Grocery Tax

[Gaspar]

You know the 'Fair' Tax started out at 14%, rose to 17% directly, then suddenly became 23% in recent discussions. Did I hear 30%?!

Nope. 

Been 23% since 2003.  When the bill was authored in 2005 it was set at 23%.  Never changed. based on research.

http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf

[swake]

Nope. 

Been 23% since 2003.  When the bill was authored in 2005 it was set at 23%.  Never changed. based on research.

http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf

Research like how much that billionaire was going to pay in taxes?

[nathanm]

And it doesn't disproportionately tax anyone.   You pay tax on what you buy.  The "poor" are using food stamps and WIC so they are not paying anything. 

For three months before their benefits run out. (Except in the case of families with kids, of course, or if the state is kind enough to use one of its exemptions on you)

Then there are the large number of people who refuse for whatever reason to apply for benefits and therefore don't get them.

[swake]

LOL Yes you are correct you can get there with 3rd grade math. 

Assume there is a worker named Joe who earns $125 and spends all of his earnings. Let’s further assume that the government requires him to pay $25 in taxes.

Let’s use an example to illustrate the difference between tax-inclusive and tax-exclusive tax rates.

If the government put a tax on Joe’s income, he would earn $125 before tax and would have $100 after tax to spend at the General Store. Thus, Joe has to earn $125 to have $100 to spend. Joe would also have to file an income tax return.

If the government put a tax on what Joe spends, he would earn $125 and would have $125 to spend at the store. Of the $125 paid by Joe to the storekeeper, $100 would be for the goods he bought at the store and $25 would be taxes that the storekeeper would send to the government. Joe would not have to file a tax return, as the storekeeper sends the tax in to the government.

Either way, Joe pays $25 in taxes and the government gets $25 in taxes. With a tax on income, Joe pays the $25 directly to the government, and with the tax on spending (sales tax), he pays the $25 in taxes indirectly when he buys something from the General Store. The General Store sends the tax that Joe paid to the government.

Wow, like, congratulations. You’ve just totally logically proven that if someone has $125 and is going to pay $25 of it in taxes, how the $25 is going to be paid doesn’t change the amount paid because you already stated the tax was going to be $25.

Totally.

How about the fact that the top 1% of wage earners make 19% of the nations income but pay 39% of the taxes. Even if they would pay 19% of the taxes under the flat tax (which they wouldn’t even come close to because they don’t spend all their income, by far) the tax burden on the rich would fall 20%. And that difference in money is going to have to come from somewhere.

Also, consider that in 2007 American and Foreign companies paid the equivalent of 2.7% of U.S. GDP in federal taxes or about $373 billion dollars. Do away with that tax and it has to be paid by someone. Can you feel that 23% rising already?

Totally.

[Gaspar]

Wow, like, congratulations. You’ve just totally logically proven that if someone has $125 and is going to pay $25 of it in taxes, how the $25 is going to be paid doesn’t change the amount paid because you already stated the tax was going to be $25.

Totally.

How about the fact that the top 1% of wage earners make 19% of the nations income but pay 39% of the taxes. Even if they would pay 19% of the taxes under the flat tax (which they wouldn’t even come close to because they don’t spend all their income, by far) the tax burden on the rich would fall 20%. And that difference in money is going to have to come from somewhere.

Also, consider that in 2007 American and Foreign companies paid the equivalent of 2.7% of U.S. GDP in federal taxes or about $373 billion dollars. Do away with that tax and it has to be paid by someone. Can you feel that 23% rising already?

Totally.

If you are going to continue to hammer the same talking points without reviewing the information i've posted than I can do no more.  The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars $358 billion more than the taxes it replaces.

YES IT BENEFITS THE WEALTHY.  IT BENEFITS ALL INCOME BRACKETS. IT BENEFITS THE POOR, THE ELDERLY, AND EVEN THE STUPID.  Over time, the FairTax benefits all income groups.  Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system.

It seems you are simply looking for a system that punishes the wealthy, no matter what that system is or how disgusting and complex.  As long as the wealth of the country get hammered you are content.  We will never agree on this so if that's the stance for your debate than we are done here.

You have already won.  You have the system you desire.

[Neptune]

I assume they meant to say that it would eliminate the tax by lowering it by half cent increments over 7 years. As it is now, it's saying after 7 years the tax would be half a cent lower.

Regardless, he may have better luck but that seems TOO long of a phase in.

From KOTV

The measure by Rep. John Trebilcock of Broken Arrow, House Bill 2204, would lower the state grocery tax each year by one-half a percent, bringing it down from 4 percent in 2010 to 0.5 percent in 2017.

[cannon_fodder]

Initial response to the last post:

Swake, you made a logic error in your final post.

How about the fact that the top 1% of wage earners make 19% of the nations income but pay 39% of the taxes. Even if they would pay 19% of the taxes under the flat tax (which they wouldn’t even come close to because they don’t spend all their income, by far) the tax burden on the rich would fall 20%. And that difference in money is going to have to come from somewhere.

39% of taxes paid does NOT mean they paid an effective rate of 39%.  The portion of taxes they paid as a percent of total revenue is NOT their tax rate.  Similarly, making 19% of the income is not correlated to the 39% of taxes paid.  NEITHER is indicative of the effective tax rate.

Thus, "39% of all taxes paid" - "19% of all income paid" != 20% tax savings at a 23% effective tax rate.  It is a totally illogical statement.   You are not adding and subtracting like figures, and even if you were - you can't do direct math on percentages.  


Originally drafted response (had to write over a long period, sorry) . . .
- - - -  -
Swake, I appreciate your arguments.  You are raising logical concerns.  Issues I had before I looked into the idea myself.  Let me try to "show you the light" by explaining some of the basics and then going over your concerns.  I'm sorry in advance if I revert to argument, it is my nature...

First, you appeared confused on the basics of the tax.  A flat tax would replace the income tax, social security, medicaid, all that junk.  You would not pay a 23% flat tax, 18% income tax, and 11% FICA.  Second, a prebate would be given at a set level - effectively establishing a minimum level of income before you are taxed at all OR you end up being paid to exist.  Finally, the net receipts from the Federal Government would not change and the effective tax rate of most Americans would go down.

In the simplest form:  all purchases of new assets are taxed at 23%.  Each citizen over the age of 18 get's a prebate of $500 monthly to offset the portion of their earnings below the poverty line that would go to Federal taxes.  And that's it.

End user annual consumption in the USA is around $12 trillion.  23% - rebates = the federal budget.   Really, it's that easy.  
- - - - - - - -

1) Company TAXES are currently built in.

Currently the taxes "the companies" pay are built in costs in the products they sell.  Companies don't just eat losses from taxes, they of course pass the cost along (D'oh!  I forgot about taxes.  Guess we lose money again this year).  Remove the taxes on the back end and put them on the front end.  The biggest change would be the method of collection and an increase in efficiency that results.

The buyer would continue to actual pay the tax as they currently do.  The notion the companies pay taxes is a misnomer.  And of course, when you say "companies" you are really referring to small business owners, pensioners, 401K holders, and anyone with an IRA.  Very few companies are owned by the Robber Barons some people want to believe in.

Anyway, the net result could be reduced prices on efficiency gains.  More than likely, it would be near level prices IMHO as efficiency gains are leveled by a shift in employee contributions to the price of goods.  But employees would then have said money in their pockets to cover any increase... so that aspect would be a wash even if prices increased (these are of course NET prices we are talking about, with tax).

2) A flat tax would have no negative impact on commerce.

The taxes are already built in.  Unless you argue that companies do not foresee taxes and adjust prices to cover them,   which is of course absurd.   Furthermore, the additional tax built in would be already paid as income tax or FICA.   There would be no net change in taxation.

The same amount of money would be taken out of the economy.  The government gets their share of the pie either way, about 12% of GDP is taxed to the Federal Government.  The net effect on commerce would be positive via efficiency gains: how much time is spent trying to figure out tax compliance and enforcement (tens of billions), how many layers of tax repeat the same process, how many mistakes are made (any system that 2 attorneys, a couple experts, and a Federal Judge can't figure out is a bad system)?

3) Entire burden on wage earners?

Actually, as it now stands wage earners pay more taxes than non-wage earners.  If I was lucky enough to have a trust left to me I would pay almost no Federal taxes.  Under the current system, the wealthiest citizens who consume the most have the lowest tax rates.  If regressive taxation is your muse, I'm not sure why you are defending <20% tax rates for the rich and 35% rates for the middle class (the poor have a negative tax rate).  

Or are you pretending that corporations are paying taxes?  The $20,000,000,000 that Exxon paid in taxes last year came from your 401K, the workers IRA's, and union pension funds.  Corporate income is both derived from and owned by people.    More importantly, corporations don't eat their tax burdens (oh crap, more taxes.  I guess we lose money now), the cost is passed on to consumers.  

The notion that anything would shift a tax burden "from companies" is an easy concept to buy into, but it really makes no sense at all.  To believe it you have to assume corporations accept taxes as an unforeseen loss that is not built into the price AND you have to ignore the ownership interests in companies by individuals.

Now you argue that then COMPANIES make more money!  Which of course means that the people behind the company are making more money, which is a good thing.  But in reality when their tax burden is lowered competition will kick in.  If they can lower prices, they will sell more product, which will make more profits.  So their competitor will offset any savings they have with lower prices . . .

and once again, the tax is already built into products.  It is currently paid by companies, who pass the cost on to customers.  Who are the wage earners you are worried about.  

4) Regressive tax?

If properly structured the middle class would have exactly the same or a lesser tax burden. The lower class would continue to have a negative tax burden (making money from the state).  Simply prebate the set level of taxes - don't think the first $40K should be taxed?  Then prebate 40K x tax rate.  If you were frugal or simply don't have the money to spend, you are now living off the state.

It would only be regressive if people earning less income were spending more.  Which would seem to be a behavior we would want to discourage anyway.  If someone in "the projects" is spending more money than a middle class family - why shouldn't they be taxed as much as a middle class family?  Presumably they are living as good of a life as the middle class family and somehow deriving as much income OR living beyond their means.

5) Tax rate, estimates say 23%.

The best estimates done say 12% of the cost of all products is attributed to taxes.   Add in 11% for FICA (et a) and you get the 23% range.  The government is going to need to same amount of revenue no matter what the tax structure.    No more money would be taken out of the economy with flat tax than with any other form of taxation.

6) The BILLIONAIRE!

Your primary fear appears to be that ultra rich people will make billions of dollars and never spend it.  Thus, the government will not be able to tax it and you will have to shoulder the burden.  I have three primary problems with this:

a) The richest person in the world saw an effective tax rate of 17% in 2008.  Warren Buffet paid 17% taxes on money earned in 2008.  That money has already been taxed, there is minimal tax revenue from it to be transferred to the Federal Government.    17%.  I did not make millions, let alone billions, and saw an effective tax rate higher than that.  

Under a flat tax he is allowed to earn whatever money he wants.  When he spends it, it will be taxed at the same rate normal people are taxed at.  No special lower tax rate for being really, really rich.

True, we would be giving up a share of the revenue NOW to get a larger share of revenue in the future.  But in the long run, the Federal Government would have a higher effective tax rate on the earnings of the billionaire.   If taking more money from rich people is your goal, this would be a means to that end.

b) The counter argument appears to be:  what if he never spends it!  What an illogical notion that is.  His wealth may persist for a very, very long time - but the point of wealth is the ability to expend it.  The Astors once owned 10% of the United States GDP, and while some remain wealthy they don't hold a significant amount of the nations wealth just several generations down the road.   The money has been spent (here it is worth noting that the Jacob Astor paid no income tax, his legatees don't pay income taxes either on their trust proceeds... but would have to pay sales tax).

The fear that rich people would simply horde money and cease spending is a fallacy.  Eventually the money would be spent, and eventually a higher tax rate would be realized.    Most people/business would see it as a good investment to forgo 17% today to get a 35% increase (to 23%) in the future.

Conversely, if we want to assume that the money is NEVER spent - then we have encouraged legacy capital investments.  Which are the basis for start up business, mortgages, expansions, and most other economic activity.  Unless the fear is the money will be stuffed in a mattress, which really would serve to hinder inflation (essentially removing funds from the monetary supply) if it was a significant enough amount of money to care about.

c) Standard of Living

A consumption tax would essentially tax your standard of living.  If you are poor and living beyond your means, you will be taxed higher.  A rich person living very frugally will be taxed lower.  What's wrong with that?

As I mentioned above, eventually the money will either be spent and taxed at a higher rate - or it will serve as capital supporting our economy.  Either way, we win.  I simply don't by the "they have it, we need to take it" argument of taxation.  

If my neighbor lived as I do, I'm satisfied if he is taxed as I am.

7) Family of $50,000.

A family of 4 making $50,000 has 2 adults.  Using your scenario lets see how it works out:

Currently:
Federal Tax rate:  15%.   (full deductions, HOH for single wage earner, 2 dependents, effective rate ~5%)
Payroll Taxes: 15.3% (of the first 106K.  12.4% FICA, 2.9% medicare)

Total Federal Taxes paid: $15,150

Flat 23%:

Federal Taxes Paid - $11,500 (spending every penny on taxable new items)
Prebate - $6,000

EFFECTIVE TAXES:  $5,500

Bump it up to 30%.  40%.  Still doing better.  And that ignores other advantages like pre-tax mortgage, tuition, charity, etc. etc. etc. AND assumes a paltry 5% effective income tax rate.

Saving the middle class $10,000 a year.  I would argue that is very good for a middle class, not detrimental to it.  

Tourism.

In 2006 Tourists spent $107,000,000,000 in the United States.  The bulk of that was for food, travel, room and board.  Some went to souvenirs and some to significant purchases.   Tourism would not have a major impact on the tax collection IMHO.

However, I do not believe it would be reduced very much.  Recall that taxes are already built in to the price of goods and thus they would likely NOT increase a tremendous amount.

9) Barter/underground economy

Barter would probably be a concern.  However, the amount of the economy that can/will function on barter would probably not change significantly from what it is today.  Most things in the modern world just do not work well on barter.  

However, illegal activities currently avoiding income tax would be largely unable to avoid a sales tax.  Sales taxes are one of the most collectible taxes because a retailer is required to registered and remit the taxes for the government.  Not residents.  QT, Walmart, Braums... they are much more likely to accurately report sales than Joe the Plumber on his income taxes.    

Similarly, people who do not report income would have no way around the system.   How many tips, cash payments to attorneys (you'd be surprised how many retainers for criminal defense are cash), independent contractors, illegal immigrants, drug deals, ebay sales of used goods, garage sales etc. etc. etc.  The cash economy would be effectively taxed.  

I'm sure there would be issues that evolve to avoid the tax.  23% is a strong incentive.  But as strong or stronger incentive exists as is to avoid many taxes.  And taxes on new goods would be simpler to enforce than the complicated "income" system we currently use.

10) Loopholes, favoritism, complication, privacy.

Tax loopholes, favoritism, cheaper effective rates for ultra rich or certain sources of income . . . all this would go away.  The primary reason this would never happen is because the government would lose a significant tool in controlling people.  Groups that get non-profit status are essentially Federally subsidized to the tune of 25%, if it is denied your group may fail.  Industries can lobby for favorably tax treatment.  Super rich get loopholes added to the tax code.  Currently the Federal Government can use the tax code to encourage or dissuade any behavior it wants to.

Likewise, the tax code is a great way to keep tabs citizens.  How much did you make?  Where did you spend it?  What charities or political groups did you support?  All the information is mandatory given to the government.

And finally, the tax code is not understood by anyone.  My father is a tax expert, it's what he does and has done for a living for decades.  He doesn't pretend to understand everything in the tax code.  I've had a hand in tax matters...  as the controller of a company (J.D., accounting/finance degree) with our tax expert and a tax attorney we had trouble figuring out some issues.  A call to the IRS will get you no where since they don't really know the law.

The tax code as it stands is horrible.  Something needs to change.

[Gaspar]

CF, Sometimes you make me feel like a 16 year old boy fiddling with his date's bra strap.

 

Very well put.

[nathanm]

The tax code as it stands is horrible.  Something needs to change.

We can all agree on that, even if we can't agree on how it must be changed.

A "pre-bate" as you call it would eliminate the largest of my concerns regarding a national sales tax, namely the sales tax's nearly punitive regressiveness. That said, I am fully in favor of progressive taxation. IMO, if we are going to go to a national sales tax, purchases of goods over a certain dollar amount (say $10,000 or $25,000, or even $100,000) ought to be taxed at a higher rate.

Sorry, I just think the more money you make, chances are you got more benefit from society to make that kind of money and should probably pay a higher proportion of your income than those who haven't had the same luck do.

One big question is would it be structured like VAT in Europe (or GST in Canada) where when one business sells something to another for resale that sale is taxed, or would we keep the current sales tax structure where businesses only pay sales tax on the items they purchase for their own consumption?

In any event, as I mentioned at the beginning, I think the current system is difficult to administer and difficult to understand. How we fix it? That I'm not sure about.

Of course, what we really need is a way to make it less attractive to base your entire industry (here's looking at you, finance!) on gambling. That's a far more pressing issue at the moment, IMO.

[Gaspar]

Sorry, I just think the more money you make, chances are you got more benefit from society to make that kind of money and should probably pay a higher proportion of your income than those who haven't had the same luck do.

I love it when people use that word.  Like wealthy and successful people won a lottery or something.  It exposes the disdain just under the surface.

99% of the wealthy (people who make over $250,000 a year according to our current admin.) worked very very hard to get to that point.  They built companies, went to school 2,3,or 4 time longer than most of us, or went through the arduous task of pushing new and unique concepts through a sea of detractors.  They worked late nights and got to the office early in the morning.  Success is their reward, but not for a game of chance, because in this country everyone has a chance and a choice.

But you are correct there is that fraction of a fraction of a percent that DID win the lottery!
(we tax them 55% already  )

[Cats Cats Cats]

I love it when people use that word.  Like wealthy and successful people won a lottery or something.  It exposes the disdain just under the surface.

99% of the wealthy (people who make over $250,000 a year according to our current admin.) worked very very hard to get to that point.  They built companies, went to school 2,3,or 4 time longer than most of us, or went through the arduous task of pushing new and unique concepts through a sea of detractors.  They worked late nights and got to the office early in the morning.  Success is their reward, but not for a game of chance, because in this country everyone has a chance and a choice.

But you are correct there is that fraction of a fraction of a percent that DID win the lottery!
(we tax them 55% already  )

Funny you put that 55% remark 2 or 3 posts down from the fact that Warren Buffett has an effective tax rate of 17%.  On Cannon_Fodder's comment, I think you are overestimating the spend that will occur for "rich" people.  The US is one of the best places to make money in the world.  So you have your money, spend $100,000 a year on your house and what not.  Invest the money in the market.  When you turn 50, cash out, move to a nice island somewhere and retire paying 0 taxes.  What else are you going to do with a flat tax tell you that you can't move out of the country if you want?

[Gaspar]

Funny you put that 55% remark 2 or 3 posts down from the fact that Warren Buffett has an effective tax rate of 17%.  On Cannon_Fodder's comment, I think you are overestimating the spend that will occur for "rich" people.  The US is one of the best places to make money in the world.  So you have your money, spend $100,000 a year on your house and what not.  Invest the money in the market.  When you turn 50, cash out, move to a nice island somewhere and retire paying 0 taxes.  What else are you going to do with a flat tax tell you that you can't move out of the country if you want?

Nothing's stopping them from doing that now.

55% is the gift tax on monetary gifts in excess of $10,000.  If I give Warren buffet a Christmas present of $20,000 cash, he will have to pay it too.

[cannon_fodder]

First, I am proud that most of the posts are target at the merits of the case.  Good logical questions and concerns.  Even if we disagree, we can advocate positions on the merits.  I THINK I'm right, but I'm not necessary correct on that.  

Nathan:

The Fair Tax, as proposed, is a tax on end user consumers of new products.  New cars, new houses, restaurant items, computers . . . you name it.  If you buy it from a retailer, it is taxed.  Business to business purchases are NOT taxed (VAT).   TO be honest - I have not significantly studied the effects of a VAT in comparison to the Fair Tax, so I can't really speak intelligently about it.

Dragon from Strongbad:

(nm, Gaspar covered it)

[Chicken Little]

CF, I think it's a little disingenuous to use Buffet to argue for a "Fair" Tax.  

He's been an outspoken advocate for resetting the capital gains rate.

“The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

This isn't a guy who wants everybody to be treated "fairly", this is a guy who understands thoroughly that the rich can AFFORD to pay more.  There's nothing fundamentally (or morally) wrong with a progressive tax.  Yeah, pols have screwed up the capital gains tax, but Buffet's the first to admit that.

[swake]

Initial response to the last post:

Swake, you made a logic error in your final post.
39% of taxes paid does NOT mean they paid an effective rate of 39%.  The portion of taxes they paid as a percent of total revenue is NOT their tax rate.  Similarly, making 19% of the income is not correlated to the 39% of taxes paid.  NEITHER is indicative of the effective tax rate.

Thus, "39% of all taxes paid" - "19% of all income paid" != 20% tax savings at a 23% effective tax rate.  It is a totally illogical statement.   You are not adding and subtracting like figures, and even if you were - you can't do direct math on percentages.  

Sorry, but you are the one with the logical fallacy. I never assumed a 39% tax rate in this argument, I assumed a flat tax rate. If you earn 19% of the income with a flat tax you should pay 19% of the taxes. Currently the top 1% of wage earners make 19% of the income and are paying 39% of the taxes. I am making no statement of rate what so ever. In a flat tax, no matter the rate, they should pay the same rate as everyone else. All money is taxed at the same rate, therefore whatever their percentage of income vs the whole, they should pay a corresponding percentage of the total taxes. Rate doesn’t come into the argument because we would all pay the same rate.

Anyway you cut it this is a massive change in the burden of the cost of government. You can't maintain a level amount in tax revenue when you cut the taxes on one group by half without raising it somewhere else.