Posted on 09/28/2005 12:14:25 PM PDT by hripka
A change in a tax affects that area of the economy . . . and beyond. Taxes hurt whatever is taxed. Income taxes hurt income (production). Sales taxes hurt sales (consumption). Higher rates have higher effects.
After having read "The FairTax Book: Saying Goodbye to the Income Tax and the IRS" by Neal Boortz and Congressman John Linder, I realized that the 'FairTax' proposed by Boortz and Linder would change EVERYTHING. The 'FairTax' is not tax reform, it is tax upheaval. Since it taxes consumption instead of income, consumption WILL fall, and incomes WILL rise. All of the incentives (and penalties) enacted into the current tax code would, at least be neutralized, or perhaps go into reverse.
A frugal person might be in favor of a 'FairTax' (National Retail Sales Tax, NRST) because the United States is consuming too much and needs more income. Considering our multiple deficits, (federal budget, international trade, consumer debt, etc.) cutting consumption and increasing income might not be a bad thing, but only to a point. However, the 'FairTaxers' assume minimal transition costs. They are VERY mistaken. The day of the change itself would be minor, but then the 'FairTax' would change EVERYTHING.
A list (in no particular order) put together by an amateur, not a tax professional:
List of those who would benefit under the 'FairTax' plan:
1. Business/production in general
2. All income-producing activities that were previously taxed, dividend payers, capital gains, etc.
3. Savers. Thrift and frugality will now be rewarded.
4. Activities that were formerly penalized: Alternative minimum tax payers, estate tax payers, gift tax payers, etc.
5. Corporate bonds, as compared to government bonds
6. Cash and bartering transactions
7. eBay for handling used transactions, also flea markets, second-hand stores, rummage/garage sales
8. Current owners of houses, cars, clothes, household goods. The answer on pg. 162-163 ignores existing houses. It states that *new* houses will decline in price, but go right back up again due to the 'FairTax'. And existing houses?
9. Companies will start a Company Store for tax-free employee benefits
10. Home-based activities: sewing, knitting, cooking, fruit and vegetable gardening at home, home repair, do-it-yourself, self reliance
11. Refurbishing of standing 'used' real estate
12. Smuggling, especially of portable high-value goods
13. Warren Buffett, who doesn't sell due to capital gains taxes which are now eliminated
14. Indian tribes could offer tax-free stores, and their casinos aren't affected
and others ? ?
List of those who would be hurt under the 'FairTax' plan:
1. Consumers/spenders in general
2. All retail establishments
2a. less impacted: those catering to home-based activities such as groceries, home improvement, etc.
2b. Internet-based retailers
2c. most impacted: portable high-value goods such as stamp, coin, jewelry dealers which might even close due to smuggling
3. Federal Government temporarily, due to initial tax simplification
4. IRS employees, tax accountants and lobbyists, HR Block, Intuit, etc.
5. Government bonds, (no longer tax-advantaged) as compared to corporate bonds
6. Roth IRA account holders (despite pg. 120-121 that a principle of the 'FairTax' that everything should be taxed only once)
7. Charitable donations to charities and churches, due to loss of tax deductible giving
8. All currently tax-exempt organizations, their comparative advantage is reduced.
9. Home real estate in general due to loss of tax deductible interest, a major selling point.
10. New real estate developments - especially near cities with old housing
11. Residents of states that don't currently have a sales tax, those states will enact their own sales tax
12. Taxpayers living in states or cities with high income or high property taxes, which are no longer deductible
13. Anything currently tax-advantaged through credits and deductions, i.e. conservation efforts, high medical bills, victims of casualty and theft losses, child and adoption tax credits, capital losses, etc.
14. Tax-advantaged 401k's, no reason to have them ? though savings in general will increase
15. China, Japan, etc., countries that currently export to us
16. All non-Indian casinos and lotteries. Casinos have to pay in effect a 23% income tax on gross profits (gross receipts minus payoffs and other taxes)!? My reading of Section 702(e).
and others ? ?
Remember, this is a list put together by an amateur, not a tax professional. Are there others affected, positively or negatively? Where am I wrong? Read my tagline.
A tax hurts what is taxed. That is how I came up with this list.
1. I am not sure how purchases made abroad by Americans are taxed. Section 101-d-1 of HR25 implies that the 'FairTax' is a Use Tax. I have seen other information that purchases made abroad are 'FairTax'-free. If it is the latter, then foreign purchases by Americans will skyrocket. See also the US Supreme Court decision of North Dakota vs. Quill Corporation regarding the use tax.
2. I read Section 102-a-2 to mean that (initial public offerings) IPOs are not taxed, but would investment real estate be taxed?
3. Also, if a 'FairTax' is only levied on final retail sales, the 'fair tax' rate will have to be MUCH higher than 23% (inclusive) or 30% (exclusive rate). Today the feds spend 2.5 trillion. The GDP is over 11 trillion. Approximately two-thirds of that (7.26 trillion) is consumer spending. 2.5 trillion divided by 7.26 trillion is a federal sales tax rate of 34%. To say that government will pay taxes to itself is a circular argument. On a 77 cent item, everyone pays $1. When the government pays for it, it goes back into its own pocket. Sure a dollar comes out of the government's right pocket, but 23 cents goes immediately into the left pocket. If that isn't the epitome of an 'embedded' tax, then what is?
Add to those that it will HURT
Drug Dealers
The Mob
Anyone that currently works "Under the Table"
Trust Fund Babies (folks like Paris Hilton, John Kerry etc)
Employees of the IRS
Offshore Banking (Or any Institution that is in the business of "Hiding / Laundering Money"
This is not true. The resulting increase in the money supply will decrease the value of savings at transition by the tax rate. That is, if you have $20,000 in savings, it will by 23% less after the creation of the so-called "Fair Tax".
it will buy 23% less
I'll let others wade in here.
Your list of those "hurt" by the Fair Tax is bogus.
The average worker will IMMEDIATELY see his paycheck jump by 25% or more (think gross pay instead of net pay). The sales tax on the first $25,000 of it will be rebated monthly so that low income folks are not hurt by it.
Businesses and industries who are thinking of moving (or who recently moved) to other countries to take advantage of lower taxes and wages will now reconsider and MANY of them will crunch the numbers and realize that financially it no longer makes sense to move to Mexico or Indonesia.
Giving to charaties for the deduction it would bring is stupid. Why would I want to give $1000 to a charity just so I could reduce my taxes by $280? Charities existed before the income tax and will exist after.
As for tax exempt organizations being in the "losers" column, I see it as a gain. No longer do they have to kowtow, shut their mouths, and kiss the ass of the IRS for fear of losing their tax exempt status. One of the most horrible pieces of unconstitutional legislation ever passed was the one that threatened the tax exempt status of the churches if they DARED to be involved in politics as they had been since our country began.
This is bad how?
There are some questions about the fair tax details. I don't think that is in dispute. However, on the grander scale of Pros Vs Cons (some or yours are valid many are not), simply removing the burden of our current federal tax system and the obvious business advantages that brings company's racing to set up shop in the US says I lean in favor. When workers are in demand, salaries go up, income goes up, spending goes up, etc. (and yes, sometimes inflation too). Add to the mix more disposable income for each citizen, which adds buying power, and I am a believer.
I am still trying to understand if 23% is the right amount and how it will effect the economy in the immediate aftermath of implementation, but I am fully on board with it being a long run HOME RUN!
in the long run, compounding savings will allow one to consume much more...
Hurt: Those who have saved in the past in non-tax deferred accounts. They paid income tax on the money before saved and will have to pay again when spending it.
"This is not true. The resulting increase in the money supply will decrease the value of savings at transition by the tax rate. That is, if you have $20,000 in savings, it will by 23% less after the creation of the so-called "Fair Tax"."
Theoretically, this balances itself out rapidly. This is one of the points I am not yet completely convinced. However, the logic does say competitive capitolism will drive the correction to about pre-tax pricing. What may devalue the dollar (inflation) could be the additional spending that Amercans can afford especially if international businesses start setting up shops and factories and there becomes a shortage of workers, which drives salaries, which drives demand, which drives costs.....
There are worse things the country's economy could do.
"How can both be true? Consumption will fall and income will rise. If all capital goods are taxed as consumption, such as homes, cars, trucks, and the machinery of commerce, and if people don't buy those items because of the tax burden, then why would anyone spend to increase production, and, if production is curtailed, how can incomes grow?"
One expectation is that American products become much cheaper to get to our export docks and therefore much cheaper for other nations to import. Our inport/export defecit is suppose to change radically as more businesses move production to the US. So if there were to be any loss in American consumption, our exportation of products would still drive demand for workers. Workers in demand drives price up as the supply is reduced.
The savings rate will rise.
This is bad how?
Who said bad?
From the book, pg. 165: "With taxes at the 39 percent level, why would they spend $1000 to save $390?"
Saving $390 (or my marginal income tax rate amount) reduces the impact of my giving the $1000. It sure affects my thinking when I write out a check to a charity. And Boortz pooh-poohs this? It must affect others as well.
Regarding currently tax-exempt organizations:
I mentioned that their comparative advantage is reduced.
The incentive to save and not spend is simple... do I want to have my money to pass on to my children, or do I want to give it to the government so that they'll re-build New Orleans?
The list can be condensed.
Helped - American citizens
Hurt - illegals, the "cash" economy, politicians.
Any questions??
Based on what you wrote, if there is a consumption tax, you say that the demand for products produced in the USA will go up because we will export more, because the price (cost of production) will go down. But in the same thought you write that it will cause income to rise. How can both be true? How can we have both lower costs of production and higher incomes based solely on the establishment of a consumption tax? If the tax take is the same, if one compares the income tax to a consumption tax, then, where did the money come from to pay workers more if the cost of goods goes down?
BTW, explain to me how Chinese and Mexican, or Costa Rican companies will move factories to the USA for cheaper labor and lower production costs if the incomes of the workers go up and when the government's total tax burden remains the same?
Yeah.... along those lines.... government spends what it spends. It's going to raise the same amount of tax (actually more as years go by). Under the current tax system there are creative ways to avoid paying tax. In a consumption tax plan there is only way to avoid the tax. And that's to not buy new items.
Unless government is talking about cutting the budget, the average tax burden is going to remain the same. The highs and lows will just be shifted to different parts of the population based on spending habits.
>Hurt: Those who have saved in the past in non-tax deferred accounts. They paid income tax on the money before saved and will have to pay again when spending it.<
This is more than off set by the absence of taxes on IRA and 401K savings which dwarf deposits in Roth Ira's.The 23% sales Tax is balanced by the lack of taxes when money is withdrawn and the ability to withdraw on your on schedule.I am 53 I would love to have access to my 401K money right now with no tax penalty
And you know.... if you study up on it a little.... there are creative ways for you to have access to IRA monies right now without paying the penalty.
Our current tax codes have tons of loop holes. They are there for a reason.
Don't forget that the fair tax hurts the blood-sucking K-Street lobby most of all:
http://boortz.com/nuze/index.html
The cruelest insult will be to those who reach a manditory retirement age on the day we switch from income tax to consumption tax. They will will have paid income taxes on an entire career of savings just in time to turn around and be taxed again as they spend it.
WRT 23, based on what you wrote do you agree that a consuption tax does not provide a greater income and lower prices?
A consumption tax has the same effect as supply and demand pricing.
A consumption tax will really hurt our economy.
I'm not sure anything can provide lower prices and greater income.
Finally, a clear and concise thinker on this topic.
I keep seeing and hearing how those in retirement or near will be "hurt" by this tax change. For one, those are the same people who paid MUCH less for most of their careers in Soc UnSecurity taxes than the current tax rates. Second, they will be getting more and more government handouts like free drugs. Third, they are implying that the tax code should not be changed so others can be penalized instead of them. No wonder the "greatest" generation is being seen more and more as the "Greediest" generation.
"Based on what you wrote, if there is a consumption tax, you say that the demand for products produced in the USA will go up because we will export more, because the price (cost of production) will go down. But in the same thought you write that it will cause income to rise. How can both be true? How can we have both lower costs of production and higher incomes based solely on the establishment of a consumption tax? If the tax take is the same, if one compares the income tax to a consumption tax, then, where did the money come from to pay workers more if the cost of goods goes down?"
First, I do believe that, initially, all consumption will slow down. I also believe that after a few short months it will rebound here and be stronger than ever. Second, demand for American products will increase internationally as American products will now be about 20% cheaper. They are cheaper because they are not taxed in the United States if they are not sold to American consumers. This drives demand. The cost of production goes down as a result of removing embedded taxes. This is even more profound for companies that have moved production to cheap labor markets and spend extraordinary shipping costs to get their product back to America. Right now, the considerably cheaper labor offsets the cost of shipping and nets a company more profit. Now, remove the tax burden and pay more in labor while reducing shipping costs and the company should realize more profit. As more company's move to America, there are more jobs to be had. As workers are in demand, salaries and wages will go up (as they did in the 90's). These are side affects of the implementation of the fair tax, not the sole reason for implementing it. And it is all theory of which I have researched and have some confidence in.
"BTW, explain to me how Chinese and Mexican, or Costa Rican companies will move factories to the USA for cheaper labor and lower production costs if the incomes of the workers go up and when the government's total tax burden remains the same?"
Who do you think Chinese, Mexican, Costa Rican largest export customer is? It may not be as big a deal for the American Continent, but for the Asian and European market, which are much more significant, it would be very appealing. Why do you think Puerto Rico is the world's pharmacuetical manufacturing headquarters? It is not because Puerto Rico is where all the worlds best scientists are. It is because for years the industry has paid $0 in taxes to the US property. Amazingly, their economy is doing well without the taxes from Lilly, Genentech, Biogen, Pfizer, etc.
The attraction is that if you can reduce the shipping costs and tax burdens, than a company can afford the higher labor costs, especially if its biggest market is in the United States.
I agree with this.... It's pretty rough on the federal deficit because we know for certain that they are not going to cut spending :).... but yeah pumping money into the system in that way will have the effect. Myself, I don't worry that much about the deficit. But I know many do...
this just creates an arbitrage when shipping costs are less than the tax rate.
>The cruelest insult will be to those who reach a manditory retirement age on the day we switch from income tax to consumption tax. They will will have paid income taxes on an entire career of savings just in time to turn around and be taxed again as they spend it.<
Not the case.401K income is not taxable the day you retire.It is taxable as you withdraw it over 20 years at the rate of withdrawal perscribed by the Gov.The retired person comes out ahead.No income tax on retirement no consumption tax on basic neccesities(where most of spending goes)
"The cruelest insult will be to those who reach a manditory retirement age on the day we switch from income tax to consumption tax. They will will have paid income taxes on an entire career of savings just in time to turn around and be taxed again as they spend it."
This is very true and sad at the same time. But what did the Baby Boomers ever give up for the this country anyway besides the Vietnam War?
(This is a joke!) -- Meant to be humerous.
Wrong generation, the Greatest Generation is in its final years. You are talking about the front end of the Baby Boomers.
This is why I mentioned that retail sales would decline. Hopefully income and exports would increase.
BTW, there is no incentive to save under the consumption tax like there is with an income tax.
Wow, I thought that the income tax hurts income (i.e. interest). The FairTax consumption tax at least doesn't tax that.
bunch of faulty assumptions in your list.
Retirees will take it in the rear under the fair tax. All the money they saved over their whole career will overnight see a reduction in purchasing power of roughly 20%. If you call that coming out ahead, I don't know what to tell you. People earning income will see their paychecks go up to compensate, fixed income people are S-C-R-E-W-E-D.
If you pay a high income tax rate right now... it's because you choose to.
Oh you forgot... they're gonna let you have food and water without paying taxes on it. :)
This has been shown to be FALSE. The FairTax study assumed that wages would be reduced to current take-home pay levels in order to remove the embedded tax costs from the pricing in products. See these threads for the whole story:
| JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive) |
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| Posted by RobFromGa On News/Activism 08/25/2005 12:40:44 AM EDT · 701 replies · 7,599+ views |
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| MONEY finds flaw in 'FairTax' bestseller [FairTax myth busted by major magazine] |
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| Posted by Your Nightmare On News/Activism 09/08/2005 7:48:28 AM EDT · 238 replies · 2,830+ views |
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Assume I am purchasing an illegal item (drugs, prostitution, etc.)
1. Under a FairTax I don't pay tax on my income.
2. I don't think that the dealer/prostitute will be collecting ANY sales tax.
3. When the dealer/prostitute spends my money, then it will be taxed. But remember, I wasn't taxed in step 1, so wouldn't it be the same as now, just taxed at a later step?
The Mob
The Mob might be a great beneficiary of a FairTax due to vastly increased smuggling opportunites.
Do you think?
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