![[SeMissourian.com]](http://www.marshallnews.com/images/nameplate.png)
|
|
Overcast with Haze ~ High: 58°F ~ Low: 45°F |
|
Enter the FairTax
Posted Tuesday, June 23, 2009, at 11:49 AM<< Previous | Read comments | Respond | Email link | Next >>
Recently, there's been some talk about the FairTax Plan. Some like it, some don't, and most just don't understand it. Let me say right up front that I am a huge FairTax supporter, but all my research has been independently conducted and is not based on what talk show hosts or political pundits have said or written.
If you haven't heard of the FairTax (not to be confused with the Flat Tax proposal), believe me, you're not the only one! In this post I will endeavor to explain why I support the FairTax and why I think you would support it, too. (This post will be lengthy, FYI.) Before I became an actual supporter, I had heard about the FairTax Plan, but I wasn't really sure I understood it. Things like "tax-inclusive" versus "tax-exclusive," "national consumption tax," "prebate," all had my head spinning for a while. Besides, what do I know from taxes? I've only paid taxes for about two years, and most of that time I wasn't even aware of how income taxes worked. (I mean, who looks at their first paycheck and says, "Hey, how much income tax is being taken out of this?") But how will the FairTax change anything? According to fairtax.org, the official FairTax website, "The FairTax plan is a comprehensive proposal that replaces all federal income- and payroll-based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment. ... The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system." Frankly, it all seems a bit too good to be true. And a lot of people have criticized the FairTax as being a good idea that is not economically or politically viable. They're wrong. For economic viability, follow this link: http://www.fairtax.org/PDF/Tax%20Notes%2.... Or this link: http://www.fairtax.org/PDF/Comparing%20A.... For political viability, follow this link: http://www.fairtax.org/PDF/Macroeconomic.... Or this link: http://www.fairtax.org/site/DocServer/Ta.... Currently, anywhere from 2% to 15% or more is taken out of an individual's paycheck, depending on the size of said paycheck, before it ever reaches the wage-earner's hand. In addition, a lot of people pay taxes every April. On top of that, you've got the fact that corporations always pass their tax burden down to the consumer, so we end up paying their taxes as well as our own. Not to mention sales taxes we already pay and the numerous hidden taxes we pay without any knowledge whatsoever. But, when the FairTax is initiated, each individual's paycheck or pension will consist of 100% of his/her earnings (except in states that have a state income tax), without a single dime taken out by the federal government. Revenue for the government will instead be collected by implementing a 23% national consumption tax or retail sales tax. That means 23 cents of each dollar spent is taxes. That's where the "tax-inclusive" versus "tax-exclusive" argument comes into play: 23 cents of each dollar is 23% of that dollar, so that is a tax-inclusive calculation, compared to the point made by those who say spending 77 cents and having 23 cents in taxes added to make the dollar is actually a 30% tax-exclusive formula. It's essentially the same thing, but the argument arose that FairTax proponents were trying to "deceive" people with the 23% figure, when it was "really" 30%. You can calculate it either way and the end number is the same, just know that 23% is "out of every dollar" and 30% is "on top of every 77 cents to make a dollar." So why 23% out of every dollar, anyway? Won't that drastically raise prices on everything, since current sales tax is only about 5% to 7%? These questions have been asked before, and here is the answer: I've already noted that corporations and businesses essentially don't pay taxes because any money they owe to the government is collected from consumers on top of the price of the actual product or service rendered. It was calculated that once all federal income- and payroll-based taxes are eliminated, prices for products would go down about 22% or 23%. Then the 23% in sales tax is added back to the price to return prices to current levels and the government gets all the same money back. Basically, it just changes the way taxes are collected. But remember, while you are still paying the same prices for products, you also have that extra money that wasn't taken out of your paycheck as income taxes. So everybody wins! That might sound overly simplified, but it is quite true. So what does the FairTax do for businesses? First off, all the income- and payroll-based taxes formerly taken by the government will be left to the business employees and employers, which is why prices will decrease once the FairTax is implemented. Second, business-to-business purchases will not be taxed at all. So a small-business baker who usually has to pay sales tax when purchasing flour, eggs, milk, sugar, what-have-you, will only pay what the wholesale producers are charging for those supplies. And not only will that leave more money in the baker's business account, but it allows him/her to even decrease prices for more competitive business. The same goes for big businesses, of course. Once the FairTax takes effect, big businesses will also purchase business-to-business without any sales tax, effectively letting them lower prices, too. Either that, or businesses big and small would have additional money to expand said businesses and offer more services and/or products to the buyers, who also have additional money. Of course, after a while it won't seem like we've got extra money, because no one is going to sit down and say, "Hmm, how much less money would I have had it been taken out in income taxes?" But even after the general boost in wealth has seemed to settle, we're still left with a tax system that is much more balanced than the current system. We are allowed to decide how much we spend, how much we save, and how much of our money goes to the government. What's not to like about this system? So some people might be wondering, with all this "extra money" everyone seems to get, doesn't that mean the government will not collect the same amount of taxes it previously had collected with income taxes? Another good question, and for the answer, just think of how many people do not pay any taxes at all. You can't collect income taxes from, say, drug dealers, who make a "living" on cash and operate entirely under the radar. Under the FairTax, unscrupulous individuals such as these will be paying taxes every time they go to the grocery store, or get their car pimped-out, or make a purchase at a gun store. The FairTax can't stop anyone from dealing drugs or whatever, but it can make sure these people are contributing to the country, at least more than they are now. In addition, let me quote Laurence J. Kotlikoff, a professor of economics at Boston University and a research associate at the National Bureau of Economic Research in Cambridge, Mass., in a column in The Boston Globe from February 2008 (http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/02/24/why_democrats_should_love_the_fairtax/): "Our tax system is regressive because none of the corpus -- the principal -- of the wealth of the rich, including our more than 400 billionaires, is subjected to taxation. Instead they pay taxes only on the income earned on their wealth. But this income comes primarily as capital gains, which are taxed at only 15 percent. Furthermore, capital gains taxes are levied only when wealth holders realize their gains -- when they sell their appreciated assets. "But the superrich don't need to sell their gains. If they need cash they can borrow using their appreciated assets as collateral. When they die, they can hand their heirs their appreciated assets with a step-up in basis, which wipes out prior capital gains. With the right estate planning, they can also avoid most estate and gift taxes. Unlike most of us, what the superwealthy and just plain wealthy pay in taxes is a matter of choice -- their choice." The FairTax expands the tax base to fully include the superrich as well, eradicating loopholes in the income tax system such as those mentioned by Professor Kotlikoff. Seemingly, the whole point of income taxes would be to tax people evenly based on wealth, but the actuality is that there are far too many wholes in the current system to tax "evenly." So in spreading the tax base, the FairTax effectively eases every taxpayer's burden, while also collecting tax money from different sources to obtain revenue neutrality. It also allows for more saving and less spending for those who desire to manage their money that way. Certain people think tax evasion is going to run rampant under the FairTax. It does seem possible at first, but think about this: under the current tax system the IRS has to sift through over 140 million tax-filers and hope to find the tax cheats, but under the FairTax, there will be less than 20 million tax-filing businesses. Basically, there's going to be about a seven-fold increase in the likelihood of a business being audited, making it incredibly risky for a business to take money under the table either as a favor or just to keep extra money for itself. And even if a business does take money under the table, the IRS will have more time on its hands to focus on cracking down on said business. In other words, it's not really a good idea to evade taxes under our current system, but it's seven times as risky under the FairTax. For more on the possibility of tax evasion under the FairTax, follow this link: http://www.fairtax.org/site/DocServer/Th.... Okay, so in fairtax.org's description of the FairTax, they mentioned the repeal of the 16th Amendment. What is the 16th Amendment, you ask? "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." That's the 16th Amendment. Basically, Congress can take whatever they want from whoever they want without any basis whatsoever. Who on earth thought that was a good idea? Congress, of course. Well, under the FairTax there will be no federal income taxes and Congress will not have the power to adjust tax rates to whatever they choose. The 23% sales tax rate will be set in stone as far as Congress and the government is concerned, and the only way to adjust that rate will be to take the issue to a national vote. So again, We the People are in control and not the government. Added bonus, April 15 will become a day like any other under the FairTax, as there will be no need for a "tax day"! Less stress in a year is certainly a good idea in my book. My next post will deal with the FairTax Prebate, a monthly tax rebate on money spent up to the poverty line. The Prebate is a highly progressive step toward easing the burden of poverty in America and is yet another way the FairTax is much fairer than our current tax system. Comments Showing comments in chronological order [Show most recent comments first] |
Clowns to the Left of Me, Jokers to the Right  - Archives - Blog RSS feed ![[Feed icon]](http://www.marshallnews.com/images/icons/feed-icon-14x14.png){kind=icon} - Comments RSS feed - Login Stuck in the middle with you! Moving to Marshall in 1999, I was home-schooled for my entire educational experience, completing the GED at age 16. I am a political centrist. I am neither a member nor supporter of either major political party (hence the title) and serve only my messiah, Jesus of Nazareth.
Hot topics Prebate to End Poverty?(10 ~ 11:46 PM, Aug 3)
Enter the FairTax
Alternations of Political Reality!!! -- Part II
Tax Day Tea Party: Be There!
Alternations of Political Reality!!!
|
One little hole I see in this is that most businesses in most states are exempt from sales tax on purchases for use in their business. The baker, to steal your example, doesn't pay sales tax on the flour, butter, eggs and so forth he uses to bake bread, so he doesn't have any "tax break" to pass on for that reason.
Labor isn't taxed in most states, either, so the person who repairs your car isn't going to pass on a tax break for what he charges you for labor, either. He does charge tax on parts he sells to you, however, so that's a break that could be passed on, unless he decides to simply roll that into the price of the parts and passes on no savings to the consumer at all.
That's a good point, thanks Kathy. However, "most businesses in most states" is not all businesses in all states, which would be the case with the FairTax. (Unless, of course, the state itself has a sales tax that is collected from certain businesses-to-business transactions, which can be easily remedied by said state passing a state FairTax Act.)
Now, if I'm reading your second paragraph correctly, it sounds like you're saying a car repairman collects sales tax when he sells a person a car part, and that once the FairTax is implemented he might still charge that same price and keep that extra money that used to be collected for taxes. That is possible, but if the auto-shop down the street doesn't do that, then the one down the street will have less expensive parts to offer (even if they're the same parts) and will probably attract more business, while simultaneously giving its customers that tax break.
In effect, the first car repairman will probably lose money by continuing to collect the money that was formerly sale tax.
Also, something I didn't point out in my post, the FairTax is set up so that when you go to a store and make a purchase, the amount on the price tag is the amount you will pay at the checkout. A $2 item will cost exactly $2, a $10.75 item will cost exactly $10.75, and so on. Hopefully that will rid us of this $19.95 nonsense and the price tag will simply read $20. I can't guarantee that, but I do know that a $19.95 item will cost you no more than $19.95.
Hole #2 - As an example. A family of 5 at the Saline County Missouri adjusted median income level of $53,100.00 on average now pays $0 to $2000.00 (most are closer to the 0 end of the scale) in State and Federal Taxes combined, depending on individual circumstances. With the new 23% proposed "Fair Tax" a simple purchase of $100.00 worth of groceries would mean that this family is paying $23.00 in taxes. at $100.00 per week for just groceries (which is a very conservative amount) this family is already paying about $1200.00. Now add on clothing, Gas, auto repair, Medical, Dental, ect. and you will see that this family will be slammed by the "Fair Tax". This is assuming that Ms. Fairchild is correct (which she is) in saying that businesses are not taxed on their purchases for raw materials. The only way that the "Fair Tax" plan could possibly affect the price of the final product would be to eliminate all corperate/business taxes. This would lower the cost of goods sold and the savings could possibly be passed on to the consumer unless the company would choose to keep the new found profit to offset the losses incurred from our current mess of an economy.
Keep in mind that witholding taxes are not a cost to a company and do not affect the cost of goods sold. This is the employees money that is witheld from their gross pay.
As I see it, the "Fair Tax" will reduce the buying power of the middle class, the largest class,which will in turn, further disassemble our economy.
Convince me that I am wrong!
Well, here's another hole to deal with - if the Fair Tax is going to work, we can't have individual states passing individual Fair Tax Acts. Fair is presumably fair for all - the same in every state. Otherwise, "fairness" doesn't exist.
And you can argue all day long that the guy who doesn't pass on tax savings to the consumer is going to lose business, but I'd argue that's in the nature of a dream. People don't always choose where to buy things solely on price. I'll pay more for better customer service if I can get it. I'll shop where it's convenient to shop, but only if other aspects of the transaction are favorable.
The point is that it doesn't matter what's written on the price tag, or how the price is calculated and whether the tax is in that amount or not. It isn't always all about the price - Consumer Reports is an excellent place to prove that. The best price is the one that gives you the most for your money - and that is not necessarily the lowest price.
Maynard G Krebbs, the FairTax replaces the entire federal income and Social Security tax systems, including personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes. (Don't misunderstand me, Social Security, Medicare and the rest will be fully funded under the FairTax, but the revenue will be gathered in a different manner.) But, yes, the FairTax does eliminate corporate taxes and reduce prices, only to have the 23% added back to bring the gross price of an item back to what it currently is. As I explained, while prices will seem to remain the same, the fact that people receive 100% of their paycheck will increase people's spending power.
Now, as to the middle class being "slammed" by the FairTax or it reducing the buying power: Let's take your average family of five at the Saline County Missouri adjusted median income level of $53,100, for example. Every month the breadwinner of the family makes about $4,425, and, say, 2% is taken out of each paycheck (about $88), leaving $4,337 in spending money. After money is spent on groceries, clothing, gas, auto repair, medical, dental, and so on, let's assume the family spends $4,000 every month, leaving $337 to save for emergencies, vacations, or what-have-you.
Enter the FairTax. Now, the breadwinner makes $4,425 and keeps $4,425 because nothing is taken out of his/her paycheck. The family will, of course, still have to spend $4,000 on groceries, clothing, gas, auto repair, medical, dental, etc. Remember, as I explained, prices are the same. So, even though 23% or $920 of that is now taxes, the family only spends the $4,000 they always have. But because nothing was taken out of the paycheck, the family now has $425 left over in comparison to the $337 under the current system. You can do the math. No matter how you look at it, $425 is more money than $337, which means increased spending power.
Sure, $920 in taxes seems like a huge increase from $88, but that $920 is already collected by retail businesses they shop at in order to pay the business's taxes in various forms. In reality, the family is paying $1,008 currently, and the FairTax reduces their tax burden by $88. I know, I know, it doesn't seem fair that the business's tax burden is placed on the consumer's shoulders, but really that's the way it works now anyway.
In addition, there is the Prebate. I didn't have near enough space to cover that in this first post, but my next one will deal more on the specifics. Suffice to say, by my calculations, our hypothetical family would receive nearly $638 of their $920 in taxes back each month, meaning they only paid $282 in taxes and are left with a monthly grand total of $1,063 in spending money. Compare that to $337 under the current system and the FairTax has effectively put $726 dollars straight into the hands of this family every single month. If you want to look at in on a yearly basis, that's $8,712 more every year.
(That about seals up hole number two.)
I hope my explanation is convincing, or at least clear enough to understand. Keep bringing on the questions, I want nothing more than to answer everything I can about the FairTax!
Taxes are taxes and for that simple reason people won't like it no matter what. I don't think people really mind paying for things that they benefit from, but when it feels like the system benefits more from us than we benefit from the system, something is broken. Every month I have Medicare deducted from my pay check and I can't even afford medical insurance for myself. Every month I have Social Security deducted from my pay check and in 33 years when I will be 65, the Social Security system will be bankrupt and there will be nothing left for me. If someone can explain how I benefit from half the taxes I pay, I'll feel better about paying them....
Sorry, I can't help you there, imaloony! I wish I could say the FairTax would automatically make politicians spend our money wisely, but, alas, it is not so. Once it is out of our hands it is, well, out of our hands.
Kathy, the FairTax will work whether individual states implement it on a state level or not. The FairTax repeals all FEDERAL income taxes, payroll-based taxes, etc., but state-level taxes remain unchanged. So, states that have state income taxes will still have state income taxes and states that have state sales taxes will still have state sales taxes. The FairTax is completely fair as far as FEDERAL taxes are concerned, which is the way it was designed to be.
The fact is, states are all going to be somewhat uneven whether the FairTax is passed or not. Take Missouri: we just passed a bill to replace state income taxes with a state sales tax, so it isn't really "fair" to all the folks in states that still impose state income taxes that we in Missouri don't collect taxes that way, is it?
But passing a FairTax Act at the state level would eliminate state income taxes if the state in question still imposes them, and thereby make that state on par with the rest of the states that have done it (I'm speaking hypothetically here). If a state wants to lag behind its neighbors and keep going with the old system once the FairTax has been implemented, it will be the job of the voters in said state to get themselves on track.
But again, states are already "unfair" in one way or another when compared to each other. The federal-level FairTax can't help that, but it is a drastic improvement to the current federal tax system, that much I can say for certain.
Uhhhh....wait....you said "we just passed a bill to replace state income taxes with a state sales tax." Not quite. The house passed the bill, but it still has to get by the senate.
When I say "we" I totally mean the House of Representatives :) But seriously, no, that was me getting ahead of myself. I surly hope it gets passed in the senate, and I have much confidence it will, but I meant "we just got a bill through the House to replace state income taxes with a state sales tax." Thanks for pointing that out, Kathy!
According to the U.S. Census Bureau, the median family income in Saline County, in 2007 inflation-adjusted dollars, is estimated to be $46,028. I think your figure of $53,100 is way too high.
I was simply using Maynard G Krebbs' figure. My calculations are correct as far as an actual $53,100-yearly family would be under the FairTax. If the median Saline County family makes less than that, it's not hard to recalculate if anyone wants to see that in black and white.
Your numbers do not add up. Think back to the family in Saline with the median income - the amount does not matter. It's the issue of where we are paying this "Fair"Tax.
Currently, say I make $5000 a month, paying 28% income tax and 10% sales tax. That equals $3600 left after income tax, of which 10% will go to sales tax for a total of $3240 in spending power. Without income tax, $5000 minus 23% sales tax yields spending power of $3850. On face, it sounds great. My dollar goes further with the "Fair"tax. I apply quotes to the word "Fair" because it is not.
Assume my neighbor makes $10000 per month - there is no reason to expect he will need to spend more than me. If we spend about the same amount each month, he will only pay half the effective tax as I will. Think about it. 23% on $5000 spent is $1150 in sales tax for each of us. This $1150 is 23% of my monthly income but only 11.5% of his. And the fun part? A higher sales tax discourages spending in general, which any learned economist will point out is bad for the economy. Also, those making more, on top of paying a smaller overall proportion of their incomes in sales tax, will have enough money left over to invest for tax breaks. You may refute that by saying that the FairTax will eliminate tax breaks for such investments. Congratulations, on top of discouraging general spending through higher taxes you will also discourage investment in important business ventures and donations (sense I'm sure these would be affected as well). Even though the numbers indicate a couple extra hundred saved in a year, the average person is going to be looking at the receipt. The key point, however, is that sales taxes unfairly and disproportionately tax lower incomes versus higher.
Also, I'm not sure why you assume that prices will no longer be $19.95 and the like. That pricing scheme has nothing to do with taxes and everything to do with marketing. Consumers look at the full dollar amount, almost always ignoring the amount of coin attached - $19.95 looks like $19, etc. A law has no business obligating a business to set its price so that, when the sales tax is applied, it comes to a round dollar amount - that is exactly what your wording seems to purport.
Another interesting note: why would big businesses pass on their savings to the consumer? If all big business is exempt from paying sales tax, it will be saved in the form of extra earnings-per-share (EPS) for publicly traded companies or pure profit margin padding to bolster the financial statements of the corporation. Just because a couple businesses pass on savings doesn't mean many will. Rarely do prices actually go down unless there's a sale or an obsolete item being sold. It's possible, but not likely to happen.
I must also point out the issue of state-to-state business. Basically, the cost of living is higher in different areas, something that isn't magnified by income tax; as a percentage, the income tax is consistently applied. However, when people on the coasts pay far more for most goods, from sundries to groceries, they are going to be paying a higher effective sales tax than anyone else. That's a problem.
What is also a problem is the issue of shopping online. With nearly all online commerce untaxed, I wonder how many people would really stretch their dollar and shop exclusively online, excepting food? I know I would.
And one last thought, anyone with kids will pay a higher proportion of their income in sales tax, which happens now but will be magnified by the "Fair"Tax.
No offense, kevinozkal, but I'm a bit confused by your post. In the first part, you talk about how two neighbors who make $5,000 and $10,000 per month, respectively, but only spend about the same amount of money each month are not taxed evenly under the FairTax. You assert that the estimated $1,150 in sales taxes collected from each is 23% of one's earnings and 11.5% of the other's, and this is correct. So the point would be that even though the same amount of actual money is collected from each, the lopsided percentages makes it unfair.
But then later on you say it is a problem that more money is going to be collected from people in states with a higher cost of living compared to people in states with a lower cost of living, even though percentage-wise they are being taxed evenly at 23%. In the first example, actual money collected is even but percentage is not, and in the second instance percentage is even but actual money collected is not. I'm confused as to which one you are trying to say needs to be even to be fair, percentage or actual dollars collected?
But issues like this can get to be more about philosophy than anything else. Should one neighbor pay more to the government because he makes more, even though he lives modestly, like the other neighbor? Or, should the neighbor who makes more only pay extra if he decides to live a more luxurious life than the other neighbor? Should two people be taxed differently based on different jobs, or on different lifestyles? Personally, I don't see taxing a higher-paying job more than a lower-paying job as being wholly fair. But taxing a luxurious lifestyle more than a simple lifestyle seems adequate, at least to me, because it is a person's choice. Does anyone really begrudge the richest of the rich because of the money they possess, or is it really the lavish spending and higher living that makes us poorer people envious? Maybe you disagree with this philosophy, but that is the philosophy of the FairTax.
Now, your points are valid up to the part where you say, "And the fun part? A higher sales tax discourages spending in general, which any learned economist will point out is bad for the economy." If you look at it the way sales tax is now (tax-exclusive), it might look that way. But let me reiterate: Prices will be the same as they are now, only calculated and taxed differently. So if you go out today and spend $100 on new goods, you'll pay an estimated $110 with sales tax. If you go out when the FairTax is in effect and spend $100 on the exact same new goods, you'll pay $100 with the sales tax already included. $77 will be for the item itself, $23 for sales tax. But DO NOT think that $77 items will be $100 under the FairTax, because if you do you need to reread the original post. A $77 item now will be $77 under the FairTax, a $100 item now will be $100 under the FairTax, and so on and so forth. In actuality, spending power is INCREASED slightly and general spending is promoted, not discouraged.
Then you say, "Also, I'm not sure why you assume that prices will no longer be $19.95 and the like." I don't assume that, and the FairTax does not demand that. What I said was, "Hopefully that will rid us of this $19.95 nonsense and the price tag will simply read $20. I can't guarantee that, but I do know that a $19.95 item will cost you no more than $19.95." Emphasis on "hopefully" and "I can't guarantee that." No assumptions are being made; I'm stating the fact that I would prefer it that way, which is why I did not include that bit in the main story.
As to businesses passing down savings or not. Obviously I poorly worded this section, or people are reading it too fast, or something. I used terms like "allows" and "letting them do something" to say that it would be possible, even if it is not a sure thing that they all will lower prices. I also said, "Either that, or businesses big and small would have additional money to expand said businesses and offer more services and/or products to the buyers." In fact, that section was more aimed at business owners, letting them know what they COULD do under the FairTax IF they so desire. If you don't own a business, that section doesn't really pertain to you.
And to end off, you said, "Anyone with kids will pay a higher proportion of their income in sales tax, which happens now but will be magnified by the 'Fair'Tax." While technically this is true, more of everyone's spending is sales tax. You make it sound as if larger families will pay more for things than they do now, but this is not true. I come from a family of seven (I have four siblings), so believe me when I say I have taken that aspect into account. You have to understand that the tax-inclusive way the FairTax is calculated means sales tax is already in the price and that the price is the same as it is now. Larger families will not only pay the same for products, but will receive a higher monthly tax prebate. End result, the FairTax is much more beneficial then detrimental.
Jacob,
You continue to assert the idea that "the price will stay the same" when in reality, there is no guarantee that the manufacturer - wholesaler - retailer will lower the original price to accomodate for the tax. The only way you can back up your claim is if it were mandated by law that all prices will be lowered in an equal amount to the tax.
Also, the idea of a "prebate" will require some form of application that could be somewhat equivalent to the current tax returns. And just think of the huge amount of government generated prebate checks each month!
Okay, Maynard G Krebbs, picture this:
I work in a high-up position in some mega-corporation. The FairTax has just been implemented, and it's my job to integrate it into the corp. I've got some good news for the CEO, because the FairTax means our corp. (and all others) no longer have to pay out corporate taxes, payroll-based taxes, etc., etc. Just last year we had to raise prices slightly to compensate for an increase in these taxes on our corp. Now, this newfangled tax system means that tax burden we used to pass down to the consumer anyway will instead be collected at retail level in the form of a 23% consumption tax. That's a burden off our corp.
And do you know what my ingenious idea for making a ton of money really quick is? All that extra money we charge that used to go to the government in taxes will instead be kept by us and that 23% will be added to that! So our $20 items will now cost $26! Our $100 will now cost $130! Our $500 items will now cost $650! So on and so forth. And the best part? The consumers apparently aren't even going to notice!
Yeah, right. That'll work out just great. No one will mind paying a ton of extra, unnecessary money for the exact same thing. There's no guarantee people will buy from a smaller business or whatever that makes the same product and does keep prices at the same level. But I know I would. And while huge corporations may be completely oriented on making the most money they can, they're not stupid. If there's even a small risk of being outsold, don't you think they're going to act accordingly?
Think about this, you're shopping for a pair of socks (after the FairTax is enacted). There are two brands that offer basically the same type sock. You remember that they both used to be $4 per pack. The brand you usually buy is now $5.20, but the other brand is still $4. Unless you are really, really loyal to that first brand, I would venture to say you would opt to save $1.20 and buy the other brand of socks.
Now imagine two car companies that make similar cars and are always trying to outdo each other. After the FairTax is implemented, one company does the logical thing and drops prices accordingly so that they level out when the sales tax is added back. The second company, on the other hand, sees fit to keep charging the same and have the sales tax added on to that price. The two remarkably similar cars sit next to each other on a lot, but while one has a price tag reading $30,000, the other one's price has jumped to $39,000. Which would you buy?
Just how dumb would a corporation, company, or wholesale provider of any kind have to be to not see the benefit of adjusting prices to compensate for the FairTax after that same FairTax has just relieved a huge tax burden from said corporation, company, or wholesale provider?
Corporations and the like might only care about profits, but they know lowering prices is enticing and raising prices pushes consumers away. It's elementary, my dear Krebbs. There needn't be a law mandating price decreases, because any intelligent corporation, company, etc., is going to see the advantage of NOT letting its prices increase so dramatically.
Jacob,
I am well versed in the concept of market competition and believe me, it is not as simple as you put forth. You just wasted 7 paragraphs of rhetoric affirming that there is no guarantee although; your theory may carry a fair share of validity but, it is still theory until it is proven that we have "intelligent" corporations. In today's world it is very obvious that there is a very small amount of intelligence (or honesty) in the corporate world.
Another wrinkle in your theory; as you may or may not know, not all corporations pay corporate tax. Corporate taxes are based on profit. There are a large number of small manufacturing companies that show little or no profit therefore, they pay little or no corporate tax. Also, as I have mentioned, payroll taxes are not a cost to a company. They are simply the employees withheld wages. This leaves no room for the theory of lowered cost leading to lower price on a large volume of products.
Okay, since you seem to be a fan of examples, I will give the following example. Two companies in the U.S. produce widgets (a favorite term used by my old economics professors). One we will call Big Company and one we will call Small Company. Widgets are identical products and a necessary purchase by the consumer. Big company produces a large volume of widgets and makes a large amount of profit. Small Company produces a small amount of widgets and shows a small amount of profit.
Along comes the "fair" tax and relieves the corporate tax burden on both companies. Big Company has just run into a large windfall from this and Small company receives little to no relief. Big company now has all of the choices. Big Company can now reduce the price of its widgets to accommodate for the new sales tax but, Small Company has seen no relief so, it cannot reduce it's price without finding some other way of cutting cost. Small Company will have to do any or all of the following: reduce labor force, cut or freeze wages, cut benefits, ect. Big Company can now run Small Company out of business and control the market. No competition means they can charge what they want. Big company could also choose not to reduce their price in the first place and leave Small Company alone and let the consumer pay the increased price.
Take this small example and apply it to the market and you can see that it's not as simple as you wish us to believe. Prices are not going to drop by your magic number to accommodate for this new tax plan. In fact, it could do some serious damage to the market place.
Next you can explain how costs will be reduced on imported goods which are not subject to U.S. corporate tax.
As I see it, at best, some prices would stay approximately the same after the "fair tax" is added but, some would raise slightly, most would raise moderately to significantly and some would raise the full amount of the tax.
Another thought on the idea of a prebate. If this is truly a "fair" tax and prices remain the same as you contend then, why is a prebate needed if for no other reason than to redistribute wealth?
Your premise is simplistic, unrealistically optimistic and ill informed.
If you look at corporate history the US consumer did not receive lowered prices when jobs were outsources at one tenth the cost of US jobs. Why would you assume they would lower prices after being relieved of tax.
Another error you have is assuming corporations/businesses will continue paying current wages. If as in the above examples a worker earns $5000 a month, paying 28% income tax and 10% sales tax. That equals $3600 left after income tax, of which 10% will go to sales tax for a total of $3240 in spending power. If an employer realizes you now work for $3240 in take home why would they continue to pay you $5000?
This "fair" tax would stimulate wage cuts, not tax equality.
Jacob, I have stayed out of the fray on purpose, so that I could dispassionately observe the give, and take.
Firstly, I applaud your courage, and your effort. I hope that you are in some way getting college credit for your endeavor. Whether, or not, you are educating your self.
Secondly, I hope to see you take advantage of the many fine arguments, pro, and con. Do not be afraid to be persuaded that the position of your adversary is more rational, sometimes it is. I know that from personal experience. Your mission is to draw a conclusion that is formed by a fair consideration of all the evidence. You will be a wiser man for it. Your mission is not to defend your position to the bitter end. You will not grow from a bunker mind set.
Having said that I must add that I am not telling you that you are on the least defensible side of this issue, nor am I saying you should not present the pro side of the issue as ably as you can. After the dust has settled revisit the presentations, then reflect. You will be the stronger for it.
Congratulations young man, job well done.
Maynard G Krebbs, I realize I probably don't know nearly as much as you about economics or marketing or anything else along those lines, so I'm going to start over. Instead of trying to explain it my way (the epitome of layman-terms), I will direct you to several relevant articles that carry far more weight than my weblog when it comes to FairTax facts and the economy. If you truly wish to know how the FairTax is intended to function, follow these links for starters:
http://www.fairtax.org/PDF/Macroeconomic... and http://www.fairtax.org/PDF/TheFairTaxAnd...
Next, you asked if the Prebate had any purpose other than to redistribute wealth. The fact is, a lot of people think any kind of a sales tax increase is regressive because is supposedly hits the middle- and lower-class brackets the hardest. The Prebate is designed to counter that by giving individuals and families with lower incomes a higher comparable percentage of tax rebates than those with higher incomes. And, truth be told, it will effectively redistribute wealth to poorer people. But it is a little more complicated than just that, so I suggest following this link for more info on that: http://www.fairtax.org/site/DocServer/A_...
formerOwl, first you have to realize the reasons jobs were outsourced in the first place, which included heavy tax burdens, increasing compliance costs, etc., etc. Although I'm not in any way ruling out cheapskate businesses and corporations, mind you.
Also, I'm not sure why you think wages will decrease under the FairTax. If an employer pays his workers $5,000 before the FairTax, why wouldn't he continued to pay $5,000 after it is implemented? We may have to ask Krebbs on this one, but I don't think wages are calculated as after-tax amounts, with income taxes added on. Unless I'm wrong, employers pay the gross amount without calculating the net remainder, and $5,000 gross before and after the FairTax is still $5,000 gross, no matter what the worker's actual spending power is.
But don't take my word for it, check out this link if you want all the facts: http://www.fairtax.org/PDF/HowTheFairTax...
By the way, Oklahoma Reader, I really appreciate your comment! You are absolutely right about learning from opposing view-points.
So, thanks again, man!
Jacob,
With this final comment I will leave you to decide for yourself whether or not you will continue to be a "huge fan" of this fair tax proposal. I am all for simplifying and modifying our current unfair tax system. The proposed "fair tax", in it's current state, also has it's share of flaws and is unfit for approval, however, it is a good base to start with.
It is my opinion that any overhaul of the current situation should not be done in one massive action but by a gradual change over. This would allow for the marketplace to adapt in it's own way and not throw a massive shock into our fragile economy. It would also put theory to a partial test and allow time to correct for unwanted results.
The website links you have provided are helpful but one sided since they are from the fair tax organization. I prefer to look at all sides and form my own conclusion.
Thank you for your sportsmanship in this banter. I think that Oklahoma said it perfectly in his last post so I will second that. I hope I made you think a little. Keep up the good work!
I doubt that wages would fall, in fact they might rise. Note that many wages are tied to economic indicators and other goodies such as 'cost of living.' This brings me back to the price of goods after the 'fair tax.' If a soda cost $1 today, a very small amount of that is to help pay the overhead created by corporate tax. most of it goes to labor, materials and a small bit to profit. With the fair tax, that soda will still start a $1, but instead of coming out to $1.10, it will come to $1.23 and the consumer will be taught that the fair tax can be thanked. Most won't notice or care. But it's not about what we notice, it's about what's right. Since raising more children creates the need to buy more goods, those families would be taxed more - simple as that. And the prices of goods do not need to be adjusted by producers to fit in the tax. That argument simply doesn't hold water. I'm not about to claim that the status quo is fair and just, but the 'fair tax' is lacking as well.
Maynard G Krebbs, I fully agree that any overhaul of the tax system should be gradual. And while it's true the links all come from FairTax.org, at least the first article was done by Arduin, Laffer & Moore Economics, independent from the FairTax organization. For the sake of clarity, it should be noted that Stephen Moore is an economist and one of the researchers who devised the original format for the FairTax.
I will give what is perhaps an unnecessary warning to those who wish to look at "both sides" of the FairTax issue: make sure information that opposes to the FairTax is coming from people who understand the entirety of the plan. There have been numerous critics debunked because they did not do the full research on the FairTax.
kevinozkal, trust me, you are not the only one who has argued against the FairTax by saying, "Since raising more children creates the need to buy more goods, those families would be taxed more - simple as that."
To that end, the FairTax Prebate was devised. You can read all about that in my next post, and comment there, please.