lines in the sand

The Answers

  Earlier this week Jerry Bowyer had seven questions for the Fair Tax crowd.  Unfortunately it was the weekend before I could answer them for him.

Why do you think that a sales tax is less prone to corruption and complexity than an income tax?

Okay, he actually had eight questions because this is two.  Complexity and corruption each need their own answers.

Complexity is relative.  A sales tax can become complex as demonstrated by the recent need for Florida to establish a commission to review its sales taxes and simplify exemptions.  But states in the U.S.  Have had sales taxes since 1930 and I don't know of any that require a two page form, numerous tables, pages of supporting schedules, and the assistance of accountants and lawyers to calculate and pay. 

With a sales tax, there will be corruption, but I've seen no convincing evidence that there will be more than we have now.  At the state level sales taxes are often ignored or manipulated, but that is generally on resale transactions, which are not taxable under the fair tax plan.  Sales taxes on new items should be relatively easy to track and enforce.

Are sales taxes, where they are currently in operation, simple and free from special interest lobbying?

No, they're not.  But with a tax based on the amount of the transaction rather than estimates involving depletion allowances, depreciation methods, mileage allowances and other arcana, there will be fewer opportunities for low visibility favors.

A Value Added Tax (VAT) is guaranteed to be complicated, since it is applied at each level of production and may even have different rules in each case.  The fair tax  avoids this type of complexity by taxing a product once at the point it leaves production

The current income tax has taken a long time to become what it is.  Perhaps 90 years hence the sales tax will need replacing, but it is unlikely that even then it will have become the hydra that we have today.

Does it apply to non-profits?

HR 25 Section 706-(a) NOT-FOR-PROFIT ORGANIZATIONS- Dues, contributions, and similar payments to qualified not-for-profit organizations shall not be considered gross payments for taxable property or services for purposes of this subtitle.

More people can take deductions for charitable donations, including to churches, than under the income tax since you don't have to consider itemized deductions.  In fact it is not even necessary to track them because they are realized each Sunday morning when the cash hits the collection plate.

Actually, I have a problem with this one.  It is the beginning of the kinds of special exemptions found in many state sales taxes.  It puts the government in the position of deciding who is qualified to get special treatment which in turn gives it control over them.  That is why I believe, for example, that we have gotten the tax treatment of churches exactly backwards in the past.  We've even had recent cases of the IRS investigating churches over political speech from the pulpit.  But I realize this puts me closer to the fringe than most fairtaxers.

Are used goods, non-taxable?

If so, this means less goods production, more yard sales, eBay stuff, etc. Won’t this hurt traditional retailers and goods producers?

Supply and demand should largely compensate for this.  As demand for untaxed used goods rises so will their prices until they reach an equilibrium with new products.  And some goods, such as food and services, don't have much of a used market.

Why wouldn’t this encourage evasion through rehabilitation? After all what exactly constitutes New vs. Used? If I repair a car, it’s used, but what if I upgrade it? New engine, but old chassis, is that new or used?

At the consumer level, I don't understand the problem here.  When you buy a new engine to put in the old chassis you pay the sales tax on it.  Whoever buys it from you is buying a used vehicle.  I'll admit that for a business this could be problematic.  If a professional refurbisher buys a used chassis, rehabs it, and sells it, I can see that the chassis could be considered raw materials and his ultimate sale might be taxable.

This is hardly evasion, though.  One of the biggest pluses to the fair tax is that it does away with the income tax's penalties on wealth creation and savings.  Preserving the utility of goods results in savings just as surely as stuffing money into an IRA.

What about the transition period?

Before the sales tax takes effect, won’t there be a buying binge? Afterwards, won’t there be a buying drought?

I'm not sure, but it sounds like Bowyer is assuming that on implementation day, prices will rise 30%.  Many Fairtaxers claim that since the it replaces the hidden taxes already in prices, they will stay the same.

I don't believe either claim.  I would expect prices to rise some but considerably less than the 30% of a fair tax.  At the same time workers would see their take home pay increase by at least 8% as Social Security, Medicare and income tax withholding disappear.  Even with higher prices the net result would resemble the fairtaxers prediction.

A common question is, "How can you be sure prices will come down?" Maybe Bowyer is, in fact, describing the mechanism.  A buying binge would create upward pressure on prices and we could see the beginnings of his 30% increase even before implementation.  The "drought" would then bring prices down to the new level.

As an IT professional, I have often seen difficulties in transitions, but rarely to an extent that would justify not going forward.

Isn’t it true that the rate is not really 23% but 30% at least, because it’s tax-inclusive?

The underlying idea of the Fair Tax is that it seeks to replace hidden taxes with a single visible one.

Before the Fair Tax 23¢ of every dollar spent finds its way to the Federal treasury.  With the fair tax 23¢ of every dollar goes to the Federal treasury.  Whether you want to call that a 30% tax on a 77¢ price or a 23% tax on a $1.00 price is semantics.

How do we determine the interest portion of mortgage payment?

This is laid out in section 801 of HR 25.  Essentially, the portion of any interest rate above that on the Federal debt (not the funds rate set by the Federal Reserve) is taxable.  That will minimize the ability to game the system by pricing houses low and mortgages high.  A market effect that would also inhibit such arrangements is that they would have to include severe prepayment penalties.

The Fair Tax has it's share of difficulties: it isn't even fair.  But even with its problems it is vastly superior to the income tax that exists today.  Making the change would not be easy, but imagine what it would be like if people with names like King or Washington had let that be reason enough not to try for something better.

Blowout

I want one.

Word Problem

Q: Al has two oranges.  Bob has three times as many oranges as Al.  Charlie has three times more than Bob.  How many oranges does Charlie have?

Your probable answer: 18
My answer: 24

Grammarphobia Blog decides:

One of the things I complain about is the use of the phrases "x times more (or larger)" and "x times less (or smaller)," since they're practically always misleading. I recommend using "x times as many" or "x times as much as."

For example, say that Bob has 9 books and John has 3. The sentence "Bob has 3 times more books than John" is incorrect, but that's what many people would say.

In fact, Bob has "3 times as many as" John, since he has John's amount (3) times 3, for a total of 9.

If Bob had “3 times more” than John, he’d have John's amount (3) plus 3 times that amount (9), for a total of 12. In other words, "3 times more" is actually 4 times as many.

The difference becomes more obvious if you reduce the factor to 1.  Suppose Al and Bob each have one orange.  "Bob has one times as many oranges as Al" is an odd thing to say but is correct.  "Bob has one times more oranges than Al" just doesn't make sense.

Just another long time word peeve of mine.