The Fair Tax and its big break for the $200,000-plus crowd

[I]f you're for a Fair Tax or any other kind of flat-rate tax, you are for shifting some of the tax burden from high earners to the middle class. There's really no way around that.

Exactly. That's a very basic point, but it's amazing how often it gets obscured in these debates.

A minor point of punctuation, but isn't it "FairTax" (no space) not "Fair Tax"?

Yeah, they write it "FairTax." But I believe we have spaces between words for a reason, and therefore refuse to go along.

The rest of that Brad DeLong link is well worth reading. A longer, spot on quote on the politics of the FairTax:

Does the FairTax make political sense? It is hard to see how -- at least not if people know what he is really proposing. After all, a lot more people make between $30,000 and $200,000 a year than make more than $200,000. Politicians prefer, other things being equal, to take positions that are advantageous to more people rather than those that are advantageous to fewer.

So why is Huckabee doing this?

I believe the reason is that he is counting on people not knowing what he is really promising. I believe he is counting on the nigh total fecklessness of America's press corps -- a fecklessness that I at least now see as deployed with a sharp partisan edge. As economist John Irons laments on his blog, ArgMax.com: "I'm not sure how he is getting away with adopting the FairTax as part of his platform. Wouldn't Democrats be skewered in the media if they proposed a tax increase on people making between $30,000 and $200,000?" Yes.

But Huckabee is a Republican. And it is different if you are a Republican...

DeLong goes on to quote the New York Times' pathetic "views differ" coverage on Huckabee and the FairTax.

A key point in all this is one shouldn't be too tough on Huckabee and the FairTaxers, at least not relative to the rest of the GOP field. As DeLong writes:

Is Huckabee's FairTax smoke and mirrors? Yes. Is it voodoo economics? Yes. But remember one more thing: It is more reality based than the proposals of the establishment Republican candidates.

We need to grade on a curve here. As Justin has documented, the other GOP majors -- even Saint McCain to say nothing of Giuliani and Romney -- or on record as saying they believe that tax cuts (and in particular the Bush tax cuts) increase revenues. The FairTax looks almost plausible by comparison.

I would disagree with the argument that shifting from income to consumption taxes is necessarily regressive. Obviously the models on offer in the current US debate do imply a shift in the tax burden to some degree, but there have been progressive consumption tax models proposed. I'm familiar with one in particular out of Canada, by a grizzled liberal thinker named Tom Kent - he published it through a think tank called the Caledon Institute back in 2003. He envisioned a taxation model that measures income against expenditure (basically your tax form becomes a general tally of cash flow, or at last the difference between revenues and net savings), and applies tax based on a household's yearly expenditures - but with exemptions built in at the low end, progressive taxation rates for high-spending households, and incentives for asset-building and saving.

It's complicated as hell - one wonders if it's workable (I'm not an economist). And it's obviously not what the guys at FairTax have in mind. But I think, given what we've seen over the past ten years in terms of the pattern of household spending versus saving (both US and Canadian households are highly leveraged in terms of borrowing - although Canada hasn't relied on mortgage refinancing to fuel its spending to the extent the US has - that Noth American voters (particularly in the US) would be increasingly open to a debate over policies to help families build savings and reduce reliance on borrowing.

Arnold Kling:
Our current tax system takes its biggest bite out of people who earn much more than they consume.

Really? Who is the archetype of an American who earns much more than he consumes if not Warren Buffett? Yet, at least according to Buffett himself, he pays a lower tax rate than his receptionist.

Or look at it a different way: The tax rate on dividend and capital gains is now just 15% even if you're making millions a year. So if you compare someone making millions a year in dividends and cap gains from investments, they will pay a lower tax rate than a typical member of the middle class who gets most of his income from salary on which he pays income tax and payroll taxes.

But I believe we have spaces between words for a reason, and therefore refuse to go along.

So says Justin Fox, valiant defender of traditional punctuation. ;)

@Crust: Yeah, Kling's phrasing is a little off there. The reality is that our current federal tax system gets a big chunk of its revenue from people who earn much more than they consume. Also, Bush's cuts in dividend and capital gains rates were seen by the economists in his administration as a move in the direction of the flat/fair tax model.

@d. andy jette: I'm printing out Kent's paper right now. Thanks for the tip!

Re: the Kent paper, I don't want to overstate it's value as a technical paper; it's not a technical paper. It's also somewhat of a period piece, written at a time when the Liberal government of the day was struggling to find direction before ultimately finding itself in an election in June of 2004. But I've always been intrigued by the proposal, even if it never gained much traction policy circles - in late 2004 at a social policy conference in Montreal I had the opportunity to ask Kent (he was the opening day keynote, speaking on another topic) about his tax paper, and he responded by saying I was one of the only people to ever ask him about it in a public forum.

I'm curious as to whether the idea of a progressive consumption, whether as envisioned by Kent or otherwise, is practical, or desirable as an alternative to sales taxes and or high income taxes.

The arguments for and against taxing consumption, regardless of how it is accomplished, must also consider the often-unintended impact of simple human nature. Aside from the general concerns that taxpayers would attempt to circumvent the tax, our present economy is predicated upon continued spending (not saving and investing - which is another topic altogether) by consumers. It can be anticipated that a consumption tax would lead consumers to reverse their decades-long love-affair with "throw-away" consumer products that we import from all over the world and sell at our "big-box" and other retail outlets. As admirable as it might be to actually decide to "repair" broken products, or to encourage the manufacture of "higher-quality" products in the first place (a result which would naturally occur if people feared purchasing new items because of the tax assessment on 'sales'), the economic losses to our economy would likely never be made up by the much-touted economic release envisioned by the Fair Tax supporters expected to result from freeing consumers from confiscatory taxation (not to mention that States would still be free to impose income and other taxes in order to fund their economies!!). Our national manufacturing base is going the way of our agricultural base. We are a nation of consumers. While taxing over-consumption (however defined) may have a certain appeal, it makes little sense to move away from a system which - over time - has removed vast numbers of individuals from having to file tax returns - to a system in which every individual - in one way or another - will be impacted by the tax system (even if just to receive a check from the government - a task which is far from error-free even today!). It would seem to make far more sense to modify our current tax system to eliminate the need for more folks to file tax returns (e.g. simplification) by expanding the Standard Deduction, re-creating socially desireable deductions for mortgage interest and charities as tax credits, allowing full above-the-line deductibility for medical expenses and casualty losses and certainly imposing a surtax on income over, say, $250,000 for a family (along with phasing out other tax benefits and making Social Security Income fully taxable and removing the limit on withholdings for FICA). Anyway, there are many things that can be done to "flatten" the current tax, but the Fair Tax is probably NOT one of them!!

One HUGE thing that seems to have been missed in this particular FairTax debate is the issue of power in Washington. The FairTax, as written would be an enormous power shift AWAY from Washington. No longer could there be favors given in the monstrosity that is our current tax code. Along with that power leaving DC, so will a good percentage of lobbyists, and corruption. The only real way to stem the corruption in Washington is to relieve it of much of its power. After all, if the federal government actually was held to the powers given it in the constitution, there would not be much need to lobbyists, as there would not be all that much going on in Washington…at least on the domestic front.

I understand that this can actually be an argument against the FairTax…as most politicians don’t go through the trouble of getting elected, just to give away that power, but, if the American people can be sufficiently persuaded, it can be done.

Finally, try arguing the reverse. Pretend that you are talking to a 30 year old, who has only, ever known the FairTax. Try convincing him of the advantages of our current system, and that we should move to that model.. Good luck with that.

I am curious as to why so many are defending the current tax system??
Also, where's the discussion about the $$ saved by Americans not having to shell out money to have their taxes done, the hundreds of millions from folks who cheat and, the hundreds of millions collected from the underground economy??

htowner,

Because your points are irrelevant ($$ saved on tax prep is far less than money lost), untrue (100's of millions don't cheat on income taxes), and irrelevant again (it's arguable that the underground economy is taxed when "business owners" in that economy themselves purchase goods and services in the open market (whose profits are taxed).

How stupid do you think we are?

You're cleverly leaving out the rebate.

Let's say for simplicity that $20k/yr is the poverty line for singles, and that our two examples are single men.

Man A makes $30k/yr and spends $30k/yr. He pays $2300 in FairTax. 23% of 30k is 6900, but his rebate checks cover 23% of the first $20k, so that nets to $2300, or 23% of $10k.

Man B makes $200k/yr and spends $50k/yr- only a quarter of his annual income. He too gets a rebate check. 23% of $50k/yr is $11,500, his rebate covers the first $4600 in FairTax, making his total tax bill for the year $6900, which is $4600 more than Man A.

I guess liberals can't do math.

"I am curious as to why so many are defending the current tax system?? "

Because we have zero faith that a new tax system would be immune to the pressures our current one is. We need the IRS to enforce the current tax law, and a new tax method wouldn't change that. Unless we trust that business will self report their taxes properly, or won't sell products under the table in cash.

Secondly, the special interest groups will start to get all types of exceptions and deductions for their products. Or certain activities (home rebate, buying a car this year etc.) will warrant a larger rebate. Our problem isn't that the idea behind our taxes is difficult, it's that a lot of deductions and rebates have been added to the tax code.

The "prebate" is irrelevant. Here's why:

The current US economy is primarily driven by consumer spending. That means we need to understand how people will behave in order to predict the effect of a national sales tax.

Knowing that...

1) Prices of goods and services are set at what the market will bear (income taxes play little to no role).Ergo, prices at the register will rise and people will notice that (it'll be hard not to).

2) People generally respond to stimuli that are most salient (i.e., at the forefront of their thoughts) in the environment. That means the "prebate" will not factor into purchasing behavior because prices at the register will be far more salient to consumers

The most obvious conclusion is that a national sales tax will drive down purchases. Spending will drop no matter what, regardless of a prebate (this will be especially true in the middle class who will not receive the prebate). Consequently, the economy will tank.

Okay, so the economy will tank, which is still debate-able, but I'll concede for simplicity.

You still skipped right past the fact that as the richer man makes more, he spends more, which means he pays more in taxes. As opposed to paying less, as in the "big break for the 200k crowd" and trying to trick us littles into thinking we're paying for it.

Waa? I just re-read- how does the middle class not receive the prebate? Everyone receives the prebate.

The economists who support the Fair Tax (or Steve Forbes's flat tax or any other tax change that would shift the burden from income to consumption) believe that money saved and invested is worth far more to the economy than money consumed. People who make $200,000 a year tend to save a much higher percentage of their income than people who make $30,000. Therefore, giving those high earners a tax cut would mean even more saving and investment, which would mean more economic growth. That's the thinking. It's certainly not universally shared among economists, but neither is it some crazy fringe idea.

what's crazy is that its not a fringe idea ;-)

the basic theory is that when you decrease taxes that go into "savings and investment", you contribute to economic growth.

Which may be true when the government isn't already running a deficit, but simple logic tells you that can't be true when the government has to borrow to "pay" for the tax cut, because for every extra dollar you make available for "savings and investment", you are creating a demand for a dollar of that capital by the government. You haven't really increased the pool of capital available for investment in "private sector economic growth" at all.

In a true market based economy, there is no need for government incentives for capital growth. When the benefits/costs/risks calculation of a proposed investment outweigh the benefits/costs/risks calculation of an existing investment, the existing investment will be sold, and the proceeds will go into the new investment.

Moreover, adding money to the investment pool when there is no need for new capital simply leads to asset inflation --- and the creation of bubbles that eventually burst and highly speculative investments that don't pay off.

The bottom line is that in economic terms, the "Fair Tax" is simply stupid economically --- because it will reduce consumption and demand, thereby reducing the need for labor, while also reducing the need for investment that contributes to economic growth and leading to asset inflation.

Like I said -- the whole thing might not be a fringe idea, but that don't mean it ain't crazy.

verybadcat, I'm not sure who you're replying to but in any event according to your own numbers Man A making $30k/year has a tax rate of 7.7% and Man B making $200k/year has a tax rate of 2.3%. So the man making more -- though he is of course paying more dollars in tax -- is paying a lower tax rate. Certainly, 2.3% would -- as DeLong and Fox say -- represent a huge tax cut versus the current system for a typical person making $200K.

Furthermore, as of 2006, the poverty level for a single person was $10,488 not $20,000. So in reality the tax burden on the single making $30K would be roughly double what you say.

Has it occurred to any one that goods produced in the United States bear an unfair tax burden that goods imported from other countries do not.
goods produced in the United States would cost the same because the tax is shifted from the front to the back end. Imported goods would cost more thus making American industries more cost competitive when the goods are consumed in our own country.

Waa? I just re-read- how does the middle class not receive the prebate? Everyone receives the prebate.

The middle-class -- and everyone else -- would get the prebate. The point is that accounting for everything (including the prebate) the total tax burden for the middle class would go up under the FairTax (or Steve Forbes' flat tax). You may think that's a feature or a bug; either way, it is a reality.

I'm a fan of changing the status quo in our current America on many levels and the FairTax seemed to be the best vehicle for tax reform when I first learned of it 5yrs ago or so. While, it's not a perfect plan - none ever are perfect - it's a good plan based on leveling the playing field as much as possible, eliminating the grotesque tax code and providing an opportunity to divert the power held in DC back to the people. Anything that can do this, while inspiring regular Americans to shake off their apathy and get involved make this a winner in my book!

My main concern is that there is a large contengency of journalists writing articles under the guise of "fair reporting" on the FairTax that really have not taken the time to do proper research to understand the plan and then present it correctly. Bartlett is one of those who amazes me in his omission of large facts, concepts and figures regarding the FairTax. These are blatent hit pieces, that in this era of internet fact checking, should be pointed out with a white-hot spotlight - whether you are a friend of the plan or not. All I ask is for folks like Mr. Fox here continue to show the good the bad and the ugly in the pursuit of truth vs. an agenda. (Very good job here Justin)

Let's continue to debate and poke holes into this and any other reform plan that surfaces, but after 5yrs of research and discussion The FairTax is still my current #1 girl at the dance.

You still skipped right past the fact that as the richer man makes more, he spends more, which means he pays more in taxes.

ah yes, its the Paris Hilton school of economics (the school that says that there is no distinction between wealth and profligacy) rearing its ugly head again.

Its my second favorite school of economic thought, right after the Mother Theresa school (the one that says that that every dollar taken out of government services for the poor and given to the rich will not merely find its way into the hands of private charities, but the private charities that are specifically designed to help the poor people that the government just cut out --- and because they are private charities, they'll be more efficient!)

In the real world, the Fair Tax will reduce consumption -- even among those making "only" 200K a year -- because anytime you increase the price of something, the demand for that item goes down... So even someone making 200K is gonna look at the price tag of that Jaguar, and say "do I really need a third car?"

Correction: It was my understanding only those below the poverty line receive the prebate.

Verybadcat, you're clearly unfamiliar with the idea of diminishing returns.

There're only so many things you will spend money on. I'd have to check but the largest expenditures in the consumer market (which is all that the proposed "Fair" Tax covers) are "everyday" items (e.g., gasoline, food, clothes) as opposed to "big ticket" items (e.g., homes, cars, boats). There are only so many big ticket items a single household will purchase and those tend to be extremely durable goods (especially when you have more money).

In other words, the relationship between income and expediture in nonlinear. Specifically, think of it as similar to a curve that approaches infinity (though with different numbers). It may be "more" as defined by a higher raw number, but when you compare the percentage of income that would go to taxes it would be radically different. With percent of income in mind, a national sales tax clearly shifts the burden to the lower and middle classes, who spend a far higher proportion of their income on goods and services than do the upper classes.

However, it is the upper classes who use far more of the commons than the lower and middle classes (but that's another argument against the FT).

Okay, can we please separate out the issue of the grotesqueness of the current tax code from the issue of the relative merits of Flat Taxes vs Progressive Taxes, income taxes vs consumption taxes (and my personal favorite, wealth taxes) etc.

You can get rid of all the tax loopholes, deductions, tax credits, tax incentives, and still have a progressive tax system --- and you can have (and will have, if the same people who are financing the push for a flat tax have anything to say about it) a flat tax full of tax loopholes, deductions, etc. etc. etc. And the same goes for consumption taxes....

and yeah, I KNOW that "the plan" says it won't be complicated by loopholes, etc....but exactly how long do you think its gonna take before the government decides that in order to reduce greenhouse gas emmissions, solar powered water heaters are going to be exempt from the Fair Tax?

Has it occurred to any one that goods produced in the United States bear an unfair tax burden that goods imported from other countries do not.
goods produced in the United States would cost the same because the tax is shifted from the front to the back end. Imported goods would cost more thus making American industries more cost competitive when the goods are consumed in our own country.

Don, could you clarify? Because I don't see where a notebook sold by walmart that it bought from a Chinese manufacturer would suddenly cost more than the same notebook bought from a factory in the USA as a result of the Fair Tax.

(

I don't see anyone commenting on the very specific research that's gone into this EXACT "Who pays?" question. See this Boston University site about a dozen and a half results down: http://people.bu.edu/kotlikoff/

It shows that every income level come out better (as presumably the 84% current compliance rate improves) but the poor do the best percentage wise.

As far as exempting things, I'm sure that can or will happen under the FairTax but why not wipe the slate clean and force congress to justify every exemption at the retail counter instead of the lobbyist back room deals we don't hear about?

P_lukasiak, I think the info you're looking for is in the FairTax.org research section an is at

This is the paper's tagline: http://www.fairtax.org/PDF/FairTax_on_American_manufacturing.pdf

"The impact of the FairTax on American manufacturing, agriculture, trade, and international competitiveness
Manufacturing’s share of the U.S. economy has been in a relentless decline to less than 50 percent of what its share of the gross domestic product (GDP) was in the 1950s. The FairTax plan reduces the cost of American manufacturing and agriculture considerably."

#1: Everyone gets the pre-bate.
#2: I CLEARLY STATED that I was using $20k as an example, don't be asshats. This is why people who argue on the internet are slow, myself included, because idiots split hairs when you clearly state your intentions.
#3: If Man A's rate is higher than Man B's, but both men get a substantial cut, than trying to play off the FairTax as shifting tax burden from the middle class to the rich is nothing short of class warfare. Only that kind of mindset is still looking for the shaft from the dirty rich when you've just gotten a tax cut.
#4: It's awfully cute to refer to Paris Hilton, but it detracts from your message.

If ya'll want to hate the FairTax, there isn't anything I can do about it.

It is not necessary a tax break for $200,000 crowd once you count in long term capital gains.

It does not mean it is a good idea, though.

It shows that every income level come out better (as presumably the 84% current compliance rate improves) but the poor do the best percentage wise.

First off, thanks for the link.

Secondly... everything I've read said that the Fair Tax is designed to be revenue neutral. Now, if its revenue neutral, how is it possible for ALL income levels to come out better?

It is not necessary a tax break for $200,000 crowd once you count in long term capital gains.

well, if you add in the fact that corporate taxes are being eliminated (as are estate taxes) and take into account the additional capital gains that will be realized by the wealthy because the corporations won't be paying taxes, I think where you can see that the rich are gonna make out like bandits.

#3: If Man A's rate is higher than Man B's, but both men get a substantial cut, than trying to play off the FairTax as shifting tax burden from the middle class to the rich is nothing short of class warfare.

well that's it. The only time you ever hear anyone talking about "class warfare" is when the rich are gonna make out like bandits while everyone else gets screwed. (I mean, when was the last time you heard anyone -- let alone a conservative -- talk about 'class warfare' when it came to cutting social programs for the poor?)

How much does the government spend on funding the IRS? IF we move to a sales tax method, do we need the IRS anymore or can it be reduced?

I like a fair tax model. Not that I am making over $200K but it is something to strive for.

The problem with a graduate tax bracket system is that if you are at the TOP of the bracket you are optimized, but if you are at the bottom of the bracket you are not. I heard a doctor say that if he saw less patients, he would have more take home pay as it would move him to a lower bracket. DO we want people trying to optimize how much they make OR should we reward those that strive to make more money.

IF you make 30K per year don't you want to make more? But what if you were told.. the more you make, the harder you work, the more we will take away from you......

http://www.irs.gov/pub/irs-utl/budget-brief-05.pdf

The FY 2005 budget for the IRS was 10.674 billion.

Which translates into slightly over a month's cost for the occupation of Iraq.

It should be noted, however, that the costs associated with the collection of the Fair Tax will be borne by state governments.

I suspect, however, that the Feds will have to pay for enforcement -- and one of the big potential problems with the Fair Tax is that it is likely to lead to a large "underground" economy --- and there will be lots more stuff "Falling off a truck" and ending up in people's homes. So don't expect to see government costs reduced by the full 10.674 billion -- and do expect to see a few more dead cops each year (income tax criminals rarely resort to firearms... not so the kind of organized gangs that are likely to be created in response to demand for "no tax" big ticket items.)

I heard a doctor say that if he saw less patients, he would have more take home pay as it would move him to a lower bracket.

he was lying. higher tax brackets only apply to the money you earn over and above the lower tax bracket income maximum.

(i.e. if the highest rate kicks in at $70K, you only pay that rate on the amount you earn ABOVE $70K. )

Have any of you actually read the fair tax book?
It doesn't sound like it. Read the book instead of debating false information. Of course there is a fear of the unknown, so educate yourself before bashing the plan.

A few thoughts....
Employees will immediately get a major increase in their paychecks when the withholds are gone. More discressionary income means more opportunity to save and/or spend. Since when is it a bad thing to save. We are constantly hearing how social security won't cover our retirement. Why wouldn't we want our society to consider saving more. Flip side, many people will spend more if there is more in their paycheck so the lagging economy due to an increase in sales tax is cancelled out.

With the elimination of corporate taxes we move from the least attractive place on the planet to start a business to the most attractive place. The blood letting of American industry needs to stop. This seems like a good concrete way to increase the attractiveness and jump start the creation of new business in America. We become more competitive with foreign markets both on our soil as well as abroad. When taxes are imbedded like they are now, our products become more expensive when sold abroad compared to the competition. When imported products are sold in our country, our sales tax is applied and they lose their advantage over American made products, again keeping parity with domestic goods.

It cost almost two thirds in additional dollars to collect the billions of dollars in taxes that are gathered each year. Why are we paying that kind of money to "collect" that kind of money.

Businesses all ready collect state sales tax on items. What is the big issue to add federal? The process is the same. The computer software is the same.

The underground economy includes many individuals that try to bypass paying taxes. Drug dealers, prostitutes and illegal aliens enjoy tax free payment, but they are still consumers of above board businesses and are often major consumers of non essential items. Why not take advantage of a way to tax them?

Only new items are taxed. If you buy a new car off the lot you are taxed. If I buy the car from you, I am not taxed.

It is a shift of power. Wouldn't you rather decide for yourself, what you think is worth spending your money on and paying the tax on it? Or do you want to continue to let Washington and its many lobbyists decides how to tax your income before you have a chance to decide how spend it.

The biggest challenge in understanding the fair tax is that is is so transparent, fair and clear. Americans are so use to being deceived and trying to understand the tax laws that it doesn't feel possible that we could collect the money this way and stay revenue neutral. It works. Read the book. Check out the website and ask the tough questions.

I must say you all raise obvious and good points at that, however I came across a website devoted to comparing various tax models and the FairTax appears to take a backseat to the FLAT TAX......stay with me here. If you want to truely be fair to all, this is the way to go. It really does make sense to me to apply the same tax rate to everyone @ a rate of 17% above the Federal Poverty Level. Think about it...no rebate checks, one simple tax formula on all PERSONAL INCOME earned above the Poverty Level (no regressive comsumption taxing here). I'm not sure why American's are stupid enough to fall for these damned 'pretty in pink' named phrases like "FairTax". This whole, rich men invest for the little guy crap has run it's course...really, how stupid do you think we are. "Trickle Down" economics="Trickle On" economics.
-Please give it a "FLAT" shake, read the info and tell me it doesn't beat the FiarTax or the "current system". Hell, rename it the "Level the Playing Field" tax as FlatTax sounds just that. (in the interests of disclosure, I earn about 30K/yr)
http://one-simple-idea.com/TaxSystemReform.htm

Only new items are taxed. If you buy a new car off the lot you are taxed. If I buy the car from you, I am not taxed.

this is good news in terms of the environment (the potential to avoid taxation by buying "used" will decrease the impetus toward a 'disposable' society...)

But its not good news for the economy -- the development of a marketplace for used goods will mean less demand for new ones.

But I'll take the positive impact on the environment over the negative impact on the economy any day.

a couple of questions ---

1) Does this include houses? Is the value of my pre-existing home going to go up, because of the decreased demand for new construction because of the tax on new housing?

2) Will this include "reconditioned" goods? (i.e., if it doesn't, I'd be looking to set up a business that takes "broken" stuff like major appliances, repair them and replace worn parts, and then sell them with a warranty -- that is, I would do it if I knew what end of a screwdriver was for! ;-) )

3) What is to prevent someone from selling a "new" product well below cost to a "partner", who then sells it as "used" to a third party in a way that results in underpayment of taxes while maintaining the same profit margin on the item in question. (I guess I've got the mind of a criminal... too bad I don't know what each end of a handgun is for! ;-) )

and no, I won't read the book -- no one has yet explained how you can do what is being claimed --- lower everyone's tax burden, yet remain revenue neutral.

I haven’t really looked at the merits of a fair-tax but a flat-tax is used in several ex-USSR countries with great success as their economies are growing better than anyone else’s. A known flat-tax requires little bureaucracy and you can’t skip out on the taxes you owe easily.

If you look at the US tax code it is to easily manipulated by congress for the benefit of business and lobbyist and the rest of us get to make up these special interest tax breaks. However congress and the lobbyist love the current system so it will take an act of god or a civil uprising by US citizens to make this change happen because everyone benefiting from the current system is happy with the status quo.

For those who think we are getting our money’s worth from the current system just look at what you pay every year by adding up your federal, state, and FCIA and it’s over 33% or more and I know for myself I’m in the high 40% without consider all the local taxes, sale tax, gas tax, etc.

A flat-tax could be very simple and generate more revenue that is currently brought in under the confusing system we now have. Consider a 30% tax on income over $30,000 and below this line you pay nothing. The poor are protected and the guy who is making 10 million pays 30% of $9,999,970 which is way more that he pays now. Your return would be as simple as:

What did you make ____200,000 all income, wages, interest, dividends, capital gains
Tax cutoff ____-30,000
Taxable income ____170,000
Multiply by _______0.30
You owe ______51000

Simple and the IRS is now the smallest and not the largest federal bureaucracy but absolutely no one in Washington wants this for several simple reasons. First the democrats can say they protect the poor. Second the republicans can help the wealthy avoid taxes by shifting them to the lower income people. Third why get ride of the largest federal bureaucracy the IRS because bigger is always better.

Just my two cents.

Steve, I would like you to read a bit from the Flat Tax @ 17%. I really do not understand what people are afraid of. I have compared the options and this one lacks a lot of hyped up support, but makes up for it in substance. I imagine in part because no fanatical group one comes out a victor. It really balances out well and has few flaws....it is hard to see where the "FairTax" would come out the better plan. If anyone has reviewed the below site and found it a poor choice, let me know why. I am convinced it is as close to "fair" as we will get. Oh, and Steve, there really is no need to Tax the wealthy more, 17% for ALL (on income after poverty level) is a decent number.
http://one-simple-idea.com/TaxSystemReform.htm

Combine the FairTax with a FlatTax for all 100-times-over-average incomes.

For anyone who advocates any sort of flat tax, please address the disproportionately higher use of the commons by the wealthier members of society.

Those with greater wealth use the commons like the courts (e.g., enforcement of contracts and the like) and the financial systems (e.g., the SEC) far more than the poor (and middle class).

This is one of the reasons for progressive taxation.

A few thoughts:

1. The prices will not go up because they already contain embedded taxes. Read the plan.

2. No one has mentioned the fact that illegal aliens, criminals that make money illegally and foreign visitors will all be contributing when they purchase goods and services.

3. I don't know about everyone else but I would love to be able to keep my whole paycheck and decide for myself what I do with it.

4. To the person saying the IRS should enforce the laws?!?!?!? Sometimes they can't even give the same answer if you ask more than one agent about the same issue because of the overly complicated tax code. It is far past trying to fix and virtually impossible to enforce.

Again, read and resarch the plan. I have been weighing all the options for years and I can't see anything that would keep me from putting my full support behind it.

1. The prices will not go up because they already contain embedded taxes. Read the plan.

oh please. anyone that assumes that "the savings will be passed on to the consumer" needs to look at the history of corporate tax cuts and consumer prices. (and this is one of the big problems I have with these kinds of tax proposals -- they assume that all the money that will be shifted around will be utiltized in a way that is most advantageous to their proposal, without any evidence that this is the case.)

2. No one has mentioned the fact that illegal aliens, criminals that make money illegally and foreign visitors will all be contributing when they purchase goods and services.

somehow or other, I don't think that making criminality a feature of your proposal is really how you want to go. As I noted earlier, this proposal will also lead to criminal activity designed to "help consumers save money". And I don't know if I want to encourage taxpayers to be criminals just to turn criminals into taxpayers.

4. To the person saying the IRS should enforce the laws?!?!?!? Sometimes they can't even give the same answer if you ask more than one agent about the same issue because of the overly complicated tax code. It is far past trying to fix and virtually impossible to enforce.

I agree. But it isn't the progressive tax system that makes the tax code so complicated -- its the demand of special interests (and average americans) who want deductions for this, exemptions for that, tax credits for something else, etc. etc.

And the idea that somehow or other the forces that have demanded that the tax code be so complicated with just disappear is naive in the extreme.

You can simplify the tax code while maintaining its progressive nature. Just get rid of all deductions and exemptions and tax credits and the rest, and end the advantages given to certain sources of income, and you can file your taxes on a post card and a simple chart.

To p_lukasiak

If the founding fathers had thought like you we would still be under Britains rule.

If you want to pay higher prices then by all means go ahead and shop at the stores that for some insane reason raise their prices. If a company sees that it can sell its goods at a lower price than the competition then that is what they are going to do. Unless the competition is just out to go out of business they will have to lower their prices too. There have already been companies that said they will immediatly lower their prices or in this case not raise them the day the Fair Tax goes into affect.

Your argument is weak about turning tax payers into criminals. If this was the case we would all be dodging and cheating on our income taxes. What makes you think that the majority of the people are going to turn to a life of crime when they aren't criminals now? Yes, I agree that with the Fair Tax as with anything there will be people that try to cheat and get away with anything they can to get around it. Should we dismiss the entire plan because certain people might cheat just like certain people are cheating now?

As to simplifying the tax code - good luck with that!! It won't matter how much you try to simplify it, as long as it is in government hands it will never be a system that the American people will be happy with.

The basic point is that eventually all wealth is consumed (albeit sometimes by the taxpayer's children or grandchildren or great-grandchildren), therefore a consumption tax effectively amounts to a wealth tax.

Justin, you know better than that. First off, even if all wealth is eventually consumed it isn't necessarily taxable under the FairTax. If you spend your wealth in other countries or if you buy a house that isn't new construction or on Rembrandts, etc., etc. it won't be taxed. Furthermore, whose to say that the FairTax will still be in place decades or centuries hence.

As for "a consumption tax effectively amounts to a wealth tax", that's just hokum. A wealth tax taxes a constant percentage of wealth each year. If a family spends it's fortune over a century they would pay the same amount as under a 0.23% wealth tax. If they spend it over ten years, it would raise the same as a 2.3% wealth tax. In other words, a FairTax and a wealth tax are very different. Justin, I'd encourage you to update your post to correct the error.

I'm still struggling with that eventually.

So am I (though as I said in my previous comment there are several other serious issues). As Keynes said, "in the long run, we're all dead".

There have already been companies that said they will immediatly lower their prices or in this case not raise them the day the Fair Tax goes into affect.

talk is cheap. Do you have any data showing that corporate tax cuts lead to lower consumer prices?
(and there would be no reason to raise prices with a Fair Tax -- the question is whether/how much consumer prices would be lowered because business no longer contribute to social security or pay corporate taxes -- and bear the associated administrative expenses of them. )

Should we dismiss the entire plan because certain people might cheat just like certain people are cheating now?

no, but neither should you make the argument that the Fair Tax is a good idea because it turns criminals into taxpayers when at the same time it will encourage taxpayers to become criminals.

Corey,
You state prices are not affected by income taxes.
How so?
The highest expense of any corporation is payroll. In that the corporation has income taxes and compliance costs, do you seriously think that these costs are not added into the price of the goods they sell. In other words corporate taxes are passed on to the consumer. The FairTax relieves the business of these taxes and the prices of their goods will drop. Market competition will push the prices down.
The consumption tax will then apply and the price of goods under the Fairtax will not change.
The most salient thing the consumer will see is their increased take home pay, not an increase at the register.

The highest expense of any corporation is payroll. In that the corporation has income taxes and compliance costs, do you seriously think that these costs are not added into the price of the goods they sell.

since payroll is automated at most companies, the costs associated with collecting taxes for the government is minimal (I mean, we are talking about a few extra keystrokes per employee when the data necessary to get them into the payroll system is added, plus the expense of printing and distributing W-2 forms.)

So while the price of administering payroll itself is probably included in the price of products, payroll still has to be administered, and the costs associated with collecting taxes for the government are not even worth considering in the context of lower prices.

Corporate taxes (which are not on income, but on profit) and employer contributions to social security are "added" to the cost of goods and services -- but again, until I see some data that shows what proportion of savings are passed onto the consumers, rather than to their executives and stockholders (which seems to be the case) I'll remain skeptical about this 'prices will go down a whole lot' theory. (In recent years, savings/increased profits from productivity gains have tended to go not to consumers or the average employee, but to stockholders and top execs.)

Finally, a question. Is health insurance going to taxable? If so, won't this have an impact not merely on the cost of health insurance, but on the employer's willingness to contribute to their employees health insurance premiums, since THEY will be paying the tax on the percentage of the premiums that they are "buying"?

(Because insurance premiums paid by employers are not considered taxable income, smart people prefer that their employer pay more of their health insurance premiums than give them the same amount of (taxable) money in their paychecks.)

FairTax shud be compared to our existing system not to some perfect system that does not exist.

Rather than worrying how the bread is sliced, we all should envision new bakeries. Why wouldn't U.S. become Global Tax Haven?

Has anyone calculated the pre and post FT numbers for someone making $60,000 for example to include prebate and absence of Medicare and Social Security taxes and receiving paycheck without deductions? Wouldnn't that be the real test of FT viability and political acceptance then how tax burden shifts from one earning level person to another? FairTax Fan Foster

FairTax shud be compared to our existing system not to some perfect system that does not exist.

Rather than worrying how the bread is sliced, we all should envision new bakeries. Why wouldn't U.S. become Global Tax Haven?

Has anyone calculated the pre and post FT numbers for someone making $60,000 for example to include prebate and absence of Medicare and Social Security taxes and receiving paycheck without deductions? Wouldnn't that be the real test of FT viability and political acceptance then how tax burden shifts from one earning level person to another? FairTax Fan Foster

No one has mentioned the fact that the FairTax will force tourist, illegals, and the US citizens who don't pay taxes to help fund the US government not just US citizens who follow the law. Just my two cents.

Just leave taxes alone.

Steve:
No one has mentioned the fact that...

Actually, Jason mentioned this -- using rather similar wording even -- above. And p_luk replied.

Just a note on prices at the register...

I took a look at the CPI (a measure of the prices paid for certain goods and services). To account for random yearly variations I decided to use a 5-year rolling percentage change. Keeping in mind on a yearly basis, the CPI for a given year reflects changes in price from the prior year (I think...correct me if I'm wrong).

FICA Passed-1936. Tax collected 1-37. The 5 Year Percentage Change in 1937 was a 10.77% increase. In 1938, the 5-Year Percentage Change was 5.22%. In 1984 (the year the trust fund began collecting--I think), the 5-year percentage change was 25%. In 1985, it was 18%. Granted those years are inclusive of the rampant inflation in 79 & 80. Dropping those years however, has no effect on the directionality (13% vs 11%).

For the sake of fairness, I will note that Medicare was introduced in 67 (taxes started). The 5-year rolling change in 67 was 9.15%. In 68, it was 12.26. In other words, Medicare may have affect prices a little, but FICA may not.

I will note caveats--these numbers are rough estimates only and do not partial out other economic effects. It is worthwhile to note that a major program's (Medicare) introduction in one year occurred coincidental to upwards increase in the rolling CPI percent change while the introduction of and changes to FICA do not.

The only group that will pay more taxes are those that are currently paying no taxes. This is because the FairTax will have a much wider base. It will do this by bringing the underground economy (est $1-1.5 trillion), illegal immigrants, and others that are not currently paying taxes into the tax system.

Robert V: define "more"

That is...what units are you using?

Corey: More as opposed to less or the same. The unit is Dollars.

Robert: good...now I know you're using the raw number...not the better estimate of percentage.

For example: It's a fact that you will make more money this year than last year. However in terms of constant dollars it may not be more.

Back to the concept of more...

As a percentage of income, a national sales tax imposes a greater burden on those in the middle class and below. As a point of fact, burden increases as income decreases. As a consequence, those making less money subsidize the wealthier's greater use of the commons (e.g., courts, financial systems, etc.).

Corey: What your saying is irrelevant.

It doesn't matter to me how the FT effects the rich. I'm not rich so why should it concern me? All that concerns me is that my income will go up (payroll tax gone), I will get my entire paycheck (income tax gone) and I will be paying less taxes(buying combo of new/used goods). I care that business will do better cause I might want to go into business, and also cause there will be more good jobs to choose from. The FT will be good for me, and for this country, so I support it.

Robert: well...how about this as a reason for concern:

If your tax burden is higher than the wealthy's, then you are subsidizing their disproportionately higher use of the commons.

The next question is: do you want to do that?

Corey: People should be for the FT because it's good for them. People should not be against the FT because it's good for someone else. That would be stupid.

It's just a fringe benefit that it's also good for the country.

Here is a repost showing a reason why the sales tax is bad:

Corey wrote:

The current US economy is primarily driven by consumer spending. That means we need to understand how people will behave in order to predict the effect of a national sales tax.

Knowing that...

1) Prices of goods and services are set at what the market will bear (taxes play little to no role). Ergo, prices at the register will rise and people will notice that (it'll be hard not to).

2) People generally respond to stimuli that are most salient (i.e., at the forefront of their thoughts) in the environment. That means the "prebate" will not factor into purchasing behavior because prices at the register will be far more salient to consumers

The most obvious conclusion is that a national sales tax will drive down purchases. Spending will drop no matter what, regardless of a prebate. Consequently, the economy will tank.

As an example...take dining out, especially someplace nice (3-4 stars). The primary cost of the meal is driven by the skill of the chefs making it--not taxes. Another example. It cost 6 cents to make a Sharpie, but it retails for a $1.

Cory: That repost shows nothing, cause it has no bearing on reality. To say that taxes have no bearing on prices, and the amount of money a person has has no bearing on how much they spend, we might as well be talking about centaurs and pink fairys.

You don't understand economics very well do you? In economics 101 you learn that prices are decreased by competition. You might want to take a refresher.

Justin,

Thank you for answering my question about progressivity in my comment response to your other FairTax posting. You got me reading this posting. However, I am still convinced that you are wrong about the progressivity of the FairTax for two reasons:

1. In this article, you compare the tax distribution of the FairTax with that of the Flat Tax, but the two are entirely different animals, mainly because the Flat Tax includes a huge give-away to the rich -- a 0% rate of taxation of capital gains (whether or not they are reinvested). The current income tax code has the same giveaway, a maximum 15% tax rate for capital gains (whether or not they are reinvested), which is why it gets less progressive at the highest income levels. The FairTax has no such give-away.

2. I keep thinking from your comments that you are imagining in your head the 1996 distribution of the income tax, not the distribution of the tax system of today. Check out this Urban Institute and Brookings Institution data (http://www.urban.org/UploadedPDF/1001065_Tax_Units.pdf) for the 2006 distribution. If you actually take the time to graph the distribution of the FairTax against the combination of the current personal income tax, earned-income tax credit, and payroll taxes, as we did on page 165 of Chapter 8 of our forthcoming book (that chapter can be read online at www.idealtaxes.com) you would see what I am talking about.

Howard Richman

If you are not rich, paying no taxes will not make you richer. The price of things will go up and you will still be complaining. You people have to realize that if you are not rich, you will NEVER get ahead. Earning $40,000 a year and paying no taxes will not allow you to live like someone making $200,000 a year and paying 50% of of their income in taxes.

Do you understand that you are not important or special if you are not rich? Do you know that 99.99999% of people on Earth do not care whether you live or die? So why do you people come on here and get mad about petty things like taxes? If you were rich, you would hire people to help you cheat the government out of tax money. Stop crying about taxes and get out there and make more money. The rich do not care about your tax troubles. The poor do not care about your tax troubles. The middle does not care about your tax troubles. Why do you?

The meek shall inherit the Earth, once they become rich.

to:P_lukasiak
you stated:
In the real world, the Fair Tax will reduce consumption -- even among those making "only" 200K a year -- because anytime you increase the price of something, the demand for that item goes down... So even someone making 200K is going to look at the price tag of that Jaguar, and say "do I really need a third car?"

Really, this would be true if it not were for embedded taxes. For a complete discussion on this you need to go to the www.fairtax.org
But in a nutshell, once the corporations do not have to pay income tax and payroll tax (the total of which they pass on to the consumer in the form of higher prices of their goods) then the price of their goods can come down (by 23% or more), so the price of the goods, even with the FT added to it, would be the same as it was before the FT was added. So would you like no income tax, keep your whole paycheck, and still pay 1.49 for that bottle of Bud? Of course you would!

There are so many other advantages of the FT we cannot come close to covering here.
I speak on the FT all the time and have been trained to do so. So the next objection I always hear is "well then the corporations will just keep the extra money saved by not paying taxes and will not pass the savings on to the consumer".
Would be true if it not were for two words- Simple Economics". If you really think all the companies are going to conspire to not pass the savings on, economics will not allow this. Some if not most companies will see the competitive advantage of lowering the prices and do so. So then, whom will you buy from? The lower priced company - of course! Then the others will have to follow to keep market share.

If you want to argue that all this would not happen, fine. But please ask your self "if this is not true, then why would the price of gasoline come down by even one penny when the supply increases or oil per barrel prices decrease?” All the oil companies could huddle together in some dark room and conspire to keep prices up, but they do not. Why? Again simple economics. Some might, but as soon as one lowers the prices, other follow.
Embedded taxes- go research it please!

The reason I speak on the FT is because I have seen that once FULLY informed on the FT, 80% of the people support it! The people posting here are all very good, smart folks, but they clearly are not informed FULLY on the FT. It would take about 2-3 hours of study on the website, or coming to one of our presentations to get ALL of it. It is simple to understand, it just takes time to answer the concerns over it, many of which are raised here in good form.

For those on this post who feel the Flat Tax is much better a choice than the fairTax, and have been posting links to site proclaiming such please take a moment to read this.
By far, the FairTax outweighs the Flat Tax, here is why:
1) Lower costs of compliance. The FairTax is a national sales tax that would replace the corporate income tax, the personal income tax, the payroll taxes and the gift and estate taxes. As a sales tax, it is only collected by retail businesses. Under the Flat Tax, however, tax returns are filed by both businesses and households.

2) More savings for businesses to invest. The FairTax is a tax on consumption and so leaves undistributed corporate profits and household net savings untaxed. The Flat Tax is a cash flow tax on corporate profits in that businesses expense their investments. The Flat Tax only increases the amount of savings that businesses have available for investment at first. In succeeding years, businesses would have less and less savings to invest because they would no longer be able to take off depreciation for past investments.

3) Encouragement of business investment. The FairTax is a consumption tax that encourages business investment by not taxing business profits, unless those profits are consumed by shareholders. The Flat Tax discourages business investment by taxing businesses on their profits as well as on their interest payments when they borrow money.

4) Progressivity. Because of its prebate, a monthly rebate given in advance to "un-tax" basic necessities, the FairTax falls most heavily on the rich, less heavily on the middle class and least heavily on the poor. In contrast, because the Flat Tax allows capital gains to go tax free (even when they are not reinvested), it falls more heavily on the middle class than the rich.

5) Border adjustability. The FairTax would be charged on imports into the United States, but not on exports from the United States. It would help level the international playing field for products produced by American workers, while strengthening the dollar. The Flat Tax is not border-adjustable. It would do nothing to level the international playing field.

6) Higher basis. Since the FairTax is border adjustable, it has a higher tax basis for a country like the United States today that has a high trade deficit and low net savings. Specifically, the net imports (which would be taxed by a sales tax) are currently much higher ($760 billion in 2006) than the net savings, including undistributed corporate profits that would be exempt from a sales tax ($245 billion in 2006).
Number of congressional signees for the FairTax:72
Number of Congressional signees for the Flat Tax:2

For those who feel it will encouage cheating:
More than 80% of all tax returns are eliminated under the FairTax--every individual filing. What remains are retail outlets collecting the FairTax. Of these, 80 percent of all retails sales now occur at large retail chains like Wal-Mart. The point is oversight will still reside under the Treasury Department but the government's responsibility will be over a far smaller "universe" of tax collection points making compliance oversight far less costly and far more effective than the current system which costs $265 billion a year in compliance costs and still comes up $350 billion a year short of what is owed.

Robert wrote: "That repost shows nothing, cause it has no bearing on reality. To say that taxes have no bearing on prices, and the amount of money a person has has no bearing on how much they spend, we might as well be talking about centaurs and pink fairys.

You don't understand economics very well do you? In economics 101 you learn that prices are decreased by competition. You might want to take a refresher."

No bearing on reality you say? It's Consumer Science 101, Robert. Give specific examples of where the flat tax will lower costs--specific products. I can give specific examples where it won't for sure-Sharpies for example-they cost 6 cents to make but are priced retail at $1. Why is that? It sure isn't taxes.

Face it. Most goods and services are priced at what the market will bear. *That* is ECON 101. And that is what the price will be even after a sales tax is implemented (i.e., the price before).

Faitytaxgodfather wrote: "But in a nutshell, once the corporations do not have to pay income tax and payroll tax (the total of which they pass on to the consumer in the form of higher prices of their goods)"

You really need to read my posts. On an aggregate level, this will not happen. I'll list more reasons here:

1)Imports: you say it will be charged on products coming into the US and thus make US products competitive. Let's think about this. Imports occur because production costs in other countries (e.g., China & Mexico) are far lower than in the US, but when was the last time you saw prices drop? Companies move production outside the US in order to reduce operating costs (and thus increase their Operating Income that year). By taxing foreign produced goods upon coming into the US, you would reduce the profit margins of the companies importing them. Do you think the companies will accept a loss of profit margin? I wouldn't. My prices to retailers would go up. In all likelihood it will still be a lower cost than moving production back to the US (even without a payroll tax). Oh...and taxing imports would require abrogating NAFTA.

2) The marketplace sets the price. Companies actively determine the optimum price to charge for a product...the maximum that people will be willing to pay (or say they would). In other words, retail prices are a reflection of the market rather than manufacturing. Brand awareness and perception plays a huge role in this.

"All the oil companies could huddle together in some dark room and conspire to keep prices up, but they do not. Why?"

Because the information about who is charging what is publicly available. They don't need to actively collude.

"The FairTax is a tax on consumption and so leaves undistributed corporate profits and household net savings untaxed."

And when that happens you reduce consumer spending and that means the economy will take a massive hit.

Cory: All of the costs that go into getting a product to the end consumer are factored into the price of that product. These include manufacturing, distribution, employee wages, utilities, advertising, and taxes. The .06 cost of making that sharpee is only a tiny portion of the cost of getting that sharpee to the consumer.

You are partially right about the "Price the market will bear". This number is defined by a combination of perceived need for the product, and the lowest price available for that product, ie competition.

You should ask your economics prof about competition.

Cory: NAFTA is not being violated under the FT. Imports are not taxes as they arrive in the port, they are taxes at the counter just like all the rest. Then that gives our products an edge cause our products have no imbedded taxes, but thiers do. The same with our products shipped over there. Our products are shipped out untaxed, then sold in thier countries with an advantage, cause thier products do have imbedded taxes, but ours don't.

Cory wrote "Do you think the companies will accept a loss of profit margin? I wouldn't. My prices to retailers would go up."

Cory, I think you just proved my point.

The retailers also don't want to accept a loss of profit margin. They will also raise thier prices. If they think they cannot do that cause the market will not bear it, then they don't buy the product.

Aaron Said, "The FairTax plan reduces the cost of American manufacturing and agriculture considerably."

The FT will increase American manufacturing cause the removal of the imbedded taxes will bring costs down here in the states, and also make them more competitive abroad.

:)

Last thing I will add will be addressed to Cory and others and the comments on prices and imports. Again as a speaker I argue my points using the 20 million dollars in research done on the FT addressing these concerns. I hear what you are saying so well but consider this:
Over 1 year ago 80 noted Economists from many prestigious Universities and organizations got together and wrote a open letter to the President endorsing the FT. Additionally, for all the detractors I run into and all the good points most raise I find it hard to argue with these renowned Economists who took the initiative to sign their opinions and reputations on the line and back the FT after doing the research on it themselves. Your views are appreciated very much by me but I will refer you to the newest research, which also addresses your concerns, and posted on www.fairtax.org, One notable research paper states:

"Incentives drive all economic behavior. Taxes are a negative incentive. People do not work, invest, or engage in entrepreneurial activities in order to pay taxes. They engage in such economic activities in order to earn after-tax income. When the government increases its share of the income earned by its citizens, the incentive to engage in growth-enhancing economic activities falls; alternatively, the disincentive to these activities rises. The higher the tax on the next dollar earned (the marginal tax rate) the larger the disincentive. However, without taxes the government cannot operate. From an economic efficiency perspective, the appropriate goal for tax policy is to establish a tax system that minimizes the tax disincentives on economic activities, given the revenue needs of the government."

This paper addresses many if not most of the issues raised on this blog and is well researched by Arduin, Laffer & Moore Econometrics. It is also 41 pages, which I think only crazies like myself take the time to read to increase my working knowledge of the FT! Here is the link to it: (PDF file)
http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf

My point is that I think it is great we have these dialogues but you have to go a long way to make a valid well-researched point in the face of such overwhelming research by solid economic experts. Perhaps run your opinions to some of these authors? Much of what you all say is economically true for many things, just not the FT, in my opinion.

If you prefer to argue for the flat tax, keeping the current system, or moving a new idea forward, it will never have the research and economic support the FT has!74 sponsors and growing!

Thank you all for the thought provoking dialogue and maybe we can look back at some time in the future, post passage of the FT, and ask, "How could I have not supported this? I hope so!
Rich/Fairtaxgodfather

FairTax is great. We love it. You go, FairTax!!! :)

What the Fair Tax Good Will Do for You
The implementation of the Fair Tax is predicated upon four 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.

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 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 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 to offer Medicare Part C over and above what Medicare was already obtaining from the healthcare industry 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 WORKING AND RETIRED 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 to the Middle Class, retirees, and children.

(3) 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.

(4) 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%.

(5) 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.

CONCLUSION: 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 if individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.

In addition, State and Local governments will have to increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will have less income available to provide services.

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 wage increases or reduced prices for the products and services they sell.

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 agencies.

I found this comment on http://robertreich.blogspot.com/ regarding economic issues.

MONDAY, JANUARY 28, 2008
The Real Recession Problem: Consumers Are at the End of Their Ropes
Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery, instead of spreading those deductions over several years, as is normally the case. The idea is to get businesses to invest in more machinery, which will stimulate the economy.

But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002 and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything.

This tax break exemplifies the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.

Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich -- which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return.

Add all this together and there’s just not enough consumer demand out there to keep the American economy going. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth. Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington.

Beware of regressive sales taxes (despite a prebate).
Here's a better tax plan:

http://One-Simple-Idea.com/TaxSystemReform.htm
http://One-Simple-Idea.com/FairTaxFraud1.htm

Thanks Gabe!