"Fair Tax"-a better alternative than "Flat Tax"

[Kama45]

What about state tax?
What will be the fair tax rate?

[bookie socks]

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What about state tax?
What will be the fair tax rate?

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[img]/images/graemlins/mad.gif[/img] How come no one ever follows the suggested links to get more info?

No state is required to repeal its income tax or piggyback its sales tax on the federal tax. All states have the opportunity to collect the FairTax; states will find it beneficial to conform their sales tax to the federal tax. Most states will probably choose to conform. It makes the administrative costs of businesses in that state much lower. The state is paid a ¼ of one percent fee by the federal government to collect the tax. For states that already collect a sales tax, this fee proves generous. A state can choose not to collect the federal sales tax, and either outsource the collection to another state, or opt to have the federal government collect it directly. If a state chooses to conform to the federal tax base, they will raise the same amount of state sales tax with a lower tax rate – in some cases more than 50 percent lower – since the FairTax base is broader than their current tax base. States may also consider the reduction or elimination of property taxes by keeping their sales tax rate at or near where it is currently. Finally, conforming states that are part of the FairTax system will find collection of sales tax on Internet and mail-order retail sales greatly simplified.

[tread]

The biggest problem is that people endorse it before fully understanding it. I love the comments that the current system unfairly punishes those who dare to achieve and rewards underachievers. If I understand correctly, the basis for that claim comes from the fact that those who earn more are taxed at a higher percentage of income.

Well, by that same line of logic, then the rich are unfairly rewarded by the system of LIFE because they get to use such a comparatively small percentage of income to purchase the basic needs (food/housing, etc) and the poor are unfairly punished there.

Like it or not, there is a cost to running this federal government (although the current administration and congress doesn't seem to fully grasp the concept with the massive continual debts they run up from the reduced revenue streams resulting from their current tax breaks).

The evaluation of any alternative taxation plan is simple, you start with the baseline of the current system and ask yourself, will the new system continue to bring in the same revenue stream as the current system? I believe Boortz calls this concept "revenue-neutrality".

So question one is, what is the required flat-tax rate required to keep us revenue neutral? I'm not sure if the book defines this or not, I haven't read it. But whatever it is, we have to assume the system is revenue neutral because not taking in as much money as we do currently would add to even larger debts than are currently projected and hopefully no one would find that acceptable (although you would may have a hard time convincing Republicans on this point).

So once you have determined it is revenue neutral, now you need to ask yourself, what is the current breakdown of % of revenue paid into the system by each quadrant of taxpayers? What % of tax revenue do the top 20% of earners pay? What do the bottom 20% currently pay?

Now the million dollar question, how do those percentages change with this new system? Again, I have not read the book, but my understanding of any flat/fair tax scheme is that they are designed to allow rich people to pay less in taxes. If we have revenue neutrality, then if someone is paying less, then someone else must be paying more.

This is the inherient flaw in flat tax schemes. You presumably have done nothing to change the percentage of money that the poor need to spend on essentials yet you are now asking them to pay a higher percentage of their income in taxes.

[The Dude]

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What is the general opposition to the Fair Tax comprised of?

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Just about all of the opposition that I have run into in regards to the FairTax plan is a function of ignorance (not stupidity, please don't misunderstand me). Much of the misunderstanding comes from the incorrect assumption that this is basically a flat tax proposal - it's not.

Let's look at some objections:

The FairTax plan is not progressive enough. It leaves to high a burden on the lower wage earners.
Yes, it's true that everybody pays the same consumption tax rate, regardless of income. But what happens is that every family of equivalent size, regardless of income, gets the same rebate check every month - a rebate equal to the tax rate of poverty level spending. So a family of 4 that spends money at the upper limit of poverty in essence pays zero percent of their money to taxes - they get the entire amount rebated. Another family of 4 who spends $2 million per year gets the exact same rebate check, which has very little effect on the overall rate at which they pay taxes. A family of 4 who spends less than the poverty threshhold will actually get a larger rebate from the government than they paid in taxes - the equivalent of the current "Earned Income Credit."

In addition to the rebate, flexible tax rates on different items allows us even more control in this area. Luxury cars, for example, can be taxed at a little higher rate than small compact cars, or even hybrids. (Expenses in certain areas, such as education and charitable donations, are not taxed at all.) Also, since paying off debts is not "buying" anything, there is nothing to tax. So a family that decides to work overtime in order to pay down debts is able to do so tax free, so to say.

The FairTax system takes away the government's ability to influence economic behavior, the way they do now through income tax breaks.
Actually, there will be greater control in this regard. Since any category can have a different tax rate than the norm, the government has a great ability to encourage/ discourage behavior. Cigarettes and alcohol can be taxed as high or as low as we'd like, hybrid cars can be taxed much less than gas guzzlers, gas itself can be taxed at whatever rate, education is set to not be taxed at all, etc. There are no complicated tax codes for the average citizen to try and fight through understanding in order to take advantage of this, either. When you buy a car at the dealership, they automatically calculate the tax, it's very simple - no big tax returns to file.

The FairTax plan will cost hundreds of thousands of jobs if implemented.
What these people are referring to are the accountants and such that earn their livings implementing the disaster we call our income tax system. The IRS alone employs over 100,000 people, and there are tons of accountants and tax preparers all over the nation. These poeple will lose their jobs if this code is implemented. But I hope you can understand that just because jobs exist, doesn't mean they should. The money spent on this is a complete drag on our economy, and hurts us overall. I think the estimated number (by an independant organization, not related to FairTax at all) was that last year, it cost the US economy $250 billion dollars for businesses and individuals to plan, prepare, and collect income tax. When that money kicks back into our economy plenty of jobs will be created. Hell, put these people to work helping to implement the system! The point is that it is a huge drag on our economy, and the people whose jobs depend on the debacle of a tax code we currently have will find new ones.

The FairTax proposal is too radical, it will never have enough support to go anywhere, so why should I support it?
Well, I hope everybody smart enough to get through this much of my post understand how stupid this argument is. Everything starts small, even the most obvious and beneficial plans. And the more complicated and embedded (am I using that word alright?, to mean "been around for a long time") a system is, the longer it will take people to get used to the idea of changing it.

There are more objections, but there are - in my opinion - more than adequate responses to all of them individually. That is to say that each individual objection has been answered suffeciently, not just that it's better overall, specific problems notwithstanding.

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But the elephant in the room seems to be if this is such a superior system, why the difficulty in enacting it?

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I think I just answered that above. But another thing to consider is this. Most Americans have no idea about any detail of the FairTax, and are immediately skeptical of any change as radical as this. So for a politician to be willing to put his name on something such a high percentage of constituents are bound to misunderstand, is a pretty big risk. As more citizens get behind, and contact their representatives letting him/her know they support the FairTax proposal, the more confident politicians will be putting their names on it.

[The Dude]

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What do you believe the liklihood of it being implemented is in a) the next 10 years and b) ever?

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a) Less than 1%, probably much less.
b) I'm not sure. The optimist in me would like to say over 50%, in my lifetime. It is so clearly a better system, I'd like to believe that, despite the complications involved in politics, good sense will prevail. I don't know, though.

[The Dude]

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So once you have determined it is revenue neutral, now you need to ask yourself, what is the current breakdown of % of revenue paid into the system by each quadrant of taxpayers? What % of tax revenue do the top 20% of earners pay? What do the bottom 20% currently pay?

Now the million dollar question, how do those percentages change with this new system? Again, I have not read the book, but my understanding of any flat/fair tax scheme is that they are designed to allow rich people to pay less in taxes. If we have revenue neutrality, then if someone is paying less, then someone else must be paying more.

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The FairTax system is not designed to make it easier for rich people to pay less in taxes. It's designed to give everybody more control over what they pay in taxes, and encourage behavior that is good for our economy in the meantime. (Not to mention cut out hundreds of billions in economic waste, which is completely independant of the amount being taxed.)

A rich family that wants to live very modestly will pay very little in tax. If they save the rest of their money or give it to charity then they don't pay any taxes on that. But if they want to consume a lot, or buy luxury items, they'll pay a ton of tax - often more than they are under the current system. And the same goes for middle- or lower-class families. If they spend all of their money on consumption items, they will pay more in tax (including things they went into debt for, and didn't actually earn the money to pay for this year). But if they choose to save their money, give it to charity, spend it on education, or pay down their debt, they can do so without being burdened by the tax on these things.

There is more to taxes than simply how much you collect, and where it comes from. Different taxation methods have different effects on how people spend money, thus affecting the economy - either in a positive way or a negative way. There is also the issue of cost of collection. It is HUGE under our current system, about $250 billion if I remember correctly. I believe FairTax proponents say their system will reduce that by 90%.

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This is the inherient flaw in flat tax schemes. You presumably have done nothing to change the percentage of money that the poor need to spend on essentials yet you are now asking them to pay a higher percentage of their income in taxes.

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Again, you're missing some key components:
1. Cost of compliance.
2. Economic effects of the taxation method.
3. Giving individuals more choices on how much they pay, depending on how they spend, not how they earn.

[fimbulwinter]

essentially just another way to shove the tax burden further up the income ladder.

only real advantage i see is lower administrative costs. that alone is enough to convince me.

fim

[tread]

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A rich family that wants to live very modestly will pay very little in tax.

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Precisely the problem I am refering to. If the rich have the ability to CHOOSE to pay less in taxes, there can only be one of two possible outcomes.

1) Less revenue will be taken in OR
2) The poor/middle have to pay more in taxes to make up for the shortfall.

Less adminstrative costs are great, and this would be part of the revenue neutrality concept. So if your facts are correct about 250 billion (this was per year?) in administrative cost, a revenue neutral system would only have to take in 250 billion less than it currently does. In essence creating 250 billion dollars in tax breaks over the current system. Again I ask you, where will these breaks manifest themselves? Will the be another Bush-like cut where 53% of the cut goes to the wealthiest 10%?

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There is more to taxes than simply how much you collect, and where it comes from. Different taxation methods have different effects on how people spend money, thus affecting the economy - either in a positive way or a negative way.

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Could you be a little more specific about what your point is here? Are you saying that putting more money back in the hands of poor/middle class improves the economy, or are you advocating "trickle down" economics? All I have to say is there is, in order for there to be a coorelation between tax policy and the strength of the economy, you have to have a noticeable shift one way when you take one action and the exact opposite way when you take the opposite action. There isn't a shred of evidence that supports a coorelation in this case. Economies were very strong during both the Reagan and Clinton presidencies (and ultimately collpased at the end of each) and one lowered taxes and the other raised taxes. Any attempt to link taxation policy to being the determining factor as to whether or not we can have a thriving economy is baseless rhetoric.

You actually answered my post with mostly baseless rhetoric and gave us no facts/projections with which to analyze or judge the system and compare it to the current one. Yes, we all understand it gives some people the option to choose how much they pay in taxes, is this a good thing? Since control is in the hands of the people, how can you project what revenues will be? Especially for future years? Much of legislation in congress deals with deciding on programs, how can you accurately asses that legislation when it is very difficult to predict future budgets? Are you going to use current spending habits to make estimations when they most obviously will change under the new systems? Or has someone figured out a way to estimate this?

Perhaps I am wrong and they have figured out reliable ways to estimate this stuff. If they have, please provide the facts so we can evaluate them. What will the overall revenue taken in be and what classes pay what percentage of the revenue taken in. With everything I have heard so far (upper class "option" to pay less and rebates to the poor) it sounds like a squeeze on the middle class to me, but I will wait to see the facts before making a final judgement.

[The Dude]

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A rich family that wants to live very modestly will pay very little in tax. [ QUOTE ]

Precisely the problem I am refering to. If the rich have the ability to CHOOSE to pay less in taxes, there can only be one of two possible outcomes.

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You're missing something here. The ways that people spend money that is not considered consumption (ie they won't be taxed on that spending) are things the government wants us to spend it on. Paying down debt, giving to charitable organizations, and spending on education all reduce the amount that the government needs to spend on these programs.

So when somebody has the choice to pay less in tax, by spending in a fashion that reduces their tax burden, they are taking some of the load off of the government. Education is probably the best example. How much does the US government spend every year on education? I have no idea, but I know it's astronomical. When parents pay for their children to go to private school, or when people pay their way through college, the amount that the government has to spend to encourage its citizens to become more educated goes down. So, a system that does well at encouraging behavior does not need to be revenue nuetral. The government doesn't need to spend as much on alternative energy sources if everybody buys hybrid cars, so if the new tax system encourages everybody to buy more energy effecient cars as a means of paying less tax, that works out better than revenue neutral (since I think we all agree that the private sector is a more effecient spender than the government).

I don't have time to say more right now, but I have more to say later.

I encourage you to buy the book or read more on the website. The book starts out very pep-rallyish, but gets into some very good conversation and numbers a few chapters in.

[tread]

I'm not missing a thing, you just gave a paragraph full of smoke screen and rhetoric with no facts to back it up. Perhaps I am confusing things with the "revenue-neutral" concept, what I mean to be focusing on is "budget-neutral". So yes, I agree that if spending comes down as a result of any of this then there is less revenue that needs to be taken in, so long as the budget balances.

What I'm looking for are projections to back up your hypothesis. How many people will put their kids thru private schools who wouldn't do so other wise? What is the
reduction in federal education spending per family (or 100 families or whatever) as a result of this? And this needs to be categorized for all your other suppositions as well.

I'm not doubting that any of the things you have stated wouldn't happen, but until someone can define the actual impact to the bottom line is, it is nothing more than guesses and rhetoric. And I'm guessing this will be a pretty difficult thing to estimate. And once the estimates are out there, are we to put the balancing of the federal budget in the hands of a guess of people's behaviour we HOPE to be true? What if the estimates are flat out wrong?

And the most important question which still is not answered is, after the schooling thing supposedly does this and hybrid car thing does that, WHO ENDS UP PAYING WHAT. How do the percentages break out. Are the rich paying less and the middle class paying more? Is everyone paying less, and if so, who got the biggest breaks compared to the old system? Those are the facts I would like to see.

No thanks, I'll pass on buying the book, I'm not interested in funding something/someone until I better understand if there are facts behind his theories or just a bunch of rhetoric and guesses.