Due to its length, I decided to make my response a post and not a comment. In the interest of saving space, I have not re-pasted Justin’s analysis. Refer to his post, for the original analysis.
Justin- the 23% versus 30% is addressed in the second book, FairTax- The Truth. The reason it is a 23% inclusive tax rate is because it IS calculated the same way income and payroll taxes are calculated- inclusively. Making it an exclusive tax is not being entirely honest about what the FairTax is replacing. If we want to use the exclusive model, why not compare it to an exclusive income tax rate? What would that be? Between 30 and 50%? Higher? Now that is scary!
The rebate is calculated based on size of family. It makes no difference what income or social status the family is in. Very fair.
The President’s Advisory Panal for Federal Tax Reform is also addressed in the second book. Because the panel did not include the payroll tax in anticipated future government earnings (the payroll tax is also replaced under the FairTax), the calculations they developed are meaningless. It is an inaccurate, and SCARY, study for opponents of the FairTax to use in spite of the criticisms on the panel’s methodology. Here’s a quote from the panel: “These estimates do not account for how those behavioral changes will affect the size of the overall economy. Instead, the Treasury Department holds constant the Administration’s projections for the future size of the economy. That means, for instance, that even if a reform option caused the total size of the economy to increase due to favorable investment incentives, these estimates would not incorporate the corresponding increase in revenues.” - FairTax- The Truth pg 121.
The FairTax would encourage Americans to save- agreed! And invest!!
The National Retail Federation study in 2000 is further addressed in this second book. The study looked at a national sales tax bill that was different than the proposed FairTax bill. For one, I don’t believe that HR 2717 included replacing the payroll tax and the corporate tax. HR 25 and S 1025 do include replacing these two taxes. Therefore the 2000 study doesn’t really apply. It’s like comparing apples to oranges.
Since the FairTax is designed to replace the already embedded, or hidden, taxes that exist in goods and services, the incentive on people’s spending, while fluctuating a little, will remain relatively constant. Two things could happen. One, employers keep their products the same price and give their employees higher wages (from income and payroll tax deductions). Two, employers reduce employees wages to something similar to what they take home now AND reduce the cost of their goods and services because they don’t have to pay corporate taxes OR pay their employees wages over their take home pay due to payroll and income taxes. The reality will probably be somewhere in the middle of these two options. Those companies that try to gain one over on the consumer and keep their prices high to increase profits will not last in a competitive marketplace where competition can underbid them. The FairTax is also embedded in the cost of goods and services. It’s not added. From this perspective, the disincentive to spend money argument is not very strong.
Perhaps we can look at a small case study of two states pertinent to this particular Tuesday, March 4th, 2008: Texas and Ohio. This case study is found in an editorial from yesterday’s WSJ: Texas v. Ohio - WSJ.com. Let’s look at the differences in taxes and labor in these two states.
Ohio imposes the third highest corporate income tax in the country: 10.5%
Ohio imposes the six highest income taxes in the country: 8.87%
Ohio workers are forced to join labor unions
Texas has no income taxes.
Texan workers are not forced to join labor unions.
I don’t know what Texas’ corporate income tax is.
Results:
In the last ten years, Ohio has lost 10, 400 jobs and has an unemployment rate of 6%.
In the last ten years, Texas has gained 1,615,000 jobs and has a current unemployment rate of 4.5%.
So, states with lower (or no income) taxes attract businesses and jobs. If the country abolishes the income taxes, payroll taxes, and corporate taxes, imagine how many businesses and jobs will flock to our shores. An informal survey by the FairTax proponents found that 400 of the top 500 international companies would build their next plant in America under a FairTax model. The remaining 100 would move their headquarters to America. Alan Greenspan said in an interview that the $12 trillion currently in offshore accounts from American businesses and individuals (to avoid taxes) will flood back into the domestic economy under the FairTax model. Not in a matter of years, but in a matter of months.
The FairTax is looking pretty attractive to me.
4 comments ↓
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Mike Harmon
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Jennifer Lancey
I think you make some good points Joel. I just wanted to make a comment regarding the Rich getting Richer and the Poor getting Poorer. It is extremely important to realize the reasons why this is so happening. The rich get richer because of what the choose to do with their money. Through reading books written by many successful businessman and investors, something has become very apparent to me. This is the fact that most rich people, reinvest their money, and hold the vast majority of their money in assets, not in income. Hence the income tax does not achieve it’s purpose because most rich people have relatively low passive income. Perhaps comparable with the income of the upper middle class (or even lower). Income tax only applies to what you earn as cashflow, not in what is invested. Hence the burden is on those who are in the high income bracket with low net worth, ie: the middle class.
Conversely some people in the very low income range have poor spending habits and do not use their money wisely. These people with little financial knowledge (not taught in schools, but not hard to learn) will rarely get out of the circle of poverty. Also those with bad habits (drugs, alcohol, crime etc.), perhaps from bad family units, also tend to go in a downward spiral financially.
I think it is paramount to keep this in mind. This is not not to say that we shouldn’t help low income earners, but I do think it should be voluntary, not forced.
Also I think the idea of our tax system where the more you earn, the more is taken is fundamentally counter intuitive. Why punish people for being successful?
This is why I believe that the rob (tax) from the rich, and give to the poor mentality does not address (or solve) the actual problems.
The hardest thing in the world to understand is the income tax. — Albert Einstein
Hey Eli,
I agree with your analysis on why the rich get richer and the poor get poorer. The fact that you pointed out: that rich people pay relatively low income taxes because their income is passive and therefore taxed at a much lower (capital gains) rate… is an argument for my way of thinking…
Here, it’s important to point out that in order to even know what “passive income” is you have to have money. After all it takes money to make money. It takes a lifetime of training to handle money properly. People who have the parents with experience in money to train them about are the ones who suceed. What about the rest that don’t?
How then, can we as a society clearly see that the opportunity chasm is equal or greater to the vast income disparities… yet not do anything in the way of offering a little more opportunity to the least fortunate at birth? I’m not talking handouts, I’m talking OPPORTUNITY. That is the key term for framing this tax burden debate.
Leave a Comment