Because income and payroll taxes are embedded in the price of everything we purchase, it is unlikely that prices, even when they are calculated with the consumption tax, will increase. This is because pre-consumption-tax prices will fall once the income and payroll taxes are repealed. Nevertheless, the FairTax plan makes sure that the Social Security benefits indexing formula will be adjusted so that benefits will increase to the extent, if any, that the consumption tax results in higher tax-inclusive prices. The income tax imposed on Social Security benefits will be repealed under the FairTax.
The income tax imposed on investment income and pension benefits or IRA withdrawals will be repealed. Pension funds, IRA's, and 401(k) plans had assets of over $9 trillion in 1998. An income tax deduction was taken for contributions to most of these plans, and all beneficiaries and owners of these plans expected to pay income tax on them upon withdrawal — but they will not be required to do so once the income tax is repealed.
Repeal of the corporate and individual income tax, and the estate and gift tax will have a substantial positive impact on the stock market. Those seniors who own stocks either directly or through mutual funds, Individual Retirement Accounts, 401(k) plans, or otherwise, will experience significant gains. More seniors own stocks than any other age group. In addition, unrealized capital gains that would have been subject to the income tax when realized will no longer be taxed.
The FairTax plan imposes a consumption tax on newly constructed homes, but exempts existing homes and other used property from any consumption tax. Currently, equity payments on homes must be paid from after-income-tax earnings (i.e., principal payments are not deductible). The purchase of existing housing is thus subject to the income tax. All owners of existing homes will experience large capital gains due to the repeal of the income tax and implementation of the FairTax. Seniors have dramatically higher homeownership rates than other age groups (79.3 percent for seniors compared to 66.3 percent on average in 1998). Homes are often a family's largest asset. Gains, which will not be taxed, are likely to be in the 20 percent range.
Under the FairTax, the estate and gift tax will be repealed. The need for small businesses and farmers to engage in expensive estate planning, involving attorneys, complex estate freeze transactions, and expensive life insurance plans in anticipation of future estate and gift tax liability will disappear. Heirs will no longer need to sell the business or farm out of the family or borrow heavily, putting the business at risk, in order to pay the estate tax.
A consumption tax will make the economy much more dynamic and prosperous. Consequently, federal tax revenues will grow, spending will be under less upwards pressure, and the deficit will decline. Budget pressure on entitlement spending, already significant, will become much more pronounced once the baby boom starts retiring in 2010, in just 10 years. The economic growth caused by a consumption tax will make it substantially less likely that federal budget pressures will result in Medicare or Social Security benefits cuts.
According to recent work by Stanford University economist Joseph Kahn, those seniors with a net worth over $400 thousand (nearly four times the median) may see a reduction in their purchasing power. The largest decline in purchasing power, about 3.5 percent, is for those with net worth above about $700 thousand. The primary reason for this effect is that wealth spent for consumption purposes that is held in non-tax-deferred accounts like IRA's will be taxed when spent under a consumption tax and would not be taxed any further under current law.
Seniors will be able to take comfort in the fact that their children and grandchildren will no longer be laboring under the yoke of the income tax, and will once again be able to see their own standard of living improve, one generation to the next.
That's exactly what it feels like. I know that a consumption tax would probably work out about the same, in real terms, but psychologically it would feel so much better. I'm self employed, so I have to write the checks to pay my taxes. Every time I do, I think of all the time I've spent chained to my desk to produce those thousands of dollars I send off, and it makes me simply not want to work any more.
Again, it's probably purely psychological, but, boy, it would sure make the self-employed feel better if we didn't have to write those checks! (To say nothing of keeping every tiny little receipt and paying ridiculous amounts of money to our accountants.)
Well, isn't that selfless of them, to watch all that money flow into the federal coffers. Sorry, I don't buy it. I would lobby heavily *against* this kind of "tax reform." The federal income tax should be replaced by a *flat tax,* not a consumption tax, unless people making IRA withdrawals get a *rebate.* Considering that the population is aging rapidly, and in 20 years there are going to be a LOT of "senior citizens," this seems to be a particularly bone-headed plan.