After recently purchasing a new car and paying 6 percent of the purchase price to the state of Florida ($2,184.08) and an additional $75 to my county, I drove home outraged about having to pay this sales tax. I took comfort, however, not only in the fact that Florida has no state income tax, but that at least I didn’t have to pay a national FairTax on the purchase price. That would have set me back an additional 30 percent ($10,920.40). Does anyone really think that the FairTax wouldn’t destroy the market for new goods? And please don’t try to tell us that it would all be a wash because prices of new cars would fall by $10,000 under a FairTax system. I have refuted that nonsense here.
Source link: http://archive.mises.org/8514/fairtax-folly-a-real-world-example/
FairTax Folly: A Real-World Example
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At least you’d have 100% of your income, capital gains, etc.
If a tax system must be in place, I would rather have a consumption tax rather than an income tax. I’ve currently had almost $1500 in taxes withheld from me this year (since I’ve been working full-time since May). I would much rather have the extra income so I can have the FREEDOM to do what I please with that income.
I do not care for the Fair Tax, either, because we would likely just end up with the national income tax we already have plus a national sales tax (unless the 16th Amendment was repealed first), making things even worse. The idea would supposedly be to slowly transition between the two, but both tax systems would both end up on the books forever.
If we do have to have a national income tax that is supposedly a “fair” tax, I say that everyone (including those who currently pay no income tax) pays a flat income tax (10%?) across the board with little to no exemptions. That way the tax code could not be used to cater to various interest groups (ex. homeowners vs. renters), could not be used for social engineering, and could not provide multiple legal loopholes for people to exploit.
The most “fair” income tax is obviously no income tax at all, but I doubt that will ever happen in my lifetime. The reactions of outrage and disbelief to Ron Paul’s call to abolish the federal income tax during his recent campaign were very discouraging in that regard.
Let’s imagine a what would happen under the Fair Tax system that has been proposed. Right now, many people buy via the internet simply to avoid the 5-8% state sales tax. Of course internet sales would be covered under the Fair Tax, but I suspect a booming black market would develop in order to avoid the consumption tax.
Tax revenues would therefore be far below predicted. We would therefore see a massive crackdown on consumption tax scofflaws. Whether it is called the IRS or the FTE (Fair Tax Enforcers) some arm of the state will make sure our liberties are further eroded. I can see raids on households just to make sure all goods have been taxed. All bank transactions will be scrutinized to assure compliance, and cash transactions may have to be made illegal.
Unintended consequences anyone?
Why should a supposedly-”fair” tax be a percentage of anything? You don’t pay for milk, or a new car, based on your income. The only thing that could possibly be called “fair” with a somewhat straight face (it still wouldn’t actually be fair in any realistic way, of course) would be a fixed charge – fixed in dollars, not a percentage of your income or spending or anything.
Didn’t all of this nonsense begin with “libertarian” Neal Boortz?
I gotta say, he’s the first “libertarian” I’ve ever heard of who advocates torturing people and waging world wars.
I agree completely that it is not fair to charge people different prices for the exact same good (or service) such as a gallon of milk or a new car based on their respective incomes.
However, for that same principle of price fairness to apply to a universal income tax would require everyone paying that tax to receive the exact same “good” or governmental benefits in return, either directly or indirectly. Otherwise, one is comparing apples and oranges. I strongly suspect that a wealthier person benefits far more from any legitimate roles a government may have in a society (ex. contract enforcement, protection of property, etc.) than a poorer person does.
Furthermore, if a $0 flat income tax amount is not possible, what would be the “fair” flat amount for everyone? $10 per person? $100? $1000? $10,000? Which IRS bureaucrat would be all-knowing enough to make that call? What would be chicken feed to a wealthier individual could be potentially devastating to a poorer individual, so there would then be calls for exceptions or for tiered amounts, and we would be right back where we started with the current system.
In my opinion, trying to set a universal flat tax amount that would be “fair” for everyone would be as misguided as the government trying to set a minimum wage that is “fair” for everyone. If one were to use a universal percentage instead, then everyone would be proportionally affected in a way which more accurately reflects the proportional benefits each taxpayer actually receives in return.
If that flat tax rate were ever lowered or raised at some point (hopefully the former), everyone would be affected either positively or negatively across the board which would probably unify public opinion against having any income tax whatsoever. As it is now, people vote for this political party or that party in hopes that the other guy will be the one who get his taxes raised while they get their own taxes lowered, so the current system is very socially divisive.
Even Russia has figured out the benefits of having a flat income tax rate (if one has to have an income tax at all), so it astounds me that the USA has not figured it out yet. I suspect it is because our tax code is ultimately about politicians punishing their enemies and rewarding their supporters, and that manipulative power would be lost if a universal flat rate was adopted.
On a final note, I do not support the current system of taxes being mandatorily withheld from paychecks. If every taxpayer had to write out a single check for their yearly income tax charge in April even once, there is no doubt that there would be taxpayer discontent and a subsequent outcry for reform on such a huge scale that the politicians could not possibly ignore it. Better yet, let’s go to no withholdings, a flat tax rate, and quarterly tax payments in order to keep the government on a very, very short leash.
I strongly suspect that a wealthier person benefits far more from any legitimate roles a government may have in a society (ex. contract enforcement, protection of property, etc.) than a poorer person does.
I “strongly suspect” precisely the opposite is true!
Pleae come and link to this site.
While 11k seems like a lot, it is small compared to many other taxes. I pay more than that in social security tax alone every year.
Under the fairtax prices of new goods would rise, but after-tax incomes would rise and we would grow GDP by 7% by eliminating overhead. While used goods would be refurbished more, it seems likley that demand for new goods would also rise.
I doubt black markets would emerge with the fairtax. For example, a back market car can’t be warrantied, which is important to new car buyers.
New cars are the ultimatle luxury good. I’ve never owned a car less than seven years old, so things would have to be going pretty well for me to consider one. If things weren’t going well I could certainly use the extra after-tax income. If they were going well, I probably wouldn’t mind the tax as much.
Heinlein was right and that is precisely why we have the government and tax system now in place.
Vance seems to have forgotten his math. Vance has forgotten that he is buying that car with after tax dollars and with the embedded taxes in the price. The negative nabob naysayers conveniently leave out this little bit of information. Under the FairTax, those costs are no longer part of the price.
The FairTax would be the greatest single piece of legislation to supercharge the economy. The only losers are the politicians, lobbyists, income tax profiteers, and the underground economy.
All those in favor of a ‘Fair Tax’ please look up progressive tax and regresive tax. The government has taken fairness into account as best as possible. That is through a graduated progressive tax. That is those with more ability to pay pay more. Right now the little man pays around 20 to 25 percent of his check to the government that extra 5 percent under a fair or flat tax is huge if you are only making 20k per year. Would you really consider that to be fair? And the used market versus new goods market is a whole other concern. Be smart. Be progressive.
Let’s not forget that you would probably have to finance that $10,920 so the actual burden of the FairTax would be even more.
(Oh, and a portion of the interest on that loan to pay the FairTax would also be taxable!)
1. I strongly suspect that a wealthier person benefits far more from any legitimate roles a government may have in a society (ex. contract enforcement, protection of property, etc.) than a poorer person does.
2. I “strongly suspect” precisely the opposite is true!
I’ve no idea where the balance is, but it’s worth remembering that for a number of government services the person who ‘consumes’ the service isn’t the one who benefits. I’ve interacted with the police perhaps 2-3 times in my life, yet I’ve benefited from their services far more than the person who is regularly involved.
One must first address the Orwellian nature of the term “fair tax”, since a tax by its very nature cannot be fair. It is coercive.
I do not trust anyone who cannot make this distinction, they have proven they cannot think logically.
If retailers raise their net prices by a full 30% under the fair tax, they are in effect telling us that they’ve saved nothing from the elimination of corporate income and payroll taxes and that, in most cases, would be pure bull. Companies that are honest will only raise their prices enough to preserve their current profit margins.
Regardless, I’d gladly pay an extra 30% on all my new retail purchases if it meant no longer have to pay 40% on my income. The likelihood that prices won’t increase that much means I’m certain to pay even less. The fact that I can choose to avoid the fair tax completely on some things means I can regulate my own tax liability. It would also allow me to keep my elected leaders accountable after I’ve voted them into office without taking up arms against them. lol
Another neat thing about the fair tax is that consumers always pay the tax. Even if a seller offers a 23% discount on an item, the customer is still paying the tax as 23% on the discounted price. That means the government will never need to audit a consumer or raid another household, the way the IRS does now.
Only retailers can cheat the fair tax by withholding the taxes they collect from their customers. But they will have to cook their books pretty well to pass it off and that will be pretty damn hard to do since tax authorities will be keeping track of the books at the corporate, regional, and store levels. Any significant inconsistencies between a retailer’s sales, wholesales and taxes remitted will probably raise a flag and result in an audit involving an inspection of inventory. Most retailers do that anyway for their own sake.
TheNightFly:
I’m having a difficult time understanding how you can have a 40% federal income tax rate in the US.
The highest individual rate is 35% of any amount over $358k (if single) with of course the amounts under $358k taxed at lower rates. So if you have $400k in income, your effective tax rate is about 30%.
Of course, if you have millions in income this would get closer to the 35% effective rate, which would mean it’s time to fire your CPA and find a better way to shelter that kind of money.
Anyways, it would also assume you have no deductions or tax credits, which is unlikely, that would lower your effective rate even more. It is highly unlikely you are paying more than 30% federal income taxes (or even close to 30%) when you crunch the numbers.
It is also foolish to say that honest companies will only raise prices enough to preserve current margins. No, they will charge whatever the market will allow. They will not “pass on the savings†either, they will charge what the market will allow.
As for it being hard for a business to “cook the booksâ€, I gather that you have not worked in accounting for businesses much. Let’s just say that cash would become the preferred method of payment all the way around.
Richie –
You make the choice as to how much tax you have withheld from your paycheck. You should familiarize yourself with the basics of the tax code, it could save you in the long run. Most people foolishly have too much federal tax withheld throughout the year and enjoy the big refund at the end. Essentially they are loaning the feds money interest-free, when they could be taking that money home and investing it for themselves.
I am assuming you are relatively young, if you are not aware of the above and you just started working full time. This means that you spend most, if not all, of your income and will continue to do so for a while as you build your net worth. Meaning that you would still be taxed on virtually all of your income, since you are spending all of it. .
The authors of these “fair tax†plans could care less about how fair it is, their primary goal is how to make more money for themselves, and you will note that they are always wealthy people behind these plans. There is nothing inherently wrong with that of course, except when they try to sell it as “fair†or “a superior alternative†and spread misinformation to the gullible little people. The only fair and superior alternative is to abolish the damn tax. In the meantime I will oppose any alternative that increases my effective tax rate, which the “fair tax†will for me and the vast majority of people in the US.
I challenge everyone to find out exactly what your effective federal tax rate is – that is, your federal tax liability (from your Form 1040) divided by all of your income. I would be shocked if anyone pays 30% or more. Then consider how much of your income you spend versus save. Do you save 10%? Then 90% of your income would be taxed at 30% under fair tax. That’s a 27% federal tax rate.
According to the Congressional Budget Office, as of 2004 the average effective federal income tax rates of everyone in the US is 8.4%. Add in social insurance, and the number is 16.7%. That’s right, 16.7%!
The highest quintile (average income of nearly $200k) have an effective rate of 20.8%. Fourth quintile (avg income of $79k) = 15.8%. Middle quintile (avg income of $54k) = 12.2%. Now tell me the “fair tax†sounds better.
Even the top 1% earners, with an average income of over $1 million, pay an effective rate of 22.7%. Of course, they spend far less than everyone else, so a consumption tax obviously works to their advantage, even at 30%. A person making $1 million could spend half their income and pay only 15% under the 30% consumption tax. However, all those people making $60k, who spend nearly all of it, would pay close to 30% instead of the current 12%.
Hmmm.
curio,
You are forgetting to addin the employer’s portion of social insurance. For the average income you quoted, that would push the average marginal tax rate up to ~24%, higher than the FairTax’s quoted numbers. In order to breach that amount in FairTax payments, you would have to consume over $115,000 a year in FairTaxable goods and services.
In fact, the current tax code actually becomes regressive once you make over ~$100,000 after you factor in employer payroll tax contributions. A single person @ $100,000 income has a marginal rate of 35%, while a single person at a million pays 1/3rd.
Nick –
I don’t follow you.
For the effective rates that I quoted from the Congressional Budget Office, the employer’s portion is embedded in the employees reported income (i.e. the employee’s salary reflects those costs), so it is already included. Please explain.
Also, you are using fair tax rhetoric by using “marginal†rates instead of effective (actual) rates, which I was attempting to illustrate the vast difference.
Besides, a person who is single earning $100k is in the 28% marginal bracket. That works out to 22%, plus 7.65% for social insurance, less deductions and tax credits for an unknown (but far less, as illustrated previously) effective rate. If we include the employers portion, an additional 7.65%, then we must also increase the person’s earnings by this amount. Again, this is because his/her salary already includes that cost. Otherwise they would be making more like $108k.
Curio,
Also, the regressive nature of the income tax code ABOVE $100,000 is even more apparent when you factor in deductions.
Just look at the mortgage interest deduction as an example. As your income level goes up, you are able to devote a higher percentage of your income towards housing. An individual making 200,000 a year (single) can easily afford a million-dollar mortgage. That deduction, combined with other deductions, push his effective marginal tax rate all the way down to 15% (that’s AFTER factoring in the employer and employee payroll tax contribution max — $15,300).
A person making $100,000 and deducting $50,000 a year in income (a mortgage @ 4x income, plus $20,000 in other deductions) pays a 23.3% effective marginal tax rate.
Oh – and about the regressive nature when making over $100k – don’t forget that social security caps out at $102k. They pay $6,324 and not a penny more.
That means anyone making over $102k pays effectively less and less (from a percentage standpoint), i.e. if you make $500k you pay 1.3% for social security versus 6.2% for everyone making less than $102k.
Curio,
The FairTax eliminates the employer’s payroll tax burden. currently, employers have to “match” employee “contributions” to Social insurance programs.
Every US worker pays 7.65% to Uncle Sam in payroll taxes before he even gets his paycheck — where pays an additional 7.65%. This employer portion DOES NOT count as part of the employee’s salary at the IRS.
These taxes top out at $102,000 per taxpayer (regardless of filing status).
It is a Randoid myth, the myth of Atlas, that the wealthy have a far larger tax burden than the rest of us. Outside of the very poor, who pay little in income taxes, America’s highly productive professional class bear the brunt of taxes the most — individuals making $75,000 – $150,000 a year. The truly wealthy don’t even pay income taxes — they pay capital gains taxes at 15% (long-term rate).
The tax code was written BY the wealthy, FOR the wealthy. Anybody who thinks that it was written for the “unwashed masses” is a fool.
Huh?
A single person making $200k under the current system can easily afford a $1million mortgage? You may want to re-think that. Might look good on paper, but in reality…
I really don’t follow your math. That person would hit AMT for sure with that kind of interest deduction anyways, so I don’t know how you come up with 15%. And who has a mortgage at 4X their income? Those are the people who are foreclosing right now. Regardless, the interest payment on a $400k 6% 30 year loan would be around $20k a year for the first few, and I have no idea what the $20k in deductions is supposed to represent.
Do you even know or understand how individual taxes work? I mean no offense, but your numbers are bizarre. Please enlighten me if I am off-base or misunderstanding.
I understand exactly how employer matching works. What you don’t seem to understand is that the cost is part of the salary.
If the employer were not paying that match, the salary would be higher. A person’s salary has all costs included. That “subsidy†of health insurance which most employers pay comes right out of their paychecks, whether they know it or not. Not directly, there is no accounting entry. It is embedded.
It is the same concept that if you tax a corporation, it passes on the additional cost in it’s prices. If the employer pays a portion of payroll taxes, it passes it on in the form of a lower salary.
Curio,
A $1m mortgage will run you about $90,000 a year, or about $7,500 a month. After the mortgage and taxes, this individual has $6,500 a month left over for food, transportation, etc. Housing is by far the biggest expense one can incur — at least above the poverty line.
3x – 4x income is standard for a home — has been for decades. 4x income is 1/3rd of your income @ current rates, 3x is ~25% of income.
IRS regulations allow for interest on up to $1.1m in debt to be deducted, and that exemption is still allowed under the AMT — you lose the standard deduction and the deduction of state and local taxes w/ the AMT.
$20,000 in deductions is a cakewalk to get to. First, there is the personal exemption. Second, there are 401(k) and IRA contributions. Third, health insurance premiums are essentially tax-deductible as long as your company has a flexible spending account (premiums can also be deducted from your payroll taxes w/ a FSA). Fourth are all of the odds-and-ends exemptions: state and local taxes, work-related expenses, child care, etc.
Mortgage interest is not affected by the AMT unless you have a home equity loan.
We are saying the same thing in that the payroll tax cost is part of the salary, but it doesn’t show up in the IRS data.
I don’t know where you got the 3X or 4X gross income numbers, that is false. The standard for “decades” has been to limit the mortgage payment to 28% of the borrower’s gross income (look it up) and all debts including mortgage to not exceed 36% of gross income. This means a person making $200k is limited to a maximum of $4,667 a month in mortgage payment. That works out to about $775k mortgage on a 30 year fixed at 6%. They would also be limited to only an additional $1,333/mth in any other debt, i.e. auto loans, credit cards, etc. So a very frugal person with excellent credit, little to no debt, and a large down payment could certainly afford an $800k mortgage. Until they lost their job. Is it possible to have a $1 million mortgage on $200k? Of course. Easy? I think not.
Now onto the AMT. The person can take the interest deduction, sure, but will still be subject to AMT. This means no standard deduction, no personal exemption, no state and local taxes deductions, no work-related expense deductions, no child & dependent care deductions. This eliminates several of your “other deductions”.
As for the FSA, many companies do not offer an FSA plan, and regardless, you can NOT pay premiums with your FSA – only out of pocket costs that aren’t covered by insurance. So that is not such a cakewalk either.
Finally, 401(k) and IRA contributions are a great deduction, but if you are making $100k and have a $400k mortgage, children, work related expenses, are contributing to an FSA due to medical costs you expect to pay, and are paying state & local taxes, how much are you going to have left over to contribute to a retirement plan?
The numbers just don’t add up.
As for payroll cost being part of the salary, the fact that it doesn’t show up in the IRS data is irrelevant to the argument. Go back and read through the discussion. The point was that the employer’s match does NOT get added onto the tax rate, because it is already “embedded” in the form of a lower salary. You would essentially be double counting the effect.
I took my own advice and went back through to read the arguments from the start.
Despite the details that I bogged us down in, we are sort of arguing the same thing – the current system favors the wealthy. My point was that the “fair tax” favors the wealthy even more – considerably more.
So regardless of my nit-picking, I think we are actually on the same page?
Oh well, I hope we at least learned something along the way…
curio,
3x – 4x income is 25% – 33% of income, which would cover the 28% figure.
When a applying for a loan, lenders generally allow the debt:income ratio to rise as you go up the income ladder, since a smaller proportion of your income is devoted to other needs: food, clothing, child care, transportation, etc. $10,000 a year on child care at $100,000 is twice the burden it is at $200,000. Disposable income is high at that income level.
I misspoke on the FSA: companies offer FSAs and your premiums are deducted from your check. It’s usually done automatically by your employer.
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