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Source link: http://archive.mises.org/4428/there-is-no-such-thing-as-a-fair-tax/

There is No Such Thing as a Fair Tax

December 11, 2005 by

Writes Laurence Vance: Syndicated talk show host Neal Boortz and Congressman John Linder (R-GA) have joined forces to write a book on the FairTax Plan—a proposal to replace the current system of federal income taxes, corporate taxes, Social Security and Medicare taxes, capital gains taxes, gift taxes, and estate taxes with a national sales tax on new goods and services that does not reduce the government’s overall tax revenue. They have never been so right and never been so wrong. [FULL ARTICLE]

{ 486 comments }

Sasha Radeta January 5, 2006 at 11:48 pm

Steve said: “So if taxes are a part of costs they can be embedded in wholesale prices”

Who said that about wholesale prices???? You’re hallucinating again. Taxes are part of any cost of doing business – but it’s consumers’ demand at a given supply (market prices) that determines if sellers can recover those costs or not. That’s why some of them go out of business. You’re wasting the space on this server.

Sasha Radeta January 6, 2006 at 2:10 am

“Retailers will receive a credit for any taxes collected on the sale of inventories acquired prior the FairTax”

While I wait for this quote from the HR 25 (which I have in front of me), it is interesting to note that not a single “FairTax” supporter explained how the tax evasion would be controlled, if the government does not have any tax records of inputs purchases (it has no clue about the actual output of any firm). The authors of this act say that they are taxing consumption and they rely on sellers to collect taxes for the state. They totally disregard logic and the fact that both sellers and buyers would benefit form tax evasion. Their proponents here mentioned that firms’ owners and managers would be interviewed and that this will force them to tell the truth (?). Again, they completely depend on potential cheaters to monitor and report their own actions!? What a joke! At least they seem to have a sense of humor.

Steve Keller January 6, 2006 at 10:48 am

“Retailers will receive a credit for any taxes collected on the sale of inventories acquired prior the FairTax”

Sasha writes – While I wait for this quote from the HR 25 (which I have in front of me)

If you have it in front of you, read section 902

Every time Sasha writes “The FairTax does not provide for increase in demand by 30%” I will counter to say the prebate and 100% of take-home pay will provide for this increase in demand.

Sasha Radeta January 6, 2006 at 11:06 am

Steve, why is it a problem for you to quote me the part of HR 25 that specifies the amounts of credits and time-frame in which these credits will be provided? If it will help you out, here is the URL:

http://thomas.loc.gov/cgi-bin/query/F?c109:1:./temp/~c109Ub9zEc:e135611:

Steve said:

“very time Sasha writes “The FairTax does not provide for increase in demand by 30%” I will counter to say the “prebate” and 100% of take-home pay will provide for this increase in demand.”

Well, you can say this, but that is a lie. “Prebate” only amounts to 23% of spending up to a POVERTY-LINE. This is only a miniscule fraction of total spending that needs to go up by 30%.

As far as income-tax goes, take-home pay would have to increase significantly more than 30% in order to have an increase in demand of at least 30% (because not all of the money would be spent. Again, you are clueless about the percentage of total income that is collected in taxes.

But even before any check arrive, the “FairTax” would start confiscating 23% of every seller’s revenue, reducing demand (and prices/wages) of that labor. That’s why even the proponents of this act claimed it would not reduce government revenue at any moment. In spite of Steve’s attempts to produce some kind of argument, the government would not wait for the aggregate demand to increase by 30% before they start with taxation.

Sasha Radeta January 6, 2006 at 11:10 am

And there is still no solution about the issue of tax evasion when the government is clueless about the total output produced (since the “FairTax” does not record influx of income or purchases of inputs for production).

Fred Wilkins January 6, 2006 at 11:12 am

I get so tired of proponents to the FairTax stating the tax is 23% and opponents stating the tax is 30%. You are both right depending on whether you are talking about an inclusive or exclusive tax. So I wish both sides would quit using this as an argument either for or against the FairTax.

Since income tax is a percentage of our income, the best way to compare the two is a percentage of income.

With the FairTax, if you earn $60,000 your tax will depend on how much of the $60,000 you spend. If you spend your entire $60,000, the amount the government would receive from the $60,000 would be $13,800. If you were a family of four, you would receive a $5904 rebate for the year which would bring the total tax paid down to $7896. This means that 13.16% of your total income was paid in taxes under the FairTax. If you only spent $50,000 of your $60,000 and you saved the other $10,000, you would pay a net after rebate of $5596 or 9.33% to the government.

With our income tax, the tax will very depending on the deductions you are able to use to reduce your taxable income. Let’s say you itemize your deductions and you are able to come up with $13,000; deducting this amount along with your exemptions of $12,800 your taxable income becomes $34,200. The tax on $34,200 is $4404. Over and above the $4404, you will pay 7.65% for Medicare and S.S. which would be another $4590. This would make your total tax under our current income tax system to $8994. This means that 14.99% of your total income was paid in taxes. If you could only take the standard deduction of $10,000, you would have a total tax liability of $9444 or 15.74 percent of your income. If you had a huge amount of itemized deductions say $20,000 then your taxable income would be $27,200 and you total tax including the 7.65% for S.S. and Medicare would be $7994. This means 13.32% of your income would be paid in taxes.

A family of four who spends their entire income and has $20,000 in itemized deduction will have roughly the same tax under either system.

As the old saying goes; liars can figure but figures don’t lie.

If you are a family of four, with a $60,000 income you can look at the above figures and determine which tax system is best for you.

I used $60,000 and a family of four because that is where I fall. I had a little over $14,000 in itemized deductions and I was able to save a little over $5000. My actual income taxes for 2004 were $4359 and another $4782 was withheld for S.S. and Medicare for a total tax of $9141.

With the FairTax my total tax liability would have been $6769 ($60,251 my savings of $5150 = $54101 x 23% = $12673 – $5904 (rebate) for a total tax liability of $6769.

I would have saved $2372 With the FairTax.

Steve Keller January 6, 2006 at 11:19 am

Sasha writes “Prebate” only amounts to 23% of spending up to a POVERTY-LINE. This is only a miniscule fraction of total spending that needs to go up by 30%.

I guess an additional 25% to 30% increase in take-home pay means nothing.

Steve Kelle January 6, 2006 at 11:25 am

Sasha writes – “As far as income-tax goes, take-home pay would have to increase significantly more than 30% in order to have an increase in demand of at least 30% (because not all of the money would be spent.”

Again, if the FairTax is so bad, how would anyone be able to save money? If everyone would spend all they earn the FairTax could be considerable less to be revenue neutral with the income tax.

Steve Keller January 6, 2006 at 11:35 am

Sasha writes – “But even before any check arrive, the “FairTax” would start confiscating 23% of every seller’s revenue, reducing demand (and prices/wages) of that labor. That’s why even the proponents of this act claimed it would not reduce government revenue at any moment. In spite of Steve’s attempts to produce some kind of argument, the government would not wait for the aggregate demand to increase by 30% before they start with taxation.”

With the FairTax, it will only take one or two weeks before tax free paychecks are issued. The prebate comes before the sales tax goes into affect, and if anyone uses their entire prebate to cover their tax during the first two weeks, they are spending at a rate twice the poverty level. Bottom line, the prebate will be enough to cover the ability to pay the additional sales tax during that first two weeks. The Fair Tax doesn’t change desire. With the prebate and the increase in take-home pay, the ability to pay the 23% tax does not change; as a result people will be willing to pay the sales tax and demand will remain the same. If retailers an service providers don’t increase their prices enough to maintain their current margin of profit, it will be their own fault if they loose money. All the smart businesses will increase their prices enough to maintain their margins and sales will not be affected: besides Retailer’s will receive a credit for sales of all inventory aquired prior the the FairTax.

Steve Keller January 6, 2006 at 11:42 am

Sasha writes “And there is still no solution about the issue of tax evasion when the government is clueless about the total output produced (since the “FairTax” does not record influx of income or purchases of inputs for production)”

Compared to over 1-Trillion dollars of unreported income, retail sales tax evasion will be minor.

Sasha Radeta January 6, 2006 at 11:48 am

“I guess an additional 25% to 30% increase in take-home pay means nothing.”

Again you repeat same nonsense, since take home pay would not increase by that much. You are clueless about the amount of taxes paid by American workers (you forget that workers get to deduct their costs and other items from their gross-wages). Do you need the URL for this? Anyway, in order to have an increase of demand by 30% you would have to increase people’s income by the amount significantly higher than 30% (not every penny would get spent, since there is a need for future consumprion for everyone who is not in poverty).

Steve babbles: “Again, if the FairTax is so bad, how would anyone be able to save money? If everyone would spend all they earn the FairTax could be considerable less to be revenue neutral with the income tax.”

Steve, you and your random key strokes… You totally misunderstood what I said: IN ORDER TO IMMEDIATELY INCREASE THE AGGREGATE DEMAND BY 30% (which is necessary to sustain the “FairTax”), there would have to be an increase in people’s income by an amount significantly higher than 30% (since there would be savings for everyone who is above the poverty). If such increase in income and wealth happened, of course there would be some saving… BUT I SAID MANY TIMES THAT THIS INCREASE IN INCOME (hence increase in spending and saving) WOULD NOT HAPPEN. The government would not give us this tax-break until we increase our demand by 30%. It would continue collecting taxes from the first day of the “FairTax” implementation, shifting the entire tax burden on sellers, which would negatively affect the labor prices and all stages of production.

Steve said: “Compared to over 1-Trillion dollars of unreported income, retail sales tax evasion will be minor.”

That’s more like a religious statement. Again, it is much harder to control the “FairTax”, since it does not take into account input purchases and it does not record any changes in people’s income. Plus, both consumers and sellers would benefit from tax evasion.

Sasha Radeta January 6, 2006 at 11:52 am

Fred Wilkins,

no one remotely interested in this issue will care about your example, even if it’s accurate. Consumers are not the one paying a sales tax – it is sellers who have to accept their market prices and absorb any cost (if they can), including this form of taxation.

Yancey Ward January 6, 2006 at 11:59 am

Fred Wilkins,

You really shouldn’t deduct the savings from your income when calculating what the Fair Tax will cost you. All savings are just deferred consumption. The only way any of your money can legally avoid being taxed by the Fair Tax is to favor used goods at the expense of new ones.

Steve Keller January 6, 2006 at 12:10 pm

Sasha writes – “it does not record any changes in people’s income”

Again, if you read HR25, you will see that you still need to report income for S.S. purposes.

Sasha Radeta January 6, 2006 at 12:58 pm

Steve’s statements:

“Compared to over 1-Trillion dollars of unreported income, retail sales tax evasion will be minor.”

“Again, if you read HR25, you will see that you still need to report income for S.S. purposes.”

Don’t you see a contradiction here? You now rely on income-reporting, but at the same time you say that income-reporting is problematic and it is one of the main reasons for a tax-reform. Since inputs purchases will not have to be reported and government is clueless about the total output, there is no reason to believe that income-reporting will be accurate. And I already mentioned that both sellers and consumers can benefit from tax evasion, and the government would have to rely on sellers to control themselves.

Sasha Radeta January 6, 2006 at 1:09 pm

… not to mention that income reporting under the sales tax would not have accuracy controls that are in place now (the FairTax seeks to abolish those mechanisms).

———–

Good point Yancey.

Although I didn’t want to read Fred’s post since it incorrectly assumes that consumers would pay this tax (which would only be possible if sellers can charge 30% above their market clearing price, i.e. 30 % above what they would charge if all taxes were now removed). Waste of time.

Sasha Radeta January 6, 2006 at 1:35 pm

Steve said: “Again, if you read HR25, you will see that you still need to report income for S.S. purposes.”

LOL!

The “FairTax” propaganda says: “No more income-reporting means the end of “hiding” income from tax authorities.”

http://www.fairtaxvolunteer.org/materials/talking_points.html

LOL!

In actuality, they even want to pay sellers to control themselves and they rely on people to accurately report income for SS purposes (without the IRS control). At the same time the government has no idea about the amounts of produced output. Nonsense.

Paul Edwards January 6, 2006 at 5:46 pm

Something has been bothering me about Rothbard’s comment regarding the effects of a general sales tax on supplies and prices. And I can see that I muddled the whole thing quite brutally in my previous comments about it in this thread. He wrote,

“The burden of a sales tax cannot be shifted forward in the same way [as an excise tax], however. For resources cannot escape a sales tax as they can an excise tax:…”

However, I think this is partially wrong because resources can and will attempt to escape from the sales tax by moving from where the tax is incident: the lowest stage of production which is the retail outlets, and moving to the higher stages of production.

Rothbard continues,

“General supplies of goods will fall [due to a new general sales tax], and hence prices rise, only to the relatively modest extent that labor, seeing a rise in the opportunity cost of leisure because of a drop in wage incomes, will leave the labor force and become voluntarily idle (or more generally will lower the number of hours worked).”

But I think what would have been more correct would be to say the following:

“Supplies of consumer goods will fall [due to a new general sales tax], and hence prices rise, to the extent that resources shift out of the retail goods industry and into the higher order stages of production as well as to the relatively modest extent that labor, seeing a rise in the opportunity cost of leisure because of a drop in wage incomes, will leave the labor force and become voluntarily idle (or more generally will lower the number of hours worked).”

This form of arbitrage, a transition of resources from the lower to the higher order stages of production will have the influence both of lowering incomes of individuals in the higher stages of production, due to the increased competition by the new factors there. Also, this will simultaneously lower costs and raise selling prices for the retail businesses, due to the decreased supply of retail consumer products and the concomitant diminished demand for and increased supply of higher order products. This will distribute the cost of the new general sales tax across the entire structure of production such that interest will be the same in all stages once again.

That explanation is much more satisfying to me. Any comments?

Steve Keller January 6, 2006 at 9:30 pm

Sasha writes – “If costs can be embedded in all prices no business would ever go bankrupt.”

Wow, I guess poor management, poor marketing, poor service, poor location, starting a business without enough working capital, and poor quality control, have nothing to do with a company going out of business.

Sasha Radeta January 6, 2006 at 11:09 pm

Paul said: “However, I think this is partially wrong because resources can and will attempt to escape from the sales tax by moving from where the tax is incident: the lowest stage of production which is the retail outlets, and moving to the higher stages of production”

Nice try, but you missed what Rothbard said. Demand for inputs (earlier stages of production) depends on producers of final goods (or later stages of production). There is no doubt that 23% sales (revenue) tax will reduce the ability and willingness of final goods producers to purchase inputs (including labor), so it would make no sense to shift resources for activities for which demand is declining (ceteris paribus for foreign demand).

Everything else you wrote was derived from that faulty assumption about resources-shift towards declining demand.

——-

Stevo, Stevo…

Are you a comedian now?

You said: “Wow, I guess poor management, poor marketing, poor service, poor location, starting a business without enough working capital, and poor quality control, have nothing to do with a company going out of business.”

Well, you guessed wrong. I would never say such idiocy in public – but that’s just me. I guess you enjoy this embarrassment.

Like I said, if you say that cost can shift forward – no firm would ever go out of business. Poor management, poor marketing, poor service, poor location, starting a business without enough working capital, and poor quality control – all of this would chase away your customers and increase your cost. But it would never drive you out of business if you could simply pass all your costs forward (implying that your zombie-like customers would buy your merchandise no matter what idiotic cost you incur and no matter how high you set your price). BUT THIS SCENARIO ONLY EXISTS IN YOUR STRANGE MIND.

Sorry, but let’s not waste time on basic economics… Prices are formed by supply and demand and those prices eliminate suppliers that are not cost-efficient (variable cost below market prices). Producers’ cost can only be one of several determinants of supply – it is not a part of pricing structure. You should have learned this as a senior in highs school for heaven’s sake! But why do you so stubbornly insist on your ignorance?

.

Paul Edwards January 7, 2006 at 12:03 am

I’m not convinced you’re following my argument, Sasha, so let me try it this way:

Here are the choices for the marginal retailer immediately after the imposition of the new general sales tax:

1. remain in retail permanently suffering losses every day.
2. leave retail and remain unemployed and unpaid every day.
3. leave retail and compete with factors in the higher order stages of production

Which do you think they will choose, or is there another option I have missed?

And I will also apply my argument to your comments

“There is no doubt that 23% sales (revenue) tax will reduce the ability and willingness of final goods producers to purchase inputs (including labor),”

Correct, as we have agreed in the past, not only will it reduce the ability and willingness of the retailers to purchase inputs, it will accomplish this tendency by putting the marginal retailers simply out of business, out of a job, and it will render vacant the land these retailers operated on. As we have agreed, this is the case because the retailer cannot pass his new tax cost on to his customer. The marginal retailers must close up shop. This will reduce supply of retail goods and also reduce demand for the higher order goods.

“so it would make no sense to shift resources for activities for which demand is declining ….”

It makes more sense to shift resources to the higher order stages of production than to leave those resources completely unemployed which would be the result if they attempted to remain in the retail stage of production. The general sales tax applies directly to the retailer so the immediate incidence of the new tax falls entirely on the retailer, and not directly on any other stage of production; a point I believe you have mentioned occasionally.

My contention is that marginal retailers must leave the retail business and that they will not choose to remain unemployed, but will instead choose to compete with factors in the still very temporarily unaffected higher order stages of production, regardless of the fact that their very migration will result in lower demand for the higher order products and a higher supply of these same higher order products and thus ultimately resulting in substantially lower wages for all the factors for higher order stages of production and also a concomitant increase in the prices of retail goods. In the end, the price spreads across stages of production must adjust to provide a consistent rate of interest among them.

This analysis has nothing to do with the question of the merits of the Fair Tax. It just shows that a tax by any other name would still put money in the pockets of the parasites, from out of the pockets of the productive. But what else is new.

Sasha Radeta January 7, 2006 at 12:33 am

I love to tease Steve Keller about the high school economics (and his lack of knowledge of this subject)… One the first lesions dealt with the price formation process and the role of prices in a market economy.

Prices play several important functions, one of which is the resource directing role. Higher prices will attract resources to more valuable use. Allocation of resources is determined by market prices (these prices are not formed by producers’ cost and desired profit, in spite of Steve’s hallucinations). When tax reduces ability of final goods sellers and producers to buy their inputs of production, there is a declining demand and downward pressure on prices for these products. At the same time, abolishment of the “FairTax” would increase the willingness and ability to supply inputs, also putting a downward pressure on prices. Some of input suppliers will go out of business and only than the situation will stabilize. This will only happen after some of final sellers are driven out of markets – assuming that the government will not inflate our money supply.

Lower prices will not attract more resources – period.

Your actual options are:
1. remain in retail permanently suffering losses every day.
2. leave retail and remain unemployed and unpaid every day.
3. leave retail and compete with factors in the higher order stages of production permanently suffering losses every day.

That’s what economic stagnation does.

Sasha Radeta January 7, 2006 at 12:46 am

A reduction in prices of inputs is not necessarily a predicament of lower future prices (since input costs are one of the several determinants of supply of final goods) – but the prices of inputs actually reflect past decline in supply of final goods (this is a tricky one – but Aristotle nailed it in the 4th century BCE).

As long as lower input costs are countered by a 23% revenue confiscation, there would still be no reason to cheer, especially not for those unemployed suppliers of labor inputs.

Fred Wilkins January 7, 2006 at 12:56 am

I want everyone to know, I am not totally convinced the FairTax is the way to go, I am leaning that way, but there are a few things I have doubts about. I was just showing what my actual taxes were compared to what they would have been under the FairTax.

Yancey Ward did mention something I totally forgot about. During 2004 I purchased a used car for my daughter’s 16th birthday. It cost around $2100.00. This means my actual tax with the FairTax would have been $483.00 less. It would have been $6286 instead of $6769. As for deducting savings, I agree it is tax deferred, but in my case, I was correct in deducting because it is for my kids’ college education which will not be taxed under the FairTax. This is another positive with the FairTax; education is paid with before tax dollars and with our current tax system it is paid with after tax dollars.

One thing that does concern me is Sasha Radeta’s comment about consumers not paying the tax. It is the sellers who will have to accept their market prices and absorb and costs. The only way this could happen is if the difference between cost and market prices didn’t increase by 30%. In other words if the cost of a loaf of bread was $1.25 and the market price is $1.35 and after the FairTax the cost fell to $1.20 and the market price was $1.45, the tax of 33-cents would leave the seller with $1.12 which is 8-cents less than their cost.
I really don’t see this happening. The FairTax people say that cost will drop 25% to 30%. I really don’t believe this either. I think it would be fair to say that cost would drop by about 10%. Now take me for example, I consider myself to be an average wage earner. How much more will I be willing to pay under the FairTax? As you probably have guessed, I am a mathematician and I love numbers. My 2004 taxes were $9141. This means I had $51,110 to spend. With the FairTax I would have my gross pay of $60,251 plus my rebate of $5904 or I would have had $66,155 to spend. Let’s say the market price of a gallon of milk under our income tax system was exactly what I had available to spend ($51,110). Let’s further assume the cost of this gallon of milk was $40,000. If the FairTax cost of this gallon of milk went down by the 10%, it would be $36,000. The pre FairTax profit on this gallon of milk would be $11,110 ($51,110 – $40,000); this leaves two questions to answer. First, how much would you need to sell the milk for under the FairTax to maintain the same profit margin? And second, how much would I be willing to pay for the milk. The answer to the second question is simple. If I was willing to spend all my available cash, of $51,110 under the income tax system, I would be willing to spend $66,155 which is all my available cash under the FairTax system. Now for the first question; the profit margin under our income tax system would be 27.8%. To maintain this same percentage you would need to sell you milk for $59,750. ($59,750 X 23% = $13742 tax) ($59,750 – $13742 = gross profit of $46,008) ($46,008 – the cost of $36,000 = $10,008 which is a margin of 27.8%. Would I be willing to spend $59,750? Of course I would, I would still have some money left, where under our income tax system I would have spent all my money.

Sasha Radeta January 7, 2006 at 1:07 am

Freddy,

Good for you (I’m not even looking at your numbers – I’ll leave that to someone else). Bottom line is this: You are not the one who would pay the “FairTax” directly, but you would suffer its consequences.

Direct payers of the “FairTax” would be the sellers of final goods and services. Instead of taxing them 10-35% on their profits (if they make any), plus 7.65% of their workers’ wages as a contribution to FICA – with the “FairTax” they would loose 23% of their total revenue, regardless if they any make profit. Imagine how this would affect their ability to employ labor.

Now do your math…

Paul Edwards January 7, 2006 at 1:46 am

“Your actual options are:
1…
2…
3. leave retail and compete with factors in the higher order stages of production permanently suffering losses every day.”

Are you saying that the introduction of a general sales tax at any level would render all stages of production unprofitable to all factors?

Is this also your assessment if the tax were 1%, 2%, and all increments up to and including 30%?

Sasha Radeta January 7, 2006 at 2:02 am

I am saying that a general sales tax would translate into lower profitability in all stages of production – since the input production has no other purpose but to contribute to production of final goods. If the final goods market is stagnating, there would be negative consequences for input producers.

It is the same if the tax was 1%, 2%, and all increments up to and including 99.9% – tax rate would only change the magnitude of these negative consequences.

Fred Wilkins January 7, 2006 at 6:53 am

Sasha, I understand your point, but my figures show consumer prices can increase enough to cover existing profit margins without affecting the average American’s ability and willingness to pay the 30% increase. In fact, the ability and willingness to pay would not be affected even with an increase of 30% with no decrease in wholesale cost. At that point, it would take about the same percentage of income as it dose under our current income tax system.

Fred Wilkins January 7, 2006 at 7:04 am

I’m sorry, I should have said it would take about the same percentage of available cash as it would under our current income tax system.

Fred Wilkins January 7, 2006 at 7:09 am

Sasha, I can tell you’re not one interested in figures, but if you don’t use actual figures in comparing the two taxing systems, you are just shooting in the dark as to the effects of the FairTax.

Fred Wilkins January 7, 2006 at 7:30 am

My biggest concern is the ability to monitor the taxing process. If the FairTax becomes law, I am sure our government will keep a close eye on tax collectors. They are not going to allow firms to come up with what ever figure they desire. There’re a number of ways to do this, the extreme being to have a government watchdog at each business location. If they didn’t reduce the size of the IRS, this probably could be done. Don’t get excited; that was just a joke. But, if they spent just half of the cost it takes to operate the IRS, monitoring could be at a fairly high level. Remember, when you eliminate all individual, partnership and corporate tax returns and replace them with sales tax returns, the number of returns to be monitored will be reduced by millions.

Sasha Radeta January 7, 2006 at 10:05 am

Fred, I was not interested in your figures, since I didn’t want to waist my time on some wrong assumptions. A valid conclusion cannot be derived from your false premises. Again, you don’t pay sales taxes – sellers do, since they have to accept market prices (whatever they are) and absorb their taxation cost.

Fred said: “Sasha, I understand your point, but my figures show consumer prices can increase enough to cover existing profit margins without affecting the average American’s ability and willingness to pay the 30% increase.”

Fred, your figures are wrong, since the 23% revenue confiscation would apply from the first day of the “FairTax” implementation, while there would only be a modest increase in demand due to so-called “prebate” that only amounts to 23% of poverty-line cost of living. Demand does not go up at the same rate of the income increase (a portion of money is saved for future consumption). Any eventual increase in people’s paychecks would be countered by lack of demand from businesses (due to 23% revenue taxation that would strike even businesses that turn a little or no profit). The government will not stop taxing us until we increase our demand by necessary 30%. It would only shift a tax burden towards sellers of final products – and the effects could be devastating on all stages of production.

As far as tax evasion goes- Steve Keller finally admit it: you would have to control people’s income (IRS business)! At the same time the government has no idea about the amounts of produced output – making it almost impossible to detect suspicious amounts of reported sales. And I repeat again: all parties involved in sales would greatly benefit from tax evasion.

I’m glad that the “FairTax” proponents here finally realized that promises about IRS abolishment and “no more income-reporting” was a big lie.

Sasha Radeta January 7, 2006 at 10:10 am

I forgot… the abolishment of income tax can never increase total income of the US population by the amount significantly higher than 30% (in order to have an increase in demand that would sustain the Fair Tax of 30% above our current price level). You better check the IRS figures about the percentage they collect.

Dennis Sperduto January 7, 2006 at 10:25 am

I apologize if I am restating comments that were previously made, but the entire concept of a “fair” tax is fundamentally arbitrary, non-objective, and unscientific. Different individuals have differing ideas about what is fair, and as such, attempting to establish a tax that all or even most individuals can agree to call fair is an exercise in futility. In as much as government exists in the first place, from a libertarian/classical liberal perspective, the “fairest” tax would be no tax at all, but user fees; you only pay for the services you actually use, no more, no less.

Furthermore, all the proposals for tax “reform” are doomed to fail because they do not address the root problem: government spending. But significantly reducing government spending would require a fundamental shift in the majority of the public’s and the political class’s concept of the proper role of government. Most people, whether or not they acknowledge it, are quite content to live at the expense of others. In fact, they believe that they have a “right” to the property of others.

From a related perspective, for those that desire to read an outstanding work on taxation, see Rothbard’s “The Myth of Neutral Taxation” (1980). When I read this article over 20 years ago, it was a real eye-opener; as is usual, the logic and consistency of Rothbard’s arguments are compelling.

Fred Wilkins January 7, 2006 at 11:32 am

Sasha, if you don’t bother to calculate the affects of the FairTax, you are just assuming their affects. The only assumption in my calculations is that costs would drop by 10%, which is a very conservative assumption; the rest is factual calculations. I also showed how a 30% increase in prices would not lower demand even if there were no drop in costs. If you didn’t even bother to follow my calculations, how dare you call them false assumptions? Could it be that you just can’t comprehend my calculations. My figures are just simple income tax calculations. If you are so supportive of our income tax, it should be easy for you to follow the calculations. Could the reason for not following my calculations be fear, fear of discovering the truth. Once you see that my calculations are accurate, you will discover you theory was just shot in the foot.

Basically what your are stating is when you add 3 oz of water to a 13 oz glass that already contains 10oz, the 3 you add will all spill over the edge.

Sasha Radeta January 7, 2006 at 5:15 pm

Fred,

If I bothered to calculate something based on you false premises, than I would proved to be economically ignorant. I don’t want to do that.

There is no arithmetic way to sustain the fair tax – unless you increase people’s income FROM THE FIRST DAY OF THIS TAX, by the amount significantly greater than 30% (which would increase prices enough to cover the “FairTax” increase in prices)…

Oh, by the way – even the “FairTax” supporters on this blog refuted the “FairTax” propaganda about “no price increases after it implementation”, “no more revenue reporting”… so we actually had some success here. At least we all agree that control of this tax would be impossible in the form in which it is proposed (no records of inputs, reliance on taxed people to do self-monitoring…). Total disaster.

The bottom line: our government will not give us a tax break until we increase our demand by necessary 30%. Their plan is to shift a tax burden towards sellers of final products – and the effects could be devastating on all stages of production.

You say: “I also showed how a 30% increase in prices would not lower demand even if there were no drop in costs.”

You just tried to negate that demand goes down as prices go up. I’m not even wasting any of my time on such ignorance.

Like I said it before, the only math you can do is this one:
The 23% revenue confiscation would apply from the first day of the “FairTax” implementation, while there would only be a modest increase in demand due to so-called “prebate” that only amounts to 23% of poverty-line cost of living. Demand does not go up at the same rate of the income increase (a portion of money is saved for future consumption). Any eventual increase in people’s paychecks would be countered by lack of demand from businesses (due to 23% revenue taxation that would strike even businesses that turn a little or no profit).

That’s all the math you need. You can apply some numbers if you are not capable of thinking mathematically without actual numbers applied.

.

Sasha Radeta January 7, 2006 at 5:30 pm

Correction:
There is no arithmetic way to sustain the fair tax – unless you increase people’s income FROM THE FIRST DAY OF THIS TAX, by the amount significantly greater than 30% (which would increase INCOME enough to cover the “FairTax” increase in prices, taking people’s savings into this calculation)…

Poverty-line “prebates” will not significantly increase demand, nor prevent the initial loss of 23% of sellers revenue. And even after consumers get their tax-free paychecks – overall demand will not be affected since government would extract the exactly same amount of money from private pockets, only from different sources (business owners). Any eventual drop in prices of inputs will happen only after demand for these products goes down (reflecting the fact that many businesses would not be able to absorb a 23% revenue tax, which applies to sellers even if they make little or no profit.

Fred Wilkins January 7, 2006 at 10:00 pm

Sasha writes – “You just tried to negate that demand goes down as prices go up. I’m not even wasting any of my time on such ignorance.

The reason demand won’t go down as prices go up is the fact that most Americans will have at least 30% more available cash. If available cash remained the same, of course demand would go down as prices go up. What is so hard to understand about that?

Sasha writes “You can apply some numbers if you are not capable of thinking mathematically without actual numbers applied.”

What kind of nonsense is this? It doesn’t even make sense.

Sasha writes “The 23% revenue confiscation would apply from the first day of the “FairTax” implementation, while there would only be a modest increase in demand due to so-called “prebate” that only amounts to 23% of poverty-line cost of living.”

Most wage earners will begin to receive 100% of their earnings within one to two weeks and the prebate comes before the tax. The prebate will cover the tax on $2139 of spending. I would say that is approximately how much the average American spends in two weeks. So the prebate will cover the tax for most Americans during the first two weeks and after that they will be receiving their gross pay.

Fred Wilkins January 8, 2006 at 1:23 am

I should state that the prebate for a family of four will cover the tax on $2139 of spending.

Dennis Sperduto January 8, 2006 at 8:35 am

I apologize if I am restating comments that were previously made, but the entire concept of a “fair” tax is fundamentally arbitrary, non-objective, and unscientific. Different individuals have differing ideas about what is fair, and thus, attempting to establish a tax that all or even most individuals can agree to call fair is an exercise in futility. The same can be said as to what constitutes basic human needs; another arbitrary and non-objective concept. In as much as government exists in the first place, from a libertarian/classical liberal perspective, the “fairest” tax would be no tax at all, but user fees; you only pay for the services you actually use, no more, no less.

Furthermore, all the proposals for tax “reform” are doomed to fail because they do not address the root problem: government spending. But significantly reducing government spending would require a fundamental shift in the majority of the public’s and the political class’s concept of the proper role of government. Most people, whether or not they acknowledge it, are quite content to live at the expense of others. In fact, they believe that they have a “right” to the property of others. According to this mode of thinking, stealing the property of others is not morally wrong, especially if it is done by the government of a democracy.

From a related perspective, for those desiring to read an outstanding work on taxation, see Rothbard’s “The Myth of Neutral Taxation” (1980). When I read this article over 20 years ago, it was a real eye-opener; as is usual, the logic and consistency of Rothbard’s arguments are compelling.

Sasha Radeta January 8, 2006 at 11:46 am

Fred said: “The reason demand won’t go down as prices go up is the fact that most Americans will have at least 30% more available cash.”

That’s not true. People would get only a “prebate” on 23% of “poverty-line” spending. That’s not how much Americans spend on average. Average American is not on poverty-line: as simple as that (I don’t even have to go into all different products that don’t even get into the poverty-line calculation).

That’s why average sellers would start suffering loss even before any increase in paycheck show up. Even after those losses happen, people’s pay increase would not increase by significantly more than 30% (sustaining people’s saving preference plus 30% “FairTax”). You obviously have no intention on checking out how much taxes an average American pays. Hint: it’s not over 30% of their gross pay. Even if you believe in GDP measure, you probably know that IRS collects almost flat 19.5% of GDP.

Like I said, the government would not stop with the taxation until we increase our demand by more than 30%. “Revenue neutrality” ensures that the government will extract the same amount of money from private pockets – but they would shift the entire tax load on final-goods sellers, creating a catastrophic chain-effect on all stages of production.

EOD.

Sasha Radeta January 8, 2006 at 11:59 am

Fred wrote: “What kind of nonsense is this? It doesn’t even make sense.”

It doesn’t make sense to you, because you have no idea what mathematics is. You tried to apply numbers to completely illogical and false premises. That’s not math.

Now, find out how much Americans spend on average, how much of their gross pay they pay in taxes on average, consider their savings preferences – and than do the math and check if there would be an increase in demand by at least 30%. I already gave you the answer.

Steve Keller January 8, 2006 at 12:38 pm

Dennis writes – “Furthermore, all the proposals for tax “reform” are doomed to fail because they do not address the root problem: government spending”

This is the problem; we need tax replacement not reform. It has been reformed hundreds of times. Each reform results in a more complex system, and becomes easier to hide government spending.

Before we can cut government spending, we need a tax system that is transparent. One that shows the real cost of government. The FairTax does just that. Under our current system, I challenge anyone to tell me exactly how much of their earnings end up in our government’s hands. It is impossible to tell. This is why it will be next to impossible to replace our income tax system with any other system. The complexity of our tax system hides the cost of government, and government loves that it does.

Now, let’s take a look at the FairTax. With every purchase receipt, people will see the cost of government. With each receipt, they will become more and more frustrated. Representatives will become inundated with letters from disgruntled Americans. Representatives want to keep their jobs. How many do you think will vote for a tax increase? If there is an increase many congressmen will loose their jobs.

With our income tax system you can increase taxes by cutting a little here and adding more there, and call it reform. With the FairTax the only way to increase taxes is raise the sales tax percent. If a tax increase bill is presented to congress it won’t be called a tax reform bill, it will be called a tax increase bill. Tax reform sounds positive even if it results in an increase; tax increase is what it is. Which do you think would be easer to pass?

Fred Wilkins January 8, 2006 at 2:04 pm

Sasha, writes (you have no idea what mathematics is)
Gee, don’t tell my boss, I might loose my job.

Sasha, writes (Now, find out how much Americans spend on average, how much of their gross pay they pay in taxes on average, consider their savings preferences – and than do the math and check if there would be an increase in demand by at least 30%. I already gave you the answer.)

You failed the math exam; your answer is wrong.

So you can understand, I will explain the correct answer with as simple of math as I think you can comprehend.

Family of Four
Average Annual Income ~ $60,000 (Year 2004)
Average Itemized Deductions ~ $14,000 (Do you know what itemized deductions are?)
Exemptions for Family of Four ~ $12,400 (Do you know what exemptions are?)
Deductions plus Exemptions ~ ($14,000 + $12,400 = $26,400)
Taxable Income ~ ($60,000 – $26,400 = $33,600)
Income Tax on ~ $33,600 = $4321
Withholding for S.S. and Medicare ~ $4590
Total tax ($4321 + $4590 = $8911)
Prebate for family of four ~ $5904
Total additional cash ($8911 + $5904 = $14,815)

$14,815 is the amount of price increase this family can absorb and maintain the same level of demand. So you can understand why, I will make the next statement very simple. This is the additional money they will have as a result of receiving the rebate and not paying income taxes. I’m not saying they are receiving a raise, I’m saying it’s additional cash, in-hand, that they will have with the FairTax that they don’t have with our income tax system. So please don’t try and twist my words to make it sound like this is a raise.

If they send their entire $60,000 the sales tax will be $13,800. They have $14,815 which is more than enough to cover the sales tax and maintain their same level of demand. The sales tax rate could be 24% and still maintain their same level of demand.

What can be simpler than this?

Please don’t come back with the same old false argument that the tax will go into affect as soon as the FairTax is put into place. I already explained why this wouldn’t make any difference.

Now let’s look at a family of four who earns poverty level of $30,800

Taxable Income ~ Zero
Withholding for S.S. and Medicare ~ $2356
Prebate ~ $5904
Total additional cash ~ ($2356 + $5904 = $8260)

If they spend their entire $30,800 the sales tax will be $7084. They have $8260 which is more than enough to cover the sales tax and maintain their same level of demand. In this example the tax rate could be 26% and still maintain their same level of demand.

Sasha Radeta January 8, 2006 at 5:30 pm

Freddy, you are clueless about mathematics. Your false premises cannot become true when you apply numbers to some kind of nonsense.

You are obviously clueless that demand cannot go up by 30%, unless you increase people’s income by significantly more than 30%. Like Don said, money is the economic good whose marginal utility diminishes with increasing quantity at a lower rate than any other good. This is because it is so flexible in choosing between almost all different goods, both in the present and in the future. A certain portion of additional money will be saved (fartheer away frome poverty line – greater the saving).

DOO YOU UNDERSTAND THIS!?!?!?!?! INCREASE IN CASH DOES NOT MEAN A PROPORTIONAL INCREASE IN DEMAND BY SAME PROPORTION. If you increase people’s total income by 30%, it will not increase people’s demand by 30% (that would only happen to those who are still below poverty line after that increase).

You brought up my next point -
Fred said: “Please don’t come back with the same old false argument that the tax will go into affect as soon as the FairTax is put into place. I already explained why this wouldn’t make any difference.”

Of course the “FairTax” will start confiscating sellers’ revenue, before any tax-free paycheck show-up. There’s nothing false about that, regardless of how much you hate this truth.

I REPEAT:

People would first get only a “prebate” on 23% of “poverty-line” expenses. Only a portion of this amount of money would get spent (depending on people’s time preference).

That’s why average sellers would start suffering loss even before any increase in paycheck show up. Even after those losses happen, people’s pay increase would not go up by significantly more than 30%, since the IRS does not currently collect that much money (I’m talking about total income of this population, not your example).

You obviously have no intention on checking out how much taxes an average American pays. Even if you believe in GDP measure, you probably know that IRS historically collects almost a flat 19.5% of GDP.

Sasha Radeta January 8, 2006 at 5:34 pm

Freddy, you are clueless about mathematics. Your false premises cannot become true when you apply numbers to your nonsense.

You are obviously clueless that demand cannot go up by 30%, unless you increase people’s income by significantly more than 30%. Like Don said, money is the economic good whose marginal utility diminishes with increasing quantity at a lower rate than any other good. This is because it is so flexible in choosing between almost all different goods, both in the present and in the future. A certain portion of additional money will be saved (farther away from poverty line – greater the saving).

DO YOU UNDERSTAND THIS!?!?!?!?! INCREASE IN CASH DOES NOT MEAN A PROPORTIONAL INCREASE IN DEMAND BY SAME PROPORTION. If you increase people’s total income by 30%, it will not increase people’s demand by 30% (that would only happen to those who are still below poverty line after that increase).

You brought up my next point -
Fred said: “Please don’t come back with the same old false argument that the tax will go into affect as soon as the FairTax is put into place. I already explained why this wouldn’t make any difference.”

Of course the “FairTax” will start confiscating sellers’ revenue, before any tax-free paycheck show-up. There’s nothing false about that, regardless of how much you hate this truth! Sellers will start loosing 23% of their revenue before any significant increase in demand happens. So there will be a huge outflow of money out of private pockets to substitute for the income tax revenue(from pockets of business owners). And even before tax-free paychecks show up, demand for labor and employment would go down.

I REPEAT:

People would first get only a “prebate” on 23% of “poverty-line” expenses. And only a portion of this amount of money would get spent (depending on people’s time preference).

That’s why average sellers would start suffering loss even before any increase in paycheck show up. Even after those losses happen, people’s pay increase would not increase by significantly more than 30%.

You obviously have no intention on checking out how much taxes an average American pays in income tax. Hint: it’s not over 30% of their gross pay. Even if you believe in GDP measure, you probably know that IRS collects almost flat 19.5% of GDP.

—-

If you have any common sense and believe in revenue neutrality of the FairTax, you know that government will not wait for our demand to go up by 30%, before they apply their sales tax of 30% (which will in fact be nothing but a 23% revenue tax).

Sasha Radeta January 8, 2006 at 5:45 pm

Steve said: “With every purchase receipt, people will see the cost of government.”

Unfortunatelly, they will not see the true cost of government on those purchase receipts, since sellers are those who loose 23% of market-price revenue from the first day of the “FairTax”. True cost will be expressed in consequent drop in demand for all inputs, including labor.

Fred Wilkins January 8, 2006 at 6:55 pm

Sasha, You can speculate all you want, buy my figures are fact. Let’s see you dispute them with actual computations. You can’t so don’t even try. If you come back with your same old speculative argument, you are just wasting your time.

Sasha Radeta January 8, 2006 at 8:26 pm

Your computations are based on false premises, reflecting your economic ignorance. Even if the government waited for our demand to go up by 30% (which it wouldn’t) your “prebate” would not increase people’s income by more than 30% – which is necessary to sustain this new tax, because people don’t spend every penny they earn. And even the income tax abolishment would not increase our total income by that amount – that doesn’t even happen in your imaginary example! Any wage increase would only come after government collects taxes from sellers, reducing their demand for all inputs, including labor, negativelly affecting the aggregate demand.

But you are correct – I am wasting my time with you.

Fred Wilkins January 9, 2006 at 8:33 am

Sasha, I Like your response with nothing but, false assumptions

Sasha writes “your “prebate” would not increase people’s income by more than 30%”

Of course the prebate will not increase people’s income by more than 30%. It doesn’t need to. I guess you forgot to factor in the amount the income tax and withholding for SS and Medicare that will go directly into people’s pockets rather than going directly to Uncle Sam.

Than again, you are probably one of the few who are enjoying an uppers class living and paying income tax as if you were a poverty level citizen. If you are one of these few, I can understand why you will be against the FairTax. With the FairTax, you will need to start paying your fair share.

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