Flat Tax: what %? help me answer "fairtax" tricks

[oscar111]

a pen pal has fallen for the site fairtax.com.

Pls help me with the rebuttal - i seem to recall that the result would be a 27% sales tax, but i also seem to recall the number 37%.

What is the correct number?

My rebuttal is that income and sales ...total tax combined, for average folks,... is around 21 percent. Vs top rate, 44.

so most of us would have a HIKE of six percent. A tax shift onto us.

[BlueEyedSon]

1. The problem is that it's REGRESSIVE

[oscar111]

2. True. But i would like the Percent to fortify the answer

the term regressive doesnt have meaning for him, and i cant define it well without an example using numbers.

generations have grown up unable to define prog. or regrr taxes.
I myself could not define it till years after i was out of college.

due to DNC having no media of its own. We need AAR.

[dcfirefighter]

3. *embarrassed* I used to like the fairtax

I may be able to help.

The FairTax people claim a 30% at-the-counter tax. Other groups claim similar, or higher numbers. My own calculations put it in that neighborhood. My guess is that the number is fairly accurate.

This tax is coupled with an annual & universal grant of roughly $3000 per adult & $1000 per child. This grant is given in monthly installments and represents the tax paid on poverty-level spending. This means that those who's spending is less than poverty level receive a subsidy (in addition to whatever existing programs they receive). Those who spend at poverty level effectively spend NO tax. This grant makes the tax progressive, on it's own, when compared to SPENDING (though not necessarily when compared to INCOME, or WEALTH). I actually believe that the tax would benefit the very poor, and the very rich, while hurting those in the middle.

When compared to INCOME, or WEALTH, the tax is regressive. Those with high income, or wealth, tend to spend a smaller fraction of their available purchasing power than those with less.

As far as I can see, there are several advantages to the FairTax, as well as a few non-starters.
1st: it eliminates the payroll tax. This alone should increase employment, and thus wages. The current payroll tax raises the cost of employment, exacerbating unemployment rolls.
2nd: it eliminates the tax on domestically produced exports, though I think this is less of an advantage than it seems.
3rd: as proposed, it does simplify the process of taxation, and reduces the 'frictional' compliance cost losses to the economy.
4th: It separates SS from income, while retaining the program. This is just a personal opinion of mine, but I see this as an advantage, and a step towards restructuring SS as a safety net rather than a retirement program.

Now for the cons:
1st: It allows income and wealth to be untaxed, which means that real estate and other license will rapidly inflate out of reach of the average person. The rich get richer, with no negative feedback. This wouldn't be a problem (for me at least) except for the fact that the rest of us need to compete with 'the rich' for limited resources. In other words, 'the rich' can't buy up all the cars, TV sets, or computers, but they can buy up all (or enough of) the land, oil, water, air, radio spectrum, etc. This is somewhat of an esoteric view of the economy, as most modern economists view all of this stuff as 'Capital'.
2nd: It's a 30% at-the-counter tax. This is where you'll probably make progress against your friend. He'll tell you that prices will drop 30% as 'hidden' taxes are removed from the price system. This is true only in perfectly competitive industries - and those don't exist. Even the advocates indicate that the pre-price drop is an average, some things will drop more, some less.
3rd: Ask him what eliminating a 30% sales tax would do. It would obviously boost the economy and reduce the cost of living. The trick is to maintain a sufficient amount of government revenue. Taxing Income, Transactions, and Wealth each have their problems. Taxing income, makes both Labor and Capital more expensive, reducing commerce, wages, jobs, etc. Taxing transactions, or sales, reduces the number mutually beneficial trades people make (purchases, etc.), reducing commerce, and therefore jobs, wages, income, etc. Taxing wealth reduces the demand for wealth - which reduces wages, income, etc.

The key, imo, is to specifically tax the things that DO NOT AFFECT JOBS. For prime example, taxing land value does not reduce the demand for land, nor does it reduce the production of land, and therefore, it does not reduce the number of people employed producing land (there are none). Similar opportunities exist in taxing pollution rights, extraction rights, fishing rights, broadcast rights, pollution rights, etc.

I'm not sure of the amount of revenue available from such a system of taxation. Realize though that there is probaly $10 - $15 Trillion dollars worth of land in this country, 5% of which would generate at least $500 Billion. There's probably another $500B worth of extraction, pollution, and broadcast rights. This is revenue that wouldn't put anyone out of a job. This revenue could be used to replace the payroll tax, which should increase employement by about 20%. Such high employment would require employers to pay higher wages to attract good workers. With all these people earning money, land values will increase, as demand for land increases against a fixed supply. More tax revenue could be shifted to land (and removed from things like wages, by increasing the personal exemption on income tax).

[badger1080]

6. fair tax

First, dcfirefighter, I really enjoyed your post.
I just have a couple points.

The tax is progressive, as dcff mentions, because of the grant/subsidy.

The two major benefits of the fair tax as I see it:
1) Taxes wealthy rather than rich. I don't really know if this is a benefit or not. If we want redistribution, wealth should be our concern not income. However, I understand the philosophical justification of taxing income instead of wealth.
2) No more deductions/Simplified tax code/ eliminates the need for so many accountants and tax lawyers/ eliminates some of the time wasted on dealing with taxes. Plus the added benefit, that it's harder for people to exploit deductions and such that allow the wealthy to pay <20% in taxes.


"When compared to INCOME, or WEALTH, the tax is regressive. Those with high income, or wealth, tend to spend a smaller fraction of their available purchasing power than those with less."

I don't agree with this, yet it's the most persistant criticism of the consumption tax. For one thing a consumption tax will get at inherited wealth better than an income tax. But also, this is a static look at the world. I'm eventually going to spend all my earnings (or pass them on to my children who will spend them). So a consumption tax taxes all my earnings (with the exception of charitable donations), it just spreads out when it does. If I earn $100 this year and retire next year under income tax (of $50) I pay $50 this year in taxes and no taxes next year. Under a consumption tax of 100% suppose I buy $30 this year plus a tax of $30, and save $40 which I use to buy $20 worth of goods next year and pay $20 in consumption tax on those goods. In both cases I've paid $50 in taxes, but if you look at it statically you could claim the rich pay less and the poor pay more. But that really isn't what is happening.


Theoretically, I see real benefits from a consumption tax. However, I would hate to see it implemented.
I think there is a great benefit from making people do their taxes once a year. Even if they don't do their own, they still have to look once a year at the total amount they are sending to Uncle Sam. Hopefully, this makes them think about whether it is worth it or not.
A consumption tax just takes a bit here and a bit there from people and they are never forced to look at how it all adds up. The only thing they actually see is the monthly installment of their grants. I can't really articulate why, but I don't think such a change would be healthy.

One more thing: the transition would be a pain. The redistribution, as I hope I've pointed out, isn't so much from rich to poor, but from the work force to retirees. Consider my stupid little example above, but suppose that after the first year, after I've paid my $50 income tax, it switches to a consumption tax. I'd be getting royally screwed.

[dcfirefighter]

4. Also note that consumer spending

typically from home equity, is driving the economy. Do you really want to tax the prime force behind our economy?

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x17134

Not that it will help your friend, but note that corporate taxes are assessed against PROFITS - meaning above and beyond what is required to stay in business: above payroll, above debt service, above cost of raw materials, etc. Theoretically, you could tax 100% of profits without putting any company out of business (theoretically, not actually, and you sure wouldn't see many new companies).

[FormerDittoHead]

5. There are other threads here which address it and beat it to death.

There's a lot of good info here if you look for it.

No tax plan on anyone's table changes the net revenue, only from which classes it collected, so all of the suggestions that we'll be paying lower taxes is pure bullshit.

Ultimately, it's yet another simple minded tax scheme whose bottom line will raise taxes for the poor and lower them for the rich.

Any tax plan changes should be judged on how much it raises taxes on the rich and lowers it on the lower 99.7%. Fairtax exacerbates the current trend, however.

All of the themes of fairness, simplicity, etc. are smoke and mirrors if they don't simply reverse the current trend.

[oscar111]

8. % ? No one knows the %?

ps well said formerrush.

[dcfirefighter]

7. In general

If you tax incomes, to some degree they will decrease, leave, be hidden, or not occur.

Same with wages (payroll), businesses / corporations, homes, sales, cars, boats, clothes, food, windows, chimneys, fruit trees, road frontage, rooms in your house, etc.

Insamuch as we tax incomes that are derived from unearned sources, we haven't hurt our economy. The ethical argument against progressive income tax - at relatively low incomes - is sound. If I'm a cabinetmaker, and I make twice as many cabinets as the next guy, I should not have to pay more than twice as much in taxes. Likewise, if I'm a cabinetmaker in NYC, and make $50,000 a year, I should not have to pay more in taxes than an equivalent cabinetmaker in Alpharetta, GA; however, while in each case we might make a fair wage relative to our local costs of living, the government takes more of mine.

This in no way detracts from the idea of maintaining a progressive income tax on the upper quartiles of income.

However, if the income tax excludes income derived from wages (and tips, etc), and from productive investment, there's no reason not to have it.

However, the much of accrued wealth isn't accrued as income - it's unrealized capital gains.

And the idea of a consumption tax eventually collecting otherwise untaxed wealth is false.

Imagine i'm rich. (feels good doesn't it).
I form a trust for my children.
I purchase a bunch of valuable land with the trust.
The trust leases this land to whomever.
The trust uses the income to buy more land, with a small slice going to my descendants.

How long before my trust owns everything? At what point is my trust's wealth taxed?

[happyslug]

9. Some information on the web Attacking "Fair Tax" as being unfair:

By William Gale:
http://www.brook.edu/dybdocroot/views/articles/gale/20050516.pdf
http://www.brook.edu/views/articles/gale/20050516.htm (Short paper with link to the above paper).
http://www.budget.house.gov/hearings/galestmnt100604.pdf#search='Inclusive%20Tax%20Rate'

http://kipesquire.powerblogs.com/posts/1116417663.shtml

To be fair here is the "Fair Tax" organization web site on the "Fair Tax":
http://www.pafairtax.org/resrcs/calculator.pdf#search='Inclusive%20Tax%20Rate'
http://www.electbob.com/hr25.html
http://www.fairtax.org/pdfs/Farm_Bureau_FairTax.pdf#search='Inclusive%20Tax%20Rate'


The primary problems of a Federal Sales tax is that when Sales tax rate go over 10% you get widespread non-payment, at rates of les than 10% people just view the tax as a nuisance, above 10% as a burden.

A second problem is what is to be taxed? In most states the main source of sales tax revenue is the selling of automobiles, real estate is NOT subject to the sales tax. To keep the Federal Tax rate around 23% inclusive and produce the same revenue as the Income tax, the "Fair tax" will have to include selling real estate. This is a two edged sword, first you will have people unable to pay the tax on their new homed do to the tax. Second, if you read anything about real estate taxes you will find out that when real estate taxes get to high, the price of the property drops to reflect the excess real estate tax. It is for this reason local communities rely on Real Estate taxes for revenue, if you have two communities next to each other taxing real estate at different rates, the price of the real estate will reflect the different tax rates and thus be "equal" in the sense of how much people pay in real estate taxes (remember Real Estate Tax rate is based on the value of the Real Estate, thus as the tax rate goes up, the value of the property goes down). Basically real estate taxes are self adjusting between communities (For example in my old home town of Pittsburgh Pa, people do NOT move out do to high Real Estate Taxes but high Wage taxes, they move to areas with lower wage taxes even if the Real Estate tax rate is higher).

Once you understand how Real Estate Tax work, you quickly understand that once a National Sales Tax in implemented you will see a Nationwide drop in Housing prices of 23-30% to reflect the increase cost of buying a home do to the "Fair Tax". With the present housing Bubble that would just kill Real Estate and start the deflation of the Bubble.

I recommend you read William Gale's articles so you can better understand WHY this "Fair Tax" is unworkable and unfair.

[dcfirefighter]

13. Real property tax

You're absolutely correct in your assessment of real estate taxes as they apply to land values.

However the property tax combines a tax on land values and a tax on building values.

Because the FairTax is a transfer tax, it is only charged once. It adds to the cost of purchasing a home, and would increase the value of a 'used' home b/c the alternative of buying a new home becomes more expensive.

According to the FairTax, investments aren't taxed. Likely this means that commercial property, and property bought as a rental property wouldn't face the tax. Nor would 'used' properties - though I'm not sure how FairTax would deal with unbuilt land.

It still sucks at 30%. I could actually support it if it were at <10%.

[bemildred]

10. We can have a flat tax as soon as we have flat incomes. nt

[nonono]

11. The FairTax taxes borrowed Money

The county and cities have already decided to tax land and your home. We pay about 1 1/2% property tax. The property tax is more expensive than it sounds, because as property goes up the basis of our land goes up and we are taxed on what it is worth and not what we paid for it. It has tripled in value in the last 10 years.

We also already pay a 9.2% sales tax and a 7% state tax plus a surcharge on that tax. They have cut out some exemptions too.

Most say the Fair Tax is 23% because of a rebate and they take 22% off of our buying costs because they say prices will go down that much. (Sure they will!) But it is 30% tax at the counter.

They say it will save on the cost of compliance and hidden taxes. We will still pay state taxes on payroll and insurance and contributions etc.They will still have to keep track of everything, have payroll and records to satisfy the shareholders if they are in the market. So that is a windy.

If the hidden taxes are that much and we are running a deficit now, then they will raise them or add other taxes as soon as they can.

They don't mention the excise tax will stay. That is charged on
beer, cigarettes, gasoline, guns etc. I believe it is a high tax.

Here is the deal, the rich may buy steak and others hamburger. They may pay more for new clothes and cars, but most that are well to do will be paying a tiny percentage of their overall income in taxes. Those who make around $60,000 will have to spend most of their money for essentials.

Remember, FairTax taxes what you spend not your income.

If you borrow money, you are still taxed 30% on that when you spend it . Imagine 30% on top of the Credit Card interest. If someone gives you 100 dollars, thirty per cent will be taken, when you buy at the store.

If you buy a new home, the tax will be 30% and added onto your mortgage. Then you will be paying interest on your taxes for 30 years!

The same goes for a new car.

There are lots of other Cons, but I that is enough for now.

[lostinacause]

12. Here's my take on it

The Economic Case for Progressive Income Tax
August 23rd, 2005
There has been a recent movement towards a “fair tax” initiative. Though there are different variations of how this is to be implemented what is typically said is that there will be a constant consumption tax attached to most goods. The value of this tax is typically a number that is less that the marginal tax rate that individual’s face. While I question why they got to the numbers they are using I am going to ignore that and provide a general argument showing the strengths of Progressive taxation from an economic standpoint. Such a system has several advantages over a flat consumption tax. Progressive taxation system can better avoid taxing the basics necessary for survival. Through a Progressive taxation the government is also able to reward behavior that benefits society. The barriers to trade that are present among high income earners with a higher rate of taxation are less then that of a low income earner. Progressive taxation may also allow the pursuit of equality in an efficient way.

Under a flat tax goods can be considered a necessity or a luxury. There are goods that can be considered both. Electricity and food are both necessities when consumed in moderation. When the cost of the item of food increases, such as the case with caviar, food then becomes a luxury. Electricity is also considered to be a necessity, however as use increases it starts to be used to power luxuries and can no longer be considered a necessity. Housing and clothing are also both goods that can be considered both luxuries and necessities. Under a consumption tax these goods would prove difficult to tax as it is unclear when they become luxuries. A family of five would require a larger, and by extension, a more expensive house then a family of three. How would you account for these differences? A progressive income tax makes this really easy; account for the necessities and the number of children by allowing deductions for these situations. The flat tax, which many people claim would be simpler, would not solve this problem without being excessively complicated.

Progressive taxation allows people to write-offs part of their taxes when they do things that benefit society. While this can be done through other institutions and other processes it is much less complicated to have it done through one process allowing a more cost effective delivery of the subsidy. People may be better able to understand what incentives are available if they are mostly done through one institution. This helps reduce the cost and allow people to take advantage of the incentive available increasing the overall incentive for people to help make society better off.

Another major advantage of progressive taxation is that there are fewer losses due trade as a high income earner is usually more specialized and will keep trading as apposed to doing things for ones self. Higher income earners typically aren’t going to attempt tasks such as renovations or cutting their grass themselves. Because of the financial situation they will hire someone to do it for them. It would take a very high tax rate to get these people to do these things themselves. People working at a lower income job are more likely to venture into areas that they are not specialized if the tax rates get higher. As a result when the tax rate for a low income earner is lower there will be specialization gains while the losses due to specialization in the high income earners will be less because the high income earner will be more likely to stay specialized even with higher taxes. It is important to keep in mind that a progressive tax rate still has the other disincentives that any tax has and there are still long term consequences to excessive taxation.
Another advantage of progressive taxation is that it may provide a way to pursue equality in an efficient way. Especially when a nation has low or reasonable taxes small increases in the tax rate for higher income earners may be a better policy for pursuing equality then other methods typically used. Instead of developing regulatory policies that get equality but at a high cost to growth, such as excessive wage controls, it may be better to accept some inequality in wages while having a more efficient regulatory system and combine this with progressive taxation to make the system more equal at a lower cost. This is a way that the government can work to maximize growth with respect to equality and vise versa. The advantage of maximizing equality and growth is that no one is being made worse of unnecessarily.

The benefits that are attributed to a flat consumption tax may not be as large as what is claimed. Various assumptions are made with respect to the cost of tax fraud, administration, and other costs under such a system. These costs may be higher then estimated. The loss of control over the design of the tax system, and the ability to tax demographics at a different rate may make it so that the government is less able to respond to future issues. Because of this and the various benefits that a progressive tax system offers to society it may be better to either leave the system as it is or make the necessary reforms while keeping a similar progressive structure.

Source: my blog: http://possiblylogical.com/blog/

[dcfirefighter]

14. Income taxes keep people out of jobs

Though I do support a progressive income tax over a flat consumption tax.

The Fairtax addresses the necessity / luxury argument fairly well, I think. It does this by not being flat. Rather than exempting food & clothing, which would also exempt luxury food and luxury clothing or trying to determine where the dividing lines laid, which would open itself up to lobbying, it taxes all of them. However, it determines the effect of it's tax on a family spending at the poverty level, and gives each family that amount of money back as a rebate each month (i.e. all families of four receive ~$600 dollars each month)

Writing off portions of your taxes only allows people to spend their post- payroll tax but pre-income tax paycheck on charitable causes. The fairtax would allow people to spend their complete paycheck on charitable causes, without paying an income tax or a payroll tax. Likewise, determining what is and what isn't deductible leaves lots of room for special (i.e. undemocratic) interest lobbying.

I don't really have any problem with taxing incomes over ~$250,000 - these incomes aren't typically earned by merit, risk, or hard work, but rather by manipulation of the legal / economic system.

Problems with a progressive income tax:
Any tax that falls on income from the wages and salaries of the majority of workers rasises the cost of employment. For example, I take home $35,000 a year, this is what I'm willing to work for. However, it costs my employer $50,000 a year to employ me. Therefore, I must bring more than $50,000 worth of productivity to my employer in order to receive my $35,000. The demand for labor is elastic, removing the 'tax' wedge from income taxes (payroll taxes are much worse) would increase employment. Increased employment would require employers to pay higher wages in order to attract talented employees.

My salary is $50,000, which doesn't get me much in Washington, DC. I pay 15.8% of my salary as a federal income tax. Someone doing a similar job in a less expensive area might make $35,000 a year, and pay only 11.9% of his salary. Progressive income taxes place an undue burdon on people working in high cost of living areas - usually 'blue' areas on the coasts.

[On the Road]

15. The Most Important Point to Establish,

IMO, is that when you include all taxes and government fees, the current tax system is almost flat now. Adding a flat federal income tax would make the system highly regressive. Unfortunately, I don't have a source for that claim, but the point holds no matter what the sales tax rate would be.