Some thoughts on the tax code

[photoguy]

@ Missionfinder

It seems like it would be common sense that the bigger incentive you give people, the more they will engage in it.

For example, consider the following scenario: You want to buy a nikon D3x camera (engagement ring, laptop, etc) that sells for $8000. You could buy it in NY and pay $2400 in fair tax or you could just hop across the border to canada and buy it paying $0 tax. This sort of avoidance happens right now all the time (although people are often coming to the US to buy the gear).

Here's what economist W. Gale says in his papers:

"Other countries have at- tempted to implement some variant of a national retail sales tax with little success on the enforcement front when rates climb to more than 10 percent."

and

"A national retail sales tax would offer numerous channels for avoidance and evasion. Taxpayers could combine business activity — which is generally exempt from retail sales taxation — with personal consump- tion.22 Consumers could purchase items from offshore entities and not pay taxes on the purchases. The enforce- ment of state-level ‘‘use’’ taxes and voluntary filings has been ‘‘dismal at best’’ (Murray 1997), and the applicable tax rates for those taxes are far lower than the rates that would prevail in an NRST, which implies that people would have much stronger incentives to evade the NRST. It would prove difficult to collect high-rate sales taxes from small-scale retailers and service industries. More generally, the two parties to a sale would have incentives to report lower-than-accurate transaction prices to the government and split the tax savings in some manner."

and

"One of the most important determinants of the level of evasion in the current system is whether anyone other than the taxpayer withholds taxes or reports the tax to the government. The rate of evasion is currently around 17 percent in the income tax, but varies greatly by withhold- ing and reporting arrangements. For income on which taxes are withheld and reported to government by a third party, the evasion rate is about 1 percent. That predomi- nantly involves withholding of taxes on wages. At the other extreme, for income on which taxes are not with- held and there is no third-party reporting, the evasion rate is 30 percent or more. The retail sales tax would be collected only from businesses that make retail sales; there would be no withholding or reporting by anyone other than the business itself, so the possibility of signifi- cant evasion needs to be taken seriously."

from

http://www.aei.org/docLib/20070302_GalePaper.pdf

 

[missionfinder]

@ Missionfinder

It seems like it would be common sense that the bigger incentive you give people, the more they will engage in it.

For example, consider the following scenario: You want to buy a nikon D3x camera (engagement ring, laptop, etc) that sells for $8000. You could buy it in NY and pay $2400 in fair tax or you could just hop across the border to canada and buy it paying $0 tax. This sort of avoidance happens right now all the time (although people are often coming to the US to buy the gear).

Please go read the research that's gone into it: Fairtax.org

The average cost of embedded taxes in most goods and services is 22%. The Fair Tax is 23%. The price of goods on average will go up 1%. So that $2400 you quoted is really $1840. Now, factor in the compliance savings and the real price increase is $80, and that's on a large purchase.

Here's what economist W. Gale says in his papers:

"Other countries have at- tempted to implement some variant of a national retail sales tax with little success on the enforcement front when rates climb to more than 10 percent."

and

"A national retail sales tax would offer numerous channels for avoidance and evasion. Taxpayers could combine business activity — which is generally exempt from retail sales taxation — with personal consump- tion.22 Consumers could purchase items from offshore entities and not pay taxes on the purchases. The enforce- ment of state-level ‘‘use’’ taxes and voluntary filings has been ‘‘dismal at best’’ (Murray 1997), and the applicable tax rates for those taxes are far lower than the rates that would prevail in an NRST, which implies that people would have much stronger incentives to evade the NRST. It would prove difficult to collect high-rate sales taxes from small-scale retailers and service industries. More generally, the two parties to a sale would have incentives to report lower-than-accurate transaction prices to the government and split the tax savings in some manner."

and

"One of the most important determinants of the level of evasion in the current system is whether anyone other than the taxpayer withholds taxes or reports the tax to the government. The rate of evasion is currently around 17 percent in the income tax, but varies greatly by withhold- ing and reporting arrangements. For income on which taxes are withheld and reported to government by a third party, the evasion rate is about 1 percent. That predomi- nantly involves withholding of taxes on wages. At the other extreme, for income on which taxes are not with- held and there is no third-party reporting, the evasion rate is 30 percent or more. The retail sales tax would be collected only from businesses that make retail sales; there would be no withholding or reporting by anyone other than the business itself, so the possibility of signifi- cant evasion needs to be taken seriously."

from

http://www.aei.org/docLib/20070302_GalePaper.pdf

I've previously read his report. He's one economist making a case against it. 80 economists (at least) have gone on record supporting it:

Americans For Fair Taxation: An Open Letter to the President, the Congress, and the American people Concerning Reform of the Federal Tax Code

We'll just have to differ on this one. However, I will present a one-by-point rebuttal of the Gale paper, including points that the Gale paper didn't even post accurate data about sales tax evasion being reported by other governments:

http://www.fairtax.org/PDF/GaleRebuttal.pdf

 

[jdw_fire]

Please go read the research that's gone into it: Fairtax.org

The average cost of embedded taxes in most goods and services is 22%. The Fair Tax is 23%. The price of goods on average will go up 1%. So that $2400 you quoted is really $1840. Now, factor in the compliance savings and the real price increase is $80, and that's on a large purchase.

not according to FactCheck.org: Unspinning the FairTax

Proponents of the FairTax point out that prices on consumer goods contain what are called “hidden taxes.” Under current law, corporations have to pay taxes on their earnings. Moreover, businesses have to pay social security taxes for each employee. The money to pay these taxes has to come from somewhere, and FairTax supporters argue that the cost is passed on to the consumer. In fact, the best-known proponent of the FairTax, talk-show host Neal Boortz, argues that 22 percent of the price of a consumer good is really a “hidden tax.” Get rid of corporate and social security taxes, Boortz argues, and consumer good prices would drop by 22 percent. Even with the 23 percent FairTax, prices stay the same, and with the elimination of income taxes, paychecks will get bigger. Everyone gets a raise and the federal government still gets its revenue. About 10 percent of the e-mail messages we received from FairTax proponents trumpeted this kind of magic act. It is easy to understand the confusion on the issue, as Boortz himself made similar assertions in the hardcover edition of his book. (He later issued a corrected version in paperback.)

A bit of critical analysis shows that this cannot be right. The FairTax is revenue-neutral. That means that for every tax dollar collected under the current system, the FairTax has to collect a dollar. If the FairTax exactly equaled embedded taxes, then it could not possibly be revenue-neutral, since embedded taxes do not take into account personal income or estate taxes. The FairTax rate would have to be high enough to replace embedded taxes plus income and estate taxes.

maybe you should read the whole article.

 

[scrabbler1]

not according to FactCheck.org: Unspinning the FairTax


maybe you should read the whole article.

Thank you, jdw_fire. I had posted the link but not individual sections of the entire article.

First, the 23% tax mentioned by fairtax and missionfinder here is misleading because it is tax-inclusive, not tax-exclusive. From factcheck.org:

"First consider the way in which sales tax is normally figured. A consumer good that carries a $100 price tag might be subject to a 5 percent sales tax. That means that the final bill for the item is $105. The 5 percent figure is the amount of tax that is charged on the original purchase price. But now suppose that instead of pricing the item at $100, the shop owner simply priced the item at $105, then sent $5 directly to the state. The $105 price would be a tax-inclusive sales price. But $5 is just 4.8 percent of $105. That 4.8 percent number, however, is relatively meaningless. You are still paying exactly the same 5 percent tax on the item.

The 23 percent number in H.R. 25 is the equivalent of the 4.8 percent in the previous example. To calculate the real rate of the sales tax, we have to determine the original purchase price of an item. We can begin with the same $100 item, keeping in mind that a price tag that reads $100 has sales tax already built in. If our tax rate is 23 percent of the tax-inclusive sales price, then of the $100 final price, $23 of those dollars will be for taxes, meaning that the original pre-tax price of the item is $77. To get $23 in taxes on a $77 item, one must impose a 30 percent tax. In other words, a 23 percent sales tax on the tax-inclusive sales price is equivalent to a 30 percent tax on the actual price of the item."

Next, fairtax assumes a broader base of goods and services subject to the tax including things many of us would never dream of being subject to a sales tax. From Factcheck.org:

"The FairTax proposal assumes a 100 percent tax base on consumption. By way of contrast, most states that have sales taxes have roughly a 50 percent tax base. With the FairTax’s 100 percent base, consumers would pay taxes on a great many things that may not intuitively seem like consumption. The list would include:

• Purchases of new homes
• Rent
• Interest on credit cards, mortgages and car loans
• Doctor bills
• Utilities
• Gasoline (30 percent in addition to current taxes, which would not be repealed)
• Legal fees

At today’s prices, gasoline would cost almost $1 per gallon more. A $150,000 new home would run $195,000 – plus the 30 percent tax that the buyer would pay on the interest on the mortgage. In short, the FairTax taxes everything that one buys, with the one notable exception of education. Any exceptions to the tax base (for instance, eliminating rent or credit card interest from the tax base) would require an offsetting increase in the rate."


Factcheck.org also addressed the issue of non-compliance, or cheating, with the fairtax:

Americans for Fair Taxation, however, has complained that H.R. 25 calls for a 23 percent inclusive (or 30 percent exclusive) rate, not a 34 percent rate. Our number came from the President's Advisory Panel on Tax Reform (scroll to chapter 9 for the panel's discussion of the FairTax), which calculated that a 34 percent rate on the actual price of consumer goods would be necessary to make the program revenue-neutral. Americans for Fair Taxation has said that the Advisory Panel did not use the FairTax as detailed in the legislation but instead made up its own plan. This complaint is disingenuous. The Advisory Panel did in fact begin with the 30 percent figure that proponents of the FairTax submitted. But the panel rejected those figures, claiming that they were based, at least in part, on the unrealistic assumption that there would be full compliance with the FairTax. In other words, proponents assume that no one will cheat on taxes. However, the Treasury Department estimates that the evasion rate for the entire U.S. tax system under current law is approximately 15 percent. The Advisory Panel accordingly assumed a 15 percent evasion rate for the FairTax.

More significantly, however, the panel found that FairTax supporters were employing questionable accounting. In calculating federal revenue, proponents assumed that purchases made by the federal government would be taxed at the full 30 percent rate. But when calculating federal expenditures, FairTax proponents did not factor in the additional costs of the 30 percent sales tax. The Advisory Panel thus threw out the revenue from federal purchases, noting (correctly) that increased revenue from taxing federal purchases is exactly canceled by increased costs in the federal budget. Unfortunately, the Advisory Panel has thus far refused to release its methodology, making it difficult to reconcile its projections with those of Americans for Fair Taxation."

So, fairtax's figure of 23% is a lowball because it is really 30% (tax-exclusive), but the 30% is really 34% when you factor in non-compliance. The assumed 34% is applying the tax to goods and services which have zero sales taxes applied to them now. This means that if we keep those goods and services fairtax-free, then the fairtax would have to be increased even more (maybe doubled when you consider that the sales tax applies to only half the consumption base).

Hmmm....the fairtax is looking more and more UNfair to me.....This and the flat tax belong on the junk heap of tax reform proposals.

 

[missionfinder]

not according to FactCheck.org: Unspinning the FairTax

You guys need to dig deeper, to find the real truth behind that article, and Factcheck.org in general.

The article is analysis by a non-economist (Joe Miller, who's degrees are in philosophy and political philosophy) verses a tax that has had 20 years of study and $20 million dollars of research put into the study by economists. The person who advised Mr. Miller for the article: Mr. Gale, the anti-Fair Tax author you originally cited! Using Factcheck to back up Gale is circular in nature. When FairTax.org asked for Mr. Miller research that supports contrary conclusions on several fact subjects, Mr. Miller refused to cite countering research and claimed unnamed sources.

Who is Factcheck.org? Annenberg Public Policy Center at the University of Pennsylvania is the organization which sponsors FactCheck.org. Its director wrote an anti-conservative piece entitled "Echo Chamber: Rush Limbaugh and the Conservative Media Establishment." The Annenberg Public Policy Center is supported by the Annenberg Foundation. Bill Ayers (leftest activist and co-founder of Weather Underground) helped secure the $49.2 million dollars from the Annenberg Foundation to create the Chicago Annenberg Challenge organization. Even CNN dug into and backed this up. Who was the founding Chairman of the Board for the Anneberg Challenge: Barack Obama

That's a strange turn of events, isn't it? Especially considering the APPC was founded by a conservative and his heirs took it in the opposite direction! If you want, I can detail several articles Factcheck.org got wrong, through omission and factual errors.

maybe you should read the whole article.

I did. I also dug into the background, as noted above. The more anti-Fair Tax information is put out there, the more the trail leads to the left, often citing each other as sources.

 

[scrabbler1]

You guys need to dig deeper, to find the real truth behind that article, and Factcheck.org in general.

The article is analysis by a non-economist (Joe Miller, who's degrees are in philosophy and political philosophy) verses a tax that has had 20 years of study and $20 million dollars of research put into the study by economists. The person who advised Mr. Miller for the article: Mr. Gale, the anti-Fair Tax author you originally cited! Using Factcheck to back up Gale is circular in nature. When FairTax.org asked for Mr. Miller research that supports contrary conclusions on several fact subjects, Mr. Miller refused to cite countering research and claimed unnamed sources.

Who is Factcheck.org? Annenberg Public Policy Center at the University of Pennsylvania is the organization which sponsors FactCheck.org. Its director wrote an anti-conservative piece entitled "Echo Chamber: Rush Limbaugh and the Conservative Media Establishment." The Annenberg Public Policy Center is supported by the Annenberg Foundation. Bill Ayers (leftest activist and co-founder of Weather Underground) helped secure the $49.2 million dollars from the Annenberg Foundation to create the Chicago Annenberg Challenge organization. Even CNN dug into and backed this up. Who was the founding Chairman of the Board for the Anneberg Challenge: Barack Obama

That's a strange turn of events, isn't it? Especially considering the APPC was founded by a conservative and his heirs took it in the opposite direction! If you want, I can detail several articles Factcheck.org got wrong, through omission and factual errors.



I did. I also dug into the background, as noted above. The more anti-Fair Tax information is put out there, the more the trail leads to the left, often citing each other as sources.

This was at the end of factcheck.org's article about the fairtax (emphasis mine):

We did not ignore Americans for Fair Taxation’s research. Much of that research is publicly available and is listed among our sources. We do, however, approach all evidence with a healthy skepticism – including research that is funded by the very group whose claims we are investigating. Where possible we rely upon neutral sources, such as the bipartisan President’s Advisory Panel on Federal Tax Reform, and on opinions from third-party scholars from think tanks like the Brookings Institution and the Cato Institute.

I will trust factcheck.org's more balanced research over that from the fairtax's website which is surely one-sided in favor of....fairtax.

BTW, I first learned of factcheck.org from Vice President Dick Cheney during the 2004 VP debate. Also, Brooks Jackson and factcheck.org were profiled by Chris Wallace on Fox News Sunday's "Power Player of the Week" back in 2008.

The factcheck article includes research by the President's Advisory Panel on Tax Reform. That's Presdent Bush, not Obama. The factcheck article also includes research by the Cato Institute, hardly a friend of the Left. Also remember that the factcheck article was published in 2007, well before Obama became president.

Even if you don't like William Gale, there is plenty else in the article which points out the flaws in the fairtax, none of which you have challenged.

 

[Independent]

Please go read the research that's gone into it: Fairtax.org

The average cost of embedded taxes in most goods and services is 22%. The Fair Tax is 23%. The price of goods on average will go up 1%. So that $2400 you quoted is really $1840. Now, factor in the compliance savings and the real price increase is $80, and that's on a large purchase.

I've previously read his report. He's one economist making a case against it. 80 economists (at least) have gone on record supporting it:

Americans For Fair Taxation: An Open Letter to the President, the Congress, and the American people Concerning Reform of the Federal Tax Code

We'll just have to differ on this one. However, I will present a one-by-point rebuttal of the Gale paper, including points that the Gale paper didn't even post accurate data about sales tax evasion being reported by other governments:

http://www.fairtax.org/PDF/GaleRebuttal.pdf

It's probably time to start a "National Sales Tax" thread in Political.

 

[Independent]

If I were king for a day I would do the following to revise the tax code, any thoughts ?

For starters:

Eliminate all refundable credits; the tax code should not be geared for social engineering and welfare. This means the elimination of the EITC (earned income credit), additional child tax credit, adoption credit, American Opportunity Education credit, to name a few.

Eliminate all schedule A deductions with the exception of state/sales/property taxes. This means the elimination of charitable contributions, mortgage interest, un-reimbursed business expenses and medical expenses for starters.

Have one tax form and a flat tax rate, graduated based on income. 10% on the first $100K, 20% for the second $100K and a max of 30% on the third $100K, with 30% being the max tax rate on all personal income over $300K.

Require all tax preparers to be licensed by the IRS.

Eliminate all tax refund loan schemes perpetrated by tax preparation businesses.

Eliminate short term and long term capital gains rates and tax gains at regular ordinary income tax rates. Eliminate the carry forward of losses.

Eliminate the taxation of social security benefits.

Keep schedules, B,C,D,E, F.

You're mostly preaching to the choir here. About 90% of us said we'd take the Simpson/Bowles plan. It included a massive simplification of the income tax.

I'd go further along that road than you. I wouldn't allow deductions for state taxes, I'd tax SS as ordinary income, etc.

 

[missionfinder]

This was at the end of factcheck.org's article about the fairtax (emphasis mine):

We did not ignore Americans for Fair Taxation’s research. Much of that research is publicly available and is listed among our sources. We do, however, approach all evidence with a healthy skepticism – including research that is funded by the very group whose claims we are investigating. Where possible we rely upon neutral sources, such as the bipartisan President’s Advisory Panel on Federal Tax Reform, and on opinions from third-party scholars from think tanks like the Brookings Institution and the Cato Institute.

I will trust factcheck.org's more balanced research over that from the fairtax's website which is surely one-sided in favor of....fairtax.

Of course Fair Tax's web site is in favor it! Does that negate the endorsement of 80 economists, 20 years and $20 million of research? People from all political walks of life.

BTW, I first learned of factcheck.org from Vice President Dick Cheney during the 2004 VP debate.

Each political side uses what they can as ammo when it supports them. At some points in the campaign both sides were using it as ammo (and Factcheck got some facts wrong then as well, on both sides). Both Bush and the left got it wrong with the Fair Tax. This is not surprising since it takes power out of Washington's hands since loop holes can't be lobbied.

Funny how you learned about factcheck.org from Dick Cheney's mention at the debate... he mentioned factcheck.com which directed visitors to an anti-Bush website owned by George Soros.

Also, Brooks Jackson and factcheck.org were profiled by Chris Wallace on Fox News Sunday's "Power Player of the Week" back in 2008.

Yes, Brooks Jackson, who left CNN to go to Factcheck, and factcheck.org were profiled. The same profile where Wallace said "But some insiders say that doesn't mean they're always right."

The factcheck article includes research by the President's Advisory Panel on Tax Reform. That's Presdent Bush, not Obama.

President Bush's Advisory Panel on Tax Reform did not score the Fair Tax as it was written. They made changes to its terms and then scored it. Bush's panel got it wrong and Factcheck.org was using a flawed source.

The factcheck article also includes research by the Cato Institute, hardly a friend of the Left.

It included a quote taken from the Cato Institute's writings concerning consumption taxes. It failed to mention Cato Institute saying this:

"The shift in tax structures is predicted, in the long run, to raise the stock of U.S. capital by at least 29 percent and potentially by as much as 49 percent and to raise U.S. living standards by at least 7 percent and potentially by as much as 14 percent."

"A national sales tax would eliminate many of the distortions of current income taxes. It would do away with the differential tax treatment of corporate and noncorporate businesses, which distorts business decisions; of capital gains and dividends, which affects decisions about retaining earnings; and of investment in equipment, structures, and inventories."

"Switching to a national sales tax from the income tax would also improve the efficiency of the economy by eliminating a host of economic distortions that have arisen under our current tax structure. Of course, a national sales tax would introduce distortions of its own, but the net impact of replacing federal income taxes with a national sales tax would, it appears, be a significant overall reduction in the misallocation of economic resources."

"Under a revenue neutral form, switching to a flat consumption based might increase US incomes by 10 in the long run."

"As a side benefit, the Washington game of lobbying for loopholes would be starved as rates fell and the value of narrow breaks was reduced."

"For one thing, tax reform would reduce the roughly $200 billion in annual compliance costs of the tax system."

"Replacing the income tax with a consumption based system would achieve consistent tax treatment for families and businesses, and there would be no need for a special add-on tax." (referring to the AMT)

Also remember that the factcheck article was published in 2007, well before Obama became president.

How does the date Obama became president negate Factcheck's connections to the far left?

Even if you don't like William Gale, there is plenty else in the article which points out the flaws in the fairtax, none of which you have challenged.

I posted the rebuttal:

Americans For Fair Taxation: Weekly Feature

I don't think we'll ever agree on it, just pissing in the wind, all of us. For me, I don't think Fair Tax is perfect, but its the best plan I've seen.

 

[scrabbler1]

Our audience is not so much each other but the others here who are unfamiliar with fairtax. I did not want them to read only what you wrote and what is prominently shown in the fairtax website without reading something from the other side, those who oppose fairtax. You can't argue with factcheck's algebra when it comes to explaining the difference between inclusive and exclusive when it comes to figuring out how the amount of the fairtax is calculated. If our fellow readers here want to think of it as 23% of the total with-fairtax amount (i.e. $23 of a total $100 purchase) then they can do so. But if they want to think of it as 30% of the without-fairtax amount (i.e. $23 added to an item with a $77 price tag), then they can do so as well. Both are algebraically correct. To present only one of these percentages (the lower one more favorable to fairtax), as you did in an earlier post, is shortchanging the reader. [I feel the 30% figure is more appropriate.]

I also wanted to list all the items which were part of the fairtax's consumption base, meaning that they would be subject to the fairtax, so our audience here would know how that base would be different from the base of items they are used to seeing which were subject to other, similar taxes such as sales taxes. This is shown in the fairtax's website, http://www.fairtax.org/PDF/Tax Notes article on FT rate.pdf page 665, not easily found compared to the items which boast about the fairtax.

These two items are the ones which cause me to be opposed to the fairtax.

 

[missionfinder]

Our audience is not so much each other but the others here who are unfamiliar with fairtax. I did not want them to read only what you wrote and what is prominently shown in the fairtax website without reading something from the other side, those who oppose fairtax. You can't argue with factcheck's algebra when it comes to explaining the difference between inclusive and exclusive when it comes to figuring out how the amount of the fairtax is calculated. If our fellow readers here want to think of it as 23% of the total with-fairtax amount (i.e. $23 of a total $100 purchase) then they can do so. But if they want to think of it as 30% of the without-fairtax amount (i.e. $23 added to an item with a $77 price tag), then they can do so as well. Both are algebraically correct. To present only one of these percentages (the lower one more favorable to fairtax), as you did in an earlier post, is shortchanging the reader. [I feel the 30% figure is more appropriate.]

To be fair, pardon the pun, the Fair Tax uses inclusive because that's the same way the income tax is presented. It gives people an apples to apples comparison. Using the same comparison methods...

Fair Tax at 23% inclusive (which is how it is presented) = 29.9% exclusive.
Income tax at 23% inclusive (which is how the government presents it and how people refer to it when they state their tax rate) = 29.9% exclusive

Comparing inclusive to exclusive, especially by a site which claims neutrality, is manipulative.

I also wanted to list all the items which were part of the fairtax's consumption base, meaning that they would be subject to the fairtax, so our audience here would know how that base would be different from the base of items they are used to seeing which were subject to other, similar taxes such as sales taxes. This is shown in the fairtax's website, http://www.fairtax.org/PDF/Tax Notes article on FT rate.pdf page 665, not easily found compared to the items which boast about the fairtax.

These two items are the ones which cause me to be opposed to the fairtax.

I can understand your reasoning, but understand the big reason why the consumption base is broad is to prevent the very thing we have now: special interests gaming the system for exemptions and loop holes. Fair Tax never tried to bury these, as a matter of point one of its biggest proponents covers these in his two books "The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS" and "FairTax: The Truth: Answering the Critics".

 

[scrabbler1]

To be fair, pardon the pun, the Fair Tax uses inclusive because that's the same way the income tax is presented. It gives people an apples to apples comparison. Using the same comparison methods...

Fair Tax at 23% inclusive (which is how it is presented) = 29.9% exclusive.
Income tax at 23% inclusive (which is how the government presents it and how people refer to it when they state their tax rate) = 29.9% exclusive

Comparing inclusive to exclusive, especially by a site which claims neutrality, is manipulative.

Totally, totally disagree. The 30% is the apples-to-apples comparison because the fairtax is applied to money spent, the same way a sales tax (and the fairtax describes itself as a national sales tax) is applied to money spent. When anyone buys an item at Target (for example), the price tag shows a price which excludes any sales taxes. If that item's price tag shows a $77 price, then when that person gets to the checkout line the cashier will add any applicable taxes such as sales taxes and, if the fairtax is adopted, the fairtax of $23. The fairtax will be shown on the itemized receipt as 29.9% of the price shown on the price tag, the same way current sales taxes are shown as x% of the pre-tax price shown on the price tag.

The fact that the fairtax is replacing the income tax, a tax which is expressed as a percentage of money received, not money spent, is irrelevant. All adjustments to income which are a percentage of income such as those found on a paystub, are expressed as a percentage of the gross pay, not the net (after-tax and after-adjustments) pay.

Expressing the fairtax as a percentage of the pre-tax price paid for a good or service the same way other similar taxes (i.e. sales) are expressed as a percentage of the pre-tax price for the good or service is the apples-to-apples comparison. That's how people look at sales taxes and other items appended to the basic price of an item to get the final price. Do you really think that someone looking at a store receipt will care how the fairtax compares to the income tax it replaced?

Describing the fairtax's rate as inclusive when other taxes based on a pre-tax price are exclusive is manipulative. Factcheck is presenting a far more realistic and more easily understood evaluation of the fairtax by stating that the 30% exclusive rate is the applicable one.

I learned about fairtax long before factcheck did its article on it. As soon as I learned that the 23% was inclusive I quickly did the algebra myself to see what the "real" rate was, 30%. The 23% rate was an interesting figure but was of no relevance to me other than a distraction and misrepresentation of what the applicable tax rate on purchases was.

I can understand your reasoning, but understand the big reason why the consumption base is broad is to prevent the very thing we have now: special interests gaming the system for exemptions and loop holes. Fair Tax never tried to bury these, as a matter of point one of its biggest proponents covers these in his two books "The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS" and "FairTax: The Truth: Answering the Critics".

I can understand that the fairtax has a different consumption base. But I maintain that in the fairtax's website it is not easy to find the defintion of this expanded consumption base. It was under Note 1 of the Fairtax's Basics. A vastly different and expanded consumption base should be more prominently displayed to visitors because it very important for them to know that many items, including some big-ticket ones, will become subject to the fairtax.

 

[photoguy]

I have to say that I did not look at either the fairtax or factcheck sites before this thread (and the other tax thread) started. But presenting a retail sales tax as inclusive seems extremely misleading to me because everybody will naturally compare it to the exclusive sales tax they pay now.

If fairtax wanted to be "fair" they should say 30% sales tax (23% inclusive) and present both numbers.

 

[Texas Proud]

To be fair, pardon the pun, the Fair Tax uses inclusive because that's the same way the income tax is presented. It gives people an apples to apples comparison. Using the same comparison methods...

Fair Tax at 23% inclusive (which is how it is presented) = 29.9% exclusive.
Income tax at 23% inclusive (which is how the government presents it and how people refer to it when they state their tax rate) = 29.9% exclusive

Comparing inclusive to exclusive, especially by a site which claims neutrality, is manipulative.



I can understand your reasoning, but understand the big reason why the consumption base is broad is to prevent the very thing we have now: special interests gaming the system for exemptions and loop holes. Fair Tax never tried to bury these, as a matter of point one of its biggest proponents covers these in his two books "The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS" and "FairTax: The Truth: Answering the Critics".

A couple of points... first... I will say this is a good back and forth... and interesting to read...


But, anybody who thinks that the IRS will be desolved if we go to any other taxing method has to be smoking some strong weed.... no matter what system we got to, there will be cheats... and there needs to be a group of people who go after those cheats... I dare you to show me any first world country that does not have a tax collection group...

My second big complaint with the fairtax as presented (and I have not read a whole lot)... is that they are using static analysis (from what I can tell).... who is going to continue with their same spending habits when some things cost 23% (or 30%) more? It does not matter if you have more income due to the other taxes going away... and even getting a prebate... you now have to make decisions on where you want your money to go based on the new prices... I would bet that people's priorities will change...

 

[Independent]

A couple of points... first... I will say this is a good back and forth... and interesting to read...


But, anybody who thinks that the IRS will be desolved if we go to any other taxing method has to be smoking some strong weed.... no matter what system we got to, there will be cheats... and there needs to be a group of people who go after those cheats... I dare you to show me any first world country that does not have a tax collection group...

..

I'll agree. Efforts to evade taxes depend partially on the tax rate. My state has a 7% sales tax rate. Add a federal sales tax to that and the incentive to not report sales is just as big as the current incentive to not report income. Note also that the prebate system generates a new incentive to cheat.

I fail to see any benefits of a national sales tax that can't be accomplished more easily by simplifying the FIT.

 

[M Paquette]

DW and I were chuckling over the current tax code and it's odd side effects last night. We don't have any sort of official pension or retirement plan, and simply live off of our investments. DW has a part-time job, pretty much for fun.

This results in a really entertaining tax return. By the time I got done plonking in all the assorted deductions, including medical expenses (health insurance premiums), sales tax on a car purchase and home improvements, two daughters in college, and so on, I not only had an effective tax rate of 0%, but I was also eligible for a couple of tax credits. Yeah, the return paper stack is huge, but that's Someone Else's Problem. I figure the credits are compensation for generating all this paper for some poor soul in the IRS, between the fifth and sixth circles of Hell, to read and justify his existence.

So, I'm retired, living very comfortably on investment income, paid no Federal taxes, and am getting money for nothing. *SNORT* Tell me the current federal tax system isn't broken, when even a putz like me can zero out taxes perfectly legally.

(Our state taxes are simpler, without all the fancy deductions, so I have to pay them a little bit, except for income from gummint bonds, of course.)

 

[jdw_fire]

I fail to see any benefits of a national sales tax that can't be accomplished more easily by simplifying the FIT.

if i understand the FairTax website i think one of their suggested advantages is that since 22% (on average) of every new item's cost is federal tax (of 1 sort or another, including the FIT and payrole tax paid by the employees) eliminating all those federal taxes will lower the price of those items by that amount which would make our products and services more competative overseas, thus raising our exports. (switching to a national sales tax will also raise the price of imports.) for this to actually work though all working people would have to take a paycut (by the amount of their income and payrole taxes, since they are included in that "average 22% of each item's cost is federal tax") which i think is very unlikely. so the item's price can only be lowered buy the amount of fed tax the business is paying directly (which is not 22% of the original cost of said item) but the business is under no obligation to do that lowering. what might happen is that the cost of everything we spend money on just goes up 30%.

btw i dont really understand how the sales tax on interest will be collected in all situations. from what i have read there will be a sales tax on interest paid but who collects it? granted that is easy in the case of a mortgage to a bank or credit card interest but what about a mortgage to a private person (seller financing). who collects and how do they pay the feds? if the seller is responsible then this would be complicated for this individual. sounds like a tax return. and what about when an individual buys a bond, does he charge the bond issuer sales tax?

another thing, this sales tax applies to services too soo when you hire the kid down the street to mow your lawn that kid is supposed to collect the sales tax. i am thinking this "FairTax" wont make things all that simpler.

 

[missionfinder]

if i understand the FairTax website i think one of their suggested advantages is that since 22% (on average) of every new item's cost is federal tax (of 1 sort or another, including the FIT and payrole tax paid by the employees) eliminating all those federal taxes will lower the price of those items by that amount which would make our products and services more competative overseas, thus raising our exports. (switching to a national sales tax will also raise the price of imports.) for this to actually work though all working people would have to take a paycut (by the amount of their income and payrole taxes, since they are included in that "average 22% of each item's cost is federal tax") which i think is very unlikely. so the item's price can only be lowered buy the amount of fed tax the business is paying directly (which is not 22% of the original cost of said item) but the business is under no obligation to do that lowering. what might happen is that the cost of everything we spend money on just goes up 30%.

When they are talking about is the costs of compliance and the taxes the company pays, not the individual's payroll taxes which come out of his checks so salaries should not be impacted. By the time a company pays accountants, pays employees to help comply with tax code, (or in the case of a small business, spends time doing paperwork when he/she can otherwise be putting the time to product money making use), pays their own taxes, pays their portion of ss, etc, the costs are 22% on average. This is the embedded costs from the entire supply chain on average (materials, manufacture of parts, assembly, etc.). Of course it varies by industry but averages out to 22%. Some prices will go up slightly more than 1%, some prices will go down.

Now about businesses who don't lower costs due to savings: they are slitting their own throats. Business is competitive. If the guy down the street doesn't lower prices, all his customers will know it. If I, as his competitor, have just seen the cost of operating my business go down tremendously, you can bet your ass I'm going to undercut him. He'll lose in the market place if he doesn't lower prices, the competitor will win. First to drop prices (my bet): Walmart since they squeeze every penny in competitive efficiency they can. KMart and others will have to follow, as well as grocers. It'll cascade pretty fast.

btw i dont really understand how the sales tax on interest will be collected in all situations. from what i have read there will be a sales tax on interest paid but who collects it?

There won't be tax on interest paid.

"No tax on initial spending up to the HHS poverty level for ALL households determined by number of dependents only. Paid for with before tax dollars, there is no tax on any used items, no tax on any and all savings or investment, no tax on any business profits, no tax on any education expenses, no tax on any existing mortgage or other loan payments both interest and principal, no tax on any charitable giving, no tax on any estate and gift giving, No tax on ALL State and Local taxes paid. No tax on business to business transactions. No filing of any kind is necessary at the end of the year to receive a tax refund on any of the tax exempt items, as no tax was
actually paid initially on these items when the purchase or saving, or giving took place."

New Goods & Services only at the point of end use retail.

granted that is easy in the case of a mortgage to a bank or credit card interest but what about a mortgage to a private person (seller financing).

No tax on used items, including homes so seller financing is not taxed.

who collects and how do they pay the feds?

No one, no tax on it.

if the seller is responsible then this would be complicated for this individual.

Nope, seller is not responsible. New item sales only (ie, retailers).

sounds like a tax return. and what about when an individual buys a bond, does he charge the bond issuer sales tax?

Nope, no tax return.

another thing, this sales tax applies to services too soo when you hire the kid down the street to mow your lawn that kid is supposed to collect the sales tax.

Nope, he's just a kid mowing lawns, not a business. Same thing happens these days... some kid mowing lawns isn't paying taxes on it.

i am thinking this "FairTax" wont make things all that simpler.

Only because you based that information about what is taxed, when they aren't taxed. It really is simple: new goods and services only, to the end consumer only.

 

[jdw_fire]

now i am thinking you have not done your research

When they are talking about is the costs of compliance and the taxes the company pays, not the individual's payroll taxes which come out of his checks so salaries should not be impacted. By the time a company pays accountants, pays employees to help comply with tax code, (or in the case of a small business, spends time doing paperwork when he/she can otherwise be putting the time to product money making use), pays their own taxes, pays their portion of ss, etc, the costs are 22% on average. This is the embedded costs from the entire supply chain on average (materials, manufacture of parts, assembly, etc.). Of course it varies by industry but averages out to 22%. Some prices will go up slightly more than 1%, some prices will go down.

here is a quote (bolding is mine) from one of the coauthors, Neal Boorzt, of the fair tax book where he more fully explains the 22% (on average) fed tax in all goods and services here in the US. (and here is the link September 15, 2005 on boortz.com)

As explained in The FairTax Book, there are taxes embedded in everything we buy. Every entity which provides a product or service in the design, production, marketing, distribution and sale of every consumer good or service will incur some tax liability as they perform their particular function. This tax liability will be incorporated into whatever these individuals or business entitles charge for their services, and will all passed through to become a part of the final cost of the product or service.
Now here's what we didn't explain well in the book. Every employee of any company involved in American commerce is also a provider of a service, and, as such, the employee incurs a tax liability as a result of his or her work. This tax liability is incorporated into what the employee charges the employer for their services, and is eventually incorporated into the final retail cost of the employer's product or service. Each employee is essentially a separate business entity providing a product, be it physical or mental labor, to the employer.
The extensive research behind HR 25, The FairTax Bill, shows that the average embedded taxes in every consumer product or service is about 22%.

your response to my discussion on this topic doesnt agree with the guy who thought up the FairTax, however my point is completely consistant with this. sooo i think my observation about what would happen if the fairtax was enacted stands as your rebuttal isnt based in fact.

There won't be tax on interest paid.

"No tax on initial spending up to the HHS poverty level for ALL households determined by number of dependents only. Paid for with before tax dollars, there is no tax on any used items, no tax on any and all savings or investment, no tax on any business profits, no tax on any education expenses, no tax on any existing mortgage or other loan payments both interest and principal, no tax on any charitable giving, no tax on any estate and gift giving, No tax on ALL State and Local taxes paid. No tax on business to business transactions. No filing of any kind is necessary at the end of the year to receive a tax refund on any of the tax exempt items, as no tax was
actually paid initially on these items when the purchase or saving, or giving took place."

and here is a quote from another document on FairTax website which shows there is tax due on interest paid http://www.fairtax.org/PDF/Tax Notes article on FT rate.pdf

Implicit financial intermediation services are defined
by H.R. 25 as the difference between the basic interest
rate (as defined in section 805) and the rate paid on an
investment, account, or debt. The difference between
actual interest payments (for example, new home mortgage
interest) and basic interest payments (the 10-year
bond yield) is taxable. Thus, for example, a taxpayer with
a mortgage rate of 7 percent would have 29 percent of the
mortgage interest payment subject to tax if the Treasury
rate were 5 percent. Implicit financial intermediation
services are not included in the accounting of personal
consumption expenditures in NIPA. Consequently, we
have calculated our own values for implicit financial
intermediation services for home mortgage, nonprofit,​

and personal borrowing.

​

​

5​

and boy that sounds complicated. you need to do more research​

Nope, he's just a kid mowing lawns, not a business. Same thing happens these days... some kid mowing lawns isn't paying taxes on it.​

Only because you based that information about what is taxed, when they aren't taxed. It really is simple: new goods and services only, to the end consumer only.

and here are quotes from HR 25 itself which show tax will be due on that mowed lawn.

(12) TAXABLE EMPLOYER-​

(A) IN GENERAL- The term `taxable employer' includes--​

(i) any household employing domestic servants, and​

(ii) any government except for government enterprises (as defined in section 704).​

(B) EXCEPTIONS- The term `taxable employer' does not include any employer which is--​

(i) engaged in a trade or business,​

(ii) a not-for-profit organization (as defined in section 706), or​

(iii) a government enterprise (as defined in section 704).​

(14) TAXABLE PROPERTY OR SERVICE-​

(A) GENERAL RULE- The term `taxable property or service' means--​

(i) any property (including leaseholds of any term or rents with respect to such property) but excluding--​

(I) intangible property, and​

(II) used property, and​

(ii) any service (including any financial intermediation services as determined by section 801).​

(B) SERVICE- For purposes of subparagraph (A), the term `service'--​

(i) shall include any service performed by an employee for which the employee is paid wages or a salary by a taxable employer, ...​

all the bolding is mine and it shows that tax is due on any wage paid to a domestic servant by a household. you were incorrect through your entire rebuttal of my post however in my research i have determined who is responsible for getting the tax to the US government in this last example and it is the taxable employer, not the kid mowing the lawn.​

 

[Rustic23]

Fair Tax, Flat Tax, Income Tax, Sales Tax, Value Added Tax, it makes no difference. Nothing is really going to change. The politicians will end up with a system to punish some and reward others. Nothing will be passed that does not increase current collections. There are not enough politicians that care more about the people that elected them rather than the people that can get the re-elected, and they won't change anything that is not in their favor. All this is going to do is generate more campaign contributions from all sides. It is one of they reasons the keep it alive, and never really do anything about it. When they can no longer milk the donors they will drop it or pass something.

 

[samclem]

I fail to see any benefits of a national sales tax that can't be accomplished more easily by simplifying the FIT.

Though not a booster of the National Retail Sales Tax, I think the strongest arguments for it (compared to a simplified FIY) are:
-- The prospect of significantly enhancing US competitiveness in manufacturing. The reduced embedded labor costs, the reduced costs of US produced sub-materials that also won't have embedded tax costs, the incentives to bring capital to the US where it can be invested and produce returns for corporations tax free, are all benefits that would be hard to duplicate with any income-based FIT.

-- The opportunity to remove a means for government to manipulate behavior and shower gifts on favored constituencies via the tax code. Of course, this depends on keeping any NRST code free of carrots, sticks, and giveaways (e.g. the temptation to adjust tax rates on various favored products, the fiddling with the prbate/poverty level figure to make the system more progressive, etc). Good luck with that!

-- To the degree that any tax affects behavior, it seems a poor idea to tax something that benefits society (productivity). It's less clear that consumption has the same beneficial impact on society.

 

[Rustic23]

Manipulate behavior, well we want people to eat more veggies and less cake, so we will adjust the sales tax to punish/reward. You can just about fill in any other thing you want, ethanol, oil, farm products, auto production equipment.... it just depends on who forks over the most cash.

 

[samclem]

Fair Tax, Flat Tax, Income Tax, Sales Tax, Value Added Tax, it makes no difference. Nothing is really going to change. The politicians will end up with a system to punish some and reward others.

Do you remember this text box (or one like it) from Tongue and Quill? A favorite of mine.

Circa 1920:

"For the following reasons I am unable to send you the check asked for:
I have been held up, held down, sand-bagged, walked on, sat on, flattened out and squeezed. First, by the United States Government, for Federal War Tax, the Excess Profit Tax, the Liberty Loan Bonds, Thrift Stamps, Capital Stock Tax, Merchants License and Auto Tax, and by every Society and Organization that the inventive mind of man can invent, to extract what I may or may not possess.

From the Society of John the Baptist, the G.A.R., the Women's Relief, the Navy League, the Red Cross, the Black Cross, the Purple Cross, the Double Cross, the Children’s Home, the Dorcas Society, the Y.M.C.A., the Boy Scouts, the Jewish Relief, the Belgian Relief, and every hospital in town.

The Government has so governed my business that I don’t know who owns it. I am inspected, suspected, and examined and re-examined, informed, required and commanded so I don’t know who I am, where I am, or why I am here. All I know is I am supposed to be an inexhaustible supply of money for every known need, desire or hope of the human race; and, because I will not sell all I have and go out and beg, borrow or steal money to give away, I have been cussed, discussed, boycotted, talked to, talked about, lied to, lied about, held up, hung up, robbed and nearly ruined; and, the only reason I am clinging to life is to see what in the hell is coming next."

 

[Rustic23]

Have not seen it, thanks.

 

[Independent]

Though not a booster of the National Retail Sales Tax, I think the strongest arguments for it (compared to a simplified FIY) are:
-- The prospect of significantly enhancing US competitiveness in manufacturing. The reduced embedded labor costs, the reduced costs of US produced sub-materials that also won't have embedded tax costs, the incentives to bring capital to the US where it can be invested and produce returns for corporations tax free, are all benefits that would be hard to duplicate with any income-based FIT.

-- The opportunity to remove a means for government to manipulate behavior and shower gifts on favored constituencies via the tax code. Of course, this depends on keeping any NRST code free of carrots, sticks, and giveaways (e.g. the temptation to adjust tax rates on various favored products, the fiddling with the prbate/poverty level figure to make the system more progressive, etc). Good luck with that!

-- To the degree that any tax affects behavior, it seems a poor idea to tax something that benefits society (productivity). It's less clear that consumption has the same beneficial impact on society.

I believe that you and I have both said in the past that one simplification of the existing FIT would be to increase taxes on dividends and capital gains up to the same rates as wages in exchange for a decrease/elimination/offset of corporate income taxes. That accomplishes the first goal (and I believe most economists would say that isn't even a worthy goal).

I agree with the part in the second that I bolded. A national sales tax is just as likely to look like swiss cheese as an income tax.

If we want to favor saving/investing over consumption, the current FIT already has financial incentives for saving. They can be expanded or modified as we desire. For most working Americans, we already have a consumption tax, since any savings go into tax deferred accounts like 401ks or IRAs.

OTOH, I don't why we want to skew the tax system to discourage consumption. I thought the whole point of an economic system was to provide economic goods to people. So I see consumption as the goal. I understand that we might increase consumption in the future if we trade off some consumption today in exchange for productivity gains. But, I don't see why we would believe that the market, which automatically provides incentives for saving/investing, is so far wrong that we need to design a tax system to "correct" some error.