Replies

Dear pigdog,

"Actually, no, s-test, typically they will pay more in taxes than they do at present (due at least partially to all of the tax dodges and loopholes you outline)."

When the rich actually bother to generate income, they pay plenty of taxes, although often less than wage earners.

What you miss is that the rich may decide not to generate income that they don't want to immediately spend. Thus, they may decide not to take capital gains from a particular investment, because they have nothing to spend the money on.

That's the primary "loophole" the rich have.

Even then, it doesn't always apply.

"I've observed that the very rich prefer to buy NEW rather that USED (cars, homes, or anything else). In fact many of them will tear down a perfectly good, liveable house to put up a much more ostentatious one."

You've asserted, but haven't demonstrated. I've seen "tear-downs," but believe it or not, upper middle class folks are more likely to do those than really rich folks.

I live in an area that abounds with folks with lots of money.

Although there are many new homes being built with seven-figure price tags, and even larger number of already-existing exclusive homes is sold, as well. The fact is, most of the good waterfront is already gone. You want deep water on the South River (feeds directly into the Chesapeake Bay)? Lots easier to buy a $3 million property with a 10,000 sq ft house that's 10 or 20 years old than to try to find a couple of acres of still-undeveloped waterfront to build your own.

Now, will the new owner possibly do a $200,000 renovation? Maybe. Maybe not. But the $3 million for the property and house itself were entirely untaxable under the NSRT. At least, the fellow had to pay a bit of tax on the income to buy the property under the old system.

Cars?

Well, lemme tell ya. I love new cars, myself. Preferably Benzes. But guess what? I have a two-car attached garage and a four-car detached garage. I have three cars right now. One was purchased new. Another was purchases a couple of years old, because it was low mileage. But the third was purchased 15 years old. Because it's a classic model, and I wanted one. And I'd like to acquire a few more over the coming years. I'd like to get one model of Mercedes SL that ran from the late '70s through the '80s (broadly speaking). I'd like to pick up a couple of old 300Es for my kids as they learn to drive over the coming years (great, reliable, safe, fun sedans). And in a few years, maybe I'll pick up a used diesel E-series.

It's fun to have new cars, absolutely, and I can afford 'em. But after one or two new cars, if you're well-off and want to have a collection of cars, it's more likely that you'll be picking up "used" vehicles that happen to satisfy your personal interests and tastes.

As well, for art, antiques, etc., by the very definition, these items are bought "used."

"And I note that some of your examples use already taxed income to tell us how it is possible to invest."

I noted that an initial real estate investment may be with after-tax money (although by borrowing most of the money and paying the mortgage back with the pre-tax cash flow of the property, one even minimizes that), that the tax-free income stream then will buy plenty of real estate with tax-free money.

"Certainly that can be done, but that's not the point since using untaxed wages (with payroll taxes now back in the net pay as in the FairTax) helps anyone accumulate some measure of wealth faster"

Not really. Since this is SUPPOSED to be revenue neutral, most folks are likely not to have a lot more income than under the old system, when one takes into account that they'll be paying 30% sales taxes.

"It is clear that you haven't read any studies of the effects of lifetime taxation which apply to the very well to do. The point is that most in the 'tax specification business'' believe that such wealth is eventually spent for consumption and in the intervening time is invested in some form helping our economy prosper."

The merely modestly wealthy spend most of their bucks. I've been talking about the very wealthy. They don't spend most of their bucks. They pass 'em on to their heirs. Mr. Bush has already repealed the death tax, and is working on making that permanent. The very wealthy don't need much more than that.

"I'm afraid it's a little tough to see if, as you say, that "... capital gains can be put off indefinitely ..." how the very rich could pay less in tax under the FairTax. Clearly just the opposite is true. Present investment is certainly not free of tax costs since there is always at least compliance costs involved in making and maintaining these investments. And many of them are actually dictated by the tax laws and can therefore be politically manipulated and lobbied for advantage by the K Street fellows. In some cases an investor will have to switch to other types of investments as tax laws ebb and flow."

This paragraph appears self-contradicting. Get back to me when you've decided whether the rich will pay more or less under whichever system you decide.

I think the rich will pay a lot less under the new system than the existing system.

"And no - buying used was in no way mentioned by me as a tax dodge ... that seemed to be what you were inferring in trying to present that "the rich" would buy only used things to not pay taxes."

No, I said the rich DO buy lots of used things, and in that way, will avoid a lot of sales tax. But even if they didn't already buy lots of used things, they sure would start now.

Rich folks don't get rich by spending money unnecessarily.

"Used is seldom in their vocabulary (nor is unostentatious)."

I know a guy who is worth $300 million who drives a Ford Explorer. I know a guy who has so much money, he leads a group that is vying to buy the Washington Nationals baseball team, for something in the neighborhood of half a billion dollars (a purchase, by the way, that would be entirely tax-free, as it would be an investment, no??). He drives an older domestic car.

The very rich often aren't very ostentatious at all. Not in proportion to their wealth.

"If these folks 'avoid' income taxes now (which you claimed in your post as though it were somehow easy to navigate the present tax laws), then it certainly no more 'sinful' for them to 'avoid' the FairTax by buying used things. Cant' be 'good' one place and 'bad' the other."

Issues of morality don't enter into it for me, not under the proposed NSRT, nor under existing law. My view is, if you can legally avoid the tax, good for you!

I only point out that the very rich will do very well under the proposed new system.

As will the poor, the working class, and the lower middle class.

I think pretty much, under the proposed system and proposed rates, only the upper middle class, and certain types of investors, are going to take it in the neck.

But that then raises the question, if nearly everyone is prospering from this (and if the very rich are prospering a whole bunch from this), how can it be revenue neutral??

I know, I know, "reduced compliance cost" and "increased taxation of the underground economy."

Well, I know that "compliance costs" have been exaggerated beyond what is defensible, and I suspect that we're not going to get quite as much out of the underground economy as some folks think.

Which means:

1. Upper middle class folks, and certain types of investors, are still going to get crushed; and

2. It may be that rates may have to be higher than 30%, anyway, in which case, it's gonna get ugly.

sitetest

I think that is a faulty analysis overall. While there are certainly many very wealthy that are given to living simply there are certainly many who are not and like to buy big and splashy. They'll probably continue to do so under the FairTax (and those who do not will benefit by buying used). That's not even the discussion.

Nor is the idea of buying property in a built-up area if that is what a person decides to do. By definition there will be a used purchase since a new one is not possible in the chosen location. Despite what you observe I know of instances where some of the quite well to do (megamillions) have purchased existing homes for several million, torn them down and then built anew because they wished to do so and could afford it. These sorts of things will certainly continue with the FairTax. I'd be very surprised if in your area as you describe it that there is not some amount of this tear-down/rebuild activity that goes on. There are certainly areas of the country where is does go on.

As an example of how the rich could control their taxes presently, you used the example of indefinitely putting off capital gains taxes as to how "the rich" could escape taxation as the way in which this would be done - which led to the paragraph that you questioned the meaning of. You also claimed "I think the rich will pay a lot less under the new system than the existing system." and It may not be clear to you but it was challenging your assertion that the rich would do better under the FairTax than at present since the example of indefinite capital gains "putting off" was an example of how they could pay little or nothing presently. If they pay little or nothing now, big guy, due to manipulation of the income tax system, they certainly won't "do better" that that under the FairTax and to claim otherwise is silly.

I think the point here really is that to escape taxation in this manner is only due to the manipulation of the tax laws in a way that, while sometimes legal, is not necessarily always so while with the FairTax buying used goods is quite within the law and amounts to no manipulation of the system at all. If you're trying to claim that all of the tax-escape angles used presently are within the law or do not end up costing the taxpayer (who sometimes runs across the IRS with a different interpretation) then I'd really have to wonder. In addition, income tax laws do change relative frequently and whatever angle may have been used may very well change greatly making your tax scheme not so great alter all. It's a chancy game, that, and it can come back to bite you as some have discovered.

The used $3 million dollar house and property you use an example is also a "so what" since you merely claimed that the buyer had to pay "a bit of tax on the income". If so (and you are probably merely asserting this for argumentation purposes), then the buyer could certainly have gotten even this "little bit" with a bit of "creative" tax work. There are all sorts of exchanges that might be worked. Setting that aside, if he spends $200,000 on renovations he'd pay $46,000 in FairTax. Sounds fair to me.

The used cars and used furniture (classics or antiques or not) is also not the issue. If that's what a person prefers with the FairTax - that's great. At present it's a bit hard to get an income tax break on those unless you're in the business (and then even then Briggs Cunningham tried that a few years ago and it backfired due to - guess what - change in tax laws/IRS interpretations).

Your observation about untaxed money under the FairTax isn't correct since whether a great amount or not, it accumulates more rapidly when untaxed and helps one get started quicker and at a higher level. Also your observation:

"Since this is SUPPOSED to be revenue neutral, most folks are likely not to have a lot more income than under the old system, when one takes into account that they'll be paying 30% sales taxes."

is also off the mark in that the FairTax IS revenue neutral and has been found to be so be several different economic studies. The fact that it is, though, means nothing at all about whether they will have more income (enen considering the FairTax). Certainly they will since not only will they be receiving the prebate, but the present embedded tax costs component will be removed from prices - and the FairTax will merely boost prices back up to about where the were before the FairTax (which would now include the sales tax). This is in view of the fact that wages will be higher due to the elimination of the withholding taxes (net=gross now) so that most wage earners will have more money in hand to either spend or invest. Some will invest and it will be with untaxed dollars which is certainly preferable to the rigamarole one must now go through to use after-tax dollars for the same sort of investment (if there are no investment restrictions under the present system - which there may be).

Sorry, but I think that morality DOES enter into things since avoidance under the income tax means a knowing manipulation of the tax laws to try to favor yourself while following the FairTax law with used goods does not have the same aura of manipulation of the laws. Then, too, do you not know of some who have chosen to avoid present day taxes and then to their sorrow discovered that the rules had been changed and what was formerly avoidance is now dissallowed? I certainly do, but perhaps in your circle you have never encountered this situation. The point here is that the present system requires avoidance to get around some taxes while the FairTax does not since untaxed items are not taxed - no artificial maneuvering at all.

Most economists interested in the subject would, if being honest, tell you that a cohort's lifetime is perhaps a better measure of what can be taxed since eventually (and it may even be a generation or two down the road in a few cases, but not most) that wealth would be taxed when spent for consumption.

Since you seem to be fairly well-to-do, you may not have much contact with the illegal economy but it is much larger than most people seem to think. Not only with the huge amounts untouched in the drug and sex trades but also illegal aliens, cash sports betting, etc. and also (though hardly illegal) foreign tourists. All of these are greatly larger than any of the government estimates I've seen. The most recent detailed stuey of illegal immigrants derived the number of 20 million or more - about twice (or more) than the government number.

Since no income-based taxes even begin to touch these sources, it is clear that the FairTax will raise huge amounts of tax revenue not now addressed. Also, compliance costs which you try to minimize are actually much larger than the government figures. There have been derivations on these threads that show such costs to be over $600 billion - hardly a sum to treat like nothing. And don't forget the IRS budget of $11 billion will be gone under the FairTax.

Since you believe comlpliance costs and illegal economy collections are so minimal, let us see your derivations, please, rather than just your assertions. Your concluding 2 sentences are completely unfounded also so you might as well show us your figures there, too ... where you say:

"1. Upper middle class folks, and certain types of investors, are still going to get crushed; and

2. It may be that rates may have to be higher than 30%, anyway, in which case, it's gonna get ugly."

For your own edification about the effects of the FairTax on the costs of home ownership, you might find this of interest:

http://www.fairtaxvolunteer.org/smart/TaxNotesRebuttal.pdf

and, in a bit different light, you might discover "What's So Fair About a Tax on Income?" here (if you'll read both parts):

http://www.freerepublic.com/forum/a388d0748789d.htm