Are you operating under a set of FairTax assumptions that assume that the price of goods are going to come down by 22% on average so that the 30% FairTax can be added, and prices will stay the same?
If you are operating under that assumption, then your calculations are going to be all screwed up.
Assume that the hypothetical couple are both retired, 63 years old, and have $1,000,000 saved-- $500,000 after tax money invested in safe dividend-paying investments and $500,000 in their home which they plan to live in for ten more years then sell it and move into a smaller place and invest the proceeds. They have saved up all their life and they plan to spend money now travelling the USA and buying stuff that appeals to them.
They also have a $200,000 Roth IRA which they have paid income taxes on and a $200,000 regular IRA. These guys have scrimped and saved, and by God, now they are going to enjoy the fruits of their labor.
Make whatever other assumptions you want about Mr. and Mrs. Accumulated Wealth.
No, Rob, I don't assume the 22% price drop. I work my examples without a price drop and then see how much prices would need to drop, if any, for that particular person to come out even or ahead under the FairTax.
My additional assumptions about Mr. and Mrs. Accumulated wealth are these:
1) Retired early in 2004, with last-year income of $60K, SS benefit $1245/mo =~$15K/yr.
2) Cost-basis of dividend-generating stocks in after-tax investment account is $200K, with $300K unrealized capital gains. Dividends of 3%/yr ($15K) under Income Tax system, Dividends increase to 4%/yr ($20K) under FairTax. Reduction of tax rate on dividends and capital gains historically results in higher dividend payouts -- corporate savings from eliminated taxes must go back to shareholders.
3) Regular IRA with $200K rate of return 5% subject to ordinary income tax rates.
4) Roth IRA $200K will grow at 5%/yr, and withdrawn with no Income Tax due.
5) Home appreciating in value 3%/yr faster than inflation. Original purchase price $75K. FairTax on new construction (consequence of no Price Drop) bumps price of existing homes so they are competitive.
6) Planned life expectancy is to age 95.
7) All rates of return are inflation adjusted.
Income tax 1st ten years:
Income = $15K(SS) + $30K(AT) + $15K(IRA) + $15K(Roth) = $75K
Taxable income = $7.5K(SS) + $15K(AT) + $15K(IRA) - $10K(Married Std Ded) = $27.5K
Income Tax bill = $3K
Spendable income = $72K
At end of ten years:
AT account down to $328K
IRA down to $137K
Roth down to $137K
Home sold for $675K, capital gains in excess of allowed for couple is $100K, tax collected is $15K, net invested is $660K, rate of return is %5.
Next 32 years of income tax:
Income = $15K(SS) + $16K(AT) + $8.7K(IRA) + $8.7K(Roth) + $42K(HOUSE) = $92.4K
Taxable income = $7.5K(SS) + $9K(AT) + $8.7K(IRA) + $33K(HOUSE) - $10K(Married Std Ded) = $48.2K
Income Tax bill = $8.4K
Spendable income = $84K
The income tax bill would actually fall a little each year as less of the withdrawn amounts are interest/dividends.
FairTax 1st ten years:
Income = $15K(SS) + $44K(AT) + $15K(IRA) + $15K(Roth) + $4K(FCA)= $93K
Taxable income = 0
Income Tax bill = $0
Spendable income = $93K ($72K price + $21K FT)
At the end of ten years:
AT account down to $214K
IRA down to $137K
Roth down to $137K
Home sold for $877K ($675*1.2987), net invested is $877K, rate of return is %5.
Next 32 years of FairTax:
Income = $15K(SS) + $12K(AT) + $8.7K(IRA) + $8.7K(Roth) + $55.6K(HOUSE) + $4K(FCA)= $103K
Taxable income = $0
Income Tax bill = $0K
Spendable income = $103K ($79K price + $24K FT)
It looks like it is about a wash to me. The money lasts until age 95 with approx the same purchasing power under Income Tax and FairTax. With no Price Drop figured into anything, Mr. & Mrs. Accumulated wealth have $5K less to spend each year during their last 32 years.
This supposes that they spend none of their time traveling outside the USA, and they buy everything brand new at retail - no used vehicles, no previously owned artwork, no educational expenses.
To break even compared with the Income Tax, Mr. & Mrs. Accumulated Wealth would like to see an average Price Drop of 4%, or a lower FT Rate.
Are you operating under a set of FairTax assumptions that assume that the price of goods are going to come down by 22% on average so that the 30% FairTax can be added, and prices will stay the same?No but s/he makes the assumtion everyone has more money to spend than they earn without mention of where the extra money comes from...The fairtax money tree I guess.
Not to mention s/he assumes receiving a yearly rebate for a family of four for 32yrs into RETIREMENT....s/he also didn't account for the 25% interest rate reduction. Interest rates effect investments as well as lending.