Skip to comments.Winners and Losers under the 'FairTax'
Posted on 09/28/2005 12:14:25 PM PDT by hripka
A change in a tax affects that area of the economy . . . and beyond. Taxes hurt whatever is taxed. Income taxes hurt income (production). Sales taxes hurt sales (consumption). Higher rates have higher effects.
After having read "The FairTax Book: Saying Goodbye to the Income Tax and the IRS" by Neal Boortz and Congressman John Linder, I realized that the 'FairTax' proposed by Boortz and Linder would change EVERYTHING. The 'FairTax' is not tax reform, it is tax upheaval. Since it taxes consumption instead of income, consumption WILL fall, and incomes WILL rise. All of the incentives (and penalties) enacted into the current tax code would, at least be neutralized, or perhaps go into reverse.
A frugal person might be in favor of a 'FairTax' (National Retail Sales Tax, NRST) because the United States is consuming too much and needs more income. Considering our multiple deficits, (federal budget, international trade, consumer debt, etc.) cutting consumption and increasing income might not be a bad thing, but only to a point. However, the 'FairTaxers' assume minimal transition costs. They are VERY mistaken. The day of the change itself would be minor, but then the 'FairTax' would change EVERYTHING.
A list (in no particular order) put together by an amateur, not a tax professional:
List of those who would benefit under the 'FairTax' plan:
1. Business/production in general
2. All income-producing activities that were previously taxed, dividend payers, capital gains, etc.
3. Savers. Thrift and frugality will now be rewarded.
4. Activities that were formerly penalized: Alternative minimum tax payers, estate tax payers, gift tax payers, etc.
5. Corporate bonds, as compared to government bonds
6. Cash and bartering transactions
7. eBay for handling used transactions, also flea markets, second-hand stores, rummage/garage sales
8. Current owners of houses, cars, clothes, household goods. The answer on pg. 162-163 ignores existing houses. It states that *new* houses will decline in price, but go right back up again due to the 'FairTax'. And existing houses?
9. Companies will start a Company Store for tax-free employee benefits
10. Home-based activities: sewing, knitting, cooking, fruit and vegetable gardening at home, home repair, do-it-yourself, self reliance
11. Refurbishing of standing 'used' real estate
12. Smuggling, especially of portable high-value goods
13. Warren Buffett, who doesn't sell due to capital gains taxes which are now eliminated
14. Indian tribes could offer tax-free stores, and their casinos aren't affected
and others ? ?
List of those who would be hurt under the 'FairTax' plan:
1. Consumers/spenders in general
2. All retail establishments
2a. less impacted: those catering to home-based activities such as groceries, home improvement, etc.
2b. Internet-based retailers
2c. most impacted: portable high-value goods such as stamp, coin, jewelry dealers which might even close due to smuggling
3. Federal Government temporarily, due to initial tax simplification
4. IRS employees, tax accountants and lobbyists, HR Block, Intuit, etc.
5. Government bonds, (no longer tax-advantaged) as compared to corporate bonds
6. Roth IRA account holders (despite pg. 120-121 that a principle of the 'FairTax' that everything should be taxed only once)
7. Charitable donations to charities and churches, due to loss of tax deductible giving
8. All currently tax-exempt organizations, their comparative advantage is reduced.
9. Home real estate in general due to loss of tax deductible interest, a major selling point.
10. New real estate developments - especially near cities with old housing
11. Residents of states that don't currently have a sales tax, those states will enact their own sales tax
12. Taxpayers living in states or cities with high income or high property taxes, which are no longer deductible
13. Anything currently tax-advantaged through credits and deductions, i.e. conservation efforts, high medical bills, victims of casualty and theft losses, child and adoption tax credits, capital losses, etc.
14. Tax-advantaged 401k's, no reason to have them ? though savings in general will increase
15. China, Japan, etc., countries that currently export to us
16. All non-Indian casinos and lotteries. Casinos have to pay in effect a 23% income tax on gross profits (gross receipts minus payoffs and other taxes)!? My reading of Section 702(e).
and others ? ?
Remember, this is a list put together by an amateur, not a tax professional. Are there others affected, positively or negatively? Where am I wrong? Read my tagline.
A tax hurts what is taxed. That is how I came up with this list.
1. I am not sure how purchases made abroad by Americans are taxed. Section 101-d-1 of HR25 implies that the 'FairTax' is a Use Tax. I have seen other information that purchases made abroad are 'FairTax'-free. If it is the latter, then foreign purchases by Americans will skyrocket. See also the US Supreme Court decision of North Dakota vs. Quill Corporation regarding the use tax.
2. I read Section 102-a-2 to mean that (initial public offerings) IPOs are not taxed, but would investment real estate be taxed?
3. Also, if a 'FairTax' is only levied on final retail sales, the 'fair tax' rate will have to be MUCH higher than 23% (inclusive) or 30% (exclusive rate). Today the feds spend 2.5 trillion. The GDP is over 11 trillion. Approximately two-thirds of that (7.26 trillion) is consumer spending. 2.5 trillion divided by 7.26 trillion is a federal sales tax rate of 34%. To say that government will pay taxes to itself is a circular argument. On a 77 cent item, everyone pays $1. When the government pays for it, it goes back into its own pocket. Sure a dollar comes out of the government's right pocket, but 23 cents goes immediately into the left pocket. If that isn't the epitome of an 'embedded' tax, then what is?
Add to those that it will HURT
Anyone that currently works "Under the Table"
Trust Fund Babies (folks like Paris Hilton, John Kerry etc)
Employees of the IRS
Offshore Banking (Or any Institution that is in the business of "Hiding / Laundering Money"
This is not true. The resulting increase in the money supply will decrease the value of savings at transition by the tax rate. That is, if you have $20,000 in savings, it will by 23% less after the creation of the so-called "Fair Tax".
it will buy 23% less
I'll let others wade in here.
Your list of those "hurt" by the Fair Tax is bogus.
The average worker will IMMEDIATELY see his paycheck jump by 25% or more (think gross pay instead of net pay). The sales tax on the first $25,000 of it will be rebated monthly so that low income folks are not hurt by it.
Businesses and industries who are thinking of moving (or who recently moved) to other countries to take advantage of lower taxes and wages will now reconsider and MANY of them will crunch the numbers and realize that financially it no longer makes sense to move to Mexico or Indonesia.
Giving to charaties for the deduction it would bring is stupid. Why would I want to give $1000 to a charity just so I could reduce my taxes by $280? Charities existed before the income tax and will exist after.
As for tax exempt organizations being in the "losers" column, I see it as a gain. No longer do they have to kowtow, shut their mouths, and kiss the ass of the IRS for fear of losing their tax exempt status. One of the most horrible pieces of unconstitutional legislation ever passed was the one that threatened the tax exempt status of the churches if they DARED to be involved in politics as they had been since our country began.
This is bad how?
There are some questions about the fair tax details. I don't think that is in dispute. However, on the grander scale of Pros Vs Cons (some or yours are valid many are not), simply removing the burden of our current federal tax system and the obvious business advantages that brings company's racing to set up shop in the US says I lean in favor. When workers are in demand, salaries go up, income goes up, spending goes up, etc. (and yes, sometimes inflation too). Add to the mix more disposable income for each citizen, which adds buying power, and I am a believer.
I am still trying to understand if 23% is the right amount and how it will effect the economy in the immediate aftermath of implementation, but I am fully on board with it being a long run HOME RUN!
in the long run, compounding savings will allow one to consume much more...
Hurt: Those who have saved in the past in non-tax deferred accounts. They paid income tax on the money before saved and will have to pay again when spending it.
"This is not true. The resulting increase in the money supply will decrease the value of savings at transition by the tax rate. That is, if you have $20,000 in savings, it will by 23% less after the creation of the so-called "Fair Tax"."
Theoretically, this balances itself out rapidly. This is one of the points I am not yet completely convinced. However, the logic does say competitive capitolism will drive the correction to about pre-tax pricing. What may devalue the dollar (inflation) could be the additional spending that Amercans can afford especially if international businesses start setting up shops and factories and there becomes a shortage of workers, which drives salaries, which drives demand, which drives costs.....
There are worse things the country's economy could do.
"How can both be true? Consumption will fall and income will rise. If all capital goods are taxed as consumption, such as homes, cars, trucks, and the machinery of commerce, and if people don't buy those items because of the tax burden, then why would anyone spend to increase production, and, if production is curtailed, how can incomes grow?"
One expectation is that American products become much cheaper to get to our export docks and therefore much cheaper for other nations to import. Our inport/export defecit is suppose to change radically as more businesses move production to the US. So if there were to be any loss in American consumption, our exportation of products would still drive demand for workers. Workers in demand drives price up as the supply is reduced.
The savings rate will rise.
This is bad how?
Who said bad?
From the book, pg. 165: "With taxes at the 39 percent level, why would they spend $1000 to save $390?"
Saving $390 (or my marginal income tax rate amount) reduces the impact of my giving the $1000. It sure affects my thinking when I write out a check to a charity. And Boortz pooh-poohs this? It must affect others as well.
Regarding currently tax-exempt organizations:
I mentioned that their comparative advantage is reduced.
The incentive to save and not spend is simple... do I want to have my money to pass on to my children, or do I want to give it to the government so that they'll re-build New Orleans?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.