[ale] OT fairtax isn't

[Byron A Jeff]

On Fri, Mar 16, 2007 at 03:18:55PM -0400, Jeff Lightner wrote:

> Well we'll have to agree to disagree.

Discussions like this of lead to disagreements. It's one of the reasons that
I doubt that any significant tax change will ever be implemented.

I think talking about it may give rise to another road that hasn't been
thought through yet.

> Confusing because of "prebates".   I don't see the need.  If you only
> make $1000 a year you pay significantly less than someone making
> $1,000,000.  

If you make $10,000 a year, then a significant portion of your income is
devoted to essential services (food, clothing, shelter). While the $1,000,000
earner will pay more total tax presumably, the percentage of discretionary
income not devoted to essential services is significantly more

> It can be gamed because of the "prebates".

How? The prebate is fixed and unconditional. The only way to game it is to
either scam someone else out of their prebate or to declare people who do
not exist. I'll admit I may have a hole in my thinking. But I can't see how
this part of it can be gamed.

>   It can also be gamed because of the bartering you mentioned. 

No doubt. As the article I point to shows, that if new items are taxed and
non new items are not, then folks will try to game the system by getting items
that are new declared as non new.

> It also doesn't talk about items "imported" for personal use.

Imports are taxed at the same rate as if purchased locally IIRC. So you
can't buy a new Mercedes in Germany and have it shipped over without paying
the tax on it.

> The tax I mentioned isn't "progressive" in percentage but in dollars.

Can you explain. What would be the dollar rate and the percentage rate?

> The current system is "progressive" in BOTH so the one I proposed would
> ease some of the burden on people making more for the reasons I
> previously stated.   

I don't think that FairTax is trying to ease the burden to those making more.
It has the same wealth distribution scheme that other tax systems have.

> By the way:  The sales tax would also be "progressive" in the same
> dollars by dint of the fact that richer folks would presumably buy more.

But the effective tax rate is lessened for those with more money without
the prebate.

> In fact in this way the "fairtax" isn't because people who make more
> folks can usually save more of their take home than poorer ones. 

Agreed. But that's why the prebate is important. It helps to equalize the
disparity in savings between the low wage earners and higher wage earners.
Quick example: $20,000 earner vs. $100,000 earner at a 30% consumption tax
rate. The $20,000 spends all their money on taxable goods/services with a
total tax of $6000 (effective rate of 30%). The $100,000 earner spends
$70,000 on taxable goods/services and saves $30,000. Total tax is $21,000.
The effective tax rate is 21%. With a prebate the $20,000 earner gets back
$6,600 (30% of $22,000 poverty level income) eliminating taxing them. The
$100,000 earner also gets the $6,600 which they can save. Their effective
tax rate is 19.6% and they get to save $36,600 in the bank tax free.

It isn't fair. In fact it doesn't work because to make the same revenue, the
30% tax rate would have to be raised, taxing the high spenders even more.
But the tradeoff is what they keep, they get to keep and invest untaxed until
it is spent.

>  My
> savings rate dramatically increased when I moved into IT from my prior
> career.
> 
> We are to trust businesses with the tax money?  The same way we trusted
> Enron?  Adelphia?  Phar-Mor?  Not saying trusting government is much
> better but really...

I think that's a solved argument. Sales taxes are already in place in many
places throughout the country. Businesses already collect and remit sales
taxes. Of course there's fraud and deception in the process. But I don't
think it really covers new ground.

One point the article I posted made is that FairTax would extend to service
providers that currently do not have the burden of collecting taxes. Plumbers
and babysitters, and doctors (OH MY!) would have an additional burden that
the feds would place a relatively small price tag on (0.25% of the tax
collected). I'm sure that Jenny the babysitter will relish that nickel as 
she's filling out paperwork to submit Fairtax for babysitting.

> 
> My main point is that "fair" is a relative term.  Proponents of this tax
> see it as "fair" but I don't for the reasons given.   

I don't think that Fair the right term. The only truly fair tax is no tax 
at all. But I think that's a pipe dream. Personally I think it's enough to
get rid of the day to day/year to year taxation management and give folks
an opportunity to choose when and how taxes will be applied. No worries because
for each and every saver and investor, there are 10 spenders that will be
funding the coffers. It also appeals to me that the tax base is widened to
everyone who spends on goods/services. Right now if you don't have an income,
or don't declare an income, then you're not taxed. All those folks who are
undocumented or have cash businesses are making a killing off us folks who
are W2 income based. Tax them too.

> Anyway - not trying to start a flame war.  Just figured it was OK to
> propose alternate suggestions to political signatures than to leave them
> unchallenged.

I think it's a great discussion. I bought and read the FairTax book a while
ago. It isn't perfect. I think the numbers are skewed. I think to be revenue
neutral that the external tax rate is going to be north of 35%. Also it will
not work unless a constitutional amendment repealing income and capital gains
taxes and a cap on the sales tax rate is implemented. If not then congress 
critters will simply start adding new taxes (or pushing the tax rate up) to 
fill in the gaps.

But the system is a mess right now. I think people resonate with the idea of
simplifying taxation. But total simplicity is going to be regressive.

I think that's why the flat tax with the prebate is being called the FairTax.

BAJ

> -----Original Message-----
> From: ale-bounces at ale.org [mailto:ale-bounces at ale.org] On Behalf Of
> Byron A Jeff
> Sent: Friday, March 16, 2007 2:17 PM
> To: Atlanta Linux Enthusiasts
> Subject: Re: [ale] OT fairtax isn't
> 
> On Fri, Mar 16, 2007 at 12:02:10PM -0400, Jeff Lightner wrote:
> 
> >> David Corbin
> >> Abolish the IRS - http://www.fairtax.org
> 
> I moved the catalyst here. I remember why I don't like top posting...
> 
> > Fairtax is just as confusing as the current system so wouldn't
> eliminate
> > the IRS IMO.
> 
> Confusing how? Fairtax is supposedly a national sales tax on new goods
> and
> services. It'll move the tax collection point from the IRS out to retail
> businesses. All other income and capital gains taxes would be repealed.
> 
> There would still be some tax collection entity. But it wouldn't deal
> with
> individuals, but the businesses that collect the taxes.
> 
> I'm reversing your next two points...
> 
> > Why not a simple tax? Everyone pays 10-30% of income to the
> city/county.
> > The city/county remits to the state and the states remit to the feds.
> 
> 
> >  Especially I don't like the idea of "prebates" because it
> > just allows for gaming the system like current tax shelters do.
> 
> Several reasons:
> 
> 1) All simple/flat taxes are regressive. The less you make, the more the
> tax
> impacts your bottom line.
> 
> 2) The prebate offsets the regressive nature of the tax. It untaxes
> goods
> and services for each individual up to the poverty level. Also the
> prebate
> could not be gamed. If you are a living citizen, you'd get the prebate.
> 
> 3) By taxing goods/services when purchased (and I presume bartered too)
> it
> decouples taxation from income. The problems with taxing income is
> manyfold.
> First is that richer folks do not necessarily make what is considered
> income.
> Secondly lots and lots of income simply goes unreported, especially
> income
> from illegal activities. Fairtax would tax these revenue streams that
> are
> currently sliding under the radar.
> 
> > You'd still need an IRS to insure "perks" were included as "income"
> > which of course they really are no matter what the guy riding on the
> > corporate jet tells you about his need to do that rather than be with
> > the cattle on commercial jets.
> 
> This is the whole point of switching from an income tax to a consumption
> tax.
> Consumption taxes don't bother to differentiate where the revenue stream
> came from. So there'd be no need for an organization to make those types
> of differentiations.
> 
> >  Not saying they aren't entitled just
> > that they shouldn't pretend it isn't "compensation".
> 
> Again with Fairtax and other consumption taxes, there'd be no need to 
> differentiate compensation in any form.
> 
> > The rich that liberals complain about would still be paying more than
> > the middle class - we'd just eliminate the tax tables that penalize
> > people by taking a bigger and bigger percentage as they rise.
> 
> So now you're talking about a progressive tax system again. Now you'll
> start
> folks trying to game the system. Because once you set it up that the
> amount
> of tax is based on the amount you "make", then folks will work real hard
> to
> find ways of reporting that they are "making" less, even when they are
> not.
> 
> Now Fairtax would still need to transfer that problem to the tax
> collection
> points. But it would be out of the public's hand.
> 
> > I recently got a raise and was distressed to see that only 50% of the
> > raise made it to my "take home" pay where I'd only been predicting
> 33%.
> 
> With Fairtax you'd get 100% of it take home. You'd get to decide how to
> spend it or save it, only being taxed when you purchase new goods or
> services.
> Someone who grows their own food, only shops secondhand, and services
> their
> own stuff would literally be untaxed. In addition they'd get a deposit
> from 
> the federal government every covering the prebated taxes.
> 
> Administration issues would disappear. No tax filings. No receipt
> tracking.
> No audits. You'd only have to do that if you were collecting taxes from
> the
> public, and IIRC the feds would pay you for that service.
> 
> > My favorite tax ever was the National Insurance Scheme in Grenada.
> > (Loved the word "scheme" in that tax.)   It was sort of like our
> Social
> > Security. The law was less than one page long and they only taxed you
> > over a certain income level and then you had a maximum of $50
> Grenadian
> > limit per year.   In that law they exempted "international
> > organizations" without defining them as "NGOs" or not-for-profit
> meaning
> > since I worked for an international hotel company I could successfully
> > have claimed to be exempt.  :-)
> 
> Well that ship has sailed in the US. Taxation, and fairly heavy
> taxation, is
> a fact of life. So while Fairtax isn't perfect, anything that reduces
> administration by individuals, widens the tax base, and accounts for the
> regressive nature of flat taxes is looking the the right direction.
> 
> The problem is that the public would choke when they realize the tax
> revenue equal percentage that would have to be implemented. Honestly it
> would
> be on the order of 35%. 
> 
> I of course can see that when you add up the 7.5 employment tax, along
> with
> the 25-28% income tax, that 35% really isn't looking too terribly bad.
> 
> > P.S.  I'm not "rich" even by Democratic limits nor am I a Republican.
> 
> 
> 
> A pretty good rebuttal to the Fairtax can be found here:
> 
> http://www.mises.org/story/1975
> 
> The author approaches the subject from the basis that all taxation is
> wrong.
> Of course that's a different debate. But from the basis he tears into
> many
> of the issues that the FairTax raises.
> 
> Personally I'm fatalistic when it comes to taxation. So I won't get into
> the
> debate of are taxes justified. But any tax scheme that simplifies the
> process
> for the majority of individuals is worth looking into IMHO.
> 
> BAJ
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