1 I like the idea of the consumption tax, I think it is interesting. I also agree lowering transaction costs for citizens, capturing lost taxes from the black market, eliminating a bureaucracy, and eliminating a needless service industry would all have positive effects on our economy.

However, I do question the effect this tax would have on US consumption. The tax would increase the incentive to work, to save, to invest, and to pay off debt, all good things. It would also increase investment in business, but there would also be a negative pressure on consumption. As the world's largest consumer, has any research been done to evaluate what the type of chain reaction we might cause?

Obviously it would be better for the economy if the government did not tax at all, and wherever it does tax it will cause the market to behave imperfectly. Quoted from fairtax.org by Alexander Hamilton, "If duties are too high, they lessen the consumption." There is an optimal consumption tax percentage that will maximize tax revenue for the government. But if the consumption tax is revenue neutral, my concern is that we have already crossed the natural "barrier" which Mr. Hamilton references and ultimately the consumption tax would unbalance the world economy.

Given legislators general ignorance of economics, I don't trust their judgment in considering the option of decreasing a consumption tax to increase consumer demand with an end result of increased revenue.

If at some point the government wakes up and balances the budget and begins to pay down some of our more than $8.3 trillion in debt then I think would be in a better position to experiment with the tax system.

I may be off base here so I welcome corrections.

Sincerely,
David Goebelt

2 Which is better for the economy -- having more money put into savings and investment or into consumption? I would propose that it is better to allow people to choose which.

I'm not sure we've crossed that line -- when we haven't even tried it. And I think one of the theories behind the fair tax is that the actual cost to people will be reduced. In other words, if it costs 50% less to MAKE a product, the reduction in price will be passed on to the consumer. So, if the consumer has to pay 10% more in sales tax, it's 10% of 50% of today's cost of the item. That sounds like it could result in MORE consumption, not less.

The reason I don't want to wait for the government to balance the budget is because they simply will not the way the current system works -- they will just keep taking more and more of my money, claiming they need it, and they will continue to punish those who work.

If a fair tax were implemented, hard work would once again be rewarded. I could choose to spend my money or save it -- and government would be more limited on their spending.

3 Mr. Ogre,

I wasn't very clear about the "line" to which I was referring. Hamilton was talking about a natural tax barrier beyond which increases in consumption tax would result in decreases in overall tax revenue. What I would be worried about is that a revenue neutral mark missed and bring in less tax revenue as a result of misunderstood market dynamics. I don't think the government needs more money (in fact they need less), but I don't think many people realize what a precarious position the federal government is in. If a consumption tax that is intended to be revenue neutral falls short, it will cause us to run an even larger annual deficit, because Washington doesn't quite have the hang of spending less than they bring in.

(Aside: I believe our nation is on the edge of a precipice due to the incredible spending habits of our national government. At best within the next 10-15 years we are in for a massive tax increase or at worst the bankruptcy of the federal government and the resulting collapse of our economy. In 10 years social security will be insolvent, which will add to the strain on the federal budget. Additionally, a large percentage of our federal debt is owned by baby-boomers. As they begin to spend their retirement, they will cash their treasury bonds. This will cause instability in the demand for federal debt, which has been financed in large part over the last several years by China and Great Britain, but is still owned mostly by US citizens. The federal debt is more like a car loan or credit card debt than a morgage. It is not debt that we can make gradual payments on, or just stop adding to annually if demand for federal debt diminishes. The vast majority of the debt is in short term securities that need new investors on a regular basis, which means if the market for federal debt falters, there will be immediate consequences. This huge debt creates an upward pressure on interest rates, which the Federal Reserve keeps in check by increasing the money supply. The increased money supply cause the dollar to falter and contributed to the increase in the cost of imported energy and goods. I know there are many other dynamics which have also contributed to the increased cost of oil, but the situation I described only exacerbates the problem. But, on a lighter note.)

Marginal analysis would tell us the government would move the consumptive tax percent, up and down to find the optimal point for their purposes. My question is if the tax burden is already to great to flip everything over to the consumption tax causing massive shifts in our economy. If I were a policy maker I would suggest a gradual shift towards a consumption tax over a 10 to 20 year period. In this way we wouldn't shock our economy and we would allow businesses to plan ahead. Think Alan Greenspan slow

There's another thing I may not be thinking about correctly, or maybe I need to do a little more research. The only way I can think that it would cost less to produce a certain product is that the supply of labor would increase, thereby lowering the cost of production a portion of which would be passed on in consumer savings.

You don't need to sell me on the idea though, I think it is feasible. Perhaps, though I need to do more reading on the subject to be completely comfortable.

Sincerely,
David Goebelt

(I guess I need to learn how to shorten my posts?)

4 Hey, if you keep writing that much, you're going to have to get your own blog! (Just kidding)

I could agree with a gradual implementation -- but there would have to be strong controls to ensure that we didn't end up with taxing income AND sales -- that's my biggest fear.

The way it would cost less is because to make an item will cost substantially less. If you move towards a consumption tax, you remove all the intermediate taxes AND the income taxes. For example -- let's take the classic widget, sold at Joe's Widgets and Stuff.

That Widget has to be manufactured. The manufacturer first has to buy raw parts. The raw part costs 2 cents. The raw parts have to be shipped to the manufacturer -- there's taxes on the shipping, roads, trucks, and other items used to transport the item. The shipper also has to pay huge taxes on the wages of the truckers. Therefore, to GET the raw part to the manufacturer now costs 5 cents. For the shipper to make a profit, he's charging 8 cents.

Now the manufacturer gets the raw parts. He's got to pay taxes on the manufacturing facility and on the wages of the people who do the manufacturing. So while it costs about 8 cents for the part, he's got to pay 6 more cents in taxes to manufacture it. Then he's got to have some profit, so he sells it wholesale for 17 cents.

Next another shipper has to ship from the manufacturer to the store. Again, taxes on the labor (4 cents) plus profit (3 cents), so the store has to pay 24 cents for the item.

Now the store has to pay taxes on the income of it's employees (4 cents) and on any profit they make, so they're going to sell the item for 32 cents -- that's the price to the consumer.

The consumer will have to pay a sales tax on the item of about 7%, so they'll pay about 34 cents for the actual item.

Now, if there's no income tax, you can remove all the taxes from that process involving income -- the shipper, the manufacturer, and the seller. The end price to the consumer, if reduced by those tax amounts, will end up being 32 - 17 = 15 cents! Even with a national sales tax rate of 20% (enormous), that's still a grand total to the consumer of now only 18 cents -- half the initial cost.

5 So you are saying every tax we have would be rolling into a consumption tax. I thought it was just individual income tax, I didn't know it would also be replacing corporate taxes. That makes more sense

6 Yes, the idea is to replace nearly all taxes -- income taxes, both personal and business would be the primary targets.