FairTax Treatment of Renting vs. Home Buying
This morning my inbox had a well thought out and written email with some concerns about how the FairTax will affect low-income renters. There is still a lot about this facet of the FairTax proposal that I need to learn, but read on for my initial stab at responding to the concerns.
I earn about $15,000 per year and have no hope of owning a home. (I cannot conceive of any economic scenario under which I can buy a home.) In this context, I look at proposed legislation with an eye toward how I, as a renter-for-life, would be affected, and the FairTax troubles me.
I see the FairTax as imposing a large and explicit tax penalty on those unable to buy a home. First, renters pay more for housing (median monthly payment) than do homeowners, even though they “consume” much less housing. (At my previous address, I paid more to rent a small upstairs apartment than my next door neighbor Bob paid to own a 2BR home: did I consume more housing than Bob?) Second, rent is fully taxed, including components (such as embedded property taxes and the principal reduction afforded by the rent payment) not taxed when a homeowner pays them. Third, property tax rates are higher on rental prop than on owner-occ primary residences in many states – here, the FairTax would represent a tax on top of a tax on top of a tax. Fourth, renters would also face a stiff tax penalty whenever they pay interest, since renters generally face much higher interest rates than do homeowners (think 18% credit card vs 6% mortgage or HELOC). Since cost reductions historically have not translated to rent reductions, e.g. California’s Proposition 13 – (as an economist might say, rents are ‘sticky’) – I do not expect a rent reduction under the FairTax.
Because at least a substantial portion of a homeowner’s housing payment will be exempt from FairTax, it will be possible for a homeowner to spend more and consume more than a renter, while paying less tax. How, exactly, is this Fair?
My response:
Thank you for posing your concerns and questions to me. I am a big fan of the FairTax, however, I am not an expert. I want to say up front, that I do not have all the answers.
That being said let me address your concerns as best as I can. Let me start with some bullet point gut reactions to my first reading of your email.
- Renting currently is at a disadvantage with regards to taxation. For whatever reason, when I was renting (I was a renter for 3 years before I bought my current home), I could not deduct the interest on the mortgage that my landlord was carrying and paying with my rent. Nor could I deduct the portion of property taxes that my rent was covering.
- Renting is a lot cheaper. When you look at the total cost of ownership it definitely is cheaper. When I rented, I didn’t have to mow my yard, didn’t have the fix the plumbing, make repairs from storms, and other general maintenance items that I am CONSTANTLY spending money on now that I owning, instead of renting, property. In addition, my utilities are quite a bit more (I doubled my square footage when I moved into my house from the apartment, however, the utilities tripled).
- Renting is a choice, not a requirement. Whatever money one is paying in rent now, could go towards a mortgage payment. I finally quit renting myself because I got sick of my landlord getting the breaks on taxes and being the one building equity in property with my money. In fact, my monthly mortgage payment is higher than my rent payment — and it stays the same every year because I got a fixed mortgage. My rents would go up yearly.
- Prebate checks are sent to everyone with a social security number and these checks will cover the cost of a month’s worth of necessities for a given family size. Therefore, the FairTax is the ONLY tax reform proposal that totally eliminates the tax burden on the poor.
- As far as interest rates go, I don’t use credit cards or HELOC. I am in the process of paying off my one car loan and then attacking my mortgage to be debt free. Debt helps no one, especially the poor.
- Since the costs of owning a home (e.g. all the maintenance stuff mentioned above) is much higher than the renter (virtually zero maintenance costs), the taxes on those costs will only be paid and felt by the homeowner and not the renter. I don’t know numbers and figures to draw comparison, but while on one hand you make the claim that the homeowner is getting all the tax benefits under the FairTax plan, I see this as a huge taxable burden that the homeowner faces that the renter is free from.
I have noticed your posts on other FairTax blogs and forums that are very similar to the concerns outlined here. I hope that I helped to address some of your concerns. If you still have disagreements or questions, please do not hesitate to let me know.
This was cross posted at http://paltman.com.
[UPDATE 9/26] I received these notes the other day in reference to this post and I thought it would be useful to add for others to read.
As a landlord, I would expect to get enough rent to cover my expenses. If my expenses include income tax, my renter will pay that tax for me. If that expense goes away, I will either make more money on the unit or I can reduce the rent. Probably not the later. However, I would probably not raise the rent as soon as I would have had the income tax continued.
Not only will the landlord not pay income taxes on his profits from renting, he will probably be able to get a lower rate mortgage on the property and thus save even more. Again, the renter may not see a drop but it may prevent an increase from happening as soon. It all depends on what other landlords are doing. Unless there is a shortage of rental units, a landlord must compete for renters. If there is a shortage of rental units, new unit can be built under the FairTax for less money than under the present tax. Lower construction costs may not be passed on to the renter but again it depends on the competition.
From the renter’s angle. Let’s say that he pays 15% in payroll taxes and 10% income tax. To pay $75 rent, he must earn $100. Under the FairTax he will earn $100 and receive $100. His rent is still $75 but now has the sales tax (29.9% exclusive) added. 1.299 x $75 = $97.425. However, at $15,000 annual income, most if not all of that sales tax would have been prepaid and is not money out of the renter’s pocket. To look at it another way, he now has to work x hours to get $75. After the FairTax is law, he will get $100 for the same number of hours. That is one-third more money to spend. Apply that extra money to a credit card and get out from under the interest a whole lot faster.
Will the home owner do even better? Maybe but does that matter? A person who buys second hand goods and raises most of their own food will do better than the someone spending a million dollars a year. If both the poor and the wealthy are better off, who lost?
- Richard
Richard wish to remain anonymous so I have removed his email address and last name from this post. However, I thought it worthwhile to include the viewpoint of a landlord on this topic.
A couple additional thoughts:
No. The landlords spending on maintenance is not taxed under the FairTax, because it is a cost associated with providing the service of ther rental property. The landlord is not a retail consumer of maintanence services for the property, but a businessman purchasing those services in support of a money making enterprise.
If that, then, is the case, then it makes sense that the renter should pay sales tax on a portion of their rent to account for the maintenance costs being consumed at a retail level.
I’d point out that due to the prebate, this will not impact *poor* renters one bit. If anything, it will impact higher-income renters, like I used to be. My wife and I lived in a nice gated community in Irvine, CA, and our 1-bdr apartment cost about $1500/month in rent. The prebate wouldn’t have helped much with the tax we would have to pay on that rent, punishing middle-class renters (of course, the fact that we’d be getting 100% of our paycheck, *plus* the prebate, would probably make it a net gain).
For the poorest renters, i.e. someone making 15K/year and is under the poverty line, the prebate would undoubtedly give them enough extra per month to cover the FairTax on their rent.
It makes even more sense when you consider how the life cycle runs for newly built rental property. Let’s say I want to build a house that I intend to rent out. I buy the land. Land is definitionally used, no FairTax. I build the house as a business proposition (to rent it), no FairTax. I rent the house. Now there is FairTax on the rent. 5 years later I sell the house to a nice couple (it’s first sale at retail), so there is FairTax on the house portion of the sale. 5 years after that the nice couple sell it to some other nice couple, the house is now used, so there is no FairTax on the sale.
A childless adult earning $15K is well above the poverty line. Also, there is a common assumption casually offered that net pay will increase by the full amount of the payroll tax which will disappear under the FairTax. Not so fast! The hamburger flipper has 7.65% deducted as “employee” share of FICA taxes, while another 7.65% is formally attributed to the employer. But look what happens when the payroll tax disappears: McDonald’s has options for the use of the 7.65% they were paying previously, and it will be put into paychecks only if the employee can command that sum in the face of competing interests, such as price reductions, management compensation, and stockholder dividends. NOW do you really think the hamburger flipper’s going to get that money when those other options are on the table?
I worked out my own numbers, and under the Bush Tax Cuts (SM) my effective FIT rate is very close to 5 percent. Add in “my” 7.65 percent payroll tax (per my previous reply, I hold no illusion that the “employer’s” 7.65 will appear in my paycheck) and I’m still under 15 percent.
I ran some numbers comparing a homebuyer and a renter in a $100K existing house (rent $1000/mo). In the long run, the tax penalty for renting just grows and grows; over 30 years (term of a typical mortgage) the renter will pay about three times as much FairTax on his housing than the homeowner will pay. Over 50 years (an adult lifetime) the renter will pay five times as much. (This example assumes the homeowner buys a home, pays off his mortgage, and neither sells nor reborrows.) And the renter will end up poor and broke in his old age (at least he’ll no longer have to pay taxes) while the homeowner can retire comfortably, due in large part to that huge tax differential.
I also note that renting is cheaper than owning *only in the short run*. That is why median monthly housing expense is greater for renters than for homeowners even though renters get much less housing: renters always must pay current rents, while homeowners lock in their P&I with a fixed-rate mortgage. The median monthly cost is lower for homeowners because most homeowners are NOT paying current or even recent prices; their mortgage payment might be based on the purchase price of 5 or 15 or 25 years ago (not to mention those who are free-and-clear).
Because I see no economic or tax scenarion under which I can buy a home, I do not consider renting a CHOICE in my case. Similarly, renting is NOT a choice for many who rent. While it is sometimes a choice and even sometimes the optimal choice, most renters would buy if they could.
Terry:
1. In calculating the taxes you currently pay, you failed to include the ~22% in embedded taxes you are already paying, in every good or service you buy (including your rents). Most or all of these taxes will eventually disappear under the FairTax.
2. I also do not see any accommodation for the prebate in your comments. Even if you are at twice the poverty level, you’re still only paying about half as much money in taxes (per dollar spent) as a wealthy individual spends.
You seem determined to paint the FairTax as a soak-the-poor scheme, but I don’t see much evidence to support this.
On the contrary, the President’s tax panel described this as the only tax reform proposal which completely un-taxes the poor — by eliminating or compensating for all taxes up to the poverty level.
By the same logic, it eliminates half the taxes for someone at twice the poverty level — while simultaneously eradicating the huge problem of existing embedded taxes, which hugely impacts the poor (with no corresponding compensation) under the current system.
I think the isolated examples you’re giving only paint part of the picture, and you seem to be overlooking the fuller picture, such as the effect of the prebate and all the embedded taxes you already pay.
Have you read the FairTax Book?
I had thought, upon reading the Fair Tax book, that both used and new homes would increase in price, because there would be more competition due to increased individual wealth. Now it would appear that there is such a great tax benefit to owning that home ownership will rise to unprecedented levels if the Fair Tax is passed. It will definitely be a seller’s market. This will drive the price of new housing.
Sharon raises an interesting point that I have mulled over a bit. That point being that there probably will be an increase in the cost of almost everything, new and used when the tax goes into effect. Most of the reason would be that the used prices of most goods, most notably housing are tied pretty much directly to the cost of new housing. The real estate market would not stay static if the new housing market suddenly jumps by 10% not to mention that the owners of a new home will, upon resale, need to recoup the tax$ invested in the home at the time of original purpose. If the used home prices did not rise to meet the cost of home bought after the tax, those post – event purchases would have to take a loss to compete.
Bren, you have just noted a little talked about concept called “The Embedded Costs of the Fairtax”! While no tax dollars will go to the Feds upon a sale of a “used” home, car, boat, etc., buyers of used goods will certainly be paying back some of the original owners taxes which are embedded in the used price. It may make some folks happy to not be sending any tax money off to WDC by purchasing used items, but taxes are an indirect part of the transaction price nevertheless.
While we are on this subject, let me observe that the Fairtax claim that everyone can control their taxes paid by purchasing used stuff seems to me to be overstated. About 50% of taxable consumption is for services, and there are no used services as far as I know. There are no used groceries, restaurant meals, airline tickets, rental housing, etc., etc., you get the idea. I’m hard pressed to find any used item purchases in my budget, although that’s not to say there isn’t some.
There is NO WAY my rent is going to decrease 22% under the FairTax, just as rents did not drop one dollar (and even increased) under California’s Proposition 13, which cut property taxes an average of 57 percent. (Rents also did not fall (yep, they went up) under Massachusetts’ Prop 2 1/2 and Michigan’s Proposal A (even though Prop A left renters keeping less of what they earned due to a sales tax hike.))
Yes, I would receive the prebate, along with everyone else. Which means that poor homeowners will actually get free money while I will continue to pay through the nose. All renters end up worse off than homeowners with equal consumption.
TERRY:
I agree that rents wont drop 22%. Neither will other products and services; at least not initially. Rental rates will continue to be determined by supply and demand.
Newly constructed rental properties will be built for less than they are today. Economists claim that new homes built today include at least 25% in embedded taxes. Interest rates are expected to drop by 25%. Real estate companies will be able to buy new rental units for 12-15% less initially. The cost will probably continue to drop in future years. As a business, they wont have to pay the Fair Tax.The products and services that a real estate investment company buys will also be lower.
The real estate company is going to buy new if the price is lower. They will have lower costs and will charge lower rents. That will put pressure on the rates of older units. It will probably take a longer period of time for prices to drop than on other items with a shorter production time. But, they will certainly drop over time.
With lower interest rates and the opportunity to save money for a downpayment tax free, you can save to buy your own home much faster. Then you wont be disadvantaged as a renter.
Terry,
I will assume that your calculations for the difference in FairTax paid for a person renting vs owning a house are based on the difference in how much a person is paying to rent vs own over time. I do not disagree that renters over time pay more money for housing than owners, and thus will pay more FairTax.
What I will quibble with is whether this is any worse under the FairTax than it is under the current system. Currently if I earn a dollar, a portion of it is taxed by income plus payroll taxes and I get to spend what’s left. Under the FairTax, if I earn a dollar I get to keep all of it, but when I spend it, a portion of what I spend is FairTaxed. I call the ratio of what you earn to the amount of value you can purchase your buying power. It is a neutral way of discussion the FairTax vs the Current Tax System.
If your effective tax rate under the current system is 15%, then your buying power is 85%. Since you have to earn the dollars you spend on rent, and thus they are subject to the current tax system, if your buying power under the FairTax is the same or more than your buying power under the current system, then you are no worse off with respect to renting under the FairTax than you are under the current system.
Let’s take your example of $1000 a month in rent. If your buying power under the current system is 85%, then you have to earn 1000/0.85 = $1167 in order to pay that rent. If your effective FairTax is 15%, then your buying power under the FairTax is 85%, you would have to earn $1167 in order to pay your $1000 rent plus FairTax. If your buying power is equal, it’s a wash.
So the real question is how does your buying power under the FairTax compare to your buying power under the current tax system. Since a family of four spending $78k a year in 2007 would be paying an effective FairTax rate of about 15% (($78k-$27380)*0.23/$78k) I suspect your buying power under the FairTax would be higher.
Are renters still getting screwed, sure, but it’s not the FairTax that’s screwing them, it’s the difference in cost between renting and owning, and the tax consequences are no worse, and probably a good deal better than under the current system.
Quadrupole,
Not to quibble, but your post seems to have left out a very important point regarding purchasing power. Your discussion was really about effective tax rates, but if you want to compare purchasing power, I believe that you need to incorporate the Fairtax pre-tax price/cost reductions, whatever you think they may be.
Last year I did a comparative analysis of both effective tax rates and purchasing power. Turns out that most senior retirees have equal or lower effective tax rates under current tax law, but everyone had greater purchasing power under the Fairtax. (I used a 12% pre-tax cost reduction which may be too generous according to Marvin’s analysis).
Hank,
You aren’t quibbling. I left those out intentionally.
While I personally believe we will see price reductions due to elimination of the embedded tax, arguing with those price reductions is not particularly persuasive to FairTax opponents because:
1) Different products and services have different embedded tax costs and different levels of competition and price stickiness. This makes it maddeningly hard to argue the issue in detail, and your results somewhat uncertain.
2) A lot of FairTax opponents have a bias towards believing that prices will not decline because evil corporations will just pocket the savings. Even the most fair minded I’ve dealt with still have this uncomfortable feeling in their gut that the embedded tax price reductions are all smoke and mirrors. They aren’t, but the lumpiness that results from 1) lends to that feeling.
Between these two, I just don’t find it particularly productive to include the embedded tax price reduction in most of my arguments. As it happens, generally I don’t have to, which speaks to the strength of the FairTax plan in general.
Quadrupole,
Well, you certainly have the right to avoid the price issue, and I understand your logic, although it is disappointing to see you, along with other advocates, avoiding the price issue as though it was the third rail of the Fairtax.
Look, this whole issue stems from the original misapplication of Jorgensons embedded costs study, and the erroneous marketing statements from Linder/Boortz and the AFFT organization to the effect that everyone will “keep all your pay and prices will remain about the same”. The free lunch scam! Fairtax advocates are still spouting that nonsense to the detriment of the overall Fairtax grass roots campaign.
After promising many of us for more than a year that the issue of prices would be addressed by the Kotlikoff/BHI study, it was very disappointing to read last September that they basically took a pass through the magic of “monetary accomodation”. Because HR25 lays a consumption tax on state and local governments, it would have been important to be able to understand just what the net cost impact would be. But, no such luck! Kotlikoff simply wrote that in the event state/local government revenue needs went up in order to pay the national sales tax, they could simply raise other taxes. But no estimate of what kind of tax increases might be necessary. Unacceptable!!
I find Marvin’s price analysis to be reasonable and in line with other estimates. For planning purposes, I’m perfectly willing to say that initially, prices will increase 15%-18% following a pretax decrease of 9%-11%. And until AFFT produces a more accurate analysis, that level of price increase with all the implications for the national economy will stand. I’m sorry, but IMHO, your perception of the strength of the Fairtax plan is somewhat of an illusion caused by an inability to tell the whole story.
Price is determined by supply and demand. What is the FairTax doing to change either?
Fred,
In a free and open market, price is indeed determined by supply and demand. No disagreement there. But when government policy gets injected into the equation, strange things happen, due to the law of unintended consequences perhaps?
The government policies contained in HR25 result in lower pretax costs, and higher net prices overall. Once the dust settles from the government interference, the law of supply and demand will be reasserted. But I still believe that the Fairtax will have a near term major impact on prices.
OK, but you aren’t removing the government from the equation, just rearranging the order of the factors.
If I own a business and am currently making a dollar profit for each widget I sell and I pay ~25% of that profit in income taxes — my real income is $0.75 per widget. Now replace the income tax with a NRST. I no longer pay 25% of my profits in income tax so can I reduce my price by $0.25? First, if people are paying the price I was asking before, why would I? Second, I can’t because I still have to pay taxes when I spend my $1 profit. I spend a dollar and pay $0.25 in NRST — my real income is still $0.75.
This also goes for the employer portion of Social Security. The employer isn’t paying it directly under the FairTax, but the employee is when he buys stuff. Unless the employer increases the employee’s nominal wages (although an economist would say the employer portion of SS was part of the employee’s nominal wages), the employee would see a real wage decrease.
As far as compliance costs, first, they are grossly exaggerated by opponents of the income tax. The methods used to determine these “costs” are laughably simplistic.
Second, they proponent of the FairTax always assume the compliance costs of the FairTax would be $0 or so insignificant as to no be worthy of mention. But it wouldn’t be insignificant. There would be very significant compliance costs — much more than the 0.25% they would receive for remitting the FairTax. Just think about the increase in credit card processing fees alone. These fees are a percentage of the transaction, if you are increasing the amount of the transaction by 20-30% you are talking some very large numbers in aggregate.
Third, compliance costs is not money burned — it’s money paid to an employee or another business. To reduce this “cost”, we must reduce our aggregate income. Someone might say we could put these people to more productive use, but then that wouldn’t be a “cost” savings, would it?
Product prices can not be ignored when asessing the impact of the Fair Tax. Both those costs that will reduce before tax prices to consumers and the net increases that will result when the Fair Tax is collected.
Throwing in the prebate and the indexing of social security makes it difficult to determine the net effect on individual people and business in the short term and more importantly in the longer term.
To properly evaluate the fair Tax requires an in-depth analysis of all the important effects on the total economy. The plan should not be judged based on isolated situations or the impact on single individuals or businesses.
The problem is that no one has presented this broad analysis. Kotlikoff and other economists have constructed models to cover the next 100 years. But, they seem to have ignored the effect on prices from reducing costs to business and from adding the Fair Tax. Economic growth resulting from the Fair Tax should not be ignored. The impact on U.S. jobs should not be brushed off. The balance of payments with other countries and our own budget deficit are factors that need to be considered. The Fair Tax issue is very complex and we are all trying to reduce it to one simple example that proves or disproves the overall validty of the program. Unfortunately, each of those examples presents only part of the picture and accurate conclusions can not be drawn.
We have shown that a rate of about 23% (tax inclusive) multiplied by the current relative consumption by individuals and governments will replace the same amount of revenue plus the prebate. Unfortunately, there hasn’t been an in-depth review of either cost savings or increased outlays that will impact government at all levels. This has to be done before the necessary Fair Tax rate can be determined. The 23% rate only replaces current revenues. It doesn’t consider the current or expected deficit from uncontrolled government spending.
Government savings will result from elimination of employer share of payroll taxes and from reduced costs of products and services consumed. Lower interest rates (if 25% reduction) would save at least $50 billion on interest at the federal level. Many questions have to be answered. Would rates fall 25% on government obligations. Would this cause foreign bond holders to reduce their holdings and move their investments to other countries? Would municipal bond rates fall? They are already exempt from taxes. Corporate rates would fall quickly to the extent that bonds can be called and refinanced. What per centage can be refinanced and how soon? Elimination of the IRS would eventually save $10 billion of The $13 billion. How soon would this occur? How much will added economic activity add to the government coffers. A 10% increase would add $230 billion from the Fair Tax.
Significant increased costs have to be considered. Indexing social security by 30% will cost an additional $163 billion; more if the Fair tax rate and the index is increased; about $5 billion for each per centage point above 23%. Of course this will put another $163 billion into the pockets of retirees. This will also spur the economy or pay for additional taxes. Will congress replace the earned income and child credits? How much do these expenditures now cost; $100 billion? Wont medicare, medicad, umemployment, disability and other programs increase by the net price increase in goods and services. A 17% price increase would cost maybe $130 billion on mandatory government spending.
State and local governments would also have huge savings from elimination of payroll taxes and price decreases. The Fair tax would of course cost state and local governemnts 17% more than today on consumption of items covered by the tax.
To top it all off individual tax payers would still hold the amount of Fair tax paid by governments; several hundred billions. The net revenue loss to state and local governemnts would have to be replaced by additional local/state taxes.
Until all of these interrelated complex issues are carefully analyzed, no one can draw meaningful conclusions about the Fair Tax. My gut feeling is that the overall impact will be very positive. But it is difficult to assess the effect on individuals until we know the answers to the above questions.
I am sure that many of the intelligent readers of this blog can add other significant items to this list of questions and hopefully provide at least soome of the answers.
Marvin,
Excellent post! In the few short months that you have involved yourself with the Fairtax, you certainly have achieved a good grasp of the not-so-obvious. I might add that Joshua is also to be credited for allowing the free exchange of ideas on his blog. Had you made comments such as these on other advocacy sites, you likely would have been banned for “inappropriate behavior”, as I was.
Other than the issues of evasion and the constitutionality of the federal government taxing state and local governments, your list of “unk-unk’s” is pretty complete. And I’m pessimistic about any economic think tanks ever being able to state with assurance the outlook for any of your issues.
All of which makes an excellent case for why I proposed “Fairtax-Lite”, particularly the five year implementation period rather than the “cold turkey” Fairtax proposal. There should be little question that the Congress will never adopt HR25 as written in view of all the unknowns you listed. But there may be a real opportunity to replace the IRS/IRC with a much simplified version introduced over a period of time.
It is my opinion that part of the reason these issues haven’t been addressed more openly is that Fair Tax leaders are afraid they will be accused of overstating the case with unprovable assertions.
Some if not all of these issues lend themselves to making reasonable predictions of what will happen. I don’t have all of the data that I would like to have. But, think these questions could be answered relatively easily by good economists who understand the effects of these types of changes. They should at least be able to give us good working estimates.
Kotlikoff and many others are very positive about the long term benefits of the Fair tax. It is more what happens in years one, two and three that have received little clarification.
Supporters fear that a phased introduction over several years would keep the income tax alive coexisting with the Fair Tax. Elimination of the current tax code might not happen. Compliance costs wouldn’t go away. Many of the benefits of the Fair Tax would be delayed several years.
Marvin, you wrote:”Supporters fear that a phased introduction over several years would keep the income tax alive coexisting with the Fair Tax. Elimination of the current tax code might not happen. Compliance costs wouldn’t go away. Many of the benefits of the Fair Tax would be delayed several years.”
Balderdash! The income tax has been around for 94 years. Is it so unthinkable that it might take five years to get rid of it? Someone needs to explain to me just what the paranoia is all about as to having income taxes and sales taxes at the same time. Turns out Canada has both, and their budget is balanced and the Canadian national debt should be extinguished in the next few years. As for delaying the so called benefits, I think a little patience would be smart in this case. Too many unknowns that may need legislative fixes as the transition period moves along.
I know you don’t agree, but to me, the choice is a phased introduction or no introduction at all!
Hank:
I am not saying that a phased introduction isn’t possible only providing some reasons why Fair Tax proponnents want a clean cutoff. Like any problem, solutions can be found if people work together.
For example, writing into HR 25 that payroll and corporate taxes along with estate taxes would be eliminated in year 1. Most business compliance costs would be eliminated. Competitiveness against foreign producers would be enhanced. This would provide the 10% price reductions on all products and services and only require a fair tax rate of about 1/3 of the rate for full implementation. Transition inventory would be only 1/3 of the problem. Don’t think that would bring the $13 trillion rushing home that is now stashed overseas but may result in return of a chunk of it. The prebate would only be 1/3 the size in the first year and the net impact on government entities may be very little.
For political reasons, it would be hard to sell because most people don’t understand that business don’t pay any taxes today. They think they are reducing personal taxes by taxing business. Perhaps, the deduction rate could be raised at the same time to exempt more low income people from income taxes without costing too much revenue and increasing the fair Tax rate.
Year two could eliminate the employee share of payroll taxes and end
payroll withholding. Another jump in the standard deduction would eliminate more people from the income tax. Year three would eliminate the total income tax and end the IRS by year 4.
If something like this was written into the law, phase in over three years might be possible. I wouldn’t want it to be any longer than that and would want to be certain the income tax and the IRS had a death sentence with a definite execution date.
Paranoia comes from a distrust of politicians and their abysmal track record for keeping promises. The income tax is bad for America and unfair. People should pay their pro rata share of taxes based on what they consume not on what they produce.
I still think a clean cutoff would be best if all details can be worked out. But I could live with a three year phase in if the details were spelled out clearly and written into law.
I am against allowing the income tax to live indefinitely for the same reason that I oppose the Flat Tax. The system is in place to start the exemption, increase the base, increase rates cycle that got us where we are today. We would soon have both a sales tax and a cumbersome income tax with the government taking an even bigger share of peoples money.
Joshua
We seem to have hijacked an important thread on renting. Perhaps the last half dozen posts could be put into a separate category. Sorry for being part of the inadvertent hijacking.
I couldn’t understand some parts of this article Treatment of Renting vs. Home Buying :: The Fair Tax Blog, but I guess I just need to check some more resources regarding this, because it sounds interesting.