You’re talking about inclusive vs exclusive taxes here, and completely ignoring the fact that all other federal taxes will be repealed, from social security and Medicare payroll taxes to capital gains and the AMT.
Please read the book. I don’t think you’re understanding the concept. You can continue to throw out numbers to scare people, but you’ll need to back them up with some proof to make your point. In fact, proponents of this plan actually see the tax rate going down over time as the tax revenue grows.
Ravenman, the reason the tax is revenue neutral is because what’s being taxed is changing from income to purchases. Right now, a retired businessman living off his savings account of $1,000,000 pays no income tax (except of course, taxes on the interest in his account). Under the FairTax plan, every time he buys a loaf of bread he’ll be taxed. We’ll be opening up the tax base to people who aren’t currently paying it. Even drug dealers, who pay no taxes on their illegal income since they don’t currently declare it, will be taxed every time they buy a pack of cigarettes.
I urge all of you to read the book or research at www.fairtax.org. Although I am a proponent of this tax plan, I am by no means a complete expert on all aspects of it, and I may not be able to explain every nuance to your satisfaction. Neal does a good job of explaining some of the points here in his online rebuttal to an Amazon.com review.
You’re trying to compare apples with oranges. If you calculate the income tax exclusively, then the national sales tax is 30%. If you calculate the income tax inclusively, then the national sales tax is 23%. It depends on how you want to look at it. Both ways are correct, but you can’t compare income tax inclusive to national sales tax exclusive, because you’re not using the same numbers for both sides.
But before he was a retired businessman, he was earning more than he was spending, thus paying more income taxes than he would have in retail taxes. It all ends up being revenue neutral in the end.
Your example is wrong. In an income tax model, the governement loses money because the drug dealer isn’t taxed on his income. In a FairTax model, the government loses money because the drug dealer isn’t taxed on the drug sale. It is revenue neutral in the end.
This seems to be the major misconception of those proposing the Fair Tax system. That, somehow, when the Fair Tax law is enacted, the sky will burst open and tax money will rain down from the heavens. It won’t. The government needs X amount of money to run itself, so it collects X amount of money from the people. Any system of taxation only juggles from whom the money is taken. In the Fair Tax system, the poor will pay more and the rich will pay less, compared to the current system.
My statement was quite clear. If you calculate the Fair Tax like a typical sales tax, which is what they are comparing it to, it would be 30%. I’m saying that the reason they don’t calculate it that way is to be able to use the 23% number in their sound-bites. Even AZCowboy, a strong proponent of Fair Tax admits that it’s at least partially a marketing ploy.
I did back up my points with numbers. I actually used the 1040A form and instructions from 2004, and without taking anything but the most basic deductions and EIC, showed that a fairly typical poor family gets the shaft under the Fair Tax proposal as opposed to the current method of taxation. It is now your turn to show some actual numbers and stop parroting the book’s soundbites.
It’s nice that some proponents see it going down, since just about all opponents think it’s going to go up. In, since the bill doesn’t do a damned thing about, nor rely on the repeal of the 16th amendment, some opponents are actually concerned about paying both this national sales tax and an income tax.
Keeping in mind that he’s going to pay this tax, no matter how much or how little he spends, how much would you estimate that the government will get out of this?
Keeping in mind that he’s going to get a rebate for what he spends on necessities, how much would you estimate that the government will get out of this?
I have no desire to enrich the authors, but I’ve studied the site plenty. This isn’t the first (or second or third) time this has been debated here.
Unless you are one of the rich folks that this will be a huge benefit for, and don’t mind screwing over others, you might want to make yourself an expert on all aspects of it.
You shouldn’t limit this to retired buisnessmen. Right now, my mother lives off a her life savings (which she has already paid income taxes on) and Social Security. For a variety of reasons, she essentially pays very little Federal taxes (even though the SS benefits are taxable), and a bit more in state taxes.
Under the Fair Tax system, her tax bill would rise from basically nothing to at least $1,000 – and by my guess, probably more like $3,000 or more – even including the monthly stipend. Why on earth would Fair Tax advocates want to raise taxes on retired workers by such a huge amount?
When you have a chance to look at the book, I’m very curious about any kind of justification that this tax would be revenue neutral. According to the Bureau of Economic Analysis, Americans spent approximately $8.1 trillion on personal consumption. Cite. (See table 2.3.5u) That includes spending on things that, to my understanding, would not be taxed under the Fair Tax, such as gasoline, various services (like electricity), religious activities, and whathaveyou. But never mind, let’s just say that there’s $8.1 trillion in consumption. Also never mind that part of that is doubtlessly consumption by sole proprietorship businesses, let’s just stick with $8.1 trillion. 23 percent of that is only $1.8 trillion.
For the current fiscal year, the White House projects that gross receipts will be $2.05 trillion, and the budget deficit will be about $330 billion. Cite in PDF. Now, this spending doesn’t include roughly half a trillion in new spending that will be required to give every household roughly $4,000 each year to compensate for the cost of necessities. Therefore, the best case scenario is that government revenue under the Fair Tax would be $1.8 trillion, and government expenditures would be at LEAST $2.7 trillion, resulting in the biggest deficit this country has ever seen. Interest rates would go haywire.
If there’s anything in the book that gives estimates of how much revenue would be generated by the tax, I’d love to hear it.
Ah, now I see your point. But the fact remains that 99% of the people in Japan do 99% of their shopping in Japan. For most people it just isn’t worth the time to haul themselves off to a foreign country to do their shopping; and as I said earlier, there is the issue of customs.
Y’know, the snark really doesn’t help your cause. The only unabashed defender of it (ivylass) has been civil. Please endeavor to do the same, or else open a pit thread.
Sorry, wasn’t intended to be snarky. My friends use that expression casually.
I just see the potential for abuse to be as much or even greater than the current system. Having a sales 30% tax provides a high incentive for loopholes. Within just a few minutes, I can come up with methods around these rules, such as:
The sales tax is on new products only. So, open a Porshe dealership in Canada. Sell all the cars to your brother-in-law and he sells them back to you. Now you are selling used cars. Ditto for computers, rolex watches. Since they are “used” customs can’t do anything.
Actually, I prefer the Japanese income tax method. It’s progressive, but very few loopholes. Companies file for their employees, and even the self-employed can fill out the form within minutes.
Your criticism is one of style over substance. The FairTax would replace the income tax, seems entirely reasonable to me that they chose to present it in a manner that is directly comparable. You seem to attribute some nefarious motives to these people - why? What’s their motive?
The family of four you describe does break even under the FairTax. Those who earn less have a net tax benefit. You do understand that the $500 ivylass refers to is paid monthly, right?
Your 30% number already assumes net prices drop about 22%, due to the removal of about 22% of the costs due to embedded taxes. And yes, if prices dropped further due to other economic drivers, the tax would need to be adjusted. See faq #9 for information on this concern. And see #33 regarding your concerns of compliance.
And yet you have not offered any other models that you would support.
I think this is a reasonable criticism of the style used in presenting the concepts. How about the substance?
You don’t understand. Prices wouldn’t increase. No damage here.
No, SS benefits and how they are determined would not change, simply the method the government uses to raise the funds.
I am not a volunteer, but due to the lack of substantive criticisms here, I am certainly considering it.
Seriously. This isn’t an entitlement program. The government already cuts about 48M checks each month. Under the FairTax, this number would only double. This can be done inexpensively using electronic payments. And the savings aren’t simply from the IRS budget, but from all the time and costs for every taxpayer to comply with the incredibly complex tax code.
Yes, it is revenue neutral. And you are correct that the drug sale still isn’t taxed. But under the current system, someone earning all their income from drug dealing is never taxed. Under the FairTax, they are at least paying their share when making legal purchases with their drug profits. The question was of the “winners and losers” in the revenue neutral plan. Drug dealers are in the loser category.
This is your misconception. No one is suggesting money rains from the heaven - simply that this plan is a more fair way to raise the revenues of the government. And it simply isn’t true that the poor will pay more and the rich less, as demonstrated by many examples in this thread. Some poor people will pay less, some rich people will pay more. It isn’t that simple of a comparison to our current dreadfully complicated system.
This is tiresome. Please educate yourself of the FairTax plan before continuing to toss out unsubstantiated criticism. See faq #42 to refute this assertion.
Ravenman, I appreciate your macro analysis. As I understand it, one problem with your analysis is starting with the $8.1 T of personal consumption. Under the FairTax, even government consumption would be added to the tax base. Economists that have independently developed the calculations for a revenue neutral FairTax have ranged from 22.3% to 24%. These include unaffiliated researchers from Harvard, MIT, Boston University, Stanford, The Heritage Foundation, The Cato Institute, and Fiscal Associates. If 23% isn’t the right number, it is close.
But you are assuming that there is an arbitrage market opportunity here - there isn’t. You are erroneously assuming that these same cars in the US will be 30% more expensive - they won’t.
I like how we opponents of this scheme are supposed to indoctrinate ourselves with a long FAQ (preferably reading the book, ja, right) before we have the right to comment here. Nice.
DMC, my original criticism still stands, and those who oppose the system here with me seem to agree: People of means will save their money here tax free and spend it at a lower tax rate in foreign countries. Will or will not all of the following happen?
[ul][li]People who live on US borders will cross those borders to eat at Mexican and Canadian restaurants for cheap, avoiding the 33% tax. This isn’t illegal, and they owe no customs upon return.[/li][li]Similarly, a vacation in a foreign country has just gotten a lot cheaper, relatively. Why not spend that week in Canada instead of Michigan or Wisconsin, or in Mexico instead of California or Florida. Heck, just about anyplace in the world is now a good deal cheaper than the US, even if you figure in airfare.[/li][li]Similarly, the rich can afford to set up permanent locations in Canada, Mexico, and the Carribbean, where they can buy the cars, yachts, etc., that they desire without regard to US customs and without breaking a single law.[/ul][/li]
Save in the US, consume abroad: it’s safe, legal, and cheap. Any disagreement?
If you tax consumption in the US, you will lower consumption in the US. The poor, middle class, and especially the rich would find all manner of creative and LEGAL ways to consume abroad.
This is a double punch to the scheme. One, it prevents the Gov from getting the tax money. Two, it encourages people to skip the US economy altogether. Our economy is not a closed system, as the painful lesson of cheap Chinese labor and goods informs us. One of the benefits of the current income tax-based system is that the Service keeps tabs on US citizens everywhere: you have to file a return and report your income, even if it is foreign-earned (the US is one of about 3 countries that do this; having worked in a foreign country myself, I will say that it’s not a very fair thing, but it’s effective). Foreign nationals who live in the US for 6 months out of a calendar year have to pay US income tax. Etc.
The proposed “fair” system will encourage foreign and native alike to avoid the US economy like the plague. It would be an absolute disaster. And if you don’t think this will affect behavior, think again. The EU is not much of a bargain when it comes to tourism, what with the ultra-high VATs and all. I went to Britain back in '00 (for an interview, not tourism), and there was a crushing 17% VAT on everything. I ate my fish ‘n’ chips walking down the street rather (no tax) rather than sit down in a restaurant and pay the tax.
In regard to ALL the other parts of this ridiculous scheme, it is a libertarian pipe dream, which, as with all libertarian schemes, garners support in inverse proportion to its practicality. IMV, the supporters in this thread are engaging in a wide and creative range of rhetorical dodges and fallacies, such as arguing from authority (read the FAQ, the book), not proving what they posit (read the FAQ, the book), nitpicking their opponents arguments while ignoring their substance, etc. It’s really frustrating.
It’s a truism that we need tax reform in the US. We need to do away with FICA and other regressive taxes and have a simple, progressive income tax. A single tax. We need to do away with the mortgage interest credit (regressive sop to the middle and upper classes; the poor get no deduction for their rent payments). In fact, I would do away with ALL sales taxes; they’re regressive and unfair. For that matter, property taxes are also bogus. Income tax, income tax, income tax.
What is a better, more descriptive name for the so-called “Fair Tax”? Naming it the “Fair Tax” is an argumentative cheat because whether it is fair or not is in the eye of the beholder.
Look, we cite from the book and the website supporting our arguments, and we are dismissed as “parroting soundbites.” Is there any cite supporting this tax that you would find acceptable? It sounds to me as you have already made up your mind.
As to your wish for doing away with FICA and replacing it with a simple, progressive tax, The FairTax does that!. Every head of household gets a monthly pre-bate, equal to what they would pay for the taxes on the basic necessities of life. So, in effect, the poor get their tax burden covered, meaning they pay no taxes, while the middle and richer classes get a portion covered. The more you spend, the more you pay in taxes.
Again, there will be NO CHANGE in prices. So, it won’t be “cheaper” to purchase abroad, since the prices here won’t change. You seem to think businesses will keep their prices at the rate they are now and enjoy a 23% (not 33%, was that a typo?) increased profit. Well, what’s to stop them right now from raising their prices 23%? Market forces. And as I pointed out in an earlier post, this has happened before when an airline ticket tax expired.
You yourself stated that it was at least partially due to marketing. Are you retracting that?
I haven’t seen anyone do the numbers to prove this. If you demonstrate to me that poor families and middle class families come out ahead under this scheme, then I’d like to know where the money is coming from. It’s certainly not the rich, as their burden drops hard under this scheme.
It’s not my 30% number, it’s their’s. This is also one of the many assumptions that are required. No one has demonstrated how all of these assumptions are going to come true, nor what we’ll do about the disaster if they don’t.
I don’t have to offer a solution to take issue with a proposed one. Since you insist, the first thing I’d do is be certain that the proposed solution is progressive. If it’s not, I’m completely against it. The Fair Tax is regressive. I could get on board with a greatly simplified progressive tax code.
What’s even more tiresome is the “See FAQ #xx” responses, since Congress doesn’t vote on website FAQs. I’ve read the bill itself, which is what I assumed we’re actually debating, and it does not require a repeal of the 16th amendment. Just because the FAQ states that it does does not make it true. If you want to refute me, show me where in the bill this requirement is made.
Do you happen to know what Congress came up with as the number?
Of course prices will go up, since the government will now slap 30% on the items, right?
But wait, you say: Prices will stay the same but incomes will go down. Hogwash, that’s not how it works (ever hear of the wage/price spiral?). Wages will remain sticky and prices will rise. Or are you claiming that incomes will remain the same AND prices will remain the same? That’s even more ridiculous.
Every single economic factor can and will be influenced by the change in tax scheme: prices, wage rates, the exchange rate, etc. All will fall into a new equilibrium. Consider the case of exports. Say Company A makes item Z. Currently they make it and sell it in the US, where various state tax rates get slapped on it. In states with a 5% sales tax the items costs $1 x 1.05 = $1.05 (including shipping, profits, etc.). When they export it to Japan, retailers there slap a 5% VAT on it. At an exchange rate of ¥100/$1, it costs ¥100 x 1.05 = ¥105 (including shipping, profits, etc.).
Now we have the new tax scheme. You say prices in the US won’t change, so that the item still retails for $1.05 after all is said and done. Let’s say that the tax rate on that is 5% for state and the proposed 30% for federal. That means that the base cost of the item is now $1.05/1.35 = $0.78.
Now, here’s the rub. The company can now ship this item to Japan for the lower price. So it could arguably sell in Japan for $0.78 1001.05 = ¥82. So now you can go to Japan and buy it cheaper there than in the US.
Of course, that would not happen. If foreigners were suddenly offered goods at a 23% discount, their demand for those goods would increase and–surprise!–the prices would rise accordingly.
How the whole thing would play out is any economists guess (and nightmare). It would be the ultimate experiment in the Law of Unintended Consequences. I’m no economist (not that are actual scientists or anything), but I am still allowed a guess: Wages would remain sticky, prices would rise, exports would increase somewhat, and the dollar would fall somewhat.
And when I’ve seen sales taxes implemented or raised, I’ve seen items increase in price the very percentage of the increase.