Here's the latest on former Godfather's Pizza CEO and presidential candidate Herman Cain. He is in favor of a 30% sales tax.
Yup, he wants to eliminate the income tax and replace it with a the sales tax. This is called the "Fair Tax". It is not clear who would actually pay the sales tax, it would probably depend on elasticities of various items and the ability to "pass through the tax", this is about as fair as pepperoni pizza without cheese.
I don't think Wassily Leontief would be able to figure out the who, how and where of such a tax.
That said, serious tax reform is about freezing the current system and reducing taxes from here, not some new tax system, which distorts the economy in some new way and creates new give away programs. (Fair Tax supporters want to institute a national rebate equal to the tax rate on a poverty level income) and almost always raises taxes.
Bottom line: There is nothing fair about the Fair Tax. It is a complex tax that will appear simple to simple minds.
I've read the Fair Tax books. What about it is so insidious?
ReplyDeleteEliminating the IRS (and stripping the Gov from skipping off our paychecks) is the moral thing to do. The sales tax is the natural alternative. To specify only at final bill of sale (as opposed to VAT) and only then on new goods (used cars would cost sticker price + ST taxes) would tax proportionate to income.
The rebate was included so that the FairTax bill would just replace the method of our payment, and not change entitlements at the same time (battle for another day). When everyone sees how much they have to pay to support the gov on their receipt at checkout everyday, we might then get the spending reductions our economy needs!
I’m interested in more of your thoughts and criticism of the Fair Tax. I’ve read the Fair Tax material, and I agree it is complex. The only way I would ever support the Fair Tax is if it is combined with the elimination of income taxes, which means repealing the 16th amendment to the US Constitution. I am opposed to the income tax on moral and principled grounds. I hate the presumption of guilt by the IRS.
ReplyDeleteI think repealing the 16th amendment is necessary. I would rather the Federal Government tax the States in proportion to their population and let the States decide how they will go about taxing their residents.
Bob, I think you are mis-characterizing the Fair Tax proposal a bit. It's not all that complex. The idea is to replace *all* federal taxes with a single retail sales tax.
ReplyDeleteSo eliminate personal income taxes, corporate income taxes, medicare taxes, social security taxes, capital gains taxes, gift taxes, estate taxes, etc. Instead of all that, it would be a single sales tax on new retail goods and services purchased by consumers (23% inclusive, 30% exclusive). The tax would be collected by the merchants who collect sales tax anyways (in most states). The taxes collected would be handed over to the state, and then from the state to the feds.
The main advantage is that the tax is very visible to the taxpayer. The taxpayer buys a hamburger for $6.99 and sees that the Fed's take on his purchase is $2.10. There's no mumbo-jumbo about splitting the tax burden amongst a hundred different taxes over different time periods. Fair *Tax supporters like this because it would make it very hard for politicians to raise taxes.* It would be immediately visible to everyone, who would theoretically "throw the bums out."
Another advantage is that the states get their hands on the money first. This gives them more leverage over the federal government. From an anarcho-capitalist perspective, I'd rather have 51 governments fighting each other than one ruling them all.
Of course, there are other issues. In no particular order:
One, If you tax only new products and services, that would create a sizable incentive to buy used goods.
Two, The pre-bate idea would require some sort of monthly check/debit card issuance. It would be like the food stamp debit cards expanded to all households. Of course, something like 45 million Americans use those anyways, so it may not be that big a difference.
Three, it would be a boon to those who are upset that illegal immigrants and criminals don't pay taxes. As it is a tax on consumption, they will be taxed whenever they buy retail goods and services.
Four, you'll hear the quote often that "you get to keep your whole paycheck" because there is no tax withholding. Many Fair Tax supporters think wages will rise to their gross pay now. I think it much more likely that wages will fall to their current net levels. This will allow the firm to sell its goods and services cheaper, with the final consumption good/service being the same price after the Fair Tax is applied.
Five, there are no exceptions to the Fair Tax. If it's a new good or service, it gets taxed. This adds to the simplification.
Six, the biggest threat to the whole idea is if it were turned into a VAT or if the other taxes were not repealed and the Fair Tax were levied in addition to existing taxes.
Seven, as a tax on consumption, it is somewhat optional. Within wide ranges, you have a choice as to how much you consume. Hypothetically you could grow your own food, buy only used goods, and never pay any federal taxes.
Anyways, you can argue that the market shifting effects are good or bad (it is a tax after all). You can also argue whether it's fair or not. But I think that even with the above issues, it is light years simpler than the millions of pages of tax code we have now.
Any tax scheme is a system of wealth confiscation and redistribution. A tax scheme by any other name is still a tax scheme.
ReplyDelete@Neal McSpadden: You have to recognize that the "Fairtax" is also designed to replace ALL the revenue currently being generated by all of the taxes you list. Therefore the "Fairtax," before anything else it may be, is designed to keep the federal government unconstitutionally large and out of control. This is hardly something to get all giddy about.
ReplyDeleteAs far as I can tell, the only real advantage is simplification.
Neal, What makes it complex is what Bastiat referred to as "that which is not seen" or what is commonly called "unintended consequences." What you have listed are the obvious implications of the fair tax. As Wenzel pointed out, the fair tax would cause distortions as current taxes do, but they would be a heretofore unheard of type.
ReplyDeleteIt's fallacious to think of the economy in aggregates instead of in terms of billions of individuals with unique valuations interacting to increase their own state of affairs.
Anon 11:14, I agree that dismantling the IRS is the moral thing to do, but I do not see how replacing it with an alternative form of theft is "the natural alternative." How about the complete elimination of the institution of taxation, as Wenzel suggests?
The flat tax will not reduce paperwork. It will not simplify anything. It will turn every business into a tax collector and make it easier to raise even more taxes and eliminate loopholes to escape paying.
ReplyDeleteWe must concentrate on reducing and eliminating current taxes not instituting new ones, especially one that make the government more efficient.
This "pre-bate" stuff sounds like code for a negative income tax, something which Murray Rothbard comprehensively debunked, along with other Friedmanite schemes.
ReplyDeleteDoes anyone really believe the income tax would go away if the Fair Tax was enacted? Please read Laurence Vance's archives at LRC (http://www.lewrockwell.com/vance/vance-arch.html) or Mises.org (http://mises.org/articles.aspx?AuthorId=260) if you want a good overview about why the Fair Tax is a bad idea.
ReplyDeleteAny talk about changing the tax system without addressing spending will never be the answer. Politicians only bring up the Fiar Tax to distract voters from the fundamental issue in Washington - the government spends way too much money and is way too big.
I don't like the name "FairTax" because the reality is that no tax is fair. I am no fan of Herman Cain. I see him as little more than a Koch funded Fed stooge, but I would take sales tax over income tax. Of course, all of this tax talk is meaningless without cutting spending, which I don't see happening.
ReplyDeleteHow do we pay for the cost of government if we eliminate federal taxes altogether as some here have suggested? I realize that seriously downsizing the federal government is the goal, and one that I heartily endorse, but if we get rid of all federal taxes, how do we pay for whatever government is left?
ReplyDeleteJust a clarification. Costs don't get passed onto consumers in the form of higher prices. The higher cost puts the marginal sellers out of business and the reduced supply raises prices.
ReplyDelete"but if we get rid of all federal taxes, how do we pay for whatever government is left?"
ReplyDeleteThere will be none left, which is the point. There is no reason to have a federal government (or any government for that matter).
Anon 1:16, "How about the complete elimination of the institution of taxation, as Wenzel suggests?"
ReplyDeleteAnarchy is a tough sell. IMO, there must be law and order, which predicates an organizational body, e.g. government.
Anonymous said... "...there must be law and order, which predicates an organizational body, e.g. government."
ReplyDeleteHAHA, as if we have law and order now?
Currently we've only got arbitrary rule of men.
The tough sell is getting People to realize they are not a free People.
@Neal... could u spare $10 for a hamburger?
ReplyDeleteAll taxes are, in effect, consumption taxes. The only difference is how they are calculated and implemented. As Robert said, it would create a new system with new incentives (and presumably, new loopholes). Its likely that the politically connected would find those loopholes first and profit from them first, before they are closed off for everyone, which in the end would likely lead to more taxes being collected than now are. Effectively, this is an opportunity for a money-grab. This would only be a solution if you see the country's economic problem as only a problem for the govt, and not for the people it taxes.
Involuntary taxation is theft. Calling one scheme the 'Fair Tax' does not undo that fact. All this would do is create a new system with new exploitations, and delay any return to a system that is 'fair' in reality, and not just name.
I agree with Bob that the Fair Tax is far from fair, and we would best work towards reducing spending. Here is what I would require to support a "Fair Tax":
ReplyDelete1 Repeal 16th Amendment, IRS, and all federal taxes.
2 End the Fed.
3 Only tax new products. Taxing used goods would be double taxation. No taxes on services.
4 No rebates or prebates. Minnesota (where I live) is high taxes, but we do have one thing right. There are no taxes on food or clothes. All of the necessities for life should be tax exempt: food, clothing and shelter. This should quite and complaints for the poor as only wants are taxed. This also gets rid of the wealth redistribution that comes with a rebate.
5 An amendment that spending can not exceed revenues.
6 A amendment that the rate starts at 30% and goes to 10% after 10-20 years.
From there we could easily end the "Fair Tax"!!
Does no one remember Ron Paul talking about the effects of abolishing the income tax in 2007?
ReplyDeleteGet rid of IRS; get rid of income tax; get rid of spending
Q: You have been saying on the campaign stump, “I’d like to get rid of the IRS. I want to get rid of the income tax.” Abolish it?
A: That’s a good idea. I like that idea.
Q: What would happen to all those lost revenues? How would we fund our government?
A: We have to cut spending. You can’t get rid of the income tax if you don’t get rid of some spending. But, you know, if you got rid of the income tax today you’d have about as much revenue as we had 10 years ago, and the size of government wasn’t all that bad 10 years ago. There’re sources of revenues other than the income tax. You have tariff, excise taxes, user fees, highway fees. So, so there’s still a lot of money. But the real problem is spending. But, you know, we lived a long time in this country without an income tax. Up until 1913 we didn’t have it.
Q: But if you eliminate the income tax, do you know how much lost revenue that would be?
A: A lot.
Q: Over a trillion dollars.
A: That’s good.
Source: Meet the Press: 2007 “Meet the Candidates” series Dec 23, 2007
"Anarchy is a tough sell. IMO, there must be law and order, which predicates an organizational body, e.g. government."
ReplyDeletehttp://en.wikipedia.org/wiki/Polycentric_law
Law can be implemented by competing private firms, as it has been in the past.
Order, such as defense and security, may be provided by competing private security or insurance firms, as it is in many places right now (much more successfully than state police I might add)
A much easier way to make the cost of government visible to taxpayers would be to repeal the "temporary" tax withholding by employers that was instituted during WWII. Make everyone who owes any federal taxes (income, SS, Medicare) write one check on April 15. Should only take one iteration of that to make people aware of the cost of government.
ReplyDeleteCain is merely mimicking his radio station colleague and part time, principled libertarian, Neal Boortz. The Fair Tax has been Neal's love child for years. Cain just raised the ante to 30% from Neal's 23%. Most likely because there was not enough to cover neocon Cain's government program of choice. I do not often listen to the Boortz program or "Neal's Snooze" as I prefer to call it. It has become largely insignificant and rife with personal fluff. I do however, recall a listener phoning in with a concern about government simply being able to increase the percentage of the Fair Tax whenever it needed more spending money. Neal's solution was for Americans to stand vigilant and oppose such despots. As if that has ever happened in the almost 100 year history of the FED and the income tax.
ReplyDeleteTaxation is slavery. Fair Tax, therefore, means fair slavery, an oyymoron.
ReplyDeleteHaving said that, it is lightyears better than the current system for the taxpayer.
The downside is it continues to give this "government" (mafia) way more money than it deserves (which is 0%).
This government should not get another penny until it does only what it is supposed to do and nothing else. Since that will never happen, they are in a state of breach of contract with the citizens of America and should not get any more of our money no matter what tax scheme it would confiscate it through.
Shut this evil government down then let freedom ring. Only that will save what's left of America and the rest of the world.
The federal income tax, if properly applied, is a benign tax on federal revenue taxable privileged activities. Its reach is constitutionally limited to "income" from federal investments of "whatever source". There is also a federal employment social welfare tax. The tax does not properly reach to the private for profit activities of most Americans.
ReplyDeleteThe Sixteenth Amendment merely closed a loophole in the Pollack Supreme CT cases that had excluded income derived from rents and dividends on federal properties and federal corporations such as railroads chartered in the territories. The Supreme ct ruled over and over that the income tax was an excise tax, not a direct tax on property.
If libertarians would only learn some economic history and realize the limited and benign nature of the federal income tax by reading the statutes themselves we could sidestep this whole issue by putting the income tax back into its constitutional box.
I empathize with those who disdain taxes of any kind. And, of course, spending has to be drastically reduced. But that isn’t a reason to support the status quo on taxes. Wouldn’t replacing of the IRS with a national sales tax make it harder for pols to pick winners and losers by manipulating the tax code? And wouldn’t it make more sense to tax consumption rather than savings, investment, and employment?
ReplyDeleteJust another tax and bait and switch. Yah we will destroy the income tax after the sales tax is fully implemented. Then the Democrats will take control and decide to keep both. The uni-party at its finest. Everyone and their brother knows the income tax is unconstitutional and yet we keep paying it. But hey whats new when you consider American's now allow their wives to be grappled and viewed naked by government thugs in TSA uniforms. And what have the brave and free done now that the Supreme Court has given law enforcement thugs the right to bash your door down without a warrant? We're a coward lot, but I don't think it going to continue. See people have a lot less to lose as tyranny becomes more an more defacto. Newtons physical laws and Le-Chatliers principle mean that an equilibrium where forces come to check new ones will occur, but the aftermath may be bloody and destructive both for the elite power hogs and us the dogs of the American empire. I for one am starting to wonder why I even bother feeling so scared of the IRS, seriously I don't have a lot to lose anymore. I know the IRS seems to want to turn the tables when a man is on bad luck and steal from his neighbor to give to a guy like me, but yah know what I don't want any of their filthy whore money and Earned Income Credits. I know I'm a rarity a guy who would ideally believes the same whether rich or poor, but it really comes to a mind of survival now for me. I can sell my soul to these whores of mammon or I can die with dignity and I'll choose the latter anyday. The answer is very simple people, stop paying your income taxes. This government can't stop you if you only do what is right in your hearts, you know the whole things need to come down like the towers of Babel, but still you fund it while it fondles your daughters and wives. Stand for what is right even if it means your own demise, better to enter heaven with no land, then enter not at all and God wants you to stick up for righteous even at your own loss. --Nothing to lose, Freedom to Gain
ReplyDeleteI'm sure there a problems with the Fair Tax or Consumption Tax, but I'd like the CHOICE to pay taxes instead of being forced to pay them because I earn a paycheck or interest or make a profit.
ReplyDeleteNeil Bortz said in his Fair Tax Book that the Fair Tax was about a better tax system, NOT about reducing goobermint spending, which is another topic completely.
I don't mind paying my share of a reasonable tax load, but I want the effin goobermint leaders to balance the effin budget so they don't ruin our currency and make it worthless which is what it seems they WANT to do. I just do not see how it would be possible to be stupid enough to keep spending money we don't have until we are $14,000,000,000,000 in debt - it HAS TO BE an intentional plan to destroy our currency. Probably so they can put in place a new world currency; possibly even a new world goobermint. I cannot even type what the rotten bastiges leading our goobermint deserve without being thrown in jail. But you KNOW what I'm thinking.
To all those who responded, I understand perfectly well that taxes have consequences, both intended and unintended. And I agree that government is too big, and that the fair tax doesn't address that. Fair tax supporters make the point, validly I think, that stopping growth is the first step. Reduction would come next.
ReplyDeleteYes, it's exploitation by the government, band of thieves writ large, etc etc. I was just trying to point out that it is far simpler than the current tax regime.