Taxing Sales under the FairTax – What Rate Works?

Boston University ^ | September 2006 | Laurence J. Kotlikoff et al

[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.

[Dimples]

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.)

[pigdog]

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.

[pigdog]

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.

[Dimples]

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

[pigdog]

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,

[phoenix0468]

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.

[phoenix0468]

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

[pigdog]

"... 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.

[Doctor Stochastic]

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

[pigdog]

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.

[pigdog]

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.

[lewislynn]

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

Which might explain the eagerness to tax it.

[Mind-numbed Robot]

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. :-)

[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.

[pigdog]

You'll have greater disposable personal income than before, but you can always become politically active and pound on your congresscat.

[pigdog]

And that's hardly the only one.

[pigdog]

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

[pigdog]

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.

[pigdog]

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.

[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.

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.