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[Ben]:Fair tax questions Discuss This [2 comments so far] View Comments
Knowing that Nate and to a lesser extent Michael are big Fair Tax supporters, this might get dirty.

First, I'm not tremendously well-informed about the various Fair Tax proposals, but I recently read an article that rather tore into the whole concept. Some of the points seemed potentially reasonable, but without more information I can't really say. I thought I'd post two of the more interesting arguments here, and hopefully someone with more knowledge than I will be able to set me straight.

The 23 percent ‘inclusive’ sales tax rate is actually 30 percent. They deceive supporters using mathematical trickery. Assume you are going to buy a $10 item. The sales tax rate will be 30 percent making the total $13. They then use the $3 tax as a percentage of the $13 total to come up with the 23 percent rate. 3 / 13 = .23 That’s the reason for the "inclusive" qualifier on the tax rate they give.

I had heard this before. I know the attempt is to sell the idea, but if you're going to sell me something like this I'd rather you be up front about it.
They included a provision for the federal government to pay sales tax to itself on all spending including defense, all procurement and presumably inter-departmental chargebacks. On the surface, you would say that’s silly because it would net to zero. But because they used a different treatment of prices on the revenue side than they did on the spending side, it resulted in a $500 billion discrepancy that would have to be corrected if the Fair Tax system were to be adopted. This means that the 30 percent sales tax would have to be increased to cover the $500 billion shortfall. To understand the differential treatment, you have to keep in mind that all tax reform proposals have to be revenue neutral. The Fair Tax people assume that, for every dollar you spend currently on goods and services, there is an embedded 22 percent overhead cost to cover income and payroll taxes. When they calculated the government spending side of the equation for revenue neutrality, to maintain current programs, they assumed prices would decline 22 percent due to the elimination of income and payroll taxes. When they calculated the revenue side of the equation, they assumed that prices would remain fixed at the current levels, which includes the embedded 22 percent overhead. The result of the differential treatment of prices on either side of the equation results in the $500 billion discrepancy.


Unfortunately for the source, they tend towards whining about the loss of welfare spending, the idea that corporations wouldn't be taxed and the like, and that garners no sympathy from me.

Anyway ... thoughts?
  2006-08-18
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