[QUOTE=Alex_Dubinsky]
Consumption tax is based on a flawed model of economics that says ‘consumption’ is bad and ‘savings’ are good and fuel growth. The thinking is that by not spending, people leave money that will be used to build factories and such things (ie, it will be ‘invested’) which increases the total capacity for production. The problem is that no company will have the incentive to build factories if no one is buying the goods, and what you’ll actually get is stagnation. Fact is that the USA, which emphasizes consumption and hates saving, has managed to build itself the most powerful economy in the world.
Income tax is neutral with regard to spending-vs-saving: it taxes both equally.
Ideally, I’d say the main tax should be from income, with a small consumption and/or saving tax that could be adjusted by the Federal Reserve to steer the economy. (Right now, the Fed has only one economy-manipulation tool: printing and burning money. This is crude and severly limits the Fed’s effectiveness.)
As for a tax at every money exchange: That would be interesting. It’d discourage idle speculation and place a general friction on all activities (some more than others). This might have some good results, but it’d also have many bad ones. In general, frictions in the economy are bad. However, the frictions that cause real problems are FAR worse and more insiduous than losing a tiny bit of money on each exchange. Anyway, it’d be very interesting to know what the actual percent would have to be. Also, I can’t decide if enforcing such a system would be very difficult or very easy. With our modern electronic money, it might be so trivial we could abolish the IRS.
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It’s nice to see that someone besides DMC can make an intelligent argument. You bring up my primary concern - that the FT would reduce consumption enough place us into a deflationary spiral. I have not seen strong arguments against this from FT proponents. There might be an analogy made to the stagnent Japanese economy of the late 80s-90s.
The concept of a consumption tax that is controlled by the Fed to help restrain or accelerate the economy is very compelling and thought-provoking.
[QUOTE=flex727]
It’s nice to see that someone besides DMC can make an intelligent argument.
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Actually there have been a number of intelligent arguments made; I’m not quite sure what it says when you only accept the one that you expected.
Why don’t you think would competitive pressure not drive down wages when the cessation of income tax puts all that extra money in people’s pockets? Why don’t you think that all that extra liquidity in the economy would not drive up inflation and eat the real gains, as it typically does? If you understand those two risks, why do you keep acting as if it’s a foregone conclusion that people will have more money in their pockets? (And I mean real money, not inflated money with the same purchasing power as today).
[QUOTE=Cosmic Relief]
Actually there have been a number of intelligent arguments made; I’m not quite sure what it says when you only accept the one that you expected.
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Let me just say that it was a thoughtless remark that I regret and apologize for. I was a bit frustrated at some of the replies (though that’s no excuse).
I don’t think I have ever claimed that people would have more real money in their pockets. I did work through a simple calculation that showed reduced taxes owed by a hypothetical median family, however, I have stated many times that market forces would act to change both prices and wages, though I will admit that I cannot predict the direction or magnitude for any specific case.
I would be interested/concerned/worried about one thing in regards to the Fair Tax. Let’s say people are fed up with the government, or they’ve been fucked up by a recession, and they simply stop consuming things. They stop with the weekend runs to Wally World and Best Buy and decide to save their duckets.
How does the government get revenue? As the system stands now, bad economy or not, we don’t have a choice in whether we pay our taxes. But it would be totally legal, under the Fair Tax, to not buy anything.
[QUOTE=monstro]
I would be interested/concerned/worried about one thing in regards to the Fair Tax. Let’s say people are fed up with the government, or they’ve been fucked up by a recession, and they simply stop consuming things. They stop with the weekend runs to Wally World and Best Buy and decide to save their duckets.
How does the government get revenue? As the system stands now, bad economy or not, we don’t have a choice in whether we pay our taxes. But it would be totally legal, under the Fair Tax, to not buy anything.
Am I missing something?
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Do the people pushing the Fair Tax care about running a massive deficit?
monstro, the consumption tax (FairTax) proponents’ thinking is that if you don’t want your money, you’ll give it to someone who does. Ie, you’ll put it in a bank. The bank will cut interest rates to get this money off its hands, lots of other people will then want to borrow it, they’ll inevitably spend it, and the wheel of economics will keep turning.
I disagree with this thinking strongly. Penalizing consumption to boost saving (and, by extension, borrowing) is the path to stagnation. The only truth in the above scenario is that it’s true the wheel won’t stop turning completely.
I think most economists abandoned the “savings is the only important thing in macroeconomics” ideology some time ago. Nowdays, it’s more the hippies who champion consumption tax because they hate consumerism.
[QUOTE=begbert2]
Do the people pushing the Fair Tax care about running a massive deficit?
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I was trying to find a nice way to say this before, but I cannot help but be incredibly suspicious of a tax scheme that relies on a huge new entitlement (the prebate) in order to make it work – and yet, this proposal is coming from the people who are generally the most vocal opponents of new entitlements or growth of existing entitlements.
I can’t shake the feeling that the fair tax has zero to do with economics or finance and 100% to do with trying to cripple the government.
flex727, do you have any answer for my questions about savings that have already been taxed and the Roth IRA? Your previous answer indicated that these people are the ones who don’t pay enough under the Fair Tax, so it’s not a problem if they pay tax twice. I find that answer absurd for two reasons. First, how can these people be the ones who don’t pay enough under the Fair Tax when we are talking about funds saved before the imposition of the Fair Tax? Second, that answer belies the use of the word ‘fair’ in Fair Tax.
[QUOTE=monstro]
I would be interested/concerned/worried about one thing in regards to the Fair Tax. Let’s say people are fed up with the government, or they’ve been fucked up by a recession, and they simply stop consuming things. They stop with the weekend runs to Wally World and Best Buy and decide to save their duckets.
How does the government get revenue? As the system stands now, bad economy or not, we don’t have a choice in whether we pay our taxes. But it would be totally legal, under the Fair Tax, to not buy anything.
[QUOTE=Dag Otto] flex727, do you have any answer for my questions about savings that have already been taxed and the Roth IRA? Your previous answer indicated that these people are the ones who don’t pay enough under the Fair Tax, so it’s not a problem if they pay tax twice. I find that answer absurd for two reasons. First, how can these people be the ones who don’t pay enough under the Fair Tax when we are talking about funds saved before the imposition of the Fair Tax? Second, that answer belies the use of the word ‘fair’ in Fair Tax.
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As to the first question, are you saying that the people who won’t pay enough under the FT are overtaxed under the current system?
Apparently, the FT is imperfect. The FT proponents merely claim it is less imperfect than the current system. The FT proponents would also claim that the issue is moot since prices will decline almost as much as the added tax. I find that argument unpersuasive though.
[QUOTE=Cosmic Relief]
The reason my employer doesn’t cut my pay right now is that I’d walk out because I need my full salary. If I suddenly had to pay no more income tax, they would know I am taking home more money than I was before, therefore they can cut it. Or to look at it another way, people a little more desperate than me would suddenly be able as well as willing to take the job for less money. You can call it competition, you can call it free markets, you can call it whatever you want. Either way, it undercuts your repeated assertion that people will be taking home more money than they presently do. It will be either through wage competition for lower wages, or through inflation from people having all that extra liquidity to throw around, but the combination of those things is going to leave people right back where they were under the existing tax code.
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I think this is a good point.
There was once a discussion (somewhere I don’t recall where) that it would be great for a ‘cure’ for sleep…so that people would not need to sleep anymore. One person was adamently against it. His reason? He didn’t want to work 16 hours a day.
[QUOTE=Alex_Dubinsky]
monstro, the consumption tax (FairTax) proponents’ thinking is that if you don’t want your money, you’ll give it to someone who does. Ie, you’ll put it in a bank. The bank will cut interest rates to get this money off its hands, lots of other people will then want to borrow it, they’ll inevitably spend it, and the wheel of economics will keep turning.
I disagree with this thinking strongly. Penalizing consumption to boost saving (and, by extension, borrowing) is the path to stagnation. The only truth in the above scenario is that it’s true the wheel won’t stop turning completely.
I think most economists abandoned the “savings is the only important thing in macroeconomics” ideology some time ago. Nowdays, it’s more the hippies who champion consumption tax because they hate consumerism.
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I am neither a “right winger” nor a hippie - and I champion consumerism (you don’t want to see my credit card bill every month). I came here looking for honest debate about something with which I was undecided on, though was leaning toward. When debating friends and cow-orkers, I would typically get unsubstantive arguments that did little to help decide things, so I turned to the Dope for what I was certain to be an improvement. Turns out I was right. I appreciate the great back and forth, but I think the most persuasive argument was from Alex_Dubinsky in post #56. I think the FT could put us in a situation where reduced consumption would overcome the increased savings and investment and stagnate the economy. If there is a FT proponent that has an answer to that, I’d like to hear it.
[QUOTE=flex727]
As to the first question, are you saying that the people who won’t pay enough under the FT are overtaxed under the current system?
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No. I’m saying it is preposterous to posit that an unfair situation that occurs due to conditions that exist before the Fair Tax is in imposed is somehow ‘fair’ because these very conditions are deemed ‘unfair’ under the Fair Tax. Your claim ‘that people with large after-tax savings are precisely the people you claim are not paying enough under the FT’ cannot hold true before the Fair Tax is imposed. How can one not ‘pay enough’ under the Fair Tax before it is even imposed? Your argument makes me think that you do not understand my position. Let me reiterate:
An individual earns income today under the current income tax and pays tax on that income. He manages to put that money in a bank and save it. At this point it has been taxed once. The next day, the income tax is abolished and replaced with the Fair Tax. If the individual withdraws his money from the bank and spends it, it is now taxed again under the Fair Tax. He has paid tax twice on this money. It doesn’t matter if he has $1 or $100,000,000 in the bank, he should not have to pay tax on that money twice. If he does, how is this fair?
An individual puts money into a Roth IRA. He has already pad income tax on that money, and the rules of the Roth IRA stipulate that the gain will not be subject to income tax when withdrawn. Subjecting that money to a "Fair Tax’ in lieu of an income tax isn’t in the spirit that of the Roth IRA. How is taxing these funds under a ‘Fair Tax’ fair?
It seems to me that an accounting of everyone’s net worth (that has already been taxed once) and a corresponding credit against the Fair Tax would be in order. For example if I have $100,000 in the bank on the date of conversion to the Fair Tax, I get to spend that $100,000 without paying the Fair Tax on my purchases. Do you agree?
[QUOTE=flex727]
Your taxable federal income is most certainly NOT reduced by payroll taxes.
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I am pretty sure that the money you pay into social security and medicare is not part of your adjusted gross income.
BTW do you have a link to the FairTax legislation? The Huckabee site and the Fairtax site seems light on details. I am not sure how rent and mortgages and large purchases like homes and cars are treated.
[QUOTE=Damuri Ajashi]
I am pretty sure that the money you pay into social security and medicare is not part of your adjusted gross income.
BTW do you have a link to the FairTax legislation? The Huckabee site and the Fairtax site seems light on details. I am not sure how rent and mortgages and large purchases like homes and cars are treated.
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Your adjusted gross income definitely includes money you paid into social security and medicare. If you can find a cite that says it is excluded, I’d like to see it.
I think a link to the legislation can be found at fairtax.org, and I also think DMC provided it upthread.
Not sure about rent, but the thrust of the FT is that ALL purchases for NEW items at retail would be taxed, including big ticket items like houses and cars. However, USED items would not be, including houses and cars.
[QUOTE=Dag Otto]
It seems to me that an accounting of everyone’s net worth (that has already been taxed once) and a corresponding credit against the Fair Tax would be in order. For example if I have $100,000 in the bank on the date of conversion to the Fair Tax, I get to spend that $100,000 without paying the Fair Tax on my purchases. Do you agree?
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I wouldn’t be opposed to this modification of the FT. However, there are many unfair situations, like this, in the current tax system. Just one example is corporate dividends. Earnings by a public company are taxed, but when the after-tax remainder is actually distributed to the owners it is taxed again, without any other transaction having taken place.
[QUOTE=China Guy]
I’m a huge fan of flat taxes, no exemptions. Ok, scale in the flat tax something like below $20k no tax, 20 to $40k10% tax, $40k+ 20% tax. The last big flat tax movement was around 1980, and it was calculated then that if everyone in the US paid a flat tax it would be IIRC 17%.
Huge advantage is that it is a really simple tax code. Even room for a little social engineering. Eg, can put in some simple tax breaks like for a child or first home as long as the flat tax does not exceed 20%.
Hong Kong & Singapore both have a flat tax system.
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