THE BOOK--Playing The Percentages In Baseball

I’m not opposed to a simpler tax system (eliminate most of the overhead of the IRS) like a sales tax.  However, my concern is that it may do exactly what we don’t need - limit spending.  I’m not an economist, so I don’t know if this is actually a problem, but if you have a national sales tax, the price of good will go up (since the tax is added in), and this may decrease spending.  Which may be healthy for individual families, but not be so good for the country.  I’d like to see some details on projections for the GDP under a tax system like this.

In Quebec, we have 14% sales tax, PLUS income tax.

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Two questions:
1. Under their proposal, how much do they estimate is the amount of total tax (sales, income, etc), that a family of four earning under 30K, 30 to 60K, 60 to 120K, 120 to 240K, and 240K+ will pay?  And how much do they currently pay?

2. The tax collector now becomes the small business, instead of corporate America?  That seems ripe for an underground (black market) economy.

Maybe the book has answers to these, but I have two big issues with such a large sales tax:

1. How will the government prevent tax evasion? I’ve talked to a couple of people who work as state tax collectors and they say tax avoidance is a big problem (on state taxes of 5-10%). Even if the 30% rate is realistic, state and local sales taxes would have to be added on top of that (if the federal income tax is eliminated, states would have to eliminate their income taxes as well, so state sales tax levels would rise significantly), resulting in a total sales tax of at least 40% in most locations. That creates a huge incentive to avoid paying the tax. Large corporations like Wal-Mart will pay the tax, but what about local restaurants, mechanics, even landlords?

2. Wouldn’t this kill the tourism business by creating a huge incentive to take vacations outside the country? Instead of going to the beach in Florida, why not go to the Caribbean where your hotel, meals, activities will all be taxed at much lower rates? I live in NYC, suddenly a 6-hour drive to Montreal becomes much more appealing than a 5-hour drive to Boston. A trip to London or Paris is suddenly just as cheap as a trip to California.

If you’re in favor a flat tax, why not just have a flat income tax, but with absolutely no deductions/exemptions?

Two more concerns related to transition from an income tax to a sales tax:

1. What do you do about double taxation? Responsible people earn more money than they spend for part of their life; when they retire, they spend (much) more money than they earn. So, if I’m 70 years old and already payed income tax on all the money I earned over the years that I put away in the bank, I’ll get taxed again now that I’m spending it.

2. There’d be a huge surge in large purchases (homes, cars, etc.) in the months leading up to day 1 of the FairTax and then almost no sales at all in the months following once the prices go up by ~40%. It might take years for the housing market to adjust to the new price scheme. Depending on your perspective, this might not be a real negative, but it would be chaotic for a lot of people.

The recent proposal of a gas tax holiday suggests there will be complications added to any sales tax system. You could end up with different tax levels for the same item depending on where you bought it (Wal-Mart versus, say, mlb.com), when you bought it, why you bought it (business, personal use) and how you bought it (cash, credit card, installments). You can rest assured if the possibility of such distinctions exists, that our government will find ways to use them to make the system ‘fairer’.

The implementation of a new system could be introduced over a period of 5 years or so which would lessen the effects of massive amounts of purchases followed by none at all.  Year 1 purchases could be taxed at a rate of 5%, then 10%, 15%, 20%, 23%.  This would be accompiannied by a decrease in the income tax rate. 

As for the issue about evasion, you would still need some type of tax agency to collect the money.  Enforcement could still fall under their jurisdiction.

I’ve always thought there was a simpler way.  It’s flat, and it’s progressive.  And I can describe it in one paragraph.  There is simply one tax rate.  That tax rate is for everything (capital gains, social security, medicare, income, etc).  Your first $20,000 is exempt as an individual (or $15,000 whatever is deemed acceptable).  You give married couples double the exemption.  And an exemption for each child ($5000 or so) up to a certain limit.  It’s so simple it will never work.

This sort of tax scheme would provide a very strong incentive to spend one’s money on things other than goods.  In other words, instead of buying a car, maybe I’ll just invest the money (especially since I won’t have to pay capital gains tax anymore).  While people are arguably consuming too much instead of saving, this tax structure would put things at the opposite extreme.

On a related note, there ARE activities that should be subsidized (e.g. education), and activities that should be discouraged (e.g. pollution, drug use).  Taxation is the best way to go about this.  While you rightly point out the government is susceptible to capture by interest groups, such interest groups would have other ways of extracting such rents anyway.  For example, farmers currently get a check from the government for no good reason.

Many of those concerns questions are addressed somewhere, although not necessarily in the book (which, as I said, is quite biased, to a fault, and somewhat misleading and dishonest, although I don’t think that takes away from the proposal itself).

A flat income tax is certainly a valid alternative.  The “problem” with that is it is NOT progressive by definition (other than having one exemption of say $20,000/$30,000 for single/couple, although it should be based on total number of persons in the household) which means that the middle class will be paying A LOT more than they do now and that will never fly, AND it is still an income tax, which means that:

1) no illegal activities or underground businesses will get taxed
2) the government is still in our business
3) most importantly, how long do you think it will be for another 60,000 pages of deductions, exemptions, incentives, breaks, etc.?  You CANNOT have an income tax without someone eventually (soon and often) crying, “That’s not fair,” or “Let’s use this to ‘encourage’ something.”

Which gets me to:

On a related note, there ARE activities that should be subsidized (e.g. education), and activities that should be discouraged (e.g. pollution, drug use).  Taxation is the best way to go about this.  While you rightly point out the government is susceptible to capture by interest groups, such interest groups would have other ways of extracting such rents anyway.  For example, farmers currently get a check from the government for no good reason.

That might be good in theory, although you could argue that it is not (using taxes to encourage or discourage behaviors or activities).  But, in practice it will lead no nothing but bribery by politicians for votes or money.  That is inevitable.  Can’t be helped.  Plus, it will eventually lead to the monstrous system we have today.

And, BTW, one thing I forgot to mention, which is important, I think, is that a FairTax or any National Sales Tax system, would provide a transparent system of taxation.  Do you realize that a good percentage of ordinary people, especially young people, do not even know how much money they make?  They vaguely know how much money they take home, but not what they actually earn before all taxes.  There is something wrong with that.  Try asking a young wage earner, “How much money do you make,” and I’ll bet that at least 50% can tell you what they take home but not what they actually earn.

And such a system would not affect State income taxes.  The Fed government cannot tell the states what to do.

As far as compliance, right now the Fed government loses a huge amount of tax income from taxpayer cheating and illegal and underground businesses.  Compliance is a problem with any system.  Since lots of other countries have similar systems already, we have an idea as to what the compliance rate would be.  I have seen anywhere from 80-85% of total revenue.  The people who propose and advocate the FairTax have supposedly spent something like 30 million dollars researching it, so I assume that they have answered many if not all of these concerns to their satisfaction.  While, you definitely want to listen to opponents’ criticisms, I can’t imagine that a group of people would advocate something that they think or have found out is not going to work.

The small businesses that are most likely to “cheat” (like they do with sales tax) comprise a very small percentage of total sales, BTW.  The giant corporations, which I assume would not cheat, make up the lion’s share of all consumer sales.

All the other things (double taxation, people are encouraged to vacation or even receive services overseas - BTW, consumer imports are taxed, etc.) are all legitimate “criticisms” and concerns.  But, as I initially said, there are going to be dozens if not hundreds of those with any system.

However, if you are going to award points and demerits to decide on a tax system, I say that you deduct 1 point for each of those concerns, assuming they are valid and that the present system is better with respect to that criticism, but that you award 10 points for its simplicity, and another 10 points for the fact that it keeps the government out of our business.

You could end up with different tax levels for the same item depending on where you bought it (Wal-Mart versus, say, mlb.com), when you bought it, why you bought it (business, personal use) and how you bought it (cash, credit card, installments). You can rest assured if the possibility of such distinctions exists, that our government will find ways to use them to make the system ‘fairer’.

I don’t understand this.  Do you mean because the price is different everywhere?  So what?  Your last sentence is telling and chilling.  That is the reason why our present system is a monstrosity.  Because in a country of 300 million people, everyone has their idea of what is “fair” when it comes to taxation (and of course, there really is no such thing).  Add to that, the bribery and corruption which I think REALLY underlies the tax code.  Maybe the government would find a way to screw up a simple system like this and maybe they won’t.  But that is NOT a good reason not to at least attempt to implement it.

MGL - Let me see if I have this right.  FairTax gets passed and then I win the $150,000,000 lottery.  No tax on that.  I buy a penthouse in one of those nice prewar apartment buildings overlooking Central Park and a nice old beach front estate on Long Island.  No tax on those because they are “used” houses.  I furnish them with antiques and the early 20th century American art that I like, but still no tax on the used furniture or preowned pictures.  I’ll need to upgrade my ride(s) and I’ve always coveted one of those 60’s Cobras; the 289 not the 427, its a bet two gaudy for me.  I’ve also like the look of a 1930s Rolls Royce and it would be perfect for those more formal occasions in the city when I don’t want to drive myself.  So I’ll buy those, but without any tax because they are used cars.  I’ll need a boat of course.  Maybe a classic ChrisCraft or one of those old wooden sailing yachts from the 30s when they really knew quality. 

So I think I’m leading a pretty good life, and my only taxes are for groceries, utilities, a few pair of new sweat pants, and my driver’s salary, which isn’t much because he gets room and board and only works a few times a year.  Oh, I forgot, the groceries, utilities and sweat pants are probably mostly covered by my $20,000 exclusion.

Somehow I don’t think I’ll be supporting the FairTax proposal any time soon.  Unless, of course, I actually do win the lottery.  Then by all means sign me up!

MGL - you say that a flat income tax would be unpopular because it wouldn’t be progressive. Why do you think a flat sales tax would be progressive? Generally speaking, the richer someone is, the lower the percentage of their income they spend. Poor people save very little money; rich people save a lot of money. I think it’s pretty much universally accepted that state sales taxes are regressive. (Yes, I realize the ~$20k deduction would make it somewhat progressive, but that would be the same for the flat income tax).

I can’t argue with your “government being in your business” concern, but it’s never particularly troubled me.

Other than that, I don’t see any advantage to a sales tax over an income tax. Why wouldn’t interest groups push for exemptions from the sales tax? I’m sure that politicians would be pushing for exemptions for housing, education, and health care from day one.

And as far as illegal activities go, I don’t see how the sales tax solves anything. Yes, the drug dealer will now have to pay taxes on stuff he buys, but the drug purchasers won’t pay taxes on the drugs, so the tax base stays the same.

Do you mean because the price is different everywhere?

No, I mean the tax will vary for the same good at the same price based on perceptions of fairness. That is almost guaranteed to happen. Now the various epicycles may not reach 60,000 pages of documentation, but the ‘simplicity’ advantage of a flat tax is really that it’s a new system coming in as a blank slate. Some, maybe all, of that advantage will be lost with time. That’s political reality.

Because in a country of 300 million people, everyone has their idea of what is “fair” when it comes to taxation (and of course, there really is no such thing).

There’s also no such thing as a perfectly fair defensive metric. I’m guessing (and hoping) that doesn’t stop you from computing UZRs.

None of the arguments above has swayed my opinion one iota.  As i said, if it does nothing else, I would vigorously vote for and support it because it keeps the government out of our business (at least more so than presently), and that is my number one concern as a citizen of this country, bar none - privacy.

Whether it is “progressive” or not depends on your definition of that word.  If it means the rich pay more taxes, then yes, it is progressive.  If it means “as a percentage of income” then it is regressive.  I don’t know the official definition of “progressive” and “regressive” so I just won’t use those words.  I’ll just say, that on the average, the rich will pay a lot more than the middle-class, who will pay a lot more than the poor.  And, as I said, that is about the only thing that everyone can agree on, I think, or at least agree to hate.

I take back what I said about a flat tax not being progressive.  I erred. It is progressive in the same way that a National sales tax would be progressive - rich people would pay more.  That is good enough for me.

Peter, your anecdote is meaningless to me.  If you want to purchase all used items with your fortune, and thus avoid paying a lot of taxes, that’s fine with me.  All of those items you purchased were already taxed.  The system is set up, somewhat arbitrarily to tax only new items. So be it.  No matter what the system, someone is going to be able to game it.  So what.  I just hope that whatever system of taxation is ultimately chosen in this country, that all the so-called intellects and know-it-all’s don’t throw the baby out with the bath water, which is what people tend to do, especially in politics, legislation and public policy. They spend all day telling one another what is wrong with something (and most are legitimate concerns), and nothing ever gets accomplished.  Find something that is better than what you got, make it simple, and then leave it alone. You are not going to make everyone, or even anyone happy with any tax system.  I don’t know how many times I have to say that.  It would be like trying to get your kids to make all the decisions in your household with regard to them.

I really don’t care if we have a VAT, a National sales tax, or a flat income tax, with no exemptions or deductions.  But I think that current systems in its evolved state, is a joke.  NO ONE likes it. No one.  Yet it keeps on getting worse.

And yes, it is possible that it will eventually turn into the type of monstrosity we have no with eighty million exemptions and incentives, etc. And maybe the real beauty in the system is not the system itself, but the notion that we tear down the old one and start anew.  But when you tear down something that is atrocious, you certainly don’t start with the same structure you had before.  You at least attempt a new system that might not be as prone to being bastardized.  You’ve got to give people credit for possibly learning from their mistakes.  We do do that every once in a while.

One benefit of eliminating the IRS is that Barry Bonds would still be playing baseball.

I disagree with the premise that a flat tax would “get government out of our business.” Government is still going to want to influence behavior.  If they can’t use the tax system to provide behavioral incentives and disincentives, they’ll use some other, possibly more invasive methods.

Ken, I just don’t think that is a reason not to try and get rid of something that is bad - because something else is likely to crop up and take its place.  I didn’t say that I wanted to get rid of income taxes because I am certain that that will end the governments obsession with knowing everything they can about us. I said that I wanted to get rid of the income tax because right now that is the primary way that government keeps its nose in our business. If the income tax is gotten rid of, that is one less reason and one less way that the government can invade our privacy.  If something else pops up, then we’ll deal with that when the time comes!  And BTW, I do think that if there were no income taxes, then the motivation for the government to monitor our activities is greatly reduced if not eliminated completely.  They have to have a reason to want to keep tabs on us.  I think that collecting taxes is THE reason.  Get rid of that, and we go a long way towards keeping our privacy. If something else comes up, then we will deal with that.  One step at a time.

Here are a few more issues and concerns which might need airing out or are worth repeating.

(1) By including payroll taxes on the list of taxes to be replaced, and including a prebate feature, the Fairtax plan would create a group of 30 million workers who would become net “non-contributers” to the federal treasury.  Yet, they all will be eligible for full pension and health care benefits.  Is that really good for America?  Compare that to the less than 1 million workers under current tax law that can reduce their income tax liability to near zero and then use the EITC and Child Care refundable credits to totally offset their 7.65% payroll tax amount.

(2) Retirees who have paid in to the SS Trust Funds for 45 years or so would be forced to resume paying for their benefits with their sales tax dollars.  Is that fair? 

(3) All after tax savings would be essentially double taxed.  The authors of HR25 added a $600 billion inventory tax credit, but gave no consideration to the impact of the Fairtax on savings.

(4) By taxing State and Local government operations, all S/L taxes will have to be raised by 30%, or services reduced by a like amount.  Roughly 15% of the revenue needed for the federal government would be hidden in higher state and local taxes.  Is that really so transparent?

(5) Alternatively, the Supreme Court will likely find that federal taxation of state and local governments is unconstitutional under the long held doctrine of “intergovernmental tax immunity”.  It’s easy to forget that our Republic consists of two sovereign powers, state and federal, and a constitutional challenge can be expected. If successful, expect the Fairtax revenue neutral rate to rise significantly.  I might add that the State governors all oppose a national sales tax.  Check out the National Governors Association 2008 tax policy paper for confirmation.  Repealing the 16th Amendment may not be possible!

(6) While illegal tax evasion is certainly a concern, it may be that legal tax avoidance will turn out to be an even greater problem.  For example, instead of buying a new car every two years as I do now, I’d buy an extended warranty and drive the thing for ten years.  What would be the federal revenue impact if people did that on a national scale?

(7) And finally, that $14 trillion in US assets held offshore for tax reasons is another Fairtax myth.  Google the Tax Justice Network and find their 2005 white paper entitled “The Price of Offshore”.  It turns out there is trillions in offshore asset but they aren’t all owned by US citizens or corporations.  Less than $1.6 trillion is owned by North Americans, and there are 23 sovereign countries in NA.  Best estimate is that less than $700 billion is US owned.  And in light of HR25, Section 905, it is unlikely that foreign owned assets would come rushing to our shores.

why not just get some of that internet money?

I actually think the FairTax is a pretty terrible idea. Quite frankly. something being simple doesn’t sway me. I think it’s simple because it has about 72 bajillion holes in it. It’s even easier to take advantage of that than the current system, and I don’t see how it makes anything better. Well, I guess there’s the privacy issue. I’m not too concerned with the government knowing my business. In fact, if they want to keep tabs on me, fine. They’re wasting their time and somebody is incredibly bored. The only part of the “invasion of privacy” (which, by the way, is not a right given at any point in the Constitution) that bugs me is people are being paid tax dollars to waste time.

It’s probably a fairly insignificant problem that would result from the Fair Tax, but I’m pretty sure it would be the dream of organized crime syndicates to have this sort of thing, especially if it grows and eventually spreads to the states. A lot of RICO cases involve various tax offenses. If there is no consequence in the way of tax fraud/avoidance/whatever, what is to stop organized crime? Seems like they would be able to minimize a lot of their risk by transferring operations to legal goods (no drugs, illegal guns, etc.). Acquire the products by any means necessary, sell them for a cheaper price, and you don’t have to answer for anything.

About the only thing I agree with in this post is that the current system isn’t very good. Maybe it’s too complicated. But I don’t think something so simple with so many obvious holes (which would eventually get patched via thousands of pages of new tax rules) is the answer.

(1) By including payroll taxes on the list of taxes to be replaced, and including a prebate feature, the Fairtax plan would create a group of 30 million workers who would become net “non-contributers” to the federal treasury.  Yet, they all will be eligible for full pension and health care benefits.  Is that really good for America?

Again, you are arguing about what is “fair” or not.  You can argue that until the Earth gets swallowed by the Sun, and no one will win and there will be no consensus.  Do I have a problem with someone who earns very little getting SS?  No I do not.  Is that any different from someone earning very little money and not paying for all the other government services they receive for free (roads, military protection, etc.)?  Why do you make a distinction?  Where is it “written” that in order to receive SS and Medicaire when you retire, you have to have paid for it yourself?  SS and Medicaire is just another government service.  That the funds are “separate” and are paid for separately is a needless formality.  Put everything (taxes) into one big box and then give it out in the best way possible.

One thing people forget.  Taxes are merely a convenient way for everyone to pay for the services that most people need.  Different people obviously need different services, but it is not practicable to charge people only for the specific services they use or need.  In addition, we and most societies, believe that it is morally correct for people who earn more money and have more wealth to help pay for the services for people that don’t. Taxes are like going out to dinner with a bunch of friends and rather than separate checks, everyone just splits the check equally and the guy with less money in his pocket contributes less.

(2) Retirees who have paid in to the SS Trust Funds for 45 years or so would be forced to resume paying for their benefits with their sales tax dollars.  Is that fair?

I am going to sound like a broken record, and this is the last time I will mention this, but, NOTHING is going to be fair.  No system is going to be fair.  It ain’t fair now, and it never will be fair.  For two reasons:  One, there is no universal definition of fair, and two, everyone has their own selfish interests in mind when it comes to taxes.

Is it fair that the first group to receive SS did not pay into the system?  Is it fair that I am forced to pay into the system when I don’t want to collect?  Shouldn’t I have the option?  Is it fair that you have a lot of savings that draws interest that your SS gets taxed and you essentially get penalized for saving money?  Is it fair that I rent and you own and you get some ridiculous mortgage interest tax deduction?  We could go on for hours about what is and what is not fair.

(3) All after tax savings would be essentially double taxed.  The authors of HR25 added a $600 billion inventory tax credit, but gave no consideration to the impact of the Fairtax on savings.

That’s too bad. Eventually that won’t be the case.  And things get taxed a multitude of times in the present system.  BTW, the FirTax eliminates the death (estate) tax.  It has to start somewhere.  When SS first started as a government run “forced” savings program, I’m sure that people screamed bloody murder that it wasn’t fair that the first group started receiving without paying in (which was the case, BTW - they could have waited until a generation already put money into it, but they didn’t).

(5) Alternatively, the Supreme Court will likely find that federal taxation of state and local governments is unconstitutional under the long held doctrine of “intergovernmental tax immunity”.  It’s easy to forget that our Republic consists of two sovereign powers, state and federal, and a constitutional challenge can be expected. If successful, expect the Fairtax revenue neutral rate to rise significantly.  I might add that the State governors all oppose a national sales tax.  Check out the National Governors Association 2008 tax policy paper for confirmation.  Repealing the 16th Amendment may not be possible!

Again, if they have to exempt S&L governments, fine.  I doubt that is going to make a dent in revenue.  Do you know how much it would?  I don’t think that there is any barrier to repealing the 16th Amend.  It simply allows the Fed Gov to levy taxes.

(4) By taxing State and Local government operations, all S/L taxes will have to be raised by 30%, or services reduced by a like amount.  Roughly 15% of the revenue needed for the federal government would be hidden in higher state and local taxes.  Is that really so transparent?

You are talking about taxing expenditures by Government entities?  I am not sure those are taxed, just like business expenditures are not taxed. You’d have to write someone who is an expert and ask them.

(6) While illegal tax evasion is certainly a concern, it may be that legal tax avoidance will turn out to be an even greater problem.  For example, instead of buying a new car every two years as I do now, I’d buy an extended warranty and drive the thing for ten years.  What would be the federal revenue impact if people did that on a national scale?

So what?  If you are suggesting that everyone is going to all of a sudden stop buying new things, that is ridiculous.  If you are suggesting that the buying habits of American might change, I assume that that is factored into the FairTax rate.  Is it that hard to include in the legislation a provision that recomputes the rate every 3 or 5 years, to make sure that the Fed Gov has enough money?  Isn’t that we do now in constantly tinkering with the income tax rates.  That is a really weak argument, I am afraid.  No argument at all.  It is a little like saying that if we invoke an income tax (if we didn’t have one), everyone will stop working.  They’ll just stay at home and grow their own crops and make their own food.

(7) And finally, that $14 trillion in US assets held offshore for tax reasons is another Fairtax myth.  Google the Tax Justice Network and find their 2005 white paper entitled “The Price of Offshore”.  It turns out there is trillions in offshore asset but they aren’t all owned by US citizens or corporations.  Less than $1.6 trillion is owned by North Americans, and there are 23 sovereign countries in NA.  Best estimate is that less than $700 billion is US owned.  And in light of HR25, Section 905, it is unlikely that foreign owned assets would come rushing to our shores.

I agree that unfortunately there is a lot of BS associated with the FairTax proponents.  That is one of the first things that came to mind while reading the book and perusing the website.  Where politicians lurk, there will always be loads of B.S.  Like the old joke, “How can you tell when a politician is lying?”

Is that a reason to oppose the system?  No.

Here is my take:  The government is going to need and gets its revenue somehow and someway. How much is necessary is a discussion for another day.  Given that they need X amount of dollars per year, I don’t much care how they collect it.  From income, from a sales tax on all goods and services, or from a tax on toilet paper. It’s all the same thing.

All I ask are three things: 

1) Make it simple.

2) Get the government out of my business!

3) And set up a system that makes it harder for entities to bribe the politicians into giving them tax breaks.

A National Sales tax is as good as or better than any other in helping to insure these 3 things, and far better than the current system, which does exactly the opposite of these 3 things.

MGL,

To answer a couple of your questions, all government entities will pay the sales tax on all purchases of new goods and all services except those related to education.  And it should be clear that governments can’t tax themselves into prosperity. If the federal government is taxed on consumption, the money to pay the tax has to come from somewhere, and as you know, the somewhere is us in the form of a higher sales tax rate.That is why the real rate is not 23% but closer to 28% inclusive, which is almost 40% exclusive.  How high is too high?

Failure to tax state and local governments does indeed put a dent in federal revenue, to the tune of around $300 billion annually, or 15% of the total revenue neutral amount.  Which simply means that all state and local taxes will rise by 30% or so.  Alternatively, States could “tax the tax” or reduce services as I pointed out. 

I believe that a national sales tax would be preferable to the income tax.  The arguments in favor are quite compelling.  The problem is that the Fairtax authors tried to do too much, too quickly.  Rather than me simply throwing grenades, consider my alternative which I call “Fairtax-Lite.  It’s a plan for a 12% national sales tax, no prebate, no inventory tax credit, leaves payroll taxes in place, no exemptions, and phases in over five years.  If you really want to get rid of the IRS/IRC, Fairtax-Lite has a much better chance of Congressional approval imho!

I’m in general in favor of something like the Fair Tax.  I’m not sure that’s it exactly, but something similar.  And think of all the money we’d save by eliminating the billions we spend on the IRS every year (not to mention all the tax lawyers and accountants that would have to find useful employment!)

Click my name for a link to a post on Time’s website about the FairTax. There are some interesting comments about tax evasion from someone who works as a state sales tax investigator.

See comment 68 in particular, and also 58, 65, 100.

Henry, sounds good to me (Lite).  As I said, (almost) anything but the system we have know works for me. 

When you (or anyone else) ask, “How high is too high?” I have to come back to the same thing:  If we are going to have an alternative to the current system which is revenue-neutral, then we are going to pay exactly the same tax, more or less, as before.  As I also said, I don’t much care where it comes from - sales tax, income tax, tax on toilet paper, etc.  We are not discussing how MUCH in tax we should pay, but the method of collecting it. One thing I can’t stand about the FairTax proponents is that they clearly make it seem as if everyone is going to pay less under their system, which is ridiculous of course (not to mention impossible), since, by definition, their plan is supposed to be tax neutral.

One thing I did not mention is that supposedly the FairTax bill has wording in it that is supposed to make it “taxpayer friendly.” No more Gestapo IRS, guilty ‘til you are proven innocent, etc.  Speaking of that, if there is ONE thing that kills me is when the government acts as a nemesis to the people, such as is the case with the IRS.  Is there anyone in this country, rich or poor, that thinks something like, “Oh, yes, I like the IRS. They are just looking out for my interest and the interest of our country?” Every government office should have plastered on the wall, “a government of the people, by the people, and for the people..”

Fairtax= Simple.  Luxary flat tax on the consumption side.  I love the idea!!
true choice, whether you win the lotto or not. Whether you choose to get taxed or not.  Wake up people. Stop taking my money on what I earn!!!  Let me choose how I want to donate to my fellow Soldiers, Fireman, Policeman, and City structures.
Upward mobility for all, and why do you care how much money I make?

Just one comment:

Anyone who actually thinks that our current system is GOOD is an idiot!  I can say that because - guess what? - No one thinks that our current system is good!

It’s just as easy to argue that this is a virtue of the current system. (Similar to which religion is “right”,) Either everyone is getting screwed, or a huge percentage of people are wrong about who’s getting screwed. That there’s a huge argument and lack of clarity over who’s “getting away” with not paying enough in taxes is an indicator the system is pretty darn fair.

I love Tango’s insight that sometimes, reality and what works best is just messy, and we can’t simplify it into one an A+B equation that everyone will understand. Yet, those who are capable have a responsibility to wade through the mess and try to illustrate the better answers, not obscure them through unnecessary simplifications.

#26, I don’t disagree.

I don’t remember providing that insight, but I’ll take whatever nice things are said.

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From cannatar’s link:

In my state, we estimate that sales tax not remitted amounts to 60 percent of the tax collected by small businesses. Large corporations tend to remit the full amount and abide by the rules, but most of the revenue and sales tax collections are generated by small businesses. I am currently doing a detailed calculation of the sales tax stolen within a single industry in our state, and its amounting to hundreds of millions of dollars so far. This particular industry is one where the amount of tax collected can be determined by reference to filings with other state agencies. By comparing the reports we can finitely determine the amount of tax stolen. The amazing thing is that businesses in an industry where the amount of sales tax collected can be verified are still stealing taxes to that magnitude. In industries where the amount of sales tax collected cannot be verified, the amount of sales tax theft is off the charts. We have done detailed estimates of theft in those cases based on purchases. For example, convenience stores that purchase $50,000 worth of cigarettes and beer every month but never report more than $15,000 of gross sales. You would not believe how common that is.

And also:

http://dor.myflorida.com/dor/news/news082404.html

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I agree that compliance is the main issue.  How much tax money is currently being stolen, and how much tax money will be stolen with a sales tax only system?

Also, no one has said what the tax burden will be for various levels of household income, under the different scenarios.  This is the #1 question that 100 million households will have.

Unless these two questions are answered, I find keeping up with the discussion almost pointless.

By pointless I mean without any hope of moving forward.  Of course, there are other (valid) points to be made, other than that.

For some reason (I assume it is calculated), which I find incredibly intellectually dishonest, the FairTax proponents refuse to show approximately how much in taxes a person or family in the various income brackets would pay, given a National Sales tax of 23% (of the final price, including the tax).

I am pretty sure you can figure that out for yourself, though.  How much do you spend?  It is a little tricky, because a lot of the big ticket items are only purchased every once in a while.

I have read several times that the overwhelming majority of sales, in dollars is from large businesses and not small ones, such that the overall impact of small businesses cheating would be small.  Whether that is true or not, I don’t know.  That is a matter of fact, so there is no use arguing it (I can’t stand when people argue things that are facts).

I don’t think that compliance is going to be a problem.  At the very least you ought to be able to do two things.  Estimate the compliance rate going into this thing.  Have much better enforcement than the states and local governments apparently have.

Not to mention the fact that everything comes out in the wash.  If a certain percentage of businesses are cheating or every business is cheating a certain amount, that will lower the prices of the goods and services you purchase from them and then you can charge a higher tax to make up for the cheating.  It’s all the same thing.

Click my name for a link to a chart from the President’s Advisory Panel that shows (in their opinion) how the burden would shift under the FairTax - people who make under $15,000 or over $200,000 pay less; everyone in between pays more.

The Panel’s report was based on the basic parameters of the FairTax, except that it determined that the tax rate would have to be 34% (exclusive), not 30%. (The 34% figure is based on a conservative estimate of tax evasion; using a more liberal estimate, the Panel calculated that the rate would need to be 49%.)

If you scroll down below that chart, there’s a link to the relevant chapter of the report.

MGL/31: if a certain percentage are cheating, you are figuring that the government will simply up the tax rate (on everyone), because, to the consumer, it’s all the same.  Like shoplifting.

Compliance will be an issue, far more than it is today, and that breeds criminal activity.  Not sure what “Fair” has to do with this.

cannatar: again, great stuff.

Ok, so households between 30K and 50K will pay 70% more taxes.

And between 50K and 100K is 35% more.

And 100 to 200K is 17% more.

And over 200K is 14% less.

Those between 15K and 30K see no change, and those who make less than 15K come out the best.

Yeah, ok, great.  This is a solution in search of a problem.  We may have a tax problem, but it is not the problem this solution is addressing.

The President’s own commission, p213-214:

http://www.taxreformpanel.gov/final-report/TaxReform_Ch9.pdf

The Treasury Department’s analysis of hypothetical taxpayers shows that married couples at the bottom 25th percentile, 50th percentile, and 75th percentile of the income distribution for married taxpayers would see substantial tax increases under a full replacement retail sales tax. A typical married couple at the bottom 25th percentile of the income distribution earns $39,300 per year and would pay $5,625 dollars in federal taxes in 2006. Under the retail sales tax with a Prebate, the same family would pay $7,997 in net federal taxes after subtracting the Prebate of $6,694, resulting in a tax increase of $2,372, or 42 percent. A typical married couple at the 50th percentile of the income distribution making $66,200 would pay an additional $4,791, a tax increase of 36 percent, and a typical married couple in the 75th percentile, making $99,600 would pay an additional $6,789, a 29 percent tax increase. A typical single mother at the bottom 25th percentile of the income distribution for head of household taxpayers has $23,100 of income per year and, compared to current law, would pay $5,866 more under the retail sales tax with a Prebate.

So, they need to bump up the Prebate check from 6694$ to some insane number like 15,000$, and then have something like a 50% sales tax rate.  Then the middle-class will end up paying the same amount.

After I wrote that, the very first paragraph says:

The Panel requested that the Treasury Department develop a more targeted cash subsidy program to alleviate the burden of a retail sales tax on lower- and middle-income American families. The resulting program required a cash grant of up to $7,068 to married couples, plus $2,570 per dependent per year, with a phase-in and a phase-out. Further details regarding the program are provided in the Appendix, as well as a brief discussion of an alternative targeted subsidy program.
The Treasury Department’s proposed targeted cash grant program would cost $780 billion in 2006. It would represent 30 percent of total federal government spending, and would dwarf all other federal entitlement programs and exceed the combined size of Social Security and Medicaid. To implement the program, the government would need to collect 34 percent more revenue and redistribute an additional 6 percent of GDP.

So, my WAG numbers were kinda in the ballpark. 

In order to get a system in which we end up paying around the same amount, the government has to deposit some 15,000$ into our bank account every year, and then charge about 45% sales tax (and 0% for wages).

And it doesn’t end there:

Administration of a Cash Grant Program Would be Complex
The proposed cash grant programs would require all eligible American families to file paperwork with the IRS or another federal government agency in order to claim their benefits under this new entitlement program. A federal agency would need to manage the program, verify individuals’ marital status and number of eligible children, and write checks to every family in the United States. Eligibility rules would be necessary, for example, to ensure that a child claimed as a dependent could not also file for his or her own separate cash grant.
Substantial additional complexity would be imposed by a targeted cash grant program because determining eligibility would require additional information. For example, a program based on annual income would require the IRS or another federal government agency to make many of the same determinations now made under the current income tax.

!!!

The Panel also had substantial concerns that a base as broad as assumed above would not be viable and that evasion rates could be higher than under the present income tax… A federal retail sales tax assessed at a rate of at least 34 percent, added on to state retail sales taxes, would provide a substantial inducement for evasion at the retail level… Empirical evidence suggests third-party reporting substantially improves tax compliance, particularly when tax rates are high. For the portion of income from which taxes are not withheld and there is no third-party reporting, income tax evasion rates are estimated to be around 50 percent. There is no third-party reporting in a retail sales tax. Retailers would add their retail sales tax to the pre-tax price for their goods and would remit that amount to the government, but shoppers would not separately report what they bought, and at what price, to the government. The government would rely on retailers alone to report their own taxable and exempt sales.

I stopped at page 218.  I suggest a complete reading of the entire Chapter 9.

p.222:

Conclusion
Like other consumption taxes, the full replacement retail sales tax has pro-retail growth features. Nevertheless, the Panel does not recommend a full replacement retail sales tax.

- Without a large cash grant program to ease the burden of the tax, a retail sales tax would not be appropriately progressive.

- A cash grant program to make the tax appropriately progressive would cost at least $600 billion per year – which would make it America’s largest entitlement program.

- The Panel concluded that it was inappropriate to recommend a tax reform proposal that required the federal government to collect and redistribute this amount in additional revenue from taxpayers.

- The Panel also was concerned with administrative and compliance issues associated with a retail sales tax, as well as difficulties involving coordination with existing state sales taxes.

Interesting. I’ll have to do more research. Basically it sounds like you have at least 2 entities here who are really smart and have spent a lot of money researching the issue. Entity number one says it is the best thing since sliced bread and entity number two says it is the worst thing we could possibly do.  That’s real helpful.

Tango/35:  A typical married couple at the bottom 25th percentile of the income distribution earns $39,300 per year and would pay $5,625 dollars in federal taxes in 2006. Under the retail sales tax with a Prebate, the same family would pay $7,997 in net federal taxes after subtracting the Prebate of $6,694, resulting in a tax increase of $2,372, or 42 percent.

Maybe I’m missing something here, but do these numbers make sense (not that I would ever think that a govt org would mess anything up!)?  If they make $39300, to pay $7997 in sales taxes at a 30%(?) rate, that means they’d spend $26657.  If they have to pay state and local taxes (15%?) or about $6K and pay rent/house payment ($12K/yr?) plus any non-new purchases plus, plus, plus, that seems like more than $39300.

Every version of a simple or so-called flat tax that I’ve seen turns out to be deceptive for one basic reason:  either it’s a tax on consumption or it’s a tax on earnings.  “Unearned” income (read: income from investments, savings, inheritance, real estate gains, etc.) is totally excluded.

Thus such a tax is ultimately regressive by excluding from taxation a very substantial part of the income of the rich.  You have to read the fine print to ask what kind of income is in the base that is subject to tax. Does the print say “earned income?” It’s not truly a flat tax.

OK, so each proposal carries risk and is subject to the inertia of a giant bureaucratic agency, which we all agree (I think) is too powerful and inefficient.  But we have 50 other agencies that do more or less the same thing.  Why not go with a more federalist approach? 

Congress approves a budget that is a fixed percentage of the previous year’s GDP (20% ?).  Each state is then required to pay in proportion to its share of the that GDP.  Each state could come up with that money in any way that they think is the most efficient, balancing the needs of getting the money and effectively serving its residents.

Think you can efficiently collect a sales tax?  Go right ahead.  Losing too much revenue because of that tax? Try something else.  The key ingredient is that states must be responsive to their residents, who can easily move if a policy too intrusive or restrictive.

TThere is no way the Federal government will cede power to the states and have them collect the federal taxes.

If the tax was passed, most states would follow suit, and change to a similar tax. A few holdouts may keep the income tax, but eventually the cost for the state would be such that I think they would all eventually change.

The tax would have to have a long phase-in period; longer than 5 years suggested earlier.

The 6 zillion pages of IRS code is largely the result of the government attempting to do things by using tax incentives or penalties.

The best example of government incentive is the mortgage exemption. The government thinks that encouraging people to buy houses is a good thing.

If you take that away, and keep my taxes the same. my incentive to buy a house decreases. This will have a big impact on the housing industry, as the demand for new homes will decrease.

Now, I have a house, and have made financial plans as a result. If you take that exemption away, home owners will pay more taxes overall, and renters less. In the long run that is fine with me.

In the short term, it affects decisions I made.

In total the government needs so much money, and in total they will get it. Already different states do it differently. In Illinois the income tax is low, but the real estate property tax is high.

The posters above who state that sales tax is not collected on things like cigarettes is not correct. They are monitored very closely and have been for years. The people in the state taxing authrorities are not stupid. It isn’t too hard to audit things that are bought and resold.

Things like services are much harder to monitor.

It isn’t too hard to audit things that are bought and resold.

I did not argue with the people that said that cheating is rampant on sales taxes or that it is going to be, because if that is the case (that cheating is indeed rampant), then who am I to argue with facts and the truth.  But if it is not true (that cheating is and would be rampant), then I would think off the top of my head, that sales tax is one of the easier things to monitor through various means.

It’s not even funny how wrong those numbers are.  If a family earning 39,300 paid 7,997 after a 6,694 rebate, that means that they would have paid 14,691 or 37% in tax, assuming that they spent every penny they earned and never bought anything used.  And that’s the INCLUSIVE rate. 

If we use the actual rate in the plan (23%), they would pay 9,003-6,694=2,355 in tax, not 7,997.  (again, assuming they spent every penny on new goods)