Posted on 10/10/2006 8:59:26 AM PDT by cryptical
And if only being "revenue neutral" was a virtue.
The tax system in this country is broken, but the damage is not limited to the federal government. The most damaging aspect of the tax system is that it has to support spending habits that are completely out of control.
The easiest way to reduce federal spending is to eliminate all transfer payments to the states. But that would push the deficits down to the states, and start a whole series of crises in states which pretend they balance their budget by using federal money with strings attached to provide services that most governments are not authorized to provide, let alone required by law or God.
There are three rules of taxation you have to memorize. Somebody is always changing all the rest of them, so you might as well not commit them to memory.
1. The only fair tax is the tax that taxes you and not me.
2. When in doubt, deduct it.
3. Who's gonna know?
Seriously, do you understand the payroll tax at all? For every penny taken out of the employee's paycheck for FICA, the employer has to contribute an additional penny -- for employees earning less than the Social Security cutoff (what is it, about 90k these days?), the employer is actually paying 107.65% of what the employee's stated salary is, when you include the "employer's share" of FICA taxes.
The example uses the numbers being thrown around by the NRST detractors that if employees keep their entire paycheck, that pre-tax prices could be expected to drop by about 8%. But what the detractors fail to show, and what I show in my example, is that this means there's more money in the individual's pocket too, which offsets, give or take a percentage point, the NRST added to the pre-tax price.
I'd love to see you back that up with numbers, rather than your repeated assertions.
Of course, but let's have that discussion at another time.
BTW, the example in #32 assumes the bill's current 23% inclusive / 29.87% exclsuive NRST rate. if, however, the Bush tax cuts were made permanent, the revenue-neutral rate drops to (I beleive) 19.2% inclusive / 23.76% exclusiveSo you Fairtaxers are now saying the Bush tax cuts have reduced, not increased revenue.
Welcome to the wonderful world of GSA static scoring.
If you don't have that conversation first, you never have it.
But as long as politicians can play the shell game that "someone else" is paying for it, people are going to take the promised goodies without question.
And that's comparing the income/payroll tax's effective rate to the NRST marginal rate. When you actually figure in the NRST effective rate, even under Rob's numbers, "Joe" is paying less for that item in the post-NRST world than he was in the pre-NRST world.Joe does not live by bread alone.
Paying an additional 30% on government services as well as
30% ON all government employee's (local, state and federal) wages salaries and benefits as well as 30% tax on their purchases(local and state taxes would have to be increased for the NEW federal tax they'd pay).
30% tax on interest (paid or earned),
30% more for anything imported (how many products do you buy that aren't?),
30% tax on fees, exises and other taxes included in a "gross payment" tax,
30% more for rent, gasoline, utilities, car repairs, insurance (Insurance coverage would have to increase 30% to cover the new tax then another 30% on that for the insurance "service" fee (premium)...
That's to name only a few that would NOT be an increase in purchasing power nor do they improve any marginal or effective tax rates.
First, lets start with ANYONE who derives a substantial portions of their income from non-wage income. For low to middle income earners, payroll tax is the larges component of Federal taxation. People who do not receive wage income do not pay payroll tax. Elimination of payroll tax puts exactly ZERO extra dollars into their hands under the FairTax to pay for increased prices.
Who are these people?
-- People who derive their income from investment activity or assets (retirees, for example)
-- People who derive their income from Government Transfer payments (SSI, for instance) Note that for a single retiree, as long as 1/2 their SSI plus their modified AGI is under $25K, their SSI is untaxed ($32K for married.)
-- low income wage earners receiving EITC (essentially a refund of payroll tax.)
Note that almost 17% of all tax returns filed had EITC income ... and that this 17% is a DIFFERENT set of tax filers than the 15% above who had NO wage income. We're now talking about 32% of all tax filers (over 42 million filers.)These people receive little to NO income benefit from the repeal of the payroll tax and, therefore will have little to NO additional "money to start with" in their pockets from payroll tax repeal to pay for inflated FairTax prices.
While I don't have exact figures, of the 15 million tax returns with SSI benefits, roughly half fall into the AGI range that would render their SSI as non-taxable.
As for the Income Tax component, roughly 32% of all tax filers paid no tax ... primarily owing to losses from investment or business activity. Roughly 60% of all tax filers had AGI under $25K and therefore paid little to NO income tax. So, somewhere from 40 million to 80 million tax filers will have little to NO additional "money to start with" in their pockets from income tax repeal to pay for inflated FairTax prices.
Now having said all that, I am NOT suggesting the status quo is either fair, or proper. What a AM saying is that a change to the FairTax has a FAR DIFFERENT impact on a FAR LARGER portion of the population than you and other FairTax advocates suggest. Far more people will experience a significant DROP IN PURCHASING POWER from the FairTax than you let on: they will see little to NO increase in disposable income yet be faced with substantially higher prices. MOST of these people are low income.
Enough numbers?
Business profits are taxed.
People who derive their income from investment activity or assets (retirees, for example)
Investment income is taxed.
People who derive their income from Government Transfer payments (SSI, for instance) Note that for a single retiree, as long as 1/2 their SSI plus their modified AGI is under $25K, their SSI is untaxed ($32K for married.)... low income wage earners receiving EITC (essentially a refund of payroll tax.
These folks have incomes so low, their effective NRST rate is well under 10%.
Corporations don't pay NRST. Seriously, educate yourself on the bill before criticizing it.
Which has been included in the NRST rate calculations.
My point, which YOU asked me to quantify, is that there are a substantial number of taxpayers who will derive NO additional spendable income if the FairTax were to be implemented. This additional spendable income concept appears central to your assertion that rising prices are immaterial because people will pay the higher prices with higher income.
As I have just shown you, using real data, a substantial portion of the population will derive NO additional income to pay for inflated FairTax prices if the PAYROLL tax is repealed AND a substantial portion of the population will derive NO additional income to pay for inflated FairTax prices from the repeal of the INCOME tax.
No matter how you spin it, these folks will NOT enjoy the benefit of higher take-home pay to offset higher FairTax prices ... contrary to your central thesis.
I find it curious, but not surprising, that your reply is neither responsive nor quantitative. Especially since you make it clear you were interested in numbers rather than assertions.
These folks have incomes so low, their effective NRST rate is well under 10%.
Immaterial, and frankly, a mere assertion. You continue to avoid the fact that "these folks" also have a combined tax burden under the Income Tax regime of well under 10%.
My point remains unrefuted: a substantial number of individuals will NOT enjoy higher take home income to offset their FairTax burden (prebate included). Now again, whether or not we agree that the situation is good, or "fair," your denial that it exists and is significant flies in the face of the facts. Your unwillingness to engage in an in-kind debate on the topic (responsive, quantitative, and on-anecdotal) suggests I have probably hit the proverbial nail squarely on its head.
Read what you're saying. You shift the discussion from total in-pocket dollars to payroll tax. Sorry, but that doesn't fly. Payroll taxes are but one source of taxes paid under the current system that go away under the NRST, and which affect spendable income.
The entrepreneur paying himself out of corporate profits is paying himself out of money that has been taxed by the federal government at somewhere between 15% and 35% (USC 26.A.1.A.II.11.b.1). Under the FairTax, he would have at least 17.65% more money in his pocket than he would have under the income tax.
The investor pays between 15% and 25% taxes on capital gains (I think, that is... USC 26.A.1.A.I.1.h is pretty convoluted on the capital gains definition). For retirement savings, the vast majority of income drawn from that investment is capital gains, not principal. Again, we're talking about someone who will see 15% or more money in hand after the NRST enactment due to the elimination of federal income taxes.
Immaterial, and frankly, a mere assertion. You continue to avoid the fact that "these folks" also have a combined tax burden under the Income Tax regime of well under 10%.
No mere assertion. A couple with an income of $25k gets an FCA of $4,508 (23% of $19,600). If they spent their entire $25k income on taxable goods and services, their effective tax rate would be 4.97% (total taxes of $5,750, minus FCA of $4,508 for a net tax total of $1,242, divided by $25K spent equals .0497).
If they spent their FCA as well, bringing their spending total to $29,508, the effective tax rate becomes 9.12%.
The lower the income, the lower the effective NRST rate would be, again, assuming the entire income is spent on taxable goods and services.
This underscores one of the central problem with the economics of the FairTax. You, Myrddin, are correct: the FairTax calculus requires the employee to shoulder at least a portion the burden of paying the formerly employer paid portion of payroll tax (other consumers, who were NOT employees, must also shoulder some of the burden.) To do so, two things MUST happen, and happen FULLY:
Second, consumers must INCREASE their level of consumption in proportion to the magnitude of the aggregate transfer. No amount of said transfer can be diverted to investment nor savings. 100% of it MUST be consumed or the FairTax falls short of revenue neutrality.
Of course this contradicts one of the most touted predictions of the FairTax: that the elimination taxation of investment will create an irresistible incentive to invest rather than spend.
This also flies in the face of another FairTax prediction: that consumption will be sharply curtailed in the early year of implementation (see Jorgenson, et.al.)
While were at it, this need (to increase consumption to cover taxes formerly paid by employers) also undermines an "advantage" of the FairTax: that you can "choose" how much tax you want to pay by choosing the nature and level of your consumption. Of course, to stay revenue neutral, everyone must either "choose" to to increase their consumption as describe above, or must hope someone else will "choose" to take up the consumption slack one leaves behind by "choosing" to consume less or consume differently (in a non-taxable way.)
The same problem exists for sums available from the repeal of the Corporate Profit Tax.
Money in a 401K is subject to ordinary income tax when withdrawn. Most of it is pre-tax contributions, some is actual capital gain. None of it has been taxed. I don't think the politicians will allow that pot of gold to remain untouched. The forced distributions at age 59 1/2 are evidence of that policy. Fortunately for most people, their annual income and tax brackets are much lower by the time the forced withdrawals begin. They pay less tax than if the withdrawals were lumped on top of an active employment income. Of course this assumes you are actually unemployed at the time the forced withdrawals start. I hardly expect to be retired before about age 70, so my 401k is going to get nailed pretty hard.
Savings accounts are mostly filled with principal from after tax income. It's pretty easy to discern the principal vs capital gain elements. Those savings are going to be double taxed. Savings account rates have been very low for the past 10 years. It's going to be mostly principal and whacked severely in value by NRST.
I did nothing of the sort. I quantified the magnitude of taxpayers who would receive little to no benefit from the repeal of payroll and income taxation. Payroll taxes represent the majority of taxes for low to moderate income taxpayers.
The entrepreneur paying himself out of corporate profits is paying himself out of money that has been taxed by the federal government at somewhere between 15% and 35%
Your source notwithstanding, your assertion is incorrect. The vast majority of small business owners are not corporate entities subject to your citation. They are proprietorships, partnerships and S-corps that pay individual income tax on distributed profits and NO payroll tax. As such they pay anywhere from a negative tax rate (if recapturing prior losses) to a top rate of 35%. Within that range are indeed individuals who will have little to no additional available income from the repeal of the current tax code ... in fact, some will experience a net LOSS of spendable income from the inability to recover prior losses.
For retirement savings, the vast majority of income drawn from that investment is capital gains, not principal.
Well that is truly an unsubstianted assertion if I ever saw one. Retirees live from government transfer payments, previously taxed savings and investment, pensions (subject to income tax but not payroll tax) and, principally from living frugally. Yes, capital gains do indeed contribute to the retirement pot, but a substantial portion, perhaps even a significant majority of capital gains are tax exempt: home ownership gains.
You continue to evade the point: there exists a substantial portion of the population who will NOT see sufficient increases in spendable income to offset inflated FairTax prices.
No mere assertion. A couple with an income of $25k gets an FCA of $4,508 (23% of $19,600). If they spent their entire $25k income on taxable goods and services, their effective tax rate would be 4.97% (total taxes of $5,750, minus FCA of $4,508 for a net tax total of $1,242, divided by $25K spent equals .0497).
If they spent their FCA as well, bringing their spending total to $29,508, the effective tax rate becomes 9.12%.
There you go with anecdotes again ... useless since I'll just give you a counterexample. But before I do, note a couple of problems:
You also failed to compare that to the Couple's current tax situation (I can guess why :-)... but I'll take care of that below.
If she spent her FCA as well, bringing her spending total to $27,254, the effective tax rate becomes 16.06%.
Under the income tax, this Single paid $0 in payroll taxes and $1,000 in income taxes for an effective tax rate of 4%. Clearly she is at a significant disadvantage under the FairTax.
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