Well I talked about Fair Tax a while back and that was before I read this book. I found a few nits I would like to pick with them.
First for those that don't know the Fair Tax is a proposition to eliminate the current tax code and replace it with a 23% national sales tax on all retail goods and services... and to do it cold turkey. IE one year would be done the old way and the next would be on the Fair tax. Taxes would only be collected on goods and services purchased at retail. It would also be an inclusive tax... IE the listed price on the shelf would be inclusive of the tax... not a tack on at the register.
Boortz and Linder do a good job of talking economics regarding the current hidden embedded taxes in retail goods. They also point out how if the current tax scheme were eliminated that it would kill all of the emebedded tax cost for goods and that the laws of supply and demand would rapidly drop the costs to current margin levels. Well this is true and I agree with them. Though methinks they are a bit optomistic about how fast this would occur... granted I agree that the bulk of the price drops would happen relatively quickly but it would take a while for folks to get all the way down to the bottom. However here is nit one.
The idea is that embedded costs will drop and that the fair tax will bring it right back up. IE you won't go to the store and pay 23% above current rates. Current cost of goods will drop 23% only for it to be replaced by the tax. In other words you simply change the accounting. Instead of it being embedded it is a known component of the cost added in one place instead of buring along the way in the cost of doing business. And unlike sales tax it would be on the listed price. The nit ? That means after the fair tax is passed and the goods do their pricing reshuffle from hidden cumulative tax to a clearly defined rate at the till I now have more purchasing power than I did before. The reason this bothers me is that they claim this thing is revenue neutral. I like the idea of having more purchasing power. But that can't happen if after buying the same amount of goods I have money left over. Because before that is money the government already had... PLUS they got the money from embedded taxes on goods. 1+1 = 2, 1+0 = 1. It seems to be that Boortz and Linder are in effect saying 1+0 = 2.
Even if prices remain the same and retail costs suddenly increase 23% due to the addition of the fair tax and I now still only clear what I did before after purchasing a years worth of goods and services uncle sam STILL didn't get the same amount as he didn't have his hand in the collection process that determined that original price. That money goes into the businesses.
How does this work. Well lets take some round number. You make 10,000. 23 percent goes to uncle sam as income tax so you get 7,300. You go out and buy a 1,000 item. As a part of that 1,000 there is another 23 percent embeded tax cost (cumulative tax costs built into the process that brought the product to sale) so its real cost is 770 and uncle same takes your 2300, and the 230 for a grand total of 2,530. Now if you remove the income tax and you take home all your 10,000 and the price of the good drops to 770 because the embedded tax is removed and the Fair tax then tacks on the added 230 that keeps the price at 1000 then uncle sam got the same 230 that was there before. But he doesn't get your 2,300. Thus I have a hard time seeing how this change is supposed to be revenue neutral.
Another nit is the issue of the poor. The stipend idea is great. IE that poverty rates are used to determine an across the board prebate that is meant to offset the taxes paid on the first X amount of goods/services. However there is still no getting around the fact that while the rich spend more money than the poor... they still spend less of the their income during the course of a year and save more. Now that your yearly tax rate effectively becomes a factor of how many goods and services you purchase then if you don't spend all of your money your effective tax rate goes down. So with the Fair Tax those who can save the most will have the effective lowest tax rates while those who must spend almost all of their money will effectively have the highest tax rates. that alone is going to make this plan a very hard sale.
Now seriously I like the idea. If it really removes the yearly filling headache it may be worth more than a little pain to accomplish it. But I am not sold on it being what its proponents claim it to be. The revenue neutral concept is based on a predicted massive upswing in the economy that would raise more money than the current situation.
How could it go wrong ? Employers simply keep that money you never saw before and either bank it or cut it as an expindeture in order to drop prices even further... leaving you without your expected rise in take home pay and potentially to be faced with at least temporarily price spikes that will exists for a short while before market forces cause them to deflate. This also means people will not have the supposed extra added buying power that is supposed to fuel this so called economic boom that fair tax would usher in.
Damnit... I want this thing to work I hate arguing like this poking to many holes in something I actually like. But I think there are problems here that are not being addressed. We NEED change in our tax code. It must be simplified and a consumption based tax sounds like a damn fine way of doing it. So please folks lets patch up the wholes and get this one out there.
As for the idea that all the expat dollars would come flowing back home ? That may be a bit of a pipe dream. Nothing in what they suggest has a lowering of american labor costs. And convaluted tax burdens or not there is no way current labor costs will compete with the absurdly low cost of doing business over seas. It may well manage to swipe some of the international capital market that has shied away lately from the US... but frankly we are still quite strong in that department as we still have the most liquid market in the world.
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