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Fair Tax Debate

I... um.... kinda hijacked prester_scott's blog post about taxes. Since it's kinda rude to take over someone's sandbox, I'm moving any further discussion I was involved with over there to this journal.

Here's Where We Are So Far...
(I've re-ordered some of the comments a little to make it flow better as a single journal entry, but doing so shouldn't have changed the intent.)

drmellow: I was a little skeptical at first, but the more I studied the Fair Tax and talked about it with other people, the more reasonable and fair it seemed to be. Is it a perfect solution? No, I'm sure it's not. I don'tsee any glaring holes in it so far, but I wouldn't be surprised that some areas for tweaking became known if the idea were actually implemented. While I'm sure it's not a perfect solution, I'm even more sure that it's a much, much, much better solution than the currentsystem and I'd rather make a huge step in a better direction than sit around doing nothing while trying to decide what the "perfect" solution would be.

christtrekker: You and I have probably already discussed this elsewhere, but I stil lthink it's a better solution to simply make certain classes of items free from sales tax rather than having a "prebate". A "prebate" system still requires a massive bureaucracy to administer (admittedly it would probably be smaller than the IRS, but still) and it still rests on a government-defined (i.e. arbitrary) level of "poverty".

If you simply make "essentials of life" (food, clothing, medicine) off-limits to taxation, it all automatically takes care of itself. Basic economics work out who lives tax-free and who doesn't. Some deride this idea because someone has to define which borderline cases qualify as "food",and debate whether "luxury" items like fur coats and caviar should also be exempted. I say "who cares?" If you're in the $8k range and have a few dollars "extra" that you could spend either on a taxable item or a luxury version of a non-taxable item, who cares how you spend it? It's your life and your money,live/spend it how you will. For "the rich" who would spend much more on luxury items, I again say "who cares?" If the argument works for one person, why should it change just because of the amount of mone yinvolved? If I choose to tie up all my money on buying expensive clothes and food, that's my prerogative.

This type of system also takes care of the differing expense of living in different areas of the country, which a "prebate" system would require additional bureaucracy to handle, if it handles it at all - and whether it should or not is debatable.

That said, I support the Fair Tax as an incremental step to this ideal. It's definitely better than income tax and the IRS.

Additionally, and perhaps more compelling, is that everyone has different medical needs. Any "prebate" system is going to be based on typical/average needs. Assuming for argument's sake that Steven Hawking were a US citizen, why should be effectively be penalized for having expensive medical needs while someone else gets a financial reward for being blessed with health?

drmellow: As I mentioned in another commenton this post, since the Fair Tax is designed to keep the (after tax)prices of goods and services the same as they currently are, no one gets penalized -- the prebate is essentially a bonus that everyone,rich and poor alike, receive.

OK, maybe your point is that under the current system, if your medical expenses are high enough, you get to adjust your reported income so you don't pay as much income tax.Well, under the Fair Tax, nobody pays any income tax, so everyone comes out ahead. In your hypothetical example, Steven Hawking is currently paying X for medical care and Y for income tax (adjusted for the medical deduction) -- a total of X + Y dollars. Under the Fair Tax,Steven Hawking would pay X for medical care and 0 for income tax -- a total of X dollars. The only way Hawking is better off under the current system is if he pays negative income tax.

That argument goes for everyone -- the healthy and the sickly, the rich and the poor.

christtrekker: My point is not simply the economics of it, but the principle.

1.Government should be protecting our life, liberty, and property. It should not be making it more difficult (through taxes or whatever) to simply maintain your life. This is why "essentials of life" should remain untaxed.
2. Government should not be in the business of redistributing wealth. Period. No prebates. The prebate is designed to compensate for the fact that low-income folks pay no income tax currently, and in fact are a net beneficiary. A prebate still makeslow-income people direct beneficiaries of taxation, and that's wrong.

I don't care if the end result is "revenue neutral" compared to ourcurrent system. The federal government costs too much the way it is.I'd like to see it bring in less revenue, and spend less in the process as well. I don't care it is designed to have equivalent impact on people as the current system does. The fact remains that it still goes about it the wrong way. That's what I'm saying. True, it is an improvement over the current system because of the increased transparency, but it could be even better yet. If we're going to fix the system, let's do it right!

Hawking may spend more on medical taxes under FairTax than he is allowed to claim an income tax deduction for currently, so I'm not convinced every individual will be unaffected by the change. (In aggregate, I'm sure the numbers work out to make sure gov't gets just as much money from us.) In any case, the cost o ftaxes may make it impossible for him to get the care he needs. This is wrong, as I stated above in point 1. Sure tax-free essentials jus toffsets the taxes to other things, but it allows people to prioritize their spending, and in the final analysis the essentials are what we would all choose first when times get tough. Merely trying to maintain your existence should not be a revenue generator for government!

I think that's my primary problem with FairTax. It's still designed in a way that sees the taxpayer as a gov't resource.

bodnej: Actually, you should ask Steven Hawking how he handled the bills for his medical care:

http://fermat.nap.edu/books/0309084105/html/221.html

He knew that the only way for him to stay alive was to make money himself to pay for his own care.

christtrekker: That is why I used him as an example.



drmellow (in response to an already quoted comment from chrisstrekker): Yeah, I think we've gone around the block on this issue before, and I continue to completely disagree with you. ;-)

Basically, I favor the arguments advanced by FAQ Question 4 much better than the arguments you advance on this issue:
Why not just exempt food and medicine from the tax? Wouldn’t that be fair and simple?Exempting items by category is neither fair nor simple. Respected economists have shown that the wealthy spend much more on unprepared food, clothing, housing, and medical care than do the poor. Exempting these goods, as many state sales taxes do, actually gives the wealthy a disproportionate benefit. Also, today these purchases are not exempted from federal taxation. The purchase of food, clothing, and medical services is made from after-income-tax and after-payroll-tax dollars,while their purchase price hides the cost of corporate taxes and private sector compliance costs.

Finally, exempting one produc tor service, but not another, opens the door to the army of lobbyists and special interest groups that plague and distort our taxation system today. Those who have the money will send lobbyists to Washington to obtain special tax breaks in their own self-interest. This process causes unfair and inefficient distortions in our economy and must be stopped.
Additionally, the bureacuracy needed to issue the prebate is already in place, in the form of the Social Security Administration. The government has been sending checks to people based on the SSN for decades, and it seems to be working OK. The prebate could go through the same office, with little need for any real growth in the bureaucracy -- I think having the bureaucracy required to define the borderline cases under your proposal would end up being more invasive and painful.

We can keep going around the block on this issue, but you'll likely never convince me to change my position on it.The important thing is that we agree that the Fair Tax is a good place to go from where we are now.

christtrekker: Well, I disagree with the FAQ's idea of"fair". "Fair" is whatever meets your needs, as long as you can afford it. If you want to spend the money for steak rather than hamburger*,"taxes" shouldn't be a reason why you cannot make this decision for yourself. So what if the rich eat better than the poor? They're going to anyway.

I don't think the idea of "fairness" in taxation should be making everyone pay the same absolute amount, or the same fraction of their personal wealth or income, or that taxation be used to make everyone economically equivalent. I think a goal of the tax code should be to treat every person with equal respect for their human dignity and liberty, not merely meeting the revenue goals as easily as possible. Taxing food and medicine is just wrong, and I'll always maintain that it is. It matters not to me that refusing exemptions makes the system easier to administer. Living by principles rather tha npragmatism isn't always an easy choice. If I can be convinced that my principles here are unsound, I'll change my opinion on implementation of the tax.

* Some will make the argument of "needs" vs "wants"but really they are the same. All we really "need" is sustenance, and I'm sure science could come up with some mass-produced nutritional sludge (maybe called "soylent") very cheaply that would satisfy the basic requirements of maintaining our phyiscal existence. So arguing the distinction between burger and steak won't gain traction with me.

drmellow: OK, you *might* be able to convince me to change my position on making food tax-exempt, but only if it were so narrowly-defined that it wouldbe pointless: as you pointed out, the only "need" is basic nutrition,so come up with the soylent you describe and make that tax-exempt,while every other foodstuff is taxable. Yes, that's a silly position to take, but it addresses much of the problems that will be caused by having categories of tax-exempt things.

But it doesn't really:Who would make this soylent? If the government, why are they in the business of producing food? If a private company, which one? Multiple ones? Why do they get the benefit of being able to produce tax-exempt goods while other companies don't? You've still got the lobbying problem -- whenever an exemption can be made, companies will throw money at the government to try and convince them that they should benefit from the exepmtion. No exemptions, no corruption.

By creating any exemption, the government is implicitly endorsing that product -- attempting to encourage people to buy that instead of taxed alternatives. When there are exemptions, you have a situation where the government is rewarding certain behavior. That is definitely not therole of government.

When it comes down to it, my position isbased on principle rather than pragmatism, too. I am principly against the gov ernment unnecessarily encouraging behavior. Creating a category of tax-exempt goods means that government encourages behavior -- and in this case, it is completely unnecessary.

And, really, I'd still be fine with the Fair Tax if they took the prebate away. But I don't have a problem with the prebate, either.

There's really no needto keep going back and forth on this point, though -- I think you are fundamentally wrong in your basic outlook on this issue, and I suspect you think the same of me. ;-)



At that point, I asked prester_scott if he minded us continuing this in his journal, or if he'd rather we took the conversation somewhere else. He kindly suggested that we move to one of our own journals with it. So I brought it here.

Any further discussion related these issues can continue over here. Feel free to jump in.

Tags:

Comments

( 30 comments — Leave a comment )
christtrekker
Apr. 18th, 2006 06:47 pm (UTC)
I guess I don't have anything else to add now, unless one of your readers desires clarification or expansion of something I've said.

You are aware of thefairtax right? (Just checking.)
drmellow
Apr. 18th, 2006 07:00 pm (UTC)
I wasn't aware of thefairtax until you brought it up earlier in prester_scott's journal. I'm checking it out now. ;-)

And, yeah, I don't have much more on this to say, either. But I'm more than happy to keep going if anyone else has anything more to say.
christtrekker
Apr. 18th, 2006 08:54 pm (UTC)
LJ politics
I don't know how I discovered it originally. It's one of the political communities I follow on LJ, though all of them (except libertarianism) are pretty quiet. The others (if you're interested) are constitutionals, federalists, us_thirdparties, and voting_reform.
belovedcrown
Apr. 19th, 2006 01:38 am (UTC)
i think you are a genius. tax exempt food and medicine and flat sales tax everything else.
drmellow
Apr. 19th, 2006 03:25 am (UTC)
I've got to completely disagree with the idea of creating exemptions. It's too prone to be exploited by special interests trying to convince the government that their particular flavor of food or medicine should be exempted. Basically, I agree with the the Fair Tax answer to this question:
Why not just exempt food and medicine from the tax? Wouldn’t that be fair and simple? Exempting items by category is neither fair nor simple. Respected economists have shown that the wealthy spend much more on unprepared food, clothing, housing, and medical care than do the poor. Exempting these goods, as many state sales taxes do, actually gives the wealthy a disproportionate benefit. Also, today these purchases are not exempted from federal taxation. The purchase of food, clothing, and medical services is made from after-income-tax and after-payroll-tax dollars, while their purchase price hides the cost of corporate taxes and private sector compliance costs.

Finally, exempting one product or service, but not another, opens the door to the army of lobbyists and special interest groups that plague and distort our taxation system today. Those who have the money will send lobbyists to Washington to obtain special tax breaks in their own self-interest. This process causes unfair and inefficient distortions in our economy and must be stopped.
Until someone can adequately address the points made in that defense of no exemptions, I'm not buying it.

Seriously, you recommend tax exempting food and medicine. Does food include escargot? If so, that's not fair to the poor people who could never afford escargot in the first place and provides an unfair advantage to the wealthy escargot lovers. If not, that's not fair to the wealthy escargot lovers because they get taxed on what they're eating while the poor get a tax-free ride. For medicine, do scented candles count? 'Cause they're used for medicinal purposes in aromatherapy. If they do count, how do you determine whether a person is buying a scented candle for medicinal purposes or because they just want someting that smells good.

The biggest objection I have with exemptions like this is that you have to create an entire beuracracy devoted to making decisions about the questions I asked in the last paragraph. It's unnecessary and just asking for corruption.
(no subject) - belovedcrown - Apr. 19th, 2006 11:10 am (UTC) - Expand
(no subject) - drmellow - Apr. 19th, 2006 12:01 pm (UTC) - Expand
other forms of taxation - christtrekker - Apr. 19th, 2006 02:36 pm (UTC) - Expand
shoot all the lobbyists - christtrekker - Apr. 19th, 2006 02:12 pm (UTC) - Expand
Re: shoot all the lobbyists - drmellow - Apr. 19th, 2006 03:33 pm (UTC) - Expand
Re: shoot all the lobbyists - christtrekker - Apr. 19th, 2006 04:37 pm (UTC) - Expand
Re: shoot all the lobbyists - drmellow - Apr. 19th, 2006 05:48 pm (UTC) - Expand
Re: shoot all the lobbyists - christtrekker - Apr. 19th, 2006 07:09 pm (UTC) - Expand
Re: shoot all the lobbyists - eagle243 - Apr. 20th, 2006 01:50 am (UTC) - Expand
Re: shoot all the lobbyists - drmellow - Apr. 19th, 2006 05:52 pm (UTC) - Expand
christtrekker
Apr. 19th, 2006 02:17 pm (UTC)
aw shucks...
Flattery will get you nowhere.

But keep talking...
meep
Apr. 18th, 2006 08:23 pm (UTC)
I prefer the simplest implementation, which is a little difficult to consider given the "prebate". The thing I don't like about the "prebate" is that everybody is getting a check directly from the govt (pretty damn transparent and everybody getting the same amount, more or less) and the taxes are nibbled, bit by bit, at the cash register (not as transparent a process, because it's one number amongst many. And people hate thinking about percentages.) Yes, you control how much tax you pay through your consumption, but the psychological effect is that people see cash coming from the govt, and barely feel the dribs and drabs going out. Taxes should be explicit, at best, because that acts as a check to those who would wish to raise them.

My own preference is a plain old flat income tax, as it would be relatively easy to implement with the machinery of our current system, and would make withholding really easy. This is why I'm not making too big a stink over the AMT (though I expect to be "caught" by it in a couple years), because if we sit around, it becomes an =almost=-flat tax hitting a huge swath of people. Not quite a flat tax yet, though, because you'd still have to calculate your "regular" taxes.

I'm tired of any classes of expenditures/behavior getting special tax treatment, because not only does it create economic distortions, but because it's so damn opaque, and many times it's only a priveleged few who know about it who get the benefit of these special deductions and credits (and then there's the legions of tax lawyers and accountants who make a living off of this... in truth, because my job involves tax-priveleged retirement savings, I'm arguing against self-interest here.)

In any case, I would argue that no one is going hungry in America because food is taxed (I remember it being taxed in NC when I lived there) - we have a surfeit of really cheap food, even with taxes heaped upon it. No one is going naked in America because clothes are taxed.

I think what annoys people the most is every damn thing is taxed, at different rates for arbitrary reasons, and some people get special cuts because of political power, and then it's such a headache filing taxes and the results are so punitive if you screw up the filing. I think the main mandate right now is to SIMPLIFY.
christtrekker
Apr. 18th, 2006 08:57 pm (UTC)
Withholding is evil. You think paying in "dribs and drabs" is bad with a sales tax, but at least you see that. Most people don't even read their pay stubs, and since you never see the money, it's hard to see how much gov't is costing you.

Withholding was a temporary wartime measure, to pay for WWII. No one wanted to be unpatriotic by not supporting our boys in the war, you know. Funny how it never went away afterward...
neebs
Apr. 19th, 2006 05:15 pm (UTC)
(I just want to start off by pointing out that people in America are going hungry because they can't afford a roof over their heads, medicines, utilities, AND food. So they choose everything else first and food last. Also, the cheapest food alternatives are also the most expensive, so the hunger problem we are facing is more a nutritional one than a lack of food problem. For example, a Snickers bar will fill you up more and longer than an apple, but nutritionally, it's not doing anything for you. That's why obesity is more of an issue for the poorest people in our country than the richest.)

ANYWAY, on to my main point. You argue that there should be no tax exempt on food, because how do you determine which food is ok. Well, what if they took the WIC (Women, Infants and Children) program guidelines and changed that into Food Exempt guidelines. That would be things like bread, milk, cheese, fruits, veggies, etc. Basically, the staples. You could make nutritional guidelines that they have to meet in order to be exempt. For example, Cheerios are exempt, Lucky Charms are not. Why? The nutritional content, sugar in this case. Lists could be posted in grocery stores or there could be a special mark on the packaging to identify it as tax exempt, like things that are fat free or whatever now.

I think this would fix your lobbying argument. If the item meets nutritional guidelines, exempt it. If not--or if the company doesn't want to go through the process to become tax exempt--tax it. Also, just like WIC is an arbitrary list but it works, the gov. could just come up with an "approved" list that would have, say, ground beef but not filet mignon.

And actually, from a business standpoint, those companies or products that were NOT tax exempt would be more in demand because they would be luxury items. That's just the mentality of our country today. More expensive=better.
christtrekker
Apr. 19th, 2006 06:19 pm (UTC)
But then you still have someone dictating to you (at some level) how to run your life. Shouldn't you be the one to decide that? The way I look at it, if you're stuffing it down your throat, it's food. Who's to say that because it has only 24.99% of some nutritional indicator that it has to be taxed, yet if it had 25% it could be tax-free? That's where the lobbyists come into play, and that's bad. They'll work to get those guidelines changed to their benefit.
neebs
Apr. 19th, 2006 06:38 pm (UTC)
Honestly, no, I don't think that we should let a majority of people in this country make that decision for themselves. People are too dumb for their own good. (Not those of us in this discussion!) If incentives like tax exemption on some things will make our country healthier, I am all about it. People can then use their expendable income (after the staples are bought) to buy any kinds of crap--food, electronics, more LJ userpics, whatever--that they want to.

Also, if the rule/law/whatever is 25%, then it has to be 25%. 24.99999999999999% is not 25%. I don't see why that wouldn't stick. (Living in DC, yes I KNOW that people would still lobby for/against it, but they do that about EVERYTHING. If you say it has to be X and it is not X, no amount of lobbying can change that.)
drmellow
Apr. 19th, 2006 07:03 pm (UTC)
People are too dumb for their own good.

Perhaps. But I am decidedly against using the government to help correct that. That's what private charitable organizations are for. ;-)
(no subject) - neebs - Apr. 19th, 2006 07:15 pm (UTC) - Expand
(no subject) - christtrekker - Apr. 19th, 2006 07:25 pm (UTC) - Expand
christtrekker
Apr. 19th, 2006 07:31 pm (UTC)
My point wasn't that you shouldn't comply with the standards. I'm saying: why is someone else dictating standards to you at all, and thus influencing how you run your life? If it's food that you want to eat, it shouldn't be pushed out of your price range because gov't saw fit to slap a "sin/nonnutritional tax" on it.
(no subject) - neebs - Apr. 19th, 2006 07:47 pm (UTC) - Expand
(no subject) - christtrekker - Apr. 19th, 2006 08:20 pm (UTC) - Expand
drmellow
Apr. 19th, 2006 06:43 pm (UTC)
What about cat food? Some people eat that -- would it be non-taxable in your tax-exempt plan? However you answer that question, there will continue to be lobbyists lining up to disagree with you. No matter how you define tax-exempt categories, I will easily be able to ask a question that requires further explaination. The point is, no matter how you define categories for tax exemption -- short of *nothing* is exempt -- you continue to leave the beuracracy and lobbying doors wide open, asking for inefficiency and corruption.

"Stuffing it down your throat" -- I've seen people eat light bulbs before. There's zero nutritional value there, but a strict interpretation of "stuffing it down your throat" constitutes food would indicate that it should be tax-exempt under your proposal. Yes, that's absurd. But look at the reality of present-day politics -- absurity is commonplace. The only way to guarantee against absurity is a completely objective standard. By definition, creating categories of tax-exempt items is necessarily subjective. Because of that simple, unalterable fact, I will never support a subjective tax-exempt system over an objective system like the one presented by the Fair Tax.
christtrekker
Apr. 19th, 2006 07:22 pm (UTC)
There's nothing objective about declaring by fiat that "you get a prebate of $X, and you get a prebate of $Y". You may think it a better solution in practical application (pragmatically speaking it may indeed be easier to administer), but it's purely arbitrary. You cook some numbers, come up with those results, and have it enforced by statute. OTOH, we may quibble about what constitutes "food" and "medicine" and I'll grant you that, but it has a grounding in principle. Gov't cannot deprive anyone of life (or liberty or property) without due process of law, and I believe that a tax on food/medicine constitutes (in part) deprivation of life.

But you know what? If we eliminated the lobbyists trying to get this or that marginal food item exempted by adopting FairTax, they'd turn their attentions to trying to expand/increase the "poverty limit" definition. The food/medicine definition is relatively static...there is some play around the edges, but you can't move it all that far. OTOH, those who stand to benefit from raising the poverty limit definition can always exert political pressure until it gets to the point that 50%+1 pay no tax at all, not much different than currently.
(no subject) - neebs - Apr. 19th, 2006 07:48 pm (UTC) - Expand
( 30 comments — Leave a comment )

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