Scott Burns on the "Fair Tax"

[samclem]

Lots of folks here are fans of Scott Burns. Here's an 18 Oct article he wrote concerning the National Retail Sales Tax (aka "Fair Tax").

http://oamnetwork.com/

 

[retire@40]

And as I've said many times before, the "fair" tax is a fly trap the looney libertarians put out there around every election to try to convince the ignorant to join their cause.

 

[AltaRed]

The US is the only major developed nation that doesn't have a national sales tax, or Value Added Tax (VAT). All of the BS about how it isn't fair, taxes the poor and lets the wealthy get off free is fearmongering to justify a position.

1. Generally speaking, the wealthier one is, the more they consume. BMWs cost a lot more than a Hyundai. If you choose to LBYM, you get to save on tax too.
2. The wealthy have ways of reducing their income tax more than the common wage earner with various loopholes and do not pay much more anyway.
3. Key essentials like food can be tax exempt. In Canada, all food is exempt (except snack items and items bought on individual basis like one muffin).
4. Tax credits via a means test can mitigate the VAT paid by the poor. Canadians can apply for a VAT credit in their tax filings. My sons took advantage of that for several years.

Despite all the fears and wailing by Canadians when VAT was first introduced in the late 80's/early 90's, there is not a ground swell of dissatisfaction with it any more. Lots of people grumble, but at least it is transparent and up front.

 

[sgeeeee]

There is nothing inherently wrong with a VAT or all sales tax approach. There is nothing inherently wrong with an income tax approach.

VAT tax taxes consumption. Income tax taxes income. Over a lifetime, it shouldn't matter much.

But if you are retired or soon to be retired, you would have to be nuts to favor transitioning from income to consumption tax now.

Here's what retirees who support the fair tax seem to be saying: "I've been taxed on my income my whole life. Now let's transition and let income earners off the hook and tax me all over again on my consumption." I don't think so.

 

[Texas Proud]

The US is the only major developed nation that doesn't have a national sales tax, or Value Added Tax (VAT). All of the BS about how it isn't fair, taxes the poor and lets the wealthy get off free is fearmongering to justify a position.

1. Generally speaking, the wealthier one is, the more they consume. BMWs cost a lot more than a Hyundai. If you choose to LBYM, you get to save on tax too.
2. The wealthy have ways of reducing their income tax more than the common wage earner with various loopholes and do not pay much more anyway.
3. Key essentials like food can be tax exempt. In Canada, all food is exempt (except snack items and items bought on individual basis like one muffin).
4. Tax credits via a means test can mitigate the VAT paid by the poor. Canadians can apply for a VAT credit in their tax filings. My sons took advantage of that for several years.

Despite all the fears and wailing by Canadians when VAT was first introduced in the late 80's/early 90's, there is not a ground swell of dissatisfaction with it any more. Lots of people grumble, but at least it is transparent and up front.

Let me give my opinion on your comments....

1. Agree

2. Mostly wrong... yes, there are more tax advantaged things the rich can do, but it is very rare that they do not pay a lot of tax no matter what they do.... there is the AMT which hits a lot of people who try and do to much in reducing their tax... also, these tax saving schemes (sp) are designed to encourage some kind of investing that is supposed to help others...

3. Agree

4. Agree...

But, you statement that it is transparent is just wrong... it is buried in the price you pay for everything.... you buy a soft drink... it cost 1 pound in the UK... they don't say .85 for the product and .15 for tax... and you do not think about it when you are consuming... it is well hidden in plain site...

 

[samclem]

But if you are retired or soon to be retired, you would have to be nuts to favor transitioning from income to consumption tax now.

Here's what retirees who support the fair tax seem to be saying: "I've been taxed on my income my whole life. Now let's transition and let income earners off the hook and tax me all over again on my consumption." I don't think so.

Right, but not really. Some folks do not always decide whether to support anissue based solely on their own self interest. (Hey, I sound like a socialist!) Sure, I already paid taxes on the $$ converted from a conventional IRA to a Roth IRA. I paid lots of taxes, and, under a NRST this is money I wasted. But nearly everyone will have some a similar ox that is being gored. Heck, under the present tax system the laws change every few years and folks get burned (there should be less of that craziness under a NRST, if the pols can stick with a simple "prebate" method and restrain the impuse to exempt particlar items from the tax)

A simpler, fairer, more transparent tax system that makes our goods and services more competitive overseas might just help retirees, too. Rising tide . . .boats. . . you know.

 

[jeff2006]

A simpler, fairer, more transparent tax system that makes our goods and services more competitive overseas might just help retirees, too. Rising tide . . .boats. . . you know.

Oh, I don't think so. More likely in the USA today that one boat out of a hundred will rise to the top of the Empire State Building, and the other 99 will stay at street level.

 

[lets-retire]

I think we would be better off with the national sales tax.

1. Many cash intensive small businesses understate their income.

2. Many people work "under the table" so they don't pay any tax.

3. Take you yearly earnings figures to three different tax professionals and you will receive three different tax bills. Give the same information to the IRS and you will have a fourth.

4. 10% of everything non-food you buy is pretty straight forward and the method for collecting is already present.

5. If the national sales tax is ever past (doubtful) the income tax would have to be banned by amendment. Otherwise the Government would attempt to re-institute the income tax after a few years.

 

[retire@40]

I think we would be better off with the national sales tax.

1. Many cash intensive small businesses understate their income.

2. Many people work "under the table" so they don't pay any tax.

...

1 and 2 are facts, but you come to a wrong conclusion.

Under a "fair" tax they would be just as bad if not worse. We've talked about this in previous threads on this topic during the last election.

 

[donheff]

Right, but not really. Some folks do not always decide whether to support anissue based solely on their own self interest.

I have a Fed pension with pretty good health benefits for life. Yet I hope the US adopts a good national health care system even though I assume it will cost me more than I now pay. I don't see this as altruistic - the more stable the US, the more likely my retirement years will go smoothly.

 

[Martha]

Take a look at this thread for a lively discussion of the issue:
http://early-retirement.org/forums/index.php?topic=3774.0

I am disappointed with Burns. There are a large number of fairness issues with the national sales tax. If you address those issues, you have complexity. There are good reasons and there are bad reasons why the current tax code is as long and complicatd as it is.

The money has to come from somewhere. I have not seen a satisfactory explanation why the "fair" tax would be more fair. Equal does not mean fair. What I see is that people who have greater necessities will pay greater taxes and complexity will rise significantly for those of little income.

 

[Gone4Good]

Equal does not mean fair.

To most people "treating people the same, or equally" is a pretty good definition of fairness. Unless, of course, were talking about income taxes when "fairness" means treating people differently and is often code for deliberately taking from one person to give to another.

The world is too complicated to make such broad distinctions about "fairness". But I hardly consider it "fair" to tax the person working 80 hours / week at higher percentage rate then the guy working 40 hours per week simply because the longer-working person makes more in total income (even if his hourly rate is lower). But that is what passes for "fairness" in some circles.

 

[sgeeeee]

Right, but not really. Some folks do not always decide whether to support anissue based solely on their own self interest. (Hey, I sound like a socialist!) Sure, I already paid taxes on the $$ converted from a conventional IRA to a Roth IRA. I paid lots of taxes, and, under a NRST this is money I wasted. But nearly everyone will have some a similar ox that is being gored. Heck, under the present tax system the laws change every few years and folks get burned (there should be less of that craziness under a NRST, if the pols can stick with a simple "prebate" method and restrain the impuse to exempt particlar items from the tax)

A simpler, fairer, more transparent tax system that makes our goods and services more competitive overseas might just help retirees, too. Rising tide . . .boats. . . you know.

I don't follow your reasoning at all. Why do you think a sales tax tacked onto everything will be inherently more fair than an income tax? What do you mean by fair? What part of an income tax is inherently unfair and could not be fixed with appropriate legislation? If you don't think the current income tax is fair, it is surely only because of the way it is implemented and the loop holes that have been driven through it. No? But the same governmental bodies are going to write the sales tax laws. Why would you trust them to do a better job on sales tax? I assure you I can think of a large number of special interest groups that will offer ways to modify any sales tax that gets proposed. You recognize that under the present system "the laws change every few years and folks get burned", but you imagine that the same group of people who change those laws will magically decide to keep their hands off of a sales tax law. What is that based on? Blind trust of the neo-cons who are pushing for this change? So far this group of politicians has systematically driven tax law changes that have transfered the burden of payment from the billionaires to the middle class. I suspect that they will continue to do that with every piece of tax legislation they can get passed.

For someone who doesn't trust the goverment, you sure do trust the government.

 

[astromeria]

I thought the VAT would have to be 17% to be revenue-neutral.

The welathy spend relatively more on entertainment, travel, and services (everything from box seats at the opera <or Opry> to nannies and private tutors, housekeepers and groundskeepers, lawyers and investment advisors, to more medical care)--will spending for those be subject to the VAT? If not--the VAT is quite unfair, IMO.

Hey please let me know before we go there--I wanna buy my RV and next car first :

 

[MooreBonds]

4. 10% of everything non-food you buy is pretty straight forward and the method for collecting is already present.

Ah..but then, for the age-old question: Is edible underwear considered "food" or "clothing"

 

[astromeria]

So does every"thing" you buy include medical care (dr visit, lab work, drugs/devices), restaurant meals, takeout food from the grocery store, housecleaners (would still be under the table in most cases, I imagine-), tax accountant bill, lawyer bill, swimming lessons? What about buying a CD (banking, not music-) or mutual fund.

 

[Martha]

It is interesting to see the different percentages thrown around for the sales tax. I have seen some economists say it would have to be as high as 50%. Generally, I have seen figures in the 25% range. This includes food and clothing.

The plans I have seen provide that services are taxed. Need that cavity filled? Get sued? That will cost you. What do you tax, the service or the insurance that pays for the service? Kid going to college? Pay the tax. No insurance or big insurance deductible? Pay the tax on the necessary services.

Most proposals exempt used goods because of the difficulties in reporting and auditing. Suddenly, an explosion in "reconditioned" goods and used "demo" vehicles. What about overseas purchases? Who is collecting? Who is reporting? The underground economy will grow.

I think the progressive income tax works fine, thank you. It is pretty transparent to me what I pay in taxes.

 

[Martha]

The wikipedia discussion (which was cited in our last discussion) on the fair tax is really pretty good (as in explaining both sides of the issue) and cites a number of decent references. http://en.wikipedia.org/wiki/FairTax#endnote_endorsement

If someone pays less, someone else will pay more. So, who do you think should be paying less and who more?

From the wiki:

Economist William G. Gale at the Brookings Institution writes: "Under the AFT poposal, taxes would rise for households in the bottom 90% of the income distribution, while households in the top 1% would receive an average tax cut of over $75,000."

. . . bipartisan panel's final report to the President rejected a National Sales Tax.[5] The panel's evaluated plan differs from the FairTax legislation in many areas. However, they reported that with the rebate, the overall tax burden on middle-income Americans would increase while the tax burden on the very rich would drop. According to the report, the percent of federal taxes paid by those earning from $15-$50,000 would rise from 3.6 to 6.7 percent, while the burden on those earning more than $200,000 would fall from 53.5 to 45.9 percent

 

[Texas Proud]

I agree that the rate would be in the 25% or more...

England has a 15% rate (or they did when I was there) AND had a pretty high income tax rate (which is why I still have a tax credit waiting if I could only earn foreign income)...

Also, for an item mailed to you from overseas... I had it happen and they held it at the post office until I came and paid the VAT tax...

And I have not read anybody talk about STATE income taxes.... would you not still have all the same issues with them?? but, since I am from Texas we don't have to worry...

 

[samclem]

Martha,
A couple of observations:

There are some very effective arguments in rebuttal to Gale's conclusions, but the Wikipedia article (unfortunately) doesn't cite them. I can find them if folks aren't sick of this discussion in a short while.

It is interesting to see the different percentages thrown around for the sales tax. I have seen some economists say it would have to be as high as 50%. Generally, I have seen figures in the 25% range. This includes food and clothing.

Often those against the idea modify the actual proposal (by excluding various categoriesof goods and services), then thrash the newly created strawman by pointing out that the rate would have to be very high. Another source of (intentional?) confusion is whether an "inclusive" or "exclusive" rate is used. It is also very important to point out that the actual costs paid by consumers will likely stay just about the same, since the present taxes built in to the cost of items won't be there.

Kid going to college? Pay the tax.

Nope. Tuition isn't subject to the tax. This section is from the Fairtax.org web site
*****************************************
[Concerning education]

(1) We have to define it. Sec. 2 [of H.R 25] Definitions (4) defines education and training as tuition for primary, secondary, and postsecondary education and job-related training courses. It does not include other activities such as room and board, and other activity fees charged by the educational institution. Definition 8(D) says that education and training shall be treated as services used to produce, provide or render or sell taxable property or service.

(2) So are education and training taxable? Sec. 102 says the services used for a business purpose are not taxable. The definition of business purpose includes "services used to produce, provide or render or sell taxable property or services". Sec. 2 said that education should be treated the same as these services. Therefore education tuition and job-related training courses are NOT taxed. It does not matter whether the education provider is a private sector for-profit educational institution or a nonprofit educational institution.

Karen Walby, Ph.D.
Director of Research
FairTax.org
********************************

I think the progressive income tax works fine, thank you. It is pretty transparent to me what I pay in taxes.

You are a special breed. You understand the present tax code thoroughly, you have a wealth of legal training and experience with the tax code. Your expertise in these areas has been a huge help to many of us (Thanks again!). I would just like a tax system simple enough that Americans would need no such assistance in understanding how their decisions affect their taxes.

 

[AltaRed]

But, you statement that it is transparent is just wrong... it is buried in the price you pay for everything.... you buy a soft drink... it cost 1 pound in the UK... they don't say .85 for the product and .15 for tax... and you do not think about it when you are consuming... it is well hidden in plain site...

Depends on where you are at. In Canada and most other places, it is not buried in price. It is added on at the cash register.

 

[sgeeeee]

If the un-"Fair" tax is so transparent and simple, can one of the proponents tell me what you will pay in tax next year if we adopt it. Now tell me what you would pay in Federal tax if we don't. I am interested in dollar amounts, but feel free to give us a percentage up or down.

Better yet, give me a precise formula (tax rates by item) so that I can analyze it as compared to what I pay in federal income tax.

Now, if you and I are going to be paying more, tell me who is paying less. If we are paying less, tell me who is paying more. Then we can talk about how fair it is.

So far, the only thing I hear from the proponents is a broad claim that it will be more fair. How can we possibly carry on a meaningful discussion of how fair the tax will be if we don't know exactly who will be paying what as compared to today?

 

[Martha]

If the un-"Fair" tax is so transparent and simple, can one of the proponents tell me what you will pay in tax next year if we adopt it. Now tell me what you would pay in Federal tax if we don't. I am interested in dollar amounts, but feel free to give us a percentage up or down.

Better yet, give me a precise formula (tax rates by item) so that I can analyze it as compared to what I pay in federal income tax.

Now, if you and I are going to be paying more, tell me who is paying less. If we are paying less, tell me who is paying more. Then we can talk about how fair it is.

So far, the only thing I hear from the proponents is a broad claim that it will be more fair. How can we possibly carry on a meaningful discussion of how fair the tax will be if we don't know exactly who will be paying what as compared to today?

Well, I know last year we paid six figures in income tax. Under the national sales tax we would have paid substantially less. You, in contrast, as a retiree, likely would have paid more tax. But yes, I said the same thing, if someone is paying less, someone else will pay more. The only response to that I have heard from the proponents of the tax is that such a tax will so stimulate the economy, and result in so many cost savings, that the overall tax burden will be less. I don't see it.

Ain't gonna happen anyway.

 

[samclem]

If the un-"Fair" tax is so transparent and simple, can one of the proponents tell me what you will pay in tax next year if we adopt it. Now tell me what you would pay in Federal tax if we don't. I am interested in dollar amounts, but feel free to give us a percentage up or down.

Better yet, give me a precise formula (tax rates by item) so that I can analyze it as compared to what I pay in federal income tax.

Now, if you and I are going to be paying more, tell me who is paying less. If we are paying less, tell me who is paying more. Then we can talk about how fair it is.

So far, the only thing I hear from the proponents is a broad claim that it will be more fair. How can we possibly carry on a meaningful discussion of how fair the tax will be if we don't know exactly who will be paying what as compared to today?

If this is more than a rhetorical question and you want to know what you'd pay under the NRST, the calculator is at the link below. Use info from last year and you can compare it to your tax burden under present tax system.

http://www.fairtaxcalculator.org/

There are tons of studies of who wil pay more, who would pay less. I'll post some links when come upon them. There are two things to beware of in this issue, however, and they usually allow you to spot a bogus argument.
1) Remember that under the NRST (the "Fair Tax") as outlined in HR 25, all payroll taxes would be abolished. For lower income workers this is a huge deal--many of these people pay far more in payroll taxes than in income taxes. The NRST is designed to pay exactly the same amount into SS as is being paid today.
2) Some studies assume no change in behavior as a result of the change in taxaton. Obviously, people will not contine to behave in the same way when a new set of incentives is put into place. So, beware of bogus comparisons based on steady-state behaviour.

People on this board appreciate the importance of saving and the problems caused when consumption is encouraged. The NRST would encourage savings, free up more funds for business investment and job creation, and lower the cost of US goods on world markets.
Or, we can keep playing the class warfare envy game and divide up a smaller and smaller pie while the rest of the world passes us by.

 

[retire@40]

If this is more than a rhetorical question and you want to know what you'd pay under the NRST, the calculator is at the link below. Use info from last year and you can compare it to your tax burden under present tax system.

http://www.fairtaxcalculator.org/

Golly, if I'm a single guy making $1,000,000 a year, my effective tax rate goes down from 33% to a "fair" rate of 21%!!! And that's not even including social security and medicare taxes I won't have to pay anymore!!! What a savings!!!

But wait, if I'm making $100,000 a year, my rate is about 19%. Hmmmm, my effective tax rate goes from 20% to a somewhat "fair" tax of 19%. Ok, if you count social security tax and medicare tax savings, it really goes down a few more points, so I guess I'm a little more ahead.

Oh, if I only make $30,000 a year, my effective tax rate goes from 10% to "fair" tax of 15%. Ok, put in the ss and med tax savings and I'm just barely ahead with the...do I have to say it?...fair tax.

But what the heck, it looks like under a "fair" tax everyone, yes sir, everyone in the country, rich or poor, tall or short, pays less, so why not?

Now, back to this magic lotion....it removes every kind of spot or stain.......