Tuesday, September 28, 2004

Welcome and Intro

Welcome to the FairTax Blog! I'll be using this space as a venue for education on and critical discussion of the FairTax.

The FairTax is a tax reform proposal for tax replacement embodied by HR 25. The FairTax proposes to replace all of the existing federal income, payroll, dividend, capital gains, and business taxes with a single national retail sales tax. This sales tax would fall on all retail level new goods and services. Used goods would not be taxed. Business to business purchases would not be taxed as long as they were used for business purposes. The stated objective is to tax all goods and services once and only once.

In order to overcome the intrisic regressivity of a sales tax the FairTax proposal provides for a Family Consumption Allowance (FCA). The FCA is a payment sent out monthly to each household by the Social Security Administration refunding to each household the amount of federal sales tax they would pay if they were to spend up to the Health and Human Services Departments poverty level for a household of their size.

More details on the proposal will be provided in follow up posts. Please feel free to ask questions or raise objections in the comments section. I will attempt to address questions and objections either in the comments section or in subsequent posts or both.

3 Comments:

At 11:57 AM, Blogger marlene tobin said...

Regarding the sales tax/income tax rate charts.

This chart is a good start, but the graphs shown are wrong by a wide margin. The FairTax is even more progressive than shown here, as those at the poverty level will pay 0% tax, they will not and in fact can not pay more. Live at the poverty level, and you will receive all your taxes back. Live just above the poverty level and you will receive most of your taxes back, which is way more than the current system, but is shown wrong on your graphs. Here's why:

FairTax replaces the entire tax code as we know it today. That includes all income withholding tax, but also includes all the FICA 7.65% payroll taxes that are currently deducted. It also includes the elimination of all Business taxes, eliminating the 7.65% matching FICA businesses have to pay per employee. FairTax eliminates all estate and gift taxes as well.

In your charts, you have left out a most important part of the income tax rates you show which should include an additional 7.65% for all workers for Social Seucurity benefits withheld on top of the income tax. FairTax pays for this 7.65% within the sales tax, so the margin of differece between the two tax rates (income tax vs FairTax) would actually be greater by an increase in all your income tax rates shown on your chart by 7.65%.

Finally, while you have included the stadard deductions in your calculations for the income tax, you have failed to include all the "exemptions" under FairTax that factor into your net effective annual tax rate under that system. This is common, most folks don't think of FairTax as having any exemptions. It does, in the form of tax free spending, which will make up the bulk of most lower income folks' spending, and which lowers their yearly net effective rate considerably.

To be fair in your calculations you have to include ALL the tax exempt spending on FairTax. While this will be harder to do since under income tax these exemption dollar values are stanardized, under FairTax each tax payer will determine the dollar value of these exemptions for themselves

You have quoted the NET rate for the income tax system but the Gross (before tax exempt spending) rate for FairTax. This is comparing apples and oranges, and doesn't give the true picture.

The net effective tax rate for anyone under FairTax is lowered by all the tax exempt spending they do, and these ARE the exemptions. For Example: Any mortgage payment both principal and interest under FairTax is Tax free (not just interest like the current income tax system). Mortgage payments make up a large portion of spending, particularly for the lower income folks, and would lower your "net effective tax rate for FairTax" considerbly so it must be included in any rate table comparison.

All taxes, State sales, State Income, and property taxes are tax free spending under FairTax so this lowers the net effective tax rate for FairTax. All education expenditures under FairTax are tax free so this lowers the net effective tax rate for FairTax. All savings and investment is tax free spending under FairTax so this lowers the net effective tax rate for FairTax. All used items are tax free under FairTax so this lowers your net effective tax rate under FairTax. Finally, all charity giving to any organization, profit or non profit, AND all estate or GIFT giving to family or anyone, at any dollar amount is also tax free and lowers your effective rate under FairTax, so has to be calculated into one's tax rate. All of these items are included in the standard deduction under income tax and standard deductions for dependents under income tax.

Since you are figuring the "net effective income tax rate" based on the inclusion of current standard deductions using dependents as your base, you must also use the FairTax "duductions" (ie: tax exempt spending) to do an honest comparison of rates for the two systems side by side.
If you are to compare the two systems, you must include the "deductions" in both system calculations.

You could also include the Flat Tax in this table if after the standard deducion they are proposing, you used the 19% rate being proposed for the flat rate but you would also have to add the 7.65% FICA payroll rate to that as well to be a fair comparison to the FairTax.

You must always be sure that if you are using deductions in one system, you must use the deductions in the other. As most people don't think of "deductions" under a sales tax, this creates the problem. There are actually more deductions (tax exempt spending) under FairTax than the current system, it's just that when you say sales tax, folks autmatially think % percetage of total gross income, rather than looking at the whole FairTaxPlan.

Truth is, every dollar under the current income tax system you spend today, every one, on everything, has already been taxed, which means under today's system, you are taxed on EVERYTHING you spend your money on.

Under the FairTax you will only be taxed on NEW GOODS and SERVICES at retail (end use),so clearly you will not be taxed on everything under FairTax which automatically means the FairTax will tax you less than the current system.

It is important when comparing the current income tax system to the FairTax (naional retail sales tax PLUS), that you do not include preconceived notions of what a sales tax is or does. To get the true picture of the beauty of FairTax, you need to study the entire PLAN, all 110 pages of pure GOLD. Only then can you really make an informed choice. When you do, I am sure you will find FairTax to be the best, the simple and honest progressive sales tax PLAN, that will help today, and save tomorrow's children from a life of slave labor and endless debt.

Marlene Tobin
PA StateDirector
FairTax

 
At 12:38 AM, Blogger quadrupole said...

Marlene:This chart is a good start, but the graphs shown are wrong by a wide margin.

quadrupoleYou are correct that the charts and graphs shown here are conservative (on several counts). I was intentionally attempting to show the worst case. I was attempting to show the worst case not as an argument against the FairTax, but in favor of it. I've been in MANY discussions with people who refuse to believe some of the rosier predictions about the FairTax, and so choose to scrupulously stick to the most pessimistic available set of assumptions to demonstrate that even under the worst assumptions, the FairTax is still quite progressive. Perhaps I should have been clearer about that in the text of my posts.

Marlene:The FairTax is even more progressive than shown here, as those at the poverty level will pay 0% tax, they will not and in fact can not pay more.

quadrupoleYou are correct that those at the poverty level will pay 0% tax. The family consumption allowance will in fact make the tax rate negative on families that spend below the poverty level for their household size. That is reflected in the charts and graphs (mouse hover to see my calculations, for the FairTax they are mercifully simple).

Marlene:Live just above the poverty level and you will receive most of your taxes back, which is way more than the current system, but is shown wrong on your graphs.

quadrupoleThe current system, due to the Earned Income Tax Credit, will refund for some households in some income levels more money in tax than they pay in. For a household with two or more children the income tax rate can be as low as -40% for some income ranges. When you add back the 15.3% payroll taxes (which I do in every case in my calculations for the current system) and you still get a -24.7% tax rate for some households at some very low income levels.

Marlene:In your charts, you have left out a most important part of the income tax rates you show which should include an additional 7.65% for all workers for Social Seucurity benefits withheld on top of the income tax. FairTax pays for this 7.65% within the sales tax, so the margin of differece between the two tax rates (income tax vs FairTax) would actually be greater by an increase in all your income tax rates shown on your chart by 7.65%.

quadrupoleActually, mouse hover over the cells with your browser to see the calculations for each cell. In every case when computing the Effective Tax rate of the current system I've added in the 15.3% payroll tax (7.65% employee, 7.65% employer) to the total tax computed. I agree, leaving this out would invalidate my results, which is why I included it in every case (including correct phase out of the FICA portion of payroll taxes at higher incomes).

Marlene:Finally, while you have included the stadard deductions in your calculations for the income tax, you have failed to include all the "exemptions" under FairTax that factor into your net effective annual tax rate under that system. This is common, most folks don't think of FairTax as having any exemptions. It does, in the form of tax free spending, which will make up the bulk of most lower income folks' spending, and which lowers their yearly net effective rate considerably.

quadrupoleGuilty. I make the pessimistic assumption of identifying spending on new goods and services with income for purposes of comparison. I did not do this by mistake however. I did it intentionally to reflect a worst case senario from which to argue that it will always be better than indicated in the charts and graphs.

The best data I can find on spending by income is from the
BLS from 2002. I've by no means done a complete analysis of it, but a quick examination would tend to suggest that the poor spend the majority of their income on food, utilities, rent, and transportation. Of these only transportation (through purchase of used vehicles) has the potential to be used and thus FairTax exempt. If you have better data or better analysis I'd love to be able to claim that the poor spend the majority of their income in FairTax exempt ways, but I can't justify that claim currently.

Marlene:To be fair in your calculations you have to include ALL the tax exempt spending on FairTax. While this will be harder to do since under income tax these exemption dollar values are stanardized, under FairTax each tax payer will determine the dollar value of these exemptions for themselves

quadrupoleThis is the second reason I didn't include FairTax exempt spending. I can't get a real handle on it. So I picked a line (0% FairTax exempt spending or savings) that I KNEW I could defend against the FairTaxes detractors. I am seeking to build a case that CANNOT be assailed by FairTax opponents. Unfortunately this leaves me quite open to reasonable attacks from FairTax proponents. But I'd rather leave the weapons against me in the hands of the side I support than the side I oppose :)

Marlene:For Example: Any mortgage payment both principal and interest under FairTax is Tax free (not just interest like the current income tax system). Mortgage payments make up a large portion of spending, particularly for the lower income folks, and would lower your "net effective tax rate for FairTax" considerbly so it must be included in any rate table comparison.

quadrupoleFunny you should mention mortgages :) I actually started this site to assemble a counter argument to someone hysterically claiming that the FairTax was coming for the middle classes mortgage interest deduction. Much of the work to date has been scaffolding to support that. For existing home owners the FairTax is a clear win (for the reasons you site). For purchasers of existing homes it's a clear win for the reasons you site. For purchasers of new homes the situation is much more complicated. Do you have any data on home ownership rates among lower income tax payers? I'd love to be able to say something supportable about the FairTax helping lower income folks with their housing costs. Most people I've dealt with though presume that lower income folks are mostly renting, which would be FairTaxable.

Marlene:Since you are figuring the "net effective income tax rate" based on the inclusion of current standard deductions using dependents as your base, you must also use the FairTax "duductions" (ie: tax exempt spending) to do an honest comparison of rates for the two systems side by side.
If you are to compare the two systems, you must include the "deductions" in both system calculations.

quadrupoleIf you could suggest a good concise way of doing so I'm quite game :)

Marlene:You could also include the Flat Tax in this table if after the standard deducion they are proposing, you used the 19% rate being proposed for the flat rate but you would also have to add the 7.65% FICA payroll rate to that as well to be a fair comparison to the FairTax.

quadrupoleDo the flat tax folks have a bill I could refer to? I've tried to be careful to actually represent either current tax law or precisely what HR 25 proposes. And don't forget to add the 7.65% employer half of payroll taxes. The payroll tax rate is 15.3%, not 7.65% :)

Marlene:Truth is, every dollar under the current income tax system you spend today, every one, on everything, has already been taxed, which means under today's system, you are taxed on EVERYTHING you spend your money on.

quadrupoleFor the record, I fully understand embedded taxes, and also believe that you will see price declines for items bought and sold in functional (non-monopoly) markets. All of my estimates are, quite intentionally, static. If I can beat the oppositions argument with static assumptions they are toast.

Marlene:It is important when comparing the current income tax system to the FairTax (naional retail sales tax PLUS), that you do not include preconceived notions of what a sales tax is or does. To get the true picture of the beauty of FairTax, you need to study the entire PLAN, all 110 pages of pure GOLD. Only then can you really make an informed choice. When you do, I am sure you will find FairTax to be the best, the simple and honest progressive sales tax PLAN, that will help today, and save tomorrow's children from a life of slave labor and endless debt.

quadrupoleI appreciate the problem of preconcieved notions of what a sales tax is and does. I argue against them frequently. I have read HR 25 completely, several times, and quoted it chapter and verse in discussions of the issue.

Marlene, thank you for taking the time to comment on my work to date. I'm very interested in any suggestions you might have for improving my advocacy.

I am constantly looking for better ways to analyze the issue.

 
At 9:21 AM, Blogger Mark said...

Here is a way to analyze this.

Assume you are a nursing home patient -- or a cancer victim - or the parents of a child with leukemia.

You will have to pay 20-50,000 just in TAXES. How you can pay that.

Analyze it from the viewpoint of someone paying their rent - and filling up their gas tank.

Pass the fairtax!! Please! We need to see this in action, so we can move on.

Fairtax says federal government can pay taxes to itself! Neal Boortz wrote (Page 148 of his Fairtax Book), "The federal government itself will become a MAJOR taxpayer."

Well, if the federal government can pay 500 billion to itself -- why not pay a trillion? Pay 2 trillion and don't bother to tax people.

Fairtax is an illusion, wrapped in bad math.

Faitax not only depends on taxing, somehow, the governemtn, it also depends on taxing medical care. That means people in nursing homes, people with cancer, the parents of a child with leukemia - a huge sales tax.

Where will the 80 year old alzheimer's patient in a nursing home GET 30,000 a year in sales taxes anyway? There again, the government -- who probably are paying her bills, would have to pay itself its own tax.

Some people would get clobbered with this lunatic tax - anyone with medical bills, anyone who rents (rent is taxed) anyone who pays utilities (utilities are taxed) and anyone who pays insurance (insurance premiums are taxed).

Its simply impossible to tax the government, and impossible to tax many health care patients. THefore, that money WONT be coming in to the treasury.

So the Fairtax would have to rise to over 50% to make up fo that.

Imagine a 50% tax on rent, on utilities, on new houses, on new cars.

People complain about 20 cents federal tax on gasoline. Wait till its 1.50 in taxes. Plus state taxes.

Hey - fairtax folks - your king has no clothes. We need a real solution, not illusions

 

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