Alrighty, alrighty... I worked for several days on my toy economy before realizing the salient fact that it had nothing to do with anything, since I was modeling a medieval system where the FairTax would have been a marked improvement. (Nobles controlling all the wealth and paying no taxes at all.)
I do however heartily endorse the game I mostly based it on:
Patrician III, the guys at Ascaron are really cool and they even put my name in the credits for help with the translation.
So we have all the tools for an objective FairTax analysis, once I gathered the appropriate numbers.
r(GDP - FederalBudgetWagesandPayments) - ((r) * Cost of Living * Households) = (1 + r)FederalBudgetGoodsandServices + FederalBudgetWagesandPayments
GDP - $13.22 trillion - CIA World Factbook (Don't mess with 'em.)
We had previously established that the US Cost of Living * Households works out to 25% GDP, as the household poverty level = 10,000 and the average household income = 40,000, and it logically follows that avg Household Income * Households = GDP.
For the division of the federal budget into Goods and Services versus Wages and Payments, I had to do some legwork and make some assumptions. There may be some slight variations in numbers with reality, as I had to settle with numbers from 2005 and 2006 in some cases.
First off is Medicare. I am admitting this as a purchased Good and Service. Since the monies paid out by Medicare go directly to pay for medical goods and services, they will either have to go up with the sales tax increase or have seniors left seriously in the lurch.
We have the following stats for Medicare:
Medicare Enrollees: 42.5 million -The almighty Wikipedia
Medicare Payments: $394.5 billion -The almighty Wikipedia
Next Social Security, I'm going to allow that as a payment not increased by the sales tax, for the reason that some recipients pay income (But NOT Payroll) Taxes on their benefits. We will analyze the effect on the "Average" senior couple later.
Here are my figures:
Social Security: $586.1 billion ~The almighty Wikipedia
Social Security % GDP = 4.44%
Social Security Enrollees: ~42 Million. (Extrapolated from scare graph somewhere in the Senate webspace.)
Our last major adjustments are the wages paid out by the fed, which we assume to "fairly" rebalance themselves without need for increase since taxes on them will be eliminated. I was actually under the impression that Federal employees paid no Payroll tax, but I couldn't find any verification.
Military wages:
$ 102,294,000,000 - Office of Budget and Management, DoD Budget summary.
Civilian Wages:
Mean Govt Employee Income: $100,000 - Cato Institute
# of Govt. Employees (Non-military): 1,600,000 - Center for the Advocacy of Latinos in Government Jobs.
$ 160,000,000,000 - You'd think that OMB would have had this somewheres.
I suppose I should have checked for benefit programs as well, but let's not worry just now.
Net Federal Wages:
$ 262.3 Billion
Wages as % GDP ~ 2%
One more adjustment. Since the FairTax abolishes the Payroll Tax, all of the bonds in the Social Security Trust Fund can revert to the treasury, so the Debt is knocked down a notch, and the interest payments to it proportionatly. (We assume that the bonds issued into the trust fund have a mean interest rate proportional to the privately held bonds, but then we're assuming a lot.)
Da Debt: $8,694,902,769,091.18 - Bureau of the Public Debt
Da Trust Fund: $1,994,158,000 - Somewhere or others. Maybe the Social Security administration.
Debt Interest: $243.7 billion or 1.8% GDP - All glory to the Hypno-Wikipedia.
This is irrespective of any changes in the sales tax as
Debt Interest when Trust Fund reverts: $187.8 billion or 1.4% GDP
We will count the portion of the Federal Budget not affected by sales tax price increases as 7.8% GDP.
Since the total Federal Budget is $2.66 trillion, or 20% GDP, the portion subject to sales tax cost increases is 11.2%, but we need to hack off the interest payment reduction, making the total 10.8% GDP
We have all the variables accounted for, but there is one more outstanding item. The formula for GDP is:
consumption + investment + government spending + (exports − imports)
Consumption is what is being taxed, the trade deficit is too minor, proportionatly to be worthy of notice, but investment we haven't accounted for. Obviously, all consumed things are sold at some point or another, BUT not all investment takes place in terms of the direct purchase of capital goods. (Factory equipment, tractors, trucks, computers and so on.) A lot of our investment goes on in house, corporations producing their materials, internal software development. Tuition is also an investment. Housing construction is an investment. Is all of this passing through the sales tax at one point or another? If it IS, then we don't have to increase the tax rate on all other consumption to compensate, BUT we have increased the cost of investment in the same proportion, and investment is the component of the GDP that facillitates economic growth. If it ISN'T, investment costs are fixed, BUT the tax rate on all other consumption must go up in proportion. Furthermore, in the latter scenario, some deduction and reimbursement system must be put in place for Capital purchases, particularly for those items which can be either a business investment or a personal consumable. (ie most computers). And that is exactly the sort of thing the FairTax was intended to eliminate.
After some waffling, I have decided not to remove the Investment portion of the GDP, as I believe that the FairTax's patent unfairness will become clear even without the higher rate.
For reference:
US Investment (gross fixed): 16.6% of GDP ~ Our buddy the CIA World Fact Book.
There is one thing that must be removed from the taxable GDP, and that is the Government spending we have identified as not having been increased by the sales tax. You will have noticed that above. Since the definition of GDP includes Government Spending, I think you should see the logic of this.
r(GDP - FederalBudgetWagesandPayments) - ((r) * Cost of Living * Households) = (1 + r)FederalBudgetGoodsandServices + FederalBudgetWagesandPayments
With our numbers plugged in, the equation is as follows:
r(GDP - .078GDP) - ((r) * .25GDP) = (1 + r).108GDP + .078GDP
r.922GDP - r.25GDP = .108GDP + r.108GDP + .078GDP
(Just divide out GDP and sum the vars in one step.)
.564r = .186
r = 33% sales tax.
That's a smidge more then 23%, and I don't think it can go down.
Now let's use our handy dandy
1040 Tax Calculator and
Payroll tax calculator to run some scenarios. For the sake of simplicity, we are ignoring all non-Federal taxes in this excercise.
Let's look at Mr. and Mrs. Poverty. They have 2 children and have a combined income of $10,000. Let us assume they have no disposable income. They need pay no Federal income tax, naturally.
BUT, they still have payroll to account for, and these net $765.
Their take home pay is $9,235, and assuming our poverty level is at 10,000, they possess -765 disposable income.
Switch over to FairTax. They no longer pay payroll tax, and receive a $3,300 prebate. New income is $13,300, but cost of living is now also $13,300. Consequently their net gain was $765, but Purchasing Power Parity with the pre sales tax dollar, they only made 575.19.
So Mr. and Mrs. Poverty are doing slightly better, but hardly enough for FairTax to be classed as radically more progressive.
Next we see Mr. and Mrs. Mean. They have a combined income of $40,000 and 2 children. We will assume that they have no disposable income after taxes. For simplicity's sake, Mrs. Mean doesn't work. They pay $2794.74 in Payroll taxes and $710 in Income Tax. The after tax income is therefore $36495.26 and their living expenses are the same.
Enter FairTax. $3,300 prebate makes their total income $43,300. Their living expenses become $48,538.70. Mr. and Mrs Mean are down nearly $5,200, ~3,900 in old purchasing power.!
Let's go to Duke Leto and his imaginary wife Lady Jenny. They have no children. He is paid $70,000 as a software developer and she makes $50,000 working in finance. Owing to a ridiculously discounted apartment owned by Leto's dad Old Duke Laertes, and a mutual disinclination to luxury, they live on only $50,000 a year. They have no children and a non-deductible cat. They have just paid her student loans and have no appreciable interest income.
Their pretax income is $120,000. Their payroll taxes come to $9179.82. Their Income Tax is $20,540.00. Less the living expenses, their disposable income, all of which will be invested or saved, is $40,280.18.
The FairTax cometh. Income ticks up to $123,300 after the increasingly irrelevant prebate. Their expenses go up to $66,500. This leaves a disposable income of $56,800, a seemingly significant improvement, except that the actual PPP value is $42,706.77, meaning they only gained the equivalent of $2,500 pre-FairTax dollars.
Change to Baron Harkonnen and his wife, a 12 year old boy. Identical pay setup, but no savings. (Not sure how the 12 year old makes $50,000, don't really want to know.) They spend $90,280.18 a year on various consumable crap. Fair tax hits, boom! $120,072.64 in expenses, meaning their slight gain in new income is almost equal to their prebate, and again only $2,500 in PPP.
Another step up the income ladder. Single income household, lawyer, makes $500,000, 3 kids. Spends $200,000 a year. $6,120.14 payroll, $144,646.00 income tax. $349,233.86 take home pay, $149,233.86 disposable.
Post FairTax, $503,300 income, spending of $266,000, $234,000 disposable. That being $175,939.85in PPP, the only group showing a significant gain of $26,705.99
Let's have Mr. Lawyer living hand to mouth. $350,000 spending becomes
$465,500. $503,300 - $465,500. $37,800 net and a gain of $28,421.05 after the PPP adjustment!
One more test case. Let's have a look a sickly elderly couple on Social Security and Medicare. They are each receiving $13,954.76 from Social Security. (The national average as shown above.) Each gets $9,392.86. from Medicare, which completely covers their medical bills. They have no other income and no savings, and live in an assisted living facility that was partly paid for by the sale of their house, with the $13,954.76 being spent as well.
Here is their income tax: $1,887 of $27,909.52. Leaving $26,022.52. Their expenses at assisted living are $20,000, and the combined Medical bills are $18,785.72. That means they can go out for trips to see the grandkids with their $6,022.52.
Revenge of the FairTax!
Their income is now $31,209.52, but the expenses have become $26,600. This means $4,609.52 in net disposable income, or $3465.80 in former purchasing power. You took money from the elderly! You bastards! Of course the medical bills went up to $24,985.00, but fortunatly I thought to make sure that medicare would go up in proportion, otherwise they'd have to beg their kids for money.
So what have we have we learned?
The Bad about FairTax
1) The FairTax does not function as advertised. It gives a minute benefit to the very poorest, but low income families lose a big chunk of their incomes, middle class families see little or no benefit and wealthier families reap the most gains. It is not progressive.
2) It does not encourage investment. It makes no difference in the investible income of the Middle Class after purchasing power adjustments are made. It is actually more beneficial for the non-savers in the upper classes.
3) It may actually retard investment by increasing the cost of capital goods, particularly if corporations were paying little income tax previously. It may further cut profitability if raw materials costs are not offset by decreases in corporate income tax.
4) It hits seniors very hard if an adjustment is not made for their Social Security benefits, and will be even more hurtful to retirees living off of pensions as well.
The Good
1) It does reduce the national debt by ~20% by cannibalizing the trust fund.
2) It may have the advantage of less GDP productivity being wasted in Tax administration. Whether the administration of the prebate and the distributed management costs of the sales tax will be significantly less is not clear.
That's it.