Modeling Assignment: The “Fair Tax”

Modeling Assignment:The “Fair Tax” Group A Jeff Benne Maurice Hughes Rachel Johnston Samantha Selz Mark Thornhill

Modeling Assignment Our assignment is to examine some decision that is current in the local business or political community, and identify models that are being used to examine the question, as well as those models which should be used to examine the question.

Topic: The “Fair Tax” We are considering the adoption of the so-called “Fair Tax”, also known as the National Sales Tax. The Fair Tax is one of the key policy proposals of Republican presidential candidate Mike Huckabee. According to fairtax.org, The Fair Tax has these key principles: A “progressive” national retail sales tax A “prebate” to ensure that no American pays federal taxes on spending up to the poverty level Dollar-for-dollar federal revenue neutrality Through companion legislation, the repeal of the 16th Amendment.

What is the Fair Tax? A “Progressive” national retail sales tax The proposal is for a 23% national sales tax to replace federal income and payroll taxes, including personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes. This tax rate is 23% of the tax-inclusive sales price, which is an important distinction. For example, under this proposal an item selling for $100 would have $23 in taxes included in that price, meaning that the pre-tax price is $77. You can see that in order to get that $23 in taxes, the actual tax rate is almost 30% ($23/ $77 = .298, or 29.8%). This is one of the key arguments of opponents of the tax: that the 23% figure is misleading, given the way we are used to viewing sales taxes. (This example is from factcheck.org)

The “Prebate” The “prebate” is a prepaid, monthly rebate for every registered household to cover the consumption tax spent on necessities up to the federal poverty level. This would be about $27,000 per year. According to proponents, this is how “the FairTax completely untaxes the poor, lowers the tax burden on most, while making the overall rate progressive.” They say that the FairTax is progressive based on lifestyle/spending choices, rather than simply punishing those taxpayers who are successful. The Treasury Department estimates the total annual spending for prebates could be as high as $700 billion annually, making it the largest category of federal spending. Fair Taxation says that the total would be closer to $485 billion.

Other Principles Dollar-for-dollar federal revenue neutrality Fair Tax proponents say that the plan is revenue-neutral, meaning the amount of taxes paid to the government in total would remain the same. However, noted tax analyst William G. Gale says that if the tax rate were set at 23 percent (tax-inclusive), the revenue loss would exceed $7 trillion over the next decade relative to current law. Repeal of the 16th Amendment This is the constitutional amendment, passed in 1913, that established the Federal Income Tax: The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration. Repeal would have to come through a constitutional amendment.

Who are the decision makers? The decision maker could be the voter deciding whether to vote for a candidate supporting the Fair Tax. However, since there are many other factors in a voter’s decision whether or not to vote for a candidate, for this assignment we will consider this issue from the perspective of a member of Congress considering whether to vote for the Fair Tax Bill, or not.

What options are they considering? Vote for the Fair Tax Bill, or Vote against it.

What kinds of information are necessary to determine the benefits of the options under consideration? Estimated Monetary Impacts Costs to implement the new program Annual cost to administer Annual cost to administer current system Effect on tax revenue Effect on taxes paid by the public (particularly constituents likely to vote) Effect on the overall economy (particularly constituents likely to vote)

What kinds of information are necessary… (continued) Opinions The public (particularly constituents) Special interest groups Key individuals (donors) Courts (constitutionality) The party line Likelihood of passage

What model is being used now? • Congresspersons currently rely on: • Polls • Special interest groups / lobbyists • Party leaders • Media • Personal bias

What kinds of models are necessary to examine that information? Descriptive models would be required to show: Public opinion Constitutionality Support or opposition by special interest groups and key individuals Likelihood of the bill’s passage Party line

What kinds of models…(continued)? Predictive models would be required for: Costs of implementing the proposal Costs of administrating Effect on tax revenue Effect on taxes paid by the public Effect on the overall economy

What kinds of models…(continued)? Decision models pull together results of the other models in ways that allow the decision maker to make an informed decision. • Show key correlations • Allow weighting of inputs • Adjust for bias • Relative priorities • Allow flexible combinations of input data

Result of Modeling • The final model would include graphical displays of the overall monetary effect of enactment of the proposal. • Compare current system to proposed • Results could be disaggregated into components: • Costs to administer • IRS, other enforcement • State revenue agencies • Tax accountants • Tax revenue • Effect on constituents • By income class, other demographics

What kinds of problems in data collection and/or analysis are likely? Costs and effects are difficult to estimate. For example, one key factor is the impact on spending and saving among the general public. How accurately can this be predicted? The challenge is to find estimates that are well-researched and unbiased. Much of the data available to the general public is published from a perspective of being for the tax or against it. Complexity of the analysis. It is important to have access to accurate, unbiased summary data, with the capability to drill-down to relevant lower levels. Several of the factors are based on opinions, thus polls must be conducted if they are not already available. It is important to show not only the latest poll information, but the trends of polls wherever possible. Sampling must be large enough to be statistically significant.

How would you address those needs in a DSS? • Bias in data can be addressed gathering enough data to overcome the bias. Also can be overcome by alerting the user to potential bias, and allowing the weighting of data to account for the degree of confidence. • Complex data will require a fairly powerful database capable of holding low-level disaggregated data, with the capability of aggregating up to the initial summary level. The user should be able to control the summary levels through an intuitive interface. The summary levels should match across the various data – for example, by state and congressional district. • Polls should show trends over time in a graphic format. The user should be able to drill into the poll data for various demographic factors, particularly congressional district. Overall Goal: Turn data into information

Modeling Assignment: The “Fair Tax”