.

To make tax exempt business purchases, you would need a tax exempt certificate. If you are buying from a business wholesaler (who only sells to other businesses), the purchase will be tax exempt; if you are buying items for business from a retailer, you will have to pay the tax and apply for a credit. It is a simple matter to track business purchases and match them to inventory, sales records, checking accounts, etc. Instead of audits being spread over 130 million points of collection, there will be less than 20 million. The FairTax contains penalties and sanctions for those who practice tax evasion.

Regarding bonds, the FairTax will not tax investments, whether stocks or bonds. That includes muni bonds. The change will be in the fact that competing corporate bonds will not be taxed either. According to a study by economists from the St Louis Federal Reserve a few years ago, moving to a consumption tax such as the FairTax would lower the interest rate on such corporate bonds by 25%. That means a one time capital gain for current bond holders (other than muni bonds).

Corporate bonds and munis will then compete on equal terms of duration and quality. Keep in mind, under those terms revenue bonds (munis) will still have an advantage because they are backed by the taxing power of the municipality.

Only newly built structures will carry the cost of taxation. Therefore, your existing home will not lose value relative to new homes.

For example, if prices on new homes drop 20%, adding the tax back into the price will make it three percent higher than today. The sale of your existing home will not be taxed (the tax was already paid as part of the embedded cost of building it before the FairTax), therefore it will retain it's current price in relationship to new homes.

If prices don't drop (they will!), then your existing home would be worth 23% more than it is today. It would still be relative to new home prices. Because everyone would have more money in their pocket and the economy would start growing at a much faster rate, demand would likely increase for all homes.

Raw land will not be taxed until it is determined whether it will be used for personal consumption or business input. By itself, I believe it is treated as any other investment under the FairTax (not taxed).

I've seen many post on here concerned with home deductions, evasion, state income taxes, etc. First of all, if you haven't reviewed the main NRST Bills, do so and many of your concerns will be answered. The FairTax, which I support replaces the Federal Income Tax, the Federal payroll tax, Capital Gains tax, gift and estate tax, with a single level National Retail Sales tax, only at the final level of sale and only on new goods and services. It does not hurt the poor. There is a monthly rebate to every family based only on the size of the family. The rebate equals the poverty rate times the tax rate and is paid in advance monthly. The only thing the Government needs to know is the size of the family. This is verified by the Social Security number so illegal aliens do not get a rebate. In effect, the rebate completely untaxes the poor. It has the effect of exempting the basic necessities of life for all of us without leaving loopholes called food, medicine, etc. (Item exemptions allow for abuse by changing the definitions of items).

The Home interest deduction is NOT a concern. It is only a habit. Today we only deduct interest on a mortgage, not the principal. To get this deduction, one must itemize and give up the standard deduction on their tax form. Most Americans DO NOT itemize so do not get the deduction. Those that do, still don't get the benefit of deducting all interest because they must simultaneously give up the standard deduction. But that is not the main point.

The fairtax (www.fairtax.org) only taxes new items. A home would only be taxed once, when it is new. When the fairtax is passed, existing homes would not be taxed. ONLY the principal is taxed on those new homes. Interest expense is not taxed. That is no different than under the income tax where you can only deduct interest. Not taxing something is the same as exempting it. But one big difference is, under the FairTax you have much more money in your paycheck to make the payment.

Some will say that new home construction would end, and everyone would buy used. That is not practical either. This bill has been endorsed by the Association of General Contractors of America. Why? It removes the embedded cost of the income/payroll tax from every nail, piece of board, drywall, and effort of labor that goes into construction. According to economists from Boston University, Harvard, Rice, MIT and Standford prices for new goods would drop in cost between 20 and 30%. The tax rate would be approximately 23% to be REVENUE NEUTRAL so prices in actuality would remain at their current level. There would be a 6 month to 1 year adjustment period because items in inventory will still be carrying the embedded cost of the income tax. Whatever the cost of new homes after the change, used homes will adjust in price. They will not be taxed, so if the cost of a new home drops in price and after the tax stays at the same level, used homes will also stay at the same level. That is supply and demand.

In one conversation on this topic, a bank officer asked me what made me think he would finance a new car for $20,000 plus an additional $5,000 for taxes. My first response was to ask him if he'd like to remain in business. In reality though, he is financing taxes today as the cost of taxation is throughout the value of the car. People just don't see it. Under an NRST, if I buy a new car for $20,000 plus $5,000 in taxes, drive it across the street, decide I don't want it and offer to sell it to an interested party for $24,000, that party will have two choices...go across the street and pay $25,000 or buy mine with less than a mile on it with a $1,000 savings. Prices adjust.

A final thought on home sales...in a 1996 study by Princeton Economics, the CEOs of 500 large corporations in Europe and Japan were asked how they would response to this type of change. Eighty percent stated they would build their next factory in the US, twenty percent would move their headquarters here. This would create a huge growth in the economy as well as making the US the savings capitol of the world. Why place tariffs on imported steel which increases prices, when you can simply attract the companies to America to provide the jobs?

Regarding State income taxes and evasion...45 states today have a sales tax. The Fairtax will be collected by the States. The mechanism is already there. It does not require a new bureaucracy. In America, 85% of the retail sales are made by 10% of the retailers (i.e. Walmart, Sears, etc.) I can't see Wal-mart conspiring with me to evade the tax. Comparing the rate of 23% to today. If you are in a 15% marginal tax bracket, adding in the employer and employee payroll tax brings your current marginal rate to 30%. If we go out of our way to avoid a 23% on what we spend, what do you think most Americans are doing to avoid a 30% bite or more on what they make?

Keep in mind there is no perfect tax system. In the late 1800s the average American complained about being enslaved by tariffs as they were used by business to keep foreign competition down and artificially keep prices high. There is no perfect tax system, but a tax system based on a man's production is akin to slavery. You can't retain freedom under a system that requires loss of privacy, intimidation and division of citizens. A flat tax at any rate will not change this. You still must report to Government the value of your labor and they will still lay first claim to your production. This is slavery, is is only a matter of degree.

The FairTax pays the State and the retailer to collect the tax, so we end the notion of involuntary servitude for businesses as tax collectors. The States that have an income tax piggyback on the federal system. Without a federal income tax, most people (including officials in my State) feel the State would also go to a broadbased sales tax. At any rate, it is much better to have 50 States to choose from than one abusive Federal Government.

The greatest benefit by far though is the visibility and accountability this bill would bring. Even though the rebate "in effect" untaxes the poor, they would still see the cost of government included on every receipt. Any Government expense could be quantified. As an example, there would be no Free Government Health Care. It would have to be related to a percentage increase in the rate. Americans could be united in decisions instead of divided into thousands of special interest groups. This will lead to smaller government.

For the sarcastic among us (I am frequently one) it is hard to imagine our elected officials passing something that takes such a huge part of their power. No one says this will be easy, but it is possible. It is up to all of us to convince our elected officials that they either give up this control mechanism or their job. Politicians love to jump in front of a moving parade. We need to form the parade. I have spoken to senior groups, business groups, unions, etc on this topic and can personally say that 95% of the people support this change, but are very skeptical and therefore do not get involved. That is the only thing preventing this from happening. If you're for this, START ACTING ON IT! Americans for Fair Taxation are holding their first annual convention starting tomorrow (Friday the 8th) through Sunday. Be there, or call 800 FAIRTAX to get involved.

Imagine a world with no more income tax forms to file. We could change the initials of the IRS to INS and send them to terrorize terrorists instead of Americans.