Is the current system broken?

1. All tax replacements start with the current system brings in $x in taxes. So it's replacement must. Thus any tax replacement is just a redistribution of the tax, usually (as in the fairtax) lowering the burden on the rich and very rich placing that additional burden on the middle class, since the biggest tax break in the fairtax is for the poor.

Granted that the FairTax could increase taxes on the middle class (I am not convinced they will however), people making under $100,000 would see a tax shift away from them. The additional burden you speak of would be offset by increased income from real wages and capital gains. I am not saying that all people will see a wage increase, but everyone will be able to control their entire paycheck, thus make smarter decisions with it. People making $100,000+ a year are not rich, especially when you live in high cost of living areas, but they will have enough to invest a little or save a little and get extra income from the interest and dividends they would be earning. You forgot to mention that under the FairTax the poor, those living at or under the poverty line would pay no tax at all! The FairTax is the only proposal that completely eliminates any tax on the poor. Also the "rich and very rich" still pay the largest percentage of taxes of any group under the FairTax. Is this unfair?

2. The second thing is the current system is complex because life is complex. There is rarely anything free in life and there is rarely any simple solution that is also the best solution. That's great that the government gives a "standard deduction" with the fairtax. But where are the exemptions for charities, handicap, medical exemptions, housing exemptions, schooling, etc.? Are you saying that these were all bad laws, that these individuals don't deserve any tax break?

I refuse to accept that the tax system needs to be "complex because life is complex." That is a bunch phooey. It is like saying that the controls in game Z are nigh impossible to manage because the game is so epicly massive you can't control everything. An epic game can have nigh impossible controls, but that doesn't make it a great game. The FairTax is as fair as it knows how to be. There might be a tweak or two on down the road, but for the most part is already as simple as it gets. Charities, or non-profit organizations, will be exempt from the FairTax if the goods or services they are pruchasing are for their end use, and not to resale to its constituants. I didn't know handicap people could get tax exempt status. They would also get the Prebate, the same as everyone else. Medical exemptions are covered under the Prebate as Medical expenses are part of the cost of living. Housing exemptions are based on income tax law, since there is no income tax, there is no need for the Home Mortgage Credit. Schooling is also exempt from the FairTax as it is viewed as an Investment.

3. There may be a large portion of payroll taxes/compliance taxes, that corporations would save. But they won't pass along the savings. I'm sure there will be some advantages, but the economy has been tough recently with several large corporations claiming losses. They have this chance to make a bleak situation much better and they are going to give money back? It'll just be an easy way to pass along the price increase that they wanted to pass along.

You underestimate market forces my friend. I will point to a time when Congress was at a deadlock and let the airline ticket tax expire. For a few days after it expired the prices remained the same. Then a small airline, looking to grab marketshare, dropped it prices to match the same profit levels as when the tax was in effect. Very soon after that all the airlines dropped their prices to remain competitive. As soon as Congress passed a bill that re-instated the Ticket Tax, Prices went right back to where they were before the price drop. This was in an industry that was not and is not in good shape.

My biggest problem with the fairtax is currently we have a lot of #'s but they are all projections. No one knows for sure what the first year with this tax would be like. (Is this all that is stopping you? How many countries had an income tax before America?... none that I recall. America has always been on the leading edge of things and would continue that tradition with the FairTax.) How many industry individuals predicted the Wii would be sold out for a year, sell nearly 20M in it's first year and would likely cruise to an easy victory this generation? (johnlucas did) Not one that I know of. But they based their expectations off of the best information that they had of the market. (they failed to see the need and value of new experiences of the Wii, but this was a good example nonetheless)My concerns are:

1. We save $x billion (no one has given me an exact #) on the cost of compliance. These are almost fully the cost in individuals salaries. Yes, I think that this may be a bad thing. This is billions of dollars of skilled labor losing their jobs accross the country. All signs are that we are very close, if not in a recession. I understand that if the tax dissapears and they aren't giving us value, we have no other option, but it's not the best time in our countries history for a change like this.

Look at the bright side, since these people produce nothing now besides removing aggro from the IRS, they can move on to more productive things to help the economy. There will still be a need for accountants, but I will not need a CPA to run my taxes for me. Companies would probably try to find somewhere else to put them to be more useful for increasing productivity within their budget. I do not have any real hard data to show you what compliance costs will be under the FairTax. But since tax filers will drop about 80% and the simplicity of the FairTax does not require an army of accountants pushing numbers to ensure Tax compliance, it would be significantly less than the current levels.

Also, what about other industries such as construction? If they are charging this tax on new homes, any one that has the money will likely push up their start dates to a time period before the tax begins. Any individual not this lucky, will likely have to push their date back (due to lack of downpayment, lack of ability to get approval) or downsize their house. Fine again and all, but I would expect a boon for the construction industry before the tax, then a crippling period of time where very little building was occuring.

True, new houses would have the FairTax attached, but when you build a house now you are already paying for the taxes of the construction workers. If you want a similar hand made example, read one of my post before this where I described all the business costs of Final-Fan and Eomund, Inc. Taxes mean something costs more somewhere, and it is nearly always passed on to the consumer. Granted workers and shareholders can take hits too, and they do. The prices of new housing will not go through the roof as you may be thinking, as with other industries, prices will remain near current levels. 

As an added bonus, interest rates will fall after the FairTax gets enacted. Why, you ask? Because more people are saving and investing. This creates a larger pool from which to loan money, and therefore reduces the need for higher interest rates. The Fed would lower rates to match what needed to be done, if they have any brains at all.

I would also expect this effect accross the other industries but not as hard. It'll be Christmas the week before the tax goes into effect as every buys goods that will last a long time. Thus, I expect sales for the first six months of the sales tax to be well below any prediction that has been talked about. I'm thinking all I would buy is uncanned foods, and gas until my stash ran out.

You do not have a grasp on what the FairTax can and will do for people. Every month at the first of the month, beginning in January, you would have a Prebate of about $196 waiting for you either in your mailbox, or hopefully in an electronic account accessible to you buy using a card. True prices might be a bit higher for the first week or so, but they would rapidly come down to current levels.

Again I point to the time when Congress was at a deadlock and let the airline ticket tax expire. For a few days after it expired the prices were remaining the same. Then a small airline, looking to grab marketshare, dropped it prices to match the same profit levels as when the tax was in effect. Very soon after that all the airlines dropped their prices to remain competitive. As soon as Congress passed a bill that re-instated the Ticket Tax, Prices went right back to where they were before the price drop. This was in an industry that was not and is not in good shape.

2. Fair tax gains exemptions eventually becoming as convoluted as the current tax law.

If so, then we are falling asleep. The FairTax is as fair as the FairTax will get. There maybe a few tweaks to the system, but overall the system is already setup to be as fair and equitable as possible to as many people as possible.

3. Tourism will certainly be harmed by that large of a tax on sales.

This is false, because prices would not go up significantly, as I have pointed out in other posts. 

4. Government becoming dependent on even higher taxes. Sales taxes are highly cyclical. We could have one great year of sales, followed by a very poor year in sales. So it will never be as simple as we got 10% less than we needed last year, so we need 10% more sales tax next year. Income is much more stable. The other part of this is that our government is notorious for spending the money it is given. They got an extra $1 billion in tax? Likely they will create several new programs using that $1 billion extra in tax. Thus creating a future yearly tax need of $1 billion to keep those programs going. This is a large reason we have such a huge deficit now. When we, as a country, are doing good, we get fat. But, when we aren't doing good, we never trim the fat.

Here is a look at how stable income is vs. consumption.

AGI= Adjusted Gross Income, PCE= Personal Consumption Expenditure of GDP

PCE is more stable than AGI. 

5. State taxes typically piggy back off of federal tax. As such, I foresee increased costs of compliance surrounding state issues and all Americans in states with Income tax to have an increased state compliance cost.

Yes, States are independent of Federal Taxes, but for sake of compliance costs, most have a similar tax structure as the Feds. When the Feds switch so too will most States. Even if no state switched, Americans could then manage to file most of the State Income Tax on their own. There would be less paperwork and less headache. Removing the hassle and costs of filing the Federal Income Tax would be a huge burden lifted from the American people's shoulders.

6. Used sales will increase significantly detracting for the # of new sales that can be acheived.

Used items will only last so long, then you have to buy new. Don't worry, I plan on buying a few used goods too, but I will not stop buying new food, new clothing, new games, new movies, new electronics, etc., since prices will remain near current levels.

Final-Fan said:
(First: "eluded" should be "alluded". I alluded to people who elude taxes.)
(Thanks, I went back and fixed it. But what do you expect from that long of a post...)

Eomund:

1. Your only reason given in the last post for why businesses would not cheat on a 30% (exclusive) sales tax is that they would have to have a permit and would be afraid of getting caught. Yet in Florida, 5% of all business-exempt purchases were found to be fraudulent and in fact for personal use. That statistic doesn't even include any other type of sales tax evasion, such as Kasz216 describes! And that is on a sales tax of 6% or less!

Arguing that people won't break the law because they will be afraid of being caught and punished is ... incredible, considering the current existence of crime despite the current existence of punishment. Moreover, the punishment you describe is hardly any deterrent at all -- "pay the fraud back with interest" sounds to me like a loan that you only have to pay off if you get caught! (Or, depending on the interest rate, a credit card. )

(Sounds like you might have experience, lol. But seriously, you do raise a valid concern. I just feel that this is a risk we should take. I have nearly exhausted my reasons for switching to the FairTax, save one, but that is another post. But lets take the evasion concern. These are the penalties of non-compliance with the FairTax. Page 20 of http://www.fairtax.org/PDF/PlainEnglishSummary_TheFairTaxAct2007.pdf is the penalties list. Small list and doesn't seem harsh at first glance, but for each infraction these can add up to big trouble for a person and business. Perhaps the penalties could be harsher, more draconian... but we want humanity to survive under the FairTax LOL.)

2. I don't intend to enumerate all the possible ways someone could evade taxes. Let's just agree that there are such ways. Ways that would be lots, lots more tempting; ways that people use more and more often as a given tax rises higher and higher. Which brings me to the fact that in the PDF you youself referred me to, a study in Minnesota in 2000 found that a 6.5%* (exclusive) sales tax had an evasion rate of 9.9%. (Oddly, they claim that an estimated 15 to 16.6% federal tax evasion rate is "almost double" this. 52-68% more =/= almost 100% more, in my book.)
http://www.fairtax.org/site/DocServer/TheFairTaxReducesComplexityComplianceCostsAndNoncomplian.pdf

(Perhaps they were referring to tax revenue... I am not sure.) 

*This is current general state sales tax according to Wikipedia. I don't know if it was the same in 2000 (but definitely not lower than 6%) and I don't know if the study included local sales taxes or the state alcohol tax. I haven't looked up the study myself.

3. I like your example. But I noticed that the income tax rate you quoted was wrong. This is from the source you quoted:
$ 0 ------- $ 50,000 ---- 15%
- 50,000 --- 75,000 ---- 25%
- 75,000 --- 100,000 -- 34%
- 100,000 -- 335,000 -- 39%
This means that only the income at or ABOVE $100,000 is taxed at 39%, or $0 of our income. Since you say our taxable income is $6245.35, we are taxed ($6245.35*0.15)=$936.80, leaving $5308.54. Even had we had $100,000 taxable income, only $1 of it would have been taxed at the 39% rate.

(My mistake if you are right, which I will cede you most likely are. I was thinking revenue instead of income.)

Secondly, and more importantly, your example actually proves my point. Our business may have tax troubles, but none of those troubles are the 15% withholding tax. That is going right to the government and neither we nor the employee ever see it, even though you rightly put that expense in with "employee wages". If that tax were to disappear, to be replaced by a sales tax, and we paid our employees the same wages, they would suddenly have bigger paychecks, and we would suddenly have bigger (after-tax) prices.

(You are not counting the Complaince costs, which I never even attempted to calculate. I don't even want to try that though.... But perhaps the compliance costs can go toward employee pay in our company? Also in my example we had more taxes than just the taxes on our employee wages which were 7.65% FICA and Medicare + OUR MATCHING 7.65% + 15% withholding tax. 7.65+7.65+15=30.3% of wages paid or 80,000x30.3=24240. 24240 as a percentage of our income= roughly 24%. Now add the other taxes and it just goes downhill fast. In my example, which is by no means scientific or based on hard numbers, other than the tax rates, our tax liability could have been replaced with the FairTax @ 23% and lowered prices and paid our employees the same amount. Again that example wasn't anywhere near perfect, but that many taxes for a small business means higher prices or lower wages or both. Fun fact of the post: Small Businesses create 80% of the jobs in America.)

Unless we dropped their wages and our prices by the amount of the withholding tax ... if all the businesses in the US did this simultaneously when the FairTax took effect, then you would not see higher prices -- but you would not see higher paychecks, either. Is this the way you meant it when you said that it was an embedded tax? I see it as the very nature of interrelated monetary flows. Kinda like how rainwater used to be river water before it was ocean water before it was water vapor.

(I may have said that prices will drop AND wages will increase, but I was mistaken. Now that I know better I did not mention that as a possibility in my example. But yes, the taxes are embedded. Our employees must be paid a "living wage" or they won't work for us. This forces us to pay more matching taxes however.)

P.S. Are you sure all those other taxes are taken out AFTER the corporate income tax? My instinct is to doubt it, since it's a tax on what would otherwise be our final profit, but I really have no idea.

(Again I am not sure as I am not an accountant, thanks for bringing that up though. I hadn't thought of it.)