FairTax: Double Taxation, An Admission

Townhall ^ | January 23, 2008 | By Hank Adler

[xcamel]

H.R. 25, the legislative proposal inappropriately named the FairTax, would eliminate the Federal income tax and replace it with a national sales tax. It is axiomatic that if enacted, those individuals who have saved money during their lives would be faced with double taxation. (Under the Fairtax, someone who earned $1000 and paid income taxes of say, $250, would find his remaining $750 subject to a 30% sales tax on all retail purchases.)

Generally, when commentators have pointed out the above fact, they have been met with either personal attacks or nonsensical economic gobbledegook. Recently, Bruce Bartlett, a former deputy assistant secretary for economic policy in the George H.W. Bush administration wrote a treatise entitled “Why the FairTax Won’t Work” in a noted tax publication. In that same publication, a week later, Laurence Kotlikoff, who appears to be the lead economist speaking for Americans for Fair Taxation, responded. Mr. Bartlett’s statement with respect to double taxation and Mr. Kotiloff’s response are as follows:

Bartlett:

(The Fairtax) penalizes those late in life who have saved for their retirement during an era when saving was heavily penalized by the income tax. But rather than being able to spend their savings tax-free, as they anticipated, they will now have to pay sales taxes on everything they buy, including health care. It will be hard for them to avoid seeing this as a double tax.

Kotlikoff:

Bartlett suggests that it would be unfair to force wealth holders to pay extra taxes when they spend their wealth (principal). He might have added in his defense of the rich that most of the rich are older and that we should tread lightly with respect to the elderly.

Well rich members of today’s older generations may be a concern of Bartlett. They aren’t a concern of mine. Our country has spent the past five decades transferring ever greater sums from young workers to contemporaneous older generations, including extremely wealthy members of older generations. The most recent example his the introduction of Medicare Part D’s prescription drug benefit. This transfer to current and near-term elderly has a present value cost of some $10 trillion.

The above confirms that supporters of the FairTax understand and acknowledge that the Fairtax would cause anyone that has saved money during their lifetimes to face double taxation. (Mr. Kotlikoff’s extensive prior writings are consistent with his above paragraphs. Perhaps his most interesting paper is his short presentation in 2001 entitled: “The Case For a Tax Hike”.)

While it is the contention of both myself and Mr. Bartlett that the rich will undoubtedly be the mega-beneficiaries of the proposed FairTax, Mr. Kotlikoff’s acknowledgement that there would be double taxation to anyone, rich or poor, who saved money for their retirement is of great importance.

Older generations are and should be a concern of most Americans. Endorsing a tax plan that penalizes Americans who have saved money for their retirement is a pretty interesting position. Penalizing older Americans with double taxation because the government has determined to subsidize medications that keep them alive is, well, a bit beyond the pale.

The double taxation element of the proposed Fairtax is not an issue solely for the rich. It is an issue for anyone with any savings, including and particularly for the retired individual who has been responsible and saved for retirement. It is not an issue which is ameliorated by a monthly prebate of $188.00 which theoretically covers taxpayers at the poverty level; having income $1.00 beyond the poverty level does not make one rich.

The very thought of subjecting the savings of responsible social security recipients to double taxation on their savings should be a notion which is repugnant to Americans.

Hank Adler is an Assistant Professor at Chapman University

[Man50D]

This is why I prefer a simple, low flat income tax. Low rate, no exceptions, no deductions, no credits. Everybody pays the same rate.

The Fair Tax is a flat income tax on consumption instead of income. A flat tax on income has been tried and proven to be an abysmal failure. It's called the income tax. When it was enacted in 1913 the first $20,000 was taxed at 1% and 7% over $500,000. So few people made more than $500,000 that it was essentially a flat tax. The income tax in 1913 effected less than 5% of the population. Today more than 80% are effected. Enacting another flat income tax will eventually bring us back to the same oppressive, overly complex monstrosity of an income tax code we have today. The only difference is it will reoccur much faster thanks to 40,000 lobbyists.

[bill1952]

Flat tax or fair tax?

I do support flat tax.

taxes don't hurt the rich - they prevent you from becoming rich

[ReignOfError]

“Any asset held by a retiree that is to be liquidated for income in retirement will be subject to an additional 30% tax” —

Only if the proceeds are spent on new retail goods. And if the asset has appreciated -- like, for example, the common circumstance of a retiree or empty-nester selling a big, expensive one and buying a less-expensive one, smaller or in a less-expensive area -- they won't face capital gains tax on the sale.

[untrained skeptic]

I take it you haven't been saving a sizable portion of your income for a decade or more in the hopes of retiring at an age that your health is still sound and have a reasonable standard of living.

I've been putting roughly 13% of my income away for retirement for well over a decade. I'm sure there are a lot of people that have been putting away money for retirement much longer than I have.

The Fair Tax would force me to work years longer to maintain the same standard of living in retirement.

If people try and implement the Fair Tax, they had better make sure the 2nd Amendment is good and dead first, because they are screwing with people's retirements for which they have in many cases saved for decades. I suspect that millions of people will react very badly.

And for what? The symbolism of getting rid of the IRS? A revenue neutral change in the tax system that doesn't cut taxes? A change in how taxes are collected that implements a different system that could still be abused by politicians to benefit special interest groups?

[untrained skeptic]

Those folks are paying the embedded taxes when they spend their money now “tax free”.

The embedded taxes that the Fair Tax would remove (it doesn't remove excise taxes) make up roughly 5% of the price you pay for goods now. The fair tax would make up 23% of the price you pay for goods. That's a difference of roughly 18%.

That won’t change. The tax just becomes naked. Its no more “double taxation” than it is now.

Only if you are really, really bad at math.

[GatorGirl]

I am not comfortable with the Fair Tax, I’d rather see EVERYONE pay 10-15% with no deductions (Flat Tax) but this article fails to consider that all of us are subject to double taxation now.

We use after tax dollars to secure goods and services that are largely subject to state and local sales taxes, and any pre-tax dollars that are used for retirement savings are taxed at the time of earning and at the time of withdrawal (albeit at a lower rate, presumably).

If they are indeed “wealthy”, they might not be eligible to deduct retirement savings during their working years (and the term “wealthy” covers a surprisingly low adjusted gross income) and thus their pre-tax retirement money is taxed upon withdrawal, and of course all that money is still subject to capital gains.

[Paladin2]

VVVEEELLLLLYYYY interesting (poor Laugh-In reference - though these FT days maybe it should be renamed laffer-in)).

I found it interesting that the FT samurai shill philiwill (sp), last night, avoided this topic completely. It seemed to be the elephant in the chat room.

His tag teammate baybabe has also studiously avoided discussion (the FT b0ts v1.0 never engaged either, apparently because the concept is too large to wrap their minds around).

[Smokin' Joe]

The tax just becomes naked. Its no more “double taxation” than it is now

Sure it is. The excise taxes won't be abolished, tariffs won't go away, and these people have already been taxed on their income.

Now the Fair Tax would tax the same money (already taxed going in to their pocket) on the way out, when it is spent.

Once going in, once coming out. 1+1=2

nothing quite like penalizing fiscal responsibility.

[Smokin' Joe]

YES! You know how to post images?

[Sprite518]

If you clowns want to misquote the Fair Tax by saying its 30% instead of 23%. Then the current taxes you are paying now is 33% or higher.

Yes its a consumption tax, and you are only taxed when you consume. WOW imagine that!

[Man50D]

It was my understanding that the Fair Tax would return the same amount to the government as the current tax system.

If that's the case how can the total tax burden be decreased?

The Fair Tax will spread the tax burden over more than 300 million taxpayers compared to 140 million income filers. It is also a more stable method of collecting taxes since everyone makes purchases but not everyone pays income taxes.

What provisions exist to ensure that the tax rate won't be increased?

The Fair Tax rate will be transparent to the taxpayer as the rate will be a separate entry on the receipt as opposed to the hidden taxes with the income tax we never see increased. If Congress were to raise the rate people would immediately see the change and provide immediate feedback to Congress with the same level of outrage as was expressed to Congress this past summer about granting amnesty to illegal aliens. Feedback is something politicians don't want from their constituents when it comes to taxes.

Also raising the tax rate too high will cause a resulting decrease in the amount of tax collected as people will make less purchases. Congress must keep the tax rate within reasonable bounds in order to maximize its collection. Founding father and first Secretary Of The Treasury understood this concept in his Federalist paper #21. To quote:

"It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them. "

[untrained skeptic]

But he is wrong in the case of some types of retirement savings (401K, etc.)...these plans enjoy pre-tax status and in the case of spending 401K or IRA retirement dollars, they have not already been taxed.

I agree with that statement. However, my Roth IRA has already been taxed. The post tax money I have been investing in my employer's stock purchase plan for retirement has already been taxed. All of my savings other than the money I put in my 401K has been taxed.

While my 401K is a sizable portion of my savings, it is far from all of it. The Fair Tax would royally screw me and millions of other people over. I would have to work for years longer to enjoy the same standard of living in my retirement.

[foreverfree]

bump

[MadPenguin]

Proponents claim the Fair Tax is "revenue neutral", meaning the treasury will continue to receive the same input under either tax system. Proponents also claim that the current tax system puts a disproportionate burden on the top earners in this country.

So, for it to be revenue neutral, one of two things must happen. 1) We all end up paying the same proportion of our earnings in taxes, which means no advantage and no reason to change to a different systems; or 2) the tax burden is shifted from one group to another. If the highest earners and already paying an unfair amount of the taxes, is the new system making that situation worse? If not, then those of us lower in the income chain will end up paying more. Yup, sign me up to pay more! < /sarcasm>

[xcamel]

A flat tax on income has been tried and proven to be an abysmal failure. It's called the income tax. When it was enacted in 1913 the first $20,000 was taxed at 1% and 7% over $500,000.."

Another crock of BS - and thoroughly discredited on several threads - the poster does not know the true history of the US income tax system.

[Question Liberal Authority]

I don’t have a dog in this fight, but I’m wondering why, if the Gummint can get along with an income tax rate of less than 30%, it would have to charge 30% or more of sales to generate the same revenue.

[xcamel]

You’re not supposed to ask that question, you see, looking behind the wizards curtain is simply not allowed..

[RangerM]

Then you missed the point.

[xcamel]

footnotes of history, dead more than a hundred years, with no concept of taxation in modern society. You’d have more credibility quoting Nostradamus..

[Paladin2]

You are correct with regard to FT's effect on used vs new.

However to be fair, the FT should provide a BIG prebate as it starts to avoid the clear unfairness of this attempted asset grab.