I had a comment not too long ago about whether or not the government can pay itself taxes.
The commenter believes this is impossible. On simple view of this, I would agree. For example, if I have ten $1 bills and pay myself $2 for washing the car, how much money do I have? The answer is $10. Simple math would then tell you that the government cannot pay itself taxes.
Unfortunately, simple math is not applied to how the federal government would begin to pay taxes on what it purchases.
Take that ten $1 bill example and look at it this way. If I have a budget and I pay $2 to five budget areas, I still have $10 but to be spent in different ways. Let's say I told myself that for every $1 I spend from a budgeted item, I will take 50 cents and redistribute it. So I take and spend $1 out of my budget for entertainment. I now have to take 50 cents from entertainment and redistribute it into each of the other budget areas. I now have, 60 cents left in my entertainment fund but each of my other five areas now have $2.10. Now I have to be more careful with my spending in entertainment.
Again this is way over simplified. For example, with the FairTax, experts agree that when all other tax revenues are abolished, we now have a final product or service that costs less (about 23% less). So instead of something costing $100 because it has embedded taxes, it now costs $77. Add the FairTax and the item costs $100. Add local tax (like you would do anyway) and you get the total cost. At most, an item will differ in price about a dollar (plus or minus). Very little if any change.
Now apply that to the federal government paying taxes. The federal government spends money. It pays out on services, contracts, and consumable goods. If the federal government was to have to pay the same tax rate as everyone else, it would not be any different than how we each will have to pay. Now, whoever receives payment from the federal government, will be collecting taxes from government purchases and the money will be reinvested into our government.
It is very simple when you think seriusly about it. If I have to pay $100 for an item (which includes the FairTax), then the fedral government will have to pay $100 for the same product. If I was able to afford a $100 million dollar item, then 23% of that money (already calculated into the sale) would be tax. When the federal govenrment pays for the same item, it does not get a tax break and get to pay $77 million for the same product. It has to pay the FairTax and its total costs will be $100 million. Whoever collects the payment, will then pay the sales tax.
Do not over think this. It really is that easy.
Think Fair and you will get the FairTax. Until next time.
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1 comment:
David,
It's not quite as simple as you seem to believe.
First, I don't agree that prices will remain about the same. The only way to get rid of 22% in the embedded costs of the income tax is to reduce everyone's gross pay/pension to their current net take home amount, and that won't happen for contractual and fairness reasons. And if everyone gets to keep their gross pay, then the best you can hope for is a 10% reduction in business costs and a 17% increase in retail prices.(1.00 x .9 x 1.30 = 1.17)
However, none of that has any bearing on the issue of whether or not the federal government can pay the tax to itself. Of course it can, but there will be some costs to consider. Federal government purchase of new goods will include the payment of the collection fee to both the contractor and the state collection agency in the state the purchase is made. This fee will amount to over $3 billion annually, a not insignificant amount. And, although it's not very likely, there might be some slippage due to evasion somewhere along the way.
Contrary to the opinions of the poster you said brought up the subject, according to all the economic experts, the Fairtax rate will be unchanged no matter if the federal government taxes itself or not.
The real issue here is the constitutionality of the federal government taxing state and local government operations as proposed in HR25. Forcing state and local governments to pay the tax may prove unconstitutional under the long held Supreme Court doctrine of intergovermental tax immunity. That remains to be seen.
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