Modeling Assignment: The

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Modeling AssignmentThe Fair Tax

• Group A
• Jeff Benne
• Maurice Hughes
• Rachel Johnston
• Samantha Selz
• Mark Thornhill

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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.

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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.

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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)

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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.

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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.

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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 voters 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.

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What options are they considering?

• ? Vote for the Fair Tax Bill, or
• ? Vote against it.

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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)

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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

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What model is being used now?

• Congresspersons currently rely on
• Polls
• Special interest groups / lobbyists
• Party leaders
• Media
• Personal bias

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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 bills passage
• Party line

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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

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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

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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

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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.

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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