Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

Why exempt used goods

Why are used goods exempt? There is a massive retail industry in such goods (cars and parts, household goods, collectables, refurbished items, etc.), and, other than charitable entities, retail sellers all collect sales tax for the States now, so why not the FairTax as well? Shouldn’t the tax base be as broad as possible, while lowering the rate accordingly, with closer parity between new and used goods? Wouldn’t subjecting both new and used goods to FairTax be less susceptible to fraud?

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Permalink Reply by Joe McCune on January 22, 2011 at 10:29am

What would prevent the government from taxing used goods under the FairTax?

The same thing that keeps the government from taxing "home mortgage interest" and "charitable deductions" under the Income tax.

Public pressure and oversight.

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Permalink Reply by MrGadget on January 22, 2011 at 12:34pm

I'm not sure if I was unclear or misunderstood in reference to "broader base", but I meant it in terms of more stuff being taxed and a lower rate across all stuff, and excluding used stuff creates a big "middle" in margin between new and used goods. I don't know how inclusion of used goods can be avoided in the long view, so it seems like they just should be included from the beginning.

As I said in the other thread, there seems to be a lot of assumption that "tax-burdened" materials will wash out by the time the law would go into effect, and given some long term procurement contracts, I'm not sure that can happen.

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Permalink Reply by Ron Wenrich on January 22, 2011 at 3:19pm

I understand your broader base. It would be used to offset the taxes on new items. But, that also means that an item that has longer life would be taxed more than those of shorter life spans. A car could be taxed any number of times, as well as housing. You could end up with a tax of over 100% or better on these, depending on turnover. Non-durable goods would be taxed only once. So, their burden of tax would actually be less than that of a more durable good. It doesn't exactly equate to being fair.

As for the margin between new and used, if prices increase due to the Fair Tax, then the used things will also appreciate in value. In the end, the margin will be the same. But, instead of the government reaping any benefit for selling the used, the original used seller would be the one who would reap any profit.

There is some debate whether prices will go down or go up. That's all dependent on how labor reacts to no tax on income. They can allow their income to fall by the amount of the normal deduction, which would result in prices coming down. Or they could demand that the pay stays the same and pocket the difference. Then prices will go up due to the additional taxes.

As for "tax-burdened" materials, that's handled through inventory and a tax credit given against the Fair Tax proceeds. No one said it was going to be easy to transform from one taxing system to another. But, no one said it was impossible, either.

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Permalink Reply by MrGadget on January 22, 2011 at 7:50pm

Honestly, I consider your first paragraph to be more fair, in longer life things generating more tax over time, for the exact reason of lowering the front-end tax load. We may agree to disagree. I think the current State sales tax system bears me out. I think taxing the used goods will keep sudden artificial equity (aka price gouging) in check in the short term allowing new goods prices to come down toward them over time, otherwise I fear that the artificial push up of used goods prices under new goods will artificailly sustain new goods prices high for longer.

When this proposal gets serious consideration by policy makers, the media will squeal and the public will squeal, and it may boil down to how it is "pitched" to both.

Personally, with labor perceiving (rightly or wrongly) a substantial increase in their cost of goods and services coming at them, I would expect labor to insist that their paycheck be fully delivered without the withholdings to offset, perhaps even with the matching employer taxes added in as a "raise" followed by a long-term freeze while market pressure drives prices down from removal of compliance overhead at all levels to result in an effective "raise" in their pay as it goes farther over time. Payroll is the easiest thing for employers to change, while refactoring production costs is the hardest and most costly. I say most costly here because there are costs to repeatedly changing marketing material to reflect price changes, renegotiating term contracts both with suppliers and buyers within the chain, plus stock prices in companies are partially factored on periodic revenue, perhaps making investment draw more of a challenge as market analysts grapple with the new system. It's just much easier and costs almost nothing for all employers to tell their payroll clerks to "zero out all withholding, bump everyone 10%, and call it done." Publishing a quarterly financial report that says, "we sold 5% more widgets, but generated 20% less revenue due to price slashing, and your dividends got whacked" is not what stockholders and investors like to hear.

Cutting pay for a given job is very hard, as workers make decisions on major purchases and investments based on their income at the time as being the minimum they'll earn going forward and won't accept a decrease willingly. About the only way an employer can cut wages is through attrition and hiring new workers at a lower wage to replace those promoted or departed. This will happen in some sectors, but takes time, perhaps a lot of time.