I don’t know a lot about taxes, but this seems like a lot of double talk. So, could this work?
I heard this explained on the Neal Boortz show last week, and thought about starting a thread on it too. It seemed to make sense to me. Too much sense, actually, which says to me that there’s almost certainly something terribly wrong with the whole concept; I’m just not sure what it is.
An example they used to explain “hidden income taxes” is a loaf of bread or any other consumer product. Every single person employed to produce it, directly or indirectly, paid income taxes. Everyone from farmers who planted the wheat to whoever it is that made the little twist tie to keep the plastic bag shut, got paid for their work, and some of that got sent to the IRS. Then there’s also the cost companies incur just trying to figure out exactly what taxes they owe the government in the first place, tax laws being so complicated. So built into the cost of the loaf are all those taxes and expenses. I’d be curious to see how they arrived at the 20-30% figure, but it doesn’t sound all that far-fetched.
So, in their idea, once income tax is abolished, prices on these goods theoretically drop 20-30%. A federal sales tax of a similar percentage is tacked on to take the place of the income tax. Goodbye IRS bureaucracy.
The one problem that stuck out to me is that when income taxes are abolished, those prices aren’t going to drop 20-30% overnight! On Day One there’ll still be a whole lot of goods sitting on shelves with those yucky expensive built-in income taxes, and now there’ll be a 23% tax on them. After a time I could imagine things would even out, but I can’t imagine a transition to FairTax would be anything other than a very bumpy ride.
(Plus, what will become of all the unemployed tax accountants?)
I don’t know much about taxes either, so I fully admit my take on this could be completely wrong. Anyone else want a go at this?
pretty thin on details. zero income tax and 23% tax on everything you buy. These “hidden income taxes” sound like an academic semantic crock. anyhoo, seems pretty dang simplistic to me and I was a econ major some 25 years ago.
There are the flat rate income tax people, that target something like 20-25% flat rate income tax to cover the US government expenditures. If you accept these numbers, then the consumption tax would have to be higher as it ignores savings.
Seems like there would be some issue of who gets taxed and how to track it. How I read the OP it that people below the poverty level don’t pay the tax. How do I, as a retailer, know who is and who is not in the tax paying income brackets. I guess the govt could issue a “poor person” card that exempted people below a certain income to pay taxes, but that would be fraught with opportunities for fraud, and I’m sure the ACLU would have a field day with that.
I also think it’s unrealistic to think that the good folks at Wonder Bread would happily drop their prices once the effect of the income taxes went away. I’m thinking Phillip Morris or whoever owns half the food companies on the planet would just become incredibly profitable…course, I’m a bit of a skeptic sometimes.
A rebate is sent out every month on the amount a person at the poverty level would spend on essential purchases, everyone recieves the rebate, thus there is no need to prove you are poor. On some level the scheme could work if it is indeed revinue-nutral, that money ultamately came from sales somewhere. It’s the short-term transition that has me worried. consider gas prices, I really doubt there is 23% to be saved from “free” pay-cuts, and this won’t happen overnight. This will drive up the prices of just about everything, at the same time as everything gets huge taxes slapped on them. I smell stagflation.
I don’t see why people should have to pay a tax on goods and service purchases, but not on capital purchases. Doesn’t sound very fair to me. If they put the tax on stock and land purchases, I’d be more inclined to take a look at it. Otherwise, this is just another way to keep the tax buden shifted to the middle class.
Ooh, this just like when the Feds lower interest rates, mortgage loan and credit card rates go down, right? Wrong; Oops…
I don’t see this being a fair tax, though I believe I’d end up paying less in taxes. This is because I’m single. I will buy less things than someone who is married with children, so I will pay less in taxes. If grib is right and I get a rebate check each month, it will be the same for me as it will be for a single mother with four kids. And don’t forget that there are also state and local sales taxes. Add your local rate to the 23% to see what you’ll actually be paying. For me, this would be around 30%, which is more than my payroll deductions.
Hi all. I’ve been lurking around here for a while but this piqued my interest enought to post. I read a letter to the editor in the Wall Street Journal a week or so back from John Linder, who is a major proponant of this FairTax. Since then I’ve been reading about it but I find that the material I learned in Econ 1 isn’t helping me too much. I’m glad Homer brought this up.
Anyone, to the point of my post…
Julius,
The rebate is not the same for everyone. The rebate check sent to you would be smaller than the check sent to the single mother of four. You can check it out in this PDF http://linder.house.gov/_pdfs/FairTaxFrequentlyAskedQuestions.pdf if you like. This is from John Linder’s (R-GA) website on the Fairtax. http://linder.house.gov/index.cfm?Fuseaction=Resources.Home&Resource_id=1
You would receive $2,065 /year and the mother of four would receive $4,954 /year.
These checks are based on the federal poverty level (I don’t know how this is determined) for a household, so I don’t believe that variable cost-of-living based on location is considered. I could be wrong, but I have not yet seen anything to indicate otherwise. This means that the mother of four would get the same rebate whether she lived in NYC or El Paso, TX.
I’m also assuming that Linder’s proposal is the same as the one in the OP.
Well the problem to many would be that it’s not “fair” unless the rich are taxed more than the poor. If everyone pays an equal 23% it would surely be racist and would benefit the rich more than the poor (sounds like a “tax cut for the top x%”).
I don’t get it.
So basically everyone pays about half as much tax, less rebates, and tax on money they save rather than spending.
Why won’t the governement go bust overnight?
Any consumption tax is going to be regressive once you get over the poverty level. A family of four with a single wage-earner making $30,000 a year will pay the same amount of consumption tax as a family of four with two wage-earners making a combined $500,000 a year. Assuming that each family ends up paying $5000 in consumption taxes, the first family is being taxed at a 17% tax rate, while the second family is being taxed at a 1% rate. The figures will vary depending on how much is consumed – if the wealthier family buys more luxury consumer goods, their consumption tax will be higher, but unless they live an extremely extravagant lifestyle, they are likely to put much of their additional income into untaxed savings and investments.
In my mind, a tax that puts the higher tax burden (as a percentage of earnings) on those least capable of bearing it is not a fair tax.
I also wonder how consumption taxes would be applied to imported goods. Presumably they would not have the same savings from a reduction of U.S. income taxes – would the 23% go on top of existing rates for foreign goods?
Also, I don’t understand this part at all:
Exactly how will the determination of business vs. personal personal consumption be determined. I see the potential for enormous amounts of fraud.
The FairTax sounds to me like it’s designed to relieve the tax burden of business owners and the wealthy.
So, instead of the IRS, you have a bureacracy that has to calculate the poverty rate for each household on a monthly basis. And where will the new bureacracy get the information from on each household? Well, the only source is from the household/individual, isn’t it?
So presumably each household/individual will have to file a return at least once a year to update this new bureacracy on how much they made in the year, whether they lost a job, made it off welfare, had a new child, had a child leave the household, new spouse, ex-spouse…
And then, the bureacracy will have to send out the rebate cheques, plus track down people who haven’t filed returns, or gave inaccurate information…
So where’s the savings in getting rid of the IRS?
In Canada, we have a federal Goods and Services Tax. The way it works is that every time anyone purchases something, they pay a tax of 7%. If they are a business who’ve bought the item for re-sale in a commercial transction, they charge a 7% tax to the purchaser. They then remit to the feds the 7% they collected from the customer, less the amount of GST they paid themselves when they bought the item from the supplier. That way, the tax is neutral for the middlemen, and the entire incidence of it in respect of that item falls on the consumers. Here’s an example:
CarShop buys a car at wholesale from BigCarCo, at $20,000. BigCarCo tacks on 7% GST, so CarShop pays $1400 in addition to the wholesale price, for a total of $21,400. BigCarCo remits the $1400 to the federal government.
CarShop now sells the car to a customer. What’s mark-up on a new car? Let’s say 25% of wholesale, or $5,000, so the retail price is $25,000. CarShop sells it to Mr. Easy Mark, who pays the full ticket price without complaint. CarShop charges 7% GST on Mr. Mark, which is $1750, so the total invoice is $26,750. (Let’s assume Mr. Mark doesn’t go for the extended warranty and rust-proofing.)
So CarShop has now collected collected $1750 GST on behalf of the federal government and has it in its bank account. But it earlier paid GST on the wholesale price, of $1400, which BigCarCo will have remitted to the government. CarShop is entitled to deduct the amount it paid from the amount it collected: $1750 less $1400, means it only owes the feds $350, which it remits.
Now, none of that occurs without a federal administration that handles all the remissions, returns, etc. So again, we find that this wonderful new tax doesn’t eliminate the IRS. They’ll just have a different type of tax returns to monitor, and will still have to enforce claims against businesses who don’t file or remit the money collected.
*Originally posted by SpoilerVirgin *
I see the potential for enormous amounts of fraud.
Tell me about it.
A recent CBC report indicates that the feds have lost millions of GST revenue in just one type of scam, and that overall the annual loss due to fraud may be in the billions: Free for the Taking - GST Fraud in Canada. For more info, go to the CBC site and type “gst fraud” into their search engine.
Their take on it seems to be that without a vigilant federal revenue agency (read: IRS equivalent), the GST is a gold-mine for scammers. So where are all those cost savings again?
Why won’t the governement go bust overnight?
I believe the discrepency here is caused by the use of fuzzy numbers. I believe the ‘43%’ mentioned not only includes the income tax of the consumer in question, but also the amount he is paying to corporations to offset their own income taxes, as well as what is lost to accountants and oversight commitees both for him, and the corporation; while the ‘23%’ mentioned later is only assuming his own costs in ACTUAL taxes payed (and completely denying that he will still have to pay for all that other stuff).
I personally support going from an income tax to a consumer tax, but i don’t think the benefits will be anywhere near what some proponents suggest.
Well, IF any proposal is "revenue neutral’- that is it collects about the same amount of taxes as the current system- and it is not signifcantly “progressive”- then you & I will pay MORE. Period.
Look, the upper % pay a large portion of the income taxes in the USA. If they only pay 23%, rather than 36% or whatever- then SOMEBODY ELSE has to make up the difference. And SOMEBODY ELSE will have to pay what the gov’t currently collect from Corp. Income tax. It appears like that “SOMEBODY ELSE” is not the poor. Thus, it HAS to be the middle classes.
Of course- if the “Fair Tax” is enacted we won’t have “hidden income taxes”- we’ll have “hidden consumption taxes”- as of course our “living wages” will still have to account for how much WE pay in taxes- however we pay 'em. Thus the “hidden taxes” arguement is specious. Prices won’t go down
Then their math is wrong. Few if any pay 28% of their wages as Federal income tax withholding- I pay 12>13%. The 28% is the MARGINAL rate us middleclass types pay on our HIGHEST taxed dollar. BTW- the total they withhold for Federal taxes is only about 19% not 43%. A tiny difference of 24%.
So- yeah- I’d pay more. No longer 19%, I 'd go up to 23%. Of course, I would pay “sales taxes” on rent, so…
However, they are using the correct “guesstimate” for going to a Federal Sales tax or whatever you want to call it. 23% is about right, according to an OPM study I read. However, the OPM said there could be considerable fraud, and thus the rate would have to go higher. All those flea markets, swap-meets, farmer markets & such would multiply, and there’d be even more tax evasion than now- IMHO. Plenty of work for an “IRS”- but I am sure they’d change th ename. :rolleyes:
Sounds like a giant “crap-shoot” with the economy, the Federal Budget, and the tax burden of the middle class all on the line so’d it would be easier for some to figure their taxes. :dubious:
That’s “…I would NOT pay sales taxes on rent…”
Big Government is still Big Government, whether you fund it through income taxes, consumption taxes, or (per GWB) borrowing. Give enough lobbyists enough time to operate and the $2 trillion consumption tax will become encrusted with just as many exemptions, subsections, special provisions, and IRS letter rulings as the income tax.
Another problem with a consumption tax, in addition to the ones already mentioned: The stated federal sales tax rate is 23% (I have my doubts about whether that would be high enough.) State sales taxes average 5-7% today, and they will need to increase if states have to abolish income taxes as well. Suppose they double to 12%. Now you have a total consumption tax of 35%, versus 0% tax on income you save. Guess what this will do to the saving rate.
Now saving is all well and good, and we probably need more of it, but not that much more. The shock impact wouldn’t be pretty.
The blurb in the OP suggests that the FairTax will somehow pay for itself - not only will you have no income taxes, but the 23% consumption tax will pay for itself out of the 20-30% cost savings that will result from no income tax.
From the Web site:
the FairTax completely untaxes the poor, and lowers the tax burden on everyone else.
When something appears to be too good to be true, it usually is.
Also, that tax rebate on purchases up to the poverty line has to cost some major bucks upfront.
Not to mention, we’ve got to ask just what transactions the 23% consumption tax would be applied to, and what % of GDP they constitute. From that, we’d get a quick sense of whether that 23% tax could really fund the government as it exists, or whether it’s another bit of promise-the-moon nonsense.
I think I already know the answer to that one, but what the hey.