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Fairtax plan debate

G

gdalton

If you haven't heard to much about this please check out http://www.fairtax.org/ also http://www.irs.gov/formspubs/article/0,,id=112782,00.html#estate_max_rate_2003 (thanks Indiconservitive)

After reading up on the information I would like to hear some arguments for and against this plan.
I am personally for it but I do have concerns regarding inflation, when everyone starts getting 100% of their pay check and a pre-bate from the government every month then the market will be flooded with new cash which is of course cause for inflation. Now I do not know much about economics, to be honest it confuses the hell out of me and I'm a numbers guy, so any information regarding the cause and effect of inflation along with an explanation of how the Fairtax plan would or would not cause it would be great.
 

Mikkel

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It essentially replaces the income tax with a much harsher sales tax. If people are afraid to spend their money because of high sales taxes, then the economy will go into the gutter. This will only inhibit the flow of commercial goods. Our current system is better for now.
 
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gdalton

Apparently mr. Mikkel has neglected his research into this plan so I will just ignore his input untill he does.
 

Dezaad

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gdalton said:
Apparently mr. Mikkel has neglected his research into this plan so I will just ignore his input untill he does.

:roll:
It is you Mr. gdalton who seems to have misunderstood your own reading of the plan, if you think Mikkel's assessment was operating from a misunderstanding of it:

: said:
Americans for Fair Tax
Simply put, the FairTax replaces the way we're currently taxed - based on our annual income - with a tax on goods and services. The FairTax is a voluntary “consumption" tax: the more you buy, the more you pay in taxes, the less you buy, the less you pay in taxes.
It's simple.

Everyone pays their fair share of taxes, and with the FairTax rebate, spending up to the poverty level is tax free. The Federal government is fully funded, including Social Security and Medicare, and you don't need an expert to determine your Federal taxes.
It's simple.
 

Dezaad

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gdalton said:
If you haven't heard to much about this please check out http://www.fairtax.org/ also http://www.irs.gov/formspubs/article/0,,id=112782,00.html#estate_max_rate_2003 (thanks Indiconservitive)

I am personally for it but I do have concerns regarding inflation, when everyone starts getting 100% of their pay check and a pre-bate from the government every month then the market will be flooded with new cash which is of course cause for inflation. Now I do not know much about economics, to be honest it confuses the hell out of me and I'm a numbers guy, so any information regarding the cause and effect of inflation along with an explanation of how the Fairtax plan would or would not cause it would be great.
Precisely because of the issue that arises due to this being a sales tax, which Mikkel brought up, there might not be inflation due to this plan. Quite the opposite. It tacks on additional dollars to each purchase, so even though the marked price stays the same, the actual price has already risen. Some people who would have purchased items will choose not to because the real cost is already higher. This will tend to decrease inflationary pressure, if not reverse it, causing deflation. Deflation would be scary, though not a given with this plan.

The fear of deflation is credible, however. The transfer of the tax burden from savers (generally the wealthy) to the spenders (generally the middle class) could decrease the real amount of money the middle class has to spend. This would threaten deflation, and the "tank" scenario Mikkel expressed could then manifest.
 

Dezaad

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: said:
Amercans for Fair Tax"If you were in a 23-percent income tax bracket, the federal government would take $23 out of your paycheck for every $100 you made. With the FairTax, if the federal government gets $23 out of every $100 spent in America, the same total revenue is delivered to the federal government. This is revenue neutrality. So, instead of paycheck-earning Americans paying 7.65 percent of their paychecks in Social Security/Medicare payroll taxes, plus an average of 18 percent of their paychecks in federal income tax, for a total of about 25.65 percent, consumers in America pay only $23 out of every $100. Or about 30 percent at the cash register when they elect to spend on new goods or services for their own personal consumption. And this tax is collected only on spending above the federal poverty level, providing important progressivity. "
These numbers don't add up. Essentially, they say that 23 dollars out of every hundred earned is equal to 23 dollars out of every hundred spent. Not every dollar earned in America is spent, so the total revenue is not "neutral", as this group claims. Furthermore, the wealthy spend the least of their total income. This would be a tax cut, primarily to those most able to afford to pay taxes, alongside a tax cut to those least able to pay. In other words, a tax burden transference to the middle class. While partially progressive, it is partially regressive, and therefore it is not a progressive tax structure as this group claims.

Those sophisticated enough to come up with a taxation scheme like this are smart enough to know that the obvious things I am pointing out are true. Therefore, I must conclude that they intend to deceive.
 

herrwolf

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Dezaad said:
This will tend to decrease inflationary pressure, if not reverse it, causing deflation. Deflation would be scary


Um isn't deflation defined as a lowering in the price of goods?
 

herrwolf

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I think that one major point missed by many of you arm chair scholars is the complex tax structure that the rich have manipulated to their benefit and, the enormous cost of the IRS. I for one am willing to try a new system.
By the way can you people name an example were deflation has occured on a national level?
 

Dezaad

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herrwolf said:
Dezaad said:
This will tend to decrease inflationary pressure, if not reverse it, causing deflation. Deflation would be scary

Um isn't deflation defined as a lowering in the price of goods?

Um, yeah. Sounds great doesn't it? We could have deflation if the government, through the Federal Reserve, caused one. I wonder why they don't, if its such a great thing... I wonder why they maintain, when possible, stable prices on the side of a slight inflation... How dare them deprive us of the lower prices we deserve... Well, I'm not going to do the necessary economics lesson here. But you need one. Clearly you have the Internet. Use it.
 

Dezaad

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herrwolf said:
I think that one major point missed by many of you arm chair scholars is the complex tax structure that the rich have manipulated to their benefit and, the enormous cost of the IRS. I for one am willing to try a new system.
By the way can you people name an example were deflation has occured on a national level?
I think some backwater bumpkins have crawled out from the Appalachians and are trying their hand at social science. Ambitious.

No matter.

I can name an example. The period of time is called "The Great Depression". It started in 1929 and continued through much of the 30s. It was a time characterized by declining prices (deflation), declining wages, and high unemployment. Its beginning was marked by a catastrophic stock market crash, and the collapse of the banking industry.

Mainstream economic thought on deflation might be served by reading this speech:Speech, Bernanke Transcript

However, if you want to also read something that intellectually supports the idea that deflation is not bad, you might try the Mises Institute:Mises Institute
 

herrwolf

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Dezaad said:
Um, yeah. Sounds great doesn't it? We could have deflation if the government, through the Federal Reserve, caused one...

How dare them deprive us of the lower prices we deserve...


Do tell how the Government through the Federal Reserve could cause one.
Also,
Who are you to say that the government shoud dictate prices? Competition should be the one(s) to dictate prices. In my observations anytime government gets involved prices usually get screwed up. The less government (reverting back to my original post, ie. less IRS makes Fairtax good) we have, the better off we will all be.

As far as an economics lesson do tell me what internet sites your visiting so I can be as smart as you!
 

Dezaad

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herrwolf said:
Dezaad said:
Um, yeah. Sounds great doesn't it? We could have deflation if the government, through the Federal Reserve, caused one...

How dare them deprive us of the lower prices we deserve...

Do tell how the Government through the Federal Reserve could cause one.
Also,
Who are you to say that the government should dictate prices?
I am not the one who says that government should 'dictate prices'. Actually they don't dictate prices. They can influence general price trends. The government, through the Federal Reserve, has influenced this, along with business investment and unemployment/employment levels. They do this by restricting and loosening the money supply.

They've done this since around 1913, when the Federal Reserve was established. Actually, I should say they've tried, and as time went on, succeeded at these goals.

When the Federal Reserve tightens money supply, the interest rates rise. Business investment costs more, so there are fewer jobs, and prices rise less. If the Federal Reserve tightened the money supply drastically, they could easily cause the price pressure to send prices into negative territory, and prices would fall.

Another way that government might cause prices to fall would be to make it so that people had fewer dollars to spend through higher taxation. This would be trickier, since the government would spend the money on something, and that would make price pressure neutral. If all they were interested in was creating deflation, though, they could just not spend the money (HA!).

There are several reasons falling prices are dangerous to everyone. To name a few:
  1. Already existing loans 'cost' more.
  2. Employers have a hard time making enough money to pay their workers. Employers have a hard time adjusting their employee pay downward to the new price levels. In many cases, this can cause layoffs, which then increases the labor supply which then decreases wages. But this adjustment rarely happens smoothly, so the pain for everyone is considerable.
  3. Deflation is ironically harder on the poor than on the wealthy. From history, we know that wages tend to outpace whatever the direction general prices are going. This means that wages tend to fall slightly faster than prices. The wealthy, on the other hand, need do nothing with their money in order to become wealthier still. Their money is increasing in value while it just sits there in their bank vault. The debt burden of the poor and middle classes is greater relative to their income (increasingly so, as we've shown) than the debt burden of the wealthy.
  4. Deflation tends to feed upon itself far more than inflation does. Think about what your reaction would rationally be. If you thought something would cost less tomorrow than it does today, would you not wait? How long would you wait? The rational response would be to wait until you simply could no longer do without the item, or until you thought the prices had bottomed out. Except that they tend not to for a while, precisely because people are waiting. This waiting is detrimental to business investment, and in turn, your prospects for employment. The wealthy just hold their dollars, making no investments, watching their dollars increase in value daily.
  5. These lazy dollars further increase downward pressure on prices, and the cycle repeats. This is the mistake that the Mises Institute makes because they deny that dollars actually go idle. History has proven them wrong. The Mises Institute's set of policy recommendations is a house of cards, and when they go wrong about this thing, their recommendations collapse. They are the flat-earthers of economics science.

Competition should be the one(s) to dictate prices. In my observations anytime government gets involved prices usually get screwed up. The less government (reverting back to my original post, ie. less IRS makes Fairtax good) we have, the better off we will all be.
This is naive. Competition is good at determining RELATIVE prices. That is, the price of goods as compared to other goods. However, leaving general price trends under the forces of the market leads to free market failures, and a lot of poor people. You have alot of faith in the free market, but you do not understand it. For the most part, free market forces create good things for everyone, so your faith is well placed. But, the free market does fail, in the sense that it works against the general welfare, and deflations are market failures in at least this sense. This has been identified through the science of economics and is corrected for by no other force than government intervention.

Be thankful that they do intervene. We would probably have had another Great Depression if they had not intervened in the latest recession. The precipitous drop in interest rates was evidence of the government's intervention. The level they had to drop them to in order to prevent all but a small deflation was frightening. They almost ran out of room. When I looked up deflation for you, I included a speech from a Federal Reserve Board governor, addressing this very issue, and what they might have done had they actually run out of room.

As far as an economics lesson do tell me what internet sites your visiting so I can be as smart as you!
Lesson complete, even though I said I wouldn't give one. Despite your sarcasm arising from your lack of knowledge, I will answer this, and even be fairly nice about it: If I needed to go to web sites to know and understand these things, I'd gladly give them to you. I really do already know these things from my education. I've also already looked up some sites specifically for you and put them in my last post. I don't know of any basic economic sites, but I am sure you could find them using google. That would be a good place to start, and then start reading books on economics to bring yourself up to speed. Good luck to you on that.
 
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herrwolf

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Well your arguement is structured in a way that makes me believe your happy with the way things are! I'm not happy with the way things are. Economics your right is a science, that is why all this is pure speculation. Some theorists will even say we are all being manipulated.
Deflation is ironically harder on the poor than on the wealthy.
Half of what you say is pure jiber jaber. Or to try and sound smart, sophistic. First define rich, second when are the poor better off then the rich?
If you made everyone equal tomorrow in a month there would be rich and there would be poor. You can't legislate common sense or business sense.
 

Dezaad

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herrwolf said:
Well your arguement is structured in a way that makes me believe your happy with the way things are! I'm not happy with the way things are. Economics your right is a science, that is why all this is pure speculation. Some theorists will even say we are all being manipulated.
Science is pure speculation? What do you rely on for information that approaches objectivity?

I am not exactly happy with the way things are, I just don't think the suggested consumption tax is better, and I've given a reasoned account as to why. I've also given a partial context where the suggested solution ought to be discussed.

The consumption tax will make things worse.

Half of what you say is pure jiber jaber. Or to try and sound smart, sophistic.
You really are not happy with your ignorance are you? Do you have to make it so obvious though? Your unhappiness with the state of your education, not your ignorance, I mean. If you took the time to understand some things, you might find that you are less insecure, especially alongside some affirmation and visualization self-help work. That's my suggestion.

First define rich, second when are the poor better off then the rich?
You get a general feeling from what I'm saying, but don't really understand what's being said, much less the links I gave you? You're not related to a certain someone who shall remain nameless but he lives in the White House, are you? Just wondering, sometimes the look on his face makes me think he is just like that.

Let me be clearer. The poorer you are, the more you are hurt by deflation. The richer you are (the more dollars you have tucked away, and intelligently withdrawn from investments), the more you are likely to be able to still improve your financial well being through deflation.

The relative rich/poor line where financial pain would be felt as opposed to financial improvement enjoyed depends on the intensity of the deflation. If you are a wage earner of any kind, then, as your wages fall, you'd need to offset whatever that loss is with improvement in your savings realized through the increased value of your saved dollars. No savings at all, no help, only pain, through deflation, as your wages fall or you lose your job. Some saved dollars, some help through deflation. Lots of saved dollars, deflation lessens your gains, because you can't invest, and you may be losing salary or wage level, but the saved dollars potentially create a net improvement in your total financial picture. Billionaires simply ride it out singing to their dollars "You are my sunshine, my only sunshine, you make me happeeee ... when skies are gray..." No definitions necessary. Unless you don't understand how relative terms work.

Here's all you need to remember. Price stability, gooooood. Inflation, not so goooooood. Deflation, BAAAAAAD. Unless you have a sizable savings. Just to be on the safe side, for you I'd say a very large savings.


If you made everyone equal tomorrow in a month there would be rich and there would be poor. You can't legislate common sense or business sense.
Where in the world did you get the idea that I wanted to make everyone financially equal? Ok, well, yes, I do, so it was a good guess. But, not right now. Furthermore, everything I have said here recognizes that it is necessary for the general welfare for there to be rich people, a robust and stable free market, progressive taxation, and attempts to level opportunity in the free market. Yes, I wish people would just enthusiastically work for nothing, and still be able to be provided for equally and comfortably. But, we all (pretty much) know where that leads, except on Star Trek.

Ironically, though, it leads to precisely the same place that this hair-brained consumption tax does.

The only thing of those that the consumption tax would surely accomplish (in the short term) is that there would be rich people. In the long term it would create lots of poor people, stagnation or reversal of opportunity for the middle and poor classes, and a decline in the total wealth of the nation.
 

herrwolf

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You really are not happy with your ignorance are you? Do you have to make it so obvious though? Your unhappiness with the state of your education, not your ignorance, I mean. If you took the time to understand some things, you might find that you are less insecure, especially alongside some affirmation and visualization self-help work. That's my suggestion.
Can we say ad hominem?
 

herrwolf

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Science is pure speculation? What do you rely on for information that approaches objectivity?
Certainly not one event in history that you refer to (the great depression) without reviewing all the facts. If there is deflation under this sort of system how far would it go? You've got it in your mind that we will be back in Hoovervilles. You can articulate all you want that this plan stinks but you'll have to convince me that just because there was deflation in the 30's there will be deflation post-fairtax. Hardly a trend. Things are a lot different now, people invest more than before, we are more educated than ever, I just don't see the doom and gloom of it all.
Look at states in this fair union whose revenue is collected mostly by a sales tax.
 

nkgupta80

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wouldnt that that be middle class salaries?
 

Dezaad

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herrwolf said:
Can we say ad hominem?
Yes. "Ad Hominem".

But, let's go back to the beginning of the Ad Hominem behavior:
herrwolf said:
Um isn't deflation defined as a lowering in the price of goods?
What is "Um" meant to convey here?
herrwolf said:
by many of you arm chair scholars
What is "Arm Chair Scolars" meant to convey here?

The exchange of Ad Hominems escalated on both our sides from here. Finally we reach
herrwolf said:
... Or to try and sound smart, sophistic (directed at Dezaad)
To which I responded, which is equally ad hominem:
You really are not happy with your ignorance are you? Do you have to make it so obvious though? Your unhappiness with the state of your education, not your ignorance, I mean. If you took the time to understand some things, you might find that you are less insecure, especially alongside some affirmation and visualization self-help work. That's my suggestion.
I take it you would like to debate now without the posturing? Fine. Let's end it.
 

Dezaad

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herrwolf said:
Certainly not one event in history that you refer to (the great depression) without reviewing all the facts. If there is deflation under this sort of system how far would it go? You've got it in your mind that we will be back in Hoovervilles. You can articulate all you want that this plan stinks but you'll have to convince me that just because there was deflation in the 30's there will be deflation post-fairtax. Hardly a trend. Things are a lot different now, people invest more than before, we are more educated than ever, I just don't see the doom and gloom of it all.
Look at states in this fair union whose revenue is collected mostly by a sales tax.
You are not responding here within the context of the issue you originally asserted, which was that economics is a science, and thus mere speculation. If you have conceded that the science of economics is not mere speculation, then I am satisfied in that regard.

You are correct that one example of deflation doesn't mean that we are under threat from deflation from the consumption tax proposal at issue. But, I did not assert or imply that it does, so don't look to me to defend a Straw Man.

However, the one example does lend support to the assertion that we'll 'be back in Hoovervilles' (I like that way of putting it :lol:). This consumption tax proposal is regressive. That is, generally the more money you make, the less percentage of tax you will pay. This follows from the fact that, again generally, the more a person earns, the more of a percentage of their income is saved.

Regressive taxes redistribute wealth toward the top. That is to say that, wealth accumulates even more than it would without the tax (to that extent because of the tax) into the hands of those with the most money in the first place.

We leave the part now of fairly well established economic theory to less well established. Concentration of wealth toward the top tends to cause overproduction.

We return now to the well established theories. Overproduction leads to more goods than people can afford to absorb through consumption.

More goods than people can afford to absorb leads to prices falling. This is deflation.

A glut of goods that cannot be absorbed leads to businesses cutting back on production, and the layoff of workers.

Layoffs in a general deflation lead to more deflation and the downward spiral of deflation is initiated.




One of the things that has characterized many of the deflationary periods for economies is greater concentration of wealth at the top, just prior to the economic collapse. When the government corrects this, the economies recover. We have gotten much better at avoiding these kinds of collapses, without redistributing wealth to the bottom, through the Federal Reserve's excellent ability to control the money supply. The Federal Reserve just got finished fighting off massive deflationary pressure, ending with the low in interest rates last year. Concentration of wealth at the top has never been at the extent it is now, that we know of.

If a tax structure like the one that is described at "fairtax" was created, it would make the concentration of wealth at the top much much worse. The Federal Reserve might not be able to halt the deflationary pressure this accelerated concentration of wealth would definitely trigger.
 

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I've read the book and am pretty well convinced it's a good idea. I am particularly concerned at the number of disincentives currently in place for doing business in the USA. US corporations are certainly at a disadvantage compared to competitors elsewhere in the 1st world. This is because there is a large embedded tax component in all products & services we try to sell overseas. Even countries that use the horrible VAT do not levy it on their exports. Buy a Cadillac in Germany - you are paying General Motors' corporate income tax. Buy a BMW in the USA - you do not pay their VAT.

I've never seen the point in taxing corporations - it's only purpose is to veil income taxes from individuals.
 

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Morris Minor said:
I've read the book and am pretty well convinced it's a good idea. I am particularly concerned at the number of disincentives currently in place for doing business in the USA. US corporations are certainly at a disadvantage compared to competitors elsewhere in the 1st world. This is because there is a large embedded tax component in all products & services we try to sell overseas. Even countries that use the horrible VAT do not levy it on their exports. Buy a Cadillac in Germany - you are paying General Motors' corporate income tax. Buy a BMW in the USA - you do not pay their VAT.

I've never seen the point in taxing corporations - it's only purpose is to veil income taxes from individuals.
What is the difference between a "fair tax" and a VAT? The are both a sales tax, from my understanding.

Proponents of the sales tax argue that it will simply tax collection. I'm not sure that is so, a sales taxes creates a huge paperkeeping requirement as the tax on each transaction must be recorded, organized, and reported.

Plus, as several have pointed out on this thread, it has an inherit regressive component, and to resolve that, countries with VATs frequently have a bewildering array of rules as to exemptions, deductions and rebate, that shortly become just as complex and confusing as an income tax.

I agree 100% with your last sentiment, btw. IMO it makes no sense to tax corporations instead as opposed to individuals.
 

Morris Minor

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Value Added Tax (GST in Canada) is a sales tax levied on the sale of goods & services & it is collected by businesses. Unlike the FairTax, it is levied on tranactions at every stage of economic production in the supply chain. However businesses can offset the VAT they pay to suppliers on materials against the VAT they collect from customers further down the chain - - until you get to the end consumers, who end up paying the tax. Obviously the costs of collection & compliance are passed down the line to the consumers.

The Fairtax is levied only once, at the retail sales level. One advantage is that it is extremely inexpensive to collect - especially since the sales tax mechanism is already in place in many states. The proposal includes provision for the Feds to pay the States a collection fee of 0.25% for their trouble.
 

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Quote:Indiconservative: All items cars to cereal have a 20% to 25% tax built into them now . So it wouldn't change the price much or maybe not at all.
Iriemon: So you add a 25% tax, and the price doesn't change. I'm going to have to look a little more closely at how this magic is accomplished
Indiconservative: A corporation pays income taxes. They pass those income taxes to you the consumer through there goods. Its estimated that the taxes they pass on to you through there products is between 20%-25%. So if they no longer have to pay income taxes through the fair tax the will remove the 20%-25% from the price of the goods and it will be replaced by the federal sales tax.
I'm anticipating you saying "What will stop them from keeping the price the same and then adding the tax on to it?"
The current tax on corporations is on profit, which is (roughly) revenues (from sales) less expenses. A company can have billions of revenues, but if it has billions in costs and no profit, it pays no tax. You are replacing the tax on profit with a what is essentially a tax on revenues. Huge difference. Last year taxes on corporations raised $189 billion. The fair tax plan will have to raise roughly $2,400 billion with the sales tax. Huge difference. For someone to argue that it will not effect prices is hogwash. Go to Europe and buy something and then tell me a sales tax makes no difference.

Now, it may not have a major effect on the pre-tax price of goods, in fact in may (as some have argued in the fair tax thread) have a deflationary effect as the overall increase in price lowers demand. But the total price of everything that is taxed will go up by roughly the amount of tax.

Its the free market system where you can choose to buy products from people who are honest. If the ones that are not honest don't change they will be run out of business. I'm sure the people pushing this legislation would be smart to keep an eye on who is and isn't adjusting there prices
It would be nice if things actually worked this way, but unfortunately businesses that are not honest are often not run out of business unless the are so bad they get caught with a really big scandal like Enron.

If you are talking about a huge Govt bureaucracy to enforce the law to prevent cheating, that kind of cuts against the argument for a VAT on the grounds that it simplifies everything and reduces bureacracy.
 

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Morris Minor said:
Value Added Tax (GST in Canada) is a sales tax levied on the sale of goods & services & it is collected by businesses. Unlike the FairTax, it is levied on tranactions at every stage of economic production in the supply chain. However businesses can offset the VAT they pay to suppliers on materials against the VAT they collect from customers further down the chain - - until you get to the end consumers, who end up paying the tax. Obviously the costs of collection & compliance are passed down the line to the consumers.

The Fairtax is levied only once, at the retail sales level. One advantage is that it is extremely inexpensive to collect - especially since the sales tax mechanism is already in place in many states. The proposal includes provision for the Feds to pay the States a collection fee of 0.25% for their trouble.
Thanks for the explanation. But that raises a host of other questions:

How do you define "retail"? Suppose I want to buy a $2000 computer. If I go to the local computer store, it will cost me $2500 with the tax. On the other hand, if I buy from a "wholesaler", I pay no tax. Retail establishments aren't going to be happy with that, are they? Or, if the producer of parts aren't taxed because they aren't building the end product, I could buy the parts and save the tax.

So you will need an extremely complex legal system of how you define a "retail" transaction. How do they propose to define that so that people can't get around it?

Then, with every tax transaction, you need paperwork identifying who the purchaser is, and verifying the data needed to demonstrate that the transaction is a "retail" transaction and not otherwise. The paperwork and bureacracy needed to accomplish and enforce this gargantuan task will probably exceed the current IRS infrastructure.

And they you have after market sales. Apparently resale transactions are not taxed? So all new cars, boats, bikes and guitars and are given a 25% (or greater) tax. But used car sales are not. Effectively, the cost of new items increases 25% relative to the cost of used items. What is that going to do to the market? Great hords of folks are going to decide it makes a lot more sense to buy used rather than new, which will play havoc with the new product markets. The cost of used cars will probably go up relative to new cars, effectively giving used product sales a huge windfall.

Seems like there are a lot of simple sounding proposals that underly great complexities have not been really thought out with this plan, but maybe someone can explain it to me.
 
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