The Fair Tax, for better or worse?

[wind_magic]

I see what you are saying Dan, but you know, I still like the fair tax idea for one big reason, and that is that it encourages savings. Right now the way our tax system is set up, the more money you make and the more you cut your expenses, the higher your tax bill is going to be. Under a fair tax type of system saving money is encouraged, because the less you spend, the less tax you pay. I like that. I know there are plenty of people out there who don't like that aspect of it because it encourages people to stop spending money and increases the savings rate, which for a consumer driven economy doesn't create nearly as many wage slaves, but I think its good. As it is the more money someone tries to save the more they end up giving to the government, it just isn't fair in the least to people who are trying to be responsible. It also gets rid of a lot of really distasteful tax events such as being taxed for leaving money to your family when you die, being taxed for giving large gifts of money to family members, etc. A lot of people really resent that kind of stuff.

[US27inKS]

Originally Posted by danjarch

Let me say that I don't think the basic setup of our current taxes are that bad, I think they do a good job of getting all people somewhat equally. This isn't to say that all the current rates are where they should be or evenly hitting all the different people fairly, but switching to one big sales tax would unfairly hit the middle class and poor while letting the wealthy get away with paying very little, conversely, continuing to raise the rates on the wealthy is allowing the poor and middle class to skip out on they're bill. So that's what I mean by the basic setup being a good one.

All that aside, we need to get rid of the thousands of loop holes that riddle the current system. We need to get rid of gimmicks like earned income credit. As I stated before, we need to stop taxing artificial persons and get rid of withholding. Those last two would focus public attention real quick. Since then all would have to write that check. No more believing that your not paying taxes.

Our current system is designed to allow fraud and corruption. If you take the time to clean out all of the favoritism and loopholes, politicians will add them back in just as fast.

Also I'll add for the benefit of ssneade, some of the other problems with the fair tax concept.

1. Demo/Lease sales. Since the fair tax is only charged for new retail items, an easy way to avoid a big bill is to sale the items at or near cost to a third party that is owned by the first party, then turn around and lease the item to the second party for a short time before selling the item used.

So rather then buy a $100,000 new boat and pay $35,000 in taxes, why not lease the boat for one year for $35,000 then purchase the boat for $85,000 for a total of $120,000, a net savings of $10,000. Meanwhile the wholly owned third party bought the boat for $40,000 from the manufacturer and made an additional $11,000 on top of the sale of the boat.

If the item is sold to a third party to be leased, sales tax is generated upon the sale. The lease co is free to lease the item for whatever they want, but the tax was paid when the item was sold to the lease co. Your example also assumes that there is a 60% profit margin on big ticket items such as boats. That margin does not exist.

Lets make the numbers a little more realistic: rather than buy a boat for $100,000 and pay $30,000 in taxes (the rate proposed by the fair tax), why not lease the boat for one year for $35,000 then purchase the boat for $85,000 for a total of $120,000, a net savings of $10,000. Meanwhile the wholly owned third party bought the boat for $80,000 and paid a tax of $24,000 on that purchase for a total of $104,000 investment. The wholly owned leasing company makes a total of $16,000 on the transaction, or they could just sell the boat for $100,000 and make $15,000 more than the $85,000 used boat sale price. I don't know any company that would assume the administrative costs, the risk, and the liability for only $1,000. In order to make the numbers work for the lease co. the used boat sale price would have to increase, making the deal less attractive to the buyer.

2. Sale/Delivery and set up. Another way to cheat the tax man would be to sale an item for cost or close to it then make up the difference on the delivery and setup charge. Room to Go already does a bit of this without the extra incentive.

So you go to buy a new matress, for the low price of $50 dollars, but you have to pay a $150 delivery fee for each matress. Oh you'll just pick them up your self, but then the catch, this is just the showroom, the only place you can pick them up in person is three counties over, and only open to the public from 10am to 3pm tuesday and thursday. Total that way is $217.50. It's either that or pay $175 at the competitor for a total of $236.25 with another $25 dollar delivery fee if you want it delivered.

There is sales tax due on the set up and deliver fee. The total after tax in this scheme would be $260, exactly the same as it would be if you chose to have the mattress delivered by the competitor.

3. Remanufactured and Used Products. The fair tax would create an artificial demand for used and remanufactured products, this would increase the price of both used and new products, Used products because the lack of sales tax makes them more attracktive and new products since demand for them would drop and so would the economies of scale.

Your washing machine breaks. You could buy a new one for $500 but that would mean $675 before local and state sales tax. Paying $350 for a repair doesn't seem so bad now. Even if the machine is totally gone, why pay the $675 when you can buy a remanufactured one for $500 and since it's used there are no taxes.

When I buy remanufactured items like an engine or transmission, they are taxed as new. This may be a bit sticky with the fair tax, but somewhere along the line, tax would have to be paid for the parts needed to remanufacture the item plus the labor involved as well. Used items would be in higher demand, and the price for them would go up, but as time goes by those used items would have had sales tax paid on them, and some of that tax paid would be recaptured when the used item is sold. This concept is outlined better at the fair tax web site.

This last one creates even more problems, like moral hazard, since the profit motive would encourage the remanufactures to not replace everything, there would be more electrical fires or other issues depending on the items remanutfactured. Then we get stuck with last years technology, since there would be a major incentive to just keep rebuilding what is already here rather then buy new stuff. So instead of getting newer, more efficent and better technology at our current rates, we'd really slow that down.

Not likely. There is already an incentive to not replace everything during remanufacture, since a "remanufactured" item may look the same from 2 different suppliers, it often is not. Marketplace competition quickly weeds out those rebuilders who cut corners.

So ssneade, you may be willing to ignore the law of unintended consiquinces but that doesn't make them go away. Are current system needs a good scrubbing and we need to change some of the underlying assumptions but it's actually a pretty good system and swapping it out for the fair tax would be trading one set of demons that we know for another and possibly worse set that we don't, and in my opinion will be much worse in the long run.

So then what would the unintended consequences of your suggestions be? If we asked everyone to write a check to the IRS quarterly, a huge industry would spring up that takes advantage of poor and lower middle class people who find themselves a little short when it comes time to pay that tax. More and more people would fall behind on their taxes, and the IRS audit and collections departments would swell. The interest and penalties charged by the IRS would be so large that congress would treat it as another reliable income stream. Once it becomes a reliable income stream for congress to spend, congress will not fix it for fear of having to find another source of income to replace it.

You say that the fair tax will place a higher burden on the middle class, but advocate elimination of corporate taxes. The middle class is already paying a high percentage of the total tax bill through corporate taxes that are included in the products we buy. If corporate taxes are eliminated, the tax rate on the middle class must go up. There simply are not enough rich people to make up the difference, even if we tax them at 90%.

[danjarch]

Originally Posted by US27inKS

Our current system is designed to allow fraud and corruption. If you take the time to clean out all of the favoritism and loopholes, politicians will add them back in just as fast.

No it's not, any system can and will be corrupted, and that what our's has become.



If the item is sold to a third party to be leased, sales tax is generated upon the sale. The lease co is free to lease the item for whatever they want, but the tax was paid when the item was sold to the lease co. Your example also assumes that there is a 60% profit margin on big ticket items such as boats. That margin does not exist.

Lets make the numbers a little more realistic: rather than buy a boat for $100,000 and pay $30,000 in taxes (the rate proposed by the fair tax), why not lease the boat for one year for $35,000 then purchase the boat for $85,000 for a total of $120,000, a net savings of $10,000. Meanwhile the wholly owned third party bought the boat for $80,000 and paid a tax of $24,000 on that purchase for a total of $104,000 investment. The wholly owned leasing company makes a total of $16,000 on the transaction, or they could just sell the boat for $100,000 and make $15,000 more than the $85,000 used boat sale price. I don't know any company that would assume the administrative costs, the risk, and the liability for only $1,000. In order to make the numbers work for the lease co. the used boat sale price would have to increase, making the deal less attractive to the buyer.

The cost of building the boat is different then the total cost of saleing the boat. There is marketing, shipping, dealer overhead and other costs that could be considered to fall under services rather then retail. So the manufacturer could sell the boat for far less and basically run at just a small profit since the leasing side would be the real profit maker. In essence the taxes would be paid on the $40,000 so they would be pay $14,000 in stead of $35,000. You got to realize that the boat makers want to sale boats, and won't just sit back and watch their sales go to crap to pay their fair share of taxes. Since the two companies are owned by the same people then the goal is to maximise the profits from the combined companies.



There is sales tax due on the set up and deliver fee. The total after tax in this scheme would be $260, exactly the same as it would be if you chose to have the mattress delivered by the competitor.

No those are services, so no tax.



When I buy remanufactured items like an engine or transmission, they are taxed as new. This may be a bit sticky with the fair tax, but somewhere along the line, tax would have to be paid for the parts needed to remanufacture the item plus the labor involved as well. Used items would be in higher demand, and the price for them would go up, but as time goes by those used items would have had sales tax paid on them, and some of that tax paid would be recaptured when the used item is sold. This concept is outlined better at the fair tax web site.



Not likely. There is already an incentive to not replace everything during remanufacture, since a "remanufactured" item may look the same from 2 different suppliers, it often is not. Marketplace competition quickly weeds out those rebuilders who cut corners.

But your not counting on the increased demand for used and rebuilt items. And the parts would be purchased by the remanufacturer as the end user and the rebuild billed as a service. That's the same problem we have now. If we could trust every body to report their real business expenses then we would have thousands of laws on what is and isn't a business expense and what must be reported.



So then what would the unintended consequences ofyour suggestions be? If we asked everyone to write a check to the IRS quarterly, a huge industry would spring up that takes advantage of poor and lower middle class people who find themselves a little short when it comes time to pay that tax. More and more people would fall behind on their taxes, and the IRS audit and collections departments would swell. The interest and penalties charged by the IRS would be so large that congress would treat it as another reliable income stream. Once it becomes a reliable income stream for congress to spend, congress will not fix it for fear of having to find another source of income to replace it.

You say that the fair tax will place a higher burden on the middle class, but advocate elimination of corporate taxes. The middle class is already paying a high percentage of the total tax bill through corporate taxes that are included in the products we buy. If corporate taxes are eliminated, the tax rate on the middle class must go up. There simply are not enough rich people to make up the difference, even if we tax them at 90%.

You agree that the middle class is already paying the bulk of the corporate taxes, so why would you oppose making this transparent. I'm not advocating raising any new taxes, I'm just more inclined to support cleaning up the existing system. Making it more transparent and reasonable. This will also lower the cost of preparing and filing taxes in general.

As to the middle class, this would encourage savign since you would know your going to have to write a big check every three months. This would be the same for the poor. Even now most of the poor are poor because they don't think ahead or curb their imediate desires. This changes nothing in that regaurd and I don't think the aurgument that we should keep hiding the real tax burden from the majorty to keep the poor from getting in trouble, has much merit.

You can also add in that making all those taxes transparent would bring more honsety in other discousions. How do you think talks about making medicare more like an insurance plan with co-pays and deductibles would go now versus if those grandparents were hearing how much it really cost their children and grand kids in taxes. The whole system right now runs on the illusion that most aren't getting hit pretty hard already. It's taking out of their checks a couple bucks at a time, it's paid at the register or in the monthly payment.

Windy, I agree with the idea that we need to have more savings, but the local and state sales tax takes care of that right now. Ultimately, as PB said before, we've got a spending problem not a revenue problem. This also goes back to my own opinion that the federal government is doing to much and we need to give more power back to the states, who do get more of their money through sales and property tax. So that hardworking man wouldn't be paying as much. But that's a whole other set of issues. I'm trying to stay on topic, and that's how the fair tax compares to our current taxes. And I don't think it compares very favorably.

[US27inKS]

No it's not, any system can and will be corrupted, and that what our's has become.

I'll bet I can go back and find loopholes and political payback in the very first tax bill after the 16th amendment was passed. I don't have time to look right now, but if you would like me to, I will.

The cost of building the boat is different then the total cost of saleing the boat. There is marketing, shipping, dealer overhead and other costs that could be considered to fall under services rather then retail. So the manufacturer could sell the boat for far less and basically run at just a small profit since the leasing side would be the real profit maker. In essence the taxes would be paid on the $40,000 so they would be pay $14,000 in stead of $35,000. You got to realize that the boat makers want to sale boats, and won't just sit back and watch their sales go to crap to pay their fair share of taxes. Since the two companies are owned by the same people then the goal is to maximise the profits from the combined companies.

OK, so lets look at something much more common, a car. Much easier to find financial statements for too. Last year Ford made a gross profit (direct cost of goods sold, no marketing or admin) of 17% (a pretty average GP% even if sales are down GP% remains fairly stable), no where near the 60% you used in your example and even less than the 20% that I used. I doubt that I need to run the numbers again for you with a 17% GP. Your example doesn't hold up.

No those are services, so no tax.

Apparently you have not read the Fair Tax plan.

You agree that the middle class is already paying the bulk of the corporate taxes, so why would you oppose making this transparent. I'm not advocating raising any new taxes, I'm just more inclined to support cleaning up the existing system. Making it more transparent and reasonable. This will also lower the cost of preparing and filing taxes in general.

I don't oppose making this transparent. The fair tax is very transparent. There is no corporate tax under the fair tax. There are also no capital gains taxes, no other federal taxes. So instead of the very wealthy paying a maximum of 15% on capital gains and dividend income (the vast majority of income for the very wealthy) they would pay an effective rate of 23% (or 30% depending on which end of the equation you're working from). Additionally, the poor would pay no tax unlike the hidden taxes they pay now. Since the Fair Tax has a tax "prebate" feature that every citizen receives, the less you make, the less taxes you pay all the way down to $0.

The cost of preparing taxes will become $0 under the fair tax for the average citizen. Businesses will have to pay sales tax like we do now just at a higher rate, and since most of us already use an accountant for this, our costs would go down since there would be no more corporate or individual tax return to file.

As to the middle class, this would encourage savign since you would know your going to have to write a big check every three months. This would be the same for the poor. Even now most of the poor are poor because they don't think ahead or curb their imediate desires. This changes nothing in that regaurd and I don't think the aurgument that we should keep hiding the real tax burden from the majorty to keep the poor from getting in trouble, has much merit.

The Fair Tax plan would encourage saving even more because there is no tax paid until you purchase goods or services. The only savings change that would happen if we wrote a check every three months would be for writing that check. Short term savings to pay taxes are not really savings at all.

You can also add in that making all those taxes transparent would bring more honsety in other discousions. How do you think talks about making medicare more like an insurance plan with co-pays and deductibles would go now versus if those grandparents were hearing how much it really cost their children and grand kids in taxes. The whole system right now runs on the illusion that most aren't getting hit pretty hard already. It's taking out of their checks a couple bucks at a time, it's paid at the register or in the monthly payment.

How do you think those discussions would be going if those grandparents were looking at paying a higher sales tax at the register? I know that if I were reminded several times a day that our politicians were taking 30% of my money, I would watch them very closely.

[danjarch]

Originally Posted by US27inKS

I'll bet I can go back and find loopholes and political payback in the very first tax bill after the 16th amendment was passed. I don't have time to look right now, but if you would like me to, I will.

No need, I believe you.



OK, so lets look at something much more common, a car. Much easier to find financial statements for too. Last year Ford made a gross profit (direct cost of goods sold, no marketing or admin) of 17% (a pretty average GP% even if sales are down GP% remains fairly stable), no where near the 60% you used in your example and even less than the 20% that I used. I doubt that I need to run the numbers again for you with a 17% GP. Your example doesn't hold up.

I didn't use cars, because there not an average item. Better comparisons would be TVs, dishwashers, or furniture.



Apparently you have not read the Fair Tax plan.

Actually, I would say the opposite. I have yet to see a proposal that tries to tax services. They all focus on goods.



I don't oppose making this transparent. The fair tax is very transparent. There is no corporate tax under the fair tax. There are also no capital gains taxes, no other federal taxes. So instead of the very wealthy paying a maximum of 15% on capital gains and dividend income (the vast majority of income for the very wealthy) they would pay an effective rate of 23% (or 30% depending on which end of the equation you're working from). Additionally, the poor would pay no tax unlike the hidden taxes they pay now. Since the Fair Tax has a tax "prebate" feature that every citizen receives, the less you make, the less taxes you pay all the way down to $0.

The wealthy don't spend anywhere near as much income on goods or services as the average man. The wealthy will wind up paying that rate on well less then half their earnings and squirrel away the rest.

The cost of preparing taxes will become $0 under the fair tax for the average citizen. Businesses will have to pay sales tax like we do now just at a higher rate, and since most of us already use an accountant for this, our costs would go down since there would be no more corporate or individual tax return to file.

This is untrue, to say it nicely. Since all those artificial persons that we discussed before will in fact spend big sums to comply with the new laws, including all the money that would be spent to avoid taxes, and since we've already admitted that those artificial persons don't really exist and therefore can't really pay taxes, puts you right back to John Q. Public footing the bill for all those accountants and tax lawyers.



The Fair Tax plan would encourage saving even more because there is no tax paid until you purchase goods or services. The only savings change that would happen if we wrote a check every three months would be for writing that check. Short term savings to pay taxes are not really savings at all.

But your over looking the market manipulation in your own argument. Yes people who had any left after buying what they needed for life would save more, and more, to avoid the taxes. Until there was a huge split between those who made enough to save and those who were caught in sales tax induced poverty. This gets back into the failed idea that the government should be trying to force people to behave in one way or the other. It only results in artificially distorted behavour.



How do you think those discussions would be going if those grandparents were looking at paying a higher sales tax at the register? I know that if I were reminded several times a day that our politicians were taking 30% of my money, I would watch them very closely.

Same as they are now since again you'll be hiding the bulk of the taxes in other places. So instead of looking at high bill for Medicare taxes, you could easily spin it so the blame is on the manufactures or the stores, those greedy Bastards.

[Stillraining]

Originally Posted by PBzeer

The whole problem with trying to discuss taxes is that it's about a whole lot more than revenue.

In a business, you adjust your spending to your revenue. In government, they adjust to to whatever they want, then try to find revenue ..... or just print more money and/or sell more debt.

When the entire budget process is irrational, why would one expect taxes to be rational?

Excellent point ..and a problem that will not change no mater how they collect it.

My business has been hanging by a thread for a year and a half now..My spending has all but stopped and I'm definitely not increasing my debt loads as government is..even as like yesterday helping a friend out buy offering to do his little 5 hour job for free...which he would not except and paid me for my fuel + a little bit....we are making due with broken stuff and doing without but still willing to lend a helping hand if we can...Our Government needs to be run the same way...yes there needs to be a surplus to help people in need but not a surplus for every whim.

[US27inKS]

I didn't use cars, because there not an average item. Better comparisons would be TVs, dishwashers, or furniture.

But a $100K boat was common enough?

Actually, I would say the opposite. I have yet to see a proposal that tries to tax services. They all focus on goods.

From HR25 (the Fair Tax plan) under section 2 "definitions"

`(A) IN GENERAL- A taxable property or service is used to produce, provide, render, or sell a taxable property or service if such property or service is purchased by a person engaged in a trade or business for the purpose of employing or using such taxable property or service in the production, provision, rendering, or sale of other taxable property or services in the ordinary course of that trade or business.

My business sells parts and service, both are taxed currently.

The wealthy don't spend anywhere near as much income on goods or services as the average man. The wealthy will wind up paying that rate on well less then half their earnings and squirrel away the rest.

As opposed to our current system where the wealthy don't pay any tax on their investments, and only 15% on what they pull out to live on.

This is untrue, to say it nicely. Since all those artificial persons that we discussed before will in fact spend big sums to comply with the new laws, including all the money that would be spent to avoid taxes, and since we've already admitted that those artificial persons don't really exist and therefore can't really pay taxes, puts you right back to John Q. Public footing the bill for all those accountants and tax lawyers.

Big sums to comply with the new laws? Large corporations already have accountants and tax lawyers on staff, and their cost is already built into product prices. Since there will no longer be corporate or individual tax returns, there will be LESS need for the tax attorneys. I pay my sales tax online, and I wouldn't expect that to change. The online form that I fill out includes my total sales, and deducts any non taxable sales that were made. The result is multiplied by the tax rate, and that's how much I pay. No tax attorney required. I would expect no changes in this since the fair tax uses the states sales tax mechanism to collect the taxes.

But your over looking the market manipulation in your own argument. Yes people who had any left after buying what they needed for life would save more, and more, to avoid the taxes. Until there was a huge split between those who made enough to save and those who were caught in sales tax induced poverty. This gets back into the failed idea that the government should be trying to force people to behave in one way or the other. It only results in artificially distorted behavour.

Sales tax induced poverty??? How is not taking taxes out of someone's paycheck, plus sending them money in an amount that equals the sales tax that would be paid on purchases equal to poverty level income, going to "induce poverty"? People who pay no income tax now still pay hidden taxes. The fair tax removes the hidden taxes, plus pre pays their expected taxes for them, which makes their taxes truly $0 instead of some unknown hidden tax amount.

[US27inKS]

Originally Posted by danjarch

Same as they are now since again you'll be hiding the bulk of the taxes in other places. So instead of looking at high bill for Medicare taxes, you could easily spin it so the blame is on the manufactures or the stores, those greedy Bastards.

Hiding the bulk of the taxes in other places? You do realize that all withholding taxes collected, no matter what the stated purpose, go to the same general fund don't you? How could you blame a manufacturer or store for high taxes on an item? No one blames me for the sales tax on their bill, why would that change? It's not like the fair tax is going to be hidden in the cost of an item, it will be added on at the time of purchase. You'll know exactly how much the feds are taking and how much the manufacturer or store is getting. This doesn't make sense to me.

[ssneade]

Originally Posted by US27inKS

Lets make the numbers a little more realistic: rather than buy a boat for $100,000 and pay $30,000 in taxes (the rate proposed by the fair tax), why not lease the boat for one year for $35,000 then purchase the boat for $85,000 for a total of $120,000, a net savings of $10,000. Meanwhile the wholly owned third party bought the boat for $80,000 and paid a tax of $24,000 on that purchase for a total of $104,000 investment. The wholly owned leasing company makes a total of $16,000 on the transaction, or they could just sell the boat for $100,000 and make $15,000 more than the $85,000 used boat sale price. I don't know any company that would assume the administrative costs, the risk, and the liability for only $1,000. In order to make the numbers work for the lease co. the used boat sale price would have to increase, making the deal less attractive to the buyer.

actually the proposed tax is only 23% rather than 30%. a huge misconception put out by the left and other opponents of the fair tax...



There is sales tax due on the set up and deliver fee. The total after tax in this scheme would be $260, exactly the same as it would be if you chose to have the mattress delivered by the competitor.

absolutely correct.....

When I buy remanufactured items like an engine or transmission, they are taxed as new. This may be a bit sticky with the fair tax, but somewhere along the line, tax would have to be paid for the parts needed to remanufacture the item plus the labor involved as well. Used items would be in higher demand, and the price for them would go up, but as time goes by those used items would have had sales tax paid on them, and some of that tax paid would be recaptured when the used item is sold. This concept is outlined better at the fair tax web site.

all items sold at a retail business would be subject to taxation.....


You say that the fair tax will place a higher burden on the middle class, but advocate elimination of corporate taxes. The middle class is already paying a high percentage of the total tax bill through corporate taxes that are included in the products we buy. If corporate taxes are eliminated, the tax rate on the middle class must go up. There simply are not enough rich people to make up the difference, even if we tax them at 90%.

pretty much sums it up.....

[ssneade]

Originally Posted by danjarch

Windy, I agree with the idea that we need to have more savings, but the local and state sales tax takes care of that right now. Ultimately, as PB said before, we've got a spending problem not a revenue problem. This also goes back to my own opinion that the federal government is doing to much and we need to give more power back to the states, who do get more of their money through sales and property tax. So that hardworking man wouldn't be paying as much. But that's a whole other set of issues. I'm trying to stay on topic, and that's how the fair tax compares to our current taxes. And I don't think it compares very favorably.

this is exactly what the fair tax does, dan. that is the MAIN reason so many politicians are against it. they, for the most part are so power and control hungry they would sell their grandmother to the highest bidder. of course they're gonna talk down anything that could even remotely limit their power.....

the fair tax is probably the least corruptible proposal of change to date. that would really be change i could believe in.....