Re: FairTax FAQ

""Given that people spend different amounts and earn different amounts,
how
can
you possibly equate an income tax rate to a sales tax rate? One is the
ration
of taxes to earnings, and the other is the ratio of taxes to purchases.
There
is no common denominator. Therefore, the only way to perform such
comparisons
is to give a few hypothetical case studies, which they done. Now, it's
perfectly legitimate to question those case studies, and I have many
questions
about them. But there's nothing flawed in the notion that the two rates
cannot
be directly compared. They simply cannot.
""

First: Then what's the point of trying to market an RST on the basis of
the supposed tax rate that would be imposed?

Second: Then why even try to gin up the argument that income taxes are
"embedded" in the prices of goods & services if you cannot get any useful
comparative work out of that concept? The whole point of the "embedded"
argument seemed to be that (a) the actual economic burden of taxes that
each person bears does not correspond to the check s/he writes to Uncle
Sugar each year, and (b) that actual economic burden is in fact the
functional equivalent of a retail sales tax imposed at a rate of x%(choose
your flavor of the minute for suggested rates on a tax-exclusive basis).

Which way is it? Either the "embedding" concept bears some sort of
deterministic characteristics which will allow me to determine my actual
economic burden and compare that to my actual economic burden under an
RST, or it won't. If it won't then it's merely smoke-and-mirrors that's
being used to disguise the true effects of changing from an income tax to
a sales tax.

Next, if one wants to talk about apples and oranges, then comparing an RST
imposed at a statutory rate of x% against the economic effects of
"embedded" income taxes is also disengenuous. There is no special magic
about an RST that means that it will not also be subject to the
cost-shifting that underlies the "embedded" concept, in which case one
should be comparing the economic effects of "embedded" sales taxes with
those of "embedded" income taxes instead of comparing the apple of
"embedded" income taxes with the orange of an RST imposed at x%.

If a sales tax and an income tax really are so incomparable, then all your
evangelism amounts to nothing more than saying "trust us, it'll be good
for you; trust us, you'll like it; we can't tell you how or why, but trust
us, we know what's best for you."

Which brings up a third point: At the end of the day, what matters is not
the absolute dollar amount, but the relative changes that would occur. In
other words, if, under an income tax, my annual income is $20,000 and the
total cost of my annual purchase of consumables is $10,000 whereas under
an RST my annual income is $16,000 and the total cost of my annual
purchase of consumables is $8,000, then I am inclined to be economically
agnostic on the choice between either tax so far as my economic burden
goes. On the other hand, it becomes more of an issue if the general
distribution of tax burden based on the ratio of income to cost of
consumables is significantly shifted; that is, suppose that my ratio of
income to costs stays at 2:1 under the change, but someone else's ratio
goes from 2:1 to 3:1 (e.g., from $50k:25K to $48k:$16k), then I start to
feel like I'm being played for a fool - I'm bearing a greater ratio of
costs than this other fellow is. Unless you can handle that sort of
differential and explain what the results are likely to be, you're not
going to sell an RST since, on the basis of out-of-pocket costs, an RST is
going to take more out of the pocket of a little guy than it will out of a
rich guy.

That, of course, is where the economic comparability would come in, but
you've already stated that an RST and an income tax are economically
incomparable, so we have nothing left to go on but your assertion of
goodwill on our behalf.

Second, even if the economic burdens are comparable, in which case one
might be economically agnostic, there is still the question of who has to
go out-of-pocket to cover the cost? That is, who gets to write the check
to Uncle Sugar?

If the economic effect of any tax is sufficiently redistributed so that we
can reasonably assume that the market takes care of placing the burden
where it can be most efficiently borne, then the obligation to pay Uncle
Sugar the actual dollars should rest on those persons who have the
greatest access to liquid assets - that is, in general, the wealthy.

Note, this is not a matter of taxing the rich, or "soaking" them either,
merely a matter of leveraging the efficiency of free-market economics to
get the economic burden spread out as cost-effectively as possible
(keeping in mind that the government is generally less efficient than a
private market actor).

In that case, an RST is a particularly poor choice of going about finding
the person(s) best able to write the check. The burden of doing so will
fall predominantly on the lower economic strata of society - people who
are both (a) less able to come up with the needed cash without being put
into dire financial straits, and (b) less able to shift their additional
costs into the marketplace where they can be efficiently distributed to
those who should ultimately bear them.

An example might be as follows: One of the great strengths of using the
wage withholding system to collect income taxes on workers is that it
centralizes the payment obligation in the employer, who has much greater
access to liquid assets with which to make such payment and who can take
one monthly payment to Uncle Sugar and quickly spread it amongst all of
the employees who are supposed to be "bearing" that tax.

By contrast, an RST is like collecting an income tax on the employer's net
income by requiring each and every employee to send a certain fixed amount
each month to Uncle Sugar and then expecting them to pass the cost along
to the employer.

First off, since the labor supply curve of any single worker is usually
much less elastic than the labor demand curve for the employer (how often
does one hear of GM's workers leaving to find other work instead of
hearing about GM's plans to lay off workers?), it is highly unlikely that
any individual worker will be able to shift the appropriate amount to the
employer with the efficiency that the employer can shift his burden under
wage withholding to the employee.

Second, this method replaces one payment obligation (that of the employer
to pay his own income taxes) with a multitude of payment obligations, each
of them dependent on the financial health (or lack thereof) of an
individual with much less access to the capital markets than such employer
(i.e., to borrow cash to cover operating expenses). That is not an
efficient means of collecting the income tax obligation of the employer.

While an RST would not suffer from the multiplicity of payment obligations
per se, it would suffer from the fact that the immediate obligation to
pay, to go out-of-pocket, rests principally on those with the shallowest
pockets.

In addition, because an RST goes to a transaction-by-transaction basis for
imposition of the tax (i.e., the amount of the tax is only known when an
actual sale is made; by contrast, the amount of the tax in an income tax
does not depend on an hour-by-hour analysis - one can wait until payday to
figure out how much tax to collect), it does suffer from a multiplicity of
collection events, a flaw that the income tax wage withholding mechanism
does not.

So, even if one were agnostic about the ultimate economic burden of an RST
as compared to an income tax, one would still have reasons for disfavoring
an RST because it would be the less efficient tax (and therefore more
costly in ultimate economic terms).

Any way you slice it or dice it, an RST is a loser of a proposition. It
will engender greater tax evasion, resulting in a higher tax rate imposed
at the cash register than would be necessary, thereby taking a bigger bite
out of the resources each person has to buy what they need than does any
putative "embedded" income tax, and even if one grants the RST crowd their
one true claim to fame - the supposed economic equivalence of an RST and
an income tax - the RST is still not the best way to collect taxes; it
imposes the immediate out-of-pocket costs more heavily on those least able
to bear it than does the income tax, and it does so in a way that is more
wasteful when it comes to re-distributing the ultimate economic burden of
such cost among all of the different players in the marketplace.

.

Relevant Pages

  • Re: W-9 & consolidated Tax Return with subsidiaries
    ... returns as are filed (in a simple RST that would be gross taxable sales ... times tax rate; in a credit-based system for B2B, ... income tax), that's a tax of $300, for a total price of $1,300. ...
    (misc.taxes)
  • Re: Question about Presidents Social Security plan
    ... I see that demographics is a problem if wages ... > Security is funded entirely by the FICA which is a tax on the wages of US ... The point, Blair, is that if increasing technological ... progressive and the SS benefits are funded by said income tax. ...
    (sci.econ)
  • Re: W-9 & consolidated Tax Return with subsidiaries
    ... taxpayers required to file returns (which would be less under an RST with no compliance issues) and the type of information required on such returns as are filed. ... sales he can generate, but this would obviously only apply to very small ... income tax), that's a tax of $300, for a total price of $1,300. ...
    (misc.taxes)
  • Re: My take on the flawed "Fair Tax" (repost)
    ... >>> employee pays the income tax ... >>> because it's a creadit against the liability which the income tax ... The government has a need to pay for its operational costs. ...
    (misc.taxes)
  • Re: Re: Avoid a VAT
    ... the inequities imposed by a sales tax. ... since the income tax is incorporated into the prices of goods & services, ... that everyone already bears an equal portion of the income tax, ... let's assume that all income taxes paid are ipso facto incorporated into ...
    (misc.taxes)