WSJ Freelink FairTax Masochism
I was the Virginia State Director for the FairTax 20 years ago. I know the plan in detail, and briefed Congressmen on the plan. I will state outright, that it is a better way to finance government and brings transparency and good governance to Congress, but sadly, because our voter base is so ill informed, it is too easy to demagogue and has become a political loser.
But if the public were as well informed on civics and government as the average 1800 farmer, it could fix a loe of wha is wrong with Congress and the country.
Tidewater News and Opinion Forum 
“Our voter base is so ill-informed . . .”
Or, like the WSJ Editorial Board, we see a dog’s breakfast on the table and do not want to eat it.
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So, Demagoguer-in-Chief, what is wrong with the FairTax compared to the current system?
The WSJ concedes that the FairTax would be less of a distortion to the economy, its criticism is based on the pollical ramifications of trying to pass it and failing.
The only harm I can see is unemployment among IRS agents and K-Street lobbyists, and that isn’t really a downside.
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I managed to respond to your post without personal insults. You seem to be having trouble staying civil. What is up with that?
The WSJ finds far more issues with the Fair Tax legislation than just the political problem for Republicans. I suggest you read your own cite again.
With so much of the wealth and so much of the income in so few hands the tax system needs to be progressive. The Fair Tax is regressive. Ordinary people have to spend every penny on “consumption.” Rich people do not have to and in fact, cannot. But, you say, they will invest more and everyone will benefit. Nope. There is no shortage of capital now. And with everything costing 30% more there would be a collapse of demand that would be ruinous.
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Why do you think everything will cost 30% more?
How much of the price of everything represents embedded taxes? Do you doubt that competition will drive down prices when those embedded taxes are removed?
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“How much of the price of everything represents embedded taxes?”
Remember, we are talking about INCOME taxes.
I know that you are repeating a popular myth in anti-government, anti-tax circles, but it is a myth. The answer is almost nothing. I spent a career in corporate accounting and finance. Tax on corporate income was NEVER part of any price calculation. Income tax is NOT a cost of doing business. That is the simple fact of the matter.
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Magical thinking,
Did the corporation you worked for have a money tree behind the office from which you plucked the dollars to pay your corporate taxes, or your employee’s taxes?
If not, it came from your customers, embedded in the price you had to charge to deliver your product. It cannot come from any place else.
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“Magical thinking”
Nope.
You are confused and eager to remain so, it seems. Here is a hard fact – In accounting, tax on income is NOT a cost of production. Period. When you sell a product in the marketplace the price you get is determined by the law of supply and demand not by whether you are paying income taxes or not. The profit you get is determined by your cost of production, overhead, etc. and NOT by whether you are paying income taxes or not.
The point that you need to grasp is that there is ZERO “embedded tax” in the prices that people pay that would go away under this Fair Tax scheme. Shareholders pay income tax not customers and only shareholders will get the benefit of eliminating tax on THEIR income.
In the real world, this new 30% “consumption” tax would be a disaster for producers. Whatever products they sell would be in far less demand.
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You didn’t answer the essential question, you are just deflecting.
What is the source of the money used to pay the corporation’s taxes, or for that matter, the taxes of their employees and their suppliers?
Every dime comes from the customers, there is no other possible source.
So, no matter what accounting fictions you are accustomed to, those taxes are embedded in the price of your products.
There is no other sustainable source.
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“What is the source of the money used to pay the corporation’s taxes”
Its earnings? Duh.
There are no “accounting fictions” involved. Tax on income is NOT a cost of production. This is really not hard to understand but you obviously are so in love with your “embedded taxes” nonsense that you cannot think straight. You should try harder.
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And where does the money for those earnings come from?
Other than temporary infusions form debt, a business gets ALL of its money from its customers, and that includes supplies. labor, profits to the owners AND the taxes it pays.
Every dime of all of its expenditures is embedded in the price of the goods it sells.
I don’t understand why you have such a hard time admitting to an obvious fact.
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“I don’t understand why you have such a hard time admitting to an obvious fact.”
I will play nice with your nonsense and say it depends on what you mean by “embedded.” Only in the most trivial sense is it “embedded.” Your stated belief that it is a cost that will go away if there were no income tax is just plain wrong. The value of goods produced is a function of the market and not of government income tax policy. Shareowners are the ones who pay income tax on what is earned. Not customers.
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So, if Acme Anvil company and Baker Anvil company both experience a drop of 30% in the cost to produce anvils, are you claiming neither will cut their prices to reflect that change and capture market share?
Because if either does, the other must follow suit, and in a few weeks, the price of anvils will be in line with the new costs.
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“So, if Acme Anvil company and Baker Anvil company both experience a drop of 30% . . .”
Income tax is not part of the cost to produce anvils. That is the flaw in your thinking you need to expunge.
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Where does the money to pay the tax come from?
The anvil buyer, right?
If the tax goes away, is it still necessary to include it in the customers payment?
Nope, you can sell the anvil 30% cheaper and still make the same profit.
So, regardless of accounting conventions, the tax makes up part of the cost of providing the anvil.
Conversely, if the customer did not pay the cost of the tax, could Acme still provide the anvil?
So, forget your accounting conventions, no money to cover the tax, no anvil, so the tax is in fact part of the cost.
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The concept of the “cost” of producing a product is not all that hard to grasp. You should try harder. I am sure you will get there. Try thinking of the cost as what the producer has put at risk. What he has paid for iron, a factory, machines, labor, etc. is at risk when he decides to offer anvils. The income tax that he might have to pay is NOT at risk. It is NOT something he has paid for and might lose. It is NOT a cost. It is a reduction of his reward.
You seem to think that with no income tax, corporations will be free to give the savings to their customers and of course, they are. But they won’t. Their shareholders would be up in arms and in a world where EVERYBODY’S after tax return on investment has been boosted they will have to boost theirs as well or their stock will crash relative to others. They are paid to keep that from happening.
Bottom line is that the idea that all that a Fair Tax paid by consumers would be offset by lower prices on everything that they buy is a fantasy. The fact that mathematically something could happen does not mean that it will happen.
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Unless you worked for a company with a captive customer base, you should be aware that market share trumps profit margin.
Absent collusion combined with import controls, competition always drives down prices to a profit margin consistent with inherent risk.
You’re still hung up on accounting conventions. The fact remains that the money to pay a corporation’s taxes, its employee’s taxes, and its suppliers’ taxes are embedded in the price it must charge.
It can’t be any other way, money does not materialize when the tax bill comes.
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“Unless you worked for a company . . .”
Sorry, but your ignorance is showing. Things you think are self-evidently true are simply not true at all. For example, “market share trumps profit margin.” No, it does not. That is a special case that applies to growth industries. Most products are not in that phase.
Your view of “competition” is also naive. In many industries, no one wants to rock the boat. No formal collusion required but companies let market leaders set the pricing and fall in behind them. That is reality.
What you call “accounting conventions” are what they are because of the very real economic difference between money put at risk (costs) versus expected rewards (profits). You MUST recover your costs in your pricing or go bust. Taxes on income are not such a cost.
What is now an acceptable return on investment after taxes would not be an acceptable return in an income tax free environment. Your idea that ANYBODY would be content to lower prices to get back to the former after tax profit is almost self-evidently wrong. That is not the way businesses are run.
Finally, the Fair Tax environment would not produce lower prices because “embedded” income taxes are removed. It is the profits that are “embedded” in the price. And income taxes are paid out of profits – if any. Markets determine prices based on demand and the cost to supply the goods. Income taxes are not “costs.” Period.
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When a tax on airline tickets expired, the airlines declined to lower prices as they expected the tax to be reinstated within weeks,
That lasted less than a day.
And you still haven’t answered where, other than the customers, the money for the tax comes from.
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“When a tax on airline tickets expired . . .”
That was not an income tax. Duh. We are talking about income taxes.
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It still applies.
Competition wrings out excess very quickly.
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“It still applies.”
No it does not.
The tax had been a very specific cost imposed on the airline tied to the sale of each ticket. When it became known that the cost was gone, it became untenable commercially to charge for it. That is NOT anything like income tax. The behavior in TRYING to leave it in place should give you a hint of the behavior that would follow the elimination of income tax. The goal is to maximize profit. It always will be.
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Who paid the cost of the airline tax?
The customer.
Who pays the embedded business taxes?
The customer.
You are arguing a distinction, not a difference.
Accounting conventions do not always reflect reality. You have said so yourself regarding depletion allowances.
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RE: “With so much of the wealth and so much of the income in so few hands the tax system needs to be progressive.”
This is an ideological statement, not one based on economics. In fact, basic economics shows that progressive taxation is undesirable.
In short, taxation devalues the currency. A progressive taxation introduces different rates of devaluation on different populations, meaning that money has no universal or standard purchasing power. The effect is a contradiction between money’s medium of exchange function and its store of value function.
Suppose that progressive taxation makes money more valuable to the poor than to the rich. Broadly speaking, this would mean that the rich have less incentive to invest in productive enterprise, whereas the poor would experience diminishing returns on their investments as they climb out of poverty. Both the rich and the poor would experience disincentives to be productive.
The easiest, most efficient way to avoid problems such as these is for money to have the same value for everyone.
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“This is an ideological statement, not one based on economics.”
Not really. It is just the fact of the matter if we are to balance spending with revenue.
Money has different “value” for the poor and the rich, but it has nothing to do with taxation. In economics it is talked about as the marginal propensity to consume. It is the economic reality that drives the fact that to stimulate the economy the best approach is to get more money into the hands of the poor.
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RE: “It is the economic reality that drives the fact that to stimulate the economy the best approach is to get more money into the hands of the poor.”
You ignore Say’s Law: Economic production always precedes consumption. It is, in fact, impossible for consumption to come first.
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“Economic production always precedes consumption. It is, in fact, impossible for consumption to come first.”
You realize, of course, that you are offering a tautology? ANYTHING consumed must first exist. And, in doing so, you are misstating Say’s Law. Look it up.
Here in the real world, production comes from the expectation that there will be demand for the goods to be produced. Puting money in the hands of people who will spend it produces demand.
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RE: “Puting money in the hands of people who will spend it produces demand.”
Maynard Keynes thought so, but he was wrong.
I happened to be reading an essay on Say’s Law this morning when you posted your ignorant comments. Here it is, in case anyone is interested:
https://www.goldmoney.com/research/say-s-law-and-macroeconomic-ignorance
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“Maynard Keynes thought so, but he was wrong.”
Uh, no he was not.
And somebody on some self-serving website regurgitating discredited economic theories does not make him so.
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What discredited economic theories are you referring to? Or, if you want to show us how smart you are, tell us how the blogger’s assessment of Say’s Law differs substantially from Wikipedia’s.
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I am not claiming to be smart. I am claiming to be able to read. From the Wikipedia article you refer to . . .
“Over the years, at least two objections to Say’s law have been raised:
General gluts do occur, particularly during recessions and depressions.
Economic agents may collectively choose to increase the amount of savings they hold, thereby reducing demand but not supply.
Say’s law was generally accepted throughout the 19th century, though modified to incorporate the idea of a “boom-and-bust” cycle. During the worldwide Great Depression of the 1930s, the theories of Keynesian economics disputed Say’s conclusions.”
A Law is not a Law if it does not describe reality accurately. Say’s Law is not an exception. The point he was making is really not so different from the idea that I expressed – demand is created by people with money who are going to spend it. In his formulation they MUST get that money by producing something of value. That is an oversimplification.
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RE: “I am not claiming to be smart.”
Good, because you are doing a fine job of proving you aren’t.
The blogger asserts that Say’s Law — a major insight in classical economics — provides a framework for discrediting Maynard Keynes General Theory. Wikipedia acknowledges that Say’s Law and the General Theory are incompatible.
So, my question remains: What discredited theories of economics were you referring to? Say’s Law is not discredited. You just refuse to accept it.
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Those who claim to be Keynesians really aren’t anyway.
Keynes advocated deficit spending during recessions to stimulate demand, but he also recommended paying down those debts in good times.
“Keynesian” politicians borrow in recessions to try to get out of the recession, but then borrow in good times too to make things look better than they are.
It’s not really Keynesian unless you pay the debts when the recession is over.
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“Say’s Law is not discredited.”
Yes, it is. The Wikipedia article you reference says why. It fails to deal with gluts and it fails to deal with savings.
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The fact that people claiming to be Keynsian sometimes do not follow what he would prescribe does not discredit the economic understanding that he reached concerning the ability of government action to affect the economy.
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What you are missing is that no government has ever adhered to Keynes’s theories.
It doesn’t matter if, followed judiciously, it might have worked, no government has ever used his theories for anything other than an excuse to spend money it didn’t have.
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“What you are missing is that no government has ever adhered to Keynes’s theories.”
Tax and spend Democrats come closest. Borrow and spend Republicans? Not so much. From a Keynesian point of view both the Bush and Trump tax cuts were economic malfeasance because they led to deficit spending at a time when retiring debt should have been the policy.
But, be that as it may, Keynes macroeconomic theories have worked as he had predicted. His theory is generally based on demand. Opposing “supply side theories” have done poorly when applied.
https://www.britannica.com/topic/Keynesian-economics
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RE: “Yes, it [Say’s Law] is [discredited]. The Wikipedia article you reference says why. It fails to deal with gluts and it fails to deal with savings.”
Hardly. But you clearly don’t understand the issue well enough to discuss it. As I said, basic enonomics explains why progressive taxation is undesirable. In essence, money ceases to be money when the value it stores is variable.
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RE: “What you are missing is that no government has ever adhered to Keynes’s theories.”
It is worse than that. Mr. Murphy doesn’t understand that there is no such thing in the real world as “aggregate demand.”
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I’m still struggling to get him to see that taxes, not only to corporate tax of the end provider, but those of the employees and suppliers, become embedded in the price of a product. That unless those costs are paid, the product can’t be provided.
Perhaps I’m not explaining it clearly enough.
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“Mr. Murphy doesn’t understand that there is no such thing in the real world as “aggregate demand.” ”
And yet the CONCEPT of “aggregate demand” is a bedrock of macroeconomics. Has been since 1936. Maybe you should stop uncritically accepting sources who think economics stopped developing in 1803 before you accuse others of ignorance.
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“Perhaps I’m not explaining it clearly enough.”
Uh, no. You tried very hard but you have set yourself an impossible task. Because you are just plain wrong. See my other post this morning where again I have tried – probably in vain – to explain the concept of “cost” for you.
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Where else but the customer does the money to pay taxes come from? You still have not answered that simple question.
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“Where else but the customer does the money to pay taxes come from? You still have not answered that simple question.”
Yes, I have. You just don’t like the answer. I will try again and put it another way.
You say that income taxes are “embedded” in the price people pay for goods. I will say that profit is “embedded” in the price people pay. And that profit is the source of the money to pay income taxes. Tax policy determines how the profit is split between government and shareholder. But whatever the split, the goal of enterprise is to maximize profit.
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And you still haven’t answered where, other than the customers, the money for the tax comes from.
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“And you still haven’t answered where, other than the customers, the money for the tax comes from.”
You are arguing in tautologies not economics. Of course the money comes from customers but that does not make it a “cost”. Profit comes from customers and it is not a “cost.”
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Whether you want to call it a cost or not, the taxes are embedded in the price the customer pays. When those taxes disappear, competition will drive down the prices.
You just don’t want to admit how ruthlessly the market wrings out excesses.
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“You just don’t want to admit how ruthlessly the market wrings out excesses.”
You just won’t give up your fantasy of lower prices because you are a Fair Tax champion. There would be no “excesses” to wring out. What is an acceptable return on after tax income now would not be acceptable to shareholders paying 30% more for every product purchased.
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And yet they would not be paying 30% more. The same competitive forces affecting the prices they charge equally affect those they buy from
What would effectively happen is that the after tax price would remain roughly the same, the added tax would be canceled out by the reduction in underlying price, on average.
One exception would be services rendered by high income providers. Since physicians pay a higher income tax than housepainters, the price of physician services would decline more sharply.
And, of course, providers who, for whatever reason, currently escape taxation, like drug dealers, would be taxed when they spend their income on legal products.
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“And yet they would not be paying 30% more.”
Now you are really getting nonsensical. There is not 30% to wring out of very many products or services even if the market were so inclined – which it would not be. Amazon, for example, operates with a 2.2% overall profit margin on sales. How is it going to wring out 30% from that?
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Sure, that’s the basis for corporate tax for Amazon, But Amazon’s corporate tax is not the only tax embedded.
What about the corporate taxes of Amazon’s suppliers?
How much tax was paid to and for Amazon employees?
How much for the employees of Amazon’s suppliers?
Taxes become embedded at every step of production and passed on down the line.
On average, 22.4% of the price of everything you buy is embedded tax. That’s why the FairTax was set at 23%(inclusive, which is the same as 30% add-on)
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“On average, 22.4% of the price of everything you buy is embedded tax”
There is ZERO income tax embedded in the price of everything if by “embedded” you mean a cost that will go away. And apparently and – I must say – laughably that is what you seem to believe.
And it is clear that you have no way to explain how Amazon which enjoys a 2.2% operating margin is going to wring out 30% out of margin when the income tax is removed. And that was your claim one or two posts back.
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Didn’t read the link again. Taxes are embedded at every step of production.
23% (30% add on) is the rate required to be revenue neutral.
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“Didn’t read the link again . . .”
The analysis is baloney. I have explained why repeatedly. Your mind is closed. You do not have the ability to think objectively about it having championed Fair Tax for many years partially, at least, based on this false premise that income tax is a “cost” that will be saved. It isn’t.
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Because you say so?
You have failed to show where the money for those taxes could have come from other than the customers.
You have offered no explanation for why you think that if those taxes disappeared prices would not be affected.
Repeating an unsupported claim 100 times does not make it a fact.
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Because you say so?
Because I know what I am talking about and you obviously don’t. You dismiss actual knowledge of corporate behavior and accounting as if they are not relevant. They are. Income taxes are paid from profits. They are not a cost of producing goods. You seem to think corporate managers will be satisfied with current levels of after tax profits when much higher levels are available to them. They won’t.
But let’s pretend. Look at it another way. Using Amazon as an example, their income tax provision for 2021 was roughly 1% of revenue. If they were willing convert ALL of it to lower prices – which they obviously would not – they come NOWHERE near the magical price reductions of your imagination.
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Did you even read what I wrote?
It’s not just Amazon’s corporate profit and taxes, it’s the corporate taxes of all the sellers there and all their suppliers, right down to the miners and growers of the basic raw materials, and then the taxes of all their employees at every step along the way that are embedded in that price. For some products, there could have been hundreds of taxpayers involved.
Again, there is no other source for those taxes other than the price eventually paid by the customer.
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“Because you say so?” (cont)
Beyond Amazon, lets consider the entire business sector. According to Fred their total sales are approximately $20 Trillion. Total Income Tax revenue from business is less than $400 Billion or less than 2%. Even if every dollar of tax savings were converted to reduced prices – EVERY Dollar – prices would go down by less than 2%. That hardly offsets the 30% tax proposed by the Fair Tax.
But, oh, you say, corporations also pay tax on their employees. Think about that. Do you think salaries and wages are going to be reduced because the income tax withholdings have stopped? Would YOU accept a major cut in pay at a time when everything you buy is suddenly 30% more expensive. I don’t think so.
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There would be no cut in pay.
For most wage earners, their FICA taxes are 15.4%(counting employer contribution could then go to the employee) plus perhaps 15% income tax withholding. Plus, they get their monthly “prebate” for the tax on spending up to the poverty line for their family size,
Their after tax buying power would be largely unchanged.
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WSJ: “Killing the income tax also sounds good until you realize that a future Congress could restore it if the Constitution’s 16th Amendment isn’t repealed.”
Yup. I’m strongly in favor of repealing the 16th Amendment. I’m also strongly in favor of radically reducing the number and variety of federal responsibilities so that the remainder — primarily national defense and an equitable justice system — can be funded with low taxes.
The way I see it, all taxes reduce the value (or purchasing power) of money. In consequence, it is desirable to keep taxes as low as possible, at least lower than the rate of wealth creation (so to speak). The FairTax as proposed would serve to keep taxes low by making them painfully obvious.
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Exactly, every receipt (Golf Balls $10 Federal Tax $3) would remind the buyer of the cost of the Federal Government. Right now, half the population sees the income tax as someone else’s problem, (unaware of the effect of embedded taxes on prices) and thus does not care about the cost of government. The effect on voters alone is worth the effort.
The reduction of the power of Congress to pick winners and losers and the true untaxing of the poor are just fringe benefits.
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