Karrl
01-12-2008, 11:38 PM
From What are they thinking? by John Maudlin
http://www.safehaven.com/article-9206.htm
Fair Tax Nonsense
The only candidate I will specifically mention is Mike Huckabee. His espousal of the Fair Tax demonstrates his lack of understanding of reality and economics. Basically, Fair Tax proponents want a 23% sales tax to replace every type of government tax. No more income, corporate, social security, or Medicare taxes. And everyone gets a $5,000 or so "prebate" which covers the taxes up to the poverty level. What could be simpler or more fair?
No one would like to get rid of the IRS more than I. I spend way too much on accounting for taxes and such. But this is not the way to do it.
First of all, the 23% they talk about is really 30%. Under the proposal, if an item sells for $100, then $23 of that would go to the government (said to be tax-inclusive). That means the item really costs $77 and the tax is an additional $23 or about 30% (said to be the tax-exclusive rate). Add an average 7% for state sales tax and we are now up to 37%. But wait, it gets worse.
That 23% number simply won't produce the revenues they suggest. That assumes the government will pay the tax, so the budget has to go up. It also assumes that there is 100% compliance and everyone pays that 37% (yeah, right - just like they do the income tax). Bruce Bartlett writes this week in the Wall Street Journal:
"A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the Fair Tax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion)."
44 states have income taxes. They would have to repeal their income taxes and raise their sales taxes in order for individuals not to have to file annual income tax returns.
Do you really want to add 30% to the cost of a new home? And pay an extra 30% in interest on the borrowing price? 30-40% more for your legal services? Do you want your rents to go up 30%? Do you really think that massive evasion would not follow? We would move back to a black market cash economy so fast it would take all of Ben Bernanke's printing presses working overtime to create enough cash for the black market economy.
Yes, in theory it would mean that exports would be priced more competitively, as corporate taxes are removed. The idea as theory is not entirely without merit, but every independent study I have read suggests the number for the tax when combined with state taxes would be north of 40% and maybe more like 50%.
Further, this is a tax hike on the middle class. If you make less than $15,000 you win. If you make more than $200,000 you win, because you actually save more and spend less of your income. This is a nice populist proposal which sounds good but is economically challenged. It only works on someone who has not read about the problems.
Let me give you two links if you want to read more. One is to Bartlett's article and the other is to the people at Fact Check (a very good site for lots of facts on a lot of things) http://opinionjournal.com/extra/?id=110010523 and http://www.factcheck.org/taxes/unspinning_the_fairtax.html.
What would I do about tax reform? Dick Armey had it right: flat and low and simple. It seems like every ex-communist country has it figured out. It is just we capitalists that can't get it right.
http://www.safehaven.com/article-9206.htm
Fair Tax Nonsense
The only candidate I will specifically mention is Mike Huckabee. His espousal of the Fair Tax demonstrates his lack of understanding of reality and economics. Basically, Fair Tax proponents want a 23% sales tax to replace every type of government tax. No more income, corporate, social security, or Medicare taxes. And everyone gets a $5,000 or so "prebate" which covers the taxes up to the poverty level. What could be simpler or more fair?
No one would like to get rid of the IRS more than I. I spend way too much on accounting for taxes and such. But this is not the way to do it.
First of all, the 23% they talk about is really 30%. Under the proposal, if an item sells for $100, then $23 of that would go to the government (said to be tax-inclusive). That means the item really costs $77 and the tax is an additional $23 or about 30% (said to be the tax-exclusive rate). Add an average 7% for state sales tax and we are now up to 37%. But wait, it gets worse.
That 23% number simply won't produce the revenues they suggest. That assumes the government will pay the tax, so the budget has to go up. It also assumes that there is 100% compliance and everyone pays that 37% (yeah, right - just like they do the income tax). Bruce Bartlett writes this week in the Wall Street Journal:
"A 2000 estimate by Congress's Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the Fair Tax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion)."
44 states have income taxes. They would have to repeal their income taxes and raise their sales taxes in order for individuals not to have to file annual income tax returns.
Do you really want to add 30% to the cost of a new home? And pay an extra 30% in interest on the borrowing price? 30-40% more for your legal services? Do you want your rents to go up 30%? Do you really think that massive evasion would not follow? We would move back to a black market cash economy so fast it would take all of Ben Bernanke's printing presses working overtime to create enough cash for the black market economy.
Yes, in theory it would mean that exports would be priced more competitively, as corporate taxes are removed. The idea as theory is not entirely without merit, but every independent study I have read suggests the number for the tax when combined with state taxes would be north of 40% and maybe more like 50%.
Further, this is a tax hike on the middle class. If you make less than $15,000 you win. If you make more than $200,000 you win, because you actually save more and spend less of your income. This is a nice populist proposal which sounds good but is economically challenged. It only works on someone who has not read about the problems.
Let me give you two links if you want to read more. One is to Bartlett's article and the other is to the people at Fact Check (a very good site for lots of facts on a lot of things) http://opinionjournal.com/extra/?id=110010523 and http://www.factcheck.org/taxes/unspinning_the_fairtax.html.
What would I do about tax reform? Dick Armey had it right: flat and low and simple. It seems like every ex-communist country has it figured out. It is just we capitalists that can't get it right.