FairTax vs. the Flat Tax
Today Neal Boortz provided a handy summary of some differences between the FairTax and Steve Forbes’s flat tax:
Now ... speaking of the flat tax, just why would the FairTax be better? OK, let’s just count a few ways. The flat tax keeps the IRS. The flat tax means you still pay Social Security Taxes and Medicare taxes. There will still be withholding from your paycheck. The money you save and invest? Still taxed. What’s more, as we have seen over the past 19 years, the flat tax is still subject to manipulation by politicians. They can come in any time with a little amendment raising the rate on that evil top one percent of income earners. They can still create tax credits for other income groups in order to buy votes. The embedded taxes in every item you buy? Still there. Get the picture?
UPDATE: Thanks to Marlene Tobin for pointing out the FairTax / Flat Tax comparison chart (PDF), provided by the Pennsylvania chapter of the AAFT.
You might want to consider adding a link to the FairTax Personal Calculator at www.pafairtax.org/calc.php It has 12000 hits to date and growing fast. It has been checked out by national FairTax to be accurate.
Also in line with your Flat Tax/FairTax comparison piece, you might want to add a link to the FairTax/Flat Tax Comparison chart on our web - a picture (or chart) is worth a 1000 words. It’s at http://pafairtax.org/resrcs/FlatTaxFairTaxComparison.pdf
We are rebuilding our web,and I will soon have a place to put links to other important sites. I will put yours on it then.
Thanks
Marlene Tobin
PA State Director - AFFT (volunteer from McMurray PA)
marlene@pafairtax.org or fairtaxsupportpa@aol.com
Ph: 724-942-7623 fax: 724-941-9443
www.pafairtax.org
FairTax Personal Calculator 11000 visitors realizing FairTax benefits and growing
[...] Add to that your social security and medicare taxes (which the flat tax keeps in place), so-called “corporate” taxes (which the flat tax keeps in place), and the cumulative embedded taxes in every item you buy at the cash register (which the flat tax keeps in place) ... and calculate all these taxes on an exclusive, rather than inclusive basis ... and you will see their numbers quickly adding up to much more than the FairTax. [...]
I could be wrong, but I read Steve Forbe’s book and it states it would not pay for Social Security or Medicare.
I am a government tax attorney and I am totally fascinated by the “Fair Tax.”
However, after reading one of your books, and this write up, I still have one question. It relates to the transition from going from the current Income Tax to the “Fair Tax.” My concern is that the Fair Tax would end up tax earnings a second time if the consumption expenditures was funded from monies that had already been previously tax under the income tax For example, in year 1, prior to imposing the Fair Tax and while the income tax is still in place, I earn a salary of $100,000. I put this entire amount into a checking account. I would thus be required to include that $100,000 of ordinary income in my tax return for year 1 and would thus pay an income tax on it. In year 2, the Fair Tax is first applied and the income tax is eliminated. In year 2, I preceed to spend that $100,000 on consumer goods and services. Putting aside the prebate, under the “Fair Tax,” I will then be required to pay the “fair tax” on this $100,000 of consumption expenditures. This means that the $100,000 of salary will be taxed twice. How does the “fair tax” deal with this transition problem?
How does the “fair tax” deal with this transition problem?
Steven, the short answer is that it doesn’t!
Also, your example seems to be a bit narrow. Turns out almost all after tax savings of any kind will be double taxed when spent as you described. If you are sure the Fairtax will become law at some future date, then the best thing to do is put as much savings as possible into tax deferred savings plans such as 401K’s or certain IRA’s. The Roth IRA would be a big loser under the Fairtax.
Fairtax proponents may try to convince you that your after tax savings are double taxed today. The argument is that you are taxed once to earn the savings and taxed again when spent due to the “embedded taxes”. My response would be that there is no such thing as an “embedded tax”. There are embedded costs that are often passed along to consumers in the form of higher prices. But not one dime in federal tax revenue is generated by the retail sale of goods and services under current law.
The most likely Fairtax scenario according to the experts is that only business income tax costs will be removed, workers will receive their gross paycheck, and retail prices will rise. If savings are double taxed under current law, then savings must be triple taxed under the Fairtax according to this argument.
Your fascination may dim somewhat if you will take the time to read some of the very good information on this blog. I’d start with the Archives where the entire bill, HR25, was discussed line by line last year(?).
Steve,
Let me give a slightly different view than Hank’s. Again, his is from an opponent’s perspective and mine if from more of a supporter’s perspective. But regardless, Hank and I differ substantially on how economics work, and more specifically, how the labor market works.
Hank believes people work for their gross wages and I believe they work for their net. If want to know how you view just answer the following question: Would you rather have a job for $200K taxed at 50% or the same job for $150K taxed at 0%?
Most fairtax proponents, I believe (or at least the authors of the bill), come from this perspective. That is why instead of addressing income as already being taxed, they addressed the issue from the inventory side. I let the experts expand and/or correct, but I believe basically they’ll pay a credit for anything produced before the fairtax takes place, but sold within the first year. That is supposed to remove any “embedded taxes” Hank doesn’t believe in before the fairtax is applied. In other words, since they believe the taxes are already in the product, the double taxation would actually occur from taxing products produce pre-fairtax with the fairtax.