Fair Tax Explained?

[vernard]

Fair Tax Plan For Dummies

Its a good summary and I like the concept. So now in true ignorant fashion I’m going to ask a bunch of questions that I would love to have answered by supporters of this plan.


1) How do you switch over the United States to this plane quickly and efficiently?


2) what about the industries that ahve been created to take care of the tax system. Is there a replacement industry in the Fair Tax plan? (i.e. Turbo Tax wouldn’t exist would it?)

3) the money for taxes is currently split across many agencies both federal and local. The new plan is only for a federal tax. Do you ignore the other taxes and tax system or does this replace all taxation?

4) Also, if it does replace all taxation, then show me some economical predictions on how much money will be generated and where it will go and how it will support itself. I seem to get the gist that if you eliminate the cost of running a tax system then it will offset the loss of revenue from the loss of multiple taxations. But I want to see an actual spreadsheet analysis of this. Talk is cheap.


p.s. I’m not against this. But I’m tired of folks trying to simplify the explanation so that everyone can understand it when the problem is too complex and important to effectively reduce it to sound bites. I’m a relatively smart person. I can handle the raw economical truth.

Comments

[cookingwithgas.livejournal.com]

Additional questions:

1) How do you determine what is a good or a service? As I have learned from quoteslaw this is not nearly as obvious as it seems.

2) If you escrow the sales tax, as it is currently handled, what happens when a business goes out of business? Currently, they try to pierce the corporate veil on go after the money that way, but it is a mess. Witholding avoids this issue.

3) How do you determine the end consumer? This is also not nearly as obvious a question as it seems.

The enforcement issue is huge, and I have never seen a satisfactory answer for it, just a lot of hand waving.

[technoshaman.livejournal.com]

Witholding is still in escrow until paid by the corporation doing the witholding, which for small companies can be as seldom as quarterly.

And determine the end user by where sales tax is normally collected. This is well-established.

[skellington.livejournal.com]

1) I'll go check quoteslaw; don't know what issues they have in mind.

2) Same way both sales tax and withholding are handled now. (Some companies withhold from employee checks and don't ever remit to the federal government.) You set up payment thresholds so that large companies must pay very regularly (i.e. weekly)

3) You can only buy things without sales tax if you have a sales tax ID number (and a business license). If you do so, you are expected to show those goods as inventory or sales (with a tax payment). The part of the plan I have heartburn with is "business equipment" (and services) not being taxed. I think that will encourage people to start businesses to buy computers, etc. (But consultants do that all the time today to avoid income taxes, and it's probably good for the economy if lots of people start businesses. Probably a wash.)

3A) Do we have a satisfactory answer for the enforcement of the income (and corporate and other) tax? I suspect it is somewhat easier, especially when the vast majority of retail sales happen through relatively large, visible businesses (i.e. home builders, auto dealers, various "big box" retail establishments such as WalMart, grocery stores, Best Buy, etc.) who we manage to enforce corporate income taxes on already and who have a responsibility to their shareholders not to commit fraud.

[technoshaman.livejournal.com]

2) It is not FedGov's responsibility, nor even its right, to prop up the accounting industry. It says *provide* for the common Defence, and *promote* the general Welfare, not the other way around.... matter of fact, there are damn few things Congress really has the right to do, strictly interpreted. Amazingly, run the post office and the Interstate Highway System *are* explicitly within its purview...

3) The plan is for a Federal tax for Federal stuff. States have the right to do what they want, and this is well and good and meet and right.

There are also 38 states that do have a state income tax. Many of them depend on the Federal forms to compute amounts. Some of those accountants will get temporary careers in state government devising new tax codes to take into account a lack of Federal structure, and in private practice figuring out the truly Byzantine matrix of codes that will exist once each state adopts its own code... particularly with people who work in more than one state...

You're also going to need to hire geeks and accountants to convert the income tax collection system to handle sales tax receipts.

Now, the real problem I have with the proposal on the website is the rebate checks. What this means is that the IRS still exists, because it's got to track everyone and issue the checks. It *further* means that homeless folks *do* get taxed, the very folks you don't want to beat on any more than necessary. Personally, I wonder at the disingenuousness of this...

My solution is that rent, non-convenience foods, and the second and subsequent retail sales of any item are not taxed. This makes it possible to live frugally and tax-free, save for consumables like, say, TP and toothpaste. That way the checks, the dead trees necessary to send those checks, and all the snoopy-ass record-keeping *becomes unnecessary*.

Rebate Checks

[skellington.livejournal.com]

Well, the IRS may exist, but it won't have much of an enforcement arm. (Mostly it would have to hunt down fraud cases, I suppose.) You might even elist the Social Security Administration, since they're already writing checks to a sizable fraction of those people. And mostly there won't be checks, it'll be electronic deposit, just like Social Security.

(And speaking of Social Security, presumably you'll still be reporting your income, although you'll now have motivation to overstate it. But that's another can of worms.)

And the sale of used goods is not subject to tax under the fair tax, so you don't have that objection.

And you forget consumables like electricity, gasoline, etc. that pretty much everyone DOES have to buy, which would have pretty much everyone NOT living tax free, and the poor paying a substantial amount of taxes.

And if you exempt rent, what about purchase of a home? Does that cover an RV? Vacation house? (Visions of people setting up LLCs to buy their home and rent it to them tax free.)

And if you exempt food, what about medicine? What about steaks, caviar, and other "luxury" foods? What about twinkies and hot pockets and frozen TV dinners? What about pre-cooked veggies at the grocery store?

The fair tax arguement is that the intrusiveness and arbitrary nature of such a system of exemptions would encourage other things to be exempted in the future, and would lead to a very unfair system of taxation. (Microsoft products become exempt to help the American technology industry!)

And if you exempt purchase of a home, or even expensive groceries, a wealthy person gets a VERY substantial tax break. In the fair tax, that isn't the case. Everyone gets the same tax break.

From a pure fairness point of view, the rebate is better. From a government tracking point of view... Well, it's not that much money if you don't want to take it.

[servingdonuts.livejournal.com]

The rebate is way better than not taxing certain stuff.

In order to not tax the things that "poor people need", you have to make exceptions. Suddenly, everyone has a vested interest in making sure that whatever they manufacture and sell is blessed by the legislature as something that "poor people need". Poof, you've recreated the loophole industry.

The rebate is logistically easy and privacy-friendly. All you need is an infrastructure to cut monthly checks - which we already have in the form of Social Security (and other similar government agencies). And as far as snoopy record-keeping goes, all that the government needs is proof that you are eligible (meaning that you exist and are alive and are perhaps a U.S. citizen and/or resident, although that last part hasn't been explicitly spelled out in the proposals to my knowledge) and the address to send the checks to.

Re: Rebate Checks

[dwivian]

Er... no.

The Rebate check is the return of ALL taxes paid on a monthly basis, calculated against the poverty limit. That is, you assume that someone at the poverty line is saving nothing and spending everything, so you divide the limit (as determined by their family size and region) by 12, multiply by the tax rate, and give that money to the citizen. If they make less than poverty line, they just got the equivalent of a tax credit. But, no matter what, the first $X of income, spent on food, rent, medicine, gasoline, or steaks and caviar, is functionally exempt and rebated.

The poor pay a tax they immediately get back each and every month. If they live frugally, they pay little to no net federal taxes. If they are homeless, they very probably live within the poverty limit (rent being the biggest expense). The only issue is getting them their rebate money. This, of course, has already been considered.

We have an electronic system for welfare payments in place already. It seems obvious that we'd use it instead of printing paper (saves the dead tree problem) wherever possible. We also have a leg up into the Census, as to get your money back you have to register your family size and location (to get the right level of rebate). All that record-keeping is Constitutionally mandated, so nobody should complain.

[brujah.livejournal.com]

Your brain is sexy. I just thought you should know.

[vernard.livejournal.com]

Flattery will get you everywhere :-)

[skellington.livejournal.com]

1) Same way we change the tax laws every year (or more often). You announce a date for the new taxes to take effect, and away you go. (You could phase it in over a year or two, but that's just begging for both systems to end up in place.)

OK, it won't be painless, there will be some chaos as people buy things ahead of time to avoid the taxes after the switchover. But we change tax law every year (Capital gains rates adjust, etc.) and people make decisions based on the old and new rates. Don't sell stock until next year; hurry up and sell to generate losses this year; etc.

And switching to a massively simplified income tax (Flat Tax) will cause many of the same problems. When Reagan simplified taxes in the 80's, it destroyed entire industries (such as the small aircraft biz, and the S&Ls, for example.)

2) Real accountants go figure out how to make money, rather than how to avoid paying taxes. Those huge consulting firms close down their tax avoidance divisions, and move the people to work on increasing profits.

Real programmers working on tax programs get other jobs doing things that are actually USEFUL to the economy (because filling out tax forms is a waste of effort for everyone.)

H&R Block, etc. along with the "tax refund advance" loan companies go out of business. Buggy whips and all that. Good riddance.

3) All other FEDERAL taxes are eliminated. It is predicted that states will also eliminate their income (and most other) taxes in favor of retail sales tax, but they are free to create any tax system they so choose. Just like today, the ratio of sales tax to income tax to property tax varies widely from state to state.

4) Lots of people have done the math, and there's a great deal of quibbling about what rate is revenue neutral. Some of the questions I'm not sure have been answered correctly revolve around various government purchased items at retail (i.e. paying for medical treatment via Medicaid) where the government will either not pay the tax or will have to increase their own spending to offset the tax (and hence have to increase the tax rate to keep things 'neutral').

The intention is that the plan should be revenue neutral, and I suspect the rate would get raised or lowered to make it essentially so.

P.S. The other "problem" with the plan is that it IS revenue neutral. Some people are going to pay more and some less. We, as a society, will not be entirely happy with how the burden gets distributed.

I think incomes are mostly going to increase immediately (as you don't pay withholding) and prices are going to increase. That will hurt people who currently have savings (where they've already paid taxes) and help those who have debt. Longer term, we'll be looking at much greater savings and investment rates which is a good thing.

Strange and painful and wonderful things will happen. And the proponents are glossing over this.

But at the core, it may be fairer, and certainly less prone to political manipulation, than the current system.

[johnkzin.livejournal.com]

I like the general concept, but I'm not sure about his specific implementation.

I think it would be interesting to apply it as a tax at the point where it is either:

a) leaving the packaging facility (on finished goods) (for foreign or domestic destinations)
b) entering the country

Essentially, it becomes a tax performed by the manufacturer/packager of the finished good, as part of the sale to their customer (for retail goods, this is essentially a wholesale tax instead of a retail tax). This still appears to the consumer to be an embedded tax instead of a sales tax. And, it covers imports and exports. So, no good escapes the tax just based on what country it came from.

That does still leave the question of "what is a good and what is a service" though.

As for the tax industry ... I don't care if that implodes as a result of tax reform. Things which exist as a result of the inefficiency of a system should not be considered as desirable when reforming that system. Sharks don't eat in a way which caters to pilot fish. If they could decide to eat better, they wouldn't say "but, wait, I have to think about the pilot fish! if I improve my eating efficiency, they'll starve!" If sharks evolve more efficient eating habits, and it causes the pilot fish to become extinct, that is the fault of the pilot fish for not finding a new niche in the food chain. Similarly, we should not consider the viability of H&R Block when reforming the tax system.

As for the poor: Don't apply this tax to groceries nor medicine. (do apply it to restaurant food, including fast food, however; just not groceries) Or, sort of like food stamps, give them a card that is like a national discount card (X% discount on all groceries, medicine, and similar essential goods). Though, the national discount card is prone to abuse and forgery. I like the "don't tax essential goods" idea better.

[skellington.livejournal.com]

Services are taxed under the Fair Tax proposal.

And what you're suggesting is called a "Value Added Tax". If a company buys a bunch of computer parts (already taxed at import), and assembles a computer to resell, they have to figure out what "value they added", and add a tax based on that amount. This gets somewhat complicated to say the least.

Because there are fewer retail estabilishments than manufacturuers and importers, and they are already collecting sales taxes in most jurisdictions, it is argued that it is easier to just have them collect the tax. (Doubly so if they sell services that will have to be taxed in any case.)

And a retail sales tax also handles the issue of imports, provided that there is a tariff on items bought out of the country at retail and imported.

[cookingwithgas.livejournal.com]

It this happens, I am going to go into the casino industry. Heres how...

I comp you the room, food, drink, etc, in a direct ratio to what you gamble. Rather like the system now, but here is the beauty part. You set the limits such that given the house percentage you are certain to make money. Given the sums involved the law of large numbers applies.

Now the fun part, I go Vegas. I have a room, food, shows, drinks, everything comp'ed because I gamble just enough to hit those levels. If the numbers are set right, I don't lose a penny more than I would have spent, and the entire casino industry can operate without paying a cent in federal taxes.

Neat! Let's do it.

[skellington.livejournal.com]

Also, if you hire someone to cut your employees hair (or provide them with medical care), have your employees just evaded sales tax on those expenses?

I think in both of these cases, sales taxes on "bartered" "retail" goods will need to be collected to keep the system fair.

But I don't know if this is covered by either existing state laws or by the fair tax proposal.

And there will be some businesses that do better under the fair tax system, and some that do worse. Any time you make such a major change in a system that has such a major distorting impact on all of our behavior (both before and after the switchover), weird things will happen.

[servingdonuts.livejournal.com]

I think you could make an excellent case for taxing gambling revenues, even under a no-taxes-except-retail-sales-taxes regime. Gambling isn't exactly a sale (not even a sale of a service), although at the aggregate level it looks very much like the casino is selling the service of entertainment.

To get the same effect as is intended with a retail sales tax, you'd have to apply the tax rate to the casino's cash flow from gaming strictly based on wagers made and winnings paid. Don't include any operating expenses like payroll or comped food. Anything that's actually sold and paid for with money, like uncomped rooms or food, gets the tax rate applied and is handled separately from the gaming cash flow. The casino remits as "sales tax" the tax rate on their net gaming cash flow plus the tax rate on their actual sales.

This way you're taxing what's really being sold: entertainment. Some people get lucky and get paid for being entertained, others get unlucky and do all the paying for other people's entertainment, same as now. But the net "retail sale price" for the entertainment is the gross wagers minus the gross payouts - so that's what the tax rate should apply to. The casino will view the tax as overhead, just like they do all their other expenses (salaries and wages, real estate costs, food, material, etc) and will factor it into their payout ratios, just like they do with all their other expenses. But by collecting it from the casinos based on their net take, you don't have to alter the games themselves - the dealer won't have to pay you for hitting blackjack and then take out 45% in taxes at the table.

[dwivian]

Since you are providing a service (entertainment of gambling) to an end user, you have to collect the tax on every bet. Of course, you insert it into the basic charge as a 'betting credit' on an electronic card, so nobody has to worry that they are playing $1.23 instead of $1. Your payouts are based on base $1, and you can comp from your profitability all you want. Something like this is done already, as cards replace the coin slots of many machines (it also allows the Casino to follow your gambling, to determine what to comp you).

The Casino industry still pays out all the taxes. You get a room, food, shows, drinks, etc, but you pay for it by your betting, or the Casino is losing money. More probably your room is paid for by lots of people that don't gamble up to the right levels to get the comps, and thus the profits from their spending cover that steak you just had for dinner.

Nobody is out taxes.

[st-darwin.livejournal.com]

The idea of replacing the current tax structure with a national sales tax is insane. (That doesn't mean it won't happen, though.)

First, sales taxes are the most regressive form of taxation out there. Income inequality is on the rise anyway, and I'd rather not live in a third world country (even if I'm one of the people who can afford the gated community).

Second, the tax structure is complex for two reasons: tax incentives to support ideals, and tax loopholes paid for by the wealthy. There are tax breaks for mortgages to promote home ownership, tax breaks for uncompensated business expenses to promote entrepreneurship, tax breaks for medical expenses for compassion, tax breaks for charities to encourage philanthropy... There are reasons that's in the tax system.

Tax breaks for the wealthy are in there because they were paid for, fair and square. The reason why there aren't any in this plan is because this plan is a tax break for the wealthy. Exemptions and exceptions are what complicate the tax code. If we standardized exemptions, income taxes would be trivially easy to calculate whether they were progressive or flat.

(Okay, there is a third reason - it looks to me like the federal government has recently started making taxes more complicated for no damn reason at all. I can only guess they're trying to make regressive schemes like this more attractive.)

Third, the 23% figure is wrong - if $23 of $100 is tax, then that's a tax of $23 on $77, which is not 23 percent. Second, follow the numbers and if you discount the government paying taxes to itself (which does not create money) and don't start taxing churches etc., the real figure is about a 56% sales tax.

Other parts of this are just kneejerk rightwingery - capital gains taxes don't discourage investment if there is more capital than places to invest it. If this is true, as it is in the US today, then reducing the capital gains tax doesn't stimulate jack.

It seems to me that the underlying motivation is make people as angry about taxes as the original poster is. I don't really understand this visceral hatred of taxes - I am actually quite fond of polio vaccines, highways, the Internet, sewers, and that sort of thing.

[servingdonuts.livejournal.com]

The 23% figure is not wrong. It's just not what you thought it was.

Sales taxes can be inclusive or exclusive. Most retail sales taxes are exclusive: the price on the menu for a burger is $1.00, but you get charged a 10% sales tax, so you pay $1.10 including the tax. Some sales taxes are inclusive: gasoline taxes are a great example. The price on the pump is $2.50, but tax is included, so you pay $2.50 including the tax.

If the gas tax is fifty cents, then the tax is 20 percent of the total price (.50 is 20% of $2.50). But you could also say that the tax is 25 percent of the pretax price. Both the 20% and the 25% figure are correct, but they're both meaningless unless put in context - either inclusive (20%) or exclusive (25%).

Most of the current federal taxes come from income taxes. Income taxes are inclusive. People talk about being in a 15% tax bracket or a 30% tax bracket and so forth; that means that 15% (or 30% etc) of their income goes to taxes. That's like the gas tax: 20% of what you pay goes to taxes.

The estimates are that a 23% inclusive tax rate would raise the same amount of revenue as the current tax system. That's (roughly) the same as a 30% exclusive tax rate. No proponent of this tax plan is hiding that - in fact, they take pains to explain it, much as I'm doing right here. But the key comparison to make isn't "how does this compare to the sales tax I'm paying now", it's "how does this compare to the total taxes I'm paying now." For most people, that comparison is best done using inclusive rates, because you'll be comparing it to your income tax rate.

It goes even further than that, though, because you're not just paying your income tax, you're also paying the corporate income taxes embedded in everything you buy. All told, the total share of the economic wealth produced by everyone in the country that is taken in federal taxes is about 23%. Just about one-quarter of everything that everyone does goes to the government. The Fair Tax keeps that amount the same as it is now - it just collects it up front rather than keeping it hidden.

[dwivian]

I don't see how this is insane -- the base $X of money spent (where X is a regional poverty limit) is effectively untaxed. There is nothing regressive at all about not taxing the poor. For everyone OVER $X in expenses, they pay the exact same rate for $N-X of their spending. And, people with more disposable income tend to be consumers of new goods instead of used, so they get hit with the bulk of the cost. Just like they do, now. Nothing changes, there.

So long as nobody exempts anything, and all the rules are equally applied, no industry benefits from special breaks, and all have to rise or fall on their own. Everyone pays the same 23%, and there is no protection or villification of the classes (except the truly impoverished). This is a good thing.

This isn't about hating taxes, but about hating a complex system that protects special interests. That's a reasonable complaint, no? We'll still have money for vaccines, roads, sewers, and your favorite politician, but the prices of real goods will shift to reflect their true cost, and you'll know what you really make in income instead of just what you take home.

[skellington.livejournal.com]

(servingdonuts addressed the 23% vs 30% arguement well, so I'll pass on it.)

Let me point out that the fair tax is significantly less regressive than the current FICA (Social Security) tax.

You pay 15.4% (inclusive) on all of your income (either through the hidden employer match or self-employment taxes).

Compared to paying 23% (inclusive) on money over $10,000 (the poverty line for a single adult), you have to be spending over $30,000 a year just to break even on the FICA taxes. (i.e. $4620 in FICA taxes on $30,000 vs $4600 in sales tax on $20,000.) And that doesn't start talking about income taxes on the $30,000 worth of earnings, or other direct or embedded federal taxes (such as gasoline).

This, of course, assumes the 23% inclusive rate is revenue neural. I'll do some research and see what I can come up with. (I assume you are also talking about a 36% inclusive rate.)

And most of us don't hate taxes; we just hate the tax system. I read recently that a company was considering (or had) bought the Atlanta Braves for tax reasons. Significant numbers of business decisions are made exclusively for tax reasons, even if they are otherwise stupid business decisions.

And even though I have a fairly simply tax return (well, compared to some people), it would be hopeless for me to do it without buying a tax program or paying an accountant. The current system has gotten completely and utterly unweildy. The question is, do you revise it to a simple income tax (i.e. what it was 20 years ago after the Regan reforms) or do you switch to something else like a retail sales tax.

[servingdonuts.livejournal.com]

Quick reply, haven't read the other comments yet, and don't know if I should (don't really have the time to get into it, and probably couldn't resist):

1) That's a great question. I don't know. I've thought about it a little bit, but not much. I don't recall reading any discussions of the transition from present tax to a Fair Tax system, so I'm not sure what the "official" answer is, if any. The transition question is a vital one and will need a really good answer. But the question of "how do you get there from here" doesn't affect the question of "is being there better than here".

2) There's nothing to replace the industry that supports the present tax system (H.R. Block and TurboTax etc). There's no reason to plan to replace it, any more than we should have planned to replace the buggy whip industry. The accountants and programmers will find work, although the labor price of accounting and programming will fall by a small amount for a short while as the market adjusts to a new equilibrium. Putting that industry out of business is a short-term economic negative for the people in the business, but a long-term economic positive for everyone.

3) The Fair Tax proposal is only intended to eliminate and replace all other *federal* taxes. It would not alter the non-federal tax systems at all. States and local governments would continue to be free to implement all the same tax systems they do now - sales taxes, income taxes, property taxes, estate taxes, the whole shebang.

4) The Fair Tax proposal is intended to be revenue-neutral, meaning that it will raise the same amount of money as is currently being raised from all the existing taxes. That's one of the design goals. Basically, you say "The government estimates that total revenues under the current system are $X. To raise the same amount of revenue under the new system, we estimate we'd have to set the tax rate at Y percent." That's how they arrived at Y percent, where Y is 23% in the current proposal (I think).

As far as where the money goes, that's subject to the same processes as now, i.e. Congress says how much gets spent on what. That doesn't change. The proposal only deals with the revenue side, not the spending side.

Does that help any?

[cookingwithgas.livejournal.com]

The question of how you get there can be more important than the question of whether being there is better then being here. If getting there kills you, I don't think the fact that being in California is better then being in Maine is terribly relevant. Throw the country into a depression, and whether the new tax system is better will be a moot point.

[cookingwithgas.livejournal.com]

Another major problem I have with the Fair tax idea is that it does not pay enough attention to human nature. If you tax consumption, people are likely to consume less. Less consumption = depression, given what our economy is set up like.

[skellington.livejournal.com]

Well, long term it probably helps everyone.

Encouraging savings would be a fine thing. We're down to a negative savings rate at this point. It will improve the economic growth rate and give us a larger base long term to pay for the boomer retirement.

It will also improve our trade balance with China, et al, which might prevent a currency crisis and massive devaluation.

[servingdonuts.livejournal.com]

Less consumption does not equal depression. That's a holdover from seriously broken economic thinking that dates back to the seriously broken John Maynard Keynes.

Less consumption means more savings, which means more capital investment, which means greater productivity, which means greater wealth. That's the best reason of all to support a consumption tax. Taxing consumption rather than income will be the biggest driver of human prosperity since the steam engine.