The Fair Tax Act, Part LXIII
Ah, here it is, the very last section of HR25. I made it.
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.’.
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).
So that’s it, the whole bill. Whew!!
No one has anything to say about Social Security? Egads, what planet am I on?
Well, since you asked?—don’t declare victory just yet!
(1) This is the most incomprehensible section I have read yet, particularly the last few lines. Currently, my SS check is protected from inflation by an annual COLA. Simple and understandable. Can you please tell me in plain english just what this section specifically says? How is the calculation done?
(2) The section says “if” the sales tax isn’t included in the CPI calculations, which makes me wonder why the sales tax wouldn’t be included? — It is an inclusive tax? How could it not be included?
(3) More generally, if the sales tax isn’t included in the CPI, what happens to the GDP? Will we see a one time 10% drop in the CPI during the transition year due to the price reductions from eliminating the employers embedded costs of the income tax system? If that is the case, what are the unintended consequences of a lower GDP? Will it affect the national sales tax rate? (Nice circular question, I guess?)
James, you have done a great job “blogging the bill”. Everyone participating is indebted and must have learned something. I’m working on coming up with a list of all the unresolved issues which arose during the process. At this point, I’d have to say that anyone that still says that the bill should be passed “as written” is indeed from another planet—or universe?
Hank,
To answer your questions:
1. This basically says “If the CPI doesn’t include the FairTax then, for SS COLA reasons, use the CPI multiplied by the EXCLUSIVE FairTax rate.” All that “national sales tax factor is equal to 1 plus the quotient” stuff is just calculating the exclusive rate.
2. That’s a good question. The bill doesn’t require the CPI to include the FairTax so I guess that would be a BLS decision. This section just allows for either situation. (Note though that if the CPI does include the FairTax, there are a lot of government programs - federal and state - that use the CPI as a factor in determining benefits. It really needs to be discussed how this could affect government expenditures.)
3. Prices are a fiction. This talk about how much prices will go down is pointless. The price level after a transition to the FairTax will have more to do with how the monetary institutions respond than any changes in costs to businesses. The thought is that they would not let GDP contract so they would adjust the money supply to keep prices where they are.
What Fred said. Seriously, though all this section does is provide an alternate method of determining SS benefits IF the SSA doesn’t come up with their own way of accounting for higher prices because of the FairTax.
If the SSA fails to account for the FairTax, then this section prescribes a way of doing it, in worst-case-scenario fashion, by simply assuming increases in price by the full amount of the tax with no assumption of any price decrease. CYA in action here.
Now if the SSA comes up with their own method of including FairTax effects in CPI (might happen right away, might happen after a couple of years of measuring real price increases, who knows?) then this section doesn’t do anything.