Posted on 02/11/2006 8:54:52 AM PST by Eaglewatcher
Recent letters have expressed concern that the poor or middle class might be harmed by adoption of the FairTax (www.FairTax.org) based on a deep misunderstanding of both the FairTax and the current system. We cannot assess the effects of the FairTax without comparing it to the reality of our current income and payroll tax system.
One cannot buy a loaf of bread without paying the income taxes of the baker. The price of that loaf of bread contains the cost of the flour, and the income of the baker, but it also contains the taxes the baker pays. After all, the baker does not have a money tree from which to pluck dollars to pay his taxes, he must get those funds from his customers, like any other business.
Further, the price of that loaf of bread contains the taxes of the miller, the farmer, the trucker and the grocer and those of all their employees. Those income and payroll taxes cascade through the production process and eventually make up more of the cost of that loaf of bread than the profits of any of those who worked to produce that bread.
Those many layers of taxes on productive work make up the embedded tax component of the price of bread or any other goods or services we buy. On average, that embedded tax component is 22.4 percent of the price of everything we buy, from a loaf of bread to brain surgery. So, the true tax burden on the working poor is 28.4 percent, (their FICA tax of 7.65 plus plus 22.4 percent of their remaining take-home pay, which goes to pay the embedded taxes hidden in the price of everything they buy).
Even if the poor paid the entire 23 percent FairTax, they would be better off than now, but they don't. The FairTax provides a rebate of all tax paid on spending up to the federal poverty line to everybody. This cancels out all taxes for those living at or below the poverty line, $25,660 a year for a married couple and two children.
For the same family earning twice the poverty line ($51,320), half their taxes are rebated, yielding an effective rate of 11.5 percent. And even at triple the poverty level, $76,980, their effective rate is only 15.3 percent, still far better than the 28.4 percent the poorest of the poor pay now.
So, who loses? The idle rich, illegal aliens, criminals, "off-book" workers and others who escape the current system through evasion or legal loopholes. Tax lawyers and lobbyists who make their livings from the complexity of the current system will also come up short. Foreign goods sold in the U.S. will no longer get a free ride while production of American-made goods and services bear the whole tax burden.
But those of us who work for a living, or who get by on a fixed income, will be far better off.
Tabor, of Chesapeake, is co-state director for FairTax.org in Virginia.
Sure, AND the additional bite from the so-called 'Fair Tax.'
How many times can anti-taxers tax the same dollar?
See post #28. e.g.
"Blank stare"??? No, you're merely ignorant of the facts and haven't done your research.
Those on the lowest end of the income scale will either pay zero in taxes with the rebate factored in or may actually receive more more money from the rebate than they would with the Fair Tax.IOW, more money is paid out as welfare under the "progressive" Fairtax than under the income tax...More money paid out breeds more people getting it.
We're supposed to stand and cheer for this because?_______________
Yea, that's me. Welcome to fantasy island!
For one thing, Robbie, he doesn't ascribe to your foolish notion that prices will be "15-20% higher" which none of you Status Quo Lovers have ever been able to show (and which clearly isn't true). Just removing the tax component mentioned in the lead-in article will reduce prices.
With sales tax rates at only 5-6% the amount of off the book sales from mom and pop stores is very large. With sales tax rates at only 5-6% the amount of off the book sales from mom and pop stores is very large. Up the rates to 20-30 and the level will rise tremendously
Not to mention the 40% marginal rates of business income/payroll/selfemployment taxes they evade on top of the 5-6% remittence of sales taxes collected from their customers.
But we wouldn't want reality of the current tax system to intetrfere with the fantasy that tax evasion occures only because of state sales taxes at 6% rates.
In short every incentive and more exists under the current federal income tax system. The overall economic incentive to evade taxes actually declines with the FairTax in place.
Hi, Willie Gee, how's the class warfare war going with you???
25 years in finance listening to salesmen pitch various financial products, I can tell you that your rule of thumb is generally pretty good.
No argument at all with the IRAs and 401ks, etc. I was just talking about regular savings, CDs, etc.
Still no satisfactory answer on that.
Good for you on the precious metals, though!
Try the FairTax website ... or check this link for a single look at some of the FairTax benefits:
http://people.bu.edu/kotlikoff/w11858.pdf
Look in the miror, Looey!!!
Nonsense. You need to read the bill AND the material on the FairTax website.
Another good post! Thanks a lot. Another point to be made about the poor and middle class - they buy used goods many times, rather than new. So they will receive the prebate, and yet will not be paying the Fair Tax on any used goods/products they buy. They will be much better off, as will every other class.
Reading the article, it sounds to me that the hidden taxes the poor and even lower middle class now pay...that 22% embedded, and 8% FICA would be eliminated for them.
Of course for the same government, the same money has to come from somewhere, and I'd suggest since it would be collected on the spending side, it would be the upper middle class and higher who do the most consumer spending. The poor, sauvy investors, and misers would make out the best. Don't spend, don't pay...would discourage the current consumerism (short-term gratification), and encourage investment for the future. I don't get bitter opposition to it...
As to it's prospect of passing, at this point dismal...but our current system is definitely horrible. What would either of you propose as an alternative?
Of course the vast majority of those embedded taxes are by far income and payroll taxes on the employees wages.
2004 IRS COLLECTIONS source: IRS Publication
TOTAL IRS COLLECTIONS $2,018,502,103
INDIVIDUAL INCOME TAXES $990,248,760
TOTAL PAYROLL TAXES $717,247,296
TOTAL INCOME & PAYROLL $1,707,496,056 (84.6% of taxes collected)
TOTAL CORPORATE TAXES $230,619,359 (11.4%)
TOTAL ESTATE TAXES $24,130,143 (1.2%)
TOTAL GIFT TAXES $1,449,319 (0%)
TOTAL EXCISE TAXES $54,807,225 (2.7%)
I don't know if it is "satisfactory"... but the value of post-tax savings will not be dimished under the nrst taxes any more than today's post-tax savings are diminished by tax costs. That is, purchasing power remains nearly constant.
Questions you may have include "but if the nrst tax adds 30% to prices, why are you saying that there won't be a difference?" The answer is that all prices today include a component dedicated solely to the collection of taxes and tax costs. This component adds appx 28% to prices of goods and 33% to prices of services (depending on industry).
You just don't see it. You don't recognize the $3.29 price for milk is actually $2.57 for costs of production plus 72 cents in tax costs. You don't recognize the $479 recliner would cost $374 without the costs of the income tax system but you have to pay an extra $105 to support our government's tax collections.
When the existing taxes and tax costs are eliminated, prices may fall and must fall in any competitive industry. Then the nrst adds a visible tax of nearly the same amount to prices.
Again, I don't know what "satisfactory" means to you in this context. Maybe if you could be more specific in your question you could get some information you could use.
Under the FairTax, the income is not taxed until spent for consumption (and then only on taxable items).
Under the income tax, that income is taxed additionally just as described in the lead-in - and there's no non-taxable items at all in that case when spent.
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