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Toawa

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Why the FairTax prebate isn't welfare
« on: October 23, 2012, 12:01:06 AM »

Yes, I'm the guy who called about the FairTax.

Well, I guess the call went about as well as could be expected.  Fortunately, Ian's constant interruptions made me realize that I had to be more specific in answering criticisms.  Thus, in this post, I will endeavor to argue two things: that the proposed prebate is not a welfare program in the sense that it's generally understood (with all the bad things that come with that), and that though it isn't the best solution, it's the best way to implement a consumption tax that does not tax "the essentials" of life.  (That is, food, clothes, etc.  If you don't believe that a consumption tax should exempt "the essentials" then you can probably skip that part, as it doesn't argue whether we should or not do so, only that if we're going to do it, the proposed prebate is the best way to do so.)

What is the prebate?

The prebate (as defined in the FairTax) is a monthly payment from the federal government to cover the taxes that a person would pay when purchasing goods and services up to the poverty line.  For example, if the poverty line were $10,000, and the tax rate were 24%, the total tax paid on consumption up to the poverty line would be $2,400.  Thus, the payment to cover this would be $200 a month.

It's called the prebate because the government prepays it to you before you pay the taxes that it's offsetting, as opposed to a rebate which would be returning money paid in taxes after they've been paid.  While you could in principle delay it by a month and call it a rebate, it's not quite the same, as I'll address later.

It's a payment from the government; doesn't that mean it's welfare?

Not all payments from the government are welfare.  For example, if you pay income taxes, and you overpay in withholding, you get an income tax refund.  That's a payment from the government, but it's not welfare.  The prebate is the same idea, except they're paying you before you pay them.  Since most people will consume more than defined by the poverty line (by definition; if everyone consumed less, the line would be moved downward) most people will still be net payers.  As for the ones that aren't, I'll address that below.

It's still a payment for doing nothing! That's still welfare, and it's still destructive.

What is the most destructive aspect of welfare?  I contend that it is not the money itself; money is fungible.  Whether I earn a dollar mowing lawns or flying planes or for sitting on my ass (welfare), it doesn't change the character of that dollar. (At least not microeconomically; macroeconomically, if the world needs more lawn cutting and less plane flying, then a dollar earned cutting lawns will be stronger than a dollar earned flying planes.  But I digress...)  No, the real destructive nature of welfare comes because of the things I must do to obtain it. 

Allow me to paint a hypothetical:  Person A receives $18,000 a year in welfare.  This is the equivalent of ~$8.65 an hour (after tax) at full time employment.  If, in addition to the welfare, they were to get a full time job for minimum wage ($7.25, after tax ~$6.50), they could live on the equivalent of $31,520.  They would be objectively better off than the person only living on $18,000 a year.  So why don't they?  Because if they get that full time job, they lose the welfare!  Thus, welfare encourages unemployment.  Similar arguments can be made for food stamps, medicaid, etc.  The government is mandating that people be helpless as a prerequisite to receiving welfare money.

The prebate is different from welfare in that there are no such requirements of helplessness.  The only requirement to receive a prebate is that you be a lawful permanent resident of the US.

(Of course, one could argue about the effects of the current income tax refund system, given that the withholding mechanism is more or less designed to ensure that you over-pay, and thus depend on the government to return your own money; but even in this case the prebate is essentially replacing the current system with a substantially similar one except that the order of payments is reversed.)



Having covered that, let us consider the problem of removing consumption tax from "the essentials" of life.

What, exactly, are "the essentials?"

Ah, that's a tricky one.  The definition of what is "essential" will, of course, vary from person to person; the government cannot hope to adequately define what is essential for each person (not that that's ever stopped them from trying, of course).  They do so even now, at many state levels, by defining different sales tax rates for different classes of product.  Which brings us to our first possible way of untaxing "the essentials:"

Can't they just say that a given product, like a food, is "an essential" and not tax it?

Under our current taxation system, there are thousands of lobbyists arguing that their client should have a particular exemption, or their clients' competitors a particular non-exemption, to the tax system. (Indeed, something like half of all of the lobbyists in DC are there to lobby on the tax code.)  If, under a consumption tax, a product could be labeled "essential" and not taxed, we'd have the exact same problem.  Lobbyists would argue that their client's particular product is "essential" and should be exempt.  The authors of the FairTax want to close this particular avenue by detatching the question of what is "essential" from the law; instead relying the assumption that everyone who consumes will figure out "the essentials" (because they're, you know, essential) for themselves, and that most will also consume beyond the mere "essentials", thus providing a tax base.

(It should be noted that there is one exception to the rule above, about government not deciding what is and is not essential and not charging tax for it.  Education tuition is specifically exempted from the proposed tax, under the idea that education is an investment in oneself, and investments are not taxed under the FairTax.)

So why can't we just rebate the tax that people actually pay?

How would we do that?  Consider our current system.  In order to collect tax, the government requires us, as individuals (or our employers), to provide intimate details about our economic lives. Doing so requires a huge federal bureaucracy (the IRS), and costs $250+ billion every year.  It's also a privacy nightmare.

If we attempted to rebate only those consumption taxes paid, we would have to provide an equally detailed accounting of all that we consume (or at least, enough of an accounting to get up to the maximum rebate) to prove that we did, in fact, pay enough in consumption taxes to justify the amount we're asking to be returned to us.  The IRS would remain right were it is, and all that work checking up to make sure you really did consume as much as you say you did isn't free.

Under the prebate system, we assume that the vast majority of people will consume more than the poverty level; that is, they'll pay more in taxes than they'll receive in prebate.  Sure, there's a cost to you in higher taxes because some people are getting more out than they pay in.  But remember, you're also paying less because you're not paying for an army of tax agents to make sure that you really did consume everything you say you did.  (Not to mention all that extra privacy because you don't have to tell the tax agents what it is you bought...)

Having said all that, I agree that the proposal isn't perfect.  There's nothing in principle (that I can see) preventing the handling/payment of the prebate at the state level.  (The bill already pushes the tax collection to the state level, making it much more compatible with the pre-16th amendment Constitution.  It is essentially an excise tax on everything.)
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Cognitive Dissident

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Re: Why the FairTax prebate isn't welfare
« Reply #1 on: October 23, 2012, 12:34:40 AM »

Doesn't really matter whether you call it welfare. It serves the same purpose that the the income tax refund greater than tax paid does--it makes the lower class ideologically dependent on the government. By your definition, those under the poverty line would be collecting checks from the government as income. Before you say you already addressed that, realize that people who work at one "straight" below-poverty job often work for at least one under-the-table.

All other arguments aside, it would be suicide to allow a VAT in this country--at least before outlawing income taxes and the IRS.
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Toawa

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Re: Why the FairTax prebate isn't welfare
« Reply #2 on: October 23, 2012, 12:59:35 AM »

Of course it doesn't really matter what one calls it; it is what it is, whatever that may be.  Of course, what one calls it can affect how people think about it.

As for income tax rebates, it isn't just the lower class; and it isn't just cases where they get paid out more than they pay in.  I've heard many people longing wistfully for the day that their rebate check arrives because it's money; the fact that it's money taken from them over what should have been doesn't seem to bother them.  That's a problem, certainly, but the prebate is no more of a problem than our current system in that respect.

In the case of refunds over taxes paid, that is somewhat closer to my original welfare argument, in that people only receive them by fulfilling whatever requirements the government deems to put on them, whether it be having kids or buying an electric car.  Such cases are directly distorting of behavior and should be avoided but the prebate does so by not conditioning its receipt on anyone's behavior (except, perhaps, obtaining lawful permanent resident status, but immigration debates are rather beyond the scope of this topic).
 
And I will certainly agree with you WRT conditioning passage on the repeal of the 16th.  One annoyance I have is that the pro-FairTax legislators talk about adding text to the bill which only triggers its implementation upon the repeal of the 16th, but I've never been able to find it the actual text...
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Cognitive Dissident

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Re: Why the FairTax prebate isn't welfare
« Reply #3 on: October 23, 2012, 12:01:30 PM »

Of course it doesn't really matter what one calls it; it is what it is, whatever that may be.  Of course, what one calls it can affect how people think about it.

As for income tax rebates, it isn't just the lower class; and it isn't just cases where they get paid out more than they pay in.  I've heard many people longing wistfully for the day that their rebate check arrives because it's money; the fact that it's money taken from them over what should have been doesn't seem to bother them.  That's a problem, certainly, but the prebate is no more of a problem than our current system in that respect.

Well, I'd argue this re-enforces my point. I won't support a new system that does this. (Frankly, I don't support taxation, so I guess it's moot.)

Quote
In the case of refunds over taxes paid, that is somewhat closer to my original welfare argument, in that people only receive them by fulfilling whatever requirements the government deems to put on them, whether it be having kids or buying an electric car.  Such cases are directly distorting of behavior and should be avoided but the prebate does so by not conditioning its receipt on anyone's behavior (except, perhaps, obtaining lawful permanent resident status, but immigration debates are rather beyond the scope of this topic).

Well, a lot of them support things someone is already going to do, like own a home, work at home, go to college, etc.
 
Quote
And I will certainly agree with you WRT conditioning passage on the repeal of the 16th.  One annoyance I have is that the pro-FairTax legislators talk about adding text to the bill which only triggers its implementation upon the repeal of the 16th, but I've never been able to find it the actual text...

Not a lot of good options when it comes to "reforming" government. Like voting, it's generally a waste of energy. The low-hanging fruit (like voting down initiatives and referenda that make government larger) sometimes come along.
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Toawa

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Re: Why the FairTax prebate isn't welfare
« Reply #4 on: October 23, 2012, 01:32:00 PM »

Well, I'd argue this re-enforces my point. I won't support a new system that does this. (Frankly, I don't support taxation, so I guess it's moot.)

Fair enough.  My support for the FairTax isn't because of some belief in the validity of taxation; it's because I think it would be far, far less destructive than the current system is.  It's the philosophy of harm reduction, as applied to the tax system.  I think that taxing production (which is what an income tax is) causes less production, which is not what we need, and I think that simplifying the structure as much as possible, even if it might mean some people get a net monetary benefit from the pre-payment system, is well worth the savings in compliance costs (and privacy).

I agree in principle that any transfer payment by the government, be it welfare or whatever you'd call it, is destructive.  However, some transfer payments are more destructive than others.   The harm in any transfer payment is twofold: the harm to the payer and the harm to the payee.  The harm to the payer is obvious; the government has taken their money.  Until we can eliminate transfer payments entirely, that harm is always going to be there, and the least we could do is try to minimize the costs associated with taking that money so that we take as little as possible.  The harm to the payee comes in the forms of strings attached to that transfer payment.  In my example in the first post, one of the strings of receiving a welfare check is "you shall not be employed."  By cutting as many strings as possible, we can minimize the harm to the payee by not incentivizing their own destructive choices.

I think that the current "welfare" payments in the tax code (Child Tax Credit, EITC, etc.) are more destructive than the prebate which would replace them.  Until we've worked ourselves into a position where dumping the whole thing is realistic (IE, without revolutionary violence) it is wise to try and reduce the harm as much as possible.
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Cognitive Dissident

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Re: Why the FairTax prebate isn't welfare
« Reply #5 on: October 23, 2012, 01:37:26 PM »

The other harm to the payee is developing dependence on something other than peaceful, voluntary, quid pro quo activity.

I support reducing (or eliminating) taxes and deductions.
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