So with Huckabee's Iowa victory, many people are wondering: what should I think about the Fair Tax?
Leaving aside the moral quandaries inherent in the flat tax--I will blog about those in another post--here are the specifics: the fair tax is essentially a 30% sales tax, with a "prebate" mailed to everyone to cover necessities up to the federal poverty level. Advocates promise that we can eliminate the IRS, that everyone will get to keep 100% of their paycheck, and that angels will descend from heaven singing "Hallelujah" the moment it is passed.
The proposal's technical merits are as follows:
- Compliance is considerably easier to get from companies than it is from individuals; overall, I would expect the level of tax compliance to rise slightly under this scheme.
- Consumption taxes are generally agreed to be economically preferable to flat income taxes, because they encourage savings and investment.
- It ends the enormous amount of time that Americans spend trying to figure out their taxes.
- It involves radical tax simplification, an idea that would be endorsed by virtually every economist as an improvement over the current system.
- The prebate simplifies welfare policy by eliminating the means-testing component.
The downsides:
- It's unlikely to raise as much revenue as claimed
- Because the tax is not calculated separately, but included in the price, it would be to some extent less transparent than the income tax
- It will end up being quite regressive, with the highest effective burden falling on the lower tiers of the middle class.
- After eliminating the IRS, you're going to have to create a new, very large government bureaucracy to manage distribution of the "prebate". Also, now every American citizen will have to immediately register any change in address with the Federal government
- This will not stop politicians from playing games with the tax code; stand by for long campaign arguments over increasing the prebate.
It's not the worst possible tax policy, but it's certainly not the best one either.
Don't forget arguments over what actually is covered. Retail sales are relatively simple enough, but what about real estate? Health care? Etc etc.
I also foresee massive prebate fraud.
I'm becoming more interested in the fair tax idea as time progresses. What if it were coupled with an estate tax on estates over 2 or 3 million? That should improve the incidence a great deal.
"I'm becoming more interested in the fair tax idea as time progresses. What if it were coupled with an estate tax on estates over 2 or 3 million? That should improve the incidence a great deal."
We already have one (the Bush repeal sunsets after just one year). It raises very little revenue, relatively speaking.
Downside #1 (won't raise as much revenue as advertised) is a deal-breaker. It begins a death spiral for the tax: too little revenue do to evasion leads to a higher rate, which leads to more agressive evasion, and so on.
If the republicans weren't so affraid of the Europeans (and Canadians), they would propose the same idea except with a VAT instead of a retail sales tax because VATs are largely self-enforcing (there are incentives built in for businesses to police eachothers' compliance).
Also, now every American citizen will have to immediately register any change in address with the Federal government
Isn't that already the case now? Or at least they get your address when you file taxes at the end of the year. Why would this change?
What we need before we enact this is a considered opinion from the tax-protesters as to the constitutionality of such a tax.
Anyone want to step up?
If someone could tell me what the price of a new car will be 1 year after the tax goes into effect, I'd be all for it. But they can't and I think that means people will tend to put off purchases that can be put off till all the dust settles. How long do they have to put it off and how much will they have to put off to cause a recession?
Perhaps a surtax on luxury goods could make it less "regressive." After all, a tax on fur coats and Lexuses is the most "progressive" tax of all. Of course, then we have the government deciding what should be called a luxury, and then we're back to the huge, excemption-ridden tax code again.
"...less transparent than the income tax"
Eliminate withholding of federal, state and local income and wage taxes as well as Social Security and Medicare taxes; then, let's talk about transparency.
You missed these effects of the Fair Tax:
1) It would reduce or eliminate the underground labor market.
2) It would increase the underground market in goods.
If you tax something, people change their behavior. If you tax a necessity too much people begin to evade the taxes. Our underground labor market is so large because of payroll taxes.
I see the Fair Tax as causing an explosion of grey market activity, with organized crime likely to be the main beneficiary.
Perhaps a surtax on luxury goods could make it less "regressive."
That has been done in the past, and it turns out that demand for luxury goods is more elastic than the tax planners realized.
When taxable activity is totally optional, lots of people choose to "evade" taxes.
"I see the Fair Tax as causing an explosion of grey market activity, with organized crime likely to be the main beneficiary."
X2
And, put the Gov't 'nose', officially, into, both, your Income and Consumption patterns..
This: "..to some extent less transparent than the income tax" from someone who was just arguing that current taxation, or borrowing, are equivalents??
MM,
can I borrow a cup of asymptotes?
The problem I see is that this throws out the current set of problems, for an entirely new set of problems. What happens when "essential items" end up getting some type of tax break. This opens up putting items into certain tax categories. Then special interest groups just focus on lowering the taxes on their items, by having the government put it into categories or lowering the rate on their category. What's included as well? Do we pay tax on purchasing IP, businesses, stock or real estate? What about phone service? Who gets to decide which items are taxable or not?
And honestly, how long does it take the average American to do his taxes anyways? I've done it by hand in under an hour before.
Greg Mankiw linked to a very well written and argued takedown of the Fair Tax by Bruce Bartlett a few days ago. It makes excellent reading: http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf
"What happens when "essential items" end up getting some type of tax break."
The Fair Tax refers to that as the "prebate"; it is part of the plan already. However, it is applied, not to specific goods and services, but rather based on the number of individuals in a family unit.
However, it is applied, not to specific goods and services, but rather based on the number of individuals in a family unit.
Wouldn't this encourage poor people to have lots of kids? Do we want that?
Couldn't we get rid of most of the downsides by applying the same monetary amount prebate to everyone. Then all you have to do is cut a check per person. Most states don't tax food, and the rich eat, so it would be equivalent to paying everyone back for the sales taxes for food. This would also eliminate the regressive element. Perhaps we could even eliminate all welfare and replace it with a "negative income tax". All pay in on the fair tax, and all get, say, $15,000 per year per family.
Of course, nobody would go for it, as there would be an elimination of power by doing this. It would eliminate several huge bureaucracies, and the people in Washington won't put up with that.
"The Fair Tax refers to that as the "prebate"; it is part of the plan already. However, it is applied, not to specific goods and services, but rather based on the number of individuals in a family unit."
I realize that this is the current plan, but I have little trust that it would stay this way. Every new tax system is going to be initially simpler than the current one by virtue that it hasn't been tinkered with by politicians/lobbyists for years.
It would increase the underground market in goods.
This is a big one. It is possible to collect a 30 percent sales tax effectively, but only if it is structured as a Value Added Tax, so that no particular buyer or seller is taxed the full 30 percent of the sales price of the good.
If the full 30 percent is charged in one fell swoop at the retail level, there will be a massive incentive for cash, off the books transactions.
Is anyone familiar with section 6672 of the current tax code? It imposes a potential personal liability on any employer who fails to collect, account for, and pay over withheld income, Social Security and Medicare taxes to the government and is frequently used by the IRS to pursue unpaid payroll taxes. It is relevant to the Fair Tax because every penny of a national sales tax is a collected tax, collected by the merchant from the consumer (and you damn better believe it will be extend to services as well as good), in essence making every merchant in the U.S. a tax collector for Uncle Sam and subjecting them to the same penalties if they fail to turn over the money. Since no tax collects itself without human agency, and some level of noncompliance can be anticipated regardless of the method of taxation, that will result under the Fair Tax regime in a federal collection bureaucracy that will dwarf the current IRS in its size and scope of enforcement. The Fair Tax advocates are the biggest pack of snake oil salesman to come down the pike in many a moon. There is an argument to be made for a consumption based tax but the Fair Tax is based on entirely false premises.
Troy and Zhombre seem to have landed closest to my curiosity.
I find the idea of completely dismantling the IRS and telling everyone "you never have to figure out your taxes ever again" so amazingly seductive and compelling, but it seems in so many ways too good to be true.
Zhombre is correct that there's still a need for an enforcement agency to enforce on the businesses collecting, but as we already stated, we believe enforcement on businesses is easier than enforcement on individuals. That seems feasible to me.
But has there ever been a government agency of the IRS' size that was completely dismantled? The idea seems inconceivable to me. I can't make myself believe that it would actually happen.
that will result under the Fair Tax regime in a federal collection bureaucracy that will dwarf the current IRS in its size and scope
Why will it be harder to get merchants to comply than to get individuals to comply? Especially given that those merchants are already, today, right now, required to comply with withholding rules for employees, it seems that a smaller (if not eliminated) IRS should be up to the task.
All the strengths and weaknesses you list are applicable to consumption taxes in general, not the retail sales tax specifically. As Bartlett (linked above) points out, compliance and enforcement are much less of a problem with a VAT than with a retail sales tax.
Thoughts on the double-taxation of previously taxed and subsequently accumulated savings?
And honestly, how long does it take the average American to do his taxes anyways? I've done it by hand in under an hour before.
If you are:
1. a single person,
2. who lives and works in only one state,
3. with a single income stream from a third-party employer,
4. has no alimony or other court-enforced obligations,
5. has no stock investments or other income-earning instruments other than exempted or deferred accounts such as HSAs, IRAs, and 401(k)s,
6. does not earn an exorbitant level of income,
7. and rents his or her living quarters;
...then yes -- you can do your taxes in under an hour every time.
But try running your own business activities whether primary or secondary, or engaging in large amounts of charitable giving, or maintaining substantial investments, or having a family with associated exemptions and deductions, etc. and you quickly enter into territory where either a few evenings can be dumped into the task as receipts are sorted and various sub-forms are completed and attached, or you can pay H&R Block a small stack to do it for you. Neither of which is a very efficient or pleasant way of funding a government.
Two things: first, it's rather ironic that the very people supporting Hucks and his Fair Tax - the middle class and lower - will feel the tax much more than the "Wall Street" folk they are trying to stymie. And two, a transition to a consumption tax could have severe consequences for those with static incomes, such as students and the retired, with the later (retired) being hit the worst.
It seems to be that you could get all the benefits of the Fair Tax with none of the problems with a flat tax that only kicks in above a certain income level. And it would avoid the massive shock that is sure to hit the system when the tax code is changed.
Funny, how Milton Friedman is still right.
It is not fair to call the Fair Tax a consumption tax without explaining how it would replace the current embedded taxes in everything already sold. As I understand it, these embedded taxes have been identified and analyzed by economists not associated with the Fair Tax movement; the Fair Tax folks simply are using already established data. I don't know exatly what the existing embedded taxes in products are, but I can guess some of them: payroll taxes, FICA and Medicare taxes, corporate income taxes, the wage premium you have to pay to make up for the worker's income taxes, etc. All the things that get rolled into the price of a product, and add some 23% to the price. Replace all these embedded taxes with a tax at the retail level, add a prebate so that the lowest quintile doesn't get slammed, and voila--you have the essence of the Fair Tax.
This could only be done in conjunction with eliminating the income tax, which could be done by amending the Constitution, so I don't see it ever happening. It would also take too much power away from the politicians, which is another reason I don't see it happening anytime soon.
But it makes a nice thought experiment.
There are other distributional effects too. If you've been saving your whole life and built up a big nest egg, you've already been taxed on the income needed to create that nest egg, and now you'll be taxed again at full rates when you try to spend it. Seniors would justifiably be very unhappy about this.
Why would we not make a new list of "staples" instead of a "prebate"?
You got questions about the Fair Tax? Yay!
You don't have answers. You have speculation. You have conjecture. You have vague ideas.
Check out www.fairtax.org - instead of going "I heard they're going to tax THIS but not THAT" or "It will drive an underground economy to new heights!" - you can actually see the plan for yourself, and search the questions asked there for your answers.
Of course, that's much less fun than arguing about it - but sometimes you've got to actually look at what a plan IS instead of arguing about it.
J.
The Fair Tax will result in seniors who have paid high tax rates on their income over a lifetime as it was earned, paying 30% rates all over again on their savings as it is spent. The Fair Tax is completely impossible politically as soon as this is widely realized.
Despite its name, the Fair Tax is grossly unfair for this reason. I've heard it said that a fair tax is an old tax (since everybody knows what to expect and the rules haven't been changed in the middle of the game).
Also, now every American citizen will have to immediately register any change in address with the Federal government.
Only if they want their "prebate." I for one would find the financial privacy worth sacrificing it for.
At 30%, the incentive for non-compliance is simply too huge to make it work, without an enforcement agency much more invasive than the current IRS. There ain't any free luch at this diner, either. If you want a very simple tax system, you need a much smaller government. Now, if you want a very simple tax system as a indirect means of shrinking the government, I understand the desire, but think the risks inherent in that approach are entirely underestimated. You are more likely to end up with a government every bit as large, and far more abusive than is currently the case.
It's unlikely to raise as much revenue as claimed
That's an understatement, and I suspect it's a feature, not a bug. People like Neal Boortz see this as a good way to drown the government in the bathtub, and that's a major reason why they like it.
The Adam Smith institute puts the case against this tax very succinctly: "This is, to put it kindly, insane." Apart from everything else, the rate would have to approach, or perhaps exceed, 50 percent to raise the claimed revenue--the calculations Mr. Huckabee uses include taxes paid by the federal government to itself as "revenues." Kind of like treating the government bonds in the Social Security trust fund as "assets" held by the government.
So instead of wasting a night a year on income taxes, we'd have to waste a night a month figuring out how much of the prebate to give back. Sounds promising. I'm an accountant, of course.
In the word's of MM, "The rest of the OECD countries do it, why don't we?"
What will happen to home prices when there is a 30% sales tax? I'm thinking they would drop around 23%. And if you're a bank, how much are you willing to loan on a house that sells for $200k, i.e. $260k with the tax? If it's anything like today, probably about $160k on a conventional loan, perhaps $200k with a higher interest rate and PMI. And who's going to loan the money to those who can't pay the $60k tax? With no home value for collateral, why would you make that loan unless it was at a high interest rate? Sounds like lower home ownership and higher rents...
I'm kind of boggled you haven't mentioned the fact that the prebate is a guaranteed income, with all the nefarious Cadillac-driving welfare-mommery and young-buck food-stampery that inevitably, in the conservative lexicon, entails.
By eliminating the corporate income tax, the personal income tax, and payroll taxes, wouldn't the Fair Tax encourage more foreign companies to build their factories, plants, and offices here? Wouldn't this reduce our trade deficit and create a lot of new jobs here?
I can't believe the opponents of the FairTax still come up with the same misinformed opinions and erroneous math to talk down the idea. Retail prices will stay the same. Seniors and retirees will also get rebates, even when they're spending their retirement savings. We must also consider that fact that high school/college graduates aren't as smart as they used to be, which makes it easier for FairTax opponents to brainwash them with their lies.
The poor will not be worse off with the FairTax. They are worse off now simply because they have lower incomes. With the FairTax, they'll take home bigger paychecks. And yes, there will be more jobs under the FairTax, many with better pay. And a $100 DVD player, for example, will still cost $100. So, retail prices stay the same, take-home pay increases and those with low incomes get monthly rebates to offset the cost of compliance at the cash register. The FairTax would also be supported by a larger tax base. Tourists, dope dealers and illegal immigrants immediately become taxpayers. And the rich will finally have to pay the FairTax out of their own pockets instead of passing the cost on to the rest of us. Now that's what I call fair!
Widespread evasion? On a level that would cause a significant decrease in the amount of revenue collected? Hardly. The amount of evasion would have to be at least a quarter of the amount of revenue actually collected for that to happen. How could an illegal retailer who's selling untaxed goods out of his garage possibly make a dent in the system? And where would he get all his merchandise anyway? Let's get real!
Look, all people have to do is read the FairTax bill at FairTax.org. Liberals oppose the FairTax because 1)liberals love taxes regardless of who has to pay them and 2)they are afraid to admit that they just don't have a better idea. Most Americans, rich and poor, liberal and conservative, agree that the federal tax system is broken, confusing and increasingly unenforceable. We need to try something new.
If a recession really is lurking around the corner like they say, and jobs start disappearing in large numbers again, we'd better be willing to try new ideas. We'll be kicking ourselves later on if we don't.
Geoff -
There's a very amusing passage in Bill Safire's Before the Fall about a similar topic. Seems that Nixon wanted to get rid of a "temporary" building that was put on Pennsylvania Ave during WW2 and was a total eyesore. Using the full might of the presidency, it took him something like two years to get the thing torn down.
The appeal of any tax reform is that people believe they will end up paying lower taxes.
No system will do that, and so no "reform" proposal will deliver.
If you want lower taxes, the government needs to spend less and reduce the tax rate. This is true regardless of the kind of tax system you have.
You can either have extensive services or low taxes, but not both. No flat tax, VAT, or any other scheme can change that basic fact.
Ms Czerniak writes: Widespread evasion? On a level that would cause a significant decrease in the amount of revenue collected? Hardly. The amount of evasion would have to be at least a quarter of the amount of revenue actually collected for that to happen. How could an illegal retailer who's selling untaxed goods out of his garage possibly make a dent in the system? And where would he get all his merchandise anyway? Let's get real!
Yes, let's get real. In the real world, not the fantasy one pitched by Fair Tax advocates, the real compliance problem will issue from merchants with cash flow problems who use the sales tax they collect for operating capital instead of turning it over to the feds, just as they do now with payroll taxes. The state of Florida has no state income tax and relies on state sales tax. You may want to look at the number of tax liens the Fl Dept of Revenue files for unpaid sales tax obligations.
matthew and Jon hit on the biggest problem with Fair Tax, or indeed any radical reformation of the tax system. People have made decisions in the past about things like investment and consumption based on the rational expectation that taxes would remain pretty much the same.
Fair Tax hurts homeowners who bought houses with the expectation that they would get a tax refund, and that they would be able to sell their house in a market where buyers expect a tax refund. It hurts people who put their (already taxed) income in savings accounts and now have to use it to pay for goods with at 23% tax, effectively taxing them twice.
A less-good but stable tax system is in some ways better than a "fairer" rewrite of the tax code, because stability is necessary both for markets to function and for people to be able to make long-term financial decisions.
"The appeal of any tax reform is that people believe they will end up paying lower taxes.
No system will do that, and so no "reform" proposal will deliver.
If you want lower taxes, the government needs to spend less and reduce the tax rate. This is true regardless of the kind of tax system you have.
You can either have extensive services or low taxes, but not both. No flat tax, VAT, or any other scheme can change that basic fact."
Posted by Peter Bautista | January 6, 2008 12:09 PM
X2
"...recently wrote a synopsis of the review of the consolidated fiscal 2007 financial statement of the United States which was recently released, and notes that, "For the 11th year in a row, Comptroller General David Walker, the Nation's Chief Auditor, stated that the GAO [Government Accountability Office] could not give an opinion on the government's financial statement."
Mr Walker's actual statement was, "Because of the federal government's inability to demonstrate the reliability of significant portions of the US government's accompanying accrual basis consolidated financial statements for fiscal years 2007 and 2006, principally resulting from certain material weaknesses, and other limitations on the scope of our work, described in this report, we are unable to, and we do not, express an opinion on such financial statements.""
Ms Czerniak should start saving for a new grip..
Ms Czerniak writes: Widespread evasion? On a level that would cause a significant decrease in the amount of revenue collected? Hardly. The amount of evasion would have to be at least a quarter of the amount of revenue actually collected for that to happen. How could an illegal retailer who's selling untaxed goods out of his garage possibly make a dent in the system? And where would he get all his merchandise anyway? Let's get real!
Yes, let's get real. In the real world, not the fantasy one pitched by Fair Tax advocates, the real compliance problem will issue from merchants with cash flow problems who use the sales tax they collect for operating capital instead of turning it over to the feds, just as they do now with payroll taxes. The state of Florida has no state income tax and relies on state sales tax. You may want to look at the number of tax liens the Fl Dept of Revenue files for unpaid sales tax obligations.
Not only that. Look at the issue of hiring illegal immigrants. Is that limited to tiny businesses out of people's garages? No, some very major corporations hire them, and they are in many cases hired out in the open.
Why? Because enforcing that law is extremely difficult given the economic shocks that it would cause. And because once powerful interests start violating laws, they use their lobbying power to prevent crackdowns. That happens already in the tax system now-- many tax avoidance schemes used by the rich and corporations are subject to diminished IRS enforcement.
If you collect the fair tax at one source at 30 percent, it will create a massive incentive to cheat. And then there will be a massive lobbying effort to prevent enforcement against the cheaters.
And what really gets me is that all you have to do is split up the tax (i.e., a VAT) to avoid this. Why are the fair tax people so opposed to that?
Heather:
You're faced, unfortunately, with people who have preconcieved ideas about the FairTax. And they have little to no wish to examine the information on the Fairtax available at www.fairtax.org - preferring instead to believe ANYTHING but what is out there.
You'll notice how they can't seem to wrap their heads around the idea of a consumption tax that ISN'T a VAT? That they're fixated on the 30%, and think that's in addition to the CURRENT tax rates? That the prebates are somehow unfair to minorities - like getting your full paycheck AND and prebate is unfair to the marginally employable?
All they need to do is go to Americans For Fair Taxation: FairTax.org - and look midway down the page on the left. Their concerns are addressed.
But it requires a somewhat open mind, and a willingness to examine ideas that are not what they think they are.
I'm sympathetic to the idea, but with such a radical change in the tax system you just won't know in advance how much tax will be collected. It could be much more, it could be much less, either one would be a real shock to the economy.
Plus, this is a tax on goods and services. As in other VAT countries, there is a tremendous underground economy in services. The home renovation business, for example, is pretty much completely underground where I live.
What about the income I have paid taxes on for decades, at very high rates, the pitiful remnants of which now sit in my savings?
You Fair Taxers now propose that I will have to pay ANOTHER 30% if I actually some day want to, you know, spend it?
I don't think so.
I've asked this question of Fair Taxers more times than I can count, including emails to their national headquarters, and they have never responded.
Here ya go, Chester - take a look at http://www.fairtax.org/PDF/FairTax-Fundamentals_and_facts-070122.pdf - page 4 and 5. And remember your retirement savings, 401k and the like - are ALREADY subject to taxation when you start tapping them. Unless you've got a Roth IRA - and even then, you think government's going to look at a fair amount of dough and let it slip through their fingers... unless they're stopped?
Wouldn't you like MORE to put into savings? Stocks or the like? If you're using a bank for your savings, at 1% or less a year, then inflation's been eating your lunch. No wonder you're pissed. Have you tried ING Direct? They vary between 4 and 5%.
By the way, don't forget the government prebate. Check that out at http://www.fairtaxcalculator.org/2007FairTaxFamilyConsumptionAllowance.pdf - for a family of 4 that'd be over $500. Per month. (Two adults, two kids. Married. One adult, 3 kids is about $400. Don't know why.)
Man, I can't BELIEVE folks won't look at this stuff themselves, preferring instead to believe whatever anyone else might tell them about it - accurate or not... I mean, it's not like it's HARD to find the website.
Oh god, not this again.
Problems off the bat:
a) it isn't going to be "23%", or "30%". It's going to be somewhere up in the 80% range if we really want to replace all the stuff raised by various income taxes (state and federal, payroll)
b) difference between B-to-B and B-to-C transacations. Now you've put every merchant into the situation of being a judge as to whether a sale should be considered a taxable or a non-taxable event. Yeah, they're going to insist on checking that every time.
c) great incentive for putting together your own personal LLC and shoehorning in as many purchases as possible as "business purchases." And since (as per the Fair Tax devotees) we've gotten rid of the IRS, there won't be anyone around to police all of this! Yay! (Can we say E-V-A-S-I-O-N? I knew you could!)
d)...and with the 'prebates", we're STILL gonna have to track income to find out who is eligible to receive them!
e) if everything else has a N% sales tax on it, why in the HECK are you exempting the purchase of investments?!
f) How are you going to handle the changeover? We've already paid taxes on a heck of a lot of our income already--so what you're saying is that we now are going to have to pay an EXTRA 18% simply because we've been virtuous enough to save it and not spend it already? When pigs fly.
g) ....and I'm not even going to get into what this will do with international trade or how it gums up tons of international taxation treaties.
About the only people who are going to enjoy this (besides the Fair Tax nuts for one week, after which they are going to get lynched by all the local small shopkeepers) are the tax lawyers. I predict multibillion amounts of money getting paid for YEARS....thanks, boys, you've just given me a great retirement fund!
No offense, but for the majority of Americans, taxes are not a complex calculation. Sorry - but the people who are getting hurt the most from free-trade and illegal immigration (lower middle-class, blue collar types) would get hammered yet again by this Fair Tax doctrine.
Secondly - the minute this goes into effect, guess what is going to happen. Some congressperson, trying to make a name for themselve, are going to start offering up tax breaks (i.e. - rebates) which will essentially do the same thing, complicate taxes.
Also - how do you deal with all of the 401(k) plans and other plans which incentivise you to save? What about the billions invested in ROTH IRA's, where taxes have already been paid? They would get double taxed (i.e. - taxed when income tax was paid, and then taxed again under the fair tax).
This is a political no-go.
I can only assume there's something about the possibility of the IRS being downsized that makes a lot of the folks directly or indirectly paid by it go apeshit at the prospect of it being trimmed.
80% tax? That's a new one. Don't know where it got pulled from, but there's a certain brown fragrance about it that's troublesome.
Look, it's not hard. Go to FairTax.org, and they've got answers. I've read the book - it makes a hell of a lot more sense to me than our current system.
I strongly, STRONGLY, urge people to go read it. Don't post your speculations, don't post your questions - check out FairTax.org - it's not hard at all to find the answers there.
Assuming, of course, that you're actually looking for an answer. You might not be. You might be an IRS agent or tax accountant who's looking at a cash cow about to go dry. I can understand why you'd put out junk speculations to try to avoid that.
Go check out www.fairtax.org. The answers ARE there.
Except for the question - "If the Fairtax is enacted, and my cushy accountant job goes away, will I have to learn to say 'Do you want fries with that?' in a caring and sincere tone for my next job?" They don't answer that.
I love the magical lie that prices will stay the same after the FairTax. That means stores would have to cut prices by about 23% (so after the tax it would remain the same). Ok, well that's possible if the cut everyone's wages by 23%. Oops. Who's going to agree to that? No one.
We'll either have a massive recession as people get fire, or prices will have to go up 30% (i.e., the Fed will print some more money).
Once again - GO LOOK AT IT FOR YOURSELF.
FairTax.org
It's NOT hard info to find. See it for yourself.
FairTax.org
JLawson, hysterically insisting that we read sites which do nothing more than regurgitate the magic-unicorn-and-flowers statements about the Fair Tax doesn't help matters.
You might want to start by accurately addressing how much $30 is of a $100 basic price. Where I come from, we call that "30%", not "23%".
If the Fair Tax advocates can't even be honest with that, what else are they shoving under the rug?
"matthew and Jon hit on the biggest problem with Fair Tax, or indeed any radical reformation of the tax system. People have made decisions in the past about things like investment and consumption based on the rational expectation that taxes would remain pretty much the same."
I think the rational expectation is really that taxes will change in the future (and for the worse), but that aside, consider folks who invested in traditional IRAs and 401(k)s for years: They would actually benefit from a Fair Tax, since they would no longer have to pay income tax on their eventual withdrawals.
Fair Tax hurts homeowners who bought houses with the expectation that they would get a tax refund, and that they would be able to sell their house in a market where buyers expect a tax refund. It hurts people who put their (already taxed) income in savings accounts and now have to use it to pay for goods with at 23% tax, effectively taxing them twice."
If you're referring to the mortgage interest deduction, that would go away in a Fair Tax, but most economists seem to think it's a bad policy anyway. If you're referring to the new 23% tax on real estate sales the Fair Tax would impose, perhaps a temporary (~5 years) one-time exemption for for first-time home-sellers would ameliorate the problem.
Well, having read several more sites on the Fair Tax (and criticism thereof), there's a heck of a lot more that the Fair Tax advocates are shoving under the rug.
Turns out that their calculations to come up with that "inclusive tax" of "23%" only holds if you add in some money finaglings where the Federal Government also pays the Fair Tax on all purchases. (Yeah--the government is gonna pay 30% extra on every piece of military gadgetry. Riiight.) Of course, the fact that you'll need to thus crank up the amount collected by another 30% in order to cover government expenses--well, they're silent about that.
Reason for all of this? It turns out public support of a "sales tax" drops drastically if it gets higher than the low 20%. So the Fair Tax advocates are doing whatever financial finaglings they can do to claim the numbers are at that level.
And a heck of a lot of economic researchers and tax planners have pointed out that we're going to get the touted "holding or drop in prices" only if we have drops in income.
If the US is dumb enough to vote the Fair Tax into effect, well, it deserves the economic implosion that will happen to it. I guess we're nothing more than a nation of financial illiterates that are perfectly willing to listen to people promising to sell us New! Improved! Lower Taxes! Higher Salaries! No Effort! (Just buy this wonderful tax snake-oil...) Oh, and they have a bridge to sell us and free ponies for everyone.
Didn't we learn ANYTHING from the subprime debacle?!
JLawson, hysterically insisting that we read sites which do nothing more than regurgitate the magic-unicorn-and-flowers statements about the Fair Tax doesn't help matters.
Neither does lying about what the Fairtax entails, Grumpy.
So what's worse? Folks who have a definite interest in NOT seeing anything like the FairTax implemented posting crap about it on boards like this? Saying the tax rate will have to be up to 80%? Or pointing people to FairTax.org so they can actually see for themselves what the plan entails?
What's the saying? A lie can get around the world in the time it takes the truth to get its boots on? God knows there's plenty of folks who'll lie about the FairTax, for whatever reason. I'm just trying to let folks actually see what's what.
Sorry that sticks in your craw.
Folks who have a definite interest in NOT seeing anything like the FairTax implemented posting crap
Please provide your evidence that the people who disagree with you "have a definite interest" in this question. Really, there aren't that many accountants or tax lawyers in the world, yet somehow all the opponents of this tax "have an interest"?
I wonder sometimes, Rob, how many real 'opponents' there are, and how many people who go on what someone else told them that's to their interest. Up the thread there's someone posting that the tax rate will end up being 80%. Where is he pulling that out of, I wonder?
And why? To what purpose?
But let me just leave this discussion with an example, found above.
"About the only people who are going to enjoy this (besides the Fair Tax nuts for one week, after which they are going to get lynched by all the local small shopkeepers) are the tax lawyers. I predict multibillion amounts of money getting paid for YEARS....thanks, boys, you've just given me a great retirement fund!"
Posted by grumpy realist | January 6, 2008 11:25 PM
By his own words - he's got an interest. The inference is that he's a tax lawyer - and he's definitely against it. He might be joking (and likely is) but there ya go.
Me? I'd like to see it, because I think our current tax system is so far gone it needs to be scrapped, not patched and repainted and touted as new.
At the risk of being redundant, look for yourself at FairTax.org. Decide for yourself. If you have questions, search the FAQ and see if they're answered.
Why argue about what it'll supposedly do here, when you can find out about it at the source? (Unless you'd rather argue - that's your privelege.)
JLawson, the US Government some time back looked into alternatives for a graduated income tax (flat tax, VAT, etc.) and started looking into the exact percentages that would have to be raised. They tried to incorporate evidence from other tax situations around the world to incorporate such bits as a) how much of the economy would be covered, b) evasion rates, etc. When they got to the Fair Tax, plugging in standard extrapolations on evasion from VAT countries, working back, and fixing the numbers so that the same amount of $$ would be raised for both state and federal governments, they came up with a taxation rate in the upper 80%.
The problem with the Fair Tax is that (aside from its incredible regressivity), it is an extremely fragile tax to put into effect. It is extremely easy to evade. The reason why VAT taxes don't have the same effect is because they are a collection of small slices added on at each stage of the sales chain, and the system has been set up so that at each stage of the game, there is an economic incentive for the merchant to police the system. Even with all this, note that Europe has not attempted to replace its income tax system with a VAT only system.
Yes, I've worked with taxes. I worked in Japan with people working on the effect of tax regimes in stimulating scientific development. I've also studied quite a lot of international taxation and may end up in that area if I don't remain in patent law. You may wish to throw out my experience and the experience of tax policy managers (who HAVE worked in this area, thankyouverymuch) and have real, hard, historical data to back up predictions as to how humans will react to imposed taxes, claiming that we "have a vested interest in the system." I guess that airy idealism and utopia is more fun than having to deal with actual facts.
My prediction: if the Fair Tax ever passes, you will find that a) there is a hell of a lot more evasion than you predicted, b) you will raise much less money than you predicted, c) there will be a hell of a lot more lawsuits than anyone predicted, and d) there will be a huge number of problems that you never dreamed would arise. You will also discover that in order to get the Fair Tax to even half-way work, you will need something as invasive, as bureaucratic, and as pettifogging as the IRS. I also predict that after 20 years of the Fair Tax, the US will have a "Fair Tax code" as long-winded, mind-boggling, and time-consuming of accountants' time as the Internal Revenue Code is today. That you will then complain about.
Grumpy, so what percentage of the economy is going to the government now? It's nowhere near 80%...
Yeah, it'll be easy to evade, Grumpy. All you gotta do is stop buying stuff! LOL...
And there's the 80% again. You really ought to clean the brown stuff off that before you put it on display - it's easy to tell where you pulled that out of. But hey, you might have a link to it, in which case you could actually gain some credibility on it... if you post the link to where we can see the context it's found in.
And then there's that funny idea that a tax has to be 'progressive'. Hey, isn't the idea of poor folks getting their whole paycheck, AND a prebate 'progressive'?
One last couple of links, and I'm done with this...
First, a vid on the "Progressive" nature of the Fairtax.
http://easylink.playstream.com/fairtax/43-trulyProgressive.wvx
And second - a link to the FAQ video section. But everyone out there should remember - DO NOT GO LOOK FOR YOURSELF! THE FAIRTAX IS EVIL! GRUMPY AND OTHERS SAY SO! DON'T LOOK FOR YOURSELF! BELIEVE WHAT THEY TELL YOU!
Or not. It's your choice.
http://www.fairtax.org/site/PageServer?pagename=news_audiovideo_QA_videoclips
Enjoy.
If the Fair Tax plan is initiated and put into effect, and it eliminates the IRS , would it also eliminate the state tax agencies that enforce/collect unpaid state incomes taxes, and unpaid state income taxes withheld by employers but not paid ? Would it eliminate like city/local tax agencies? Income taxes withheld by employers are not just federal, but state and local also. Frankly, most employers hate having to withhold taxes from employee paychecks, and then submit it to the government every quarter. Not only is it a pain in the ass, but why should employers have to do this on behalf of the government ?
And while we are at it, why the hell do employers have to " match" out of their pockets the amounts employees are taxed for Social Security and Medicare ? Why is it the employers burden to fund Social Security and Medicare?
From a small business owners standpoint, I would love to see all income tax and employer funded payroll taxes eliminated, and a Fair Tax initiated. If my employee makes $ 20.00 an hour, and he works 40 hours, I write him a check for $800.00 and that would be the end of it. Small businesses are being taxed to death, in addition to escalating insurance and utility costs , and local, state and federal regulations that protect everyone except the business owner. Just my thoughts and rants.
Which brings a another point to mind ? How would a Fair Tax affect " tax exempt " purchases ? Presently, businesses who purchase parts to "resell" do not pay sales tax on that item, because sales tax is charged to the customer at time of sale.
Would a "Fair Tax " cause a "double" tax on the same item, even a new item, in some instances? Would we as a business have to pay a tax on every item we buy, even if we are going to resell it and charge tax to the purchaser?
Iam not saying I support the Fair Tax 100%, I just wish there was a way that employers didn't have to be the "police" for the government, by collecting local, state, and federal income taxes , and sales tax on behalf of the government. I mean, when you really think about it, why is it our responsibility?
To answer your questions, taxedtodeath, just imagine the most cumbersome and expensive way of implementing the sales tax, that maximizes revenue to the government and places the greatest burden on the merchant, and that's probably what you will have. Any tax system is implemented and administered by bureaucrats and subject to "enhancements" by politicians. Thus over time it will accrue add'l regulations and increase in complexity and burden.
You mean, worse than what we have now?
That'd take some serious doing...
What Does the Fair Tax Really Do for You?
The implementation of the Fair Tax is predicated upon several assumptions:
Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.
Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).
Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.
Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.
Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.
Assumption #5 - 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. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.
The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working, and retired not in the top 5% of the income brackets as shown below.
(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears obvious 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 and not to the customers or employees.
There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.
Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.
The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.
Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.
Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.
(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.
While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that 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 (current IRS or prebates) offers the most dollars to assist low income individuals and families.
(3) 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 approaching retirement.
The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.
The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.
Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.
With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.
(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.
Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.
(5) WILL INDIVIDUALS PAY MORE TAXES? The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.
Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.
(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.
Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.
Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.
If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.
CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.
Note: Many smaller businesses will like not paying Federal business taxes and FICA but will conclude making monthly payments to a combination of State and Federal bureaucracies may prove more onerous than the current reporting requirements.
In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.
Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.
In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.
I also have serious concerns about rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.
What Does the Fair Tax Really Do for You?
The implementation of the Fair Tax is predicated upon several assumptions:
Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.
Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).
Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.
Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.
Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.
Assumption #5 - 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. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.
The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working, and retired not in the top 5% of the income brackets as shown below.
(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears obvious 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 and not to the customers or employees.
There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.
Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.
The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.
Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.
Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.
(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.
While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that 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 (current IRS or prebates) offers the most dollars to assist low income individuals and families.
(3) 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 approaching retirement.
The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.
The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.
Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.
With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.
(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.
Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.
(5) WILL INDIVIDUALS PAY MORE TAXES? The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.
Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) that is not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to grave”. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.
(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax are the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.
Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.
Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find the tax compliance work increasing by having to report to up to at 20 – 46 agencies on a monthly basis.
If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.
CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.
Note: Many smaller businesses will like not paying Federal business taxes and FICA but will conclude making monthly payments to a combination of State and Federal bureaucracies may prove more onerous than the current reporting requirements.
In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.
Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.
In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.
I also have serious concerns about rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.
Randy,
Please note: The FAIR TAX is truly the UNFAIR TAX.
As noted above: The UNFAIR TAX taxes retirees' savings and investments TWICE!
Their savings and investments were taxed once when they originally earned them in the years prior to the FAIR TAX... and... a second time when they spend their savings and investments after the FAIR TAX is implemented.
No "Prebate" is sufficient to compensate for this double taxation - when retirees begin to spend their savings and investments in large amounts, which were taxed first when they earned them prior to the FAIR TAX.
That is certainly an UNFAIR TAX.
Don't worry you'll get your UNFAIR TAX! As soon as the Dems realize that they'll have a whole new source of revenues from the retiring Baby Boomers, that will solve the Social Security funding problem - they'll enact it tomorrow!
But... I'll be living in the Caymans, or Bermuda, or Mexico, or Canada... most of the year where I'll avoid the UNFAIR TAX - returning to the US only a few times each year to collect my Social Security, and get my healthcare paid by Medicare.
Suckers!!!
R C Albin