economics of the fair tax?

Question

People often argue that a national consumption tax will cause people to buy less goods, because of the increased price they will have to pay.

1. This is bad because it lowers GDP correct?

2. Isn't this also good because people save more, making more money available in the financial system?

3.Also, I hear the counter argument that the increase in prices of goods will be offset because the companies making them will be paying less taxes. I think they say that goods now are 20% higher in price because of these built in taxes. Would a fair tax really eliminate these built in taxes and lower the price of the good?

4. I often hear that "money goes overseas to avoid our tax system" and that the fair tax would bring this money back. True or False?

Answer 1

Because like all imaginary systems, there isn't any real data, there isn't even a fleshed out imaginary system to question.

How to sell an imaginary tax.

1. Name it something like "fair tax", even if it would fall overwhelmingly on certain people.

2. Claim it'd be simpler, as if a thousand problems wouldn't immediately develop, like enforcing a brand new tax code, eliminating private sales, or convincing people they aren't allowed to have a garage sale.

3. Anytime someone points out a flaw, like the inevitable slowdown of the real estate market or the stifling of home ownership claim that your "simple" law wouldn't apply to things like that.

4.Never actually figure out what the percentages would be, just claim something like 20% out of thin air, then pretend that this would replace all other taxes. Make sure you never argue this with people who have hard data.

Answer 2

Why do you say that a consumption tax would cause people to buy less? Look at statistics re: consumption over the last 50-75 years. It always goes up, and there is no reason to believe a replacement of the income tax with a consumption tax would cause consumption to go down. Actually, I would expect to see an increase in consumption due to the prebate aspect of the bill, the removal of embedded taxes, and the fact that people will receive their entir paycheck (more to spend!).

Yes, savings will increase dramatically when you remove the various tax consequences of saving vs. spending. This will mean increased availability of capital for business expansion.

Yes, implementation of the FairTax will remove the embedded taxes that are now part of the price of every item you buy. Prices of goods will go down because of competition. It is an economic fact. If you are selling something, and your tax costs are removed, you will need to lower that price! Otherwise, you will be the only one selling your widgets(or whatever) at 20-22% higher than everyone else.

Yes. Think of all the tax rules and regulations that exist on businesses now. If these were removed, I would expect numerous businesses to want to move to the US. Remember too that businesses do not just include large corporations. Just think how this would help small businesses!

There are a couple of things that you did not mention. The FairTax greatly increases the tax payer base. Visitors to the US, people making money under the table, illegal immigrants, etc., these people will now be helping pay for the running of the Federal Government.
One more thing... lots is made of this "now I will have to pay 23% extra (or 30% or whatever)". First, that is not true (because of the prebate, and the removal of embedded taxes, etc), but lets pretend for a minute that it was true. Under that scenario, based on an exclusive tax computation, if you buy something that is $100.00, you will pay 130.00 (FairTax is not computed that way, but nevermind!). Under our current system, how much do you have to EARN to be able to but something for $100.00? About $125.00-$130.00 I would guess. But most people would have trouble going through the 67,000 pages of tax code to try to figure that out!
Also, you can avoid the tax altogether by buying a used item instead of a new one.

I urge you (and everyone else!) to become INFORMED about theFairTax before making a decision. www.fairtax.org

Answer 3

I am rather against the "fair tax", so I'll state up front. But I'll take a stab at your particulars as well.

1. Fair tax might not lower GDP. One possible benefit is that it removes some tax from the production of goods and services and adds to the sale. This could benefit GDP if it could stimulate more domestic production. But that said, most goods and services are domestically produced already, so if the increased tax burden was more than the savings, as most expect, it could lower GDP.

2. Savings are good. But if products increase in cost, it doesn't mean people would save more, they would buy less because the things they do buy would cost more. To suggest that by raising the cost of things would get people to save more is rather silly. Will you save more now that gas is more expensive?

3. I think this idea that by taking the income tax out of companies will lower the cost to produce things by enough to offset the tax increase to cover all corporate and personal income tax is totally unfounded. You don't need to be a mathematical genius to see that doesn't add up.

4. Now the money going over seas thing has some truth. Companies establish themselves as foreign based to avoid some US corporate income tax. But I don't see how not taxing them anyway does anything. They moved headquarter to the bahamas to avoid taxes, so we are going to say OK, we won't tax you anyway, for what benefit? Bring money back, what money? They are doing business in the US already, so if we aren't going to tax them, we aren't bringing any money back.

Just one more, the real problem with the "fair tax" is that it is NOT fair. It would increase the tax burden on the poor, and decrease taxes on the rich. Now, you might see a few benefits to the system, but really, is it a good idea to increase taxes on the poor and decrease taxes on the rich in America, where there is already the biggest spread between the rich and poor than any other western nation?

Answer 4

First, let me note I am not an economist or economics expert, and I did not stay at a Holiday Inn Express last night, either! However, my understanding of the fair tax is that it would replace the income tax on both individuals and businesses.

Your point 1 - If the tax is too high on products, yes, it would cause people to buy less goods, just as taxes and "built-in" costs of production do now.

Your point 2 - Saving does not make more money available in the financial system. Purchasing and investing does. Saving actually takes money out of the financial system.

Your point 3 - If income taxes are eliminated (at least federal income taxes) companies and individuals would have the money normally paid in such taxes still in their hands. The cost to collect those taxes would also be reduced or eliminated, although it would be replaced by the need to collect the fair /sales /value-added tax on products. It is still under debate whether the "offset" in savings would be greater or less than the cost of the fair tax.

Your point 4 - Money goes overseas for a lot of different reasons. In general, though, it goes overseas when imported goods are cheaper or when properties /businesses are cheaper than within the US. Labor right now is cheaper for most companies outside the US, which is why a lot of companies are "outsourcing" to other countries to cut their costs. Labor is one of the biggest costs for a business. If taxes are too high, obviously it increases the burden on a company and may cause the management to move the company to another country with a lower tax rate.

Having said all that, I expect that we will see our government attempt to implement a national sales tax /value-added tax without reducing and/or eliminating income taxes. That will really cause some interesting and potentially disastrous developments!!

Answer 5

1/2 Our net savings rate is zero, so increasing saving would be good. It is the only positive aspect of the Fair tax, if it would indeed increase the savings rate.

3 The federal tax on corporation is 35% of profits and they have many tax breaks so for many the tax is less. But assuming 35% on profits is the correct number, the reduction of 20% in prices would imply that profits amount to over 50% of the sales price. I don't think this is true for most companies.

4 Manufacturing is going over seas, but it is more motived by cheap labor than high taxes. Most countries have corporate tax rate in the 30% range , so there would be little to be gained by moving, However many countries including the UK does not tax foreign income, so the fair tax would modavate people who earn money on investments here to move to avoid paying the fair tax.