How Do Senior Citizens Fare under the FairTax Plan?
Reader Ray Brandes writes:
I am writing to you because of an issue that I don’t think is getting the attention it deserves. I have just finished reading Boortz’s book and if it is all true then I can’t wait, but….
What about the after tax money my wife and I have saved all these years? Boortz says too bad on page 169. We will have to pay tax again when we spend this money. This is chunk of change we won’t let go of easily.
Actually, on page 169 Boortz and Linder don’t say “too bad.” They say you don’t get a special interest exemption.
And then they say: “Having said that, you will benefit from the FairTax in two separate ways. For one thing, the items you will be purchasing with your already-taxed retirement savings will be, on the average, about 22 percent less expensive than they were before the FairTax. This all but wipes out the effect of the 23 percent national retail sales tax.
“For another, your retirement income now will be subsidized by your monthly check from the federal government, reimbursing you for the sales tax you’d be expected to pay during that month on the basic necessities of life. And finally, what do you think will happen to your nest egg if all the world’s investors can invest in our economy with no tax consequences? You’re bound to come out ahead. Younger workers, such as your grandchildren, may do better, but you’ll be doing just fine. Make them buy you a new car.”
Ray continues:
We saved and helped the economy for years and did without while watching our peers go on cruises and drive new Mustangs. Why should we be punished under the new system? Seems to me Lindner is hoping to sneak this one past the baby boomers.
No, it’s clear from the information above that you won’t be punished by the new system. On the contrary, you’ll experience benefits you could never have experienced under the old system.
Here is the full list of benefits you’ll experience:
- The FairTax ensures Social Security’s soundness by funding it with a progressive, broad-based national retail sales tax, rather than the current regressive, narrow payroll tax.
- The FairTax rebate zeros the retail taxation of necessities for seniors.
- The FairTax repeals the taxation of Social Security benefits and adjusts Social Security indexing to protect seniors.
- The FairTax ends all record keeping and income tax filings of any kind for seniors, totally insulating them from the high costs and abusive tactics of tax preparers.
- The FairTax does not tax used goods, giving poor seniors choices.
- The FairTax reduces manufacturers’, services’, and retailers’ costs, allowing them to lower costs to seniors.
- The FairTax delivers a tax holiday on IRAs and other tax-deferred plans.
- The FairTax ends gift and estate taxes, along with all of the unfairness to heirs and complex planning for those who earned the money.
- The FairTax allows seniors to sell their homes and pay no capital gains taxes.
- The FairTax generates an economic boom, which eases future budget pressure on seniors’ entitlements.
- The FairTax ensures your grandchildren have the same opportunity you did.
Back to the rest of Ray’s letter:
Just as a tax credit will be issued for inventory at plan inception, why can’t a tax credit be issued against the after-tax dollars responsible Americans have set aside? Be assured that if this oversight isn’t corrected, we will actively oppose the FairTax.
One of the greatest benefits of the FairTax plan is that it treats all consumers the same. Businesses (who were never intended to be taxed at all under the FairTax) receive a credit on inventory, which not only is fair but also helps to lower prices for consumers. You benefit from this, as a consumer, whether you are retired or not. It’s a win-win for you and every other consumer.
The same would not be true if they included a credit for retirement savings accounts. Any benefit you acquired through such a credit would come off the backs of other taxpayers, in the form of a higher tax rate.
What you are proposing would quickly take us back to the good old days of special interest tax policy warfare — where every interest group seeks special exemptions to reflect their special circumstance.
The precedent this would set, if Congress took your suggestion, would be absolutely catastrophic. In no time, politicians would be back to slicing and dicing, giving their favorite groups a special exemption, and leaving the rest of the population with a correspondingly higher tax burden.
Personally, I think the FairTax plan already has plenty for you, and you don’t need a special interest exemption. If you disagree and want to oppose the FairTax, that’s fine. The good news is, once the plan is passed, you’ll still gain all the benefits enumerated above.
I think the following three points are very important to both retirees and workers:
1. A correction of the ethical alignment of the Federal Tax burden is the largest benefit of this tax reform. Productivity is currently penalized by income taxation resulting in slower U.S. economic growth. The change to a consumption tax will discourage wasteful usage of all resources – especially natural resources. The value of used items will increase promoting reuse and discouraging waste. This benefits two of the three R’s of recycling – reduce and reuse.
2. An entire parasitical industry has been created to help businesses and individuals deal with current IRS compliance. This industry provides no true beneficial product to the economy. The consumption tax will reduce compliance costs, thus increasing business efficiency, resulting in lower costs.
3. The underground economy currently evades payment of income tax altogether. While there will always be cheaters, the consumption tax would be less susceptible. Under a consumption tax, the burden will be shared by members of the current underground economy. EVERYONE PAYS.
The changes in tax policy will cause prices to drop an average of 22%. The net cost of new goods including the consumption tax is projected to be within a cent and a half on the dollar with current prices. So, the down side on consumption tax is about a 1.4% increase in total cost. The up sides are first, NO INCOME TAX and second, the Family Consumption Allowance of about $418/month (2004 values) for a married couple.
I do agree with your concern about having to pay tax twice, however, the net total cost of products will only be 1.4% higher than current prices. Also, keep in mind that the $418 prebate will cover your 1.4% increased cost on your first $29,000 of monthly spending. If your after tax retirement savings allows you to consume over $358,000 per year, then I would like to persuade you to be altruistic and support consumption taxation over revenue taxation in the interest of your fellow citizens.
If you’re on a tight budget living off less than $358,000 per year, then you would be better off under a consumption tax. If any of your pension is taxed, you would be even better off under a consumption tax.
So, how am I a special interest and the car dealers are not? Giving them a credit for inventory on their floor is the same thing in my mind as giving us savers a credit for dollars already taxed.
BTW, every interest is a special interest. Show me any group that isn’t “special’.
Regards, Ray
Ray, nobody said you’re a special interest and the car dealership isn’t. I said they’re a business and you’re not. The FairTax plan taxes retail consumption, and does not tax businesses. That’s just a basic part of the plan, no getting around it.
I agree with you that everybody’s a special interest. But the FairTax has good cause for making a distinction between businesses and consumers, and the distinction is worth sticking with, because it simplifies the tax structure so dramatically and eliminates hidden taxes.
The idea of the FairTax law containing special deduction or exclusion is unsettling. The inventory exclusion, however, is a very important part of the transition process.
In time, Adam Smith’s Invisible Hand will force retail prices to drop. I have full confidence in that belief. What I do question is the amount of time that will pass before prices do drop. If the process takes too long, congressional adversaries will quickly condemn the plan and initiate unsound laws imposing price limits and special interest measures to force the economic change. Their only success would be upsetting the apple cart that we call the US economy.
My fears were relieved and confidence in the plan established when I reviewed the inventory exclusion. This provision will provide a sickle for the Invisible Hand to cut prices. Let us take a look at two scenarios. In both cases, a company will start with 1,000 items in inventory worth $100,000, purchased on 30 days net. The business owner typically earns $10,000 in the course of selling the items. To keep the analysis simple, the business does not need any employees, other than the owner.
Current Case 1 Case 2
Inventory Cost 100,000 100,000 100,000
Profit 10,000 10,000 10,000
Discount 0 0 -24,200 (22%)
Gross Sales 110,000 110,000 85,800
Fed. Consp. Tax 0 3,000 25,740 (30%)
Gross Receipts 110,000 143,000 111,540
Cost of Goods -100,000 -100,000 -100,000
Taxes Due 0 -33,000 -25,740
Inventory Credit 0 22,000 22,000
Net Profits 10,000 32,000 7,800
FICA/SE Tax -1,530 0 0
Deductions 765 0 0
Income Taxes
(15% ) -1,385 0 0
Take Home 7,085 32,000 7,800
Total Retail cost per item
$110.00 $143.00 $111.54
Under current tax law, the business owner’s profits of $10,000 are reduces to $7,085 after paying $1385 of income tax and $1530 in FICA/Medicare taxes at the full self employment rate.
In Case 1, the business person knows that he has to pay his vendor $100,000 within 30 days, so he does not lower prices. Also, as you fear, he keeps the inventory credit for himself. The owner takes windfall profits of $32,000! That is over 350% over his prior profits. This does not look fair to me at all.
Now let’s take a look at Case 2. While a $100,000 payment is due to the supplier, the owner recognized that inventory credit will provide tax rebate of $22,000. Also, because the business owner understands the impact of the 22% imbedded tax, she cuts her sale price from $110 to $85.80. Wow – her cost is $100 per item, but she is selling them for $14.20 below cost. She will need to use the inventory tax credit to make up the difference due to pay the supplier. In the end, her net take home is $7,800. That is 10% better than she made before, so she is happy.
Consider these two cases as two competitive businesses.
1. Which company will you buy from?
2. Why did the owner in the second case drop the price?
The business person dropped process to under cut her competitor. Her market share will grow at the expense of businesses that do not cut prices. If they wish to survive, they will have to cut prices also.
When either business reorders, they will find that supplies have reduces prices 22% because of the same processes discussed above.
Any business or supplier that does not cut prices after consumption tax enactment must be labeled UNPATROTIC. As an American consumer, look for the lower prices and shun businesses that do not drop prices. Even if 10 businesses try to maintain old prices, one will under cut prices to gain market share – others will follow during the ensuing price wars. The inventory credit is an integral part of the transition process that must be maintained.
If you still lack confidence in falling prices, then stock up before the law changes. Take your old after tax savings and upgrade that car, stock up on can goods, and buy new clothes before the tax change. After all, you will be able to save one and a half percent – maybe more.
The less you think prices will drop, the more you should hoard. The hording will cause a drop in demand once the law goes into effect. That drop in demand will simply increase competition and price dropping pressure. The invisible hand will become know as the invisible fist.
Table for the above comment:
Current
=============
Inventory Cost: 100000
Profit: 10000
Discount: 0
Gross Sales: 110000
Fed. Consp. Tax: 0
Gross Receipts: 110000
Cost of Goods: -100000
Taxes Due: 0
Inventory Credit: 0
Net Profts: 10000
FICA/SE Tax: -1530
Deductions: 765
Income Taxes (15% ): -1385
Take Home: 7085
Total Retail cost per item: $110.00
Case 1
==================
Inventory Cost: 100000
Profit: 10000
Discount: 0
Gross Sales: 110000
Fed. Consp. Tax: 33000
Gross Receipts: 143000
Cost of Goods: -100000
Taxes Due: -33000
Inventory Credit: 22000
Net Profts: 32000
FICA/SE Tax: 0
Deductions: 0
Income Taxes (15% ): 0
Take Home: 32000
Total Retail cost per item: $143.00
Case 2
==================
Inventory Cost: 100000
Profit: 10000
Discount: -24200
Gross Sales: 85800
Fed. Consp. Tax: 25740
Gross Receipts: 111540
Cost of Goods: -100000
Taxes Due: -25740
Inventory Credit: 22000
Net Profts: 7800
FICA/SE Tax: 0
Deductions: 0
Income Taxes (15% ): 0
Take Home: 7800
Total Retail cost per item: $111.54
A response from Neal Boortz
“Double-Taxing those who have already worked and saved for their retirement. This one is so easy; I just don’t know why some people are having trouble grasping it. Retirees who have are living off their savings are still paying taxes. They’re paying the embedded taxes present in everything they buy. Those embedded taxes will simply be replaced with the embedded FairTax. Virtually an even swap. Retirees will not be paying any more in taxes than they’re paying now.”
See: http://boortz.com/nuze/200509/09152005.html#fairtax
Is the Fair Tax Good for You?
The implementation of the Fair Tax is predicated upon three assumptions.
Assumption #1 – All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.
Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).
Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.
Assumption #3 – The Fair Tax proposal is defined as being “revenue neutral” in that it will take in the same approximate amount of Federal sales tax revenues as comes in from the existing business income taxes, payroll taxes and personal income taxes.
Fair Tax shortcomings to the average working American appear to be that:
(1) NO GUARANTY OF PRICE REDUCTIONS: It appears intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.
There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.
Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the “free market” healthcare HMOs were more efficient but required a 12% bonus to offer Medicare Part C over and above what Medicare was already obtaining from the healthcare industry for beneficiaries using Medicare Parts A and B.
The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.
Most of the profits resulting from savings for any purpose (elimination of “embedded costsâ€, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.
Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn’t understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.
(2) IMPACT ON MOST WORKING AND RETIRED AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme†that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans to the Middle Class, retirees, and children.
(3) If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.
(4) The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. By default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.
Also, the Fair Tax will result in everyone (children, working persons, and retirees) not in the top 5% of income brackets to pay the 30% Federal sales tax on every service and new product they buy from “cradle to graveâ€. Since this group spends just about all their available lifetime income on goods and services subject to the Fair Tax, their effective tax rate will be close to 30%.
CONCLUSION: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It is also disastrous to Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes).
In addition, State and Local governments will have to increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will have less income available to provide services.
In closing, I have grave reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in wage increases or reduced prices for the products and services they sell.
Do the tax math as a retired senior couple with $25k social security and $25k pension for both the Fair Tax and the current system.
You will readily see that the Fair Tax would penalize such (and most) seniors thousands of dollars each year. (The rate in this case is almost 14% for the Fair Tax versus less than 3% for the current system).
If I’m wrong (or right), I challenge Fair Tax advocates to quit the rhetoric and show the actual calculations for this situation down to the bottom line of taxes paid.
If the Fair Taxers would correct this injustice in their system, I’d probably support it. Otherwise, it’s a massive and unconscionable redistribution taken from our retired seniors.
Mike, Social security benefits are indexed to price increases under the FairTax, so there is no loss in purchasing power there (plus you don’t pay any income taxes on it). This essentially makes the SS benefits untaxed, since they increase the purchasing power. You also receive the prebate, which would be $4784 to untax the first $20,800 of spending. If you did consider the fact that they increased SS to cover the FairTax, then you would have an rate closer to 5%.
I don’t see how you would end up paying 3% under the current system. $50,000 would put them into a 25% income tax bracket. Perhaps they’d pay 15% capital gains on $25,000 but this is way more then 3%. This certainly does not include the 35% tax on income corporations pass down to consumers, which is included in the FairTax (transparency).
So I question both your numbers, what the FairTax burden is and the current burden on seniors. Why don’t you take a look at this study “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation“
Morphh,
I’m glad you aren’t doing my taxes this year. I gave Mike’s challenge to my resident tax expert, (my wife who is an AARP volunteer tax preparer), and here are the results.
Under the income tax, Mike and wife would be taxed on only $2750 of their Social Security pension, which makes their Adjusted Gross Income $27750. After exemptions and deductions of $17500, their taxable income is $10,250, and their tax is $1028. One could say that their effective tax rate is 1028/50000=2%, but I recall you prefer to define effective tax rate as tax paid divided by income after subtracting Government payments? That would make the effective rate 4%. Not sure everyone agrees with your Wiki definition of effective tax rates, but in any event, Mike is about right when he says 3%. Close enough for back of the envelope calculations!
Now, the tax paid under the Fairtax would be 23% of $54784 (including the cash grant entitlement) and if they spend it all on taxable goods and services, they will pay $12,600 in sales taxes. Subtract the prebate amount and they will pay out of pocket taxes of $7816, compared to $1028 under current law. That sure sounds like the thousands of dollars Mike was complaining about. And any comparison of purchasing power would still favor the current tax law depending on what price increases you assume.
I would also suggest you not put too much stock in the tax comparison study you referenced. Turns out the study did not address retirees, and did not account for any price impact.
The bottom line is you need to be careful when debating the Fairtax with retirees. In general, the Fairtax is not a winner with us old folks in economic terms. The only argument you have with retirees is that they made the mess, they should clean it up. But I guess that issue has already been debated on another thread.
If I use the FairTax calculator at http://fairtaxcalculator.org/, I get 12.46% if I put in $2,500 for state and local taxes, 11.31% if I put in $5,000. Am I missing something?
You need to actually work this thru the 1040. The 2007 tax return I have in front of me has a $26,000 pension and $24,000 SS. That makes agi=$29,000 ($26,000 pension + $3,000 of SS). Here’s the rest:
agi $29,000
- std ded $10,700
= diff $18,300
- exemptions (2) $6,800
= taxable income $11,500
TAX = $1,153 (2.3% of $50,000 income)
Where am I wrong?
After getting that little rant out of my system, I should say I’m probably in favor of the Fair Tax concept. The numbers just have to be fixed for retirees and others in similar circumstances.
No doubt, fixing it would jack up their touted 23% (or 30% as some figure it). Do they have the integrity to do it and present it honestly? If they do, I might get on board.
Ok, you deleted my one response. That’s ok, it was probably over the top anyway. I’ve just been frustrated for so long.
Otherwise, what say you, Morphh, to my numbers and Hank’s?
Well, like I said, this does not take into account taxes included in the costs of goods and services, which is at least 10% under the current system. Again, I’d also state that social security benefits are index to prices under the FairTax, so benefits would increase to cover the tax. I’d also add that we should consider future generations (your children, grandchildren) and lastly that perhaps retirees should pay more in taxes – see this thread “Are Retirees Leaving Future Generations High and Dry?“
I don’t get it. You say we won’t pay more, and then you say we should pay more. Which is it?
Where exactly in the bill or in the FairTax literature does it state SS “benefits would increase to cover the tax”?
Morphh,
Come on, leader, I think you know that the tax numbers Mike and I came up with are accurate. I wish you could agree that those embedded costs of the income tax system you keep writing about have nothing to do with our taxes paid, they impact only the retail prices we pay. Not one dime goes directly to the federal government when a retail sale is made today. There is no such thing as an embedded tax, just embedded costs!
However, if you want to compare purchasing power, then the embedded costs certainly come into play. The price comparison should be made between the retail price of a good or service under current law with all those embedded costs, versus the price under the Fairtax. That is a fair comparison. But it isn’t fair or proper to try to include those pesky embedded costs when calculating an effective tax rate under current law.
Somehow I knew you might bring up the generational argument again. Some day you too will be retired, and I hope I’m around to see if you hold to the same indefensible position?
Hank/Mike,
Here is my unbiased analysis. Under the current tax system, you have 48,847 ($50K – 1,153) nominal dollars. Assuming no social security indexing and the fair tax, you have 54,784 ($50K + 4,784) nominal dollars. So what you should want to know is how bad inflation will be. If the entire 22% embedded tax were removed, inflation would be about 1.5%, so for $48,847 you would need $49,530. If you believe Hank’s favorite estimate of 17%, you would need $57,150. Now you only have 96% of your original purchasing power. In fact, under this scenario, 12% inflation would be about the break even point.
If you perform the same analysis, but assume social security is indexed, the analysis is as follows (for simplicity’s sake, I remove the $24K is SS since it would only proportionally change our target number): Under the current tax system, you have 24,847 ($26K – 1,153) nominal dollars. Under the fair tax, you have 30,784 ($26K + 4,784) nominal dollars. So what you should want to know is how bad inflation will be again. If the entire 22% embedded tax were removed, inflation would be about 1.5%, so for $24,847 you would need $25,195. If inflation were 17%, you would need $29,071. Still in great shape. In fact, under this scenario, 23% inflation would be about the break even point. Of course, if even Hank is wrong, and a full 31% inflation occurs, you need $32,300.
If your pension is also indexed, now you’re just taking advantage.
Andrew,
Unbiased or not, you have me completely confused. Why are you adjusting the current income tax numbers for inflation in your discussion? The income tax nominal numbers are what they are. What you should be doing is adjusting the Fairtax numbers for your various inflation scenarios. And what has indexing social security got to do with anything. HR25 does provide for indexing social security, and current SS benefits are also indexed. So what? I might add that other than government pensions, I’m not aware of very many private pensions that are indexed. Mine sure isn’t!
So someone making $50,000 and paying 3%.. this is what you consider fair and progressive? Will this maniputation of the tax base help avoid the fiscal train wreck?
As far as embedded taxes, Hank, your correct that they are not a direct tax but a cost in the price of goods. I bring it up as that cost is included in the FairTax rate used for estimating the effective rate under the plan but then ignored when assesing the current burden. It seems that’s the entire point of putting it on business, to reduce the transparency, which makes it difficult to compare. But nevertheless, the burden is there.
I think I have a new tax plan, let’s just push all the taxes to business and then we won’t have to pay anything.
Morphh, You are right, the tax on business is a burden, but it takes the form of increased prices, not increased taxes on individuals. And, contrary to what I’ve said previously, you could make the case that taxes are included, although indirectly, in the GDP which is the base for determining the Fairtax rate. Larry K wrote that taxes are not included in the GDP, but I don’t think he meant the embedded costs of the income tax. It would be quite difficult to drive out business taxes from the GDP which is based on the price of consumption, I believe.
And those embedded costs are not ignored when comparing the Fairtax to the income tax. You simply need to calculate purchasing power and the business taxes are accounted for. The prices today are the baseline, and what we all want to know is what will the prices be under the Fairtax. There are still too many Fairtax advocates clinging to the proposition that prices will remain about the same, a scenario that I don’t believe anyone on this blog subscribes to?
Great alternative plan, Morphh. And very doable when you consider that there are only 20 million business owners, and 135 million individual tax filers? I like those 7:1 odds. (Not)
Hank,
Sorry for lack of articulation (and don’t expect any miracles this time), but here is another try. I’m not adjusting any income tax numbers at all. I’m calculating purchasing power using today’s dollars (which need the income tax paid removed from the base dollars). Then I’m determining the number of dollars one has under the fair tax. Since those dollars under the fair tax will be worth less than they are today, I calculate how much devaluation they can have before this particular scenario makes the tax payer worse off.
I believe Morph did mention that this 3% rate did not include the embedded tax, but you argued it should not. My calculations are meant to show that the embedded costs do matter, without going down the “how do I calculate effective rate†road. In the end, purchasing power is what matters.
Andrew,
O.K., the process in your latest explanation seems to make sense, but it isn’t what you first wrote about. I agree with you completely that the embedded cost of the income tax system does count when you try to calculate purchasing power under the Fairtax. So, leave the income tax purchasing power of $48847 alone and focus on what happens to the Fairtax $54784 purchasing power. Make your assumptions about how much of the embedded costs can be removed, and then you will see what the price increase might be. Call that inflation if you want to. Then you have to adjust the Fairtax purchasing power to account for what ever inflation you come up with. In the end, for Mike’s example, purchasing power under the Fairtax will probably be lower than his current situation.
And if you don’t like that answer, you can also make some assumptions about how much of the Fairtax $54784 is spent on taxable goods and services. It gets very complicated and quite individualistic. It’s different for everyone, which makes it hard to generalize about who wins and who loses. Unfortunately, the Fairtax Calculator does not work for retirees, a problem that needs fixing. And I believe that Morphh and I agree that the last page of the calculator, the options page, is clearly in error. Also needs fixing, but AFFT seems to be too busy selling T-shirts and yard signs? Stay tuned!
Did I miss it? I’m still looking for an answer from Morphh to my question:
Where exactly in the bill or in the FairTax literature does it state SS “benefits would increase to cover the tax†(quoting Morphh from #14)?
Title III Sec 303
Let’s put it out here and see if we can work thru it.
Titl III SEC. 303. SALES TAX INCLUSIVE SOCIAL SECURITY BENEFITS INDEXATION.
Subparagraph (D) of section 215(i)(1) of the Social Security Act (42 U.S.C. 415(i)(1)) (relating to cost-of-living increases in Social Security benefits) is amended to read as follows:
`(D)(i) the term `CPI increase percentage’, with respect to a base quarter or cost-of-living quarter in any calendar year, means the percentage (rounded to the nearest one-tenth of 1 percent) by which the Consumer Price Index for that quarter (as prepared by the Department of Labor) exceeds such index for the most recent prior calendar quarter which was a base quarter under subparagraph (A)(ii) or, if later, the most recent cost-of-living computation quarter under subparagraph (B);
`(ii) if the Consumer Price Index (as so prepared) does not include the national sales tax paid, then the term `CPI increase percentage’, with respect to a base quarter or cost-of-living quarter in any calendar year, means the percentage (rounded to the nearest one-tenth of 1 percent) by which the product of–
`(I) the Consumer Price Index for that quarter (as so prepared), and
`(II) the national sales tax factor,
exceeds such index for the most recent prior calendar quarter which was a base quarter under subparagraph (A)(ii) or, if later, the most recent cost of living computation quarter under subparagraph (B); and
`(iii) the national sales tax factor is equal to 1 plus the quotient that is–
`(I) the sales tax rate imposed by section 101 of the Internal Revenue Code of 2007, divided by
`(II) the quantity that is 1 minus such sales tax rate.’.
(D)(i) just seems to say that the cost of living increase is the percentage change in the CPI from base quarter to the previous year’s corresponding quarter (the same as is the case now).
Is that right so far?
Mike, See The Fair Tax Act, Part LXIII
Also, as discussed in this thread, you could account for the increase in purchasing power (decrease in production cost through business tax removal) by multiplying income by 13.05% (ALM minimum estimate) to see the value in “today’s dollars”. The fact that you can buy more with less. So you’re $50,000 (plus $4784 prebate) would be equivalent to about $64,000 in today’s dollars.
Ok, here’s your reference below.
Again, taking this step-by-step: (D)(i) just seems to say that the cost of living increase is the percentage change in the CPI from base quarter to the previous year’s corresponding quarter (the same as is the case now).
Is that right so far?
——————————————————————————
SEC. 303. SALES TAX INCLUSIVE SOCIAL SECURITY BENEFITS INDEXATION.
Subparagraph (D) of section 215(i)(1) of the Social Security Act (42 U.S.C. 415(i)(1)) (relating to cost-of-living increases in Social Security benefits) is amended to read as follows:
`(D)(i) the term `CPI increase percentage’, with respect to a base quarter or cost-of-living quarter in any calendar year, means the percentage (rounded to the nearest one-tenth of 1 percent) by which the Consumer Price Index for that quarter (as prepared by the Department of Labor) exceeds such index for the most recent prior calendar quarter which was a base quarter under subparagraph (A)(ii) or, if later, the most recent cost-of-living computation quarter under subparagraph (B);
`(ii) if the Consumer Price Index (as so prepared) does not include the national sales tax paid, then the term `CPI increase percentage’, with respect to a base quarter or cost-of-living quarter in any calendar year, means the percentage (rounded to the nearest one-tenth of 1 percent) by which the product of–
`(I) the Consumer Price Index for that quarter (as so prepared), and
`(II) the national sales tax factor,
exceeds such index for the most recent prior calendar quarter which was a base quarter under subparagraph (A)(ii) or, if later, the most recent cost of living computation quarter under subparagraph (B); and
`(iii) the national sales tax factor is equal to 1 plus the quotient that is–
`(I) the sales tax rate imposed by section 101 of the Internal Revenue Code of 2007, divided by
`(II) the quantity that is 1 minus such sales tax rate.’.
Yes, it is laying out the definition. It then goes on to state if the CPI doesn’t include the FairTax, add it into the definition. Essentially, This section changes the method of calculating Social Security benefits to offset the additional costs of the FairTax on items purchased (if CPI hasn’t already accounted for it).
Morphh
Now that I’ve looked at the rest of your referenced page, maybe we can skip the rest of this exercise if you’ll admit your statement “benefits would increase to cover the tax” is unsubstantiated. If not, then we need to go thru it.
If they come up with another method to account for it, then this section will not be needed… I’m not sure what you mean Mike and this discussion does not appear to be going anywhere constructive. Just spit it out.. stop wasting time with this back and forth nonsense. You could have looked this all up yourself. Get to the point.
This section makes sure that the cost of living adjustment for Social Security benefits includes price increases, if any, caused by the FairTax. In other words, it maintains the real purchasing power of Social Security benefits after the FairTax is enacted. Here is how it works. The cost of living adjustment (COLA) for Social Security benefits is an annual increase to offset the effects of inflation on fixed incomes based on the annual increase in consumer prices as measured by the Consumer Price Index (CPI). Based on the increase in the CPI from the third quarter of 2005 through the third quarter of 2006, Social Security beneficiaries will receive a 3.3 percent COLA for 2007.
HR 25 adjusts the CPI for price increases, if any, that occur due to the FairTax by multiplying the CPI times the national sales tax factor. The national sales tax factor is equal to 1.0 plus the FairTax rate divided by 1.0 minus the FairTax rate. Given a FairTax rate of 23 percent, it is equal to 1.299 [1.0 + (0.23/(1.0 - 0.23)) = 1.299]. Multiplying the CPI by the national sales tax factor has the effect of upwardly adjusting the COLA for any price level increase that occurs as a result of the FairTax.
If we were in a zero inflation year and sales tax exclusive prices were unchanged and the CPI did not include sales tax, then benefits would increase by 29.9 percent. If producer prices fall, then adding the sales tax back makes benefits equal to those today. If the CPI is revised to include sales tax, then there won’t be a need for such an adjustment.
“If we were in a zero inflation year and sales tax exclusive prices were unchanged and the CPI did not include sales tax, then benefits would increase by 29.9 percent.”
Just show me the two formulas for the COLAs for the first two years of the FairTax using your example above, modifying as needed the usual COLA formula:
COLA=((current year CPI) / (prior year CPI)) -1, using
CPI0 = last year CPI under current system
CPI1 = 1st year CPI under FairTax
CPI2 = 2nd year CPI under FairTax
In the example (which I got from the plain text version of the bill – available at AFFT), it is assuming a no accommodation model, where prices do not change after the FairTax is added but employees receive net wages. So in that instance, we’re expecting the CPI would decrease by approx. 23% (production costs decrease). 30% would be added to the CPI to account for the change. So in this model, the COLA would not change. So this is a little different then the partial accommodation model I discussed above.
CPI0 = 100
CPI1 = 77 * 1.299 = 100
COLA = (100/100) – 1 = 0
The more likely scenario is partial accommodation, where production costs decrease by 10%, employees get gross wages, and after tax prices rise by a partial amount.
CPI0 = 100
CPI1 = 90 * 1.299 = 116.91
COLA = (116.91 / 100) – 1 = 16.91%
In a full accommodation model, where prices and employee wages go up by the full amount of the FairTax.
CPI0 = 100
CPI1 = 100 * 1.299 = 129.90
COLA = (129.90 / 100) – 1 = 29.9%
In all cases, the CPI was adjusted to include the FairTax. The benefits will be adjusted to compensate for addition of the FairTax onto prices.
So… Let’s take another look at your example using a partial accommodation model with prices increasing by 17%.
CPI decreased by 10% (due to reduced production cost from the removal of the corporate income tax, employer half of payroll, and compliance costs.) FairTax adjusts COLA to compensate, providing a 17% adjustment.
Social security benefits increase from $25,000 to $29,250. You receive the prebate, which is $4784, which brings you up to $34,034. Add in your other $25,000 and we’re at $59,034. Now there are a couple ways to look at your burden. Since your paying 17% more for goods, it’s simple to factor the base of $50,000 * 17% = $58,500, leaving you with $534 (giving you $1687 over the current system in purchasing power).
If you want to look at from the point of view of the full 23% tax, you then have to add in the 10% (11.11% exclusive) gain in purchasing power (the fact that you can buy more with less since costs went down). If you look at it this way, you would pay $13,577 on the $59,034, leaving you with $45,457 * 11.11% = $50,507.27 of purchasing power, which is $1660 over the current system.
(Morphh) “…the partial accommodation model I discussed above.”
Where is ‘above’?
Post 9, 14, 19, & 27, although I didn’t use that term – sorry for the confusion. Partial accommodation assumes that employees get gross pay, what you have left is the corporate income tax, employer half of payroll, and compliance costs. When these costs are removed, production costs will decrease – I’ve used a conservative 10%. No accommodation assumes that employees will get net pay (not gross), production costs will drop by the full amount, and prices will remain the same after the FairTax is added. Most on this board find this highly unlikely due to employee contracts. Full accommodation would assume wages and prices go up by the FairTax exclusive amount (30%). The different models are dependent on the Fed expanding the money supply.
Morphh,
We still need some answers from BHI et al, but I am beginning to believe that when BHI calculated the inclusive rate (Sept 2006 study, page 10, chart 5, line 7), the taxes they claimed were included in the denominator must have been the embedded costs (taxes) of the income tax system. Although taxes cannot be included in the GDP, costs can be included, including the costs attributed to the income tax system.
Therefore, the Fairtax rates of 23.8% inclusive and 31.2% exclusive can only be accurate if they assumed zero accommodation, i.e. workers get net pay after withholding, costs are reduced by full amount, and prices remain about the same. Because taxes are not included in the GDP, this scenario also means that the GDP will be immediately reduced by $2228B (ignoring compliance costs), with unknown consequences?
However, a more accurate calculation of the rate should have also removed business compliance costs which I’m going to assume are $275B. Therefore, the inclusive rate in the BHI study should have been 2228/(9353-275)=24.5% inclusive, and 2228/(9078-2228)=32.5% exclusive.
As you wrote, this is a very unlikely scenario, so I want to show you what I think happens with full and partial accommodation. First, full accommodation, i.e workers get gross pay, businesses do not reduce costs, and prices rise by the full amount of the tax. Mathematically this means that the denominator now contains not only the embedded costs (taxes) but also the $2228 in new tax revenue. So, the inclusive rate becomes 2228/(9353+2228)=19.2%, and the exclusive rate would be 2228/(11581-2228)=23.8%. These are the rates that Dr. Walby reported in her May 2003 study, which is no longer in the AFFT research library? Perhaps she assumed full accommodation?
The most likely scenario that you described is the partial accommodation scenario which means that workers will get their full gross pay, business costs, including compliance costs, will be removed, and prices will rise by an estimated 17%. From the BHI study and other sources, I assumed that the 2007 business costs were actually $290B in income taxes and $435B in payroll taxes, plus the $275B in compliance costs for a total of $1 trillion. So, the inclusive rate would be 2228/(8353+2228)=21%, and the exclusive rate would be 2228/8353=26.6%.
If I’m correct about why BHI claimed the inclusive rate contained embedded costs (taxes), then the inclusive rates will vary from 19.2% to 24.5%, and the exclusive rates will vary from 23.8% to 32.5% depending on the degree of monetary accommodation. Furthermore, I believe BHI erred by not including business compliance costs in their inclusive rate calculation of 23.8%
None of this discussion has anything to do with my other concern about BHI’s failure to include a revenue offset when they added federal government consumption to the base. This could obviously change the rates listed above, depending on their response to our questions.
I’d appreciate any comments on this rather arcane matter.
Hank, from my conversations with them, I believe you are correct regarding them including embedded costs in the GDP denominator. As you stated, a no accommodation model would lower GDP, although I don’t think it would have the same impact as we might think regarding a decrease of GDP, since the cost is also decreasing. Taxes are being removed from GDP, so I expect little would be lost as far as profit and production, which I think would be the main areas for concern; however, this may certainly have other unknown (at least by me) effects. As far as the other rate calculations, I thought both Gale and BHI/Kotlikoff showed that accommodation did not change the rate. I’m glad you reminded me about the e-mail. Based on this information, did you want to modify any of your questions?
Morphh,
I agree that the experts claimed that the degree of accommodation would not change the rate. It’s just that I don’t understand it. What did I do wrong with my three scenarios that clearly show a range of rates depending on the degree of accommodation.
As for the questions, if anything I have one more dealing with the BHI failure to remove compliance costs from the base in their calculation of the inclusive rate? The other three questions can stand I guess. And I’ll reread the studies to see if I can figure out the rate/accommodation puzzle.
Thanks for your input. I think we are on the right track, but need more answers.
Hank,
Before I explain with numbers, I’d like to just explain with words that the reason your rates are changing is because you are maintaining 2228 as the revenue neutral amount. However, 2228 is only a nominal value. In real terms this number needs to be increased as the different accommodation models are employed.
Here is where I think you are making a mistake between your full and partial accommodation models. Going back to the no accommodation model, the inclusive rate (because the denominator contains embedded taxes) is 2228/9353 = 23.8%. When you calculate your partial accommodation model (let’s use your favorite 17%, but I contend that is likely too high), you calculate 2228/(9353*1.17) = 20.4%. Note that I’m using the traditional fairtax definition of inclusive, so our numbers don’t match. However, this is point in which your error occurs. Keeping the numerator at 2228 is not revenue neutral. It is a 10% reduction in revenue expressed in real terms. So the partial accommodation model should be (2228*1.17)/(9353*1.17) = (2228/9353)*(1.17/1.17) = (2228/9353)*1 = 23.8%. The key is that the numerator and denominator need to be multiplied by the same amount. So going to the full accommodation model yields (2228/9353)*(1.31/1.31) = 23.8%.
Thanks Andrew – That clears it up!
Andrew/Morphh,
Sorry, but I don’t think it has been cleared up at all. Starting with the no accommodation model, we all agree that the rates are 23.8%/31.2%. But my partial accommodation model did not use 10% and 17%. Instead, I removed from the base the actual business income tax costs of $1 trillion, and then added the new $2228B in revenue to the base to get the inclusive rate. 2228/(9355-1000+2228)=21%. Perhaps I would understand it better if you used real numbers rather than percentages. Tell me in plain english why the revenue neutral amount of $2228 needs to be adjusted if I take $1 trillion in business expenses out of the base? It seems to me that the rate, not the numerator needs to be adjusted if the base is changed? Help!
Hank,
The 2228 in the numerator only works in the no accommodation model. It’s the amount our government needs for revenue neutrality based on the current value of the dollar. The partial and full accommodation models are by definition devaluing the dollar by making items of a constant value cost more dollars.
This has all gotten beyond me. To get the support of old geezers like me, I think FairTax promoters need to:
1. Rewrite the SS adjustment section of the bill so it’s absolutely clear what is intended. Use the COLA formula. I’m willing to concede that the intent is probably honorable, but I think it’s somewhat ambiguous as it is currently written. At least it is to me.
2. Provide us with some clear, simple examples on the site (again, using the COLA formula). Define terms clearly and don’t try to make us read a book or jump around all over the place to ferret it out.
3. Avoid “retirees should pay more” rhetoric.
4. Put a calculator on the web that handles SS income correctly, so we can put in our own numbers and get correct results.
Do those reasonably well, and I’ll likely get on board.
Thanks Mike.. I like to say with regard to #3 that I don’t feel anyone should pay more taxes. I’m not for tax increases on anyone, reduce spending. It was only meant to make you think about how the tax system may effect future generations, and possibly yourself if things stay the course. Many are not aware that if we plan to meet the obligations our government has promised, future tax burdens will be enormous (40% of GDP), double what they are today. I’m thinking 70-80% of income on workers to support government at all levels. A generational transfer of wealth is taking place; $60 trillion in unfunded federal retire programs and debt to be funded by future workers. Ultimately a tax system has to bring up the question – what do you want for your children and grandchildren? Please don’t take this as a lack of respect for the greatest generation. I’m just looking at the future storm (train-wreck as Hank calls it) and I’m honestly scared. I believe a consumption tax can help solve the issue by supercharging the economy.
Hank, are we clear on the accommodation? I was holding back the e-mail since this seemed to clear up a question.. but perhaps not. Please advise.
Morphh,
I certainly understand the issue, and if you are confident that we understand just what BHI and Kotlikoff did, then you can scrap the questions. My understanding is that BHI basically assumed no accommodation, producer costs fell, prices remained about the same, and workers got their current net wages. This meant that the GDP, which is basically the Fairtax base, would also fall, and the rate would have to be increased in order to to generate the needed revenue. If that isn’t basically what you understand, then perhaps you can clear it up for me without getting BHI involved.
The reason I’m so interested in this arcane subject is that I have tentatively decided to adopt a different approach in calculating the rate under Fairtax-Lite. The new rate is 12% based on partial or even full monetary accommodation coupled with the assumption that any reduction in the GDP (base) will be offset by overall growth in the economy, making it a wash. Therefore, when we divide the revenue by the base, we will get an exclusive rate–in this case, 12%, not 14%. Retail prices under Fairtax-Lite, assuming a 6% (income tax plus business compliance costs) drop in producer costs, will rise only 5.2%, not 17% as under the Fairtax. (1.00 x .94 x 1.12 = 1.052)
I’m still interested in the other question dealing with whether or not BHI added a revenue offset when they added federal government consumption to the taxable base. If so, where is it?
Hank, If we’re understanding the same thing. 2,228 is the revenue needed with prices remaining the same (non-accommodation). If we increase prices, then the government is going to need more revenue as their expenses increase. So if prices go up 17%, then government is going to likely need 17% more revenue (2,228*1.17). However, because of the larger production base (9353*1.17), it does not increase the rate.
Morphh,
I think I’ve asked you this before, but please explain your last sentence. Why do you believe the production base is larger? The GDP does not contain any taxes, so it seems to me that, under the zero monetary accommodation scenario, production costs could fall by 22% (Jorgenson), which means the base also falls 22%. And that seems to mean that the new rate would have to be 30.5% to raise the 2228.
What am I missing?
Hank, I think the current GDP contains embedded tax costs (the 22%). The FairTax production base would not contain these taxes. The production base under the FairTax would be larger with only a 10% reduction (partial accommodation) than if they were able to do a full 22% reduction (non-accommodation). I think we’re pulling the same amount of taxes out of the same level of GDP in either case. Current GDP has it included, FairTax would have it excluded (I believe).
Morphh, O.K., I think? My brain is turning to mush over this issue.
In any event, would you agree that if governments were to be treated as businesses, and not taxed on consumption ala Fairtax-Lite, that the cost of government would be significantly reduced under any monetary accommodation scenario? And, is there any downside to that?
Hank, I would agree that the cost of government would be reduced, although so would the revenue. So it would be a wash on the fed but would likely reduce state/local government cost. The only downside that I see is the competition argument but this could be handled through some fair-compete legislation or something – instead of on the tax side.
This, to me, is why government should be taxed. Since it is a wash, I don’t see any downside other than possibly the cost of running it through the books. Nor do I buy the idea that including goverments is a conspiricy to artificially pump the base to make the FairTax look good. To the contrary, I think it is a solid design feature.
First, by including the government, there does not have to be a mechanism for exemptions. If the government were not included, there would have to be some kind of ID card and registration number or other authentication device that the government would have to present with their purchase that the seller would have to post with the sale to show why they did not collect taxes. Seems innocuous, but it is opening the door to exemptions. There is now an avenue to sell for votes. The use of that card and registration number are very valuable – if it could be extended to other groups it would have a lot of political power and the downhill slide would start all over again.
Second, is the competition issue. If one player in the market doesn’t have this huge tax burden, then we have to get into all kinds of complex issues with bidding and negotiation – as morphh notes, some kind of fair compete legislation. Not only is this another opening for political pandering, it is costly and more unnecessary moving parts.
Keep it simple, keep it low cost, keep it political proof.
Come on, Mark, you don’t seem to be thinking clearly about the taxation of governments. First of all, there is no competitive issue left once you untax all businesses. The playing field is level without the overkill of trying to tax governments. And as Morphh wrote, if we find there is still a bias favoring governments, legislation, not taxation, is the proper remedy.
As for your concern about a government ID card or whatever, why would that be any different than issuing registration certificates to the 20 million businesses in the country? Not a problem!
It may be a wash for the fed, but as Morphh wrote, the Fairtax certainly isn’t a wash for state and local governments. It is disingenuous at the least, and dishonest in my opinion to hide 12% of the revenue needed to fund the federal government in higher state and local taxes. Under the Fairtax, I estimate that state and local taxes will have to rise by 25%-30% just to pay the federal tax bill.
Politically, taxing governments is probably the worst feature of HR25. The fifty state Governors all oppose a national sales tax on the grounds that it would interfere with their current revenue collection process. Now, you want to tax state and local consumption which can only throw gas on the fire. For sure, there will be a constitutional fight over this clear violation of intergovernmental tax immunity, and the states will win IMHO. Why risk that kind of debacle?
The only thing you wrote that I agree with is that taxing governments is not a conspiracy by AFFT to lower the rate. It may have been originally, but all the studies seem to show that taxing the federal government creates no new revenue, and taxing state and local governments simply shifts the federal tax burden.
Mark, there is no competitive issue, nor was there ever one. Untaxing businesses should have been adequate to leveling the playing field. And there are too many downsides, both political and economic, to taxing state and local governments. Think about it, please.
In the case of state and local governments there actually are concrete examples of services where a municipal government might gain an unfair advantage over a privatized service if it weren’t taxed. One that comes to mind is garbage collection. In the City of Summit, NJ, garbage collection is provided by the City. In the Town of Westfield, NJ it is provided by private haulers. If the City of Summit weren’t taxed under the Fair Tax, it would enjoy an unfair advantage over private garbage haulers, and there would be a bias in favor of loading garbage collection into the public sector.
Another example is the water utility. In Summit the water utility is a private regulated entity, the New Jersey American Water Company. In the Borough of Madison, NJ however, water is provided by the Borough. If the Borough weren’t taxed under the Fair Tax, it would enjoy an unfair advantage over New Jersey American, and there would be a bias in favor of loading water utilities into the public sector.
The point being, the taxation of state and local governments under the Fair Tax is not without its basis. Taxing governments helps confine state and local governments to their sovereign functions.
~Jim Bennett
Summit, NJ
Jim,
Sorry, but I don’t get it. You are making the case that there are both private and public water and garbage services in NJ, and if you don’t tax governments under the Fairtax, they could get all the business? But, they don’t have all the business today, and by untaxing private businesses, won’t that mean even sharper competition from the private sector?
Your examples kind of make me think that taxation alone is not a reason for a municipality to select public or private utility service, although I sure don’t know a darn thing about that subject.
My bottom line remains unchanged. There are far more downsides to taxing governments than there are perceived benefits. And by the way, if you really want to get the government out of the private sector services, tell me why the Fairtax exempts government enterprises? Are you sure that a private firm couldn’t run TVA or even AMTRAC? Or any of the other dozen or so government enterprises?
Jim –
What you seem to be saying is that IF a government entity provides a service directly to a consumer that would be taxable if a business provided the same service — garbage collection or utilities in your example — then the consumer should also pay the FairTax if it purchases that service directly from the government. OK. Fair enough.
But that’s not what the legislation provides. Let’s use the garbage collection example. Under the FairTax, a private company would pay all of its wages and salaries tax-free, would purchase all of it’s garbage trucks tax free, and would lease its office space tax free, etc., etc. However, if a municipal government provided the exact same service, it would have to pay the FairTax ON TOP OF the salaries, truck payments, lease obligations, etc., etc. Thus, the FairTax would not LEVEL the playing field between private enterprise and the government, but would make it economically impossible for the government to provide that service.
Maybe you think that is a good thing, philosophically. But municipal utility services is a very small percentage of governnment expenditures. Most government spending is on things that indivuals could not contract with a private company to perform.
Military and law enforcement are obvious examples of services that must be provided by the government. Under the FairTax, the government will need to pay the FairTax on top of the pay it pays its troops, any contract labor it employes, the weapons, it purchases, etc., etc.
Or, let’s take road-building. Regardless of whether the government builds a road with government employees or uses a private contractor, the government will still need to pay the FairTax on either the salaries of the government employees or the payment to the private contractor. If you want to make an argument that all roads should be privately owned, and thus the government should get out of the business of building and maintainin roads, I suppose you could make that argument, but that would be taking libertarian philosophy to the extreme.
Hank/Hayden,
Jim is absolutely right. Think about it. A private business charges $100 a month for garbage collection. $23 has to go to the federal government. The local government doesn’t charge as a retail service would. It collects taxes and pays for labor and equipment. Since they don’t pay the 23% directly on the collection of taxes, they need to pay it on labor and equipment. Otherwise, the local government could spend $77 (since they don’t have the tax) to provide the same $100 service of the private business.
This is how I look at it. The governments providing an endpoint service that a private sector company would have to pay the tax on. Since they don’t collect the fairtax when collecting their own tax, the only way to make up for it is to have them collect it when purchasing the items that enable them to provide the endpoint service.
Hank and Hayden –
Actually it all pretty much makes sense to me. If in the case of garbage collection for example, we agree that under the Fair Tax the City of Summit NJ does not have to charge tax on the service (being performed by the government and not billed or broken out separately from its sovereign functions), in which case it should have to pay tax on the trucks it buys and on the wages of its employees.
If the City of Summit, on the other hand, should decide to have a government enterprise, with a separate set of books operated as a profit center, then it should have to charge tax on the service and be able to procure trucks and labor free of tax. Go for it and good luck!
If the state DOT decides to use its own employees to build a road instead of a private contractor, then it makes sense to me and seems fair that the state should have to pay tax on its employees’ services. This would offset the bias in favor of loading functions into the public sector.
If the tax treatment of municipal and state services today were as fair as it would be under the Fair Tax, we might see more privitization. I really don’t see the problem.
Regards,
~Jim
Jim and Andrew — You each make good points as to the rationale behind taxing government services that directly compete with private enterprise in providing services to individual consumers.
But, with all due respect, you ignore the main points that Hank and I were makings, which is that there is no economic rationale for taxing the vast majority of government spending, whether local, state or federal, that does not directly compete with private enterprises that charges the consumer directly for such service.
For example, in the road building example, under the FairTax the state government would have to pay a tax to the federal government regardless of whether it used its own employees or a private contractor. There is no economic rationale for this.
The sole purpose of taxing state and local government spending under the FairTax is to shift a significant portion of the federal tax burden onto state and local governments (and thus, the citizens of those state and local jurisdictions) in order to reduce the required FairTax rate and thus make it APPEAR as if the FairTax burden is lower than it actually is.
If FairTax proponents were really interested in transparency, which they always claim to be, then they would admit that taxing government spending under the FairTaxis simply a gimmick (the mother of all unfunded mandates), and instead exempt government spending from the FairTax so that folks could see just what their tax burden under the FairTax REALLY is.
After all, don’t we want that poor child who buys his Skittles to know how much his government is really costing him?
I don’t think we’re going from not taxing state and local to taxing them under the FairTax. They have a burden of taxation applied today based on federal income and payroll taxes. I think the idea is to continue to tax them, not start taxing them. I conceed that the level of taxation will differ and that it may have consitutional issues but to “untax” them under the FairTax would actaully give them a greater tax advantage then today. So you’re not advocating for keeping it the same as today, but reducing their tax burden, which may be your goal… I just wanted to make the point clear.
Morphh,
Please clarify just what income tax burden the state and local governments have today? Are you referring to the embedded costs of the income tax system? And if the idea is to continue to tax them, you really ought to step back and ask yourself why is it a good idea to increase the cost of government? If we don’t tax governments, why wouldn’t they enjoy our predicted 10% reduction in the cost of goods? And isn’t that a step in the right direction?
For those of you who still don’t think a Constitutional challenge is likely, here are some quotes from the Treasurer of Michigan in response to my poll of all the nations State treasurers:
“As you mention in your message, the FairTax envisions taxing all consumption, including consumption by government entities, at the FairTax rate. This would result in a significant increase in the cost of purchases of many items by state and local governments, including school lunches, prescription medication for Medicaid patients, and emergency vehicles for first responders. Even if the FairTax proposal is enacted at the national level, I believe taxing government purchases would not be included. It is difficult to envision Congress and the President subjecting public safety equipment or public health care services to such a tax.”
And here is a thinly veiled reference to the Constititional issue:
“In addition, the sometimes tenuous cooperation that exists in our government structure between federal, state, and local governments would be difficult to maintain if the federal government were collecting taxes on state and local government purchases.”
I support a national sales tax, but you can’t get there by proposing to tax government consumption. Period!
Hank, yes I was refering to the costs an employer must factor to accommodate the income tax system, which includes a larger government budget for wages due to income and payroll tax expenses. Using a non-accommodation example, the government would gain a windfall of all those costs and a large increase in purchasing power if not required to pay the FairTax. Similarly, in a partial accommodation, they would gain the windfall of employer payroll and the gain in purchasing power. Depending on the collection of revenue, they would recieve the increase on their tax base due to the inflation based on accommodation.
So as you stated.. the question is if this is a step in the right direction? I think I’m going to end up paying for it either way as if you untax the state, we’ll increase the fed rate. So I don’t know that a lower cost local government does anything to my overall tax burden. And if it doens’t change my tax burden, then why would I want to give them any advantage over private industry? I’m mixed on the issue… I lean for taxing them but I’m not opposed to other methods… so long as the issue was addressed.
Morph –
You know I love you, buddy, but I’m not going to let you get away with that!
Give me ONE good reason to tax state and local government spending.
You know there ain’t one. Come on, friend. You can admit that much!
Best,
Hayden
Morphh,
I know it’s a long shot, but would this qualify as an alternative method to prevent government competition with the private sector? (Guess who the author is?)
House Joint Resolution 23: JOINT RESOLUTION
“Proposing an amendment the Constitution of the United States relative to abolishing personal income, estate, and gift taxes and prohibiting the United States Government from engaging in business in competition with its citizens.
Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two-thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as part of the Constitution when ratified by the legislatures of three-fourths of the several States within seven years after the date of its submission for ratification:
`Article –
`Section 1. The Government of the United States shall not engage in any business, professional, commercial, financial, or industrial enterprise except as specified in the Constitution.
`Section 2. The constitution or laws of any State, or the laws of the United States, shall not be subject to the terms of any foreign or domestic agreement which would abrogate this amendment.
`Section 3. The activities of the United States Government which violate the intent and purposes of this amendment shall, within a period of three years from the date of the ratification of this amendment, be liquidated and the properties and facilities affected shall be sold.
`Section 4. Three years after the ratification of this amendment the sixteenth article of amendments to the Constitution of the United States shall stand repealed and thereafter Congress shall not levy taxes on personal incomes, estates, and gifts.”
As for your personal tax burden, I don’t think it would change –six of one, half a dozen of the other. But I would appeal to your honesty and integrity and ask if hiding 12% of the true cost of funding the federal government in higher state and local taxes isn’t just plain dishonest? How in the heck will anyone know just what it costs to fund the feds, when that register receipt doesn’t really show what part of the state sales tax is for the state and what part is this surreptitious federal tax? Simple and transparent it’s not!!
Hayden,
I was responding to your position that the government is at a disadvantage based on the statement, “Thus, the FairTax would not LEVEL the playing field between private enterprise and the government, but would make it economically impossible for the government to provide that service.†If you agree that government should be taxed for competitive reasons for some services, then how do you propose we enumerate what will and won’t be taxed. And what if someone in the private sector comes along with a plan that could potentially save a city money by privatizing something on the non-tax list. Would it have to be added to the taxable list at that point? Different municipalities take on different responsibilities. It would be quite onerous to try and define a common set unless that set was extremely small. Maybe just the mayor and city council. Maybe their staff as well. I guarantee if that was tried garbage men would be listed as mayoral staff in no time.
All this also ignores the fact that local government currently pay the “embedded tax†now. As Morph rightfully pointed out, if untaxed the no accommodation model would give a huge windfall to local governments. And you may to, but I certainly do not want to give my politicians more money. Somehow I see them spending it. If we had full accommodation, I could see some sources paying for themselves, like sales tax on top of the fair tax, and some needed to be adjusted, like property taxes (depending on turnover rate because the new house values should be based on the devalued dollars). Fees would also need to be adjusted and even if everyone keeps their gross pay I’m assuming income tax rates would also have to be adjusted (although I’ll assumes every state just switches to their own fair tax. Maybe that’s wishful thinking.)
Hank / Hayden, wording of or similar to HJR23 would satisfy my concerns if it was included in the tax bill. I’m not sure if such a inclusion would be as distasteful to local government as taxation or not. With regard to hiding the fed tax burden in state taxation, I can agree with the point, although I think this happens today, both fall short of full transparency in this respect. It could also be thought that this is the cost of state and local government for the services they provide as any other comparable U.S. business would have similar costs. It is the cost of operating in the U.S., which goes back to the competition issue. So if HJR23 was in place, and they taxed the local govt., then I would fully concede the point; but without such measure, I can also see the point that government business should show a comparable operation cost and thus the tax is not hiding but showing the equivalent local govt. cost based on our federalist structure.
Thinking of another possible solution… what about a compromise. Don’t charge the state and local government tax on consumption but keep the taxable employer provision. This would keep the burden of taxation approximately the same on state and local gov as today. It would also avoid the constitutional issue of taxing state consumption.
Morphh,
You may be on to something, but, how would the burden on state and local governments remain approximately the same as today? Please give an example or two about what you mean? Are you suggesting that governments would be treated as a business rather than as a consumer? Interesting!
Hank, The bill does discusses governmental enterprise (defined in section 704), like USPS, which must collect the FairTax like any normal business (FedEx/UPS/DHL), and is treated like a business (B2B untaxed). However, what I was referring to was a taxable employer, which is described as “any household employing domestic servants, and any government except for government enterprises.” Sec 103(b)(2) describes “in the case of wages or salary paid by a taxable employer which are taxable services, the employer shall remit the tax imposed by section 101.” So government would be treated as a business (in a way) and the services provided by government would be taxed at 23% of wages (since they don’t collect taxes). I think this would be equivalent to the embedded federal tax costs they maintain today in their budget. So it would seem a good half way point to untax government consumption (like any business), but keep them as a taxable employer (so their service is taxed).
Morph — Exactly how are wages of government employees taxed? At what rate, I mean.
That is, say a government employee will make $100,000 in salary. Does the government pay $23,000 in taxes (i.e. .23 * $100,000) or $30,000 (i.e., .23 * $130,000).
And, for that matter, if the government buys a missle defense system for a billion dollars. Does it pay $230 million or $300 million in taxes?
I assume it must be the higher number in order to make the tax “inclusive,”, but I really don’t know for sure.
Morphh, O.K., I see what you are proposing. In plain english, state and local governments would not pay tax on the purchase of goods, which would save them approximately $65 billion if you use the BHI estimates of $1093 total consumption and 59% of it for goods, and if you assume our partial accommodation model that might lower costs 10%. (1093 x .59 = 645 x .90 = $580billion). State and local payrolls would be taxed at 23% which would add $103 billion in costs, except that the legislation defines wages as the burdened amount. Assuming that the burdened amount is 150%(?) of the basic payroll, then the added cost would really be $154 billion. Except that I think the rate for this calculation really ought to be the exclusive 30%, not 23%, so the final cost for wages would be (1093 x .41 x 1.5 x 1.3 = 873 billion) or an additional $432 billion.
The bottom line is that you would double the cost of state and local services (payroll), while reducing the cost of goods by 10%, depending on whether or not the pretax cost of goods really did fall 10%. If this were a negotiation, I think at this point I would say “See you in court” if I was the government. If this is your version of half way, I’d hate to see you try to get tough?
All this to try and stop the government from unfairly competing with the private sector. No way, Morphh! Surely there are far simpler legislative means to solve this problem. Taxing governments still makes no sense!
While we are on this subject, would you or someone please comment on the burdened wages issue. I’ve raised it before, but nobody has ever commented. Read the definition of wages in HR25, and then tell me what the burdened cost of government wages might be? And how would it be calculated. It’s beyond my comprehension level.
Hank, the FairTax does both of these under HR25 (taxes consumption and taxes them as a taxable employer). The bill states 23%, not 30%, which I expect would be inclusive on wages – same as today, otherwise they would have used the term national sales tax factor, which is 30%. I don’t understand what is meant by the burdened amount or it being 150%. I’ll try to read it but I expect it has something to do with State income taxes, 401k, etc and when to apply the tax (net or gross). Keep in mind under partial accommodation, the state should also receive a increase on their base. It should be equal to a non-accommodation model, which would be a somewhat similar burden as today… so I don’t see that they would have to significantly increase their budget. So the suggestion was to tax them as a taxable employer only, and not both taxable employer and on consumption. Regarding what the gov would pay for a missile system. Under the FairTax, which is intended to be inclusive, they would pay 1 million, of which $230,000 would be taxes. Under this half-way exercise, they would not pay taxes and thus their cost would be $770,000. But it is a wash for the Fed, this really is only relevant to the state / local government.
Morphh,
HR25 clearly defines what is meant by burdened wages. The 150% is simply my best estimate for the burdened impact. I tried to search for burdened wages and got definitions ranging from 120% to 180%. In the case of government employees, I tend to think the percentage is toward the higher end due to government pension plans which are far better than those found in the private sector of late. My question is “Is the burdened amount the amount that gets taxed or not?” I see no evidence that BHI used the burdened amount in their study, but I could be wrong?
Tell me again why the states base would increase under any accommodation model? It seems to me that the base is going to decline as costs are removed? What did I miss?
Morph –
The tax on the missle defense system in my example must be 300 million.
1. The government pays the manufacturer(s) $1 billion for the missle defense system.
2. The manufacturers do not collect and remit the FairTax to the government, because they did not sell the missle defense system to individual consumers.
3. But government spending is taxed. Since the government spent $1 billion, the tax must be $300 million for the total cost to the government to be $1.3 billion. $300 million divided by $1.3 billion equals 23%.
If the tax were only $230 billion, then the “tax-inclusive” rate would be only 19%. That is, $230 million divided by $1.23 billion equals 19%.
Same for wages, I think. If an government workers’ salary is $100,000, he’s not going to give $23,000 of that to the government. He’ll keep the whole thing. The government will need to pay a $30,000 tax in order to maintain the 23% “tax-inclusive” rate on spending.
At least that’s what it seems to me. Not sure exactly what my point is, but I have a sneaking suspiscion it could prove important when the numbers are looked at closely.
Hayden,
I don’t think this is accurate. The government pays $1billion dollars for the system and nothing more. The seller is responsible for giving the government $230 million in fairtax on its sale of $1billion. It is just like if the seller sales me a missile system for $1billion. They will be responsible for giving the government $230million, unless I use it in my business. That was kind of my earlier point about the government. They represent us as the end point user.
The FairTax is leveled on government spending (including salaries for its employees), not a tax that the recipient collects.
Think of it this way. Suppose the U.S. government leases a base in Saudi Arabia for $10 million per year. The U.S. government still owes the tax. Saudi Arabia isn’t going to pay it.
I guess I don’t get it. Why is taxing the government a bad thing? In your example with the 1 billion dollar missile system. The government gets the tax of 230 million back in 14 to 30 days when the supplier pays their Fair Tax through the state tax agency. With the current system the federal government still recoups some of the 1 billion paid for the system in the form of payroll taxes, income taxes and corporate taxes. But it is not as efficient, it’s collected from several sources over several months with much higher administrative costs.
I’m not sure what your point was either Hayden, haha. If we’re just talking about how the retailer presents the tax (inclusive or exclusive), then I think we can skip the debate. I’m a little confused since the discussion was in regard to removing taxes on government consumption. Anyway
You may be correct on the wages. If it is considered a service with a base cost, then I could see how this might be factored by 30%. I’d have to get clarification from the higher powers.
Hank, regarding accommodation, the state would might have to tweak their tax to receive the inflation gains. If the FairTax is an inclusive tax added before the register and the state sales tax is exclusive added at the register, then the state sales tax might look similar as today (but would be applying the tax on top of the FairTax).
Mforbes –
The supplier does not pay the tax to the government, the government pays the tax to itself. Or, in the case of state and local governments, they pay the tax directly to the federal government.
The point Hank was making is that this is an accounting gimmick. In the case of the federal government, since it pays the FairTax to itself, it isn’t gaining any net revenue. The tax just goes out of one pocket into the other. So what’s the point?
In the case of state and local governments, since they are paying taxes to the federal government, they need to come up with the money somewhere, and will need to raise taxes on their citizens to come up with these funds.
My point was that the tax rate that governments will need to pay will be at least 30% on top of their current spending. (And that’s assuming that the tax-inclusive rate is only 23% — which, obviously, I don’t believe.)
Whether this would change the results of any of the studies, or whether this has already been factored in, I don’t know. I was just trying to figure out how taxes on government spending would be calculated.
Hayden,
In response to post 75, if you buy a TV in Saudi Arabia, you don’t have to pay any fairtax either. Unless of course you bring it into the US, then technically I believe you are required to remit the tax to the government yourself. However, if you buy a TV down the street you give the fairtax to the seller who then remits it to the government. I believe the government paying the fairtax means that when they purchases things they won’t be charged as B2B. They will be charged full retail, meaning the seller will collect the tax and remit it to the government.
You then later said “My point was that the tax rate that governments will need to pay will be at least 30% on top of their current spending.†The state and local governments will be paying roughly the same under the fairtax that they’re paying now in real terms. The only difference is devaluation of the dollar caused by the fairtax and how well their revenue sources react to that devaluation (like sales taxes should react fine since they are a fixed percentage of the nominal dollars being spent.)
As in all things tax related, I’m confused, even on the Fair Tax rules. Please, just answer this question.
HOW MUCH TAX FOR A 65-YEAR-OLD EARNING $18,000/YR IN SOCIAL SECURITY?
Thank you,
Linda
SS income would be adjusted for any change in price levels due to the tax (so this income would essentially be tax free). You would also receive a prebate every year for $2,392 (which would also be adjusted for inflation). So if SS is your only income, than you would have a nice increase in purchasing power.
According to Dr. Laurence Kotlikoff and David Rapson, low income seniors make out the best under the plan. See “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation†(PDF). Boston University. Table 5 on page 27 shows a single household (over age 60) earning $15,000 would have an negative average remaining lifetime tax burden of -28% (compared with 9.8% under the current system).
Linda,
Under current law, if your entire income is $18,000 from SS, you are paying zero income tax and, of course, zero payroll tax. Your net federal tax is zero. Your purchasing power is $18,000.
Under the Fairtax, as Morphh correctly stated, you will receive a $2392 cash grant entitlement (prebate) which would increase your spendable income to $20392, plus assuming that prices increase by 17%, your total income would be adjusted to $23858. (Both SS and the prebate would be increased by 17%) If you spent it all on services and taxable goods, your sales tax paid would be $5487. Your purchasing power would be reduced by 17% due to the assumed price increase, so your purchasing power would be $20756. Looks like you would be better off under the Fairtax, even after paying $5487 more in taxes. Whether or not the federal government can afford to increase all military and civilian retiree pensions by 17% and leave the sales tax rate at 23% is debatable?
I would use caution when buying in to the Kotlikoff/Rapson report. According to a 2007 Bureau of Labor Statistics survey, seniors with incomes such as you used in your question are spending 50% more than their income by spending principle and/or interest from accumulated life savings. You need to understand that those savings are mostly after tax savings, but all would be taxed under the Fairtax when spent on taxable goods and all services. This is double taxation without question, and I believe it would be unfair to our senior retirees! It would also flip the purchasing power results shown above.
Hayden & Hank,
How is this any more an accounting gimmick than the government paying a contractor for a item at the inflated price and then getting the money back from the employee’s payroll withholding.
RM,
Sorry, but I don’t understand your question. What are you referring to? Thanks!
Sorry Hank,
I wasn’t very clear that I was referring to Hayden’s post #79.
Have you looked at the Fair Tax for Seniors proposal in its entirety?
• The FairTax ensures Social Security’s soundness by funding it with a progressive, broad-based national retail sales tax, rather than the current regressive, narrow payroll tax.
–Over 65 we have already paid 100% into Social Security and earned it, someone suggests we start paying again for something we have paid for? Please save us from this Republican idea…
• The FairTax rebate zeros the retail taxation of necessities, up to poverty-level spending, for seniors.
–Why pay Tax on anything -we are paid up! We’re retired…Now someone suggests we pay taxes on what we buy? Most of us Seniors are above poverty level so we have to pay the tax and claim it back later? Think of the paperwork.
• The FairTax repeals the taxation of Social Security benefits and adjusts Social Security indexing to protect seniors.
–We pay tax on the income above what we earn on Social Security – Not social security. “If the only income you received during the tax year was your social security or equivalent railroad retirement benefits, your benefits are probably not taxable and you probably will not have to file a tax return,” according to the IRS, Tax Topics 423.”
• The FairTax ends all record keeping and income tax filings of any kind for seniors, totally insulating them from the high costs and abusive tactics of tax preparers.
–Fair Tax does not even start this way-you must prove if you are at poverty level to get taxes back for USED items. This bill protects Rich people from paying tax on Millions of dollars in income and retirement plans and the regular person not pay sales taxes on everything we buy. This is welfare for the rich!
• The FairTax does not tax used goods, giving low-income seniors choices.
–Again, why do we have to be at the mercy of people who collect taxes, often not distinguishing between used and new, and pay for Social Security PAID UP COVERAGE we already have paid for – Over 65 should not pay Sales tax for what we already have paid up…A person I know at 86 could not find a single store who knew how to give her the over 85 sales tax rebate Columbia has posted in its stores…
• The FairTax reduces manufacturers’, services’, and retailers’ costs, allowing them to lower costs to seniors.
–The Bill’s author was reaching for words for this one…What does it mean? They have to collect the tax, determine if we meet the Senior discount, determine if we have met the poverty level to see which items we may not have to pay tax on, prepare forms and send tax money to Federal Government – Be inspected, etc. by the Fair TAX police – hire folks who will not steal the additional money collected, etc.
–The remaining proposals in the bill are just as unfair to seniors such as not paying Estate taxes – to save the rich or those who inherit some tax money, we all pay sales
Scvoter,
I think Morph said it best when he said (I’m paraphrasing) that senior citizens did not pay in 100%. In fact, as of the end of Bush’s term, they owed about $10T (we refer to it as the debt).
Of course, that’s only if one believes that all these taxes aren’t just embedded in the cost of goods anyway (which they are).