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The Fair Tax
After listening to Monday's show (02/04/08), and a few prior, both our podcasting heroes seem to show disdain towards the idea of the Fair Tax, albeit Rym more so than Scott. Yet unlike many other of their political ideas and stances they have yet to show much reasoning for this disagreement so far (maybe just because there has yet to be a show on it) and I am interested in what they think of it, and why they apparently think its not a good idea.
So guys, I greatly expect your opinion and expertise, please respond.
So guys, I greatly expect your opinion and expertise, please respond.
Comments
The fair tax is a lot like communism. On paper, it seems fair and awesome. However, it completely ignores the way the real world works. The fair tax proposes that we get rid of all other taxes and simply have a very large sales tax. There are two incredibly major problems with this.
First off, is the problem that a fair tax is not fair. In fact, it is the opposite of fair by most people's standards. Right now in the US we have a regressive income tax. This means that someone who makes a lot of money, like Bill Gates, pays a higher percentage in tax than someone who works at McDonald's. Let's completely make up numbers and say Bill Gates pays a 10% tax and a teenager pays a 1% tax.
In a fair tax system, everyone would pay a 20% tax, but only on money they spend. If they save the money, it won't be taxed. The teenager working at McDonald's is very poor, and will probably spend every single dollar they earn. This means they will effectively pay a 20% tax. Bill Gates is very rich. He will probably save most of his money. Even if he lives up a life of luxury, he might spend 10% of the money he makes in a year. So he will only actually pay a tax of 20% of 10% of the money he makes. So Bill Gates gives 2% of the money he earns in a year to the government, and a teenager gives 20% of the money they earn to the government every year. Sure, Bill Gates is probably still giving more dollars to the govt. just because he is so rich, but does that really seem fair to you? The fair tax is poorly named. It is nowhere near fair.
Another reason the fair tax is bad is because it is difficult to enforce. Think about how sales tax works right now. You go to anime conventions and some dealers don't charge sales tax. You buy things online, and you hardly ever have to pay sales tax. It is stupidly easy to avoid paying sales tax. There is almost no way to prevent people from avoiding sales tax. Since the government will no longer be tracking how much money people are making, how will they know if you lie about how much you spend? Increasing the sales tax to such a rate will only give people a greater motivation to dodge the tax, and it won't be any harder to dodge.
Income tax, on the other hand, is much more difficult to dodge. It's not impossible to dodge it, plenty of people work under the table. However, it is not easy. Since people very much want to receive government services like social security, medicare, medicaid, etc. an income tax allows the government to figure out who paid how much tax and distribute those services accordingly. With a sales tax, it becomes very difficult to track who is buying how much, and disseminating these types of services becomes nigh impossible.
I think I'll let Rym take over, he's going to have fun with this.
One of the reasons Reagan was driven to drop the top marginal rate was because as an actor (in his younger years) it was pointed out to him that making more than two movies a year was financial suicide because it would put you in the top tax bracket. A bracket which I believe was 90% at the time.
All taxes have an effect that curbs whatever is being taxed. If you tax sales then sales will go down. If you impose a luxury tax than people will buy less luxury items. Do you know why so many rich people drive hummers now instead of sports cars? Taxes. Due to a loophole in the tax code a Hummer is considered a commercial vehicle (due to size/weight) and the cost can be written off as a business expense.
I disagree greatly that dodging this sales tax would be easier than dodging income tax, other than that the government requires the business take an income tax from you before you even see it. Many people "cheat" on their taxes simply because the law is so contrived there is no way to know how much you actually owe. But most businesses would comply with the law, especially public businesses who have to disclose their earnings. To not pay sales tax would require an act of conspiracy on part of both the buyer and the seller, instead of simply one person lying on a form. I don't know many businesses that would risk their business simply to give a small discount to a couple of customers. The cost of compliance is minimal since most states already require a state sales tax, and the government doesn't need to know how much you make to know how much you spend since the two aren't related, they simply collect the taxes from the businesses.
Example: Did you know that Warren Buffet pays less in taxes (percentage-wise) than his secretary? That's because he receives an extremely low salary from his company. His fortune and the money he makes comes from Capital Gains on numerous investments. That tax rate is around 17%. His secretary makes $60K a year and pays in the 25-30% range. But, with the Fair Tax, they each pay the same percentage. Difference is, Buffet has millions to spend and is taxed on every penny he spends.
The idea will be difficult to implement, obviously, but that doesn't make it inherently wrong. Our current tax system is confusing and oppressive. I'm working basically as an independent contractor (church musician & author) and substituting in 2 different counties and other private schools. I've got 5 W2 forms from last year plus my 1099 statement and have to pay a small business tax despite the fact I'm not a business.
As for those anime conventions, they're prolly not the best places to imagine a perfect economic environment. But, at the end of the year, businesses must report sales and owe the government the slaes tax on those items they sold. So, even if you're not being charged sales tax, they are. Most just don't bother with the particulars of the state you happen to be conning in.
Anyway, no more time to keep going now. Read HR 25 and comment on the actual bill, not what you've heard.
So people start to save money, which means they start spending less money. Which would ruin the economy sending into a possible recession then depression. Granted that's close to worst case scenario, but you get the point.
Take a look at the current US income tax brackets. Remember that just about everybody usually ends up paying less than that percentage out of their actual income. With a fair tax the result is that prices on everything will rise, a lot. People will have more money due to lack of income tax and so-called prebates, but mathematically people won't be able to buy as many things. The prices will rise more than the extra money they will get.
Most of all, the government will end up getting a lot less money. Say goodbye to roads, schools, military, social security, medicare, etc. We can't even afford the shit we've already got, and you want to basically take away all the money that keeps the ship afloat. Smooth move.
Also, what about states and towns? Even if you put in a fair tax, there will still be property taxes, school taxes, state taxes, etc. How do you expect people to pay for these things when food costs over 20% more?
I just want to also point out something. Notice who is supporting the fair tax? Ideological nut jobs. If it was such a great idea why aren't the world's leading economists and people at the federal reserve supporting this idea? You know, the people who actually know what the fuck they are talking about. The people who know more than me, or anyone else here. I'm not saying I trust others 100% or anything. All I'm saying is that I wouldn't argue against Stephen Hawking on the subject of theoretical physics.
The trick here is you have to remember that people aren't stupid (well, most people anyway,) a sudden 20% jump in prices will affect how and what they purchase. And when they begin to spend less, especially the rich on luxury goods, then people are going to start losing jobs in niche markets like yacht building, furniture, home construction, auto workers, etc. Since there is suddenly a big penalty attached to big ticket items.
Have you read the bill itself? If not I recommend you do so. Though I'd recommend The Fair Tax Book by Neal Boortz as well, I'd even be willing to buy you two a copy if you'd like, although I'm sure many local libraries have a copy by now.
Removing taxes from these sales drops the price, also true since the no longer have to charge more to cover for the cost.
But then somehow you make the jump to the fair tax somehow keeping prices the same, yet charging a 20% tax. Here is where you lose me. Since based on your first statement the price of these goods will increase even more then 20%, because now each purchase required on the way to producing the good now costs 20+% more.
For example lets look at say a wooden table in somewhat ceteris paribus. Lumberjack cuts down trees and sells them to a lumber mill, lets say its $100 a log. So each log with the tax now costs $120. Lumbermill makes 10 boards for each log, so to break even they have to sell each board for $12 to the furniture maker who pays $14.40 per board after the tax. To keep things simple we'll say they buy ten, so they pay $144 total. Now they turn around and turn those ten boards into a table which they have to charge $144 to break even, so after the tax a consumer will pay $172.80. So not accounting for other production costs like machine maintenance, worker's pay, other goods needed in these production steps, and adding to the price for increased revenue. So the price of that one log went from $100 to $172.8, thats an increase of almost 73%. That's a huge jump in cost considering that that is a best case scenario.
My point is that its impossible for the price of a good to somehow magically remain the same with this tax. It is not logistically possible short of companies eating the cost of the tax themselves, which they would never do.
A purchase made in order to produce another good is not subject to the tax as defined under Sec 102.
Your log is not taxed unless it is going to be used for firewood. However products that a business is going to consume, for instance pens and paper in the administrative side will most certainly be taxed.
e.g.: Oh, these food products? I'm going to cook them together in order to make another good, that being a dinner. Therefore, I don't have to pay tax?
Moreover, there's no way for the govs to know if you're lying or not without invasions for privacy, and audits wouldn't do crap.
Obviously, I have no basis or source for the idea that the fair tax would lead to a large drop in government intake, but I don't really think that matters as there are, I'm sure, many studies that agree and many that disagree with that statement.
Maybe there should be an episode like "when it is appropriate to point out logical fallacies, and when it's not."
Seriously, read things written by supporters and by skeptics and see if you come out supporting the Fair Tax.
Back to topic: Where did that whole 'Fair Tax' idea come from anyway? I mean, why would you suddenly go and claim that taxing purchases is somehow superior to taxing incomes? This is a serious question, because I just don't see the point behind the whole idea.
The Fair Tax itself started after a group known as Americans For Fair Taxation (AFFT) solicited proposals from several major universities for research on tax systems that would raise the same amount of revenue for the federal government while being less intrusive and more transparent.