Tuesday, August 22, 2006

Fair Tax

MOOSE:

Speaking of taxes, what do you guys think of the Fair Tax?

Summary:

- Eliminates withholding and income tax. You'd take home everything.
- Eliminates Social Security tax and employer's match.
- Creates a 22-25% federal sales tax on everything: homes, cars, sandwiches, legal services, etc.
- Claims to be "revenue neutral" (i.e. the economists who have studied it claim that it wouldn't add/reduce the federal debt).
- Marginally progressive: Everyone would get a check from the government on April 15. The check would be approx. $5000, which is meant to cover the tax on everyone's first $20,000 spent (i.e. theoretically the "first" $20,000 that everyone spends is on clothes, food, etc. In other words, if you earn $20,000 a year and spend it all, you'd essentially not be paying taxes.)

5 Comments:

At Tuesday, August 22, 2006 4:51:00 PM, Blogger UCLaw98 said...

This reply is to your summary, not to the actual proposal. Take it for what it is worth.
First, we have to assume away some things. First, it could never pass, intriguing though it be. Second, I would guess there are serious commerce clause issues associated with such a tax.
Here's a question: how do states raise funds? Federal grants? That, in turn, is quite bothersome. Note the one-time red-state advantage in homeland security funds vis-à-vis blue cities (has that been rectified?). Unless the federal government takes over all responsibility for all social services, it is an abysmal idea.
Another issue: although perhaps revenue neutral, I wonder if there isn't some de facto effect of sales taxes versus income taxes in the sense that people realize when they are purchasing something what the actual cost (meaning tax) of it is. If it inhibits purchases, that will have dramatic economic impact that will, in turn, have a drastic effect on tax revenues.
Apart from all that, I like it, but I'm not sure I like it any more than I like any tax scheme that would help me at the expense of others.


And, check out:

http://volokh.com/posts/1156261829.shtml

Very different issue, but interesting.

-Max

 
At Tuesday, August 22, 2006 5:59:00 PM, Blogger UCLaw98 said...

Just picking off points:

State Funds.
Not sure that I follow. States could still raise funds exactly as they do now.

Incentive/decentive to spend.
Agreed. I went so far as to read the book, just to familarize myself with the issue. In their defense, they spend a good portion of the book discussing this very fact. OTOH, they aren't too convincing.

Their basic argument is that if it causes people to save more -- well that's a good thing. And the cost of capital will come down and there will necessarily be more investment. I don't really buy it; for a lot of reasons, not the least of which is that in a recessive economy no one invests. And it has little to do with capital's cost. (See, e.g. Japan 1990-2005).

-Moose

 
At Tuesday, August 22, 2006 6:50:00 PM, Blogger michael budelsky said...

First, I am extremely distressed at any plan that seeks to impose a 23% tax on sandwiches.

Second, do I understand correctly that there would be no capital gains tax, only a 23% sales tax when you buy stocks, bonds, mutual funds, etc.?

Third, the main reason that this thing will never pass is the baby boomers. The plan seems to make sense for people earning an income, but it screws retirees. Think of your average retired couple who has a good portion of their income from non-taxable sources such as Roth IRAs, certain types of bonds, and the biggie, social security (although I realize that up to 85% of this CAN be taxed if your non-SS income is above a certain amount, but that still won't diminish the argument much). The rest of their income will likely come from sources such as IRAs and 401ks that will be taxed at 15% capital gains. Say a retired couple lives off of $50K. Half is SS and other non-taxable stuff, and the other half is from their 401ks. Instead of paying 15% on roughly $25K, they are now paying 23% on roughly $30K (since the first $20K of spending is tax free due to the refund). Ouch.

The other problem I see is that it gives less of an incentive to save for retirement -- people need all of the encouragement they can get, and I've seen this argument work: if you put $10 into your 401k, that is really only $8 less out of your paycheck. Once someone is enrolled in a 401k, the reverse argument is even more compelling: If you stop saving $10 for retirement, you will only get $8 more dollars in your take home pay.

I wouldn't necessarily be against it. It is essentially what the state of Washington does (without the regressive adjustment for the first X amount of spending).

That Murphy case was interesting, Max. I had been under the impression that damages collected under a defamation case, let's say, for injury to reputation and pain and suffering were not taxable. But apparantly there has to be some sort of physical injury at the core of one's claim. Seems a bit arbitrary. I can see why past and future wage damages should be taxed, but the difference between an ache in your leg from a car accident, or injury to your reputation from defamation is lost on me.

 
At Wednesday, August 23, 2006 8:52:00 AM, Blogger UCLaw98 said...

Re: phase-in for the elderly.
I think that you could phase in a Fair Tax to offset the elderly problem that Bud mentioned. For instance, you could grant anyone over 65 a double/triple/etc. Apr 15 hand-out.

Re: incentive to save/401K.
Under this program ALL of your money is essentially a 401K, except what you spend. Theoretically every dollar you dont spend this year is saved tax free. It's the ultimate incentive to save. Plus, I'm sure that my market would help too. I'll bet banks would offer 20 and 30 year Certificates of Deposit with healthy interest rates that would be branded as "401K CDs," which cannot be touched until one's 65th birthday without enormous penalty. Employers would partner with these banks, etc.

-Moose

 
At Wednesday, August 23, 2006 11:49:00 AM, Blogger Ewald said...

"Fair" Tax is certainly a step in the right direction. But, calling it a "Fair" Tax is very Orwellian. Call it what it is, a national sales tax. I hate when governments and think tanks come up with these ridiculous labels.

Europe has been quite successful instituting a value added tax, which I think is a more fair approach.

Inhibiting purchases can be a good side effect since Americans are currently running a negative savings rate for the first time since the depression.

Of course collection of revenue is only a small problem compared to how it is spent. Some republican recently proposed that the government be force to put its check book online in a huge searchable database so anyone can see where the money is actually going. A really cool idea that would transform government over the next twenty years.

 

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