The Fair Tax Act of 2005, Part XV
I am hoping this next section will generate some more comments, as it affects everyone and for some, is one of the most controversial segments of the bill, the Family Consumption Allowance.
`SEC. 301. FAMILY CONSUMPTION ALLOWANCE.
`Each qualified family shall be eligible to receive a sales tax rebate each month. The sales tax rebate shall be in an amount equal to the product of–
`(1) the rate of tax imposed by section 101, and
`(2) the monthly poverty level.
This is the basic definition of the size of the prebate. The rest of the section goes into more detail:
`SEC. 302. QUALIFIED FAMILY.
`(a) General Rule- For purposes of this chapter, the term `qualified family’ shall mean 1 or more family members sharing a common residence. All family members sharing a common residence shall be considered as part of 1 qualified family.
`(b) Family Size Determination-
`(1) IN GENERAL- To determine the size of a qualified family for purposes of this chapter, family members shall mean–
`(A) an individual,
`(B) the individual’s spouse,
`(C) all lineal ancestors and descendants of said individual (and such individual’s spouse),
`(D) all legally adopted children of such individual (and such individual’s spouse), and
`(E) all children under legal guardianship of such individual (or such individual’s spouse).
`(2) IDENTIFICATION REQUIREMENTS- In order for a person to be counted as a member of the family for purposes of determining the size of the qualified family, such person must–
`(A) have a bona fide Social Security number; and
`(B) be a lawful resident of the United States.
This bit defines the term qualified family. The only real requirement to receive the prebate is to have a Social Security Number and to be lawfully residing in the USA. This section continues later!
This has some very interesting implications with regards to illegal immigration. Not only does it force compliance on illegal immigrants by making under-the-table income moot for tax purposes, but it also excludes them from receiving the prebate, providing a disincentive to come to the US illegally in the first place.
Perhaps this is not as much a disincentive to come to the US illegally so much as an incentive to try to get legal (to get the money).
Many illegal immigrants (particularly Mexicans) are already so much better off simply by working in America, that the tax advantage of being legal will be something they will likely be able to do without until such time as they have put together the money and arrange for an employer to begin the legal naturalization process (which can be significantly difficult in terms of time and money).
However, I think that ‘going legit’ will be much more attractive with the prebate system in place. Without being green card holders, they would be very heavily taxed at retail (especially since many would be low-income families) with no relief. Most people become quickly aware of any financial assistance available to them, and are generally quick to take advantage.
I was going to wait until the whole bill had been reviewed, but this discussion of the prebate raises serious issues, so now is as good a time as any, I guess.
We all agree that the prebate is an essential part of the Fairtax plan. No question that without the progressive aspects of the prebate, the concept would die. But, IMHO, there is a train wreck in our future and the prebate is going to cause the wreck to happen sooner rather than later.
First, lets get past the terminology issue. Federal spending is basically split into two buckets–entitlements and discretionary spending, with the discretionary spending usually talked about as defense and non defense. Discretionary spending must be voted on each year as part of the annual appropriations cycle. Entitlements are voted on once and are left in force until the enabling law is changed or repealed, the latter a very difficult political proposition. (Clinton’s health care, Bush’s Social security among recent such failures).
The prebate is an entitlement, or will be if HR25 becomes law. I know many of you would rather call the prebate just an advance rebate of taxes paid, but it doesn’t matter, it’s still an entitlement. Every family unit is “entitled” to the monthly payment as long as they register.
In 2006, with a GDP of $13 trillion and a federal budget of $2.379 trillion, entitlements consumed 59% of the federal budget ($1.4 trillion) according to the CBO. By 2016, entitlements will increase to 66% of the budget due to inflation, demographics, and rising health care costs. The remaining 34% is certainly not enough to fund discretionary spending, and the options seem to be; (1) curtail discretionary spending; (2) raise taxes; (3) increase the national debt; and (4) reform entitlements. All tough choices, but the most likely seems to be #4 according to economic experts.
Now along come the Fairtax advocates who propose to immediately increase entitlements by 40%. This means that entitlements would have consumed more of the budget in 2006 than was originally forecast for 2016. In other words, the train wreck would have arrived ten years earlier. Now perhaps the more strident Libertarians amongst you see that as a solution to big government, but surely there must be a better way to solve our national budget dilemma.
My opinion is that the Fairtax addresses the wrong problem, with unfortunate unintended consequences. How revenue is extracted from our citizens is not nearly as important as how the revenue is spent! Despite all the good news about employment, the stock market, etc., we are on an unsustainable economic course and we need our elected officials to get serious about it. If not, our grandchildren will always wonder why we left them such a mess as they cope with national bankruptcy.
Happy New Year!
Hank, I respectfully disagree with you about the prebate being an entitlement.
If the prebate was essentially going to be a brand-new way to spend money, and not a net part of taxes that needed to be there, then it might be considered an entitlement.
For example, no one assumes today that the EIC, Child credit, or other forms of tax-system based welfare are in the federal budget under ’spending for entitlements’. They have no departments, they have no administration other than the IRS. But they are in point of fact, a form of welfare, and a much greater one than the prebate idea. They can provide several thousand free dollars a year to poor families with several children that live on the welfare available to them.
But we don’t consider all those tax credits and refunds entitlements do we? They are tax credits and refunds.
I might also accept the idea of the prebate as an entitlement if one could convince me that a significant number of people would not end up spending back the prebate as tax money later. It’s simply not that much money. It is only 23% of poverty level spending, and that’s a pretty small figure. As tax credits (which this essentially is) go, it’s pretty small, smaller than your standard exemption for example.
Ultimately the number of people who will be able to have a negative tax rate under the plan should be very small, and the amount of negative tax should also be very small. $9800 is simply almost not enough to live on for one person, period. When I was 19 and living at this level, my only real way to make ends meet was eating at my mom’s house when I ran out of cash. I certainly consumed every dollar I earned until I got a better job, and I don’t think too many other folks at this level would be much different. Certainly $2254 isn’t enough to even look like welfare
Now REAL entitlements are when we tax everyone and provide a government sponsored benefit for something beyond a person’s means. That’s retirement via Social Security, medical insurance via Medicare, and other social welfare programs like unemeployment and housing projects. These programs provide no benefit to nearly anyone paying for the bulk of them, only to a few. Tax credits and refunds today work similarly, giving many poor families with little or no tax burden credited or free money to spend as a sort of annual bonus.
The FairTax prebate simply isn’t like that. Virtually every dollar of that prebate will go right back to the Fed every year, without exception. The end result is the progressive effective tax rate system everyone seems to think must exist for any real tax reform to happen.
Now for a more accurate idea of how the FairTax compares to current entitlement spending under your definition of it, we would have to include all tax credits and rebates today as ‘entitlements’ and increase the Federal budget to include them (more than $750 billion as I recall). That’s $750 billion that the government ‘gives back’ for being poor, for having kids, for owning a home, for losses in investment, or what have you. And it’s probably only a fraction of what the government probably is SUPPOSED to be giving back, since the system is so complicated that most cannot fully take advantage of it, particularly as it relates to mortgage interest deductions.
Then compare that with the ‘prebate’ idea which costs about $450-500 billion. Well now that’s starting to look like a $250 billion dollar reduction in entitlement spending to me!
Another way to think about it is this:
Today’s tax system almost always takes too much, and places the burden on the citizen to claim back what he overpaid. In essence, it errs on the side of the government in virtually every case.
What we propose with the FairTax is a system where the government gives back money ahead of time in a fixed amount and schedule, and you pay that back (and generally much more) as you spend over the months. This system errs on the side of the citizen.
As a libertarian, which would you prefer?
In any case, the amount of error (the money overpaid one way or the other) should be far less with the FairTax, another thing I prefer.
It’s also important to think about the implications of the way the prebate is structured on people’s behaviors. I predict for example that there will be zero non-spouse adult dependents very shortly after the passage of the FairTax. Why? Because a head of household (and the spouse of a head of household) are worth about $2000 in prebate a year, while dependents are worth about $700 in prebate a year. Children pretty much have to be a dependent of *someone*, but adults don’t, and I predict that most will simply report as a separate household, even if they cohabitate with others.
James,
With equal respect I draw your attention to the Senate definition of current entitlements.
“ENTITLEMENT SPENDING refers to funds for programs like Medicare/Medicaid, Social Security, & veterans’ benefits. Funding levels are automatically set by the number of eligible recipients, not at the discretion of Congress. Each person eligible for benefits by law receives them unless Congress changes the eligibility criteria. Entitlement payments represent the largest portion of the federal budget. ”
It seems to me that the prebate will be added to this list if HR25 passes. Again, there are only two general catagories of federal spending (in addition to interest), and there is nothing discretionary about the prebate. You get it under the law, it rises each year with inflation, and it will greatly exacerbate the split between discretionary and mandatory spending, leading to an economic catastrophe in the next ten years or so.
As for this quote of yours, I don’t agree at all.
“Today’s tax system almost always takes too much, and places the burden on the citizen to claim back what he overpaid. In essence, it errs on the side of the government in virtually every case.”
I don’t know about you, but anyone who over withholds as you suggest, is either very foolish or is the sort that needs to rely on a forced savings method. Giving the government an interest free loan by over withholding isn’t very smart IMHO. There is no penalty as long as your withholding is at least 90% of your taxes owed, and I’d rather pay the additional 10% on April 15th and have the use of the money in the meanwhile. I just don’t believe your statement is correct, but if it is, shame on all of you! Go revise your W-4 immediately, do not pass go, and do collect $200 (at least).