Well, I’m not convinced. Shipping is cheap. Out-of-country services could set up operations using multiple addresses to throw off customs. These services could obtain insurance for the goods so customers wouldn’t have to worry about thievery.
Hell, I’m almost hoping the FairTax passes so I can chill in the Caymans and ship boxes in and out.
I’ve fallen way behind here, so I’ll try to cover the main points that have been raised. Please repost anything you feel I’ve failed to address and you’d like an answer on. (Though Wikipedia or the FairTax FAQ is a good place to start. It’s not like I’m the world’s only FairTax supporter.)
“A 30% revenue neutral sales tax will increase prices by 30%.”
The overall price level in a country is not randomly determined. The main cause of price inflation is monetary inflation, and by default the monetary supply won’t be changed under the FairTax. You can just tweak prices by 30% and expect it to stick. The vast majority of economists will agree to that. It is not a controversial issue.
http://www.fairtax.org/site/News2?page=NewsArticle&id=9321&news_iv_ctrl=1521
“In the course of calculating the tax rate needed to achieve real revenue neutrality, my co-authors and I pointed out that the economics of the FairTax do not, apart from transition issues, depend on whether the Federal Reserve does or does not accommodate the FairTax by permitting the price level to rise. In discussing the possibility that the Fed would not accommodate, we pointed out that in this case, producer prices, wage rates, and rental rates would all fall.”
“The tax being revenue neutral, the aggregate demand is unchanged and so there would be no impact on the aggregate price level. There is unanimity among the economists all over the world that there seems to be nothing inherently inflationary about the use of VAT.”
It is not difficult to find more cites.
Note that this temporary process could well be painful. People don’t easily accept reductions in their gross wages. That’s a valid objection.
And if the Federal Reserve increases the money supply and creates real inflation to fix that problem, it works out to a one-time tax on everyone who holds USDs. That’s not good either. But this kind of inflation is a well known quantity.
“The FairTax will unfairly benefit the rich.”
I’ve posted references to the research showing that the middle class won’t be worse off under the FairTax, and that the rich may be hurt a little. If you disagree with those fidnings you either need to get into the details of the research to show why it’s faulty, or explain why the middle class having the same or better standard of living (depends on consumption) under the FairTax is such is a big problem.
http://www.beaconhill.org/FairTax2007/DistributionalAnalysisFairTaxBHI4-25-07.pdf [pdf]
*“We argue that it is most appropriate to sort households and individuals on the basis of expenditure, on the grounds that this best represents “lifetime” wellbeing. On this basis, we show that the FairTax benefits households and individuals in the lower expenditure categories, while imposing a higher burden on those in the higher expenditure brackets. When the dynamic effects of the FairTax are included, only those households in the top per-capita-expenditure decile would be worse off after the 25th year of the implementation of the tax, and then by a relatively small amount.”
*
“A retail consumption tax will lead to widespread tax evasion.”
A few key points to remember
You can’t just be caught on the border, you can be caught selling the merchandise as well. All in all it does not seem like an all that profitable business. Drugs would be far more attractive (easy to hide, extremely high profit margin).
DrDeth points out that while Norway has a 25% retail consumption tax, it also has a high income tax and other taxes. Strassia wants an example of a large country that has switched completely to a VAT (or sales tax).
Norway is certainly not a country to be emulated tax-wise <shudder> . That was hardly my point. The point is that the many counties currently using a high VAT to get part of their income prove that it is possible. The doomsday scenarios from this thread (such as a massive drop in consumption or a massive increase in tax evasion) failed to occur when the taxes were introduced. Making a full transition is just a matter of degree, unless you want to argue that there’s some magical tax limit over which the system suddenly collapses. Not theoretically impossible I suppose, but … cite!
(Russia and other Eastern European countries that have switched to flat income taxes are as close as you’re going to get with regards to a complete switch to sales taxes. Not the same, certainly, but there are similarities.)
Then there’s been some questions about the economic effects of increasing savings.
To elaborate further on what I’ve already said, I consider the idea that you can spend yourself to wealth ludicrous. The main source of growth is increased efficiency, and the source of efficiency is usually investments. People who want to buy stuff are never in short supply. Resources for new machines, scientific research, better computer software, employee training and so on are not so easy to come by.
Other than that I once again refer to the experts.
On to a few specific replies to stuff not already covered:
If you re-read what you just quoted I said the employees in FairTaxUS pay no taxes on income. In this (simplified) example the workers get the same amount in net wages, and pay the same prices in stores. The same amount of taxes are collected, the same amount is paid. There’s no magic involved.
Not sure what your point is. Dividends are taxed at 15% (or less), just like Kotlikoff said.
Charitable donations = spending. Just because you choose spend the money so that it benefits someone else (as well as yourself) doesn’t mean it’s not spending.
And as I understand it, offshore trust funds are generally created to hide wealth and avoid income and inheritance taxes. They have little or no purpose under the FairTax.
Trillions of US dollars worth of wealth is currently stashed abroad for tax purposes. Under the FairTax a lot of that wealth flows back into the US economy.
A consumption tax is not unaffected by fluctuations in the economy, and if you look at the graph in the link i gave you, you can see that. But it is less affected than an income tax.
Since you brought up California, their highly progressive income tax is generally identified as the main cause of their volatile tax revenues. California is currently considering broadening the sales tax base to get more money.
Let’s look at the link. The first two paragraphs say
Here inflationary means an increase in the rate of change in the price level, not the absence of a one time increase. I can agree that there is no reason to think that a Fair Tax would change the rate of change. In fact, it would tend to be deflationary.
There is an implication that revenue neutral means demand neutral. This seems unlikely, since anyone paying income tax at a level below the fair tax (considering the baseline waiver) will suffer a loss of effective income which can only contribute to a loss of demand. As I mentioned, the retail industry, who should have good models about this, are deadset against it. BTW, his link mentions that several countries, Norway in particular, found they had to set up price controls after the introduction of the VAT in order to avoid inflationary pressures. I doubt many conservatives would like this.
Let’s think about the impact on pricing. Some products, commodity based, might be able to reduce the net price increase by downward pressure on commodity prices through lack of demand. However unlike the current downturn this would not be a global effect, and American companies might not be able to push prices down as far as required to keep domestic product prices stable. How about other types of products? I doubt we can expect a voluntary decrease in margin. If we did, that would drive income (not the same as sales!) down, which would cause a stock market issue. Savings would have to come from increased productivity or decreased costs. I don’t see how this would magically increase productivity. Corporate income taxes would decrease, but this is nowhere near enough to make a dent in prices, if any at all. I don’t see how manufacturing costs would decrease. That leaves labor costs. we’d see more layoffs, which would leave more people not being able to afford newly expensive products, and a major downward pressure on wages. Over time, I could see this stabilizing at income after taxes today. Which would be fine, except that anyone with a tax burden less than the increase in prices is in trouble.
Not if it goes to people who would not be paying the tax under the system by being too poor, and getting their rebate.
I’m not talking about offshore funds at all. Trust funds are set up to avoid probate, not taxes. As Thaler notes, inheritances go into the savings mental account, so it is not true that inheritances get spent. Inheritance taxes in the US today apply only to the very wealthy, and their heirs are precisely the kind of people who will not spend the inheritance. Thus the rather large amount of revenue from these will be gone.
Actually, a big part of the problem is the reduction in the percentage of revenue coming from the far more stable property tax.
Has the effect of the loss of the government “float” on taxes been worked into this proposal? Income taxes generally work on a withholding plan and in many cases, people have more taxes withheld than they actually end up owing. Between the time of the collection and the time of the refunding, the government gets the use of this extra money for free. With a sales tax, the government collects nothing until the point of sale and even then, there’s probably a period between when the store collects the sales tax and when the government receives it - a negative float as it were.
While we’ve been over the stupid “Fair Tax” a million times, including showing how the numbers just don’t add up, the single biggest gripe I have with it is this: why, if it’s so freaking awesome, do the Fair Tax folks have to pull all of their various deceptions when selling it?
As pointed out many times, the middle class is the group most screwed, although the poor would have a tough go of it at first, unless the “rebate” checks were issued in advance. Running some of the numbers in one of the threads actually came to the conclusion that some poor people would actually fare worse. Basically, anyone who isn’t a certain subset of the poor, but spends the vast majority of their money each month, is going to pay more taxes than they do today. Those who spend half or less of their money? They’ll pay shit for taxes as a percentage of their income. And the super rich, who already pay shit for taxes as a percentage of their income? Yep, they’ll pay even less than they do now, which is already lower than their secretaries in most cases.
Hell, even some of the opinion writers for the WSJ, which loves helping rich people stay rich, will tell you about what a scam it is.
If you implemented the Fair Tax tomorrow, I’d be incorporated the day after that. Enjoy paying taxes you suckers!
Some various threads, including some with actual facts and figures, rather than vague theories that require A, B, and C to happen in order to remain revenue neutral.
Yes. Now read the rest of the article. He then goes on to discuss the possibility of a one-time increase. The conclusion is what I quoted - “no impact on the aggregate price level”.
Cite?
Link to those models/studies?
That’s not true. He does not say they “had to” set up price controls. Like I said earlier, it’s one possible way to make the transition easier. Price controls can not work in the long run if you try to fight the natural market prices.
If anyone wants to debate the possibility of a long term price increase directly caused by the tax further they will have to come up cite from a credible source explaining why practically every economists is wrong. I am not going to keep harping on a basic fact of economics.
You don’t understand. Everybody gets the prebate. Everybody. Bill Gates gets the prebate (if he bothers to apply for it). There is no special bureaucracy to measure your spending and dole out rebates accordingly.
Your scenario makes no sense.
What? People never spend their inheritances?
Cite that wealthy heirs don’t spend money and accumulate vast fortunes while living like ascetics?
The money is always spent eventually. That’s just common sense. If it’s never used it’s taken out of circulation and effectively taxed 100% through inflation.
(If you stash away $1000 and never touch it again, the government can print another $1000 with no harm to the economy. And trust me - they will…)
Let’s assume for the sake of argument that the rich mainly manage wealth in society, spending relatively little of that wealth to make their own lives better.
Why is that a bad thing? Why is it important to discourage it though taxes?
Of course it’s part of the problem. But the biggest part of the problem is the drop in revenue from the progressive income tax. (The dot-com bust hit California revenues hard for the same reason.)
I don’t understand why you’re even bringing this up. Did you look at the graph I linked to? Are you disputing that consumption is more stable than income over time? If so, what data are you basing that on?
Not true. And I’ve posted the research to back that up.
In advance you say? Like some sort of pre-rebate maybe? Like the FairTax prebate?
The “poor” who might fare worse compared to an income tax are those who spend more than they make. In other words, those who have a good standard of living, but temporarily low income. “The poor” as a group will not be worse off, especially if you measure poverty by how people live.
Wanna compare Warren Buffet’s income with his spending in 2008? I think you’ll find that he had negative income, yet still spent a lot.
Bartlett doesn’t know what he’s talking about. For example, the FairTax was not “devised by the Church of Scientology”. It’s bullshit. He thinks the rebate requires the government to track “every American’s monthly income” - again, completely wrong and a failure to understand one of the most basic aspects of the FairTax.
There’s a thorough rebuttal of Bartlett’s arguments (from somewhere else) here: http://www.fairtax.org/site/News2?page=NewsArticle&id=9321&news_iv_ctrl=1521 .
Good luck with that. Enjoy your massive fines and prison time for tax evasion, sucker!
(Why are you paying taxes today? Get incorporated, and claim all your spending as business expenses. No tax! What could possibly go wrong?)
The FairTax rate is based on several academic studies with “actual facts and figures”. It does not depend on vague theories.
Here’s one such study: http://people.bu.edu/kotlikoff/Taxing%20Sales%20under%20the%20FairTax,%20What%20Rate%20Works,%20October%206,%202006.pdf [pdf]
There are two issues when discussing taxes. One is the level of taxation. (Why do I have to pay so much?) The other is tax simplification. (Why do i have to spend two weekends filing my forms.)
Most discussions cross between these two issues endlessly causing lots of confusion.
The OP proposal has some merit as a means of tax simplification. Everyone pays as they go, few would file paperwork. The proposed level of the tax (25% of all non-exempt purchases) is a fight best left for another day.
I’d say the big divide is over two other issues: “how much total taxes does the government collect?” vs “how big is my share of those taxes?”
Which is the point many of us have made. Do you think Buffet didn’t actually earn any money in 2008? Of course not. He just knew how to collect his income in a manner that didn’t incur any taxes. And if you changed the tax law, he would figure out a way to spend his money in a way that didn’t incur any taxes.
We have vastly different opinions of what qualifies as “research” and “backing things up.”
No, actually in advance, as in received prior to the beginning of the month, not mailed in bulk on the first of the month.
No, we ran the numbers in another thread. Some poor families would actually come out worse, even if they lived “barely” within their means.
Warren Buffet will happily tell you that capital gains is income, no matter what many who benefit from capital gains might tell you, just as getting a paycheck is income. So sure, we can compare his income with his spending. You won’t like it, but we can do it.
Bartlett makes all sorts of claims. If you want to cherry pick, we can go that route. Later.
Me and dozens of other posters are VERY aware of all the various claims and rebuttals made by the FairTax folks. I certainly wouldn’t be surprised if we know far more than you without having to do any further research on our part. Most of us have studied the actual resolutions, instead of relying on the organization’s spin on their website.
It’s perfectly legal for me to incorporate. It’s also perfectly legal for me to consider many things, things which I pay for out of pocket today, to be work related purchases.
Because to do it today, I’d have to hide my income within my business which is much harder than justifying business expenses. With the fair tax, I can freely make money all day long, through all sorts of means, as long as I’m careful how, and on what, I spend it.
Please tell me that you’re referring to the oh so presitigious Beacon Hill Institute. Vague theories might be too generous to call some of the stuff coming out of there.
Yep, BHI. Kotlikoff is one of the worst offenders in their arsenal as far as making wild-assed assumptions, and then using those as the basis for further assumptions.
Tell you what, if you really want to do this, I’ll happily go forth, assuming you start off answering a single question. Assuming it’s going to be revenue neutral (ain’t happening at 23%, but I’ll assume it does for this experiment), and taking into account that even the proponents acknowledge that the rich, those who make quite a bit more than they spend, will pay less as a percentage of their income, which group is going to make up the difference?
Also, if you want to go down this route, I’m going to ask for you to stop posting drivel from Kotlikoff and friends, which are simply fluff pieces, and work with the actual text of the resolution, which is what would be implemented if it ever came to pass (which it thankfully never will). I’ll even be nice and let you pick which exact HR or SR from any given year you’d like. Just pick one and I’ll work from it as well.
I see a bunch of assertions around VAT, which is 1/3 the level of a Fair Tax - 1/4, actually, because of the state sales tax issue. I see him say that Indonesia did not see inflated prices the first week, and no inflation - but I see no comparison to similar economies without the VAT. I do see that some countries saw the need for price controls.
My cite is a discussion on Forum (an NPR show out of San Francisco). My googling of this turns up 95% pro-fair tax sites, which seems to indicate that no one else is very interested. There did seem to be a Retail Industry newsletter from 2005, but it is no longer available. BTW, I must credit you for not repeating the 23% rate lie. On that Sen. John Breaux, who used to me my congressman, dope slapped a Fair Tax proponent for using this number.
Really? A country sets up unpopular controls which do not work for the fun of it?
You didn’t understand my argument. If money from the rich, which you say will eventually be spent, is transferred to the poor, it will go into purchases effectively untaxed due to the prebate. Sure the rich can get a prebate, but they will have purchased enough things to cover it already, and the transfer of money to the poor loses it forever. According to the prebate schedule here any single person spending more than $10K starts to pay at 30% - and notice the prebate is 23%, not the proper 30%. This person doesn’t pay taxes until well past this range, so I expect all the except the very poorest will get screwed also.
Do rich people spend anywhere approaching the level of their income that poor and middle class people do?
Say we have a person making $50K and spending all of it. His fair tax is on $40 K - $10K for prebate or 30% of $40K or $12K. (We’ll assume the prebate is fixed so he actually gets 30% back for simplicity.) That is 24% of his salary.
Now consider a person making $500 K a year, spending half of it. He gets taxed on $250K - $10K or $240K, or $72,000. That is 14% of his income. Fair? Not likely. He gets the same tax rate as the middle class guy only if he spends $490K of his income - which is not likely.
No, it gets invested at rates higher than inflation. You think this money is under the mattress?
I have an example of this. My father in law, who is 92, is sitting on a nice pile of money. When he dies my wife will get it. Since we’re old enough to not really need it, it will sit as retirement savings, and will probably never get spent. It will go to our kids, with some extra, who, by the time they get it, won’t need it either. We don’t have enough to set up a foundation (not hardly) but things like the Rockefeller Foundation, the Carnegie Foundation, and university endowments represent huge chunks of money that would never be taxed under the fair tax plan.
Who is discouraging it? But the rich can afford more taxes than the middle class, and in this plan they pay a smaller percentage. They do just fine with the current tax rate, and did just fine with the one before Bush cut the taxes.
Can’t find the graph. However I did find the Beacon Hill paper. The claim the fair tax is progressive by redefining progressivity as related to expenditures, not income. Which, quite frankly, is utter bullshit. Say a thrifty person making $100K spends on $75K, while a not so thrifty person making $65K spends $75K. They claim that a person living off his savings with no income and no change in expenditure (as if) has a well being equal to a person with income and the same expenditures. Right. Indeed, if you measure whether the tax is progressive by percentage of expenditures, the fair tax is progressive by definition. But this just shows their dishonesty, since progressivity is not accepted against income. That’s similar to claiming the inclusive measure of the tax rate is reasonable. A fair tax is like a sales tax, which has been always exclusive, so switching it to reduce the percentage cited is just plain dishonest.
The more of this stuff I read, the more I understand why it gets no traction here.
I finally found the answer to this one. Even if the rich pay a smaller percentage of their income in the tax, to the Beacon Hill chumps they suffer, because they pay a higher percentage of their expenditures. So the middle class pay more, but are better off by definition since they pay a smaller percentage of their expenditures than the rich do.
One theory is that there are a number of people who are not paying the tax they should legally be paying on their income. Or that they’ve found legal loopholes so they can legally avoid paying income tax. A sales tax would supposedly find these people because even people who hide their income still have to buy stuff. So the argument is that all of the people who are currently paying income taxes would end up paying less in sales taxes and the difference in total revenue would be made up from the sales taxes collected from people who are not paying income taxes. Personally, I find this theory questionable but there it is.
Very weak, it assumes there won’t be just as much non-compliance and evasion under the new laws, and I have no doubt there will be even more.
Those are some of the reasons I find the theory questionable. I also doubt that the underground economy is as large as the theory would require it to be in order for it to generate the amount of revenue required.
Ah, the drug dealer/prostitute bonus of the FairTax. 
The problem is that while the dealer/prostitute would indeed pay taxes that they otherwise wouldn’t have, the user/john won’t pay taxes on the money that they otherwise would have. Oops. This magical extra money keeps drying up when exposed to light.
Thanks.
I actually know this answer, but can’t get the proponents to ever actually answer it. I just get more links to the same deceptive bullshit. Much like the way they use “progressive” to describe their tax. While I don’t suspect we’ll ever change the mind of the “true believers”, which is why I usually ask them questions that trigger their “flight response” before wasting a ton of time, I’m pretty sure we’ve demonstrated to those on the sidelines that the AFT claims are mostly bogus in the various threads.
My favorites are the ones that claim it repeals the 16th amendment.
I will give AFT credit, as they have spent a ton of time and money coming up with new spin to explain away critiques of their old spin. It’s still crap, but it’s pretty sounding crap. Using the web archives of their site is also enjoyable, as you can see just how far they’ve come in learning how to sugar coat shit, now that simply hiding it isn’t acceptable. It wasn’t that long ago that you’d have found it almost impossible on their site to see the inclusive/exclusive tax angle covered.
If I’m reading correctly, the groups that are going to “make up the difference” via the Fair-tax are purported to be:
A. The super-rich that make all their money on capital gains.
B. The rich that lose money during a particular year but still consume the same.
C. Trust-fund kids
D. Other people that spend more than they can afford.
And that is not going to do it, since most of those people will pay less under the plan. Just to break it down:
A. Already covered. They will pay more in capitol gains tax, unless they spend more than half their gains rather than investing them.
B. The rich still pay taxes when they lose money. They may not pay taxes on capitol gains if they are offset by loses, but those are actual loses. Any money they spend has to be earned at some point so it would have been taxes as income, capitol gains, or inheritance.
C. Trust funds pay more in taxes than individuals (cite with 2000 rates). The rates are probably lower now, and the kids spending the money may not pay the taxes themselves, but all the money in the trust has been taxed.
D. This is a false income. If Joe spends 2k of his savings, or of borrowed money this year, he will have that much less to spend next. It just moves the money around.
Jonathan