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.
Subscribe to:
Post Comments (Atom)
3 comments:
Hi,
Interesting post on the Fair Tax Plan (FTP). BTW: I believe that the FTP is Senate Resolution 1493.
Here are a bit of my ramblings on your post.
“This isn’t something that a couple of politicians threw together on a napkin over a cup of coffee at 2am …”
-Darn, It sounds so much better that way. Since politicians were involved one has to wonder what they will get out of all this down the road.
“if you say a 7% state and local sales tax”
-Since some State Tax laws are based in part with the current Federal Tax laws, I would expect some resistance to the adoption of the FTP until those states determine a new tax code.
““BUSINESSES AND INDIVIDUALS WILL NO LONGER HAVE TO SPEND OVER $250 BILLION EACH YEAR IN COMPLIANCE COSTS.”
-I just don’t see these expenses dropping 95% like the FTP groups suggest. You still will have your accountants making the reports and filings to Local, State, and Federal Governments. Large companies will have to secure a bond/security in the amount of $100,000 or one and one-half times the seller's average monthly tax liability during the previous 6 calendar months, which ever is greater. (Section 501.g)
"People will start using the barter system to buy things"
-If a seller barters an item then they are required to pay the fair tax on transaction. The payment must be in “real” money. If it is not reported then the seller and possibly the buyer will face criminal penalties. Pretty much like our current system.
"The government will know everything we spend our money on!."
-Yep, Under the FTP they have the ability to get all that info and possibly more. Section 501.2.D states that Tax reports will contain: "`(D) other information reasonably required by the Secretary or the sales tax administering authority for the administration, collection, and remittance of the tax imposed by this subtitle" This is fairly broad wording and could include any captured point of sale transaction information.
-Your employer still submits all your earning information to the Government.
-Every October 1st your head of household must submit your "family determination" information. This is used to determine if you can qualify for the “prebates” and for what amount. If you happen to be in this country illegally then you will not qualify for any prebates.
::Sarcasm on::
I am sure that will make the President of Mexico very happy.
::Sarcasm off::
“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 …”
-Well, I thought that was what special interest groups were made for. They trumpet specific causes to our representatives and attempt to influence decisions on behalf of the people they represent. (Like the Americans for Fair Tax)
I would be more impressed if our “representatives” would be more concerned with the welfare of the country instead of the welfare of their next campaign.
-EdP
You certainly bring up some good points, though I think that you missed my points on a couple of them.
"BTW: I believe that the FTP is Senate Resolution 1493."
Could be correct there ... I was quoting from an Email from the Fair Tax Organization, so if the SR # is incorrect, I blame them.
"-Since some State Tax laws are based in part with the current Federal Tax laws, I would expect some resistance to the adoption of the FTP until those states determine a new tax code."
- I expect that you are correct. However this will be true of any change to the federal tax code as there is currently no move in most or all of those states to reform their state income tax. Basically theses states aren't going to change until changes at the federal level make them change. Keep in mind that the 7% I used there is based off the current sales tax in most areas ... I'm not saying that it would be the entire tax income for the state.
"-I just don’t see these expenses dropping 95% like the FTP groups suggest. You still will have your accountants making the reports and filings to Local, State, and Federal Governments. Large companies will have to secure a bond/security in the amount of $100,000 or one and one-half times the seller's average monthly tax liability during the previous 6 calendar months, which ever is greater. (Section 501.g)"
At first, no they probably won't. As you mentioned there is still state and local tax filings. Even with the bond issue there is still significantly less accounting needed under the fair tax plan. Presently just for payroll taxes the money must be withheld and seperated into seperate acounts for Federal Income, SS, and Medicare taxes. And I believe a similar security/bond issue is in place for large businesses as it is ... and that's all businesses. The likelihood is that if the Federal Government moves to the FTP state governments will most likely follow suit (either for the sake of simplicity or through pressure from the voters.) and this would completely eliminate payroll taxes and tax filing completely for any non-retail business. This is where the economists estimate the 95% drop from.
"-If a seller barters an item then they are required to pay the fair tax on transaction. The payment must be in “real” money. If it is not reported then the seller and possibly the buyer will face criminal penalties. Pretty much like our current system."
That's generally my point ... it will be as illegal as tax evasion is now .. and to a large degree it will be harder. In terms of auditing FTP is a much simpler system total pre-tax sales*tax rate=amount that the company should have paid to the government. This would be no change at all from the accounting that retail stores do now reporting state/local sales tax. There would be an small additional accounting there keeping state/local sales tax AND federal sales tax (both are computed from the pre-tax price of the item) but a cash register could easily track those sales amounts.
"-Yep, Under the FTP they have the ability to get all that info and possibly more. Section 501.2.D states that Tax reports will contain: "`(D) other information reasonably required by the Secretary or the sales tax administering authority for the administration, collection, and remittance of the tax imposed by this subtitle" This is fairly broad wording and could include any captured point of sale transaction information.
-Your employer still submits all your earning information to the Government.
-Every October 1st your head of household must submit your "family determination" information. This is used to determine if you can qualify for the “prebates” and for what amount. If you happen to be in this country illegally then you will not qualify for any prebates.
::Sarcasm on::
I am sure that will make the President of Mexico very happy.
::Sarcasm off::"
The fact of the matter is that no information that isn't already collected would be collected. I believe also that any state that collects a sales tax already has the right to collect the point of sale information and with the laws on information sharing can share that info with the federal government already. The government is not going to realistically have access to anything that they don't already have, and if you're that concerned with the point of sale information, use cash.
As for the Illegals not being able to get the prebate ... well I can't say I'm heart broken about that.
Saddly there aren't any 'represenitives' that are interested in the future of the country ... Yes American's for Fair Taxation is a special interest group in the technical term, but that is because ... especially on the federal level ... government doesn't listen to anyone else. It is special interest groups that provide the campaign money to get re-elected ... either through direct donation, or simply through using their money/manpower/media resources to work for you or against you. Unfortunately this means that even a young politician who goes to washington intent on doing what's 'right' and do what is 'good for the country' ... if he wants to continue to do that he's going to have to have the suport of the 'groups.'
I would LOVE to see someone go up there and really do only what they believe in and what they feel is right for the country reguardless of the fact that they would most likely be tossed out on their ear in the next election. The problem is ... for it to have any real effect it would have to be a majority of the senators or congressmen in a particular term.
Short of that ... the only hope is people becoming aware of what is going on and standing up to their represenatives and saying 'hell no ... we aren't going to take this crap anymore' ... but that would require a majority of people to become informed, and aware of what their represenitives are doing, how they are voting, and either bring them in line or vote them out.
"Right now, when you buy something from another person, you're supposed to pay the sales tax... but we all know that many of these 'under-the-table' transactions are never reported. I have no idea of the dollar amount, but the government does stand to lose "more money" on these transactions if the additional sales tax isn't collected."
True ... but under the FTP post market sales of an item aren't supposed to be reported and taxed. So, while currently if I buy something from you that you bought from the store the sale is supposed to be reported and taxed that's not true under the FTP. And the government currently looses billions in unreported income anyway (illegal transactions, illegal workers, untaxed money from such individuals that is sent out of the country.) ... With a sales tax some of that 'unreported' income would actually become taxed.
"I don't get the whole price cut part, either. It makes my head spin. Are we saying that my company will lower my salary by 23% so my "take home" pay remains the same? Do you really think I trust my company is now lowering its rates for my services by that same 23%? Even if they were, isn't it just changing inflation by -23% or something somehow?"
I'm assuming that you're talking about the estimated 20% or so drop in retail prices. Currently roughly 23-26% of the price of any retail item is 'imbeded taxes' (corperations don't pay tax because the tax that they pay is covered in the price of the item ... their 'tax burden' is passed along to the consumer ... so raising corperate 'income tax' only really results in increased retail pricing.) Since all of those imbedded taxes (payroll taxes, corperate income tax, sales tax on materials) are removed the manufacturer will see a (roughly) 23-26% increase in profit margin ... studies show that in a competitive market prices will drop by 20-23% as companies compete for market share (this still gives the manufacturers a roughly 3% increase in their profit margin on the sale).
Where this generally fails in the studies are in markets where competition is overly controled through government regulation .... IE thier prices become inflated through government interferance in the competition.
"Does it favor the rich? The poor pay much less than 23% income tax, in some cases, 0%. The rich pay up to 33% (or more I suppose)."
True, but under the 'prebate' system a 'poor' house will recieve an amount roughly equal to what they would be expected to spend on tax in the month leaving them at a roughly 0% tax bracket. A 'rich' family of the same size would get the same prebate check (since the amount of the prebate is based on family size, not income) but since they consume more (because they have more disposable income) they pay more in taxes ... up to a 23% tax bracket.
They looked at exempting 'essential' items from the FTP ... but they found that set up a situation for 'special interests' to come into play again and studies also show that rich people spend significantly more money on what are typically classified as 'essential' items than 'poor' people do ... as such it would be an 'unfair' tax break for the rich.
Also, iirc (and I may not) the Prebate is essentially 23% of the 'poverty' level monthly income (I do not recall if it is adjusted for location or simply the national figure) so someone living below the poverty level income would, technically, be getting a higher prebate amount than they could spend normally on taxes.
The FTP is simple in the user level application ... the economics of it's implementation is a little more complex - and that is one of the FTPs biggest hurdle to overcome, getting people to understand it. Is it a perfect system? I don't think such a plan exsists, but I think that it is a significantly better plan that what is currently in place, or the other reforms that I have seen proposed.
Post a Comment