Redstate

Every time I've bought a car from a private seller. I had to pay sales tax on it when I went to transfer the title.

I have to pay 6.5% of the purchase price of my used vehicles. The state sees to that. I pay the state directly as a buyer, unless I buy the used car from a dealer, in which case the dealer has to collect it for the state.

There's always going to be some things that slip through the cracks. Yard sales would be an example of this. These kind of transactions are more than offset by the billions of dollars of unreported income that's earned every year.

There would still be a need for an IRS, but it would be focused on a much smaller group of people... merchants. We could have 1/10th the IRS workforce and audit the same % of merchants as we do earners today. Or we could keep the same workforce and audit 10x the rate we do today. Or anything in between.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

IMO, sensible people look only for legitimate ways to avoid tax.
It would not be sensible to do otherwise.

There's always a tipping point at which tax rates are just too high. Exactly where that is depends on the nation involved, the goods being taxed, and other factors.

Laws have to be obeyed but not if they're unreasonable. The choices facing a people that are beset by a government too stupid to realize this are to obey and fall behind, or take the risk of incurring scattershot enforcement action. When rates are high enough, the latter becomes reasonable.

The choices facing the government, on the other hand, are to tolerate the black markets, profit illegally from them through protection rackets, and/or make examples out a few people.

It's not an option for them to criminalize the whole population. That's almost immediately self-defeating. (Although the only government I can think of in the world that takes itself seriously enough to try, is ours.)

but I would like to see the advocates of consumption taxes explain why the IRS won't stay busy monitoring garage sales and private sales, in pursuit of many billions of lost tax revenue

Here's a few reasons:

1)The FairTax as written is revenue-neutral without taxing the sale of used goods- so one good reason is that it just won't be necessary.

2) Taxing the sale of used goods would require incredibly invasive and burdensome (read: expensive) monitoring of your private affairs, just like the current tax system.

3) Without the above-noted invasive and burdensome system, the sale of used goods is impossible to enforce- come to think of it, it's probably impossible with it.

4) It's predictable that not taxing used goods will drive up demand for used goods, which in a macroeconomic sense will promote more efficient use of wealth, which will be good in general for the economy. Increased demand will drive prices of used goods up relative to new goods, and will probably drive down the prices of like new goods, until some competitive equilibrium is reached.

5) One of the key objectives of the FairTax design is to put a stop to cascading taxation- this is why it's done at one single point in the supply chain (at the point of retail sale) and nowhere else; otherwise, you'd see cascading taxation (which is what you get with a VAT, where a tax is levied at each tier in the supply chain- taxing tax upon tax) which is famously disastrous for your economy.

The current tax system produces some ~140M household returns. Under the FairTax, enforcement will be limited to businesses, who (just like now) will need to keep their books and will be auditable- and there will be ~19M retail points of sale, an easier enforcement task. Per the legislation, the states will do the enforcement (note that 45 states already administer and collect sales taxes) and both business and the state get a quarter-percent of revenue for their trouble- meaning there's funding, existing expertise and infrastructure already in place, and the system will be simpler than the current one.
In other words, the FairTax will likely be more enforceable than the current code.

That will have to be accounted for with some kind of stimulus to take things over the hump.

Once it gets in though, any widespread move towards savings will increase the money supply and decrease costs. People will have more dollars chasing less expensive goods, a situation that will self correct.

No the problem will be unreported transactions. Over in europe VAT tax evasion is a big problem and it will be here as well.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

That would be a tax break, which amounts to complication, which is what your're trying to eliminate in the first place. I'm not quite understanding how an increase in money supply will result in decreased costs. In the end, people will find ways to evade taxes both legally & illegally, so that portion of the problem is probably a wash.

Its not the only one. You might want to educate yourself about the others.

As to the rest of it lets go through it.

1. Consumption based tax phased in.
2. Joe and Jane Consumer purchase less.
3. 2 leads to Joe and Jane consumer having more money to spend
4. Vendors see sales drop.
5. Vendors act in a manner to raise sales (Discount prices/Advertise/Promotions/Etc)
6. Joe and Jane consumer who have more money in their checking/credit accounts take note of lowered prices and decide to buy things they have been depriving themselves of.
7. Over time an equilibrium is struck.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Joe & Jane have just succeeded in lowering the tax rate, which will, in turn, prod politicians to raise the tax rate, which will, in turn, prod Joe & Jane to purchase less, and presto, we have a real recession.
Whatever you call your stimulus, it will amount to a tax break, or it would not be a stimulus.
Personally, I would like to see a flat tax, from the first dollar earned to the last. This is as likely to happen as the elimination of the IRS.

That the government can take to stimulate the economy besides a tax cut says volumes.

I would suggest googling "government economic stimuli"
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Government can spend, which involves taxes, or it can tax, or it can cut taxes and spending. Economic stimuli by government must involve taxes, again, regardless of what you call it.

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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

I suppose that means something, but I have no idea what.

Since I do not "google" on command, perhaps you would share ways to increase consumption of luxury items outside of tax or spending policy.

Thank you for confirming my opinion. Seeing as you are talking about the trade in luxury goods and I am talking about overall economic activity. Just a heads up (Trade in luxury goods) <> (Overall Economic Activity)

Purchases of luxury items is entirely dependent on the personal perception of wealth. Your initial thesis that a fair tax would suppress these purchases is at best unsupported. Someone who feels confident in their economic station and future has less trouble buying high end goods of any kind. Seeing as a fair tax could amount to 30%+ raise for people in a position to buy the goods sales could actually increase.

As to ways to increase economic activity without spending, its obvious that you neither google nor think when the stimulus is presented.

For bonus points pick another statement you got wrong in your prior posts.

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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

My replys have been in good faith, your's have been commands to google.
My original post clearly stated that our economy is based upon the purchase of luxuries. It's well understood that an increase in purchase prices will result in a decrease in sales. While Luxury is relavent to your individual situation, a fair tax would effect all in some way. It is my contention that everyone in this country engages in some sort of "luxury" spending and that their activities would be alter, in my opinion, for the worse, by the fair tax.
I could also end with an insult, but I thought this was a better forum than that

It's well understood that an increase in purchase prices will result in a decrease in sales.

And an increase in disposable income will result in an increase in spending. Most people earn money so they can spend it on stuff. There will be an increase in savings and investment, yes, but there will also be more spending.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

you mentioned that all government stimulus to the economy must involve taxes. Not true.

The federal reserve can cut interest rates to stimulate the economy. The FairTax, unlike Ron Paul, will not do away with the federal reserve.

Deficit spending is also considered stimulative. Taxes would remain the same, but the multiplier effect from the increased government spending would be stimulative.

As for the demand of luxury goods, they would be faced with both income effects (increases demand, as workers would have 100% of thier paychecks) and substution effects (Luxury goods would cost even more than non-luxury goods, because they would have higher taxes, assuming they cost more than non-lux goods).
You state no thesis on which effect would be stronger nor why, to assume that consumption of luxury goods would go down. You have also failed to account for the imbedded costs of the tax system that may allow the costs of these goods to come down an amount equal to the tax, at which point the income effect would clearly be stronger, and thus consumption would go up, not down.

DeRegulate. Open up anwr and the coastal zones for drilling. Eliminate barriers to entry in telco services. Cut down the paperwork for licenses, permits etc, get rid of baker hamilton.

Boom watch economic activity explode, and a lot of tinpot monopolists as well.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Just somethings you need to think through for yourself. You are missing much on what the government can do to regulate the economy. You misunderstand the relationship of government income to government spending.

As Zuiko pointed out, and I did as well what effect will having 30% more after tax income have on your spending habits ? Would you really be upset about paying 10-20% more for luxury goods ?

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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

It's well understood that an increase in purchase prices will result in a decrease in sales.

Actually, that's not really accurate. An increase in cost of goods to labor would result in a decrease in sales- and the FairTax will not increase that cost- in fact, it will probably decrease it.

here's how:
The FairTax replaces several existing taxes: the income tax, corporate income taxes, payroll taxes, capital gains, inheritance. This means you get your whole paycheck, and the cost of the goods you're buying doesn't have your whole supply chain's income tax and cost of compliance rolled into the price tag. It's estimated that about 22% of the price of everything is due to tax and compliance costs. It's predictable that when the FairTax is enacted, prices will correct downward, probably 5-10%, as tax and compliance costs bubble out of the supply chain. You'll have more money in your pocket- there's the prebate, no withholding- if you're in the 25% bracket the amount of money you get in your paycheck will probably increase by at least that much. ...and then when you buy something at retail, you'll pay 23% in sales tax at the point of sale.

When you roll all of that together, it becomes a wash at worst and at best you're ahead because of efficiencies involved in reducing everybody's compliance overhead costs.

Finally, consumption is more steady as an index than income is- and this has been true for as long as we've tracked both. That alone makes it a better tax basis. Those with money in hand will get what they want, when they want it, as they do today, and price is only one factor: The market knows this- it already keeps boutiques that sell $3000 handbags and $2500 shoes in business. People are willing to pay what the market will bear, and they always will be. Shifting the point of taxation to the consumption side will not suddenly upend the relationship between supply and demand.

The use of an n/t at the end of a short subject line only comment is part of site etiquette.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

Government cannot stimulate the ecomony, because we only let them engage in transfer payments. That means there are two ways for governments to "stimulate" economic growth: 1) reduce taxes or 2) increase inflation. Past experience shows that #2 doesn't really stimulate production in practice. The Fed (which is a quasi-governmental agency) can stimulate the availablity of credit, but it also cannot directly stimulate the economy, which can only be done by actual investment in capital goods or consumption.

Joe & Jane have just succeeded in lowering the tax rate, which will, in turn, prod politicians to raise the tax rate, which will, in turn, prod Joe & Jane to purchase less, and presto, we have a real recession.

A couple of points here:
1) Individuals like Joe&Jane might lower their personal tax rates by reducing consumption, but not everyone will- statistically, history says that consumption is a much stabler index than income is - for every Joe and Jane, there's 3 of the joneses, who consume prodigiously.

2) Real cost of goods-to-labor (how much work you need to do to get the thing you want to buy) won't go up under the FairTax- if anything, it'll go down, meaning consumption won't predictably suffer in the first place.

3) This critique applies equally to the current system- if there's a revenue shortfall, no tax system, the current one included, is insulated from congress trying to raise rates, causing harm to the economy. Where the FairTax shines is that it's visible (it's a line item in each sales receipt) and it applies to 100% of the consuming electorate.

Whatever you call your stimulus, it will amount to a tax break, or it would not be a stimulus.

Not so.
1) As a nation, we pay an estimated 22-29% of revenue collected, in addition to what we pay in tax, just to comply with our tax system- that's the cost of all those tax specialists, accountants, tax attorneys, and tax consultants. We pay that burden in the form of higher prices on everything we buy, reduced wages, foregone opportunity, reduced profits. Getting that millstone off of our economy's neck will be a huge stimulus, and can be done without cutting government revenue or requiring a heavier tax burden.

2) US-manufactured goods sit on foreign shelves today with these embedded costs built into them, making them artificially more expensive and less attractive to foreign buyers, which hurts the US export industry. Relieving those taxes will spur US businesses, attract capital and investment, and stimulate the heck out of the economy.

it was the way Grandpas and Grandmothers lived; one saved the nickels and dimes until there was enough to buy what was wanted.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

n/t

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

That would be a positive change. The way the system is currently set up, the incentives are encouraging people to spend everything you earn and then some, which most people are happy to do. So you have people taking out $800,000 100% financed stated income loans to buy houses they can't really afford. Or you did until a few months ago.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

and then I realized that while this was true in the 17th and 18th centuries, our financial system has metamorphosized to the point where the savings rate is actually irrelevant. At their height savings accounts generate 5.25% interest and if things were going well you had 3.25% inflation for a 2% growth rate. I'm better off investing that in the stock market if my horizon exceeds 20 years, and bonds otherwise. Hence, what I keep in my savings account is strickly what I need as immediately available cash (essentially, since I'm not the best at keeping my checking account balanced, how much would I need to cover the largest check I write in a pay period if I loose track). Otherwise I'm better off in a vehicle which is not included in the "savings rate" for the country. It's also created some problems at the Fed, because they no longer can use M1 for their predictions. They have to look at M2, M3 and even try to hazard a guess at how to account for stock market.

It already includes things like fixed and equity investments. It's just what's left over when you subtract "personal consumption expenditures" from "personal disposable income." It hovers at around 0-1%. That is not nearly enough for people who hope to be able to provide for their own retirement, for one thing.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

they are the pigeon in the coal mine. Being the most susceptible to controlled purchasing, they are the easiest to eliminate when times get tough. And they will certainly suffer under a VAT tax.

The FairTax proposal only taxes new retail goods and services, which means used goods are tax-free.

This will drive demand on used goods, drive their price up a bit relative to new goods... and (as you rightly point out) lots of people want what they want when they want it and won't buy used unless it's convenient.

But we would need conditions like the depression to enable action. Personally its probably best, to try and make what we have better.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

... origins of the Depression (sustained money-supply contraction followed by a loss of private sources of credit) than it's easy to see how to get tax reform.

Elect Ron Paul.

We'll get another Depression. After his one Hoover-like term in office expires, hopefully we'll get in a Republican rather than a Democrat to pick up the pieces.

Kidding aside, it's good to the arguments ready to go, in case another Reagan should come along.

If Hillary is elected.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

I'll bet you a lot of money that he's a liberal Democrat.

The number of strokes and heart attacks on Wall St. if Ron Paul were appointed ?
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Longer answer, Joliphant is on the right track, as usual.

There would have to be a compelling need on behalf of the half of people who currently aren't paying income taxes. That's one of the reasons the FairTax might have some chance, in that it does away with FICA taxes, as well, which have a much higher burden on lower income folks than higher income workers.

I also believe that the key to getting something like this passed is to get the backing of unions, on the basis that the FairTax makes the cost of American labor cheaper relative to that of foreign labor, and may reverse the trend of outsourcing American Manufacturing jobs.

I am growing tired of our ticket constantly running on cutting marginal tax rates or adding additonal loopholes as tax cuts. While each act provides a short term stimulus, it just makes the long term structure of our economy more screwed up.

Tax reform is possible but it will require several years of campaigning, educating the electorate, and pressuring the critters in Congress.

P.S. Only government employees love the IRS.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

One thing not mentioned so far in regards to the "Fair Tax" that might help grab the attention of the folks that see the current system as a "pretty good deal" is the prebate.

In order to prevent anyone from paying consumption tax on the essentials, there would be a built in refund up front of the amount of tax that would be paid to cover the basics. As I understand it, this would be based on the size of the family and an index calculated from the poverty level income. So if, based on 2004 HHS poverty guidelines, the poverty level for a single individual is $9310, and the consumption tax were 20%, the annual "prebate" would be $1862, which would be paid in monthly installments of about $155. So not only would people collect their whole paycheck, but they'd receive a check every month as well.

Part of me doubts the Fair Tax will ever get a fair shot because of the power it removes from government and returns to the individual. Not to mention the fact that most people that oppose it don't even really seem to understand it, or just choose not to. But I really believe this could change the face of this country for the better for a very long time to come, so thanks RS for talking about it and hopefully our friends in Washington are taking notice.

and as we prove in Iraq on a daily basis, the people generally and the politicians specifically no longer seem interested in engaging in those sorts of sustained efforts.

The key is the marketing concept that the National Sales Tax/VAT proponents have latched onto in their current proposal: The American people inherently oppose anything that isn't FAIR. Our problem is that the Progressive Income Tax has been sold as FAIR because it is self-evident that the richer you are the more able you are to pay. Unfortunately, like many self-evident things, it isn't necessarily true. It's also why the Dems keep fighting private investment accounts for social security so hard. Once people actually have private investment accounts, they quickly begin to see how UNFAIR the current progressive system is. Achieve a larger investment class in America, and you will move to a place where reforming the tax code is possible.

Now where I disagree with the most of the current reform proposals is on refocusing taxes to an area where a smaller portion of the populace encounters the enforcement mechanism. The power to tax is the power to destroy, and if we want to minimize the risk of that destruction, I believe we need to ensure that the largest number of people need to be exposed to that risk so they take the appropriate actions to stymie it. Where I disagree with the VAT people is that I don't see that a massive resturcturing actually gains us anything. We spend a very chaotic transition period working out the details, and then, because politicians are politicians, even if you start out with an ideal system, their subsequent tinkering with it breaks it the same way the current one is broken. The problem with the current tax system isn the system, it is human nature.

So in order to stop the Socialists from taking over, you want to put businesses in the direct crosshairs and then deprive them of the support of the people? If the FAIR tax goes through, even your local grocer will be part of the same global capitalist cabal started by Exxon-Mobil that overwhelms the little people everywhere, at least by the reports in your local newspaper. And the Socialists will be right there with a plan to stop it.

...a long habit of not thinking a thing wrong, gives it a superficial appearance of being right...

---Thomas Paine---

not the consumers. So the consumers don't experience the draconian enforcement mechanisms necessary to collect the taxes. The politicians shift the blame for rising prices to the greed Enron-Haliburton-Exxxon-Mobil cabal when in fact it is their own tax policies which drive the prices through the roof.

The only thing the current tax system has going for it is that all of the population is at risk from the IRS, even if they don't owe any taxes. So even though the IRS is abusive, it isn't as abusive as it would be if only a small percentage of the people were at enforcement risk.

When you mandate that business must pay income taxes, you essentially require that it collect and remit tax, in addition to doing whatever that business does.

The FairTax repeals the corporate income tax, meaning prices of goods and services will come down as the cost of compliance and embedded taxes fall out of the supply chain overhead.

Enforcement, under the FairTax, is performed by the states. The FairTax legislation mandates a quarter of a percent of taxes remitted go to fund enforcement, and another quarter of a percent of taxes go to the business collecting and remitting them. Compare that to the current system, where businesses must pay all costs associated with tax compliance- and consider that according to the tax foundation, small businesses in 2005 paid on average $724 in compliance expense for each $100 they paid in actual tax.

Bottom line, the FairTax is MUCH better for business than the current one.

Theres no way thats correct. I outsource my payroll to paychecks and its considerably less than that. Its more like $7.24 per hundred dollars in paid taxes. My word if the compliance costs were 7 times the employer contribution and employee contributions nobody would hire anyone.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

Here's where I got the figure, and it looks like I've got my dates wrong- it cites a 1996 paper from the Tax Foundation:
http://www.fairtax.org/PDF/TheImpactOfTheFairTaxOnSmallBusiness.pdf

the cited article: http://www.taxfoundation.org/files/b5745133d33c0ebb5170f62be59a789c.pdf

It does seem fantastic. I've assumed that this is because income tax strategy for businesses is to run the business as close to zero profit (and therefore zero income taxability) as possible. I've also assumed that this includes time spent on benefits, insurance, administering 401(k)s, not just doing payroll.

for each $100 they paid in actual tax

They might be the operative word. They spend a lot of money on compliance with things like income and sales tax laws. They are only collecting those taxes on behalf of the government, so it is conceivable that their compliance costs would be higher than their tax burden.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman