Just as one example of how silly this article is, what do you suppose a flat 20% sales tax would do to the Real Estate market.

Your post is the silly one -- if the income tax is gone, then the sales tax that replaces it must be judged by the standard of people who now have kept much more of their paycheck. The effect of the sales tax on anything purchased will not be anywhere as dramatically awful as you indicate -- but it will be in the direction of postponing luxury purchases. I.e., people might be more prone to save up before spending big. Given our current national savings rate, this can only be a good thing.

Income tax is gone. But the price of everything has gone up by 30%. Including your house.

Yeah that's gonna do great things for the economy.

And every $1 saved is $1 sucked out of economic circulation. That collapses the economy faster than you can say 10 Years of Stagflation In Japan (that's exactly what their response was).

It will bolster the Real Estate market. Rather than make the obvious assumption that the FairTax is the same as any other sales tax please dismiss this thought. The FairTax is not in addition to the price of a home or any other product. It replaces the embedded taxes already in the product's price. A full explaination of this can be found at www.fairtax.org.

The National Association of General Contractors is a strong supporter of the FairTax

GCs like this because they often have to pay sales tax on their purchases and the would like it to be removed from their costs. But most GCs do remodels, not new home construction. New home construction under Fair Tax would collapse (and since Housing Starts are a big driver of the economy, so would the economy) because new houses suddenly carry a 30% price premium.

And yes, the "fair tax" IS an addition to the price of a home or product. Consider

• Two side-by tracts of land that a builder bought for $100k and built a 2,000 sq ft house @ $100/sq ft
• House #1 sells the month before Fair Tax goes into effect for $330,000 (10% profit for the builder).
• House #2 remains on the market

What price does the builder set for House #2 the month Fair Tax goes into effect? Remember that there is a 60 day "bad faith" clause that lets the 1st seller back out of the sale if he can show that the seller negotiated in bad faith.

For the second house, does the builder charge

• $440,000 ($330+30% sales tax)
• $330,000 (which breaks down to $254k for the builder +30% sales tax)

In the second case the builder is losing $46,000.

the obvious answer is that the builder will have to charge at least $400,000 JUST TO BREAK EVEN.

well the homeowner in the first house is absolutely thrilled, because in 1 month, HIS house value just went up $100k.

And the buyer of the 2nd house cannot afford to sell his house for anything less than $466k ($440K + 5% closing costs).

So explain again how this won't add to the cost of housing dramatically?

The full explanation at "fairtax.org" is at best naively fanciful. In fact there is no easily discoverable example of how the "fairtax" will work on housing. Instead there is some fancy armwaving about how it will drop your mortgage rates (only if you pay the cost of refinancing), but there is no discussion of the actual economic impact. The closest it comes is in the "fairtax fundamentals PDF" but the comparison table offerred has a glaring flaw in it. It equates $69,000 in payroll taxes paid over 30 years as equivilent to $69,000 in sales tax paid up front.

That's simply an economically incorrect analysis because it ignores the "opportunity cost" differences of the two payments. $69k averaged over 30 years is $2,300/yr

Now lets assume a market rate ROI of 9%.

A quick excursion into Excel's Future Value function tells us that if you spent 30 years paying $2,300 a year into a Stock Index fund, it would be worth $313,000 at the end. That is the "missed opportunity" of the income taxes you pay towards your equity over 30 years.

But wait, if we take the same Future Value equation and apply it to $69,000 paid into the same account and then held for 30 years, it would be worth $915,000 at the end. That is the "missed opportunity" of the "sales tax" you pay towards your house value.

So by paying all the taxes UP FRONT, you increase the cost of the house by some $602,000 over 30 years. If we add that into the "fair tax" 30 year cost estimates we get

The $230,000 house under Income Taxes costs $947,167 over 30 years

The same house under Fair Tax costs $1,426,431 over 30 years.

IOW under the Fair Tax system, the effective cost of buying a home goes up by 50%

And that's not going to kill the economy. Yeah right.