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Taxing Sales under the FairTax What Rate Works?
Boston University ^ | September 2006 | Laurence J. Kotlikoff et al

Posted on 10/19/2006 5:11:50 PM PDT by pigdog

As specified in Congressional bill H.R. 25/S. 25, the FairTax is a proposal to replace the federal personal income tax, corporate income tax, payroll (FICA) tax, capital gains, alternative minimum, self-employment, and estate and gifts taxes with a single-rate federal retail sales tax. The FairTax also provides a prebate to each household based on its demographic composition. The prebate is set to ensure that households pay no taxes net on spending up to the poverty level.

Bill Gale (2005) and the President’s Advisory Panel on Federal Tax Reform (2005) suggest that the effective (tax inclusive) tax rate needed to implement H.R. 25 is far higher than the proposed 23% rate. This study, which builds on Gale’s (2005) analysis, shows that a 23% rate is eminently feasible and suggests why Gale and the Tax Panel reached the opposite conclusion.

This paper begins by projecting the FairTax’s 2007 tax base net of its rebate. Next it calculates the tax rate needed to maintain the real levels of federal and state spending under the FairTax. It then determines if an effective rate of 23% would be sufficient to fund 2007 estimated spending or if not, the amount by which non-Social Security federal expenditures would need to be reduced. Finally, it shows that the FairTax imposes no additional real fiscal burdens on state and local government, notwithstanding the requirement that such governments pay the FairTax when they purchase goods and services.

(Excerpt) Read more at people.bu.edu ...


TOPICS: Heated Discussion
KEYWORDS: fairtax; incometax; itchyandscratchy; taxes; taxreform
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To: Congressman Billybob
In another form the FairTax is just another form of withholding, this time by the retailer rather than the employer ... except you get no summary accounting of what you pay over time.

So how so you think the average, math averse taxpayer will reconcile his daily FairTax tithing at the grocery store against the lump sum payment they receive monthly to offset his spending on "necessities," (his "prebate")??

My guess is probably the same he rationalize his 1040 each year: "I didn't pay any tax, I got a refund!."

A conversation overheard after the implementation of the FairTax:

If anything, the amount of tax paid is totally lost in plain sight under the FairTax by dicing up the payments into thousands if tiny daily bits. Then buried further by the prebate. You will NEVER know how much tax you really paid unless you keep track of EVERY receipt you get ... and properly deduct your prebate. There is no summary accounting.

If you want to make taxpayers painfully aware of their tax burden, simply eliminate withholding and force Joe Taxpayer to write a monthly check ... rather than receive one.

51 posted on 10/19/2006 7:38:55 PM PDT by Dimples
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To: lewislynn
Just as I suspected.

What does any of that have to do with me, exactly?

It has everything to do with you unless you're one of those trust fund babies living off of your muni's.

Who's stopping you?

The 25% of my income that is confiscated from me before I can: A. invest it, B. spend it, or C. give it away. That's who.

Once again, I ask you, how would you tax the citizenry? On their income or their consumption. What do you want to encourage? Savings or investment.

Or are you one of those people who think that gov't spending is an "investment"?

52 posted on 10/19/2006 7:41:55 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: Logical me
"I'm having a hard time believing this."

Then by all means you should spend some time teaching yourself about the FairTax. Even reading the first few pages of the lead-in paper would help. Reading some of the bill itself would be even better.

As it is you're merely guessing and assuming things that aren't true. Another source of information is the FairTax website. Become an informed voter.

You might even use the anonymous FairTax rate calculator and find out what your actual effective FairTax rate would be. If you pay taxes now chances are you'll see a sizable drop in your effective tax rate over that you have under the income tax. Frequently the rate is something like 1/2 the effective tax rate under the income tax. But do yourself a favor and read the clear instructions, do it as accurately as you can and see the benefits for yourself.

53 posted on 10/19/2006 7:42:30 PM PDT by pigdog
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To: Beagle8U
Go with a flat tax.

Haven't we tried that enough? The issue is the method. Do we tax labor or do we tax the fruits of that labor? Meaning, after I have accumulated wealth I'll pay the taxes. Let me accumulate it first.

54 posted on 10/19/2006 7:43:46 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: samm1148
Your complaint is with politicians, not the FT.

Anything, well almost anything, that replaces a tax code that punishes achievement, demands reports on almost every aspect of ones life, is so complicated that the IRS refuses to stand behind its own answers to tax payer questions, that rewards some activities and punishes others, that pretends to tax the rich while creating vehicles by which the rich escape the taxes but the middle class can't, that is 60,000+ pages long, and on and on, is well worth serious consideration.

55 posted on 10/19/2006 7:44:49 PM PDT by Mind-numbed Robot (Not all that needs to be done, needs to be done by the government.)
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To: Extremely Extreme Extremist
Horse hockey - there's still going to have to be some sort of gov't bureaucracy to collect the funds.

Why? 50 clerks instead of 130,000 agents who hide behind masks to testify before congress.

56 posted on 10/19/2006 7:45:26 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: Dimples
You are missing a critical point. "Withholding" means the government gets the money before you ever receive it. That's the key to avoiding maximum response from the taxpayers. When you pay a tax at the grocery store, you've already gotten the money and know when you are paying it out.

John / Billybob
57 posted on 10/19/2006 7:47:47 PM PDT by Congressman Billybob (Have a look-see. Please get involved.)
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To: groanup
Nevertheless, the bureaucracy will remain.

You don't think states will magically mail 50 checks to the federal government simultaneously, do you.

58 posted on 10/19/2006 7:48:06 PM PDT by Extremely Extreme Extremist (Why can't Republicans stand up to Democrats like they do to terrorists?)
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To: groanup
Fairytax wont work being on consumption until you can charge the tax on everything spent in other countrys.

I think it's a "steaming pile" for anyone that makes under 200k a year.
59 posted on 10/19/2006 7:50:08 PM PDT by Beagle8U (Demonrats want the Gays out of Congress.....stand back and let them purge their base.)
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To: groanup
Why? 50 clerks instead of 130,000 agents who hide behind masks to testify before congress.

Completely delusional. The fairtax will take a significant effort to enforce, especially trying to collect from the millions of self-employed.

60 posted on 10/19/2006 7:51:00 PM PDT by Always Right
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To: Dimples
If you want to make taxpayers painfully aware of their tax burden, simply eliminate withholding and force Joe Taxpayer to write a monthly check ... rather than receive one.

Like many ideas on their face, brilliantly simple but impossible to impliment. It is similar to saying the secret to a happy life is to find happiness.

61 posted on 10/19/2006 7:51:15 PM PDT by Mind-numbed Robot (Not all that needs to be done, needs to be done by the government.)
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To: Beagle8U
You have it exactly backwards. A "hidden" tax is when the government gets your money without you ever seeing it happen. A tax is not "hidden" when the money must come directly from your pocket, and you can see the amount on the receipt.

FICA and income taxes are hidden. The hundreds of taxes buried in the price of a new car (except the sales and registration taxes) are hidden. Got the distinction?

John / Billybob

62 posted on 10/19/2006 7:51:29 PM PDT by Congressman Billybob (Have a look-see. Please get involved.)
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To: Extremely Extreme Extremist
You don't think states will magically mail 50 checks to the federal government simultaneously, do you.

Please tell me why not.

63 posted on 10/19/2006 7:52:15 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: Congressman Billybob
When you pay a tax at the grocery store, you've already gotten the money and know when you are paying it out.
And then what, stop buying groceries?...Oh wait I know, we can complain to tax loving deaf ears in Congress.
64 posted on 10/19/2006 7:53:36 PM PDT by lewislynn (Fairtax = lies, hope, wishful thinking, conjecture and lack of logic.)
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To: Beagle8U

That's not an argument. That's rhetoric. But I can respond to one part of it. The items brought here haven't been taxed. They would be under the FairTax. Border adjustment.


65 posted on 10/19/2006 7:54:39 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: MaDuce
Believe it or not, when the Income Tax Amendment was in Congress the Republicans had the votes to put a 10% cap on income taxes. They declined to do that, on the grounds that such a cap would "encourage" later Congresses to raise the rate all the way up to that high level.

Now there's a classic example of Congress failing to predict accurately what Congress would do in the future.

John / Billybob

66 posted on 10/19/2006 7:55:07 PM PDT by Congressman Billybob (Have a look-see. Please get involved.)
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To: Always Right
Completely delusional. The fairtax will take a significant effort to enforce, especially trying to collect from the millions of self-employed.

Perhaps you would like to expand on my delusion. Why can't 50 clerks do the job of the IRS? I'll give you a thousand auditors.

67 posted on 10/19/2006 7:56:07 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: Beagle8U
"... OK. Now I get it. You mean if the tax is partially hidden and misleading people may buy into it being a good deal.

Kinda like the Fairytax when they say its going to be a 23% sales tax, but when you buy a $1 item, after the tax is added it wont be $1.23. It will be more.

Great idea, hiding what the real tax will be. I'll bet that will help to get people on board with this."

No, obviously you DON'T get it. You're seriously misinformed on almost every point you make. You'd help yourself a great deal just by reading the first 3 or 4 pages of the report and then the paragraph headed "3.3 Tax-Inclusive versus Tax-Exclusive Rates" that starts at the bottom of page 10 of the paper.

There is no "hiding" of the tax rate - quite the opposite since a receipt is required with each taxable sale that shows the rate clearly.

68 posted on 10/19/2006 7:57:52 PM PDT by pigdog
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To: pigdog

If you were really worried about "people's time" you'd resign from FR now, instead of waiting to get banned again.


69 posted on 10/19/2006 7:59:04 PM PDT by xcamel (Press to Test, Release to Detonate)
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To: Congressman Billybob
"When you pay a tax at the grocery store, you've already gotten the money and know when you are paying it out"

Even if they are pissed off at all the extra they will have to pay at the grocery store, what can they do about it?

Do you think they can buy "used" food to avoid the tax?

How about a "used" doctors visit? Some "used" gas for their car?

The little welfare check "prebate" wont cover the taxes the average Joe will be spending. Not when it takes all they earn to live.
70 posted on 10/19/2006 8:00:47 PM PDT by Beagle8U (Demonrats want the Gays out of Congress.....stand back and let them purge their base.)
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To: groanup
Perhaps you would like to expand on my delusion. Why can't 50 clerks do the job of the IRS? I'll give you a thousand auditors.

It is not the complexity of the code which makes the requirement for having thousands of tax collectors. It is the incentive to cheat the system. There will still be millions of people trying to avoid taxes and it will still take the watchful eye of an intrusive and abusive tax collection agency to collect 2 trillion in taxes. If you think having a few clerks sitting in Washington DC can do the job, you are delusional.

71 posted on 10/19/2006 8:03:22 PM PDT by Always Right
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To: groanup; Congressman Billybob
Because the 'poll' had just one question for the 'room temperature IQ crowd'...

"Do you hate the IRS? (yes) (no)"

Even a politician isn't that stupid.

72 posted on 10/19/2006 8:04:03 PM PDT by xcamel (Press to Test, Release to Detonate)
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To: groanup
The gov't taxes itself now in that it taxes the wages it pays its own employees...

Actually, it doesn't tax itself, it taxes its employees and directly withholds the money from them. If the tax rate was 10%, instead of paying a $100 wage to an employee, the Federal government only has to pay $90 though it accounts, on the books, the full $100. In effect, it pays a discounted actual wage and inflates both the "wage paid out" and the "tax received in" entries in the Federal books by the same amount: the amount of the tax. In doing so it generates no net revenue. The actual spending burden it only 90% of the accounted burden. The tax out/in exactly balances and is, in effect a virtual accounting gimmick.

For simplicity, let's assume that under the FairTax, the magnitude of the tax base is the same, and the revenue requirements are the same. In essence, the $100 income that used to generate $10 of tax still needs to generate $10 of tax.

Working under the "keep all your paycheck" scenario, the government has to pay the full $100 wage, in cash, to the employee. That alone raise the cash required to operate by 11%. Of course, since the FairTax used the "virtual tax received" under the Income Tax to set the rate, you'd think: "No problem the tax rate is sufficient to generate the additional cash the Federal Government didn't need before because of the accounting gimmick." Well, if the tax base was entirely in the private sector, you'd be right.

The problem arises because that $100 wage is part of the FairTax base but is "consumed" in the public sector. "Revenue neutrality" demands that the $100 still generate $10 of tax ... it's part of the tax base. But, NO MATTER WHAT THE TAX RATE, the $100 generates NO net tax revenue to the Federal Government ... just as before. If the Rate is 10% (exclusive) the government pays the $100 out, pays an additional $10 in tax, and receives the additional $10 as tax: NO NET TAX REVENUE!

That is why the FairTax is flawed from a Revenue Neutrality perspective.

BTW, the problem is a bit different at the state and local level, but Kotlikoff, in the very paper cited above, agrees that S&L governments will need to raise their own tax rates to collect enough money to pay their FairTax.

73 posted on 10/19/2006 8:06:26 PM PDT by Dimples
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To: groanup
And 20 million business owners, and another 40 million "whopper flopper's" behind cash registers. - all now federal tax agents.
74 posted on 10/19/2006 8:07:11 PM PDT by xcamel (Press to Test, Release to Detonate)
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To: lewislynn
"... >"any government" employee's wages salaries and benefits would also cost 30% more under the "Taxable Employer" clause ... "
Untrue - both as shown in the paper and has been explained to you many, many times. Why continue to post something you know is not true?

The tax on governmental non-education employees is a tax paid by the government on the gross wages of those employees and it is 23% less the 7.65% ER FICA less another adjustment for the educational employees ER FICA that no longer is paid either. That is all accounted for in the 23% revenue neutral derivation the paper presents.

Actually taxing government IS a good idea and it's done at present (as has also been explained to you many times) but we've decided to shortcut all of that and just you pay the entire tax amount for all taxpayers ... OK???

75 posted on 10/19/2006 8:07:22 PM PDT by pigdog
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To: xcamel
If you were really worried about "people's time" you'd resign from FR now, instead of waiting to get banned again.

And if you were really worried about the method of taxation you'd debate instead of jabbing about banishment and personal attacks. Have you ever thought about the issue? Do you have an opinion? Have you given serious consideration to methods of taxation? Have you studied these issues? Have you ever added anything to these debates other than poking around trying to get someone banned? Are you nothing more than a groupie hanging on to every word your fellow SQL's spout? Buck up man. Read something.

Rather than hovering around the abuse button may I suggest reading a book on taxation?

76 posted on 10/19/2006 8:08:46 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: pigdog
" You'd help yourself a great deal just by reading the first 3 or 4 pages of the report and then the paragraph headed "3.3 Tax-Inclusive versus Tax-Exclusive Rates"

You would help yourself in selling your idea if you would $hit-can all the 'tax inclusive" double talk and put out information that wasn't designed to confuse people that wont know it means it will be a 30% tax, not a 23% tax.

I've read the stupid plan. I know what it means.
77 posted on 10/19/2006 8:09:12 PM PDT by Beagle8U (Demonrats want the Gays out of Congress.....stand back and let them purge their base.)
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To: Dimples
I declare you second in line to Your Nightmare. It escaped me that you too are learned about things. Your point is taken. So. In your world, is taxing income better than taxing consumption? If so fine, though I would like to know why. If not, how would you design a revenue neutral consumption tax? How would you convert the tax that Fed employees now pay on their salaries when the tax is purely consumption?

And with this outburst, I am going to puff meagerly on a cigar and be off to bed. I'll look forward to communicating tomorrow.

78 posted on 10/19/2006 8:15:00 PM PDT by groanup (Limited government is the answer. What's the question?)
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To: lewislynn
Ah, but it's much easier to do for most people under the FairTax since income is not taxed, nor savings, nor investment nor expenditures such as mortgage and other load payments such as credit card debt, political contributions, education tuition/student loan payments, state and local taxes including property taxes, money in or income from savings accounts, stocks and bonds, donations to church or charities, political donations, purchases of used goods - and other things ... all in the list are not taxed.

Having those things not taxed helps reduce your effective FairTax rate considerable which you'd see if you were to use the rate calculator linked to earlier.

79 posted on 10/19/2006 8:15:47 PM PDT by pigdog
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To: Beagle8U

read the paper or the first 8 or 10 pages and you'll see it's a carefully worked out amount.


80 posted on 10/19/2006 8:18:22 PM PDT by pigdog
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To: Mind-numbed Robot
I'm not missing that at all. I'm suggesting that despite having the cash in your hot little hands, you'll never know how much of it you actually spent on tax.

In addition, the monthly prebate check will offset perception of paying tax at all! (Hey, I didn't' pay any FairTax; I got a refund!)

Do you know how much sales tax you paid in North Carolina last year? Do you really think the average "I don't pay tax, I got a refund" guy is going to be able to figure it out?

Do you TRULY want people to feel the Tax Bite? Then simply eliminate withholding ... (of course tax revenues will tank, but that's another story.)

81 posted on 10/19/2006 8:18:29 PM PDT by Dimples
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To: phoenix0468

If you'll read the first 10 pages you'll see why that won't do the job, but that the rate carefully determined by the paper will.


82 posted on 10/19/2006 8:19:56 PM PDT by pigdog
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To: Extremely Extreme Extremist
Actually under the FairTax, the state would have a sales tax authority to collect and forward the tax from the merchants. And the merchants and the states would both be paid to do so.
83 posted on 10/19/2006 8:22:51 PM PDT by pigdog
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To: Mind-numbed Robot; Congressman Billybob

Sorry, the above reply was not meant for you ... my bad, it was meant for Congressman Billybob.


84 posted on 10/19/2006 8:23:35 PM PDT by Dimples
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To: phoenix0468
The FairTax actually eliminates the IRS which presently has an 11 or 12 billion $/year budget. The paper assumes that at lest 8 billion will be saved, but I'd think it would be even more,
85 posted on 10/19/2006 8:24:45 PM PDT by pigdog
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To: pigdog

I disagree with the papers assumptions using current GDP. The GDP will increase dramatically with the elimination of most taxes on manufacturing and business, therefore decreasing the necessary tax rate to a much more conservative number. I may have quoted too low, but I think it is feasible given the offsets that a drastic downsizing in the Federal Government that should result. Many programs that are funded by Federal dollars could be shifted to the states for funding and thus further decreasing the size and expenditures of the federal government. Tops on my list would include The Department of Education, The Federal Housing and Human Services Agency, many agencies within the Treasury, etc. I think you get my drift. The Feds are bloated and dipping their wicks into areas best left to the States. And when the country and the Federalist Republicans and Democrats come to their senses, it just might happen.


86 posted on 10/19/2006 8:27:46 PM PDT by phoenix0468 (http://www.mylocalforum.com -- Go Speak Your Mind.)
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To: pigdog

Not only that the increase in GDP will be an additional offset (increase) that would further reduce the tax.


87 posted on 10/19/2006 8:28:48 PM PDT by phoenix0468 (http://www.mylocalforum.com -- Go Speak Your Mind.)
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To: Dimples
"... the amount of tax paid is totally lost in plain sight under the FairTax ..."

Far from it. In fact a receipt is required with each taxable purchase that clearly shows the amount and rate of the tax. Anyone buying something will certain notice how much "his government" is costing him for that loaf of bread (or that BMW).

People aren't stupid and they'll quickly realize the benefits of having a lower effective tax rate than at present for most taxpayers and for making the connection that taxes on everything cost a great deal - every time they take out some greenbacks to pay. Unlike the income tax system, no tax is hidden and none cascades.

88 posted on 10/19/2006 8:31:15 PM PDT by pigdog
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To: lewislynn

Imputed values are subject to even more inflation than market values.


89 posted on 10/19/2006 8:32:32 PM PDT by Doctor Stochastic (Vegetabilisch = chaotisch ist der Charakter der Modernen. - Friedrich Schlegel)
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To: Extremely Extreme Extremist
The states don't handle the prebate in any event - the SSA does and there will be very few checks used since most payments will be done by computerized wire transfer. It's faster and far cheaper to handle that way.
90 posted on 10/19/2006 8:34:26 PM PDT by pigdog
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To: Beagle8U
In fact, those taxpayers are the ones who will benefit the most. Determine your own effective FairTax rate using the calculator link that was given and see for yourself.
91 posted on 10/19/2006 8:36:19 PM PDT by pigdog
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To: Doctor Stochastic
Imputed values are subject to even more inflation than market values.
Which might explain the eagerness to tax it.
92 posted on 10/19/2006 8:40:37 PM PDT by lewislynn (Fairtax = lies, hope, wishful thinking, conjecture and lack of logic.)
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To: Dimples
Sorry, the above reply was not meant for you ... my bad, it was meant for Congressman Billybob.

Well, I was scratching my head in wonderment but then just chalked it up to my senility. :-)

93 posted on 10/19/2006 8:42:12 PM PDT by Mind-numbed Robot (Not all that needs to be done, needs to be done by the government.)
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To: Always Right
Nonsense. No one who buys at retail will be able to purchase and avoid the tax as the "enforcement" is pretty much automatic ... if you want the thing, you pay the tax.
94 posted on 10/19/2006 8:42:23 PM PDT by pigdog
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To: lewislynn
You'll have greater disposable personal income than before, but you can always become politically active and pound on your congresscat.
95 posted on 10/19/2006 8:44:27 PM PDT by pigdog
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To: Congressman Billybob

And that's hardly the only one.


96 posted on 10/19/2006 8:45:32 PM PDT by pigdog
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To: xcamel

Your foolish personal attacks sound more childish all the time. How about debating the FairTax?


97 posted on 10/19/2006 8:46:40 PM PDT by pigdog
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To: Beagle8U
Actually you're misinformed about that as I'll show you later in the thread. Those are the folks who will greatly benefit from the FairTax.

It's the high living big spenders (some of which are on this thread or soon will be) that are terrified since the don't want to pay and can avoid many taxes now and they don't want to change their lifestyle.

98 posted on 10/19/2006 8:49:41 PM PDT by pigdog
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To: Beagle8U
Actually you're misinformed about that as I'll show you later in the thread. Those are the folks who will greatly benefit from the FairTax.

It's the high living big spenders (some of which are on this thread or soon will be) that are terrified since the don't want to pay and can avoid many taxes now and they don't want to change their lifestyle.

99 posted on 10/19/2006 8:49:42 PM PDT by pigdog
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To: pigdog
Nonsense. No one who buys at retail will be able to purchase and avoid the tax as the "enforcement" is pretty much automatic ... if you want the thing, you pay the tax.

What about the millions of self-employed people. What about the millions of foreign transactions. What about the millions of mom and pop retailers. There is nothing automatic about collecting 2 trillion dollars in taxes. It takes a big organization that puts some fear into people to collect that much in taxes.

100 posted on 10/19/2006 8:51:36 PM PDT by Always Right
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