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The Fair Tax Postings

Posted by cavalier973 on Monday, June 09, 2008 2:16:51 PM
On one of the blog posts (http://www.townhall.com/blog/g/2df4fc63-4d6f-4310-bb8f-8b3fac7638b5?comments=true#comments) discussing who should be McCain's VP, I mentioned the Fair Tax.  Another poster, named "Dan in SC" responded thus:
 
 
Dan in SC writes: Sunday, June, 08, 2008 10:08 AM
Cav, I know about the fair tax...
I listen to Bortz. Eliminate the income tax, impose a consumption tax - yada yada yada. Theory is that the income tax punishes good behavior (working for a living) and that the "fair" tax would reward good behavior by allowing people to pocket all of their income and only being taxed on their purchases.

I have several problems with this.

First of all, what guarantees would we have that we would actually get to keep all of our income? How do we know that the companies we work for would not just keep it for themselves?

Second of all, I have yet to hear any fair tax supporter explain how anyone would be able to afford a new home when the taxes would be 20-30%. People who want to sell their house would not lower the price and take a loss to off-set the increase in the sales tax. Even automobiles would likely become out of reach.

Lastly, suppose we eliminate the income tax in lieu of the fair tax. What guarantee would we have that the government would not eventually impose another income tax in the future so that we end up with both the fair tax and income tax?

I would much rather see the government cut taxes and cut spending first, then we can talk about tax reform. Right now, we do not need to trade one tax system for another one just to keep feeding the monster.

"A government that is big enough to give you everything you need is powerful enough to take everything you have" - Gerald Ford
 
Here is my response:
 
cavalier973 writes: Sunday, June, 08, 2008 2:04 PM
Great questions, Dan in SC
Your first question: "First of all, what guarantees would we have that we would actually get to keep all of our income? How do we know that the companies we work for would not just keep it for themselves?"

The statement "You will be able to keep all of your income" refers to the government's practice of automatically deducting it's "share" of your income from your paycheck. It doesn't have anything to do with your employer (aside from the fact that he is the agent who collects the taxes for the government by deducting them from your paycheck).

Now, I am interpreting your question to mean, what safeguards do we have that the companies we work for will not simply lower our pay to the point where our paychecks after the Fair Tax is enacted are the same amount as our net pay (after taxes) is today.

While salaries could go down after the Fair Tax, it would not be because of Corporations. It will be because of Workers.
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cavalier973 writes: Sunday, June, 08, 2008 2:07 PM
Great questions, Dan in SC Part 2
I don't think that it's likely that companies will be able to say, "Since we no longer have to deduct taxes from your paycheck, we are going to cut your pay." Really, since the company is already paying you a certain salary, it doesn't behoove them to lower your salary simply because their costs go down. If a company found some new way to cut costs, the tendency is for salaries to go up, to try to woo better workers from the market.

Your worry stems from the fact that workers who are able to keep 100% of their paychecks might be willing and able to do your job for less money than you.

For example, if I work at a job for $100,000 a year. I pay around $30,000 in taxes, which brings my take-home pay to $70,000. After the Fair Tax, I would bring home all $100,000. At the same time, say that you are currently working at a job making $70,000 and paying $21,000 in taxes, with a take-home pay of $49,000. You could go to my employer and offer to do my job for $70,000. You would get pay raise of $21,000, and my employer would be cutting its costs by $30,000. So the boss comes to me to see if I would be willing to take a cut in pay. If so, I would negotiate a lower pay, as long as I'm making at least $70,000.
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cavalier973 writes: Sunday, June, 08, 2008 2:26 PM
Great questions, Dan in SC Part 3
Of course, even if I negotiate to a lower salary, I can expect to get a big raise soon afterward, because the Fair Tax would result in rapid economic growth. By lowering expenses, the Fair Tax would increase the amount of capital money that corporations could use to expand their businesses, which means more jobs.
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cavalier973 writes: Sunday, June, 08, 2008 2:31 PM
Great questions, Dan in SC Part 4
The answer to your second question is tied to my answer to your first question.
Your second question is: "Second of all, I have yet to hear any fair tax supporter explain how anyone would be able to afford a new home when the taxes would be 20-30%. People who want to sell their house would not lower the price and take a loss to off-set the increase in the sales tax. Even automobiles would likely become out of reach."

The cruel, callous answer is "Simply shop for a less expensive home."

But since I don't feel cruel or callous right now, I will elaborate on how the Fair Tax doesn't punish homebuyers.
First, The Fair Tax would only apply to newly built homes, not to previously-owned homes.

Second, the cost of building new homes would decrease by the amount that the contractor's expenses are lowered from not having to do all the Income Tax work (filing taxes every month or quarter, messing with payroll, etc.).

Third, the cost of mortgages will decrease, because the banks are no longer having to deal with income tax issues.

Fourth, when you sell your house, you will not have to pay capital gains taxes, so you could accept a lower price and still come out with more money than you would under the current tax system. This would put downward pressure on the prices of previously owned homes, which would in turn put downward pressure on new construction homes.
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cavalier973 writes: Sunday, June, 08, 2008 2:43 PM
Great questions, Dan in SC Part 5
My last post reminded me of something else about salaries. Going back to my post at 2:11 (part 2), let's say that I negotiate my salary down from $100,000 to $80,000. The company sees me getting a pay cut of $20,000, but I see my take-home pay increasing by $10,000.

Now your last question is this: "Lastly, suppose we eliminate the income tax in lieu of the fair tax. What guarantee would we have that the government would not eventually impose another income tax in the future so that we end up with both the fair tax and income tax?"

I like this question because the answer is so poignant: WE ARE ALREADY PAYING BOTH AN INCOME TAX AND A SALES TAX. The sales tax is hidden in the higher prices of everything we buy. It's impossible for corporations to pay taxes--their fictional entities. Oh, I know that I can look at GE's income statement, and see a line there for taxes. But GE doesn't pay those. The customers do through higher prices. If GE decided that customers shouldn't be paying those taxes, it can lower salaries, making the GE employees pay for the taxes. If GE didn't want either its customers or its employees to pay its taxes, it could accept lower profits, which means that the shareholders of GE are paying its taxes.

Since the shareholders are its primary concern, and it needs to keep its employees relatively happy, then GE will most likely pass the taxes off to the customers, by charging more for lightbulbs, etc. And it's not just passing on the cost of its own taxes; GE is also passing along the taxes of every one of its suppliers as well.

With the Fair Tax; the Income Tax, Corporate Tax, Capital Gains Tax, Estate Tax, and the FICA/Medicare Tax are all eliminated, and the Sales Tax, which we are already secretly paying, is brought out into the open and relied upon exclusively by the Federal Government for its financing (along with borrowing, of course).
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cavalier973 writes: Sunday, June, 08, 2008 2:54 PM
Great questions, Dan in SC Part 6
Your last comment was: "I would much rather see the government cut taxes and cut spending first, then we can talk about tax reform. Right now, we do not need to trade one tax system for another one just to keep feeding the monster."

The Fair Tax would help tremendously with your goal, which I heartily share, of not only cutting government spending, but reducing the size and scope of government. By making the tax rate transparent and universally applied, the Fair Tax eliminates politicians' ability to monkey with the tax code to favor this lobbyist or that constituent. It would make everyone, not just the rich who are currently paying most of the taxes, aware of the intrusion into our personal economic lives by the government.

And eliminating the IRS is always a worthy goal for those wanting to limit the power of Government.
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