John Linder (R-somewhere) and talk show host Neal Boortz are advocating a “fair tax” system. It is essentially a national sales tax on retail goods that replaces most if not all other taxes, with the interesting twist that everyone would recieve a monthly rebate check to ensure no-one falls below the poverty level.
I’m not sure if I agree with it myself, but I’d be interested in seeing a discussion of it, especially by dopers with greater understanding of economics than I.
I’m in favor of it.
We as taxpayers will have more takehome pay to spend as we see fit. And we’ll spend it. The government will bring in more money in tax revenues. It’s a win-win situation. But the powers that be don’t like it because it scraps the existing tax code which they can exploit and give breaks to their cronies.
But no tax reform of any kind will really help until we get a constitutional amendment capping government spending.
I think there is one BIG, WHOPPING thing that they are missing with this.
They have set the tax at 33%. Well, rich people could just go to foreign countries and consume there at a VAT rate that is much, much lower. Even Britain’s 17% looks pretty good.
My wife is from Japan, and we have family there. Hell, if I paid 0% income tax but could then spend months in Japan consuming at a rate of only 5%, I would be overjoyed.
I don’t think you can say that this tax scheme will “work” unless you have a solution for the above. Got one?
Bonus bitch: There was a discussion of this system on TNR.com, and there would still be a significant tax on earnings to pay for social security. Gre-eat. We’ll have an all-new national sales tax but still deal with an income-based tax (that’s still regressive, too, yippee!) including all the forms, employer withdrawals, audits, the whole works.
System won’t work.
Can anyone say black marketing? I’d place bets on the tremendous increase in car sales in Canadian dealers. Also, look for increased Internet purchases of a lot of nonperishables. Could be quite a boom for the Canadian economy.
To work in reverse
Can you find a cite for that? AFAICT the website says nothing of the sort, and says that
Well, I’m not exactly comfortable defending the plan as it isn’t mine, but since you phrase it in such a freindly way: my answer would be that I’m not sure how “big and whopping” it is.
To begin with, the bar is not set at perfection. To insist that any alternative to the current system be without any flaw is absurd; the far more sensible question is whether it is significantly fairer/more efficient/less abusable/etc. than the current system. Thus, finding a loophole or two is not neccessarily meaningful; the question is whether the loopholes are smaller or less numerous than the ones we currently have.
So to address the scenario of people leaving the country to spand, we’d conversely have to address the fact that there are people who earn income overseas, bring it home, do not report it and are currently untaxed. We’d also have to factor in the added income from all the sales tax that visitors to the US would be paying (and yes, we’d also have to factor in that it would hurt the US tourism industry). What are all those figures? I got no idea.
In general, I suspect that the number of people who are going to be able to leave the country on a regular basis and spend large amounts of money is fairly small. I mean, unless you’re lifestyles-of-the-rich-and-famous wealthy, leaving the country for weeks at a time to loll on the Riviera isn’t an option (most working-age millionares have 9-5 jobs). TokyoPlayer mentions people buying cars in Canada, but I’d imagine it’s rather hard to sneak a Buick through customs. Sure you’d see people sneaking over the border to buy a few hundred bucks’ worth of cigarettes, but on the scale of the overall economy, how significant is that?
I mean, sure, it’s pretty easy to imagine ways to get around paying your fair share now and again; and you would see black-market activity. But at least those types of cheating would be illegal and punishable. The current byzantine system provides all sorts of legal ways to squirm out; ways that in practice work very much to the benefit of the wealthy and better-educated.
The 23% tax adds quite an incentive to cheat, and it could be harder to track. I’d say that there could be a fair chance of widespread cheating. Unlike a VAT, the intermediate steps are not taxed, correct? So how does one keep track if things “dissapear” from normal channels? Business to business sales are not taxed. Gifts to individuals would not be either, right? So I incorporate and run all of my purchases through that.
Thank the gods for the Internet, right? No need to leaving your chair, let along the country. Just have it shipped.
Much smaller percentage of people working abroad than people who would shop abroad (directly or Internet)
Prices in Japan are often more expensive for the same product than they are in, say, Hong Kong, although it’s not as bad as it was before. Women would fly down to HK to by brand name bags, and could save enough to pay for the airfare.
You’re going to have to spell this out; I’m not following. It ain’t like you can walk into Wal-Mart and say “I’m a company, don’t tax me.” Retail sales are taxed, no matter who is buying.
Again, I have no doubt that there will be be people who open phony businesses to buy stuff in bulk and sell it, tax-free, out of the back of a van. I also imagine that as those guys get caught and sent to jail, they will raise their prices to acccount for this risk; as they do so they start having less and less an advantage over legit businesses. Presumably it’s also a crime to knowingly purchase goods that aren’t being taxed; I find it hard to believe that people who have just seen their income rise dramatically as they started getting their entire paycheck would suddenly risk legal trouble to save 10% on a new coat.
Advocates of legalizing drugs (such as moi) often say that you could legalize them, tax the hell out of them, and still put dealers out of business. I think the same principles would hold here.
And also much smaller tourist economy? And also much smaller number of people who do not have currently-taxable income, or are taking advantage of loopholes?
And if Japan isn’t doing anything to stop it, I submit it’s probably because they figure that in the grand scheme it’s no big deal.
Actually, furt, you show your tax exemption paperwork to the clerk and she pushes a button for that the purchase is for resale and the tax disappears. Not sure if WalMart is set up for this, but Sam’s Club sure is.
I used to know a rather weathly (but cheap) guy. He ran a very small business on the side so that he had his tax exemption paperwork. He paid sales tax on very little, claiming most of it was for resale (it wasn’t, but he chances of getting caught on sales tax fraud were slim). But he actually didn’t buy most stuff in the U.S. He spent several weeks every year overseas. All his clothes were bought from tailors in Bangkok, his electronics were bought in Seoul, he shipped tens of thousands of dollars worth of goods for his personal use into the U.S. every year because it was cheaper. He isn’t the only person I’ve met who does this.
I think this is a fairly significant risk. I know too many people who functionally do this now just to get lower prices. Add the incentive of a large tax, and cross boarder shopping will be a big deal.
What about corporate taxes? Will we drop them when we drop income taxes, or will we leave the patchwork of loopholes and shelters that we now call a corporate tax system in place as is?
Similar OP and discussion to this debate here.
There’s a fundamental inconsistency with arguing that a Fair Tax system would allow workers to keep 100% of their current pay, including all of the taxes that they now pay to the Federal government, and arguing that businesses will cut the price of their goods and services so that any increase in price due to a nationwide sales tax will be minimal.
To illustrate: For simplicity’s sake, let’s say all the assembly line workers at Company A earn $30,000 a year, and they pay something like $4,000 a year in income taxes out of their own paychecks.
Boortz et. al. argue that it is the businesses that are really paying these income taxes, because in order to pay their workers a wage that will allow them to cover their $26,000 in annual living expenses, the company actually has to pay them $30,000 so that workers can pay that $4,000 in income taxes. This means that the widgets made at the company might cost consumers $25, due to “embedded taxes.” I don’t dispute this at all.
If the Fair Tax were enacted, Boortz and others argue that since companies would no longer need to pay “embedded taxes” for their workers, the price of goods would decline. So, Company A would then be able to retail its products at something like $20, and with the sales tax added, it would cost consumers something like $26 (he estimates that the price of goods would rise 3% if his proposal was enacted). The trade-off is that workers would get to keep all of their take home pay.
What is not discussed is that worker’s salaries would have to decline in order for companies to eliminate the cost of the “embedded taxes” that is included in the cost of their products. Therefore, if the retail price of widgets from Company A are to decline to $20, the company must cut worker salaries by $4,000 plus whatever payroll the company contributes. Workers would then be earning $26,000, and they keep every penny of that reduced amount. That’s just simple math.
However, advocates of this tax reform proposal are eager to say that workers would simply stop paying income taxes, and keep their salaries at the level that they are now. It is a “free lunch” argument. In fact, Neil Boortz makes this argument again and again, that workers will see a “10 to 15 percent increase in their take-home pay.” Cite.
But the math simply does not add up. If one is to eliminate the cost of “embedded taxes” in retail products, then worker’s wages must be cut by the amount of the tax that workers are now paying in order for businesses to be able to cut the price of their goods. But Boortz and others deliberately mislead people about this point. It is exactly like that question that has been discussed in GQ time and again, “Where did the other dollar go?”
In short, it’s a questionable idea as presented, and when one factors in the fact that outright mathematical lies are being committed in order to present the idea, it should be dumped immediately.
They’re full of it.
This is where I pretty much stopped reading:
Huh?
Yeah, the wealthy probably spend more on the necessities in absolute terms, but the poor undeniably spend more as a proportion of their income. For instance, in my household, we’re currently living paycheck to paycheck, for a variety of reasons. 100% of my take-home pay is going out the door. Sales tax in these parts is 6.5%, so I’m effectively paying an additional 6.5% income tax. That’s not accounting for the lack of taxes on food or shelter, and not adjusting for my before-vs-after tax income, but I challenge anybody to prove to me that the wealthy pay more in sales taxes as a proportion of their income – wage and capital gains – than the poor.
Okay, in typing that, I realized that I should probably skim through the page to see how they deal with capital gains tax rates. Other than mentioning that they would abolish them, they don’t say anything at all. So they’re not just mistaken, they’re fundamentally dishonest.
Whatever.
I’m talking about under the proposed system.
I assume you missed the part about all sales tax needed to fund the poverty level being paid?
This is disingenuous–it’s true as far as it goes, but it isn’t what most people mean by “progressive”. They seem to be dancing around the fact that rich people spend far less of their income than poor people. (Does anybody have numbers on this? It has certainly been true as my income has risen.)
In fact, even if someone who makes $10 million a year spends $5 million of it on FairTax-able goods, his effective tax rate is half of the 23%, or 11.5%. (Or half of the 30%, which is 15%. Whatever.) This is far less than he would currently pay. So if people like this are paying way less, somebody has to be paying more to make this thing revenue-neutral. Who is it? (My guess: neither Neal Boortz nor John Linder.)
From DoctorJ
Yeah, it would be progressive by the baseline measure of its own system but regressive if compared to the baseline of the income tax system. Lots of potential for heated argument.
I’m interested in your second paragraph. I imagine the real losers will be those out of the workforce living off savings. They are not earning much income but are paying living expenses. Students and retirees jump to mind. Presumably, the situation would be temporary for students.
The only way to begin to make such a system fair would be to exempt food, clothing, and medicine, which is what NJ does. Throw in that gas is already taxed and therefore probably not going to be taxed additionally under this system, and that would mean that what’s left would have to be taxed at a very high rate, I would guess, to make the thing work revenue-wise. Throw in on top of that that, for instance, the mortgage interest deduction would go away and drop house prices 10 or 20% overnight, and the politics get interesting, to say the least.
Just on that basis, it seems impractical.
Under the proposed system, items for “business purposes” are still not taxed, so Dangerosa is quite correct. You can be quite certain that shell companies will appear all over the place,. Here is how they define the non-taxable “business purposes”:
(1) for resale,
(2) to produce, provide, render, or sell taxable property or services, or
(3) in furtherance of other bona fide business purposes.
I’m a consultant. It is harder for me to find things in my house and garage that I can’t make those arguments for than ones I can, and that’s without the need to actually lie about their usage. The FairTax is almost a license for me (and most companies of any size, actual or shell) to print money.
A few other things, the rate is not fixed. In fact, they expect to change the rate every rear. It’s not very simple either. The PDF of the bill is 132 pages, and that’s despite the fact that the text is littered with places where they basically say “we’ll figure this one out later and them come up with the regulations.” It also has no effect on state and local taxes, so there will be people who pay close to a 40% sales tax rate. It’s also based on a ton of assumptions that make joyous optimism look downright melancholy in comparison. It will “raise the standard of living”, “enhance productivity and international competitiveness”, “improve upward social mobility”, and “respect the privacy interests and civil rights of taxpayers.” That the bill doesn’t make the claim that the fair tax cures cancer or that it makes your smile whiter is a surprise.
It’s horribly regressive, even with the rebates. The only thing the rebates do is moves the group that is hardest hit up the economic scale a bit. This one will hurt the lower-middle class types, the ones who do okay, but aren’t saving much, like a Mack truck. Their tax burden as a percentage of their income will either drastically increase, or they’ll be forced to make major changes in their lifestyle.
Yes, I’m betting the authors want you to mentally replace the word “spending” with “income”, as that is how this is typically phrased. While they are technically correct with the obscure phrasing that they use, what they say is pretty meaningless. If a person with a yearly income of $1,000 who received a rebate of $0.01 was compared to a multi-billionaire who received no rebate, their statement would still be true. Hardly a bullet-point for the tax’s progressiveness.
It certainly seems that way (warning: large PDF of 53 pages).
I read what you had to say in the OP, and I just read what the site actually says.
How is it different from the current system? Households living below the poverty level basically don’t pay any FIT under the current system. In fact, they get a little extra, thanks to the EITC, the proposed system is actually worse, by that measure.
And FTR, I never said my household was below the poverty level. I said that we’re currently spending 100% of our income, other than my 401k contributions. This system would basically screw me.
From DMC
The proposal is silly for many reasons but this is probably not one of them. There will always be compliance and enforcement burdens on any tax system. This proposal inflicts that burden on businesses exclusively. Small business like yours would be subject to audit. The businesses that sell to you would also be subject to audit. As a practical matter, auditors would collect from the vendor who will then try to collect from you. In this situation, the vendors will probably be a little hesitant to accept your word for it that you are a business. (This situation alone may retard economic growth)
As a small business guy, you are currently allowed to deduct any cost that is ordinary and necessary to your business. The case law views “necesary” as “appropriate and helpful.” That would probably apply to nearly anything in your house as well. Of course taking those deductions will invite the wrath of the Service.
If implemented, this will be complicated and will cause disruption to the economy but Joe Average may be happier because he is freed from any compliance burden in the system.