posted
What would the potential for a black market be with fairtax? It seems that every new good is a potential black market item given the high level of sales tax.
It appears that the prebate system doesn't take location into account when calculating poverty level. $10000 for an individual might be fine if the individual is living in Phoenix, Arizona but won't even cover rent in Silicon Valley.
It looks like there's going to be some pretty intrusive oversight for anyone claiming exemption for items purchased for business use. How does this compare to the intrusiveness of the current system for those who are self-employed? Would it be better or worse?
Is there a limit on what the government will tax? Will teenagers have to file returns if they make a couple hundred per year babysitting?
Posts: 3546 | Registered: Jul 2002
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posted
Saying corporations pay no tax is no more correct than saying individuals pay no tax, because they require higher salaries for the same skills due to the amount of taxation.
The reality is, both individuals and companies transmit part of taxation costs and absorb part of taxation costs as deadweight loss (except in the case of a lump sum tax, which is impractical for many reasons).
As noted, the Fairtax is less progressive than the current income tax structure. Whatever the arguments about fairness, the middle class would be paying more taxes, and that would very likely be felt in the short term (at least) as a fairly significant shock.
Indeed, the fairtax is mostly regressive, even with the 'prebate'. People who earn a lot more would pay significantly less in tax, as a percentage of income, than people who are middle class, in large part because they consume substantially less as a percentage of their income. It is hard to come up with a reason why those who earn more should pay less by percentage in taxes than most others.
The fair tax would create a giant black market. Every government policy that creates a large impediment to free exchange creates a black market (or equivalent), but some black markets are easier to police than most. The employment market, for instance, is much, much easier to police than the goods market. This has been repeatedly observed in many countries. The VAT has this problem, but considerably less, as the payment is collected during the stages of production, and each successive stage has an incentive to police previous stages.
If you think a large number of IRS agents are employed now, the number of agents that would be required to police the black market would be staggering.
Many of the benefits for savings/investment are overblown. After all, the costs aren't going away, they're just being shifted around. Doing that will mean the value of a dollar of investment to a firm being invested in will be different (and less) under the fairtax even as they are receiving more dollars of investment. However, it should provide some benefit.
Even without the black market, those who could consume outside the country would have a great incentive to do so. Domestic tourism revenues would drop, and foreign tourism revenues would rise. Similarly, consumable luxuries would often be consumed elsewhere (expensive food, for instance).
The optimistic value of advocates for a fairtax is a 30% sales tax. Several projections put it as approaching 40%. This would be exacerbate the regressive problem.
All major benefits of the fair tax are from simplification (and, as remarked wrt the black market, that is deceptive: several countries that have tried high sales taxes have fallen back to VATs after black markets threatened tax revenues). There is no denying that a simpler system would be much preferable to the current system, but the benefits of simplification could be had in several alternate plans with fewer downsides. Notably, a flat or two-tier income tax with just a standard exemption (and no others). Flat taxes have been extremely successful in numerous countries, while high sales taxes have not.
Posts: 15770 | Registered: Dec 2001
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posted
Kwea: you misunderstand. Her argument is that if a company is taxed $5 in making an item, they will set the price of the item $5 higher than if they paid no taxes on making the item.
However, as I mention above, both models and experimental results have shown that in most cases, a tax of $5 on making an item results in the item being some part of $5 more expensive, and with some part of $5 being absorbed by the corporation as a deadweight loss.
Nearly everything will be taxed under the plan, including many services that are not currently taxed (mmm, healthcare).
Posts: 15770 | Registered: Dec 2001
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posted
Information of possible relevance to this debate: Norway has a 'federal' (that is, it's imposed by the national government; our lower-level governments don't have that power) sales tax of 25% (12.5% on food). Oddly enough, this is not widely reviled, perhaps on the principle of the frog being boiled slowly; it's been creeping up by half-points for forty years or so.
Posts: 10645 | Registered: Jul 2004
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quote:But what constitutes need? If I have to buy crayons for my child because they are on her school supplies list, is that "need"? What if she just wants a box to color with? I would also suggest that Lucky Charms are never needed, but who's going to go down the list and check everything off?
What I understood from the explanation earlier in this thread is that there'd be a certain arbitrary amount at which it is determined that people should be able to meet their needs (the poverty level), and you'd be refunded that amount each month. You'd then go ahead and pay taxes on everything, including the things you need. Nobody would be deciding the things you need, they'd be deciding how much you need.
Posts: 16551 | Registered: Feb 2003
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posted
I think WIC might be a pretty good model of effectively distinguishing appropriate and needed foodstuffs (e.g., they cover many healthy cereals but not the oversugared and overprocessed stuff).
But I'm not pro-FT, for reasons mentioned above by others, and far better than I could.
Posts: 14017 | Registered: May 2000
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From the FairTax Book (Chapter 9: The FairTax Prebate: The Key to Fairness):
quote:Second, remember that 22 percent is already inflating the retail prices we all pay in the form of embedded taxes buried in the cost of all consumer goods. As soon as the competitive forces of the free market work their magic, as they always do, consumers of all incomes will be payong at least 20 percent less for virtually everything they buy, including the basics of food, clothing, shelter and transportation. Yes, they'll have to pay the new national sales tax-but when you factor in the lower prices caused by the disappearence of embedded taxes, you'll see that the total price paid for consimer goods will remain very nearly the same.
....
To get a handle on how this would play out, pull out your calculator. Let's say that a single mother with two children spends $45 a week on groceries. The removal of the 22 percent embedded tax would bring the price of those groceries down to $35.10. Add the FairTax and the groceries would cost $45.58- just a few pennies more. But remember under the FairTax Plan, this single mother with two children now gets to take home 100 percent of her paycheck. The removal of all income taxes and payroll taxes gives her a 25 to 30 percent incrase in her take-home pay...and in exchange she she's paying fifty-eight pennies more for her groceries than she was paying under the old income tax system. Does that sound like such a rotten deal to you?
Same chapter explaining prebate checks:
quote:Let's say that your household consists of a married couple with two children. The FairTax Act sets forth a formula for computing the poverty level, based on government figures, which negates any marriage penalty. Under the FairTax Act, in 2005 your household would be granted an annual consumption allowance of $25,660. This is the amount the government estimates you would spend during that one year to buy the basic necessities of life for your family. The sales tax on this amount would equal $5,902. The government would rebate this amount to you in twelve equal monthly installments of just under $492.
I have a hard time imagining there's THAT much waste in the current tax code, even if all that did work out right. There's a list in the book, at 2005 levels, of what size family you could have and what your expected spending would be and what your prebate would be.
They cover the possibility of black markets, but mostly wave it away as being more difficult than it is now. $350 billion goes uncollected every year, and they say that even if there is a black market, it'll be no worse than the status quo.
Anyway, I'm ambivilant towards the FairTax. I wouldn't mind seeing it tested, but I have serious concerns about it, but I won't dismiss it outright. But there's some info straight form the horse's mouth.
Posts: 21898 | Registered: Nov 2004
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posted
Where does this leave people who like to buy with cash? How do you track the 10 small purchases I made on my way home through the market, all in cash?
Posts: 2849 | Registered: Feb 2002
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I don't get what you mean? It'd be charged the same way a state tax is. Well, sort of, it'd be right on your receipt, but if you saw something that cost $100, it would have the FairTax already included, whereas a sales tax would be added on top of that. But either way it'd be right on your receipt, so I don't see how paying with cash would be an issue.
Posts: 21898 | Registered: Nov 2004
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quote: I don't see how paying with cash would be an issue.
It wouldn't be an issue with honest businesses, but I bet there would be plenty who would take “cash in hand” and not put everything through the books and therefore undercut the honest competition.
I bet there are plenty of consumers who would turn a blind eye as well.
Posts: 169 | Registered: Aug 2005
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quote:Second, remember that 22 percent is already inflating the retail prices we all pay in the form of embedded taxes buried in the cost of all consumer goods. As soon as the competitive forces of the free market work their magic, as they always do, consumers of all incomes will be payong at least 20 percent less for virtually everything they buy....
Man, those ten to twenty years in the middle, while you're waiting for prices to fall throughout the supply chain so that overall finished unit costs drop 22 percent, would be a killer.
Posts: 37449 | Registered: May 1999
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quote:Second, remember that 22 percent is already inflating the retail prices we all pay in the form of embedded taxes buried in the cost of all consumer goods. As soon as the competitive forces of the free market work their magic, as they always do, consumers of all incomes will be payong at least 20 percent less for virtually everything they buy....
While it is far from clear exactly how things would shake out, this is most likely not true. One reason that has been discovered empirically: prices are sticky downwards; they tend not to be lowered, even if the economic incentives change so it makes sense to lower them.
Also, this is based on the previous presumption that businesses pass on all or almost all of the tax they pay to consumers. This has been shown not to be true (in the case of tax increases, prioes do not go up anywhere near the amount of the tax increase).
And of course, it is predicated on salary levels going down (pre-tax, not post-tax). If someone makes 100k now, but 20k of that goes in taxes, they aren't suddenly going to get 100k and yet have effective prices not increase significantly. If companies maintain salary levels, effective prices must increase significantly. If effective price levels have any chance of not increasing too much, salaries will be cut so that they remain approximately the same, post-tax.
They are right in one thing. People on the whole are not going to become significantly worse off by the mere fact the tax code is restructured to use sales tax. Of course, middle class people will be bearing a higher percentage of the same approximate tax revenue, so they will be worse off.
Lyrhawn: it doesn't matter much, now. Sales taxes are low. Exchanging goods legally is not, in most cases, significantly more expensive than exchanging goods illegally, and the penalties are moderately effective. Make exchanging goods legally much, much more expensive and the incentive structure is very, very different. The area where there's a big incentive for black market activity, employment, is much easier to police than the goods market.
Tom: I suspect the real course of events would more likely be, that initially people's salaries had a large effective increase, but that prices also jumped by a large amount, but that for quite some period there would be few salary increases and few increases in effective prices, eventually bringing things approximately into what they would if the prices had only gone up a little, effectively.
KoM: a VAT is different in that it is collected on value-added, not sales price. That is, at each stage of the production chain (depending on the good) the VAT is taken care of based on the difference between the price of the inputs to the product and the price of the product as sold to the other party. This requires significantly more bookkeeping, but it also is better at insulating it from black market activities and such. If you want more details, I can go into them.
Posts: 15770 | Registered: Dec 2001
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posted
Israel's consumer tax is also a VAT, right? I know tourists get to claim it back (up to some cap) on the way out of the country.
Posts: 32919 | Registered: Mar 2003
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posted
It just occurred to me that all the analyses on this seem to assume that current buying patterns would continue. But a sales tax can be avoided with some of the same creative book-keeping that was used back in the day to avoid usury bans. For example, you don't buy a plasma TV, you lease it for five years, payment up-front; at the end of five years it's not worth anything, so you buy it from the dealer for one dollar. Plus tax. The car dealer doesn't get X cars from the manufacturer; rather he purchases the right to sell cars of that brand for some large sum, and then he buys the cars at 1 dollar each ("and other good and valuable considerations") plus tax. Then when he sells them to you for several thousand, they are used cars that tax has already been paid on. And so forth. What's more, this approach lends itself best to big-ticket items that you buy rarely; you can't very well lease your breakfast cereal. So in effect it would not be a tax on consumption, it would be a tax on consuming groceries.
Of course you can pass laws against this sort of thing, but then all you've accomplished is to move the regulatory and enforcement burden around.
Posts: 10645 | Registered: Jul 2004
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posted
While there are many ways the tax might distort behavior, the examples you give are the flimsiest sorts of things that there is little problem dealing with through well-worded rules and straightforward enforcement strategies.
Posts: 15770 | Registered: Dec 2001
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posted
The straightforward black market. Skim off an amount of product from your store that can be reasonably ascribed to loss by theft and sell it on the black market. Over report breakages during production and sell them on the black market. There is no need for complicated strategies that leave paperwork trails screaming of tax circumvention (you're a gov't auditor, and see a receipt for a new car for $1; you arrest the dealer), such as the ones you list.
Btw, leasing would be taxed at the same rate. Many sorts of used sales would probably also be taxed to make attempts at such schemes less likely.
Posts: 15770 | Registered: Dec 2001
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posted
Oh, I forgot something. If the adjustment does occur by keeping effective prices the same and lowering nominal wages, that will be have effects including the equivalent of a huge tariff on imports. This will harm both the US consumer and foreign producers, especially in countries less well off. Our tariffs are already one of the leading contributors to world poverty (and deadweight loss to US consumers), so I see no reason to increase them.
Of course, I think that scenario for the adjustment is wrong, so I don't think that's a reason to oppose the fair tax. There are plenty of others, though.
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