Replies

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

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?)
[Yes, I had to deplete it faster in the FairTax to maintain the same purchasing power as in the income tax. My goal was to maintain as close to the same purchasing power between tax systems for as long as possible.]

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.
[Over the last 30 years, real estate has averaged 3% over inflation. If you don't allow for any price drop, then a new home that is currently selling for 'X' will sell for 1.3*X under FairTax. Since existing home prices are generally competitive with new home prices of the same size in the same area, it seems reasonable to assume that existing home prices would have a final price similar to FairTaxed new homes. Since the FairTax won't apply, that is all benefit to the seller.]

3. did you mean next 22 years for the second phase?
[Oops. I did intend that, but all my numbers came from using a retirement calculator called "I'm retired, how long will my savings last ?" http://www.fincalc.com/ret_06.asp?id=12221 and I used 32 years after the initial 10. So my example turns out to run out to age 105. That income stream looked a little low to me for a $1.4M nestegg. Thanks for pointing out why.]

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).
[Well, the lower capital gains tax is slated to sunset in 2009, so I ignored the lower rate. But you may be right about the $6,500. That would make their spendable another $2K higher.]

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.
[Yes, they do go through their nestegg faster at first and benefit later from the higher home value. But the FairTax still penalizes them. They come out better under the income tax. To come out ahead under the FairTax, they'd need to get some Price Drop, spend some money not subject to FairTax, or buy under a lower FairTax rate. It looks like it is really the Roth IRA that is penalized most when compared to Income tax. Which makes sense, of course. Theoretically, if someone was relying entirely on Roth IRA money, they'd be really screwed.]