Fair Tax

[Verik]

Well those numbers look a lot better than I expected, but you're saying that consumption would rise 20% (yes I get that people are also getting 25% more money). IMO the savings rate would be much much higher and consumption would decline a lot more than that under the fair tax.

I disagree. When given money, the first reaction of American's is to spend it. The saving's rate is far more culturally based than you are implying. Japan spent out the ass in govt stimulus during the 90's trying to get people to spend and even though they knew it would help the economy, consumers had higher savings rates than ever.

Doubling the savings rate is not very significant because the savings rate was tiny to begin with.

It's huge actually. Psychologically speaking, 5% we are at right now is big, but its enough that the government wants to spend a trillion to get people spending again (and NOT saving this much).

You should have started with a big cut in consumption and went from there IMO.

Even with 10% cut in consumption you are getting 25.875 on T (a total change of ~5).

But if you think that would occur I really disagree. With S at 12.5, there be a huge change. I'll make another graph to explain... the IS-LM curve is a pain in the ass to explain in words.

When income taxes are raised, we can do absolutely nothing about it, so we don't do anything to change our normal habits. Sales tax on the other hand has a much bigger psychological impact, and gives the consumer the choice on what to do.

You can't invest (i.e. "save) more? Psychologically I agree the tax is different. But I disagree that when taxes are changed your behavior doesn't change. Granted there is little empirical evidence for this because the changes are so minute that it wouldn't be changing your overall income level by any drastic amount.

Basically I think that the very fundamentals of American society, that of being a consumer-based economy, could possibly change into Americans saving a lot more.

A 10 year depression in Japan couldn't change their fundamentals of their economy. What do you base the US changing into a saving heavy economy on? Even in times of depression our savings rates have stayed relatively low (maxing out in the 70's at close to 13% but that was also during a time when the federal funds rate was 10-15%. Japan has averaged 15% savings and has spiked in the 1990's even against economic wisdom and available stimulus).

You cannot expect people to not change their habits when you change the rules of the game. Saving is a good thing, the point is I still don't think the 23% figure is realistic.

Savings increasing opens up a whole new ball park... brb. Especially if we are talking about American's who have lived their whole live accustomed to spending xx% and saving only x%, when given higher income they will rationalize the sales tax and continue to spending in their "comfort" % of their income.

[SampaGuy]

It's huge actually. Psychologically speaking, 5% we are at right now is big, but its enough that the government wants to spend a trillion to get people spending again (and NOT saving this much).

Thats true.

Even with 10% cut in consumption you are getting 25.875 on T (a total change of ~5).

A total change of ~5 is equal to ~20% less tax revenue coming in. So you would have to change the fair tax rate to ~27.5% instead of 23% to get the same tax revenue, assuming C and S stay the same with this new tax rate (which they wouldn't).

You can't invest (i.e. "save) more? Psychologically I agree the tax is different. But I disagree that when taxes are changed your behavior doesn't change. Granted there is little empirical evidence for this because the changes are so minute that it wouldn't be changing your overall income level by any drastic amount.

I could save more as it is, but the fair tax would be a huge incentive to do it, IMO.

A 10 year depression in Japan couldn't change their fundamentals of their economy. What do you base the US changing into a saving heavy economy on?

I base it on that huge sales tax scaring the life out of people, psychologically.


I don't think the analogy with Japan is good in this case because it is the opposite situation, which is very different. Like, it's a lot harder to get a conservative person to do something very risky than to get a risk-taker to act more conservatively, if that makes any sense. But you might be right, Americans do spend more when they get raises.