The FairTax, Join in!

[senseinobaka]

Entroper said:
@senseinobaka: I followed your example perfectly. However, I find it extremely difficult to believe that you can replace a 22% inclusive corporate tax with a 23% inclusive FairTax, completely eliminate the income tax and payroll taxes, and remain revenue-neutral. Please explain.

 This is a very good question. However there are many factors that go into how the economist behind the idea figured it out. Both Final Fan and Eomund touched on some earlier in the discussion. But here are four factors I remembered from my research. There are others. The first Factor brings the Fair Tax within 65-85% of the revenue generated by the current tax system. The other 3 are designed to close that gap. 

One factor is that the Fair Tax taxes 23% of a much larger number, this is because the fair tax is designed to increase economic functions.

Example: While I was in school I made about $1200 biweekly. After taxes I brought home about $900. So effectively I was paying 22% in corporate taxes on $900(which means my total tax bill on $1200 in two weeks was $498)  instead of 23% on $1200 which would make my total tax bill $276. This leaves a deficit of $222 (19%) that the Fair Tax has to make up for me. You can imagine as income increases then the gap would remain the same or increase (probably as high as 35%). 

 

Second Factor is that lobbyist, congress, or the president will not be allowed to play favorites. There will be no cronyism in the tax code like the income tax code has. Do you ever wonder why there are hundreds of thousands of pages for our lovely tax code and why thousands are added each year? It's because congress is screwing over some and handing out free passes to others. By Leveraging the Fair Tax on EVERYTHING and EVERY BUSINESS the paying base will be greatly expanded. Right now, many corporations do not pay corporate taxes or pay less than 22 percent. 

 

Third Factor is the fact that more money would be circulated into the economy. If you look back to my example for factor one. I circulated $900 into the economy; under fair tax I would circulate $1200. Again, as income rises this would happen on a bigger scale. That much influx of cash into the economy would drive jobs, which increases the tax base, and would also increase buying power, which would increase tax revenue since it is a consumption tax. 

 

Fourth Factor is like the third except it happens from an international standpoint. The fair tax is designed to make America the single most competitive country for businesses. Imagine the prospects of a business creating a product with NO tax liability. Unlike we've seen in recent history, business would not flee the country but instead business would come home and bring some friends with them. This increases the number of jobs and increases buying power. 

 

Factors 1 and 2 are proven. They are from hard numbers and legislation. Factor 3 is theoretical but is a model used by economist in many situations. Circulating more money into the economy is always positive. Factor 4 is one that would happen sometime after implementation, so it may not be one that makes 23 percent neutral, it may be the one that makes 23% a bigger revenue generator than the current income tax system