Fair Tax - Straightening Out Some Confusion

When Congressman Linder and I were busy researching and writing The FairTax Book we knew full well that it would one day become the focal point for those opposed to this tax reform idea. We tried, therefore, to make sure that our numbers and claims were correct and consistent with the research that went into the drafting of HR 25.

On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck. Those who have much to lose if the FairTax were to become law will focus on these areas in an attempt to undermine support, so let's put their objections and distortions to rest by addressing those matters here and now.

We explained in the book that the FairTax plan was revenue neutral. By this we meant revenue neutral for everyone ... the government, businesses and individuals. You can't put more money in the pockets of one without taking money out of the pockets of another. The harsh reality is that politicians would not support the FairTax if it meant less revenue for the federal government; business leaders would not support the FairTax if it meant a decrease in corporate earnings and profits, and the people would most certainly not support the FairTax if it meant a decrease in their income. Taking an snapshot view of our economy, an increase in income in one of these sectors would necessarily mean a decrease in another. This is why the FairTax was designed to be absolutely revenue neutral – leaving everyone pretty much where they are in terms of income or revenue. To put it more bluntly, there is no free lunch in the FairTax plan. There is no "something-for-nothing."

This brings us to the question of embedded taxes in the cost of consumer goods and services, and your paychecks.

As explained in The FairTax Book, there are taxes embedded in everything we buy. Every entity which provides a product or service in the design, production, marketing, distribution and sale of every consumer good or service will incur some tax liability as they perform their particular function. This tax liability will be incorporated into whatever these individuals or business entitles charge for their services, and will all passed through to become a part of the final cost of the product or service.

Every employee of any company involved in American commerce is also a provider of a service, and, as such, the employee incurs a tax liability as a result of his or her work. This tax liability is incorporated into what the employee charges the employer for their services, and is eventually incorporated into the final retail cost of the employer's product or service. Each employee is essentially a separate business entity providing a product, be it physical or mental labor, to the employer.

The extensive research behind HR 25, The FairTax Bill, shows that the average embedded taxes in every consumer product or service is about 22%. In some industries, such as leather goods, the embedded tax is smaller. In other industries, such as homebuilding and construction, the embedded tax is higher, but it averages out to somewhere between 22 and 23%. With the passage of The FairTax Bill, those embedded taxes disappear. These embedded taxes include the combined tax burdens of all entities involved in bringing those goods or services to market, and that includes you, the employee, and the taxes you incur as a result of your employment.

We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So ... what does this mean to your paycheck after the FairTax becomes law?

When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay – the amount you can put into your bank account – will not decrease, and may actually increase.

On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax. Once again, a zero-sum, revenue neutral game.

Now, let's elaborate on the "keep 100% of your paycheck" line that appears in The FairTax Book. It is certainly true that after the FairTax becomes law there will be no more withholding from your paycheck for any federal taxes. What you earn is what you get. This is not to say that your gross pay will equal what it was before the FairTax. This will depend on what your employer does when the embedded costs represented by the tax burden you have passed on to your employer disappear. One thing is certain: You will suffer no decrease in real or net earnings --- the amount of each paycheck you deposit into your bank account every other week. The "keep 100% of your paycheck" concept can more easily be applied to those who either change jobs or come into the labor force after the implementation of the FairTax. A new worker will negotiate a wage with an employer knowing that the amount negotiated will be the amount that worker receives every two weeks ... no deductions. Likewise, when you change employers you, too, will negotiate a wage that will not be subject to withholding, and you will get 100% of your wages in each paycheck.

Some of you reading this amplification of the principle's of the FairTax may have come to a rather interesting and accurate conclusion. The reality is that in America we're already operating our federal government off a consumption tax. A convoluted and impossible to understand consumption tax, but consumption tax nonetheless. We say this because ultimately all taxes paid by businesses or individuals eventually make their way through our economic system until they are embedded in the cost of some consumer item or service. In other words, taxes, like that other stuff you've heard about, roll down hill. At the bottom of that hill we find the retail sale and you, the ultimate consumer.

As we said in the book, and as we repeat here, the FairTax is not a "something for nothing" scheme. It was designed to be and, in fact, is revenue neutral. Having said that; the non-government economists who studied the FairTax play are nearly unanimous in their agreement that the implementation of the FairTax will lead to unprecedented economic growth in the United States. We will see economic growth in our economy of such magnitude that it will, sooner rather than later, lift all boats ---- including yours.

Dear Mind-numbed Robot,

Who gets socked now? Predominantly the upper middle class, with the rich contributing a very significant amount.

If the share of taxes paid by the rich declines significantly (and it will under the NRST), and the poor continue to pay, effectively, no tax (that IS the point of the prebate, right? to give back everyone the taxes they would pay at something around poverty level income), then, to stay revenue neutral, the middle class, especially the upper middle class, will pay more of the tax burden.

From Rush Limbaugh's website, I see a set of graphs that relate some interesting information. In 2001, the top 1% of households, by income, paid about 34% of the federal income tax collected. They paid 34% of the federal personal income taxes on about 17.5% of all personal income that year. The average tax rate on the top 1% of households was, in 2001, 27.5% in personal federal income taxes. Yup, 27.5% of income paid, on average, by the top 1% of households, in federal income taxes.

Yep. They paid about twice as much in federal income taxes, on a percentage basis, as the other 99% of the population, on their income. That's the rich.

However, whether you think they're paying ENOUGH or not isn't the point.

Whether some rich people manage to pay nearly no taxes at all or not, that isn't the point, either.

The point is, these folks pay a huge chunk of the taxes being paid. If they wind up paying less (and they will), then someone else will be paying it.

Interestingly, even if these folks spent 100% of their incomes on 100% NRST taxable purchases, their overall level of federal taxation would fall. They currently average, as a group, 27.5% of their income in federal income tax, and if they spent 100% of everything they earn on completely taxable purchases, they'd pay 23% of their income in the national retail sales tax. LOL.

However, it's much more likely that these folks will spend half or less of their income on taxable stuff. Meaning, the amount of their income that winds up in the hands of the US Treasury will fall from 27.5% of their income to around 12% of their income. That turns out to be an overall tax reduction for the rich of several hundred billion dollars per year.

Now, who will pay those extra hundreds of billions of dollars?

We know it won't be the bottom 50% of folks (these folks already pay nearly no income taxes, and under the NRST, with the prebate, will continue to pay no net taxes). I guess it's that 49% that goes from just above the median household income, up to folks that don't quite crack the top 1%.

I suspect, more precisely, it will be folks from about the 60th or 70th percentile to around the 98% percentile.

I don't have a MORAL problem with that result. But the rest of folks (especially the folks who wind up paying more) may have a PRACTICAL problem with it.

sitetest

Dear groanup,

"This not necessarily true at all."

Well, actually, it pretty much is necessarily true.

Rush's numbers show that 27.5% of the income enjoyed by the top 1% of households is paid in federal income tax. I guess not as many of these folks are buying Georgia tax-free municipal bonds as one might think.

Remember, that's the ENTIRE top 1%, not just the folks near the bottom of that 1%, not just the folks making $500K per year, but folks also making $5 MILLION per year, and MORE.

These are aggregate numbers. 27.5% of the income of the entire 1% is going to the feds in the form of personal income taxes.

Even if, as a group, this entire 1% spends 100% of its income on 100% taxable stuff, the average amount of income paid in tax, under the NRST, would fall to 23%.

I think that's an unrealistic "if," but it represents, for the NRST argument, the best case. Almost tautologically, the federal tax burden for the very rich will fall.

"Exactly. The top 50% of wage earners pay 96%..."

Yes, but that wasn't the point. The point was that the top ONE percent pay THIRTY-FOUR PERCENT of federal income taxes.

And they pay on AVERAGE 27.5% of their income in federal income taxes.

Even if they spend every penny, the amount of tax they pay will fall.

"Exactly. The top 50% of wage earners pay 96% of all taxes yet the bottome 50% who pay merely 4% have just as much voting power as those paying their way. Under a NRST the non-productives would not be in such a privileged position of voting themselves largesse from the producers. The NRST is the ONLY way I see to avoid what is becoming invevitable - the loss of our republic because voters can vote themselves a free ride."

Nothing changes. 50% of folks STILL will pay no tax after the prebates apply, and politicians will STILL play one class off against the other. It will start with returning some of those "middle class entitlements."

One big weakness the NRST has currently, from a political perspective, is that it will be charged on health insurance. Most middle and upper middle class folks receive hefty subsidies from their employers for this currently tax-free benefit.

With the NRST, it won't be tax-free, anymore. So, if the health insurance costs $750 per month, SOMEONE'S going to have to come up with an extra $225 per month. As an employer, I know who is going to take the hit. It ain't me, LOL. My profits wouldn't sustain the hit. Middle class folks are going to get squeezed by this.

That will be the thin edge of the wedge. I can hear ol' Chappaquiddick Ted, now:

"The NRST didn't repeal the 16th amendment, and RICH FOLKS ARE PAYING LOTS LESS, now, under the NRST!! Let's put a modest 5% income tax back on folks making $200K and up per year (or $400K, or $600K, or whatever sells politically)! And we can exempt health insurance from the NRST! After all, we exempt EDUCATION! Health insurance isn't less important or vital as education!! It's fer the chilrun, doncha know?"

LOL. At that point, you've appealed to the pocketbooks or the class jealousy of 99% of taxpayers.

sitetest

Our basic disagreement is over the level of taxes paid by the rich and by the middle class at present and then projecting that into the changed tax system with the NRST.

The figures you quoted from Limbaugh's site are the accepted wisdom of the day. I don't argue with them. What is not said in those figures, and what will make the difference in the transition, is that only about 50% of all of us pay taxes at all. That certainly includes me, I get an undeserved earned income credit, and possibly you.

There are many, and not just the rich, and again even you, who use legal means to avoid taxes. That includes a fair chunk of the middle class, especially the entrepreneurial middle class. So, when we look at the percentage of total taxes paid by the rich we are not looking at them as a percentage of taxpayers but of taxes paid. That may seem a non difference but it is not when we consider the transition. Those non payers will become payers and that is a lot of folks, 50% more in fact. With a 50% increase in the tax base, not even including the underground and the cheats, the ability to reach revenue neutral is easily understood.

When we mention the poor, the poverty level, and fairness, we must include the other benefits the poor get. In addition to their income (often unknown and unreported), many get food stamps, welfare checks, and subsidized, or free, housing. Those government programs take care of their basic needs which the prebate supposedly covers. Because of that, those prebates in many cases will become discretionary income and will be spent on taxable items. That broadens the tax base.

In addition, many people like you will become larger contributors to the tax base. Even if your business is tax exempt by it nature, you aren't. There are millions like you. (That is probably your true objection to the change.)

The tax shelters for the rich will be gone, the business decisions now being made for tax purposes will be unnecessary and counter productive, as many are anyway except for the tax angle, the poor will be better off but also contributing to the tax base, more of the middle class will be participating in the tax base but will be better off, and on and on.

In your case and of those like you, you ignore the costs that are now part of everything you buy. You think, erroneously in my opinion, that you will suffer if the system is changed. I think you are wrong, you will be better off. Ask yourself whether you would even be in the business you are if it weren't for its tax niche? If you would that is great. The transition will be even easier.

Dear Mind-numbed Robot,

"The figures you quoted from Limbaugh's site are the accepted wisdom of the day. I don't argue with them. What is not said in those figures, and what will make the difference in the transition, is that only about 50% of all of us pay taxes at all. That certainly includes me, I get an undeserved earned income credit, and possibly you."

No, that's wrong. The Limbaugh figures actually speak to the fact that precisely 4% of federal income taxes are paid by the bottom 50% of households.

But that will mostly stay the same under the new system, as FOLKS WILL GET PREBATES, and those prebates will add up to most, if not all, of the taxes paid by folks in the same bottom 50% of households.

That's how the NRST retains progressivity.

"That certainly includes me, I get an undeserved earned income credit, and possibly you."

I'm not sure what you're talking about. Are you talking about the Earned Income Tax Credit, the EITC? Do you receive that? I certainly don't, and never have.

"There are many, and not just the rich, and again even you, who use legal means to avoid taxes. That includes a fair chunk of the middle class, especially the entrepreneurial middle class."

Yeah, I agree. And that's part of WHAT I'VE BEEN TRYING TO SAY FOR A LONG TIME. Even though nominal income tax rates are high, most folks don't actually pay anything close to the nominal rates, even in their brackets.

I mean, heck, the nominal rate for the rich is 35%, not 27.5%, right? And remember, starting around $150K, most deductions, and even many "tax-free" sources of income start getting taken back by the tax code. By the time you get to the median of the top 1% (which, if I recall correctly, is about $400K), folks can't even deduct their state taxes from income to reduce their federal income tax burden. Only a narrow range of "tax-free" bonds remain tax-free, with most of them becoming entirely taxable.

So, the bottom line is, the top 1% of folks get 17.5% of the national personal income (by the way, if this doesn't represent something close to ACTUAL INCOME, not just TAXABLE INCOME, then the top 1% get an even HIGHER level of the national income). But these folks pay 34% of the personal federal income taxes. And they pay at a rate of 27.5%.

"In addition, many people like you will become larger contributors to the tax base."

I already AM a large contributor to the tax base. I work hard to minimize my federal income taxes, but I pay plenty, still.

"Even if your business is tax exempt by it nature, you aren't. There are millions like you. (That is probably your true objection to the change.)"

There you go again, ascribing evil motives - I'm selfish, I just don't want to pay more in taxes, that's why I'm opposed to this edenic program.

Nope. Completely wrong. I just think it's a bad idea at the levels of taxation we currently have.

"The tax shelters for the rich will be gone,..."

Sorry, Rush's numbers show that the "tax shelters for the rich" are modest, at most. The rich currently pay 27.5% of their income in federal income taxes. That will fall to an absolute upper ceiling of 23% under the NRST, and probably to half that amount - closer to 12%.

"In your case and of those like you, you ignore the costs that are now part of everything you buy."

No, actually, based on my own research, I think that the costs to which you refer are very modest. I look at my own experience, the experience of other small businessmen I know, and the actual financials of large corporations. The costs are real. In absolute terms, they're in the many billions of dollars.

But as a percentage of GDP, as a percentage of the cost of goods and services sold, it's very, very modest. Low single digit percentages.

"Ask yourself whether you would even be in the business you are if it weren't for its tax niche?"

You know, that's a pretty insulting question, Mind-numbed Robot. You don't know a thing about my business, and you should keep your fingers off your keyboard rather than make asinine assumptions like that.

My business would exist no matter what the tax laws were.

My views of the NRST aren't about what happens to me, but what I think will happen to the country. I think, with current levels of federal spending, the NRST will harm the country, harm the economy.

Would that you weren't so caught up in your own delusional system that you could ascribe decent motives to those who disagree with you.

Perhaps you're projecting.

sitetest

Dear groanup,

If you think that those who live off their investments only have tax-free bonds, then you really need to do a little research.

As well, if you have enough income, a lot of the income from those "tax-free" bonds becomes taxable. LOL. Over the last number of years, the range of "tax-free" bonds that remain tax-free to high income folks has been narrowed. The income from lots of tax-free bonds is now subject to the Alternative Minimum Tax (AMT).

Here's a quote from a link:

"Many investors buy municipal bonds because the income isn't subject to regular income tax. But investors should be aware that municipal 'private activity' bonds issued to help finance private-sector projects, such as stadiums or airports, are subject to AMT."

http://www.reformamt.org/articles/baltimore_sun.txt

I don't remember the rules, but I believe that general revenues bonds are AMT-exempt, where as the more restricted bonds that fund specific initiatives that are not strictly about building schools, public libraries, roads, bridges, and the like, are not. I've pinged some folks who probably know lots more than me about it.

I just perused a list of 128 currently-available municipal bonds, and most seem to fall into the "private activity" category.

But it doesn't matter. No one with, say, $10 million to invest is just going to buy tax-free bonds. Munis would be a small part of their portfolio. The returns are insufficient (right now, they appear to be around 3% - 4% per annum), and just don't protect against inflation.

If you're not getting an overall return of at least 7% or so on your financial assets, you can't both live on a significant portion of the income generated AND protect against inflation.

Most folks with that kind of money invest in various types of equities, some bonds, some other types of debt instruments, and real estate. Investment in equities will yield a total return, on average, of around 10% annually, for the long-haul.

The typical financial advisor to the rich will say, okay, invest your $10 million, buy some bonds, some other stuff, but buy mostly equities, so that you'll achieve an overall return of about 8% - 8.5%. Live on 4%, and let your capital grow, in nominal terms, by the other 4% - 5%. That way, you live comfortably now, and you protect against inflation later.

How do I know this? Because I've discussed with my own financial advisors how I will generate a living off my own financial assets when I sell my business.

"Your example doesn't account for that 'old' money class."

Well, it isn't an "example." It's actually the entire universe of rich folks. The simple fact is that on average, the top 1% pay 27.5% of their income in federal income tax.

If you don't like the facts, I can't help you. I can't change them. Neither can you.

sitetest

If you don't like the facts, I can't help you. I can't change them. Neither can you.

Well I love facts. Pinging people doesn't qualify. You state the "facts" as you see them, expect others to believe you, have no basis for your "facts" other than the fact that your financial advisor has told you what he thinks you want to hear.

It's too bad what passes for debate around here sometimes are pre-textual opinions. Is your pinging of your fellow SQL's every time you post a cry for help or something else?

If you think that leaving out an entire class of people who invest in municipal bonds and pay no taxes on them is justifiable then your research comes up short once again.

Any financial advisor who places high income individuals into muni's that are subject to AMT is subject to complaint and losing his license for a while. Kind of like putting munis into IRA's.

The low yields on munis at the moment require the use of laddered portfolios so that shorter maturities come due they can be re-invested in higher r of r's.

Many people aren't suited for equities. Why would a person who has plenty of money to retire with want to risk it in the stock market? That makes no sense at all? Your financial advisor tell you otherwise?

If you're not getting an overall return of at least 7% or so on your financial assets, you can't both live on a significant portion of the income generated AND protect

And if you don't NEED to take risk? Why would you?

There you go again, ascribing evil motives - I'm selfish, I just don't want to pay more in taxes, that's why I'm opposed to this edenic program.

I almost included a note to make sure this wasn't misunderstood. Perhaps that illustrates another difference between us. I don't consider the desire to avoid taxes as evil, I see it as human and natural. Just as with the NRST, if it weren't for all the benefits that I SEE, speaking strictly for myself and intending no slight to you, for the good of everyone which will help me in the long run, I would be against it because I will change from a receiver to a payer. I don't willingly pay more without added benefit.

I'm not sure what you're talking about. Are you talking about the Earned Income Tax Credit, the EITC? Do you receive that? I certainly don't, and never have.

Another misunderstanding. I was referring to paying taxes, not the EITC. You have corrected that.

Our difference is that I see a benefit and you don't. Morality has nothing to do with it.

No, that's wrong. The Limbaugh figures actually speak to the fact that precisely 4% of federal income taxes are paid by the bottom 50% of households.

There is no conflict between that figure and what I said. Both can easily and logically be true. Part of the 50% who pay no taxes are in the top 50% of households and some in the bottom 50% pay taxes. That has no impact at all on the fact that about 50% of us pay no taxes.

But that will mostly stay the same under the new system, as FOLKS WILL GET PREBATES, and those prebates will add up to most, if not all, of the taxes paid by folks in the same bottom 50% of households.

You are confusing household income with taxes paid. With our present system that is not a linear connection. Under the NRST it will be.

Yeah, I agree. And that's part of WHAT I'VE BEEN TRYING TO SAY FOR A LONG TIME (Entrepreneurs taking legal tax breaks.). Even though nominal income tax rates are high, most folks don't actually pay anything close to the nominal rates, even in their brackets.

This seems to be suggesting that even though the rich pay a lot of taxes, the dollar sum is not as great as it may appear. That makes it easier for the increased tax payers under the NRST close the tax collection gap.

Sorry, Rush's numbers show that the "tax shelters for the rich" are modest, at most. The rich currently pay 27.5% of their income in federal income taxes. That will fall to an absolute upper ceiling of 23% under the NRST, and probably to half that amount - closer to 12%.

According to the numbers released during the presidential campaign, Theresa Heinz Kerry paid only 12% of an estimate $800,000 income. How did that happen? Is she unique?

No, actually, based on my own research, I think that the costs to which you refer (embedded costs) are very modest. I look at my own experience, the experience of other small businessmen I know, and the actual financials of large corporations. The costs are real. In absolute terms, they're in the many billions of dollars.

But as a percentage of GDP, as a percentage of the cost of goods and services sold, it's very, very modest. Low single digit percentages.

First, you can't dig that information out of an annual report. What you are looking at is the percent of corporate taxes paid compared, I guess, to gross income, although the taxes are figured on net. Using gross is the only way you can compare that to GDP, which in itself is a deceptive and wrong comparison.

Embedded costs are in everything the corporation buys and in the services they use. Those aren't annual report line items and most corporations aren't even aware of them. They are, however, in the costs they consider to price their own goods or services and to determine their profit and taxes.

In addition, the GDP includes ALL goods and services. That include the millions of small mom and pop businesses, every doctor, lawyer, artist, etc., who plays in the market place.

To take annual reports, which don't even account for embedded costs, your own experience whose embedded and compliance costs are minimized (that is not an insult, it is my opinion and it reflects human nature, not deviousness or evil), your friends and acquaintances who are also not likely knowledgeable about embedded costs, and then comparing that to the GDP is by nature going to yield a small percentage.

You know, that's a pretty insulting question, Mind-numbed Robot. You don't know a thing about my business, and you should keep your fingers off your keyboard rather than make asinine assumptions like that.

My business would exist no matter what the tax laws were.

I am simply amazed at your proclivity to find insults where none are intended nor, indeed, even there. In one of our very first exchanges you took exception to a nothing comment. I have been exceptionally careful since. Had I read your entire post before I started replying I would have covered this at the top with the others.

Are you aware of how many business advice and self-help books are written to help people decide their true calling and find the right niche for themselves? Are you in anyway aware of how many people are in businesses they don't like, tax benefit or not? I'll bet fully 75% of all people are in jobs they don't particularly care for. They are doing what they think they need to do to make a living and support their families.

For you to consider that question an insult says more about your insecurities than any projection on my part.

Would that you weren't so caught up in your own delusional system that you could ascribe decent motives to those who disagree with you.

Now there is a true example of projections. There is another SQLer that I no longer respond to because anytime his tail feathers get singed he runs to the moderater and cries, Mommy. they are being mean to me. You will be happy to know that I will not bother with you anymore either.

Tell your shrink I said hi. Don't look for an insult there, I intended it as one. If I were to say what I am suppressing I would be banned from even the Smokey Back Room

Dear groanup,

"Pinging people doesn't qualify."

Well, I actually stated why I pinged folks. Here is what I said: "I've pinged some folks who probably know lots more than me about it."

"Is your pinging of your fellow SQL's every time you post a cry for help or something else?"

No, but a request for more expertise.

"If you think that leaving out an entire class of people who invest in municipal bonds and pay no taxes on them is justifiable then your research comes up short once again."

Well, there may be some very wealthy folks who are that stupid, but I was talking about the entire class that comprises the top 1% of households, in terms of income. They have income that is about 17.5% of all household income in the US, and pay on average 27.5% of that income in federal income tax. Here's the link:

http://www.rushlimbaugh.com/home/menu/top_50__of_wage_earners_pay_96_09__of_income_taxes.guest.html

Now show me your documentation that shows that the very wealthy mostly invest all in tax-free bonds. Thanks.

"Any financial advisor who places high income individuals into muni's that are subject to AMT is subject to complaint and losing his license for a while. Kind of like putting munis into IRA's."

Well, there are a limited number of tax-free bonds available in the United States. One site at which I looked showed that there are about $1.9 trillion in bonds outstanding, as of the close of 2003. Most bonds are currently yielding between 3% and 4%. A little less for the AMT-free ones, a little more for the ones that can be taxed under the AMT.

That translates to maybe around $65 billion per year in income. That's ALL tax-free bonds, including those subject to the AMT. From what I can see, perhaps as much as half of these issues are free from the AMT (although I suspect in dollar terms, it's actually lower). That yields about $32.5 billion. About half of these are held by tax-free bond mutual funds. Believe me, folks with $10 million or more don't usually buy mutual funds. LOL.

Anyway, that leaves about $16 billion to accrue to all these very rich folks who buy all tax-free bonds.

But these households have nearly $200 billion annually in income.

Thus, it isn't really possible that most very rich folks are generating all their income (or even half their income) from tax-free bonds.

Like I said, tax-free bonds play a role in the portfolios of lots of very rich folks, but it's not the largest role by far.

"The low yields on munis at the moment require the use of laddered portfolios so that shorter maturities come due they can be re-invested in higher r of r's."

You can ladder all you want, the returns just aren't there.

"Many people aren't suited for equities."

The folks who aren't suited for equities usually never become rich. The ability to accept volatility and change is an inherent attribute in those who succeed greatly.

"Why would a person who has plenty of money to retire with want to risk it in the stock market? That makes no sense at all?"

Frankly, groanup, that's a naive attitude about financial assets. I've seldom seen it among successful business owners. I've never seen it among very wealthy folks.

Usually, this kind of attitude is more common among W-2 workers without requisite knowledge, skill, and experience in investing, or without the experience of successfully living from a business that may or may not yield the same amount of income every payday.

Your two questions reveal a misunderstanding on your part, that the stock market is especially "risky" as an investment vehicle.

It isn't. It's volatile. Prices of stocks go up, and they go down. There's a difference between volatility and risk.

Most folks buy and sell on emotion, and they buy when prices are high, and sell when prices are low.

When a stock is hot, and the price is high, folks think, "I gotta have that stock." When news of the company is bad, and the price drops even below its real value, people say, "Oh! That stock is in the toilet! I paid $30 per share, and now it's SIX! I better sell!"

So, yeah, you're right, buying equities isn't for everyone.

But most of the folks who get to be very rich understand the basics of investing - buy low, sell high. Resist transacting on emotion.

Volatility is the friend of the real investor. The real investor recognizes that volatility isn't true risk, just volatility. The real investor understands that there ARE risks in stock investing, but share price volatility isn't intrinsically risky.

A diversified, carefully-researched portfolio is not especially risky. The likelihood is that it will yield some current income, and will likely appreciate at a rate greater than the rate of inflation.

A portfolio comprising all tax-free bonds is very risky, unless you're 80 years old or older, and in bad health.

The risk comes from inflation. A 60 year old investor, living on his financial assets, could easily live another 30 or 40 years. In 40 years, the rate of inflation could quadruple the cost of living, in nominal dollars. That means that the fellow with $10 million, getting 3% in all AMT-free bonds (you pay a bit of a premium for the AMT-free issues) is living on $300K per year. Pretty good.

But in 40 years, his $300K may only be worth $75K in today's dollars.

Without the ability to grow his capital, inflation will eat away most of the value of his wealth within a few decades.

THAT's risk.

"Your financial advisor tell you otherwise?"

Absolutely. Losing ground to inflation is an ugly way to lose a large part of your wealth.

"And if you don't NEED to take risk? Why would you?"

The real risk for someone not on death's doorstep is to lose one's fortune to the ravages of inflation.

sitetest

"I just wish that these so-called 'Fair Taxers' would just ONCE comment on the transition phase between two different tax systems."

From H.R. 25, found at thomas.loc.gov:

"....`SEC. 902. TRANSITION MATTERS.

`(a) Inventory-

`(1) QUALIFIED INVENTORY- Inventory held by a trade or business on the close of business on December 31, 2006, shall be qualified inventory if it is sold--

`(A) before December 31, 2008;

`(B) by a registered person; and

`(C) subject to the tax imposed by section 101.

`(2) COSTS- For purposes of this section, qualified inventory shall have the cost that it had for Federal income tax purposes for the trade or business as of December 31, 2006 (including any amounts capitalized by reason of section 263A of the Internal Revenue Code of 1986 as in effect on December 31, 2006).

`(3) TRANSITIONAL INVENTORY CREDIT- The trade or business which held the qualified inventory on the close of business on December 31, 2006, shall be entitled to a transitional inventory credit equal to the cost of the qualified inventory (determined in accordance with paragraph (2)) times the rate of tax imposed by section 101.

`(4) TIMING OF CREDIT- The credit provided under paragraph (3) shall be allowed with respect to the month when the inventory is sold subject to the tax imposed by this subtitle. Said credit shall be reported as an intermediate and export sales credit and the person claiming said credit shall attach supporting schedules in the form that the Secretary may prescribe.

`(b) Work-in-Process- For purposes of this section, inventory shall include work-in-process.

`(c) Qualified Inventory Held by Businesses not Selling Said Qualified Inventory at Retail-

`(1) IN GENERAL- Qualified inventory held by businesses that sells said qualified inventory not subject to tax pursuant to section 102(a) shall be eligible for the transitional inventory credit only if that business (or a business that has successor rights pursuant to paragraph (2)) receives certification in a form satisfactory to the Secretary that the qualified inventory was subsequently sold subject to the tax imposed by this subtitle.

`(2) TRANSITIONAL INVENTORY CREDIT RIGHT MAY BE SOLD- The business entitled to the transitional inventory credit may sell the right to receive said transitional inventory credit to the purchaser of the qualified inventory that gave rise to the credit entitlement. Any purchaser of such qualified inventory (or property or services into which the qualified inventory has been incorporated) may sell the right to said transitional inventory credit to a subsequent purchaser of said qualified inventory (or property or services into which the qualified inventory has been incorporated)...."

Because of the foregoing section, prices can be reduced by 23% ON DAY ONE, without any reduction in the profit margin of the business. This will provide great incentive to reduce prices by that amount, allowing net nominal price to remain constant. Competition will inevitably result, and most, if not all of this credit will be passed to the consumer. Of course, businesses may choose to utilize the value of that credit to boost employee pay or to retain it all to boost return on investment for the shareholders or to reduce prices...or some combination of the three options. It will be up to the market to allocate the incidence of the credit.

As the economy adjusts to a new equilibrium, the invisible hand of the market will likewise allocate the incidence of the consumption tax. Whereas consumption taxes are thought to be fully incident on the consumer, that is false. * Consumption taxes, like corporate net income taxes, can be incident on any one or combination of three groups: Consumers, employees, owners. As nominal prices rise, some reduction in consumption is likely. That will effectively push some of the burden back onto employees in the form of reduced wages, and back on to owners in the form of reduced return on investment. This is critical to understanding why the FT is superior.

The key points to remember are these: 1. The FairTax is calculated to be revenue neutral. This means the size of the 'tax wedge' is unchanged. Total purchasing power of the American people will remain unchanged. 2. There will be shifts in the incidence of the tax. Those who currently make their living from tax-free investments/sources like municipal bonds (Ta-RAY-za Heinz - Kerry - Heinz), drugs, prostitution, illegal aliens, will see a reduction in their purchasing power under the FairTax. For the first time, they will be paying their fair share. Those who are currently paying income taxes (middle America) will continue to pay taxes in the form of the consumption tax. 3. The WTO has been at war with the US for years. (Please see: Domestic International Sales Corporation, Foreign Sales Corporation, Extra-territorial Income Exclusion) The WTO has categorically refused to allow the US to 'border-adjust' the cost of the Corporate Net Income Tax from the price of exported goods. By contrast, the WTO permits the VAT (another consumption tax) to be border adjusted fully. Because the incidence of the VAT is allocated in the same manner as the CNI, This artificial distinction puts US goods at a distinct disadvantage in the world market. Please see above.* 4. The FairTax broadens the base over which the Social Security tax is imposed. We must broaden the base and increase the incidence of this tax if we are to 'save' social security---a questionable goal at best, but that's another rant. 5. The pay-as-you-go nature of the tax will eliminate the need to lien/levy private property to enforce the tax. The FairTax will strenthen private property rights. Sure there will be cheats, but audit and enforcement will be directed at retail outlets who conspire with consumers to evade the tax.

The FairTax is not perfect, but it's the best of all the proposals I've seen thus far, and I've been watching the Fundamental Tax reform movement for over a decade now. If you have a better system, I'd really like to hear about it.

Now show me your documentation that shows that the very wealthy mostly invest all in tax-free bonds. Thanks

There are 1.9 trillion bonds out there and only a tiny fraction are bank qualified. MOST of that represents individual investors. Insurance companies are about 20% the last I looked so it's individuals whether through intermediaries such as mutual funds or direct.

But these households have nearly $200 billion annually in income.

Once again you're confusing income with wealth.

The folks who aren't suited for equities usually never become rich. The ability to accept volatility and change is an inherent attribute in those who succeed greatly.

I'm talking about those who have already made their fortunes. What do they have to gain from risk if they are finacially well off and have accomplished what they needed to accomplish? Any reasonable financial plan will remove as much risk as possible from a portfolio.

Frankly, groanup, that's a naive attitude about financial assets.

Call it naive, call it dull. I sure does preserve assets, create peace of mind, allow for a good night's sleep and allow for an optimal retirement. I once called a client bank of mine and showed the portfolio manager a 10 million dollar CMO that had just hit a 10% yield on our offered side. He took the offer in to the bank president's office and conferred. The president said: "Well that sure is a cheap bond, but, do we NEED it? Are we in such a position that we need to seek that sort of risk? My client responded "no". Then go buy a 7% treasury. LOL.

Your two questions reveal a misunderstanding on your part, that the stock market is especially "risky" as an investment vehicle.

LOL. Misunderstanding? 1973-1974, stock market cut in half. Millions of retirees have to return to work or defer retirement altogether. 1987 stock market loses 20% in one day. 2000-2002 stock market cut in half, millions of retirees have to return to work or defer retirement. Nah, there's no risk there. Hell, just hold on for the ride, buy and hold, you'll get your money back. LOL. Buy low sell high. That's the ticket, that's what the smart money does right?

The ONLY people that buy low and sell high are wrong MOST of the time and cut their losses short. Once in a while you hear stories about the little old man that put his life savings in New York GO's when the city was about to go under and bought them at the bottom. But successful trades are WRONG most of the time. They just let the profits run and cut their losses.

Volatility is the friend of the real investor.

Only if that investor is a hedge fund or a speculator. It's a dreaded thing for investors and a necessary thing for traders.

A portfolio comprising all tax-free bonds is very risky, unless you're 80 years old or older, and in bad health

LOL. Inflation risk is the LEAST risky factor in a muni bond portfolio. Back in the days of Paul Volcker I knew of a bank that kept buying long term munis as interest rates went up. Before long the losses in those munis were greater than the bank's capital. Fortunately, in those days, banks didn't have to mark to market. LOL.

Usually, this kind of attitude is more common among W-2 workers without requisite knowledge, skill, and experience in investing, or without the experience of successfully living from a business that may or may not yield the same amount of income every payday.

And after 27 years in the securities business I can say for certain that your attitude, which seems to be that all the axioms (lies) you have been told by Wall Street all these years are gospel, is not conducive to getting the best deal from the financial advice crowd. Why would anyone believe any investment guru? If the investment guru knew what was going up and what was going down he would just manage his own money from his yacht.

The real risk for someone not on death's doorstep is to lose one's fortune to the ravages of inflation.

LOL. Do you have any idea what inflation does to the stock market?

Even cash is an investment.

Dear Mind-numbed Robot,

"I almost included a note to make sure this wasn't misunderstood. Perhaps that illustrates another difference between us. I don't consider the desire to avoid taxes as evil, I see it as human and natural."

The issue goes like this. I've often seen, and you've done it again in these posts, the NRSTers infer that opposition to the NRST is most likely rooted in self-interest. So, I've seen NRSTers assert that Your Nightmare, RobFromGa, myself, and others, must derive our livelihood from the current tax system, or from some other advantage of the current tax law. Thus, you infer that perhaps my business wouldn't even exist without the current tax law.

This is maddening and insulting.

It's maddening because you people are so convinced of your own rightness that you can't believe that honest, well-informed people would dare to disagree with you. Unless it was against their self-interest.

It's insulting because the clear upshot is that you think that we'd put our own private interests ahead of the best interests of the United States. In my book, that's unpatriotic. Maybe it isn't in your book. If not, get a new book.

I've seen it repeated over and over. You usually don't make this gross misjudgment, but it doesn't make it any less maddening or insulting when you do make it.

Stop thinking that I have any other motivation than what I credit you with - the desire to do what is best for our country.

For myself, I'm not altogether clear whether the NRST would be better or worse for me, personally, except that I believe it would cause at least an initial recession, which would hurt lots of folks, including me.

Here's another way the NRSTers, including you, insult the rest of us - by calling us "status quo lovers." I don't love the status quo. I can think of lots of ways to improve the status quo. Some NRSTers have liked these ideas when I've expressed them, but most brush the ideas aside because it doesn't fit with their agenda.

I don't love the status quo, but neither does the NRST scheme appeal to me. It's a false dilemma to say that I must love one or the other, take one or the other.

The fact is, we may be in the frying pan with the current system, but I suspect the NRST, under current conditions, is the fire.

"Another misunderstanding. I was referring to paying taxes, not the EITC. You have corrected that."

Well, I don't know how you get from what you actually SAID to whatever it is that you actually meant (which is still unclear). This is what you SAID:

"That certainly includes me, I get an undeserved earned income credit, and possibly you."

Well, you don't mention anything about paying taxes. You DO mention something that you called "earned income credit." I googled "earned income credit," and came up with countless links. The first 30 or so all referred to the Earned Income Tax Credit, which is what I thought you were referring to, essentially a negative tax given to working class families with very low incomes.

Investopedia.com defines Earned Income Credit as: "A tax credit for low-income workers, even if no income tax was withheld from the worker's pay."

http://www.investopedia.com/terms/e/earnedincomecredit.asp

That's all I found when googling.

If you're talking about something else, perhaps you should actually say what it is you meant.

"First, you can't dig that information out of an annual report. What you are looking at is the percent of corporate taxes paid compared, I guess, to gross income, although the taxes are figured on net. Using gross is the only way you can compare that to GDP, which in itself is a deceptive and wrong comparison."

Well, I've actually known Fortune 500 CFOs, and thus, have some direct knowledge. As well, if a company is paying only 1% of its gross receipts in federal corporate income taxes, we may assume that the money it spends to avoid taxes is not significantly higher than that, since, to spend lots more on tax avoidance would give a diminishing return.

As for compliance costs, as with audits, etc., what NRSTers fail to acknowledge is that most of the accounting done for taxes has to be done, anyway, especially in publicly-held companies, as the SEC regulations for accounting are a lot tougher than the IRS regulations. Folks in really big corporations don't usually go to jail for tax evasion. They most assuredly go to jail for violation of securities laws.

Even for my very small, very private business, I know that compliance to thousands of other federal rules, regulations, and laws, ranging from OSHA to ADA to Family Leave Act, shape my business and cost me money to comply far more than the tax laws. As well, most of my tax compliance costs have to do with the accurate accounting of payroll, and the accurate accounting of the sales I make, and the accurate accounting of the purchases I make for my business. Guess what? I have to do all that under the NRST.

"You are confusing household income with taxes paid. With our present system that is not a linear connection. Under the NRST it will be."

You are confusing individual households with aggregate classes by income.

"'Yeah, I agree. And that's part of WHAT I'VE BEEN TRYING TO SAY FOR A LONG TIME (Entrepreneurs taking legal tax breaks.). Even though nominal income tax rates are high, most folks don't actually pay anything close to the nominal rates, even in their brackets.'

"This seems to be suggesting that even though the rich pay a lot of taxes, the dollar sum is not as great as it may appear. That makes it easier for the increased tax payers under the NRST close the tax collection gap."

That's a pretty wild non sequitur.

"Now there is a true example of projections. There is another SQLer that I no longer respond to because anytime his tail feathers get singed he runs to the moderater and cries, Mommy. they are being mean to me. You will be happy to know that I will not bother with you anymore either."

Well, with you NRSTers, the insults are pretty common, and pretty much expected.

"Tell your shrink I said hi. Don't look for an insult there, I intended it as one."

Well, I suppose you don't disappoint.

"If I were to say what I am suppressing I would be banned from even the Smokey Back Room."

Par for the course.

sitetest

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