Arnold Kling  

Why The Fair Tax is Unworkable

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Brad DeLong explains.


Estimates of the actual rate of taxation required for the FairTax to be "revenue neutral" (meaning for it to bring in exactly the same amount of revenue that the federal government collects under the current system) start at 30 percent and keep climbing. William Gale of the liberal Brookings Institution think tank says it's a de facto 44 percent sales tax. Calculations go still higher once you add in all the necessary and politically inevitable exemptions on big-ticket items -- like a new home or hospital care. Congress' Joint Committee on Taxation, which draws members from both parties and both houses, says the real rate would be 57 percent. (And this leaves aside the enormous federal outlay required by the "prebates," which even FairTax advocates say would cost the government $485 billion per year.)

...it's a mammoth tax cut for the crowd making more than $200,000 a year and a substantial tax increase for those making between $30,000 and $200,000 a year.


Our current tax system takes its biggest bite out of people who earn much more than they consume. Because the Fair Tax (or any consumption tax) would abstain from tapping this rich vein of unspent earned income, it would taking larger bites out of others to obtain the same revenue.

Consumption taxes reduce tax rates drastically on people who earn more than they consume. To be revenue neutral, they have to increase taxes drastically on people who consume more of what they earn. Whether this is a bug or a feature of consumption taxes is more debatable than Brad lets on.


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CATEGORIES: Tax Reform



COMMENTS (40 to date)
Jody writes:

To be fair, consumption taxes also shift the taxation onto those with accumulated wealth (as they spend it). I normally hear those on the left side arguing for a wealth tax, and the Fair Tax seems like a palatable way of implementing a wealth tax. In my mind, those concerned with egalitarian issues of the Fair Tax shouldn't be agitating for more exemptions, but discussion different ways of implementing the prebate to make the taxation incidence fall where they want it to.

An ancilliary, though rarely discussed, benefit of the Fair Tax proposal is it gets liberals to admit what a GIGANTIC slice of the economy is consumed by the federal government. I view this as a positive as it should have an indirect effect of making people more inclined towards smaller government.

Floccina writes:

In the Fair tax, the prebate seems to me to be very difficult. How do you handle the prebate in regard to immigrants? How about people who decide to attempt to live on the prebate alone (I think some smart people could pull this off – certainly some could with a bit interest income)? So I think that it would impossible politically to implement the Fair tax although I would like to see it without a prebate.

I would suggest as an easier way to exempt some savings would be to allow people to add as much money to and IRA as they care to each year up until the IRA is worth more than say $2,000,000.

Bruce Bartlett writes:

Prices will not fall if the goofball FairTax is enacted. The only way this can happen is if business costs fall by 22%. The biggest business cost is wages. Therefore workers will have to take a 22% nominal pay cut for this argument to have validity. This will never happen.

Furthermore, if it is true that prices will fall enough to leave the net price level unchanged after imposition of the FairTax, what need is there for a prebate? If the tax has no burden, as the falling price argument implies, then why does the burden of the tax need to be offset with a prebate?

Jody writes:

why does the burden of the tax need to be offset with a prebate?

To act as a political sop.

Chuck writes:

"To be revenue neutral, they have to increase taxes drastically on people who consume more of what they earn. Whether this is a bug or a feature of consumption taxes is more debatable than Brad lets on."

Interesting. I wonder where I could find a discussion of how this seeming bug might actually be a feature. I guess I'll have to run to google and find a econ blog or something.

Truly, though, this proposal is such a radical departure from the status quo, *as proposed*, that once you add in the unknowables of how it would get implemented, one can't really claim to have any opinion on the actual effects of implementing it.

This seems to me like a case where consistant, traditional small govt. conservatives would say, "this should be tried out in a state before we inflict it on the whole nation, law of unintended consequences, etc, etc."

Or is there a reason the plan would be fundamentally undermined if it were implemented at the state level?

Jody writes:

this should be tried out in a state before we inflict it on the whole nation, law of unintended consequences, etc, etc

Except for the prebate, consumption (sales) taxes as the primary means of revenue generation have been implemented at the state level. It's never close to 23/30%, but it is done.

Bruce Bartlett writes:

If there was anything to the embedded taxes argument that moron FairTax supporters keep making, then we would expect prices to be lower in states with no income taxes. They aren't.

Dan Weber writes:
How about people who decide to attempt to live on the prebate alone (I think some smart people could pull this off – certainly some could with a bit interest income)?
They can use that money to buy health insurance, then.

But if someone can live that cheaply, well, more power to them.

Chuck writes:

There are two issues here:

1. In principle, if we were starting from scratch, which would we prefer: an income tax or a consumption tax? I'd be surprised to hear too many people advocating an income tax.

2. Now that we have an income tax, are there a lot of practical reasons to resist switching?

I think everyone is getting caught up in #2 and letting that blur their view of #1. For instance, I was shocked to see that Tyler Cowen of MR say that he's almost certain that a consumption tax would be a bad idea. Does he (and everyone else here) honestly believe that an income tax is better!?!

That said, I think there may be strong arguments for sticking with what we've got, but let's not confuse the two issues.

8 writes:

I would bet that few people who support the FAIR Tax believe it to be—nor want it to be— revenue neutral. The main argument for the tax, I believe, is that it is more easily avoided. Individuals will shift their behavior by reducing consumption and increasing savings & investment. In the short-run, the government loses revenue, but in the long-run the economy grows faster, enough to justify the early costs.

Ryan Hart writes:

We have a very hard time estimating the impact on tax revenue with a percentage change in the current system; how can we pretend to know the revenue-neutral level of a consumption tax? You have to be pretty arrogant to come out with 57%. It just shows that we'll be analyzing this for the next 100 years - but global warming will get us before then (assuming you put faith in those analyses too!)

Jon_Smackenrow writes:

1. Federal and State compliance cost would be consolidated. Saving enormous amount of time, a commodity 2.IRS agents, who spend their entire day reviewing 1.3 returns a day. Does that sound like a waste of human capital? 3. We already tried Flatting the tax during the 80's. It doesn't work. 4.If you guys think that cutting spending, what stops spending from rising again. There is no incentive for politicians to keep spending down. 5. Fair tax is the only tax that tax illegal and black-market freeloaders.
This is a economic thread right? Where is talk of incentive and resources? Stop deferring faceless organization and make a case.

Dan Weber writes:
Fair tax is the only tax that tax illegal and black-market freeloaders.
Unless they shift their consumption to be off the books, as well.

I don't mean this to be FUD; both (all?) systems will have a certain amount of fraud. But we're not going to make any significant revenue off of catching the cheats, any more than you can reduce the government by getting rid of "waste, fraud, and abuse."

Mike writes:

To Bruce Bartlett: "... goofball FairTax" and "... moron FairTax."

Are you the Bruce Bartlett who wrote the excellent article in the WSJ. If so, this sort of ad hominem name calling is inappropriate and takes away from your other work. Even if what you say is well founded it is still inappropriate.

I am going to assume this is really the work of a self appointed left of center nihilist trying to sully your name. If we are going to have a meaningful dialog on important issues of the day we shouldn't unnecessarily poison the air.

Jon_Smackenrow writes:

Hey Dan Webber
Crimes and illegals pay sales tax on everything they buy(food, gold chains, 9mm clips and Mercedes). How does income tax or capital gains effect these groups?
Incentive and resources. This is a Econ-forum right??

Jon_Smackenrow writes:


Crimes and illegals pay sales tax on everything they buy(food, gold chains, 9mm clips and Mercedes). How does income tax or capital gains effect these groups?
Incentive and resources. This is a Econ-forum right??

Dan Weber writes:

Instead of people being employed under the table, people will buy things under the table.

You think that drug dealers are going to collect sales tax on the crack they sell?

Again, this kind of FUD shouldn't scare one away from a consumption tax. Each tax has ways of being avoided, legally or illegally.

Mike writes:

from Bruce Bartlett comment: "Prices will not fall if the ... FairTax is enacted. The only way this can happen is if business costs fall by 22%. The biggest business cost is wages. Therefore workers will have to take a 22% nominal pay cut for this argument to have validity. This will never happen.
Furthermore, if it is true that prices will fall enough to leave the net price level unchanged after imposition of the FairTax, what need is there for a prebate?"

These are very good points! One thing that always fascinated me about the FairTax (or a VAT) to replace the income and payroll taxes was how prices would adjust to reflect the 20 to 25% tax rate embedded in prices of goods and services which could be offset if those taxes were eliminated. The two extremes seem to be your position (no reduction in prices resulting in an increase of about 22%) versus the FairTax advocates (100% offsetting of taxes resulting in no change in price levels). Your argument about this is correct in that they can't have it both ways (need for a prebate and 100% offsetting of embedded taxes). My suspicion is that the truth lies somewhere between these two extremes.

If the truth lies either somewhere between these extremes or at your extreme then we have another issue to worry about. If adjustments in wage rates fail to reflect the lower income taxes than it will constitute a one-time wage increase which will result in a one-time increase in prices. If COLA clauses in labor contracts are not adjusted to reflect the impact of this one-time price jump than this type of consumption tax will turn into a vicious cycle of labor cost driven price increases as the COLA response to tax cost increases cause the cat to chase its tail.

The impact of unadjusted COLAs would seem to me to result in an ultimate equilibrium which produces a dramatic change in relative wage rates between COLA wage contracts which automatically adjust to price changes being the winners and non-COLA wage rates who are driven by market price forces being the losers.

Jody writes:

I'll be Bruce's moron for the day.

First, it's not just income taxes that are replaced - it's (to quote)

"income taxes including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes"

we would expect prices to be lower in states with no income taxes

As income taxes are just a part of what the Fair Tax replaces, we'll evaluate the test for all state taxes. Here's prices by state (link) and here's the state and local tax burdens for these states (link).

We'll use the miscellaneous goods column as representative (as opposed to say housing or groceries or health care) from the cost of living table and we'll exclude Hawaii and Alaska where transportation costs dominate with one a very low tax state and one a very high tax state. (This has the effect of narrowing but not eliminating the following effect).

The ten highest taxing of the contiguous states (VT, ME, NY, RI, OH, WI, CT, NE, NJ) have an average miscellaneous price index of 105.0 and the ten lowest taxed of the contiguous states ( NH, TN, DE, AL, OK, SD, TX, WY, MT, NM) have a price index of 99.4. So low tax states have lower prices than high tax states.

Completing the relationship, the ten lowest priced states (IN, KS, MI, MS, NE, OK, SD, TN, TX, WV) have an average tax burden of 10.22% and the ten highest price states (CA, CT, MA, NV, NH, NJ, VT, NY, OR, RI) have an average tax burden of 11.46%.

Also of interest, note that only one state is in both the low tax and high price lists (NH) and only one state is in both the high tax and low price lists (NE) while 5 of the high tax states are also high price states (CT, NY, NJ, RI, VT) and 4 (TN, TX, OK, SD) of the low tax states are also low price states.

It could be (and I expect it will be) argued that there are confounding factors. But from the data, it certainly looks like lower taxes = lower prices which kinda implies that the Fair Tax morons are right (at least in terms of the sign, if not the magnitude).

Morgan writes:

It's interesting to watch which economists scramble away from the fair tax. Economically, it is a far superior tax system. It makes taxation explicit instead of hidden. It taxes consumption instead of production. It vastly simplifies taxation making it more efficient. It eliminates a host of of market distorting government incentives and subsidies.

The reasons listed in the above comments for opposing it are ludicrous. Some would have us believe that the tax would have to be 57% or higher to be revenue neutral. Perhaps 145%!!! 100% of our income would have to go to paying this tax leaving us nothing to buy food with. We would all starve!

Or just maybe if it is revenue neutral, it will be revenue neutral. And it can easily be adjusted up or down to make it revenue neutral. Good Lord, people, that is a simple, simple issue to fix. The only question is its incidence.

And here is where the tire meets the road. The reason many economists are absolutely useless is because they are rich kids and have no direct knowledge of anyone who actually works for a living. They claim to support free markets for all sorts of idealistic reasons, but the fact is that they are simply pursuing their own limited self-interest. If communism personally enriched them, they would be communists. Especially if it was a contrary view they could hold at cocktail parties.

The incidence of the tax, with the absolutely necessary prebate, falls on those who consume more than they produce. The first people that come to mind are the wealthy. What is the incidence of tax on the wealthy today? That is to say, how much of their economic increase in net worth each year is taxed? The necessity for the AMT should be a clue to the correct answer. If anyone remembers, Ford, not the President, the owner of Ford Corporation was a poster child for the AMT. He paid virtually no tax yet spent millions each year on personal consumption. The situation has not changed much since.

Many people who are against the fair tax are those who live primarily off of wealth and inheritance. It would reduce their purchasing power and make them relatively poorer. There is a much fairer solution to that problem. Go earn some money.

Lord writes:

As a sales tax, it would be massively evaded. As a VAT tax, it has some enforceability, but that would negate much of the simplification argument. As for being a tax on wealth it mostly wouldn't be. With the repeal of the estate tax, large estates would be passed to heirs, who if wise, would live only off the proceeds of it as an pluto-aristocracy.

Jon_Smackenrow writes:

reply Dan Weber
Criminals don't pay income tax or payroll tax. They only pay sales tax. They don't collect sales tax like a typical retailer, but they still buy products and services like you and me. There is no tax system that tax illegal activity. But criminals have to eat like you and me.

Lord writes:

Yes, but criminals would have a lucrative new enterprise to go into, supplying food. It is probably the only thing that will end up taxed as everyone would consume everything else abroad.

Dan Weber writes:

As a thought experiment, we could make the consumption tax simple by taxing just one thing: say, gasoline.

Tax gasoline at $20 a gallon. Send every adult a $100 check at the start of the month, every kid $50-$100 depending on age. That brings in $2.9 Trillion a year, sends out about $0.3 Trillion a year, leaving the Federal budget with about what it's got right now.

This tax will still show up in the rest of the economy, as the price of goods goes up, some significantly. Maybe those bananas shipped in overseas aren't so tasty and you should eat more in-season fruit.

The conservatives could probably really get the liberals on board with this if it was framed as "let's get the US off of gasoline."

Mike writes:

Jody

Very interesting observations. Perhaps a little data mining could improve your results. If you choose only the top 5 and bottom 5 states you get the following:

Top 5 tax burden states (VT,ME,NY,RI,OH)

Average tax burden = 13.4%
Average Price index = 106.36

Bottom 5 tax burden states (OK,AL,DE,TN,NH)

Average tax burden = 8.62%
Average Price index = 101.68

Top 5/Bottom 5 % differential

Tax burden = 13.4% - 8.62% = 4.78%
Price Index = (106.36/101.68) - 1 = 4.60%

Hummm!!

Only problem with this is a bit of apples to oranges comparisons. The tax burden includes property taxes which would be better compared to the total index. I did the calculation and got

Total Price Index = (112.8/97.58) - 1 = 15.6%

Right sign but not as close a fit but still supportive of the point being made.

I'm sure there is a lot that is being left out but the anecdotal evidence seems to support the FairTax argument that tax burden at the state level is embedded in prices. Furthermore, there may be a red state/blue state phenomena going on with income being lower in less expensive red state fly-over country which is reflected in lower tax revenue (burden). Interesting none-the-less and something opponents of the FairTax should address. BTW, I do not support the FairTax proposal due to the enforcement of such a high sales tax rate. A VAT would break the tax up into smaller increments so there would be much less incentive for tax evasion at each stage of production.

8 writes:

As I understand it the Fair Tax is a retail tax, so there would be no tax evasion necessary for anyone except final sale retailers. The opportunity to avoid taxes would be high, but the number of tax collection points would shrink significantly.

Morgan writes:

Re: Lord

How is that different than it is now? Don't be so naive.The wealthy in our country in fact avoid almost all taxation in comparison to their economic income and wealth. There is a self-perpetuating aristocracy here living off of wealth accumulated in the 1800's. Taxing their ostentatious consumption is the only way to capture anything close to their fair share of taxes.

As to how easy it is to avoid, I am not so convinced. Big corporate retailers will find it almost impossible to avoid it. Perhaps micro businesses might be able to avoid it, but if so, better our system benefits the entrepreneur over the corporation. As it is now, corporate subsidies and government distortions benefit corporations over small businesses. It is better to err on the side of entrepreneurs.

Lee Haslup writes:

While I have little doubt that the Fair Tax would work as advertised if implemented, I am sympathetic to the idea that it is politically impossible. An income tax is a tax on new money. This makes it the preferred method by which patrician old money likes to pay themselves interest on the municipal bonds they bought with granddad's money. The already-rich and their clients have little interest in upward mobility and confiscation of gauche new money for the public good seems to them only right and sensible. There are enough members of congress that are beholden to established wealth to make the Fair Tax an idle dream.

Still, it is annoying to listen to the chattering class tell me that they oppose the Fair Tax because it won't work when the truth is that it won't work because they oppose it.

Lord writes:

It really wouldn't be much different from now for the wealthy. The wealthy have options the rest of us don't. They can move abroad if they want to consume. But the FairTax taxes consumption, not wealth. Consider the income tax an invitation for the wealthy to live here since they need to realize relatively little to consume with abandon. How would driving their consumption abroad benefit us? Actually, I think relatively little would really change. Some would find it convenient to pay the tax and stay here and others would be happy to move. The benefits are oversold. There is no pony in the box.

Morgan writes:

You really think that the wealthy would get up and leave if we passed a sales tax? Pray tell, where would they go? Europe, where the weak dollar and VAT makes prices just as high or higher as they would be here? Perhaps Darfur. I understand prices are very low there. Or Russia, I'm sure their wealth is safe there.

In fact, the vast majority of the people who would be willing to relocate to a different country already have. IF some leave, so much the better. I have never understood why the wealthy think that their conspicuous consumption is a favor to the rest of us. Monetarism aside, I note that the rich aren't as sensitive to prices as the rest of us. Where they congregate, the price level inevitably rises. Another good reason to get them out of here.

Mike writes:

RE: 8

You underestimate the evasion problem associated with the FairTax over a VAT. Granted you would have fewer businesses having to pay the FairTax than a VAT but the incentive to evade is much more.

A VAT requires documentation between intermediate value adders much like the income tax requires you to 1099 businesses you are claiming a payment for services to so the IRS would have a quick and easy audit trail back to the offending party. Since the tax is only on the value added and not the entire sale the incentive to evade with the associated risk of getting caught would limit evasion.

Since a sales tax is collected by the retailer you must police them as there is no check and balance on them. Next time you go to a small family owned restaurant watch the transaction at the cash register closely to see if what is rung up corresponds to what you have been charged. Its an old trick to avoid having to pay as much sales tax since the state can't go to your cash register to see what your sales actually were. This is particularly a problem with struggling family restaurants which is not doing well or are just getting started. Now extrapolate that to all retailers and jack up the sales tax rate from 7 or 8 percent to 30 or 40%. Get the picture!!

Europeans have got the VAT down to an art form. No other country has a national sales tax as the only source of revenue. The key to a VAT is to be sure you kill off the income tax otherwise it becomes a vehicle for government to spend without the transparency of an income tax. No European country which has employed a VAT has also killed off their income tax system.

The other major problem with a VAT is it does too good of a job at raising taxes without the electorate knowing spending is getting out of control. So either pass a constitutional amendment reversing the authorization of an income tax or be very vigilant of your politicians.

Morgan writes:

This is where the transparency of the sales tax is such a huge advantage. For the first time we can say, do you support this Bill at the cost of $.01 of sales tax? Do you support the Farm subsidies at the cost of $.03? The most important strength of a market system is associating costs with actions. Income tax totally fails to do this resulting in no effective constraint on government spending.

Arnold Kling writes:

Morgan,
your point about the transparency of the sales tax is one that I try to build on in my next essay.

Michael writes:

The economic impact would be far reaching. Think about the added value of used goods when compared to a 30% price hike (this the extra amount paid, not the 23% of the new list price). Therefore, prices would HAVE to drop on new goods to be competitive. The concept of efficiency would hit hard.

People would save more - which is not necessarily good for the economy since the utility of that money is "wasted" - however this would have the impact of wiping out consumer debt, which is worse than oversaving. It would kickstart a more realistic valuation of everything. If you wanted to save money, you would buy something used. Your property would have higher resale value and you'd have more incentive to take care of it.

I think there would be a massive ripple effect of efficiency. The extremely wealthy would still pay for everything new all the time. But I recognize that buying myself a luxury car I could do for 30% cheaper buying it used - hmm, sounds alot more appealing doesn't it?

You might think this would put the strangle on corporations, for example the consumer tech industry and the constant upgrading. Personally I would fear corner-cutting to lower production costs, and less innovation. I wonder how that would pan out... I think certain industries would be screwed, like credit card companies, whereas the ebays of the world would thrive even more.

The whole concept of tax reduction would be tied into the engine of sales and product distribution - that would be alot more capitalistic in a way, because the most efficient companies would be rewarded alot more.

I'd feel bad for the old tax guys who've done this their whole lives and are out of a job. But I wouldn't feel bad not paying them!

Josh writes:

First, if a national sales tax was enacted, the economy would fall into a recession, most likely, a depression. After years of an income tax, how do you think all people will react to sales tax rate above 30%? It will be quite the sticker shock. Yes, they will have more money in their paychecks, because no tax is taken out, but then will realize they must pay taxes all time when money is spent. You want a new HDTV for $2,000, well there goes close to $700 to the government. Want a new couch for $1,500, there goes close 500 dollars to government. How about food, insurance, utilities, mortgage interest, or just about anything else you spend your money on? Again, yes, you receive pre-tax wages, but that benefit quickly dissipates when you are required to purchase items. So, to counter the government being extremely involved in a person's everyday life, what will the avergae American do? Either two things: don't spend money or look for ways to evade taxes.

When a massive amount of people think it is a good idea to not spend and save money in a country built on massive spending, the USA is going to have a big problem. Prices will have to drop to intice people to spend, but wait, what about the stock market? I don't think anyone realizes what a high rate of sales tax will do to the market. If retail prices are dropping to adjust to the sales tax, coupled with lower profits because people aren't spending much money, that means corporate revenues and profits will drop on a massive scale from previous levels. Investors don't like dropping revenues and profits and especially the prospect of revenues and profits continuing to spiral down to adjust to the new type of consumer spending. The selloff of stock will be huge, and cause a crippling crash to the stock market. It would take years for the market to be an attractive investment again. This could bring the country to its knees, economically. So, when the sales tax is enacted, people will stop spending as much money, retailers will have to drop their prices, which means lower revenues for public coporations, which means lower expectations for profit and revenue, which will lead to a massive sell off of stock. This will all happen in the first year if the sales tax is enacted, and the economy will have almost crumbled before our eyes.

Second, massive tax evasion. There are plenty of small businesses who evade sales tax in states that have them. These states only have a 6-9% sales tax, imagine what would happen with a sales tax of 30% PLUS. And since the IRS would be abolished under the plan, who is going to make sure the business owners are reporting correct sales and paying the correct tax? The states? What incentive do they have to give full attention to this issue? Not much, since it would require them to pay to pay agencies to audit businesses for a sales tax that they don't even COLLECT. Abolshing the IRS is like giving badges and guns to citizens and getting rid of law enforcement. "Average Joe, here is your gun and badge, go uphold the law." "Business owner, you must collect tax and correctly report your sales and sales tax to, uh, no one. Please comply." HA! You can just imagine how that will turn out. People need authority to keep things orderly, whether it be for policing society or collecting taxes. A COLLECTION AGENCY MUST EXIST under any type of tax, otherwise, no one would be ensuring proper compliance. Do you think the government will allow people to run wild with their tax money? Never in a million years. So, under the FairTax, they say they will abolish the IRS, yet they will quickly have to create a new agency to do what the IRS already does, collect tax money and ensure proper compliance! And they are going to spend millions and millions of your tax dollars to get rid of the IRS and implement another agency to do the same exact thing!! What sense does that make? NONE! These are just a couple of points about enacting a national sales tax in this nation. Maybe this could work for a new country just starting out, but not for this country.

John M. Haker writes:

The "Fair tax" is anything but. I am elderly and living on savings which I accumulated when I was working. I paid all the required taxes. To now tax me on consumption is an unfair double taxation. I seriously doubt that any "prebate" granted would offset the "fair taxes"

Gunnar writes:

>> Prices will not fall if the goofball FairTax is enacted. The only way this can happen is if business costs fall by 22%. The biggest business cost is wages. Therefore workers will have to take a 22% nominal pay cut for this argument to have validity. This will never happen.

This is nonsense. Apparently, you have never met a payroll. Payroll taxes are a huge percentage. If that were suddenly gone, it would have the following simultaneous effects: dramatically increasing profits, increasing dividend income, reducing retail price pressure, increasing the amount companies are willing to pay employees, dramatically increasing # business ideas that are now profitable. The logic error in your statement is extreme. In reality, the cost of an employee is the employee net pay plus the payroll taxes for that employee.

>> If there was anything to the embedded taxes argument that moron FairTax supporters keep making, then we would expect prices to be lower in states with no income taxes. They aren't.

As has been shown, they are. The effect is also reduced by the fact that state economies are not isolated from each other. Even more importantly, the federal income tax burden is much greater, so the effect would be far more dramatic.

>> Consider the income tax an invitation for the wealthy to live here since they need to realize relatively little to consume with abandon.

Actually, the lack of a federal income tax would draw many bright wealth producers to the US. The subsequent brain drain from the ROW would be huge.

>> The "Fair tax" is anything but. I am elderly and living on savings which I accumulated when I was working. I paid all the required taxes. To now tax me on consumption is an unfair double taxation. I seriously doubt that any "prebate" granted would offset the "fair taxes"

This is a good point. There probably should be an additional income tax rebate that is proportional to the amount of total income tax paid.

The most important aspect of replacing the income tax with a national sales tax is moral, not dollars and cents. With the bottom 50% of wage earners paying only 3% of taxes, the current situation is essentially taxation without representation. Most people have no interest in tax cuts, because they don't pay taxes.

Gunnar writes:

>> Prices will not fall if the goofball FairTax is enacted. The only way this can happen is if business costs fall by 22%. The biggest business cost is wages. Therefore workers will have to take a 22% nominal pay cut for this argument to have validity. This will never happen.

To answer this more specifically, there are 3 possible responses to a removal of all income taxes:

1) employee insists on retaining his gross pay, resulting in no change to business costs stay the same, as implied by the above quote.
2) employee accepts his gross pay being reduced to his previous net pay plus 15% for social security
3) employee and employer agree on something in between

Both #2 and #3 result in a dramatic reduction in business costs. However, even if #1 were the result, it would mean that employees would have far more cash flow, and therefore, they would easily be able to pay the new sales tax. The situation would normalize as new employees come into the system, and prices started coming down.

JON writes:

Reading the most recent comments, I found many comments to be misleading.

The "Consumption Tax" is an "unfair tax" that would greatly favor the upper class's wealth *(top 1% with 33.4% of the wealth),favor the middle class's budget *(mid 19% with 51% of the wealth),and unfairly "consume" a greater percentage of the lowest class's meager earnings *(bottom 80% with 16% of the crumbs).


This article is filled with a wealth of information;
*Wealth, Income, and Power;by G. William Domhoff(September 2005 (updated December 2006)
-http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Poor people are lucky if they have extra cash, their own home(especially nowadays with the sub-prime mess),health insurance,dental insurance,retirement,or savings. Thats why they're labeled poor.They are lucky if they have a car and are able to pay for thier gas.

Poor people usually spend all the money they make on bills or food.If they have children then it makes it doubly hard on them(daycare,diapers,healthcare).It can make it impossible to save any money,or even treat yourself to something nice that we take for granted.

So,IF they are lucky enough to make a $1,000.00 a month *($8,625.00 a year/$718.00 a month is the median;(Keister,2005)),they are barely over the poverty line. So,if the "Consumption Tax" is assessed at,say,22%(from what I saw in earlier entries on this site),then the "Consumption Tax" would be $2,640.00 a year

Now,I will use the approximate low value for the upper classes *(actual median from figure 3),of the above mentioned article. If we use $80,000.00,at 22%,the "Consumption Tax" would be $17,600.00. But the wealthy don't have to spend all their money to make ends meet and pay their bills. As **Mr.Rothbard's article states, the wealthy will put some money into savings and investments. So we will,for practical purposes,assume that the amount is $60,000.00,the "Consumption Tax" would be $13,200.00. Now the rate of the "Consumption Tax" would now be 16.5%($13,200.00/$80,000.00=16.5),5.5% lower than the poor.

Now,I saw mention about "Prebates", which brings us to the next problem. How would we determine the amount of the "Prebate" for the poor without determining the amount of need. It would take an agency like the IRS to determine or audit the person to set the "Prebate" amount. Now, how would you call it a "Prebate", or determine the amount in advance. Sounds like we would still need the IRS.

The next problem would be collecting the "Consumption Tax". Would you fill out a tax form,would you be legally bound to collect a reciept,would the business be obligated to collect your personal information,would some shady businessess start giving fake reciepts. Would these problems make it easier to cheat the government. what about Internet sales,offshore purchasing clubs,people buying directly from farmers for food,people bartering or trading services for products,etc.. .I could go on and on.Now it would take more than the IRS,and a much more complicated and ensnarled system to handle and police each exchange

Furthermore,once somebody had,or already had, enough in savings or investment that they didn't need to work,grew their own food,became so sufficient that they didn't pay taxes but still used government services,national infrastructure,telephone services,cable services.

-Here is a site with more intelligent info on the "Consumption Tax" debate.

The Consumption Tax: A Critique;By Murray N. Rothbard(Posted on 3/18/2005)
**http://www.mises.org/story/1768

On another note,the errant theory that government and taxes are the root of the problem is comparable to blaming a vehicle for a DUI death, or blaming a gun for a shooting death. The reason why our government is in bad shape

"Jody writes:Posted January 7, 2008 08:27 AM.
..a GIGANTIC slice of the economy is consumed by the federal government.
..it should have an indirect effect of making people more inclined towards smaller government."

In the statement referenced above,written by "jody",..GIGANTIC..,was greatly misleading actually only about 28% to 30% of our national GNP. These are numbers that I got from 6 to 7 republican web sites.I am a NPA(non-partisan affiliate) voter. Of that 28% to 30%, social programs make up 45% to 48% of

Our federal government agencies(regulatory ones like the FDA,GAO) have been gutted of inspectors,accountants and auditors. Because of all these job cuts the FDA is only able to inspect 1% of the foods we eat.Anybody want their kids to have some ECOLI spinach,vegetables or burgers. What is even worse is that the GAO doesn't have enough auditors to stop the corruption by the dishonest contractors like "Blackwater,Halliburton and I think it's Fallusia in the "Illegal invasion of IRAQ". Will this corrupted and liing republican administration ever end, Bush will bankrupt our economy and morals. Bush and the stubbornly narrowminded,unmoralistic(SANTA CLAUSE, duplicit,brainwashing,lies)evangelistic republicans will be the ruination of our great country. PEACE TO ALL.

Please America

Gunnar writes:

JON,

Actually, it's your post that is very misleading. When you say:

>> How would we determine the amount of the "Prebate" for the poor without determining the amount of need. It would take an agency like the IRS to determine or audit the person to set the "Prebate" amount. Now, how would you call it a "Prebate", or determine the amount in advance. Sounds like we would still need the IRS.

There is NO need for the IRS or any other agency to determine need of individual people. The prebate is calculated objectively based on the amount of necessities associated with the agreed upon poverty line. EVERYONE gets the prebate!

>> The "Consumption Tax" is an "unfair tax" that would greatly favor the upper class's wealth *(top 1% with 33.4% of the wealth),

No, the rich consume far, far more than poor people. A second 10 million dollar home would yield 2.3 million in taxes. Flying all around would cost them big time. Those that are more frugal would have a much higher savings rate than in the current scheme, yielding huge market investments, which would create jobs on an unprecedented scale.

Contrary to what you said, it is the current system, where 86% of all federal taxes are paid by the top 25% of wage earners that is unfair. The top 50% pay 97% of income taxes, while top 1% pay 39%!! It is 1) unfair and immoral, 2) taxation without representation, and 3) not practical (ie not good for the economy), since it results in smart dynamic productive people choosing not to start that new business, or being unable to because taxes took away the seed capital.

A sales tax would also extract taxes from people who avoid taxes in the current system. The majority of income taxes are paid by very high income wage earners. However, there are many other rich people who already have their wealth, either from previous success or inheritance, and don't earn a wage. They simply invest their wealth in tax free municipal bonds (eg Ross Perot).

>> [ The sales tax is unfair because it ] favors the middle class's budget *(mid 19% with 51% of the wealth),

No, the opposite is true. It's fair because it makes it possible for middle class folks to use their OWN MONEY for what they want, rather than federal waste, fraud and abuse. They can pay down their mortgages, pay for college, or save for retirement a lot easier.

>> [ The sales tax is unfair because it ] "consumes" a greater percentage of the lowest class's meager earnings

It completely covers the amount that the poor would pay in sales tax. The end result is that the poor pay no taxes. The sales tax system gives them a much more viable way to get ahead, with a more robust economy creating more jobs.

>> On another note,the errant theory that government and taxes are the root of the problem is comparable to blaming a vehicle for a DUI death, or blaming a gun for a shooting death.

A better analogy for your position: You're in a jail, shackled to the wall, and you say: I don't blame the people who put me in here without cause or a trial, I blame the guard who doesn't give me enough bread. It's not fair that some people get to walk around free. They should be shackled too.

The current system is not an unblamable inanimate object. It's created by people who violate the right to property using the power of government.

Another really bad consequence of the current system is that it breeds corruption in our elected officials. The scam is that they regularly tweak the tax code to disfavor some group, who then contribute money to politicians to "fix" the problem, and then the politicians move on to the next group.

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