Tax Policy Change We Can Believe In

Earlier this month, Dan Caplinger of The Motley Fool called on President Obama and Congress to make fixing the tax code a high priority. His laundry list of action items consisted mostly of revisiting provisions that have already expired, such as the inflation patch for the Alternative Minimum Tax, and provisions that will soon expire, such as the Bush tax cut rates. But he did call for one new reform: addressing "[t]he link between lobbying and corporate tax benefits ... [which] disturbs many taxpayers' sense of fairness." I think this suggestion constitutes the kernel of a great idea.

Historically, humans managed pretty well for most of our existence with no taxes, and not much government. But around 10,000 years or so ago, some combination of our success at populating the planet and environmental changes pushed us past the level where the tribal hunter-gatherer subsistence mode of existence could produce sufficient food. By necessity, we invented agriculture and cities... and the inherent necessity for planning entailed in making that work engendered more government... and the constant need for funding its activities and functions. Basically, the 99% surrendered their liberty and the right to make most decisions about their own lives in return for a (usually) reliable food supply.

And that's pretty much the way things were for thousands of years... until something unprecedented happened about 250 years ago, when the pace of engineering and technical innovation began to lower the price of stuff -- first food, and then other goods and services -- so dramatically that the quality of life began improving for more and more of the 99%.

In terms of personal liberty, we are probably closer to the level of freedom of choice enjoyed by virtually everyone in hunter-gatherer society than we have ever been. Which is probably not all that close considering all the tenant farmers and Foxconn workers on the planet, but the vector is looking good.

Howsoever, a mere 250 years of moving in a "good" direction after 9,750 years of moving in a "bad" direction does not confer immunity against the tendency of The Powers That Be to want to consolidate authority. The typical pattern is that we fall into a period of chaos where not everyone has enough to eat, some talented and ruthless individual or group takes the opportunity to seize control and sort out the mess -- in our Mesopotamian days, this principally involved getting the irrigation system working again -- and things are relatively good again for a generation or two. But eventually, those in control at the top get complacent and greedy, and start exploiting their power for self-aggrandizement, the infrastructure is neglected, and we are back to chaos and starvation again. Rinse and repeat.

Which gets us back to the U.S. tax system. When Mr. Caplinger opines that "[t]he link between lobbying and corporate tax benefits ... disturbs many taxpayers' sense of fairness," he is engaging in masterful understatement. Our tax code is rife with exemptions, dispensations, credits, special preferences, incentives, and loopholes, most carefully crafted and steered through the legislative process by a bevy of highly skilled lobbyists who are well-bankrolled by one corporatist interest or another. The purpose of these "improvements" to the income tax law is to benefit that particular corporatist interest, either directly by providing some sort of tax relief or indirectly by encouraging otherwise irrational behavior by other taxpayers that boosts the fortunes of the corporatist.

So not only are individuals encouraged to do things that they otherwise might not -- even things that are socially destructive, such as take on mortgage loans they can't afford -- but they have to struggle with incredibly complex tax returns each year. And it gets worse still. While the direct benefits of the loopholes afford large corporations one sort of unfair advantage, the hassles of coping with and complying with the arcane rules constitute a significant barrier to entry for small businesses that can barely afford to pay accountants to help with compliance... forget about hiring lobbyists to gain their own "special preferences."

This behavior is not nefarious. If you were charged with maximizing the success of a large corporation, it would be not merely irrational, but irresponsible to eschew the tax lobbying game. All your competitors are playing, and by not competing, you would be handing them a significant competitive advantage and betraying the interests of your employer.

However, the cumulative effects of this sort of activity are per force corrupting. About half the lobbyists on Capitol Hill are engaged in tax code work, which means a lot of money is flowing. And we are not just talking campaign contributions. Legislators and staff who play ball with respect to tax code "improvements" certainly tend to get special consideration for lobbyist, legal firm, and board of director sinecures after retiring from government service. Mr. Caplinger has this right: It is not a pretty picture.

But the thing is, if we leave an open honeypot in the woods, we really shouldn't complain if it attracts bears to our campsite. And funding our government with income tax revenue is, metaphorically speaking, a big open honeypot. So, given that modern civilization requires at least a modicum of central authority and that the actions of government need funding, how can we address this problem?

The answer is that we have to look beyond a laundry list of marginal tinkerings with our current tax code. And having a president at the start of his second term looking for a win-win opportunity to make a positive difference just might be the catalyst that could make it happen.

How about a solution that politically speaking would galvanize instant support from virtually every small business and Chamber of Commerce in the country, and be greeted enthusiastically by middle-to-upper bracket taxpayers -- especially anyone who has ever been audited -- while providing the prospect of lots of new jobs to un- and underemployed folks? And, of course, would both eliminate the loopholes now on the books and prevent any new ones from being created?

The solution is a simple one: Eliminate all income taxes -- personal (including estate) and corporate -- disband the IRS, and implement a revenue-neutral consumption tax. The tax would be collected on the sale of services and new products to individuals (not on business-to-business sales or the resale of used products to individuals).

Come to think of it, why are we even taxing income in the first place? Why create a disincentive for people to be as productive as they can be and maximize their income? Isn't that a prerequisite for capital formation and investment that promotes growth? And in a world of limited resources -- particularly in the USA where, with 5% of the planet's human population, we consume 25% of the goods and services produced -- shouldn't we be taxing consumption to discourage wasteful over-indulgence?

To make this work fairly, you would need one basic exemption: for folks near and below the poverty line. This could be accomplished relatively simply by issuing every taxpayer rebate checks to zero out the tax on the first x thousand dollars of purchases each year. In effect, poor folks -- or anyone who limited their spending to a minimal amount -- would pay no tax. But for richer folks, the more you buy, the more you pay.

This would be a huge boon to our economy. U.S.-based producers could price their products cheaper, not having to account for the cost of the income tax, and thereby gain a competitive advantage against imported goods and, potentially, in the export markets. It would make more economic sense to produce goods in the USA again, and we'd gain jobs... lots of jobs!

Speaking of which, small businesses historically provide 70% of job growth and the elimination of the estate tax would strengthen such privately owned businesses. With no taxes on interest, dividends, or capital gains, investment decisions could be made strictly on an ROI basis. Retailers should not be affected too much because the increase in sticker prices will be mitigated by both the elimination of payroll taxes --consumers will have their entire paychecks to spend -- and fact that producers will no longer have to "price in" the cost of their own corporate income taxes, so they can afford to charge less.

Of course, while eliminating all corporate income taxes would be popular with small businesses, eliminating the personal income tax and IRS would be a hit with most middle-class taxpayers, and the prospect for more jobs would make it a hit with virtually the entire 99%, there would be significant opposition to this proposal because it would sweep away all the loopholes and preferences that the corporatists have invested their lobbying money in over the decades.

Big businesses that benefit from the competitive moat afforded them by the income tax code -- energy companies such as ExxonMobil, defense industry companies such as Halliburton, Big Pharma companies such as Merck, Big Insurance companies such as UnitedHealth -- would fight it with all their lobbying power. Tax lawyers and accountants would generally be unhappy. And legislators would be loath to surrender the power -- and attendant remuneration -- of being able to dispense favors to the rich and powerful.

But if President Obama is looking for a signature issue that would enable him to bring together a strong coalition of both have and have-not citizens, all of whom would benefit from this solution, demonstrate that the government does not (always) favor corporatist interests over those of the public at large, and increase the odds he can deliver on his 12-million-new-jobs promise, he could scarcely do better.

And by restoring a more reasonable balance between the exploitation of centralized state power for purposes of self-aggrandizement by the few and the rights of the citizenry to life, liberty, and the pursuit of happiness, Mr. Obama can build himself a lasting legacy of accomplishment that will ensure the gratitude of future generations.

Plus, think of what the USA could accomplish once the brainpower and persuasiveness of all those high-powered former tax code lobbyists are redeployed to work that is socially redeeming!


Read/Post Comments (54) | Recommend This Article (44)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2012, at 7:40 PM, ScottmFool wrote:

    Beautiful. Will never happen, but we can dream...

  • Report this Comment On November 17, 2012, at 12:18 AM, EngMarty wrote:

    My conceptual reaction is "yes that sounds more equitable, lets do it!"

    But logistically, how to collect a consumption tax consistently? It seems even more ripe for manipulation/skirting than income tax. There are so many more transactions to monitor and regulate.

    And would bartering become illegal? Otherwise those with the capacity will employ accountants/tax lawyers to ensure all their significant purchases exist outside the US consumption tax reach (geographically, legally, or otherwise)

    I would love to hear if there has been more technical investigation into how this could work.

  • Report this Comment On November 17, 2012, at 12:35 PM, bhessel wrote:

    EngMarty,

    Thanks for your comment; good questions! The short answer is, yes, there has been considerable noodling done as to how this would work. :-)

    Basically, the tax is on the sale of services and NEW (not used) goods. To legally sell either, you need a seller’s license, are required to collect and remit the consumption tax on your sales, and your records are subject to audit. Because there would be a lot fewer licensed sellers than there currently are corporate and personal income tax payers, enforcing compliance would be easier, from the point of view of the government.

    You can buy something new abroad, but if you bring it back into the USA, you are required to pay the consumption tax on it. This sort of situation comes up all the time for countries that have instituted value-added taxes (or even now in the USA with duties on imported goods).

    The seller of any service or new product could accept barter items instead of money, but would still be required to remit the consumption tax on the value of the service/product sold.

    There are a lot of other questions that have come up, far beyond what we could discuss in the article. If you are interested, I again recommend that you check out: www.fairtax.org

    Brad Hessel

  • Report this Comment On November 17, 2012, at 4:31 PM, bellpa wrote:

    I would further invite everyone to get Neal Boortz's 2005 tome on the subject "The FairTax Book" written in collaberation with Congressman John Linder.

    The idea has been out there for some time now and has never been thoroughly vetted by Congress.

    IMHO it is an idea that is way over due to be implemented.

    Thanks for opening it up for discussion for all Fools, Brad. Our current code is punitve and immensely convoluted.

    And, no Mr. Obama, it never has been and never will be FAIR.

  • Report this Comment On November 17, 2012, at 4:33 PM, bellpa wrote:

    Another idea

    Lets start a petition on wethepeople.com!

  • Report this Comment On November 18, 2012, at 9:45 AM, creitsma wrote:

    In general, I think this is a great idea, primarily because it would offset more taxes onto foreign goods, and reduce taxation on American goods. However, there is a disincentive that would make this less desireable from a government income perspective.

    The income that the government would receive from year to year and from season to season would be greatly unpredictable & unreliable. Income tax is fairly steady and consistent because layoffs don't happen overnight. The unreliability of consumption tax makes it difficult to plan for new investments, and at least in the case of this most recent recession, would cut our government funding at a time when reinvesting funds helped prevent economic collapse.

    That said, our government has the ability to sell bonds, so that gives us an ability to create a more steady cash flow, however the shifts would be much more drastic and harder to control.

    I'd be interested to hear your thoughts on this potential pitfall!

  • Report this Comment On November 18, 2012, at 10:10 AM, bhessel wrote:

    creitsma,

    I believe you are overestimating the unpredictability of retail sales; if you have ever managed a retail store you would know that the pattern is pretty consistent from year to year. Which is not to say there are not significant seasonal variations, but they tend to be predictable. And I doubt the variations are much more pronounced that the 15 April spike the Feds currently get.

    Of course, it is true that macro economic trends do affect the overall sales—and thus, in theory, consumption tax revenues—but would this be a significantly larger effect than the variation in incomes—and concomitant taxes—caused by those same trends under our current regime? I do not know if this has been studied; I think it is a good question.

    Brad Hessel

  • Report this Comment On November 18, 2012, at 11:09 AM, wolfman225 wrote:

    The major problem with a consumption or "Fair Tax" scheme is that it simply cannot work as advertised. It would do nothing to get the heavy thumb of government off the tax scales. In fact, it would increase both governmental interference and complexity beyond what we already deal with.

    The best, fairest tax system is a flat tax. Preferably on wealth and accumulated assets, not income. A flat tax on wealth would keep the liberals happy by letting them "tax the rich" and prevent the (to them) dreaded establishment of dynastic wealth outside the scope of taxation and would help the middle class by encouraging economic activity, the buying and selling of goods and the creation and building of new businesses. (If you're gonna get taxed on it, may as well spend it)

    The problem with the Fair Tax is the proposal for "prebates" to be given out in order to offset the cost of living for citizens. How is this supposed to work without government interference? It can't.

    Firstly, you have the problem of differing costs of living in disparate parts of the country. It costs a lot more to maintain middle income living standards in NYC, for example, than it does in rural North Dakota. In order to maintain "fairness" you would have to create several governmental bodies in each state to set the appropriate levels of prebate, in accordance with the cost of living for each area. So much for smaller, less intrusive government. Aside from that, you would still have all of the multiple special interest groups currently complicating the tax system involved in setting up the parameters of the new consumption tax, lobbying for exemptions based on their clients' products or services being "necessities" that should be left untaxed.

    It would be a disaster. In order for any tax reform to be effective and efficient it needs to be sheltered from interference from politicians. A flat tax with set rates for all, no exemptions, credits, or carveouts is the only to accomplish such a goal. Just don't expect politicians to go along with the idea. Rep or Dem, none of them will agree to give up the power and influence that comes from the ability to modify the tax code.

  • Report this Comment On November 18, 2012, at 1:29 PM, kthor wrote:

    I have a dream, that one day .... that the tax system ....would be better than what it is now ....

  • Report this Comment On November 18, 2012, at 2:00 PM, bhessel wrote:

    wolfman225,

    Thanks for your comment. I like the concept of the flat tax—it achieves many of the same goals—but IMO the Fair Tax has it beat.

    First of all, with respect to your objection, the Flat Tax prebate works as follows: every citizen is eligible for the prebate, a monthly check which provides you in advance with money equivalent to the tax you will pay on the purchase of necessities. This amount is not adjusted for geography—or anything else, for that matter—it’s the same for everyone. While it is true that the cost of living is different across the nation, most of that difference is attributable to the cost of housing, and there is no consumption tax on rent or mortgage payments. Another large component of the difference is energy, and most of that difference is a function of local taxes, which also are not included in computing the Fair Tax. So while this is a legitimate issue to discuss, the problem is not as big as you make it out to be.

    In any event, while the FairTax does not alter the prebate for geographical variations in salary or cost of living, neither the flat tax nor the income tax today alters the amount of their individual exclusion or the rate of either the payroll or wage tax based on where the payer of the tax resides. So insofar as your criticism of the Fair Tax in this regard is justified, it applies equally to the flat tax.

    Which brings me to the areas where the flat tax—relative to the Fair Tax—clearly falls flat. (Sorry.)

    First, while one of the biggest advantages of the Fair Tax—as discussed in the article—is to eliminate the intrinsic advantage foreign exports now enjoy relative to domestically produced goods, the flat tax does nothing to help there.

    And secondly, the Fair Tax treats human capital the same as physical capital. Tuition, job training. or educational wages are not taxed in either the government or private sector. This is appropriate since the primary reason most people pursue an education is to increase their future earning capacity and the expenditures generated by those future earnings will be taxed. Tuition and job training are an investment in human capital, just as building a new factory is an investment in physical capital. The flat tax does not address this; education is treated like a consumption good and must be purchased with after-flat-tax and after-payroll-tax dollars.

    Finally, the Fair Tax is less amenable to future corruption. It would be difficult to go back to an income tax system. The entire massive and expensive administrative apparatus built up over nine decades would have been dismantled; it would require a massive investment to reconstruct it. But the flat tax can be easily changed back to an income tax. The apparatus of the income and payroll tax system is retained. In either case, pressure from the special interests to regress would be unrelenting, but their case would be a lot harder to make after we had switched to the Fair Tax.

    Here is a good discussion comparing the pluses and minuses of the flat tax and Fair Tax:

    http://www.fairtax.org/PDF/GradingtheTaxReformPlans_10.16.20...

    Brad Hessel

  • Report this Comment On November 18, 2012, at 2:02 PM, bhessel wrote:

    oops, in the above comment, the first sentence in the second paragraph should read “The Fair Tax prebate works as follows…."

  • Report this Comment On November 19, 2012, at 9:43 AM, devoish wrote:

    Ok.

    1) So lets say you exempt poverty level incomes from a consumption tax.

    Where do you collect it? Presumably point of sale.

    Lets say I go to the local roadside farmstand, with cash or a credit card. How do they know I do not deserve the exemption? How much of their income is expended keeping records of which sales pay and who doesn't? Same question at the deli, etc.

    2) Lets say i am not poverty level. Lets say i am upper middle class and make $35,000. (ok I admit it - that actually is poor). Do i get the deduction on my poverty level income up to $25,000 and only pay taxes on my consumption above that amount?

    3) Lets say i'm jaimie Dimon and take a business trip - not taxed - to Las vegas. While I am there I have thirtytwo business lunches and dinners also not taxed. will the person who serves hiom have to pay consumption taxes on his lunch? The person who cleans the dishes? Or are they exempt because their income should not exceed the poverty level exemption that makes it possible for jaimie to afford not to make his own sandwich for lunch.

    4) Based upon Mr Warren buffets expenses, what percentage of what he gets out of our economy (his income) would he pay, and what percetnage of what I get out our economy (my income of $35,000) would I pay to support, among other things the theft of iraqi oil using Federal government resources to "protect our interests" overseas?

    5) Corporations are people too, dude. Tax corporate and all business income - not profit or savings - at the same levels mine is taxed, including poverty level deductions and simplify the tax code by eliminating all corporate expense deductions.

    This would redeploy thousands of financial wizards into the productive economy, ease the accounting burden for corporations, solve the deficit, and simplify the tax code considerably.

    Best wishes,

    PS. I really want you to answer the buffet vs $35k income question for us. he has written enough books to estimate his consumption.

    Steven

  • Report this Comment On November 19, 2012, at 10:37 AM, CluckChicken wrote:

    I love the line about disbanding the IRS, it just shows a complete detachment from reality. Does anybody truly believe that there would not be some government agency to collect and audit whatever tax policies we would have?

    Since sales taxes are the easiest form of taxes to cheat on I can only imagine the load of fun this would create for auditors.

  • Report this Comment On November 19, 2012, at 4:47 PM, bhessel wrote:

    devoish,

    Thanks for your thoughtful comments and questions. Before I address them directly, please let me clarify that the prebate is a monthly check/deposit to which EVERY taxpayer is entitled. It “preimburses” you for the consumption tax you will presumably pay during the month on necessities. You get it just by registering with the government as a consumption tax payer. So with that in mind:

    1] HOW DOES THE SELLER KNOW NOT TO COLLECT THE TAX FROM ME BECAUSE I AM POOR? There is no such exemption—all individuals pay the consumption tax—so this problem does not exist.

    2] IS SOMEONE SLIGHTLY ABOVE THE POVERTY LEVEL ELIGIBLE FOR EXEMPTION FROM THE CONSUMPTION TAX FOR PURCHASES UP TO A CERTAIN LEVEL? In the spirit in which you asked the question, the answer is “yes”—in that both a person below and a person above the poverty level is eligible (along with everyone else) for a prebate…keeping in mind, once again, that there is no exemption from the consumption tax for individuals.

    3] DOES THE SELLER HAVE TO PAY THE CONSUMPTION TAX ON PURCHASES BY BUSINESSES (WHICH ARE EXEMPT FROM PAYING THE TAX)? Of course not. The purchasing business does need to be able to demonstrate that any purchases made on which no consumption tax was paid were legitimate business expenses. The burden of proof—and any potential fines for late payments if illegitimate purchases are uncovered—is on the business PURCHASER of the good or service on which no consumption tax was paid/collected/remitted, NOT the business SELLER.

    4] HOW WILL MY TAX BURDEN COMPARE WITH WARREN BUFFET’S TAX BURDEN? You and Mr. Buffet will both control over your respective tax burdens because, beyond the basic necessities (on which the consumption tax you pay is balanced by your prebate), you both choose when and how much to spend on consumption, and your taxes will be higher or lower depending on your decisions. The consumption tax rate is intended to be revenue neutral; on average the Feds now collect 23 cents of every dollar earned and the consumption tax is calculated to collect the same revenue. Generally, this means that folks whose spending money comes primarily from wages—from which they currently have to deduct Federal income tax plus SS withholding plus Medicare withholding but with the Fair Tax would get 100% of—would pay the same or somewhat less in taxes while folks whose spending money comes from accumulated wealth will pay more (at least, something).

    5] CORPORATIONS ARE PEOPLE AND SHOULD BE TAXED AS PEOPLE. Sorry, no sale. First of all, I do not agree that corporations should have the same status as people…are you saying you agree with the Citizens United ruling that allows unlimited corporate spending on elections and opinion influencing? Secondly, taxing corporations is insidious because those costs are just passed along to the citizens/consumers invisibly as higher prices; I would much rather know and control what I am paying in taxes. Finally, IMO the whole idea of taxing income—individual and corporate—is misguided and self-defeating…not to mention unAmerican, as explained here:

    http://www.youtube.com/watch?v=UXJXtscsuXc&feature=playe...!

    Brad Hessel

  • Report this Comment On November 20, 2012, at 12:16 PM, bhessel wrote:

    CluckChicken,

    Compliance costs with the Fair Tax would be a fraction of what we as a nation pay now. The only entities that can purchase services or new goods without paying the consumption tax are licensed businesses. There are many fewer businesses in the USA than individual taxpayers; ergo we will need many fewer auditors to enforce compliance. In short, you are probably technically correct that the IRS will not be completely abolished, but under the Fair Tax regime, it would be a much smaller entity with which individual citizens would have virtually no interaction.

    As for your assertion that “sales taxes are the easiest form of taxes to cheat on,” the only entities that can legally sell services and new goods are licensed businesses, and they will have to explain any sales on which they do not collect/remit the consumption tax. I am not seeing a lot of room for cheating. Also, please note that some similar objections were discussed in earlier comments.

    Brad Hessel

  • Report this Comment On November 20, 2012, at 12:53 PM, CluckChicken wrote:

    "As for your assertion that “sales taxes are the easiest form of taxes to cheat on,” the only entities that can legally sell services and new goods are licensed businesses, and they will have to explain any sales on which they do not collect/remit the consumption tax. I am not seeing a lot of room for cheating."

    You are obviously not creative enough nor have you ever had been involved with an audit of a business. You seem to have this belief that a "license" means "trustworthy" or something along those lines.

    For example lets say I run a local shipping company, I help people move from point A to point B, this is a small part time business. This type of company would obviously buy many different types of things, many of which could be replacement items for items "damaged" in transport. In theory me going to McD's could be a business purchase. Or change my business to a restaurant or better yet catering or even Bed & Breakfast. How many of these small, part-time businesses would pop up and how many of these do you think would actually record accurate sales numbers or would they just report sales numbers to match whatever they felt like paying in taxes? Do you think these types of audits are more or less complicated then audits of individuals?

  • Report this Comment On November 21, 2012, at 10:48 AM, jwiest wrote:

    The main problem I have with the Fair Tax, which seems to rear its ugly head every 3-5 years or so, is that the wealthy don't really buy a lot compared to their income levels. Instead they park it in funds and bonds, or move it out of the country to buy land or other assets. The major burden of the Fair Tax is going to fall on the middle class and below who pretty much have to spend everything they receive. It's net regressive, despite the prebate.

    One question I had many years ago when I first heard of Fair Tax was: what about used goods? At the time I was told they would not be taxed. So how many business do you think will pop up overnight selling "used" goods that are simply bought business-to-business (i.e.: untaxed) and sold to consumers at a discount? How would you prevent/enforce it?

    The progressive income tax system worked fine for years until the top rates were lowered, all that money was freed up to flow to Congress and offshore, and the exemptions began in full force. The odds of turning back the clock there are probably as good as getting the Fair Tax in place. Philosophically I get the point of preferring to tax consumption rather than income, but I'd rather see something that works in reality than something more regressive that seems broken before it begins.

  • Report this Comment On November 21, 2012, at 10:48 AM, bhessel wrote:

    CluckChicken,

    Any business (not individual) that obtains a reseller license can purchase new goods and services needed for business purposes tax free. However, all such sales are recorded (the seller needs to justify not remitting the consumption tax by pointing to the buyer), so when the auditor comes around, the buying business has to be able to justify the purchases—all of which the auditor will know about—as being legitimate business needs.

    In your restaurant example, I am supposing you would collect the tax but then report and pay the tax on only a portion of your sales—omitting most of the cash sales or even refusing to take credit cards so that all your sales were cash and, therefore, harder to track. (In theory you could refuse to collect or remit the tax altogether which would make your place popular and increase your volume for the short period of time before, in practice, word got around you were breaking the law and got busted.) I think you are right that if you were careful and not too greedy this scam would work. But keep in mind that a potential auditor knows how much food you are buying and if there is an obvious systematic disconnect between that and what you are reporting for sales, your scheme would fall apart. So I see this as a minor problem.

    And obviously auditing a small business is as or more complicated than auditing an individual taxpayer…but keep in mind that [a] the focus of a Fair Tax audit is narrower and simpler than an income tax audit and [b] there are many fewer small businesses than individual taxpayers. So overall, compliance assurance costs with the Fair Tax would be much less.

    Brad Hessel

  • Report this Comment On November 21, 2012, at 11:05 AM, bhessel wrote:

    jwiest,

    Thanks for your comments; I think I can help out with the questions you raise.

    First of all we WANT the 1% to invest their money in capital formation mode as that facilitates economic growth which is good for everyone…don’t we? The Fair Tax increases the incentive for this, or more precisely, eliminates the current self-defeating disincentives we have in place.

    Second of all, with respect to progressivity, it is not clear that the percentage of their income the wealthy pay in taxes would decline under the Fair Tax when you take ALL income (including the gobs of it excluded under the current tax “preference”-ridden scheme) into account. But it is clear that the AMOUNT of taxes the wealthy—whose spending money generally comes from wealth, not current income—would pay is likely to go up under the Fair Tax regime, while the amount of taxes folks whose spending is funded by their paychecks—which they now get to keep 100% of—will likely decline on average.

    Finally, a business that has a reseller license can purchase services and new goods without any consumption tax, as you say…but that transaction does not magically transform the goods into being “used.” So when they turn around and sell those goods to consumers, they still have to collect and remit the Fair Tax.

    Brad Hessel

  • Report this Comment On November 21, 2012, at 11:09 AM, atkinskd wrote:

    The idea is grand! I totally agree that noone should be able to exercise deductions on the order of millions to pay the same taxes as a poorer individual. However, as one of my engineer colleagues likes to say 'Theory and practice are the same in Theory but not in Practice':) Unfortunately, stymieing greed is no small feat. Really what must be crafted is a code through which there is absolutely no escape to ensure that even, or perhaps particularly, the greedy are held accountable.

    I've been playing with the idea of an Asymptotic tax code. One axis is income the other is perhaps GDP. As persons and corporations ascend the income/networth curve their resources are subject to more tax as they accumulate more.

    Then there's traceability. One fortunate consequence of the IRS is that they're responsible for tracking all of this, a credit or a debit out of place and a notice is issued and interest begins to accrue until the matter is resolved.

    In a strictly electronic, fully traceable society all things are accounted for. Right up until Barter kicks back in to get around it. So then it's a matter of assessing where the optimization point is and maximizing that.

    The other issue is what to do with all of the proposed out of work accountants and auditors? They're not really suited for general labor. These proposed changes would disembowel an entire industry. The same argument that plagues changes to our energy structure. If we're all Off-The-Grid, whether it's watts or dollars the peripheral industries all disappear, those skill sets aren't necessarily complimentary to the new industry (coal mining vs uranium mining).

    Ultimately IMO we have organized crime running our government. Look no further than Jared Polis barking about slapping the FTC for investigating anti-trust on Google. Makes y'think how big his position in Google is rather than let the FTC do their eval.

  • Report this Comment On November 21, 2012, at 11:11 AM, sheldonross wrote:

    " It costs a lot more to maintain middle income living standards in NYC, for example, than it does in rural North Dakota."

    Well, you haven't been to North Dakota in while huh?

    The Bakken oil boom has made places like Williston just like an old-west gold-rush town.

    People are paying $1000 bucks a month to live on a couch in a trailer house. McDonalds employees start at $15 bucks an hour, etc.

    Just being pedantic of course, but your choice of comparison just happens to be untrue for a lot of North Dakota at the moment.

  • Report this Comment On November 21, 2012, at 11:53 AM, Letsgojacks wrote:

    "Why create a disincentive for people to be as productive as they can be and maximize their income?"

    Taxing consumer spending will create, in your world, a disincentive to spend. Thus, lower economic growth.

    You can't argue that taxes disincentivize one area of our economy, while becoming an outright boom in another area.

    Help me square that circle.

  • Report this Comment On November 21, 2012, at 11:57 AM, wolfman225 wrote:

    ^Point taken, Sheldon. I should have thought for an additional second and chosen a different rural area, say, some small coal town in W.Va, or my rural home here in Vermont. I think the comparison is still valid, however. While I like the idea of the Fair Tax incentivising thrift and savings and putting the brakes on our overly consumption driven lifestyle, it just seems to me that the proposal would be ripe for two things: Increased governmental interference and control of the economy and less freedom for individuals to build true financial security for themselves. To wit: Brad Hessel wrote:

    "The only entities that can purchase services or new goods without paying the consumption tax are licensed businesses..... the only entities that can legally sell services and new goods are licensed businesses..."

    How is this going to be good for the economy going forward? It gives government (and it's embedded special interest groups) a de facto veto over the formation of new businesses and start-ups. It can already be reasonably argued that larger, established firms actually prefer regulation (as long as they have a hand in the writing of such) because it helps erect new barriers to entry for entrepreneurs.

    You will still have government overly involved in the way citizens conduct their business with each other. What criteria are going to be required in order for a business to become "licensed"?

    The corruption and crony capitalism such a system would be subject to staggers the imagination.

  • Report this Comment On November 21, 2012, at 12:06 PM, wolfman225 wrote:

    ^It also does nothing to address the point made by CluckChicken about the formation of a black market or off-the-books barter economy. People will always find a way to buy and sell (or trade) to get what they want.

    What's to stop someone from agreeing to trade one item they have for something they want from another? Is the government going to really have such tight control of supply as to be able to prevent such transactions? A "cure worse than the disease", indeed.

  • Report this Comment On November 21, 2012, at 12:17 PM, whereaminow wrote:

    --> To legally sell either, you need a seller’s license <---

    That's really all you need to know that this is just another big government scam. It's very fitting that this is being pushed by Beltway Libertarians attempting to gain favor in that grease pit known as the nation's capital.

    Every exchange has a "seller" and a "buyer". Every person with any kind of property is a potential "seller" of a service or good. To not understand the implications of forcing (by gun point) people to obtain licenses for engaging in normal human behavior is true naivete.

    This is worse than the income tax.

    All promises of how much the taxation level will be are just that: phoney baloney promises with no understanding of how government works. It will never be enough revenue. And it will always be raised.

    Eventually we'll be taxed at levels higher than we see now, whether we engage in consumption (which is nothing to tax anyway, since it's part of human exchange) or not. And on top of it, we'll have mountains of onerous regulations piled upon us.

    It'll be just another excuse for disgusting bureaucrats to wedge themselves further into your lives.

    Lesson here is always do not ask the government solve your problems. They most certainly will. And then you'll have an even bigger problem.

    Ask yourself this,

    If government has its own money making machine and can "create" out of thin air its own revenue, why does it need to take us at all?

    And why does a government with a monopoly on legal violence and a monopoly mint always have trouble making ends meet?

    If you understand the nature of the State, you know why. Those who don't, ask the State for more solutions to the problems it created.

    David in Liberty

  • Report this Comment On November 21, 2012, at 12:47 PM, bhessel wrote:

    Letsgojacks wrote:

    > Taxing consumer spending will create, in your

    > world, a disincentive to spend. Thus, lower

    > economic growth. You can't argue that taxes

    > disincentivize one area of our economy, while

    > becoming an outright boom in another area.

    > Help me square that circle.

    Excellent question! I agree that a consumption tax is by definition a disincentive to consume, and as such will tend to retard growth. As I mentioned in the article, in the USA we SHOULD “be taxing consumption to discourage wasteful over-indulgence.”

    Having said that, by leveling the playing field between domestic and foreign producers of goods, the Fair Tax would provide a material boost to USA-based manufacturers both respect to selling their goods here and overseas. And so while the overall pie may not grow as fast, our portion of it here in the USA should be larger.

    However, I would not go so far as to claim that under a Fair Tax system circles would acquire right angles. :-)

    Brad Hessel

  • Report this Comment On November 21, 2012, at 12:58 PM, bhessel wrote:

    wolfman25,

    Now you are boxing with shadows. The only requirement for obtaining a seller’s license is that you have to apply for one.

    Think about it: even if the law didn’t mandate that it be easy to get a license, what possible incentive would the government have for restricting them? The funding of all government activities including the salaries of the bureaucrats all depend on that revenue stream! The more sellers of services and new goods, the better!

    And as an individual, you don’t need a license to sell anything you previously purchased, as the sale of used products is not taxed. And if you find a seller of a service or new product willing to barter for something you have, no problem! (Of course that seller is still responsible for remitting the consumption tax on that transaction which would be based on the fair value of whatever was sold so they better make sure whatever you have traded them in the barter transaction makes it worth their while.)

    Brad Hessel

  • Report this Comment On November 21, 2012, at 1:04 PM, seattle1115 wrote:

    Without even getting to your economic arguments, your historical precis is hilariously inaccurate. To say that there was less government and more "liberty" (however you mean to quantify such a thing) in pre-agricultural hunter/gatherer societies is simply absurd, just as it is absurd to think that the Industrial Revolution unleashed a great wave of "liberty" upon the Earth.

  • Report this Comment On November 21, 2012, at 1:14 PM, bhessel wrote:

    whereaminow,

    LOL I agree with many of the points in your speech, but please be aware that virtually nothing of what you say pertains to the Fair Tax.

    Please note that under the Fair Tax:

    • there is no tax on the sale of used goods by individuals (or by businesses)

    • the government does not care who the buyer is (unless there is no consumption tax collected/paid on the transaction, in which case the buyer better be a business that can justify the purchase as a legitimate business expense)

    • revenue collection levels are designed to be the same as under the current system; if you want to reduce/criticize government spending, that is an independent issue (but it would be easy enough to lower the consumption tax rate if it turns out less revenues were needed)

    Please read over the comments of wolfman225 and my responses to him; I believe you may share some of his misconceptions about the Fair Tax…which most likely arose from my failing to explain it well enough. :-)

    Brad Hessel

  • Report this Comment On November 21, 2012, at 1:23 PM, bhessel wrote:

    seattle1115,

    I am not sure I understand your argument.

    You are asserting that when we were pretty much free to order our daily lives in hunter-gatherer society we had less, not more, liberty than we did once we invented agriculture and the 99% essentially became slaves to the 1%?

    And you are saying that the industrial revolution with cheaper food and availability of leisure time and literacy for more of the 99% was a step backwards?

    So…you believe our best days were in Mesopotamia?

    Brad Hessel

  • Report this Comment On November 21, 2012, at 1:55 PM, jwiest wrote:

    bhessel said: "Finally, a business that has a reseller license can purchase services and new goods without any consumption tax, as you say…but that transaction does not magically transform the goods into being “used.” So when they turn around and sell those goods to consumers, they still have to collect and remit the Fair Tax."

    Yes, but you haven't answered the important part: how will you enforce this? Your comment that goods are not "magically transformed" into "used" suggests that goods have a magical property of "newness" or "usedness", which of course they don't. So how will you prevent a company from buying up a bunch of iPhones directly from Apple, creating the fictional paperwork to show they sold the item and collected the tax, it was returned and they remitted the tax, and then resold the item as "used"? Heck, Apple itself sells "refurbished" items, I wonder if these wouldn't experience a significant uptick...

    There are millions of products. Will you spend enough to enforce it? Will the enforcement costs be built into the tax itself?

  • Report this Comment On November 21, 2012, at 2:21 PM, bhessel wrote:

    jwiest,

    I think you are making this seem much more complicated than it really is.

    First of all, the concept of fictional paperwork showing tax remittances is a non-starter; the government knows what was and what was not remitted to it. But clearly, in the case of a legitimate return, the consumption tax collected by the company should be refunded by the company to the erstwhile buyer and—if already remitted to the government—credited back to the company by the government.

    As a rule, companies do not issue full refunds for used items, only unopened items that can be sold (again) as new. If a company did accept a used item back under the Fair Tax regime (e.g., a “30-day money back guarantee” promotion), then the consumption tax they remitted (or owed) for that sale would not be credited back to them by the government and they should have to build that possible expense into the cost/benefit analysis of their promotion, possibly planning to not refund the tax, to refund only part of the tax or to eat the entire cost of the tax themselves.

    Brad Hessel

  • Report this Comment On November 21, 2012, at 2:59 PM, jwiest wrote:

    "If a company did accept a used item back under the Fair Tax regime (e.g., a “30-day money back guarantee” promotion), then the consumption tax they remitted (or owed) for that sale would not be credited back to them by the government..."

    ?? Non-starter. All current sales taxes are refunded on returned items.

  • Report this Comment On November 21, 2012, at 4:38 PM, bhessel wrote:

    jwiest wrote:

    > All current sales taxes are refunded on returned

    > items.

    Companies are required to return all sales taxes collected on returned items now and the same would be true in a Fair Tax regime, and obviously they would not pay—or would be credited if they had already paid—those taxes to the government.

    However, companies are not now required to accept as returns items that have been used…and again that would not change under the Fair Tax. Some now choose to do so anyway under conditions that they set (e.g., if you don’t like it after 30 days, return for a full refund). Of course, they cannot then turn around and sell that used item as new to another customer. That would not change under the Fair Tax, either.

    What I am saying is that under the Fair Tax, if a company accepts a USED item as a return, they are still responsible for remitting the consumption tax on that item. How they handle that with the customer is up to them (so long as their policy is clear).

    Brad Hessel

  • Report this Comment On November 21, 2012, at 5:29 PM, learningfool1873 wrote:

    I see nothing that would ensure fair wages to workers. Seems to me the corporations would still persist in paying as low a wage as possible, so that workers would end up paying a higher percentage of their pay, same as a flat tax.

    As far as I can tell, the workers still get screwed.

  • Report this Comment On November 21, 2012, at 11:59 PM, bhessel wrote:

    learningfool1873 wrote:

    > I see nothing that would ensure fair wages to workers.

    Good point. I was also skeptical at first because it lacks anything to repel mosquitoes, address the obesity problem, or resolve the marriage equality issue. But then I said to myself, “Oh, right…it’s a TAX REFORM proposal.” And now I am OK with it.

    Brad Hessel

  • Report this Comment On November 22, 2012, at 12:29 AM, NOTvuffett wrote:

    @bhessel ok, I am just being silly but here is a youtube link for Mesopotamia: http://www.youtube.com/watch?v=XLfbu7NzBWI

  • Report this Comment On November 22, 2012, at 10:52 AM, bhessel wrote:

    NOTvuffet,

    Thanks! If you like that B-52s number, you may want to check out Renaissance, if you are not familiar with them:

    http://www.youtube.com/watch?v=XPIInrREJW8&playnext=1&am...

  • Report this Comment On November 22, 2012, at 12:12 PM, wolfman225 wrote:

    <<Now you are boxing with shadows. The only requirement for obtaining a seller’s license is that you have to apply for one.

    Think about it: even if the law didn’t mandate that it be easy to get a license, what possible incentive would the government have for restricting them? The funding of all government activities including the salaries of the bureaucrats all depend on that revenue stream! The more sellers of services and new goods, the better!>>

    You'd think that, wouldn't you? Then why doesn't it work that way now? After all, the funding of all government currently depends on the revenue stream provided by taxation, yet there are countless barriers to entry for entrepreneurs and even more regulations levied on current businesses.

    Where is it guaranteed that "the only requirement to obtain a sellers license is that you have to apply for one."? Since when has government made it that easy? Even something so basic and simple as a child's lemonade stand can't be set up without the approval of several local authorities and the payment of licensing fees. In addition to the vendors license there are the EPA and FDA regulations governing the handling of the fruit and the ingredients allowed in the drink. Not to mention restrictions on hours of operation, etc, etc.

    As for what the incentive would be for government to make it difficult......control. One of the primary goals of our modern government seems to be to find new and innovative ways to control the lives of it's citizens.

  • Report this Comment On November 22, 2012, at 12:53 PM, bhessel wrote:

    wolfman225,

    Well now you are preaching to the choir. As pointed out in the article, one of the main plusses of this reform would be to remove the corrupting power to do favors for the corporatists via income tax “special preferences” from our elected representatives. There is no wiggle room with a consumption tax that has one rate and no exceptions.

    We are in complete agreement that too much power is concentrated in government.

    http://t.co/ah7MhdbV

    And to specifically answer your question, Federal legislation making it easy to obtain a seller’s license—which is most definitely an integral part of this proposal—would not sweep away state and local restrictions, but those are easier for citizens to organize against, if so inclined.

    Brad Hessel

  • Report this Comment On November 23, 2012, at 10:22 AM, SharpNJ104 wrote:

    Yes! I totally support the Fair Tax. Let's separate the lobbyists and our politicians.

  • Report this Comment On November 23, 2012, at 10:35 AM, whereaminow wrote:

    Brad,

    Just stop.

    First, the State will never allow anything to pass that isn't "revenue neutral". I.E. the Fair Tax would have to match the revenue the State is currently stealing from us in order for them to allow it.

    If it did match that revenue or looked to exceed it, they would move in that direction. Think about that.

    I don't care how easy it will be to obtain a seller's license. I don't F**KING want to have to apply to the State to live my life. I want the removal of all mandated licenses and the removal of all taxation.

    I don't need any more schemes thought up by think tanks in DC, no matter how "friendly" they are to my position.

    My position is that the State is an evil, violent minority that only exists to redistribute wealth. It has NO OTHER PURPOSE.

    So please, stop. Stop pretending that you have a great idea here. You don't. It's a deck shuffler and nothing more.

    David in Liberty

  • Report this Comment On November 23, 2012, at 11:40 AM, bhessel wrote:

    whereaminow,

    Your obsession with perfection does not constitute sufficient reason for the rest of us to stop working to make things materially better.

    Brad Hessel

  • Report this Comment On November 23, 2012, at 2:30 PM, aleax wrote:

    @bhessel, I do philosophically like the idea of taxing consumption rather than income, but I see a horde of problems with your proposal.

    For example almost as a side note you mention the abolition of payroll taxes. So how would you determine who gets what amount of social security payments?

    Or, consider cars. Many businesses have perfectly rational business reasons to buy cars (and indeed do today) and they no doubt may want their (e.g) salespeople to look good by always driving pretty new cars, so they'll resell their used cars after a while in order to buy them new ones.

    How long does an employee of that business need to have been using the car before the business can resell it to an individual as "used" and thus tax-free? Same goes for many other items such as laptops and other computers, tablets, phones, &c. I suspect a simple new/used 1-bit classification just won't work. The consumption tax will need to be pretty high (upwards of 30%, I would think, if consumption is 70% of GDP and gov't revenues in the low-20%'s of GDP) so the incentive to have businesses sell "used" 1-month old cars &c will be correspondingly high unless complex legal regulations are added.

    Do I need a license to donate to my neighbors, co-workers, &c, some of the eggs the wonderful chicken in my backyard produce so regularly? I'm not even sure of the legal situation today, actually, even though what's in doubt is only a single-digit sales tax -- with > 30% consumption tax in play (plus local sales tax) it might be a problem. So say I often donate eggs and various neighbors donate to me some of the stuff they make such as tomato sauce, home-baked pies, &c. Such informal barter-like arrangements are becoming more and more common as movements such as "urban homesteading" keep growing -- and why shouldn't they, after all "exchanges of gifts" are biologically natural to humans and at the root of what evolved into "sale/purchase transactions" (see Graeber's book "Debt: the first 5000 years" for more).

    Does my employer have a legitimate business need to purchase food and feed us employees for free? Apparently it's currently recognized as such (said employer gets that food expense recognized by tax authorities) and, while it was pretty revolutionary around here when my employer started doing that, nowadays just about all startups in Silicon Valley and many elsewhere provide their employees with free lunches. And laundry rooms -- employees can freely do their laundry at work so they can go back to their workstations and produce more wonderful SW while it's washing and drying. And gyms, massages, ping-pong and fussball tables, coffee, snacks, haircuts, &c -- all provided onsite to let enthusiastic employees stay longer hours and astonish the world with great products (one hopes).

    Note that all of these facilities are currently provided, even without much of a tax incentive, just because the employer hopes they're getting more in return for keeping employees around (and healthy, in the case of gyms, or awake, in the case of coffee). Just imagine if you slapped a 30%+ tax incentive on top -- wouldn't every employer suddenly wake up to what a great business advantage they'd get by providing employees w/these amenities? It's just a matter of degree, for example finding free coffee provided in an American workplace (sometimes to customers too, definitely to employees) is totally unsurprising, so, why not free steaks or chair massages...?

    My employers flies me around a lot for business purposes -- mostly speaking at conferences and the like, since I'm a somewhat-famous engineer, but others of my colleagues such as salespeople or business development types fly around even more. But of course when I do so fly I often also take a few days' worth of tourism; so is my transoceanic flight a business expense by my employer (as it's currently treated) or also a consumption expense "by me"?

    BTW you mentioned in passing rent would not be considered consumption -- so would staying at a hotel be, what's the rationale?! Why isn't rent consumption, BTW?! Sure it's necessary, but so is food and (now that even San Francisco is forbidding nudity;-) clothing -- indeed there are more people doing w/o rent (the homeless) than there are people doing w/o food (for any long time) or clothes.

    I could go on but this is already a long comment and I'd really hope to see you addressing these points as you have so punctually done with others. A lot boils down to defining what's consumption (vs non-consumption expenses such as apparently rent), individuals (taxed) vs businesses (untaxed), used (untaxed) vs new (taxed) consumption goods and services, sales vs exchanges of gifts (informal barter), and so forth... much as I like the philosophical underpinning I'm starting to suspect the practical issues may just be too much... (I still like 9-9-9 and, as a European, still don't understand why a politician's extra-marital affairs should in any way affect the worth of his or her policy ideas, but, that's a whole 'nother thread;-).

  • Report this Comment On November 23, 2012, at 3:57 PM, houdini101 wrote:

    I would certainly back and vote for this idea...but the politicians would never give up their power to tax or not tax. The ability to designate winners and losers. This is how they all become wealthy while in office... by handing out favors that are always repaid one way or another.

    My fear is that someday we will see a consumption tax...in addition to the current income tax.

  • Report this Comment On November 23, 2012, at 4:10 PM, Eddie66 wrote:

    Brad- I suggest you get out of your ivory tower and visit the real world for a while. I avoid paying sales tax on so many items that it boggles my mind. The thing that frustrates me is that I may avoid paying an 8% sales tax, but the vendor is probably avoiding a 50% income/payroll tax. And you have forgotten to mention that the fair tax is estimated to amount to 35%, compared to the average Joe's income tax of 10% (this doesn't include the prepayment, but that's based on poverty income).

    My conclusion is that this would be a bonanza for tax cheats and the wealthy, and a killer for the middle class.

  • Report this Comment On November 24, 2012, at 12:01 AM, bhessel wrote:

    aleax,

    Thanks for your thoughtful comments. As to your questions:

    With respect to Social Security and Medicare, there would have to be a transition period but ultimately, I expect these would become means-tested programs with set benefits paid out to those who qualify. The concept that the benefits one receives from these programs is a function of what one pays in has always been at best a polite fiction; in reality the average SS recipient gets a bit more and the average Medicare recipient WAY more in benefits than they paid in taxes. It is more honest to fund these benefits out of the general tax revenues, and distribute them according to need.

    The Fair Tax is designed to be revenue neutral and replace the income tax system that on average collects 23 cents of every dollar earned (by individuals and corporations). On a retail basis, the tax rate required to achieve this is 30%, so your estimate is right on target.

    There is no problem with businesses providing amenities for employees so long as they can demonstrate that a legitimate business purpose has been served. I think your idea of a “holding period” for a new product purchased by a business for use by their employees before it can be sold as used merits consideration. I am confident even without such a formal rule that a business which bought a new car for employee use and then sold it as used a month later would have a problem if an auditor found out about those transactions (and would end up having to pay the consumption tax plus a penalty and interest).

    Technically, barter sales are subject to the Fair Tax, but as a practical matter, if you trade some eggs to a neighbor for some lettuce without obtaining a retailing license and collecting and remitting the tax, no one is going to chase you for it. Most commercial-scale bartering is business-to-business and would not be subject to the Fair Tax anyway. So I do not see this as a big problem.

    If I said that rent is not subject to the Fair Tax, that was a mistake; it is…as is, logically, the cost of the service one gets at a hotel. Thanks for pointing this out.

    Brad Hessel

  • Report this Comment On November 24, 2012, at 12:26 AM, bhessel wrote:

    Eddie66,

    On the subject of “real world,” do you have any inkling of the level of noncompliance with the current income tax system? On an annual basis, it is estimated to be hundreds of billions of dollars, much of this inadvertent due to the complexity of the tax code. In addition to the folks who underpay by accident, there are millions of non-filers who pay no taxes whatsoever. All that will go away with the Fair Tax.

    And mayhap you can maintain your willingness to cheat on purchases but you won’t find nearly as many willing selling cheaters, because it will a lot harder to get away with it under a consumption tax regime. Businesses who are licensed to sell services and new goods are liable for collecting and remitting the consumption tax unless they can show that the buyer was another licensed business, and that buying business must be able to demonstrate the purchases served a legitimate business purpose. The cost to the government of enforcing compliance would be just a fraction of our current expenditures as the number of taxpayers (businesses) subject to audit would be 15% or fewer of the number there are now (corporations plus individuals), and the complexity of determining compliance would be greatly diminished.

    FYI, here is a document that spells out these Fair Tax advantages in detail:

    http://www.fairtax.org/PDF/Lamar_Smith_rebuttal_letter1-11-0...

    Your question about who benefits more, the 1% or the 99%, has been discussed earlier in this thread; look for my exchange with jwiest above.

    Brad Hessel

  • Report this Comment On November 24, 2012, at 1:06 AM, NOTvuffett wrote:

    Eddie66 wrote: "My conclusion is that this would be a bonanza for tax cheats and the wealthy, and a killer for the middle class."

    But before he wrote " I avoid paying sales tax on so many items that it boggles my mind."

    So which is it Eddie? Are you a card carrying member of the independently wealthy elite hellbent on destroying the middle class by cheating on taxes, or are you part of the downtrodden masses working against his brethren for a paltry reward? lol.

  • Report this Comment On November 24, 2012, at 4:16 PM, josephfumich wrote:

    I enjoyed the debate however, don't expect to see any changes coming down the road !!!! ----should any change come. it will be in the favor of the Govt. and/or the 1 %

  • Report this Comment On November 28, 2012, at 9:57 AM, fromthecenter wrote:

    Thanks for the useful interpretation of human economic behavior. The only quibble there would be that people invented agriculture "out of necessity" in response to population growth. Probably the logical sequence is that by "inventing" agriculture people started living longer and babies began to have a chance at survival. That in turn led to cities and the rest I would agree with.

    Consumption taxes and taxing sales both would increase the movement of income and wealth to the already wealthy. Simply put the wealthy are already getting a disproportionate slice of the economic pie. These people cannot spend the huge sums of money they are bringing in, so they invest it; increasing the inequality in income and wealth you often decry. Value taxes, consumption taxes and sales taxes do not tap into the money that the wealthy are earning but do not spend. At the same time these taxes increase the burden on the "middle class" and the poor who spend a greater share, if not the totality of their income.

    A similarly goofy idea is to replace the income tax with a property tax. This is usually applied to real property. The problem being that wealth, what used to be reflected in how much land someone owned, now is mostly held in financial instruments, CDs, stocks, money market accounts and so on. If we decided to tax that wealth as we do real property, that might make sense and bring in vast sums of money. But, I haven't heard that proposed.

    The only reasonable excuse for an income tax is that it more or less accurately taps the share of national wealth that is being produced each year. To some extent that increase is due to individual efforts, but more accurately it is determined by being a member of a country that uniquely rewards those personal efforts. Think of income tax as the dues paid to belong to the United States country club. Your dues/taxes are commiserate with the benefits you are getting from your membership.

    The ideal income tax report for individuals would be one line long. Income times tax rate equals what is paid. For businesses there would be three lines; income less expenses times rate equals tax to be paid. And for corporations add one more line; income less expenses less what is paid out to owners time tax rate equal tax to be paid. This presumes no exclusions, no deductions, but some sort of means of protecting the poor.

  • Report this Comment On December 02, 2012, at 3:58 PM, bhessel wrote:

    fromthecenter wrote:

    > Consumption taxes and taxing sales both would

    > increase the movement of income and wealth to

    > the already wealthy…. Value taxes, consumption

    > taxes and sales taxes do not tap into the money

    > that the wealthy are earning but do not spend. At

    > the same time these taxes increase the burden on

    > the "middle class" and the poor who spend a

    > greater share, if not the totality of their income.

    Thanks for your comments. I think you’ve articulated a good general criticism of consumption taxes on a conceptual level. I would point out that our particular income tax code has become ridden with special preferences that exclude or minimize the taxes on high incomes…but that does nothing to vitiate this criticism. The Fair Tax, however, is expressly designed to address it.

    Everyone who wants to can register as a consumption tax payer and thereafter will receive a monthly “prebate” calculated to cover the cost of the consumption tax to be paid on necessities. So the poorest folk—who don’t buy much more than the necessities—will actually come out ahead on the deal (because they will also be getting their full paychecks with no FICA or Medicare deductions). And according to studies the Fair Tax folks have commissioned, folks at the high end of the wealth scale will generally pay more in taxes, because the consumption tax hits them on spending from their accumulated wealth (which income taxes fail to do).

    Brad Hessel

  • Report this Comment On December 02, 2012, at 4:00 PM, bhessel wrote:

    Huzzah! The New York Times is now echoing The Motley Fool in considering the idea of replacing the income tax with a consumption tax worthy of discussion:

    http://mobile.nytimes.com/2012/11/30/opinion/Brooks-lets-tal...

  • Report this Comment On December 02, 2012, at 5:36 PM, NOTvuffett wrote:

    At this point, I am hoping that we go off the "fiscal cliff" at least temporarily. Why would I wish for such a thing? It would expose the big lie told by the left that the Bush tax cuts were only for the wealthy.

    Merely allowing the top marginal rate to revert to the old rate will not generate enough revenue to make a dent in the debt. It would only offset pennies on the dollar of projected deficits going forward, Plus there is no reasonable expectation that any additional revenues would be used for that purpose.

    There is nothing wrong with funding the govt. via a progressive income tax. But no amount of tweaking the tax code will fix things until spending is brought into line.

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