It’s PAYDAY! What’s coming out of YOUR wallet?
Friday! Yay! As an Average Joe worker, I get paid every two weeks. But it’s nibbled at by deductions. So, let’s look at the numbers, shall we?
(Note - this is a representative paycheck. The numbers aren’t my real pay, which is a bit higher, but the percentages of what’s coming out are what’s on my pay stub.)
Let’s get started...
$1000 - Pay for this paycheck. Yay! Immediately I take out...
$100 — for the 401K deduction. Won’t be young forever, need to plan for the future if I want more than a Social Security pittance! Pretax money.
That leaves...
$900 — Gross pay. 10% off the top’s gross, all right. From that, let’s take...
$93.60- 10.4% Federal Witholding... (I claim 1 exemption.)
$62.10 - 6.9% Social Security...
$13.50 - 1.5% Medicare...
$42.30 - 4.7% State withholding...
That’s 23.5%. I’ve a grand total of $688 left.
But wait! There’s a few things I missed!
Now, suppose I spend it all on necessities. (New underwear, a frying pan, gas, a couple of new tires, Easy-Mac, dishwasher detergent, paper towels, a month’s supply of food...) Take 5.5% off the top of THAT to pay for sales tax. (Some areas I shop in are at 5%, some at 6% so I’ll split the difference.) Now we’re down to an effective net pay of...
$650.
And that doesn’t count payroll deduction for insurance, disability or stuff like that.
Kind of a ways off from my original $1000, isn’t it?
So - if the FairTax is implemented, what’s the first thing I’d do if I had that extra $250? Maximize my 401k and start tossing money into my Roth IRA account. Then put extra money towards paying down the mortgage. Oh, wait - I’d be getting a prebate also - that runs out to about $429 a month for our family (no matter the tax bracket.).
If the FairTax passes - I’d get $500 more every two paychecks. And $429 for the family - that totals to $929 a month. (This doesn’t include the amount my lovely bride makes. Let’s just say we’re about comparable in our incomes, and so from HER side we’d see an extra $500. Oh, and add in an extra $20 per year, because I won’t have to buy TurboTax to prep for April 15th.)
Somehow, I just don’t see what I’d be losing here by going to the FairTax. Can anyone explain to me just WHY the current system is better?
J.
I’ve written about this at my site, but the Fair Tax can’t give you a raise and lower prices. Either you get the money back you pay in taxes and prices have a 30% tax added on, or you get the same paycheck you do now post-taxes and the prices stay roughly the same, give or take a few cents. The “embedded tax” is largely the cost of paying employees’ taxes, as that’s where the vast majority of tax revenue comes from. Unless companies can keep the money that now goes to taxes, prices are going to rise by at least the 30% Fair Tax amount.
If you get extra money, it’s meaningless - it’s eaten up by higher prices before you ever get a chance to enjoy it.
Jesse, the embedded taxes are much more than just payroll taxes. For example, businesses and individuals currently spend hundreds of billions of dollars in compliance costs with the current IRS system.
Ditto with funding the bloated IRS bureaucracy and K Street lobbyists.
The FairTax puts that money back in the hands of consumers, companies, and their employees.
I recommend reading the FairTax book to learn more. It’s a very informative book.
Jesse - what Joshua said. The book lays out the costs of compliance with our current tax structure, and the proposed changes. Again, after looking it all over I don’t see what I’d be losing by going to the FairTax system. And you REALLY ought to read the book.
J.