Skip to comments.The Fraudulent Tax
Posted on 10/10/2006 8:59:26 AM PDT by cryptical
Advocates of replacing the income tax with the FairTax a consumption tax in the form of a national retail sales tax (NRST) on new goods and services regularly point to the complexity of the tax code, the millions of hours and dollars wasted on compliance costs, the evils of the withholding tax, and the abuses of the IRS to bolster their case for the FairTax.
The twin truths that taxation is theft (no matter how the money is collected) and that the US government should never be given a budget that is in the trillions (no matter how the money is collected) are concepts that FairTax proponents have never grasped.
The FairTax is intended to be revenue neutral; that is, the federal leviathan and all of its programs will receive exactly the same amount of funding as under the current tax system. Federal spending will remain at the same obscene level that it is now. This means that, although conceivably some people might pay the same amount in taxes under the FairTax plan that they do now, some will pay more and others will pay less.
Or, if we accept without reservation the claim of FairTax supporters that tax evaders, tax avoiders, workers in the underground economy, and others who don't pay their "fair" share will now be "caught," therefore increasing the tax base, we can, for the sake of argument, say that some people might pay the same amount in taxes, many will pay less, and the few that will pay more are the ones who were paying little or no taxes to begin with.
But even though the things that FairTax proponents say about the tax code, compliance costs, the withholding tax, and the IRS are certainly true, what most people care about is the bottom line. If an individual's taxes were lowered but the prices of all goods and services were at the same time raised, lower taxes might actually be a curse instead of a blessing.
The question is therefore not one of paying higher or lower taxes, but instead: Will I have more money remaining from my paycheck to save, invest, or spend on vacations and luxury items under the FairTax plan after I pay my bills and make my necessary purchases?
This is a question that FairTax activists have answered in the affirmative.
The FairTax Plan
Under the FairTax proposal, there will no longer be Social Security and Medicare taxes, withholding taxes, corporate taxes, gift taxes, estate taxes, capital gains taxes, and personal income taxes. However, these will all be replaced with a national sales tax on all new goods and services. But never fear, says the FairTax advocate, even with this sales tax, the prices of most goods and services will still be about the same.
As talk show host Neal Boortz claims in The FairTax Book: "The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax." The embedded costs of taxes in all consumer goods and services drive up prices because they increase the costs of doing business of manufacturers and service providers. As Boortz explains about suppliers of goods and services:
When you buy that loaf of bread, you're paying a portion of all of the bills, including tax bills, of every person or business entity that had anything to do with that bread, from before the wheat was planted up until the loaf of bread ends up in that plastic bag in the back seat of your minivan.
Have you thought about how much your doctor pays into the payroll tax system to augment his or her employees' Social Security and Medicare taxes? And what about all the embedded taxes your doctor paid when purchasing all of that sophisticated equipment, not to mention the endless monthly outlay for cotton swabs and tongue depressors?
Compliance costs are also "costs that are ultimately embedded in retail prices paid by consumers." Boortz's coauthor, Congressman John Linder (R-GA), in his November 5, 2003, testimonyin behalf of the FairTax before the Joint Economic Committee on " Rethinking the Tax Code," stated that "because of the tax component incorporated into prices under the current income tax code, we are already paying the equivalent of the FairTax!" This must include the prices of all goods and services, for Boortz maintains that "like retail goods, new homes won't be any more expensive, even with the FairTax added."
The rate of the NRST under the FairTax is supposed to be 23 percent. But as I have already shown in my first article on the FairTax (" The Fair Tax Fraud"), that is just the initial rate it will be adjusted upward every year. And as I have already shown in my review of Boortz's book (" There Is No Such Thing as a Fair Tax"), the stated rate of 23 percent is really 30 percent the new math used by FairTax proponents figures the rate inclusively (the tax is included in the price of the product) rather than exclusively (the tax is added to the price of the product).
To offset the full amount of this sales tax, retail prices would have to fall by a like amount if the prices of most goods and services are to "remain essentially the same." This is exactly what Boortz asserts will happen after the FairTax plan is implemented:
One of the beauties of the FairTax is that the price of consumer goods and services in our economy will go down by roughly the same amount as the proposed FairTax rate of 23 percent. This very nearly makes everything a wash.
Consumers of all incomes will be paying at least 20 percent less for virtually everything they buy, including the basics of food, clothing, shelter, and transportation.
And how does Boortz know that this will happen? Why, Dr. Dale Jorgenson said so or at least that's what Boortz claims. Back in 1997, Jorgenson, the former chairman of the Harvard Economics Department, authored a report for Americans for Fair Taxation (AFT) entitled "The Economic Impact of the National Retail Sales Tax." Before writing his 1997 report for the AFT, Jorgenson had testified before the House Committee on Ways and Means in 1995 on "The Economic Impact of Fundamental Tax Reform" and in 1996 on "The Economic Impact of Taxing Consumption." 
Referring to this study, Boortz says: "On average, Jorgenson concluded, 22 percent of the price paid for a consumer product represents embedded taxes. That means that for every dollar you spend on a loaf of bread, twenty-two cents ends up being passed on to the government somewhere along the line in the form of taxes." Congressman Linder also referred to this report in his 2003 testimony before the Joint Economic Committee: "The FairTax plan creates transparency within the tax code. It eliminates the hidden tax component from the prices of goods. According to a Harvard study, the current tax component in our price system averages 22 percent."
Boortz believes that prices will fall because "if these embedded taxes were to disappear that is, if the tax burdens of all the corporations, businesses, and individuals involved in the manufacture, marketing, and sale of these items were to be removed these businesses would experience an immediate increase in their profit margins that would roughly equal that 22 percent." Then, once profit margins increase, Boortz presumes that "competitive market pressures" would "force prices down to a level where corporate profit margins are pretty much where they were before the passage of the FairTax." Linder likewise testified that competition would "bring prices down an average of 20-30 percent."
But this isn't all that Boortz has promised, for under the FairTax system everyone will get a raise because everyone will be able to keep his whole paycheck:
Once the FairTax takes effect, you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes.
The poor along with everybody else will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.
We start collecting 100 percent of our earnings on our paycheck.
We all get virtual raises, since payroll taxes are no longer siphoned from our checks.
But as we shall presently see, these four statements turned out to be lies and were subsequently altered or omitted in the new paperback edition of The FairTax Book.
Boortz has seriously misread and/or misrepresented Jorgenson in four key areas.
Boortz's First Misrepresentation
Boortz's first misrepresentation concerns the rate of the FairTax. He maintains that in order to be revenue neutral the tax rate would have to be 23 percent figured inclusively or 30 percent figured exclusively. But here is what Jorgenson actually said:
The imposition of the NRST would produce a sharply higher tax rate on consumer goods and services, but the tenth chart shows that the initial consumption tax rate would be twenty-three percent at both federal and state and local levels or only 18.4 percent at the federal level. This would gradually rise over time, but remain below thirty percent or 23.8 percent at the federal level.
Unlike Boortz, Jorgenson does not give us any baloney about inclusive and exclusive tax rates. But note that Jorgenson's rate of 23 percent includes federal, state, and local taxes. This is because of one of Jorgenson's assumptions:
Since state and local income taxes usually employ the same bases as the corresponding federal taxes, it is reasonable to assume that substitution of NRST for taxes at the federal level would be followed by similar substitutions at the state and local level. For simplicity I consider the economic impact of substitution at all levels simultaneously.
Boortz's rate of 23 percent (which is actually 30 percent) includes only the NRST. To this would have to be added any state or local sales tax rate. This means that in some areas of the country where the combined state and local sales taxes average 10 percent, consumers will pay a whopping 40 percent tax on all of their purchases. No wonder Jorgenson says that "as a consequence of the elimination of taxes on capital income, individuals would sharply curtail consumption of both goods and leisure."
But in Jorgenson's 1996 testimony at the "Hearings on Replacing the Federal Income Tax" held by the House Committee on Ways and Means he said that "the consumption tax rate required for replacing existing revenues from individual and corporate income taxes at both federal and state and local levels would be around fifteen percent. This would gradually rise over time reaching twenty-one."
The initial "revenue neutral" tax rate has already gone up twice and the FairTax hasn't even been implemented yet.
Other economists believe that the rate of a NRST would have to be much higher than 30 percent to be truly revenue neutral. This has been pointed out several times by Bruce Bartlett, and most recently by William Gale, an economist with the Brookings Institute, in his May 16, 2005, article " The National Retail Sales Tax: What Would the Rate Have To Be?"
Gale estimates that "a federal sales tax that maintains real federal revenues under current law and real federal noninterest spending over the 10-year period of 2006 to 2015 would require a tax-inclusive rate of 31 percent, or a tax-exclusive rate of 44 percent." This latter rate would actually climb to 49 percent by 2015. And these rates are assuming that there is no tax evasion or legislative erosion of the tax base.
Boortz's Second Misrepresentation
Boortz's second misrepresentation concerns the amount that prices could fall once the cost of embedded taxes is removed from goods. He maintains that the price of consumer goods will fall by roughly the same amount of sales tax that will be added under the FairTax plan. But again, here is Jorgenson:
Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart, would fall by an average of twenty percent.
In the long run producers' prices, shown in the eighth chart, would fall by almost thirty percent under the NRST.
He is saying that producers' prices will fall by about 20 percent in the short term and about 30 percent in the long term. Producer prices are not consumer prices. That is why the government has a Producer Price Index (PPI) and a Consumer Price Index (CPI). So, in order for a price increase from a national sales tax and a price decrease from the removal of the cost of embedded taxes to balance each other out, a much higher tax rate will be required since it is not consumer prices that will be 20 percent lower.
There are, of course, three other problems with any talk of a decrease in producer or consumer prices.
First, how does Jorgenson know for sure that producer prices "would fall by an average of twenty percent"? Why, an economic model that he created says they will, that's how.
And even if producer prices did fall by about 20 percent, we still have the same problem: How does anyone know for sure how much consumer prices will fall? There is one thing we know and one thing we don't know. We know that consumer prices will increase by 30 percent under the FairTax plan; we don't know how much they will decrease because of the elimination of "embedded costs" in the price of goods.
Second, saying that because costs will fall by x amount that prices will likewise fall by x amount is a grave economic fallacy. Not only does this ignore the basic laws of supply and demand, it is based on the fallacy that the costs of inputs in the production of a good determine the price of the output they produce. As Ludwig von Mises has said about prices:
The ultimate source of the determination of prices is the value judgments of the consumers. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of market prices. But the larger the market is, the smaller is the weight of each individual's contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct. What is called a price is always a relationship within an integrated system which is the composite effect of human relations.
Prices are determined between extremely narrow margins; the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying.
And third, the question of tax incidence who actually bears the burden of a tax is an elusive one that economists still debate. For example, many economists would argue that although a portion of the corporate income tax may be passed forward to consumers through higher prices, the majority of the tax comes out of after-tax profits and employee wages. Boortz is assuming that the full amount of all taxes paid by businesses are embedded in the costs of the goods they sell.
And what about the prices of imported goods? They would have no reason to drop at all.
Boortz's Third Misrepresentation
Boortz's third misrepresentation concerns the reason that prices could fall once the cost of embedded taxes is removed from goods. He maintains that it is the removal of the embedded taxes in the cost of goods that will account for the price reduction of those goods. Let's revisit an earlier statement of Jorgenson:
Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart, would fall by an average of twenty percent.
How would workers no longer paying taxes on wages lead to a fall in prices? Workers currently have deductions from their paychecks for federal income tax, Social Security tax, and Medicare tax. Although employers remit these taxes to the federal government, the money does not come out of their profits it comes out of each employee's gross pay. Jorgenson is saying that prices will fall because of two factors, not one.
Producers costs would be lower because not only would they no longer have to pay taxes on their profits, they would no longer have to remit their employees' deductions to the federal government they would pocket them.
When Jorgenson testified on the subject of "The Economic Impact of Taxing Consumption" before the House Committee on Ways and Means in 1996, he made essentially the same statement that was quoted above from his report for Americans for Fair Taxation:
Since producers would no longer pay taxes on profits or other forms of income from capital and workers would no longer pay taxes on wages, prices received by producers, shown in the fifth chart, would fall by an average of twenty percent.
After an inquiry by a citizen  who was concerned that the FairTax proponents were misrepresenting his conclusions, Jorgenson made his position perfectly clear:
A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers' prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increased economic efficiency.
Boortz is double counting. The portion of the worker's paycheck formerly sent to the government for taxes that will be now returned to him so he can collect "100 percent of every paycheck" is the same portion that producers will now pocket to help them lower their costs. This is because Boortz originally maintained that the embedded taxes that drive up the costs of goods and services are "in addition to the money taken out of your check in income taxes and payroll taxes." He has since changed his tune.
From his Nealz Nuze, here is Boortz on what will really happen to "100% of your paycheck":
On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck.
We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So what does this mean to your paycheck after the FairTax becomes law?
When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay the amount you can put into your bank account will not decrease, and may actually increase.
On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax.
Because of Boortz's epiphany, he had to make some significant changes in his new paperback edition of The FairTax Book. Gone is the statement on page 55 that embedded taxes which drive up the cost of goods by 22 percent are "in addition to the money taken out of your check in income taxes and payroll taxes." Here are the other changes and omissions:
First edition, page 59:
Once the FairTax takes effect, you'll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes and you'll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.
Paperback edition, page 60:
Once the FairTax takes effect, you will be in complete control of your paycheck as nothing will be withheld and your purchasing power for t-shirts and all other goods and services will be almost exactly what it was before the FairTax.
First edition, page 120:
When we all start getting 100 percent of our earned income in our paychecks.
Paperback edition, page 120:
When we all start controlling 100 percent of our earned income in our paychecks.
Being in "complete control" of your paycheck no longer means keeping 100 percent of it.
First edition, page 83:
Remember that the poor, along with everyone else will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.
Paperback edition, page 83:
Remember that the poor, along with everyone else will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. If employers leave this money in paychecks instead of taking it out of price, most of those we categorize as poor would see an immediate 25 to 30 percent increase in their take-home pay.
Now the increase in take-home pay is tied to the generosity of the employer. Prices cannot be reduced and take-home pay increased at the same time.
First edition, page 84:
When you factor in the lower prices caused by the disappearance of the embedded taxes, you'll see that the total price paid for consumer goods will remain very nearly the same.
Paperback edition, page 84:
When you factor in the combined lower prices/higher take-home pay caused by the disappearance of the embedded taxes, you'll see that the total price paid for consumer goods will remain very nearly the same.
This again shows that the fall in prices that may result under the FairTax is due to two factors, not just the removal of the embedded taxes.
In the "Time for a Quick Review" chart on page 111 of both editions, there are some substantial alterations:
We start collecting 100 percent of our earnings in every paycheck.
We start controlling our earnings in every paycheck.
We all get virtual raises, since payroll taxes are no longer siphoned from our checks.
Paperback edition: [this sentence is completely eliminated]
The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.
Our purchasing power for buying consumer goods and services remains essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.
Do these corrections mean that Boortz is no longer guilty of misrepresenting Jorgenson? Perhaps. But consider the following:
* The new edition of Boortz's book still states (on pp. 84 & 160) that people will take home 100 percent of their paycheck under the FairTax.
* The website of Boortz's coauthor, Congressman John Linder, still maintains that one of the results of the FairTax is that it "allows you to keep 100 percent of your paycheck, pension, and Social Security payments."
* The Americans for Fair Taxation website still claims that the FairTax "enables workers to keep their entire paycheck."
Boortz is very naïve to think that once the FairTax plan is implemented that employers will be able to lower employee wages just because the net amount an employee receives might be more than his current take-home pay. Not only will workers be extremely reluctant to take a pay cut, wage contracts will in many cases prevent an adjustment downward.
And consider the case of two workers who currently make the same gross pay but each with a different take-home amount because they claim a different number of exemptions. Under the FairTax plan, if wages are lowered to current take-home amounts, one employee would end up making less than the other and certainly cry foul. Can you imagine the number of workers who will, on the eve of the implementation of the FairTax, rush to change the number of their exemptions on their W-4 forms so as to increase their take-home pay before their employer has a chance to take it away?
Boortz's Fourth Misrepresentation
Boortz's fourth misrepresentation concerns Jorgenson himself. Although Boortz quotes Jorgenson to give weight to his FairTax proposal, Jorgenson is not a devotee of the FairTax he supports an income tax plan called the Efficient Taxation of Income. That's right an income tax. That means an IRS and a 1040 form, not a sales tax.
In his 1996 article, "The Economic Impact of Fundamental Tax Reform,"  Jorgenson states: "Changing the federal tax base from income to consumption is an idea whose time has come. This change will create important new opportunities for growth in the standard of living of all Americans." But that was 1996, long before Boortz wrote his FairTax book. Since then Jorgenson has written quite extensively about his income tax plan. Here are just three examples.
In his 2002 article for the Financial Times, Jorgenson called his Efficient Taxation of Income plan "A Smarter Type of Tax," and explained that
Efficient Taxation of Income is a new approach to tax reform that would introduce different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 per cent, while property-type income would be taxed at 30 per cent.
Also in 2002, Jorgenson testified yet again before the House Committee on Ways and Means on the subject of taxes. But instead of advocating a consumption tax like the FairTax, he presented his Efficient Taxation of Incomeproposal. Under Jorgenson's plan: "Income would be defined in exactly the same way as in the existing tax code."
In 2003, Jorgenson wrote an article for Harvard Magazine on the subject of you guessed it the Efficient Taxation of Income:
Efficient Taxation of Income is a new approach to tax reform based on taxation of income rather than consumption. This would avoid a drastic shift in tax burdens by introducing different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 percent, while property-type income would be taxed at 30 percent.
The Fraudulent Tax
Besides the misrepresentations of Professor Jorgenson, there are other reasons the FairTax should be called the Fraudulent Tax.
The FairTax does not abolish the IRS. Changing the name and some of the functions of the IRS does not mean that it will go away. The FairTax simply exchanges one federal agency for another. If there were no IRS or other enforcement bureau to enforce the collection of a national sales tax, then why would anyone bother paying or collecting the tax? Actually, the Fair Tax Act of 2005 sets up a "Sales Tax Bureau" in the Department of the Treasury. With a bureau comes an army of bureaucrats. And what Jorgenson said in his report on "The Economic Impact of the National Retail Sales Tax" shows that these bureaucrats will still have plenty of work to do:
Any definition of a consumption tax base will have to distinguish between consumption for personal and business purposes. On-going disputes over exclusion of home offices, business-provided automobiles, equipment, and clothing, and business-related lodging, entertainment and meals would continue to plague tax officials, the entertainment and hospitality industries, and holders of expense accounts. In short, substitution of the NRST for the existing tax system would not eliminate all the practical issues that arise from the necessity of distinguishing between business and personal activities in defining consumption.
The FairTax will abolish the IRS in the same way that it will abolish the income tax by replacing it with something else.
The FairTax is not cosponsored by Congressman Ron Paul (R-TX). Every month or so since I began writing against the FairTax I have received an e-mail insisting that Congressman Paul is a cosponsor of H.R. 25, the "Fair Tax Act of 2005." Although there are fifty-eight cosponsors of this bill, Ron Paul is not one of them. Why is it that no one bothers to mention the names of the actual cosponsors of the FairTax bill?
FairTax supporters know that it is Dr. Paul who consistently votes to lower or abolish federal taxes, spending, and regulation. His support for the FairTax bill would further their cause more than any number of cosponsors or anything Boortz could ever say or write. The Americans for Fair Taxation website lists Congressman Paul as a " supporter" of the FairTax. This is strange since Dr. Paul has not taken an official position in support or opposition to the FairTax. His priority is reducing government spending and taxes, not getting sidetracked in debates about which type of tax we should have. As he has made clear: "The real issue is total spending by government, not tax reform."
So what about these cosponsors of the FairTax bill? Are they interested in reducing total spending by government? Out of the fifty-eight cosponsors, forty-four of them voted for the Medicare Prescription Drug and Modernization Act of 2003 the largest expansion of the welfare state since the Great Society. Only six voted against it  (eight cosponsors were not members of Congress at the time of the vote. ) The sponsor of the FairTax bill, John Linder, also voted for the Medicare Act. No wonder the FairTax has to be revenue neutral now with adjustments every year! How else will the government come up with the billions of dollars it will need to pay for all these prescriptions?
The FairTax is not a voluntary tax. Calling the FairTax a voluntary tax has got to be the most ridiculous thing ever said about it. Boortz maintains in his book that "there is nothing coercive about the FairTax." In Congressman Linder's testimony before The Joint Economic Committee on "Rethinking the Tax Code," he stated: "The FairTax plan is a voluntary tax system. Every citizen becomes a voluntary taxpayer, paying as much as they choose, when they choose, by how they choose to spend."
Well, could we not also say that the current tax system is a voluntary tax system? Every citizen becomes a voluntary taxpayer, paying as much as they choose, whey they choose, by how they choose to work. Under the present system, if someone doesn't work then he doesn't pay any income tax. Sounds voluntary to me. Rather than being voluntary, the FairTax is a "permission-to-live" tax, as Murray Rothbard has described consumption taxes.
We know that retail prices will increase by 30 percent under the FairTax plan; we don't know how much prices will decrease because of the elimination of "embedded costs" in the price of goods. Because it is embedded with fraud, the FairTax plan is not the answer.
The income tax should be repealed, not replaced. The IRS should be gotten rid of, not renamed. Tax reform should reduce taxes, not be revenue neutral. Government theft of the wealth of its citizens should be abolished, not adjusted. The FairTax should be called the Fraudulent Tax.
Laurence M. Vance is a freelance writer and an adjunct instructor in accounting at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Send him mail. Comment on the blog.
Congressman John Linder (R-GA) is Boortz's coauthor, but since Boortz has previous writing experience and his name appears in larger letters on the book's cover, I will refer to Boortz as the author of The FairTax Book.
This report is unfortunately not available online.
These reports are likewise not available online.
Rob Northrup, to whom also I am indebted for bringing to my attention the new paperback edition of The FairTax Book.
This appeared as chapter 11 of Frontiers of Tax Reform, edited by Michael J. Boskin (Hoover Institution Press, 1996), and was reprinted by the economics department of Harvard University as part of its Reprints in Economic Theory and Econometrics.
Dan Burton (R-IN), Jeff Flake (R-AZ), Jeff Miller (R-FL), Charlie Norwood (R-GA), Mike Pence (R-IN), Thomas Tancredo (R-CO).
K. Michael Conaway (R-TX), Dan Boren (D-OK), Thelma Drake (R-VA), Michael McCaul (R-TX), Ted Poe (R-TX), Michael Sodrel (R-IN), Lynn Westmoreland (R-GA), Tom Price (R-GA).
If we start with the basic premise that most government spending is illegitimate by definition, than a burdensome, convoluted tax system that enables smart, shrewd people to avoid taxation in a legal manner is a good thing.
I don't suppose that anyone will ever suggest that the government should be limited to those functions actually allotted it by the constitution, with a budget limited to just those funds essential to perform those allotted functions.
Nah - too radical.
That's like the argument made when the tax rates were lowered in 1986 and all the rental real estate loopholes were eliminated. Six years later - the Clinton administration racheted up rates again - and there were no loopholes to jump through.
A "Fair Tax" is a pipe dream. You can't pull the rug out from under the cash flow of the USgovt and expect a non-eventful transition.
At best a "fair" consumption tax like the horrible VAT tax would have to be phased in while other taxes were phased out. And if you think this will happen easily your're dreaming.
Instituting a "fair tax" is the easiest way to form a national GESTAPO who's purpose in life is to harrass, arrest and utterly destroy tax cheats and avoiders.
I'm sure the gang will be here shortly with the obligatory cut-and-paste FairTax BS.
I like the FairTax but the article does make one good point: what are the final tax burdens? This is a separate issue from the way in which taxes are collected. The answer is simple: the federal government will cease funding for any program or agency not described in the Constitution. That eliminates pretty much everything except the military, intelligence agencies, and a few agencies to regulate interstate commerce. In order to do this, you'd need to submit and pass an enormous bill that implements a sales tax, disbands the IRS (except what is necessary to deal with people remitting collected sales taxes to the government), and sets the sales tax at a rate such that all money saved by such enormous government cutbacks is left in the hands of the people.
WAGES: It has been made clear by many proponents of the FairTax that they are expecting 100% of their current gross pay, and that many employer/employee wage relationships, including those for government workers are controlled by contract. So, we'll assume every wage earner gets to keep 100% of their current gross pay. Everyone can figure out for him or herself what that gives them in terms of a take-home pay increase.
BUSINESS COSTS: If we assume that businesses get to keep their half of the payroll taxes (7.65% of all payroll costs up to first $95k per employee), plus taxes on corporate profits (average <2% of Cost of Goods sold) and some tax compliance savings (being generous we'll call this 1% savings), this gives the business about 8% of cost savings with which to potentially reduce prices.
PRICES: For domestic goods, if we assume that the entire 8% is passed along to the consumer, this means that pre-tax prices will be 92% of present day prices. That $10 twelve pack will now be $9.20. Of course, the twelve pack of imported beer is still $10 pre-tax. Once the 30% FairTax is added, the price of the domestic beer will be $11.96 and the price of the imported beer will be $13.00 even. So, domestic prices will go up about 20% and imported item prices will go up about 30%.
GOVERNMENT EXPENSES: Since the government expects this plan to enable them to purchase the same things they purchase now, they will need to raise sufficient revenue in order to achieve purchasing power parity. Since they will be paying the 30% FairTax on every item, we can assume that for stuff they buy, they will see the same 20% price increase on domestic items and 30% increase on imported items as other end consumers. So they will need to increase their dollar intake by this 20%+ to enable them to buy the same amount of stuff. And, of course all government salaries will have the 30% FairTax paid on the salary, less the employer half of the payroll taxes, so this is a net 22.35% increase in the cost of the entire payroll of the US government (and states too, but that is another can of worms).
ENTITLEMENT COSTS: Since the social security payments are linked to CPI, when this 20%+ price rise slams through the economy all the social security checks will have to be raised to cover this massive FairTax caused inflation. They will rise by at least 20%, and a litle more because the basket of goods will include some imported items like oil. Medicare/medical expenses will have the FairTax added, for a 20%+ increase.
GOVERNMENT PURCHASING POWER PARITY: with the cost of Payroll, plus everything they buy, plus the entitlements, all going up 20% plus we can assume that the governement will need to collect approximately 20%+ more of the new inflated dollars in order to buy what they are today with today's more stable dollars.
FAIR TAX RATE: Assuming nothing else changes regarding purchasing behavior, size of the government, etc. this means that the 30% FairTax would need to immediately raised 20% (to 36%) just to bring in all the inflated dollars that are required to fund the govt at present level. The price of domestic beer is now $12.50 and the import is $13.60. This assumes no evasion and no reduction in spending by consumers on new goods and services when the large sales tax is imposed. (an unrealistic assumption by the FairTaxers)
SAVED MONEY: All dollars that are post-tax savings would be devalued by the FairTax inflation by 20% in terms of what they can buy with their hard-earned and saved after-tax money.
Does this sound like a utopia to anyone? Isn't it very likely that a 36% sales tax (or much higher like 50%) will cause consumption to suffer and/or transactions driven into a barter system or the black market where they cannot be taxed. And every dollar that is taken from the legitimate economy is another increase that is needed in the FairTax rate in order to feed the government the amount of money it needs.
Isn't is likely that we will end up with an income tax again on top of the FairTax when this all plays out?
And once people either stop buying, or buy used, or barter for services, or buy on the black market, or funnel purchases through their businesses for a tax exemption, it is very likely that the FairTax inclusive rate would be 33%-- which is an exclusive rate of 50%, making the problem worse.
The FairTax plan makes the false ASSUMPTION that 23% inclusive will be enough to fully find the government at today's level.
FairTaxers generally agree that the FairTax will cause higher prices and FairTaxers think that these will be ok because the purchasing power is what matters. Wage earners will receive a pay increase with their 100% paychecks to compensate for the higher prices.
Domestic prices will rise about 18-25% after a small (max 8%) price cut and then the 30% FairTax is added-- and rise the full 30% for foreign items.
Stick with me here for just one more minute. The government will also need a "raise" to pay the higher prices (because the government pays the FairTax on everything too), and it will take the form of additional revenue that needs to be raised. That additional revenue can ONLY be raised by increasing the FairTax rate, there is no other source to generate revenue. So, the 23% rate when multiplied by 1.18 is now 27.1% inclusive, which is 37.2% exclusive.
And that assumes no reduction in the base. If we assume just the very minimum that the base reduces 8% due to reduction in shelf prices-- ie. no reduction in unit volume of sales, just an 8% lower price for everything, then we need to divide the 27.1% by 0.92 to get a new inclusive rate of 29.5%, which is 41.8% exclusive. And this assumes ZERO evasion, and the same exact level of unit sales as now.
Most recently the FairTax commission found that the FairTax Rate was grossly understated by the FairTax people and that the actual rate would have to be MUCH HIGHER than 29.87% exclusive due to 1)government paying itself tax and 2) erosion of the taxable base due to all factors. Just a 15% erosion in base, coupled with a Federal government costing 20% more than presently (the cost with the FairTax added) makes the rate 33% inclusive which is 50% exclusive.
The FairTax people need to go back to the drawing board and plug in the new reality where prices go up 18-25% and stick that in their models and see what somes out the other side. It won't be pretty is my expectation.
I want to see elimination of corporate taxes, elimination of death taxes, additional reductions in the marginal income tax rates until we find that we are the Laffer optimal point.
In addition I want to see Social Security privatized, and I am willing to pay extra money to pay for those who were promised this benefit, and never receive a penny of it myself. I also want to see Medicare reformed from top-to-bottom. I also want to see Tort Reform to reduce the exorbitant costs of insurance on our medical costs. And we need to reduce the scope of the Federal Government to its constitutionally mandated responsibilities and get rid of the rest. The Golden Goose that is America is way too fat and needs to be put on a severe diet.
These are what we need to do, incremental improvements in what we already have. This is already working and we should keep at it...even Boortz seems to think so. Boortz (9/20): "...the economy continues to go like gangbusters. We are right in the middle of an historic economic boom. Don't let the mainstream media or the Democrats tell you otherwise...we've never had it so good...
Plus the IRS will still remain in some form. Somebody's gotta collect the money, and I don't believe for a second that 50 checks will be mailed to the government simultaneously by the states.
And that is exactly why I'm *not* 100% in favor of the "fair tax". Well spoken.
Ahhhh... Thank you.
A breath of fresh air blowing away the stench of islamo-fairtaxism er... something like that anyway.
What we need is a revolution. The federal government cannot be reformed without the shedding of tyrants' blood.
Freeper RobfromGa is getting some press.
Only limited spending begets limited taxation, and No society ever taxed itself into prosperity -- anywhere.
And we don't have that today in the IRS?
Don't be silly. It would be progress if we could just get the government to freeze government spending. Even that suggestion would get a lot of government panties in a bind.
IMHO, the people would revolt. That, and the budget would be dramatically reduced every election year as pols would magically find fat to trim, to 'buy' votes with lower taxes. :-)
BTW, I can't STAND idiots who give me the 'look how much I got back' line in Feb/Mar of every year. Fools, all of them.
The majority of taxes show up on your pay stubb every week. Truely hidden taxes like corporate taxes are a small portion of federal taxes.
I have not been trained in economics(or spelling for that matter) but I did stay in a holiday inn express one night.
I was thinking about the life of a $. It is given birth by the US Government and then paid out to people/ companies providing something for the goevernment.
Once paid, it is TAXED say 20%. So that $1 is now $.80. If it was paid to a company that company will probably to pay it to an employee and share holders. Either way that $.80 is now taxed again as income for that person, say another 25% so now it is $.60.
Well John Q's now $.60 is going to be spent on something, say a pack of thumb tacks at Walmart. He has to pay State tax(most states) on his purchase.
So now Walmart has $.57 left after a 5% state sales tax. They have to pay for the product say 25%. Leaves them with about $.42 left.
Now Walmart has to pay their employees' wages and insurance(10%). So buy the time Jane Q. gets paid it is only $.38.
Guess what Jane Q. is taxed at a lower rate of say, only 15% for her income bracket. So her actual after tax is $.32.
What will she do with her money? She will buy something with it. and again taxed. Eventually, that $1 is taxed out of existence.
My point is while it seems that money keeps going around and around it always ends up back in Washington or a state capital in the form of taxes.
If you spend your dollar will die a slow death of taxation.
I know I am missing some major stuff like when taxes are collected they are respent back into the economy. But I think it stinks that it always will end up in Washinton or Bejing.
Nah - too radical."
I can think of one function: to coin money and make nothing but gold and silver coin a tender in the payment of debt. But that is too radical as well.
Tax Currency, there fixed it.
The twin truths that taxation is theft (no matter how the (1)money is collected) and that the US government should never be given a budget that is in the (2)trillions (no matter how the (1)money is collected) are concepts that FairTax proponents have never grasped."
(1.) Money? What kind of money, please? We use a money substitute as money, not 'primary money.' Not even a money substitute as in a silver or gold certificate redeemable in coin. No, it is more pathetic than that. Our money substitute is a substitute for legitimate money substitutes. It is a second-degree money substitute. The money substitute that we pass as money is all debt, comprised slightly as base metal tokens and paper slips, but mostly of deposits and "securities." The money is nowhere and everywhere. It is everwhere someone's bank balance is positive. But if everyone were to try and withdraw his and her deposits all at the same time, we would find out that our money is nowhere. My wife has an account at the credit union, and the teller fussed because she wanted to withdraw $1,000.00 FRN. Need to phone in first so they can order it. Thanks! That'll be a lot of help in a panic.
(2.)Trillions...of what, please? What were you going to say? Dollars? The United States has been fooled into regarding paper coupons which redeem nothing and which represent someone else's debt, as dollars. Real dollars contain about an ounce of silver, and have "heft." Or a real dollar can contain gold that is of the value of the silver dollar, and also has "heft." Papers that sport the word dollar, no matter where they come from, no matter how official they look, are no more dollars than a piece of paper that reads "Cow," is a cow. But if you can be made to believe anything it is amazing what people can get away with!
The fair tax is a laudable mission. But until control of credit is wrenched from the state where it is centralized, and returned back to the private sector where it belongs, there is not much hope of restoring economic liberty to this land, fair tax or not.
The Mises Institute has been trashing the FairTax for years. So now they have a junior college teacher, cued by Rob Northrup, writing a missive that he obviously researched on Free Republic tax threads. I'm not impressed. Yawn.
Since there are only 18 clauses under Section 8 of Article 1 of the US Constitution, I submit that the federal budget should be divided into 18 parts, with 1/18th of each funding each of the 18 clauses.
Anyone who (positively) cites Gale in a critique of the NRST can be safely classified as someone who isn't serious in the first place.
And you could say the same for the paid for economists who the NRST quotes and puts on their website. Economists are a dime a dozen and you can find any number to say whatever you want to.
At least the NRST economists analyze the ill as written and don't change the underlying assumptions to prove a pre-determined point, as Gale does.
That is because the bill claims to raise money by having government tax itself. Silly assumptions like that are just stupid. It doesn't take a PhD from MIT to realize that is just fraudulant analysis by fairtaxers.
Yeah, it's so much easier to get people to buy your BS when you get them focused, as the author tries to do, on marginal rates rather than effective rates.
But thanks for pointing out another area where the author does his own misrepresentation. How many times does he go back to some variation on how everything will cost 30% more? He's trying to scare people with a marginal rate "sticker shock" rather than dealing with what the actual effect is.
Look, I can blow apart his "everything will cost dramatically more" thesis even with dealing only in marginal rates.
Today's item costs Joe Smith $100. We will accept Rob's thesis that prices will drop by 8% with the removal of corporate taxes and employer-side payroll taxes.And that's comparing the income/payroll tax's effective rate to the NRST marginal rate. When you actually figure in the NRST effective rate, even under Rob's numbers, "Joe" is paying less for that item in the post-NRST world than he was in the pre-NRST world.
Base item price: $92
NRST (29.87% exclusive): $27.48
Total Price: $119.48
So, you're thinking, "see, the price went up by $19.48!" Not so fast, bucko. You see, Joe's current effective federal tax rate (income + payroll taxes) is 15%. That means he had to earn $117.65 to pay for that $100 item in the first place. Under the NRST, he has that entire $117.65 in his pocket.
So, that's a price increase in effective dollars of $1.83, or 1.83%. Given the rather vague nature of the assumptions, this is practically statistical noise, and quite consistent with the prediciton I've always made that effective prices will remain the same, plus or minus five percent.
The nest argument for the "Fair Tax" is that by combining all federal taxes into one clear percentage hit, many more people would be able to grasp what politicians are really doing with regard to taxes. Under the current system, politicians claim to have raised taxes or lowered taxes, but nobody but PhD economists can figure out if they really did, and the truth always boils down to one answer for some people and the opposite answer for other people. People would also have a much clearer picture of just how much of a hit the government is taking. A big chunk of our population is unable to do the math on their paychecks to determine what percentage of the gross is being confiscated in taxes. But a national sales tax would be clear to all but the truly retarded. If it's 20% one year, and 19% the next, it went down.
Fine. Let's exempt all federal employees from existing income and payroll taxes, since they are, according to you, fraudulent.
OK, I'll bite. This article (and reply number 7) are simply too long to digest here at work.
So I'm bookmarking for later.
(Altho, at first pre-read, the argument that fair-taxers are missing the point by not addressing government largesses is flawed since fair tax is aimed at addressing the separate problem of even-handed tax collection.)
Is that a bigger problem than out-of-control, Unconstitutional spending?
Besides, as much as everyone hates the current system, there are enough "beneficiaries" of the system that meaningful reform of any sort will be nearly impossible. Personally, I like the Steve Forbes plan of a flat tax that can be filed on the back of a post card. But good luck getting people to give up their tax credits for housing, children, education, medicine, etc. Our only hope is that technology will one day allow us to earn and manage our money out from under the watchful eye of big poppa gov.
While you may indeed THINK that (and while some -- like FairTax shills -- want you to believe that) it simply is not the case. ALL Federal taxes, embedded or not, wind up as Federal Tax Revenue. That number is easy to find; any report on the Federal Budget will provide the data for any year you choose.
As shown in Post #23 the combination of Personal Income Tax and FICA taxes represents about 80% of all Federal Tax Revenue ... and is growing as a consequence of the rise in Social Security funding/spending.
It is near impossible to know just how much of the cost of a good is inflated ...
Actually, it's not all that hard to figure it out. Data is available to anyone who wants to look that lays out what the components of the aggregate price level are ... taxes, labor, capital, profits, interest, etc. To summarize such analysys, which has been repeated countless times on these threads, Corporate Taxes represent less than 2% of the price of goods. The Employer part of FICA tax represents about 4% of the price of goods. Costs of compliance with the Tax Code represent about 1% to 2% of the costs of goods. In total, if ALL Corporate taxes, ALL Employer paid FICA taxes, and ALL compliance cost savings are returned to the Consumer through price reductions, price can only adjust, AT MOST, about 7.5% (before the addition of the 30% FairTax.) In reality, some portion of these sums will likely remain in price to be put to other business uses.
...due to the need to make a profit by each contributor to the production of a product, which is affected by taxation at each stage.
Actually you have the cause and effect backwards. The "need to make a profit" is not affected by taxation. Taxes are affected by profit: small profit, small tax. Large profit, large tax. The need to make a profit is what drives businesses to lower costs. The market drives prices. What's left over from the two is profit ... and a portion of profit is peeled off as tax ... just like your wages. Your wages are not "inflated" due to your need to have income; taxes affect the cost of labor in the same way they affect the cost of goods.
If you want to lower your tax burden (hidden or otherwise) you first need to lower government spending. The method of collection is secondary.
That makes the "net" price change for "Joe" $3.79 (3.79%) less than the current price. Again, still within the +/- 5% prediction.
The Mises Institute has been trashing the FairTax for years. So now they have a junior college teacher, cued by Rob Northrup, writing a missive that he obviously researched on Free Republic tax threads. I'm not impressed. Yawn.You would prefer a radio talk show clown?
Just where did I say that?
... that's a "fer peice" from your prediction of "+/- 5%".
PRICES will indeed rise (much more than your 5% prediction. DISPOSABLE INCOME might or might NOT rise depending on who you are. AGGREGATE PURCHASING POWER will remain initially unchanged (for a revenue neutral program) BUT ...
... INDIVIDUAL purchasing power WILL VARY SUBSTANTIALLY.
BTW, the example in #32 assumes the bill's current 23% inclusive / 29.87% exclsuive NRST rate. if, however, the Bush tax cuts were made permanent, the revenue-neutral rate drops to (I beleive) 19.2% inclusive / 23.76% exclusive.No it wouldn't. Research just released (and supported by the AFT) by Kotlikoff using projected 2007 data and every possible positive assumption about the FairTax found that the 23% rate was not revenue neutral.
Just where did I say that?Just where did I say that you said anything? I asked you a question.
But in order to make your point, you had to choose a case where someone is living off a practically untaxed, relatively high fixed income. The only way I can see that happening is from tax-deferred investments, so the whole mantra of "double-taxing poor seniors' savings" doesn't work here.
For someone living on a low or moderate fixed income, the effective NRST tax rate is much lower than the marginal rate (note that my example put the NRST at a disadvantage by comparing it as a marginal rate to the icnome/payroll tax effective rate), and that correspondingly skews the numbers so that while prices go up, there was considerably more money in the spender's pocket to start with.
I agree. Get rid of tax whithholding, move tax day to 1 week before federal elections, mark incumbents on the ballots.
I have never given Boortz any credence on his understanding of the FairTax. Hell, I've never even read the book.
"move tax day to 1 week before federal elections"
Exactly, there is a reason that taxes are due in April and elections are held in November...
....Viva la Revolution!
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