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Dear groanup,

Actually, I was assuming that the income was from pensions or qualified retirement accounts, since currently, these are taxed as ordinary income.

If I were to suppose that some of their income came from non-qualified accounts bearing dividends from equities, then it may be possible that some of their income would be taxed at the 5% rate. Which makes their situation all the more dire under the NSRT.

If I were to assume further that they were, say, spending the principal of their bonds, then that makes it much worse, as that money isn't taxed at all under the present system (or rather, it was accumulated after paying tax, and when you spend the accumulated capital, you don't get taxed again).

Let's say they had $750,000 in tax-free municipal bonds yielding, say, 3%. That'd $22,500 per year. Let's say they get $20,000 from Social Security, and draw down the $750,000 by $17,500 in the first year, hoping they don't run out of money before they die ;-).

Then, there federal taxes look more like this under the current system:

Tax-free income: $22,500
Income taxable as ordinary income: $20,000
Use of principal: $17,500

Federal income tax liability: $800 (after the standard deduction, they have nearly no taxable income, and they're in the 10% tax bracket [thank you, President Bush]).

Amount available for purchases: $59,200.

Under the NSRT, their equivalent purchasing power is still: $49,589.54.

That's WAY ugly. WAY WAY ugly.

That's because cash and cash equivalents become devalued instantaneously under the new system. That $10,000 you have in the bank that would have bought $10,000 worth of new stuff will now only by $7,700 worth of new stuff.

Folks with significant cash assets that they want to spend are screwed big, big time.

Depending on what businesses do with saved corporate income taxes, so are folks with lots of stocks.

If businesses lower their prices by the 1% - 2% they save from corporate income taxes, then shareholders are generally screwed. Upon selling one's shares, one may not have to pay the 15% capital gains tax (5% for middle class and lower middle class taxpayers), but that money just won't buy as much stuff taxed at 30%.

But if businesses retain those taxes, then net, to-the-shareholder earnings go up a good bit in many cases, and the shares of many companies will rise part of the way back to make up for the NSRT, and with no capital gains tax, I suspect shareholders in most companies would at least break even.

However, then those corporate income taxes can no longer be used to reduce prices.

Oh, well.

sitetest

With the income tax gone, people will be encouraged to save money. There will be a penalty for extravagant spending. That's where a consumption tax hits people. Your figure does not factor in the fair tax allowing for an exempt basket of goods and services needed to sustain life. Like food and water and fuel in a reasonable quantity. Every one would still come out ahead. The money isn't taxed until and unless you spend it and tht remains YOUR decision.

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

"Depending on what businesses do with saved corporate income taxes, so are folks with lots of stocks."

Let me see if I understand this. Under the FairTax
1. the USA becomes the largest tax haven in the world
2. the cost of doing business in the USA decreases significantly
2. the demand for US produced goods goes up substantially
3. businesses would expand to meet the increased demand
4. $11 trillion in capital would be freed to return home and be invested in expanding our own businesses.

And in the midst of this, people owning stocks would get killed? Amazing the lengths you guys will go to, just simply amazing.