[I can play that game. Let's suppose a person retiring tomorrow with $2,000,000 in after-tax savings. Do you think they'd be better off with the FairTax?]
I've already said closer than 4 years to retirement starts to see a problem. That is a far cry from "anybody over 50".
[Try your example without the 401(k) (or, even better, factor it into the outcome) and see how your numbers turn out.]
The 401k grows rax-free under both PIT and FairTax for ten years. At the end of 10 years it is worth $600K. It provides the same $4,200 per month income for 25 years. Together with the A-T savings income and my pension and SS benefits:
PIT:
A-T income stream: $2,800
401k income stream: $4,200
Pension: $1,800
SS: $2,200
Total: $11,000 per month $132,000 per year ($80K taxable income)
Income Tax: $1,500 per month $18,000 per year
Purchasing power: $9,500 per month
FairTax:
A-T income stream: $5,400
401k income stream: $4,200
Pension: $1,800
SS: $2,000
FCA: $200
Total: $13,200 per month $158,400 per year
Income Tax: $0
FairTax paid: $2,700 per month
Mortgage + PropTax: $1,400 per month $17,000 per year
FairTaxable purchases: $9,100
Purchasing power: $10,500 per month
So the FairTax is only going to allow me an extra $1,000 per month in purchasing power. That's not a lot, but I'm sure I'll find a use for it.
[The portion of mortgage interest representing the cost of financial intermediation services is taxable under the FairTax. ]
So my mortgage interest rate falls from 6% to 4.5% due to the removal of the income taxes the bank must pay, my mortgage interest falls from $12K to $9K, and then I pay FairTax on the financial intermediation portion which is about $1200 (30% of $4,000) and my net outlay falls from $12K to $10.2K.
Thanks for clarifying. That's another $2K per year I can add to my savings.
[You showed an example where someone at the extreme margin would show limited gains ...]
You think my numbers are at the extreme margin ? I had no idea I was so well-off -- considering I still can't afford better than a townhouse in SoCal. And you consider a 50% improvement in purchasing power on the A-T savings to be "limited gains" ? It sounds like a significant gain to me.
You think my numbers are at the extreme margin ? I had no idea I was so well-off -- considering I still can't afford better than a townhouse in SoCal.The median income for nonelderly childless households (that seems closest to your situation) was ~$44,000 in 2002. $125,000 may not be much in SoCal, but you'd be a real playa here in Houston (a really nice 3,500 sq. ft starter castle in the suburbs would cost you about $300k).
Purchasing power: $10,500 per monthThat's a pretty good deal. Not many people can retire with more after-tax purchasing power than their gross pay BEFORE retirement....Who's going to be paying all the taxes in your scenario?