I heard about this site, Americans for Fair Taxation (http://www.fairtax.org/site/PageServer) on WGN radio the other day and thought it might be an interesting topic for this forum.

Would replacing income, estate, and capital gains taxes with a national sales tax be viable or not? If viable, would it be desirable to do so?

I heard about this site, Americans for Fair Taxation (http://www.fairtax.org/site/PageServer) on WGN radio the other day and thought it might be an interesting topic for this forum.

Would replacing income, estate, and capital gains taxes with a national sales tax be viable or not? If viable, would it be desirable to do so?

I have been following the movement and am on their mailing list. I even signed the petition to get it enacted. The movement started here in Georgia. While I don't believe it to be a perfect plan, it is certainly better than the hopelessly flawed tax system currently in place.

It would certainly simplify the tax code. :D

NO.

From what I see, the sales tax would just be simple. That's the problem. It's simple. Meaning it is likely that the government won't get much reveune.

I would love a tax break, I would love to be rewarded for saving money. I would love this. It's viable. But it will destroy America. And I will not let my own personal views about my money ruin America.

We are having a huge national debt. Sure, if we keep the national debt at a low level, everything might be fine, but by having this system, we're going to surely blow everything up into smoke. The system of borrowing by the national government will be accelrated, as how else can we make up the shortfall in reveune? China, Russia, Germany, Japan, they'll love to start loaning to us, until they realize that we may be unlikely to pay it back and that America is too risky to throw money at. We'll pay even more of our tax dollars to interest...and ...I can't think of any more horrors that will occur. Needless to say, kiss our world power status goodbye.

Anyway, no Fair Tax. In fact, I'd be happy for a tax increase or a substaintal cut of essential programs, to decrease the national deficit and maybe roll back the debt.

Would replacing income, estate, and capital gains taxes with a national sales tax be viable or not? If viable, would it be desirable to do so? I haven't read the site, so I'm taking this question at face value.

If all taxes came from sales, where is most of the money going to come from:

a) the wealthy and upper-middle class that spend only a portion of their income or
b) the middle-class and the poor who spend most if not all of their income trying to make ends meet

Suspending capital gains, income, and estate taxes means that wealthy people get to earn as much money as they want via investment and inheritance without devoting a single cent toward taxes unless they actually spend it on something.

Let's try this:

Family A is a two income household. Combined salaries for the two earners equals $200,000 per year. They have investments which earn them approximately $20,000 per year which they cash out but do not spend. They shop smart, live below their means, and give to charity. Just to keep the number simple and account for cost of living, let's say they spend about $1000 per month (I'm assuming that mortgage or lease payments don't count as "sales"). Family A spends $12,000 per year which means that only 5% of their income is taxable. How much of that $12,000 is actually taxes is unknown. Note that in this scenario, their taxable monies are covered completely by their dividends, therefore their incomes are completely tax free.

Family B is also a two income household. Their combines salaries are $100,000 per year. They have a few modest investment earning them approximately $5,000 per year. They are also frugal with their money and live below their means. They spend the same $12,000 per year that Family A does. This means that 11% of Family B's income is taxable.

Family C is our final two income household. Their combined salaries are $50,000 and they do not have any investments. Living at their means, they spend $12,000 per year, which means that 24% of their income is taxable.

Family D is a single income household. Their annual salary is $30,000 per year. Living at their means, they spend $12,000 per year. 40% of their income is taxable.

The poverty threshold for 2006 for 4 person household (2 parents, 2 kids) was $20,516. If $12,000 were the cost of living, then someone living in poverty could expect 60% of their income to be considered taxable. In 2005, 13% of americans (37 million people) were considered impoverished.

So, if you ask me, it sounds as though the people pushing for this are hoping that their audience has never taken an intro-level economics course.

Would replacing income, estate, and capital gains taxes with a national sales tax be viable or not? If viable, would it be desirable to do so? I haven't read the site, so I'm taking this question at face value.

That's all the question was meant to be in this case--a face value question to get a discussion going. I haven't read much of the site either, but the discussion on the radio was interesting enough that I thought everyone here would enjoy reading and discussing it, too. I don't have an opinion on this at this point since I haven't number crunched data from the site, although I had thought along the same lines as you that it might actually be a regressive tax. If there's no sales tax on food and utilities it'd be a little more fair, but I just don't know at this point.

If there's no sales tax on food and utilities it'd be a little more fair, but I just don't know at this point. Those tax cuts will go to the rich too. This might change the numbers a little but the distribution of tax burden stays the same.

So, if you ask me, it sounds as though the people pushing for this are hoping that their audience has never taken an intro-level economics course.
Agreed.

Sounds like another way to push American jobs off shore to me. If I’m wealthy and want to buy an airplane or yacht what is going to prevent me from purchasing it off shore to avoid paying the additional taxes on it?

I’m all for a simple tax plan, but I believe you have to tax income and not spending. Taxing spending would stagnate the economy and places the burden on the lower and middle class. If I was extremely wealthy I’d be all for this plan, but as I’m a poor working stiff I’ll wait for the next plan.

If I’m wealthy and want to buy an airplane or yacht what is going to prevent me from purchasing it off shore to avoid paying the additional taxes on it? Excellent point. I hadn't even thought of that.

You guys really do need to read the site before you make judgments about the Fair Tax. The benefits are enormous.

You guys really do need to read the site before you make judgments about the Fair Tax. The benefits are enormous.

I’ve read it.

Abolishes the IRS
Good thing, but what other government agency will spring up to insure collection of sales tax? Also it is Congress that writes the tax code not the IRS, the IRS job is just to enforce the collection of taxes as ordered by Congress. Seems to me if we hate taxes so much we should blame Congress and not the IRS.
Closes all loopholes and brings fairness to taxation
Really? What about my example with airplanes and yachts? What about people crossing into Canada or Mexico to buy goods. I really think this would be a boon to their economies and could solve a large part of our immigration problems. Still we would have to build fences to keep Americans from crossing over for cheaper goods. Only now we’d have to build two fences one over our southern border and another over our northern border.
Ensures Social Security and Medicare funding We could do that now if the government hadn’t raided it in the 80’s. What is to keep the government from raiding it again when they run short of projected revenue?
Brings transparency and accountability to tax policy You can accomplish the same goal with a straight percentage tax rate base on income level without placing the entire burden on the poor and the poor middle class.
Allows American products to compete fairly
How? The problem with Americans competing in the world market has very little to do with taxes and more to do with cheap labor. Is that a hidden part of this plan to lower wages?
Reimburses the tax on purchases of basic necessities There they go complicating it already. Why not just reframe from collect sales tax on food, clothing and utilities in the first place? States do it why can’t the Federal Government.
Enables retirees to keep their entire pension
Yes, until they buy their “Depends” they have their entire pay check.

Enables workers to keep their entire paycheck
Yes, but only until this buy their first stick of gum.

Only Problem is... Now many people would go party out in Canada and what not. To be fair, Income Tax is needed, and in a way more fair than sales tax. Consider that a person with more income(like those uber rich dude) would only spend a small portion of his cash on stuff taxable. While the poorer ones would have to use up pretty much every dime each month.

If anything I would say focus more on things like income tax and reduce sales tax.

Listen, can't we take control of one state, test out this new Sales Tax over there? I would love to go that state, and so would many people. It's simple, it got advantages. It got problems, but that why we do it for ONE state, and not for the whole USA. If that state becomes very succesful and happy, and if tehre is no loss in services, and if we still have a surplus, then we can think about expanding it.

I will oppose any attempt to replace the US' system. The US needs our money. You know all those people who say that freedom is not free? That's why we pay taxes.

Mimartin, if you had read the ENTIRE site, you would have had many of those questions answered. I am going to refrain from going point-to-point with you because it has been well thought out and presented in their literature and website. Please note that I said that it wasn't a perfect plan, but it sure is better than what we have now.

What do I like about the Fair Tax concept? You get to keep your whole paycheck as opposed to the government taxing what you earn AND what you spend (in other words, encouraging citizens to save for the future). And, also, that people who do not pay income taxes now will be forced to pay taxes when they buy something at the store (tourists, illegal immigrants, and crime families come to mind). I think once the full impact of the Fair Tax is realized, the government can actually reduce the tax rate due to overwhelming revenue. You can believe what you want, but first take England into consideration. When they had a consumption based tax system, it was the most prosperous time in their economy's history. When they went back to income based taxes, the bottom fell out.

I did a simplistic comparison based on Achilles' scenario using the 2006 U.S. Tax Rates, the Fair Tax proposal (H.R. 25) and two flat tax models (one being H.R. 1040).

The results were interesting.

Under 2006 tax guidelines the $200000 married couple, assuming only standard deductions, would pay about $63000 in taxes. Under Fair Tax proposal, they'd pay about $3000. (Of course it's likely the $200000 couple chose to itemize their deductions.)

The effect on the lower $30000 couple however was actually better under the Fair Tax plan. (Federal sales tax 23%, state tax 0%... even if state tax is 6.5%, it's still slightly better by about half a percent in savings).

Feel free to critique the assumptions I made, I know it's simplistic.

Edit: I should also say, I don't know for sure what the intent of HR 1040 (Flat Tax) was going to be in regards to state sales taxes.

Realizing that I'm asking you to hypothesize, how do you foresee the government compensating for the $60000 per year decrease in revenues from the Family A's?

I'm curious as to how some of you seem to think that the >$200,000/yr crowd is just going to forgo buying anything, thus escaping consumption taxes in the first place. Afterall, to avoid paying high taxes, these people often have to put their money in a shelter, hence it's "untouchable", both for the purposes of taxation and consumption. Also, state sales taxes are consumption taxes, and I don't recall seeing anything that says the rich don't buy cars, etc.. b/c that'd mean they'd be losing their money to the government. The current system is burdensome. You pay some form of income tax in most (though not all) states, as well as in cities, municipalities in addition to what we pay the feds. Then, to top it off, we pay sales taxes on items on a wide array of goods we need/want to live comfortably. So, just how much should we HAVE to give to the greedy sob's that "run" our society? How much is enough?

Please note that I said that it wasn't a perfect plan, but it sure is better than what we have now.

I’ll agree with that statement. I would save me money on my taxes too, but it would shift most of the tax burden on those that spend their entire income to make ends meet. I’m more of a supporter of the Flat Tax and find it to be fairer than the Fair Tax.

You get to keep your whole paycheck as opposed to the government taxing what you earn AND what you spend (in other words, encouraging citizens to save for the future).
I really don’t see the difference if they take it now or later the government is still getting their cut. So I will not begrudge you this point because I don’t see the difference either way.

And, also, that people who do not pay income taxes now will be forced to pay taxes when they buy something at the store (tourists, illegal immigrants, and crime families come to mind).

I really can’t see the point of making tourists pay our taxes. To me this is a negative that could harm the tourism trade.

Yes, you are adding the illegal immigrates and the crime families, but you could be cutting out the rich and those that live within our boarder states. (If this passes I will have to learn Spanish).

I think once the full impact of the Fair Tax is realized, the government can actually reduce the tax rate due to overwhelming revenue.

Like I wrote earlier our law makers (members of Congress) write the tax law, not the IRS. They could make our tax code simpler any time they wanted, but a simple tax code is not what they want. Even if they go to something similar to this it will have loopholes and various other things to protect their campaign contributors.

I also agree that it will help savings, but my worry continues to be for those that live from pay check to pay check and the impact this would have on them. I’ve seen nothing on their ENTIRE web site that diminishes those fears.

The plan calls for getting rid of the IRS, but moving their job of collecting taxes to the states.

I’ve look and really wish you’d show me were they address my main question, where do they prevent those able from purchasing goods out of their jurisdiction to tax?

My other major question was about business other than corporations (I saw they will be taxed on a flat rate bases), but how will small business such as myself be taxed? Sales and Income?

I'm curious as to how some of you seem to think that the $200,000 couple is just going to forgo buying anything, thus escaping consumption taxes in the first place.
I don't believe they will totally be able to avoid it, but on some major purchase they could venture across the border for the savings. In my college days I was known to venture into Mexico a few times to purchase liquid refreshment. I also have family members that head down once a month for prescription drugs (something I’d never consider).

Realizing that I'm asking you to hypothesize, how do you foresee the government compensating for the $60000 per year decrease in revenues from the Family A's?Was that to me? :) I have no idea. I'm just sitting on the sidelines pondering the merits and pitfalls of both flat and fair taxes. After plugging in some numbers, SilentScope001's criticism carries more weight with me.

If I had to make a guess, I'd say that Family A will probably be spending more within their means (>$12000 in goods, probably much more). Meanwhile Family D will also make cutbacks on their spending so that the savings% will be closer among the different families. Family A will probably be contributing much more to the bottom line than listed in the table.

I recall from a conversation on the fair tax proposal that by removing corporate taxes the products they sell would no longer include those taxes as a portion of the price (remember: corporations don't pay taxes, the consumer does). Under such a scenario, product A @$1 would now cost $1 + sales tax. Under the FT plan, the cost of the item goes down to soemthing like 80% of original cost and post tax costs are roughly the same. If it does work that way, there'd be no need to really go anywhere else. We already know that high sales tax resulted in NY residents going to Jersey a # of years ago (the '90s, I think) to get around paying the unreasonably higher sales tax. Also, high "progressive" taxes have hurt CA merchants who've fled to surrounding pro-biz states.

If I had to make a guess, I'd say that Family A will probably be spending more within their means (>$12000 in goods, probably much more). Meanwhile Family D will also make cutbacks on their spending so that the savings% will be closer among the different families. Family A will probably be contributing much more to the bottom line than listed in the table. No doubt that they will. I was only trying to apply ceteris paribus to the model (a common practice in economics). The point is that under this model, the rich will get richer while the poor get poorer. Same problem with the flat tax.

Family A will have to make no adjustment for the new tax model and will likely increase their net worth while Family D will have to alter their lifestyle to adjust. And what happens when Family D needs a new vehicle or incurs some other unanticipated expense? What happens to the bread-winner if they are injured or become unable to work? How robust will our government programs be if they experience even modest cuts due to decreased revenues?

I recall from a conversation on the fair tax proposal that by removing corporate taxes the products they sell would no longer include those taxes as a portion of the price (remember: corporations don't pay taxes, the consumer does).
Yes but instead of corporate income taxes, the corporations are paying sales taxes instead on their raw materials and services they purchase. There is no free lunch.

PERSON- The term `person' means any natural person, and unless the context clearly does not allow it, any corporation, partnership, limited liability company, trust, estate, government, agency, administration, organization, association, or other legal entity (foreign or domestic.)
Liability for Tax-

`(1) IN GENERAL- The person using or consuming taxable property or services in the United States is liable for the tax imposed by this section, except as provided in paragraph (2) of this subsection
`(2) EXCEPTION WHERE TAX PAID TO SELLER- A person using or consuming a taxable property or service in the United States is not liable for the tax imposed by this section if the person pays the tax to a person selling the taxable property or service and receives from such person a purchaser's receipt within the meaning of section 510.~Emphasis added

@Achilles: I will defer to the proponents. :)