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.
I don't care how far you have to cut back spending I want my money and benefits. If you can't be trusted meet your obligations we might as well be living in some open dictatorship. That we are even discussing this is a disgrace.
"Just as "Social Security" is a massive transfer of wealth from younger to older Americans???"
Don't confuse the issues. The "Fair Tax" has nothing to do with reforming Social Security.
"Define income."
How about payroll wages? Minus some very commonly agreed-upon deductions?
If you enact a 30% sales tax, you don't think a black market for goods will emerge? Remember Prohibition? Federal agents didn't stop liquor from flowing, and they won't stop black-market computers and tv sets from travelling from Tijuana to Los Angeles, where you could buy them on the street for a 30% discount to the price at Circuit City or Best Buy.
Enforcement would need to be massive with a "Fair Tax."
Where is it written in stone that the tax would be 23%? I have also heard 18% bantered about... Also on a $77.00 purchase the tax @ 23% would be $17.71...at least where I went to school that's what I was taught....
ehhh?
It changes the base! The SS tax base would no longer be regressive. There would be no limits. It would be more stable. It would end the SS/MC crisis we now face.
"It would end the SS/MC crisis we now face."
The reason why we have a SS "crisis" is because we have too little revenue, and too many obligations.
Shifting the tax burden will not solve the "crisis" unless benefits are cut. So, if the "Fair Tax" is ending the crisis, then the "Fair Tax" must be increasing government revenue (i.e. increasing taxes.)
Has something changed? I thought all of the above were going to be taxed. What's going on?
My wife and I are retired supporting ourselves and our one son. The way I read this, I would get a rebate up to the Federal poverty level? What about state sales taxes? They aren't affected and would remain in place? Here in The Peoples Republik of Illinois, our sales tax rate in DuPage County is just under 7%. So I would pay roughly a 30% tax on all purchases!? Doesn't sound good to me.
If you don't mind me asking, do you own your own home? And if so, is it paid off?
"So I would pay roughly a 30% tax on all purchases!?"
As I understand it, the "Fair Tax" would be a 30% federal sales tax (or 23% of your income, if you spend all of your income on consumption.)
So you're looking at a 37% sales tax in Illinois.
The "Fair Tax" benefits people who don't spend all of their income. It's a consumption tax. If you have a lot of money left over at the end of the month, it will be good for you. If you don't have a lot left over, you'll probably pay more.
Yes, and yes.
And Seniors on a fixed income would support this plan!? WHY!
That would be what you think, but what I said was 100%accurate.
"And Seniors on a fixed income would support this plan!? WHY!"
Wealthy seniors that don't spend most of their income would support it.
It all comes down to how much of your income you spend.
when you buy an item now you are paying taxes on that item--imbedded payroll, SS taxes that the company has to pay.
there is no transfer of wealth but there is a better, fairer way...sorry that it was not thought of sooner
"when you buy an item now you are paying taxes on that item--imbedded payroll, SS taxes that the company has to pay.
there is no transfer of wealth but there is a better, fairer way"
There are imbedded taxes on items you buy today. Employers have to match employee's social security contribution at 7% of income.
But employees are paying 20-35% income tax and 7% payroll/SS tax. That part isn't embedded today.
So prices might fall a little (due to no employer match of SS contribution), but not more than a few percent.
It all comes down to how much of your income you spend.
I'm NOT wealthy and what little income I have I usually end up spending. I fail to see how this plan would help seniors like me on fixed incomes.
Is a 25% sales tax rate supposed to excite us?
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