Posted on 12/16/2005 2:20:48 PM PST by ancient_geezer
| Laurence J. Kotlikoff, David Rapson NBER Working Paper No. 11831 ---- Abstract ----- This paper compares marginal and average tax rates on working and saving under our current federal tax system with those that would arise under a federal retail sales tax, specifically the FairTax. The FairTax would replace the personal income, corporate income, payroll, and estate and gift taxes with a 23 percent effective retail sales tax plus a progressive rebate. The 23 percent rate generates more revenue than the taxes it replaces, but the rebate’s cost necessitates scaling back non-Social Security expenditures to their 2000 share of GDP. The FairTax’s effective marginal tax on labor supply is 23 percent. Its effective marginal tax on saving is zero. In contrast, for the stylized working households considered here, current effective marginal labor taxes are higher or much higher than 23 percent. Take our stylized 45 year-old, married couple earning $35,000 per year with two children. Given their federal tax bracket, the claw-back of the Earned Income Tax Credit, and the FICA tax, their marginal tax is 47.6 percent. The FairTax imposes a zero marginal tax on saving meaning that reducing this year’s consumption by a dollar permits one to increase the present value of future consumption by a dollar. In contrast, the existing federal tax system imposes very high marginal taxes on future consumption. For our stylized working households foregoing a dollar’s consumption this year to uniformly raise consumption in all future years raises the present value of future consumption by only 45.8 to 77.4 cents, i.e., the effective marginal tax rates on uniformly raising future consumption via saving facing our households ranges from 22.6 percent to 54.2 percent. The FairTax also reduces most of our stylized households’ remaining average lifetime tax rates ? and, often, by a lot. Consider our stylized 30 year-old, single household earning $50,000. The household’s average remaining lifetime tax rate under the current system is 21.1 percent. It’s 16.2 percent under the FairTax. |
If anyone would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.
H.R.25,S.25
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:
Oh. The Fair Taxers won't like this! Someone is admitting that the FairTax is effectively a 23% income tax! This is because a sales tax and and income tax can be structured to be "economically equivalent".
23% of GDP is a whole lot of money!
This is because a sales tax and and income tax can be structured to be "economically equivalent".
Ahmmm, "economically equivalent" just means they bring in the same amount of revenue to the govenment.
Any tax system can be made economically equivalent to any other tax. It just needs to be designed to be revenue neutral.
This is false. "Revenue neutral" means bringing in the same amount of revenue to the government. "Economically equivalent" means they impact the economy in the same exact way.
Any tax system can be made economically equivalent to any other tax. It just needs to be designed to be revenue neutral.
I suppose any kind of tax can be "revenue neutral". A city can reduce property tax and raise sales tax so that there is no change in revenue. But there will be economic effects of reducing property tax and raising the sales tax. Property ownership becomes more desirable. Economic activity becomes less desirable. Our "revenue neutral" changes in property tax and sales tax are not "economically equivalent".
On the other hand if I make $1 more now I pay $0.3265 more to the feds, plus my employer pays another $0.0765 for a total tax rate of 40.3% whether I spend or invest it.
23% of GDP is a whole lot of money!
True, 23% of GDP may be a lot of money.
However neither Federal revenues, nor the FairTax is 23% of GDP. Both are lower than 23% of GDP.
A nice try as misdirection however.
"Revenue neutral" means bringing in the same amount of revenue to the government.
It means bring in the same amount of money to government as the tax law it replaces would.
If government gets the same amount of money as it would under the tax law it replaced, the economy gets the same as it would as well. That is revenue neutral and economically equivalent.
This is true. In recent years, federal revenues have be 21% of GDP.
This is the amount that the FairTax is intended to generate. It is a little less than the 23% rate due to the quirky rebate scheme. (The rebate scheme serves no economic purpose. It exists only to make the rate progressive.)
Notice that in recent years that the federal share of GDP has decreased. That is the result of the Bush tax cuts. We are getting more revenue on a lower percentage because the economy has grown. FairTax proponents have not adjusted their claim to 21% of GDP. In effect, the adoption of the FairTax would be a tax increase over today's rates.
Well...of course that would stay...as would some part of our income tax as well. Any money saved by disbanding the IRS would of course not be passed along to us in savings. Instead it will be spent by politicians to benefit the greater good. Of course the rate would need to increase over time. At least it would finally provide a way for our government to finally tax frequent flier miles.
What happens to the present sales taxes we pay on purchases imposed by cities and counties?
The FairTax legislation is a replacement for federal income and payroll taxes. As federal law, it cannot address state or local govenment.
As far as impact, the only factor changed is when federal tax dollars are taken from you, before you can spend today, or when you spend under the FairTax.
A retail sales tax gives you the first option of using your money, save and invest without tax, or spend and pay tax.
And income tax takes the dollar before you can save or invest.
You seem to be caught in static analysis. You cannot see that reducing property tax and increasing sales tax will affect the decisions of economic participants.
A flat income tax and a sales tax will certainly change the behaviors of economic participants over today's income and wealth tax. But in steady state, a flat income tax and a sales tax will affect economic participants in the same exact manner. The only difference is that a sales tax has destructive consequences at transition due to the necessary increase in money supply.
Notice that in recent years that the federal share of GDP has decreased. That is the result of the Bush tax cuts. We are getting more revenue on a lower percentage because the economy has grown. FairTax proponents have not adjusted their claim to 21% of GDP. In effect, the adoption of the FairTax would be a tax increase over today's rates.
As the bill stands at present, you are correct. As the true revenue neutral rate should be closer to 19% taking the Bush tax cuts into account. Howerver, since the Bush tax cuts have not been made permenant and they all expire by 2010 the bill has not been adjusted for obvious reasons.
I would suggest you get on the ball and make sure those tax cuts are made permanent. To do so will drop the FairTax rate considerably.
The 23% rate is based on pre-1999 tax and NIPA/GDP data when the legislation was first introduced, refer to the CATO's description of Calculating the Tax Rate.
A more current calculation based on current tax law (Bush tax cuts in effect 2003) is provided below:
| http://www.fairtaxvolunteer.org/smart/tax_system.html
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Oh, and that's when we would be offered deductions!
Thank you for recognizing that the FairTax is not revenue neutral. It is a tax increase.
Right...it's like a shell game...give me $30 and I give you back $5...now give me that $5 and I'll give you back $2...now give me that $2 and I will give that to someone else.
GDP includes busines investment and inventories. Neither are taxed under the NRST.
http://www.colorado.edu/Economics/courses/econ2020/section6/GDP-components.html
You are misinterpreting your link. GDP only includes economic activity, not assets such as inventories. Your link clearly shows that GDP includes CHANGES IN inventory. If businesses push more inventory out the door than it receives, that is an increase in GDP, and a sales tax will capture it.
A flat income tax does not tax inventories or business investment either. That's why I said a sales tax and a flat income tax are economically equivalent.
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