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4) Roth IRA $200K will grow at 5%/yr, and withdrawn with no Income Tax due.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The income tax bill would actually fall a little each year as less of the withdrawn amounts are interest/dividends.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.
I'll take a look at this closer later, a few quick questions:
1. how did you calculate the $44k AT income in the FairTax example? (as compared with only $15k AT income off the exact same amount of money under the present scenario. by depleting the AT nest egg?)
2. how do you figure that all used homes will be worth 30% more plus real estate continue to rise at 3% over inflation after the FairTax is enacted? This is illogical to me.
3. did you mean next 22 years for the second phase?
4. Income tax for MFJ at 48,200 per year is $6500, not $8400. (and capital gains are taxed at a lower rate of 5% for those in the lowest two tax brackets so I think the taxable income would not even be as high as you state).
at first glance it looks like this hypothetical couple makes out better as you describe it by depleting their after tax next egg much faster until they sell their house, but then the additional amount of home appreciation you predict under the FairTax makes up for it and restocks the money they spent out of their nest egg.
if you look at the amounts that this hypothetical couple actually sends to the FedGov for the total period you describe is:
present system: ($3k * 10) + (6.5k * 22) = $173,000
FairTax system: ($21k * 10) + ($24k * 22) = $738,000