Fair Tax?

[Texas_Jarhead]

good point

[ancient_geezer]

I'm a little confused on exactly how a Federal Sales Tax (instead of Federal Income Tax) is fair?

I'm sure we can find one or two reasons why:

[Montesquieu wrote in Spirit of the Laws, XIII,c.14:]

• "A capitation is more natural to slavery; a duty on merchandise is more natural to liberty, by reason it has not so direct a relation to the person."
  --Thomas Jefferson: copied into his Commonplace Book.

Thomas Hobbes from Leviathan

• It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.

Federalist #21:

"It is a signal advantage of taxes on articles of consumption
that they contain in their own nature a security against excess.

They prescribe their own limit, which cannot be exceeded without
defeating the end proposed - that is, an extension of the revenue.

When applied to this object, the saying is as just as it is witty
that, "in political arithmetic, two and two do not always make four."

If duties are too high, they lessen the consumption; the collection
is eluded; and the product to the treasury is not so great as when
they are confined within proper and moderate bounds.

This forms a complete barrier against any material oppression of the
citizens by taxes of this class, and is itself a natural limitation of
the power of imposing them.

-- a free people that pays slave taxes to its government is willingly training itself for bondage.
Alan Keyes 1999

I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accepts it. Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power. Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.
Alan Keyes 1999

Keyes on Taxes & Government Spending:

• "The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

• "Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

• "A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."

[Leaning towards Libertarian]

How will the FairTax affect Social Security, seniors and retirees?


The FairTax will ensure the funding of Social Security and Medicare. The FairTax will make the economy much more dynamic and prosperous. Consequently, federal tax revenues will grow. This makes it less likely that federal budget pressures will require Medicare or Social Security benefit cuts. Under the FairTax, Social Security will operate exactly as it does today, except that its funds will come from the FairTax. And, research shows that consumption is a more stable revenue source than income.

As a group, seniors will do very well under the FairTax. Low-income seniors will be, in fact, much better off under the FairTax than under the current income tax system. Seniors, like everyone else, will receive a monthly rebate, in advance of purchases, for taxes paid on the cost of necessities. There will be no more income tax on Social Security. There will be no more income tax on investment income and pension benefits or IRA withdrawals.

Seniors who own existing homes stand to experience large capital gains due to the repeal of the income tax and implementation of the FairTax plan.

Prices at the cash register will go down under the FairTax. The price of every good or service we buy today is inflated by the cost of income and payroll taxes paid by workers and businesses. These costs are passed on to consumers in the form of higher prices. When income and payroll taxes are repealed, prices will come down 20–30% according to Dr. Dale Jorgenson, Chairman of the Harvard University Economics Department. Therefore senior citizens, like all Americans, will be able to buy more.

Seniors will keep government benefits, Social Security and Medicare funding will be ensured, tax deferred investments will now be tax-free, and savings that are invested in stock, real estate and some bonds will increase substantially in value. Most importantly, the FairTax will create wealth for all Americans providing tax-free dollars for tax-free saving and retirement, thus providing money for future prescription drugs and nursing care.

[Always Right]

Answer ... you can't!

There are always ways to cheat the tax man. Ever heard of the black market. You just buy stuff without reporting it. Lots of people cheat the state sales tax. With the higher rate there will even be more insentive to cheat.

[coloradan]

A rich person who makes $1 million a year buys a million dollar yacht, and pays 15% or $150,000 additional in sales tax, which is 15% of his entire year's income. A poor person who makes $20,000 each year doesn't buy the million dollar yacht, which is 0% of his yearly income. This makes the rich person's tax rate infinity times more than the poor person is. Sounds like the rich person is taxed a lot more, at least when it comes to yachts.

[FairOpinion]

Wissa: "I paid tax on my earnings over the years and saved quite a bit of what was left instead of spending it all. With the national sales tax, I'd now have to pay taxes on the same money AGAIN as I spend it?"

Texas_Jarhead: "good point"

===

Good grief! No, it isn't a good point.

If you have money saved, unless you have it under your mattress, you have it invested, and are currently paying tax, on that income. With the sales tax, you would NOT be paying tax on what your money earns, and you only pay tax on the money you spend, while the rest keeps growing, including the compound interest, without having to use some of that to pay taxes.

And if your money is in an IRA, when you pull it out, you pay regular income taxes on it. With the fair tax, you would not be paying that.

[ancient_geezer]

With the national sales tax, I'd now have to pay taxes on the same money AGAIN as I spend it?

You do today when you spend it. On the federal income & payroll taxes paid by businesses as well as the cost involved in planning, accounting, reporting, remitting, litigating and litigating.

American General Contractor's Association
http://www.agc.org/Legislative_Info/Members_Testify/testimony_04-10-00.asp

The following article covers the mechanism on how the current Federal tax system propagates and is embedded into consumption expenditure.

DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation

The 24% in the article considers only those factors actually paid to government out of imposititions on business in complying with the income, payroll, excise & tariff tax laws.

I refer you to the section of the following article about the Income/Payroll tax system and its impact on our economy "A. Hidden Upstream Taxes. " paragraph 39.

"[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent."

Looking at the accompanying chart, the range of values from industry to industry appears to be about 12-25%.

Economists Gary and Aldonna Robbins of the Texas-based Institute for Public Policy examined the case of dry cleaning a shirt, with a particular eye toward uncovering the hidden costs of taxes in price.

The Robbin's attributed over 33.6% of "consumer prices" to be due to federal taxation passed on to the customer.

The Federal Tax System
http://www.cbo.gov/showdoc.cfm?index=2125&sequence=0&from=1#pt1

From the Table 1 we may extract the proportionate contributions of each sector of taxes as they contribute to consumer price for the year 2000.

• Total revenues collected by Feds in '00 = $1945billion ( 33.6% of consumer price)

Those tax components which will not change prices as a consequence of enactment of HR2525

• Individual Income Tax(Labor) = 945billions,
• Employee half of Social Insurance = 653/2 = 326.5billions,
• Excises = $68billion
• Customs Duties = $19Billion
• Miscellaneous = $40Billion

============================

• Total constant price factors = $1358.5 billion
• Remainder federal tax components affecting price = (1945-1358.5) = $586.5billions

Adjust for the approximate reduction of interest & cost of tax compliance (

Adjust for a conservative $800 billion cost of tax compliance, (Payne '95 estimates 65cents for each dollar of revenue collected, $1264billion) reductions .

• Total tax related factors affecting consumption price = (800 + 586.5) = $1386.5billions

Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:

33.6*(1386.5/1945) = 23.9% reduction in consumption prices

Which more than verifies the Jorgenson empirical study of 22% fall in producer prices.

The two sources are in reasonable agreement, and I see 20-25% a reasonable value to expect retail prices to fall, not only for customers here in the United States, but in our exports as well making them far more competitive on international markets.

[ancient_geezer]

I agree we need tax reform, but I don't think the poor should be paying more under any new system.

They won't be, fairness is totally restored by a monthly pre-payment for taxation up to the povertyline of consumption for every legal resident, effectively the retail sales tax equivalent of personal exemption:

All legal residents will receive a FCA equivalent to the FairTax paid on essential goods and services. The FCA will be paid in advance, in equal installments each month. The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate.

Every year, the Department of Health and Human Services [HHS] determine the "poverty level" for each family size.

The 2001 "FairTax" Family Consumption Allowance Figures
Family Size	HHS Poverty Level	Annual FCA	Monthly FCA
One	$8,590	$1,976	$165
Two	$17,180	$3,951	$329
Three	$20,200	$4,646	$387
Four	$23,220	$5,341	$445
Five	$26,240	$6,035	$503
Six	$29,260	$6,730	$561
Seven	$32,280	$7,424	$619
Eight	$35,300	$8,119	$677

1) Federal Register: February 16, 2001, Pages 10695-10697).

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

A family of four, for example, could spend $23,220 per year free of tax because they will have received over the course of the year rebates totaling $5,341. $5,341 is the amount of sales tax paid on $23,220 in expenditures. A family spending double the "poverty level" or $46,440 per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.

[71] To illustrate the plan's progressive nature we can examine the tax burden that a family of four will have at various annual income levels (or in this case, annual spending levels).

H.R.25 "The FairTax Act

[Texas_Jarhead]

gee whiz... sometimes I forget that off-the-cuff remarks can be held against you around here. I only said it was a good point because I had not thought about the spending of post-tax savings under a consumption tax scheme. If I take my savings right now and go buy some item I will pay sales tax of ~8%. However, if I were to make a similar purchase using my savings under consumption I pay a higher rate. I guess that means I make any expensive purchases just prior to the implementation of the consumption tax. Of course, there is probably something wrong with this line of thinking but I'm too tired to care.

[supercat]

I think the Fair Tax debade may best be summed up by two arguments--one pro and one con:

PRO

The government would no longer have to intrude on everybody's financial privacy to ensure that they're complying with all of the 47 kajillion rules in the tax code.

CON

The government would no longer have an excuse to intrude on everybody's financial privacy to ensure that they're complying with all of the 47 kajillion rules in the tax code.

Given today's government, the CON argument clearly wins.

[Wissa]

I think a national sales tax would definitely be a more fair way to fund the government. However, I don't see any realistic way to transition from the current state of taxing income to the state of taxing consumption unless it is done gradually over a period of a number of years.

If it would happen all at once, with your 23% rate you stated above, anybody with any money would spend it all right before the consumption tax took effect to save the 23%. Not only that, but people would borrow as much as possible and spend that money too. Everybody would buy a new car before the tax went into effect, and nobody would buy one for years after that. Immediately after the sales tax started, consumption would fall to near zero, and businesses would be laying off people so fast that Willie Green would wear his fingers to the bone.

On the other hand, if the plan would be to change it gradually over a period of years, I think it would be a hard sell to get people to believe that it was a good thing that there would be a new national sales tax, while the income tax was still in effect. Too much temptation for Congress to add the sales tax and then not follow through with eliminating the income tax.

[supercat]

I paid tax on my earnings over the years and saved quite a bit of what was left instead of spending it all. With the national sales tax, I'd now have to pay taxes on the same money AGAIN as I spend it?

Yup. That would be something of 'gotcha' for people with Roth IRA's who were set to retire around the time the program went into affect. But even they would probably not do too badly, as the removal of the income tax would tend to depress prices somewhat, making their dollars worth more.

Calculating exactly how much more their dollars would be worth would be somewhat tricky, since not all prices would be affected equally. Indeed, one of the major effects would be to lower the prices of domestic goods relative to foreign goods; for goods which are produced offshore for reasons other than manufacturing cost, eliminating the income tax would not affect the price. For other imported goods, the elimination of the income tax might make domestic production competitive with the foreign companies, thus reducing prices slightly. And for domestic goods, the elimination of the income tax would cut prices greatly.

[ancient_geezer]

There are always ways to cheat the tax man. Ever heard of the black market. You just buy stuff without reporting it. Lots of people cheat the state sales tax. With the higher rate there will even be more insentive to cheat.

Yep and the same folks cheat the income tax, by simply not reporting income.

Taking all factors into consideration, tax evasion will decrease under the NRST as compared to what we know is true about the income payroll tax system of today.

Of course there is the little problem with retail sales taxes that 80% of retail dollars flow through 20% of business (revenues over $million). They don't have a problem with collecting sales tax from customers and will not risk their certification to do business their purchases untaxed.

The other stick in the eye is that it takes only one person to cheat on income taxes, as said just don't report cash trasactions.

With retail sales taxes it takes two persons in collusion to accomplish the same thing, and the seller takes all the legal risk for not remitting taxes. If you are a seller do you really trust everyone buying your blackmarket goods to keep it quiet? How do you expand your market and profitibility without advertising your little enterpise. Definitely not a growth market you want to let just any revenue agent know about.

Finally, under the income/payroll tax system, the maginal rate on the next dollar earned can be as high as 40% under some conditions, and under much of the tax scale more than 30%.

Quite an incentive to cheat, resulting in an IRS estimated non-compliance rate of 15-20%.

The maximum marginal rate under the NRST is 23% on expenditure, not income, a much lower financial incentive for the risk taken.

The tax burden that a family of four will have at various annual expenditure levels.

[Wissa]

Good grief! No, it isn't a good point.

Actually, I think it IS a good point. You've got a good argument there, but a lot of people planning on living off investments could be hurt by the change.

Let's say I need $25k per year to live on. I get $16k from income on my investments. The first $8k I don't pay tax on because it covers the personal exemption and the standard deduction. The next $8k I pay $800 tax on at the 10% rate leaving me with $15k in after tax income. I take $10k out of principal to cover my $25k living expenses and don't pay any tax on that. Total of $800 taxes while spending $25k.

With the 23% consumption rate thrown out above, I'd be paying about $6k in taxes while spending $25k.

[Slings and Arrows]

You got bump. Nate got zot. Everybody happy.

[Wissa]

...the removal of the income tax would tend to depress prices somewhat, making their dollars worth more.

You think prices would drop by more than the 23% they're going up becasue a tax is being added on to the cost of what I'm buying?

I'm skeptical, but I'm open to being convinced.

[ETERNAL WARMING]

I personally think we should eliminate all taxes, gouge out large chunks of the budget and operate on tarrifs and assorted trade taxes.

I'm with you, WC. Return to the Constitutionally mandated trade rules, and this nation will once again prosper. We'll enrich ourselves instead of India and China.

[ancient_geezer]

I don't see any realistic way to transition from the current state of taxing income to the state of taxing consumption unless it is done gradually over a period of a number of years.

Federal reserve, on review of the legislation, recommend 6 months. As most factors are compensated for by the FCA, and a time for businesses to adjust operations in anticipation.

You pay business income & payroll taxes and the costs associated with them embedded into prices today of 20-25% as it is. Six months for adjustment allows market competition for market share to operate in bringing prices to their equilibrium levels on implementation of the NRST.

Folks that want to buy ahead, can always borrow, purchase, and pay back the loan out of taxfree earned dollars after implementation if they figure some advantage to that. Six months is more than sufficient for such operations. Though as pointed out above, and considering that embedded tax burdens will still be in place for the most part until implement takes place that doesn't make a whole loat of sense.

As far as any assets to be converted, if your hold investments for income, the income from those investments are not taxed under the NRST. Rolling over investement assets from one place to another has no tax concequence under the NRST.

Residential properties and all products are grandfathered so no NRST will be charged against those items.

[babygene]

To the extent that you are talking about your retirement, I would assume most of that is pretax dollars...

[Wissa]

In my case, that wouldn't be an accurate assumption, but I'll concede that you're right in the case of the huge majority of the people.