Fairtax?

[Sulkdodds]

http://en.wikipedia.org/wiki/Fairtax

What the hell is this? And would it work? And why or why not?

Let the explanation/debate begin.

 

[Raziaar]

I only heard about it like a week ago. Haven't spent too much time yet researching it.

 

[Operational]

Yeah I read about this after seeing it in that link in Raziaar's thread.

Sounds good, in theory at least

 

[OmegaX]

So do you have more or less money in the long run?

 

[staticprimer]

Sounds to me like it would put an additional burden on the middle class, something we definitely don't need right now.

 

[Mr Stabby]

I think it basically mean get rid of income tax and increase sales tax(VAT)

The Fair tax only works with small government. It would generate less money than progressive income taxation, therefore spending must be less. However the decrease in taxes on the wealthy/ middle classes, gives them a disposable income to spend, so it will have a good affect on the economy.

I think this is an interesting tax system http://en.wikipedia.org/wiki/Negative_income_tax

 

[Kadayi]

I am Andrew Ryan, and I'm here to ask you a question. Is a man not entitled to the sweat of his brow? 'No!' says the man in Washington, 'It belongs to the poor.' 'No!' says the man in the Vatican, 'It belongs to God.' 'No!' says the man in Moscow, 'It belongs to everyone.' I rejected those answers; instead, I chose something different. I chose the impossible. I chose... Rapture, a city where the artist would not fear the censor, where the scientist would not be bound by petty morality, Where the great would not be constrained by the small! And with the sweat of your brow, Rapture can become your city as well.

Heh couldn't resist. My question would be how does it impact on corporations etc, or is it purely a model for personal tax? Also the model is one built on constant consumption and that's actually a state (people as consumers rather than citizens) that with ever diminishing resources we want to move away from rather than encourage further.

Consider:-

http://www.storyofstuff.com/

Hate to sidetrack, but it's an important issue.

 

[Mr Stabby]

It would get rid of income tax on corporations.

Consumption is a fact. Although the removal of income taxes will give people more disposable income, the price of goods would also increase, so consumer spending would probably increase. Maybe people would be less credit dependent though.

 

[Kadayi]

It would get rid of income tax on corporations.

so if the corporation I work for buys me a house, pays for the food my family consumes and keeps us to a lifestyle we enjoy, effectively no tax is paid by them at all for what we receive, Because they are paying me as their employee through perks rather than money. Sounds like a model that could encourage increasing indenture. Sounds like the perfect gateway to encourage the emergence of corporation as City State. :O

*heads to Google embassy and applies for citizenship

 

[Mr Stabby]

I don't think corporations would operate much differently to how they do in countries with low corporation taxes, like the ROI.

 

[theotherguy]

NO.

This is a horrible idea.

The sales tax is not at all "fair." Here's why: the law on decreasing marginal benefits. To a rich person, the added sales tax is nothing. To a rich person, buying vast amounts of stuff, the sales tax is just an annoying little added fee which can easily be paid for. However, for a poor person, who needs the necessities of food, clothing and shelter, the added tax seriously impedes their ability to survive. Their income is so small, and the things they need to buy so necessary, that the tax is a massive burden on them, rather than an annoyance. Basically, a dollar to the poor is worth a lot more than a dollar to the rich.

The problem with the "fair" tax is that it is the same across all income levels, while the actual cost (in terms of opportunity cost and the burden on the person's purchasing power) decreases as income increases. This means that the "fair" tax is actually just a tax break for the rich, and an added burden on the poor.

The real "fair" tax is the progressive income tax. This is the tax we currently have, which increases the amount of tax as income rises, in concurrence with the law of decreasing marginal benefits.

Ideally, necessities like food, clothing and basic shelter should be tax free, while the only things that should be subject to sales tax are luxuries, or products above a certain price.

 

[Sir Phoenixx]

In most states food is already tax free, there's only a small hand full of states that have a very low tax on food.

 

[theotherguy]

In most states food is already tax free, there's only a small hand full of states that have a very low tax on food.

In Texas there is a flat 7% sales tax on everything, including food. There is also no state income tax.

 

[DEATHMASTER]

The 4th paragraph in the "no" section convinced me to vote "no" (which is apparently what Obama is)
http://www.vajoe.com/calculator/fair_tax.html

Also found some points on the "yes" part to be stupid.

 

[blahblahblah]

I am a tax auditor for the IRS. (really I am)

A VAT system has a lot of advantages, but the transition from a progressive system (what we currently have now) to a VAT system will be difficult at best. Some things to consider:

1) Elimination of an entire occupation (tax preparers) across the entire US.
2) Compliance risks haven't been properly estimated. Our current system has a compliance rate of about 82% (from memory); yet fairtax estimates have determined that compliance rates should exceed 90%. The IRS and the US government has learned that no information reporting (i.e. W-2's) equals no compliance. (a substantial portion of our 82% compliance rate comes from W-2 reporting which has a 96%+ compliance rate). So in my opinion compliance rates of 90%+ for fair tax are overstated dramatically.
3) What happens if Wal-Mart inadvertantly understates their income? Do they loose their business license? If no, where is the line drawn for small business and large businesses?
4) Compliance will be made more difficult to perform. Current audits perform audits on businesses and individuals to find unreported sales. With a fair tax business return, a substantial, if not abusive and invasive rights would have to be given to the IRS to probe for income outside the scope of a business (such as the owner's personal bank accounts). Currently, this is not a serious issue because the owner's are required to file individual tax returns.
5) Fair tax is neat and simple in traditional store setting, but how is fair tax handled in complex income recognition scenarios? Examples could include recognition of income for construction contracts or sales with contingent liabilities.
6) The progressive tax system is designed to encourage and discourage certain types of behavior. How will that impact charitable organizations, buying a home, adopting kids, and other things? If credits were adopted to encourage charitable donations or home buying into the fair tax system, you just made the fair tax system into a progressive tax system.

If a fair tax system were to be introduced in the US, I would want it discussed in much more depth than it currently has been to work out the kinks before it has been introduced.

 

[No Limit]

This is a great idea, if you happen to be rich. If you are poor you are pretty much ****ed. But that's the republican platform in a nutshell.

 

[Sir Phoenixx]

In Texas there is a flat 7% sales tax on everything, including food. There is also no state income tax.

Are you sure they also charge sales tax for food in Texas? Because unless I'm missing something here, all of these sites say otherwise...

http://www.stateline.org/live/details/story?contentId=174956
http://www.cbpp.org/3-16-06sfp3.htm
http://www.taxadmin.org/FTA/rate/sales.html
http://en.wikipedia.org/wiki/Sales_taxes_in_the_United_States

(b) Sales of exempt food products or water. Food and food ingredients are exempt from sales tax unless otherwise taxable under subsection (c) of this section. Water is exempt as explained in ?3.318 of this title (relating to Water-Related Exemptions). Heated and unheated bakery items are exempt regardless of size or quantity unless sold with plates or other eating utensils provided by the seller. Separately stated charges for bakery items sold by caterers, mobile vendors, or by restaurants, fast food outlets, lunch counters, cafeterias, hotels, and other similar places of business, are taxable if sold in conjunction with taxable meals in which plates or other eating utensils are provided. For example, a roll served in a restaurant with a meal is taxable even if the roll is served rolled up in a napkin rather than directly on the plate. However, the restaurant is not required to collect sales tax on bakery items purchased without utensils from its bakery.

(c) Taxable sales. The following are subject to sales tax:
(1) sales of soft drinks;
(2) sales of candy;
(3) sales of ice;
(4) sales of beer, wine, and other alcoholic beverages unless subject to mixed beverage gross receipts tax under Tax Code, Chapter 183;
(5) sales of cigarettes and other tobacco products;
(6) vending machine sales of food, soft drinks, and candy as explained in subsection (d) of this section;

 

[theotherguy]

Okay, you're right.

 

[swanzoid]

FairTax is the antidote to our broken tax system

This is a great idea, if you happen to be rich. If you are poor you are pretty much ****ed. But that's the republican platform in a nutshell.

With all due respect, you are off on both counts. The FairTax is a bi-partisan concept (if you go to www.fairtax.org and click on the "congressional scorecard" link, you'll see there are both democrats and republicans endorsing the idea). And the FairTax is the antithesis of being a favorable tax for the rich.

Much to the contrary, the FairTax completely eliminates all the loopholes the rich are currently exploiting to avoid paying taxes. Furthermore, the FairTax eliminates the non-progressive elements of the income tax - that being the FICA tax that you pay from the very first dollar you earn.

Under the FairTax, which is basically a national retail sales tax (NOT a VAT), every worker would get their FULL paycheck, no more federal withholdings eating away at their income. On top of that, every registered citizen would get a monthly "prebate" from the government equivalent to the sum of all retail taxes the average person or family would have paid for food, shelter, etc... That essentially means ALL taxes we pay, right up to the poverty line, are refunded quickly and cleanly every month. And the prebate does not apply to any undocumented workers or illegal aliens, so they would stop getting a free ride on all the services they consume in this country.

The true beauty of the FairTax is that it's so SIMPLE and it expands the tax base to include just about EVERYONE, effectively meaning most of us would pay WAY LESS taxes in total. This is because (1) wealthy citizens can no longer escape taxes by exploiting loopholes or hiding money overseas, and (2) people who normally hadn't paid income taxes because they deal in cash (or never filed tax returns) will be contributing to the pot. That includes people who have been escaping taxes in underground cash businesses, like drug dealers.

Corporate income taxes are eliminated too, which is a BIG deal - it would help stem the tide of businesses that are fleeing the US in droves because it costs them too much to do business here. I know about this first hand because my own company is evaluating moving to the Caribbean for that very reason.

I urge you to read up on the concept. The FairTax could be the best thing to hit this country in decades. It is NOT something dreamed up by congress (unlike the income tax, which required an amendment to the constitution 100 years ago to make it legal and is now an arcane mess that costs $1 to process for every $3 collected). Rather, the FairTax was engineered by an independent group of think tanks looking for a way to improve our very broken system.

And when I say "broken," I'm referring to statistics like this: It's estimated that US citizens and businesses collectively spend nearly $500 BILLION every single year complying and maneuvering around our arcane 60,000+ page tax code. Think of the impact that money could have on the economy if it weren't being wasted on non-value-added paper pushing exercises like that.

It's also estimated that over $12 TRILLION in US-denominated currency currently in foreign banks would be repatriated into this country in a matter of months if the tax consequences of bringing that money home were eliminated. Think of THAT stimulus!

I can't possibly describe all the details of the FairTax here, so I implore you to educate yourself on it before the November elections. Many longer term senators and congressmen are not in favor of it because it threatens to remove their biggest source of power - that being all the special tax breaks they offer to their constituents in exchange for votes and campaign funding. These are the people we need to vote OUT for the sake of our country and our wallets.

One of the most eyebrow-raising books I've read in years is Neil Boortz's FairTax book, which you can pick up on Amazon for like 10 bucks. It's a very quick read and it will change the way you think about your paycheck and taxes.

-Robert

 

[Mr Stabby]

Would the government have a dependable income, if revenue is based on consumer spending?

 

[swanzoid]

Would the government have a dependable income, if revenue is based on consumer spending?

Absolutely! In fact, consumer spending historically has been more stable than income. I believe charts substantiating this fact can be found on the fairtax.org website.

 

[No Limit]

swanzoid, welcome to the forums.

What you described is a rich person's wet dream. If you make a few million dollars a year you can only spend so much, most of that money is saved or invested. In that case your tax rate will end up being tiny. If you make lets say $30K a year you spend most of that $30K on buying stuff, you don't have the luxury of saving or investing. So in that case your tax rate will be huge.

As you said it will eliminate the corporate tax, which accounts for most of the government's revenue. Why in the world should corporations have to pay no taxes? You could probably argue that their taxes are too high but to try and argue that they should have absolutely no taxes is a bit silly, especially if you are working off the assumption that these corporations will pass the savings off on us and their employees. History proves time and time again that they don't. Look at the oil companies right now.

Finally on the point that Stabby made. There is no way this government could afford this. We are seeing record defecits with our current tax system. How are you going to fix that by slashing hundreds of billions of dollars off the government's yearly income? Since you seem to be an expert on this do you have any independent statistics for how much money the government would bring in using the fair tax compared to our current system?

And I did go to that score card. You have only 1 democrat in the house and senate that supports this. You could find one democrat to support anything in this world, I wouldn't call that bi-partisan. Everyone else that supports this is a republican. Like I said, this is the republican platform in a nutshell, screw over the working class while enriching the elites.

 

[swanzoid]

US corporations don't operate in a vacuum. There are plenty of countries with ZERO corporate income taxes, and US businesses are flocking there. These foreign countries have THRIVING banking systems for that very reason. Take a look at Panama City, for example.

My own company, a software business, is evaluating this "offshoring" move simply because our foreign competition operates without the overhead of paying 39% taxes on their earnings, thereby giving them a big advantage over us. If our market was strictly within US borders and all our competitors had the same expense, that'd be one thing. But we're competing on an international level. Or at least we're trying to.

Ever wonder why Daimler/Chrysler chose to locate their HQ in Germany? There were lots of reasons, but if you read up on it, the US corporate income tax policy was one of the top factors influencing their decision. We have, after all, the second highest corporate income tax in the world. Even Germany with its ugly VAT taxes has a more favorable system than we do.

Where do you get that we would be slashing hundreds of billions of dollars from the government's income by switching to a consumption tax? The FairTax is designed to be revenue neutral, meaning that upon implementation the total $$ collected would be the same as what's being collected today. Only it would be collected much more fairly.

Though I can't deny that republicans are more on board with the FairTax than democrats at this stage, I disagree with your assertion that the FairTax is a rich person's wet dream. Not at all! People tend to live at a spending level proportionate to their income (and in the case of the US, most people live a bit beyond their income thanks to credit cards and home equity loans). In other words, people in general spend about what they earn. All the FairTax does is hit these people when they SPEND their money, rather than when they earn it. Do you think it's fair to penalize people for saving money?

 

[No Limit]

Like I said, if you are going to argue that the corporate tax in this country is too high I'll probably agree with you to a certain extent. But that's not what you are trying to argue, you are trying to argue that they should pay absolutely no taxes. If corporations want to move their headquaters to Panama then by all means let them, see how that turns out.

If you are a small business owner that's really thinking about outsourcing I suggest you research this move in great detail. Although my company did not outsource their entire office we tried to outsource some of our departments. After the nightmare that followed we are back at doing this work here in the states. Saving money always looks attractive, until it comes back to bite you in the ass. Our corporate taxes have been high for decades, there is a reason most corporations still operate out of the states. It's interesting you bring up Germany, their corporate tax rate was as high as ours until 2006 when it was lowered to about 29%:

http://query.nytimes.com/gst/fullpage.html?res=9801E4DC103FF930A35752C1A9609C8B63

Where do I get that we will slash hundreds of billions of dollars from our annual revenue? Common sense. You are eliminating corporate taxes which I already pointed out is where most of our revenue comes from. If I am wrong on this you are more than welcome to post some independent research that proves me wrong.

You have every right to disagree that a fair tax isn't a rich person's wet dream but simply saying you disagree doesn't mean you win a debate. I layed out exactly why it is a rich person's wet dream, you didn't dispute any of it. Yes, middle class and poor people tend to live in proportion to what they earn. Rich people don't, because they have no way to spend that kind of money. If you make 10 million dollars a year there is so much shit you can buy before you run out of room to put your useless crap in. These people tend to invest their money instead of spending it, and what you are proposing would give them 100% tax free income, their absolute wet dream.

And again, the republicans aren't "more on board" on the fair tax. They are the only ones that are on board. Just because you have 1 democrat that says otherwise doesn't make this a bi-partisan proposal.

 

[Mr Stabby]

What if an income tax that only applied to incomes over 200,000 and corporations was included with the fair tax system.

 

[No Limit]

What if an income tax that only applied to incomes over 200,000 and corporations was included with the fair tax system.

I don't think you will get the fair tax people to jump on board to that so it will never happen. Again, the purpose of the fair tax is to give rich people a huge tax cut, so if you take that out of the picture they will not be on board. I probably wouldn't mind but I'd have to look at the details of such a plan.

 

[Mr Stabby]

I doubt it's purpose is to give a tax break to rich people even if that is one of it's consequence. I think the idea behind it is by taxing spending not wages, then taxes are more optional, and therefore fairer.

 

[Kadayi]

I doubt it's purpose is to give a tax break to rich people even if that is one of it's consequence. I think the idea behind it is by taxing spending not wages, then taxes are more optional, and therefore fairer.

Apart from the fact that it means the government has a direct incentive to ensure all citizens consume like crazy things, where as before it was the corporations alone. Also the more items cost, the higher the tax return for the government...hmm is that a good thing ever? :|

 

[swanzoid]

To No Limit:

Look, I'm not going to regurgitate everything the FairTax authors have spent 15 years and $20 million+ studying and refining. If you refuse to study the literature yourself and insist that "common sense" means a zero corporate income tax means less revenue for the US then so be it, I'm too busy to talk you out of that. Never mind the economists who've studied the FairTax estimate an immediate 10% surge in GDP would result from adopting the FairTax (for those keeping score, that's TRIPLE what we would consider to be a good year).

The fact is, my company isn't looking to outsource. It's looking to relocate its HQ so it can protect income earned abroad from the US government. It will retain it's US presence as a subsidiary, sending in just enough $$ to cover costs incurred within the US operation. Once that's done, voila - no US tax liability! And we're not alone in doing this. Right or wrong, it's a public company's purpose to minimize expenses and maximize profits for its shareholders, and as it stands right now, doing business in the US imposes some of the world's biggest penalties on earnings. So you see how that could serve as a disincentive on businesses to locate and hire here?

The FairTax is the best solution I've seen to this problem. Trying to flatten or tweak our already arcane tax code is just going to make it even more arcane. Of course, if you work for H&R Block filing tax returns, or you make a living advising businesses on how to move to Aruba to shield themselves from taxes, or you work for the IRS, or you're a congressman/senator who's added their own assortment of pages to the tax code to benefit their constituents, or you're a foreign company enjoying the cost advantage you have over your American competition, etc. etc., then I can see why you wouldn't even want to give a second look at the FairTax as an option.

As for your "rich people running out of room to put their toys" argument - I suppose that means super wealthy people just sit on mountains of money and never spend it, right? They don't invest in planes and automobiles and houses and vacations and what-have-you. They don't use their earned capital to seed new businesses. No, they just swim around in their cash piles like Uncle Scrooge. Come on! Maybe the uber-uber mega rich could fall under that category, but do you seriously think that would amount to more than 0.000001% of the population? And you think that teeny-tiny subset of the population is going to pay for the bulk of government? You prefer a small tax base of a few thousand people over a base of hundreds of millions, including tourists and illegal aliens? I suppose you believe it when a certain presidential candidate promises tax cuts for 95% of the taxpaying public, the remaining 5% (of which I am not a member) is going to happily comply and foot the balance of the bill?

And don't think that all those big bad corporations out there are bottomless pits of cash that Uncle Sam can tap into at will. Ultimately, corporations don't pay taxes. People do. Sure, corporations may pay bills to the IRS, but they ultimately MUST pass those costs on to whatever entity consumes their goods or services. And who is at the bottom of the food chain? CONSUMERS!! That's what the concept of "embedded taxes" is all about. And it's estimated that 22% of the cost of everything you buy is the result of this trickle down effect.

 

[Mr Stabby]

Apart from the fact that it means the government has a direct incentive to ensure all citizens consume like crazy things, where as before it was the corporations alone. Also the more items cost, the higher the tax return for the government...hmm is that a good thing ever? :|

Without consumption the economy would collapse, so the government already has a vested interest in consumer spending, the current fall in consumer spending is contributing to the recession we're headed for. The higher revenue from consumer spending is to counterbalance the loss of income tax.