A Modified FairTax

[Free Bird]

Someone talked to me about this plan to modify it.

- Keep capital gains tax and make it more progressive. This would crack down on true inequality
- Keep payroll taxes at a lower rate to keep those afloat
- Keep estate tax worth over $1,000,000
- Lower the national sales tax accordingly to lessen the blow of it

What should I tell my friend? As we all know I'm not an economic expert so I don't want to say something stupid!

[136or142]

This is what I posted on the 'Bell Gab' website about a guest who appeared on the pathetic U.S Radio Program "Coast To Coast" (which I even more pathetically listen to) who was promoting the so-called 'fair tax'. I'm reposting it complete so that's where the references to 'the guest' come from (The guest was Bill Spillane).

1.Total consumption spending was around $12 trillion in 2014, 25%  (23%) of that is $3 trillion.  Total direct federal revenue in 2014 was $3.2 trillion http://www.usgovernmentrevenue.com/total, so even without adding in the cost of the 'prebates', a 23% sales tax rate would not be enough for the tax to generate enough revenue to make up for the loss of existing federal taxes.  Quoting Arthur Laffer to say that the cost of federal tax compliance is around $1 trillion a year is simply not credible to me. In the first year, it would mean that retail businesses (there are around 23 million small businesses in the United States) would have to retool their computer systems and their cash registers to set up receiving the tax.  If the 'fair tax' were to be 'hidden' as opposed to 'paid at the cash register' it would also mean they would have to change all their prices.  Both of these would have very high costs, although they would be 'one time things' as long as the rate of the 'fair tax' didn't change.

2.I had an english instructor once who would write "MNS" on papers (I received it once, I believe). At the beginning of the year, she handed out a guide that explained what her acronyms meant.  "MNS" meant "makes no sense".  The guest's responses to how a 23% sales tax would somehow lead to lower prices or, at most, would barely raise prices and, even more so, the response to how the huge increase in sales taxes wouldn't lead to a massive black market "MNS".

3.I agree with the idea of eliminating corporate income taxes, partly because, as the guest said "corporations don't pay any taxes" but mainly because corporations should receive an incentive to reinvest their profits.  So, I would increase dividend taxes to the 'normal rate' to partially make up for the loss of corporate taxes.  Other than that, I would get revenue by shifting to pollution taxes and possibly increasing the capital gains tax rate. I would also increase pollution taxes so much that I'd have the ability to significantly decrease, if not eliminate, the corporate share of payroll taxes. Business payroll taxes certainly have a negative impact on job hiring (though how big I have no idea), as corporate income taxes are 'after profit' their impact is probably minor, though obviously they discourage investment. Of course, very few large corporations likely even pay the effective 35% rate anyway.

4.The idea that switching from the present tax system to the 'fair tax' would increase GDP by "10% in the first year alone", is ridiculous. One of the first things taught in macroeconomics is that in the long run the only way to increase real GDP per capita is by increasing productive capacity (new plant and equipment, better infrastructure, better education...).  Even if eliminating income and other taxes did spur growth, the idea that productive capacity would increase significantly in the first year is laughable.  Eliminating corporate income and payroll taxes likely would lead to greater growth, but it would occur over many years.  Eliminating other income taxes and personal payroll taxes would likely have little impact, if any, on growth rates.

5.The guest promoted his 'prebates' but left out that lower income people already pay little to no income taxes and that even a great deal of payroll taxes are paid back to low and lower middle income earners through the EITC.

6.Switching to a 'fair tax' would not eliminate the IRS.  To be sure, it would be smaller, but there would still be a need to ensure that businesses sent on their 'fair tax' remittances as well as an agency to fight the newly hugely expanded black market. There would also need to be an agency to hand out the 'prebates' and, more importantly, to prevent what would likely be massive fraud with the 'prebates.'  I believe that the IRS also handles state income taxes, so, implementing a 'fair tax' would likely force states to eliminate their income taxes and move to sales taxes as well (or maybe increase property taxes).  Many counties (and I believe cities) also use sales taxes as well.  So the full effective sales tax rate (the nearly 30% the federal sales tax would have to be to achieve the same amount of revenue) as well as state, city? and county, would likely approach 50%! in many states.

The French Finance Minister and early economist Jean-Baptiste Colbert famously said: "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing."  While having as many different taxes as possible increases compliance costs, it keeps tax cheating and fraud to a minimum.

7.The guest said that a paying sales taxes are a 'choice'.  This, is, of course, for everybody but the 'back to earthers' ridiculous.  He also said that the effective rate on the 'flat tax' goes 'up and up.'  This is simply not true.  Many of the wealthiest save or invest a great deal of their income rather than spend it.  None of that would be taxed. It is most likely that the middle class, or the slightly upper middle class would end up paying the highest percent of their income in 'fair taxes.'

8.The Fair Tax would almost certainly not eliminate lobbying and claims for 'deductions'.
 Charities would certainly get a lot of sympathy if they argued that sales tax payers should be able to send in tax receipts and receive money from back from the government equal to a percentage paid to the charity.  There are many other worthy tax deductions and credits, for instance those that benefit the physically and mentally challenged.  Again, it would be hard to imagine these people not receiving subsidies to equal what they presently receive in tax deductions and credits.  The fair tax would not eliminate lobbying, it would merely shift the demand from credits and deductions to direct subsidies.

[King]

Tell him that teenagers shouldn't be writing tax code

[AggregateDemand]

Someone talked to me about this plan to modify it.

- Keep capital gains tax and make it more progressive. This would crack down on true inequality
- Keep payroll taxes at a lower rate to keep those afloat
- Keep estate tax worth over $1,000,000
- Lower the national sales tax accordingly to lessen the blow of it

What should I tell my friend? As we all know I'm not an economic expert so I don't want to say something stupid!

The government keeps the payroll tax, capital gains tax, and estate tax. Gains national sales tax.

No.

[AggregateDemand]

5.The guest promoted his 'prebates' but left out that lower income people already pay little to no income taxes and that even a great deal of payroll taxes are paid back to low and lower middle income earners through the EITC.

7.The guest said that a paying sales taxes are a 'choice'.  This, is, of course, for everybody but the 'back to earthers' ridiculous.  He also said that the effective rate on the 'flat tax' goes 'up and up.'  This is simply not true.  Many of the wealthiest save or invest a great deal of their income rather than spend it.  None of that would be taxed. It is most likely that the middle class, or the slightly upper middle class would end up paying the highest percent of their income in 'fair taxes.'

The EITC doesn't come close to refunding taxes. A single person earning $5,000 per year pays roughly $750 in payroll tax. The maximum EITC is $496. The numbers are more robust for people with children, but the benefit still doesn't cover all of the imputed payroll taxes and corporate income taxes in the products we buy.

You have to think of the fair tax in terms of marginal purchasing power. Who gains the most purchasing power from eliminating payroll taxes and income taxes? It's not the wealthiest Americans. Their recognized income is only a fraction of their total wealth. Laborers are in the opposite situation. Their recognized income is often a large percentage of their net worth.

[Representative MJM]

Tell him that teenagers shouldn't be writing tax code

This.

Also, the whole point of the FairTax is to create a simple tax code. Under your friend's plan, money is taxed over and over again. For instance, a person earns income through his salary and pays a payroll tax. He then invests this income and makes a profit, but has to pay a capital gains tax. This money is then used to purchase goods, so he must pay the sales tax. He then dies and leaves the remainder to his children, paying the estate tax. His children will then be taxed when they use the rest of the money to buy goods.
It just makes more sense to tax all of it at once. After all, the point of money is to spend it, so why not tax it when it is spent? Let people transfer and invest their money as they please; it will all be taxed eventually.

[Bacon King]

The EITC doesn't come close to refunding taxes. A single person earning $5,000 per year pays roughly $750 in payroll tax. The maximum EITC is $496. The numbers are more robust for people with children, but the benefit still doesn't cover all of the imputed payroll taxes and corporate income taxes in the products we buy.

You have to think of the fair tax in terms of marginal purchasing power. Who gains the most purchasing power from eliminating payroll taxes and income taxes? It's not the wealthiest Americans. Their recognized income is only a fraction of their total wealth. Laborers are in the opposite situation. Their recognized income is often a large percentage of their net worth.

Check out the chart on page nine of this PDF released by the CBO.

The lowest quintile has an average individual income tax rate of -9.2% and a payroll tax rate of 8.4%, so tax credits like the EITC generally do provide a full payroll tax refund for that group. The lowest quintile's total effective federal tax rate (which includes the impact of corporate income tax and excise taxes) is only 1.5%. Amusingly, given this quintile's average income is $24,100, their average tax liability is almost exactly $1.00 per day ($361.50 per year).

Compare this to the top quintile: total effective tax rate of 24.0% on a pretax income of $239,100, which is $57,384 in taxes per year.

How would the Fairtax change things? Let's use the BLS Consumer expenditures report to find out!

The lowest quintile spends $22,393 on stuff per year while the highest quintile spends $99,237, which suggests an annual FairTax burden of $4074.90 (16.9% rate) for the former group and $27,128 (11.3% rate) for the latter once you subtract the individual prebate of $2,643.

You said to think of the FairTax in terms of marginal purchasing power. So let's do that:

The average member of the poorest quintile would see their total tax rate increase tenfold, from 1.5% to 16.9% of pre-tax income.
The average member of the wealthiest quintile would see their total tax rate cut in half, from 24.0% to 11.3% of pre-tax income.

This is little more than back-of-the-envelope arithmetic so it might not be entirely exact, but I believe it adequately demonstrates whose purchasing power the Fairtax would change and how. I might be underestimating the impact of the prebate- larger and poorer families would get larger prebates and wouldn't see much of a tax increase at all. Still, though, that's pretty insignificant compared to the wealthy having their tax bills cut in half.

[AggregateDemand]

Check out the chart on page nine of this PDF released by the CBO.

The lowest quintile has an average individual income tax rate of -9.2% and a payroll tax rate of 8.4%, so tax credits like the EITC generally do provide a full payroll tax refund for that group. The lowest quintile's total effective federal tax rate (which includes the impact of corporate income tax and excise taxes) is only 1.5%. Amusingly, given this quintile's average income is $24,100, their average tax liability is almost exactly $1.00 per day ($361.50 per year).

Compare this to the top quintile: total effective tax rate of 24.0% on a pretax income of $239,100, which is $57,384 in taxes per year.

How would the Fairtax change things? Let's use the BLS Consumer expenditures report to find out!

The lowest quintile spends $22,393 on stuff per year while the highest quintile spends $99,237, which suggests an annual FairTax burden of $4074.90 (16.9% rate) for the former group and $27,128 (11.3% rate) for the latter once you subtract the individual prebate of $2,643.

You said to think of the FairTax in terms of marginal purchasing power. So let's do that:

The average member of the poorest quintile would see their total tax rate increase tenfold, from 1.5% to 16.9% of pre-tax income.
The average member of the wealthiest quintile would see their total tax rate cut in half, from 24.0% to 11.3% of pre-tax income.

This is little more than back-of-the-envelope arithmetic so it might not be entirely exact, but I believe it adequately demonstrates whose purchasing power the Fairtax would change and how. I might be underestimating the impact of the prebate- larger and poorer families would get larger prebates and wouldn't see much of a tax increase at all. Still, though, that's pretty insignificant compared to the wealthy having their tax bills cut in half.

Did you read the prebate report? They provided information about the effective tax rates.

I have no idea how you're calculating 11% effective income tax rate, and a casual glance at your model indicates that you've assumed an ungodly savings quotient for the upper quintile. Use the data included in the Fair Tax prebate report.

[136or142]

Check out the chart on page nine of this PDF released by the CBO.

The lowest quintile has an average individual income tax rate of -9.2% and a payroll tax rate of 8.4%, so tax credits like the EITC generally do provide a full payroll tax refund for that group. The lowest quintile's total effective federal tax rate (which includes the impact of corporate income tax and excise taxes) is only 1.5%. Amusingly, given this quintile's average income is $24,100, their average tax liability is almost exactly $1.00 per day ($361.50 per year).

Compare this to the top quintile: total effective tax rate of 24.0% on a pretax income of $239,100, which is $57,384 in taxes per year.

How would the Fairtax change things? Let's use the BLS Consumer expenditures report to find out!

The lowest quintile spends $22,393 on stuff per year while the highest quintile spends $99,237, which suggests an annual FairTax burden of $4074.90 (16.9% rate) for the former group and $27,128 (11.3% rate) for the latter once you subtract the individual prebate of $2,643.

You said to think of the FairTax in terms of marginal purchasing power. So let's do that:

The average member of the poorest quintile would see their total tax rate increase tenfold, from 1.5% to 16.9% of pre-tax income.
The average member of the wealthiest quintile would see their total tax rate cut in half, from 24.0% to 11.3% of pre-tax income.

This is little more than back-of-the-envelope arithmetic so it might not be entirely exact, but I believe it adequately demonstrates whose purchasing power the Fairtax would change and how. I might be underestimating the impact of the prebate- larger and poorer families would get larger prebates and wouldn't see much of a tax increase at all. Still, though, that's pretty insignificant compared to the wealthy having their tax bills cut in half.

Did you read the prebate report? They provided information about the effective tax rates.

I have no idea how you're calculating 11% effective income tax rate, and a casual glance at your model indicates that you've assumed an ungodly savings quotient for the upper quintile. Use the data included in the Fair Tax prebate report.

Which prebate?  Bill Spillane used to speak of an approx $6,000 prebate for every person, but on his last appearance on Coast to Coast, he lowered it to approx $2,500.

[True Federalist (진정한 연방 주의자)]

- Keep estate tax worth over $1,000,000

The estate tax already exempts considerably more than $1,000,000 of estate. Even those in the lower upper class don't need to fear the estate tax, and those in the middle upper class just need some decent estate planning to avoid it.