Posted on 01/23/2008 3:28:27 AM PST by 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
Recalculate the current income tax on an “exclusive” basis, and then compare the two.
We need to see the equations behind your assertion along with a couple of examples for those of us who are mathematically/numerically challenged (as determined by baybabe).
I hear ya. In one breath they say it will be “revenue neutral”, in the next they say it will “starve the beast”. Go figure.
Most responsible people have bought all the junk that they need before they retire and are finished with keeping up with the Jones’. This is a straw-man argument.
That’s a non-responsive reply to the issue raised. Not only that, your reply makes zero sense in response to the issue raised.
The savings of Americans, particularly retired Americans, will be double taxed under the misnamed Fair Tax.
Two people go into the widget store. One retired, the other a young person. Both buy a widget and are taxed an additional 29.87% for the misnamed Fair Tax. The young person’s purchase money is being taxed for the first time, but the retired person’s money has already been taxed as income before he deposited it into his savings account.
The retired person pays for the $77 widget with $100, just like the young person. However, to save that $100, the retired person had to earn more than $117 of income to retain that $100 after paying income tax on it. So, the retired person had to earn $117 to pay for his $77 widget with money that he has saved, while the young person only needed to earn $100 to pay for his $77 widget.*
That’s the issue.
* (Only? I can hardly believe I wrote ‘only’ WRT the amount added by the 29.87% tax.)
** The retired person might or might not have earned interest on his savings, but he also might or might not have been taxed on that earned interest. Too many variables to include in the above calculations, but they don’t result in much bottom line difference, so I’ve ignored them. In the interest of full disclosure, I’ve footnoted them, at least.
It'll never happen but I've fallen back to the flat tax.
But while the method of taxation is a problem it's a fly on the elephants butt compared to the big problem...the beast.
You see it, I see it and most of us here see it but the effort is made to rearrange the deck chairs.
Go figure nails it.
Ask the FTers for the expected rate by State (and city in many cases) should the individual States "get on board".
Rats! I thought you were trying to be SUBtle.
Doesn't this problem go away, as people grow old and pass on? Eventually, there would be no one alive who paid in under the current tax scheme, and the problem dis appears, right?
The highest earners might pay the highets taxes, but I woudln’t call it the highest burden. They seem to live quite well with the small pittance the government lets them keep.
“No one believes your embedded taxation BS anymore, as it has been disproved time and time again.”
I believe in those embedded taxes because I believe everything is taxed along the way, from raw material to my doorstep.
If you have time, please explain why you don’t believe there are *embedded* taxes?
Nice pic to post since you were the one complaining about name-calling and such.
It’s not an ADDER its a MULTIPLIER. Think about it some more and get back to me later.
Were not.
Right. That's why I used the word "transition." In the short term, some folks will take it hit. In 30 or 40 years, that will no longer be a factor at all. In 10 or 20, it won't be much of a factor. Folks who have a 401(k) or IRA won't be double-taxed.
What we really need is “spending reform”, but quite frankly, most Americans (include many FReepers) want the Government to spend, spend, spend. Any one particluar rat-hole the Feds pours billions and even trillions into has the support of a substantial number of Americans. We’re more than willing to sacrifice some other guy’s pet rat-hole, but not our own. And that’s how we got here.
There are embedded taxes, but they are not uniform across all goods and services and, in most cases, not of the magnitude claimed as part of the FT scheme. Taking the post in context will demonstrate that.
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