Interesting Discussion on the FairTax Online

Kevin Hassett, Resident Scholar at the American Enterprise Institute, published an article on TCS (Tech Central Station) the other day titled, "Tax Reform 101." His major points are: Consumption is a better base than income, a value added tax is a consumption tax and consumption tax proposals are just VATs.
FairTax enthusiasts will immediately see what caught my attention and led me to the online feedback area. What follows here is the feedback as it has developed over the past four days:
Ken Re: But in the real world: Message: While I'm in favor of a consumption tax the type of proposal described here scares the excrement out of me. In the real world of politics, such a scheme would almost certainly evolve (quite rapidly) into something closely resembling the current income tax system, with a VAT or national sales tax piggybacked on it.

The only way I could support a federal consumption/sales tax would be if the constitution were ammended to remove Congress' authority to tax income. Without removing this temptation, the 'purely' redistributive tax on wages would likely prove to be an irresistable temptation to legislators whenever the public complained about the level of the sales/consumption tax. In the end, we'd probably have a VAT extracting sufficient revenue to support current government spending, with a wage/income tax to boot.

Assuming that redistribution were required (after all, why would Paul support anything that didn't include his getting some of Peter's meney?) there are safer ways to accomplish it. One way would be to send every household a monthly check equivalent to the tax that they would be paying on some basic income level, e.g., twice the poverty level. Not only would the government not be taxing people who consumed less than the threshold, but would in fact be paying them a stipend.

Dietmar: Re: In the real world: Message: Redistribution is only required if you're a socialist. In a really free society, socialists could voluntarily donate much of their income for redistribution. Micheal Moore suggests 70% as a good number.
I kind of like the VAT idea because it means that everybody who consumes something has to contribute. Liberals hate it though because that would mean that even illegal immigrants would be paying taxes when they buy their cell phones, cars, etc.

Veritas: Re: But in the real world: Message: Good post, but I'd also exempt the courts from ruling on it as well and mandate any increasesbe left to direct voter approval.

Sunnye Re: But in the real world: Message: Judging from what you have said, each of you wants the FairTax.

It repeals the income tax and the embedded taxes in products and services (retailers pass along the taxes they pay to the consumer embedded in the price of the products they sell).

FairTax taxes only new goods and services, not used ones. It provides a $178 a month rebated to every social security card holder so that no one pays tax on goods up to the poverty level, thereby exempting the poor.

It would make the USA the only nation in the world that doesn't tax productivity, increasing our appeal and strengthening our trade in International markets.

The VAT is just another embedded tax, added to the employee taxes and corporate taxes businesses already pay and pass along to customers. That's why it didn't work in Europe.

Learn more about FairTax at www.fairtax.org

TJ Jackson Re: But in the real world: Message: Sounds good but I wouldn't exept anyone at any level. If all pay all feel the same pain. It makes it harder to raise taxes and promotes more effective government.

Scott Kwilinski Re: VAT Message: I've always preferred a pure VAT so the government can get out of the business of knowing everything about everyone's income. The cost of enforcement is astronomical. Every financial institution has to generate reports for every customer and the government for even miniscule amounts. A simpler tax code leads to simpler enforment and the total drag on the economy is less. Also with a VAT all this IRA, 401K, College fund, Health Savings Account junk becomes moot. Save at no cost. Get taxed on spending. Very simple.

Sunnye Re: VAT Message: Well, the VAT is more complicated than that. It's imposed on top of the income tax, and new taxes are added at each stage of product development instead of at the end. Those taxes, along with the FICA taxes and corporate taxes the manufacturers and middle men pay are tacked on to the price of the product and passed along to the consumer.

The best solution to all this is a national retail sales tax that gets rid of the income tax, corporate taxes, etc. and taxes only the final new product at the point of sale. It's called the FairTax.

Check it out at www.fairtax.org or www.us4fairtax.blogspot.com

TheOneLaw: Two major problems with VAT Message: The first problem is psychological because every individual must feel that they are being treated fairly.

The article states that 'Since a VAT is like a sales tax, and since poor people on average spend almost all of their income, poor people would face a significant tax hike if the U.S. adopted a VAT.'

I do agree that people who have less money, and in turn spend less money, should pay less in taxes. This is, by definition, already built in to an individual consumption tax. But everyone, rich or poor, must pay the same rate on every new product and every service that they purchase. If you start to provide exceptions or you provide any form of rebate then one group feels that they are getting something from the government(other citizens) for nothing and the rest feel like they are getting shafted. No matter what controls are written into the code the tax percentage will grow and more exceptions will be added by legislators trying to show preference to their group for every possible excuse known to man (like it is now).

For everyone to feel that the taxation system is fair we should choose an consumption tax that taxes each individual's consumption of new products and services equally. Then at the same time we must attempt to equalize the per capita spending for government provided social services to the local level. Equal taxation of consumption and equal per capita spending would provide the fairest and most non-political re-distribution of wealth.


The second problem with a VAT is that it only taxes legal businesses. A very large portion of our economy is in the black market which yields very high profits to the people providing these products and services but these people do not pay any income taxes. Whether you want to try to police these black market products and services that these people are providing does not matter in this discussion, they will not recieve benefit from that income until they spend it and most of this spending will be legal and they will have to pay the consumption tax.

A proper Individual Consumption tax has many benefits:

- Eliminates all other forms of taxation that politicians use to reward groups they like and punish those groups that they do not like.
- Promotes true fairness in government treatment of citizens.
- Rewards saving and investment.
- Promotes Caveat Emptor (buyer beware and choose purchases carefully).
- Punishes Opulence and luxury spending by those who cannot afford it.
- Promotes recycling and conservation of resoures by not taxing used products.

If the United States (or any other country) adopted an individual consumption tax and equalized per capita government social spending each citizen would be treated as fairly as possible by the government. It would lead to a booming economy, high investment from abroad, but also a marked advance in civilization (and I don't think I am overstating the possibilities).

As citizens of the United States we should stop trying to gain advantage for ourselves and 'our group' over another and instead just try to treat everyone that is not trying to hurt others equally, and it will benefit everyone.

Thanx,

Kevin

Sunnye Re: Two major problems with VAT Message: Kevin,
You just described the FairTax.
In addition, however, FairTax gives a rebate to every social security card holder in the US so that no one pays any tax at all up to the poverty level. The poor are therefore exempt from paying taxes.

It makes the US the only country in the world that doesn't tax productivity. Think how desirable that makes us in international trade. All those jobs lost coming home!

Do look into it in detail at www.fairtax.org or www.us4fairtax.blogspot.com

TheOneLaw Re: Two Major Problems with VAT
Message: Sunnye,

I have been interested in the FairTax idea for a few years now and have followed the discussion closely but do not agree with all of the FairTax proposal. You wrote that the 'FairTax gives a rebate to every social security card holder in the US so that no one pays any tax at all up to the poverty level' and that is the one aspect of the FairTax that I disagree with. The problem with the rebate is that it adds complexity and opens an opportunity for politicians to change in the future to the benefit of their preferred group. As I wrote in the comment that you responded to, every citizen must believe that they are paying something for the government services they are recieving or they will never stop asking for more government and we will be back in the same situation we are now.

With a fixed rate individual consumption tax (sales tax)those that have less money to spend (the poor) would pay less in taxes but would still pay the same percentage as someone that has significantly more money to spend. The person who consumes less pays less and the person who consumes more pays more and everyone pays something for the government at the same percentage of consumption. This would be the best way to treat all citizens equally.

Thanx for your feedback,

Kevin

Although I responded to this, Kevin has not posted it.
Here it is:
Thank you, Kevin, for discussing this with me.

I find in talking to people all over the country about the FairTax, two things always come up: first, how can we best help the poor and two, will people stop giving to charities. I have been surprised (and dalighted, actually) that almost everyone seems to care about the disadvantaged. (That's evidenced, of course, by Americans' generosity in emergencies.) So I really don't see people feeling that they're getting shafter, especially since they, too, get the rebate. Everyone does who has a valid social security card. Equal taxation of my son, a severely retarded and disabled adult whose income is less than $12,000 a year, would be punishment. Having all his benefits tax-free gives him a chance.

Trying to get Congress to equalize per capita spending will effectively kill any reforms you try to pass. That's another issue that needs to be battled in another forum. Like adding amendments to a bill, you can kill a proposal by adding peripherals to it. And that's a fight that definitely should not be fought along with thte tax issue or we'll never get anywhere. And that alternative is to keep what we have.

Of course, we can always change Congress at the voting booth.

The people who produce black market products have to eat, sleep, and dress. They have to have transportation (and most of them prefer the most expensive transportation of all). They have to purchase the tools and materials to either produce, package or sell their products and with the FairTax, in every case they would be paying the tax. They may get away with some, but certainly not the $300 Billion a year that the IRS can't touch and that doesn't count the money the FairTax would bring in from 40 million foreign tourists a year and who-knows-how-many illegal immigrants. I suspect we'd have a black market (we always have had for one thing or another) but it would be significantly smaller than the benefits gained by using the FairTax.

The main problem with the consumption tax, in my mind, is that it simply doesn't get rid of the income tax. It's one more tax added on to what we already have. Even if you reduced the income tax rate, you still have the rules and the fact that the IRS is not controlled and not accountable to anyone. The IRS has severely abused it's privileges and there's no reason to assume they would ever change their ways.

The other problem I have is making the poor pay taxes at all. They need a chance to get ahead.

One great thing about the FairTax is that it does tax the rich more than the rest of us. They buy more expensive homes, cars, furnishings, clothing, vacations -- everything -- because they can afford it. The social stigma of second-hand will always be there and you can depend on the rich taking great pride in buying new things because those who make less money can't afford to. Why else would anyone ever want a limousine? It's that kind of thinking that plays straight into the FairTax coffers.

You say, "As citizens of the United States we should stop trying to gain advantage for ourselves and 'our group' over another and instead just try to treat everyone that is not trying to hurt others equally, and it will benefit everyone" and I agree. But that is not human nature and above all, we have to deal with human nature. So let's make the best of it and pass the FairTax. The FairTax comes closer than any other proposition on the table to doing what you suggest.
Sunnye
The discussion also runs under another heading, "Tax reform 101"

Whooper Re: Tax Reform 101 Message: In order to discuss tax reform one must correctly frame the issue. It is this: how to provide revenue for the operation of government. It is not how to stimulate the economy; it is not how to raise revenue it easily; it is not how to raise revenue painlessly. Second, one must address how to raise revenue fairly. This involves identifying the beneficiaries of government. In the process of the latter one better defines the purposes of government. For example if the purpose is to transfer wealth then fairness is thrown out the door. In which case stimulating the economy, easy and painless will win. If the purpose is to provide infrastructure then fairness will dominate and lead one to the conclusion that a progressive income tax is the fairest. It targets those who accumulate wealth from use of infratructure and nature's resources.

Sunnye Re: tax reform 101 Message: The FairTax is revenue neutral -- that means it funds the US government at present levels because it taxes everyone fairly and recovers the $300 BILLION a year the IRS says it can't get to.

FairTax is fair because it imposes a visible tax on only new goods and services. Pre-owned and used goods are not taxed. The poor pay no taxes at all because everyone gets a 'prebate' at the beginning of each month -- $178 per social security card holder -- to assure that no one pays taxes up to the poverty level.

Prices go down by 20% to 30% because the income tax, employee taxes and business taxes are repealed by the repeal of the income tax. Walmart has promised to reduce prices by more than 20% as soon as passage of the FairTax is announced.

Learn more at www.fairtax.org or www.us4fairtax.blogspot.com (to comment)

Nat Re Fair Tax National Sales Tax Message: I'm surprised there's been no mention of a national sales tax yet. There are a number of advantages to such a scheme. For one thing, in a democracy it is essential that the citizenry be aware of as much as possible if the people are to be able to make informed choices. With a sales tax, and only with a sales tax, everyone will be aware of just how much tax he or she is paying. Further, there is absolutely no government intrusion in private life--no forms to fill out, no need to keep track of income and expenses beyond one's own personal requirements. A VAT hides the tax and increases the wholesale cost of goods. A sales tax minimizes that cost, making US made goods more competitive. Because a sales tax is out in the open, legislators can't increase it without the public knowing about it. Everyone who buys any new good or service pays the tax, so the entire underground economy gets covered.

The Fair Tax proposal includes a 'prebate' that's sent to every registered household each month in anticipation of the sales tax they'd have to pay if they spent at the poverty level. This makes it progressive and does it automatically, without any bureaucratic rule making. There are a great many benefits to this particular, much studied, proposal which can be found at http://www.fairtax.org and I encourage study at that site!

Nat.

John F. Re Fair Tax National Sales Tax: Message: I think Nat said it very well. A national retail sales tax, of the type proposed by the Fair Tax people, has many advantages over an income tax or VAT. To my mind, the primary advantage is that the tax is visible to every buyer at the time of purchase.

In Europe, where the VAT is common, it is impossible for the consumer to reliably differentiate tax increases levied quietly by the government from the effects of inflation. I, for one, do not wish to provide politicians with the temptation of a hidden tax that they can ratchet up at will.

The Fair tax does relieve the tax burden on poverty-level households, but it does not re-distribute income, which I count as a plus. Income redistribution is a socialist theory which has only acted to dis-incentivise the more productive members of society, leading to a smaller pie for all. Another name for income redistribution is 'fairness'.

John F

So the discussion goes on. If you'd like to join in, the article is at http://www.techcentralstation.com/042605B.html. Just click on the feedback bar at the bottom of the piece to get to the feedback forum.