As April 15 approaches and you are struggling to fill out those ugly tax forms I thought I would post my opinion on the Fair Tax. For those of you that know all about the Fair Tax this can be a little refresher. Those that don't know anything about the Fair Tax than you will be pleasantly surprised that taxation can actually be fair.
The Summary
It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities. You only get taxed on what you spend not on what you earn. No more tax forms, no double taxation.
The Examples
I learn best by example so let me give you a couple of examples...
1) Currently there is a farmer that has a peach orchard. He has a worker named "Joe" that picks peaches. When Joe gets his paycheck, he finds that they have taken out Federal withholding, Medicare, and Social Security from his paycheck. The farmer also pays income tax and Social Security taxes, which he adds into the price of the peaches he sells to the peach cannery.
At the peach cannery they buy the farmers peaches and put them in cans and sell them to the grocery stores. The business owners of both the cannery and the grocery store both add the income taxes and social security taxes that they pay into the price of the peaches. The customer is then paying the hidden cost of taxes from three different businesses and their employees. With the Fair Tax, only the end result (the canned peaches) is taxed. Thus eliminating all the "hidden" taxes in the product, and bringing the price down.
2) OK, so let's go back to the farmer and his worker Joe. We find out that the farmer isn't really ethical and likes to hire illegal immigrants. Then we find out that Joe's real name is ,and is an illegal immigrant. The farmer pays Jose cash under the table. Jose not being really "into" obeying laws of this country likes to spend most of his money on illegal prostitution and meth. Jose can do this completely tax free.
Under the Fair Tax, people like Jose and the prostitutes and drug dealers that supply Jose, would be paying the same taxes as everybody else in this country. They pay the tax when they purchase legal items at a store.
3) Lets make Jose an honorable guy again. He pays his taxes now and has a wife and 4 kids. Picking peaches is what Jose does while he is going to night school to try to become a peach farmer. His wife Jane can't really work anymore than she already does because everybody knows that a woman that has 4 kids is doing the work of 3 men. They struggle everyday to try to make ends meet.
You might ask how why we would want to penalize Jose for doing everything he can, to make himself better by giving him a 23% tax increase with the Fair Tax. There is a "prebate" system set-up in the Fair Tax bill. So people who are below the poverty line would get a check each month to help them pay for the taxes they will incur during the month. Plus the products Jose and his family buy will be cheaper with no additional taxes buried in their price.
So that is my poor attempt to explain the Fair Tax. This is a place to start a conversation. It is a good idea. You can get much better information by going to this website: The Fair Tax
The Summary
It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities. You only get taxed on what you spend not on what you earn. No more tax forms, no double taxation.
The Examples
I learn best by example so let me give you a couple of examples...
1) Currently there is a farmer that has a peach orchard. He has a worker named "Joe" that picks peaches. When Joe gets his paycheck, he finds that they have taken out Federal withholding, Medicare, and Social Security from his paycheck. The farmer also pays income tax and Social Security taxes, which he adds into the price of the peaches he sells to the peach cannery.
At the peach cannery they buy the farmers peaches and put them in cans and sell them to the grocery stores. The business owners of both the cannery and the grocery store both add the income taxes and social security taxes that they pay into the price of the peaches. The customer is then paying the hidden cost of taxes from three different businesses and their employees. With the Fair Tax, only the end result (the canned peaches) is taxed. Thus eliminating all the "hidden" taxes in the product, and bringing the price down.
2) OK, so let's go back to the farmer and his worker Joe. We find out that the farmer isn't really ethical and likes to hire illegal immigrants. Then we find out that Joe's real name is ,and is an illegal immigrant. The farmer pays Jose cash under the table. Jose not being really "into" obeying laws of this country likes to spend most of his money on illegal prostitution and meth. Jose can do this completely tax free.
Under the Fair Tax, people like Jose and the prostitutes and drug dealers that supply Jose, would be paying the same taxes as everybody else in this country. They pay the tax when they purchase legal items at a store.
3) Lets make Jose an honorable guy again. He pays his taxes now and has a wife and 4 kids. Picking peaches is what Jose does while he is going to night school to try to become a peach farmer. His wife Jane can't really work anymore than she already does because everybody knows that a woman that has 4 kids is doing the work of 3 men. They struggle everyday to try to make ends meet.
You might ask how why we would want to penalize Jose for doing everything he can, to make himself better by giving him a 23% tax increase with the Fair Tax. There is a "prebate" system set-up in the Fair Tax bill. So people who are below the poverty line would get a check each month to help them pay for the taxes they will incur during the month. Plus the products Jose and his family buy will be cheaper with no additional taxes buried in their price.
So that is my poor attempt to explain the Fair Tax. This is a place to start a conversation. It is a good idea. You can get much better information by going to this website: The Fair Tax
Todd,
ReplyDeleteA fairly good beginning, but many errors need correcting.
(1)The Summary: All of my after tax savings will be double taxed when spent under the Fairtax. Is that fair? And, what you earn and what you spend are basically the same for the average American family. Unless you buy your underwear at Goodwill, almost all of your spending will be taxed. There are no "used" services, which make up half of a typical family budget. No used groceries, no used restaurant meals, no used gas or heating oil, no used gas for your car, nothing used at Wal-Mart, etc. etc. Only your occasional purchases of homes, cars, boats, etc. might go untaxed. But you won't save any extra money even then. After a short transition period, the law of supply and demand will return the used/new price relationship to what it is today.
(2) Your description of hidden taxes makes me think you believe that those hidden costs cascade or accumulate up through the various levels of production? It's true that dollar cost savings do accumulate, but as a percentage of sales, they do not. It doesn't matter if there is one level or ten, the percentage cost savings remains the same. This is true because cost savings at each level only apply to that particular level.
(3) While production costs will be reduced, retail prices will go up significantly. Assuming we all get our full gross pay, business tax costs, including income taxes, payroll contributions, and compliance costs, averaged 10% of sales based on 2007 actual tax revenue data. Reduce costs 10% and add the 30% sales tax and retail prices will rise by 17% on average.
(4) Towards the end, you discuss the prebate. I wish it did only go to the really needy as you wrote, but it doesn't. Every qualifying family gets the prebate, from Jose to Bill Gates. The prebate is in fact a $600 billion annual cash grant entitlement coming at a time when entitlements are squeezing out discretionary spending in the federal budget. What we don't need at this time is another huge entitlement program! And to repeat, the products Jose buys will be 17% more expensive under the Fairtax, not cheaper as you suggest.
Happy to answer any questions and/or comments you may have.
Let's start with your "All your tax savings will be double taxed under the Fair tax". First off, not true there is only one tax applied so how can it be double taxed. Secondly, even if the statement was true, that is like saying "I do not want your gift of $100 to me because they might tax it."
ReplyDeleteYes, supply and demand never goes away. That isn't a bad thing the costs will be lower causing an increased demand (if they are quality products). There will be inflation. There will be recessions, maybe even depressions. But I do believe that happens currently. I did not say that the Fair Tax repairs every economic problem or makes your teeth whiter. It fixes the tax system, period.
Question #2 I can not spend a percentage, I can only spend real dollars. So when something saves me real dollars that is the plan I support. It is true, at worst, the plan is revenue neutral. At best we are saving money.
Question #3 You are comparing apples with oranges here. You say it is a 30% tax, not true. It is a 23% Inclusive rate. The 30% rate is an exclusive rate. I believe your savings numbers are also incorrect. Are you counting the billions we spend to administer the tax code now? Or how about the savings that result when the United States becomes a place for foreign companies to bring their business, instead of American companies sending jobs overseas.
4) OK, the prebate goes to everybody, so how is that not fair? Are the poor people more deserving of a prebate than a rich person. I bet the rich person will spend a lot more money than a poor person. The poor persons taxes are paid on what they will spend. It may be an entitlement, but no more than the current Earned Income Credit or Child tax credit.
The difference is that in a Fair Tax world the government loses control of the individual, I am all for that.
Todd,
ReplyDeletePay attention-my after tax savings are going to be double taxed. This is a serious Fairtax transition issue. Everyone with after tax savings under current law will see those savings double taxed when spent under the Fairtax. This is particularly unfair to retirees who live off of SS and savings. Under current law, a retired couple spending $30,000 in SS pensions and $18,000 from savings pay zero federal taxes. Under the Fairtax, their taxes would be $11040. How is that fair?
(2) One of us missed the point. From your post, I thought you believed that cost savings cascaded up through the various levels of production. My caution is that while dollar cost savings do accumulate, percentage cost savings do not. Too many Fairtaxers seem to think that the 22% embedded tax costs cascade up through the system. They do not for the reason I gave. Perhaps I misunderstood your comments?
(3) Do you understand that retail merchants have to add 30% to their costs in order to arrive at a 23% inclusive tax rate? Again, a common misunderstanding by Fairtax advocates is that 22% in embedded costs can come out, and 23% will be added on for a net wash or even a retail price reduction. Nonsense! That just isn't true. Business tax costs were actually 10% of sales in 2007, and adding the 30% sales tax results in a 17% average retail price increase. Businesses can't save any more on taxes than they paid, it seems to me!
Don't hold your breath waiting for all those foreign companies to relocate to the US. Read HR25, Section 905 where you will learn that a 23% tax will be applied to all income generated within the US by foreign owned companies or foreign individuals. Not much of an incentive to move to our high cost of labor environment, is it?
(4) You may think it's fair to give a prebate to everyone, but I wonder where in our Constitution it is written that no one should pay taxes on essentials. My point is that under current law, only 1 million families pay zero federal tax, while under the Fairtax, that number jumps to 30 million. Just what kind of nanny state are you in favor of?
Todd, I agree that a consumption tax might be better than an income tax for our economy. But we are where we are, and the Fairtax plan has too many moving parts to ever be seriously considered. In closing, I would favor a 12% consumption tax aimed at replacing just the income tax with no exemptions, no taxation of governments, no investment tax credits, retain FICA and gift/estate taxes, perhaps a targeted prebate, and phase the whole thing in over five or ten years. Who knows, Congress might favorably consider such a simple plan.
On your first point about pre-tax savings I'm going to do some more research. I have not studied that portion of the Fair Tax that well.
ReplyDeleteI think points 2 & 3 are pretty much one point that we can't seem to bridge. You are saying essentially that the savings you get from the production end will not transfer to the retail end. I believe that is incorrect. If you are assuming that it takes 1 manufacturer to make a end product for a retailer you might be correct. Most things built in this country take many more than 1 supplier to create an end product. Take the building of 1 simple product, a radio. It takes someone to mine the raw materials to make the metal in the radio, another company builds the components, a third puts all the components together, then there is the people who ship those products between the various companies and then you have the retailer. All of those companies pay taxes. Those taxes accumulate, each company in the chain will reduce their price to the next stage. There is no Fair tax on business to business purchases.
Let's just take one tax cost that an employer has, social security matching funds. Every employer pays this now, 7.65% of each employee's wages. So in the supply chain each of those different employers pay that amount. Real dollars. If those costs are eliminated . The price of the product will fall. If the business does not drop their prices, they will fail. Because his competition will drop theirs and they will in effect take the business. Those employee taxes will be part of the Fair Tax. There are other taxes that a business pays that are also included in the Fair Tax. How about Corporate Income tax, most corporations are individuals filing a 1040. You don't think that a business ads those taxes onto the current price of a product?
If you are talking about just the management of the taxes (act of paying them) yes the retailer would incur more expenses than a manufacturer, but still less than they do now. Also the costs that the manufacturer no longer pays would be transferred to a lower cost product for the retailer.
On to point four. The "nanny state" you believe will exist, already exists. Look at the earned income credit and child tax credit. What you are not accounting for is the part of the "nanny state" that we are not currently paying for, illegal immigrants. The Fair Tax, taxes those 10 to 20 million people, without giving them a prebate. Thus eliminating part of the current "nanny state".
As for your proposal, I would need to do much more research. As for Congress approving any of plan which removes power from them (including the Fair tax)I think it will be a long time coming with much more public interaction.
Todd,
ReplyDeleteRe: points 2&3. No, I'm not saying that those production costs won't transfer up through the chain towards the retail merchant. The dollar cost savings will. What I'm trying to get across is that as a percentage of sales, cost savings do not cascade. Again, the reason is that the cost savings percentage at each level apply only to that level. It doesn't matter if there is one level of production or ten, the percentage cost savings remains the same.
For example, if the raw material producer saves 10% in tax costs, and each successive level also saves 10%, if there are ten levels to get to the retail merchant, the cost savings are not 100%, but simply 10%. May not be intuitively obvious but it is the truth.
On the nanny state, I can see a big difference between the 1 million workers who currently pay no federal tax due to the EITC, Child credit, etc., and the 30 million who would pay zero federal tax annually under the Fairtax. The reason I refer to a "nanny state" is because those 30 million workers who pay no federal taxes still qualify for Social Security pensions and health care. I believe it was a big mistake to include Payroll taxes on the list of taxes to be replaced by the Fairtax. No only did that result in the 30 million free loaders, but it created transition issues such as, how is it fair to force current retirees to resume paying for their benefits with their sales tax dollars?