Redstate

A VAT may not be an bad idea but it's hardly simple.  And transitioning to a VAT is a HUGE process.  

And to say that we are, all of the sudden, going to see a 10% growth in GDP by going to a VAT is absurd.  We STILL HAVE TO PAY for the same services.  If we derive the taxes from income or from consumption we STILL need the same amount of money.  

and the Fair Tax would be one of several acceptable proposals.  But beware ratcheting up expectations to those heights.  10% GDP growth means adding $1.2 trillion of goods on top of the $12 trillion we make every year.  I'm quite proud that we add $400 billion a year right now (3%).

Changing the tax code to be more market-friendly is good policy, but overselling is just setting it up to fail.

should be considered offset by the external deficit.  We borrow altogether 333B$ (not counting supplementals and funny accounting) to produce only 400B$ extra worth of goods and services.  Then theres the huge trade deficit.

Is the US not simply maxing out its credit card in order to buy stuff from China and Japan?  I'm not sure what to make of all these rosy growth numbers.

GDP measures how much we create.  That is entirely different than how much the government spends or taxes although they are related.

GDP = C + I + G + X - M

GDP = Comsumption + Investment + Government + Export - Imports

G = Government = Spending - Taxes = Deficit

So GDP goes up as the deficit goes up.  That's the static way to see things.  But when government pays for health care, retirement insurance, school fees, or anything else it crowds out private consumption and investment driving down C and I.  So the dynamic effect is much more muted.  Keynesian economics was built on the idea that government should spend more (run a deficit) during a recession to compensate for the drop in C and I and spend less (run a surplus) during good times to not crowd out C and I.*

As for the trade deficit, it is explicitly in the GDP figures.  Exports - Imports.  Our major trade deficit shows that we make things and ship them out (exports) at a much lower rate than we buy things from other people (imports).  That in and of itself is not worrisome.  However, our currency should fall over time to keep that balance within a reasonable band.  We are on the cusp of that band now, but our currency has been falling which should help.  We also have the problem that many other economies (especially Europe) are doing poorly and so our currency isn't falling as much as it should economically.

Well that's enough econ 101 for now.

*This is a very simplified explanation.  Those with an economics background could pick it apart quite easily.

this is not going to a VAT. How in the heck did you ever jump to that conclusion????????

I just went to the website for the Fair Tax (that was given above) and clicked on the FAQ and looked for VAT, here's the answer:

45. What about value-added taxes (VATs), like they have in Europe and Canada? Are they not consumption taxes? While VATs are also consumption taxes, and better than income taxes, the FairTax is not a VAT. A VAT works very differently. It taxes every stage of production. It is much more complex, and is typically hidden from the retail consumer. Second, in industrialized countries that have a VAT, it coexists with high-rate income tax, payroll and many other taxes that, in some instances, have led to marginal tax rates as high as 70 percent. Third, all other industrialized countries, except Australia and Japan, have a much larger tax burden than the U.S., which requires higher rates and makes tax administration much more difficult. Lastly, a VAT is a lobbyist's dream, allowing them to install their loopholes unbeknownst to the purchaser. A retail sales tax, in contrast, is a lobbyist's nightmare, applied as it is under the bright lights of the retail counter.

You're absolutely correct.  Mea culpa.  I didn't read the entire site and just assumed that they stupid enough to look to replace ALL taxes with the most REGRESSIVE tax system possible.  I do like how the site says that exempting food and medicine benefits the wealthy and hurts the poor.    Why?  Well because the wealthy pay, in absolute terms, more for food and medicine than the poor.  You just can't make this stuff up!

So basically the people that pay virtually no tax now will essentially pay a 23% tax on almost all their income since they live hand to mouth(I realize that there is a rebate program but that is only given to the very poorest of people).  The good news is the wealthy no longer need to worry about ANY of their investments ever being taxed.  Even better businesses will no longer pay ANY taxes.  

Of course this tax does absolutely nothing to address the concentration of wealth issue but I suspect that the proponents of this tax aren't too concerned about that particular issue.

This is real fantasyland stuff.  Reading over that site there are so many mythical beasts being slayed it amazes me that anyone pays any attention to this.

I noticed on their FAQ page, #21, it discusses the loss of the home mortgage interest deduction:

With the FairTax, mortgage interest rates fall by about 25 percent (about 1.75 points) as bank overhead falls; this is a huge savings for consumers. For example, on a $150,000, thirty-year home mortgage at an interest rate of 7.00 percent, the monthly mortgage payment would be $999.12. On that same mortgage at a 5.25 percent interest rate, the monthly payment would be $830.01.

Setting aside the magic that lets them assume bank overhead falls by 25%, the statement ignores the lion's share of where the bank's interest rates come from: it's not overhead, but the cost to the bank of borrowing the money which they in turn lend out.  Lowering overhead would have a very modest effect on the rate consumers pay.  Such an obvious whopper on their FAQ page makes it clear we should assume "Fair Tax" proponents' statements are false unless proven otherwise.

that you didn't bother reading the original post as well, as it states that the Fair Tax is Better than a VAT. I saw that and then went to the website to check out if they had a difference between them. Sorry for not being clear.

I missed that comment.   Must have read right over it.

are too numerous to list.

They have a chart for rebates that would be given to every person with a Social Security card.  It lists out payouts paid based on number of dependents.

If you have no dependents you would get $178 a month.  If you have 4 kids you would get $361.  Wait a second.  Why not just have your kids receive the rebate themselves?  

This one is my favorite though.

#12 s the FairTax fair? Yes, the FairTax is fair, and in fact, much fairer than the income tax. Wealthy people spend more money than other individuals. They buy expensive cars, big houses, and yachts. They buy filet mignon instead of hamburger, fine wine instead of beer, designer dresses and expensive jewelry. The FairTax taxes them on these purchases. If, however, they use their money to build job-creating factories, finance research and development to create new products, or fund charitable activities (all of which help improve the standard of living of others), then those activities are not taxed.

This is some really good stuff.

...this tax reform plan is one of the best I've seen. Maybe The Best. I urge the diary author to consider putting up a companion piece with a few bullet points outlining the specifics of the plan, and then perhaps a hyperlink to the thumbnail section of the Fair Tax site.

...the statement ignores the lion's share of where the bank's interest rates come from: it's not overhead, but the cost to the bank of borrowing the money which they in turn lend out.

I believe the retort from the backers of the FairTax to your point would be that our economy would see an overall drop in interest rates, and this includes the rates banks must pay for capital. Hence, banks would be able to lend for less, and competition would force them to do so. I don't see the flaw in their logic, nor the reasonableness in your objection.

Anyway, even if a modest drop in home values did accompany radical overhaul of the tax code, this would result from removing a huge, tax code-induced sectoral distortion -- a distortion that makes housing less affordable for all Americans and creates serious repercussions that reduce prosperity.

That actually helped me because I've never taken an economics course.

I guess my primitive understanding of GDP, which was the value of goods and services produced, is reflected in C (what is actually sold) and I (excess inventory).

So, by this definition, the deficit is a direct contributor to GDP growth.  That's troubling, because it seems to create an incentive for the governement to overspend in order to keep the economy looking healthy.

One last thing: where does external debt interest go?  Does it fall under M for financing services?  Or G for governement spending?  Please tell me it's the former.

Interest rates are NOT predicated on the profitibality of banks.  This is simply wrong.  Perhaps the GAP between lending and borrowing rates is, in some small way, related but the overall rates are not.  

Here is what they say:

With the FairTax, mortgage interest rates fall by about 25 percent (about 1.75 points) as bank overhead falls; this is a huge savings for consumers.

They claim falling bank overhead will result in a 25% reduction in interest rates, not from lower Fed lending rates.  Alot of their claims are fanciful but can not be proven false; this one is just plain impossible.

G = Government = Spending - Taxes = Deficit

So GDP goes up as the deficit goes up.

What, what, what?!?!

Did you just that by substitution GDP = C + I + Govt Spending - Taxes + (X - M) ?!?

It's G.  In fact a good part of our deficit is paying interest on debt.  They are inseparable.

But if you read the whole post, you'll realize that C and I go down when G goes up.  It's called dynamic effects.  This is why the conventional (Keynesian) wisdom is to run a deficit when in recession to pump up GDP.  It is also how some states make their economies boom in election years (esp. Mexico).  Often the longer term consequences are inflation or other bad economic trends, but the government can boost GDP by running a deficit.

Check out his diary it has plenty of articles about the Fair Tax and all well-written.

I realize you understand this, I think you just made a mental mistake though.

You stated that G in the GDP identity was equal to the deficit:

G = Government = Spending - Taxes = Deficit

But G is all government spending, not spending minus taxes.

If anything, you want to say G = Spending = Taxes + Deficit.

If total government spending is $300, and it raises $200 in taxes then it needs to float bonds for the other $100.

Substituting into the GDP formula then gives the much more sensible: GDP = C + I + Taxes + Deficit + NX.

I just confused myself. Don't post when just getting off work. Head hurts.

I do have a point.

This line "G = Government = Spending - Taxes = Deficit" is flawed. Thge equestion "Spending - Taxes = Deficit" is obviously true. However the "G = " part is messed up, but the "= Deficit" is true.

You are throwing two sides in there when only one should be.

Don't confuse me like that anymore ;)

GDP = C + I + Govt Spending - Taxes + (X - M)

That is wrong b/c "G = government spending" by definition. All of the sudden the this "- Taxes" part crept in b/c you redefined G to be the deficit instead of spending.

One defines C as Consumption before taxation and one after taxation (C-T).  This is usually proxied by total income for the country in one survey.  Depending on if you take out taxes or not you have to compensate in the defintion of G.  If that doesn't make sense, it's my fault not yours.  I should have just linked to some elementary textbook write-up instead of doing my own.  My bad.

Depending on if you take out taxes or not you have to compensate in the defintion of G.  If that doesn't make sense, it's my fault not yours.

No, no. I totally get it now. It just took me a few second (and about four posts).

However, I have never seen an example of C including government consumption and therefor G being only the deficit portion of government expenditues.

Can you show me anywhere this convention has been used?

In the Fair Tax Book by Boortz and Linder, Government WILL PAY the fair tax on all of its purchases.  Therefore, the Governement Spending portion isn't correct.  The condition of government having to pay the fair tax will force government to make better choices, and more importantly, perhaps decrease spending by privitization.  Fair Tax  website answers to this are:

What assumptions have been made about government spending? The FairTax plan is devised to be revenue neutral for the first year of operation. It raises the same amount of revenue as is raised by current law. After the first year, revenue is expected to rise because of the growth generated by this plan. At that time the American people, the Congress, and the President will have to decide whether to lower the tax rate, or to spend the additional revenue.

How does the FairTax affect government spending? The public must remain vigilant to ensure that the economic gains caused by the FairTax benefit the people and the causes they deem worthy. However, it is easier to determine if your elected representatives are acting in your best interest. Legislators can more easily be held accountable for their decisions. For the first time in decades, it is simple to see whether a politician is advocating an increase in taxes or a restraint on government spending as the economic pie gets bigger. This is not the case today.