The Flat tax is bull moose stupid. It has about as much chance of working as Prohibition. The standard average tax rate mentioned is 30%.
So -
do you think businesses mark up products by 30%, and can cut prices that much and still be profitable?
do you think a 30% discount isn’t enough for a significant number of people to turn to an underground economy? There are very disparate tax rates on cigarettes among states quite close on the East Coast, and thus a big smuggling business.
can a proponent give expected payments vs. income levels? What percentage of their income do you think rich people consume, anyway?
the impact on retail will be tremendous. Sales of most things are reasonably elastic, and an effective 30% increase in prices is going to make people less likely to pick up that second shirt. If you think that people won’t care about prices because they have bigger paychecks, then you really need to read some behavioral economics. I head a Forum about this, and the person from the Retail sector was deadset against it, for obvious reasons.
It basically is another handout to the rich, and yet another example of the right wanting to screw the middle class.
I read both threads in their entirety. You were definitely one of main contributers and possibly the most cogent, however, I fail to find any consensus that you imply by saying “…the reason(s) we’re against it aren’t because we don’t understand it.”
In those two threads (2.5 years old now, isn’t there anything more recent?) I see mostly the same litany of tired objections to the FairTax (FT). To me, they boil down to this:
The rate is really 30% - they’re trying to fool us!
The rich don’t spend as much as they make, therefore the FT is regressive.
The FT proponents double count savings by saying embedded taxes will disappear from product prices, but remain in employee’s paychecks.
Rich people and border people will simply buy from foreign countries to avoid paying the FT.
A black market and/or sham companies will develop to circumvent the FT.
The transition will be to painful and onerous.
People with large after-tax savings will be hurt by having to pay the FT on top of previous income taxes.
Sending a check to every family in America will be too difficult.
The FT will not be revenue neutral.
FT proponents claim prices will come down without the embedded taxes, but they won’t.
FT proponents claim it will tax the current underground economy (drugs, gambling, prostitution, etc), but it won’t.
Taxing consumption will crash the economy.
Whew! Quite a list. Did I get them all?
Well, I’ll admit that I’m open-minded about the FT and can be persuaded that it won’t work, or could even be a disaster. While I think some of the objections above are valid, they don’t fully persuade, even though I cannot see a good answer to all of them. Here are my responses in brief:
DMC, in particular seems to be hung up on this one - it’s expressed several times in the threads. This is surprising since it’s wholly immaterial. While DMC seems to think they MUST be comparing the FT to a sales tax, it seems obvious that as an income tax replacement, the only proper comparison is to calculate them the same way. But either way you calculate it, it is what it is, and this is not a material argument.
Did you recently hear the story about Warren Buffett claiming he paid a lower percentage of his income in taxes than his secretary? Did you believe him? I think it’s possible the FT is not progressive, but don’t try to tell me the current system is.
The employee withholding tax is not what FT proponents are talking about when they talk about embedded taxes in product prices. They are talking about the direct taxes companies pay on their profits and the similar taxes that are embedded in the raw and intermediate materials they must purchase. I would also add the EMPLOYER portion of the payroll tax (7.65%), as I would not expect employers to start paying that to the employees. Are embedded taxes enough to bring prices down by the claimed 22%? No, I don’t believe so, but they should come down some. Obviously, foreign goods don’t have this advantage - better for the trade deficit!
Eh, maybe. They do things now to avoid paying taxes - that will always be true.
Probably the biggest wild card. I agree that this may be a problem.
I would suggest a 5 year transition. How about adding a 4.6% FT in year one and calculating income taxes normally, but subtract 20% of the amount owed. Increment this by 20% each year for 4 more years and we get the opportunity to phase this in gradually and adjust. If the train coming down the track looks like it might derail, then we have everything still in place to revert if necessary.
I would suggest that people with large after-tax savings are precisely the people you claim are not paying enough under the FT. So what’s the problem?
This is silly. Most will get an electronic deposit.
Unbiased professionals say it will. They used actual data rather than assumptions and feelings.
I agree that prices will not come down as much as FT proponents say they will. I would favor this even if they didn’t come down at all - after all, my paycheck will be larger to cover the extra cost.
I can’t argue with this. I think taxes on the underground economy will be a wash and the FT proponents are wrong about this.
I said #5 was the biggest wild card. I take that back - this probably is. I don’t have the answer, but a gradual phase-in, as I mentioned in #6 might help.
I like and support the FT, but I agree that there could be some problems. However, there are a few advantages that the opponents rarely consider:
Eliminate the IRS and its disgusting invasion of privacy. The IRS says you’re guilty until proven innocent - how is it we stand for that?
To the extent that embedded taxes are removed from American manufacturing, we become much more competitive on the global market. This will greatly encourage manufacturing to move back to the US and provide more high-paying jobs. Trade deficit should also improve.
The burden of record-keeping and tax-paying moves from the individual to businesses, who will be compensated for the effort. A MUCH improved situation.
Businesses and individuals can make important decisions to their own benefit without the skew caused by tax considerations. This makes for greatly improved efficiency.
With a single tax rate, it is more difficult for politians to hide tax increases. If spending increases or reductions are directly tied to the FT, which is visible to every American at every purchase, we will likely make better political decisions. Power moves from the politicians to the American people.
I am not an accountant, so my calculations may be incorrect, but just this simple one would suggest you’re wrong.
I’ll pick the 2006 median family income and make a couple of basic assumptions and see what the family pays in taxes both ways:
Income tax:
Income: $48,201
Income tax (married, 1 child, standard deduction): $3,445.15
Payroll tax (employee portion only!): $3,687.37
Total taxes: $7,132.52
FairTax:
Income: $48,201
FairTax (family spends ALL money at retail!): $11,086.23
FairTax Rebate (couple with 1 child): $5,497
Total taxes: $5,589.23
The assumptions I made generally favor the income tax and the family owes over $1,500 less. This assumes the employer keeps their portion of the payroll tax, the family spends all money at retail, and retail prices do NOT go down.
It’s not the basic necessities of life…it’s *taxes *on the basic necessities of life. That’s what the prebate is designed to reimburse, the taxes, not the total purchase price. And every household gets it.
For the record, the prebate would be higher for those living in Hawaii and Alaska.
I’ll happily go over it AFTER you tell me where we’re getting that missing money from, as otherwise, I’m comparing a plan that pulls in most of what we spend to a plan that pulls in a bit over half of what we spend.
[I forget that **here** I can rely on posting actually saying what they mean, and not messing up syntax … ]
But my point still stands; a nation-wide flat level would be inequitable. The child-deduction is now, but it is so laughably small that it is immaterial.
Another change I would make in that code is to increase the dependent child deduction to an economically signifcant amount BUT limit it to one deduction per adult over 18. [If we are going to stick to a code that tries to implement social policy.]
While I’m “hung up on” a large number of aspects of the FairTax, some even more so than this one, this is far from immaterial. If you want to sell the general public on a plan, do so with facts, not distortions. The FAQ is absolutely full of weaseling, distortions, and tons of unsubstantiated assumptions. Annual Income = Annual Spending? Please. One of my favorites: “Is the FairTax progressive? Do the rich pay more and the poor pay less as a percentage of their spending?”
That percentage would drop much further for him under the FT. The current system is progressive, except for some of the various loopholes that are predominantly available to the wealthy investor (which was the point he was making). You can close up those loopholes all day long as far as I’m concerned. Oddly enough, many of those loopholes came from the same people who seem enamored with the FairTax.
It will be a LOT more true when you’ll save $30,000 on that new Porsche by doing so. How far would you drive to save $30,000 on a single purchase?
Another one of my pet peeves. I won’t even have to cross a border to not pay taxes on that Porsche. It’s a company car. That’s a company meal. That’s for the home office. I needed a new suit for the presentation. I’m having a harder time figuring out what I couldn’t justify as a business need.
I didn’t make this argument, so I’m only guessing, but my guess is they were talking about people who had saved portions of their taxed income, and were now retire. They’d get taxed all over again as they spend their savings.
Cite? Citing Beacon Hill Institute, Cato Institute, etc. ain’t gonna cut it, as they don’t meet the criteria. Is Gale not an unbiased professional? Can we use him? Hell, even I used data rather than assumptions and feelings and no one wants to show me where the missing money comes from.
I’m hardly a fan of the IRS (having had to pay money I didn’t owe, that they couldn’t even demonstrate why they thought I owed it, etc.), but the original FairTax proposal didn’t even eliminate the IRS. It “suggested it”, instead. I do see that their latest bill has sort of corrected that. The wording’s still a bit open, but at least it’s more than a suggestion.
I absolutely believe it, assuming he pays his secretary well - which seems likely. Buffett’s major source of income is, I suspect, capital gains, dividends, and other investment income taxed at a lower rate than straight income. He obviously pays a lot more in absolute terms, but a lower percentage.
I think employers would have to pay some of the payroll tax to employees, since the employees would now pick up the cost of running government now covered by the payroll from the (yes. :smack: ) consumption tax. Many products have very small labor increments - those products will not be able to have their prices cut by anywhere near 7%.
They detail the total tax base as being $11.244 T. Some of the numbers are similar to yours, but they also include government expenditures. While I understand and agree with their reasoning on this, it does make me uneasy. They also add in the deficit, which I think is appropriate since they claim revenue neutral, not balanced budget. They also admit that the 23% rate in the bill would result in a 2.73% shortfall ($76 B)
Okay, your turn - I’m ready to take my medicine on my over-simplified tax calculation.
That’s fine, but we really should just stick to the facts rather than whine about their lousy, or even misleading, PR. I think we here at SDMB can see through the distortion and discuss the actual issue, don’t you?
I think you misunderstand the requirements for tax-exempt status. You must have a registered re-sale license and file quarterly statements with your collections. The state of Texas, where I live, deals with this every day and I think it’s easily handled. Could you get away with fraud? Yeah, but people are doing something similar with income taxes now.
Of course you didn’t. I certainly implied it though - sorry. I would say most middle class people have their savings in tax-exempt accounts as the sensible thing is to save there first and add post-tax savings only after one has maxed out tax-exempt contributions.
I’m definitely in agreement here, on both counts. I got a letter from the IRS once telling me I had made an arithmetic error in my favor and owed $5 (plus interest & penalties, of course). I checked their figures and discovered that I had, indeed made an error - in THEIR favor. They owed ME $5! Needless to say, I sent them a check for the 7 bucks and washed my hands of it.
I also agree that I want to be certain that the income tax is dead, buried, and cannot be resurrected before any sales tax is implemented.
I made that argument, and although I used $100,000 in savings in my example, any amount in the bank at the time of conversion would be subject to to double taxation. A family with $100 in savings or someone with $100,000 would both suffer when they spend that money. These are funds in the bank or other liquid form, not in retirement account. Do you think that paying the Fair tax on these funds, already once subjected to the income tax, is fair?
What exactly is a tax exempt account under the Fair tax? Currently we have tax deferred retirement accounts, which I guess would be fair to tax as a consumption tax as those funds are spent, but there is the issue with the Roth IRA. How do you handle that under the Fair tax?
So the federal government is going to start paying sales taxes on things like interstate improvements, which are services, and therefore taxed? Want to bet?
They also added in government investment (that’s included in the GCE), which they themselves claim isn’t supposed to be taxed. You think the government will pay what neither consumers nor businesses will pay?
You’ll note that even with the “uneasy” additions (which I don’t find convincing), this sales tax will still have to be higher than 30% (31.27% using their numbers) to equal what they estimate our current tax receipts will be. They conveniently forget to add that now that the government will be paying taxes on all kinds of stuff, they’ll need more money to work with. Their estimates also seem to be a bit off. The CBO expects revenue to be 18.8% of GDP for 2007, not the 16.4% they used. In other words, their $76B deficit is actually going to be a lot more than that when you add in the roughly $250B additional dollars in revenue. Maybe we should make the sales tax 40% instead.
We can and are. One of the actual issues is the intentionally misleading statements made by the proponents. If the FairTax is so awesome, then let’s all be honest about it. They either need to stop selling it as a sales tax, which has a tax-exclusive basis, or give the tax-exclusive percentage. They also need to stop asserting “Income=Spending” in their attempts to demonstrate that it’s a “progressive” tax.
I’m fully aware of the requirements for tax exempt status under the FairTax legislation, as I’ve read the entire text of several iterations of the bill. I’m stating that I could incorporate and exclude all manner of purchases from taxation, without committing fraud.
It’s not really dead and buried by the bill. The portions of the IRS dedicated to income, payroll, and estate/gift taxes (these are subtitles A through C) will stop receiving funding, but subtitles D through K will stay on the books. The departments in charge of those areas will be moving to Treasury. Of course, that funding elimination for subtitles A-C doesn’t take place for 2 years after the sales tax is in place, so it’s not going to be dead and buried when the sales tax kicks in.
With the FairTax, wouldn’t there be a huge incentive to grow black-market (tax-free) economies? With every transaction being subject to a tax, it would seem much harder to regulate tax-free selling than tax-free earnings.
Now that you provided some data to make up the budget difference (even if I disagree with the numbers), I’ll address this.
First, you say “Standard Deductions” for the baseline family. Why? Do they have a house, medical expenses, etc? Does he have health insurance payments taken out pre-tax through this employers? There are a ton of things that will lower that first families tax requirement. Nothing will lower the second families tax burden other than not spending their money (unless they want to incorporate like I plan on doing).
By the way, I don’t know of anyone who doesn’t agree that much of the poor would benefit from the FairTax (and I’m fine with that), much like the richest of the rich will make an absolute killing (I’m not so fine with that). Those who will be hit hardest are the ones who make a decent amount of money but spend the vast majority of it, i.e., the middle to upper-middle class.
The CEO who pulls in 100M and spends 20M is going to pay about 5% of his income in taxes. The accountant who pulls in 110K and spends 100K is going to pay about 18% of his income in taxes. That’s my problem with it. I’m not a flat tax proponent by any stretch of the imagination (I’m a proponent of a progressive income tax with fewer loopholes), but I’d be far more happy with that solution, along with a moderately high tax-free point so the poor wouldn’t get screwed, than with the FairTax.
