FairTax Act-Is it a viable solution?

The question as to be if that is pragmatically possible. How do we removed the non-value added costs to enterprise that would increase international competiveness of US business while imposing the same tax burden on both domestic and foreign produced goods?

Considering that Congress has abused every tax that they've had the power to impose can a suggestion be made? Remember that the 16th Amendment was sold to the States as only being imposed on the top 3% of the wealthy. That turned out to be a lie just like the Social Security tax was never to exceed 3%. We're continually being sold a "bill of goods" by Congress and they will exploit any form of taxation to the maximum historically.

 

There can certainly be alternative suggestions but the problem is that they don't have the advantages of a consumption tax. Income taxes which increase the costs of enterprise and that are non-value added expendatures of enterprise have negatively effected the competitiveness of US enterprise in the world economy. So long as we impose these costs on enterprise we're going to have the negative consequences of income taxes. We've lost tens of millions of jobs because of income taxes so there is an inherent problem with them if we address the quality of living for Americans.

What is completely unacceptable is to have both a consumption tax and income taxes. That merely increases government revenues without any benefit to the economy (and would actually harm the economy) or the People.

 

We already have that.

When the foreigners started dumping trash in our dump we charged the foreigners to dump, and the "liberal" law said "garbage is common to us all" so we could not charge foreigners to dump. So we paid local taxes to build the landfill and to support it, and then according to "liberal" logic foreigners can dump there for free. So to pay for the landfill they started charging us all to dump there, and told us that if we did not love "liberals" we were bigots and worse than Hitler. Why do "liberals" not want to tax foreign tyrants who dump all over us?

The problem seems to be the all or nothing approach.

What would be so bad about a gradual implementation? All income tax rates drop a point and the (revenue neutral) Fair Tax calculated to fill the void happens, two years later it happens again that way... Then instead of all or nothing, your way or the highway, my way or else--if it works we should be able to easily see it works--a few years down the road there is no income tax and the full Fair Tax.

 

I've deleted the irrelevant portion of this as it was partisan and the difference between a consumption tax and an income tax is not really a partisan issue. Both Democrats and Republicans can support a consumption tax with prebates because it meets the criteria of both. It is progressive because of the prebates and the degree of progressiveness is controlled by the "prebate level" as the higher the level the greater tax relief is provided to low income earners. The Democrats can and do support progressive taxation. It is also completely fair as everyone receives the identical prebate and everyone pays the identical tax rate. The Republicans can support this.

But what I've retained is the important part of the above quotation. There is a huge problem related to converting from an income tax system to a consumption tax system and a phased approach is a logical approach. If it was abrupt taking place on a specific date then products produced under the income tax system would have the embedded taxation on those products already inherent in them and then they would be taxed again under the consumption tax. That would result in the double taxation of the same product. So I would support a phased implimentation of a consumption tax to reduce this double taxation.

As I've noted previously I do oppose the FairTax.org proposal but do support a consumption tax with prebates similiar to the FairTax.org proposal. I just see too many political modifications and dishonesty made by FairTax.org in their proposal. It needs to be a clean and simple consumption tax with prebates as opposed to one that's starting out that's already been corrupted by politicians.

 

The problem I have with this scenario is competing only on price. This is something we avoid and won't even discuss. Prices have been determined over long periods of time. Yes they fluctuate but this is to be expected; win some lose some, good years bad years, etc. If the product at retail sells for $X, while our price is $X-50% and our cost goes down and we arbitrarily reduce our price to $X-60%, there is zero reason for this action to reduce the retail price. As long as their is sufficient demand the retail price will remain the same...or even increase. So now we would be making less money, the retail price stays the same, and the middle-man is making more.

I don't personally wish to design a business model competing solely on price. I like the markets, supply and demand. I don't wish to be like a gas station in which I change my prices everyday solely because the guy across the street changed his prices...

 

I've actually addressed issues other than the cost/benefit analysis of a Consumption tax with prebates.

The fact is that it is "voluntary" as a person could live "off the grid" and pay no taxes whatsoever. Not likely but there will be a few brave souls that will sacrifice the benefits of society to live completely off the grid. More power to them. Yes, this would cause a loss of revenue to the US government but it is so insignificant as to not warrant any serious consideration. More people today hide income which costs the US government revenue than could even hope to live off the grid.

It is absolutely fair as everyone pays the identical tax rate at the consumption level and everyone receives the identical prebate.

Because the prebate has a far more positive impact on low income earners it is progressive. The degree of how progressive it is would be controlled by Congress but the prebate would still be identical for everyone.

I saved perhaps the most important advantages for last.

A consumption tax is completely transparent because the actual cost of government would no longer be hidden by burying the taxes into the costs of the products and services we pay for. If the government requires 20% to fund government then that's the tax rate. If it requires 40% then that's the tax rate. It also eliminates corporate lobbying related to taxation from our political system. The taxpayers really have the "cost of goverment" placed directly in their face. The politicans can't hide it as they do today. No more simply saying "let someone else pay for it" when all of us are sharing the burden and that burden is evident everytime we purchase a new product or service. We will get the prebate that offsets the tax up to the specified prebate level amount but we'll still be paying the tax starting at dollar one for new goods and services. It will show up on every single sales receipt for a new product or service.

Large corporations spend hundreds of millions of dollars annually using PAC to influence the tax laws and they do succeed. This is the "corporate influence of politics" that so many complain about. That is not the only thing that corporations lobby for but it is one that they spend a lot of money on and that money does influence our politicans.

Finally, and this is a strange outcome of a consumption tax, is that it will accurately reflect the GDP which is the production of new goods and services within a year. As others have noted in this thread there appears to be a little bit of false (fraudulent?) accounting practices related to how our government reports the GDP. The government certainly has motivation to do this as they compare the cost of government, the deficits and national debt to the GDP and if the GDP is actually less than what the government reports then it puts our government in a bad light. If only the new goods and services are taxed then the government cannot include anything in the GDP that isn't a new good or service which is what the GDP is supposed to reflect. Of course the consumption tax also taxes imported goods at the identical rate as domestically produced goods (which is fair) but then it doesn't tax exports which is also good because it lowers the prices of our exports making the US more competitive.

All of these are benefits not directly related to a cost benefit analysis. Alone they provide enough reasons to support the consumption tax.

 

First and foremost it must be defined as an exclusive, not inclusive, tax. This directly effects the prebate which is supposed to be enough money to pay for the consumption tax up to the "prebate" level. An inclusive tax rate does not do that. The prebate is based upon the "prebate level" multipled by the "tax rate" and a little quick math shows that an inclusive rate does not pay the tax on the prebate level of spending.

Next is that only new goods and services are taxed and that all new goods and services are taxed. There are no exemptions nor should payments unrelated to a service being provided or a product being purchased be taxed. As an example a person renting an apartment is paying part of their rent to cover the cost of the building which is not new and would have already been taxed during construction. They should only pay a tax on the services being provided by the landlord and not for the building. A logical ratio for this could be codified under the law for example 10% of the rent might be established as the cost of the services provided to the tenant by the landlord and that would be all that was taxed. Some places might provide greater services than this and that could be allowed but it would have to be specified in the lease agreement. How much is a "service" being provided and how much is a return on investment to the landlord as one is taxable where the other is not.

All consumers, including the government, pay the consumption tax on new goods and services at the retail level.

Of course purchasing of a "used home" or real estate would not be taxed as it's used but services related to the purchase such as loan fees, escrow fees and title fees would be taxed because they are a service being provided. Interest, to a degree, would also be non-taxable as it is a return on investment and does not reflect the purchase of a new good or service. Some of it obviously reflects the loan service that's provided but most is merely a return on investment and investments are not taxed.

Those that employ others at a "retail" level (e.g. a gardener or maid that is a direct employee of the individual) would have to pay the consumption tax for the services provided. This would not apply to a business which produces or provides a service that is taxed at the consumption level. This is similiar to the requirement that FICA/Payroll taxes must be paid today for the same labor of others when employed by an individual and not an enterprise.

I know I haven't covered everything but this gives a good idea of where I'm coming from.

 

ShivaTD,

Now that you have more or less defined your views about a national consumption tax, I have a few comments/questions.

"A consumption tax is completely transparent because the actual cost of government would no longer be hidden by burying the taxes into the costs of the products and services we pay for.

By taxing government operations, you are hiding the actual cost of the federal government in State and Local taxes. Burying the taxes in the price of goods and services today is no different than burying the tax cost in State and Local taxes under your plan. If you agree that only people can pay taxes, then why not bite the bullet and set your rate without adding government consumption to your tax base? At least that would be honest! And, if you are concerned about tax free government competition with the private sector, use the AFFT solution which mandates that any government agency that sells goods or services on the private market would be classified as a "government enterprise" and would have to collect and remit the sales tax.

"The prebate is based upon the "prebate level" multipled by the "tax rate" and a little quick math shows that an inclusive rate does not pay the tax on the prebate level of spending.

What on earth is a "prebate level"? I think you mean "poverty level", and if so, are you going to use the official HHS poverty level figures, or do you believe the AFFT claim that there is a marriage penalty that requires revising the official poverty level upward? I also would suggest that using an inclusive rate to calculate the prebate is appropriate. The poverty level is a fixed amount and if you use an exclusive rate, your prebate would be too high. Check it out!

 

I hear you loud and clear on all of your points. Having a 25-30% consumption tax at the point of sale will certainly drive people crazy...to the point that it will modify their spending habits. I don't personally believe workers will achieve higher wages in this conversion process.

I've been curious but forget to ask; how is the proposed prebate doled out?

I remain convinced in our business that if we pay less taxes this is great...but we won't modify our prices downward, or increase wages, unless we are forced to do so by supply and demand.

I also remain adamant that if we ever try to adopt a different tax system, that no matter which tax system we choose, it will be a 100% waste of time if we don't also balance the federal budget...

 

The unintended consequence of a consumption tax is really pretty obvious. If you tax consumption, then consumption will go where there is little or no tax. Want to see a huge increase in the success of Chinese and other foreign e-commerce web sites. Just put in a consumption tax and you will see it.

 

State and local governments, as well as the federal government, are already paying the taxes/expendatures of enterprise when they purchase goods and services from the private sector. The consumption tax doesn't "hide" these costs when the government is the consumer as they would pay the identical tax as any consumer. If, for example, we look at the government buying "red tape" (a favorite commodity used by government) how much of that cost is related to the payroll taxes and the adminstrative costs for enterprised to administer that tax? How much of the cost of that product is related to the accounting necessary for compliance with the income tax laws? It is buried in the prices but if the local, state and federal governments purchase a new good or service with a consumption tax we know exactly how much of that expendature is because we know the consumption tax rate. It is transparent.

FairTax.org has basically linked their prebate level to the "official poverty rate" but that is an arbitrary dollar amount that the government keeps lower than the actual cost of existance. For example the government keeps the "official poverty level" at roughly $10K for an individual but if an individual has that level of income then they qualify for enough "welfare" benefits so that their actual "income" from all sources, including the government, is equal to almost $30K/yr. A person simply can't purchase all of the basic necessities with $10K/yr of income so it is an unrealistic prebate level IMO.

I've recognized this and typically used 2X the official poverty level. There is no logical reason for linkage related to the poverty level and the consumption tax when instead a realistic prebate level should reflect the necessities, not luxuries, that an individual would reasonably be expected to purchase annually. Ultimately the prebate level determines how progressive the tax is and that could be left to Congress to decide and they could raise or lower it as they see fit and while it would effect everyone to a greater or lessor degree (more or less progressive) it would be the same level for everyone.

 

All imported goods and services are taxed under the consumption tax. There is no evading it. If a good or service is consumed within the United States the consumption tax on it is paid regardless of whether it's domestically produced or originates in a foreign country. Even used goods (e.g. a used yacht), when imported into the United States, would be taxed when it enters the country as it would not have been previously taxed.

On the flip side a commodity produced in the US and exported would not be taxed which makes them less expensive internationally increasing demand and therefore production which increases the demand for labor to produce these goods increasing the number of US jobs.

 

ShivaTD,

"State and local governments, as well as the federal government, are already paying the taxes/expendatures of enterprise when they purchase goods and services from the private sector. The consumption tax doesn't "hide" these costs when the government is the consumer as they would pay the identical tax as any consumer. If, for example, we look at the government buying "red tape" (a favorite commodity used by government) how much of that cost is related to the payroll taxes and the adminstrative costs for enterprised to administer that tax? How much of the cost of that product is related to the accounting necessary for compliance with the income tax laws? It is buried in the prices but if the local, state and federal governments purchase a new good or service with a consumption tax we know exactly how much of that expendature is because we know the consumption tax rate. It is transparent."

You are missing the point. By taxing government consumption, 10-15% of the cost to fund the federal government is included in State and Local taxes. There is nothing transparent about claiming that the Fairtax rate is 23% when in fact, if you remove State and Local consumption from the tax base, the inclusive rate is actually 28%. And I defy you to tell me just how much of the State/Local tax on the sales receipt goes to the federal government. Can't be done. It is not transparent!

 

Please ignore the FairTax.org proposal as it is already politically corrupted. Now let's address the rest of your concern.

Let’s create a theoretical example using a $20 million highway construction project that the State contracts a corporation to build. We’ll assume, for the sake of the example and based upon historical evidence, that this is one of 80% of all corporations in the United States which excludes the large multi-national corporations. For this hypothetical example let us assume that one-half of the corporations expenditures, or $10 million, is related to the labor costs to build the project.

The payroll tax (excluding the temporary reductions) of 7.65% on $10 million is $765,000. For the 80% of all corporations that are in the United States the compliance costs are 3.84 times the cost of the tax being paid so this equals $2,937,600 so the total cost for the taxes and compliance costs to the state are $3,702,600 on a $20 million project. That equals 18.513% of the cost of the project…. But it doesn’t include the costs of labor related to the asphalt, concrete and steel which is purchased by the construction company.

The elimination of the income taxes, specifically the payroll taxes, plus the compliance costs by 80% of all businesses would result in the project costing $3.7 million less reducing the project cost to $16.3 million but there’s even more.

If we assume that the corporation needs to earn roughly 10% on the project that would be $2 million on a $20 million project but only $1.6 million on a $16 million project. That is an additional $400,000 reduction in the cost of the project bringing it down to a cost of $15.9 million. Some ask why would the corporation lower the cost of the project and that's simple. It is competitive bidding so several corporations want the work and they will cut the cost as much as possible to obtain the project while still earning a reasonable profit. The free market drives the price down.

Now, let’s apply a 25% exclusive tax to that $15.9 million road construction project. That would be an exclusive tax of $3,975,00 for a total project cost including construction and the consumption tax of $19,875,000. The State actually comes out $125,000 better off with the consumption tax.

Of course this works with a 25% tax rate where the state as well as the people are better off but then neither would not be better of with a 30% exclusive consumption tax rate. The higher the tax rate the worse off everyone is which is why I typically used the 25% rate. When government revenue requirements exceed the 25% rate then the tax becomes oppressive but that would be true with the equivalent income tax as well. 25% is about the limit to what we can afford without the tax beginning to cause serious financial problems so that is the logical point to limit government expendatures.

I believe this is a realistic theoretical example but another basis for an example could be offered and we could run the numbers. I do try to be honest and realistic when creating theoretical examples as it serves no purpose to create pie in the sky examples. That's what politicans do and I'm not a politican. LOL

 

Sorry I missed this before so let me address it now. I do like the "tough" questions because they really do need to be asked.

Workers will not receive higher wages but they will have more disposable income because they would receive 100% of their paycheck with no deductions. No FICA or income taxes would be withheld. While income taxes ultimately are based upon "net income" FICA taxes are collected on gross income. Let me provide an example based upon the 2006 statistics related to the median household income of about $50,000 which was typical for a two worker family household. It's an easy number to work with.

At $50,000 the FICA taxes are (excluding the current reduction) $3,825.
Now I don't know what the income tax withholding is or the ultimate income tax paid is so I'm just going to guess at 10% which maybe too high or too low. Whatever that would be another $5,000 withheld from their paychecks.

Instead of the worker receiving $50,000 they would actually only receive $41,175 in net disposable income under the income tax system. That would equate to a tax of 21.4% of their disposable (not gross) income.

If they spent that entire net income of $41,175 on taxable goods and services at a 25% consumption tax rate the tax would be $10,294 which would be $1,469 more than their gross income... but they would also be receiving a prebate. I prefer a "prebate level" of $20K which would give them an additional $5,000 for a total income of $55,000 which would leave them with $3,531 in their pocket. If the prebate level was only $10,000 like FairTax.org basically proposes then they would only have $52,500 in total income with only $1,031 left in their pocket but they would still be better off than if they paid income and FICA taxes.

I will address the tax rate below.

The head of household would register the household and the prebate would be paid based upon the number of individuals in the household. It could be paid monthly, quarterly, semi-annually or annually. Obviously the more often it's paid, even though the payments would be automatic, it costs more to administer. I'd suggest annually just like income tax refunds are paid but some people would prefer it more often. Perhaps the individual could determine how often the want it but would have to make a small payment (deduction) for payments more often than once a year to cover expenses.

I addressed supply and demand in the previous post linked below related to a highway construction project. Anytime there is competition companies are going to reduce prices to achieve sales while still being able to earn a reasonable profit. That's how the market works.

First and foremost we not only need a balance budget but, in fact, a surplus budget. The current $15 trillion national debt is over ten times the amount of general revenues of the US government. That is over 10:1 debt to income ratio and that is completely absurd. A typical household should not have a debt to income ratio above 1:1 and having a debt to income ratio over ten times that amount is financial insanity. This has absolutely nothing to do with how the taxes are collected.

Please read the following on both what an acceptable consumption tax rate has to be as well as why the prices come down under a consumption tax. The example contained there is pretty realistic and I believe it addresses it well.

http://www.politicalforum.com/budget-taxes/200086-fairtax-act-viable-solution-42.html#post4831737

 

ShivaTD,

With regard to your $20 million road project, you wrote:

"The payroll tax (excluding the temporary reductions) of 7.65% on $10 million is $765,000. For the 80% of all corporations that are in the United States the compliance costs are 3.84 times the cost of the tax being paid so this equals $2,937,600 so the total cost for the taxes and compliance costs to the state are $3,702,600 on a $20 million project. That equals 18.513% of the cost of the project…. But it doesn’t include the costs of labor related to the asphalt, concrete and steel which is purchased by the construction company."

I know you have quoted that 3.84 number before, but it doesn't make sense to me. In 2007, Corporations paid $291 billion in income taxes and $147 billion in compliance costs. Isn't that .5%, not 3.84%? That is, for every dollar paid in corporate taxes, compliance costs were 50 cents? Where did that 3.84 number come from? It isn't credible.

 

Yeah, but if someone could do the math would there be more revenue with Apple people only paying consumption taxes?

 

I think it is pretty simple.

If you own the principle means of production you pay no income taxes on that which you must make to pay State property taxes...and you pay no consumption tax on what you make (I never paid any sales tax on anything I ever made, like a potato), if you want to buy someone else's product you just go to the Caymans and buy it there free of consumption taxes.

Rich 1
US government 0

 

The math was; "I don't understand the math? No matter which tax system we use, again unless someone is planning wealth redistribution, everyone should be paying approximately the same amount of taxes. There can't be any money left in their pockets...on average and per year."

Your comment above does not answer or relate to 'understanding the math'...

 

Please, forgive me, I am like brain dead here and trying to figure this out.

I just seems to me that this is the situation:

"If they spent that entire net income of $41,175 on taxable goods and services" in the "New" Cayman Islands tax shelter then "the tax would be" $0, which would be not be "more than their gross income... but they would also be receiving a prebate."

So, with "no matter which tax system we use, again unless someone is planning wealth redistribution, everyone should be paying approximately the same amount of taxes," it does not compute.

The math so far under getting rid of income tax and replacing it with a consumption tax only paid by us and not foreign buyers and no impost tax is:

You make six million in income, and pay no taxes, you go to "New" Cayman Islands to buy US made plane, and pay no taxes, you fly plane home and pay no impost taxes.

Basically rich man makes six million in income, buys plane, and gets more income from prebate redistributed from poor who cannot afford the one time fee needed to pay no taxes.