[Apollo81]

Since we're on the topic of taxes, what do people think about this?

http://en.wikipedia.org/wiki/Fair_tax

[jtfanclub]

Horrible, horrible concept. Nails the poor, the rich end up paying considerably less. Which is why you have to put in a 'prebate', which means that the taxation becomes just as complex and full of loopholes as the current method.

I can't think of any advantage to this tax over a 'disputeless' income tax. A disputeless income tax is where the government fills out all of the forms for you, and then says "if you agree with our assessment, sign here and send it in, with a check if you've underpaid. If you disagree, fill out the forms yourself".

[hrothgar]

Three quick comments (Hectic day at work otherwise I'd post more)

1. The Fair Tax looks to be yet another ploy to make the tax code much more regressive

2. There are a lot of good online critiques of the Fair Tax available. I'll try to link to some after work.

3. I think that its important to understand some of the background about the Fair Tax proposal. The Fair Tax was originally promoted by Scientologists as an attempt to neuter the IRS. The IRS is quite sceptical about the Scientologists claims to be a religion. The Church of Scientology responded by trying to devise new and exciting ways to change the tax code that didn't require the IRS

As a general comment, I am all in favor of tax code simplification... prefer structures in which the government directly subsidizes certain activities rather than building deductions into the tax code. Its much less distortionary. I am quite happy to eliminate broad classes of deductions (home purchases, college education, you name it).

In general, I favor a very flat progressive tax scheme. Design a nice (continuous) function that maps income onto a tax rate.

Hypothetically, if you made 50K a year you'd pay 20% of income (or $10,000) to the Feds.

If you made 100K a year you'd pay 33% of income to the Feds.

No point in arguing about precise percentages. We're discussing general design principles rather than precise application.

[mikeh]

The fairtax proponents are always wealthy

I understand at least some of the rationale behind a consumption-based tax instead of an income tax... perhaps the best is that it encourages saving rather than spending, and that would have wide-ranging implications. Poverty in old age would diminish, altho be far, far from eliminated, and this in turn would perhaps make reform of some of the entitlement programs a little easier to enact. The incredible consumerism that contributes to the creation of waste and other forms of pollution might abate a bit more if people's urge to spend, spend, spend were inhibited.

But a flat consumption tax would add to the alrady sickening gap between the wealthy and the middle-class, not to mention the poor.

There is an alternative: a graduated consumption tax. You want to buy a Kia, you pay the price plus 10% tax. You want to buy a Bugatti, you pay the price plus a tax of 100%.

However, the problem would seem to lie in how one fixes the appropriate tax for the individual good or service. You can't make it by basic category.. both the Kia and the Bugatti are cars. If you make it by price, then do we have the same tax structure on, say, a house as on a car? A Bugatti costs more than most houses.

You can't really make it by how much did you spend, since then people will find ways to cheat..... the wealthy will have companies and trusts and foundations make their purchases, and those with children will have children buying all kinds of things, placing the family collectively into a lower tax bracket, and so on.

While the income tax idea has given rise to enormous complexities, I don't think that a simplistic answer to a complex issue will ever be equitable. That doesn't mean that populist politicians will stop advancing simplistic solutions for complex problems.

[kenberg]

In her column this morning Ruth Marcus noted that the FairTax, to apply not now but soon, might be the ultimate stimulant to the economy. For example I would rush out and buy a year's supply of wine before the tax clicked in.

For me, it would be a pretty good deal. I don't buy that much. if I don't have it already I probably don't want it. Also, my mortgage is paid off so I don't benefit from that deduction anyway. We have some (modest) investments we would like to cash in without paying tax on them. Probably there is a hook somewhere, but even if not we have to ask if the purpose of tax reform really should be to make my life easier at the expense of young families.

I know Mike Huckabee loves this. Another reason to not support him

[helene_t]

jtfanclub, on Jan 23 2008, 06:40 PM, said:

I can't think of any advantage to this tax over a 'disputeless' income tax. A disputeless income tax is where the government fills out all of the forms for you, and then says "if you agree with our assessment, sign here and send it in, with a check if you've underpaid. If you disagree, fill out the forms yourself".

That's how it works for most people in Denmark. I never understood why e.g. the Dutch revenue service asks for all those details which they have already. Maybe it's some kind of misguided "privacy" concern.

[luke warm]

it has drawbacks but looks better than what we now have... it won't come close to passing though, too many people stand to lose too much power if unable to control other people's money

[pclayton]

This isn't enough of a reason to vote for Huckabee I doubt he's in bed with Tom Cruise on this one.

Canning the IRS is a good thing, but there's of lots of compliance issues with a Fair Tax, as long as paper money is still in circulation. You'd also see barter economies spring up, which will avoid a lot of taxes.

I can't really comment on the economic ramifications.

[Al_U_Card]

Ron Paul is "against" the IRS, isn't he?

[kenrexford]

There are some good results of using this sort of approach. One obvious gain is in the unavoidability of the tax. The U.S. shadow economy (illegal or unreported income) is about 10% of the GDP. If those folks were included in the mix through a conversion to a consumption tax, it seems that the obvious end result would be a reduction of the tax burden for the rest of us (as a group) by about 10%.

Of course, this might work as a "tax on the poor," insofar as the shadow economy has a large number of poor "workers" whose "wages" would "decreased" and poor "consumers," whose "prices" might in theory go up to "pay taxes on the merchandise."

A consumption tax also taxes wealth and not income. Suppose that two people start the year, Richie Rich with One Million Dollars and Joe Bluecollar with $10. Suppose that Joe Bluecollar earns $500K and spends $10. Suppose that Richie Rich decides not to work but spends $500K living lavishly.

At the end, it seems that each would have $500K in the bank, barring taxes. With a 50% income tax, however, Richie Rich ends up with $500K at the end of the year and Joe Bluecollar ends up with $250K. With a 50% sales tax, Richie Rich ends up with $250K and Joe Bluecollar ends up with $495K.

[TimG]

kenrexford, on Jan 23 2008, 11:04 PM, said:

One obvious gain is in the unavoidability of the tax.

Goods and services would both be taxed, correct? What's to prevent unreported cash sales of items? Same for services.

[helene_t]

kenrexford, on Jan 24 2008, 06:04 AM, said:

There are some good results of using this sort of approach. One obvious gain is in the unavoidability of the tax. The U.S. shadow economy (illegal or unreported income) is about 10% of the GDP. If those folks were included in the mix through a conversion to a consumption tax, it seems that the obvious end result would be a reduction of the tax burden for the rest of us (as a group) by about 10%.

Not true (assuming it's basically replacing income tax with VAT, I might have misunderstood something). It's just as easy to avoid paying VAT as to avoid paying income tax.

[kenberg]

kenrexford, on Jan 23 2008, 11:04 PM, said:

There are some good results of using this sort of approach. One obvious gain is in the unavoidability of the tax. The U.S. shadow economy (illegal or unreported income) is about 10% of the GDP. If those folks were included in the mix through a conversion to a consumption tax, it seems that the obvious end result would be a reduction of the tax burden for the rest of us (as a group) by about 10%.

Of course, this might work as a "tax on the poor," insofar as the shadow economy has a large number of poor "workers" whose "wages" would "decreased" and poor "consumers," whose "prices" might in theory go up to "pay taxes on the merchandise."

A consumption tax also taxes wealth and not income. Suppose that two people start the year, Richie Rich with One Million Dollars and Joe Bluecollar with $10. Suppose that Joe Bluecollar earns $500K and spends $10. Suppose that Richie Rich decides not to work but spends $500K living lavishly.

At the end, it seems that each would have $500K in the bank, barring taxes. With a 50% income tax, however, Richie Rich ends up with $500K at the end of the year and Joe Bluecollar ends up with $250K. With a 50% sales tax, Richie Rich ends up with $250K and Joe Bluecollar ends up with $495K.

There is a lot of supposing going on with Joe and Rich. Surely the more common example is along the following lines:\Take two people, say Ken and Pete.

Ken is retired, owns his home, he and his wife own two cars neither of which need replacing, they enjoy hiking, reading, playing cards, visiting grandchildren. Ken has a decent pension on which he pays taxes.


Pete is a young married guy with a couple of kids. He hopes to buy a house and get the mortgage deduction. The kids are growing and need new clothes every year and they want a lot of the things young kids want. It's beginning to look like a minivan will be needed to cart the kids around to soccer and such. Physical appearance is crucial in the jobs Pete and his wife have so a lot of money needs to be spent on clothes (and maybe haircuts?).

You get the idea. Looking just at self-interest, should Ken or Pete favor the fairtax?

Retired people are entitled to their pensions. I put in 7% of my salary over many years to build up my pension, and this was on top f the 8% or so that I put into Social Security. So I make no apologies if my life is now comfortable. But I still live in this country and I am fine with paying my share of taxes.

Of course it is all a mental exercise in nothing. Whoever is elected (and I dio hope it is not Governor Huxtabee) I am prepared to bet that four years from now we will still be paying income taxes. But this brings up a question: If we make a bet and if fair tax is in force, who has to pay tax when the money changes hands. As it stands now the winner must (well, should) report it as income and pay tax on it. With fairtax would the loser count it as consumption and thus pay a tax on his losses? (A serious answer is not expected here.)



Ken

[y66]

Hard to argue with the goal of creating a less complex tax structure that provides greater incentives for savings and investment in which everyone pays their "fair share".

Don't think the Fair Tax Program gets us closer to this goal though. Agree with Chris Edwards (Cato Institute tax guy) that a national sales tax, if enacted, would likely become an add-on tax. And, anyway, isn't "fair share" a function of income, not consumption?

Very interesting to see that the flat tax revolution (unrelated to Fair Tax Program) is gaining momentum world-wide. According to a recent article in the Wall Street Journal: "There are now at least 11 nations formerly behind the Iron Curtain with flat rate taxes of 25% or lower. On January 1, a new flat tax of 10% became law in Bulgaria, replacing its progressive rate structure and as far as we know the lowest such rate in the world. The newly elected Polish parliament is also planning to cut taxes, though an earlier flat-tax proposal earned a veto threat from the president."

Rep Paul Ryan (R-WI) has some practical suggestions for moving U.S. tax policy in this direction. Checkout http://www.cato.org/...hp?eventid=4253 for an interesting discussion of tax policy issues by Ryan, Chris Edwards and Dan Mitchell (the sound quality gets better).

Very cool to see what's been happening in Ireland for quite some time now, at least partially because they have the lowest corporate tax structure in Europe (12.5%) as well as some of the most highly educated workers on the planet. And Guinesss

[helene_t]

The name "fairtax" would, for me, be enough reason not to consider the scheme. A politician who thinks his voters are stupid enough to fall for such a cheap marketing stunt will not get my vote.

[mike777]

helene_t, on Jan 24 2008, 09:07 AM, said:

The name "fairtax" would, for me, be enough reason not to consider the scheme. A politician who thinks his voters are stupid enough to fall for such a cheap marketing stunt will not get my vote.

The fairtax is called VAT in Europe. I think you gals fell for it a long time ago.

[luke warm]

y66, on Jan 24 2008, 09:06 AM, said:

And, anyway, isn't "fair share" a function of income, not consumption?

no

[awm]

There are three major reasons for taxes:

(1) Raise money for the government. This money is then used for various things that (supposedly) serve the common good.

(2) Encourage/discourage certain behavior. This may be done for nebulous "social benefit" or because certain types of behavior tend to impose a societal cost. An example would be taxes on cigarettes, because smoking tends to harm individuals, create unpleasantness for others, create pollution (cigarette butts), and also tax the health care system (partially government funded). By placing a high tax on cigarettes, the government deters smoking and also penalizes the tobacco companies for selling an addictive product that kills people.

(3) Redistribute wealth. This is a more accepted function of government in Europe than in the USA, but the intent is to make sure that the economy doesn't "leave most people behind" while rewarding only an elite few.

To some degree all these functions are controversial, but nonetheless we can analyze what effect the "fair tax" would have. It's quite possible to set the tax rate in a way that would raise the same amount of money for the government as current income tax structures. People have computed how high this tax would have to be. It's not really true that the "fair tax" would require less infrastructure or be harder to dodge than the income tax, although it would ease the burden on individual taxpayers to compute their tax due.

A "fair tax" would act to discourage spending. After all, if video games (for example) become more expensive I will buy fewer of them. An income tax might be perceived as discouraging people from making an income, but since making a larger salary still gets you more money (despite diminishing returns from a progressive tax rate) it's not like people will be declining raises at the office "because of the income tax." In contrast I do see people declining to buy luxury items "because of the fair tax." In general reducing spending is a negative effect of the fair tax and would be bad for the economy.

Finally there is the "redistribute wealth" function. In general the fair tax favors wealthy individuals, who spend a much lower percentage of their income. Obviously the "rebate" designed with the tax is supposed to combat this, but if you look at someone like Bill Gates or Warren Buffett, it would be hard for them to spend a substantial percentage of their income even if they wanted to. They will be much better off under the "fair tax."

The people who really suffer from "far tax" are the people who live in areas with a high cost of living. Compare two people, say A lives in Los Angeles, California and B lives in Lincoln, Nebraska. They both make $100K per year. However, for A, housing costs roughly five times as much as for B. Food and gasoline cost A roughly 1.5 times as much. State and local taxes on property and/or income are dramatically higher for A. Going to a movie costs A roughly 1.5 times as much. It seems like A's $100K is not going nearly as far as B's $100K. Under current income tax rules they pay the same federal tax in spite of this. Under fair tax things are even worse -- A will pay more!

No wonder the advocates of "fair tax" tend to come from rural areas...

[han]

Good analysis Adam, except for the last paragraph and its conclusion, which I think are wrong. If you compare two people who spend most of their money, the shift to fairtax always benefits the higher salary independently of where they live and shop.

[TimG]

awm, on Jan 24 2008, 07:27 PM, said:

A "fair tax" would act to discourage spending. After all, if video games (for example) become more expensive I will buy fewer of them. An income tax might be perceived as discouraging people from making an income, but since making a larger salary still gets you more money (despite diminishing returns from a progressive tax rate) it's not like people will be declining raises at the office "because of the income tax." In contrast I do see people declining to buy luxury items "because of the fair tax." In general reducing spending is a negative effect of the fair tax and would be bad for the economy.

Doesn't the "fairtax" replace an income tax? So, individuals will have more money available for purchases. In theory, this should cancel out the reduced spending because of higher prices.