Taxes and the Increase in Families Going Bankrupt
Todd Zywicki at Volokh.com looks at taxes and the increase in families going bankrupt:
[Since 1973] taxes increase in the example by $13,086. By contrast, annual mortgage obligations increased by only $3690 and automobile obligations by $2860 and health insurance $620. Those increases are not trivial, but they are swamped by the increase in tax obligations.
To put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage (the supposed driver of the ‘two income trap’) and about double the increase in the combined obligations of mortgage and automobile payments....
Overall, the typical family in the 2000s pays substantially more in taxes than in their mortgage, automobile expenses, and health insurance costs combined.
And the growth in the tax obligation between the two periods is substantially greater the growth in mortgage, automobile expenses, and health insurance costs combined.
Via InstaPundit.
Joshua — Welcome back! Now, naturally I need to rag on you right away. So, I’ll skip with the small talk and get right to the point: You are NUTS if you believe any of that!
Since 1973 — Health Insurance has increased by only $620????? What planet is that guy (and you) living on. Heath insurance premiums have been going up over 10%-20% per YEAR for the last decade. At my firm, health insurance is over $15,000 per year per family. I guarantee it wasn’t half that 10 years ago.
Mortgage obligations increasing by $3690????? What, per month? Our retired friend , Hank, can remember when you could buy an entire HOUSE for $3690. Seriously, since 1973 housing prices have gone up over 10 times. I realize you are a young guy Joshua, but you might want to check with some folks who actually remember house prices during those years.
And car costs? Gasoline? Car insurance? Hellooo!
Seriously, Joshua. You might need to issue a mea culpa on this one. On the other hand, while I do agree that taxes are far too high, if you look at any honest chart, you’ll see that taxes a percentage of GNP haven’t really fluxuated much over the last 40 years or so. (Although Social Security and Medicare taxes have increased dramatically.) So, if average taxes have risen dramatically, it’s only because incomes have risen dramatically as well, but most significantly among the top 1%. Given the amount one needs to make to reach that top 1% (and I keep missing it), those folks can raise the average quite a bit.
By the way, Joshua, I happen to be a bankruptcy lawyer. You didn’t really think you could slip a headline like that past me, did ya’?
Best,
Hayden
By the way, the link to the Zywicki quote doesn’t work. Before I fire of an email to the guy (who’s a bankruptcy professor at George Mason University), I want to make sure that he’s been quoted correctly.
Oops. I guess I’m the one who owes the mea culpa. I finally read the post by Zywicki, and he was using data in a hypothetical example that was in Elizabeth Warren’s book The Two-Income Trap. In other words, Zywicki was not vouching for their accuracy, he was just using Warren’t own examples against her.
Now, since Warren is a good liberal and rights about some of the real causes of personal bankruptcies as opposed to the myths perpetuated by the credit card companies, I happen to like what she writes and agree with most of her positions. (You can read some of her stuff over at tpccafe.com.) But, it looks like Zywicki is right on this one.
Gosh. I need to proof read my posts before I submit them.
Josua: Please replace “rights” with “writes.” And replace “tpccafe.com” with “tpmcafe.com.”
Sheesh.
A question on taxing governments.
Many cities, I don’t know but maybe all, are incorporated. How does this differ from a business being encorporated?
It is my opinion that, while less unfair than the current system, it is by no pure measure “fair” with its main revenue source (sales tax, which I like) convoluted by a very politically susceptible system of monthly refund checks going to households based on the poverty level.
Both ‘households’ and the ‘poverty level’ are political concoctions subject to constant redefinition.
Why not forget the households concept and forget the highly politicized refunds and just lower the sales tax rate accordingly? Why the heck would we conservatives go through years of work to end up with essentially the same thing: a system that still requires tracking you by household and income and allowing leftists to exploit the sin of class envy. Instead of raising income taxes on the successful, the politicians will just raise the sales tax on everybody and then rebate to whomever will vote for them - it is virtually the same situation.
I understand the politics behind the effort to avoid taxing lower income folks but I don’t agree with it. Republicans are just as guilty as the Dems in this regard. For example, their support for the earned income tax credit and Bush’s proud remarks about how many folks no longer pay any federal tax.
We will never get serious about controlling overall long-term taxation and spending if our short-term goal is to insulate half of the voting population from the burdens of supporting the ever growing federal government appetites.
One flat rate...all the time...for everybody...based on consumption rather than income or wealth! That is as close as a government can get to instituting fairness in the taxation of individuals.
No need to define and, even worse, to “track” households.
No need to set up yet another federal bureaucracy, especially not one which would have the socially divine and politically delicious role of sending money to every household in America every single month - just try to get rid of that new federal department once established!
I hear the cries: “You cold-hearted SOB, what about the poor?” Well, I’m not worried about it.
To start with, if the Really Fair Tax which I’ve just described ever happened to come into fruition, I am quite sure it would only have been because a slew of new politically-required spending-side goodies would also be simultaneously created to address whatever imagined hardships might result from the tax system conversion. If it were politically possible to avoid that new spending, great! If not, then at least we’d have a system where EVERYONE would be paying taxes at the cash register and hopefully building resentment toward a wildly spending government.
Of course, if you end up poor enough because of the new sales tax that you are willing to go to the government and ask it to acquire somebody else’s money for you to spend, then you will need to provide them with enough information to show need, etc. But, those who do not want or need government assistance should not need to disclose their income, whether employed, household status or anything else - at least not for purposes of taxation.
If it is only the ones feeding off the trough that are required to be tracked by the government, perhaps that will be one more incentive for those folks to achieve self-support.
“Won’t that create a stigma for those receiving federal assistance?” you might ask. Regarding the able-bodied, I reply “Let’s hope so!”
Some envision the Really Fair flat tax as somehow ‘regressive’, but they are wrong. Yes, the lower income folks will pay more under a flat sales tax since they pay nothing now under the current system. But to say the tax is regressive is not technically correct since the tax rate will be the same no matter how much a fellow spends.
A fabulous side benefit of the flat sales tax is that the guilt-ridden rich liberals who feel we should increase taxes on people who earn more would now have an extremely therapeutic and potentially entertaining means to satisfy themselves while simultaneously impressing their comrades:
Let’s say that Kennedy wakes up today feeling guilty that the rich might not be paying enough tax. Under my plan, he can go right out and buy another fancy car and -abracadabra- he is not only boosting the economy but he is also directly contributing more to the federal revenue stream. When he’s feeling particularly guilty, he can buy another yacht!
Rich guys would be free to contribute as much tax to the feds as needed to assuage their guilt just by purchasing more stuff. And if they are honestly conscience-stricken then they can further comfort their souls by later donating the stuff to charitable organizations who would no longer need to pay a gift (income) tax or need to bend over backward (or muzzle themselves) to maintain non-profit status. At the same time the rest of us will be more free to save/invest on a tax-free basis in our effort to become the next guilty, conspicuously consuming rich guy. It’s a win-win-win situation in the long run!
Fair Tax: NO.
Really Fair Tax: YES!
Duane,
As best I can tell from HR25, states and their “political subdivisions” are subject to the Fairtax. I think that would include counties, cities, etc. whether incorporated or not.
Section 102 (A) (3) says there will be:”no tax on state government functions that do not constitute final consumption of property or services”. I understand that to mean that if a state/local government agency purchases goods or services that will be resold to the public, no tax will be paid, just the same as a BTB transaction.
I’m not sure why you raised this issue, but hope this helps–(and is correct??).
Daniel, I think you may misunderstand the prebate. It is not based on income. You have to supply your family size (and this is optional as you don’t have to accept the tax refund). The intent is to untax necessities (spending up to the poverty level). Everyone is treated the same - same rate, same prebate (based on size of family) - Rich or Poor, no legal resident pays federal taxes on consumption up to the poverty level (disputable). The effective rate on consumption becomes progressive as the more you spend the less effect the prebate has as a percentage. While I expect the SS administration would need to grow slightly to adjust to sending out more checks, this is tiny compared to the decrease in size of the IRS bureaucracy expected.
I’m all about lower taxes and smaller government, but the numbers in this particular example are wrong.
Zywicki cites Warren & Tyagi’s numerical example, but they have no source for the 24% tax take in 1973 or the 33% tax take in 2000. My diagnosis is that Warren & Tyagi confused average tax rates and marginal tax rates.
What would the marginal rate have to be in order for tax payments to rise to 33% of income? Husband was earning $39K, and say that some new tax bracket kicks in at $40K, so *all* the wife’s income is taxed at the higher rate. They say that the wife increased family pre-tax income by 67%, so she must have added $26K, for a total of $65K pretax. 33% of that is $22K. Find X:
($39K)(.25) + ($26K)(X) = $22K
X = .47
No individual or family was paying a marginal tax rate of 47% in 2000.
Bottom line: Warren & Tyagi confused average and marginal rates, pulled the 33% figure out of their ears, and then Zywicki accepted the figures uncritically.
Daniel,
I think you’ve got it about right, the prebate should be scrapped. And you have suggested a major step towards coming up with an income tax replacement concept that might actually work and might even pass into law. But you are only partially there.
Here are three other steps that must be taken if the income tax is to be eliminated and replaced with a consumption tax. (1) Remove government consumption from the base. (2) Leave payroll taxes in place. (3) Phase in the sales tax over five years, making the inventory tax credit unnecessary.
By making these major corrections, revenue neutrality could be achieved by a 14% national sales tax.
I’d call it “Fairtax-Lite! And it has a far better chance of becoming law than the Fairtax. Rudy Giuliani has got it about right when he said words to the effect that if we were starting from zero, he would support a consumption tax rather than an income tax. But he has repeatedly said that we can’t get there from where we are with the Fairtax. Boo and hiss all you want, but he’s right!
Morphh,
I understand. I just don’t like it. And, as a staunch conservative and all around fair-minded fellow, I will campaign my heart out against this silly idea.
I’m giving 30:1 odds right now that, very shortly after instituting such a politically vulnerable plan, both the so-called ‘poverty rate’ and the tax rate will climb dramatically. At least to the point we’re at today where half the voting population pays no net federal tax.
I don’t know how such a liberal idea has caught on with so many folks who claim to be conservative.
Let me be the first to say: ‘No representation without taxation!’
No, I don’t mean that people should ever be kept from voting. I just want everyone to pay the same rate. It is the ONLY way to ensure rates won’t go through the roof.
If you have not guessed by now, my goal is to have ALL people hate taxes so we can finally deliver the political pressure necessary to stop the absolutely insane level of spending.
Hank,
You make much more sense than most on this topic. It’s positively surreal listening to conservatives talk about the feds sending every ‘household’ in America a check every month. And, yes, I fully expect the courts to eventually rule that illegal immigrants are eligible for the goofy prebate.
Your numbers 1 and 3 seem reasonable and 2 might be politically required for the whole idea to get beyond the blogosphere. But, I still would oppose payroll taxes, as I do now, just because I’ve always hated trickery in taxes.
Many people actually think the employer pays half of FICA out of his profit pocket, but you and I know that to the employer his half is just another part of the cost of employing you and that much less he has available to pay you.
Also, regardless of his views on taxes...I will never vote for Rudy.
Daniel,
It might seem rediculous for me to oppose payroll taxes—I paid into the trust funds for 45 years, am now retired and taking full advantage of the retirement and medical benefits. But, here is the reason I think AFFT badly over reached when the authors of HR25 included FICA taxes in the list of taxes to be replaced by the national sales tax. This is why I leave the payroll taxes in place in my Fairtax-lite concept.
When coupled with the prebate, the largest cash grant entitlement in the history of our country, it turns out that as many as 30 million workers might never pay any net federal tax, and yet will still qualify for full retirement and health care benefits. I readily admit that the 30 million is just a rough estimate based on some 2004 IRS filing data and the Fairtax calculator. But, I also estimate that less than one million workers pay no net federal tax today under the current income tax law. While it may be true that almost half of our population pay no income tax, almost all workers pay the 7.65% payroll tax. Very few workers can reduce their income tax liability to zero through exemptions, deductions and credits, and then utilize the refundable EITC and Additional Child Care credits to totally offset the amount of the payroll tax. Is the Fairtax really fair?
I view the payroll tax as not so much a tax as an insurance premium on a policy to protect folks in their retirement years. It’s kind of like a term insurance policy, except with term insurance, one is betting they may die before age 70 (typically), and with the payroll tax, one is betting they are going to live past age 62 (or whatever the current rule is?).
So, if you oppose the payroll tax, tell me what you might do to provide tha same retirement and health care benefits? And who pays?
And by the way, you may be right about the employer share of the payroll tax being that much less available for wages, but I seriously doubt that employers would raise your pay as a matter of priority if the payroll tax was eliminated? My guess is that a payraise comes last after (1)reducing prices to increase market share and (2) using the windfall to increase profit margins? Others might disagree.
I didn’t mean to imply that I’m a Rudy supporter–just that he made an interesting observation about the Fairtax, i.e. we can’t get there from here with the Fairtax. The really sad part about that debate was the graphic that ABC showed to kick off the segment on the Fairtax. 30 million viewers were told a lie- that is, that all those taxes listed would be replaced with a “23% sales tax”. It just isn’t true, and everyone on this blog knows it. The Fairtax rate is either “23% of every dollar spent” or it is a “30% sales tax” as understood by all Americans. Isn’t it time to start telling the truth?
Daniel, while I share some of your thoughts - they are unrealistic. You’ll never get (not anytime soon) a truly flat (considered regressive by most) tax system. It will never happen - so it seems you’ll campaign against a system greatly better then the current system with the dreams of something unobtainable in the political climate and against the thoughts of most Americans. I think there are things that some of us here don’t like about the FairTax. Personally, I think I’d prefer a VAT over a sales tax (or Jim Demint’s hybrid GST / Sales tax plan) but they’re not going anywhere. Most Americans (and most of the modern world) think a progressive tax is “fair”. You will not be able to change this.
To make the FairTax progressive on consumption, you can provide tax refunds (prebate) or try to exempt items. Exempting leads to lobbying and larger arguments on regressive effects, so the FairTax has chosen rebates. The Beacon Hill Institute estimated the rebate cost to be $489 billion (assuming 100 percent participation). Income tax deductions, tax preferences, loopholes, credits, etc. under the current system was estimated at $945 billion by the Joint Committee on Taxation and that the IRS itself sent out $270 billion in refund checks for 2005. In 2004, the Social Security Administration (those that would issue the FairTax prebate) paid out almost $500 billion in benefits. So we’re not talking about major efforts here to issue a tax refund.
The hope is that the visibility of the FairTax (since today the cost of government is spread out among many different avenues and may not be fully visible to individual citizens) and the single rate that applies to all will put political pressure on the spending and taxation. We have to look at the options available and what provides the most for civil liberties, economic growth, trade deficits, freedom, visibility, some level of fairness and equality, and a tax base that will soften the impact of coming generational workforce shifts. These are serious things to consider. You want an option that doesn’t exist. If you kill the lesser of evils, your going to end up with the greater of evils. The FairTax does a lot of positive things. My thought is... evaluate your options and pick the best horses in the race, as the “perfect” one in the pasture ain’t racing anytime soon.
Daniel, let me also quickly make a comment on the point that they would quickly raise the poverty level and rate. Throughout most of American history, taxes were levied principally on consumption, rather than income. Except during the Civil War, the federal government was financed almost entirely by import duties and excise taxes until 1913, when our current income tax was imposed. The Founding Fathers favored consumption taxes in part because they are harder to raise to confiscatory levels than incomes taxes.
In the Federalist Papers (Number 21), Alexander Hamilton had this to say: “It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. ... If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens of this class, and is itself a natural limitation of the power of imposing them.”
This may not address your concern but the transparency and the mechanics of a consumption tax may have effects that decrease this possibility.
Morph — Thanks for the history lesson. But in those days the only alternative tax systems were (a) poll taxes, (b) property taxes, (c) import duties, and (d) consumption taxes. Income taxes were completely unfeasible because it was impossible for the government to establish how much people made.
And, if I recall my history, the American’s revolted against England because of consumption taxes (e.g., the “stamp act.”). Poll taxes, of course, hurt the poor the most and were generally the most hated when they were used (and probably caused the French Revolution).
Property taxes were the fairest since they were essentially taxes on wealth, since most all wealth in those days was held in real property. Unfortunately, these days property taxes primarily hit the middle class since most of their wealth is usually tied up in their home.
Import duties are out of favor as they lead to trade wars and ultimately hurt every country’s economy.
That leaves us with the income tax.
End of history lesson. You will all get your grades at the end of the term.
Morphh,
I appreciate your patience and the cute race horse analogy but I have heard all the numbers many times before. The reason I specifically avoid number crunching in my opposition is because I oppose this whole idea on a more philosophical level. And because many of the numbers are only forecasts that might prove to be significantly wrong since it is not possible to precisely predict how consumers will react to the tax code changes in the short term or how the legislation will look in the long term.
One problem I have is that the definition of “fair” is completely subjective. Progressive taxes are the epitome of unfairness by my reckoning. Possible majority opinions to the contrary are meaningless to folks who make decisions based on principle. And compromising said principles in a way that seems politically pragmatic in the short term rarely leads to good things in the long run.
I understand how you can see my viewpoint as unrealistic, but I feel exactly the same about this whole FairTax gambit. There are some seriously delusional folks out there pushing this thing thinking that the IRS is going to vanish, that the income tax will disappear overnight, etc. I actually had a conservative fellow try to tell me on another site that “The politicians won’t be able to manipulate the prebate”. Sure, and I’ve got a bridge up here in Mpls I’d like to sell this guy.
You seem quite intelligent to me. Do you really believe this system which, correct me if I’m wrong, is strictly based on actions taken by the most fickle branch of government (Congress) is going to be safe from manipulations such as: yearly (or at least with each new Congress) changes in the tax rate, political chicanery when constantly redefining the already ridiculous “poverty rate”, the possible (nay, likely) contortions in the definition of a “household” (it would not surprise me if the concept of fractions of personhood are resurrected or at least the introduction of a “household” factoring scheme) and even judicial redefinitions of any of these items? Remember now, Congress thrives on accounting tricks that would land you or I in federal prison.
Don’t get me wrong - I’m all for consumption-based taxation just as the brilliant founders were. The only One smarter than they were is God and He went with the straight flat tax of 10%. I, like both He and them, just happen to despise socialism and the (un)FairTax is exactly that. In fact some of its propaganda is like a shiv stuck into the back of the founders with quotes like “A very progressive long-run outcome” and charts bragging about how many people will basically be receiving welfare payments in the form of prebates that far exceed projected taxation for certain demographics.
Let’s talk realism here for a moment. This most recent incarnation of wealth redistribution has about as much chance of becoming law as Ron Paul has of winning the White House - even less I’d wager. And the chances of this boondoggle remaining as designed beyond one congressional term is zero.
This silly thing has been in the works for a long time now. I personally believe the millions of dollars and oodles of man-hours spent pushing this legislation-based approach might be better spent addressing both taxes and the REAL problem which is spending via constitutional amendment.
Since this scheme already relies on what the FairTax calls its “companion legislation” to start the constitutional ball rolling toward repeal of old #16, why not just make a comprehensive amendment that kills the sixteenth, mandates a consumption based tax, mandates a consecutive congress supermajority to raise the rate, limits spending to a percentage of GDP and mandates an automatic lowering of the rate when revenues exceed the defined spending limit. Call it the “FairBudget Amendment” or some such.
I like the amendment approach because, while it might take a bit longer (then again it might not), it would still require a national debate but a more locally-based approval process. The results would be much, much harder for legislators to screw up - though I’m sure they would still try. It’s possible that real progress toward a lasting solution could be soon measured as some states take an early initiative.
I agree Hamilton had some great and timeless ideas. Mostly because they were not perverted by misguided notions of fairness and politically convenient compromises of principle. Your quote from him clearly supports my viewpoint over yours in my opinion. You will note that his vision of a “COMPLETE barrier against any material oppression of the citizens” does not include a prebate ladder for half the voters to scale that barrier completely unscathed or - unimaginably worse to Hamilton I’m certain - a system which allows millions of less productive citizens to actually profit from the tax burden of others.
Just so you know that I’m not the first person to dislike the idea of selling my soul for the sake of appeasing your “modern world”’s view of fairness:
“When the people find they can vote themselves money, that will herald the end of the republic.”
—Benjamin Franklin
“The American Republic will endure, until politicians realize they can bribe the people with their own money.”
—Alexis de Tocqueville
“There is nothing more unequal than the equal treatment of unequal people.” and “Congress has not unlimited powers to provide for the general welfare, but only those specifically enumerated.”
-Thomas Jefferson
“Politicians never accuse you of “greed” for wanting to take other people’s money—only for wanting to keep your own money.”
—Joseph Sobran
“Once the government becomes the supplier of people’s needs, there is no limit to the needs that will be claimed as a basic right.”
—Lawrence Auster
“The idea, in A.D. 2006, of aiming at reform by movement toward socialism is at best quaint.” and “Achieving socialism takes time, and a great deal of aid from non-socialists.”
—William F. Buckley, Jr.
“People serious about reducing the role of money in politics should be serious about reducing the role of politics in distributing money.
—George Will”
“The FairTax is a neo-Marxist dream: checks for all in the name of balance.”
-BuddhaB
Daniel,
I did not mean to imply that you should abandon your principles. Keep on keep’n on and push your agenda. We may get there some day. But this all or nothing approach seems pointless. In the choice between A and B, killing B only leaves you with A. There is no option for C. The enemy of my enemy is my friend. By being the enemy of the FairTax, since it does not fulfill your goal, you only preserve the Marxist income tax. There are no other choices available - progress toward your goal or nothing. There will never be a jump from the current system to what you suggest without some middle progression, unless your hoping form some John Galt implosion of the system. The philosophical devide is too great.
To some of your other points - According to the Census Bureau income statistics for 2005, 12.6% of Americans are living at or below the poverty line (so this percentage would not be paying taxes and may gain a small amount). I don’t think the Department of Health and Human Services is going to greatly alter what they define to be poverty, as it is by definition accounting for the basic necessities to live. Do I believe that the FairTax will be safe from manipulations? Absolutely not... they will try there best but I do believe that the FairTax is much more transparent to such action then the current system. I’m comparing the FairTax to the current income tax and you’re comparing the FairTax to an improbable plan. Don’t give up on the dream, but don’t shoot yourself in the foot from ever achieving it by killing all progress toward the goal. I can understand posters like Hayden that truly believe the progressive income tax is the best system but I struggle with your form of logic. Consider reading Honk if you Oppose a Fairer Tax, which argues how the FairTax plan is least destructive to what I perceive to be your goals and ideals. http://www.fairtax.org/PDF/Honk_if_you_Oppose_a_Fairer_Tax_11-2-06.pdf
Hi Daniel,
That’s quite a statement from someone who’s state elected “The Body” as governor :-).
Seriously, I understand your position. You, like so many of us do not trust congress any further than you can throw the capital, but, as with so many things in life, baby steps are the only way to progress. Giant steps can never get the support needed to pass.
As I am want to do, I try to expand the conversation to what I see as the biggest reason we need the FairTax. That reason is the globalization of business and our need to change so we can compete. If anyone thinks we are competing today just look at the trade balance. Only by untaxing labor and taxing consumption can we compete on a more equal footing. May I suggest, if you haven’t, reading “The World Is Flat” by Thomas L. Friedman.
Morphh,
I believe you still misunderstand my position and I’m becoming increasingly unconvinced by your general reasoning.
Your last post contains the clearest example of a false dichotomy I’ve been presented with in months...and I debate at even some kooky, nonsensical liberal sites. If A is the so-called FairTax and B is my quicky revision of it, then what principle of either economics or politics leads you to believe that “there is no option for C”?
Proposals in your linked pdf file alone include at least a C, D and E. I personally can provide you with enough options that we’d need the Chinese alphabet to discuss them all.
And your use of the Arab favorite “enemy of my enemy” maxim confuses me. Normally folks use it to suggest that they can stomach another party as long as both despise a common foe even more than they dislike each other. But you seem to twist that logic to presume that I and Marxism have bonded to defeat the FairTax.
This demonstrates not only your inability to correctly apply the stated adage, but also your complete inaccuracy in comprehending my clearly delineated position on Marxism. If my verbose responses to your queries aren’t evidence enough to communicate my utter distaste for collectivism then my list of quotations should have enlightened you as to my feelings. The last quote came from me personally:
“The FairTax is a neo-Marxist dream: checks for all in the name of balance.”
-BuddhaB
I too despise the socialistic way the income tax is currently implemented. But, as you seemed to desire earlier, let’s be “realistic” here. The sixteenth amendment makes the income tax one of the more constitutionally valid taxes right now. And, implemented in the fairest way possible - which would be flat and without exception or deduction - it would provide one of many candidates for your elusive “option C”. But, AGAIN, I’m on your side in the desire to switch to consumption-based taxation.
If you think it’s hard to convince a conservative like me to swallow the socialistic prebates, then just wait till you see how hard it is to get the extreme leftists (who continue to gain prominence in the party currently running Capitol Hill) to not use the silly scheme to their advantage.
And if the FairTaxers have not a concrete plan to address the imbalance of constitutionality between income tax and sales tax very early in the process -and even if they do- leftists on the Hill and on the bench are not going to let the income tax die whether the sales tax delivers economic results or not. It is far more than a source of revenue for them. It is one of their perennial favorite avenues of demagoguery and the hardest evidence of their progress in the class war which is the sole inspiration of many of their faithful.
The FairTax throws a bone to those of us who desire economic common sense and restrictions on intrusion. But it throws a 48oz porterhouse steak to the socialists whose holy grail of government-controlled wealth distribution is greatly helped by instituting a plan to let them mail every “household” money every month based on rules which they can change in any way their need for votes might dictate.
You may think that my opposition to the leftist half of the FairTax means I’m shooting myself in the foot, but I consider support of it similar to wrapping my lips around the barrel of 12 gauge socialism.
Duane,
Actually, while I still work in the Twin Cities, I have lived and voted across the border in WI since before that buffoon was elected - without a majority of the vote, by the way, because he ran as an independent against two other bad choices and MN has no run-off. He fortunately chickened out of running for re-election after one dismal term.
You and Morphh both seem to think the absolutely monstrous changes required by the FairTax plan are somehow “baby steps” toward economic and political utopia whereas my suggested simplifications of the idea by removing the giant backward steps are considered an impediment to forward progress. Obviously I disagree.
Gentlemen,
In recent posts, there has been a discussion about just exactly what the prebate really is. Fairtaxers want to call it a sales tax refund, while others, including the Presidents Tax Reform Commission, call it a “cash grant entitlement”. Recently. I have come to believe that there is far more than semantics at stake–here’s why.
The instructions for calculating the effective tax rate, provided by AFFT, go something like this: Starting with gross income, subtract non-taxed spending, (includes education tuition, charities, gifts, savings/investment, installment payments, and state/local property and sales taxes), then calculate the tax based on the inclusive rate of 23%, then subtract the prebate amount to arrive at a net tax, and then divide by gross income to get an effective tax rate. For example, in 2005, a minimum wage worker making $10,000 annually with only 5% in untaxed spending would have an effective tax rate of zero. ($10,000 x .95 x .23% - $2201/ $10,000 = 0.00%).
Now, bear with me and look at what happens if the prebate is treated as a cash grant— income. Starting with the regular gross income, add the prebate to get a net gross income, reduce the net gross by untaxed spending (5%), apply the 23% sales tax, and divide by the net gross to arrive at an effective tax rate. For the same low income worker as used in the example above, it looks like this: $10,000 + $2201 x .95% x .23%/ $12201 = 21.8%.
So, folks, is the effective tax rate for this worker zero% or 21.8%?
I maintain that the prebate is indeed a cash grant entitlement which will be spent as income. Others may want to believe that the prebate is somehow a tax refund, but it turns out that the prebate is unrelated to taxes paid! The prebate is a function of family size and the poverty level. Live in a tree and spend nothing and you will still get a monthly check. It is a cash grant from the federal government.
It seems to me that everyone has been educated by AFFT into believing the prebate is a tax refund. It is really only so because they say it’s so. Call it what it really is and the outcome is quite different.
Does the prebate really untax the poor? Does the prebate really untax life’s necessities? I don’t think so! There is only one way to untax the poor and untax life’s necessities and that is to exempt all necessities from taxation! The States have understood this for more years than I have been alive. And State experiments to tax services have failed. Why does anyone believe that a very broad based national sales tax, including a tax on government operations, makes any sense? The prebate is not the answer IMHO.
Hank,
I’m with you 100% in opposition to the prebate regardless what anybody wants to call it and no matter how they crunch the numbers. They can put lipstick and a dress on it, but it’s still a pig.
Daniel;
Perhaps baby steps isn’t the correct term. I believe that it would be impossible to get congress to “burn their bridge” and repeal the 16th amendment prior to seeing the FairTax work. With that mindset I think getting congress to try the FairTax is only possible if they believe they have a “fall-back” position.
That said, I agree with one piece of legislation to do both. Again, it’s just my fear that if we bundle it we will get nothing.
Duane
” I maintain that the prebate is indeed a cash grant entitlement which will be spent as income. Others may want to believe that the prebate is somehow a tax refund, but it turns out that the prebate is unrelated to taxes paid! The prebate is a function of family size and the poverty level. Live in a tree and spend nothing and you will still get a monthly check. It is a cash grant from the federal government.
It seems to me that everyone has been educated by AFFT into believing the prebate is a tax refund. It is really only so because they say it’s so. Call it what it really is and the outcome is quite different.
Does the prebate really untax the poor? Does the prebate really untax life’s necessities? I don’t think so! There is only one way to untax the poor and untax life’s necessities and that is to exempt all necessities from taxation! The States have understood this for more years than I have been alive. And State experiments to tax services have failed. Why does anyone believe that a very broad based national sales tax, including a tax on government operations, makes any sense? The prebate is not the answer IMHO.”
P.S.1. The prebate does not un-tax necessities, it just gives “preemptive entitlement” equal to poverty level spending. It does not account for true poverty level spending. There is no one who can figure out if you spent less than poverty level in order to reduce your prebate. Also, what this means is that you get taxed on necessities and don’t get any money in return if you are not registered for the prebate (say if you are an illegal or a tourist).
P.S.2. Take me off the list of “educated” who think that it the FairTax prebate is a real “tax refund”. Oh, perhaps why that it is called “prebate” - sort of like a “preemptive entitlement”. Unfortunately, politically efficient propaganda does not always use technically correct terms to call its concepts.
P.S.3. State sales taxes on services exist, regardless of the number of failed experiments to implement them.
http://www.google.com/search?hl=en&safe=off&q=%22state+*+tax+on+*+services&btnG=Search
“In recent posts, there has been a discussion about just exactly what the prebate really is. Fairtaxers want to call it a sales tax refund, while others, including the Presidents Tax Reform Commission, call it a “cash grant entitlement”. Recently. I have come to believe that there is far more than semantics at stake–here’s why.
The instructions for calculating the effective tax rate, provided by AFFT, go something like this: Starting with gross income, subtract non-taxed spending, (includes education tuition, charities, gifts, savings/investment, installment payments, and state/local property and sales taxes), then calculate the tax based on the inclusive rate of 23%, then subtract the prebate amount to arrive at a net tax, and then divide by gross income to get an effective tax rate. For example, in 2005, a minimum wage worker making $10,000 annually with only 5% in untaxed spending would have an effective tax rate of zero. ($10,000 x .95 x .23% - $2201/ $10,000 = 0.00%).
Now, bear with me and look at what happens if the prebate is treated as a cash grant— income. Starting with the regular gross income, add the prebate to get a net gross income, reduce the net gross by untaxed spending (5%), apply the 23% sales tax, and divide by the net gross to arrive at an effective tax rate. For the same low income worker as used in the example above, it looks like this: $10,000 + $2201 x .95% x .23%/ $12201 = 21.8%.
So, folks, is the effective tax rate for this worker zero% or 21.8%?”
0%, since income is not directly proportional to consumption, it makes no sense to use income when determining the effective “consumption” tax rate.
Alternatively, you can think of what happens to the effective tax rate when that “prebate” is spent for consumption.
If poverty level consumption remains the same for each year, it should be matched by the FairTax “prebate”. However, the prebate will serve as extra money that could be spent in the next year. Suppose that this “prebate” was spent anyway***, while still maintaining poverty level consumption. The effective tax rate would be 0%. But consider if the person who would normally spend up to the poverty level now would spend 23% more as a result of the prebate. Total spending would be 123% of original spending and taxes would be 23% of the “prebate”. In this case the effective tax rate is (23%*23%/123%) or 4.3%.
*** (the “prebate” money loses identity when it becomes part of one’s piggy bank since it will mixed with all the other money without any distinct property attached to it)
As far as the 21.8% you calculated, you forgot to factor in the “prebate”. What you should really have is:
[($10,000 + $2201) x .95% x .23% - $2201] / $12201
This gives us
$464.92 / $12201
Which is 3.8%
Good points! Lower tax rates have been shown to produce efficiencies. The problem is that the term tax rate and tax revenue are confused in the media: http://www.a2dvoices.com/realitycheck/commentary/budget.html
I have heard that one cannot charge a consumer taxes on services (for what it’s worth, I am in California), or at least some types of services. But for the life of me, I cannot locate any law (state or fed) that sets this forth. The services in question happen to be tailoring clothing. Any ideas appreciated.
Ted,
Each State is different as what they choose to lay a sales tax on. In general, services aren’t taxed, probably because it’s darn difficult to get small service contractors to cooperate by charging and paying the tax. The law you are looking for has to be the California tax code which surely spells out just what is to be taxed.
As for the federal government, other than excise taxes, there is no national sales tax at this time. All that’s needed is to pass HR25 and we would have a national sales tax. But, you might want to know that the 50 State governors are all opposed to a federal sales tax as evidenced by the latest National Governors Association tax policy paper. And the Fairtax isn’t going to get much support from State officers when they learn that HR25 proposes that the federal government tax State and Local consumption. That is really very inappropriate, if not unconstitutional, under our republican form of government.
Ted,
Very good question, I also live in California and have been avocating the applying the Fair Tax idea to our sales tax so the rate could be drastically reduced. Whereas Hank is likely correct that small service operators may be difficult to get to comply at first, I think they would come around quite quickly with a rate that would drop down by at least half. Also, service providers are already required to charge sales tax on materials and/or parts so taxing the entire bill at the same rate would actually simplify their billing.
There is no prohibitions against taxing any consumption because it’s an indirect tax. The tax can be avoided by the individual required to pay the tax by not purchasing the product or service. It’s income taxes that have to get tricky to remain constitutional.