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Lamrot Hakol (Despite Everything)

Musings and kvetchings and Torah thoughts from an unconventional Orthodox Jew.

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"I blog, therefore I am". Clearly not true, or I wouldn't exist except every now and then.

Tuesday, August 09, 2005

Jumping on the FairTax bandwagon

I'm a skeptic. Also a bit of an absolutist.

("A bit!" Dozens of readers cry, outraged.)

Yeah, well... I don't think the government should be in the business of handing out goodies, however important those goodies may be. It should not fund art or science or social programs or universities or schools -- especially schools, but don't get me started on Dewey's Folly -- or space exploration or... really anything other than police, army and courts. Taxation to fund these things is incredibly immoral. "Taxation is theft" is a wild slogan, but in some cases, it's true.

And maybe when I was younger, I would have opposed any attempt to fix the insane tax system in this country, on the theory that the more a mess it is, the sooner it'll crash. But hey , you get older, and you start to be willing to make baby steps.

Which brings me to the FairTax. This is a proposal that has been around for about 10 years now, and I've been trying to poke holes in it for a while now, without much in the way of success. And I'm good at poking holes in things. I am a veritable Cassandra. If it's got a flaw, that's the first thing that jumps out at me. As you might imagine, it makes me pretty popular at parties.

But the FairTax looks like the genuine deal. It's revenue neutral, which is bad, in the sense that we need to stop the thievery, but good, in the sense that it will improve things immeasurably. You can see a sketch of the plan here, but let me give you the salient points:
  • The income tax and all payroll, personal, gift, estate, capital gains, Social Security, Medicare (etc., etc., ad nauseum) are eliminated, and the 16th Amendment to the Constitution, which permitted the income tax, gets repealed.
  • These taxes are all replaced with a single national retail sales tax on new goods and services being purchased for personal consumption.
  • A "prebate" equal to the amount of the poverty level is given to every holder of a valid Social Security number, every month, to offset the sales tax for basic necessities.

No more Form 1040. No more IRS. April 15 becomes just another day. No more being taxed more and more just because you're more productive. You take home every penny you earn, and you only pay taxes if you buy new things.

This is not a VAT (Value Added Tax). With a VAT, taxes are charged and collected at every stage until and including your purchase. With a 15% VAT, you think you're paying 15% in tax, but every successive stage of production had to pay VAT, so they passed that on in higher prices to the next guy. You're really paying a lot more than just 15%.

The FairTax looks high. It's 30%. But eliminating corporate taxes as well means that they don't have to pass those tax expenses on in the price of things you buy. So if something costs $100 today, it's likely to cost $77 after the FairTax goes into effect. When you pay 30% tax on it, you're just back to the original price of 100%.

There's no filing with the FairTax. Storekeepers will have to collect it, but they do that now in most states anyway, and the FairTax allows for states to do the collecting. Do you know how much the income tax costs in this country? Every year, it costs $225 billion. That's "billion", with a "b". That's three times what the war in Iraq has cost the United States so far, and it's paid every single year.

The FairTax falls on everyone. Today, drug dealers and prostitutes and criminals don't pay income tax on what they earn. Anyone who can afford a good tax accountant can manage to get away with paying very, very little in the way of income tax. Once taxes are moved from income to consumption, everyone gets taxed on an equal basis. If a millionaire buys a yacht, he pays 30% on it. If a kid buys a candy bar, he pays 30% on it. If a poor person buys a bottle of milk, he pays 30% on it, but he's already received a grant for that at the beginning of the month.

Today, everyone is at risk of an audit from the IRS. They have their own courts, with rules that are very different from regular courts. It is virtually a government within the government, and its first rule is that we are guilty until proven innocent. Every time you file a tax return, you have to worry about whether you might have made an honest mistake that could bring the wrath of the IRS down on your head. With the FairTax, that can't happen. You only pay tax at the cash register.

I recommend that everyone check out http://www.fairtax.org, http://www.fairtaxvolunteer.org, and get yourself a copy of The FairTax Book. Call your senators and representatives and tell them to get moving on this. There is no downside.

10 Comments:

Anonymous Anonymous said...

I didn't know that you were such a libertarian. However, I should have guessed.

CW

9:59 PM  
Blogger Milhouse said...

You're wrong about a VAT. A 15% VAT means that the final consumer pays exactly 15% of the total cost, and not a penny more. It also means that it's difficult to evade, because most of the tax is paid before the goods reach the final consumer, and at each intermediate stage the seller has an incentive to collect the tax in order to get back the portion that he has already paid.

A national sales tax will mean that everyone who sells a good or service will have to file, and will be subject to audits, so for all those people it won't be much different than now. The IRS will still descend on people and demand that they prove they didn't sell more than they claim to have done, and that the refunds they claim are genuinely for inputs to what they sold, and it will spy on their purchases and lifestyle, in order to "prove" otherwise. So we don't really gain much in that respect.

10:05 AM  
Blogger Lisa said...

Well, the "About Me" at the top of my blog does say that I'm a post-Objectivist. That might have been a clue. <grin>

10:27 AM  
Blogger Lisa said...

I don't think I'm wrong about a VAT. If I'm an intermediate manufacturer, and I buy raw materials for $100 and sell them to the next business for $110, I have to pay 15% on that additional $10 under a VAT.

But I want the whole $10, so instead of selling it to the next guy for $110, I sell it to him for $111.76. When I pay 15% on the $11.76, that's $1.76. I've passed my tax burden on to the next guy.

And unlike VAT, there's no claiming of refunds with the FairTax. You simply don't pay tax in the first place for production inputs. You don't even pay it on consumer goods if they're used.

Once tax has been paid on something, it's never taxable again.

10:35 AM  
Blogger Milhouse said...

If I'm an intermediate manufacturer, and I buy raw materials for $100 and sell them to the next business for $110, I have to pay 15% on that additional $10 under a VAT.

No, you charge 15% on that $10. When you bought your materials for $100, you paid $15 tax. Your receipt from your supplier will say so. When you sell them on for $110, you charge your customer $16.50 tax, and you send the IRS $1.50 and your receipt for the $15.

The main advantage of this is that you have an incentive to charge your customer at least the $15 that you paid, and since he intends to sell the product on, he doesn't much mind paying you the whole $16.50. So neither of you are likely to evade the tax. Even if the retailer, who buys the finished product for $20 (paying $3 in tax), and sells it for $25, agrees to charge his customer only the $3 he paid, rather than the $3.75 he should be charging, the IRS is out only 75c, not the whole $3.75.

Another advantage is that if you decide not to sell the goods you bought, but keep them for your own use, the tax has been paid. Under a retail sales tax regime, people in the business can take things out of stock and evade the tax.

2:36 AM  
Blogger Lisa said...

Lisa wrote:
If I'm an intermediate manufacturer, and I buy raw materials for $100 and sell them to the next business for $110, I have to pay 15% on that additional $10 under a VAT.

milhouse wrote:
No, you charge 15% on that $10. When you bought your materials for $100, you paid $15 tax. Your receipt from your supplier will say so. When you sell them on for $110, you charge your customer $16.50 tax, and you send the IRS $1.50 and your receipt for the $15.

=====================

Lisa replies:
That's a bit pedantic. You charge 15% on the whole $110. You were charged 15% on the original $100. The net amount that you pay is 15% on the $10. As you said, I send the IRS $1.50.

And like I said, the reality is that manufactureres just jack up the price a little more to cover the tax. It always gets passed on to the end consumer.

As far as what you're saying about how people can cheat, how is that any different than today? If I was self-employed, which I'm not, I could incorporate and have my corporation buy stuff for me and write it off as a corporate expense.

No one is claiming that the FairTax is all of a sudden going to change people.

6:51 AM  
Blogger Milhouse said...

Of course the whole tax gets passed on to the end consumer - that's the point. But why would the manufacturers "jack up the price a little more to cover the tax"? They don't have to cover the tax - it's an explicit item, 15% of whatever the current price is. The tax isn't a cost to the manufacturer, precisely because it gets passed on down the chain to the end user, who is the one who should pay it.

As for cheating, again, the advantage of a VAT is that it's largely self-enforcing. There is very little cheating under a VAT, because most people along the chain of transmission have no incentive to cheat. Whereas with a retail sales tax the entire tax is collected from the end user by the final seller, which creates a huge incentive to cheat.

If I was self-employed, which I'm not, I could incorporate and have my corporation buy stuff for me and write it off as a corporate expense.

And with a VAT you would still end up paying most of the tax on it.

6:43 PM  
Blogger Lisa said...

Milhouse said...
Of course the whole tax gets passed on to the end consumer - that's the point.


It's not just that it gets passed on to the end consumer. It's that it gets hidden.

Look. Reuven digs up some iron ore and sells it to a refinery for $100. He has to charge $115 and send $15 to the government.

Shimon runs the refinery. He turns the ore into metal ingots and sells them to a parts shop for $200. But he has to charge $30 extra, and send $15 of it to the government (he gets to deduct the $15 he paid to Reuven).

At the next stage, the price goes up another $100, to $300, and the government gets another $15. Then the end product gets sold to Levi, who pays 15% on the $400 price tag. That's $60. But he's also really paying the $45 that's already been paid to the government along the way. So in reality, he's not paying 15%. He's paying 26.25%.

Had we forgone all the nonsense with the intermediate stages and just charged Levi 26.25% on his purchase, the government would be getting exactly what they got to begin with. Ah, but since the people in the middle didn't have to pay anything to the government at all, they didn't have to hike the price up quite as far, so Levi would still wind up paying about $460. But now he's aware that he's paying more than a quarter of the price in taxes. Before, he was deluded into thinking he was only paying 15%.

Do you see?

4:30 PM  
Blogger Milhouse said...

No. You are wrong. Levi is paying exactly $60 in tax, not $105. That's 15%. The government ends up with exactly $60, not $105. If Levi's paying 26.125% on his purchase, then he would be out $505, which he's clearly not; and the government would be in receipt of $105, which it isn't. So where do you think this mysterious $45 comes from, or disappears to? Is it like one of those virtual particles that are created out of vacuum, only to be instantly annihilated?

2:22 AM  
Anonymous Anonymous said...

hi lisa, guess i'm a johnny come lately but this is very interesting and i'll like to state that the your belief that VAT taxes more than it claims is incorrect.

To quote:
"Look. Reuven digs up some iron ore and sells it to a refinery for $100. He has to charge $115 and send $15 to the government.

Shimon runs the refinery. He turns the ore into metal ingots and sells them to a parts shop for $200. But he has to charge $30 extra, and send $15 of it to the government (he gets to deduct the $15 he paid to Reuven).

At the next stage, the price goes up another $100, to $300, and the government gets another $15. Then the end product gets sold to Levi, who pays 15% on the $400 price tag. That's $60. But he's also really paying the $45 that's already been paid to the government along the way. So in reality, he's not paying 15%. He's paying 26.25%."

I summise that your example has 4 manufacturers, each adding a value of $100 at each stage, and charging 15% of that $100, thereby arriving at the figure of $400 as the cost of the product w/o tax and $460 with tax.

Looking at the end result, it is very clear that $460-$400=$60 is the only amount attributable to tax, which is paid by the end user, or 15% of the original cost of the good (which is $400, in the absence of VAT). The VAT therefore charges according to wat it claims to charge.

The fallacy of your argument lies in the last part, when u thought the retailer slapped $60 extra on top of $400. That is not the case. It is actually slapping $15 more to $445 only. To illustrate->

0->100+15=115 (1st stage)
115->215+15=230 (1st stage)
230->330+15=345 (1st stage)
345->445+15=460 (1st stage)

2:29 AM  

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