I know this have been brought up before, and likely will again, but I figured that since there is actually a FairTax bill in congress now, and because we all just went through tax paying hell, I'd bring it up again. More information can be found at fairtax.org and if you are interested, please sign up. They recently did a fax campaign and sent out over 134,000 faxes to congress before the tax deadline. Also there was an even at a republican even in Iowa. They're looking for volunteers to go out and show support for the FairTax on May 15 during a presidential debate.

All that said, I imagine that with as diverse a group as we have here there are some people who disagree with the FairTax. I'm curious as to your thoughts. I noticed from their congressional scorecard that Obama (one of my senators) was against it. Any ideas for finding out why a congressman opposes a specific issue?

Hope everyone had fun doing their taxes and got them in on time.... Now don't you wish you didn't have to?

Just noticed that Democratic presidential candidate Mike Gravel supports the Fair Tax. He has virtually no chance of winning, but for this reason alone I support him being included in future Democratic presidential debates.

Is there a country in the world that has implemented anything like this? One of the few advantages of the current, bloated mess of a tax system is that it's battle-tested. Fair or not, we know it brings in X dollars per year and that with appropriate leadership it can fund a balanced budget.

You don't want to try a giant experiment like this whole-hog and find out that it drives more of the transaction of goods and (especially) services underground, crippling the federal tax base. Any field data out there?

valguarnera@carrionfields.com

Most states already use sales taxes for a significant portion of their income. Consumption taxes also have a long historic record of usage. I'm curious as you how/why you think people would conduct more goods/services "underground" than they already do to avoid paying state sales taxes.

This link (pdf) http://www.fairtax.org/PDF/Lamar_Smith_rebuttal_letter1-11-07.pdf talks about the enforceability questions you raise at the beginning.

And this one (pdf) http://www.fairtax.org/PDF/Excerpts_from_response_to_tax_panel-103006.pdf
has more information regarding both you inquiries which I think you will find informative.

The relevant portion from the second pdf in response your your first question:

Panel statement #7: The FairTax has never been enacted in the world and is risky and untried.

FairTax response: Consumption taxes are the oldest form of taxes on this planet; they require very little government overhead in comparison to direct/income/poll/head taxes. Phoenician traders paid a percent of each ship’s cargo for the privilege of using safe Mediterranean ports. The greatest expansion in the history of the British Empire followed the repeal of the detested, only-to-beat-Napoleon income tax with the subsequent use of consumption taxes. Florida and Texas, two of the largest economies in the world, rely primarily on sales taxes.

The FairTax is a pure consumption tax with a tax base virtually identical to value-added taxes used by 29 of the 30 OECD7 nations. Distinguished from these systems, however, the FairTax replaces all forms of income and payroll taxes, where these VATs are add-ons to existing income taxes. And the FairTax is a visible tax being separately stated on the retail receipt, whereas VATs are usually hidden in retail prices.

Based on 2005 VAT rates, the average rate is 20 percent with 14 countries having rates of 20 percent or more. Five countries have rates equal to or greater than 23 percent; again, these rates are in addition to their income/payroll tax systems (Belgium: 21 percent; Denmark: 25 percent; France: 19.6 percent; Ireland: 21 percent; Italy: 20 percent; Hungary: 25 percent; Austria: 20 percent; Poland: 22 percent; Portugal: 21 percent; Slovenia: 20 percent; Finland: 22 percent; Sweden: 25 percent; Iceland: 24.5 percent; Norway: 23 percent). The FairTax rate of about $0.23 out of every dollar spent is a revenue-neutral replacement for our income/payroll tax system

One question: FairTax is 23% of the sales price that does not include the tax, right? So, in practice, 18,7% of every dollar the customer gives you would be tax, since the dollar already includes tax. In other words, you don't pay tax for FairTax, right?

The FairTax is a pure consumption tax with a tax base virtually identical to value-added taxes used by 29 of the 30 OECD7 nations. Distinguished from these systems, however, the FairTax replaces all forms of income and payroll taxes, where these VATs are add-ons to existing income taxes. And the FairTax is a visible tax being separately stated on the retail receipt, whereas VATs are usually hidden in retail prices.

It's compulsory here to have the VAT listed in the receit(companies can deduct VAT from purchases in their taxation here if they pay VAT from their sales. Also, companies with low net sales are given release from having to pay the tax. The companies have 45 days time to announce and pay the VAT to tax officials for each month), but most people here give the price in the form that includes VAT, since it's the price you actually have to pay, which is the most viable form.

What's so groundbreaking about this FairTax anyway? Isn't it just a normal VAT?

This is the answer from the FAQ http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#47 but basically it's 23% of every dollar the customer gives you is tax, but if you look at the receipt it's a 30% sales tax. The link explains it better than I can.

The difference between this and VAT is that it is simpler in that it only taxes final sale not every stage in between, replaces our current income tax structure instead of subsidizing it (as yours likely does), and uses our existing tax collecting infrastructure (state sales taxes). Because it is only taxed at the final point of sale, the burden on companies is less*.

It isn't a normal VAT, and it isn't so much groundbreaking as simplified. Our current income tax system is a complicated mess and nearly universally loathed by those who can't afford to have their taxes done by a professional. VAT's show that this sort of tax system can work, and since the FairTax is actually a simplified version, would be even better. There is a correlation between the difficulty of complying with tax codes and the compliance rate.

(*) Apparently the forms and whatnot of VATs is pretty complicated, but not having them here I can't say for certain.

The difference is that that 23% is from the total price, which includes tax. Thus, it's 30% of the sales price, meaning that what cost a dollar before Fairtax, costs 1,30 after the tax is added. This 30% is the percentage directly comparable to the European VAT percentages you gave us. So, the 23% gives you how much of the final price is VAT and 30% gives you the amount the VAT increases the selling price.

Because it is only taxed at the final point of sale, the burden on companies is less.

And what point of sale is final? How do you define that?

Example: Bob sells car parts in a car part store to both garages and people who fix their cars themselves. Jim owns a garage and buys parts from Bob. Jim uses the part to fix customers' cars and charges for both parts and the repair work. So, Jim sells car repairs, both to private car owners and Tom the taxi driver, to whom the car, it's repairs and gasoline are purchase he converts to his final product, he sells passages in his vehicle. Now, he sells passage to Mandy the Dominatrix, who is doing a housecall to Bill the owner of a story writing company, who sells fetish stories to a company that produces fetisish magazine, so purchasing Mandy's services are vital for his business. Then, the magazine is sold back to Mandy, who needs it to keep up with the latest trends.

The problem here is that each of these businesses have both sales that can be classified as final sale and sales that are a part of a long chain. What would you consider to be the simplest way of arranging the VAT taxation and how FairTax makes the taxation for the businesses of this chain simple and easy?

Since I've already pointed you to the FAQ a couple times, and the answer to this question is in there, I'll let you find it this time. Sorry, but I'm feeling lazy today.

>One question: FairTax is 23% of the sales price that does not
>include the tax, right?

Actually that figure is misleading. It annoys me that all the FairTax material continues to use it. The truth is that the FairTax is "comparable to a 23% tax on income". In other words it's actually closer to a 30% sales tax.

The important thing that (imho) people fail to take into account when evaluating the FairTax are all the *regressive* flat taxes they already pay.

SS is currently 6.2% plus an equal employer match. That's a 12.4% flat tax (i.e. regressive) everyone pays, before income taxes even come into play.

Medicare is 2.9% split evenly between employee and employer. The two together amount to 15.3%. Worse yet (for the non-wealthy) these taxes only apply to the first $76k earned.

Added to these are federal and state unemployment tax. FUTA is 6.2% but you can take credit for any SUTA you pay. In another jab at the non-wealthy, this tax is only levied on the first $7k.

Bottom line: there's a crapload of taxes I (we) pay before even filing our income taxes.

> What's so groundbreaking about this FairTax anyway? Isn't it just a normal VAT?

It's a VAT that replaces a bunch of other taxes. It would replace the federal personal income tax, corporate taxes, capital gains tax, and estate tax. It also incorporates a "prebate" system where every adult gets a periodic payment equal to the amount someone at the poverty level would expect to pay in sales tax. The thought is that if you're *at* the poverty level then you pay no federal tax.

So, the whole package is 30% VAT, no federal personal income tax, no corporate tax, no capital gains tax, no estate tax and citizen's salary for everyone.

That sounds right, except that I'm not sure what you mean by "citizen's salary". If you figure that an individual at poverty level spends maybe $7500 a year on taxable items, then the prebate would only be around $200/month.

Having read their material, I'm not sure how they would handle families and/or variances in cost-of-living across of the country. Though, the current federal income tax doesn't recognize cost-of-living differences when calculating its standard deductions, so maybe the FairTax wouldn't need to either.

>Most states already use sales taxes for a significant portion
>of their income. Consumption taxes also have a long historic
>record of usage. I'm curious as you how/why you think people
>would conduct more goods/services "underground" than they
>already do to avoid paying state sales taxes.

Degree. Skirting state and local sales taxes doesn't give you a huge competitive advantage over the competition, and it carries substantial risk. It also reduces the pool of people who'll do business with you. But if the competitive advantage were much, much bigger, more people might consider it "worth the risk" to move their business to the black market.

I was curious about the history of the income tax and it's "battle-tested"ness. Seems that it is a rather recent invention (at least in the graduated form) that was first started in the UK to pay for the Napoleonic wars. I'm not sure how well researched it was then, or how well it was researched before we implemented it here in the US, but I'd guess that it wasn't researched very well, if at all. FairTax has been researched a lot, and not in the creationist find data that supports my conclusions way, but in a real scientific way. I know you do your research, so I'm sure you've looked into it some already, but just thought I'd put this out there.

I'm not intimately familiar with it, but I think the VAT tax in the UK is "sort of" similar.

I ran the numbers on my own finances, and I could handle something like a 50% increase in the post-tax cost of goods and still come out ahead (given all the other taxes the FairTax would eliminate).

And we have nice exemptions if you're a smaller business so that its the larger ones that get bitten by it instead.

The thing I'd watch for is the giants that can afford tax evasion schemes. They're a bigger hole in the system than any number of individual business' and the ones that any law wants to catch. Since I'm still not certain on its application even after reading it twice (the tiering for the system of taxing in america boggles me, even after an hour talking to my dad about it) so I'd ask - does this sting medium sized companies more than large? The bottom and higher tiers usually are the focus, but in a competative market the higher ups want to really watch the middling business for competition just in case their position is threatened by killers like innovation or originality :p

As far as I can tell, this change looks like a step in the right direction. Taxing in the UK still isn't that brilliant but its alright. We have honest business like Harods that comply 100% because otherwise the government threatens them (poor Mohammed Al-fayed) and others that completely get away with dodging while mainting a british identity (rolls royce). I still laugh at how many 'british' business' operate large parts of their company in Mauritius. No, its not part of the UK anymore. Damn telephone companies lying their arses off.

Yhorian.

>The thing I'd watch for is the giants that can afford tax
>evasion schemes.

If anything, I'd expect smaller businesses to be the ones that are more likely to illegally refuse to collect sales tax. Big places tend to get "noticed".

As for how it would affect small vs. large businesses, I assume it would affect them both equally.

American tax system in a nutshell:

1. Local + state sales tax. Where I am this is approx. 8.25%.

2. Local property tax. This is higher where I live because there is no state income tax. I estimate this is about 2% of the market value of my home, levied yearly.

3. State income tax. None where I live.

4. Federal income tax (including taxes on capital gains). This ranges from approx. 20% to approx. 40%. However, many deductions are allowed, so most people only pay federal income tax on a portion of their total income. I think my "taxable" income was something like 60% of my gross income. Long-term (over 1 year) capital gains are taxed at a flat rate of approx. 20%.

5. Taxes on corporations. No idea how these work.

6. Employee payroll deductions (to pay for Social Security, Medicare and unemployment benefits). Total about 15%, levied on the first ~$75k earned.

The FairTax would replace #s 4-6 with a 30% federal sales tax on *new* goods and services, plus send everyone a rebate check equal to the amount someone at the poverty level would expect to pay in federal sales tax.

>You don't want to try a giant experiment like this whole-hog
>and find out that it drives more of the transaction of goods
>and (especially) services underground, crippling the federal
>tax base. Any field data out there?

As opposed to the huge underground economy we have now with day labor, off shore accounts and the several hundred other ways to hide income. I know what my wife's boss keeps off the books because he's paid in cash, and I expect that alot of other businesses do the same. I just think the positives far outweigh the negatives, at the worst we would be trading one underground economy for another, but we would have the following benefits:

I would like to think the Fair-tax does three very important things. First it makes us more efficient as a country. It eliminates having to pay to have our taxes done which would free up millions if not billions of dollars. It also shrinks the size of the IRS making the government a little cheaper to run. The second facet is that it makes politicians actually have to think when they make policy. No longer can they just give tax breaks, some actual policy planning has to be done, hopefully it will spur creative solution to some of the problems out there. Which leads to the third and most important facet is it allows us to be more competitive on a global scale. No longer will there be tax breaks to take jobs out of the country, and if I remember correctly, there will be no tax imposed on products sold outside the country**. This will make our products about 20% cheaper to produce than before. No longer will be running a trade defecit, instead we will have a trade surplus.


Dave Krenz

**You may want to double check this I know most of the general ideas behind it, I just haven't dug into all the specifics.

>First it makes us more efficient as a country. It
>eliminates having to pay to have our taxes done which would
>free up millions if not billions of dollars. It also shrinks
>the size of the IRS making the government a little cheaper to
>run.

I believe the savings from eliminating compliance costs would *vastly* outweigh the savings in what it costs to "run" the IRS. There's personal compliance costs, but there's also corporate compliance costs and the cost of doing all the paperwork for one's employees. It would make it *much* simpler for small businesses to handle payroll, and large businesses could release a significant portion of their accounting departments. Those individuals could go do something *productive* that actually benefits society.

(Note that I have nothing against tax accountants - I just liken their job to digging holes and filling them back up again: hard work, but not especially useful in the grand scheme of things.)

One you failed to mention: the fair tax would create a huge incentive for non-citizen residents of the U.S. to actually become citizens. As a non-citizen they would pay the federal sales tax, but would be unable to collect the prebate check. My suspicion is that the issue of illegal immigration would be greatly mitigated if the FairTax were implemented. And best of all, it wouldn't require wasting a ton of money on something as stupid as...oh...a big fence.