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.

[lewislynn]

Simply put, In addition to the money sucked out of government employee's hands from the Fairtax when they spend it (it's a replacement tax, remember?), "any government" employee's wages salaries and benefits would also cost 30% more under the "Taxable Employer" clause.

If taxing government is a good idea for raising revenue, why not just tax government?

[pigdog]

Great letter to Columbia U., BTW. Hope you got a response (but doubt it). You deserved one.

[pigdog]

The FairTax is not at all a flat tax. A flat tax is merely another form i=of income tax.

The FairTax is a true tax on retail consumption. You might read the first couple of pages of the paper - or the bill itself.

[groanup]

That's not an explanation. How would you create a consumption tax to replace the income tax? Or would you? The gov't taxes the wages it pays now. How would you segue that into a consumption tax?

[lewislynn]

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

Is any of that supposed to make sense to anyone but you?

LET ME ACCUMULATE WEALTH. PLEASE!!!

Let you? Who's stopping you? If you're a loser and don't know how to accumulate wealth without an act of Congress that's your fault. The opportunities for wealth are endless. If you're waiting for Congress to act, you lose.

[Extremely Extreme Extremist]

BTTT

[Beagle8U]

It should be scrapped and start over.

Go with a flat tax. Figure the tax exactly as sales tax is figured now. Don't put the tax on anything that isn't normally covered by sales tax now in most states.

follow those guidelines to figure what the rate would need to be.

[phoenix0468]

I think after cost savings from all of the "unfair taxes" an 8-12% rate would suffice.

[Extremely Extreme Extremist]

The Fair Tax will abolish the IRS

Horse hockey - there's still going to have to be some sort of gov't bureaucracy to collect the funds.

[phoenix0468]

Oh, yeah, the reduction in force or total elimination of the IRS would furthur reduce revenue necessities. I am sure there are related agencies that could be cut as well. A thin government is a healthy government.

[Dimples]

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:

Disgruntled taxpayer: "But isn't the FairTax rate really high!"

FairTax supporter: "Naw ... it just the opposite, your Income tax rate was probably 21% and your Payroll tax rate was another 15% ... that's 36% right there! Don't worry, gub'mint just got cheaper under the FairTax, yessirree!"

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.

[groanup]

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"?

[pigdog]

"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.

[groanup]

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.

[Mind-numbed Robot]

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.

[groanup]

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.

[Congressman Billybob]

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

[Extremely Extreme Extremist]

Nevertheless, the bureaucracy will remain.

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

[Beagle8U]

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.

[Always Right]

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.