This is quite unrealistic. The Fair Tax quoted rate is 23%, but that means that the final cost of an item with a pre-tax price of $100 would be $130, not $123. This is because $30 is 23.08% of $130 and the sponsors of the Fair Tax wanted the rate to sound as low as possible (especially after focus groups showed that public support for such flat-taxes dropped precipitously once the rate went beyond 25%), so they stated the rate in a way that is entirely counter-intuitive with respect to sales taxes.
In pure numbers you are correct. I flinched at first when the rate was introduced in the book dealing with the subject but the competition argument presented therein is compelling. Basically it states that all previous taxes are to be counted for the year prior, then the consumption tax(only) would indeed add to the purchase price, consider though that other taxes are stricken from the record so this becomes "at point of transaction" taxation rather than a constant tax on earnings. Therefore taxes paid at transaction would essentially be relatively close to what is already paid in actual dollars plus or minus consumption habits. The idea is that once the "hidden taxation" along the chain dissappears profits are better realized and can be passed along to the consumer as price reductions, the counter argument being that businesses will retain the larger margins. However the nature of competition will state that businesses will realize that the larger margins are less than a quantitative margin with more sales so they will reduce prices, the pressure of competitive price drops will force other businesses to likewise lower their own prices until the sustainable rate is hit, this gives the consumer a better price even with the high tax rate. I don't summarize the book as well as I would like to but I do suggest it as a read, a lot of it makes sense.
We meanwhile do not pay in hidden taxes anything like the amounts that the Fair Tax people claim to be able to recover.
This is simply not true. Even at a minimum wage there are still taxes on labor that must be paid such as FICA, Medicare/Medicaid, etc. Then there are compliance costs etc. A simplified tax code would eliminate much of that.
The bureaucratic costs of the IRS would supposedly vanish, but the costs of the new and even more invasive bureaucracy that would have to track people in every step of their personal lives in order to assure that they were still eligible to receive a monthly "prebate" check are ignored and thus grossly underestimated.
First, I am not a fan of the prebate, actually neither are the authors of the bill, this is a concession to the side that is worried about the poor being hurt by this tax. I actually favor a lower rate on necessities and a "luxury Tax Rate" on consumer goods with a margin gap complimentary to both. The idea of eliminating the IRS is a good one, first off they have less accountability to due process than any other agency which is concerning, secondly if the IRS were to be dissolved it would not be that difficult to incorporate into the FBI former agents of the IRS to enforce collection and investigate failures to pay on collections. I think that is an economically viable alternative.
Also not well considered is the factor by which state and local governments will have to come up with new revenues to cover new taxes that they will owe on their existing purchases of new goods and services. These entities do not currently pay income taxes, hence these Fair Tax outlays would be new gross costs to them. This is hardly the end of the issues with the proposal.
States already lay and collect taxes in some form or another, and they do still pay a "hidden tax" on all purchases, I would argue that once consumer goods needed to run state operations became less expensive buying in bulk or in fleet would actually save states a considerable amount of money.
Consider for instance that if you are a homeowner, you would not only lose the mortgage interest deduction that you currently enjoy, but you would have to pay that 30% sales tax on the interest portion of your monthly mortgage installment as a purchase of new financial services.That will typically run several hundred dollars per month. Are people really aware of and ready for that?
Actually, the taxes would be paid on purchase. Consider this, if the mortgage deduction is lost it is a percentage of what the mortgage represents, under any tax system you still have a mortgage but if you are making 60k a year and taxed 10k with a mortgage deduction of say 1k you save at that point 1k but still pay 9k, with the fair tax you retain the 10k but pay at purchase. The mortgage is a standing financial service so you would pay at signing not on a continual basis so through the life of the mortgage you actually have free money as disposable income which leads to either consumption or investment/savings at which you pay the taxes. I argue that the consumer is still ahead.
And speaking of housing, the cost of a new home would have to include a 30% sales tax, while the cost of an existing home would have to include a 0% sales tax. What might happen in real estate markets as the result of that, I wonder. Any implications for new versus used cars?
I don't think behavior will change all that much. Many people already don't buy new cars due to the automatic depreciation upon leaving the lot, used cars have a lower rate, I believe that a new car/new home buyer is already of the mindset that they will pay for new. Most people who buy new homes buy because it has what they want, many buyers of existing homes do so as a trade off on cost. I see no reason this would change.