If I'm putting after-tax income into my retirement plans (like a Roth?), won't it be double taxed if I'm using those postponed dollars under a NRST down the road? Isn't the promise of such plans that you're not going to be taxed down the road? Am I missing something?
How do you fix that?
They don't plan on fixing that. They hope you will go away. You are in the minority of Americans who have savings. This plan is for people who are way over their heads in debt. Those are the ones jumping for joy.
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 This is because pre-consumption-tax prices will fall once the income and payroll taxes are repealed.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 The income tax imposed on Social Security benefits will be repealed under the FairTax.
The income tax imposed on investment income and pension benefits or IRA withdrawals will be repealed.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expected to pay income tax on them upon withdrawal — but they will not be required to do so once the income tax is repealed.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.
And you're worried about paying sales tax after you extract your effectively tax free earnings from retirement account? You realize in many jurisdictions sales tax has already crept up above 10%...? What makes you think you're safe from next tax...(hey, the capital tax! Comes up every so often...remarkably similar to Ad Valorem in justification)
No, you're not missing anything, and I don't see how it could be fixed either. Actually, it works far better for younger people - they would get to save and not have their savings taxed. Older people with IRAs, savings, etc. would get royally shafted, because of double taxation. In other words, all the people who traditionally vote Republican would suffer MORE. Actually, that is a bit of a deja vu kicker, because as I recall the 1986 "tax reform" had the same effect. Imagine that.
Statement of Laurence J. Kotlikoff,
Professor of Economics, Boston University, and
Research Associate, National Bureau of Economic Research
Testimony Before the House Committee on Ways and Means
Hearing on Fundamental Tax Reform
April 11, 2000
....So what does taxing consumption have to do with achieving a generationally equitable fiscal policy? Again, essentially everything. The reason is that the current elderly as well as the baby boomers, who will shortly retire, have one primary economic activity left to accomplish - consumption. And under a consumption tax, they will pay a lot more in future taxes than they would under the current tax system. Although the elderly as a group would share in the burden of a consumption tax, the poor elderly - those living exclusively on Social Security benefits - would not because their benefits are indexed to the consumer price level and are thus guaranteed in real terms.To recapitulate, given the likely path of government spending and the inevitable aging of our society, our children and our children's children are in for extremely rough sledding. Indeed, the CBO-FED study suggests they will face lifetime net tax rates (1) that are 80 percent higher than those we face if nothing is done. This generational imbalance, rather than the treatment of the rich versus the poor within a generation, is the fundamental issue of economic justice facing us today. Consumption taxation can address that issue by asking the current and near-term elderly to do their fair share in helping to achieve generational balance.
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Were the very staid and well established businessmen and women who advocate the Fair Tax to proclaim that their tax reform 1) levies a tax on the holdings of wealth, 2) provides a highly progressive tax rebate, and 3) implies an increase in Social Security benefits and, most likely, transfers to the poor, they would probably be viewed as members of a vast left-wing conspiracy. But this is precisely what they are recommending.
100% of your money is already double taxed... at income and at spending of ANY type.
Under the nrst, the income level taxation is eliminated, but the spending level stays.
But only certain spending is taxed. EG if you buy a home that has already been lived in. Further, if you want to give some of your money away there'd be no tax. If you want to leave some money to heirs, there'd be no tax.
In fact, if you were an astute investor, you would already know that you have to pay taxes anytime you spend your savings. However, under the nrst, that tax is lessened.