Saturday, July 13, 2013

All Government Spending is Tax

America does not have a tax problem. We have a government spending problem.

All government spending must come from some sort of tax. When the government spends that money must be extracted from the people somehow.

The FairTax is selling the myth that if we replaced the Income Tax with a national sales tax that the United States would become a magnet for business and job creation.

There logic is as follows. They say the income tax creates an embedded 22% cost in American goods and services. Replacing the income tax with a national sales tax would remove this embedded expense.

But the tax is placed on wages. America would only attract if employers responded to the imposition of the FairTax by dropping wages.

If we dropped wages while adding a 29.87% to existing sales taxes, then American workers would see a dramatic drop in their standard of living.

The FairTax book starts with the assumption the assumption that workers will keep their entire wage with no taxes removed. The FairTax book then assumes that prices will drop by the amount of the embedded tax.

Theses are mutually exclusive ideas. Either worker keeps their tax money or the employer keeps the tax money by dropping wages. We would probably see a little bit of both.

A primary law of economics is that all government spending must show up in the economy as some sort of tax. No matter how one goes about collecting the taxes, the government spending will result in a tax burden on the economy.

A national sales tax does not allow us to avoid the burden on the economy created by wasteful government spending. The FairTax just shifts things around.

The FairTax creates the dynamic in which employers keep paying high wages so that their employees can pay high sales tax without seeing a drop in their standard of living, or employers will drop wages in which employees see a drop in their standard of living with the increase in the sales tax.

If wages stay high, the costs of the FairTax remain embedded in American goods or services. If wages drop, we will see the workers quality of life drop dramatically as they struggle to pay the new 29.87% sales tax added to the price of goods and services. The second scenario is problematic as it would cause a general drop in the US economy. The FairTax would simply turn the US into a low wage nation.

The tax burden on the American economy is set by government spending. Shifting the tax burden around just creates disruption along with winners and losers. The Fair Tax will either have no change in the cost of employment in the US or it will result in a drop of wages making the workers the big loser of the reform.

1 comment:

Chris said...

Correct. Ans as it now stands only 58 per cent pays income taxes.

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