Would you please add your two cents to the FairTax issue?
FairTax is in fact a 30% flat rate, but if you're going to compare it to our current system to get side-by-side numbers we can discuss it works out to be about 23%, tax-inclusive, after all... it's not as if we're going to be spending every cent of our income at 30% on stuff. So for all intensive purposes, 23% works well for now. The numbers work out, and calculations abound as to why this is so, but I'll stick to the basics here.
So let's assume we have a fair tax situation, and every worker now has whatever% more income than they previously had. But the downside to this is that everything is now going to be 23% more expensive. The worker is in no way better off than when he started.
Now 23% taxes sounds like an incredibly reasonable rate, yes? But that's because we don't all understand what taxes truly are, and your true tax rate is probably well under this. What I call a "true" tax, i.e. government revenue, is oftentimes BELOW 23%. What you see in your paycheck is not true tax, but a combination of taxes, deductions for medical, etc. The payroll deductions are not true tax, as they are supposedly for use in an account, benefits to be drawn from it later. Your true tax rate (2007 figures) is 10% up to 7,824, 15% from 7,824 to 31,849, and 25% from 31,850 to 77,100. This means if you make $50,000 a year you pay $8,924 in taxes, or roughly 17.8%. FairTax just screwed you, pardon the language. In fact, anyone who is making under $120,000 a year gets screwed in this way (at which, by our current tax bracket for 2007, the overall rate would be 23%.)
I know that FairTax wants to get a policy so up to the poverty level you don't have to pay the sales tax, but the unfortunate thing about this is in the end the middle class bears the burden. In a FairTax system the wealthy don't get to pay their 33% tax bracket on their upper-levels of income, and the lower class doesn't pay taxes at the register. Where is this revenue going to be generated? You guessed it. Anyone who earns less than $120,000 a year.
Now we've lost a good deal of our income to more expensive goods. The middle class is supporting the lower and upper classes. And so we begin to save. We don't spend, we don't buy what we don't need, and we squirrel away our money. Economic contraction is imminent, and with that we get a recession because recessions are based on consumer confidence. If we see signs of ecnomic contraction we pull out of markets and IRA's and 401(k)'s and go into cash. Or banks, with a measly 2% return. Either way, no one's happy.
Another assumption is that wages would remain the same. Sure, they're not going to knock you down a notch from your current rate of pay. But it's been relatively proven that employers pay more to their employees to compensate for after-tax income being less due to the fact that consumers think of their income as cash post-tax (Dahl and Ransom, 2002; etc.) Employers would hire people on at lower levels, because they no longer need to adjust the gross income to match post-tax levels.
Also, a price change is always eventually balanced out by wages, and vice versa. It would seem at first that FairTax would equal out, but a closer examination would tend to show that as prices increase (by 23%, for simplicity sake) and wages would now increase (by 23%) it all balances out. But as is shown earlier, no one pays 23% in the taxes FairTax is targeting in this country unless they make $120,000 or more. If prices increase by 23%, and you earn $50,000 a year and your wage increase by 17.8% you begin to see the discrepancy. Your wages, essentially, fell.
Wow, I rambled on a bit, I just wanted to add a couple points, but I wrote a mini-thesis.
I also wanted to get into the Federal Reserve and how their monetary policies would affect everything, etc. etc. etc. If anyone is still interested, I can add more to this topic, and perhaps publish it all in a Hub.
But please, feedback is always welcome.
Thanks for your time,
Jarrod Haze, M.P.P. 2007, Economic Policy and Quantitative Analysis
Irving B. Harris Graduate School of Public Policy
University of Chicago
Also, for a discussion of immigrant taxes and how we're benefiting currently, please:
http://hubpages.com/_jarrodhaze/hub/Illegal-Immigrants
And I used Juan as the immigrant, and John as the American. Please do NOT send me nasty e-mails calling me a racist, I've received so many of them so far. Keep comments and e-mails about the subject matter. I always appreciated feedback or critiques, after all, that is the only scholarly way to reach better conclusions.
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