posted
I've been reading up on the FairTax and I admit, from my knowledge thus far on the matter I think it could be something America could and should do.
posted
I think it's a bad idea. A 30% sales tax is itself pretty dangerous, cutting income before cutting spending is an irresponsible idea, and plans that fail to account for corporate tax are ultimately irrelevant. Moreover, I don't see how they'd manage to avoid widespread tax fraud; the IRS most certainly could not be eliminated, as the temptation for businesses to improperly report receipts would be enormous.
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posted
From what I understand the IRS would not be eliminated right off. A drastic reduction of about 70% i think. But there would still be an infrastructure in place so as to regulate the FairTax.
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posted
FairTax might be slightly better than what we have now (though not if it pans out the way some advocates present it, as they typically argue prices will adjust, instead of salary, effectively creating a gigantic tariff).
However, I think there are numerous simplification proposals that are far better. In particular, the huge black market that would be created by the FairTax would be a downside, as would the difficulty of ensuring particular income groups were not overly targeted (since the FairTax is proportional to prices, people earning the same income in places with higher prices would be taxed even more; this would be a very large burden on the poor in high priced areas like New York).
Examples of superior proposal include a straight flat tax and a nearly-flat tax, a negative income tax, an expanded earned income credit, and various combinations of the previous ones (along with a huge reduction in the number of loopholes in the tax code, required in every case).
edit: you can readily see why a large national income (edit: by which I mean sales) tax is a bad idea by looking at the several countries that have tried it. Pretty much all of them switched rapidly to something else, frequently a VAT or flat tax.
posted
They do discuss that on their web site. For one, they claim (and given the rebate, it's at least plausible) that it is more progressive than the current income tax.
I'm not a fan of the fair tax myself. But the naming doesn't seem any more manipulative than a lot of other political names across the political spectrum.
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quote:But the naming doesn't seem any more manipulative than a lot of other political names across the political spectrum.
Not exactly a high standard when you consider names like "The Patriot Act" and "Blue Skies Initiative".
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posted
So I've looked at the fair tax site a bit and I simply can't see how the math could possibly work out.
Right now, payroll taxes (Social Security, Medicare and Unemployment) run ~15% of salaries. It hard to see how a 23% sales tax could possibly cover what is now covered by payroll taxes, income taxes, and all the other taxes out there.
Right now, federal spending constitutes ~18% of GDP. Only a fraction of GDP is made up by retail sales that would be taxable under the fair tax. For example, if you simply subtract government spending from the GDP, a 23% tax on all the rest of the GDP would be necessary to meet the current federal spending. Even if you ignore the rebates -- 23% the portion of the GDP that makes up taxable retail sales can not be anywhere near large enough to come even close to meeting federal spending.
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posted
There's a bit of trickery with the 23%. That's 23% of the total, after a tax has been applied. In other words, a 28% sales tax (approximately).
edit: while it is confusing, it isn't much trickery. Income tax is computed on the amount prior to the tax, for instance. But sales taxes are usually thought of in terms of a percentage of a pre-tax amount.
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posted
Also, the Fair Tax would not just be applied on retail sales. It would be applied on virtually all sales and services.
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posted
I've also got some real problems with the way housing will be taxed. As I understand the proposal, the tax will apply to the sale of new houses but not the sale of used houses or to the sale of homes (or other real estate) purchased as an "investment" however the tax will be charged on rent.
There are all kinds of problems with this. First, it creates the possibility for an enormous tax loophole. Rather than buying new houses, people could work through a developer who would build the house as an investment property (tax exempt), rent it to you for say a year (during which you would have to pay 23% tax on the rent) and then sell it to you as a used house (tax exempt). That way you would avoid paying the lion's share of the taxes.
Furthermore, the dividing line between what constitutes a personal residence and what constitutes an investment property is quite blurry. For example, my husband and I own a house in Bozeman MT. We bought it new, lived in it for nearly a decade and are renting the property. Under the fair tax system, would our renters be exempt from paying the tax because the tax was paid on the house when it was purchased, would we be reimbursed for the tax when we converted the property to an investment, or would it simply end up being double taxed?
And even if you can close the loopholes and work out all the double taxation issues, it ends up being an enormous windfall to people who already own houses (and thus a big penalty to those who do not). In nearly all cases, the 23% tax on new houses will end up being folded into the morgage. So when the house is resold (average every 5 years in the US), that tax will generally get transferred into the sales price on the house. So although the government won't collect any more tax, the second house buyers will have to pay more for the house to pay for the taxes initially incurred. That would be just fine if this sort of tax had always been in place, but it hasn't. All the people who currently own houses will be grandfathered into the system.
The value of homes is dictated by market forces which is why the price of older homes rises in parallel with the price of new homes. The fair tax would cause an instantaneous 23% increase in the cost of buying a new house, which would mean more demand for older homes driving up the cost of older homes. End result: windfall profits for people who own a home before the tax is implemented.
I haven't found anyone who discuss the question of "land" vs. "improvements" which is another big can of worms.
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quote:Originally posted by fugu13: There's a bit of trickery with the 23%. That's 23% of the total, after a tax has been applied. In other words, a 28% sales tax (approximately).
Even with that trickery, I can't see the math working out. The GDP is the sum of private consumption, capital investments, federal spending and net exports. Since only the private consumption and the portion of capital investment associated with new homes would be subject to the tax, I can't see how the math works out even if you ignore the rebate on a large portion of the tax.
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quote:There are all kinds of problems with this. First, it creates the possibility for an enormous tax loophole. Rather than buying new houses, people could work through a developer who would build the house as an investment property (tax exempt), rent it to you for say a year (during which you would have to pay 23% tax on the rent) and then sell it to you as a used house (tax exempt). That way you would avoid paying the lion's share of the taxes.
This and a plethora of similar schemes are the reason I discount the promise of reduced enforcement costs.
quote:That would be just fine if this sort of tax had always been in place, but it hasn't. All the people who currently own houses will be grandfathered into the system.
A similar problem happens with savings, but in reverse. I have paid taxes on most of my savings (all except 401k deposits). Some of that is currently tax advantaged. Some is not. Anything I spend from savings would be double-taxed.
The grandfathered house problem is ameliorated a little by the fact that some or all of the money paid for it's original purchase price was taxed as income. Of course, for recent purchases, this will not be the case, because only a tiny portion of the price will have been paid.
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posted
I suppose my skepticism is largely because the proponents of the "fair tax" make such grandiose claims. Everybody benefits. Everybody has more money to spend. The government collects more taxes. Everybody gets to consume more. If it sounds to good to be true, it probably isn't true.
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quote:The grandfathered house problem is ameliorated a little by the fact that some or all of the money paid for it's original purchase price was taxed as income. Of course, for recent purchases, this will not be the case, because only a tiny portion of the price will have been paid.
For recently purchased houses, almost all the money paid toward the mortgage goes towards "interest" and can be deducted from taxes. If you sell a house that has appreciated and use the proceeds as a down payment on another house, that money is also exempt from taxes. Since homes are resold an average of every 5 years, I suspect that there are very few people who have invested a significant portion of "taxed" income in their homes. So while the problem may be ameliorated a little, its a very little.
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quote:A similar problem happens with savings, but in reverse. I have paid taxes on most of my savings (all except 401k deposits). Some of that is currently tax advantaged. Some is not. Anything I spend from savings would be double-taxed.
This is a problem I hadn't considered and could hurt me big time. Of course, now that I'm no longer a resident of the US and spend far less of my money there, it affects me less.
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posted
I meant to say that the partial amelioration I described would not occur for recent purchases. So i agree with you on that.
Minor nit:
quote:If you sell a house that has appreciated and use the proceeds as a down payment on another house, that money is also exempt from taxes.
This is no longer the case for personal residences. The old capital gains structure that required putting the profit toward a new house went out in the 90s. Now, each person can get a $250,000 capital gains exemption every two years on personal residences. For most people, this is advantageous.
On investment property, there is something called a like-kind exchange that allows capital gains from one property to be put into a new investment without paying tax on those gains.
Doesn't change your larger point, but I wanted to clarify.
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posted
Correct and a valid point. I just sold my personal residence in Utah so I have been checking the details on this one. My profit on the sale of that property is exempt from taxation whether I reinvest it in another home or not.
But as you noted, that is largely irrelevant to my point. It is a common pattern in the US for people to buy a small "starter home" with an FHA or equivalent loan that requires them to put down very little as a down payment. They live in that home for an average of five years and then sell it making a tidy profit which they use to make a down payment on a larger home. Or perhaps they get a second mortgage, borrowing against the appreciation of their house and use it to expand the original home. People frequently do this repeatedly getting progressively larger and nicer homes (or so I'm told). The point being, that many many home owners haven't put any significant amount of taxed money into their houses.
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posted
The 28 percent is probably a little low, but not all that low. Keep in mind that the balance between different activities would readjust very significantly under such a tax.
But yes, not everybody benefits, and it is too good to be true. A plan similar to the one proposed would probably be slightly better than our current system, but only because we have so many absurd and convoluted rules in our current system.
There are much better possible taxation systems being used in the real world.
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