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Thursday, January 10, 2008

An itemized tax bill 


Arnold Kling adds to my list:
The FairTax also has the oddity of taxing the purchase of a new home but not taxing the purchase or the implicit rent on existing homes.

I've also wondered how the fair tax would affect capital expenditures by business and self-employed. Kling also notes that the US government is so dependent on taxing upper-income savers that a whole hog transition to the Fairtax is implausible. He suggests a hybrid conversion to his own proposed consumption tax:
I do not think it would be prudent to go "full Monty" with the FairTax. However, I believe there is some potential for reforms along the following lines:

1. Abolish the income tax for households with incomes under $100,000. Tax 10 percent of income between $100,000 and $150,000 and 35 percent of income over $150,000. Index these brackets for growth in nominal wages, but otherwise put in mechanisms that freeze the income tax.

2. Abolish the payroll tax.

3. Institute a national sales tax of about half of the FairTax plan. In the future, implement all tax cuts and tax increases through the sales tax, not the income tax.

Roughly speaking, the income tax provides 1/2 of Federal revenues, and the payroll tax accounts for 1/3 of Federal revenues. If we cut income tax revenues by 1/3 and abolish the payroll tax, we would lose in total 1/2 of Federal revenues. Thus, the national sales tax would have to be about half of what it would under the FairTax plan. If Gale's estimate is correct, then the national sales tax would have to be between 20 and 25 percent.

The idea of freezing the income tax while leaving the sales tax up for grabs politically is to try to increase the public's sensitivity to the cost of Federal programs. Right now, politicians can treat high-earners as an ATM machine, always there to dispense cash for "targeted tax cuts" or foolish spending programs.

Instead, the idea would be to fix the amount of "soak-the-rich" taxation permanently, with all of the variation at the margin coming in the sales tax. Thus, if a politician wants to raise spending or institute some form of "targeted" tax cut, the sales tax rate has to rise, and everybody has to feel it.


In my own fantasy, each major program in the budget has its own tax, sort of like the christmas tree of taxation on your phone, cable and cellular bill. So you go to get your iPod and pay a 7% Defense Tax, a 10% Social Security Tax, 2% Medicare/medicaid tax, 1% welfare tax, 30% Medicare Reserve Fund tax....

Because you know how we all love our phone bill - "Your basic service cost 10.99. With taxes and surcharges that comes to $124.03, which is randomly up or down a few dollars each month.

5 Comments:

By Anonymous Anonymous, at Thu Jan 10, 12:22:00 PM:

In Maryland, as in most states, you already pay sales tax on the materials, appliances, lighting, etc. that go into making up the house. Just as if you went and bought the items yourself. A new modilbe home is taxed at 60 percent of it sales price. Existing homes and mobile homes are not subject to the sales and use tax.

As more and more jurisdictions begin to tax services such as pluming, electricians, HVAC, etc., the sales tax included in the new home price will go up.

States take a big hit in sales tax revenue when the home construction market tanks.  

By Anonymous Anonymous, at Thu Jan 10, 01:54:00 PM:

I don't like the idea of a hybrid system. Remember that the European VAT was originally only supposed to be one or two percent. Now in most countries it's in the 18-21% range in addition to no reductions in the income tax.

I don't trust the bastards. I want some kind of single tax system. One and only one source of income for the government. No usage fees, no license fees, gas tax, sin taxes, etc whatever. That we can keep track of. No more earmarking of tax revenue sources for particular pet projects. Money is fungible. Once it goes into the general account, its source is totally lost. Look at what happened to the so-called Social Security Trust Fund when it was folded into the general revenue stream.

Another thing that the soi-disant Fair Tax doesn't do is eliminate any complexity in the system or reduce the need for revenue agents. There will be big squabbles about what's taxable and what isn't. If a new house is taxable and a used house isn't, what is the tax on a used house that was extensively renovated for the purpose of sale? Assuming a taxpayer's personal residence, how long do you have to live there to consider the improvements "used?" If I buy a house for $500,000 now and sell it in three years for $650,000, will someone have to pay a tax on the difference? Remember the old Robert Mitchim movie about moonshiners, "Thunder Road." Now the revenooers will be chasing him down the road with a batch of "untaxed" quilts from his Aunt Minnie's Quilting Bees in his trunk.

JLW III  

By Anonymous Anonymous, at Thu Jan 10, 05:30:00 PM:

Eliminate all federal income and payroll taxes. Make the feds live off import duties alone. Beef up the border patrol, the Navy and the Coast Guard to deter smuggling.  

By Blogger Andrewdb, at Thu Jan 10, 06:05:00 PM:

This comment has been removed by the author.  

By Blogger Andrewdb, at Thu Jan 10, 06:05:00 PM:

"Implicit rent" is just government-speak for "taxing income that doesn't exist"

I understand the goal of a consumption tax, and I like it, but I like more everyone having to sit down once a year and see totaled up how much they paid the government.  

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