Presidential Tax Politics & the "Fair Tax" [split from 2008 Presidential Election thread]

[zman]

Seems that Clinton is toast...

I watched a news program last night about the 4 top candidates (according to NBC) and their stance on the economy and taxation.

While I feel, if elected, Huckabee would turn the Constitution into a religious document, I did find his eradication of taxes and implementation of a 23% national sales tax intriguing. What are the thoughts of the Cyburbians on this?

[Maister]

I did find his eradication of taxes and implementation of a 23% national sales tax intriguing. What are the thoughts of the Cyburbians on this?

Seems like it would be a very efficient method of shifting the tax burden on to the poor.

[zman]

Seems like it would be a very efficient method of shifting the tax burden on to the poor.

So if the national sales tax was applied to everything, what about the goods (more expensive goods, mind you) that the middle and upper class buys.

[noottamevas]

So if the national sales tax was applied to everything, what about the goods (more expensive goods, mind you) that the middle and upper class buys.

Are food items exempt? What about utilities? If so, this would lesson the burden on the lower class.

[mgk920]

Are food items exempt? What about utilities? If so, this would lesson the burden on the lower class.

His proposal (which I *REALLY* like, although I don't support Huckabee since I am not a single-issue voter), called the 'Fairtax', would impose the tax on the sales of all retail services and new goods (used goods would be exempt on the basis that they will have already been taxed) and includes a monthly rebate check equal to the tax rate times the poverty level based on family size.

Thus, spending on services and new goods below the poverty level would be untaxed and the really thrifty would pay a negative rate. Essentially, the tax would be 23% on all retail service and new goods spending above the poverty level.

Compared with today's USA income tax mess, administering the rebates would be a stroll in the park.

Mike

[Plan-it]

Seems that Clinton is toast...

I watched a news program last night about the 4 top candidates (according to NBC) and their stance on the economy and taxation.

While I feel, if elected, Huckabee would turn the Constitution into a religious document, I did find his eradication of taxes and implementation of a 23% national sales tax intriguing. What are the thoughts of the Cyburbians on this?

Various efforts of shifting tax strategy have been tried ever since the advent of taxes themselves. The only thing that a full consumption tax will do is to increase bartering and create a larger and more expansive black market. People hate paying taxes, they will do anything to avoid them. Also, the impact of instituting a consumption tax will be extreme on the lower income and on manufacturing. Becasue all transactions are taxed, businesses will have to pay higher taxes on the assembly of goods. Therefore the inflation cost on society will increase. It will also cause a loss of jobs as the expense to manufacture products rises thus making it more financially beneficial to create products in Mexico, China, India, or some other lower cost lower tax environment. In my opinion, this is just a horrible idea.

[zman]

Various efforts of shifting tax strategy have been tried ever since the advent of taxes themselves. The only thing that a full consumption tax will do is to increase bartering and create a larger and more expansive black market. People hate paying taxes, they will do anything to avoid them. Also, the impact of instituting a consumption tax will be extreme on the lower income and on manufacturing. Becasue all transactions are taxed, businesses will have to pay higher taxes on the assembly of goods. Therefore the inflation cost on society will increase. It will also cause a loss of jobs as the expense to manufacture products rises thus making it more financially beneficial to create products in Mexico, China, India, or some other lower cost lower tax environment. In my opinion, this is just a horrible idea.

So, how could it work to keep Americans employed in manufacturing and prevent jobs from going overseas?

I appreciate the dialogue as I did not post this to bait people, rather to get the wide-spectrum on Cyburbia's view for education of this layperson who did not pay too much attention in Economics class (or Poli Sci for that matter)

[mgk920]

Various efforts of shifting tax strategy have been tried ever since the advent of taxes themselves. The only thing that a full consumption tax will do is to increase bartering and create a larger and more expansive black market. People hate paying taxes, they will do anything to avoid them. Also, the impact of instituting a consumption tax will be extreme on the lower income and on manufacturing. Becasue all transactions are taxed, businesses will have to pay higher taxes on the assembly of goods. Therefore the inflation cost on society will increase. It will also cause a loss of jobs as the expense to manufacture products rises thus making it more financially beneficial to create products in Mexico, China, India, or some other lower cost lower tax environment. In my opinion, this is just a horrible idea.

The Fairtax proposal would exempt business-to-business sales. Right now, under the present income tax, businesses pass a LOT of tax liability along to their customers in the form of higher list prices (remember, businesses do NOT pay taxes, PEOPLE pay taxes). The Fairtax would bring that all into the open. Export sales would also not be taxed, so USA-made goods would be more competitive on the world market, increasing exports.

As for black markets and tax evasion - how much of those bar and restaurant tips are really reported to the IRS?

Mike

[wahday]

My concern with the Fairtax proposal is, while it exempts people below the "poverty line," the reality, I think, is that many people earning over this amount may still be living in poverty. What about those people? Paying 23 percent on sales items is, IMO, pretty darn regressive. It also does not eliminate the need to pay state taxes (or is he proposing no state tax either?)

And as was noted, its likely that at least some of the poor (but not below the poverty line) are working in situations where income is not always accurately counted (like the tips issue for wait staff). These people would still have to pay the 23 percent sales tax and so they would pay a higher percentage of their income than they do currently and have even less.

Admittedly I don't know a lot about the specifics of this approach, but I would like to see a lot more "what if" scenarios to see how it might play out on the ground.

[mgk920]

My concern with the Fairtax proposal is, while it exempts people below the "poverty line," the reality, I think, is that many people earning over this amount may still be living in poverty. What about those people? Paying 23 percent on sales items is, IMO, pretty darn regressive. It also does not eliminate the need to pay state taxes (or is he proposing no state tax either?)

And as was noted, its likely that at least some of the poor (but not below the poverty line) are working in situations where income is not always accurately counted (like the tips issue for wait staff). These people would still have to pay the 23 percent sales tax and so they would pay a higher percentage of their income than they do currently and have even less.

Admittedly I don't know a lot about the specifics of this approach, but I would like to see a lot more "what if" scenarios to see how it might play out on the ground.

Again, it is 23% on services and new goods spending above the poverty line, so someone spending a couple hundred or so per month above the poverty level will be paying an effective rate of only a few percent. Right now, the lowest wage earners already have at least 7% of their pay taken by the federal FICA tax, which the Fairtax also repeals.

As for state and local taxes, that is 100% up to the individual states and localities.

There are position papers on all of this on the Fairtax website.

Mike

[Duke Of Dystopia]

As for black markets and tax evasion - how much of those bar and restaurant tips are really reported to the IRS?

Mike

depends on if it is a corporate restaurant or bar. Corporate track those things like everything else. Mom & pop shops don't.

[Maister]

I don't hold myself out to be any expert on tax codes, but here's what the Annenberg Public Policy Center (a nonpartisan, nonprofit org) had to say about the 'fair tax'

http://www.factcheck.org/taxes/unspi...e_fairtax.html

[btrage]

How about abolishing the Federal Income Tax and replace it with absolutely nothing?

I don't mind paying into the system for Medicare/Social Security, but leave the rest of my income alone.

[TexanOkie]

Fred Thompson had had a plan that was a modified two-level progressive flat tax where people earning over a certain amount (which was different for singles than it was married couples) paying a flat 25% and those making under the amounts paying 10%.

I'd just be happy with an across-the-board flat tax. I don't see how anyone could argue against a flat tax being fair - people would all be paying the exact same amount (as far as percentage) of their income and by definition it would be fair to all.

[Planit]

Isn't the Fairtax system similar then to the Value Added Tax in England and Canada?

[Suburb Repairman]

Split from 2008 Presidential Thread since we had nearly a full page dedicated to this tax discussion. SR

Isn't the Fairtax system similar then to the Value Added Tax in England and Canada?

Not quite. The VAT used in England and Canada is more sophisticated in that the purchaser pays tax only on the additional value created by the previous stage of production. The fair tax is an oversimplified version of the VAT that operates like a pure sales/consumption tax at only the retail point of purchase. Having never lived in Europe or Canada, I can't really tell you from experience how well a VAT works. I do know that my public finance professor loved VAT to a point that I think he would have made babies with it if possible.

From my perspective, the Fair Tax has a whole host of problems. For example, folks like me place a lot of money in Roth IRAs, which is funded with after tax dollars so I can withdraw tax free later on. So let's say I'm 70 and have decided to start drawing on my Roth. I am now being taxed again by the replacement Fair Tax, which would create a double-taxation situation. In addition, the income tax structure allows the government to encourage/reward certain behaviors, such as charitable giving, purchasing a home, and pursuing higher education. I'm not sure how you get there with the Fair Tax without creating another IRS and a wealth of forms to go with it. In addition, in my playing around with the Fair Tax stuff at school seemed to indicate the Fair Tax would help those in real poverty, but low-income to middle-income wage earners would bear the brunt. The Fair Tax would also help those at the top of the pay scale.

Honestly, I haven't put much thought beyond my work in school into the fair tax because it has a snowball's chance in hell of getting through. Major programs, like tax laws, are typically incrementally changed. The fair tax folks are trying to use a comprehensive-rational model, which is generally good, but they are not assessing it as carefully as they should (much like what is suggested in Maister's link).

[giff57]

How about abolishing the Federal Income Tax and replace it with absolutely nothing?

I don't mind paying into the system for Medicare/Social Security, but leave the rest of my income alone.

So you work for the private sector then? How do you propose they pay for anything.

[Maister]

if the national sales tax was applied to everything, what about the goods (more expensive goods, mind you) that the middle and upper class buys.

Then the 23% sales tax would apply to those more expensive goods too.

What I meant by the ‘shifting the tax burden’ comment, though, was that the so-called flat tax is in fact concealing a regressive tax – that is, a tax that falls more heavily on those who make less money. Lemme explain how the regression is concealed….some hardworking Joe/Jane is making $18,000/year as a janitor or a barber. This individual will pretty much HAVE to spend close to everything they make every year putting a roof over their head, clothes on their back, and food on their table. Rich people, however, only have to spend a fraction of their income on living expenses and only get taxed on the portion they do spend, so poor people are effectively paying much higher taxes proportionally than the rich people.

[DetroitPlanner]

Only good thing I can see about a high sales tax is that it would seriously hurt the drug dealers by making them part of the legitimate tax-paying economy.

That being said, I do feel like Maister that it would be too regressive and really screw over the poor and those with children.

I would hope that food, used clothes, medical, and housing would be exempt to make it more fair for the working poor.

[KSharpe]

How about abolishing the Federal Income Tax and replace it with absolutely nothing?

I don't mind paying into the system for Medicare/Social Security, but leave the rest of my income alone.

Our Federal taxes pay for defense, too, you know...

[TexanOkie]

What I meant by the ‘shifting the tax burden’ comment, though, was that the so-called flat tax is in fact concealing a regressive tax – that is, a tax that falls more heavily on those who make less money. Lemme explain how the regression is concealed….some hardworking Joe/Jane is making $18,000/year as a janitor or a barber. This individual will pretty much HAVE to spend close to everything they make every year putting a roof over their head, clothes on their back, and food on their table. Rich people, however, only have to spend a fraction of their income on living expenses and only get taxed on the portion they do spend, so poor people are effectively paying much higher taxes proportionally than the rich people.

That being said, I do feel like Maister that it would be too regressive and really screw over the poor and those with children. I would hope that food, used clothes, medical, and housing would be exempt to make it more fair for the working poor.

Actually, odds are it would not wind up being a regressive system, and if by "screwing the poor" you mean the poor would actually have to pay taxes, then yes, it would screw the poor. But let us not forget that not all of life's expenses are necessity. Along with higher income, those who Maister calls "rich people" are more likely to spend tons more on luxuries they do not actually need (i.e. vacations, toys [not the children's playthings], gadgets, what-have-you]). This would make the tax burden still be pretty skewed toward the wealthy, and, more importantly, would by nature provide a very real incentive to promote responsible spending habits and savings amongst the poor and middle classes. In other words, a consumption tax would breed more savvy and wise consumers.

[wahday]

Only good thing I can see about a high sales tax is that it would seriously hurt the drug dealers by making them part of the legitimate tax-paying economy.

Interesting point, though it would only tax half of the problem - dealers would pay taxes on legitimate goods and services (regardless of whether the money was ill-gotten or not), but buyers would not be paying taxes on their drug purchases and so drug sales themselves would remain untaxed. It would recoup some of that money, though. Interesting, though I still don't support the idea of a 23 (or 30, depending on who you trust) percent sales tax. It still seems excessively regressive to me.

With regard to Btrage's comment about doing away with the Fed Income Tax altogether, I know that some that advocate such a move suggest that this money does not go to actual government services and spending, but largely to pay off the national deficit. But this misses the point, I think, which is that this is our collective debt, borrowed for the collective good - spending which was allocated for in the national budget, but for which there was a deficit (like, say, a big fat war we couldn't afford or, as may happen soon, upgrading an ailing national infrastructure). As such, I feel we still have a collective obligation to contribute toward paying it down. These are, afterall, expenditures that we collectively benefited from. Do we really want to be a delinquent debtor as a nation?

Now, we can argue about government efficiency and I expect there are plenty of areas for improvement that would shrink the deficit gap, but the debt is money already spent for which we owe someone, and we need to pay. It is also likely we will need to pay for big expenses in the future. I personally don't have a problem with paying federal income tax as I see I enjoy the fruits of many of the expenses made.

Besides, in contrast to the past, the federal government is now financed primarily by personal and corporate income taxes, and not on tariffs (anymore). Doing away with this income would be devastating. In 2006, personal income tax accounted for the highest percentage contribution to tax revenues, about three times what was taken in by corporate taxes, and a little more than all other taxes combined.

Lastly, the suggestion that FICA is somehow money "taken" from taxpayers as a tax just like others, mis-characterizes its purpose. FICA is a tax WITHOLDING. It is not money the government is free to spend - it sits in accounts for people to then draw down on through Medicare and Social Security. I have a hard time seeing that the Fair Tax approach could pay for annual government expenditures, address national public debts AND pay an adequate amount into Social Security and Medicare to make the system work for the hordes of people entering the ranks of retirement. I think taking all of this into account is how the factcheck figures Maister posted arrived at their numbers.

[Whose Yur Planner]

Actually, odds are it would not wind up being a regressive system, and if by "screwing the poor" you mean the poor would actually have to pay taxes, then yes, it would screw the poor. But let us not forget that not all of life's expenses are necessity. Along with higher income, those who Maister calls "rich people" are more likely to spend tons more on luxuries they do not actually need (i.e. vacations, toys [not the children's playthings], gadgets, what-have-you]). This would make the tax burden still be pretty skewed toward the wealthy, and, more importantly, would by nature provide a very real incentive to promote responsible spending habits and savings amongst the poor and middle classes. In other words, a consumption tax would breed more savvy and wise consumers.

On this point I will disagree with you. The poor is a rather broad category and conservatives like to paint them as a bunch ne'er-do-wells, welfare moms and the such. The poor consist of college students, those just starting out, retirees, the disabled, accident victims and others that fate has not dealt the best hand to. To say just suck it up and do better does them a disservice. With gas over $3 a gallon, which inflates the cost of everything else, the expense of a car and keeping a roof over their heads, there just isn't enough money to go around. A consumption tax would drive these people further into a hole they cannot dig themselves out of. Finally, who are we to deny a lower income person a few simple pleasure, especially in a country where spending money is all important.

Also keep in mind, with all the off shoring, out sourcing and the such, we have cut off alot of people's ability to advance. Not everyone is cut out for college nor has the ability to go. With the cost of higher education these days, even that dream is getting rarer. What made this county great was the idea that if you worked hard, you would get ahead. That is when we had factory jobs for those who were inclined that way.

One thing I learned from college many years ago, is that taxes are a method of redistibuting wealth. Tax serve a social function as well as an economic one. Regressive taxes defeat this purpose and it is a valid purpose. It's one of the things that keeps this country from having a revoltution. It's the whole hope thing. Sorry, I've worked in poor and dieing areas. It has given me a heart for the lower income people. It's also made me very thankful for the blessing I've received.

[Brocktoon]

First, the Fairtax rate is 30% not 23%. If you purchased an item that was $1 the after tax amount would be $1.30 not $1.23.

Second the Fairtax people underestimate two other influences, black markets and the ability of lobbyists to exempt certain goods and services. I am not 100% but I think visits to doctors, dentist and vets would be charged under the fair tax system as would services provided by barbers, lawyers etc. If you purchase a new home with a purchase price of $200k the final sales price (assuming no state sales tax) would be $260K. I don't think the Home Builders Association would be a supporter.

Also to implement the Fairtax it would require a new Constitutional Amendment repealing the 16th Amendment."The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

[safege]

If anyone thinks the fairtax is going to fly, consider this, the alternative minimum tax is also a flat tax. Now grown up as a cancerous growth on the formerly progressive income tax, the AMT also spares the low income people of our great nation, only to prey on our middle class.

Much like the movie, the blob, everyone hates the AMT, but this middle class neighborhood can't find a young, and brave Steve McQueen to save the day.

If you loved the AMT, be sure and see the sequel, the Fair Tax. Playing at selected theaters near you.