I’ll Pay More under the FairTax? No Worries
From a reader willing to put his money where his mouth is:
I’m 40 years old, single, and I live off of a royalty income from an invention I made several years ago, that gives me $80K a year and I spend about $80K per year. I own my home free and clear, and I have about 500K in stocks for a nest egg if I need it.
I used your calculator and have referred many people to it. Because royalties are taxed at a lower rate and there is no FICA, I am one of the few special cases that will pay more under the Fair Tax.
But I am a strong advocate of the Fair Tax because it will be a boon to the economy, the country, and a rising tide floats all boats. It will put this country, which I love, on solid financial footing for decades, and eliminate the source and opportunity for a large part of the corruption in Congress.
However, I would support a gradual phase-out of the prebate for high earners.... not because it saves money, but for public relations reasons.
I would also support keeping the income tax (wait... let me explain) if it was limited to periods in which Congress has passed a declaration of war against a foreign nation, and the revenue from such a tax went directly to the commander in chief to use in prosecution of the war.
That way, Congress can’t get any of the money from an income tax for their own pet uses. Such a tax would also expire 1 year after passage, so Congress would have to re-impose it every year that they wanted it.
Repeal of the 16th Amendment could include these provisions easily.
Interesting.
If only we could trust congress to do anything at all, perhaps we could trust them with this too.
Why not, instead of keeping income taxes during a national emergency, just raise the sales tax a percentage point or two?
To me, that’s one of the many wonders of the consumption tax system. If there’s ever a national emergency that the government needs cash for... it can be generated overnight with a simple press release. No need for anyone to file any extra tax forms or for the government to create another IRS-like service. With one word, it’s done - as simple as that. And the larger burden continues to fall on the larger spenders.
This poster brings up two interesting points.
1. He says he would pay more taxes under the FairTax than he currently does. I’ll take him at his word, but he’s actually one of the not-so-few Americans who could live tax-free under the FairTax for the rest of his life. How? He could simply move to Mexico, the Bahamas, Central America — whereever the climate is nice and the cost of living is cheap.
Many Americans on pensions or even Social Security currently do this already. (Having spent much of my life in Central America, I know many of them.) There would be even more incentive to do so under the FairTax, because purchases made outside the US would not be subject to the tax.
Or, if he wanted to keep living in the US, he could still travel to different parts of the world whenever he decided he wanted to take a break on paying taxes. Get a nice tax-free vacation. It would be a pretty darn nice life. I suspect, however, that folks remaining here in the states would quickly complain about being stuck paying the FairTax while expatriates and world travelers get a free ride.
2. He does not pay FICA taxes since he lives off royalties. So, under our current system, he would not be entitled to Social Security benefits when he turns 65. I’m not sure whether he would be entitled to Medicare benefits or not. What about under the FairTax? Since there is no FICA withholding, and there would be know way of knowing how much one has paid over the years under the FairTax, does everyone automatically get Social Security and Medicare when they turn 65? I don’t know the answer and am curious.
Thanks.
The original poster makes a good point. The 16th amendment was not necessary for Congress to impose an income tax. They have always had that right, even before the 16 Amendment to impose an imcome tax (and they did as far back as Lincoln). The 16th amendment was need for them to impose the “unapportioned” income tax. The modification suggested to the 16th amendment, to limit any income tax to a period of declared war makes sense, as well as the automatic sunset provision. But regardless, you can’t just repeal the 16th amendment - you must replace it with a prohibition on income taxes or a limint on when they can be imposed. Otherwise, an apportioned income tax can come right back.
Wars are generally inflationary pressures on the economy. Raising the national sales tax rate would also be inflationary. A short-term income tax (surtax) imposed on high income individuals is less inflationary.
That brings up another question... I’d want a super-majority requirement to raise the 23% in the Fair Tax or alter the prebate.
Joshua, & Tanner
Two very intelligent and informed posts about the FairTax. Thanks ! Comboned, your both right on the money.
Hayden, I think you missed some things.
If one travels to another country and spends money there, they do avoid the US Fair Tax... but it is far from a “tax free” vacation as you claim. The embedded taxes are everywhere and in every country to some varying degree. He would replace paying the US Fair Tax with the various taxes wherever he travels.
Furthermore, foreign visitors to the US will begin paying the Fair Tax. Perhaps someone can point to stats to how many man-days Americans vacation out of the country versus how many man-days foreigners spend in the US. My guess is that they would not be grossly disproportionate.
There are many, many people who could move to another country today for tax reasons, but they do not do so. I can’t see the Fair Tax providing much added incentive to do so.
All the analyzes I have seen indicate that the Fair Tax would incentivize expats to return.. not send them away.
Medicare and SSI do not change under the FT. How they determine who gets how much is their business — they are just funded by the FT. They can implement any method they want for determining who gets how much or for capturing earnings information annually. Or better yet, they can just give everyone the same basic SSI/Medicare benefits. You want more than the basic? Then you should save for your own retirement. That’s no different from the current situation.
Erica said: “Medicare and SSI do not change under the FT. How they determine who gets how much is their business — they are just funded by the FT. They can implement any method they want for determining who gets how much or for capturing earnings information annually. Or better yet, they can just give everyone the same basic SSI/Medicare benefits. You want more than the basic? Then you should save for your own retirement. That’s no different from the current situation.”
I am currently retired and about 60% of my monthly expenses, including charges for Medicare Part B and the prescription drug coverage, are covered by SSA monthly payments. The other 40% of expenses is derived from investments I have made over the years in the form of dividends and capital gains. My goal in my investment account is to maintain a given level of income indexed for inflation and preservation of capital.
My current federal tax rate is about 15%, based on my 2006 return. I do pay a tax on a portion of my SSA payments from the fed, since my annual income from other sources exceeds the current limit of $25,000.
Questions:
1. Will the Fair Tax eliminate the $25,000 ceiling on earnings with repect to SSA receipts by retirees. I assume it does, if not please clarify.
2. It appears my monthly expenses will rise if a Fair Tax is implemented. How much is an open question. The key issue for myself is how it will affect rents. I live in a high rent district on the West Coast. A 23% or more increase in rent would hit my expense budget considerably.
3. Will my share payments for Medicare Part B, the Medicare prescription drug benefit, and my supplemental medical insurance plan be taxed by the Fair Tax plan.
4. A portion of my investment account consists of municipal closed and open end bonds funds. What effect will the Fair Tax have on such funds as compared to taxable bond funds?
5. Are mortgage payments considered a taxable expense under the Fair Tax plan?
Erica said: “Medicare and SSI do not change under the FT”
A assume as outlined in Section 101 Imposition of Sales Tax (Ref. H.R.25 2007), the General Revenue portion of the Fair Tax is 14.91%. Subtracting this from the overall rate of 23% leaves 8.09% for the old-age, survivors and disability insurance rate, and the hospital insurance rate. It appears then, as a retiree, currently receiving no wages from employment, I will be paying a portion of the tax for current and future retirees benefits. This seems a bit unfair to those already retired who have contributed all their working lives to such funds, and would be under the Fair Tax plan required to pay a certain portion of their expense outlays in additional tax in the future. Am I wrong in that interpretation?
As a citizen and resident of the USA a portion of my investment account indudes investment trusts or funds by which I receive dividends on a periodic basis. Currently the US tax on these investments is covered by treaty with other countries. For example, the current withholding rate on dividends on Canadian Trusts is 15%. This is offset in whole or part by a credit on the current 2007 Form 1040, line 51. Question: Does the Fair Tax plan have any effect on these dividends, or will the current treaty requirements still prevail?