Should the FairTax Solution be Part of Fiscal Cliff Negotiations?

With tax the big issue in "fiscal cliff" negotiations, would now not be the right time to take a serious look at the FairTax solution?

On Dec. 17, U.S. Sen. Saxby Chambliss, R-Ga., and U.S. Rep. Rob Woodall, R-Ga-7, sent a letter to the Joint Committee on Taxation to produce a revenue estimate of H.R. 25 and S. 13, the FairTax bill. According to a press release from Woodall's office, this estimate would allow the FairTax proposal to be considered during congressional negotiations for tax reform.

“The current tax code has become too burdensome and complex, and is filled with provisions that benefit only a few Americans at the expense of everyone else. That’s simply not right,” said Chambliss. “Now is the time to enact the FairTax, which would create a fairer, simpler tax code that allows every American the freedom to determine his or her own priorities and opportunities.”
“No matter what they do, honest, hardworking Americans are punished under our current tax code.  Pass the FairTax, and we can unshackle America’s job creators and jump start this economy.  Pass the FairTax, and we can reward all Americans who contribute to our economy—not just those who can afford the best tax lawyers and accountants,” Woodall said. “We, as a nation, can do better than relying on a tax code that picks winners and losers.  Let’s level the playing field with the FairTax and restore more freedom to our economy, not more government.”

The FairTax collects taxes on spending instead of on income. It repeals all federal personal income taxes, corporate income taxes, payroll taxes, self-employment taxes, capital gains taxes and gift and estate taxes. At this time 23 percent is the suggested rate.

The National Center for Policy Assessment, however, says it won't work. It claims that at a 23 percent rate, someone paying more than that in income taxes now would be better off, but someone paying less would be worse off. The NCPA claims this system, again, is more beneficial to higher income earners.

What do you think? Is this the right time finally to have the FairTax solution come up for consideration? If so, why so - and if not, why not?

Stephen C. Eldridge February 04, 2013 at 03:48 AM
Re" R's comment 34 min ago. I did that and found the place to leave a note. But, soea that space have room for more characters than this "Leave a Comment" space - the problem was twofold - first I had to beak it up into 8 comments and 2nd, i had to write out my chart (it didn't print out as it does in Word.
Hank Van Gieson February 05, 2013 at 02:57 AM
Matthew, My business income tax related costs included business income taxes, business share of FICA, and business compliance costs. Based on 2007 actual data, those tax related costs came to around 10%. Add the 30% sales tax at the retail cash register and the avarage retail price increases 17%. While it may not be intuitively obvious, percentage savings do not cascade or accumulate up through the chain of production. Dollar savings, yes, but not percentage savings. This is true because savings at any level of production only apply to the value added at that level. It doesn't matter if there is one level of production or ten, if the average cost savings is 10%, that doesn't change. Do you really believe that if each level of production saves 10% on tax related costs, that the total savings would be 100%? Just not true, my friend. The answer is still 10%, and your 20% estimate is incorrect. Check it out!
Hank Van Gieson February 05, 2013 at 11:44 AM
Matthew, In addition, my reference to a "free lunch" was simply in response to some Fairtaxers claim that we will get 100% of our pay/pensions and retail prices would remain about the same. That can't happen as I have shown with my 17% analysis. You just can't have both as there is no free lunch. And, if you want to continue the fiction that retail prices remain ablut the same, then admit you are willing to give up your income tax and payroll contribution withheld amounts to your employer so he might reduce his costs by over 20%. That isn't going to happen for legal, contractual and fairness reasons, and I don't tbhink you would get any support from the rest of us.
jim armstrong February 05, 2013 at 01:18 PM
Even if it does away all taxes based on income, which is a punishment for being successful? Please, for the sake of the chldren, LearnToReadWithComprehensionThisTime.
Stephen C. Eldridge February 05, 2013 at 01:35 PM
To Jim Armstrong; Have you carefully read the 8 part Executive Summary that I was to post here?
Stephen C. Eldridge February 08, 2013 at 09:09 PM
Folks, I was able to post my 2 page Executive Summary in a new blog, here. I suggest that we move this discussion over to the new blog and continue from there.
Matthew Dirks February 09, 2013 at 11:48 PM
So with corporate income tax rates between 15% and 35%, a combined *payroll* tax burden of 7.65% of payrolls (not just 6.2% FICA but also 1.45% Medicare), and the cost of the products they buy from their suppliers carrying the same tax burdens embedded in the cost of their goods, you expect us to believe that companies will *only* see a reduction (through not being taxed in the first place and not having to spend money in compliance costs) of 10% on current levels? What's your data-set - large politically connected corporations (like GE) that get to use tax write offs to (legally, mind you) skirt the tax-man? Sorry, claims like that need citation and context. Furthermore, I notice that you never say what the 10% cost savings is of. Their revenue? Their income? Their costs (material, labor, and overhead)? "Do you really believe that if each level of production saves 10% on tax related costs, that the total savings would be 100%? " I never said the percentages were *additive* over the production chain! Of course they're not! But, they the percentage of savings *are* cumulative (which is not the same as additive) as you go up the chain as the savings of each producer ripples up the chain such that the total *cumulative* saving is a percentage that is greater than simply the initial link's cost savings, tapering off as you go further up the chain as the ratio for value added by an individual company to the total value up to that point decreases.
Matthew Dirks February 10, 2013 at 12:26 AM
So credits like the EITC and the Child tax credit are "welfare" when they (in a minority of cases) allow one to have a negative tax rate but aren't "welfare" for everyone else that has an effective rate 0% or more (a rather subjective view and full of cognitive dissonance)? Or are you saying they're welfare in all cases and therefore don't properly belong in the tax code. Also, in response to given your prior statements about credits/deductions only reducing either tax viability or taxable income to zero, having a 0% effective tax burden sounds (even just on income tax) sounds more akin to the negative effective rate side as both of those groups would benefit from all the things that income taxes pay all while not actually paying anything towards them themselves ... especially since payroll taxes were set up to fund very *specific* programs (i.e. Social Security and Medicare).
Stephen C. Eldridge February 10, 2013 at 12:43 AM
Matthew, Your last sentence of your 1st para is correct. IMHO, these tax credits constitute welfare in their entirety and have no place in the tax code. We should not be reducing anyone's tax liability solely because they have earned income or babies (the deduction for personal exemptions also falls into that category). I am not sure what you are saying in your 2nd para. IMHO, have 1.2 the people pay no income tax, yet enjoy the protection of our military, etc, DOES INDEEED constitute WELFARE. We the taxpayers pay their fair share of our nation's common charges. I agree that SS/Medicare taxes are paid for specific benefits (and the poor receive more from these programs than they pay in) and thus they should not be used as an excuse that the poor "pay some ". Also, the fact the poor may pay sales taxes (they rallly don't because we pay it back to them in welfare benefits) should not be a valid argument that the poor "pay tax" - even if they did pay with their own money, they are paying for STATE "services" and still pay nothing for federal "services". Matthew, did you see my pdf of my Executive Summary on my new blog, Reforming our Tax System?
Stephen C. Eldridge February 10, 2013 at 01:05 AM
Matthew,, My calculations were "back-of-he-envelop" but are consistent with Hank van Giesen (who is trained as an economist) and is not much lowr than other econonists (including those paid by AFFT) estimate (Hank may provide a list and sources and I will start to look for those as well). I believe Hank has pointed out that AFFT-paid Hrvard Professor Dale Jrgenson ultimately explained that 2/3 of his initial 22% price reduction would come from employers reaping their empoyees' tax savings, leaving only 7% remaining for POTENTIAL price reductions - IMHO. the entire econony is not nealy as cometitive as the airline industry that AFFT used to justify its claims that any tax cost reduction would result in a dollar-for-dollar price reduction. BTW, to paraphrase Jogenson "The FT takes on too great a burden for it to bear by trying to replace those 3 taxes". Incidentally, I quickly reviewed that GE financial staatement - the claims of the Left that GE paid no taxes is a typical use of ignorance to make a political point. In short, a substantial part of their profits were overseas (and not remitted) and the current year's tax on income was almost eliminated because the had huge carryforward tax losses from prior years that they could not use (because the tax law only allows them a stingy 2 year carryback of losses). Incientally, I have
Stephen C. Eldridge February 10, 2013 at 01:17 AM
Matthew, Further to your comments about price reductions. Corp taxes reprsent a very small % of SALES PRICES. Payroll Taxes apply only to LABOR costs. Suppliers' price reductions will be similarly small.
Hank Van Gieson February 10, 2013 at 02:25 AM
Matthew, O.K., get out your copy of the 2006 BHI/Kotlikoff Fairtax rate study. That is the source of my 10% claim. It goes like this. In 2007, corporations paid $290 billion in income taxes against retail sales of $9 trillion or 3.2% of sales. Businesses paid 60% of the total FICA revenue or $522 billion which is 5.8% of sales. (60% rather than half accounts for self employed business owners who pay both FICA shares) And businesses paid $147 billion in compliance costs according to the Tax Foundation, or 1,6% of sales. Add them up and business tax related costs averaged just over 10%. Add the 30% sales tax and retail prices rise by over 16% on average. Granted, I'm talking averages, and I know that business size may result in very different tax burdens. But averages is all we have to work with at this point. Check it out!
Matthew Dirks February 10, 2013 at 04:06 AM
I was able to find your "Executive Summary" here on the site and must say the piece is fatally flawed. How does a couple with *six* kids only spend 10,000 a year in consumption?!? How do you feed, clothe, shelter and otherwise provide *eight* people for only $27.40 (rounded up) a day? Even if they bought used as much as possible as humanly possible, this is hardly realistic. Furthermore your calculation of the tax is *in addition* to the base amount, but price paid at the register will include the tax (i.e. it is an inclusive 23% and yields the same numerical result as using the 30% exclusive rate on only the retailer's portion of the price ... which would no longer be the price on the shelf). If the first figure is their spending in dollars prior to the FairTax even being implemented, then you cannot just tack on an extra 30% as that completely disregards the reduction in prices that will occur due to removed tax burdens on producers (i.e. the portion of the price that is attributable to the retailer will not stay the same as it was before implementation) ... even Hank Van Gieson's anti-FairTax comments in this thread admit that producers costs will go down (even though I suspect his cost savings percentages are either cherry-picked or cited out of context to come up with a lower result than will actually occur). Seeing as conclusions in your paper stem from from this chart, your entire work falls apart as you cannot form a valid argument upon false premises.
Hank Van Gieson February 10, 2013 at 09:11 AM
Matthew, No matter how you twist and squirm, if the government lays on a 10% tax, that percentage will not cascade or accumulate up through the chain of production. That is so because the tax is paid only on the "value added" at each level. It doesn't matter if there is one level or ten, the percentage tax cost or savings is the same. The cost of an article increases at each level and the dollar value of the taxes paid also increase at each level, but the overall tax percentage is whatever the government mandates. Perhaps this simple chart will help? 1. $10 initial cost minus 10% = $9 2. $1 value add minus 10% = $.90 3. $1 value add minus 10% = $.90 4. $1 value add minus 10% = $.90 5. $1 value add minus 10% = $.90 6. $1 value add minus 10% = $.90 $15 normal cost-- $13.5 after cost savings Total percentage reduced 10%, not 60%.
Stephen C. Eldridge February 10, 2013 at 03:57 PM
Matthew re your commnts on lat night at 11:06 I am going to try to copy and paste them into ye blog to which they relate Reforming our Tax System. and will respon to them there. Thank you for the opportunity to explain. If you read my responses you will absorb the facts you need to truly understand.
Stephen C. Eldridge February 10, 2013 at 05:09 PM
To: Matthew Dirks I have posted 2 responses to your last commnt, but I did so on the other blog, Reforming our Tax System. Thank you for your comments and willingness to keep an open mind . I hope you will read my responses. I can try to explian even further.
Stephen C. Eldridge February 11, 2013 at 02:11 AM
To ALL, I invite you all to move to the new blog, Reforming ourTax System.
Matthew Dirks February 11, 2013 at 04:36 AM
So the 10% is based of *sales*? You're inflating the base needlessly by calculating against *prices* rather than costs as business have to push their prices higher *because* of costs like taxes to maintain a sufficient profit levels some need higher margins on lower quantity sales some can do with lower margins on more frequent sales! To do a proper comparison you need to base it of their actual costs as price is a function of cost (as well as what the market will bear). Lower costs can mean lower prices by more than just the cost reduction. "O.K., get out your copy of the 2006 BHI/Kotlikoff Fairtax rate study. That is the source of my 10% claim. It goes like this. In 2007 ..." um, it's a 2006 paper, so you're getting 2007 numbers how exactly? You do realize any 2007 numbers in the paper were *2007 *estimates* right? You can't intermix estimates (like the Corporate Income Tax and Payroll numbers) and real, observed figures (like apparently your "retail sales" figures and compliance costs) and get an accurate assessment. Also, you do realize that counting "retails sales" as it is generally defined today will include goods that have already been "retail sold" before (like cars for example) and, as such, will be double-counting goods and over-broadening the base such that the total burden of taxes is watered down by an the artificially high base, right? Used goods would *not be taxed* under the FairTax, only after the first instance of retail consumption would they be taxed.
Matthew Dirks February 11, 2013 at 05:02 AM
"but are consistent with Hank van Giesen (who is trained as an economist)" I have heard Frank claim many things and many things claimed of him, but being a trained economist is certainly not one I've heard until now. If you're going to take the word of trained economists, might I suggest the works of Laurence J. Kotlikoff and David G. Tuerck? Some suggested ones being "Taxing Sales Under the FairTax: What Rate Works?" and "Memo to Bruce Bartlett: Just Do the Math". Also look up their 2011 testimony before the House Ways and Means Committee.
Stephen C. Eldridge February 11, 2013 at 01:34 PM
Matthew, I am trying to get you to move this discussion over to the new blog, "Reforming ur Tax System". "Frank"??? (it's Hank). My, Hank's and other economists believe the POTENTIAL (not guranteeed) price reduction is up to 10% (including apparently Harvard Prof. Dale Jorgenson who was PAID BY AFFT). Kotlikoff & Tuerck are/were paid by AFFT and their claims thus SUSPECT. I am free to challenge any economist, review their findings and analysis and make up my own mind thank you. I read (skimmed) most of their reports and found serious faults with their analyses. Do you analyz what they said or are you merely impressed that they are Phd Economists? If you in fact watched their testimony at the House W & M Comm. 7./26/2011, you are aware that the FT did not do very well. Charlie Rangel almost chiked on the PREBATE. Chas. Pascarell (D-NJ) called it a "Fairy Tale"
Hank Van Gieson February 11, 2013 at 01:41 PM
Matthew, The 2006 Fairtax rate study done for AFFT used 2007 data as estimated by the GAO. (see pg 9) If that somehow make my analysis garbage, then the Fairtax rate study must also be gargage. Maybe you should tell them? I used retail sales data as my base because that is what is going to be taxed. One person suggested I use GDP data. If you want to use costs, let's subtract 10% in average profits and see what results. With a new base of $8.1 trillion, retail prices would increase by 15% rather than 16%. Is that important? And, yes, I understand that under the Fairtax, used goods (tax previously paid) won't be taxed again. So the taxable consumption base goes down, and the rate has to go up for revenue neutrality. So what? I still like my 16% retail price increase until you come up with something better.
Stephen C. Eldridge February 11, 2013 at 01:42 PM
Matthew, I am having trouble quickly understanding your new 10% comments, I will study them when I return later today. Please try to move this discussion over to the new log, Reforming our Tax System and lets try to review this FT in an orderly fashion, starting with the Prebate's exacerbation of welfare.
Stephen C. Eldridge February 11, 2013 at 04:00 PM
Mike. I find your arguments confusing and difficult to discern. Let's start out with the BIG PICTURE. Kotlokoff, et al or Hank, nor I can GUARANTEE any $ price decline. Even if Kotlikoff , et al wrte a FLAWLESS paper (they did not - it is full of holes) that does not translate to a CERTAINTY, it is only one possibility. You seem to trea a (paid-for) economists paper to be the equivalent of combinig 2 part Hudrogen with 1 part Oxygen, which will ALWAYS produce WATER. So, whatever quibbles you might have with the details of the calculation, its still only a calculation of a possiblity, NOT A GUARANTEE. Yu seeem to be a "true believer" of AFFT's paid-for economic "conclusions". I find Kotokoff & Tuerck's work seriously flawed - you sem to accept it as gospel. I do not artificially increase the base. RETAIL PRICES EQUAL SALES. If corp profis equal (say) 5% of SALES and they pay 35% IT on PROFT, then they pay IT of only 1.75% of SALES.
Hank Van Gieson February 11, 2013 at 05:03 PM
Matthew, Before we get too deep in the Fairtax weeds, lets step back and see where we are--or aren't? This series of posts started with your claim that prices would only change 1-2%. I responded with my free lunch explanation --that is, you can't get all your pay and expect prices to remain about the same. That 22% written on clay tablets includes your income tax and payroll withholding which you aren't about to give up. You then switched to a flawed argument that cost savings cascade or accumulate up through the chain of production. That is just not true for the reasons I gave. Now, you are knee deep in the detail of my 10% analysis. You are welcome to use any data you want, but what I want to read is that you now agree that we can't get all our pay and expect prices to remain stable. Can you agree with that?? The Fairtax economists sure do.
Stephen C. Eldridge February 11, 2013 at 06:23 PM
Matthew, You never rsponde after I responded to your criticism of ony the first part, i.e., the Prebate of my Executive Summary. Please let me know if you now understand that while Jones may "spend" more than $13,000, but NOT IN CASH that HE EARNED, so that he will pay only between $0 and $3,000 FT ,while receining a Prebate check from all of us in the sum of $10,833 that was suppose to keep him whole from FT but actually OVERPAYS HIM GREATLY. Please resoond on the new blog, Reforming our Tax System.
Stephen C. Eldridge February 11, 2013 at 09:34 PM
To add to Hank van Giesen's comment of 4 hours ago: With all due respect to economics Phd's bless their hearts) we can submit nanalytical papers, find errors and shortcomings in them and hone those papers until we all agrre on the one proper projection.Yet is still only a PROJECTION, a mere THEORY because econoncs CANNOT PREDICT ANYTHING! No-one can say for vertail exactly how much prices will rise. I make a totally independant point, an in-your-face MINIMUM sales tax rate of 38%-68% will precipitate the 2nd American Revolution. No-one will be placated by a slight reduction in pre-tax prices nor by not paying IT - they will be inflamed by those tax rates on virtually EVERYTHING THEY BUY.
Matthew Dirks February 12, 2013 at 04:00 AM
"Frank" was an obvious typo. I meant to type "Hank", and spell-check must have "fixed" it for me and I didn't notice the error (as it was late when I posted). "Kotlikoff & Tuerck are/were paid by AFFT and their claims thus SUSPECT. " So just because independent analysis is paid for means it's "suspect" (which I take to mean presumably biased and therefore faulty)? Is independent analysis funded through government also suspect? Furthermore, most analytical studies are paid for by some group in some fashion (most analysts aren't going to be working on a project for free), therefore, that means *all* analysis is suspect and, therefore, why should you trust any of it or bother studying it if it's so suspect? I read through their works as well and while expect a PhD in economics to know what they are taking about, especially on fundamentals, but I have read though the whole piece before and found no fault with their analysis (although Bruce Bartlet thought he had found a "flaw" in their analysis but was promptly corrected on his *own* oversights). "Charlie Rangel almost chiked on the PREBATE. Chas. Pascarell (D-NJ) called it a "Fairy Tale"" Are you now taking *politicians'* analysis on sound economic policies over actual studied economists? Please, if you're appealing to credibly, they can hardly manage to properly budget the money they bring in and still have to borrow on top of it, not to mention that a budget hasn't actually been passed in (going on) 4 years.
Stephen C. Eldridge February 12, 2013 at 02:03 PM
Response to Matthew Dirks' commment at 11:00PM last night: Yes, especially when a loobying group funds "research", one (who is not naive) must view such "research" with skepticism. Any such "research" should be thoroughly analyzed and challenged. All "research" should be challenged thoroughly. Bruce Bartlett, among ohers, did challenge the FT and found significant flaws. The FT response (in the article "Do the Math") was "corrected" ONLY IN YOUR MIND, thats your opinion, not a FACT - I find that Bartlett found some critical flaws in FT and then I discovered far more flaws than Bartlett did. Charlie Rangel choked OVER FT's GIANT NEW ENTITLEMENT - amazing, a Democrat did not want to burden us with a giant new annual bill to pay (your dismissal of this as merely "political" is superficial, IMHO). Charlie Pascarel's calling FT a "fairy tale" sounded to me like he performed financial analysis on the bill (after much analysis, I share his conclusion) - again, your dismissal of his opinion as merely "political" is itself superficiial, IMHO.
Stephen C. Eldridge February 12, 2013 at 04:48 PM
Matthew, Further to my last respons to you about "correcting Bartlett's "math". They id not find fault with Bartlett's math, they merely supplied the FT's propaganda math, which I find extremely faulty (why don't you join me on my blog, Reforming our ax System and we can discuss this in an orderly fashion, starting with the Prebate). The eal point I wanted to re-emphasize is that you appear to be in awe of economists calculations, treating them as gospel that must be corrrect is the math is not faulty. I view those calculations are mrely interesting THEORIES - honest ecnomists will admit, the cannot predict anything with guaranteed accuracy - their predictions are not biblical.
Sharon Swanepoel February 14, 2013 at 02:46 PM
An executive summary PDF has been uploaded at the request of Stephen Eldridge


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