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US FairTax; a potential negative effect?
Bennmann
Registered User regular
Registered User regular
Besides there being no fair tax discussion here, I hadn't heard this specific objection yet and wanted some other varied opinions on it.
I originally sent the objection to my friend Doug to get a response and it lead to something humorous. Humor and Fair Tax?! So here is the general convo below:
I originally sent the objection to my friend Doug to get a response and it lead to something humorous. Humor and Fair Tax?! So here is the general convo below:
Ben: I gave myself a thought-experiment to think of the the worse case scenario that could actually happen if the Fair-Tax were implemented as our tax system. Quite a good challenge and also could lead to appropriate responses if the worse case scenario becomes more viable.
And terrifyingly I have come up with some long term very negative effects that must be either checked for or balanced against if the system were ever implemented.
Firstly, under the current income tax, the government gets it's allowance and monetary gain directly from work force and jobs. This has created a paradigm of lobbies and Congressional House and Senate members that very obviously promote jobs directly. Goods are still considered, but secondarily.
Now under the FairTax, the paradigm is turned on it's head. Jobs come secondarily to goods (because while goods bring home the bacon, people need jobs to pay for those goods). This could have lasting long-term consequences as the government could (in a time of economic crisis) start protecting goods in a militaristic fashion. In a worse-case scenario, the rights of the people are not as important to the government as Congresses rights to things and goods, and the entire country goes up into a replay of the Boston Tea Party as everyone shows the government whose really in charge.
Of course, the monthly check everyone receives within the FairTax plan for food and living expenses is currently a good check against this scenario because it prevents consumer's backs from being backed into a corner. But if it were somehow removed or not applicable to a large portion of the population (immigrants?), the scenario would be very valid.
Just something to consider. It's obviously more complicated than I put it here, but the general idea holds. Maybe I should make a movie about it.
Doug: I think it's a valid concern. I've seen similar intimations before.
The long-term check to this and nearly every other problem associated with the fair tax is quite simple. The reform must be accompanied by spending reform.
Your concern is a symptom of the problem with "revenue-neutral" reforms. They don't actually reform anything, they just displace the cost and, worst-case, hide the cost even further.
Tax reform won't work until the government says let's get that $3 trillion budget down to 1 (or .75). It won't work until the gov't addresses the unfunded entitlement liabilities that are piling up (and by address, I mean "eliminate", not "talk about").
If that happened, you might not even need a food and housing prefund, because the tax rate would be something like 10% instead of 23%.
Giving the dragon a virgin tied to a pole rather than a tree won't stop the dragon from eventually eating all the virgins. You have to change his appetite.
Ben: If I were a dragon I'd like virgins tied to poles. And why virgins? Actually, nix that, if I were a dragon I'd want [i]whores[/i] tied to poles.
Thank God I'm human.
Bennmann on
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If that's the case, I hope your politicians will enjoy attempting to defend something like the GST.
The main advantage that I see with the Fair Tax is that it would throw out the current tax code, drastically simplifying things. However, there's no reason that you can't do that and still keep an income tax.
"Nuclear Fallout: A potential negative effect?"
"Poisoning children: A potential moral hazard?"
And so on.
I don't think the boston tea party would be a factor in the same sense. The taxes in that case were miniscue compared to our sales tax today and it was the issue that they got taxed at all without representation. I dont think that even shifted rates for goods (some goods taxed more then others) and then having a small increase on said goods would cause riots. But as you said, it was worst case scenario, so yeah I guess I could see that happening, but I dont think its realistic.
AngelHedgie: instead of going 'olol dats horribel' could you explain your position? Like I said above ive tried to look into it, and well this is a discussion forum... I understand you have two positions, that its "utterly fucking ridiculous.", and that you think people pushing it are dishonest. I am interested in who/why people are being dishonest about it (or is it just intent of trying to put it in place?), but I am mainly why you dont think it would work in a realistic example.
One issue is that any sales tax is going to be regressive in nature. The poor spend the vast majority of their income, while the rich save or invest the majority of their income. That means that the poor will pay more in taxes as a % of their income. The Fair Tax offsets this with the monthly check, but it still doesn't address all the problems. Only having a sales tax (rather than an income tax or a wealth tax) makes it very difficult to use your tax code to increase equality (i.e. take from the rich and give to the poor); not everybody thinks that should be done, however.
Bullshit.
Honestly, don't expect the Fair Tax to get too fair a shake on here, given that it's popular with Libertarians. Anything that Libertarians like is generally despised on here regardless of what it is. That being said, I'm neither a Libertarian nor am I very receptive of the Fair Tax as being a workable solution.
And these straightforward models of "if we make it as simple as sales tax, no such body as the IRS for tax enforcement will be needed" are naive.
If there is a tax, any tax at all, people will find a way to subvert it, and there will need to be a government body to check this subversion, particularly if you're talking about a 23-28% sales tax. The black market would explode, retailers would lie about the prices they retail at in order to under-report sales tax payments, and people would find a way to skirt around this tax. To add to Benjamin Franklin's truism -- the only thing certain in life are death, taxes, and the fact that people will kill themselves to avoid paying taxes.
I thought that while the above is true and companies would expect higher profit from items sold, the items that they are purchasing themselves then have this tax applied so on the next purchase after this is in effect, its balanced out. They arent going to magicly then raise prices by another 3$ realisticly (in my opinion) to then "counter-act raising costs". It is accepted that there would be eye bulging from people at 30% more expensive goods, but this rounds out by the fact that nothing is removed from their paychecks either.
The research ive always done and read into has really stated that the tax on goods would never really be 30%, and would be closer to 15-20%. My math is probably way off and Ill admit it was a while ago when I looked into it. the point was when I tried to look at both sides of things is that the amount of money paid would be less then what income tax is now. (on second thought: it might be that the average was lowered to 15-20% by the necessities check, so take this paragraph with a grain of salt)
Personally the necessity checks that people would recieve seems acceptable to me, the real issue with that is does everyone get them, or do certain brackets of income only get them? is it a flat rate or a % of income? I think it was explained to me with a flat rate in mind for how much it takes to survive food wise.
Edit: Green eyed monster, I dont think it would remove the IRS to have this system in place, as somone would have to manage the necessity checks and such. But stores lie now about how much money they make all the time to avoid taxes. Theres talk in some areas to place machines in the stores to track credit card transactions so they have first hand records that cant be tampered with, and the store cant keep two sets of books. I dont want to and wont make speculation on what % of stores do this now, but I dont think the number would increase by tremendous amounts under a sales tax based system. Secret shopping would be the easiest way of telling how much the store is charging and the tax collected, vs the tax paid to the government and reported. you can also view sale rates on items vs the average for the industry during an audit. I might be going about that the wrong way of thought, but its from having a job where I need to report that kind of data daily so it isnt an issue to make those kinds of comparisons.
I'm pretty sure that the checks are a flat amount that go to every household. The idea is that you wouldn't have to calculate incomes in order to administer it. Of course, defining what counts as a household makes it much more difficult.
it'd pretty much just fuck those close to the poverty line.
Except that since income tax is progressive and sales tax is regressive, the worker does, in fact, get fucked over further when you switch from the former to the latter.
Then your research is really off. The FairTax proponents assume that a 30% exclusive rate would be revenue-neutral, but there's evidence that shows such a rate is too low, and you'd need something more akin to 35%-40% or better.
I think that instead of worrying about that, the better solution is to stick with progressive taxation models instead of trying to retrofit a regressive model to be sorta kinda but not quite progressive.
You do realize that FairTax proponents assume a zero non-compliance rate, right - something that not even the IRS does? (IIRC, the IRS assumes a 5% noncompliance rate in their calculations) This is one of their two big dishonesties (the other being the use of an inclusive tax rate).
Well, it's more that we've gone through its guts way too many times, so we get a little green when someone brings it up.
Yes, stores do this now. Increasing the sales tax from 7-8% to 25-28% is going to greatly increase the extent to which stores do this. All that enforcement which is currently applied to income tax collection won't go away, it will simply roll over to a new sector of tax collection.
*for those who struggle with irony, this is a joke, as it is the same kind of ridiculously literal arithmetic which has no real bearing on how the real world operates that is the exact same problem that makes the Fair Tax untenable.
Overall, I dont think the Fairtax would be a good idea, but I'm for it anyway on the grounds that it would benefit me personally.
I believe one of the proposals involves giving EVERYONE a check to cover the tax on necessities up to some arbitrary amount (maybe its poverty level spending?). The intent there is to minimize the damage of higher prices.
In that scenario, I live so far under my means (and under poverty grade spending) that I end up effectively not paying much of anything.
The higher prices should reduce spending, which would be good generally except it might lower it TOO MUCH and the economy goes to shit during the transition.
Overall, if it really was a good idea, someone else wouldve tried it succesfully by now I reckon. Because it hasnt (as far as I know), there must be some fatal flaws in the concept.
Well, you can say the same thing about most get-rich-quick schemes. If I receive an e-mail telling me that they have a way for me to make $1,000,000 overnight, I'm going to dismiss it right off the bat.
Generally, when people suggest a radical change in the status quo, I tend to be highly skeptical. Are the problems legitimate? Are the solutions practical? What are the net benefits?
One additional argument I hear regarding the fairtax is the idea of rebates for people who make below a certain income. For two reasons. One, because you would need a IRS type agency to measure income. Second, because it basically amounts to free money to anyone who doesn't work.
- You implement it without any kind of breaks/benefits for the poor, and they get shafted.
- You implement breaks/benefits for the poor, and the middle-class gets shafted.
- You implement breaks/benefits for the poor and middle-class, and you end up with a regressive tax system just like every country in the western world already has.
- Puts tax burden on poor, who spend everything they make, or the lowest class that doesn't get refunds.
- Greatly encourages 2nd hand selling (ebay, craigs, yard sales) and black market, cutting off money to both companies and the government.
- I don't see how the math can possibly add up to the government getting as much as they do now, given the %s usually offered, meaning drastic cuts in government services or explosion in the deficit.
- Makes government income much more directly related to the health of the economy, meaning wild swings from one year to the next.
- Gives the government motivation to encourage spending and discourage saving, and already we save negative amounts on average.
- 0% chance of noticeable price decreases supporters claim would happen.
- Does not mean we can close the IRS.
Pros:
- Spend a little less time filling forms once a year?
Also, a tax on purchases except groceries and stuff like this would allow people greater mobility to get out of debt. I know if I didn't have to pay income tax I'd have quite a bit more to spend and help unbury myself from debt.
As a percentage of their income, a lot of their money goes into savings and investments, while the poor usually spend 110% of their income as a necessity. Money that gets saved never gets taxed, so the 28% tax on money they do spend is a big decrease.
What about screwing over Tourism? The US is a big tourist destination, we we'd also be screwing over Hawaii, Florida, NYC, and other major attractions. Since it suddenly costs an extra 30% to vacation to the US. I really think the FairTax will encourage people to retire Abroad. If I'm 65 and have saved up a ton of money, what incentive is there for me to stay in the US to spend it? My money will go much further in Canada, or the EU, or any other country.
Also, note that this is not a TOTAL sales tax of 30% (or more)... it's an INCREASE of 30%. State and local governments aren't going to suddenly stop collecting sales tax just because the federal government is doing it. Most states have a sales tax around what? 7%? So, if the federal sales tax really does hit 40%, many people will actually be paying nearly 50% of the value of their purchases in sales tax.
- It's impossible to predict inflation accurately enough to send out appropriate checks
- It hands out checks to people for identical amounts despite their savings rate
- The definition of the poverty level is fucked, and gets fucked constantly by Presidents who want to make it look like the economy isn't doing so horribly.
- Almost forgot one: this scheme regards prebates for households, not individuals. It punishes married couples and families because of the way the poverty level is designed.
But, you know, this comes from a guy who wants to fix the poverty level definitions and then issue a flat tax on all incomes (ALL of them, in ALL forms) with all income under the poverty level exempted.
The system right now is set up progressively: the people at the top with the most income pay a higher % of their income in tax. Regardless of your opinion on tax trickery, or whether that's a good idea or not, that's how it's set up. It benefits the people at the bottom.
Any system proposed as an alternative is upending that progressive tax structure. This means that every alternative system proposed is going to fuck over the people at the bottom worse than they're getting it now.
There's a reason why these things are proposed by rich people. *SteveForbes*
I mean, if the FairTax is going to have the same distribution of taxes as our tax system now (which is what its proponents are selling), why the hell would we change things? You'd just be moving the work of collecting taxes from a government agency that in theory knows what it's doing and decentralizing it to rely on the owners of every business in America to collect that tax. Not to mention the other factors that people have mentioned (people buying less stuff/used/rich people buying out of country to avoid taxes). I think these are the same people who argue that our tax system as set up right now means that people don't want to get better jobs and make more money. What a bunch of bull.
That's essentially my point. When people combine their resources it becomes Ok to tax them more heavily? That's a disincentive to having a family.
And tsmvengy, the current system is set up to benefit those making little or nothing... and the very rich and those holding stocks. We tax investment-related income at a significantly lower rate than we tax wages. Some people, like me, and like Warren Buffet, think that's bullshit.
Good point, I can see couples staying unmarried if it gives them a few thousand more a year.
I gotta say, my respect for Buffet is pretty high, but somehow it keeps going higher. I was just reading he instructed his company to avoid credit default swaps a few years ago, one of the reasons banks are in all this trouble now... I mean its one thing to claim you saw it coming, or to write about it, its a completely different thing to put $billions on the line.