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.

[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 Such a great failure that congress actually repealed the tax.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.