Friday, April 4, 2014

CEO to Worker Pay Ratio

 If you are keeping up, Laurie and I got a bit side tracked on G2A ACA Signups.
"This is just an extension of our long standing discussion. How much government spending is enough?  The Liberals keep pulling to Left while saying it is the Conservatives that are trying to change things... How far to the Left is far enough?
G2A Continuum Currently we are approximately dead center at ~38% of the country's GDP being "distributed" by local, state and the federal governments... Personally I think that is great plenty... Now how do we get them to spend it more wisely... Whatever that means... G2A 
"I think at the most basic level our disagreement about "wealth transfer" is my belief that our form of capitalism has major flaws in how earnings and wealth are distributed, whereas you see no problem in CEO's earning 273 times the pay of their median-paid employee. Why is it that you have so little concern about the wealth transfer from middle class people to the 1%?" Laurie

"No one is forced to give their money to the 1%... The 1% will be thrown in jail if they don't pay their taxes..." G2A
EPI CEO to Worker Compensation Results
EPI CEO to Worker Compensation Methodology
Bloomberg SEC to Shame CEO
Forbes How Wide is Wage Gap?
SEC Executive Compensation Context
Yahoo Finance CEO vs Avg Worker Pay: A Dumb Metric
Politfact CEO Worker Pay Ratio

After trying to do some research, it looks like the EPI data is somewhat consistent, if a bit funny.  The reason I say this is because it seems EPI:
  • does not compare the CEO pay to workers within that company
  • does compare the CEO pay to typical workers in "industry"
  • doesn't include any Supervisors or Managers in their "worker data".
  • does only include the largest 350 companies in the USA
So it does seem give a good historical comparison of the CEO pay for the largest revenue companies relative to the average "worker" within that industry.  Of course I don't have the energy to even guess how they handle companies like General Electric, Emerson, Tyco or other large conglomerates that own companies in dozens of different industries in many different countries.

Also, only including the top 350 and implying that this is typical of reality seems a bit strange. Since it seems most Americans are not employed by these companies...  Then there is that ignoring Supervisor and Manager incomes, I keep thinking they are "workers" also.

I do like the idea of having the companies report that ratio, since I am an investor. Though the Yahoo link indicates that it may create problems.

All that said...  Should the CEO of McDonald's makes 1,196 times what their typical restaurant worker makes?  It does seem high, however apparently he ultimately is responsible for keeping 1,8000,000 employees working, 35,000+ restaurants open and even more stock holders making money...  What is the value of the employee who says "do you want fries with that hamburger" compared to person steering that monster sized company?  I am certain I don't the government trying to make that decision.  And I sure don't want that CEO job...

Thoughts?

98 comments:

Scott Schoberg said...

It seems we complain if the government tries to be too socialist and if then is the capitalists make too much money. What about over paid athletes, celebrities, or movie stars? Try living in a society or country where the government takes all and the only rich people are the corrupt and criminals. CEOs make obseen money because their capitalist investors like the returns. No makey money = No CEO. They're gone! So, they look for the next CEO who is a big winner and you gotta pay to win! We all live this way with things that matter most to us. We spend our money on what's most important to us. No surprises here.

John said...

I agree, however the other side of this post that I forgot to mention was my discussion with a friend who is an HR Compensation consultant. His heartburn with the system was how interconnected the upper echelon is.

His concept of reality is that the system is somewhat "corrupt". Meaning that "friends" are scratching each others back at the expense of the shareholders and employees.

As for "No Make Money = No CEO"... If our corporate culture changed to be more like Costco, Whole Foods, etc, we could still get good CEO's for a lot less money. (what else are they going to do...) Somehow a lot global companies make great profits without compensating their CEO's nearly as well compared to their typical worker.

Maybe that "old boy" network is over inflating our "CEO" market...

John said...

Jerry's comment cross posted from ACA.

""Why is it that you have so little concern about the wealth transfer from middle class people to the 1%?" -- Laurie

Laurie, how do you see unequal salaries as being a "wealth transfer"? Who PAYS these CEO salaries? Certainly not the "median employee," or ANY employee. And if you are worrying about the "gap," then how about the gap between an NFL football star and the high school football coach? Personally, I wouldn't want a CEO job, or you would have to pay me an incredible amount to take it. What's wrong with that? Would you prefer that government step in and mandate that a CEO be paid TWICE what he/she now earns? Then why would you want government mandating they get less? How does it help the median worker if the CEO earns less?"

John said...

Hiram's comment cross posted from ACA.

"Here is how the arithmetic of wealth redistribution works out in terms of government. As is often the case, Republicans are right, they just aren't aware of the extent to which they are right.

Let's say the top one percent pays forty percent of the taxes. That' a wealth transfer since the top one percent don't get forty percent of the value of what their taxpayers. The soldier putting his life on the line for our freedoms benefits each of us on a per capita basis. So in benefiting from his service equally, the greater amount the rich person pays the poor person for that service is a wealth redistribution. It's an inescapable consequence of the arithmetic of the situation.

Is there an alternative? Sure there is and Jason Lewis identified once, a moment of euphoria. Let's not have a progressive system of taxation where the rich pay more. Let's tax people in the same way people receive benefits, on a per capita basis, which means with certain adjustments, each individual pays the same. It's fairer, and we are all big fans of fairness, right?

Well, Houston, we have a problem with that. The reason why rich people pay taxes is that they are the ones who have the money to pay them. We are up again, against that inexorable and unfair law of life, that blood is not to be had from turnips. It falls on rich people to pay unequally for things that benefit them equally because there is no one else that can do it. A jobless single mother on welfare simply doesn't have the wherewithal to buy a tank, and so the rich person is stuck with the bill.

The laws of arithmetic while inexorable, can be evaded. One way to do that is the "opt out. In terms of personal security, one can move to an armed enclave, and cut the police budget for everyone else. In terms of health care, the healthy can construct plans for themselves that exclude the unhealthy. In terms of education, the rich can create schools for themselves, and restrain spending on schools to which the rest of us send of our kids. In terms of military service, well in that case it's perfectly ok for poor folk to keep rich folk safe in their mansions. I mean, isn't it fairer when wealth redistribution works the other way on occasion?"

Laurie said...

I do not want govt determining salaries in private industry, aside from minimum wage. I do believe the large and growing inequality in our country is grounds for an even more progressive tax code. The 6 Walton heirs have wealth equal to 42% of Americans combined. Why shouldn't their taxes fund the food stamp program and the ACA for their employees.

Just how wealthy is the Wal-Mart Walton family?

and just for fun, here is a link about the growing inequality that I am sure I've posted previously:

It's the Inequality, Stupid

I really don't understand the view that free market capitalism works perfectly and there is no need for a progressive tax code. Or is the difference in opinion only over how progressive the tax code should be?

Laurie said...

btw, there are other good policy ideas for dealing with the growing inequality, in addition to higher taxes for the rich:

Inequality
Growing apart


So what policy ideas to others support, or is there no need because the economy is working perfectly and our current level of inequality is not a problem?

John said...

Hirams comment cross posted from ACA.

"Who PAYS these CEO salaries? Certainly not the "median employee," or ANY employee.'

Think of a corporation as a pie. When top managers get a bigger portion, someone else must get a smaller portion. Oddly enough, it's the folks whose job it is to divide up the pie, are the ones who not only get the biggest piece but pieces which get bigger every year.

"And if you are worrying about the "gap," then how about the gap between an NFL football star and the high school football coach?.

I don't worry about gaps myself. Gaps are two issues artificially combines into one. For example, the one issue is the gap between NFL and high school coaches too large, is two really two issues, how much should NFL coaches be paid and how much should high school coaches be paid, neither of which has much to do with the other. It's not a pie question, when a pay increase for the NFL choice must be paid for by a cut in the college coach's salary."

John said...

Laurie,
Would make up your mind... Do you want to talk about income or wealth? What happened to the 273 times concern? Since I live with a houseful of women, I can adjust...

That said, the policy changes seem rationale:

"A simpler, flatter code with no exemptions would be more efficient and more progressive. A blast of deregulation would help, too. Many of America’s most lucrative occupations are shielded by pointlessly restrictive rules (think doctors and lawyers)."

"Investment in the young should focus on early education. Pre-school is a crucial first step to improving the lot of disadvantaged children, and America is an international laggard."

John said...

Too bad the DFL is against a simpler FAIR / FLAT tax code.

Too bad the GOP is against free PreK that would likely be made expensive and screwed up by the Teacher's Unions and the government... ( I just heard about the new MN Pre-K rules... Lots of cost/waste, with little benefit...)

And too bad all Union and Organized Professional groups try to keep their rates high by limiting competition. (ie Teachers, Doctors, Lawyers, Electricians, Plumbers, etc.)

Any thoughts how we over come these challenges.

Sean said...

The problem with CEO pay is a problem with corporate governance. Since boards of directors are largely made up of executives from other corporations who also want to be paid well, there's little pressure to truly rationalize executive compensation to performance. I have no problem at all with successful CEOs who make a ton of money. I do have a problem with executive compensation packages that still pay exorbitant salaries when the company doesn't perform well, and give ridiculous golden parachutes to failed executives.

Laurie said...

If you want to choose, focus on income inequality, though to me both types of inequality are appropriate for govt adjustment through the tax code.

Didn't the Waltons accumulate their wealth through exorbitant incomes over the last 50 years?

so what do you mean by a "simpler FAIR / FLAT tax code."? Would that be more or less progressive than our current tax code?

It seems to me the govt should be raising more revenue through a more progressive tax code, part of which could be used to reduce the deficit and part could be spent on infrastructure and education, thereby reducing unemployment.

Lastly, I still don't get all your whining about wealth transfer through govt programs, when a much greater wealth transfer from the middle class to the 1% has been occurring over the last 30 years.

lastly, for real, Why were the CEOs a generation ago only deserving of 20 times more than their employees, are modern day CEOs that much smarter and harder working?

jerrye92002 said...

Both the FAIR and FLAT tax proposals out there are FAR more fair (not that it is an objective of the tax code) because they are "perfectly progressive." Right now, I suspect you could find points in the tax tables where somebody making 10x the income pays not just 10x more in taxes, but 100x more! That's overly progressive and grossly unfair. And it is wrong too far DOWN in the income scale as well. One thing the Bush tax cuts did is move millions of the "working poor" off the tax rolls entirely. The FAIR/FLAT tax continues that trend with a complete exemption for something like poverty level income-- roughly $35,000 for a family of four-- and then applies a SINGLE tax rate (say 23%) to all DISPOSABLE income, the income above that point. It's perfectly progressive, because somebody making $36k pays 23% of $36k-$35k, or $230 for an effective rate of just 0.6%. At $70k, you pay 23% of $35k or $8,050 for an effective rate of 11.5% (half the flat rate). At $1M, you pay almost the full amount- $221,950, an effective rate of 22.2%.

Now the resistance to this ultimately fair tax system is simply that it denies Congress the chance to reward behavior it likes and discourage behavior it doesn't like, through the tax code-- it's called "social engineering" and it's a terrible practice.

jerrye92002 said...

On the topic at hand, I'm partial to the Peter Prescription, myself. That is, that a CEO gets paid well for a 5-year limited term, and accumulates a large number of shares of the company that don't pay off until 3-5 years after he/she leaves the post. This makes sure that effective CEOs get rich, and ineffective CEOs do not. I don't much care how much money that is because the amount earned comes from the broad success of the company, and that's "worth it" to the rest of us. Just like a football star that draws fans to the seats enough to justify his outrageous salary, and because there are a very few people who can do the job of CEO or wide receiver well.

John said...

The Walton's got rich because they owned a significant share of a very well run company that met the needs of their customers...
Walmart Capitalization

And that's not even counting the dividends paid out.

If your family started and grew a business like that, what do they owe evryone else? It is an interesting question...

Laurie said...

My family would not make a fortune like the Walton's because I would never be that greedy and ruthless.

When/if my older son is wealthy one day I will still believe in a progressive tax code.

I think he may be wealthy one day because as a 20 year old he has run a ticket brokering business that has generated more than $40,000 in sales and $6,000 in profits. He is currently working on his taxes, claiming his residence, car, and cell phone as business expenses. Needless to say his dad and I are of no help to him on any of this. In fact his dad gives him a hard time for ripping people off.

John said...

"his dad gives him a hard time for ripping people off"

Well I have hopes that your son will stay a capitalist who provides a service that people happily pay for.

As for Walmart, I think you are forgetting all the money that company has saved it's customers. Just like your son, they provide the right service for the right price. No one is forcing anyone to shop with either of them.

Anonymous said...

Too bad the DFL is against a simpler FAIR / FLAT tax code.

These are two different things. A fair tax is a general sales tax. It's popular in Europe where it takes the form of a VAT tax.

There is no particular reason for a FAIR tax to be progressive. Lots of rich people don't spend much money. that's how they got to be rich.

The fascination with a flat tax is one of those things that I have never quite understood. For one thing, the devil is in the details. and nothing has more details than a tax system. But putting aside those issues for the moment, our current tax bracket system isn't much more than a mild set of tweaks intended to even out the progressivity of the current tax system.

Hardly anyone ever challenges the fundamental assumption of the tax system that the more money you make, the more you should pay in taxes. The Republican position is maybe, the rich should pay a little less, Democrats say the rich should pay a little more but that's fussing around the margins. Mitt Romney is always going to pay a lot more taxes than you and nobody seems to want to change that, not even Mitt really.

And again, even if we did want to change that, we couldn't. That's because it only makes sense to tax people who have money. Rich people have money. And in our society today, pretty much the rest of us don't.

--Hiram

jerrye92002 said...

Hiram, you're just not doing the math properly. The idea that folks who save or invest their money should have it taxed away instead is folly. The reason we have the progressive tax system is so that the more you make, the more you pay. That isn't absolutely fair, as has been pointed out, because most folks don't have enough money for their "fair share" of what government spends. (Part of the problem is government spends too much, of course.) So I have long been willing to concede that the "rich" should pay MORE, in absolute dollars, but under the current system they also pay at a higher RATE, and that's definitely unfair. To solve the other problem, I would tax everyone at the same rate, but on DISPOSABLE income, not total. This automatically turns a flat rate tax into a "perfectly progressive" tax, where those with a tiny bit of disposable income pay a tiny rate, and those making oodles pay at almost the full rate.

The beauty of the FAIR tax (it is NOT a VAT, because it is collected only at the retail level, and replaces all other taxes) is that anything saved or invested is excluded from taxation. And isn't that what we want? All of this sinful envy and coveting is because your neighbor is living lavishly, yes? Well, with a FAIR tax, all of that spending makes his tax bill go up. If he saves for his old age or puts it back into his business, or gives it to the church, he does not pay the sales tax. BIG difference between FAIR and FLAT, but either is preferable to the ridiculous system we have now.

Anonymous said...

"The idea that folks who save or invest their money should have it taxed away instead is folly.

So is not paying for things like roads. We are often told that rich people get rich because they work harder. If that's the case, how do we justify preferential tax treatment for income generated by a couple of calls to a stockbroker?

"The beauty of the FAIR tax (it is NOT a VAT, because it is collected only at the retail level, and replaces all other taxes) is that anything saved or invested is excluded from taxation."

Whatever their other merits, I have not seen the beauty of sales taxes, at the retail, except when the cashier is really cute.

"And isn't that what we want?"

Well, that's a can of worms. What do we want in terms of tax policy? A whole bunch of stuff. For myself, I am very uneasy with a unitary tax system, because it is almost by definition, easy to avoid. A FAIR tax taxes consumer spending, and the burden of it falls unduly on the poor who can't afford to save. Lots of effort, by the way, goes into ameliorate that consequence, but the extent to which that happens, it undermines the rationale for the FAIR tax.

Single tax proposals, by the way, are nothing new. A hundred years or more ago, Henry George's single tax on real property was all the rage. It had many of the same advantages as the retail sales tax, and more. Unlike with a retail sales tax, it's hard to see how you can have a black market in land. I mean it's not if you can illegally ship North Carolina in the back of a truck to Minnesota the way you can with a load of cigarettes.

--Hiram

"The reason we have the progressive tax system is so that the more you make, the more you pay."

That isn't a reason for it, just an explanation of what it does. The reason rich people pay more in taxes, is because they have the money needed to pay for stuff everyone or at least lots of folks believe we need.

Laurie said...

So I believe Jerry is the only one who has answered my question. Given that extreme inequality is inherent in our free market capitalist economy is it proper for the govt to collect progressive taxes and use some of the revenue for wealth transfer in providing food, housing, and healthcare to the poor? Does the McDonald's CEO deserve 1000 times more than his employees?

and just for fun I googled income inequality by country and came up with this link:


Income Inequality and Wealth Distribution by Country

Anonymous said...

"Given that extreme inequality is inherent in our free market capitalist economy is it proper for the govt to collect progressive taxes and use some of the revenue for wealth transfer in providing food, housing, and healthcare to the poor?"

Not only proper, but also unavoidable. Since rich pay the taxes that benefit all of us, wealth transfer is inevitable.

==Hiram

John said...

"is it proper for the govt to collect progressive taxes and use some of the revenue for wealth transfer in providing food, housing, and healthcare to the poor?"

Laurie,
I don't think most of us mind some wealth transfer. The problem is that it has been increasing non-stop since the 1930's and the Liberals seem to be insatiable.

And when questioned "how much is enough?" They just call Conservatives greedy and demand more, more, more...

I watched the first 2 Atlas Shrugged movies on Netflix last night... They lacked some of the detail of the book, but they did capture the heart of the matter.

John said...

For data on that...
Total Cost Chart by Spend Type

If you think of the G2A Continuum as a gas gauge... We are slowly but surely headed toward empty.

Anonymous said...

You know when we think of progressivist in terms of tax brackets; the higher the income the higher the tax bracket, right? Yet we don't seem to ever ask how the tax bracket a taxpayer is in, translates into the taxes he actually pays. Consider the case of Mitt Romney. A huge portion of his huge income is in the 39% bracket, so it would seem that under our progressive system of taxation, his tax rate should be under but close to 39%. This is what we expect under a progressive system. But the fact of the matter is that Mitt pays a much lower tax rate, about 13%. That being the case, why are we even under the impression that we have a progressive system of taxation? It seems to me that the progressive system of taxation, so intensively excoriated by our friends on the right doesn't even come close to existing.

--Hiram

John said...

Are you still using that tired example. The man is for the most part retired and he gives more to charity than he pays in taxes. If he gave little or nothing to charity like most Americans, his bracket.would be closer 30%

John said...

And that is only his federal taxes. Then I am sure he payes a boatload in property taxes, sales taxes, etc.

Anonymous said...

The man is for the most part retired and he gives more to charity than he pays in taxes. If he gave little or nothing to charity like most Americans, his bracket.would be closer 30%

Taking specific items out of his tax return, isn't really helpful. If we had a more complete picture of his finances, we would almost certainly that the 13 percent overstates his tax rate since such huge amount of his wealth is in untaxed accounts.

Even substituting the 30 percent tax rate for the 13 percent he actually pays, how can we say a tax rate is progressive when a man with the vast wealth and income of Mitt Romney pays a lower tax rate than those making four hundred thousand a year? If we understand tax progressivity as generated by brackets, how is it possible to consider a system progressive when the rate the rich actually pay is lower rather than higher than the rate paid by people whose income is much less?

--Hiram

Anonymous said...

And that is only his federal taxes. Then I am sure he payes a boatload in property taxes, sales taxes, etc.

When we speak of progressivity in federal taxes, we are sort of limited to federal taxes. But the fact is, most of us pay those taxes too, quite possibly at a higher rate in terms of overall income than Mitt. Somehow, I don't have a sense that Mitt has trouble paying his property tax bill. Many of my friends do.

--Hiram

Laurie said...

about "I don't think most of us mind some wealth transfer. " so what would you do if you were in charge?

Would you raise of lower taxes? on who?

would you spend more or less than we are currently? what spending would you cut? I understand the recent Ryan budget proposal would make big spending cuts on programs that aid the poor? do you agree?

John said...

Personally I would like to see us get to a point where the government only spends about 30% of our GDP... Of course that means we need to put government spending back to relatively where it was in 1970...

I am thinking that would mean cutting the current budget to about match the current receipts. (ie eliminate the deficit immediately) Even with Ryan's supposedly aggressive plan, it will take ~10 years.

That would stop us from adding to national debt, a problem that we are going to pass on to our children.

As for where to get the money from, I am flexible... However the government can not afford to keep promising "defined benefit" programs that they can not afford.

John said...

"Social Security is facing issues of long-term solvency, with the DI trust fund facing exhaustion in 2027, 16 years before the insolvency of the Old-Age and Survivors Insurance (OASI) trust fund. The Hospital Insurance (HI) Trust Fund, which funds the Medicare program, will be exhausted even earlier, in 2020."

SS Disability Insolvency

Laurie said...

so after reading how John would run the country if he was in charge, I decided to watch Atlas Shrugged to see if I could get a better understanding of this viewpoint. I found the movie to be more entertaining than I expected, and plan to watch the second part tomorrow.

So does John's proposal to immediately cut federal spending by about 20% seem radical to anyone else? (I deleted the term idiotic in my description of this idea as it didn't seem very respectful)

btw thanks for answering my question.

John said...

Thanks for using your polite words...

Now for my question to you. We are already letting the government choose where ~38% of our money is spent each year. Which by some strange stroke of luck is about the midpoint of the continuum. How far to the left do we need to go before you are satisfied that we are socialistic enough?

John said...

Some Charts to go with my crazy ideas...

Revenue vs Spend
Revenue vs Spend History

Anonymous said...

By the way, I talk a lot about Romney, he really is my go to rich guy, not out of any personal animus really, but because he is the rare rich guy whose finances we know a lot about. For some reason, rich folk aren't very excited to come forward and discuss their personal finances in detail. Now, due to recent Supreme Court decisions, they will have more money to make heart warming struggles about the sacrifices they make when their marginal tax rate moves from 14 to 15 percent.

Anyway, in a spirit of bipartisanship and just because I happened to recall it, remember when John Kerry and his wife came under fire for their shockingly low rate of taxation back in the 2004? I believe their effective rate of taxation was under 10 percent. Republicans were outraged. The unusual dudgeon from the Wall Street Journal was particularly high. The memory of Kerry's hypocrisy was particulary shaming for me. I cried for weeks.
As it happens, I don't recall whether the Kerrys made a lot of charitable contributions. What I do remember is that their low tax rate was the result of investments in tax exempt bonds, and stocks which got very favorable tax treatment.

My points is the same with the Democratic Kerrys as the Republicans Romney. Why is the progressivity of our tax brackets of concern when, as it turns out, that tax progressivity bears almost no relationship at all to the taxes rich people actually pay?

--Hiram

jerrye92002 said...

"Since rich pay the taxes that benefit all of us, wealth transfer is inevitable." ==Hiram

Almost correct. But instead of the word "inevitable" you should use a word like "immoral." Theft is the taking of property by force, whether under color of law or not, and regardless of who gets the money. Robin Hood, absent the good publicist, is just a robbin' hood.

jerrye92002 said...

"Social Security is facing issues of long-term solvency, with the DI trust fund facing exhaustion in 2027, ..." - John

That's a pleasing fantasy, isn't it? Thinking we have ten years to solve the problem? When ten years ago we had 40 years to solve the problem? The unfortunate reality is that the "trust fund" is insolvent NOW, and has been for a few years, because there is less money coming in thru taxes than is being paid out in benefits. And since there is ZERO actual money in the trust fund (it is just IOUs, the money having been spent), the only way the "trust fund" makes up the difference is to redeem those IOUs from other taxes, or from kiting more government bonds.

jerrye92002 said...

"So does John's proposal to immediately cut federal spending by about 20% seem radical to anyone else? " -- Laurie

Not nearly as radical as the 20% INCREASE we suffered when BHO took office. If we simply went back to the last Bush budget for our spending, the deficit would essentially be gone. Besides, it isn't like we have a choice. How long do you think you can get away with putting half of your high-living expenses on your credit card? If you've ever known someone who got in credit trouble, you know the first step, don't you? You cut up the credit cards. And the second step is to cut out whatever spending is above what you make so that you live within your means-- you prioritize, in other words. It's painful but it MUST be done. Why we tolerate this government profligacy, bordering on insanity, I don't know.

jerrye92002 said...

Hiram, it is obvious you have no idea what the FAIR tax is. It is "perfectly progressive" and protects the "poor" much better than the current system. It eliminates 100s of billions of $$ in compliance costs with the tax code and 100s of billions of $$ more in market distortion-- things done not for their own benefit but for the tax benefits. Here's a link:

http://www.fairtax.org/site/PageServer

You want the rich to pay their "fair share"? This is IT. There is no way that the current tax code can be made fair; it's simply not possible.

John said...

FAIR Tax Page

John said...

Hiram,
As for tax rates, I don't have the answer. Somewhere along the line our policy was changed to encourage people to invest and hold. (ie lower long term capital gains and dividends taxes)

Maybe it was to encourage people to save/invest, or maybe the rich lobbied for it. The only way to eliminate low taxes on "non-working" wealthy people would be tax their investment income as typical income. I have no idea what ripple effect that would have on the value of our property, stock, and other investments...

My guess it could be worse than if we eliminated the home mortgage interest tax exemption...

Sean said...

A progressive consumption tax could work. Structure it as follows: instead of being taxed at time of purchase, consumption would be calculated as your income minus savings and investment. After a large standard deduction (probably in the range of $30K for a family of 4), your consumption is taxed progressively and eventually reached 100% at some very high level.

This form of tax would encourage savings and investment. It would also have the impact of encouraging restraint on major purchases.

For instance, the average size of new home has nearly tripled since the 1950s. Part of the reason for this is because of the explosion in high-end construction, which through the media has filtered down and shifted the window of what folks think is acceptable.

Even low-end townhomes being built today generally have more than 900 square feet that was the average single-family home back in the day. The desire for larger, more expensive homes is one factor that was able to be exploited in the mortgage crisis of last decade.

This has happened across many other sectors of the economy as well (think weddings and high school proms, for instance).

Anonymous said...

But instead of the word "inevitable" you should use a word like "immoral.

I have acknowledged that wealth transfer is unfair, at least arguably. Mitt Romney pays a million times more taxes than you. But the roads he drives on are not a million times better than the roads you drive on. In fact, they are the same roads. He pays for them, not because that's fair or moral, but because he is the one who can.

"You want the rich to pay their "fair share"?"

I could make that argument, there are lots of arguments I can make, but at the moment, I am making the opposite argument, that the Mitt Romneys of the world, and just to be bipartisan, the John Kerry's of the world, pay an unfair share of taxes because that's the only way the whole thing can work. It's one of the most basic laws of economics, the only people who can buy things are the people who can pay for them. If the one percent of the population wants to stop paying for 40 percent of the stuff, they need to find a way to stop owning 40 percent of the wealth. It's as simple as that.

--Hiram


Anonymous said...

A progressive consumption tax could work. Structure it as follows: instead of being taxed at time of purchase, consumption would be calculated as your income minus savings and investment. "After a large standard deduction (probably in the range of $30K for a family of 4), your consumption is taxed progressively and eventually reached 100% at some very high level."

First, note that every time you create an exception to a single tax you are complicating it, and simplicity the lack of complexity is one of the principal goals of single tax systems.

As always, the problem with any single tax system is that the tax is too easy to evade.

"This form of tax would encourage savings and investment. It would also have the impact of encouraging restraint on major purchases."

And boy is that a problem in an economy such as we have now where people are not spending enough. This is one of the things that baffles me about the Fair tax proposals. They hugely increase the tax on the buying and selling of things. When did the buying and selling of things become a bad thing? Why would we want to discourage economic activity?

--Hiram

Sean said...

Certainly the timing of such a transition would be critical. (Although, if you announced a move to such a system in say, 2017, you'd see a flurry of consumption between now and then that could prove to be rather stimulative to the economy)

I would argue, though, that the long-term benefits of more rationalized consumer spending (and particularly the direct incentive for saving and investment) are worth investigating.

jerrye92002 said...

You folks are still not understanding the FAIR tax. I've been studying it for years and asking questions of the folks promoting it. They do answer!

The FAIR tax IS progressive, because of the single exclusion for family size, and EVERYBODY gets it. The guy making a million bucks gets a refund for the sales tax on the poverty level of about $35,000, and pays the full sales tax on everything he spends (at retail) on the other $965,000. The guy making poverty level income gets a refund for everything he buys and thus pays zero tax. If you make less than that, you actually come out ahead! If somebody, rich or not, saves money instead of spending it, he pays no tax until he withdraws and spends it, so EVERY savings and investment account becomes an instant IRA.

The first step in adopting the sales tax is repeal of the 16th amendment, so the FAIR tax eliminates the income tax, estate tax, gift tax, and Social Security tax. So it is "revenue neutral" to the government, but the entire tax system is now as simple as can be-- only retailers file a return, and it is a single rate for everybody, that everybody pays at the time of purchase, with no exemptions for nobody. It is also perfectly progressive and absolutely fair because of the single rate and the single-value "rebate" of poverty level taxes that everybody gets. And because all of the intermediate taxes have been eliminated, it is expected that prices for goods and services will be "price neutral" to the consumer as well.

Finally, the transition will happen once the 16th amendment has been repealed by the States, and then there will be an "existing inventory" exemption to the new tax.

There are other advantages, too, even over the FLAT tax. The only drawback is that Congress cannot use the tax code to punish their enemies and reward their contributors.

Anonymous said...


The FAIR tax IS progressive, because of the single exclusion for family size, and EVERYBODY gets it.

Progressivity means that those who make more money pay more in taxes. It's not a concept that sits particularly well on top of the fair tax. Lots of rich people don't spend much money. It's how they got to be rich. So despite being rich, the taxes they under a Fair tax would be low if they lived a modest life style. Nothing wrong with that as such, but it isn't an example of a progressive tax result.

As always, the problem with this and any other system of taxation is the turnip principle. Just as blood can't be squeezed from a turnip, money can't be squeezed from those who don't have it. Stuff has to be paid for and it's only the rich who have money. So sooner or later, the result of a Fair tax system had to be to get us back where we currently are, where one percent of the population pays for 40 percent of the stuff. There just isn't any way around it.

--Hiram

Sean said...

The FairTax is likely to increase the tax burden on middle-class families, who are over the rebate limit in income but not rich enough to be able to devote significant portions of their income to savings and investment.

The G.W. Bush Administration's President's Advisory Panel for Federal Tax Reform found that the FairTax would, on aggregate, increase taxes for those making between $30,000 and $200,000 and that the rate would need to be much higher than FairTax creators claim in order to be revenue-neutral. It would also be a massive tax cut for those at the top of the income scale.

Anonymous said...

The only drawback is that Congress cannot use the tax code to punish their enemies and reward their contributors.

From a tax policy point of view, the drawback of any single tax system, is that a single tax is too easily avoided. High income people can avoid the fair tax simply by not buying stuff.

--Hiram

jerrye92002 said...

Right now, we're not getting the money out of the rich because they are investing it, or saving it, or putting it into tax shelters of a million different kinds, written into the tax code to favor one person or corporation or activity at the expense of others.

You have to make up your mind whether you want the tax code to be fair or simply gouge the middle class, because the rich can afford accountants to find all the loopholes. The FAIR tax is perfectly progressive, but it doesn't tax savings and shouldn't. We don't care that the rich "escape taxes" by living modestly, do we? Don't we only become envious when they live lavishly and STILL avoid taxes, like they do in the current system?

The reason they say the rate would "need to be much higher" is because they start at a different place. The FAIR tax people say the revenue neutral rate is 23%, and that prices would drop by that 23% to be "price neutral" to the consumer. The opponents want to start at that 77%-- the new price-- and then claim that the tax on THAT is 30%. I suppose that is actually a better way to say it, since that what consumers will see on their receipts (and presumably be shocked), but it doesn't alter the fundamental economics of the tax nor the huge economic advantages of this admittedly radical simplification.

Anonymous said...


The reason they say the rate would "need to be much higher" is because they start at a different place.

the reason the rate has to be higher is that the single tax has to raise a huge amount of money. Where that burden falls is a complicated question. It depends on things like market elasticity. If demand is inelastic, as it would be for a life saving drug, the burden would fall on the consumer. If it's totally elastic, it might fall on the seller. In any event it would be a hit or miss thing. The tax you might see on your sales receipt would not tell you where the tax burden actually fell.

I have never seen the economic benefit of a fair tax. Henry George's single tax on real estate, had some complicated arguments behind it, but he was taxing one thing, where he thought the real value was. But a Fair tax, obviously is vastly more complex. Who knows what the economic effect of taxing stock sales at 23% would be?

jerrye92002 said...

"the reason the rate has to be higher is that the single tax has to raise a huge amount of money."

No, the "rate" compared to current prices has to be exactly 23% to be revenue neutral, or 30% if you want to talk about the actual tax rate on the reduced "price neutral" price. The fact that this is a huge number simply tells you how wildly out of control federal spending is, and how much of our economy it consumes. The tax would apply to retail, first-time purchase of goods and services. So, stock transactions-- broker fees-- would be taxed, but not the stock purchase. New homes would be taxed, but would sell for 23% less, so net price with tax would be the same as now. Used homes would be tax-free but of course have the same value as they otherwise would have, because the tax would have been paid and would not be paid again. It seems you are trying to make this difficult, when it is really, really simple compared to the current incomprehensibly complex and grossly unfair system we have.

Your concern for stability of government revenue is touching. Would that it applied to stability of government spending. However, it has long been a concern that income taxes swing widely during recessions, while consumer spending pretty much continues on (people must eat). A sales tax is more stable. Will people be inclined to be more frugal and save more? Probably, especially knowing that every investment is an IRA. Will people do more buying of second-hand goods? Probably, and that will enable others to buy new stuff. It's all good. Try as I might, I can't see a downside.

One other thing. We're worried because under the current system the poor pay nothing (unless you count the highly regressive SS tax, eliminated by the FAIR tax) and the rich don't pay the full rate (though they pay the bulk of the taxes). Any notion that the FAIR tax creates "winners and losers" is simply unprovable, because the complexity of the current tax code makes everybody different! Under the new, fair FAIR system, you know exactly how much you will pay, and know that everybody else is paying the exact same rate. It even includes profits from illegal drug sales!

Anonymous said...

No, the "rate" compared to current prices has to be exactly 23% to be revenue neutral, or 30% if you want to talk about the actual tax rate on the reduced "price neutral" price.

I don't dispute the number which is within the range of estimates I have seen. Subjectively, I think of that as high, but I am sure there are people who subjectively see it as low, also.

" So, stock transactions-- broker fees-- would be taxed, but not the stock purchase."

And of course, that's the problem. What gets exempted from the universal sales tax? Stuff poor people buy like diapers get taxed, but stuff rich people buy like stocks does not.

" It seems you are trying to make this difficult, when it is really, really simple compared to the current incomprehensibly complex and grossly unfair system we have."

It is incredibly complicated, among the most complicate tax changes that it is possible to imagine. To paraphrase the brilliant insight of Nancy Pelosi, we wouldn't even begin to know what's in it, until it came into effect.

The world is complicated. You can't simplify it with a process change.

--Hiram

Anonymous said...

"We're worried because under the current system the poor pay nothing (unless you count the highly regressive SS tax, eliminated by the FAIR tax) and the rich don't pay the full rate (though they pay the bulk of the taxes). Any notion that the FAIR tax creates "winners and losers" is simply unprovable,"

The reason why the poor don't pay taxes is that they have no money. What I worry about is that the poor are poor, not that they are unable to pay taxes.

I have to say, why do people believe it's efficacious to tax people who don't have money? That's another thing that baffles me about Republicans.

--Hiram

Anonymous said...

"However, it has long been a concern that income taxes swing widely during recessions, while consumer spending pretty much continues on (people must eat). A sales tax is more stable."

That's why you have diverse source of taxes. It's the argument against single tax systems.

--Hiram

Sean said...

Prices would only drop 23% if wages also drop. It all has to move together in order for it to work, there's no free lunch.

FairTax folks also forget that by applying the tax to government purchases, they're actually implicitly raising spending at all levels of government by about $1.3 trillion (based on a 2007 analysis, would be higher now).

Anonymous said...

Prices would only drop 23% if wages also drop.

Arghh.

Why in the name of Adam Smith do you think wages are linked to prices? Do you ask the cashier at Target how much she makes an hour and then base your decision as to what to pay for tooth paste based on that information?

Prices are determined in lots of different ways. It is beyond impossible to effectively generalize what the impact of a fair tax would have on any price of anything, and that includes the price of labor. Boy, does it ever.

--Hiram


jerrye92002 said...

"why do people believe it's efficacious to tax people who don't have money?"

Gee, I don't know, why don't you ask the creators of the current income, social security, property, sales and assorted other taxes, namely Democrats? Even the AFL-CIO says, with their "tax incidence study," that the poor pay a higher percent of their income in taxes, counting all taxes, than do the rich, and that the middle class actually fares best. The FAIR tax changes that by, first of all, combining all of the federal taxes into a single, simple rate, and then simply exempting the poor from it entirely, making the whole system "perfectly progressive" above that point.

jerrye92002 said...

"What gets exempted from the universal sales tax? Stuff poor people buy... "

You're not understanding again. NOTHING is exempt, so long as it is a first-time sale of goods or services to the end customer. What the FAIR tax DOES is exempt the PERSON from tax. Everybody pays it, but everyone gets back the amount of tax they would pay if they spent at the poverty level. So, Bill Gates gets back the same 23% of the $21,000 that a poor couple would spend on necessities, just the same as any poor couple would.

jerrye92002 said...

"That's why you have diverse source of taxes. "

No, we have many different taxes because a) people would scream if they knew how much in total was being taken from their paychecks, and b) the politicians keep trying to make the tax "system" "fair" by taxing all kinds of things unfairly. Why, for example, do THEY (not "we") so often raise cigarette taxes? Is that fair to cigarette smokers?

What do you suppose would happen if we simply stopped federal tax withholding, and made people write one big check on April 15th? One thing about the FAIR tax is that people would suddenly see a HUGE increase in take-home pay, and then a BIG tax on everything they bought, even though net prices would be the same. Politicians would HATE that.

Anonymous said...

why don't you ask the creators of the current income, social security, property, sales and assorted other taxes, namely Democrats?

I should think my answer would be obvious enough. It isn't. And of course it's true. The poor pay lots in taxes.

"we have many different taxes because a) people would scream if they knew how much in total was being taken from their paychecks, "

I hear that a lot. It's an argument that goes back to the decision to withhold income taxes back during WW II. Annette Meeks argued it in the Strib, when she in effect argued that the taxpayers in Minnesota would rise up in revolt if one day they became aware that repairing roads wasn't free.

Maybe, but that's neither hear nor there. Stuff must be paid for.

--Hiram



Anonymous said...

What do you suppose would happen if we simply stopped federal tax withholding, and made people write one big check on April 15th?

Hard to say. Is this the way we should think of it? Do we receive governmental services one day a year? Do we send our kids to public schools one day a year? Do we only drive on roads paid for by taxpayer dollars only one day a year? Does our military only serve our country on April 15th?

--Hiram

Sean said...

It's obviously not a 1:1 wages to price linkage, but prices are in part dependent on the costs of the inputs required to provide a product or service. If FairTax people assume that the 23% is built into the price a company charges at retail, it's also built into what the company is paying for the inputs, wages included.

Sean said...

"making the whole system "perfectly progressive" above that point."

I don't think you understand what a progressive tax code means...

Anonymous said...

"but prices are in part dependent on the costs of the inputs required to provide a product or service. If FairTax people assume that the 23% is built into the price a company charges at retail, it's also built into what the company is paying for the inputs, wages included.

Before you conclude that, ask yourself how often you look at the cost of input before you decide how much to pay for something. I go to movies a lot, and one thing I have noticed is that the ticket price doesn't vary with the cost of the movie. When I buy tooth paste, I don't ask for an itemized list of ingredients and their associated costs.

This isn't always the case, but think about how often this is the case. Prices aren't determined by adding a percentage to costs of production. Prices are determined by the laws of supply and demand, and those things are not linked to costs of production. If the only price a manufacturer can get is below the cost of production, he will sell it to you at the price, because he knows the only two alternatives to that are selling it for less, and just throwing it away.

"I don't think you understand what a progressive tax code means..."

I really, really don't, but I make stuff up a lot as I go along. What progressivity in taxation has been commonly accepted to mean is that the higher the income the higher the taxes paid, and a higher tax rate is paid. My own view of progressivity would discard the business about the higher rate, and least when trying to understand the issue. For one thing I don't believe that higher tax rates means higher taxes.

I pulled the term "perfect" progressivity out of a hat this morning hoping no one would notice. I haven't heard anyone else use, and that includes me before I invented it. What I meant by that was that all people would pay the same tax as their income own income levels. But under the status quo, this is nothing like the case. Without going into a lot of detail, people with the same amount of dollars pay widely different amounts in taxes for a multitude of reasons. That's not going to change, but it certainly is in conflict with the notion that our tax system, as it works out in the real world is progressive. Sometimes it is, sometimes it isn't. Much of time we can't even tell.

--Hiram

Sean said...

The fact that, as a buyer, I don't know the cost of the inputs myself doesn't mean they don't impact the price or the supply/demand for a product or service.

And, yes, while it's true that a producer will sell out their current inventory for less than the production price if that's the only way to get rid of it, if a company can't consistently sell something for more than what they make it for, they will stop producing that product.

I believe the larger point regarding the falseness of the claims made by FairTax promoters still stands.

My comment regarding "perfectly progressive" was directed to Jerry.

Anonymous said...

"I don't know the cost of the inputs myself doesn't mean they don't impact the price or the supply/demand for a product or service."

How can factors of which you are unaware affect decisions you reach? Which one does cost of production affect? Supply? Or demand?

==Hiram

Anonymous said...

I should also note here if that prices are linked to costs of production, how is it possible that things that have no cost of production can still have a price? Indeed with respect to such items, it doesn't even occur to anyone that the fact there are no costs of production is a problem in establishing a price.

--Hiram

Laurie said...

The tax discussion is too wonky for me so I am going back to something more closely related to the original topic.

I finished watching Atlas Shrugged, which I found both entertaining, yet also stupid. Rather than change my views in any way, it clarified my liberal viewpoint. While the movie mostly focused on an inept and corrupt govt, it left me thinking about who are the makers and takers. To me all the Walmart employees and also Chinese factory workers are the makers and the Walton family are the takers.

Whenever I visit the J.J. Hill house I get annoyed by discussion about how he built the railroad with no mention of the thousands of workers who contributed all the hard labor.

Sure the CEOs deserve more than their workers, for me it is a matter of how much more. I shop Target, rather than Walmart, and if there was one closer I would shop Costco.

Laurie said...

Here are some links I found interesting that seem related to the topic to me:

My Kinda Sorta Non-Review of Thomas Piketty's "Capital in the 21st Century"

Capital in the 21 Century: Still Mired in the 19th

jerrye92002 said...

"Prices would only drop 23% if wages also drop." Wrong.

Prices will drop by 23% because, at every step of the production, NOBODY pays out any taxes. No corporate taxes, no income tax withholding, no FICA taxes (that's 14% right there). And workers take home their ENTIRE take-home pay. So "apparent" wages actually go up while prices come down. All of the taxes get added back in at the very last step, at the retail sale. You don't think that 100% of product cost is wages, do you?

jerrye92002 said...

"I don't think you understand what a progressive tax code means... " -- Sean

What I mean by a progressive tax code is that each successive dollar is taxed at a slightly higher rate than the previous. That is the current liberal definition of the term. When I say "perfectly progressive" I mean that, literally, each dollar of additional spending actually increases the effective tax rate (no "brackets,") and the lack of deductions, credits, exclusions, etc., etc. means that EVERYBODY pays that rate.

Sean said...

"You don't think that 100% of product cost is wages, do you?"

No, I don't. But, in many industries, it's a critical component.

Below is a link to an article by a former Reagan Administration official that talks about many of the problems with the FairTax, including the wage issue. It's a good read, although wonky.

http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf

jerrye92002 said...

"Stuff must be paid for." -- Hiram

Not according to Democrats in Congress. They think they can spend whatever they want because they've got your grandkids' credit card.

And it wouldn't be bad except that we don't NEED all that "stuff," and we ought to be buying it on sale, not at Neiman Marcus markups.

jerrye92002 said...

"Sure the CEOs deserve more than their workers, for me it is a matter of how much more." -- Laurie

You are free to base your shopping decisions on anything you like, I hope. But the one thing I refuse to do is to allow the notion that somehow GOVERNMENT is the one who decides how much money anyone is "allowed" to make. Government already thinks they can set a minimum wage without consequences like lost jobs and higher prices. How would you feel if the minwage were $9.50 and government set a max wage of $10? Would that be fair enough to suit you?

jerrye92002 said...

"FairTax folks also forget that by applying the tax to government purchases, they're actually implicitly raising spending... " -- Sean

Since the tax is set so as to be price neutral, it would do no such thing. Of course, the federal government would be paying taxes to itself on any goods and services it purchased at "retail," but my guess is that is a small fraction of total federal spending.

jerrye92002 said...

"Is this the way we should think of it [payroll withholding]? Do we receive governmental services one day a year?" -- Hiram

OK, then let us each write a check once a month. Most of us don't care about money we never see, but make it "real" like this, where you have it in your hands and have to write the check, and you DO care. That's the point. I'm reminded of the young man who came home from work with his first paycheck, and angrily asked his father, "Who is this FICA guy and why is he getting all my money?"

jerrye92002 said...

Mr. Bartlett obviously doesn't understand the FAIR tax. While he has some valid concerns, he completely overlooks price neutrality, and insists mightily that Congress will never allow it to be passed as intended. The first is a common criticism but completely irrelevant and unworthy of a man of his learning. The second is a very big concern, but, after all, that is why the concept is so attractive, because Congress CAN'T "tinker" with it to claw out millions of little exceptions for their friends and campaign donors. One estimate is that 70% of the lobbyists in D.C. would be eliminated, because without these tax code "favors" they have nothing to work for.

Anonymous said...


Prices will drop by 23% because, at every step of the production, NOBODY pays out any taxes.

Again, costs aren't necessarily linked to price. For example, a seller of a life saving drug will simply allow the price to increase 23 percent because his customer must buy his drug.

I have a list out there, of things that baffle me, and one of those things is how people who proclaim the virtues of markets have so little understanding of how markets work and the different ways they work. People who will explain to you the wonders of the laws of supply and demand, will almost in the next sentence tell you that prices are determined on a cost plus basis.

Cognitive dissonance anyone?

--Hiram

Anonymous said...

Not according to Democrats in Congress. They think they can spend whatever they want because they've got your grandkids' credit card.

It's our credit cards. They have just been borrowing it to pay for stuff.

We all know stuff isn't it free. It's just that Republicans have convinced themselves that Democrats under the illusion that things are free, and it literally freaks them out. I was struck by Annette Meeks' column in the Strib on Monday. She feels that the way we tax ourselves to pay for roads is insufficiently transparent. Her belief is that if we actually knew how much we paid for roads we would, well I don't know what we would do. It's not as if road repair can go unpaid for. With my belief with Annette is that the reason she thinks there is a problem with transparency is because she happens to be wearing blinders.

By the way, I do understand the other side of the argument that taxes should be paid once a year and not pay check by paycheck. If my employer had to pay me once a year, I have no doubt at all that the number on the check would send him to sticker shock.

--Hiram

Anonymous said...

What I mean by a progressive tax code is that each successive dollar is taxed at a slightly higher rate than the previous.

Interesting definition. Actually, if it did work, That's what our bracketed system would do. I don't have the exact numbers before me but let's say the second highest bracket is 35 percent topping out at 4000,000, and the highest tax bracket is 39 percent is applied to income above that. I am roughing the numbers here, but basically what that means is that with every dollar the earner makes over 400,000, which is taxed at the higher rate his effective tax rate moves but never quite reaches 39 percent. For whatever that's worth.

--Hiram

jerrye92002 said...

But that is "stepwise progressive," not "perfectly progressive." And as you point out, NOBODY pays the nominal tax rate, FAR from it.

Anonymous said...

But that is "stepwise progressive," not "perfectly progressive."

Although the tax code has brackets, as it applied the rate of taxation in the highest bracket does increase slightly with each dollar earned.

--Hiram

jerrye92002 said...

Dang, you are correct! I should have checked the math. That still assumes that every dollar is taxed at that "nominal" rate, though, which as we all know and have complained about, is not the least bit true, and not the least bit fair. My other complaint is that, if it WERE true, it would be hugely unfair to rich and poor alike. The rich should pay more actual taxes, but not at a higher nominal RATE, which is now the case. And the poor should not be paying at the lower nominal rate, because they (at least supposedly) have no "disposable income" and need every penny just to keep food on the table. The FAIR tax solves both problems handily.

Anonymous said...

That still assumes that every dollar is taxed at that "nominal" rate, though, which as we all know and have complained about,

yes that's very much of an assumption. The fact is we tax dollars in wildly inconsistent ways. The problem is that it's really hard to tax dollars uniformly, when they are received in uniform ways, often not even in the form of dollars.

--Hiram

jerrye92002 said...

That's why it makes some sense not to make from whence the dollars come, nor to whom, the basis for the tax system. Taxing them when they are spent on consumption is vastly less complex all the way around. Having just filed, I can attest that our current system is incomprehensible, and if I never had to file again, it would be a boon.

Anonymous said...

That's why it makes some sense not to make from whence the dollars come, nor to whom, the basis for the tax system. Taxing them when they are spent on consumption is vastly less complex all the way around.

The whence they come from is the whom. The Fair Tax would be enormously complex to implement, and no one has any idea of what the impact on the economy might be. We do note that our current economics struggles are the result of insufficient demand. People aren't buying enough stuff. Consumption is depressed. How would adding a huge tax to what we consume help with that?

--Hiram

jerrye92002 said...

"The Fair Tax would be enormously complex to implement, and no one has any idea of what the impact on the economy might be...."

You're talking through your hat. It would not be complex at all. 45 states already impose a sales tax, so the mechanism is already there. We would go from having 100 million individual income tax returns filed down to 1 million sales tax returns, from only the retail outlets. And the filings would be vastly more simple compared to current corporate tax forms that deal with all of the exceptions, exclusions, etc. The impact of the FAIR tax has been thoroughly studied and the proposed rate is both revenue-neutral to the government and price-neutral to consumers. The other economic effects are to eliminate the roughly $300 billion in compliance costs with the current system, improved compliance with the new system (even drug dealers buy things), new incentives for savings and investment that will grow the economy, automatic reform of the Social Security system, and dropping the cost of our exports by 23%, making us newly competitive in the world markets.

As for consumption being adversely affected, you're still thinking like a Democrat. There is no increase in the total cost of goods! The sales tax applies only after all other taxes have been removed from the supply chain, so this new tax is price-neutral. And with people taking home the full value of their paycheck, there will likely be an incentive to buy MORE. Why anyone would want to continue to object to a reform they don't understand just to defend the current system is simply beyond me.

Anonymous said...

It's a completely different animal. Battles will have to be fought over everything. What I find interesting is how blithely it is assumed that a 23% tax won't affect prices. It will, for reasons that are pretty obvious. If you have a product for which there is an inelastic demand, like a life saving drug, You will simply mark the price up 23 percent. Prices for stuff, gas for one, are often determined in global market places. It too will simply be marked up 23 percent. These kinds of interactions will occur everywhere, often with less visible results. It will be very difficult in just about every case to determine where the tax burden lies.

A friend of mine, a conservative economist, is very critical of centralized planning. I am not actually sure what bothers him more the planning or the centralizing of the planning. In any case, whatever the virtues of decentralized planning, it does, like the fair tax, aid in the shifting away responsibility for unpopular things from politicians, something all politicians really like.

--Hiram

jerrye92002 said...

"What I find interesting is how blithely it is assumed that a 23% tax won't affect prices."

What I find interesting is how blithely people ignore the fact that there is a hidden tax of 23% on everything they buy today, because everybody's taxes are added to the price charged the next consumer in the supply chain. If all of those taxes are removed, as they MUST be before the FAIR tax becomes effective (it's written into the legislation), then prices drop 23% before the new sales tax is added. PRICE NEUTRAL.

Anonymous said...

What I find interesting is how blithely people ignore the fact that there is a hidden tax of 23% on everything they buy today, because everybody's taxes are added to the price charged the next consumer in the supply chain.

We don't know what the impact on the supply chain might be. Presumably everything everybody buys along the way will be subject to the tax, or is that another exemption to be carved out of a supposedly universal tax? Lawyers would have a lot of fun with that.

More generally, taxes like a lot of other things a cost of doing businesses, and like all costs, if businesses can pocket a reduction rather than passing it along to their customers, they will.

--Hiram

jerrye92002 said...

"Presumably everything everybody buys along the way will be subject to the tax, or is that another exemption to be carved out of a supposedly universal tax?"

Yes, the tax is universal, and NO, there will be no taxes collected "along the way," because this is a RETAIL sales tax. I inquired about that, specifically, because of the way my house was built. Some of the material the workmen bought, and added into the cost of the house. Some of the material I bought directly. The material the workmen bought would NOT be taxed, because their price to me for the home would be taxed. The stuff I bought WOULD be taxed, because I am the retail customer. So the price of the house is the same either way, whether I buy all the material, or let the carpenter buy it, and it's the same price as it would have been under the existing system. Very simple.

I understand the concern that some businesses would continue to charge their old price and pocket the extra 23% profit. Since liberals have done so much to suppress the competitive free market, there may be a bit of that, but most consumers are going to be put off by a sudden 23% jump in price.

Anonymous said...

the tax is universal, and NO, there will be no taxes collected "along the way," because this is a RETAIL sales tax

So people who buy and sell stuff not at retail aren't taxed. Good deal for them.

--Hiram

jerrye92002 said...

That is correct. Those buying materials to be built into other things-- companies or craftspeople, do not pay the tax, but charge it to their end-users or retail customers. If they sell to someone later in the production cycle-- business to business-- there is no tax. If you sell your house or car, there is no tax, because it's used and the tax has been paid. The price of second-hand goods will not go down, however, relative to new, so there is no tax advantage to buying second hand, just the normal savings as you find today.

We get back to a system in which economic decisions are based on what is best for the individual making them, rather than on the tax consequences of the decision.

Anonymous said...

We get back to a system in which economic decisions are based on what is best for the individual making them, rather than on the tax consequences of the decision.

Believe me on this, taxing retail sales will have an extraordinary affect on how people make decisions. As I understand it, the fair tax will not apply to used goods, which will have a huge impact on the durable goods market. When you are talking about a 25 percent cost savings, practically every transaction will revolve around ways to avoid it, legally, and illegally as well.

--Hiram

jerrye92002 said...

I repeat. Used goods will sell for the same relative cost to new as is currently the case. The tax was paid once on the used item, and doesn't get charged again. The new item has the tax charged. There will be absolutely nothing like the number of people that invested in the cattle business because of the tax breaks and ONLY because of the tax breaks.

Anonymous said...

Used goods will sell for the same relative cost to new as is currently the case.

That would be the way it works. Which means that the seller of the used goods gets 23 percent dded to his profit margin, because he doesn't have to pay tax and his competitor selling the same thing new, does. The fair tax is a subsidy to flea markets.

--Hiram

jerrye92002 said...

"Which means that the seller of the used goods gets 23 percent dded to his profit margin,"

Not even remotely correct. The person who bought the used goods either paid the current "inflated" price (that includes all the intermediate taxes), or they paid the new "price neutral" price and the 23% tax. Either way, they paid for that item, when it was new, exactly what somebody who buys a new one would pay. When they sell it, they cut the price below the new (price + tax) price because it is used, just as they would today. The balance between new and used commerce would be exactly what it is today. And a sales tax is a lot more difficult to avoid than is an income tax with 70,000 pages of exceptions and loopholes.