FairTax Act-Is it a viable solution?

Every citizen would not receive a prebate. Every household would.

Yes, the prebate does create a government expendature that must be accounted for.

I have previously agreed with the proposition that regardless of what tax system is used it needs to "balance the books" and, in fact, because of the national debt it needs to generate a surplus. This cannot be accomplished by any from of taxation today without imposing an draconian tax rate. Only reducing expendatures can balance the budget without a draconian increase in taxation.

Reducing expendatures is mandatory under any tax system because government spending really is greater than the People can afford.

Here is something to consider though. Currently the federal government is spending between $25K-$30K per year for every household in America and that spending has been on a constant increase for well over a decade. If we can reduce that by $5K/yr then it offsets the prebate but the tax rate would still be draconian to support the expendatures. If we could reduce it by $10K/yr then it greatly reduces the amount of taxation required. If we assume the current expendature per household is the lower $25K/yr amount (which it's actually above) then that would require a 40% reduction in expendatures. Is that doable? I would say that it is.

Military spending alone could be dramatically reduced if the US government simply stopped playing "World Cop" (which we can't afford to do) without sacrificing the ability of the US military to defend the United States from attacks by foreign nations which is what the US military is really for.

Social welfare program spending could also be dramatically reduced by replacing the existing Social Security program with a "401K" type privatized personal investment accounts that are diversified and age-adjusted. Such accounts historically reflect that they would result in retirement benefits 5-times greater than the current Social Security program which is a major contributor to about 1/2 of all Americans being classified as "poor" or "low income" households. While it would impose short term costs these costs would decline and disappear over time eliminating about 1/3rd of all government expendatures.

As noted this doesn't have anything to do with the form of taxation but let me address something that does.

A consumption tax (with prebates) as has been previously noted creates a positive marketing advantage related to international trade and that advantage, regardless of how much it is, will increase demand for US goods and services in international markets. This is specifically true of the manufacturing sector and that demand increases the demand for labor. This employs Americans which results in more consumption and that results in higher government revenues. I've previously made a prediction that the elimination of income taxes to be replaced by a consumption tax with prebates would increase the GDP by (conservatively) 10%. If we convert that 10% increase in the GDP to jobs it would equal about 15 million new jobs being created. That's a lot of jobs which also create consumer spending which would then increase federal revenues.

There is a balance though and trying to run all of the numbers would be pragmatically impossible for me. What I believe we can agree on is that the government needs to reduce expendatures so that the tax burden is not draconian. We also want to do that which provides the most robust economy which benefits the American People.

It would be my position that eliminating the singular greatest non-value added expendature by enterprise, which is what income taxes impose on enterprise, is beneficial to the American economy and therefore beneficial to the American People as a whole.

 

The plane would be taxed when it's imported into the United States.

 

I have no interest in your political diatribe but the assumption remains 'whatever we pay today under the current system we will pay approximately the same amount under a consumption tax'. If we do not, and if the government plans on collecting an equal amount of taxation, then there will be wealth redistribution.

You can dream up fraudulent and fictional scenarios about any tax scheme. But you should discuss the separate tax schemes on their own merits sans the fiction...

 

Just wanted to be sure. Getting a baggy though customs is one thing, big ticket items are another.

"As a rule of thumb, Americans returning from overseas trips must pay 3 percent on the first $1,000 worth of merchandise over the $800 allowance. Import products worth even more than that and you may be taxed at a higher percentage." http://articles.cnn.com/2009-02-13/...-free-shops-heathrow-and-gatwick?_s=PM:TRAVEL

 

OldManOnFire,

Corporate income taxes paid in 2007 were $291 billion. But they also paid $435 billion in payroll contributions, and $147 billion in compliance costs according to the Tax Foundation.

Add them up and they total $873 billion which is around 6.2% of your $14 trillion GDP. Or, as a percent of sales, it is 9.6% assuming retail sales were $9 trillion.

 

Please note that the "compliance costs" are only the direct costs of compliance and not the total cost of compliance. For example, capital investments and expendatures by enterprise that are required for compliance are not tracked. By way of example the computers, desks, utilities and office space required for the accounting departments are not included in these compliance costs.

What also isn't noted in the Tax Foundation number is how much corporations spent to not pay taxes and where that money was spent. For example GE in either 2008 or 2009 (maybe both) paid zero in US federal corporate income taxes. They accomplished this because they're a multi-national corporation where incomes derived from foreign production and sales are not subject to US taxation. While the foreign sales would not be taxed under a consumption tax the wages paid to foreign workers, which could have been US workers did not result in domestic consumption that would have been taxed under a consumption tax.

What we really see is a shadow of the cost of the taxes and not the total costs being imposed.

 

Yes. The prebate level (not the tax rate which it is multiplied by) would vary based upon household size similiar to how the "poverty level" is determined based upon household size. It would NOT be the same as the Poverty Level but would need to be developed based upon a review of the anticipated average expendatures of a household on new goods and services for basic necessities. I've used the number of $20,000/yr for an individual in my calculations for simplicity but that represents more of a weighted average for all households. It would need to be less for an individual but more for a family of four but it worked for calculation purposes.

Just a couple of comments. First of all the People are already paying the $190 billion in corporate taxes and that only represents corporate income taxes. We're also paying the Payroll taxes these corporations. Corporate income taxes ($190 billion) represent 12% of federal tax revenues but Payroll taxes represent 36% of all federal tax revenues. If the $190 billion is correct then the Payroll tax equals three times that amount or $570 billion for a combined total of $760 billion that is being passed on to consumers in the form of higher prices. That does not include the compliance costs which are also passed on to the consumers.

http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm

I'm also of the opinion that many things government should be taking care of it isn't. For example the conditions of our bridges based upon recent reports is terrible. Both the states and federal government have been collecting fuel taxes that are supposed to pay for roads and maintenance but one of two things is occurring. Either the money is being spent elsewhere or we're not collecting enough in fuel taxes to pay for the roads and maintenance. It's probably a combination of both. Much of what needs to be done really needs to be done by the states though and not the federal government.

I can see where we can significantly reduce expendatures though. While I'm sure to get arguments from "liberals" I see Social Security/Medicare as being an unnecessary government expendature. The government addressed real problems but they did so in a very foolish way. I would argue that mandated (and I hate that being a libertarian) retirement accounts funded by employee/employer contributions into selected diversified and age-adjusted 401K type investment accounts could eliminate both Social Security and Medicare.

If, as investment history reflects, individuals would receive 5-times more in retirement income then the average individual today under Social Security would receive almost $6000/mo as opposed to less than $1200/mo. and with that amount of income they could afford private health insurance which would probably cost about $15K/yr. (based upon current Medicare costs per person). Medicaid would still be necessary as there will always be those that simply can't afford medical services but the elimination of Social Security and Medicare alone would represent about a trillion dollars per year in federal exendatures or about 1/3rd of the entire US budget. More important than that is that the People would be far better off and this increased income for the individuals would also increase the consumption taxes being collected. What's more is that the individual would be vested from the first dollar so even if they die before retirement that money would belong to their heirs increasing "family wealth" throughout America. Today if a person dies before retirement their heirs receive something like $500 from Social Security to bury them and that doesn't even cover the average funeral costs.

http://ssa-custhelp.ssa.gov/app/ans...-social-security-benefit-for-a-retired-worker

There is some credibility though to the belief that the federal government won't reduce spending although it is somewhat pessimistic. I believe that if the taxpayer actually saw the cost of government on every receipt for all new goods and services that might change.

BTW if we assumed the GDP numbers were correct, which I have reason to doubt, and the GDP reflects new goods and services being sold at the retail level if we had a $14 trillion GDP with $3.5 trillion in government expendatures (including prebates being paid for) then the consumption tax would have to be 25% to generate the $3.5 trillion in revenue required to pay for the expendatures.

I believe that 25% is the upper consumption tax limit based upon a financial analysis as it would represent the "break-even" point if costs are reduced by 20% (which has been somewhat established as being pragmatically possible). Basically if the cost of a $100 product/service is reduced by 20% then it costs $80 and with a tax of 25% then the total cost to the consumer is $100 which is the identical cost of the product/service today. Yes, this is based upon assumptions of a 20% cost reduction but it does not account for the prebates or the fact that the individual would receive 100% of their paycheck as disposable income. We do know that the costs will be reduced and even the skeptics point to at least a 10% reduction but in any case the increase in disposable net income as well has the prebates can compensate for a lower than 20% reduction in costs.

 

There's no point in talking about taxes until federal spending is down to 15% of GDP.

 

Increasing GDP growth by the elimination of the single largest non-value-added cost to enterrpise which would occur by the replacement of income taxes with a consumption tax is one way of accommplishing this. A combination if expanding GDP growth as well as reducing expendatures is the most expeditious means for accomplishing this goal.

 

Corporate taxes were 14% of total revenue and corporate FICA contributions were about 17%. Combined this is 31%. 17% would be about $350 billion.

Compliance costs are not tax revenues. They are costs applicable to federal compliance. For all I know compliance costs are expense deductions??

But if we remove all of this tax burden from business, then we must place it on people. So in this case the tax burden on people will increase by $291 + $350 billion or $641 billion. Where will the people get this money? The total tax revenue equals 100%. If 0% is paid by business, then 100% is paid by people. If 31% is paid by business then 69% is paid by people.

 

All costs of enterprise are passed onto the consumer. If they weren't then the enterprise would generally go bankrupt. The only difference is that many expendatures, such as the non-value-added expendatures related to embedded taxation, are not evident to the consumer as they are incorporated into the cost of the product or service.

We're already paying the taxes plus the cost to enterprise related to the taxes. If we pay at the retail level the cost to enterprise is substantially less and the tax collected remains unchanged BUT IT IS VISIBLE to the consumer (taspayer) because it's printed right on the sales receipt.

 

Actually, it is often not possible for a business to pass on all costs of enterprise. There are any number of reasons why this happens, from fierce price competition to temporary decreased worker productivity. Many businesses will reduce their profit margin before raising prices, especially in highly competitive markets.

Also, businesses do not always pass on all cost savings. Usually they resist price drops until forced into it by market competition.

Your assumptions are faulty when compared to actual business behavior, especially the assumption that the elimination of tax costs will lead directly and immediately to price decreases of equal value. It is an absurd idea.

 

As is correctly noted market pressure drives enterprise. Yes, there are situations where an enterprise would not transfer limited expenses on the the consumer but these are temporary in nature. A short term decline in productivity or fierce competition would be such situations but ultimately the enterprise does have to provide a reasonable return on investment to the owners whether it is privately owned or publically owned. Most enterprises target a profit margin of between 6% to 12% depending upon the enterprise. Profit margins above that generally come down to increase market share while profit margins below that have to come up to meet owner expectations for return on investment.

The only exception to this are monopolies which are prohibited under the law (unless the government creates them - LOL).

In the end everything balances based upon the markets which is why it is not unreasonable to anticipate a drop in prices based upon lower operating costs. Enterprise will do this to increase market share and because their competitors will also be doing it. The market will drive the lower prices if the non-value-added costs related to income taxes are removed from enterprise.

 

In the end.....based upon the markets......

You are prematurely anticipating theoretical long term results from immediate changes. There will be massive dislocations and a not so short period of adjustment. How do you address these so a smooth transition can occur without causing undue distress to ordinary people?

There are many ideas around here that appeal to me, and about as many that do not. What I find both amusing and distressing is that so very few have an actual plan of how to get from here to there without variously fomenting war or rebellion, destroying the economy, the environment, the social construct, the government or some other political structure, etc, etc.

What I am seeking is a reasonable alternative, one that can get us from here to there without a lot of trouble.

 

I agree 100%, however, Americans have such demands on our government, right or wrong, with high expectations, in which we've created a monster requiring $11K from all 310 million Americans just to break even! A family of four is basically responsible for $44,000 in federal tax revenue. This is impossible which helps explain deficit spending and debt. I call these types of paradigm shifts Herculean efforts. IMO typical Americans are not prepared to put forth Herculean efforts...

 

Let me address this singular issue.

I live in WA where we don't have income taxes but do have a sales tax which includes both a local as well as the state sales tax. It's 8.6% and it applies to all goods and services and is not limited to new goods and services. So if I purchase a used car I would pay the state/local sales tax of 8.6%. If I purchased a new car with a 25% federal consumption tax the total tax would be 33.6% and not 35-36%. Yes, 33.6% is still a lot of tax to pay and people would certainly have "sticker shock" related to it but it would represent the total cost of federal, state and local taxes (excluding some user fees and local property taxes).

Personally I like the "sticker shock" because we're already paying those taxes but they're often hidden taxes. Perhaps if the People realized how much government actually cost they would demand less from government.

 

Last time I had any numbers on federal spending it equaled an average of between $25K-$30K per household but that cost per household has been constantly increasing. It is still a staggering number and, IMO, unjustifiable.

 

Regarding Social Security:

Social Security/Medicare only has a fraction of 1% ROI. The only portion of FICA/Payroll taxes that has any ROI is the surplus which is invested in Treasury securities that pay virtually the same interest as T-Bills. This is only a very small percentage of the total FICA/Payroll taxes collected and the ROI has to relate to the total and not just to the surplus for comparative purposes when looking at privatization. Social Security/Medicare benefits are welfare benefits and not a return on investment for the individual. The individual has no vested assets in Social Security/Medicare and those programs could theoretically be ended tomorrow and the people would recieve zero from the government. They were established as "pay-as-you-go" welfare programs.

A properly structured 401K type plan for privatizing Social Security that creates diversified and age-adjusted investment portfolios for the individual is literally risk-free from a historical standpoint. It would not put "all of the eggs in one basket" but instead it spreads the investments out over a broad range of investments and then those investments are age-adjusted so that they would have more "risk" early in a person's working career to build assets and then would move to more and more secure investments as the individual grows older. This is the universal investment advice from all financial experts because IT WORKS. There are no documented cases where this investment strategy has ever failed. The typical ROI for these types of investment portfolios is over 8% with most earning over 10% over the long term. That is a historical fact.

 

I can't respond to this without you answering a question I once had which was 'how is the proposed prebate distributed?'.

 

Two things are obvious;

1. Average households cannot afford $25K-$40K in federal taxation.

2. Until we know the clear and concise mission/goal of the US government, how do we know if $11K for every citizen of the USA is high or low?

 

In bold above is the problem. Long term means years and decades. There is no way to guarantee the value of the fund on a given month and year. The investment might be 30% lower? If the fund won't produce enough as 'expected' then the person is forced to find other income or do with less. Why are so many people today feeling forced to work beyond retirement age? And as I said, most people will not have separate funds to make up for any shortfalls in the retirement fund. If a person starts investing X$ into your privatized fund and asks how much will they have when they turn 65, there can be no guarantee. If it's so fail-safe to invest in your type of funds, then why doesn't the government do this now? I'd rather see the current SS-type fund redesigned so average payout is $2500/month! If we can currently guarantee $1000/month payouts, why can't government invest in your type of funds and be able to payout $2500/month?

 

Each household would file a "household" status with the individuals in the household and their SSN with the US Treasury (The IRS would cease to exist). An automatic payment system would be set-up to pay each household based upon a formula for the number of individuals in the household. The payments would then be distributed annually, quarterly distributed, or monthy distributed.

It would be my choice to distribute them annually for cost reasons but the other options could be selected if the household was willing to have a small fee deducted for the cost of the distribution.

I believe I answered this before but no problem with that.

 

Sorry didn't remember seeing an answer.

The reason I asked the question is I don't believe most people can control their spending. Therefore, if they get windfall amounts of money, relative to how much money they typically have, like a larger prebate payment monthly or annually, they will spend the money prior to the time period passing. This means they won't have enough money to make purchases towards the end of each payment period. IMO this is a huge issue...