I think the most interesting thing to watch here is the Exemptions Question: HOW CAN THIS BE ABUSED? I think laws should look for ways it could be abused and take preventative measures. I worry the language will benefit some more than others Say . . if there are exemptions for all things over purchases over 100K . .. well that does not help the poor Rocket River
first of all, the fairtax is an inclusive 23%, which corresponds to an exclusive 30% rate (i.e. you'd pay $1.30 for every $1 you spend at the counter) Second of all, the fairtax assumes government expenditures and consumption at current levels, yet it taxes government consumption at the 30% rate and doesn't fix the target to reflect that. Taxing government expenditures produces $0 on net to the american public, since they have to finance that, so they're not calculating the true cost of their tax. Also, a key omission is that they don't address the deficit, that is, they don't design the tax to be solvent in the long run. If they did, that would raise the tax rate. I don't see anything about erosion of the consumption base on their website, but I admittedly only looked at the FAQs. If they don't deal with this properly, this is a HUGE problem. I'm sure there are plenty of economists who agree with their concept, but I'd like to see some that defend their 30% figure.
Max - I don't want to belabor the point on whether it's 30% or 50%. Sorry if you think I'm being argumentative. Different simulations with different assumptions on parameters can produce a wide variance of estimates. I think the bigger issue is the conceptual one. I think if we want to be non-distortionary, I'm down with a flat income tax with a very generous standard exemption and a negative income tax for the very poor. I don't think there's much political momentum for such a huge overhaul of the tax system though.
What about the retired population, the disabled, and the elderly? Seems like they'd get pretty hosed in this situation. Not paying any income tax now (since they're not working) but would be paying under a consumption tax.
i PROMISE you this...it can not be MORE abused than the current tax code which is set up for loopholes for those rich enough to pay lawyers/accountants to figure them out. i can assure you of that.
here's what fairtax says: What about senior citizens, retired people, and anyone on a fixed income? As a group, seniors do very well under the FairTax. Low-income seniors are much better off under the FairTax than under the current income tax system. Some erroneously believe that people who live exclusively on Social Security pay no taxes. They may not know it, but with corporate income taxes, they are paying hidden taxes averaging 22 percent (for goods) to 25 percent (for services) on everything they buy. Under the FairTax, they break even from the very beginning because they only pay $0.23 out of every dollar they choose to spend on new goods and services, rather than anywhere from 20 to 30 percent in hidden taxes. And note, they elect to pay these taxes through their lifestyle choices. It gets better from there. Seniors, like everyone else, receive a monthly rebate, in advance of purchases, for taxes paid on the cost of necessities. If seniors choose to work, they are freed from regressive payroll taxes, the federal income tax on wages, and the compliance burdens associated with each. They pay no more hidden taxes on goods or services, and used goods are tax-free. There is no income tax on their Social Security benefits. The income tax imposed on investment income and pension benefits or IRA withdrawals is repealed. Pension funds, IRAs, and 401(k) plans had assets of $6.5 trillion in 1994. An income tax deduction was taken for contributions to most of these plans. All beneficiaries and owners of these plans expected to pay income tax on them upon withdrawal but will not be required to do so under the FairTax. All owners of existing homes experience large capital gains due to the repeal of the income tax and implementation of the FairTax plan. Seniors have dramatically higher home ownership rates than other age groups (81 percent for seniors compared to 65 percent on average). Homes are often a family’s largest asset. Gains are likely to be in the range of 20 percent. The FairTax makes the economy much more dynamic and prosperous. Consequently, federal tax revenues grow. This makes it less likely that federal budget pressures require Medicare or Social Security benefit cuts. Vik -- it's all good. i don't think you're being argumentative, because i really don't have a position on this issue yet. not a well-formed one anyway...not past hoping there's some workable alternative to the current Code.
Yes, but consumer spending wouldn't STOP under a consumption tax. Necessary goods (food, medicine, clothing, housing, transportation) would continue to be consumed. People simply cannot live without those things, though under a consumption tax, we would have the ability to pick and choose what we pay tax on. Only the most frugal and/or anti-government types would limit all of their spending to non-taxed goods and services. Think about it, are you really going to stop buying clothes, food, or medicine under any circumstances? The economy would continue to turn, but the dynamics would change a bit. You seem to think that American's spending habits would change overnight, which is hardly likely. Spending would probably stay pretty much where it is given that everyone in America will all of a sudden get a substantial raise in the form of the elimination of income taxes. In addition, once people start saving more of their money, that is more investment capital for entrepreneurs who want to take advantage of the HUGE new industries that would be spurred (recycling as well as refurbished and other used goods). The corporations that would see their sales decline would (IMO) be the ones that make cheap, throwaway products as consumers would be more interested in getting goods that they will not have to replace as well as goods they could sell on Ebay or to the massive resale industry that would spring up. No, the system could be pegged to tax a percentage of GDP equal to or just slightly higher than government spending. In addition, the corporations that would see their revenues fall would be the ones that failed to change with the times. Let those buggy whip makers go down so that the new industries can flourish. Also, corporate income taxes would be a thing of the past, so the decline in revenues should be made up in most cases by the elimination of income taxes. If you save your money, that increases money available for investment AND gives you future spending ability. Younger people would be more inclined to save, but as one gets older, it would make more and more sense to spend that money to enjoy the "golden years." Since most of the spending is done by older people (who generally have higher incomes than twenty and thirty-somethings), spending would not STOP as you seem to be assuming it would. The dynamics of that time were rightly called a "bubble economy," or one that is not sustainable. When the bubble bursts, as it inevitably does, there are problems on the back end. The current system DOES encourage spending over saving, which is the reason that Americans are further in debt than any other country. I don't think it would if designed properly.
I have never seen anyone claim that it would have to be anywhere near 53%. The numbers I have seen are between 17% and 25%.
in theory... but how many would simply have their money sitting in a checking account in the bank doing nothing or stuffed in a mattress? quite often, the poor are poor for a reason, bad decision making (fewer opportunities and inferior education) being key contributors I see the majority of Americans spending their money on real estate, the market is already high... how much higher can it go? Even if housing is excempt from the consumption tax, his would add yet another burden to lower income Americans who currently struggle to pay rent each month further, people would be buying high, and at some point the bubble will burst on them when the economy slows (don't tell me the economy will forever run full blast, recessions do happen) long term (15+ years down the road) I think we can adjust and recover but I don't see any short term benefits to a consumption tax
first of all, the 17%-25% figures are inclusive taxes, not the exclusive sales tax rates you and I are used to at the check out register. So that immediately makes them closer to 30%. The 23% inclusive/30% exclusive rate that fairtax talks about is the tax rate required to make as much as we make today from taxes. But as you know, we don't make enough to pay the bills. If your goal is long term solvency, you have to take in more than you pay, thanks to the debt, and your tax rate jumps as well. Feel free to check out that proposal by the guys I cited. For the 30% fairtax to work, a lot of things need to fall into place. I think the true level would be somewhere in between, my intuition (for what it's worth) is that it'd be on the higher side rather than the lower side.
Maybe not, but at least it would be more transparent. If there are exemptions on certain items, it would be public knowledge and right out there in the public domain. If Hastert tried to insert an exemption on Lear Jets or Pelosi tried to exempt union dues, we would be able to see it and raise a stink. The tax loopholes we have today are convoluted and hidden to the point that in a recent survey, 50% of the time the surveyors called the IRS, they got incorrect or incomplete information.
