Eomund on 12 January 2008
| Lingyis said: there's this John Mauldin guy whose opinion i value very highly. in his latest newsletter he attacks the fairtax very harshly. here goes. ===================================================== Fair Tax Nonsense The only candidate I will specifically mention is Mike Huckabee. His espousal of the Fair Tax demonstrates his lack of understanding of reality and economics. Basically, Fair Tax proponents want a 23% sales tax to replace every type of government tax. No more income, corporate, social security, or Medicare taxes. And everyone gets a $5,000 or so "prebate" which covers the taxes up to the poverty level. What could be simpler or more fair? No one would like to get rid of the IRS more than I. I spend way too much on accounting for taxes and such. But this is not the way to do it. First of all, the 23% they talk about is really 30%. Under the proposal, if an item sells for $100, then $23 of that would go to the government (said to be tax-inclusive). That means the item really costs $77 and the tax is an additional $23 or about 30% (said to be the tax-exclusive rate). Add an average 7% for state sales tax and we are now up to 37%. But wait, it gets worse. That 23% number simply won't produce the revenues they suggest. That assumes the government will pay the tax, so the budget has to go up. It also assumes that there is 100% compliance and everyone pays that 37% (yeah, right - just like they do the income tax). Bruce Bartlett writes this week in the Wall Street Journal: "A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the Fair Tax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion)." 44 states have income taxes. They would have to repeal their income taxes and raise their sales taxes in order for individuals not to have to file annual income tax returns. Do you really want to add 30% to the cost of a new home? And pay an extra 30% in interest on the borrowing price? 30-40% more for your legal services? Do you want your rents to go up 30%? Do you really think that massive evasion would not follow? We would move back to a black market cash economy so fast it would take all of Ben Bernanke's printing presses working overtime to create enough cash for the black market economy. Yes, in theory it would mean that exports would be priced more competitively, as corporate taxes are removed. The idea as theory is not entirely without merit, but every independent study I have read suggests the number for the tax when combined with state taxes would be north of 40% and maybe more like 50%. Further, this is a tax hike on the middle class. If you make less than $15,000 you win. If you make more than $200,000 you win, because you actually save more and spend less of your income. This is a nice populist proposal which sounds good but is economically challenged. It only works on someone who has not read about the problems. Let me give you two links if you want to read more. One is to Bartlett's article and the other is to the people at Fact Check (a very good site for lots of facts on a lot of things) http://opinionjournal.com/extra/?id=110010523 and http://www.factcheck.org/taxes/unspinning_the_fairtax.html. What would I do about tax reform? Dick Armey had it right: flat and low and simple. It seems like every ex-communist country has it figured out. It is just we capitalists that can't get it right. ======================================================== |
This might be my only post today. Let me dissect his argument for you.
And everyone gets a $5,000 or so "prebate" which covers the taxes up to the poverty level. What could be simpler or more fair?
Firstly this$5000 is false. The Prebate which he just mentioned only refunds $196/monthly per person. That equals $2352 a year. Everything else is right.First of all, the 23% they talk about is really 30%. Under the proposal, if an item sells for $100, then $23 of that would go to the government (said to be tax-inclusive). That means the item really costs $77 and the tax is an additional $23 or about 30% (said to be the tax-exclusive rate). Add an average 7% for state sales tax and we are now up to 37%. But wait, it gets worse.
His rates are correct. The FairTax is a 23% inclusive rate, but if thought about as a traditional sales tax it is 30%. However the FairTax will already be included in the shelf price of every item, therefore the exclusive rate will never be seen. We already pay an inclusive tax on every good and service we buy of about 22%. I believe that the states could lower the sales tax rate a point or so after the FairTax because they would be getting additional revenue from it as well. Under the FairTax, each business that sells new goods or services would be required to collect the FairTax. The business would then send the FairTax to the state they are operating in. Each business gets to keep the greater amount of 0.25% of the FairTax collected or $200 for their trouble of collecting the tax. Each state would receive the FairTax from all the businesses within its borders. The states also get to keep 0. 25% of the taxes that pass through their hands to offset the cost of collecting the FairTax. That 0.25% would be a sizeable amount in most states and could drop the sales tax rate a point in my opinion.
That 23% number simply won't produce the revenues they suggest. That assumes the government will pay the tax, so the budget has to go up. It also assumes that there is 100% compliance and everyone pays that 37% (yeah, right - just like they do the income tax).
The 23% FairTax will produce the revenues under the current system. I have looked at how the economists figured that number and it works. It was amazing trying to follow them, not hard, just tedious. Anyways the already pays income taxes for its employees, so what is the difference when they pay the FairTax? The decrease in the payroll and income taxes collected by the government from its employees would be offset by the FairTax it collected from itself when buying goods. I will explain this better. The price of goods reflects the total amount of the income taxes paid by employee, the payroll taxes, and corporate taxes. On average these embedded (embedded because they are part of the cost of doing business) taxes amount to 22% of the price (Note: this is also inclusive to the price of the good, just like the FairTax will be). The budget does not go up because of the FairTax. Let me point you to the study where those economists figured the rate of the FairTax. Taxing Sales Under the FairTax - What Rate Works? The evasion issue is something that noone has completely worked out, either against the FairTax or in favor of it. I agree it could be difficult to stop tax evasion under the FairTax, but it is not as impossible as people think it is. There are many arguments to make here, but I will continue for now.
Bruce Bartlett writes this week in the Wall Street Journal:
"A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the Fair Tax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion)."
Bruce Bartlett is not known for being Fair to the FairTax. Nor are these government studies. Many of the government studies were done by Senators who jacked with the FairTax before they calculated it. They added exemptions to essentials and other things which they deemed, "politically feasible." They then calculated the rate based on the convoluted mess they put together, making the rate seem much higher than it would have to be. They added exemptions which are not necessary since the Prebate refunds all the taxes you pay on the essentials of life (upto the poverty line). Their study therefore is broken."A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the Fair Tax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion)."
44 states have income taxes. They would have to repeal their income taxes and raise their sales taxes in order for individuals not to have to file annual income tax returns.
This is a bad thing how? Most states, 44 in fact, base their state taxes on the federal model. It would be a God-send to be able to stop worrying about April 15 for the rest of my life. As I have said before, all the states would get an Administrative Credit of 0.25% to cover the costs of collecting the FairTax. They could then dismantle the income tax structure and those costs would be gone, not increasing the budget for the state.Do you really want to add 30% to the cost of a new home? And pay an extra 30% in interest on the borrowing price? 30-40% more for your legal services? Do you want your rents to go up 30%? Do you really think that massive evasion would not follow? We would move back to a black market cash economy so fast it would take all of Ben Bernanke's printing presses working overtime to create enough cash for the black market economy.
Entroper already covered this one for me. Thanks.Yes, in theory it would mean that exports would be priced more competitively, as corporate taxes are removed. The idea as theory is not entirely without merit, but every independent study I have read suggests the number for the tax when combined with state taxes would be north of 40% and maybe more like 50%.
Yes exports would be much better off in the world market, as they would have no taxes embedded in them at all. The FairTax is not applied to exports. Again I doubt the validity of these "independent studies." Some may have merit, but overall I do not trust their numbers.Further, this is a tax hike on the middle class. If you make less than $15,000 you win. If you make more than $200,000 you win, because you actually save more and spend less of your income. This is a nice populist proposal which sounds good but is economically challenged. It only works on someone who has not read about the problems.
I make more than $15,000 and less than $100,000, yet I know about all the "problems" and still support it very strongly. I doubt there will be a serious if any tax hike on the "middle class." If there is I think their income increases would offset it. Who is to say that the Middle class can't save more as well? They could invest a small amount and get dividends every month to supplement their income as well. This argument fails to convince me that the "FairTax is nonsense." The FairTax removes power from the government and puts it squarely back in the hands of the people. The congress can't jack with the rate like they can with an income tax. It is one of the best ideas in a very long time.
The FairTax is exactly what Dick Armey wants, Flat rate of 23%, Low enough to keep the economy moving, Simple enough that businesses don't have to screw with mountains of paperwork. The people don't have to worry about a thing for personal income or spending, only a business does (which it has to already).
