Neal Boortz supports fair tax proposal?

Neal Boortz web site ^ | Friday, December 10, 2004 | Neal Boortz

[JOHN W K]

ANSWERING A FAIR TAX QUESTION

During yesterday's show a caller asked what would happen to her 401K funds if the Fair Tax bill became law. No income taxes had ever been paid on that money residing in her 401K. If, by the time she starts drawing that money out, the income tax is history, will she have to pay some sort of penalty? One month ago I would have rattled off the answer. No. No penalty. No taxes. You take the money and run. Yesterday, however, I was a bit more cautious. I've spent many hours over the past weeks studying the history of the income tax, the history of withholding, and various schemes for tax reform including, of course, the Fair Tax. I wanted my answer to be dead-on accurate, so I deferred until I could dive into the bill.

[JOHN W K]

Neal Boortz supports fair tax proposal?

I am saddened to learn that the infamous radio talk show host Neal Boortz seems to support the so called fair tax proposal. I suspect Neal simply has not had time to really study the proposal in depth. In an article titledANSWERING A FAIR TAX QUESTION Neal Boortz wrote:

“It doesn't matter that paying taxes will be voluntary under the Fair Tax plan. It doesn't matter that nobody pays the retail sales tax on the basic necessities of life.”

But the truth is, all consumers pay the tax on the basic necessities of life under the so called fair tax, and, the authors of the tax plan concoct what they call a family consumption allowance, a monthly check given to each American, which is intended to be earmarked by each consumer to offset taxes paid on the basic necessities of life.

In essence, the so called fair tax rations tax-free basic necessities of life, and rations them by the size of the family consumption allowance allotted to each family!

Instead of making every American family dependant on a monthly government welfare check [family consumption allowance], and ration tax-free basic necessities, why don’t the architects of the so called fair tax simply prohibit taxing the necessities of life [food, shelter, clothing, medical expenses, etc]?

Perhaps Hamilton explains why inFederalist Paper 79 A POWER OVER A MAN’s SUBSISTENCE AMOUNTS TO A POWER OVER HIS WILL.

Could it be that the architects of the so called fair tax intentionally want to make every American Family dependant upon government for its subsistence?

In regard to Neal’s comment that “It doesn't matter that paying taxes will be voluntary under the Fair Tax plan , let us explore this concept a little bit further.

As a basic rule, there are but two kinds of tax___ direct and indirect. The former could be described as an involuntary tax which is collected when folks in government go directly to the people to raise a revenue and is un-avoidable; while the latter, or indirect taxation, is a kind of voluntary tax which is paid in consequence of a person’s own voluntary actions and is, in general, avoidable!

Impost, duties and excise taxes are of the latter kind and fall under the category of voluntarily paid taxes, such as an excise tax on a particular article of consumption. So, if a revenue is raised by Congress taxing articles of consumption, it would appear at first glance to be a system which fills the treasury by voluntary contributions, just as Neal suggests. But in all fairness to the meaning of the word voluntary, a tax imposed on the essentials of life [food, shelter, clothing, medical costs, or tools of production and supplies necessary to conduct business, etc.] could not truthfully be said to be a voluntarily paid tax!

This brings us to what Hamilton explained with regard to taxes on articles of consumption, they:

__ may be compared to a fluid, which will in time find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be by his own option, and can be regulated by an attention to his own resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions__ It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which can not be exceeded without defeating the end proposed, that is, an extension of the revenue__ see: No. 21 of the Federalist

So, it is possible to avoid the oppressive nature of taxes on consumption by choosing articles which makes the tax a morevoluntary type of contribution, but such a tax would not include the basic necessities of life, and ought not include the tools of production, supplies necessary to conduct business, etc.!

I would say, as our founding fathers practiced, a consumption tax plan ought to be limited to articles of luxury, and each article must be individually selected by Congress and the appropriate amount of tax must be determined for each specific item chosen, just as was done in the first revenue Act of our country

NOTE: those interested may use the PREV IMAGE and NEXT IMAGE buttons at the above link to study the bill___it is refreshing to study statesmen speaking in Congress as opposed to politicians acting in their own self interest!

In any event, by limiting the tax to articles of luxury, and requiring each article to be specifically chosen and the appropriate amount of tax for the article determined by Congress, a self regulating check and balance is imposed upon Congress! If Congress does its job properly and the nation as a whole is productive and prosperous, the purchase of articles of luxury will undoubtedly increase, and with it, the flow of revenue into the common treasury. But, if the policies of Congress become burdensome and its regulatory requirements upon business, industry and our nation’s labor force inhibit a hearty economy, or any particular article is excessively taxed, the first sign would be is a decline in the flow of revenue into the national treasury, a self regulating check and balance upon Congress.

Thus, the market place, in a larger degree, determines the limit of taxation for each article selected by Congress under the Founder’s internal consumption tax plan, and it establishes a self regulating gauge beyond the reach of Congress' manipulation!

But what happens if Congress spends more money than what is brought in from indirect taxes? Our founding fathers agreed upon a solution called direct taxation, but adopted a strict rule governing direct taxation to prevent the most obvious oppressions associated with direct taxation, the rule being: ___Representatives and direct taxes shall be apportioned among the several states___ as set forth in Article I, Section 2, clause 3, of the United Constitution.

I call this clause of the constitution the FOUNDING FATHER’S FAIR SHARE FORMULA, and it is explained inEXPOSING THE FAIR TAX HOAX ___ scroll down and start reading at:

American Constitutional Research Service

Before the

Committee on Ways and Means

United States House of Representatives

June 1995

I also suggest those interested in the adverse effects of the not so fair tax proposal study:

The Fair Tax: A Trojan Horse For America

John William Kurowski

American Constitutional Research Service

Help educate Neal! I believe he means well!

[donozark]

He was supposed to meet with Rep. Linder yesterday and discuss FAIRTAX on his show today (?).

[NonValueAdded]

BTTT The only fair tax is the flat tax.

[KarlInOhio]

I am saddened to learn that the infamous radio talk show host Neal Boortz seems to support the so called fair tax proposal.

I hope you weren't surprised. He's been stumping for a national retail sales tax for a while.

Instead of making every American family dependant on a monthly government welfare check [family consumption allowance], and ration tax-free basic necessities, why don’t the architects of the so called fair tax simply prohibit taxing the necessities of life [food, shelter, clothing, medical expenses, etc]?

How does the government determine what these are? Do they have a limit of quality or quantity for them? Would Murdoch get his recent $44 million penthouse purchase tax free? Do people who buy lobster and those who buy rice and beans get the same tax deduction? Are fur coats considered clothing? Will Coke and Pepsi rent a few congressmen to get onto the food list?

By far the fairest, simplest, least intrusive and least susceptible to political games is the rebate of taxes on a certain amount of spending. That keeps the government out of social engineering by deciding what are good purchases and what are bad ones. You buy it, you pay taxes on it and you get a rebate for a base amount of taxable spending.

The biggest problems I have with a NRST is how to handle people who have paid taxes on income but lived below their means so they have a nest-egg they would have taxed again when they spend it versus profligate spenders who borrowed tax-free to spend now and pay it back with untaxed income after the NRST starts.

[heckler]

The biggest problems I have with a NRST is how to handle people who have paid taxes on income but lived below their means so they have a nest-egg they would have taxed again when they spend it versus profligate spenders who borrowed tax-free to spend now and pay it back with untaxed income after the NRST starts.

According to a Harvard econ. study, every product you buy has a "built in" tax.ie The cost of complying with tax code, employers portion of payroll taxes, etc. This cost ranges from 20 to 40 percent of the value of the product(food products have a different tax load than say...tires) . With the fair tax plan that cost is no longer needed to produce a product. Competition will quickly drive the cost of products down by that percentage. Thus the person with the nest egg would be paying lower prices plus the sales tax. In the end the total cost would be roughly the same depending on what type of product it is.

[JOHN W K]

Does your flat tax impose a tax upon the wages which labor has earned?

___ with all these blessings, what more is necessary to make us a happy and a prosperous people? Still one thing more, fellow-citizens—a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities__. Thomas Jefferson, First Inaugural Address

I support the Founding Father's original tax plan, see EXPOSING THE FAIR TAX HOAX ___ scroll down and start reading at:

American Constitutional Research Service Before the

Committee on Ways and Means

United States House of Representatives

June 1995

[heckler]

Briefly please, what exactly is youre opposition to the Fair Tax?

[JOHN W K]

I suggest you study:

The Fair Tax: A Trojan Horse For America

[heckler]

I've read that piece of crap. They accuse the proponents of the Fair Tax of being deceptive and then make their case by taking every possible objection to the FT and driving it to its worst possible scenario. They use fear and deception. I guess I'm going to have to write a point by point refutation of that piece of garbage to post every time it pops up. At work now, dont have time.

No personal insult intended.

[JOHN W K]

John w k wrote:

Instead of making every American family dependant on a monthly government welfare check [family consumption allowance], and ration tax-free basic necessities, why don’t the architects of the so called fair tax simply prohibit taxing the necessities of life [food, shelter, clothing, medical expenses, etc]?

You wrote:

How does the government determine what these are? Do they have a limit of quality or quantity for them? Would Murdoch get his recent $44 million penthouse purchase tax free? Do people who buy lobster and those who buy rice and beans get the same tax deduction? Are fur coats considered clothing? Will Coke and Pepsi rent a few congressmen to get onto the food list?

ANSWER

Surely there is a clear enough distinction between such foods as caviar and chicken eggs, between wine and milk, between silk and cotton underwear to truthfully say one is a luxury and the other a necessity. I believe in such cases the people’s perception will prevail in Congress to a larger degree and help to diminish the factions crying for “exemption“. But in the final analysis, it is far better to have Congress spend its time selecting specific articles of consumption for taxation as was done inthe first revenue Act of our country

We need to study and get back to our founding father’s original tax plan!

Sincerely,

JWK

[JOHN W K]

What objection(s) do you have, if any, with our founding father's original tax plan? It contains the necessary checks and balances necessary to control the actions of Congress, which the so called fair tax does not contain.

[heckler]

What I object to is our current tax code. It is a tool for social manipulation. It's a tool used by congressmen for engineering favors for their big contributors in business and banking. It needs to be burned to the ground and replaced with something transparent and simple.

[Conservative Goddess]

The Fair Tax supplants the RIGHT of the government to reach into my pocket before I've tithed, saved for retirement, or taken care of my family. The Fair Tax substitutes a RESPONSIBILITY to cut me a check.....

Gee......I sure like the way that river flows.

You quote the Federalist Papers but nonetheless overlook a critical passage: "It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. THEY PRESCRIBE THEIR OWN LIMIT; WHICH CANNOT BE EXCEEDED WITHOUT DEFEATING THE END PROPOSED--THAT IS AN EXTENSION OF THE REVENUE. WHEN APPLIED TO THIS OBJECT, THE SAYING IS AS JUST AS IT IS WITTY, THAT "IN POLITICAL ARITHMETIC, TWO AND TWO DO NOT ALWAYS MAKE FOUR." IF DUTIES ARE TOO HIGH THEY LESSEN THE CONSUMPTION---THE COLLECTION IS ELUDED; AND THE PRODUCT TO THE TREASURY IS NOT SO GREAT AS WHEN THEY ARE CONFINED WITHIN PROPER AND MODERATE BOUNDS. THIS FORMS A COMPLETE BARRIER AGAINST ANY MATERIAL OPPRESSION OF THE CITIZENS, BY TAXES OF THIS CLASS, AND IS ITSELF A NATURAL LIMITATION OF THE POWER OF IMPOSING THEM." --Federalist No. 21


Swing and a miss........The Fair Tax will remove power from Gobbermint, and restore it to the people. I guess you've not considered the financial privacy implications of removing the Income Tax from the backs of the American People....further, you've not considered the international implications of removing the cost of taxation from our goods. You need to rethink you position and stop using, MIS-using the Federalist Papers to try to make your Marxist points.

[JOHN W K]

But you never answered my question:What objection(s) do you have, if any, with our founding father's original tax plan? It contains the necessary checks and balances necessary to control the actions of Congress, which the so called fair tax does not contain.

[JOHN W K]

You wrote:

You need to rethink you position and stop using, MIS-using the Federalist Papers to try to make your Marxist points.

ANSWER

How have I mis-used the Founding Father's quotes? Surely you jest. And why do you suggest I try to make Marxist points? A tax on income is Marxist, not the Founding Father's original tax plan which I support. What are your objection(s) to the founding father's original tax plan as explained inEXPOSING THE FAIR TAX HOAX? ___ scroll down and start reading at:

American Constitutional Research Service Before the

Committee on Ways and Means

United States House of Representatives

June 1995

[heckler]

My objection is this- Time has proven that if you leave Congress a tool by which to manipulate the people with regards to money, they will use it. The FF's plan as you describe it leaves that ability open.

The FT treats EVERY one exactly the same.

[JOHN W K]

You wrote: "My objection is this- Time has proven that if you leave Congress a tool by which to manipulate the people with regards to money, they will use it. The FF's plan as you describe it leaves that ability open.

The FT treats EVERY one exactly the same."

ANSWER:

Is that so? What is the definition of income in your flat tax?

How does the founding father's direct apportioned tax among the states allow Congress to manipulate such a tax?

Fact is, taxing income is a tool of despotic governments, and used to tax by economic class via the definition of income.

Regards,

JWK

[Bigun]

Your anti freedom screed is so full of holes I hardly know where to start so how about this vicious lie:

In essence, the so called fair tax rations tax-free basic necessities of life, and rations them by the size of the family consumption allowance allotted to each family!

How in the world anyone could call completely untaxing the poor, as the FairTax, and ONLY the FairTax, surly would do, a device for rationing anything is beyond me. Not only is nothing rationed but the consumer, not some government bureaucrat, gets to decide what HIS necessities of life are and gets to pay for them COMPLETELY without tax!

[heckler]

Misunderstanding. By FT I was refering to the Fair Tax not the Flat Tax. The Flat Tax would be better than what we have but it still leaves to much room for manipulation.

[kpp_kpp]

I would enjoy reading the refutation. I read the article too and although I believe it is fear-mongering it certainly makes some points that are based on real possibilities that need to be addressed.

[Phantom Lord]

Instead of making every American family dependant on a monthly government welfare check [family consumption allowance], and ration tax-free basic necessities, why don’t the architects of the so called fair tax simply prohibit taxing the necessities of life [food, shelter, clothing, medical expenses, etc]?

Here is one reason. In some of the states that do not tax food and other necessities there have been long, drawn out debates as to what exactly is a necessities. As an example, I believe it was CT., they exempted toilet tissue from tax as a necessity. It became a battle over what qualified as toilet tissue.

It is much simpler to set a monetary amount that needs to be spent for basics and pay a refund based on that amount.

But in all fairness to the meaning of the word voluntary, a tax imposed on the essentials of life [food, shelter, clothing, medical costs, or tools of production and supplies necessary to conduct business, etc.] could not truthfully be said to be a voluntarily paid tax!

A tax currently exists on all of those, including sales and embedded. The imbedded taxes will be removed with the fair tax, tax on essentials will be negated by a refund.

I would say, as our founding fathers practiced, a consumption tax plan ought to be limited to articles of luxury, and each article must be individually selected by Congress and the appropriate amount of tax must be determined for each specific item chosen,

I guess you don't remember the Luxury Tax that was a total and complete failure, along with a cause of many job losses. Such a great failure that congress actually repealed the tax. How often has that happened? Hell, we are still paying a tax on our phones that was instituted to pay for the Spanish/American War!!!

[untrained skeptic]

Interesting article.

They mention a few good points, but a lot of the good points are mired in paranoid fears of what the government might do that they could already do now without a national sales tax.

A national sales tax would result in double taxation of people's current after tax money they've saved.

The way the percentage amount of the tax is being presented is misleading.

The method of taxing all goods and the government sending a check to every household as a refund for necessities is a very bad idea.

A number of the other things they mention are more questionable. They claim that inflation will hurt you worse. They say that inflation used to hurt because as you're income went up you would enter a higher tax bracket. The tax brackets were tied to the inflation rate to fix this problem.

The national sales tax does not charge you at a higher rate when you make more money. You always pay the same percentage. You pay more money in taxes, but you also do under the current system. The flat tax as well as the current income tax both tax you at the same percentage rate, regardless of inflation.

"The national sales tax is subject to manipulation in even more direct ways than the income tax has been. Let's say that Congress or some powerful regulatory agency decides that fatty foods or sugar or potato chips are bad for you – wham! Suddenly there might a 200 percent tax on those items."

The federal government already can and does impose taxes on individual items. They usually call these luxury taxes or similar names. They tax alcohol and cigarettes this way as two examples. The national sales tax is no more subject to manipulation than our current system.

"Government won't have to ban firearms; they'll just place a 500 percent sales tax on them. Or a 1,000 percent sales tax on ammunition. Cigarettes?"

They've been trying to do that for a very long time now. We must be vigilant to prevent them from doing so, but a national sales tax doesn't increase that threat in any way.

"The tax will be used to track your entire financial life. While H.R. 25 does not contain any requirement that every purchase be linked to an individual's ID, the trend toward tracking every purchase is growing. We expect that eventually, your “national ID cash card” will be required when you buy anything."

There is nothing in the proposed law that requires retailers to track who is buying what items, or for retailers that do track such data to provide that data to the government.

It is something we should be concerned about, but this law wouldn't do it, or even make it easier to do than it is now.

"A national sales tax will create a huge black market."

Possibly. I'm not sure it will create a larger black market than there already is. There already is lots of tax evasion, and a market for items like cigarettes that don't have the federal tax stamp. The nature of tax evasion will change. In some ways it will be easier to combat, in other was harder.

The national sales tax would create a huge market for individuals selling used goods. If this looks like it might go through, it might be good to buy stock in Ebay.

"The national sales tax will give government another reason to make cash purchases illegal."

Not really. They're pretty much the same reasons they have now.

"You'll pay a higher sum for your new home."

There is a serious problem involved here, but I'm not sure it's with new homes. Builders wouldn't be paying the withholding taxes for their employees anymore. Their profits also wouldn't be taxed.

Therefore the cost of building a house goes way down.

The problem is that drastically depreciates the value of current homes. That means for people like me, for whom their house is their largest investment, we take a HUGE hit.

Because of the major upheaval to our economy and the very significant harm to people who have saved money for much of their lives, I'm definitely against the national sales tax.

[Bigun]

I guess I'm going to have to write a point by point refutation of that piece of garbage to post every time it pops up.

A worthy project! Perhaps I can help you with it by pointing you to some GREAT source material. Rebuttal of the September 2004 Committee on Ways and Means minority staff report on the FairTax [pdf document]

You can also find many other such rebuttals, already written in PDF format, Here

[JOHN W K]

Agreed. But, the flat tax is still a dishonorable and dishonest system of taxation, and, it does not provide the checks and balances of our founding father's original tax plan...checks and balances to control the actions of Congress.

[Phantom Lord]

This cost ranges from 20 to 40 percent of the value of the product(food products have a different tax load than say...tires) . With the fair tax plan that cost is no longer needed to produce a product. Competition will quickly drive the cost of products down by that percentage.

I can not tell you how many times I have heard someone opposed to the Fair Tax say that greedy businesses will not lower the prices. They will just pocket that money as profit. To a man all have been liberals.

They simply do not understand that all it takes is 1 business to drop the price and all the rest MUST follow or die.

[Phantom Lord]

Instead of continually answering peoples questions with a link to an article. How about answering the questions youself, using your own mind and your own words.

Or are you unable to do so?

[JOHN W K]

What are your views on the founding father’s original tax plan as outlined in EXPOSING THE FAIR TAX HOAX? ___ scroll down and start reading at:

American Constitutional Research Service Before the

Committee on Ways and Means

United States House of Representatives

June 1995

[JOHN W K]

Oh, but I did answer the question. You just don't like my answer. Do you?

[groanup]

Neal Boortz and John Linder are working on a book about the fair tax which should be out early next year. Boortz has been a flat tax proponent for years. I have studied it diligently and I can't find any major flaws.

[Bigun]

Well Well! The author of that piece of trash, to his credit , got all the way to the fourth paragraph before he starts his out and out LIES with this one:

In addition, the alleged FT, although it would do away with the current IRS and its forms, would resurrect similar tools of oppression in a morphed body, keeping enslaved half, if not more, of the nations' entire population, including small businessmen and women , individual tradesmen and entrepreneurs, and, even ordinary working people engaged in self employment, forcing the above to "register" with folks in government in order to pursue a livelihood"

No one has to register for anything under the FairTax. They CAN register for the prebate if they choose but there is absolutely no REQUIREMENT that they do so.

[numberonepal]

What's "fair" about an involuntary payment? What's "fair" about a government agent forcing me at the point of a gun not only to disclose my earnings, but also to give up a portion of those earnings? I'll tell you what's fair - voluntary taxes.

[Phantom Lord]

Oh, but I did answer the question. You just don't like my answer. Do you?

Actually, this is your first post to me.

[NonValueAdded]

And a NST is voluntary? Hardly. The fairest tax of all would be:

     budget / # residents = individual's tax bill.

[Phantom Lord]

And a NST is voluntary? Hardly.

100% voluntary? No. But more voluntary than any other tax system. Unless you believe that the government can force you to make purchases you don't want to make.

[NonValueAdded]

Unless you believe that the government can force you to make purchases you don't want to make.

Sorry but that argument falls apart under a NST, especially one that might come to pass under a democRAT administration. Consider: tax on beef burgers: 1000%, tax on soyburgers: 5% Sure, my purchase of the soyburgers would be "voluntary" but only in the federal lexicon meaning of that word. Don't think it would happen? See Inside Politics: A hard-earned lesson. We have an object lesson of how the government, even a Republican administration, would use a transaction-based tax to modify our behavior.

[Your Nightmare]

According to a Harvard econ. study, every product you buy has a "built in" tax.ie The cost of complying with tax code, employers portion of payroll taxes, etc. This cost ranges from 20 to 40 percent of the value of the product(food products have a different tax load than say...tires) . With the fair tax plan that cost is no longer needed to produce a product. Competition will quickly drive the cost of products down by that percentage. Thus the person with the nest egg would be paying lower prices plus the sales tax. In the end the total cost would be roughly the same depending on what type of product it is.

The "Harvard econ. study" is based on a limited model. The results are flawed, even the authors state that the results are unrealistic. The only way prices can drop that much is if wages go down.

Transitional Issues in Tax Reform

Price Level Effects

Because the flat tax is similar in structure to the existing income tax system, its implementation would have relatively little effect on the absolute price level. Both before- and after-tax wages would be roughly similar before and after reform, so that nominal prices remain roughly constant.

In contrast, the effect of implementing an NRST on the absolute price level is less certain. One possibility is that the tax could be fully shifted forward in the form of higher prices for consumption goods, with no change in the price of investment goods, which are untaxed under the NRST. At the other end of the spectrum of possible responses, nominal prices could remain constant. Under this scenario, before-tax real wages would have to fall roughly to the level of prereform after-tax real wages in response to the elimination of the income tax. Intermediate responses between the "full price adjustment" and "no price adjustment" scenarios are of course also possible.

Choosing between these various scenarios requires making necessarily speculative assumptions about the response of the monetary authorities to the imposition of the NRST. However, most analysts assume that the monetary response would be sufficiently accommodating that the full price adjustment scenario would obtain.

The primary rationale underlying this assumption is the view that the downward flexibility of nominal wages is quite limited, in part because most wage contracts and agreements are specified in nominal terms. Thus, a tax reform that required wage reductions to reach a new equilibrium would be quite costly as these wage reductions would initially be distributed unevenly across industries. This in turn might result in considerable unemployment in sectors characterized by rigid wages, as well as misallocations of labor, at least in the short run. Proponents of the full price adjustment view assume that monetary policy would be expansionary to avoid these costs.

Most observers fall into the full price adjustment camp. For example, McLure (1996, p. 23) concludes that it would be "hard to imagine the monetary authorities not accommodating such an increase in prices." Gravelle (1995, p. 59) argues that full price adjustment is likely because a "national sales tax…would tend to produce an economic contraction if no price accommodation is made." In its analysis of the distributional implications of implementing consumption taxes, the Joint Committee of Taxation (1993, p. 59) concludes that, "Unless there are convincing reasons to assume otherwise, the JCT staff assumes the Federal Reserve will accommodate the policy change and allow prices to rise." Finally, Bradford (1996a, p. 135), in discussing the same issue in the context of a value-added tax, observes that, "It is commonly believed that introducing a value-added tax of the consumption type will bring with it a monetary policy adjustment that would result in a one-time increase in the price level…and no change in payments to workers in nominal terms."

Nevertheless, opinion on this issue is certainly no unanimous. For example, the alternative assumption [that wages will fall] is implicitly made by Jorgenson and Wilcoxen, who argue that implementing a national sales tax would reduce producer prices on average by 25 percent. Auerbach (1996) takes a compromise position by assuming partial price adjustment. In addition, European experience with the introduction of the VAT is mixed, generally suggesting partial price adjustment. On the other hand, Besley and Rosen (1999) find full (or even more than 100 percent) forward shifting of state sales taxes in the United States.

Source: Zodrow, George R. (2002). "Transitional Issues in Tax Reform." In United States Tax Reform in the 21st Century, George Zodrow and Peter Mieszkowski, Editors. Cambridge University Press.

 

Monetary Implications of Tax Reforms

Does it matter how the central bank responds when the tax system is reformed? Some economists would argue that in a very general sense it does not. Many would argue that the central bank's response would have little long-run effect, because what really matters is the productive capacity of the economy and because there could be no money illusion in the long run.

And, in the short run, the standard relation between prices and money makes it clear that, under limiting assumptions, the central bank need not change monetary policy. Consider the transition from our present tax system to a consumption tax. Ignoring any incentive effects caused by the tax reform, velocity and output are unchanged. With a revenue-neutral tax reform, aggregate after-tax income is unchanged, so there need be no demand-driven effects on consumer prices. Under these conditions, v, y, and q remain unchanged as a result of the tax reform, and thus maintenance of the status quo implies that the central bank need not change its policy. Assuming that output is constant, the central bank could eliminate any transitory price changes in the long run by leaving monetary policy unchanged.

But things may not be that simple. The implied changes to wages and producer prices require a degree of flexibility in the economy that many might find unlikely. Specifically, for the consumer price to stay constant, the producer price must fall by the amount of the tax. And because a drop in the producer price means that the business revenue produced by hiring another worker drops, the before-tax wage must drop by a corresponding amount. Many have argued that such price and wage changes are implausible and that the central bank should "accommodate" a transitory change in the consumer price level by adjusting monetary policy so that it is consistent with constant producer prices and wages.

Source: Bull, Nicholas, and Lawrence B. Lindsey. 1996. "Monetary Implications of Tax Reforms." National Tax Journal 49.3 (September): 359-79.

[untrained skeptic]

"What are your views on the founding father’s original tax plan as outlined in EXPOSING THE FAIR TAX HOAX?"

Interesting reading. I'm not sure it could be implemented without seriously cutting back on domestic spending.

We have also entered into trade agreements that limit how much we can raise import taxes. We do have to take those agreements into effect even if it's only to find a reasonable way to end them.

The problem is that while no one likes paying taxes, to few people are willing to have the government cut back on their domestic programs.

This is especially true because a very significant portion of those receiving those benefits are not paying federal income taxes and are happy with the government taking other people's money and giving it to them.

I really don't think we have much hope of seeing a drastic decrease in government spending. The only real hope of seeing real reductions is to have everyone paying some level of federal taxes, so that everyone has a reason to want to see taxes reduced.

It took a series of steps for us to get in the situation we are in now, and it will take a series of steps to get into a significantly better situation.

[Wisconsin155]

"Instead of making every American family dependant on a monthly government welfare check [family consumption allowance], and ration tax-free basic necessities, why don’t the architects of the so called fair tax simply prohibit taxing the necessities of life [food, shelter, clothing, medical expenses, etc]?"

If I could guess why, I would say they do this to appeal to the lefties for one. They have to sell it to them. Which would a nutball lefty rather hear? That things will be untaxed, or that they will still get their gov't cheese. See below for reason #2

"and each article must be individually selected by Congress and the appropriate amount of tax must be determined for each specific item chosen"

No, No, No. Our current tax code is of Rube Goldberg (sp?)proportions. Where if the moon is full on two thurs in a row you can deduct subject to phase out of income above $100, subject to AMT, an amount equal to the greater of 5% of the square root of, etc, etc, etc. Why would we want to let Congress do that to us again. No. I say tax everything. Give us a refund. That keeps it real simple. Nobody can lobby Congress. Otherwise we are going to have Ben & Jerry arguing that they are a necessity, or GM lobbying that the Hummer isn't a luxury item, etc. Allowing Congress to choose invites disaster, IMO. Plus all the potential trade problems that would invite. Do you tax BMW and not Corvette? KISS. Keep it Simple Stupid.

[ancient_geezer]

You back again with your screed?

No thanks.

[B.O. Plenty]

I assume you are for maximum freedom for everybody, as I am. The debate over changing the tax code breaks down for me to only one thing....freedom. A tax code that renders the federal or state governments unable to confiscate thru legal, financial or physical violence up to 100% of the fruits of my labor gets my vote whether it is flat, round or square. Right now a national sales tax is the best bet to do this. A flat tax is still a tax on incomes and preserves the 16 amendment and the Internal Revenue Service as we know it now.

Like I said, freedom is the goal here.....nobody can be free as long as someone else has a prior claim on their paycheck, and yes even their wealth.

All the arguments about who gets to keep what does not make a dent in my preference....because it does not matter a whit what you get to keep if you are not free.

[snowsislander]

According to a Harvard econ. study, every product you buy has a "built in" tax.ie The cost of complying with tax code, employers portion of payroll taxes, etc. This cost ranges from 20 to 40 percent of the value of the product(food products have a different tax load than say...tires) . With the fair tax plan that cost is no longer needed to produce a product. Competition will quickly drive the cost of products down by that percentage. Thus the person with the nest egg would be paying lower prices plus the sales tax. In the end the total cost would be roughly the same depending on what type of product it is.

That seems to ignore the fact that a large portion of our economy is based on imports; compared to a roughly $11 trillion GDP in 2003, our imports of goods were at around $1.2 trillion. Those goods' production costs are not dictated by our tax structure (although their final cost to us is subject to import duties.)

[Bigun]

"The debate over changing the tax code breaks down for me to only one thing....freedom."

A M E N brother!!! Must be an echo in here!

I have expressed the same sentiment on these threads many times in the past and STILL believe that everything else is just chatter!

[heckler]

Someone has to order that product. Someone has to unload the boat. Someone has to haul that stuff on a truck to a distribution center. Someone has to haul it to the retail outlet on a truck. Someone has to stock and sell the product. Someone in America may have designed it. That product was purchased very cheaply overseas but a lot of people still had to handle it and manage its handling. I'm certainly no expert on this stuff but its concievable to me that the embedded tax cost could actually be higher as a percentage of the total cost of the product.

It would be interesting to see a good study done on the subject.

[Bigun]

I'm certainly no expert on this stuff but its concievable to me that the embedded tax cost could actually be higher as a percentage of the total cost of the product.

Very good information on that subject can be found here.

Hope you enjoy it as much as I did.

[ancient_geezer]

It would be interesting to see a good study done on the subject.

20-25% figure is the amount that prices would decline with the replacement of all corporate income & payroll taxes with an NRST.

It is not just a result of the tax revenue legally incident on business, but the sum total effect of relieving business from the requirements to comply with the current tax code, this includes the overhead costs incured as a result of accounting, planning, costs inherent in attempts to avoid the taxes, litigation fees and fines that result from arguing with the IRS et. al. when they think you are wrong, the loss of sales that results as a consequence of higher pricing necessary to recover these costs as well as finance the tax.

The following comprehensive study compares the flat tax, and NRST with the baseline '96 federal tax law they would replace.

 

http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf

Revised April 12, 1999.
THE ECONOMIC IMPACT OF FUNDAMENTAL TAX REFORM
by
Dale W. Jorgenson Harvard University
and
Peter J. Wilcoxen University of Texas, Austin

This paper was prepared for presentation at the
Baker Institute Conference
on Tax Policy Reform
Rice University Houston,
Texas November 6, 1998

---

page 21:

In Hearings on Replacing the Federal Income Tax (1996), held by the Committee on Ways and Means in June 1995, testimony focused on alternative methods for implementing a consumption tax. The consumption tax base can be defined in three alternative and equivalent ways. First, subtracting investment from value added produces consumption as a tax base, where value added is the sum of capital and labor incomes. A second definition is the difference between business receipts and all purchases from other businesses, including purchases of investment goods. A third definition of the tax base is retail sales to consumers.

The three principal methods for implementation of a consumption tax correspond to these three definitions of the tax base:

1. The subtraction method. Business purchases from other businesses, including investment goods, would be subtracted from business receipts, including proceeds from the sale of assets. This could be implemented within the framework of the existing tax system by integrating individual and corporate income taxes, as proposed by the U.S. Treasury (1992). If no business receipts were excluded and no deductions and tax credits were permitted, the tax return could be reduced to the now familiar postcard size, as in the Flat Tax proposal of Majority Leader Dick Armey and Senator Richard Shelby. Enforcement problems could be reduced by drastically simplifying the tax rules, but the principal method of enforcement, auditing of taxpayer records by the Internal Revenue Service, would remain.

2. The credit method. Business purchases would produce a credit against tax liabilities for value added taxes paid on goods and services received. This method is used in Canada and all European countries that impose a value added tax. From the point of view of tax administration the credit method has the advantage that both purchases and sales generate records of all tax credits. The idea of substituting a value added tax for existing income taxes is a novel one. European and Canadian value added taxes were added to pre-existing income taxes. In Canada and many other countries the value added tax replaced an earlier and more complex system of retail and wholesale sales taxes. The credit method would require substantial modification of collection procedures, but decades of experience in Europe have ironed out many of the bugs.

3. National retail sales tax. Like existing state sales taxes, a national retail sales tax would be collected by retail establishments, including service providers and real estate developers. An important practical difficulty is that only sales to households would be covered by the tax, while sales to businesses would be excluded. A federal sales tax would require a new system for tax collection; one possibility is to sub-contract that collection to existing state agencies. The Internal Revenue Service could be transformed into an agency that would manage the sub-contracts. Alternatively, a new agency could be created for this purpose and the IRS abolished. Enforcement procedures would be similar to those used by the states.

 

---

 

We have simulated the impact of implementing two different versions of a consumption tax at the beginning of 1996. The first is the Armey-Shelby Flat Tax. The Armey-Shelby proposal levies taxes on the difference between business receipts and the sum of business purchases and business payrolls. Labor income is taxed at the individual level. An important feature of the proposal is the system of personal exemptions at the individual level that we have described.

The second proposal we have considered is the National Retail Sales Tax. The tax base is the same as in our simulations of the Flat Tax. However, the method of tax collection is different. The Arrney-Shelby Flat Tax preserves the existing structures of the corporate and individual income taxes, but alters the tax base. The National Retail Sales Tax eliminates corporate and individual income taxes; retail establishments would collect the taxes. This would require a broad definition of these establishments to include real estate developers and providers of services, such as medical, legal, and personal services. Most important, no personal exemptions are provided.

---

PDF page 25-27:

2. Figure 4 compares the consumption tax rates for revenue-neutral substitution of the Armey-Shelby Flat Tax (FT) and the National Retail Sales Tax (ST) for existing income taxes. The Flat Tax rate is 25.1 percent in the year 1996 and remains virtually constant through the year 2020. The National Retail Sales Tax rate rises from only 15.7 percent in 1996 to 21.4 percent in the year 2020. Only the Flat Tax includes a system of personal exemptions, so that the tax rate is considerably higher, especially at the initiation of the tax reform. Second, the consumption tax base for the Flat Tax grows at nearly the same rate as government expenditures, while the tax base for the Sales Tax grows more slowly, reflecting the increased importance of investment.

3. Figure 5 compares the impacts of the Flat Tax and the Sales Tax on GDP. Under the Flat Tax the GDP is only 0.6 percent higher than the Base Case in 1996; the impact of this tax reform on GDP gradually rises, reaching 1.3 percent in 2020. Under the Sales Tax the GDP jumps by 13.2 percent in 1996, but the impact gradually diminishes over time, falling to 9.0 percent in the year 2020. The short-run differences between these two tax reforms are due mainly to the impacts on labor supply, while the long run differences also reflect the impacts on capital accumulation.

4. Figure 6 compares the impacts of the two tax reform proposals on consumption. The impact of the Flat Tax in 1996 is to increase consumption by 3.5 percent, relative to the Base Case. This impact gradually diminishes over time, falling to 1.3 percent by 2020. While it may seem paradoxical that consumption increases with a rise in the consumption tax, the marginal tax rate for low-income taxpayers is reduced to zero, stimulating consumption. By contrast the Sales Tax curtails consumption sharply in 1996, resulting in a decline of 5.6 percent, relative to the Base Case. However, the level of consumption overtakes the Base Case level in 1998 and rises to 5.5 percent above the Base Case in 2020.

5. Figure 7 compares the impact of the two tax reform proposals on investment. The impact of the Flat Tax in 1996 is to depress investment by 8.6 percent, relative to the Base Case. Investment recovers over time, eventually reaching a level that is only 1.7 percent below the Base Case in the year 2020. Substitution of the Sales Tax for existing income taxes generates a dramatic investment boom. The impact in 1996 is a whopping 78.5 percent increase in the level of investment that gradually gives way by the year 2000 to a substantial increase of 16.5 percent, relative to the Base Case.

---

6. Figure 8 compares the impacts of the tax reforms on exports, while Figure 9 compares the impacts on imports. It is important to keep in mind that net foreign investment, the difference between exports and imports in nominal terms, is exogenous in our simulations, while the exchange rate is endogenous. The Flat Tax results in a very modest decline in exports of 0.5 percent in 1996, relative to the Base Case, but exports recover rapidly and exceed Base Case levels in 1997, rising eventually to 4.6 percent above these levels in 2020. Imports initially rise by 2.0 percent, relative to the Base Case, in 1996, but this impact declines to only 0.3 percent by 2020. The Sales Tax generates a substantial export boom; the level jumps to 29.2 percent about the Base Case level in 1996, but declines by 2020, reaching 18.9 percent of this level. Imports in 1996 exceed the Base Case level by 2.5 percent, but fall to 1.3 percent below this level in 2020.

---

7. The inter-temporal price system provides the mechanism for re-allocations of resources in our simulations. Figures 10 and 11 give the impacts of the tax reforms on the prices of investment goods and consumption goods and services. Under the Flat Tax the price of investment goods drops by more that 6.8 per cent in 1996 and the price decline continues, falling only modestly to a little over six percent by 2020. The Sales Tax produces a reduction in investment goods prices exceeding twenty percent in 1996, rising gradually to between twenty-five and thirty percent over the period 2000-2020. Under the Flat Tax prices of consumption goods and services decline by more that 4: 5 percent in 1996, but this price reduction falls over time to around three percent in 2020. The Sales Tax reduces the price of consumption by a little over three percent in 1996, but this price decline increases to more than ten percent by 2020.

8. The implied subsidy to leisure time is equal to the marginal tax rate on labor income and would drop to zero when the individual income tax is abolished. Individuals sharply curtail consumption of both goods and leisure under the Sales Tax. Figure 12 shows that labor supply (and demand) jumps initially by thirty percent in 1996. This labor supply response recedes to a level of around fifeen percent by 2020. By contrast the Flat Tax generates an increase in both consumption and labor supply. The labor supply response is only two percent in 1996, but gradually rises to more than five percent by 2020.

9. Since producers would no longer pay taxes on profits or other forms of income from capital and workers would would no longer pay taxes on wages, prices received by producers under the Sales Tax, shown in Figure 13, would fall by an average of twenty percent in 1996. Figure 14 shows that prices received by producers would fall by an average of twenty-five percent by 2020. The impact of the Flat Tax on prices received by producers is much less dramatic. Prices decline in the range of six to eight percent for most industries in 1996 and five to seven percent by 2020.

[ancient_geezer]

Neal Boortz ANSWERING A FAIR TAX QUESTION: OK.  Now I've done the research, and here's your answer: You take the money and run.  No taxes.  If you are sitting fat and pretty with a 401K plan or other deferred income plan when the Fair Tax hits you will be able to withdraw the cash with no penalty and no tax consequences.  Not such a bad deal, huh?

H.R.25 (the Fair Tax Act) repeals the entire federal tax code regarding income, payroll and gift/estate taxes, including those parts covering the IRA's, 401K plans etc. Your money is yours not the federal government's under the Fair Tax Act.

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:

H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information: http://www.fairtax.org, http://www.salestax.org & http://www.geocities.com/cmcofer/ftax.html

[socialismisinsidious]

" I suspect Neal simply has not had time to really study the proposal in depth."

please! are you new to Boortz? I suspect that he has studied The Fair Tax much more than you

www.fairtax.org

[concretebob]

As a basic rule, there are but two kinds of tax___ direct and indirect. The former could be described as an involuntary tax which is collected when folks in government go directly to the people to raise a revenue and is un-avoidable; while the latter, or indirect taxation, is a kind of voluntary tax which is paid in consequence of a person’s own voluntary actions and is, in general, avoidable!

There are NO, I repeat NO, voluntary taxes.

ALL taxes are collected either on payday, or at the cash register, and both times, WE have no say in the process.

We can adjust the amount at payday, by adjusting dependents, allocating pre-tax deductions for 401K's but we pay taxes on a NON-VOLUNTARY basis.

[EternalVigilance]

That seems to ignore the fact that a large portion of our economy is based on imports; compared to a roughly $11 trillion GDP in 2003, our imports of goods were at around $1.2 trillion.

Under the FairTax, those imports will finally be taxed, at the point of sale.

And with the huge burdens imposed on our products under the current monstrosity removed, our products are going to immediately become MUCH more competitive in the world market AND in our own.

A total WIN/WIN!

[EternalVigilance]

The article you linked upthread is a total lying joke.