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.
I don’t think that mixing benefits into whether a tax is regressive or not is the proper approach to determining the “bite” of a particular taxation since the benefits can be changed independently of the tax rates and speaking of SS the benefits don’t come for a long time after the tax (if ever) and are eaten up by inflation in recent years pushed by the government - which is merely another type of tax. You’re welcome to think your own type of “regressive” or “progressive” - and I’ll stick with mine because I think it’s more realistic and relates to the tax itself rather than (shudder) government largess.
I think the MC law is more likely to drive the country into poverty but - since the benefits are independent of the imposition of the taxes - those can be altered by congress before we get to that point if sufficient pressure is brought to bear. We’re very close to that now with SS in that we’re running out of wage earners to tax and so something must be done fairly soon. The FairTax seems like a reasonable way to proceed ... but I’d still like to see both SS and MC eliminated.
That’s the problem with entitlements, though, as soon as the taxpayers at large get them and can be led to believe that others pay for them (which happens in spades with the IT despite what you might think) then it is very difficult to correct the situation. I don’t think it would be any more difficult under the FairTax and, in fact may be easier since the action in the bill actually works to reduce the FairTax rate over time even assuming an annual projected increase in the social insurance. With the IT there is not that much leeway and we’re running out of “tax room” with too few supporting too many.
At least with the FairTax the tax base is expanded giving us more time to hopefully work on hammering upon congress to bring both laws to something within reason (and reduce the FT rate further). The tax burden is already falling more and more heavily upon the high earners all the time and there’s no relief within the IT system for those who could help boost economic progress by saving and investing while for the most part the incentives within the FT indeed do that very thing which will help boost overall economic growth.
I’ll get back to you about your “family of four” (F4), most likely example after the holidays since there’s a lot of family activity right now. I do have some comments to make about that.
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.Your figures aren't quite current but close enough for example purposes so let's take them as presented. Actually this is not an example of "gaming the system" at all but an example of how the FairTax is intended to work.
If the F4 family has a low effective tax rate under the FairTax - and as you presented the data - that seems quite likely, think about what happens with the money not spent but saved/invested. This means that they are contributing to the build up of capital and therefore helping bump up the economic activity by such capital investment. So even though some of their income is not taxed for consumption it does help our economy. At present that income would be lessened by income taxes and not be so available for investment.
One of the concepts behind the FairTax is that the consumption tax has a broader base than the income tax and therefore the individual effective tax rate will drop compared to the income tax rates. This helps drive capital investment assuming the sort of situation your example describes. So I genuinely don't see your example as gaming the system but as a reasonable operation of the consumption tax as spelled out in HR25.
Also, I don't know that keeping all things (spending, savings, etc.) the same but increasing the tax rate is any more realistic that doing the opposite - keeping all things steady but decreasing the tax rate. I don't see that modifying the example either was contributes much to the understanding of the FairTax. And I don't consider the normal operation of the consumption tax as "gaming" anything - unlike many situations under the income tax.