Economics of Fair Tax

Okay … before I go onto the rant about the weak criminal justice system in this country and how it got that way, I want to take a moment to bring up some points of the Fair Tax plan.

I’ll be excepting most of these points from an email sent to me by the Fair Tax Organization (http://www.fairtax.org/) as it contains several points that I had not considered and I think it very well shows some of the many normally unconsidered benefits of the plan.

Now … before I go onto that … The Fair Tax plan wasn’t just created by a single congressman … it was developed by a panel of researchers and economists that were tasked with the job of coming up with the simplest method of changing the current tax system while maintaining the current federal government budget requirements. This isn’t something that a couple of politicians threw together on a napkin over a cup of coffee at 2am …

“The FairTax bill currently in Congress (House Resolution 25/Senate Resolution 25) proposes completely eliminating the income tax and replacing it with a national sales tax (consumption tax). This non-partisan bill, developed after eight years of study by the country’s leading economists and co-sponsored by 32 legislators, proposes a progressive national sales tax of 23 cents out of every dollar spent on personal consumption in order to raise the amount currently raised through corporate and personal income taxes.”

This 23 cents on the dollar tax always makes people go ‘OMG things will cost 23% more!!1!” But research studies and leading economists disagree:

“THE FAIR TAX WILL BE A TREMENDOUS BOOST TO OUR ECONOMY! The cost of tax compliance and payroll taxes is built into the price of every good or service we currently purchase. Eliminating these costs will reduce production costs of U.S. products by an estimated 22%; therefore, prices will not go up. Foreign goods for sale in the U.S. will also be taxed, making American products 20% to 30% more competitive at home and abroad. Dr. Laurence Kotlikoff, chair of the economics department at Boston University, estimated that the move to a broad-based consumption tax would add a 7% to 14% increase in GDP.”

Studies actually show that through market place competition pre-tax prices will drop 20-22% on most goods … so an item that currently costs $100 (pre local tax) a 20% price drop would make it an $80 pre-tax … add the 23% tax and you have a final out of pocket cost of $98.40 … if you say a 7% state and local sales tax as well then you’re looking at 30% sales tax so the new $80 pre-tax price becomes $104 after all taxes are paid (keeping in mind that the after tax price with a 7% tax is currently $107). (Note of course that the Fair Tax proposal is a federal matter so does nothing to change any state tax systems currently in place – nor does it account for such systems in its calculations.) This would take a little time for the market to adjust of course depending on how the Fair Tax system is implemented there would likely be an adjustment period were prices were higher as both retail stores and manufacturers soaked in a little extra profit.

“BUSINESSES AND INDIVIDUALS WILL NO LONGER HAVE TO SPEND OVER $250 BILLION EACH YEAR IN COMPLIANCE COSTS. By not having to pay the costs of tax planning and filing, businesses will have more money to invest in expansion and modernization for global competitiveness. Individuals – wage earners – will be able to buy more, save more and invest more.”

Keep in mind also that less tax prep and compliance costs for businesses also means that they have more cash available to put into employee wages. While I doubt that any of us wage earners would see immediate raises there would be a greater likelihood of such over time. In the mean time we would have the advantage of taking home most or all of our paycheck (State withholdings would still apply.) so that would seem like a raise.

To that point – “With the FairTax, there will be no Federal payroll deductions of any kind – no income tax, no Social Security tax, no Medicare tax and no self-employment tax. FairTax provisions will provide monthly “prebate” reimbursements on essential living expenses and prebate all taxes to those spending under the poverty line.”

This ‘prebate’ would be provided to all households. A married couple with no children (family of 2) would receive a monthly check for about $357 so in addition to taking home most or all of your paycheck, you’d receive an extra $357 a month to cover all or some of your tax expenditure. A family of 4 would receive an estimated $479 a month.

“Our current income tax exports our jobs, rather than our products, but the FairTax allows U.S. exports to sell overseas for prices 22% lower, on average, than they do now – with similar profit margins. Lower prices sharply increase demand for U.S. exports, thereby increasing job creation in our country’s manufacturing sectors. America will be virtually the only country selling products abroad at prices that do not include a tax component in the price. As a result, multinational companies will flock to setup shop in the U.S.”

Again, not something that would happen over night by any means, but certainly a good thing for the American worker and economy.

“Federal Reserve Chairman Alan Greenspan recently testified to the President’s Advisory Panel on Federal Tax Reform that, ‘A consumption tax would be the best from the perspective of promoting economic growth …’”

One of the things that opponents to a consumption tax (a tax on spending rather than income) frequently fail to take into account is the simple fact that with the economic growth that would be stimulated would result in job growth, increased pay, and better economic long term stability.

Now a few rebuttals to some of the things that I’ve heard –

People will start using the barter system to buy things

That’s going to be a fun trick … how many people in this country create a good or service that they could reliably trade to the grocery store for their food? Or the clothing store for the cloths that they need? Am I going to cut out the stores and go offer the farmer, what, my TV in exchange for some meat and vegetables? The fact of the matter is that a Sales Tax is not easily gotten around … with the current income tax system you only need one person conspiring to evade it (by lying on their return, not filing, etc) … with a sales tax you need at least two people (buyer and seller). Will it happen? To a degree, yes. But realistically the rate of such things is going to be low, and will likely be even lower than the evasion rate under the current tax system.

(for the National Retail Federation) People will SAVE their money and that will hurt the economy!

Um … no. First off unless people are stuffing their money into their mattress then they are probably saving it in a bank or other investment (IRA, Stock, Bond, etc) which means that money is directly helping the economy grow. (What … you don’t think that the bank pays you interest out of the goodness of their hearts do you? They invest the money in your savings account.) Secondly while people may save some or even most of the ‘additional’ money that they get from their paychecks very few people spend less when they have more … meaning that on the whole people will tend to spend the same amount that they are now and will most likely spend more than they do now.

Yes they will also likely save more than they do now … but if they receive $100 more a week in their paycheck from the removal of the federal withholdings and they save $80 and spend $20 of it, that’s a $20 a week INCREASE in spending. (And that $80 a week increase in savings makes them more financially stable and helps the economy.)

The fact of the matter is that currently the US has anemic savings rates and that is one of the MAJOR factors hurting our overall economy.

The government will know everything we spend our money on!

Okay, blatant paranoia aside. They actually won’t know anymore than they do currently. In fact technically they’ll know less. Under the current system the government gets an annual report on our income, family size, financial situation (if you itemize), Marital status, and everyone in your family’s social security number. Under the Fair Tax plan … all they would get is your family’s social security numbers (as that would be used to register for the ‘prebate’) the tax collection is a ‘blind tax’ (meaning it’s collected anonymously) just as state/local sales taxes are now … you don’t show an ID or have the sales tax amount logged in your name currently.

Those are the only ones that I can remember off the top of my head … I’m sure I’ll think of more later and I’ll put them into another entry when I do. (I can think of one more, the ‘additional tax on the poor’ but I think I covered that in the last entry where I discussed the Fair Tax Legislation. I’m serious about this folks … we need to do something with the tax system in this country, but the only way it’s going to happen is if we the people stand up and make our representatives in federal government do what we want … regardless of the special interest groups …

Stand together and don’t back down.

Parents, Kids, and Death

With all the news stories of kids going missing and getting killed I sometimes wonder how any survive to adulthood these days. The other side of that is, how can parents today see these stories on the news and then turn around and have it happen to them?

Some of you likely heard the story from East Georgia this past weekend where two children, ages 2 and 3 years, went missing on Saturday prompting a police search, etc. The kids were found on Monday morning in a sewage pond a mile and a half from their home, dead. Currently there are no signs of abduction or violence and the cause of death appears to be accidental drowning as of Tuesday’s coroner’s report.

So it appears that the two children wandered out of their home on Saturday, wandered a mile and a half where they both fell into this algae covered sewage pond and drowned. But let’s look at this tragic story a bit more … not only did the two children wander out of the house … it was the second time that day that the kids had wandered out, the first time a neighbor found the kids wandering in the neighborhood and brought them home. Reportedly one of the two kids was known to have figured out how to unlock and open the front door (I’ve heard it was the 3 year old and that it was the 2 year old so I’m leaving it at ‘one of the two’).

Let me get this straight … you have a kid 2 or 3 years old that you KNOW has figured out how to unlock and open the front door … your neighbor has already brought the kids back to the house once because you obviously weren’t paying attention to where they were or what they were doing … and you do nothing to prevent the situation from happening again, either by watching them more closely or taking steps to make sure that they can’t just unlock the door and wander out again, or both? ARE YOU BRAIN DEAD?

Now cases like the guy in Florida earlier this month that raped and killed the little girl are one issue … though parents should be aware that these nutcases are out there and should be responsible enough to keep a close watch on their kids and protect them from such predators there is a failing in the jail system in this country that gives these people entirely too many chances. The man in that case had something along the lines of 25 prior arrests and had reportedly BEGGED to be kept locked up because he said that if he was released that he WOULD do it again. That, however, is a rant for another day.

How is it that parents … in a world where there is some story about kids being killed, abducted, or otherwise separated from their parents long enough to make it on the news on a weekly basis … can be so mindless and negligent as to let their own kids walk out the front door, wander a mile and a half from the house, and drown. Last time I checked the average 2 and 3 year old weren’t exactly doing 15min miles … When I was 2 or 3 years old … if I’d walked out the front door … at MOST I would have got to the edge of the yard before one of my parents picked me up and took me back inside … and trust me … when I was 2 or 3 our yard wasn’t what most people would call large.

Is the world really more dangerous today? Or are more parents simply extra negligent … or am I’m just more aware of it than I was in the past?

OMG they might SAVE!

Okay … to an extent this is old news … It’s a rant that I’ve been meaning to write for several weeks now, but haven’t had the time, energy, or motivation to put fingers to keyboard. I expect, however, that I’ll get around to firing up the old blog for a few entries over the next couple of weeks.

At this point April 15th has come and gone. Americans across the country have spent a horrendous amount of combined man-hours and money laboring under an archaic tax system that needs revision. Many of you that know me already know that I support a new tax law proposed by Congressman John Linder (R-GA) commonly known at the Fair Tax Plan (Details can be found at http://www.fairtax.org/ including a rebuttal section that explores some of the more common arguments against the plan) which would make April 15th ‘just another day’ by doing away with income tax and replacing it with a consumption tax (thus taxing DISPOSABLE income as opposed to all income).

I almost regret that both my US Senators and my Congressman already support this legislation as it means that I can’t call/mail/etc them to urge them to support the proposal. (I do email them to thank them for supporting it though.) The Fair Tax movement has grown substantially over the last couple of years and with the coverage that it gained over the last election period it gained the ear of President Bush … it also gained it’s first ‘organized’ opposition.

Now there has, of course, been opposition to the Fair Tax plan before this, but it was individuals or small groups of people that were largely unfamiliar with the bill and made blanket statements such as ‘it will just be an additional tax on the poor!’ (Since it repeals the current income tax completely it can hardly be considered an ‘additional tax’ … second off the poor, along with everyone else, would get their ENTIRE paycheck (no withholding payroll taxes) AND they would get a check for the amount that they would be expected to pay in tax for the ‘essentials’ (food, clothing, shelter) so that in essence they would pay zero tax.)

Now, however, a major organization has stepped forward and made a stance against the Fair Tax plan. The National Retail Federation is opposed to the fair tax and has apparently urged their member organizations (mostly major retail stores such as Home Depot and others) to oppose the legislation.

But why is it that this particular special interest group has stepped forward to combat this Tax Legislation? Because they’re afraid that people, once given their entire paycheck, might choose to save some of their money. OMG the HORROR! Americans, in particular the poor and middle class, might actually SAVE their own money for retirement or *gasp* for a rainy day.

What it boils down to is that the National Retail Federation wants every American to spend 100% of their Net income … or even better spend 150%. Don’t save any of it! SPEND SPEND SPEND! Never mind that part of the problem with the economy is a low savings rate … never mind that people in this country could live better longer with a little more money in their pockets … never mind that it might mean that there are less bankruptcy cases as people have more net income due to the removal of federal withholding taxes.

This same organization supports and fights for the Bush tax cuts, and states that the tax cuts are directly responsible for increased spending and economic growth because the cuts put more money in the hands of the American people to spend. Never mind that with the Fair Tax plan I (and most Americans) would receive most of the 28% or more that is withheld from their paychecks … never mind the myriad of economic studies that show that the Fair Tax would result in enormous economic growth for this country. Never mind any of that … people might SAVE!

Do you remember the first real paycheck you got? If you’re like most Americans, when you looked at that paycheck stub your jaw dropped as you realized how much was being withheld for tax purposes. I want you to relive that … look at those withholdings every time you get a paycheck and realize that there is an alternative. You and every American could be receiving all of those federal withholdings (Federal, Social Security, Medicare) yourself AND receiving a check from the federal government in compensation for your estimated tax on essential items.

I urge you ALL to become informed about the Fair Tax proposal, and if you support it, to lend your voice to the cause. Individually there’s not much we can do …. Together, there is nothing that we can’t.