Posted on 12/19/2004 1:40:29 PM PST by Remember_Salamis
Why Seniors Support the FairTax Americans for Fair Taxation October 2004
The Democratic staff (House Ways and Means Committee) makes a number of errors concerning seniors. They state that seniors would be subject to “double taxation.” To tout the virtues of the income tax, they falsely claim that seniors are exempt from the payment of tax on pensions and that they can deduct medical care and long-term care. They further mislead the reader stating that seniors would be taxed on their Social Security benefits and would have to pay tax on drugs, hospital, and nursing home care, as well as doctor visits.
This is just plain wrong once again. Americans For Fair Taxation has many seniors as members, and for good reason. The greatest gift these seniors can give is not to saddle succeeding generations with a broken tax system. But there are other reasons many seniors support the FairTax. For seniors, our broken system presents unusual conundrums. For example, consider a senior who is sitting on a capital asset. If they sell it, they will be hit with capital gains taxes and any unspent capital eventually with the death tax. If they don’t sell it, their heirs will be hit with the death tax. That is why many seniors are sitting on bad investments because the tax laws tell them there is a penalty for getting out.
Senior citizens are becoming a larger portion of the overall population. In 1970, those over 65 years of age were 9.8 percent of the population. By 1995, seniors were 12.7 percent of the population. 13 years from now, seniors will account for 13.3 percent of the population and in 2020, they will account for 16.5 percent.
The average household money income of those over 65 is about 63 percent of the average of all households.13 At any given time, a lower proportion of seniors are poor than in any other age group. However, seniors are more represented in the long-term poor than other adults but less represented than children.14 In terms of financial assets held, those 55 - 64 years old are the wealthiest age group, with those 65-74 years old next.15 In terms of non-financial assets held, those 55 - 64 years old are the wealthiest age group, with those aged 65 - 74 slightly below the 35 - 44 year old group.
Under the FairTax plan, senior citizens will receive a cash rebate effectively exempting consumption up to the poverty level from tax. The sales tax rebate is equal to the sales tax that would be paid on expenditures up to the federal poverty level. It is paid monthly in advance. Thus, poor seniors will pay no sales tax. A household spending twice the federal poverty level would pay an effective tax rate of 11½ percent.
Because income and payroll taxes are embedded in the price of everything we purchase, it is unclear whether prices will increase once the income and payroll taxes are removed and the sales tax is added. They may not increase at all because pre-sales-tax prices may fall once the income and payroll taxes are repealed. Nevertheless, the FairTax plan makes sure that the Social Security benefits would be adjusted so that benefits will increase to the extent, if any, that the sales tax results in higher tax-inclusive prices. The income tax imposed on Social Security benefits will be repealed.
The income tax imposed on investment income and pension benefits or IRA withdrawals will be repealed. An income tax deduction was taken for contributions to most of these plans. All beneficiaries and owners of these plans expected to pay trillions of dollars in income tax on them upon withdrawal and will not be required to do so since the income tax is being repealed.
Repeal of the corporate and individual income tax and the estate and gift tax will have a substantial positive impact on the stock market. Those seniors that own stocks either directly or through mutual funds, Individual Retirement Accounts, 401(k) plans or otherwise will experience significant gains. More seniors own stocks, mutual funds or have IRAs than other age groups. In addition, unrealized capital gains that would have been subject to the income tax when realized will no longer be taxed.
The FairTax plan imposes a sales tax on newly constructed homes but exempts existing homes and other used property from any sales tax. Currently, equity payments on homes must be paid from after-income tax and after-payroll tax earnings (i.e., principal payments are not deductible). The purchase of existing housing is thus subject to the income tax. All owners of existing homes will experience large capital gains due to the repeal of the income tax and implementation of the FairTax plan. Seniors have dramatically higher homeownership rates than other age groups (81 percent for seniors compared to 65 percent on average). Homes are often a family’s largest asset. Gains are likely to be in the 20 percent range.
Under the FairTax plan, the estate and gift tax would be repealed. The need for small businesses and farmers to engage in expensive estate planning involving attorneys, complex estate freeze transactions, and expensive life insurance plans in anticipation of future estate and gift tax liability would disappear. Heirs would no longer need to sell the business or farm out of the family or borrow heavily, putting the business at risk, to pay the estate tax.
A sales tax will make the economy much more dynamic and prosperous.
Consequently, federal tax revenues will grow and spending will be under less upward pressure and the deficit will decline. Budget pressure on entitlement spending, already significant, will become much more pronounced once the baby boom starts retiring in 2008 in 4 short years. The economic growth a sales tax would cause would make it substantially less likely that federal budget pressures will result in Medicare or Social Security benefits cuts or reduce their severity.
According to work by Stanford University economist Joseph Kahn, those seniors with a net worth over $400 thousand (nearly four times the median) may see a reduction in their purchasing power. The largest decline in purchasing power, about 3.5 percent, is for those with a net worth above about $700 thousand. The primary reason for this effect is that wealth, spent for consumption purposes, which is held in non-tax deferred accounts like IRAs will be taxed when spent under a sales tax and would not be taxed further under an income tax.
Seniors will be able to take comfort in the fact that their children and grandchildren will no longer be laboring under the yoke of the income tax and will once again be able to see their standard of living improve, one generation to the next.
Although the FairTax national sales tax plan would repeal both the federal income tax and payroll taxes, social Security or Medicare benefits would remain the same under the FairTax plan as they are under present law.
Currently the Social Security system is funded by a 12.4 percent payroll tax imposed on the first $87,900 of wages (2004). The Medicare program is funded by a 2.9 percent payroll tax on all wages. Both of these taxes are evenly divided between employers and employees. Self-employed persons pay a separate tax equal to the combined employer and employee tax.
Although the Social Security and Medicare payroll taxes would be repealed, the funds necessary to support these programs would come from a portion of the revenues raised by the national sales tax. Under the FairTax plan, the same amount of revenue as would have been raised by existing payroll taxes would be deposited in the Social Security and Medicare Trust Funds.
Thus, the FairTax plan does not affect the Social Security or Medicare programs except that these programs will be funded by sales tax revenues instead of payroll taxes.
Once again you are using apples and oranges-
Income tax is not specified as 'tax inclusive' If my income tax rate is 23% and I make $100, then $23 is SUBTRACTED from 100.
If I buy something that costs $100 and I pay $130 at the register then my sales tax ADDED is 30%
In both cases you start with 100 and calculate a percentage.
If I tell you the final cost of something is 157 dollars then quick tell me what is the cost before the 23% tax-inclusive rate? It is not easy to do, is it.
Can you at least admit that???
But If I tell you something is 240 and you have to ADD a 30% sales tax to it, well that is not so hard to do.
The NRST as proposed will replace the income tax thus to properly compare it, it should be in the same inclusive or exclusive mode that is currently used in order to compare them on a similar basis....it is not a lie...One of the problems is that 99% of the people who hear of a 23% sales tax think that's the exclusive rate. And the FairTax supporters are none to quick to correct them.
Gee, your costs of goods sold must be enormous! Maybe if all those embedded tax costs weren't in everything you buy for your business they might be lower. And you must be paying payroll taxes on your self and all your workers.
Did you know that General Motors pays more in payroll taxes than they do income taxes? Add to that the embedded costs of all the things they buy from their suppliers. Tell me they won't lower their prices when these added costs are removed. All it would take is for Ford to lower their prices and market forces would take over.
If I tell you the final cost of something is 157 dollars then quick tell me what is the cost before the 23% tax-inclusive rate? It is not easy to do, is it.Actually, in this example it is easy. Just multiply 157 * .77 (120.89). The better and much more likely example is if the rate is 23% inclusive and a product's sticker price is $157, what's the tax and final price?
Did you know that General Motors pays more in payroll taxes than they do income taxes? Add to that the embedded costs of all the things they buy from their suppliers. Tell me they won't lower their prices when these added costs are removed. All it would take is for Ford to lower their prices and market forces would take over.Did you know that the corporate portion of the payroll tax was only $340 billion last year. That's about 3% percent of retail prices and exports.
The better and much more likely example is if the rate is 23% inclusive and a product's sticker price is $157, what's the tax and final price?Oh yeah, also, what's the state sales tax and final price?
First, exports are not taxed. I assume your math is taking 22% of all retail sales plus exports. I don't have time to check that figure right now but assuming you're right then the NRST need not be anywhere near 22%
"That leaves a minimum of $1.8 trillion for business tax compliance costs! Most reasonable economists put the number around $100 billion, or a maximum of $200 billion."
I can't argue with you here because I have no idea what you mean. Are you saying it will cost business 1.8 trillion to do what most of them are already doing, collect a sales tax? Compliance costs will plummet under a NRST.
sorry, we are still waiting to define "is". once bill gets back to us on that we will work on this whole "income" thing.
First, exports are not taxed. I assume your math is taking 22% of all retail sales plus exports. I don't have time to check that figure right now but assuming you're right then the NRST need not be anywhere near 22%Sorry, I should have made it clear. The 22% is the amount people say prices, including exports, will drop. I was figuring for prices to drop that much, $2.31 trillion in savings has to come from somewhere. Businesses don't pay near that amount in income and payroll taxes.
I don't see it. My accountant inputs all the checks and the tax return is spit out automatically. Monthly payroll is also spit out automatically. I would still have to file monthly returns showing my sales tax. If a person wants their monthly rebate check, they still have to file with the government. The tax collection agency must still audit all my checks to make sure all my purchases qualify for tax exemption or that I paid the sales tax on them. It may easier to compute your taxes, but there really isn't all that much savings in this day with computers. Can you just imagine the cost of the government trying to mail a monthly rebate check to every individual in this country?
Sorry to misunderstand. Another question, are you saying your numbers are what businesses remit in income and payroll taxes. Are you including corporate income tax? The theory of NRST claims since all corporate income tax and all individual income tax will disappear that those amounts embedded in the cost of everything will be removed and drag prices down. I don't have a problem with that theory. I also believe the amount of jobs created will lead to a labor shortage since so many companies will want to relocate here.
Everyone gets the same amount, everyone.
"It may easier to compute your taxes, but there really isn't all that much savings in this day with computers."
Typical mid-sized CPA firms bill millions in their tax departments to individuals and corporations.
AR, I don't see the comparisson. The current tax code requires incredible compliance cost. NRST would be simple.
Yes, but everyone still needs to file a form with the government stating they are qualified. The government has to track the existance of everyone in the US and have their current address. Considering hundred of thousands of people move everyday, that is quite a task.
Typical mid-sized CPA firms bill millions in their tax departments to individuals and corporations. AR, I don't see the comparisson. The current tax code requires incredible compliance cost. NRST would be simple.
If checks are inputed correctly, there is no reason filing a return is that complicated. I own a midsize business, and I don't spend that much on outside CPA's. My accounting software spits out all the info so a return is easy to file. Whereas the computation of the sales tax is an easier calculation, there will still be as many forms to file. I spend only a few hundred dollars a year in having a CPA prepare my corporate returns.
2 points
1. I DID read the article.
2. Would YOU support anything that would make YOU pay more if YOU were on a fixed income. I THINK NOT!
Another question, are you saying your numbers are what businesses remit in income and payroll taxes. Are you including corporate income tax?That is the corporate income tax and the business portion of the payroll tax.
The theory of NRST claims since all corporate income tax and all individual income tax will disappear that those amounts embedded in the cost of everything will be removed and drag prices down. I don't have a problem with that theory. I also believe the amount of jobs created will lead to a labor shortage since so many companies will want to relocate here.The only way businesses can save the amount of personal income taxes that were previously paid is to reduce gross wages, which is virtually impossible to do across the board.
If checks are inputed correctly, there is no reason filing a return is that complicated. I own a midsize business, and I don't spend that much on outside CPA's. My accounting software spits out all the info so a return is easy to file. Whereas the computation of the sales tax is an easier calculation, there will still be as many forms to file. I spend only a few hundred dollars a year in having a CPA prepare my corporate returns.And if you have customers in different states, you will have to file a return for each one of those states every month.
http://www.fairtax.org/pdfs/small%20businesses.pdf
Then why is that number the one consistently cited,
Because 23% is the rate placed in the legislation at the time it was authored and first introduced, in 1997, sufficient to overcome the Budget Enforcement & PayGo rules then in effect requiring all tax replacement bills to to have rates sufficient that new legislation can be projected to be to be revenue neutral with the tax code being replaced through 2006.
H.R.25Fair Tax Act of 2003 (Introduced in House)
`CHAPTER 1--INTERPRETATION; DEFINITIONS; IMPOSITION OF TAX; ETC.
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Of interest is the fact that the rules governing revenue neutrality requirement expired Sept 2003. Which has opened the door for re-evaluation of the rate with future re-intoduction into Congress.
And the fact that the target is lowered if the Bush tax cuts are made permanent:
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Total Effective Tax Rates by Level of Government |
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| Year | Federal | State | Total |
| 1997 | 21.8% | 10.3% | 32.1% |
| 1998 | 22.4% | 10.4% | 32.8% |
| 1999 | 22.5% | 10.4% | 32.9% |
| 2000 | 23.1% | 10.4% | 33.5% |
| 2001 | 22.2% | 10.5% | 32.7% |
| 2002 1 | 19.7% | 10.2% | 29.2% |
| 2003 2 | 18.5% | 10.1% | 28.6% |
| 2004 3 | 17.9% | 10.0% | 27.9% |
| Notes: Leap day is omitted to make dates comparable over time. Positive and negative percentages in parentheses after legislation indicate the first-year fiscal impact of the bill,measured as a percentage of NNP. Since depreciation is not available to pay taxes, GDP is an overstatement of spendable income for the purpose of measuring tax burdens. Depreciation is netted out of NNP. 1 Economic Growth and Tax Reform Reconciliation Act of 2001 Sources: Office of Management and Budget; Internal Revenue Service; Congressional Research Service; National Bureau of Economic Research; Treasury Department; and Tax Foundation calculations. |
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so you are saying you ise the tax inclusive rate because it is done that way elsewhere... well, the sales tax percent added method is used elsewhere too- EVERY SINGLE DAY by most people...
can you at least admint that it is easier to calculate and is the accepted way of adding sales tax to a purchase price?
Can you also admit that 23% tax inclusive rate equals about 30% tax added to purchase price the 'usual' sales tax way?
so.. since we here in freeperville like to expose the truth and get rid of high taxes... why use the lower, more difficult to calculate rate when the higher EQUALLY CORRECT sales tax added method will send a clearer picture to most voters?
so.. since we here in freeperville like to expose the truth and get rid of high taxes... why use the lower, more difficult to calculate rate when the higher EQUALLY CORRECT sales tax added method will send a clearer picture to most voters?
Sounds good, infact lets take that one step further and express all tax rates in the tax exclusive method so we can continue to compare apples with apples when looking a the current tax system that is replaced by the NRST.
Actually its not all that difficult, the Tax exlusive rates for the income/payroll taxes are essentially the percentage amount of money you must earn in addition to your takehome pay to be able to buy stuff.
We'll just cheat a little and assume no state taxes and we spend everything we earn. That will make the exclusive rate a little low for income/payroll an flat tax comparison rates, but a conservative number is sufficient for demonstration.
The conversion equation is Texcl = Tax incl/ (1- Taxincl)
| Inclusive Rate | Description | Exclusive Rate |
|---|---|---|
| 4.76% | Sample State Sales Tax --> | 5.00% |
| 10.00% | <-- Penalty for IRA/401k Early Withdrawal | 11.11% |
| 15.00% | <-- Marginal Income Tax | 17.65% |
| 15.00% | <-- NRST (not including SS/Medicare) | 17.65% |
| 15.30% | <-- Social Security/Medicare Payroll Tax | 18.06% |
| 17.00% | <-- Flat Tax (not including SS/Medicare) | 20.48% |
| 20.00% | <-- Capital Gains Tax | 25.00% |
| 23.00% | <-- NRST (including SS/Medicare) | 29.87% |
| 28.00% | <-- Marginal Income Tax | 38.89% |
| 32.30% | <-- Flat Tax (including SS/Medicare) | 47.71% |
| 39.00% | <-- Marginal Income Tax | 63.93% |
| 71.00% | <--Total tax and regulation cost of government as pecent of income | 244.82% |
It is interesting to note that any tax-inclusive rate larger than 50% would have a tax-exclusive rate of over 100%.
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