Fair Tax vs. Flat Tax: Why Income Taxes destroys US jobs

[FA_Q2]

Option 1) Nothing. Steve just gets to keep $22.50 an hour after taxes. Now his motivation drops, he’s unhappy. That causes him to work less hard. Steve is still better than Joe, but he’s not as productive as he was. He’s getting $22.50 an hour, that’s the value he works towards providing. He stops working late when required, takes on fewer hard tasks, that sort of thing.

Option 2) Steve gets a raise to $40 an hour. He pays 25% in taxes, and his take home is back to three times Joe. Steve is happy, his employer is paying the taxes, they raise the price of their products and their customers actually pay the tax.

Now, keep in mind, it’s not just Joe and Steve, it’s all the Joes and Steves who make up the marketplace. All the Steves are unhappy unless they are getting their fair compensation. Since government raised taxes across the board, companies have to pay it, the taxes are driving all the Steves across the marketplace to not be happy unless they get their $40 an hour so their take home is $30.

That is mischaracterized though in the fact that the fair tax does the EXACT same thing. Essentially, an employee does not measure compensation by the number of worthless pieces of paper that the employer pays him. No one really cares about money; they care about what that money can get them. In that respect, taxing the employer’s wage or the product is utterly irrelevant, the employee still has the same purchasing power.

A fair tax creates one of 2 things (or a mix of them) – either wages decrease commensurate to the amount of taxer that were being paid so that the end product price does not change (basically, Steve only gets 22.50 anyway) OR the price of the product increases and Steve ends up with more dollars but still has the same purchasing power.

I mischaracterized nothing, you just repeated my point back to me. Steve is indifferent regardless of the system. That isn't why we're doing it. We're doing it for the other reasons I stated and pointing out that Steve is indifferent doesn't contradict that. You didn't contradict anything I said actually and you didn't address the scenarios.

What is there to address. The 2 scenarios are irrelevant because the same thing happens with the fair tax as the flat tax.

And we didn't even start talking about the massive overheads to collect all the various taxes. Lawyers, accountants, disincentives to efficiencies, management time. It's endless. And it goes away to be replaced by a simple tax.

Again, irrelevant as a flat tax and a sales tax both eliminate that paperwork. I would contend that you tax requires FAR more paperwork than a simple flat tax as it requires the record of every single sale that is made and that tax to be tabulated where a flat tax really only requires one number per person – the annual income.

Also, all the people who work cash based and don't pay taxes now become taxpayers because it's collected when they spend, not earn.

As for the pay cut, Steve will no longer pay payroll taxes or income tax, so he's going to take home the same money. If his net pay was $1,000 twice a month before the fair tax, it is after the fair tax as well. So is he really going to have an issue with that? There will be a market adjustment time, but markets adjust quickly.

The only real valid criticism you have is with offshoring/foreign competition but even then, that is not a real problem with taxes but rather with free trade. Taxes make up a minute portion of the expenses that drive manufacturing overseas. The real cost is labor in general. The answer there has nothing to do with taxes but rather free trade agreements which are asinine for America to be involved in when we have such massive demands on our local companies but require nothing past slave labor from the foreign ones.

You aren't an employer. As I said, we're not just talking income tax, we're talking social security, medicare, unemployment and we're talking about the employer and employee portions. And you multiply that across an entire plant of people, and you say it's not a big deal? That's preposterous.

It’s not preposterous, it’s simple reality. Taxes have influence but what is FAR more impacting is wages themselves, labor law, EPA regulations (and any other alphabet soup regulation) and the thousand other costs that are associated with running a business. That individual in china gets paid 2 dollars, works in a plant that can pour toxic waste in the river and can work 18 hours a day 29 days a month. American companies simply cannot compete with that. That is why when Jobs was asked what it would take to make the IPhone here the answer was basically it is not going to happen. We did not have the capability to produce the numbers he wanted in the time frame that was required. That disparity is best handled with import fees. Oddly enough, that was how the founders did it too. Eliminating income taxes will do nothing to stem the flow of jobs to other places; there are just too damn many advantages in that flow.

 

[NYcarbineer]

So now Obama comes along and says he isn’t going to tax Joe, he doesn’t make enough. But he is going to tax Steve 25% of his earnings. Steve is only taking home $22.50 an hour, but he’s worth three times as much as Joe who is taking home $10. So what happens?

Steve is making 62,400. When did Obama 'decide' to take 25% of that in taxes?

That's a 15,600 federal tax bill.

It's an illustration of the math, not a discussion of tax rates.

he is going to tax Steve 25% of his earnings

So when you say that you weren't talking about Obama and Steve's tax rates, what is that about?

Do you speak English?

 

[kaz]

What is there to address. The 2 scenarios are irrelevant because the same thing happens with the fair tax as the flat tax.

No, it doesn't. That's ridiculous. If you get rid of employees in the flat tax, their taxes go away. If you get rid of employees in the fair tax, they don't. Foreign companies because they generally have far less US production don't pay flat tax, they do pay fair tax. How is that the same?

Again, irrelevant as a flat tax and a sales tax both eliminate that paperwork. I would contend that you tax requires FAR more paperwork than a simple flat tax as it requires the record of every single sale that is made and that tax to be tabulated where a flat tax really only requires one number per person – the annual income.

Um...we keep track of every single sale now for state sales tax. Our IT systems are already built for that.

Furthermore, the flat tax doesn't get rid of the myriad of other taxes, like business taxes like the Fair Tax does.

And you're only counting income, the flat taxers I always hear say they're still taxing investments and other income.

The fair tax is one sales tax. And it adds foreign companies and the cash economy as taxpayers. And it eliminates all other taxes. It's not even close.

It’s not preposterous, it’s simple reality. Taxes have influence but what is FAR more impacting is wages themselves, labor law, EPA regulations (and any other alphabet soup regulation) and the thousand other costs that are associated with running a business.

Sure, that's larger. But there is a large cost to automate and run overseas plants. In my business, I have a range of employees. Managers, full time staff, part time staff. I run payroll twice a month and I run jobs to pay State (withholding, unemployment) and Federal (withholding, payroll, unemployment) taxes.

On a monthly basis, taxes are well over 1/3 the net amount of the payroll checks. That's a big impact, not a small one. Withholding is only a part of that. Other employee taxes are significant too.

 

[kaz]

Unfortunately the Fair Tax will be anything but simple. What qualifies as a final product and what as an intermediate product?

Businesses deal with that now. And for the same reason. State sales tax. I don't pay sales taxes when I buy goods that go into the products I sell customers, I do when I buy things like supplies for my business.

In your dog example, it's not part of the work product, even though your business is dogs, so you pay sales tax.

What you don't pay sales tax on are components in your products. So if you're building a car for example, you don't pay sales tax if you buy bumpers from a vendor. You do pay sales tax on the gas that drives the car.

Again, that issue is already part of business, we deal with it now, and again for the same reason. Sales tax.

Another way to look at it is that for the bumper, the buyer of the car I built will pay sales tax. That's why I don't pay it, it's going to be taxed. For the dog food, even if you sell the dog, the buyer won't pay sales tax on the dog food. You pay sales tax once. It's pretty clear. I have occasional questions for my accountant on this, but not very often.

 

[NYcarbineer]

This topic has come up in discussions, so I decided to start a threat to explain it. It's sad that government schools teach government, they don't teach capitalism. Capitalism is just a term for economic freedom.

Let’s say we have two employees, one is worth Three times as much as the other Joe is worth $10 an hour, Steve is worth $30. Worth is determined by the marketplace. If an employer pays them less than their value, they are unhappy, their work quality drops and they eventually leave for an employer who recognizes their value. Pay them more and they are happy, but their employer is unhappy because they are not getting their money’s worth. They push them more, raise the bar and if they can’t cut it they eventually replace them.

So now Obama comes along and says he isn’t going to tax Joe, he doesn’t make enough. But he is going to tax Steve 25% of his earnings. Steve is only taking home $22.50 an hour, but he’s worth three times as much as Joe who is taking home $10. So what happens?

Option 1) Nothing. Steve just gets to keep $22.50 an hour after taxes. Now his motivation drops, he’s unhappy. That causes him to work less hard. Steve is still better than Joe, but he’s not as productive as he was. He’s getting $22.50 an hour, that’s the value he works towards providing. He stops working late when required, takes on fewer hard tasks, that sort of thing.

Option 2) Steve gets a raise to $40 an hour. He pays 25% in taxes, and his take home is back to three times Joe. Steve is happy, his employer is paying the taxes, they raise the price of their products and their customers actually pay the tax.

Now, keep in mind, it’s not just Joe and Steve, it’s all the Joes and Steves who make up the marketplace. All the Steves are unhappy unless they are getting their fair compensation. Since government raised taxes across the board, companies have to pay it, the taxes are driving all the Steves across the marketplace to not be happy unless they get their $40 an hour so their take home is $30.

For the economists/finance people out there, I realize there are other implications, like it changes the NPV of projects and the increased prices affect sales, that sort of thing, but I’m trying to stay with this point to keep the discussion simpler.

So now to my points on comparing a flat income tax versus the Fair Tax.

1) Income tax harms US companies competing with foreign companies in the US. On average, US companies have more employees in the US than foreign. So, by charging taxes as a percent of payroll, you’re charging US companies more to sell products in our own markets.

2) Income tax drives companies to automate and reduce jobs. If you automate, you not only get rid of the employee’s salaries, but also their taxes. If you charge a percent of the sale, you are taxing it either way, including if they automated.

3) Income tax drives manufacturing overseas. Again, you build it here, you pay your employees taxes. You build it overseas, you don’t.

Steve doesn't pay zero federal taxes. At 'single' with no dependents, he pays about $1000/year income tax,

plus about $30/wk in payroll taxes.

 

[The Rabbi]

Unfortunately the Fair Tax will be anything but simple. What qualifies as a final product and what as an intermediate product?

Businesses deal with that now. And for the same reason. State sales tax. I don't pay sales taxes when I buy goods that go into the products I sell customers, I do when I buy things like supplies for my business.

In your dog example, it's not part of the work product, even though your business is dogs, so you pay sales tax.

What you don't pay sales tax on are components in your products. So if you're building a car for example, you don't pay sales tax if you buy bumpers from a vendor. You do pay sales tax on the gas that drives the car.

Again, that issue is already part of business, we deal with it now, and again for the same reason. Sales tax.

Another way to look at it is that for the bumper, the buyer of the car I built will pay sales tax. That's why I don't pay it, it's going to be taxed. For the dog food, even if you sell the dog, the buyer won't pay sales tax on the dog food. You pay sales tax once. It's pretty clear. I have occasional questions for my accountant on this, but not very often.

So your defense of the complexity of the Fair Tax is that we already have some complexity now so making it worse is OK?
In the dog example, I am a dog breeder. I sell the dogs I feed. So the feed is an element in production and therefore should not be taxed. Only the final dog sale is taxed.
FA is correct that Fair Tax will involve massive complexity as it applies to every product sold, whereas Flat Tax applies only to every individual earning income.
So on simplicity the Flat Tax wins out over the Fair Tax.
I wont go all progressive on you and argue how Fair Tax is regressive on poor people because even I dont believe that. But that will be the claim and yet another impediment to getting it done.

 

[OohPooPahDoo]

So now Obama comes along and says he isn’t going to tax Joe, he doesn’t make enough. But he is going to tax Steve 25% of his earnings. Steve is only taking home $22.50 an hour, but he’s worth three times as much as Joe who is taking home $10. So what happens?

Steve is making 62,400. When did Obama 'decide' to take 25% of that in taxes?

That's a 15,600 federal tax bill.

He didn't

Kaz prefers to argue in a hypothetical non-existent reality, using 'facts' that he just conjures out of thin air. Its far easier than thinking.

 

[OohPooPahDoo]

So now Obama comes along and says he isn’t going to tax Joe, he doesn’t make enough. But he is going to tax Steve 25% of his earnings. Steve is only taking home $22.50 an hour, but he’s worth three times as much as Joe who is taking home $10. So what happens?

Steve is making 62,400. When did Obama 'decide' to take 25% of that in taxes?

That's a 15,600 federal tax bill.

It's an illustration of the math, not a discussion of tax rates.

Then what is it doing in the poli board? Take it over to the math board you moron.

 

[hazlnut]

Agreed that the system, the way it is, is an embarrassment. I'd love to see a Tax code that was 100 pages or less. Income Tax V.S. Sales Tax? I'd go with taxing Income. Taxing Product or Services only promotes the Black Market. It does not need the encouragement. The Code needs to be simplified and made fully transparent.

The portion of the tax code that applies to 99% of Americans is less than 20 pages -- it's all th e subsidies and tax credits to corporations and the super-wealthy that take up the rest.

 

[The Rabbi]

Agreed that the system, the way it is, is an embarrassment. I'd love to see a Tax code that was 100 pages or less. Income Tax V.S. Sales Tax? I'd go with taxing Income. Taxing Product or Services only promotes the Black Market. It does not need the encouragement. The Code needs to be simplified and made fully transparent.

The portion of the tax code that applies to 99% of Americans is less than 20 pages -- it's all th e subsidies and tax credits to corporations and the super-wealthy that take up the rest.

So why do you not want to see that simplified into one standard rate for everybody?

 

[kaz]

plus about $30/wk in payroll taxes.

Assuming he works 40 hours a week, payroll taxes and unemployment would be about $220 a week.

 

[kaz]

I do agree you're right about the dog food. That isn't my line. I own a design and marketing firm. We don't need to pay sales tax on things like ink, so I'd agree dog food wouldn't be isn't taxable either. I'm a finance guy, not an accountant. However, it does not contradict my main point which is we have to make that determination now, it's not new.

So your defense of the complexity of the Fair Tax is that we already have some complexity now so making it worse is OK?

No, your attack on the Fair Tax is that it doesn't solve every problem, so you don't care how many problems it does solve.

All the flat tax solves is that for people who don't need accountants now, they still don't. They file the 1040EZ already. What the fair tax solves that the flat tax doesn't includes:

- Investors still need to hire tax accountants and tax attorneys.
- Businesses still need to hire tax accountants and tax attorneys.
- Rich still need to hire estate accountants and estate attorneys.
- US corporations still pay more taxes than foreign companies.
- Companies that automate pay less taxes than companies that hire employees.
- Companies that move production offshore save not only salaries but employee taxes.
- The cash based economy still don't pay taxes
- Management still is incented not just by economics or productivity but by the tax code.
- Taxes are still a distraction of management that doesn't make the company more competitive or efficient other than lowering their tax bill.
- Investors still are disincented to put their money in the most optimal investments because selling them triggers taxes

But on the other hand, you have the massive arguments that:

- We have to track sales and charge a sales tax, which is the same thing we already do for State sales taxes.
- We have to keep track of what is and isn't taxable because it's an end product or an intermediate product, which we already do for State sales taxes.

Easy call.

 

[kaz]

Steve is making 62,400. When did Obama 'decide' to take 25% of that in taxes?

That's a 15,600 federal tax bill.

It's an illustration of the math, not a discussion of tax rates.

Then what is it doing in the poli board? Take it over to the math board you moron.

You calling anyone a moron is rich.

You have to understand the illustration I'm using to understand the implication of it. When you understand it, get back to me.

 

[FA_Q2]

I do agree you're right about the dog food. That isn't my line. I own a design and marketing firm. We don't need to pay sales tax on things like ink, so I'd agree dog food wouldn't be isn't taxable either. I'm a finance guy, not an accountant. However, it does not contradict my main point which is we have to make that determination now, it's not new.

So your defense of the complexity of the Fair Tax is that we already have some complexity now so making it worse is OK?

No, your attack on the Fair Tax is that it doesn't solve every problem, so you don't care how many problems it does solve.

All the flat tax solves is that for people who don't need accountants now, they still don't. They file the 1040EZ already. What the fair tax solves that the flat tax doesn't includes:

- Investors still need to hire tax accountants and tax attorneys.
- Businesses still need to hire tax accountants and tax attorneys.
- Rich still need to hire estate accountants and estate attorneys.
- US corporations still pay more taxes than foreign companies.
- Companies that automate pay less taxes than companies that hire employees.
- Companies that move production offshore save not only salaries but employee taxes.
- The cash based economy still don't pay taxes
- Management still is incented not just by economics or productivity but by the tax code.
- Taxes are still a distraction of management that doesn't make the company more competitive or efficient other than lowering their tax bill.
- Investors still are disincented to put their money in the most optimal investments because selling them triggers taxes

But on the other hand, you have the massive arguments that:

- We have to track sales and charge a sales tax, which is the same thing we already do for State sales taxes.
- We have to keep track of what is and isn't taxable because it's an end product or an intermediate product, which we already do for State sales taxes.

Easy call.

?
You are constraining the flat tax to something that it should not be. Income, period, is the only thing that would be taxed and therefore your ‘points’ about the negatives are completely incorrect.

- Investors still need to hire tax accountants and tax attorneys.
No, they don’t. Flat rate is flat rate. There would be no purpose to hire anything.
- Businesses still need to hire tax accountants and tax attorneys.
In a flat rate, businesses are not taxed.
- Rich still need to hire estate accountants and estate attorneys.
No, they don’t. Again, what is that attorney going to do? Use the calculator to find out what 15%(a random number – don’t read into that) is of whatever the ‘rich’ person profits? Nope, I think the person can take care of that mental challenge all alone.
- US corporations still pay more taxes than foreign companies.
No, they pay nothing. I believe that is less than other nations.
- Companies that automate pay less taxes than companies that hire employees.
And? They also pay less labor. Companies SHOULD automate – that is a GOOD thing in ALL instances. We call that efficiency and productivity.
- Companies that move production offshore save not only salaries but employee taxes.
Covered this already. Your sales tax is not going to solve the offshoring problem and an import fee covers any tax evasion that such products might have received but can ALSO cover the advantages that those companies have with low wages and non-existent regulations (not to mention government jury rigging).
- The cash based economy still don't pay taxes
The black market still avoids taxes in sales tax in your version as well. Seems to me that arguing illegal activities is rather inane to the discussion.
- Management still is incented not just by economics or productivity but by the tax code.
Nope. Flat is flat. There is no decisions to be made there.
- Taxes are still a distraction of management that doesn't make the company more competitive or efficient other than lowering their tax bill.
- Investors still are disincented to put their money in the most optimal investments because selling them triggers taxes
Possibly the ONLY valid complaint and, quite frankly, I don’t care about that. ‘Investors’ should pay taxes like the rest of us, no more and no less. Anything else is a special interest and would defeat the entire point to flat taxes. The elimination of corporate taxes will bring investment; they are just going to have to deal with a small tax on the profits they make.

 

[edthecynic]

The biggest problem with the unFair tax is it is the most regressive of all the tax schemes devised by the rich. Not only do the rich spend very little of their income thus paying a tax on very little of their income. The poor and Middle Class on the other hand not only spend most if not all their money, very often they are spending money they borrowed and therefore paying taxes on money they don't have.

That would be true if all taxes (other than the death tax) were not built into the price of the products we buy. But they are. You're wrong, and since you just don't understand taxes, it's irrelevant to discuss until you do.

Translation: My rebuttal is so unassailable that you can only lower yourself a condescending personal insult.
Thank you for your white flag.

 

[oldfart]

The portion of the tax code that applies to 99% of Americans is less than 20 pages -- it's all the subsidies and tax credits to corporations and the super-wealthy that take up the rest.

I think that's a little oversimplified. Since I get to read updates to the reporting service every week, I get a pretty good idea of what various titles of the IRC lead to "guidance". At least 80% of the Code and regs deal with issues no ordinary taxpayer or small businessman would ever encounter. Another 10% or so deal with business issues that non-business taxpayers would not encounter. That still leaves a huge amount of material, Cut out the esoteric stuff like adoption credit, residential energy credit, etc. and there is a lot left. The instructions for Form 1040 are 214 pages.

Yes the Code could and should be cleaned up. It's way too big and cumbersome and is overloaded with special interest provisions. Twenty pages is an unrealistic target, but a massive reduction in complexity is attainable, if there is any political will to do so without everyone in Congress protecting their paymasters.

 

[kaz]

You are constraining the flat tax to something that it should not be. Income, period, is the only thing that would be taxed and therefore your ‘points’ about the negatives are completely incorrect.

The proposals I've heard only flatten income taxes, they don't address business, payroll, unemployment or the death tax. What flat tax are you looking at?

And as for investment income, first of all it's a double tax since all the taxes were already paid by you on your investment and by the company you invested in on their earnings. Terrible for the economy.

And for income tax, investment taxes are s the biggest reason we need tax lawyers and accountants and you're keeping all that. All you changed is the rate, not the process.

 

[kaz]

The black market still avoids taxes in sales tax in your version as well. Seems to me that arguing illegal activities is rather inane to the discussion.

You mow someone's lawn for cash, don't declare the income you're not a taxpayer in the Flat Tax. In the Fair Tax, when you spend the money you pay tax on it. Yeah, they're taxpayers now.

 

[kaz]

- US corporations still pay more taxes than foreign companies.

No, they pay nothing. I believe that is less than other nations.

Right, companies don't have to pay employees enough to live and pay their taxes. Sure they don't.

 

[kaz]

The biggest problem with the unFair tax is it is the most regressive of all the tax schemes devised by the rich. Not only do the rich spend very little of their income thus paying a tax on very little of their income. The poor and Middle Class on the other hand not only spend most if not all their money, very often they are spending money they borrowed and therefore paying taxes on money they don't have.

That would be true if all taxes (other than the death tax) were not built into the price of the products we buy. But they are. You're wrong, and since you just don't understand taxes, it's irrelevant to discuss until you do.

Translation: My rebuttal is so unassailable that you can only lower yourself a condescending personal insult.
Thank you for your white flag.

Aw, poor baby. I said you didn't understand it. I'm sorry I made you cry with my "personal insult." You don't understand, wow, vicious. I said that BTW because your post demonstrated you didn't understand it. You listen to liberal lawyers about economics. Because liberal lawyers know so much about our economy. They're doing such a great job, I see why you wouldn't want to risk listening to the field of economics instead.