However retaining the entitlements as wage taxes only continues to penalize those who work and pay the tax over which they have no control (and also keeps the tax bureaucracy ant the burdens on the employer in place). Despite your stating that these sorts of taxes are not regressive, in fact they are - very much so. Any perceived benefit (greater or less) does not relate to whether the taxes themselves are regressive or not but merely whether the worker gets a greater percentage return (relative to his income) than another taxpayer. Both of these “social insurance” taxes are among the most regressive taxes we have.
If it is the “progressivity” of the benefits that concerns you perhaps a better solution would be to find a way to limit the payout on that end - though that seems questionable. As I mentioned earlier, the bills implementing these social insurance give aways are the worst ever of their type in our history and - as I said - I’d prefer to see them both eliminated.
As it is, though, looking at the handling of these amounts in the FairTax bill and even projecting a reasonable increase year to year from the current baseline it is more likely that the amount representing the FairTax rate would drop over the coming years rather than rise which seems to be your assumption. The mechanism funding the social insurance is not automatically increased by an increase in the FairTax rate in any event but by the wage amounts involved just as at present.
If your “family of four” knows they’ll pay no more than zero they know something that is hardly predictable since the amount (rate) they pay is based upon taxable end consumption and the HHS definition of income classifications rather than income per se. That calculation is anything but automatic. The point is - it varies but is within the purview of the family to influence to their own benefit one would suppose. If at a given FT rate/HHS class the benefit level actually reduces, then that family might even pay more in FairTax unless they altered their spending habits ... but they have the ability to do just that.
And in addition, the voters do not vote directly on the FairTax rate, so claiming that they can do so and thereby vote themselves more money to the detriment of others is more that just unlikely. The rate is established by congressional action and those desiring increasing benefits in this way would have to have the voting power to overcome all the voters who would end up paying more as a result - which in the most recent figures I’ve seen would be the group which now has an overall income tax effective rate of 11.8% whose individual income tax rate is -2.9%. IOW they are already benefiting considerably from the present system. There are about 23 million households in this category so they’d have a lot of political inertia to overcome (and little capital) to boost the tax rate on themselves (assuming there would be any real reason to do so).
I also can’t understand your effective tax rate calculation for the $100,000 family of four but that’s just arithmetic. I guess I also don’t grasp your rationale for choosing that family - are they supposedly “poor”? Since people haven’t the option of automatically causing the FairTax the benefit themselves only, I can’t accept your reasoning. The FairTax rate even with a percentage increase of the entitle amounts thrown in each year will actually cause the FairTax rate to reduce, not increase. In fact I believe that it is far more likely that political action will reduce the FairTax rate even beyond the reduction caused by the entitlements since most likely tax revenues will actually increase overall under the FairTax. After all there will be millions of additional taxpayers added to the rolls under the FairTax due to the underground economy.
Do I believe that it is “good thing”?? Leaving aside the fact that I don’t think ANY taxes are “good”, I’d say that yes - within the context of having to have them (taxes) then having those who are not citizens, are here illegally, and/or who are making their livelihood illegally at present - having these groups contribute to our tax revenues is both fair and good since it helps reduce the tax burden on the rest of us. If those in this (underground economy) category feel strongly enough - as do you - about the “unfairness” (of contributing to our tax revenue when they presently do not) then they can certainly go through the effort to become citizens and vote against it. And, in fact the 20 or more million in this category would probably absolutely offset the apocryphal “$40,000 in tips waitress” you cite - but you present no figures to back that up. Were she to cite tips not received to boost her income, thinking to receive more in eventual social insurance benefits, first of all that would be a federal crime (a type of tax fraud or an attempt to defraud the social insurance agency) and were it to be observed as a common practice the government would no doubt set a limit that you have apparently observed in HR25. Setting that limit initially merely helps preclude some of the temptation for criminal activity or put her in the position of insisting her employer pay more in wages. Either way, her taxes under the FairTax will depend upon her consumption habits.
Thank you for the detailed response.
Obviously we agree that the entitlements are bad programs. I think changing their tax base moves us further away from reforming them. We also disagree about the concept of “regressive” taxes. I don’t see how you can leave out the benefits. I think you absolutely MUST subtract the present value of the benefit from the tax paid. The NET is the actual tax paid. Then you can compare the net tax paid to the income and you will see that it is not “regressive”. Leaving out the benefits makes such a calculation impossible.
Suppose we had a tax system where the poor paid 10% of their income in taxes, and the rich paid 50%. You would say that was ‘progressive’. According to your definitions, it would still be ‘progressive’ if the rich were sent checks for 90% of their original tax. Because you say we shouldn’t count the benefits. In fact, it would be ‘regressive’ since the effective tax rate for the rich would now be only 5%.
My example of a family of four earning $100K was to illustrate the absurdity of how the FairTax can be gamed into a clearly middle-class family paying a low effective tax rate. A family of four has a prebate that cancels out the first $26K in retail purchases. So $100K - $10K - $10K - $20K - $26K = $34K FairTaxable spending, and a FairTax collected of $7,800 at 23%. At 25% it jumps to $8,500 on the same $34K FairTaxable spending.
Whether people are voting individually to increase benefits and thereby higher FairTax rate, or they are voting for politicians promising them those things is immaterial. The result is the same — the cost/benefit ratio for this $100K family favors such an expansion of benefits, and if it favors this family at $100K, then clearly it benefits all the families of lesser income even more. A super-majority of voters will elect a Congress that gives them what they want. That tax burden will land on the backs of those to whom the prebate is a small portion of income — the very wealthy.