Thread: Tax Foundation: 'Avoiding Tax Reform is No Longer an Option'

Originally Posted by Judy

I like the plan, and totally 100% support it. Like nntrixie, I would prefer doing away with the Prebate/Rebate and having a lower tax rate of say 20% instead of the 23%, but for those people who want a Rebate on their essentials to exempt them from the tax, I have no problem with that either. It's voluntary, no one has to sign up for it. So if they want to give Social Security Administration their information and sign up for the household rebate, I've no problem with that. Everything else in the bill I support 100%. It's an easy peasy very convenience system for the retail businesses for which they're compensated, and for everyone else, it's absolute bliss with a rebate or without, either way.

I also think an across the board sales tax is a very good idea.

But the prebate does not free us of government, it does not cut out the bureaucracy. Very few are going to forego that money, so we have retained that huge bureaucracy. We, the people, are also once again going to have to 'report' to the government. The only difference, rather than file a return and wait for our refunds,, yearly , we will be dependent on it on a month basis.

Why does anyone deserve a prebate> Simply exempt food, medicene, and perhaps some other essentials, and be done with it. As I said,, poor people already pay sales tax. In Texas, they pay 8.25%, more or less depending on what local entities collect. They are not starving because of it. Truly I don't have a problem with everyone enjoying a little 'pain' with regards to taxes. I think that is the problem in this country today.

Also, a huge number will still be on welfare. Why should they get a rebate when they are spending taxpayer dollars in the first place.

That's an absolute sticking point for me -

Actually, though I don't think the percentage needs to be as high as suggested.

No amount of taxes will fix the problem until we curtain the spending in Washington.

Originally Posted by Judy

Well, it's not fuzzy math, it's the same way tax rates are calculcated on the income tax. You've never complained about that, so why complain about this? It's the difference between an inclusive rate and exclusive rate. The FairTax is inclusive and is already included in the price of your new goods and services, it's not added on. Just like the income tax is included in your salary, your expenses, your purchases, everything you receive and spend and is not added on. State sales taxes are exclusive and added on to your price.

The FairTax rate is 23% by statute. If you sell $100 worth of new goods, in that price is 23% FairTax, so you send the state $23, not $30. If you sell $77 worth of new goods before tax, then you add on $23 for FairTax. $23 is 30% of $77 but 23% of the total of $100 which is the amount of the sale. Same with your salary under the income tax. You don't add on 25% for your income taxes, it's already in your salary and then they withhold it or you send it in. If you earn $100,000 a year and you're in a 25% tax bracket, you pay $25,000 in income tax. But if you only earn $75,000 before tax, and you are in a 25% tax bracket, then you add on 33% of 75,000 to have $100,000 for which you pay a 25% income tax rate.

It's not fuzzy math at all. It's just that people who don't understand math are easily fooled into thinking they're being cheated somehow by the Anti-Fairtax Lobby, most of whom do tax returns and know how stupid most Americans are when it comes to taxation so a lot of people are easy targets.

It's like people think OH MY GOD I'll be paying 23% more for my stuff. LOL!! No, you'll be paying the same or less, the difference is you have to spend 6.1 billion hours or $234 billion a year in lost productivity and direct costs to enrich other people in the tax industry to pay it now under the income tax or be free of all that with the FairTax.

Unspinning the FairTax

We look at the numbers behind the numbers.

• By Joe Miller
• Posted on May 31, 2007 | Updated on June 14, 2007| Corrected on May 31, 2007

• Summary
  
  In our recent article on the second GOP debate, we called out Gov. Mike Huckabee as well as Reps. Tom Tancredo and Duncan Hunter for their support of the FairTax. We wrote that the bipartisan Advisory Panel on Tax Reform had “calculated that a sales tax would have to be set at 34 percent of retail sales prices to bring in the same revenue as the taxes it would replace, meaning that an automobile with a retail price of $10,000 would cost $13,400 including the new sales tax.” A number of readers pointed out that H.R. 25, the specific bill mentioned by Gov. Huckabee, calls for a 23 percent retail sales tax and not the 34 percent used by the Advisory Panel on Tax Reform. That 23 percent number, however, is misleading and based on some extremely optimistic assumptions. We found that while there are several good economic arguments for the FairTax, unless you earn more than $200,000 per year, fairness is not one of them.
  
  Update June 14: In a letter, Americans for Fair Taxation wrote to say that it disagrees “very strongly” with FactCheck’s analysis of the FairTax. For their objections and our response, see the end of the “Analysis” section.
  
  Analysis
  
  
  
  How to Make 30 Look Like 23
  Americans for Fair Taxation offers the following plain-language interpretation of H.R. 25:
  
  
  Americans for Fair Taxation: A 23-percent (of the tax-inclusive sales price) sales tax is imposed on all retail sales for personal consumption of new goods and services.
  It is the parenthetical that is important, for it hides the real truth of the tax rate.
  
  
  
  First consider the way in which sales tax is normally figured. A consumer good that carries a $100 price tag might be subject to a 5 percent sales tax. That means that the final bill for the item is $105. The 5 percent figure is the amount of tax that is charged on the original purchase price. But now suppose that instead of pricing the item at $100, the shop owner simply priced the item at $105, then sent $5 directly to the state. The $105 price would be a tax-inclusive sales price. But $5 is just 4.8 percent of $105. That 4.8 percent number, however, is relatively meaningless. You are still paying exactly the same 5 percent tax on the item.
  
  
  The 23 percent number in H.R. 25 is the equivalent of the 4.8 percent in the previous example. To calculate the real rate of the sales tax, we have to determine the original purchase price of an item. We can begin with the same $100 item, keeping in mind that a price tag that reads $100 has sales tax already built in. If our tax rate is 23 percent of the tax-inclusive sales price, then of the $100 final price, $23 of those dollars will be for taxes, meaning that the original pre-tax price of the item is $77. To get $23 in taxes on a $77 item, one must impose a 30 percent tax. In other words, a 23 percent sales tax on the tax-inclusive sales price is equivalent to a 30 percent tax on the actual price of the item.
  
  
  FairTax proponents object to the 30 percent number, claiming that critics use the larger number to frighten people. Americans for Fair Taxation claims that it uses the tax-inclusive number to make it easier to compare the FairTax to the income tax that it will replace (since most of us think of income tax rates on an inclusive basis). But we are not accustomed to thinking of sales taxes inclusively. The result is that many FairTax supporters (about 15 percent of those who wrote to us, for example) do not understand that the 23 percent figure is tax inclusive.
  
  
  Our analysis of the FairTax used a figure of 34 percent as the basic exclusive tax rate. One e-mailer complained that our number was at least 10 percentage points “higher than [the FairTax] is” because we calculated it as an addition to retail prices. But our 34 percent number is not 10 percentage points higher than the legislation. A 34 percent exclusive number is equivalent to a 25 percent tax inclusive rate – only 2 percentage points higher than the FairTax bill. We think that, intentional or not, the use of the tax-inclusive 23 percent rate has misled a lot of FairTax proponents.
  
  
  
  But 30 Is Not 34 Either
  Americans for Fair Taxation, however, has complained that H.R. 25 calls for a 23 percent inclusive (or 30 percent exclusive) rate, not a 34 percent rate. Our number came from thePresident’s Advisory Panel on Tax Reform (scroll to chapter 9 for the panel’s discussion of the FairTax), which calculated that a 34 percent rate on the actual price of consumer goods would be necessary to make the program revenue-neutral. Americans for Fair Taxation has said that the Advisory Panel did not use the FairTax as detailed in the legislation but instead made up its own plan. This complaint is disingenuous. The Advisory Panel did in fact begin with the 30 percent figure that proponents of the FairTax submitted. But the panel rejected those figures, claiming that they were based, at least in part, on the unrealistic assumption that there would be full compliance with the FairTax. In other words, proponents assume that no one will cheat on taxes. However, the Treasury Department estimates that the evasion rate for the entire U.S. tax system under current law is approximately 15 percent. The Advisory Panel accordingly assumed a 15 percent evasion rate for the FairTax.
  
  
  More significantly, however, the panel found that FairTax supporters were employing questionable accounting. In calculating federal revenue, proponents assumed that purchases made by the federal government would be taxed at the full 30 percent rate. But when calculating federal expenditures, FairTax proponents did not factor in the additional costs of the 30 percent sales tax. The Advisory Panel thus threw out the revenue from federal purchases, noting (correctly) that increased revenue from taxing federal purchases is exactly canceled by increased costs in the federal budget. Unfortunately, the Advisory Panel has thus far refused to release its methodology, making it difficult to reconcile its projections with those of Americans for Fair Taxation.
  
  
  Using a formula that corrects for the faulty assumption about government spending, William Gale, director of the economic studies program at the Brookings Institute, calculates that a 39.3 percent exclusive rate would be necessary for revenue neutrality. (We used the lower Advisory Panel number). A more recent study by FairTax supporter and Boston University economist Laurence Kotlikoff – working from Gale’s formula and adopting the same basic assumptions – determines that a 31.2 percent exclusive (or 23.8 percent tax-inclusive) rate would be sufficient.
  
  
  Even if Kotlikoff is correct that a 31.2 percent rate is revenue-neutral, there remains some reason to doubt that the rate actually would be that low. The FairTax proposal assumes a 100 percent tax base on consumption. By way of contrast, most states that have sales taxes have roughly a 50 percent tax base. With the FairTax’s 100 percent base, consumers would pay taxes on a great many things that may not intuitively seem like consumption. The list would include:
  
  • Purchases of new homes
  • Rent
  • Interest on credit cards, mortgages and car loans
  • Doctor bills
  • Utilities
  • Gasoline (30 percent in addition to current taxes, which would not be repealed)
  • Legal fees
  
  At today’s prices, gasoline would cost almost $1 per gallon more. A $150,000 new home would run $195,000 – plus the 30 percent tax that the buyer would pay on the interest on the mortgage. In short, the FairTax taxes everything that one buys, with the one notable exception of education. Any exceptions to the tax base (for instance, eliminating rent or credit card interest from the tax base) would require an offsetting increase in the rate.
  
  
  
  But the FairTax Will Lower Prices
  Proponents of the FairTax point out that prices on consumer goods contain what are called “hidden taxes.” Under current law, corporations have to pay taxes on their earnings. Moreover, businesses have to pay social security taxes for each employee. The money to pay these taxes has to come from somewhere, and FairTax supporters argue that the cost is passed on to the consumer. In fact, the best-known proponent of the FairTax, talk-show host Neal Boortz, argues that 22 percent of the price of a consumer good is really a “hidden tax.” Get rid of corporate and social security taxes, Boortz argues, and consumer good prices would drop by 22 percent. Even with the 23 percent FairTax, prices stay the same, and with the elimination of income taxes, paychecks will get bigger. Everyone gets a raise and the federal government still gets its revenue. About 10 percent of the e-mail messages we received from FairTax proponents trumpeted this kind of magic act. It is easy to understand the confusion on the issue, as Boortz himself made similar assertions in the hardcover edition of his book. (He later issued a corrected version in paperback.)
  
  
  A bit of critical analysis shows that this cannot be right. The FairTax is revenue-neutral. That means that for every tax dollar collected under the current system, the FairTax has to collect a dollar. If the FairTax exactly equaled embedded taxes, then it could not possibly be revenue-neutral, since embedded taxes do not take into account personal income or estate taxes. The FairTax rate would have to be high enough to replace embedded taxes plus income and estate taxes.
  
  
  Chris Edwards, the Cato Institute’s director of tax policy studies, points out that prices do not really matter; corporate, payroll, income and estate taxes currently generate approximately $2.4 trillion, and a revenue-neutral FairTax would still require that taxpayers pony up $2.4 trillion. Nor is it clear that the 22 percent embedded tax figure is particularly meaningful. David Burton, chief economist of the Americans for Fair Taxation, calls it "simplistic" to think that the entire cost of corporate taxes is borne by consumers. Cato’s Edwards suggests that while consumers do pay at least part of the costs, producers also bear some of the burden. That is, employees pay part of the costs of hidden taxes (in the form of lower wages), and corporate shareholders pay another portion (in the form of lower returns on their investments).
  
  
  
  The FairTax: Is It Regressive?
  Sometimes sales taxes are called regressive, meaning that the poorest pay higher rates than the wealthy. Strictly speaking, sales taxes are flat, since everyone pays the same rate. But because the poor tend to spend a high percentage of their income on basic consumer goods such as food and clothing, sales taxes do require the poor to pay a higher percentage of their income in taxes.
  
  
  The FairTax plan, however, helps to alleviate this difficulty by exempting sales taxes on all income up to the poverty level. Taxpayers would receive a "prebate," which Edwards calculates to be about $5,600 annually. The Treasury Department estimates that the prebate program would cost between $600 billion and $700 billion annually, making it the largest category of federal spending. Americans for Fair Taxation disputes the Treasury Department numbers, claiming that the actual cost would be closer to $485 billion per year. The Treasury Department has so far refused to release its methodology, making it difficult to determine whose estimate is correct.
  
  
  
  Who Really Pays?
  With the prebate program in effect, those earning less than $15,000 per year would see their share of the federal tax burden drop from -0.7 percent to -6.3 percent. Of course, if the poorest Americans are paying less under the FairTax plan, then someone else pays more. As it turns out, according to the Treasury Department, “someone else” is everybody earning between $15,000 and $200,000 per year. The chart below compares the share of the federal tax burden for different income groups under the current system and under the FairTax. Those in the highest and the lowest brackets will see their share decrease, while everyone else will see their share of taxes increase.
  
  
  
  
  Americans for Fair Taxation rejects the Treasury Department analysis, objecting that Treasury considers only the income tax. By leaving out payroll taxes (which are actually regressive) Treasury’s chart makes the FairTax look worse by comparison. We found that including all the taxes that the FairTax would replace (income, payroll, corporate and estate taxes), those earning less than $24,156 per year would benefit. AFT’s Burton agreed that those earning more than $200,000 would see their share of the overall tax burden decrease, admitting that “probably those earning between $40[thousand] and $100,000” would see their percentage of the tax burden rise.
  
  
  
  Why Be Progressive?
  It is easy to look at charts like the one above and dismiss the FairTax as simply another way to help the rich get richer. But there is an economic argument for a less progressive tax system, though that argument is extremely technical. Kotlikoff has asserted that the FairTax will lower the marginal tax rate for all earners. (The marginal rate is the tax rate paid on the last dollar earned.) Because marginal rates are lower, each extra dollar of income will result in greater purchasing power. The decrease in marginal rates is progressive – that is, marginal rate reductions are greater for the working- and middle-classes than for the wealthy.
  
  Moreover, even FairTax critics like Gale agree that consumption taxes increase the size of the economy. Many studies show that long-term incomes would rise under a consumption-based tax system. Optimistic accounts show a 10 percent rise in income over time, but even the more cautious studies show gains of 5 percent to 7 percent. Because the FairTax will grow the economy, workers will eventually see increases in their income. FairTax proponents claim that the growing economy, coupled with the reduction in marginal tax rates, will offset the increased tax burden. Burton argues that "the FairTax is a positive-sum game," one in which purchasing power will grow faster than the tax burden. The size of any such gains is disputed, however; Americans for Fair Taxation consistently chooses from among the most optimistic growth projections.
  
  
  Upon Further Review
  We stand behind our earlier analysis of the FairTax. The proposal to which Gov. Huckabee referred is not a 23 percent tax, but rather a 30 percent tax. And it is revenue-neutral only through an accounting trick. It will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year. It is possible that the FairTax would make most people better off, but much of that gain would be a direct result of making the tax code less fair.
  
  
  — by Joe Miller
  
  
  Correction, May 31: In the Analysis portion of our original story we stated that "Taxpayers with very low incomes would receive a ‘prebate’." In fact, all taxpayers would receive the prebate for sales taxes on purchases up to the poverty level.
  Update June 14: Americans for Fair Taxation wrote us to say that the organization disagrees “very strongly” with FactCheck’s analysis and that we have “uncritically accepted many misleading arguments” made by FairTax critics. As a courtesy to AFT, and as a service to our readers, we are posting the letter in our “Supporting Documents” section. We stand by our article, and our comments on AFT’s letter are below.
  
  
  Our mission at FactCheck.org is not to rule on issues of public policy but rather to reduce the level of deception and confusion in U.S. politics. We found that, whatever Americans for Fair Taxation’s intentions, there remains much confusion about the FairTax.
  
  
  AFT disputes our conclusion that the 23 percent number is misleading. We stand behind it. Sales taxes, as AFT notes, “are almost always expressed in an ‘exclusive’ manner,” which in our view makes 30 percent the logical figure to use when describing the FairTax.
  
  
  We don’t actually call the FairTax “regressive,” as AFT implies that we do. We reiterate, however, that those earning between $15,000 (or perhaps as much as about $24,000 – see our addition to the “Who Really Pays” portion of our article above) and $200,000 per year – virtually all middle-class Americans – would pay a higher share of the tax burden under this proposal. Those earning more would see their share drop, as even AFT economists admit.
  
  
  We did not ignore Americans for Fair Taxation’s research. Much of that research is publicly available and is listed among our sources. We do, however, approach all evidence with a healthy skepticism – including research that is funded by the very group whose claims we are investigating. Where possible we rely upon neutral sources, such as the bipartisan President’s Advisory Panel on Federal Tax Reform, and on opinions from third-party scholars from think tanks like the Brookings Institution and the Cato Institute.
  
  Sources
  
  Bachman, Paul, et al. "Taxing Sales Under the FairTax: What Rate Works?." Tax Analysts 13 Nov. 2006: 663-682.
  Boortz, Neal and John Linder. The FairTax Book. New York: Harper Collins, 2005.
  Edwards, Chris. "Options for Tax Reform." Policy Analysis 536 (2005): 1-44.
  FairTax. -1 2007. Americans for Fair Taxation. 22 May 2007.
  The Fair Tax Act of 2007 — H.R. 25 / S. 1025 Plain English Summary. -1 2007. Americans for Fair Taxation. 17 May 2007.
  Gale, William. "Comments on ‘Taxing Sales Under the Flat Tax’." American Enterprise Institute, Washington, DC. 28 Feb. 2007.
  Gale, William. "A Comparison of Income and Consumption Taxes." President’s Advisory Panel on Tax Reform, Washington, DC. 16 Feb. 2005.
  Gale, William G.. "The National Retail Sales Tax: What Would the Rate Have to Be?." Tax Analysts (2006): 889-911.
  Kotlikoff, Laurence. "Taxing Sales Under the FairTax: What Rate Works?." American Enterprise Institute, Washington, DC. 28 Feb. 2007.
  Linder, John. “The Fair Tax Act of 2005.” H.R. 25. Introduced 4 Jan. 2005.
  Office of Management and Budget. The Budget for Fiscal Year 2008, Historical Tables. Washington: GPO, 2007.
  President’s Advisory Panel on Federal Tax Reform. Final Report. Washington: GPO, 2005.
  Slemrod, Joel. "‘The Fairtax Book’ and ‘Flat Tax Revolution’: 1040EZ — Really, Really EZ." New York Times. 13 Nov. 2005.
  U.S. Retail Gasoline Prices. 21 May 2007. United States Department of Energy. 24 May 2007.
  
  http://www.factcheck.org/2007/05/uns...g-the-fairtax/
  
  
  

LOL!! These people are retards, MW. What you people who are fuzzy on your math don't seem to understand is $23 of $100 is $23 you owe the government, not $30. But hey, send in $30 if you want, but under the law of the FairTax it's $23 from every $100 in sales of new goods and services. The consumer gives you $100, you send in $23 in FairTax to the government on your monthly state sales tax form, not $30.

We don’t actually call the FairTax “regressive,” as AFT implies that we do. We reiterate, however, that those earning between $15,000 (or perhaps as much as about $24,000 – see our addition to the “Who Really Pays” portion of our article above) and $200,000 per year – virtually all middle-class Americans – would pay a higher share of the tax burden under this proposal. Those earning more would see their share drop, as even AFT economists admit.

Yeah, so what? I have no problem with that. There's a lot more people in the $15,000 to $200,000 range than in the $200,000 and above range so of course we're paying the bulk of the taxes, because there's more of us, why wouldn't we?

Someone who earns $15,000 a year and spends everything on new goods and services would pay $15,000 x 23% = $3,450.

Under the present income tax system, they're paying $15,000 x 8% payroll tax = $1,200. $13,800 after payroll tax x 10% income tax = $1,380 - $13,800 = $12,420. Now take their $12,420 x 23% embedded income taxes in all the products they buy = $2,856.60. So under the income tax system this person pays $1,200 + $1,380 + $2,856 = $6,456 in federal taxes including payroll, direct income tax and embedded income taxes in the products and services they purchase.

FairTax = $3,450 (Before Rebate)
Income Tax = $6,456 (Before Deductions)

It's pretty easy to see what system is best for the poor and middle class and it's not the income tax, it's the FairTax.

I should get a job checking Factcheck!! I didn't even need a graph or a chart either.

Originally Posted by Judy

LOL!! These people are retards, MW. What you people who are fuzzy on your math don't seem to understand is $23 of $100 is $23 you owe the government, not $30. But hey, send in $30 if you want, but under the law of the FairTax it's $23 from every $100 in sales of new goods and services. The consumer gives you $100, you send in $23 in FairTax to the government on your monthly state sales tax form, not $30.



Yeah, so what? I have no problem with that. There's a lot more people in the $15,000 to $200,000 range than in the $200,000 and above range so of course we're paying the bulk of the taxes, because there's more of us, why wouldn't we?

Someone who earns $15,000 a year and spends everything on new goods and services would pay $15,000 x 23% = $3,450.

Under the present income tax system, they're paying $15,000 x 8% payroll tax = $1,200. $13,800 after payroll tax x 10% income tax = $1,380 - $13,800 = $12,420. Now take their $12,420 x 23% embedded income taxes in all the products they buy = $2,856.60. So under the income tax system this person pays $1,200 + $1,380 + $2,856 = $6,456 in federal taxes including payroll, direct income tax and embedded income taxes in the products and services they purchase.

FairTax = $3,450 (Before Rebate)
Income Tax = $6,456 (Before Deductions)

It's pretty easy to see what system is best for the poor and middle class and it's not the income tax, it's the FairTax.

I should get a job checking Factcheck!! I didn't even need a graph or a chart either.

You're in denial. Perhaps you'll eventually catch on.

People who oppose the FairTax support the status quo on taxation, and they do so, because they realize an advantage from it, no different than the people who think illegal immigration is okay because it grows diaper sales and school revenue and/r saves 20 cents on the cost of a burger. It's a different issue, but an issue all the same because it is the result of the same underlying problem.

Originally Posted by Judy

People who oppose the FairTax support the status quo on taxation, and they do so, because they realize an advantage from it, no different than the people who think illegal immigration is okay because it grows diaper sales and school revenue and/r saves 20 cents on the cost of a burger. It's a different issue, but an issue all the same because it is the result of the same underlying problem.

Absolutely not true. Just because someone opposes the unfair tax plan doesn't mean they actually like our current system. It just means they can see through the unfair tax scam.

Originally Posted by MW

Absolutely not true. Just because someone opposes the unfair tax plan doesn't mean they actually like our current system. It just means they can see through the unfair tax scam.

There's absolutely nothing to see through. It's an inclusive national retail sales tax on new goods and services. The most transparent and easiest fairest tax system that's ever been proposed to the American People. So when people claim it's "unfair", or a "fraud", or a "scam", then you know without knowing anything else, they're Sheeple of the Anti-FairTax Lobby, which is the lobby for Democrats, Socialists, Globalists, Communists and ..... the Income Tax Industry.

It is your free choice to oppose the FairTax, MW, just as it's mine to support it.

Originally Posted by Judy

There's absolutely nothing to see through. It's an inclusive national retail sales tax on new goods and services. The most transparent and easiest fairest tax system that's ever been proposed to the American People. So when people claim it's "unfair", or a "fraud", or a "scam", then you know without knowing anything else, they're Sheeple of the Anti-FairTax Lobby, which is the lobby for Democrats, Socialists, Globalists, Communists and ..... the Income Tax Industry.

It is your free choice to oppose the FairTax, MW, just as it's mine to support it.

Wrong again. I'm no Sheeple, Democrat, Socialists, Globalists, or Communists. Furthermore, I'm not a member of the Anti-unFair tax Lobby. I suspect there are millions of others just like me.

Originally Posted by MW

Wrong again. I'm no Sheeple, Democrat, Socialists, Globalists, or Communists. Furthermore, I'm not a member of the Anti-unFair tax Lobby. I suspect there are millions of others just like me.

Then why do you post their garbage on this forum?

Originally Posted by Judy

Then why do you post their garbage on this forum?

Compared to what, the misleading and deceptive garbage you post?