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So Brian loves the headline “Huckabee’s Tax Plan is Brilliant (So Why is it Getting Trashed)”…wow, I’m shocked, but he should actually read the article.
The conclusion is this:
But the good news is that the details don’t matter, because there’s an easier way to design a graduated sales tax. Namely, keep the graduated income tax and add a provision for unlimited IRAs. Presto, you’ve got the equivalent of a graduated sales tax.
That’s not necessarily desirable. You could well argue that a flat tax rate is a feature, not a bug. But that’s a topic for a different column. The point of this column is that the whole flat-versus-graduated issue is quite tangential to the sales-versus-income-tax issue. And the underlying issue becomes a lot clearer once you realize that a sales tax is a modified income tax. The right question is: Is the proposed modification a good one? The answer, according to a growing consensus among macroeconomists, is: Yes.
I think a modified income tax that includes a liberalized IRA policy is much more palatable than a national sales tax, even if the effects are equivalent. The biggest issue I have with the fair tax is the fact that Alabama is already so dependent on the sales tax that you would be asking a poor citizen in Alabama to pay $33 in tax on a $100 purchase. That just isn’t going to work, no matter how you incentivize it.
Flashpoint » Blog Archive » The title says it all
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Here’s a kind of trick question for you: How much tax do you think Alabama citizens, rich and poor alike, currently pay when they purchase a new item?
Hint: the answer is not 8%.
And yes, I did read the column. I wasn’t citing it as an endorsement per se, but as an example of how the FairTax is unfairly demagogued by folks like you.
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Regarding your comment that fair tax plus sales tax “would be asking a poor citizen in Alabama to pay $33 in tax on a $100 purchase…”
The fair tax alone as proposed adds 30% to the purchase price. (A $100 item would cost $130 under the fair tax proposal.) Alabama sales taxes (with out changes in the current system) would makes the total percentage added to the purchase price easily more than 33%.
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I’ll preemptively answer my question since Danny took a stab at final total taxation without addressing current total taxation. Using 2005 federal tax data the total of the taxes that the FairTax will replace is a little over $2 trillion. Of that:
- 46% = personal income
- 14% = corporate income
- 39% = “social insurance and retirement” (i.e. payroll taxes)
- 1% = estate
To simply the math for this example let’s assume we’re talking about purchasing an item that costs $100 including the FairTax, but not including state or local sales taxes. The cost of the item is $77 and the federal tax is $23 (23% inclusive, 30% exclusive). Let’s look at the $23 tax a bit, while keeping in mind that as written the FairTax is revenue neutral. In round numbers $11 replaces personal income, $3 corporate, and $9 payroll (the estate portion is negligible). Now the corporate and payroll taxes are effectively costs of doing business that get passed on to consumers (even your preferred presidential candidate admits this). So you’re effectively paying $89 (77+3+9) for the cost of the item plus all embedded taxes. The remaining $11 replaces personal income taxes. What this means is that right now 13% of the final price paid, still excluding state and local taxes, goes to the federal government in the form of an embedded tax.
Now, bringing state and local taxes into the equation. Let’s use 8%, the rate where I live. The tax will be applied to the $77, which is a little over $6. That brings the total price of the item to $106 of which, using inclusive calculations (tax divided by final price):
- 17% are taxes currently embedded in the cost of goods (you’re already paying it)
- 10% will replace the federal personal income tax
- total tax of 27%
You can calculate the tax rates differently, using exclusive calculations, if that is what melts your butter although we’re still talking about a $77 item plus $29 of taxes. Using exclusive calculations (tax divided by pre-tax cost):
- 23% are taxes currently embedded in the cost of goods (you’re already paying it)
- 14% will replace the federal personal income tax
- total tax of 38%
You can pick which rate you like, but the underlying numbers are the same.
The point of this exercise is that implementing the FairTax does not increase all taxes paid on an item from 8% to 33% (or 27% or 38%). Using this crude analysis, the FairTax will add about 10% of the final purchase price in taxes previously not paid at the point of sale. However, there is no federal personal income tax, which offsets this increase.
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Danny,
You’re right…we pay 10% now in Montgomery, so it would actually be 40% here.
Brian,
You’re going to lose 99% of the electorate with that description. Intellectually I understand where you’re coming from, I do. Politically it’s a REALLY tough sell. I appreciate your passion for it, but I wouldn’t bet money on it, even if we have President Huckabee.
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Fairtax sounds great but its silly.
Fairtax depends on the absurdity of taxing the government– making the government pay itself — the world’s highest sales tax.
For some strange reason, people sit there with mouths open, like mindless sheep, and think this is possible. HELLOOOO WHAT IS WRONG WITH YOU PEOPLE?
Fairtax book said “The federal government itself will become a MAJOR taxpayer”. Plus, its going to tax ALL government, at all levels.
Why not just apply an INCOME tax to the government then? IF you can get a SALES tax from the government, why not an INCOME tax? Can anyone tell me why one is less insane than the other?
Boiled down — Fairtax is simply this — make the government pay over half its own taxes. Then hope 100 million American workers take a pay 30% pay cut. And then hope they will agree to pay the world’s highest sales tax, on virutally everything, on what is left.
Hey, Im all for it. I would love to see them try to work this thing. I would love to see COngressional hearings, with some of these “leaders” under oath.
Fairtax leaders know its a farce, and arent about to even let it get to a hearing.
Sure it sounds great. ANd it would work, if the federal budget was 1/3 of its present size. Because that’s all a 23% sales tax could bring in — about 1/3 of 2.6 billion.
WHy? Because the 1.4 trillion they pretend to get from the government is just silly nonsense for starters.
You don’t have to worry about the other absurdities of the fairtax, though there are dozens.
Go to Fairtaxabsurdity.blogspot.com, find out more.
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Fairtax sounds great but its silly.
Fairtax depends on the absurdity of taxing the government– making the government pay itself — the world’s highest sales tax.
For some strange reason, people sit there with mouths open, like mindless sheep, and think this is possible. HELLOOOO WHAT IS WRONG WITH YOU PEOPLE?
Fairtax book said “The federal government itself will become a MAJOR taxpayer”. Plus, its going to tax ALL government, at all levels.
Why not just apply an INCOME tax to the government then? IF you can get a SALES tax from the government, why not an INCOME tax? Can anyone tell me why one is less insane than the other?
Boiled down — Fairtax is simply this — make the government pay over half its own taxes. Then hope 100 million American workers take a pay 30% pay cut. And then hope they will agree to pay the world’s highest sales tax, on virutally everything, on what is left.
Hey, Im all for it. I would love to see them try to work this thing. I would love to see COngressional hearings, with some of these “leaders” under oath.
Fairtax leaders know its a farce, and arent about to even let it get to a hearing.
Sure it sounds great. ANd it would work, if the federal budget was 1/3 of its present size. Because that’s all a 23% sales tax could bring in — about 1/3 of 2.6 billion.
WHy? Because the 1.4 trillion they pretend to get from the government is just silly nonsense for starters.
You don’t have to worry about the other absurdities of the fairtax, though there are dozens.
Go to Fairtaxabsurdity.blogspot.com, find out more.
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