Exciting News from Rep. John Linder
Below is a letter I received today from John Linder’s e-mail distribution list.
With so much happening on Capitol Hill during the change from Republican to Democrat control, I have not had an opportunity to update you on the status of the FairTax. I have heard from many of you who fear that the change in power on Capitol Hill has doomed the FairTax, but I am writing to tell you that nothing could be further from the truth.
A decisive election like the one last November has an uncanny way of focusing politicians on the real reasons that their constituents sent them to Washington . Given the broad nationwide support of the voters for the FairTax, this refocusing is very good news for the FairTax cause.
The opportunity for FairTax this year was obvious on the very first day of this 110th Congress. I reintroduced H.R. 25 on that day, and I did it with more than twice as many original cosponsors than we had for its introduction in the last Congress. Even more exciting, I was able to introduce the FairTax as a bipartisan bill for the first time since 2003. Congressman Dan Boren, a Democrat from Oklahoma , joined me and 23 other colleagues from 11 different states to reintroduce the bill on January 4, 2007. Never before has the FairTax been reintroduced with such broad support.
This record-setting first day of the 110th Congress was only the beginning. Today, just over one month into this Congress, the FairTax and its supporters have amassed an extraordinary 52 cosponsors from 24 states. To put this accomplishment in perspective, in the 107th Congress, we never came anywhere close to this number; in the 108th Congress, we only barely achieved it after two full years; and in the last Congress, the 109th, the FairTax reached 52 cosponsors only after 15 months of hard work by volunteers across the country. As of today in the 110th Congress, the FairTax has garnered this level of support after just one month. Friends, I am under no illusion that we will continue to double the number of Congressional FairTax cosponsors every 30 days, but I am certain that this record-breaking start will produce more broken records and surpassed milestones for the FairTax as we move forward.
As you celebrate these early successes with me, I encourage you to make particular note of the FairTax cosponsors who have never before cosponsored the legislation. Among these names are freshmen Congressmen Timothy Walberg from Michigan and David Davis from Tennessee and veteran Congressmen Dave Weldon of Florida and Ed Whitfield of Kentucky . Another new name on the FairTax that I know you will want to notice is long-time supporter but first-time cosponsor, former Speaker of the House, Dennis Hastert.
Of course, the success we are seeing on Capitol Hill is simply a reflection of the enthusiasm for the FairTax that is growing across the entire nation. Hundreds of thousands of people have joined together with Americans for Fair Taxation to promote the FairTax. Newspaper articles and editorials are being written almost daily to help educate people on the many benefits of the FairTax, and FairTax rallies are being attended by thousands of people. I want to continue to participate in these exciting FairTax events, and I hope that you will join me at one of them.
The FairTax will be the next grassroots revolution, but the FairTax is a huge idea that will take a great deal of passion to enact. I encourage you to get out there and support the FairTax by telling your friends and neighbors. Everyone knows that the income tax code is complicated and oppressive, but not everyone knows that the FairTax will free them from this intrusive burden. One-by-one, we will win their hearts and minds.
Congratulations to you and all other FairTax supporters on the incredible success that we have seen so far this year. Together, if we remain firm in our commitment and dedication to the cause, we will make the FairTax a reality.
My best,
John Linder
This is great news. My question, though, is whether Charlie Rangel will let the FairTax get out of committee or even bother to schedule it for markup or an informational meeting.
Good to hear that momentum is still building.
Momentum is in the eyes of the beholder. Getting 10% of the members of the House to cosponsor anti IRS legislation is no big trick. We all hate the tax collector! The problem with this grass roots effort is that it doesn’t seem to be aimed at the right members of Congress. As we all know HR25 must first be examined by the Revenue subcommittee of the W&M Committee. And of the 13 members of the Revenue subcommittee, only one- Linder, -supports HR25. And on the full 41 member committee, only two are supporters, Linder and Brady, both minority members. There is absolutely no momentum within the committee to even have a hearing on the legislation.
It’s also not clear to me why anyone thinks Charlie Rangel might take up HR25 when the legislation completely untaxes businesses and reduces the tax burden on the wealthy. That just doesn’t fit in with the liberal philosophy on the Hill. Furthermore, Congress is basically conservative in that the members prefer evolutionary change over revolutionary changes such as the Fairtax. Call it tinkering at the margins if you wish, but that’s how the system works. In the spirit of cooperation, I once proposed a phased approach to shifting to a consumption tax, but was shouted down by all the revolutionaries who seemed to want instant gratification. Never happen!
It is also possible that we are working the wrong problem? It really doesn’t make much difference how revenue is collected. The problem is how and how much of the revenue is spent by our national government. There is an economic train wreck coming, and what is really needed is a plan to balance the budget, pay down the national debt, and restore some sort of order to our financial affairs. For a variety of reasons, I just don’t believe that HR25 will accomplish those goals. I’d prefer to see a balanced budget amendment, term limits, and reducing the size of the federal government by giving back to the states some of the functions currently performed by the Feds.
Stay tuned.
This is good news.
The biggest problem I run into when explaining the Fair Tax Act is that people automatically look at it through income tax rules.
Perhaps this will help.
The Fair Tax and the Income have the same goals. Fund the government’s needs in the most fair and efficient manner. Soccer and Hockey have the same goals, get the object of play in the opponents net but you can not officiate a Soccer game using Hockey rules.
Likewise you can not evaluate a consumption tax using income tax rules
Now how do we get John Lewis off the House Ways and Means committee or out of Congress all together? Every letter to him is answered with the same canned dribble form letter of objections to the Fair Tax Act.
Ashford Schwall
I wish everyone one adopt my view of the Fair Tax. IT DOES NOT “UNTAX” CORPORATIONS AND THE WEALTHY, as Van Geison suggests above. It removes the special provisions of the Internal Revenue Code for which wealthy individuals and corporations paid lobbyist and legislators to write into that code and the regulations accompanying it. The code is huge because the numbers of special provisions are huge.
If ever the FAir Tax is to gain traction, the common taxpaying public must be arroused by the grossly UNFAIR INTERNAL REVENUE CODE. We have been promised by presidents and congresses for generations that the “code” will be simplified. It becomes more complicated and confusing with each simplification. It cannot be “fixed.” The enemies of the Fair Tax are the enemies of the common taxpaying citizen. To defeat that army, all common citizens must band together demanding the Fair Tax from our legislators, or we’ll elect someone who will listen.
My goodness, Howard, take a deep breath and reread my previous post. HR25 completely untaxes all businesses–that is an unarguable fact. And, if you had done your homework, you would also understand that the tax burden on the wealthy is significantly lower under HR25.
I’d be happy to send anyone a brief study I did using the 2005 IRS software and the Fairtax calculation worksheet provided by the AFFT Director of Research. After determining the effective tax rates for various family units with different incomes, I can assure you of two things. (1) At incomes below $60-80,000, effective tax rates for retirees are lower under current law; and (2) effective tax rates are significantly lower for the wealthy under HR25. I repeat—HR25 untaxes corporations (businesses) and reduces the tax burden on the wealthy. And Charlie isn’t about to buy it!
As for “arousing the common taxpaying public by the grossly unfair IRC”, I’m not sure just who you are talking about. Over half of the common public don’t pay any income taxes at all. And most of the rest file either 1040EZ or a standard 1040 with standard deductions and exemptions. My personal (retired) income tax effective rate is around 10% and it takes about 30 minutes to file the return. What’s to complain about? I could be wrong, but most of the Fairtax advocates seem to be young folks with incomes under $60,000 who pay little or no income tax. The real villain is the payroll tax, the most regressive tax ever invented. You want to help the lower income folks—get rid of the payroll tax!!
Call me the “enemy” if you wish. I’ve been shot at and missed in two wars protecting your right to do so. But I’d urge you to put down that cup of Kool-aide and do your homework. As Boortz wrote, don’t believe what you hear or read, do your homework and make up your own mind!
Good luck!
Hank, if your largest concern is government spending, I would point you to http://www.cagw.org where they watchdog Congressional spending to no end. Have a look!
James,
I’ve been a regular reader of CAGW stuff for some time. And yes, I do believe the problem is spending, not revenue collection. It’s kind of scary but I think that puts me in Dr No’s camp??
Think about this. When George Washington convened the first cabinet meeting, there were five (maybe seven) people in the room. The cabinet consisted of the President, VP, and Secretaries of State, Treasury, and War. The two extra guys might have been the Attorney General and the Postmaster General. At that time, Washington, Adams, Jefferson, Hamilton, and Knox were essentially the federal government. Contrast that with the Bush Cabinet of 15 Secretaries, and countless independent agencies which all impact our daily lives. It boggles the mind.
Thanks for your kind support on the Fairtaxgroups site. I know we don’t always agree an a lot of things, but you are always courteous and willing to listen to opposing points of view. I’ve always said that I’ve never learned anything while talking!?
By the way, not to quibble, but in Florida, sales taxes generate 83% of our state’s revenue. Sounds like a majority to me?
Well to be fair, Florida is the exception and not the rule, being a state with no income tax if I am correct. Only a handful of states do that. The other 45 or so do not.
Well, I’m glad to see that Van is still alive, kicking and fighting the good fight! Since he and I were both banned on fairtaxgroups.com (and all of our posts deleted) this is probably the only place to have a civil discussion.
But I do disagree with my friend Van on one point, that the FairTax untaxes businesses. Before I prove why, however, let me present a hypothetical tax to be introduced by Hillary Clinton, who, I’ll just guess, most FairTax supporters can’t stand. Let’s call it the Hillary Tax.
Under the Hillary Tax, individuals will no longer pay any taxes whatsoever. All income taxes, payroll taxes, capital gains taxes and, for good measure, all estate taxes will be permanently done away with.
Only the evil corporations will pay taxes from now on. But, since we all know that corporations lie and cheat on their tax returns, we’ll do away with corporate income taxes. Instead, corporations will need to pay taxes on 23% of their revenues. Doesn’t matter whether they make a profit or not, 23% of their revenue comes right off the top to pay to Uncle Sam. And only revenue from individuals and goverment purchases are taxed. Business-to-business sales are exempt, since we all know businesses are in cohoots and will fudge these numbers anyway.
Now, some folks might think that corporations will just raise their prices or lower salaries to their employees to pay the 23%, but part of Hillary Tax will be a stipulation that businesses cannot raise their prices and can’t cut their employees’ wages either. Nor are they allowed to go out of business because otherwise the Hillary Tax might not be revenue neutral with our current system.
Now, just how different is the Hillary Tax to the FairTax? It’s the same thing! The only difference is that the FairTax proponents claim that economic forces (the elimination of the “embedded taxes”) rather than government mandates will keep prices level and keep wages high. They also claim that the US will become a haven for new businesses.
If Hillary proposed this, she’d be hooted out of office as being “anti-business” by the same folks who are so enamored by the FairTax. But when self-proclaimed libertarians propose the same thing, people jump on the bandwagon.
I must be missing something. I’m sure Joshua will re-educate me.
Hi “H”,
Glad to hear that Atlanta is still being served by one of the foremost legal minds!!? And you are absolutelu correct that this blog is gaining interest and respect, in part due to the fact that legitimate, polite dissent is allowed.
But with all due respect, I don’t get it. You said that you disagree with me that HR25 “untaxes businesses”, and you would prove it.
What follows is entertaining, but after reading about your “Hillary Tax” several times, I’m left wondering what the proof is?
If it’s true that businesses will somehow pay the Fairtax, then all of my research must be for naught? In case Josh doesn’t get it either, maybe an explanation using words of one syllable or less would help us?
Cheers!!
Hank
What Hayden is illustrating is actually very different from the FairTax in many ways.
He is essentially describing a gross receipts tax, which most economists describe as being draconian and ruthlessly efficient at bringing in money for governments. However, since it is not tied to profits or some other sane business measure, can actually destroy a business outright in any bad business year. It also means startup strategies of operating at a loss are even more difficult because their loss is greatly exaggerated.
Hayden then makes it even more draconian than a real gross receipts tax, by adding stipulations that are frankly, a bit ridiculous. Businesses can’t raise prices, and can’t lower wages, so they have to simply ‘figure out’ how to cope with 23% less profit.
Nor are they allowed to go out of business? This would simply not be feasible. If a business fails, it fails. You can’t simply tell a business it must stay in existence for perpetuity just to fund the government.
How is this the same as the FairTax? Are you basically saying that since there is a tax on what consumers buy it is essentially a tax on business? Do you really believe that businesses don’t or can’t pass on some or all costs of doing business as price?
Now on the other hand, if you are saying that the fictional ‘Hillary Tax’ would essentially tax consumption BY taxing business, then we can say something. Libertarians and conservatives dislike the liberal notion of taxing business on 2 levels.
1. While businesses pass off most costs of taxes to consumers, they often can’t get rid of them all. But even when they can, excessive taxes shrink markets, which damages the economy. Taxing business directly with no form of relief (at least with the FairTax individuals get income tax relief at the same time the consumption tax goes in) hurts the marketplace, which hurts all of us.
2. Liberal taxes tend to target business, under a false pretense. It is easier to convince people a tax is necessary if they don’t believe it affects them. If Hillary wants to tax Starbucks, why should I care? But I should care, if I like to get my coffee at Starbucks anyway. When people say they want to tax business, it’s a deceit. They really want to tax everybody, and they are, they just lie about it. With the FairTax, at least we are honest about it.
First, let me stipulate that Van and James are far more informed and thoughtful than the average Joe who hears about the FairTax from the radio, so I willfully accept your polite smackdowns. But, naturally, being a lawyer I just can’t shut up, so let me respond.
1. Van. You are right that I left off my “proof” about the FairTax being a tax on businesses. Ooops. But the point of my Hillary Tax argument is that since the FairTax is actually collected and remitted by the busineses that sell their goods and services to the the consumer, a liberal, commie, pinko socialist-type (like me) could argue that the FairTax is actually a tax on businesses, which would then anger the facist, conservative, libertarian-types (like Joshua and James) to no end.
2. James. I believe that the FairTax is very much analogous to a gross receipts tax, except that it only applies to purchases from consumers and government entities. There is no exception for start-ups or businesses that operate at a loss due to cyclical or other reasons. If a start-up operates at a loss, it still must pay 23% of its sales directly to the government.
My argument that the Hillary Tax would prohibit companies from going out of business, laying off workers or raising prices was meant to be a sarcastic reference to the vocal FairTax proponents that tend to claim that the FairTax will produce an economic miracle for consumers, businesses and taxpayers in which there will be no losers, only winners. Folks like you and Van might understand that prices would need to rise, wages would need to be cut, and many businesses would fold under the FairTax, but you will never hear any of that admitted from the most vocal of the FairTax proponents, including, I’m afraid, Rep. Linder, who routinely asserts just the opposite.
I guess my point is that there are many folks out there that believe that the FairTax must be this wonderful idea because it is being promoted by conservative “libertarians,” and thus thus they don’t really examine it to the same degree that they would if a similar plan were promoted by a “liberal.” All tax reform plans will have plusses and minuses, winners and losers, good points and bad points. And they will all produce a lot of pain to those whose feathers are plucked (just as our current system does). Unfortunately, many vocal proponents of the FairTax try to disguise it’s shortcomings, and ban folks like Van and I when we try to point some of those shortcomings out.
Well I doubt too many businesses would fold, since there is sufficient relief to the consumer that there should be no catastrophic effects on businesses, who would have far greater opportunity than ever before to make their pricing competitive should they wish, and the ability to hire people for moderately lower wages without having to cut pay at all.
Prices would also need to rise, this is true, but it is mitigated by relief to business and the consumer of all income taxation. So while for many it might be a small tax cut, for others it might be a slight increase, but for no one should it be a tremendous burden, unless they were gaming themselves pretty far out of the income tax game to begin with.
But I digress. I think being libertarian is kind of a strike against us, politically. We like it to be sure, but very few people in America identify themselves as libertarian or even know what libertarian means. Most people I have spoken to also are very suspicious of the FairTax on the first bounce. I think they generally believe that any tax proposal is usually a proposal to personally screw them if they aren’t careful, which makes me lose confidence that real fundamental tax reform will ever happen. “It’s the devil you know or the devil you don’t” is a prevailing attitude amongst many in the public.
I also don’t think many FairTaxers are really libertarians. They are often just anti-government or anti-tax types, or more likely one variety of conservative or another. There’s just a lot more of them than there are of us.
Hayden, O.K., I think I’ve got it! Light just dawned on marblehead! I guess as a conservative Republican with a military background, I still have a lot to learn about liberals, Libertarians, socialists, commie’s, facists and yes, even lawyers? I also sense that there is a fine differentiation between sarcasm, humor, and fact.
I guess we’ve gotten pretty far afield from the original post, and it’s largely my fault. So, is John Linders optimism justified? I don’t think so, but only time will tell.
After reading what I just wrote I don’t know if I was clear. Here’s what I meant:
If you think that applying the ‘libertarian’ label to the FairTax provides some kind of ‘halo’ effect for the legislation, I think you’re wrong, simply because most people don’t have much idea what libertarianism is all about, nor is the FairTax really the ideal libertarian measure. So for libs and cons, the FairTax doesn’t come straight from either of their camps, so they distrust it on instinct. And even for libertarians, we have to point out that it is not the ideal libertarian system, so not all libertarians are sold on it either.
I want to return to the thought of a type of class war between those who pay taxes today and those don’t. Contrary to Van Gieson’s comment #6, every LEGAL WORKER in the U. S. pays social security taxes on the first dollar he earns until his wage reaches astronomical numbers for a common laborer. Van Gieson files a short form return as a tax paying retiree, dutifully paying his income taxes.
In the Wall Street Journal Feb. 15, 2007 is the report of a settlement by Merck to pay $2.3 BILLION in acknowledgement of the illegality of their sham corporation established in Bermuda in 1993 to avoid U. S. income tax payments. This is not a record amount, even for the drug trade. GlaxoSmith-Kline, a Brit drug corp, recently agreed to a $3.4 BILLION settlement of income tax liabilities. These are the tip of the iceberg of tax manipulation claimed to be legal tax avoidances under the existing Internal Revenue Code by proper U. S. taxpayers. These are BILLIONS OF DOLLARS OF income tax that should not have been received by the Treasury according to these TWO corporations.
The simple fact is those taxpayers with the wealth and income to justify the expense will find ways to avoid paying income taxes under the existing code. Whether or not he wishes to acknoledge it, Van Gieson gets screwed every time he files that short form. I am retired and file a long form, knowing I’m getting screwed. The painter’s helper that just finished painting my house may work only a few months, but he pays about 15% (7.6 for him and 7.6 for his employer) in direct taxes and a substantial amount in hidden Federal taxes in every item he purchases. None of these taxes would be due under the Fair Tax.
All three of us would receive a monthly “prefund” check for an amount supposedly equal to the federal sales taxes paid on a poverty level spending existence for our household. That painter’s helper may well come out net dollars ahead. I will feel so much better paying my sales taxes knowing I am not carrying the load for all those wealthy tax cheats. I can’t believe anyone would object to nailing these guys.
Howard
Hank,
I’m a bit confused about your conclusion on (1) At incomes below $60-80,000, effective tax rates for retirees are lower under current law; and (2) effective tax rates are significantly lower for the wealthy under HR25.
(1) This contradicts research and tax base logic. Laurence Kotlikoff & David Rapson’s research titled “Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation” show that the most significant benifactors of the FairTax are retired seniors. With the rebate and SS benefits indexed to inflation, they make out great. The FairTax would apply to a base of $8.638 trillion, more than double current taxable income ($4.202 trillion). For that reason, the average marginal rate under the FairTax would be, by definition, significantly lower than current law.
(2) The research stated above does show that rates decrease for high income groups as well. However, Kotlikoff has stated that the FairTax generates a goodly portion of its revenues by effectively taxing wealth. See the WSJ article “The Case for the FairTax”. “When people spend their wages or their assets on goods and services, they pay sales taxes, meaning they end up with less to consume. This is no different from having the wages and wealth directly taxed, but facing no sales tax. But what about saving one’s wages and wealth and spending these funds plus accumulated interest in the future? Doesn’t this avoid the consumption tax? No. You end up paying consumption taxes not just on the original sums, but also on the accumulated interest. The same holds if you save your wages and wealth and give it to your kids. When they spend it, they pay consumption taxes on both P&I. In present value it’s the same as taxing the wages and wealth immediately. Thus a retail sales tax, with its effective wealth tax component, is highly progressive compared, for example, to taxing just wages.”
Follow up to my last post - Kotlikoff’s research for (1) shows
Seinor (60 years) - (c) = Current tax system (ft) = FairTax
Married - $50,000 (c) 14.2% (ft) 1.4%
Married - $70,000 (c) 17.0% (ft) 2.2%
Single - $50,000 (c) 21.5% (ft) 3.9%
Single - $100,000 (c) 32.1% (ft) 9.2%
In another research paper, “Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax” by Laurence Kotlikoff & Sabine Jokisch
The FairTax rewards low-income households with 26.7 percent more purchasing power, middle-income households with 10.9 percent more purchasing power, and high-income households with 4.7 percent more purchasing power.
Morphh,
I was trained in economics at the University of Nebraska by a professor who claimed to be the last of the “economic philosophers”! He had no use for scientific approaches to economic theory, and is probably turning over in his grave at the idea of betting the economic future of our country on an economic model called ESP! Perhaps that is why I have a healthy skepticism when I read all of Larry Kotlikoff’s stuff. Economic models, like meteorological models, are not always right.
I have read and reread all of the research papers you mentioned, and had exchanged emails on the subject with Larry and Karen Walby last Fall when the studies were published. I can only tell you what I told them. Dynamic models such as ESP are interesting, but they are only as good as the input data. I’m not smart enough to argue details with the professors, so will stipulate that their data is probably O.K. I also feel that writing about “marginal effective tax rates” and “marginal savings rates”, while favorite tools of economists, would put Joe 6-pack to sleep. Most folks simply want to know which system costs them the least–today–not over a lifetime.
I am smart enough to take a static look backward at what would have been the effective tax rates on various family units with different income levels in 2005 for both the income tax and the Fairtax. I earnestly ask you to simply email me a request to review my analysis and I will get it to you immediately, and also assure you that no additional unsolicited email traffic will ever occur.
If my approach to calculating effective tax rates is correct, then I feel safe in saying that the effective tax rates for most retirees would have been lower under current law. It seems to me that in this case, both Larry and I may be right. He maintains that his ESP model shows that lifetime effective tax rates will be lower under the Fairtax, and I’m simply saying that that wouldn’t have been the case in 2005.
As for purchasing power, no argument there. In general, purchasing power is greater under the Fairtax for everyone–provided the rate is really 23% and pretax prices really do fall. By the way, I was also taught that “prices are sticky downward”! Stay tuned!
With all due respect to Dr. Kotlikoff, who is a great guy and far smarter than I am, I’m a little skeptical of “lifetime” rates. It reminds me of what John Keynes was supposed to have said in a response to long-term econonic predictions: “In the long term, we’re all dead.”
Similarly, the idea that we could even begin to measure tax rates over a lifetime under a proposed tax system seems to strech plausibility. We all know that (rightly or wrongly) politics responds to immediate effects. Under the FairTax, those who see their immediate tax rates go up are going to scream bloody murder, even if their “lifetime” tax rates (or those of their children) would theoretically fall sometime in the distant future. As I don’t think there can be any reasonable doubt that the immediate effect of the FairTax would be to raise the tax rate on the middle class and on current retirees, they will be the ones screaming the loudest to repeal the system.
I just don’t see it - with a doubling of the tax base, marginal rates can only go down. While Joe 6-pack doesn’t care about marginal rates, it greatly affects his effective rate. Also, how could you have a higher tax burden with more purchasing power? It just doesn’t make sense unless your minimizing the current tax burden (which is easy to do since they’ve made the system an art of hiding taxes). Due to the base, we should be close effectively cutting the marginal rate in half. Even in a cross-section time frame, the tax burden should decreased across the board. The lifetime tax rates help cover the aspect of savings spent at some point in the future for the wealthy. This is probably where you base the statement that the wealthy get a huge benefit. When you only examine a year time frame and they save 30% of their income, it tends to show lower rates. Such a time frame does not take into account the spending of savings plus interest in the future. Of course, this is all static analysis, which is completely unrealistic.
Retirees - the rebates would supplement accrued savings, covering taxes up to the poverty level. The income taxes on capital gains, social security and pension benefits would be eliminated. Social Security benefits are adjusted for changes in the price level, so a percentage increase in prices would result in an equal percentage increase to Social Security income. Also, how long is a lifetime tax rate on a Senior (60) under the FairTax? You suggest that they would pay more immediately but some how in a 15 year period this average remaining lifetime tax rate falls from 9.8 percent to -28.0 percent on a single 60-year-old earning $15,000 a year.
No, Morphh,
I said that most retirees (not seniors) would have higher effective tax rates under HR25, and I included the prebate in my analysis. This is primarily due to the fact that workers pay the 7.65% FICA tax whereas retirees don’t under current law. Darned if I know how the ESP model is able to show lifetime effective tax rates which are so much lower. Makes no sense to me, but I’m not the one loading the assumptions into the model. Maybe you could explain it to me?
Haha - good point
I’m not so optimistic that I think everyone’s burden would decrease. I expect retirees or anyone with wealth (but low income) will see an increase but this is by design. I did see a number that reflected middle class retirees with certain retirement plans would see a small increase but the increase and group size was so small that it wasn’t really worth noting. No system is perfect but what we have now is just insane for the future growth and finance of the country.
I confess I haven’t really thought about any of this stuff for quite some time, so I apologize if I’m not up the the most current research. Also, I fully recognize that my friend Morph thinks through this stuff to a far greater extent than either most supporters or most detractors do. But we have cheerfully agreed to disagree.
At the risk of rehashing some old arguments, however, here’s a couple of quick points.
1. How can the FairTax increase the tax burden on the wealthy when it would eliminate the estate tax? If I were going to inherit $10 million, I know I’d be jumping for joy if the estate tax were eliminated, even if Kotlikoff’s model shows my lifetime marginal tax rate would increase.
2. Upper middle class folks could easily save over 90% under the FairTax as it’s currently proposed versus what they currently pay. (The really high-income earners would save more.) As an example, an upper-middle class family of four that makes $200,000 per year, owns its own home and a couple of cars, will probably spend less than $50,000 per year on taxable goods and services. Most of the rest of its income would go to house payments (untaxed) and car payments (untaxed if they already own the cars or are bought “pre-owned”), private school tuition (untaxed) and savings and investment (untaxed). With the rebate, that family’s tax obligation under the FairTax would be less than $6000 per year. Sure, that sounds good, but who’s going to make up the difference? I just don’t see how “expanding the tax base” is going to make up for that loss of tax revenue.
So, regardless of the Beacon Hill Study, I still think the whole 23% rate is a crock. The real rate would need to be much, much higher. At least that’s my story and I’m sticking to it.
If you inherit $10 million, it will be taxed when it is consumed. This is not untaxed - it just isn’t taxed when you transfer it to your children. Again - The same taxation holds when you save your wages and wealth and give it to your kids. When they spend it, they pay consumption taxes on both P&I.
Since we were talking about Kotlikoff’s economic models. I thought I would post his comments on them from a podcast at the Tax Foundation.
“We economists have been studying this for years, and really, we’re talking about moving from income to consumption taxation, and it all has very positive simulated long-run effects. I mean, I and Alan Auerbach, who’s an economist at Berkeley, have spent years developing macroeconomic simulation models to examine these kinds of policies, and our models are being used right now by the Treasury, and also by the Congressional Budget Office in their dynamic tax analysis.
So these are models that are not viewed as crazy or nutty. They’re based on standard neoclassical economics. They’re mainstream economic models. They’re dynamic models that capture the fact that people live for many years, and how the economy moves and grows through time, and they show very significant improvements in the economy’s economic condition over time. Not overnight, but over time, gradually arising from switching to a consumption tax. So we have studied this, and the message is very positive.”
Morph/Hayden,
My original claim was that most retirees would have lower effective tax rates under current law. This statement was in response to Fairtax claims that everyone would enjoy lower effective tax rates under HR25. My statement was based on a simple study I did last year using 2005 IRS software and the Fairtax calculation worksheet provided by Dr Walby. Critics of my claim point to the Kotlikoff/Rapson study from last October which used the ESP computer model to compare effective lifetime tax rates as well as marginal tax and savings rates.
Because the results of the Kotlikoff study were so different from my own, I felt obliged to really read his report and try to rationalize the differences. Here is what I think I learned:
(1) The Kotlikoff study did not look at retirees per se, just seniors at age 60, When calculating the income tax burden therefore, the 7.65% payroll tax was included. Removing the payroll tax for retirees makes the results for the income tax burden about the same for each study.
(2) When calculating the Fairtax for retirees with incomes of $100,000, Kotlikoff assumed that around 46% of the total household spending would not be taxed. I, on the other hand, used 25%. In looking at the Kotlikiff household profiles, it seems to me that assuming retirees (with $100,000 income) would spend $20,000 annually on tuition, and $24,000 on mortgage payments is unrealistic. Perhaps future generations will carry huge mortgages after retirement, but I come from the era where burning the mortgage was a grand occasion, and retirees wanted to be debt free by age 65. And spending $20,000 on education tuition makes even less sense to me.
However, I think a case can be made for at least 25% in non taxed income due to gifts, charity, investments, and savings, as well as state and local property and sales taxes where applicable. I just think that 46% is a bit high, and, of course,results in a lower effective tax rate.
So, the bottom line is that different assumptions create different results. I’m sticking to my claims for now, but plan to email Dr. Kotlikoff and try to see what background information he used to arrive at the 46% untaxed spending. I will also ask him if he could run a retiree profile so we can compare apples to apples.
Stay tuned!
The only FAIR TAX is one that taxes the super rich down from their hilltop mansions. Catch the corporate thieves and cut off their hands.
How long are we going to let the corporate crimes against humanity persist? When are people going to realize that “free market” means militant corporatism? How many innocents have to die in the Niger Delta? In Iraq? In Sudan? In China?
Your US tax dollars have been funding murder across the globe for decades via the CIA and US military fighting on behalf of our economy, aka Corporate America.
The subject of marginal rates motivated me to start a blog tackling a visual approach of taxation, including marginal rates, http://visual-tax.blogspot.com/. Obviously, this is directly in line with the FairTax proposal and tax reform is one of the subjects that will get illustrated in the future. The blog is still somewhat experimental at this time, but you may want to have a look already.
Comments welcome.