Is the "Fair Tax" Fair?

Fantine said:

In addition, of course, it's inequitable.

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That's the real issue, of course.

It is only a tax on consumption rather than income.

People who are poor tend to spend all they earn (and then some!) and save practically nothing. So they would pay taxes on 100% of the money that flows through their fingers. [The prebate shifts things a bit, but the poverty line is pretty low -- it's not going to make huge impacts to the middle class]

People who are really really really really rich save more than half of what they earn and would pay nothing on that half. And since all federal taxes have vanished, they will also pay no tax on any capital gains or dividends or interest they get from saving or investing that money.




Or another way to look at it is that people making twice the poverty level (who are still in the bottom 50%, I imagine, since only ~12% of America lives under the poverty line) would have an effective tax rate of 11.5% (because the rebate would take out half of the 23% flat tax(*) on the 100% of their income that they spend). And the richest people would also have an effective tax rate of 11.5%, because they only spend half their money. This would be a huge shift of the tax burden from the wealthy to the poor.




On the plus side, this is a dumb idea that Kevin McCarthy was forced to bring to a vote in order to get his Speakership.

On the minus side, there are a lot of dumb people in Congress.

(*) The "tax inclusive" nature of the tax is a sad sad gimmick. As the article notes, this means the rate is really 30%, so everything's much worse than I've indicated.

essentialsaltes said:

That's the real issue, of course.

It is only a tax on consumption rather than income.

People who are poor tend to spend all they earn (and then some!) and save practically nothing. So they would pay taxes on 100% of the money that flows through their fingers. [The prebate shifts things a bit, but the poverty line is pretty low -- it's not going to make huge impacts to the middle class]

People who are really really really really rich save more than half of what they earn and would pay nothing on that half. And since all federal taxes have vanished, they will also pay no tax on any capital gains or dividends or interest they get from saving or investing that money.

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Or another way to look at it is that people making twice the poverty level (who are still in the bottom 50%, I imagine, since only ~12% of America lives under the poverty line) would have an effective tax rate of 11.5% (because the rebate would take out half of the 23% flat tax(*) on the 100% of their income that they spend). And the richest people would also have an effective tax rate of 11.5%, because they only spend half their money. This would be a huge shift of the tax burden from the wealthy to the poor.


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On the plus side, this is a dumb idea that Kevin McCarthy was forced to bring to a vote in order to get his Speakership.

On the minus side, there are a lot of dumb people in Congress.

(*) The "tax inclusive" nature of the tax is a sad sad gimmick. As the article notes, this means the rate is really 30%, so everything's much worse than I've indicated.

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The one way I've seen a "Fair Tax" implemented, that I might support, is if several categories, such as groceries and utilities, are tax free. Things like rent or buying a first half could also be made exempt from the tax (though the first house limit creates some implementation issues). At least one country I've seen do something similar, to offset the hit to the poor and middle class, with their Value-Added Tax (VAT, or national sales tax) actually had a three-tier system of 6, 12, and 21% (but remember these countries still have a separate income tax). The 6% rate is for groceries, pharmaceuticals, housing, utilities, etc. The 12% rate is rather limited though covers things like some home improvement items, restaurants and catering. The 21% rate covers most everything else -- though I'd suggest in the US you'd need to put cars (at least cars costing less than a certain dollar amount) in the 6% or 12% category.

The idea here is that the poor pay and middle class still largely pay a lower tax rate, particularly combined with a rebate. I do think this would be tough, at least for a few years, on the US economy -- though may be worth the pain longer term. I would expect spending to fall in the first few years, as people get used to "higher prices." At the same time, not having savings taxes would seem to encourage people to save more money, which likely would be good for the country over the long term. I do agree, however, the biggest issue with a "Fair Tax" is finding a way for it to be "fair" and not to burden the poor and middle class with paying too much in taxes, most discretionary income they previously had is lost to pay the "fair tax"; while the rich get a tax break and are able to save/invest almost all of their discretionary income.

All these flat and fair taxes seem to fall afoul of Mencken's maxim about simple solutions.

For every complex problem there is an answer that is clear, simple, and wrong.

essentialsaltes said:

All these flat and fair taxes seem to fall afoul of Mencken's maxim about simple solutions.

For every complex problem there is an answer that is clear, simple, and wrong.

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Yup. Let me point out a few major flaws.

I'll start with the unfairness to retired people, or for that matter those who have planned for retirement by saving or investing. They have already paid taxes on what they earned, now it would be taxed when they spend it. I'll still be fine, but what about those who barely have saved enough?

Next is an entire class of problems under the umbrella of the assumption that people will not adjust and try to minimize the tax impact. A lot of these can be patched by legislation and enforcement. BUT if that is done the 'advantage' of doing away with the expense of the IRS vanishes or even becomes reversed when enforcement actually becomes more expensive and burdensome.

It isn't feasible for all but a few of the working or middle class to minimize their tax expense by buying out of the United States. But it is very feasible for the very rich to buy their new yacht elsewhere. And their new Jet and Rolls or Bently. Most of those can be patched, but the first in the list, the yacht, presents some real problems since there would be real issues with figuring out which yachts can be taxed.

Hawaii and other areas that depend on tourism would take a huge hit. They instantly become 30% more expensive. (The tax is 23 cents out of each dollar spent so it is a tax of 23 cents on 77 cents, not on one dollar. That scummy deception should be a huge red flag regarding trusting what those who support it claim). Suddenly South America, the Caribbean and a lot of European vacation spots become a lot more attractive.

What about property sales? Is there now a 30% tax on the sale of a home or other property? Come to think of it the claim was that there is no capital gains tax. But isn't a stock purchase a purchase? This seems absurd, and let's say it is and is not taxed. See the door it opens, at least for large sales? Just incorporate and sell the company!

It seems this is not a VAT, but businesses can avoid the tax by claiming the purchase is a business expense. Oops, now we need the IRS again!

Ironically this if implemented will show that there is a trickle down effect. At first only the very rich will be able to profit by dodging the tax. But in a few years there will be boiler plate instructions on how to do it and then the upper middle class will do it, followed by the rest of the middle class. But trickle down only goes so far. The poor will never be able to use most of the dodges.

keith99 said:

Ironically this if implemented will show that there is a trickle down effect. At first only the very rich will be able to profit by dodging the tax. But in a few years there will be boiler plate instructions on how to do it and then the upper middle class will do it, followed by the rest of the middle class. But trickle down only goes so far. The poor will never be able to use most of the dodges.

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Living in a state the only has a sales tax, property tax, and luxtury taxes, that is what has happened here.

It has gotten so bad that every governer talks about an income tax at one point or another in their term, which the voters will never allow.

keith99 said:

Yup. Let me point out a few major flaws.

I'll start with the unfairness to retired people, or for that matter those who have planned for retirement by saving or investing. They have already paid taxes on what they earned, now it would be taxed when they spend it. I'll still be fine, but what about those who barely have saved enough?

Next is an entire class of problems under the umbrella of the assumption that people will not adjust and try to minimize the tax impact. A lot of these can be patched by legislation and enforcement. BUT if that is done the 'advantage' of doing away with the expense of the IRS vanishes or even becomes reversed when enforcement actually becomes more expensive and burdensome.

It isn't feasible for all but a few of the working or middle class to minimize their tax expense by buying out of the United States. But it is very feasible for the very rich to buy their new yacht elsewhere. And their new Jet and Rolls or Bently. Most of those can be patched, but the first in the list, the yacht, presents some real problems since there would be real issues with figuring out which yachts can be taxed.

Hawaii and other areas that depend on tourism would take a huge hit. They instantly become 30% more expensive. (The tax is 23 cents out of each dollar spent so it is a tax of 23 cents on 77 cents, not on one dollar. That scummy deception should be a huge red flag regarding trusting what those who support it claim). Suddenly South America, the Caribbean and a lot of European vacation spots become a lot more attractive.

What about property sales? Is there now a 30% tax on the sale of a home or other property? Come to think of it the claim was that there is no capital gains tax. But isn't a stock purchase a purchase? This seems absurd, and let's say it is and is not taxed. See the door it opens, at least for large sales? Just incorporate and sell the company!

It seems this is not a VAT, but businesses can avoid the tax by claiming the purchase is a business expense. Oops, now we need the IRS again!

Ironically this if implemented will show that there is a trickle down effect. At first only the very rich will be able to profit by dodging the tax. But in a few years there will be boiler plate instructions on how to do it and then the upper middle class will do it, followed by the rest of the middle class. But trickle down only goes so far. The poor will never be able to use most of the dodges.

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Umm hmm. The screw tightens.

That this idea is proposed by supposed free market capitalists is a joke.

That's a pay to participate market.

Paulos23 said:

Living in a state the only has a sales tax, property tax, and luxtury taxes, that is what has happened here.

It has gotten so bad that every governer talks about an income tax at one point or another in their term, which the voters will never allow.

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When I lived in NH, we were fine with not having an income tax.

BTW, are we going to have extensive discussions of all these proposals that have little popular support and no chance of becaoming law now or in the foreseeable future?

I'm not being snarky. McCarthy has agreed to have votes on many proposals of the Rebel agenda. I don't take any of them seriously, any more than I did when Pelosi was minority leader and taking similar votes because of her promises to the extreme wing of the Democratic Party.

I would note that Republicans are no longer taking votes on ending ObamaCare (well no more than ending Social Security, Medicare and Medicaid),

I do not know about this tax. Hypothetically, I wonder if a flat tax ended up generating revenue, reducing deficits, reducing poverty, keeping social spending intact etc. if it would be acceptable by so called “equity” interests?

Fantine said:

All federal taxes would be replaced by a 23% national sales tax. Everyone would get a "rebate" of the amount of sales taxes for purchases up to the poverty level, so that necessities would not be taxed.

This article gives a good analysis of the fair tax.

MSN

One concern of mine is that it would strike a death knell for many small businesses which provide personal service but can't compete on price with Wal-Mart.

We would become a nation of bottom-feeders, searching for rock bottom prices for whatever we buy. Everyone would be waiting for clearance sales. No one would pay full price.

Let's look at book stores, for example. Lots of people believe in shopping at small town book stores, but Amazon charges about 30% less. A $20 book under the new plan would be $24.60 at the full price bookstore. At Amazon it would be $16.98. The $6 price difference would become $7.38.

Multiply that by everything you buy.

I recently flew to Florida on Allegiant Airlines. $117 round trip (astonishing.) On most airlines it would be $383. Now add 23% to each of those totals.

Basically, if you pay the higher price, you are also paying 23% on the higher price.

In addition, of course, it's inequitable.

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What you point out about consumers moving away from small business is already the case. I don't see the "of course' in your assertion that it is inequitable. Certainly, it would favor the frugal over the extravagant. So, someone like Bernie Sanders who is a conspicuous consumer with multiple houses would pay much more than someone like Elon Musk who seems to spend very little on himself. But that is a matter of personal choice rather than a matter inequitable treatment. I would say that it would be a bad idea and somewhat unfair to use rebates as a means of keeping people from paying tax on the basic necessities. After all, if I have to pay for it today, I cannot do it with money you will give me back tomorrow. More importantly it is not cost effective for government as the people in power will insist that thousands of extra bureaucrats must be retained in order to supervise the distribution of the rebates, check to see the legality of the claims for the rebates, file paperwork, etc. etc. etc. I personally favor flat percentage tax on income over a set amount than a consumption tax as it would make paying taxes so much less complicated and so much easier for the average person to set a budget. I don't think we will ever see that as the tax preparer industry would be devastated by such a tax and I suppose the lobbyists and crony capitalists along with the politicians who profit the most form the current system would not allow their golden goose loopholes and tax exemptions to be touched.

There are too may downsides to a federal consumption tax. the most onerous being the inevitable reinstitution of an income tax in addition to the consumption tax. There is also the impropriety of the federal government forcing retailers, wholesalers and even individual citizens providing services to all become tax collectors for the federal government. Currently they only force employers to do that.

Fantine said:

And what about Social Security? Medicare?

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In five or ten years…
The GOP will offer a permanent “tax cut”, forget the 23% (really 30%), 18.5%! We just need to eliminate Social Security and Medicare! Win-win!

Fantine said:

All federal taxes would be replaced by a 23% national sales tax. Everyone would get a "rebate" of the amount of sales taxes for purchases up to the poverty level, so that necessities would not be taxed.

This article gives a good analysis of the fair tax.

MSN

One concern of mine is that it would strike a death knell for many small businesses which provide personal service but can't compete on price with Wal-Mart.

We would become a nation of bottom-feeders, searching for rock bottom prices for whatever we buy. Everyone would be waiting for clearance sales. No one would pay full price.

Let's look at book stores, for example. Lots of people believe in shopping at small town book stores, but Amazon charges about 30% less. A $20 book under the new plan would be $24.60 at the full price bookstore. At Amazon it would be $16.98. The $6 price difference would become $7.38.

Multiply that by everything you buy.

I recently flew to Florida on Allegiant Airlines. $117 round trip (astonishing.) On most airlines it would be $383. Now add 23% to each of those totals.

Basically, if you pay the higher price, you are also paying 23% on the higher price.

In addition, of course, it's inequitable.

Click to expand...

The 23% would come from the inherent imbedded taxes - so your $20.00 book would still be $20.00. Your paycheck would change exponentially if you earned $50,000 a year, you would take home $50,000 a year. With the pre bate system the middle and lower class would benefit greatly as well as the small business people.

The high dollar men and woman would pay exponentially more than they are because luxury items would carry a 23% imbedded tax for the government. A person paying for that 1,000,000 yacht would be paying the fed 230,000.

Another point I personally like is that the drug dealers and thieves have no way of hiding their money - the moment they purchase something, taxes are paid!

There is a whole lot to like in this package and the low and middle class will benefit from it.

Here is the actual bill:

hislegacy said:

The 23% would come from the inherent imbedded taxes - so your $20.00 book would still be $20.00. Your paycheck would change exponentially if you earned $50,000 a year, you would take home $50,000 a year. With the pre bate system the middle and lower class would benefit greatly as well as the small business people.

The high dollar men and woman would pay exponentially more than they are because luxury items would carry a 23% imbedded tax for the government. A person paying for that 1,000,000 yacht would be paying the fed 230,000.

Another point I personally like is that the drug dealers and thieves have no way of hiding their money - the moment they purchase something, taxes are paid!

There is a whole lot to like in this package and the low and middle class will benefit from it.

Click to expand...

Companies have a history of passing on taxes to the costumer. I don't think something that is $20 will stay $20 dollars, they will find ways to raise the price to pass on the cost of taxes.

hislegacy said:

Another point I personally like is that the drug dealers and thieves have no way of hiding their money - the moment they purchase something, taxes are paid!

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OTOH, we wouldn't be able to convict Al Capone and other gangsters of tax evasion.

hislegacy said:

The 23% would come from the inherent imbedded taxes - so your $20.00 book would still be $20.00. Your paycheck would change exponentially if you earned $50,000 a year, you would take home $50,000 a year. With the pre bate system the middle and lower class would benefit greatly as well as the small business people.

The high dollar men and woman would pay exponentially more than they are because luxury items would carry a 23% imbedded tax for the government. A person paying for that 1,000,000 yacht would be paying the fed 230,000.

Another point I personally like is that the drug dealers and thieves have no way of hiding their money - the moment they purchase something, taxes are paid!

There is a whole lot to like in this package and the low and middle class will benefit from it.

Here is the actual bill:

https://www.congress.gov/bill/118th-congress/house-bill/25?q=%7B%22search%22%3A%5B%22%5C%22H.R.25%5C%22%22%2C%22%5C%22H.R.25%5C%22%22%5D%7D&s=4&r=1

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In general, your analysis in correct.

The question for society is whether we want the middle class to pay taxes at the same rate as the rich.

I also think that rate is a bit low if we are to eliminate payroll taxes and provide the indicated subsidies to the poor. I've seen 26% as a possible number.

Getting rid of the IRS is meaningless. The jobs just move to the Department of Revenue who will need to administer this sales or VAT.

hislegacy said:

The 23% would come from the inherent imbedded taxes - so your $20.00 book would still be $20.00. Your paycheck would change exponentially if you earned $50,000 a year, you would take home $50,000 a year. With the pre bate system the middle and lower class would benefit greatly as well as the small business people.

The high dollar men and woman would pay exponentially more than they are because luxury items would carry a 23% imbedded tax for the government. A person paying for that 1,000,000 yacht would be paying the fed 230,000.

Another point I personally like is that the drug dealers and thieves have no way of hiding their money - the moment they purchase something, taxes are paid!

There is a whole lot to like in this package and the low and middle class will benefit from it.

Here is the actual bill:

https://www.congress.gov/bill/118th-congress/house-bill/25?q=%7B%22search%22%3A%5B%22%5C%22H.R.25%5C%22%22%2C%22%5C%22H.R.25%5C%22%22%5D%7D&s=4&r=1

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I don't see how this would work....you can't "embed" prices within a free market system. You're suggesting government control over the market aka socialism.

Drug dealers pay sales tax now.

As for the rest of it....doesn't it also apply to foreign consumers? Wouldn't they have pay the sales tax?

Ana the Ist said:

I don't see how this would work....you can't "embed" prices within a free market system. You're suggesting government control over the market aka socialism.

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I over simplified - sorry - if you back out the companies cost of payroll, corporate taxes etc - it comes to 23% or a little more. Adding a 23% flat tax would not effect the prices, nor would if effect the companies profits. It is in no way socialism - it is a different mode of taxation.

Ana the Ist said:

Drug dealers pay sales tax now.

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That my friend is laughable - You actually believe that drug dealers, both small and large file taxes on their drug sales.

Ana the Ist said:

As for the rest of it....doesn't it also apply to foreign consumers? Wouldn't they have pay the sales tax?

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Sure would, because it would be part of the cost of the item.

You buy a dozen eggs today and spend $5.00 - with a flat tax, that dozen eggs still costs 5.00 - the tax is imbedded in the price.

PLUS, no IRS - no filing - no reports -