The Instigator
wingnut2280
Con (against)
Losing
6 Points
The Contender
Wierdkp326
Pro (for)
Winning
9 Points

The "FAIR"TAX

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Voting Style: Open Point System: 7 Point
Started: 1/15/2008 Category: Politics
Updated: 9 years ago Status: Voting Period
Viewed: 1,030 times Debate No: 1816
Debate Rounds (4)
Comments (3)
Votes (5)

 

wingnut2280

Con

The idea of a fairtax, or a national sales tax, has been kicked around by politicians, most notably Mike Huckabee. The concept seems simple enough. Tax consumption and not productivity. Encourage people to produce and invest, rather than penalizing good behavior.

However, a deeper look tells us that this "FAIR"TAX is possibly the least fair system possible.

Think about the percentage of a paycheck that a poor person spends versus a rich person. A poor person, living near or below the poverty level spends a FAR greater piece of his paycheck than rich people do. Rich people spend more money on the whole, but on a percentage basis, poor people would be tormented by this. Poor people spend nearly all of what they have making ends meet and are most commonly the ones who borrow or spend beyond their means. Rich people, on the other hand, invest, save, and spend when they need to, which is far less then the poor.

So, this fairtax would tax nearly every cent the poor person spends, while the rich persons savings and investments go untaxed. Talk about placing the burden on the lower class.
Wierdkp326

Pro

Hey Wingnut,
I understand your contention with the Fair tax. Yes, the poor spend higher proportions of their income on consumption when compared to the wealthy. The problem with using this logic as a means to argue that the fair tax is bad, let alone saying that it is worse than the unjust system today, is that a tax like this is behavior changing.
Understand that a tax is a disincentive for behavior, just as a subsidy is an incentive for other behaviors. The government declares what should be taxed, and what shouldn't. ANY type of tax, in order to be fair, should be one that is universal, and have EXTREMELY rigid circumstances when exceptions might be made (like using the poverty line as a basis for non taxation).
Given this, what a tax on consumption does is produce an incentive towards saving your money. This incentive is meant to reach out to all people and promote the very behavior that produces wealth.

Let's compare that incentive to today's tax system. Today's tax structure, from a VERY abstract sense, charges citizens an income tax that increases both in dollars and PROPORTION of income as you earn more. Any structure that charges increasing PROPORTIONS (must stress it, sorry) of your income as you earn more will create a disincentive to work harder when a larger proportion of your check will be thrown to the government. The statement that says to citizens is that, "Doing the right thing of working hard is going to cost you". Further, it treats everyone who worked hard to become wealthy like they are the "bad guy" in the country. There is absolutely no fair, ethical basis to tell someone who works hard and earns a lot that they owe the government a larger proportion of their income than that of someone who works hard and earns less.

The tax code does not simply tax regular income. It also taxes Capital gains. Capital gains are, in brief, the money you earn from investing money. Now, because interest on loans, earnings from stocks, or profits from selling a house are all income, it seems right to tax it. Economically, taxing investment reduces how much you can earn from investing, which is the equivalent to increasing the COST of investing. So, the government increases the cost of investing, and people earning lower incomes are crowded out from the ability to invest their income as a result. The general conclusion of this is: If you tax investment, only the rich will invest.

These two points distort the tax structure in such a manner that punish progress and productivity DESPITE the knowledge that it is best behavior for people to make. Further, the government changes the tax code yearly, making it increasingly complicated. According to the 2006 edition of "How to pay Zero Taxes" by Jeff Schnepper, The Internal Revenue Code was 9,471 pages in 1997 and consisted of 1.3 million words. In 2006, the code was 91,824 pages and consisted of 5.75 million words. As a comparison, he noted the bible is 1,291 pages and 774,746.

This immensely complicated code costs the IRS, alone, Billions of dollars to enforce, and costs the country nearly 1/5 of a Trillion in order to COMPLY with the code. These costs could be reduced immensely by changing the code to one that is universal.

In Conclusion to round 1, The Fair tax reduces all distorted costs of investment, which, if nothing else, HELPS the lower income groups to save money. The Fair Tax sends the right message to the individual that saving your money and earning more does not warrant punishment by the government, which is a strong incentive for someone to work harder. Finally, the Fair tax will reduce the cost of business and individuals to comply with the tax code which becomes a common savings for the entire economy.
Debate Round No. 1
wingnut2280

Con

This would all be well and good if changing the tax code would really be behavior changing. I agree that the current tax system is bad, but that does not mean that a universal sales tax would be better.

Behavioral tendencies and financial practice is not the problem. We don't need to change peoples incentives to invest or disincentives to spend recklessly. Fiscal responsibility is already present and, if it isn't, changing the tax code would not be an effective way to change it.

Most poor people are not poor because they elect not to save, they are poor because their situation requires them to spend the money that they do. Imagine a family below the poverty level. Its not as if these families refuse to save, they simply HAVE to spend their money in order to get by, whether its groceries, bills, or rent. There isn't a desire to recklessly spend or a refusal to save.

Additionally, people don't need incentive to invest. Whether or not the government taxes a higher PROPORTION of your check, you are still making more money net than if you were in the lower tax bracket. Rich people are going to invest anyway, taxes or no.

The claim that this tax is somehow universal is entirely misconstrued. Just because the tax is applied equally to everything doesn't mean it effects everyone in the same way. For instance, rich people save a larger proportion of their money than poor people, whether in the current system or under the fairtax, simply because they are able to. The rich have more available funds to invest and are required to spend a lower proportion. So, instead of placing a marginally increasing burden on the rich, the fair tax would place it on the poor, even if we reduce the 'cost' of investing. To elaborate, the poorer someone is, the less they are going to invest and the more they are going to spend, proportionally. This means, that instead of placing the burden on the rich by taxing profit and the like, we place the burden on those who are forced , by their means, to spend. I, for one, think that the burden (if their has to be one) should be placed on the rich, who are able to cope with it, versus the poor, who are obviously not.

You assume that poor people don't invest because the 'cost' is to high. This is not the case. People spend and consume first in order to meet their needs. The smaller amount of funds that people have left over after their needs are met, the less able they are to save and invest, proportionally. Again, its not that lower income people don't want to invest, they are simply unable to.

As far as cost is concerned, we can reduce it by lowering and eliminating taxes and simplifying the current codes.

In short, the problem is not behavior. People want to save, invest, make more, and turn profit. People don't want to spend. This is inherent in economics, regardless. By taxing consumption, we are placing an increasing burden on those who can't afford it. Basically, the more your means are stretched, the higher your marginal burden. I am not sitting here defending the current tax code by any means, but a fairtax isn't the answer.
Wierdkp326

Pro

I was not arguing that there is no fiscal responsibility in society today. That responsibility, however, to invest or spend is CONDITIONAL to whatever incentives / disincentives surround someone. A tax on any behavior is the same as a price increase on it. This price change can have strong effects in people's decisions (depending on how necessary the taxed behavior is).
Let's note exactly how a switch from the current structure to the fair tax system would affect people in the short run. I'll note which ones I would think are positive or negative :-)
1. People would receive larger paychecks immediately (rather than applying for tax refunds at in April. (positive)
2. People would then be taxed in higher amounts for purchasing goods. (negative)
3. Yields on all investments would immediately increase (positive)
4. Corporate profits would increase making stock yields FURTHER increase (positive)
5. Efficiency in the tax code immediately improves, universally decreasing costs for people (positive)

Now, that's a lot of positives in the short term. However, most economists agree that over the long term, society adjusts to any change, so let me now acknowledge that changes that would come inevitably.

1. Stock prices increase to lower yields on investment (negative)
2. Corporate profits decrease because of the competitive responses to profit (negative)
3. Price of goods decreases because of new competition, possibly beneath the prices prior to the shift (positive)
4. Investment interest decreases because more people invest (negative)

Why does this happen? New investors are created because the costs of investment decrease and ALL consumers in the US have received dramatically higher paychecks FASTER. This creates more competition in the investment industry, which eventually makes investing less profitable. In some sense, I must acknowledge that those responses undermine my point, however I assert that this is a GOOD thing for our economy.

If the rich receive dramatically lower interest on the investments that they WERE going to make, than the cost of investing has actually INCREASED for them. Meanwhile, the cost of investing for the poor is still lower than it was PRIOR to the change in the tax structure. Moving on, the rich, seeing that their financial investments are not reaping the profits they once hoped for, will be forced to either invest in businesses or capital if they wanted to REMAIN rich. The rich will have to become bigger spending consumers in order to stay successful.

So, in the end, we are left with the rich spending MORE in the marketplace, and the poor spending less. Even if the poor only spent a small proportion less in the marketplace than they had previously, they still reap the benefits of either lower or equal prices to before while saving more. And the rich who, today, are taxed less when they invest, will eventually be induced to spend in order to earn the same amount today.

I apologize for the complexity of this argument, but the true brilliance of the FAIR tax is how the structure will shake up (for the better) the entire structure of our economy today. Today, someone has to FIGHT for their taxed income at the end of each year, and they finally receive it over a year after they earned it. If they had the money earlier, they could have invested it sooner, and that could actually have earned money to improve the lives of the poor or others who live paycheck to paycheck. Worse, if you don't earn a lot of money already, the money often appears not worth doing research to fight for. The cost of getting your own money back actually exceeds the amount you could have earned.
The fair tax eliminates that issue COMPLETELY, giving the poor an increase in their income that they would not, otherwise, have had. No matter how much you simplified the CURRENT system, you still are left with a system that hinders investment by taking your money first and paying you back later.
Debate Round No. 2
wingnut2280

Con

I'm not denying that there are benefits to the Fairtax, but on the whole its a bad idea. There are two major, long-term flaws that stick out that you assume will not occur.

First, the tax burden will shift. As I illustrated earlier, an economy that penalizes the rich is, at least in some sense, acceptable when compared to a tax burden on the poor. Because of the way our tax system is structured, which you say is fundamentally bad, the top 1% of our population pays over 85% of the taxes our government receives. This is because we tax 'rich' behavior, like investing and capital gains. Suppose we switch to taxing 'poor' behavior. The tax burden would do a 180. As I said earlier, there are massively more poor people spending proportionally more money.

Now, the question becomes whether or not this 'poor' behavior will still be forced under the fairtax. If poor people aren't forced to spend more money proportionally, than there is no issue. Sadly, this isn't the case. The nature of having less money is that you have to spend more of what you have to get by. You argue that we would be giving them money back, which would compensate for taxing their inherent behavior. While this aims at remedying the problem, it isn't a full compensation.

To elaborate. A sales tax would have to increase prices by something like 25%(ish) in order to compensate for the switch. You argue that competition and freedom from other taxes would make this up? This is a pretty lofty goal. Say a person spends 80% of his earnings. When we make that 80% go 25% shorter, as far as dollar to gains, he gets less for his money. If a person gets $20,000 a year, he pays about $3,000 in taxes, not counting deductions. So, conservatively, he spends about 12-14% on taxes now. That means new competition would have to account for the other half of the sales tax hike. Is new competition going to drive prices down 15%?

You argue that the rich would forced to spend more and the poor would be able to invest more. This is also not the case. The tax systems incentives/disincentives do not bear weight on fiscal behavior. As I said earlier, people want to invest already. Poor people are simply less able. The way we make them able to invest is by making their dollar go further, so they can meet their means with less money, giving them more left over to invest and save. The fairtax does the opposite, as I illustrated above. Furthermore, rich people would LOVE a fairtax. They spend less already. So, taxing what they don't do as much would benefit them. Even if their investments are making less, they won't be 'forced' into spending in order to 'stay rich'. Quite the opposite is true. If the rich aren't getting returns on investments, they simply pull out of them. They don't have to do anything but beat inflation to stay rich.

When long term investment yields go down, we are back to square one. Only this time, the burden is on the poor, their dollar doesn't get them as far, and the rich are left timid and refusing to invest.

The fairtax would be an effective short-term economic stimulus because it floods the market with investment opportunities and capital. However, it has long-term economic ramifications, like increased poverty burdens, lower investment yields (which is equivalent to higher cost), and higher prices (which can't be overcome merely by more money and competition). While the fairtax has some economic advantages, it is fundamentally problematic.

I am not defending the current tax system, merely discrediting the fairtax. I admit the flaws in the current system as far as cost and complication. But these can be solved by simplification. As far as flipping our tax code, that would be a bad thing, so I don't want to account for that.
Wierdkp326

Pro

Well, the blunt answers to your contentions are:
1. Yes, overall prices are likely to decline more than the increased burden on spending.
2. No, the rich do not live like skinflints, and therefore are not going to stop spending in such a way that they can somehow "beat" inflation to get by.
3. Yes, the investment costs going up by virtue of the yields going down will have some measure of crowding out at the top and bottom, but it will be because more savers entered the economy. That will then result in more capital equipment investing in the economy, which is better for the poor as much as it is for the rich.

Let me start with your point on the $20,000 earner. The citizen gives the government the 3000 immediately, rather than at the end of the year. If the citizen is savy with their understanding of accounting, they can get most of it back, but that takes work, and over a years worth of it. If that money went into a savings account at the beginning of the year, then at 5% interest, they could have $150 by tax day. As such, they have to wait till AFTER tax day to get the money, and then invest it late. That is a cost implicitly imposed on them because of government beaurocracy. Simplifying the tax code may guarentee that that citizen gets the 3000 back eventually, but that doesn't change the cost of taking the money from them now rather than later.

The Fair tax offers the "money now" system, giving that person the ability to save the money in a bank account early, and tax them only when they spend the money. To your credit, of course they will EVENTUALLY spend the money, but what they earn in interest, for the period that they were able to keep it, can partially mitigate the costs of that consumption tax.

You assumed with that 20K earner that she/he spent every dollar of their income. Under that assumption, that person has 17K that they earn throughout the year with the chance of getting some of it back in september of the next year. With the fair tax, someone spending all 20K will have an effective income of $16,260. To your credit, it appears worse on the surface.

But, with that in mind, lets say that fair tax has lackluster performance on decreasing prices, say some small amount like a 5% reduction in prices. Well, that means that the effective income of the individual increases 5%, which makes their income $17073. Wait a minute, that's MORE than they would have had under the current structure, and they have it sooner rather than later! It's more likely, given that the tax burden is passed entirely onto the consumer (aka, no more corporate taxation), that the prices will have to decrease more dramatically in leu of record profits. Let's assume a 10% overall decrease in prices, we have a 17,886 effective income for that individual earning 20K a year.

Now, the effective corporate tax rate for most retailers or producers is 35%, which means that it could even be reasonable to assume that a 10% decrease in price is lackluster performance by any measure.. That rate is charged to both producers and retailers, which means that one product has to account for an at least 70% effective tax rate before it ends up in a consumers hands. This is to ignore the numerous corporate taxes that could also disappear as a result of the Fair Tax. In the end, the person spending all of their money is getting a higher value for their dollar than beforehand. But, if we assumed that the higher value afforded them the ability to invest more, than we have made him more likely to save his money.

Enough with that example. One thing I've chosen not to talk about is a stipulation of the Fair Tax that I was unfamiliar with until about a week before this topic was brought up. There is a universal "prebate" that is distributed to every family using today's poverty model. This prebate is essentially a check equal to the amount one would pay in taxes while living at the poverty line. This creates, as a by product, an increasing tax burden on spending behavior. If someone earns twice the poverty line (which would be your 20,000 a year person), then they would only have paid HALF the tax burden because the first half of it was given to them by the government (if they spent all of it).

Therefore, someone who is earning more income, and spending it, as the middle class and rich will, pays a higher tax burden closer to the 23% that the Fair Tax charges. The larger proportional burden will remain on the consumers, and those will be the wealthy. Check the Fairtax.org website for some more details with it, but the end result is the higher tax burden being shifted onto the poor is solved when you find out that the poor (and everyone) are being paid the taxes on the first 10K of income.
Debate Round No. 3
wingnut2280

Con

wingnut2280 forfeited this round.
Wierdkp326

Pro

My opponent has forfeited his last round. So, I shall just sum up.

My opponent has argued that no matter how you slice it, people are worse off with the fair tax. He has asserted the it taxes the poor because they are largely unable to control their spending and would therefore spend more in taxes under the new proposal.

I have responded by noting that, though the sales tax is substantial, it is a lower tax rate than the current system. When the cost of compliance to today's tax code is considered, plus the general inefficiencies relating to the current system are considered, the Fair tax is a step up by being simpler and will result in everyone's well-being increasing.

The Fair tax reduces all income relating taxes which will create high profits for businesses of all types today. This encourages new investing, and makes the cost of investing for the poor cheaper in the short run. It also creates competition and will inevitably reduce the prices of goods sold in the market. This will counterbalance the increased sales tax and make the poor better off than they were before because their goods will actually be CHEAPER to purchase than they were before the tax was implemented.

The Fair tax also includes a prebate, which sends families a check equal to the amount they would pay in taxes based on today's poverty structure. This means that, inevitably, a poor person spending all of their money on goods is doing nothing more than returning the tax money that was given to them. Therefore, they pay no tax, and the only people who will are going to b e the ones who earn and spend more than the poverty line.

Finally, a note about choice. In today's structure, you are charged the taxes when you earn your paycheck. At the end of the year, you have to fight the IRS to get any of it back. If you have the money earlier, you could have invested it, and earned something before you spent it. In the Fair tax, you are paying your taxes when you spend money. This gives you the money you earned FIRST and lets you pay your taxes as you consume goods throughout the year. No matter how you simplify the code today, you can never give an individual as much choice as that.

Take care wingnut, it was nice debating you!
Debate Round No. 4
3 comments have been posted on this debate. Showing 1 through 3 records.
Posted by Wierdkp326 9 years ago
Wierdkp326
The Federal Reserve is not a a "for profit" corporation, it was established by the government and acts to set the prime rates for banks to lend at. Aggressive, and painfully naive conspiracy theorists assert that the FED is private because 5 of 12 members on the board of governors are from the largest banks in the country. The rest are elected by the president. The money that is taken back into the fed, or "interest" is currency that leaves the money supply, which curbs inflation.

Kreuzian, stop watching Zeitguist and open a book that cites sources.
Posted by Kreuzian 9 years ago
Kreuzian
Fair Tax is better than Income, but no tax is even better.

Currently over 40% of all U.S. Debt, that is almost $4 Trillion dollars is owed to the Federal Reserve, private for-profit corporation in control of printing our money. Another 10% to private US banks. Only 22% is owed to foreign countries.

Currently the U.S. Governments pays about $500 billion per year to the Federal Reserve for "interest payments".

The income tax only collects about $700 billion. So the majority of the income tax goes to pay the Federal Reserve bankers. Arrest the federal reserve conspirators for high treason, and abolish the income tax.

Problem solved. $500 billion surplus, and you get rid of the counterfeiters who print and loan US currency to the government and people at whatever interest rate they decide on.

As the Grace Commission found, not one nickel of the income tax is spent on services taxpayers expect, only to pay the debt, with the #1 group we owe debt to being the "federal" reserve (private, for-profit corporation, no more "federal" than the federal cheeseburger).

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." - James Madison, founding father, and US president.

"Let me issue and control a nation's money and I care not who writes the laws." - Mayer Amschel Rothschild, 1790
Posted by shwayze 9 years ago
shwayze
I'm pretty sure you just completely won the debate with that first post weirdkp326. Well said.
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