Wed
Dec 26 2007
03:47 pm

Today's Wall Street Journal has a convincing editorial on the Fair Tax concept:

(link...)

The only arguments which I have heard against the concept is that it is very regressive and harmful to those at the lowest rungs of society's economic ladder but the referenced article discusses the idea of "pre-bate" to protect the neediest.

So what are the pragmatic, rather than the ideological, arguments against the concept of the "fair tax"?

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metulj's picture

"So what are the pragmatic,

"So what are the pragmatic, rather than the ideological, arguments against the concept of the "fair tax"?"

That it is very regressive and harmful to those at the lowest rungs of society's economic ladder.

True happiness is knowing you are a hypocrite. -- Ivor Cutler

Bill Pittman's picture

Lowest rungs harmed?

but wouldn't the "prebate check" equal to the tax up to a certain level alleviate the harmfulness of the effect?

Plus, in theory, these folks would pay less as prices wouldn't necessarily remain higher----as corporate taxes & the various payroll taxes are eliminated throughout the supply chain, competitors would compete from a lower cost standpoint and prices would find an economic "resting place". This, coupled with the "prebate", seem to be a pragmatic answer to the ideological problem of the regressive nature.

The positives of simplicity, less costly (accountants, tax lawyers, lobbyists, etc.) along with the long term benefit of having an empahsis on savings seems compelling to me at this point.

metulj's picture

My point is that the

My point is that the practical problem is the regressiveness. The problem is the conflation of a perceived regressiveness of a tax and assuming that perception is ideological. It isn't. You can quantify it. Sales taxes are, by all accounts, hard on the poor, for example. The word "regressive" has a technical meaning. As for the "pre-bate," this is as problematic as the earned income credit, people who do not bother with incomes taxes, filing them and what not, are not going to access such a pre-bate." Progressive, multi-tiered tax systems work, except when they interfere with the extraction of more discretionary income from those who can least afford to lose it.

Simple solutions do not exist for complex problems. Occam never imagined international monetary markets or global commodity chains.

True happiness is knowing you are a hypocrite. -- Ivor Cutler

jah's picture

There are some appealing

There are some appealing sounding arguments to the flat tax. But it's more helpful to look at the negatives and the reality. For example, as has been said (cubes, metulj), the flat tax (it's not fair, so don't call it that) is very regressive. By definition, the top earners will be paying far less of their income out in taxes, while the lower wage earners will be paying a huge percentage.

Granted, they give the pre-bate, and that may in some ways help, I don't know. But they would do away with the IRS to create a new system of catching fraudsters. I guarantee that tax fraud would be rampant, as everyone tried to prove that they deserve a prebate, and the new IRS would have to prove that they do or don't. And catch fraud.

And even then, even in the best case scenario, you're lumping the tax on the people right above the prebate, who will be paying the tax and getting no help. They will be paying 40 cents on the dollar just to buy anything.

And that's another thing. Don't believe the "fair tax" folks when they say it's 30%. It's not, and they will tell you that if you corner them. It's 30% on the post tax amount. So you add the tax in (double variable equation) and then tax the whole product. Also, you're trusting them that the 30-40% number is correct, while many people have suggested that the number would be quite a bit higher.

And once again, we would be paying it. It's a regressive tax because it's regressive in relation to spending potential. They call it flat because it's flat in relation to spending, not spending potential. Those who have the most ability to pay tax will be paying nothing in relation to what they earn.

gonzone's picture

Administration

Who will set up, administer, and pay for the massive infrastructure necessary for the "pre-bate" system? And who will monitor it, police, and prosecute it?

It was a stupid idea when Forbes proposed it as Flat Tax and it is a stupid idea with the new name. Nothing fair about giving an extreme tax cut to the very wealthiest.

Want fiscal sanity? Eliminate corporate welfare. Let the POS WSJ print that!

Tess's picture

Thank you.

Eliminate the tax breaks for the oil companies for starters. Then we can all quit paying taxes.

Bill Pittman's picture

Good Comments...

Thanks for the very good comments...just a couple of follow ups----

1. I completely agree...terming it "fair tax" is simply marketing; it is purely a consumption tax.
2. I'm not sure what infrastructure would be necessary for the prebate...one answer (just thinking aloud...haven't read this proposed anywhere) would be to make it based upon prior year whereby full-time employees (or employers) would submit a year end paycheck stub in exchange for the prebate. This certainly couldn't be as massive as an IRS system for all..could it?
3. I think Forbes proposal was a "flat-rate" where everyone pays the same rate not a consumption task.
4. Regarding the "upcharge" in pricing, what I have seen is 23%...but again, the many federal taxes below that would be eliminated. I'm sure that corporate America would keep as much as possible but competition might create an equillibrium over time...."if"this actually occurred, it could result in the lowest income brackets paying even less tax than today...just theory obviously.

jah's picture

This certainly couldn't be

This certainly couldn't be as massive as an IRS system for all..could it?

My guess is it'd turn the IRS into a policing board instead. And fraud would be rampant, because it'd be easy to change how much income is earned, especially for sole-proprietors. Oh, and they wouldn't have paycheck stubs at all from the prior year. etc etc, I could spit-ball all day coming up with ways that would have to be policed. And ways it could be gotten around.

Regarding the "upcharge" in pricing, what I have seen is 23%...but again, the many federal taxes below that would be eliminated.

There is no "regardless." The 23% is the number their giving (I was off by 10% - my mistake), but the real number is closer to 30%. But that's assuming that they're right in the first place and that it's not higher than that.

And there is no such thing as "an equilibrium in time." What does that mean? After countless families are pushed out into the street? After the economy is devastated?

Oh, and here's another thought. The new system does away with *all* incentives other than saving. What happens when you take away the mortgage interest deduction? Countless people who were factoring that into their income for tax purposes now make far more than they used to, and are less likely to qualify for the so-called prebate.

And yes, the lowest income tax brackets would theoretically pay less. Theoretically, while the middle class get the shaft. But you're assuming that the system will work right, that the prebate system works right (how is it going to be funded, by the way?). That people can prove that they need the prebate, that the system of handing out checks really works.

Also, "prebate" is a little misleading. They'd still pay every cent of tax that everyone else would, they'd just get a check once a month to help cover some of it.

Bird_dog's picture

prebate for "every American"

The FairTax proposal calls for sending every American a "prebate" check to offset the cost of the national sales taxes paid by those living in poverty.

I don't see where you have to "qualify" for the prebate - perhaps it is based on SS# which even children get. I do have some experience with low-income families who treat the EIC as a windfall and as such it does not raise their standard of living. A prebate would be treated the same, I suspect.

Seems like Milton Freedman proposed a minimum income (negative income tax?) for every American and didn't start taxing until well above that minimum - can't remember.

I do like the idea of eliminating the IRS and taxing consumption, but we can be certain that no matter what scheme is enacted, there will be unintended consequence that cannot be foreseen.

jah's picture

Simply put, as metulj did,

Simply put, as metulj did, it's a regressive tax that hurts the people on the bottom (or, if prebates work, it hurts most the people in the middle) and helps the people on the top, who can best pay the tax in the first place.

jah's picture

'Nother incidentally. What

'Nother incidentally. What happens to state sales tax under this system? It would still be in place, wouldn't it? So wouldn't that add another 10% on top of the federal +30%?

Opinari's picture

Come on...

Who will set up, administer, and pay for the massive infrastructure necessary for the "pre-bate" system? And who will monitor it, police, and prosecute it?

As if the current system isn't a massive infrastructure?

That it is very regressive and harmful to those at the lowest rungs of society's economic ladder.

And how is it regressive when those at the low end would get a prebate of all tax that they would pay in the first place?

The semantics of the Fair Tax are debatable, and I'm glad to see that they've made it into the public discussion. And, I might add, I'm not sold on the idea yet insofar as how it would be implemented. But I believe it has merits, and the two points above are not reasons to shun the Fair Tax.

metulj's picture

The prebate is a

The prebate is a non-starter. If the people who don't file for the EIC are going to be expected to go through the hoops for the prebate, you are kidding yourself. I can't see how the fraud potential can just be brushed away. The current system is so rife with middle to upper class fraud. Everyone and their brother is an expert on how to avoid taxes and what not.

I like the name too "Fair Tax." Let's put "Fair" on the front of every idea. It makes it OK. "Fair" Preemptive War. "Fair" Corporate Welfare. What else?

True happiness is knowing you are a hypocrite. -- Ivor Cutler

R. Neal's picture

Seems to me the system we

Seems to me the system we have works pretty well.

Bush and company tell us every month how great our economy is and how it's getting better. Anything and everything can be influenced by a tax cut here or a tax credit incentive there.

So I do think what we have works and is relatively fair. I pay a lot of taxes, and I get a lot in return, like the greatest land of professional and economic opportunity in the world, interstate highways, cable HDTV, relatively clean and competent hospitals, electricity and running water, superior armed forces to protect me from foreign threats, outstanding police, fire, and EMT protection here at home, pretty good schools, the Great Smoky Mountains National Park, Al Gore's internets and Amazon, health care and retirement pensions for my Mom and Dad, Starbucks, LL Bean, phones that work, safe working conditions and fair wages, restaurant inspections, and on and on.

I also think there are a lot of exemptions and deductions and loopholes that could be eliminated to make sure everyone including corporations pay their "fair" share and simplify what we have.

Opinari's picture

Influencing Behavior with the Tax Code

Anything and everything can be influenced by a tax cut here or a tax credit incentive there.

That's pretty much the biggest reason I can see for restructuring how federal income taxes are done currently. With a Fair Tax system, influence peddling via the tax code is all but eliminated.

R. Neal's picture

influence peddling via the

influence peddling via the tax code is all but eliminated

On the other hand, tax code is in many cases the only way we have to influence good behavior and punish bad behavior.

bpittman's picture

Good discussion

Good discussion...I'm not sold either way. Randy's points are spot on; I guess I like the savings concept as I see most family's enormous debt as a dangerous longterm proposition and a transition to a consumption tax *might* facilitate a positive change in that regard. I also think we have a pretty good system but I am always reminded of Darwin's quote:

“It is not the strongest species
that survive, nor the most intelligent, but the ones most
responsive to change.”

Thanks for the comments.
Bill

jah's picture

I keep hearing that a

I keep hearing that a consumption tax encourages savings, but I've never heard why.

Yes, higher income people will have more money to invest and earn more off of, but they never pay their share of taxes anyway (eg investing has a lower rate of tax anyway) and haven't they usually been the savers anyway?

I can't see that anyone else will be saving so much, since they'll be paying so much more in taxes at the register. And by they, of course, I mean me.

How much more savings will there be when ipods cost $500 instead of $300?

bpittman's picture

consumption tax

Savings and investments in the stock market would be exempt from capital gains thereby making such decisions more economically attractive.

jah's picture

What? To whom? With what

What? To whom? With what money?

Yes, I'm familiar with the concept, but I'm not so confident in it. They say more people will be saving, but give me a break!

Listen - a certain amount of money will go to the government. That same amount of money (give or take a little for the change in the IRS) will still be going to the government. Who is going to be paying it? The rich will be paying less. That's a fact. That's what a regressive tax does - it taxes the rich less. So who will be putting money in savings? If the rich is taxed less, the not rich is taxed more. And they (we) won't be having money left to put in savings.

mwr's picture

Without getting into tax

Without getting into tax codes that don't yet exist, here's a couple of data points for current tax systems, as far as efficiency is concerned. Comparing what I could find out about the relative tax amounts collected, and what it cost to collect those taxes:

  • Tennessee, most of revenue from sales tax, population 5.6M: spends roughly $108M (Dept of Revenue budget) to collect $27480M (total). ($4907 tax per capita) Ref: TN budget summaries
  • Connecticut, most of revenue from income taxes, population 3.4M: spends roughly $66.9M (Dept of Revenue budget) to collect $15600M. ($4588 tax per capita) Ref: CT budget summaries
  • Federal: spends roughly $10B to collect $2000B. Ref: 1040 Instructions Form

Each of these collect $200-250 for every dollar spent. So the idea of saving tons of money by abolishing the IRS or similar concepts probably isn't realistic. Carry on.

metulj's picture

Yeah. This is lost on some

Yeah. This is lost on some of the "tax the poor" sales tax lovers. Also, the cost of collection of consumption taxes is passed off to the merchants and acts as market constraint in a much more direct sense. These same people scream BIG GOVERNMENT INTERVENTION at everything.

True happiness is knowing you are a hypocrite. -- Ivor Cutler

Bird_dog's picture

more savings

Abolishing the complex tax code would also abolish the entire tax preparation industry. It always amazed me that the low-income families I worked with patronized H&R Block, for a very simple return, just to get their "instant refund". We would even bring in CPA volunteers in Jan/Feb to do it for them and save them $200-300, but they'd have to wait 2 weeks for their "refund".

So the savings would go far beyond just the IRS and professional tax preparers: less headache meds, fewer ulcers, more time to enjoy Spring...

Opinari's picture

Embedded Taxes

How much more savings will there be when ipods cost $500 instead of $300?

Ostensibly, they won't. This is because the taxes that are added as goods are passed from raw materials to assembly to wholesaler to retailer, for example, will not have embedded taxes included in them. That is to say, taxes will be removed from production, distribution, and any related income, and will be transferred to when the product is consumed and/or purchased.

Factchecker's picture

I do like the idea of ...

I do like the idea of ... taxing consumption, but we can be certain that no matter what scheme is enacted, there will be unintended consequence that cannot be foreseen.

In an ideal world, I think taxing consumption could be better, but there is no practical way to make a fair transition from our current system, even if unintended consequences would not pose a major economic threat, which I too think they would.

Any way you slice through the fog of hype to examine who the winners and losers would be, it is a spot-on certainty that a consumption tax, especially a "Fair Tax" one espoused by compassionate conservatives...

...is very regressive and harmful to those at the lowest rungs of society's economic ladder.

bizgrrl's picture

Just out of curiosity, if

Just out of curiosity, if the flat/consumption/fair/sales tax method is better then why don't more states do it (similar to Tennessee) instead of the state income tax?

Rachel's picture

Because in addition to being

Because in addition to being regressive, a sales tax is less elastic than an income tax. That is, when incomes rise, income taxes bring in more additional revenue than do sales taxes. Property taxes fall somewhere in the middle.

"The difficulty lies not so much in developing new ideas as in escaping from old ones." - John Maynard Keynes

Terry Troll's picture

Feel my pain

One drawback happens to hit me. I read Mr Boortz book on the tax and back on page 160 something he addresses people who are retired or close to it (that would be me in a few years) that have retirement money that is post tax in savings or bonds. Well yes that will be taxed twice but he says we should be happy to help out. Uhhh, no thank you. I don't like the current system and would be ok with a flat percentage of tax on all income with no exemptions.

rikki's picture

I don't think jah and metulj

I don't think jah and metulj understand the proposal. The "fair tax" concept is different from a "flat tax." Everyone gets the prebate, so in some ways it acts like an economic safety net, which is a fairly progressive concept. Since there are no rules for who qualifies, there is little opportunity for fraud. You might have trouble with dead people getting checks or with keeping up with transient types, whether homeless or just mobile, but in the Internet era, that is less of an obstacle.

Collection operates exactly like sales taxes, so the infrastructure already exists and should not be a burden. I'm not clear on which transactions are subject to the "fair tax," however. If, for example, landlords had to start paying sales taxes on rent payments, that would be an added burden to the economy. Probably someone more familiar with the concept can clarify.

It seems like a lot of the arguments against the "fair tax" are reactionary and based on a flawed understanding of the idea. I'm not sold on the idea, but it deserves more consideration than it is getting.

I like the idea of a consumption tax, but not all consumption is the same. One of the major flaws in our economy is externalized costs, and I don't see how this proposal helps fix that at all. Many forms of pollution result in health care costs paid by the victim, not by the polluter, and that is wrong.

Does the "fair tax" idea eliminate only the federal income tax or other forms of taxation as well? If it cuts too much away, there could be real harm. We have some consumption taxes, like gas taxes that fund road building, or cigarette taxes that fund health care. Those systems work imperfectly, perhaps poorly in some cases, but they provide a framework for improvement if we can ever manage to elect thoughtful problem solvers as legislators instead of rigid partisans. If this broad sales tax eliminates those sorts of taxes, I would not be able to support it, likewise if it precludes any hope of internalizing costs in markets where that needs to happen.

metulj's picture

I think my point about

I think my point about "prebating" still stands. The "unintended consequence" (which I am begining to think is a cop out for lack of research or thinking about a problem) is that there are a large number of people who will just not get the prebate. It will come in a disbursement that isn't easily handled by the poor (a check). It will become the target of grifters. Monetary disbursements cause spikes in crime in concentrations of the poor.

It maybe just as simple as the way that the money is handed out, but again, how do you do it to actually flow that money to non-discretionary uses?

True happiness is knowing you are a hypocrite. -- Ivor Cutler

SuperDave's picture

Spikes in crime and non-discretionary uses???

How do we flow welfare, social security and unemployment money to non-discretionary uses? I've worked in the poorest parts of Knoxville for years and I haven't noticed these spikes in crime on days that SSI checks are delivered. Also, most people poor, middle class and rich alike get paid by check, the middle class and rich are actually more likely to be paid by direct deposit than the poor. I can assure you that the homeless, that I know personally, will find a way to get hold of their $10,000 prebate check every year. They may buy crack with it but they will get their check and find a way to "handle" it. Not saying that the "flat", "fair", tax or whatever you call it is the way to go. I'm not sure we would see the prices lower from the removal of the embedded taxes. Just some thoughts.

metulj's picture

Read the this. It's pretty

Read the this. It's pretty much the latest stuff. I am sure that there are copious problems with method, location, data massaging, etc., but it certainly points to a problem.

True happiness is knowing you are a hypocrite. -- Ivor Cutler

rikki's picture

how do you do it to actually

how do you do it to actually flow that money to non-discretionary uses?

That's not part of the plan. The goal is to simplify. If they start complicating it with payment scales and restrictions, it loses a lot of appeal.

Let's say it is $8400/yr, no questions asked, any income beyond that is up to the individual. You pick up checks as often as monthly from networked terminals in existing government offices. Arrange to have it direct deposited. Simplicity, convenience. Wherever you go, there it is.

Of course, setting the amount of the prebate is an opportunity for fraud, especially if it is arbitrary and changeable.

Individuals receiving additional government assistance: housing, food stamps, unemployment benefits, health care, TIFs, imprisonment, contracts, professional licenses, parole, probation, bid opportunities, earmarks, etc. should have monthly garnishes deducted from their prebate. Imprisonment should be the only full garnish, and the cost of confining a person for a year could define the prebate amount. The government pays you what it would cost to jail you as long as you stay out of jail. Of course, that is a complication that invites fraud.

The most fraud-proof method for deciding the prebate amount is to key it to the previous year's collections. The government tithes 10 percent back to the people, shared equally.

jah's picture

Actually, I do understand

Actually, I do understand the proposal. The only thing I missed was that the rebate goes to everybody, meaning that every family would receive between two and ten thousand dollars a year from the government (making rebates the government's largest expenditure).

But why believe my arguments? Read metulj's link. Or try this one from factcheck.org. I like this blog post as well, as he makes some very good points.

And I said this above but I'll say it again, keep in mind that we'd still have a state sales tax. So take the new federal rate at 30% as they claim it will be (calculated the same way we calculate sales tax). Add in our 10% sales tax. That's 40% sales tax in an ideal world. But don't forget that TN will have to make up for its state income tax, which would probably go away (yes, TN does have an income tax). And also don't forget that this isn't an ideal world (the treasury department also disputes FairTax's figure).

Oh, and something else to note, if no one feels like reading any article other than the extremely biased WSJ letter posted above. Prices won't "settle" as has been suggested. Even Neil Boortz withdrew his argument that there's some hidden 22% tax on goods that would go away with a federal sales tax.

And keep in mind that the trillions of dollars that are annually collected would still have to be collected. I'll say it again, if they're not collected from the richest or the poorest, who will be paying it? What I've read says everyone earning between 15k and 200k a year would be really getting the shaft.

R. Neal's picture

Another problem as has been

Another problem as has been noted is that it may start out simple, but twenty years from new we will have a new and different 10,000 page manual of exceptions, exclusions, alternate calculations, regulations, etc. etc.

Bill Pittman's picture

Rikki's comments...

Rikki's clarifying post is a good summation of what I was *trying* to convey. Thanks Rikki.

DavidFL10's picture

The current system taxes income instead of wealth

There is only one way to assure equitable taxation and that is sufficient simplicity to ensure total transparency. Make it so everyone knows precisely what he is paying and what everyone else is paying. Make it easy and efficient for the government to enforce and thereby guarantee to everyone that everyone is carrying his or her full and fair load.
The income tax came about because President Theodore Roosevelt and other progressives of his day sought a fix to the crisis of taxation that had been manipulated so extremely by the upper class that it left the poor paying most of the burden. They concluded that the system was so broken that a radical new scheme should be put in place to tax income. The proposal was a modest 2% and would be levied only on those earning more than $4000 a year (about $87,000 considering inflation). In his 1907 state of the union address, Roosevelt advocated adoption of the income tax, yet warned:
"I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. "
The FairTax sets up a federal sales tax that will effectively tax all resources—wealth as well as wages: When the rich spend their wealth and when workers spend their wages, they will both pay sales taxes. By broadening the effective tax base to include the body of wealth, not just the income earned on it (much of which is currently exempted or taxed at a low rate), one can lower the required resource tax rate and, thereby, reduce the tax burden on workers.
When people argue that a sales tax is always regressive, I like to ask them to imagine a sales tax that completely exempted the first million dollars of spending. Of course such a tax wouldn't be regressive. How about if it completely exempted the first 100K of spending per family as it would be possible to set up the FairTax at that point. Of course such a tax would certainly be progressive, but to be revenue neutral (collect the same as today’s convoluted system), the rate above the first 100K would be in the 110% range and be extremely hard to enforce.
One challenge to the economists who spent years developing the FairTax was to determine a level of spending up to which it would be "fair" to exempt without overburdening the rest of the taxpayers. What they came up with was a mechanism to completely remove all federal taxation up to the poverty level as determined by the department of Health and Human Services. In so doing they ensure that until someone is able to pull his or her family out of poverty, he or she will not be asked to contribute monetarily to the wellbeing of society. I think that is a pretty good definition of a progressive taxation system.
It is time for true progressives to return to the ideals of Teddy Roosevelt—to expose the propaganda in our tax tables that show the rich taxed at levels they never actually pay—to once again lead the charge for a new radical shift in tax strategy.

jah's picture

I don't think you understand

I don't think you understand what "progressive" and "regressive" mean when talking tax, but nice try.

Also, the so-called FairTax model doesn't exempt anything, as you suggest. Everyone would still pay tax, we'd just *all* (even Bill Gates) be given a check by the government.

Voice-of-reason's picture

Fair Tax

Fair tax does not tax wealth, only what wealthy people spend.

Fair Tax requires retired seniors on social security to pay social security taxes embedded in the 30% National Sales Tax (Call it what it is)

Consumption tax will not lower prices as claimed. Math is flawed.

Prebate for 2 adults 2 children is more than for single parent with 3 kids. Not fair at all.

Fair Tax requires all to file yearly with government to receive prebate.

IRS goes away but each state with a Sales Tax is required to collect tax and remit within 5 days to Federal Government.

Will not bring jobs home to US as claimed. Will only return capital earned abroad by corporations to US but manufacturing jobs will stay abroad due to lower labor standards and costs.

Social Security Admin will have to send out monthly prebate checks to all who sign up regardless of employment status.

True rate is 30% and that is only for first year.

Prebate check is based on poverty level in US

30% rate will go up each year.

Cannot abolish IRS unless done with constitutional amendment.

Will eliminate incentives for businesses to offer 401k's, health insurance, etc.

Will not increase personal savings and will probably have opposite effects as penalties for early withdrawal of 401k and IRA money is eliminated.

All in All, bad idea for America at a time when dollar is weak and deficits are high.

No guarantee that businesses will reduce prices or that they will pass elimination of payroll and income tax savings onto employees.

google "unspinning the fair tax" and read article.

Voice-of-Reason

R. Neal's picture

Some estimated

Some estimated numbers:

Charlotte NC            Current Fair Tax
Housing                 719     935
Food                    587     763
Child care              866     1126
Transportation          358     465
Health care             368     478
Other necessities       353     459
Taxes                   310     100
Monthly total           3561    4326
Annual total            42732   51916
Less prebate                   -6297
Adjusted total                  45619
Additional "fair" tax           2887

Source for "typical" budget for a family of four in Charlotte NC:

(link...)

Source for "prebate" for family of four:

(link...)

Taxes in "typical" budget include federal, state, and local. NC has state and local tax, and I don't know what it would be but for comparison I just plugged in $100 per month.

Also, this budget is for the basics, and doesn't include big screen TVs, dining out, renting a DVD at Blockbuster, vacations, etc.

R. Neal's picture

Also, how does the fact that

Also, how does the fact that the savings rate for Americans is negative for the first time since the Depression figure in? It sounds like we are spending more than we make, on the whole, so every penny we make will be taxed?

jah's picture

Every penny we make will be

Every penny we make will be taxed, and some of us will be able to buy a whole lot less.

pan's picture

Actually, it's got nothing

Actually, it's got nothing to do with every penny you make. It's only every penny you spend, right? It's the current system that taxes every penny you make.

R. Neal's picture

Actually, the current system

Actually, the current system doesn't tax every penny you make, but that's neither here nor there. The point was, that if we are spending more than we make, we will pay tax on everything we make, plus pay tax on what we borrow!

Tamara Shepherd's picture

Volatility & inelasticity

So far, these comments on a consumption tax have been focused largely on its potential regressivness. Other concerns about a consumption tax, particularly from government's point of view, relate to their volatility and their inelasticity.

This type of tax is volatile in terms of the income stream it is likely to produce. In economic downturns, we consumers first act to protect ourselves by reigning in our spending. During the recession of 2001-2002, for instance, Tennessee's sales tax-based revenues plummeted faster and deeper (relative to our total state budget)than did those of other states--and we took considerably longer to recover than did other states, too.

A consumption tax is also inelastic, in that it fails to automatically capture income growth the way an income tax does. In periods of prosperity, we consumers aren't likely to race out and spend every dime of our "new money." We can opt to save it (produces no tax revenue), pay down debt (ditto), donate it to charity (ditto), or maybe pay for some untaxed service--housecleaning, lawn mowing, childcare, medical attention--that we hadn't previously felt we could afford. Government has no assurance of getting any "raise" comparable to ours, then, if the device used to collect it relies on our spending more.

I'm not persuaded so far...

frenchharp's picture

Stuff

(link...)

Maybe we should just tax trash.

metulj's picture

Unwieldy, but

Unwieldy, but interesting.

Riffing...

Tax you by the volume of effluent from your house.

Rainwater run off: A formula based on your roof area and rainfall with a fudge for tree cover.

You are already taxed for sewer waste as a ratio of your fresh water.

Tax based on your type of heating/cooling. Tax emissions from your furnace with bonuses for moving to less polluting tech (Beginning fisking by Popular Mechanics subscribers!). No A/C? Don't pay. 5 ton unit on your McMansion? Taxed by some formula taking account for your cubic footage and unit size. Have a swamp cooler instead? Get a break.

....

True happiness is knowing you are a hypocrite. -- Ivor Cutler

Tamara Shepherd's picture

Income inequality, too

"Savings and investments in the stock market would be exempt from capital gains thereby making such decisions more economically attractive."

Bill, I meant to share this point, too: The rate of income inequality in this nation has accelerated tremendously since Bush cuts in the capital gains tax. Something to do with the "magic of compounding," you understand.

(Sorry, no link for that assertion. I think we've all read lots about it, tho.)

Bruce Barnes's picture

28 % tax increase

The consumption tax will increase the tax on people about 28.5 %.
Instead of individuals paying 60 % of taxes, they will pay 100% of the budget.
In FY 2006, corporation income tax was 13.8 % of the federal budget and corporate employment taxes were 14.7 %. Under the "Fairtax plan," businesses do not pay taxes.
Corporations enjoy all of the privileges of persons except the vote. They benefit from infrastructure, employee public education, law enforcement and limited liability. If corporations do not pay taxes, their privileges should be revoked.

Bruce Barnes's picture

"FairTax" definitions

Taxable property is what most of the people have. Intangible property which is not taxable is what the wealthiest people have the most of.

“FairTax” definitions:
Taxable property – any property (including a leasehold of any term or rents for such property), but excluding intangible property and used property.

Intangible property – an asset that is not physical and not real property. It includes copyrights, trademarks, patents, goodwill, financial instruments, securities, commercial paper, debts, notes, and bonds.

Taxable property or services purchased from a seller for a business purpose in an active trade or business, or for export from the United States for use or consumption outside the United States are not taxed.

Purchases by consumers are taxed.

Investments (property purchased exclusively for purposes of appreciation of income or the production of income) are not taxed.

Used property – defined as property on which the federal sales tax has been collected already, and property that was held for other than a business purpose on December 31, 2008 (the day before the sales tax became effective). The term "used" relates to whether or not the sales tax has been paid previously, and not just to whether or not the item has been sold previously. It appears that almost everything will be taxed for the first few years.

Bruce Barnes's picture

"FairTax" is not fair

The consumption tax is not fair.
When a company has a dispute with a customer, they may find themselves in a court that only the customer has funded and to add insult to injury, the customer has to pay his lawyer 23 % more than the company does.

Bruce Barnes's picture

IRS name change?

Will the IRS really be gone? The IRS is uniquely qualified to administer the Fair Tax with people, computers, and facilities in every state and major city.

The FairTax Act will phase out appropriations for the Internal Revenue Service and then spend billions recreating bureaus to administer the Fair Tax.
The fair Tax Act will pay retailers to collect taxes and keep records for six years and pay states to collect from retailers. An administering state enters into a cooperative agreement with the U.S. Treasury Department governing the administration of the FairTax by such state.
The Social Security Administration sends out the monthly rebates.
The Secretary of the Treasury is given the authority to promulgate regulations, to provide guidelines, to assist states in administering the FairTax, to provide for uniformity in the administration of the tax, and to provide guidance to the general public.
The Secretary of the Treasury is required to establish an Office of Revenue Allocation to arbitrate any disputes between states regarding the destination of sales for purposes of allocating sales tax revenue among the states.
The Secretary of the Treasury and each state sales tax administering authority may employ persons as necessary for the administration of the FairTax and may delegate to employees the authority to conduct hearings, prescribe rules and regulations, and perform other such duties.
Following due process of law, the tax administering authority can seize property, garnish wages, and file liens to collect FairTax amounts due. Each sales tax administering authority must establish, maintain, and adequately staff an effective, independent Problem Resolution Office to protect citizens from abusive administration.
The sales tax administering authority must establish and maintain an appeals process that provides a full and fair hearing of any dispute regarding tax liability.
The Treasury Department may use FairTax data in preparing economic or financial forecasts, projections, analyses, or estimates.
The fair Tax Act establishes an Excise Tax Bureau within the Treasury Department to administer those excise taxes not administered by the Bureau of Alcohol, Tobacco and Firearms.
It also establishes a Sales Tax Bureau to administer the national sales tax in those states where the federal government directly administers the tax and to discharge other federal duties and powers relating to the FairTax.
Does a rose by any other name still smell as sweet?

Alan Lidstone's picture

Retirement and the (Not So) Fair Tax

As the rhetoric around our upcoming Presidential primaries heats up, it is important to pay close attention when candidates start talking about the Fair Tax proposal. While the simplification of the tax laws is very beguiling, there are major shortcomings in the Fair Tax proposal that can affect anyone nearing retirement, or currently retired.

Those nearing or enjoying retirement will find that the Fair Tax proposal implements a Federal sales tax of approximately 30% sales tax on the purchase of any new home, utilities, insurance, rent, medical expenses and more.

What is the Fair Tax? - The Fair Tax would replace all Federal income taxes related to corporate, business, estate, gift, and personal income, and the Payroll Tax (Medicare and Social Security) with a Federal retail sales tax of 30% on the sale of all services and new goods to provide the funding to run the US Government. Businesses do not pay the 30% Federal sales tax, but Federal, State, and local governments will have to pay the tax.

The proponents say the cost of new products and services in the US has embedded costs totaling approximately 23% of the sales price for administering and paying the appropriate business income taxes and employee payroll taxes, .i.e. a product selling for $100 has $23 of embedded costs.

In addition, they assume that businesses will reduce the prices of goods and services by the amount of their embedded taxes (up to 23%); substantially offsetting the 30% Federal sales tax applied to new purchases and all services, and may provide salary increases to their employees.

Unfortunately, the providers of goods and services will have no legal requirement to reduce prices and there are no procedures to determine what, if any, reductions are actually made.

It is also very difficult to arrive at the embedded costs for many products and businesses will be quick to say their pricing and costing process is a trade secret. Many items, such as oil, are substantially extracted or manufactured, and processed outside the United States with minimal distribution costs subject to the Fair Tax in the US.

To help offset the impact of the 30% Federal sales tax for low income families, the program will offer a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67). The Fair Tax will also eliminate all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc..

Will the Fair Tax Result in Reduced Prices for Products and Services? – The track record for reduced prices brought about by substantive changes in tax policy, free trade policies, technology, manufacturing, productivity improvements, and the global economy is a mixed record.

Pharmaceuticals -The US pharmaceutical industry has manufacturing facilities around the world, including Europe, Ireland, India, and China. Federal law prohibits Americans from purchasing those same prescription medications made by US corporations in foreign countries from the foreign country that ships them back to the US pharmaceutical companies, providing substantial protection from foreign pharmaceutical distributors.

The result of this “free trade” and “global economy” experiment, along with a healthy dose of Federal protection, has given Americans the highest prescription drug costs in the world and made the US pharmaceutical industry spectacularly profitable.

Technology Products and Jobs - The savings and increased profits gained from moving millions of manufacturing, service, and technical jobs that began in the early 1990s to low-cost sweat shops in Asia, China, India, and Mexico, cutting millions of US jobs, and dropping Federal Corporate taxes on overseas entities to 5% to bring back money deliberately left offshore went directly to the executives and investors and no one else.

When US technology corporations need more technology personnel, including engineering and IT professionals in US locations, they tell the US Government that they can’t find the skills in the US labor force and petition and receive H-1B visas to bring in computer technology and engineering specialists from foreign countries (primarily India and China).

The offshore employees are given temporary work visas, and paid less than comparable US employees (employees unhappy with their salary are well aware that they can be easily be replaced if they should ask a salary deemed inappropriate by the employer).

Health Care - The (free market) Medicare Advantage HMOs convinced the Government to give them approximately 12% (at a cost to Medicare of $7 – $9 Billion dollars) more per beneficiary) than Medicare spends on beneficiaries who opted for standard Medicare Part A and Part B coverage. The excess funding goes to marketing costs, administrative overhead, executive perks, bonuses, and retirement for the HMO executives, such as the $620 Million Dollars in various perks taken by the CEO of UnitedHealth on his retirement.

It appears to be intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors, not the customers or employees.

Impact on Retirees - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees now beginning to retire.

The Fair Tax elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable cost-efficient system used to report earnings to calculate Social Security benefit and provides no way to conduct of audits of businesses or individuals that are violating the Fair Tax policies.

The Fair Tax requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax, to pay a sales tax of 30% on all their purchases of services and new products on all retirement income, including pensions, IRAs, 401-k, Social Security income (see note below), and Roth-IRA (currently tax free).

Note: Social Security is currently tax free for many retired individuals and couples, and only partially taxed for the rest.

Since the Fair Tax replaces the payroll tax and all Federal income taxes (corporate, personal, business, estate, etc.), the Fair Tax proponents will tell us that with Social Security and Medicare being paid out of the General Revenues from the Fair Tax collections, the Social Security Trust Fund with $1.8 Trillion Dollars of US Government bonds is no longer required. I doubt that they have plans to return of the Trillions of Dollars borrowed over the last twenty years and spent on non-Medicare expenses from the working Americans who provided the funds via the payroll taxes they paid.

Observations -The Fair Tax program is in essence a reverse “Robin Hood scheme”. It shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans to the Middle Class and retirees. All Americans (children, working, and retired) will be paying a 30% tax rate on services and new products from the hospital bill from their birth to their casket when they die.

Do you really want to pay a 30% sales tax on your next new car, house or boat, or your insurance expenses? Do you think the cost of utilities, heating oil, or fuel (or anything) will go down by 23% of the current costs for these items? How will you or your family handle a 30% sales tax on all dental care, medical care and health insurance? How will you feel about selling a house, car, RV, or boat you purchased new and were advised that the resale value did not include the 30% Federal sales tax you paid?

Do you really think the large US and International corporations will be willing to reduce their prices by the amount of savings incurred by eliminating their (23%) embedded costs? These are the same corporations that threaten to move the corporate headquarters and tax home to Bermuda, Dubai, or the Cayman Islands when too many questions are asked.

The business community is very excited about the implementation of the Fair Tax because of the savings and increased profit they see coming that will be passed directly to executives, investors, and the bottom line. They support the Fair Tax because they expect not paying any business-related Federal Sales Taxes along with the elimination of payroll tax and corporate and business income taxes to provide a significant increase in profits that will not be shared with consumers via lower prices or employees via pay increases.

DavidFL10's picture

Progressives complaining that wealthy retirees will have to pay

I find it astonishing when I hear progressives complain that the FairTax would hurt retirees because they would be taxed twice on their wealth—once when they earned it and again under the FairTax when they spend it. What retirees are we talking about here? Because a person has stopped working and earning wages does that mean he no longer benefits from the services provided by Federal government? Of course not. Indeed the entitlement programs of Medicare and Social Security guarantee that a disproportional amount of the federal treasury will continue to be spent on this very demographic. Why then, if retirees have the means to continue contributing to the federal coffers, should they suddenly be exempted because they quit working? Well-off retirees are hugely tax advantaged under the current system. That does not necessarily mean they should be.
The poor elderly, on the other hand, living on Social Security and/or living modestly around poverty level spending, would end up better off. They would receive the sales tax rebate to reimburse for taxes on the necessities even though the purchasing power of their Social Security benefits would remain unchanged thanks to Social Security’s automatic cost of living adjustment.

David Nelson-VanDette
727-422-7190
DavidFlorida@Gravel2008.us

Alan Lidstone's picture

Response to "Progressives complaining that....."

I though some replies might be in order regarding the Mr. David Nelson-VanDette’s concerns regarding the above “Retirement and (Not So) Fair Tax” article.

The topics covered in the aforementioned “Retirement and (Not So) Fair Tax” commentary are not about a “Progressive complaining that wealthy retirees might have to pay”. My concerns are that the Fair Tax is larceny on a grand and unparalled scale that adversely affects ALL RETIREES below or above the poverty line.

I provide the further comments to try and clarify the concerns about the Fair Tax and how retirees are affected.

CONCERN #1: Mr. Nelson-VanDette posed that “Indeed the entitlement programs of Medicare and Social Security guarantee that a disproportional amount of the federal treasury will continue to be spent on this very demographic.” I would point out the following in rebuttal.

RESPONSE #1: The current (working and retired) demographic of the entitlement program of Social Security has paid in $1.844 Trillion Dollars more than has been paid out by Social Security. The excess has been BORROWED AND SPENT by the Federal Government to cover ongoing non-Social Security expenditures since 1986. The US Government has issued US Government Bonds to be held by the Social Security Trust Fund which are no different than those purchased by China and Saudi Arabia in very large amounts).

Regarding Medicare, the current (working and retired demographic) for the entitlement program of Social Security Medicare currently has accumulated $305 Million Dollars more than has been paid out for Medicare B expenses and $33 Million Dollars more than has been paid out for Medicare B expenses. As above the accumulated surplus of $338 Million Dollars has been BORROWED AND SPENT by the Federal Government to cover ongoing non-Medicare expenditures since 1986.

The “full faith and credit” of the US Treasury securities applies to Saudi Arabia and China when the US Treasury securities and bonds come due. Unfortunately, far too many people do not feel it applies to the US Treasury securities and bonds amounting to $1.844 Trillion Dollars held in Social Security Trust Fund and the $344 Million Dollars held in the Medicare Trust Fund.

Well over well over 150 million people have made and are making contributions to Social Security and Medicare via the payroll tax. If we had thought that Saudi Arabia and China came before working Americans we would have seen little reason to accept US Treasury securities as collateral for loans totaling approximately $2.23 Trillion Dollars.

Since 1986, the US Government has been taking and spending the excess payroll tax contributions of millions of working and retired Americans. I have difficulty in understanding how after loaning $2.23 Trillion Dollars to the Federal Government, we are now accused of causing a “a disproportional amount of the federal treasury …..to be spent on this very demographic”.

At this point, it would appear that the Federal Treasury owes $2.23 Trillion Dollars to the people who paid payroll taxes. It’s a very novel approach for a borrower to take simply because we had the temerity to ask for the return of loaned funds. Will we say the same thing to Saudi Arabia, China, or the tens of millions of US Savings Bond holders?

CONCERN #2: Mr. Nelson-VanDette posed that “Why then, if retirees have the means to continue contributing to the federal coffers, should they suddenly be exempted because they quit working? Well-off retirees are hugely tax advantaged under the current system. That does not necessarily mean they should be. ”

RESPONSE #2: When the Social Security and Medicare programs were upgraded with increased payroll taxes in 1986, people participating in the program were told that if they paid payroll taxes for their entire working career based on earned income, then they would be eligible for benefits at the appropriate age.

On Mr. Nelson-Vandette’s premise, people should continue making car payments after they have made their last payment or make mortgage payments after the mortgage balance reaches zero simply because they could afford to.

I have been paying for Social Security since 1954 and Medicare since 1966 (the inception date) and have not complained about the program (except for some occasional grumbling). Although the payouts are very conservative, they did provide me with Disability coverage and Survivors benefits coverage which fortunately not required. I was also under the impression that they were backed by “the full faith and credit of the United States of America”.

My concern is not paying for the program, it is with people who took my money, spent it on non-Social Security and Medicare needs, and now complain they just realized they owe a great deal of money to the Social Security Fund and Medicare Trust Fund.

CONCERN #3: Mr. Nelson-VanDette posed that “The poor elderly, on the other hand, living on Social Security and/or living modestly around poverty level spending, would end up better off. They would receive the sales tax rebate to reimburse for taxes on the necessities even though the purchasing power of their Social Security benefits would remain unchanged thanks to Social Security’s automatic cost of living adjustment.”

RESPONSE #3: Mr. Nelson-VanDette is assuming that the costs of all new goods and services will go down approximately 23%, offsetting the new 30% Federal Sales tax imposed by the Fair Tax program.

Unfortunately, the providers of goods and services will have no legal requirement to reduce prices and there are no procedures to determine what, if any, reductions are actually made.

The track record of large corporations passing on savings to employees and consumers in unregulated electric power generation and distribution (with disastrous price increases and power shortages), the pharmaceutical industry (Americans pay the highest prescription drug costs in the world), and the Technology industries moving hundreds of thousands of jobs offshore has been singularly lacking

The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families.

At the same time the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc. which currently help eligible people, substantially. I have seen no comparison as to which program offered more help.

Tamara Shepherd's picture

Round one...

...to Mr. Lidstone.

DavidFL10's picture

I don't feel as though you've addressed my point

Alan,
Perhaps I should have started a new thread instead of replying to your post since I wasn’t specifically addressing your concerns in the post to which I replied. It was mostly your title that set me off. Equally true, though, your reply to me likewise does not address my point.

We agree that successive congresses have stolen from the alleged trust fund since the second year Social Security existed.

You seem to think I disagree, but actually we agree that the US needs to keep the promises it made to retirees. We may disagree with the specifics of the promise. I think the promise was to keep the elderly out of poverty, perhaps you think it was to keep wealthy elderly able to live in privileged circumstances in their sunset years.

Although you accuse me of bad math, we agree that not all the embedded costs will come out of prices. In part because the laws of supply and demand which you cite do more to set prices than do costs, I expect some decrease--albeit not as much as some hard core FairTaxers. I suspect the end result will be somewhere between nine and thirteen percent reduction in prices followed by a 30% increase (figured exclusively). That results in a net increase in prices somewhere between 13%-18%. If you reduce a price of a dollar item by 9%, you get a 91-cent candy bar. Add 30% tax and you pay $1.18 on what was previously a one dollar candy bar.

Where we disagree is that you claim my point is that I want people to continue to make car payments after the car is paid for. That is inaccurate. I want you to continue to pay your share of the operating costs, if you can afford to, for the car you share with the rest of us even though you may have already paid your share of the cost to purchase it.

For the retiree who lives modestly, I will bend over backwards to be sure they are not penalized by the change the FairTax will represent. I won’t have to do much bending, though, because the cost of living adjustment will automatically kick in if your predictions come true that real costs increase by 30%.

Let me very clearly and plainly state my premise. I believe that today’s system of taxation robs from the poor and the young to give to the rich and the old and I believe this to be unjust.

If you prefer hyperbole, I don’t believe a worker making minimum wage should be taxed more so that millionaires who have reached the age of retirement can have a few extra bucks to take with them on their cruises.

Is there a point that we can come together on this discussion?

Mark Curran's picture

Fairtax is an utter farce.

Fairtax is an utter farce. Its literally a FARCE.

Its baloney for a lot of reasons, but here is a big one:

It pretends to get a "major portion" of its taxes FROM the government.

Don't believe me? Read the Fairtax book, page 148 "The federal government will become a MAJOR taxpayer."

Plus Fairtax groups admit -- brag -- that all government agencies and levels - from school districts to counties to states to federal government -- will pay this tax.

And by the way, so will all nursing home patients, cancer victims, and all health cost would suddenly pay THE HIGHEST SALES TAX ON EARTH.

UTTER nonsense. Utter bullship. First -- the federal government CAN NOT possibly really pay its own taxes. You can PRETEND it does -- fairtax pretends. But when the federal government pays itself, its a farce transaction. That farce ALONE means fairtax is 800 billion a year short -- so the REAL tax rate would have to be 60% or more.

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