Simon you are right by saying "earnings" and "income" are different. Let me try to explain this a bit more though.

A 10% tax (easy number for the example) on everything that you get in money and gifts over a certain value during that year already has your inheritance tax built in. When Paris's parents give her gifts the value is taxed 10% and when they die and give her money that will become part of her money it will also be taxed 10%.
As for investments (excluding selling the house you live in to move into one you just bought) a 10% would be placed on the positive net of your money. Example: You put $10,000 in the stock market and you later sell them for $100,000. You pay 10% of $90,000 because the initial money was already taxed. I supposed that investment like government bonds would be exempt too.
Your other point about the rich becoming powerful politically can be a problem, I ask if this takes into account the fact the not all rich people have the same political objectives? There are rich people pouring money into the liberal and conservative sides and many times their dollars cancel each other out. The elections are decided by the non-rich voters who hate all those tv ads the rich people pay for. As for the special interest groups that do something illegal the bloggers will put out a story that shocks the nation again hurting the side that was doing something wrong. If the special interest groups aren't doing something illegal then the other side gets their own special interest group to negate the first. If one special interest group starts to fails at negating the other group they pour more money into the system. When the political pendulum swings the other way, which it always does, the other group pours more in money. If this causes problems, which it usually does, then a law should be enacted to limit the amount of money that can be put into politics.
Anything else and I love to respond.

Rich people don't all have identical political views, but they tend to have a commonality of interests - specifically maintaining their positions of wealth and power. Political views are clearly not divided evenly across classes. Left-wing parties generally receive much less funding from rich people than right-wing parties (I can search for some figures if anyone doubts this).

There's also always the Robespierre option.

Lefties usually have less money than righties. In terms of elections, this doesn't matter at all, as it has been proven that after a minimum amount of finance, one campaign can have significantly more money than the other and it doesn't affect the results.

It's the behind the scenes stuff that can be affected.

The almighty Wikipedia speaks!
http://en.wikipedia.org/wiki/Poverty_in_the_United_States

Poverty level on a 2 person household is $13,200. Higher then $10,000, but hardly enough to make much difference. Also, the actual average Household income is $53,100. $43,000 is the median income. Since the average household is 2.69 and not 2, we'll add .69 people per the guidelines in the above link, which is $2,346.

This will render the % GDP bound for prebates as 29.2%, a fairly significant difference.

In another stupid cockup, the difference between nontaxed government spending and total spending in GDP terms is 13.2% NOT 11.2%, where 2.8/13.2 Trillion yields 21% Govt spending, meaning that after the interest deduction, the total is 12.8%.

Fair warning, this would increase overall taxes anyway since it produces enough to satisfy the budget, ie. no deficit.

r(GDP) - ((r) * .292GDP) = (1 + r).128GDP + .078GDP

rGDP - r.292GDP = .128GDP + r.128GDP + .078GDP

(Just divide out GDP and sum the vars in one step.)

.580r = .206

r = 36% sales tax.

Let's see if the upped prebate makes any difference.

Mr. and Mrs. Poverty. We'll keep them under the extreme pressure of a $10,000 income, and state that they have $9,235 in expenses. Now, the poverty threshold for FOUR is $20,000, and they will get 36% of that as their prebate, or $7,200. Their preceding expenses go up to $12,559.60, leaving them $4,640.40 more then they had, although this has a PP of $3,412.06. That's a significant improvement for the really poor.

Mr. and Mrs. Median. Pretax income of $40,000, expenditure of all post tax expenses at $36,495.26. Their prebate is now $7,200 for a total of $47,200. Total expenses are now $49,633.55. This means they lose $2,433.55, although this is only a PP of $1,789.38. That is still 4.4% of their old income.

DL and LJ had $120,000 in income, $50,000 in expenses and $40,280.18 in disposable income. Their prebate, having no children, is only $4,752, their expenses have shot up to $68,000. They now posess a surplus of $56,752, but this has PP of $41,729.41 meaning they have gained $1,449.23 in purchasing power. This is only ~1% of income.

BH and Small boy had $120,000 with $90,280.18 in expenses. Same prebate. $124,752.00, expenses now $122,781.04, leaving a gain of $1970.96, which is $1,449.23 in PP. Identical to the more responsible couple.

Lawyer #1 $500,000 with $200,000 in spending. Old disposable income is $149,233.86. This family has 5 children, and thus their cost of living is $30,200. (See above link.) This yields a Prebate of $10,872. New income is $510,872, with the expenses trending up to $272,000. New disposable income is $238,872, $175,641.18 PP for a net gain of $26,407.32.

Lawyer #2 $500,000 with $350,000 in spending. Old disposable income is -$766.14. New income is $510,872, with the expenses trending up to $476,000. New disposable income is $34,872, $25,641.18 PP for a net gain of $26,407.32. Again, no difference.

Lastly, we'll take another look at our elderly couple. Their old pretax income was $27,909.52 leaving $26,022.52 disposable, of which $20,000 is spent. With the the prebate set $4,752, their new income is $32,661.52. $27,800 is their new expense and this means they now have a disposable income of $4,861.52, $3,574.65 PP and a $3,774.39 loss in purchasing power.

Clearly for any kind of fairness to seniors, social security needs to have a cost of living increase.but that's bad for just about everyone else. Vis-a-vis, we move about 4.5 percentage points from fixed costs over to variable costs.

r(GDP) - ((r) * .292GDP) = (1 + r).173GDP + .033GDP

rGDP - r.292GDP = .173GDP + r.173GDP + .033GDP

.535r = .206

r = 39% sales tax.

If we take Malice's advice and move the GDP cost of living percentage for the Prebate up to 50%, then things are going to get really ugly.

r(GDP) - ((r) * .5GDP) = (1 + r).173GDP + .033GDP

rGDP - r.5GDP = .173GDP + r.173GDP + .033GDP

.327r = .206

r = 63% sales tax.

The interested party can plug these rates into the numbers above, remembering to up Social Security benefits in proportion to the sales tax for the elderly couple. But I think I have enough info to describe how the FairTax Gains/Loss function works. There two graphs to worry about. The 1st is for wage earners, the second for fixed income retirees. Imagine an X/Y graph where Y is the money saved by FairTax and X is the income level.

On the wage earners graph the curve starts at X = 0 and Y = Prebate amount. It then descends towards 0, and crosses the X axis at the point where the Prebate is equal to the amount that the income tax equivalent of the sales tax rate exceeds the sum of the former income and payroll taxes. It then continues to drop until it turns back up and then hits the point where the old income and payroll tax are less then the sales tax's income equivalent by the amount of the prebate. The curve then goes up again, peaking at or about the the point where the old income and payroll tax combo peaked, perhaps 45% at best. It then starts to curve back down towards the limit of the old Alternative Minimum Tax. If the old AMT is less then the income equivalent of the sales tax, 28%, as it almost certainly is in this case, then the the line will recross the X axis and the super rich will begin paying more in direct proportion to their incomes.

The seniors have it MUCH harder. Assuming they have no Social Security or Medicare income, or personal retirement resources of any kind, the system is a godsend since it means the Prebate gives them an income. But, even if Social Security gets ratcheted up in proportion to the tax, the line will go screaming through the X axis just after the lost purchasing power exceeds whatever meagre income tax they have recouped plus the Prebate, and the curve is going to keep right on going that way until the various old federal tax receipts exceed the income equivalent of the sales tax rate. With a sales tax rate much above 40%, this will never happen.

So with the standard FairTax deployment, the destitute get some advantages, as do the upper echelons of the middle class and low to middle portion of the upper class. The super rich get hit to some extent, but the hit isn't quite as much to them as it is for the lower class and the lower portions of the middle class. The biggest losers are the retired.

As the base of the Prebate goes up, each graph is pushed somewhat to the right and the lines on the wage graph get pulled down and flattened out a bit. Eventually both do achieve a degree of progressive redistribution, by which point the lower classes and poorer seniors are getting all the benefits and the middle and upper classes are taking all the flack. But the rate will be quite huge by that point.

I think this should end any argument for the FairTax as a viable alternative, unless someone can demonstrate a serious flaw in my math.

I will post my own thoughts on tax reform later.

The only other point that I can easily come up with (economic math makes my head hurt!) is that your examples assume that prices will not change beyond the addition of the Fair Tax. At best, that makes your examples short-term, not long-term.

OK, price decreases could only come from 3 sources:

1) Deflation, which is not entirely likely under the present circumstances.
2) A boost in productivity brought about by ongoing investment.
3) The distribution of the 95% tax administration savings accross the whole of the economy. Assuming you get the full 2% knockdown as advertised, I think it would bring prices down 2-3%, but that would not be enough to counteract the crippling losses of retirees.

The FairTax relies on option 4, Leto: The Invisible Hand of the Market. The idea is that, with lowered employee costs, businesses will lower prices of their own accord.

Of course, I think the IHM is horse hockey, but YMMV.

I'd be curious to see figures and sources. You have to assume that the rich are well educated, and I've always heard some strange sources state that the academic world is a bastion of liberalism (of course, that would be heard from conservatives that are unhappy with what they see).



If all products are taxed heavily, and investment is not (I haven't looked at the website, but have seen no discussion of it) I could see it decreasing consumption, increasing savings. The consequences could be...interesting.

I think people REALLY misunderstand the Invisible Hand. At least according to my own reading of Adam Smith, and I have yet to study Ricardo in any detail, the "Invisible Hand" is much the same kind of thing as "Mother Nature" or the process of evolution, although I doubt Smith would have conceived of it in those terms.

It's an algorithm running on a massive distributed system in which vast numbers of individual administrative decisions combine to create a genetic profit solution to each instant's economic matrix. Each solution is self selecting, and since change is propagated by cultural imitation by individual intelligences of that Matrix, rather than the slower means of reproduction, the adjustments are quite rapid.

So the considerations pertaining to the maintenance of a healthy ecosystem are exactly the same as those pertaining to the maintenance of a healthy market economy. Diversity is key, in order to ensure that the system is maximally adapted to sudden changes. (Which why centrally planed economies are always such miserable failures, not enough chefs in the broth.)

Smith seems to have been intuitivly aware of this, and spent a lot of his time on the history of the economic development of England on the limitations imposed on development by the excessive power of the nobility prior to their near extermination during the Wars of the Roses and under the Tudors. (Hard to trade with the next town when there's a hostile army between you and them.) He furthermore discussed the declining importance of the remaining aristocracy and gentry because of their overconsumption of luxuries. His point was that the old lords, through generosity towards their retainers were able to wield considerable power at little cost, while the present aristocracy frittered away their income on manufactured items and luxuries, and thus had much less power and influence. He then went on to observe that although the feudal hospitality was more virtuous in the traditional sense, this modern consumption was actually more beneficial to the public at large, and therefore in a way more virtuous.

(That's the closest he EVER came to saying "Greed is Good" as far as I can tell.)

At any rate, the Invisible Hand doesn't create investment, it merely directs it to where it is most needed. (For example, if I invented a Fusion Reactor that produced energy more cheaply then coal, my first order of business would be to set some up in NYC and LA, where the need, and the profits, would be the greatest.) And one of things I thought I demonstrated is that the FairTax does not encourage investment. It redistributes money from some classes of society to others, but it does not make any of the beneficiaries more or less likely to save or invest. The benefit accruing to a middle class family that is very frugal is exactly the same as one that is not. And further, since vests investment capital in fewer hands, it actually dilutes the strength of the free market.

I don't recommend a discussion of inefficient monopolies while talking about "The Invisible Hand"

Any kind of modern monopoly will do; Adam Smith wouldn't have known a self-enforcing monopoly if it battered him about the shins with a cricket bat. The kind they had then was top down and inefficient; and wouldn't survive free competition. Which is a microcosm of the entire problem with pretending that Smith is particularly relevant; the book he wrote describes an economy that is completely dead and gone now. Any conclusions drawn from observing it's behavior can only be germane to today's economy by accident.

Ermmm... Duke Leto's turn to be frustrated.

4) The current taxes on businesses being nullified, prices can lower to compensate, since currently those taxes are passed right along to the consumer. (Alternatively, incomes will rise to compensate, since currently those taxes are also passed along to the employee in the former of lowered wages. Prices are more likely, though.)

BreadCo makes and sells bread. Sales are 100,000,000 loaves per year. Each loave costs 90 cents to make (40 for ingredients, 50 for labor). They want to sell each for 1 dollar.

Unfortunately, the tax rate is at least 35%. (I ran the numbers through a tax form, and that's what I came up with; however, there are a few other possible taxes. We'll stick with this number.)

This means that each loaf must cost $1.54 instead of a dollar. That's a 54% increase.

Now put in the FairTax (we'll try your 36%) and remove the business tax. $1.54 + tax = $2.10.
Before the company does anything, they're making $15,400,000 profit, whereas before they were making $10,000,000 profit.

The company has a decision to make. They can keep the price the same; or they can lower the price. All of their competitors have about the same price (bread costs about the same to make). The company can drop their price all the way down to, let's say, $1.10. Now they're making twice as much profit as they did before the tax change (20 cents instead of 10 on every loaf). With tax, that's $1.50--60 cents lower than any competitor. People will start buying that bread instead of competing bread--why pay over 2 dollars when you can get it for a buck-fifty?

Now the situation is: the company's situation has improved dramatically (100% more profits than before the FairTax; and a huge market share, at least until the other companies pick up the slack, which will still probably lead to some growth due to brand loyalty and such). The consumer's position has improved as well, because now they have more income (due to the FairTax) and are buying bread at even cheaper than it used to be. Their buying power has improved.

Bread's looking at a 3% decline in price; let's generalize across the board with that one (not a terribly bad assumption, considering that corporate tax is generally the same).

Your examples, with modified expenses.

Mr. and Mrs. Poverty. We'll keep them under the extreme pressure of a $10,000 income, and state that they have $9,235 in expenses. Now, the poverty threshold for FOUR is $20,000, and they will get 36% of that as their prebate, or $7,200. Their preceding expenses go down to $8,957.95, leaving them $8,177.05 more then they had (not counting purchasing power parity). That's a significant improvement for the really poor. That's an 82% raise on their old pre-tax income, in fact.

Mr. and Mrs. Median. Pretax income of $40,000, expenditure of all post tax expenses at $36,495.26. Their prebate is now $7,200 for a total of $47,200. Total expenses are now $35,400.40. This means they gain $11,799.60 (not counting PP). A gain of 29.5% on their old pre-tax income.

DL and LJ had $120,000 in income, $50,000 in expenses and $40,280.18 in disposable income. Their prebate, having no children, is only $4,752, their expenses have shot down to $48,500. Old income after taxes was $90,280.18. New income is $124,752. Disposable income has gone from $40,280.18 to $76,252, a gain of $35,971.82. That's like getting a 30% raise on their old pre-tax income.

BH and Small boy had $120,000 with $90,280.18 in expenses. Same prebate. $124,752.00, expenses now $87571.77. Old post-tax income was $90,280.18; new income is $124,752; this results in a gain of $37,180.23 (not counting PP). This is like getting a 31% raise on their old pre-tax income. Being so irresponsible, they'll probably spend all of the surplus, further stimulating the economy.

Lawyer #1 $500,000 with $200,000 in spending. Old disposable income is $149,233.86. This family has 5 children, and thus their cost of living is $30,200. (See above link.) This yields a Prebate of $10,872. New income is $510,872, with the expenses trending down to $194,000. New disposable income is $316,872, for a net gain of $167,638.14. This is a raise of 34% on the old pre-tax income.

Lawyer #2 $500,000 with $350,000 in spending. Old disposable income is -$766.14. New income is $510,872, with the expenses trending down to $339,500. New disposable income is $171,372, for a net gain of $172,138.42. This is a raise of 34.4% on old pre-tax income.

Lastly, we'll take another look at our elderly couple. Their old pretax income was $27,909.52 leaving $26,022.52 disposable, of which $20,000 is spent. With the the prebate set $4,752, their new income is $32,661.52. $19,400 is their new expense and this means they now have a disposable income of $13,261.52. That's a gain of $7,239; that's a raise of 26% on old pre-tax income.

---

These are huge increases. Across the board, nobody gained less than 25% on their old pre-tax income.

That leaves me quite a bit of wiggle-room on how much prices will drop. I posited that since the FairTax rate (as calculated by you) would be 36% and that business taxes are currently about 35%, a business could drop prices 3% below their OldTax levels (53% drop total) and still make a healthy profit increase from the OldTax system.
Even if prices stay the same; or go up a little bit; or go up by less than, say, 40%, you're still going to get a significant increase across the board.

Righhhhhttttt.... You've really got an emotional investment in this don't you?

This is the word of the Wikipedia.

The total federal corporate taxes projected for 2007: $260.6 billion.

That is vastly, VASTLY less then 35% of all corporate revenues in the US. I don't even understand how you could believe such a figure for the average corporate tax to be right. The 35% figure goes towards profits, not revenues.

You have to realize now that you're arguing againt yourself. Most of the $265 billion administrative cost figure you cite is paid by corporations seeking to minimize this 35% tax on their profits by means of deductions, investments, and generally making sure that they never have any actual profits to report. To turn around and claim that they are in fact paying the full amount, and in fact 10 times or more then the full amount, and that eliminating these payments will cut prices and increase purchasing power is flat out silly.

Let's check some examples:

IBM - Revenue - $91.4 billion - Profit - $13.3 billion - Corporate Tax - $2 billion (Wikipedia and www.ibm.com) - Effective rate - 15%

Microsoft - Revenue - $44.2 billion - Profit - $16.4 billion - Corporate Tax - $5.7 Billion (Wikipedia and www.microsoft.com) - Effective Rate - the full 35%

I could go on, but let's simply pretend that all US corporations do pay 35% of their profits, and redo your BreadCo example that way.



I'm sorry to be so harsh on you for this one Malice, but it's pretty clear you let your desire to find a fatal hole in my analysis get in the way of getting your facts straight. On the brighter side, the variable you have found a slight mitigating factor, as the expenses increase and purchasing power decrease are slightly mitigated, but I'm afraid you did forget one little detail. As BreadCo cut it's price by 3.4 cents, the fair tax revenue went down by 1 cents or so. If all corporations did the same thing, then we see a decrease in the revenue and the rate must go up accordingly. The graph i proposed is unchanged.