The Fairtax plan will benefit the economy and the majority of Americans (a)

I must say that it is a pleasure to debate someone who is actually knowledgeable about the FairTax and who has read and understands much of the research. Most FairTax proponents merely parrot talking-points of certain talk show hosts, and thus serious discussion of the issue with them is virtually impossible. I apologize for not responding to all of the points of your first post. I plan to get to them later, but most of your arguments (and those of other FairTax proponents) are based on the mistaken belief that the FairTax rate will need to be only 30% (on a tax-exclusive basis) and that tax avoidance/evasion will be low, so it is important for me to establish right up front that neither of these assumptions are correct. Then it will be easier to respond to your other arguments. Effect on Prices First, let me congratulate you for admitting that prices will rise under the FairTax system by approximately the tax-exclusive rate (which, so far, we've considered to be 30%). Most FairTax proponents do not grasp this concept as they fall for the "embedded tax" nonsense. So, just to be clear, we both agree that if workers are to keep "100% of their current paychecks" and that the Fed accommodates (that is, inflates the money supply) that prices of taxable goods and services will rise by the tax-exclusive rate. I argued that this will lead to a shift of purchases to non-taxable goods and services, including used goods and foreign purchases. You responded by arguing that the prices of used goods will also rise proportionately (i.e., approximately 30%). Let's examine that statement. If true (and I agree with you that is probably is), then the price of ALL goods and services will immediately rise by approximately 30% upon the implementation of the FairTax. How does this help the average person (the basis for your argument) when he/she is currently only paying an average of 15.6% of his/her income in federal taxes according to the fairtax.org report referenced in your initial post. In other words, he/she will no longer be paying 15.6% of their income in federal taxes, but instead will be paying an additional 30% in federal taxes on everything (both new and used) that they buy. Who would gain from this increase in prices? Current homeowners, for one, since they would see the value of their homes immediately increase by 30%. Those who own multiple homes would be that much happier, as would those who own substantial real assets. But the loser would be the lower income wage-earner who needs to spend substantially all of of his/her income in order to survive and currently rents an apartment. They'd get a modest bump in their take-home pay , but would suffer from higher rent and much higher home prices if they ever wished to purchase a home. Retirees would especially suffer, as the price of everything (including, in particular, health care and long-term care, would all immediately increase by 30%). I'm also glad you cited the Beacon Hill/Kotlikoff study of 2006. http://www.fairtax.org.... I'll have more to say on this study later, but the part you quoted about the Fed accommodation is very important. As they said, such action would "reduce the real value of nominal U.S. government debt in the hands of the public . . . by about $1 trillion." What this means is that if the FairTax were adopted the Fed would need to increase the money supply to such an extent that the value of the US dollar would immediate drop by 30% vis-a-vis the rest of the world. So all dollar-denominated financial assets would immediately drop in value by 30%. This might benefit the U.S. Treasury (since the real value of its obligations would immediately drop by 30%), but would be terrible for the holders of U.S Treasury bonds, (whether foreigners or Americans) as the value of those bonds would immediately drop by 30%. Now, this wouldn't just apply to US Treasury bonds, but also to bank accounts, CDs, and corporate and municipal bonds -- anything denominated in dollars. Notably, these are precisely the types of assets that US retirees own. So they would see the value of their lifetime savings immediately slashed by 30%. On the other hand, since the drop in the value of the dollar would be an easily predictable result of switching to the FairTax, the George Soro's (and Paris Hilton's) of the world would simply transfer their assets into foreign currencies and foreign bonds (and other hard assets), and immediately reap the windfall of a 30% appreciation of those assets vis-a-vis the U.S. dollar. The point being: there might be less shifting of purchases to used goods and foreign purchases than I alluded to in my first post, but that would only be if the value of ALL goods and services in the US rose and the value of the dollar dropped upon the implementation of the FairTax. This increase in prices would hurt disproportionately those lower wage earners and, especially, retirees who have few real assets, and anyone who has savings in dollar-denominated financial assets. In contrast, the wealthy, the financially sophisticated, and those who have substantial holdings in hard assets and foreign currencies would benefit disproportionately. Moreover, even if there is less shifting of purchases to used and foreign goods, the aggregate increase in the price level will lead to an overall reduction of consumption (remember, when you tax something you get less of it), and thus a decrease in the revenue generated from the FairTax. (You might argue that the decrease in consumption will lead to an increase in savings and, thus, investment. True, but the increased investment dollars would more likely flow to high growth countries, such as China and India, rather than a country whose economy has slowed due to reduced consumption under the FairTax.) Business Purchases I'm afraid you misunderstand the FairTax on this point. You seem to believe that only actuall components of goods that are are resold by business would be exempt from the FairTax. This is incorrect. The FairTax exemption applies to ALL business expenses. "If a person or business buys taxable property or services for the purpose of using such property or service in the production, provision, rendering, or sale of other taxable property or services in the ordinary course of that business, then that purchase is not subject to the FairTax." http://www.fairtax.org... (Read the definition of "Produce, provide, render or sell taxable property or services" on page 6.) The remaining definitions and examples make it clear that these tax-exempt purchase would, in fact, include cars, yachts, private jets, ranches and rental property when used in connection with one's business. (Entertaining clients, for example). So, my examples of ways to avoid the FairTax via business purchases do hold true. Now, in fairness, the FairTax bill does provide that to the extent business assets are used for personal use (using the corporate jet for a vacation to Disney World, for example), the owner is supposed to pay the FairTax on the percentage that assets was used for personal use. I think we can all agree that this will be an extremely difficult provision to enforce and, in any event, will result in very little additional tax revenue. Finally, I should point out the Beacon Hill/Kotlikoff l study did, in fact, ignore the effect of tax evasion/tax avoidance. Several months after the study was published, Kotlikoff participated in a debate on the FairTax at the American Enterprise Institute in which he admitted the error. http://www.aei.org... Now, he believed the error was only 2%, whereas Dr. Jane Gravelle of the Congressional Research Service claims it was 8.4%. http://www.aei.org.... I'll have more to say on this later. Next up: The true tax rate revealed!