Fairtax As Is Versus Current Income Tax As Is
June 5, 2009 · Filed under: Education
This is really a question for opponents of the fairtax. Opponents talk alot about the negatives of the fairtax. A lot of those exist in the current system and would really be part of any tax system. Some admit weaknesses in the current income tax system. Some even highlight those issues. So my question to opponents of the fairtax is this: Would you prefer taking the fairtax as is or our current income tax system as is? In other words, is the monstrosity of the current income tax system (with its loopholes, political payoffs, distortions, complications) superior to the fairtax is in its yet to be distorted state?
95 Responses to “Fairtax As Is Versus Current Income Tax As Is”
Let’s see... stick with a system under which the U.S. has been, by far, the most dominant economy in the world for almost one hundred years, or switch to a system that has never been tried in the history of man.
hmm.... tough call.
Andrew — With all of the problems with our current income tax system, it is basically progressive. People with low incomes pay a very low effective tax rates; those with high incomes pay a higher effective tax rate. Moreover, our effective tax rates are lower (usually far lower) than every other industrialized country.
Under the FairTax, the effective tax rate goes down as peoples income rises.
So, even if the prebate “untaxes the poor,” (it doesn’t, but let’s pretend it does), all that means is that the tax burden is shifted to the middle class.
Thus, if you believe in mildly progressive tax system, as I do, you would have to say the current tax system is better.
But it’s a false choice. It’s like saying that our only choices for health care are our current system or the English system. There are many models out there that we can learn from and incorporate the best parts of those models while rejecting those that don’t work or cause more problems than they solve.
Same with taxes. The question isn’t “Is the current system better than the FairTax,” it’s “How can we make our tax system more efficient, more transparent, simpler and fairer?” If you think the FairTax is the best solution, that’s fine, but you don’t need to present it as a false choice.
Fred,
It is your position that our progressive federal income tax is the reason for our success? You think we became the economic super power of the world because our economic competition didn’t have a progressive income tax? To be polite, that’s not very well thought out.
By the way. The reason we became the world’s greatest economic power was by switching to a system that had never been tried in the history of man. Namely, by giving power to the individuals that make up our nation, not to the government that runs it.
Hayden,
It’s not a false choice. In fact, it’s not a choice at all (the fairtax will be altered as will our current income tax system). It’s just a question to gain more insight into what is at the core of some opponent’s objections.
I guess another question is what would opponents prefer if we were starting from scratch, a consumption tax or income tax?
I suspect that even some that would prefer the latter might currently prefer the fairtax over the current income tax system given the overwhelming distortions in the income tax system.
Some might still prefer the current income tax because they believe the fairtax would be a mass shift of tax burden from rich to middle class (which is of course based on the false belief that our income/payroll taxes aren’t a business tax, but a tax on people paying the wages. Totally false). But if you believe this, I could see why you might think the income tax is better because the political class can control winners and losers.
Well it certainly hasn’t prevented it, has it. Maybe it’s not as bad as FairTax proponents would like us to believe.
The FairTax is not enforceable. It would be a disaster for this country and it’s economy. If it’s a choice between the current system and the FairTax there isn’t even a choice.
I would prefer a consumption tax, though. The flat tax.
Andrew –
First, let me apologize. I shouldn’t have been quite as strident in my initial response. Let me qualify it a bit.
If the FairTax does all of the things that its proponents claim it would do, then of course it would be a better system than we have now. If, on the other hand, it has all of the flaws that its critics claim, then, of course, it would be worse than what we have. So, we’re really back to our standard arguments of “yes, it will work” vs. “no, it won’t.”
I actually agree with Fred, though, that our historical tax system, at least during the 20h century, is largely responsible for the creation of the US as an economic powerhouse. Remember, for almost the entire 20th century, we had high marginal income tax rates and high estate taxes. I believe this did two things positive for our country.
First, it helped broaden the middle class by using the tax revenue generated largely from the wealthy to create a number of programs that benefitted the middle class. From the GI Bill, to the interstate highway system, to Social Security and Medicare. By having a broad middle class, this enabled innovative American businesses to have consumers who could actually buy their products — whether it be cars, homes, computers, etc. Countries that did not have large middle classes simply did not have enough consumers with sufficient disposable incomes to purchase new products in sufficient amounts to help sustain new industries.
Second, by taxing the wealthy and high-income earners, we created an environment where each new generation was largely responsible for creating its own wealth, thus opening the door for risk-taking and innovation. In countries where wealth is largely untaxed (such as most third world countries), the wealthy don’t innovate. Rather, they spend their energies trying to protect their wealth — whether by sending money abroad, hiring private security forces, or doing whatever they can to keep the masses down. On the other hand, the “masses” sooner or later try to confiscate the wealth of the weathy few in those countries, leading to political and economic instability.
I’m short on time, but my point is that I believe policies that enlarge and strengthen the middle class are far more beneficial to our country than those that favor the wealthy.
Fred/Hayden,
“Well it certainly hasn’t prevented it, has it.” By that logic, nothing we’ve done as a country has prevented our rise to economic superiority. Not the policies that led to the Great Depression, the stagflation of 70’s, or asset bubble bursting that has caused our current economic woes. That doesn’t mean we don’t want to examine those policies.
Its funny how certain groups claim that all of America’s successes are attributable to policies they support and of its woes are due to policies they are against. Protectionists think our economic superiority comes from our protectionist policies, statists think it comes from our statist policies, and freedom lovers (myself included) think it comes from our freedoms. Correlation, however, is not causation.
Given Fred’s support of a flat tax, I’ll assume he doesn’t necessarily agree that the “progressive” part of our income is what made it great or that an income tax made it great (maybe just the fact it wasn’t a consumption tax). I too would prefer a flat tax over our current system, be it on income or consumption. Taxing income distorts production towards things that take less labor to produce. “Progressive” income taxation distorts production towards things that take less expensive labor and away from things that take high risk for high reward.
But Hayden, like you said with the claims of fairtax proponents and opponents alike, if what you claim about the benefits of our income tax system are true (which of course I believe are totally inaccurate), then I guess you should rightly support its continuation. Although I guess I’d ask, logically speaking, are the countries that we are economically superior to lacking progressivity in their income tax systems? Since our inception, did we overtake Britain economically because they didn’t keep up with our progressive income taxation. France? Our main economic competitors mostly had progressive income tax systems (I’m not sure what you’d consider the Soviet system, but I’d consider it “progressive” to the extreme). That’s why even today as we may embrace more socialist policies in this country, as long as we stay less socialist than Europe we’ll most likely outperform them economically. In the land of the blind, the one-eyed man is king.
But we changed specific economic policies based on the events you list - we didn’t change fundamental tax policy, did we?
Fred,
You stated, “to a system that has never been tried in the history of man.”.
According to such rationale, should the founding fathers have even bothered fighting the war of independence? I know there have been republics, but were there any governments such as ours with separation of powers between the 3 branches....and separation of responsibilty in representation (i.e. house elected by popular vote of the people and senate elected/appointed by the states and the president elected via a pseudo-combination of the two by way of the electorial college). I honestly do not know, so if there has been, please correct me. Also, there are numerous examples in history of something significant occuring for the first time in history. So why does that make it a bad choice. I’m not saying the choice should be made without serious deliberation and debate. Using the argument that it’s not worth trying because it has never been tried before is kind of weak, don’t you think?
You also stated “I would prefer a consumption tax, though. The flat tax.” The flat tax taxes income, not consumption. How is the flat tax a consumption tax?
John
I think such economic advantages in tax policy were not reflective of the income tax, but the tax burden (meaning it was lower than other countries). All things being equal, a consumption tax would have a lower negative impact on economic growth.
John, A flat tax can be considered a consumption tax if it excludes the taxation of savings and investment, thereby taxing income used for consumption. I also support such a flat tax over the current system.
Fred, how exactly is the FairTax not enforceable? If you are saying that a government that derives it’s income solely from consumption taxes doesn’t work, I’d like you to let Texas and Florida know that they are apparently bankrupt. Texas does not have a state personal income tax, and does just fine with the sales (consumption) taxes. It’s also interesting of note that Texas is one of the few states today not having a budgetary crisis like so many other states. Honestly there are a number of factors for that other than simply the lack of an personal income tax.
Yes, I am a supporter of the FairTax. No, I don’t think it perfect, but tell me one thing in government today that is perfect. In an appeal to intellectual honesty, please explain to me how it makes sense that an income tax with well over 100 million filers is going to be easier to enforce than a consumption tax system with under 100 thousand filers (or at least the lion’s share of the tax revenue would be generated by well under 100k filers). The rampant evasion argument just doesn’t seem realistic to me. Of course there will be some evasion, and even more avoidance, but just ask Treasury Secretary Tim Geithner about tax evasion under our current system.
Unfortunately, the more I think about it, the more I think that Hayden does have a point on estate taxes. I think that estate taxes should remain in place for the ridiculously wealthy, say those estates valued at over $10 million or maybe even $25 million. I’m afraid that even under the best case scenario with the FairTax that these uber rich families are going to primarily protect their wealth as Hayden proposes and simply pass this along and live within the means they have provided for themselves. Tax these estates such that these families must continue investing and thereby driving the economy as their fathers and forefathers who generated these fortunes did. This tax could also help to reduce the FairTax rate by .1 or .2%.
Hayden,
You stated, “So, even if the prebate “untaxes the poor,” (it doesn’t, but let’s pretend it does)”
I am married with two children. In the Fair Tax world if my income were $27,380 per year, and I spend every single dime earned on new goods or services that year, I would pay $6,297.40 in taxes (using 2007 prebate tables). If the government were giving a rebate instead of a prebate then I would get back $6,297.40. At the end of the year I would have purchased $27,380 worth of goods and services, with $6,297.40 in my pocket which is the exact amount the sum of the taxes on all my receipts would added up to. So how do you figure that it does not untax the poor?
Is it your position that when they spend the prebate they are paying taxes on it? If you buy a new item for $100 and you send in a rebate form per the manufacturer’s instructions, they send you back $23, do you still think the $100 item cost you $100 or would you think that it costs you $77?
Or is it your position that there are those above the poverty level who are still poor? If so, then you are correct.....those above poverty will pay taxes. However, I do not think that’s a bad thing. I believe people should be engaged and the I think taxing above the poverty level can accomplish that. It’s a low effective rate that increases as income increases. This is opposite what you claim. Can you please clarify?
Thanks,
John
Morph,
I am more in favor of a flat tax on income(over our current system) , excluding investment and savings and with provisions for reducing or eliminating taxation of those below some threshold (poverty level?). I understand the rationale (or equivalency) of saying a flat tax and consumption tax are the same. I wanted to clarify that is what Fred meant before proceeding with questionin as to what are his major objections then of the Fair Tax (which also taxes consumption - directly...not as income). He may have elaborated on them in previous posts, but I do not recall. To me it seems that Fair Tax and Flat Tax are very similar (granted not the same), but similar and both very different than our current system.
John
Hayden,
If reference to ” In countries where wealth is largely untaxed (such as most third world countries)....” Does the US tax wealth? I was under the impression that it taxes income. As Warren Buffet claims, he pays less than his secretary as he is not paying taxes on his wealth, but what his wealth earns him. However, according to LK the Fair Tax will tax wealth.
John
Fred,
Your reasoning seemed to be, since a policy we had didn’t prevent something, it must be a good thing. “But we changed specific economic policies based on the events you list” So you seem to be okay with changing policy even though they were in place during our rise to economic superiority. That’s a start.
“we didn’t change fundamental tax policy, did we?” Depends what you define as fundamental. We added a payroll tax. That sounds fundamental. We stopped being able to write off the cost of money (except mortgages). Some would consider that fundamental. If it is changing the fundamentals that worry you about the fairtax, doesn’t changing to the flat tax (a non-progressive, consumption tax) fall into the category of fundamental change?
John — In answer to the prebate issue, as you know, the FairTax proponents claim that the FairTax will be 30% on a tax-exclusive basis.
As you should know, health insurance will be fully taxable to individuals under the FairTax. The average health insurance premium (excuding co-pays and deductibles) for a family of four is $12,700 per year. At a 30% rate, the FairTax on health insurance preminums for that family will be $3,8100,
If that family of four is able to rent an apartment for $12,000 per year, the FairTax would be $3,000. Thus, the FairTax on health insurance and rent alone would exceed amount of the prebate. So the prebate would not cover the FairTax on food, clothing, transportation expenses, utilities, dental care, eye care, car insurance, unreimbursed medical care, furniture, interest, etc., etc. Thus, even using the FairTax rate proposed by AFFT, the prebate would not cover the FairTax on “the basic necessities of life” as they claim.
Moreover, as you should be aware, most — if not all — independent entities (i.e., those not funded by AFFT) that have studied the FairTax have concluded that the tax rate would need to be much higher than 30%. (And the AFFT-funded study found it would need to be 31.5%, assuming full compliance.) If so, the prebate would be even more inadequate.
Regarding taxing wealth. The estate tax taxes the transfer of wealth from one generation to another. The capital gains tax taxes appreciated assets when they are sold. The income tax taxes dividends and interest (other than municpal bonds), which are the product of wealth. So, wealth is taxed, albeit indirectly, under our current system.
Your reference to Warren Buffett is one that Boortz loves to make, but, I’m afraid, does not really hold up to scrutiney. Yes, Buffet’s effective tax rate is less than his secretary’s because his income is in the form of capital gains, which is currently taxed at the capital gains tax rate of 15%. (Not long ago, the capital gains tax rate was 28%, but that’s for another discussion.). Yet under the FairTax, the tax on Buffett’s capital gains would be ZERO. So, if he earns a billion dollars in capital gains per year, his current tax liability is $150 million.
What would it be under the FairTax? Well, if he spent the entire billion dollars on TAXABLE goods and services in this country, his tax liability would be $230 million. Except that he doesn’t do that. He lives relatively frugally and probably spends less than $1 million per year (and most of that would be considered business expenses, and thus non-taxable under the FairTax.) If the enitre $1 million was spent on taxable goods and services under the FairTax, his tax liabilty would be $230,000 per year.
Of course, Buffett is an extreme example, but the fact is that the richer one is the smaller percentage of his or her income is spent (particularly on what would be taxable under the FairTax). You can look up the average spending rates for various income levels on the internet if you don’t believe me.
Andrew — The payroll tax was added during WWII. I don’t think it exactly hurt our growth rate since that time. Also, probably most of the economic growth in the country occurred during the 50s’, 60’s and 70’s, when the top marginal tax rates were 70%-90%. I’m certainly not advocating a return to anything like that, but I believe it’s hard to make a convincing argument that a progressive income tax prevents or even reduces economic growth.
Hayden,
Actually I believe that the payroll tax was introduced in 1935 to fund social security (SCOTUS logic aside) 6 years before we entered WWII. I’m not sure what the statement “most of the economic growth in the country occurred during the 50s’, 60’s and 70’s” means. Are you saying that over 50% our country has had since inception occured during this 30 year period, or that these were the three decades with the most growth in our history?
“I believe it’s hard to make a convincing argument that a progressive income tax prevents or even reduces economic growth.” On the contrary, there are plenty of convincing arguments. The most recent being an OECD study (from an Institute out of France) stating that progressive income taxes reduce economic growth. Even stating that the more progressive the tax, the more restrictive. I’ll see if I can come up with the study again and I’ll post it.
John,
Re#12, I think you are confused about the nature of the prebate. Contrary to the AFFT marketing stuff, the prebate is not a refund in advance of sales taxes paid (up to poverty level spending), but is clearly just an income supplement that can be spent and taxed or saved as necessary. The prebate is nothing but a gigantic welfare program costing $600 billion annually. It will be scored by OMB as a cash grant entitlement, which is the last thing the federal budget needs at this point in time when entitlements are squeezing out discretionary spending including Defense. Call it what you like, but it really isn’t a refund of sales taxes paid, not even related to actual sales taxes paid, but based solely on family size. And it isn’t even based on the HHS poverty level numbers but is based on an AFFT redefined poverty level which eliminates the marriage penalty.
I’d also like to review your example family of four you wrote about. Under current tax law, if the family income was $27380, then no net income taxes would be due. In fact, the $250 income tax due would be offset by a $3000 refundable EITC credit plus a $1750 child care credit. The net plus of $4500 would offset the entire FICA contribution of $2094 and leave the family with a surplus of $2400 annually, or spendable income of $29780.
Under the Fairtax, the family income, including the prebate, would rise to $33677, and if spent on taxable goods and services, the sales tax would be $7746. Purchasing power would be reduced by 17% on average, leaving $27951. Who is better off?
Now let me introduce you to my situation as a retiree. In order to have the same gross income as your family under the Fairtax ($34,000), I would be living on $25,000 in SS payments, and $9,000 derived from 4% interest paid on my $225,000 nest egg acquired over my life time. Under current law, I pay no income tax and no payroll tax. I can spend $34,000 tax free. Under the Fairtax, drawing down my investments would be reduced by the amount of the prebate, but I would be paying $7700 in sales taxes as shown above. Taxation of wealth sounds good when talking about the very wealthy, but not so good when considering the retired folks trying to stretch their life savings to accommodate a certain lifestyle.
But the taxation of wealth also applies to borrowed wealth. Every dollar spent using a credit card will be taxed, and statistics show that the working poor spend much more than their income. Not only will their spending be taxed, but HR25 would impose an implicit tax on credit card debt as follows. Assume a mid term Treasury rate of 4% and a maxed out $10,000 credit card, costing 18% plus standard fees, the monthly added cost would be (10,000 x .12 x .23 /12 = $23). The added $275 annually certainly adds insult to injury, imho. Check out HR25, Sec 801-806 if you have questions about implicit taxation.
On balance, your family is pretty well off under current law, and I wonder if you would really throw my family and other retirees under the bus for those few extra bucks?
First, while I like some componets of the Fair Tax, I do not support it in the present form. Next, the income tax has been grossly perverted from it’s initial intentions. But, there is a middle ground here that both sides are ignoring.
The main flaw in the Fair Tax is that it’s too broad, it replaces too many revenue sources and insists upon repealing the 16th amendment. The Fair Tax supporters will need to be more flexable on these points. The rate can be much lower if other taxes are included or retained. Placing the entire burden upon retail markets is unreasonable. A consumption tax should be spread onto all markets, including the capital and commodity markets. There is an existing tranaction tax of .004% on stock/bond market transactions, this could be increased to .5% and extended to commodity market transactions as well. A .5% trasaction tax would generate substantial revenues without effecting the markets and reduce the rates on the retail markets. The pressure on the retail markets can be reduced even farther by keeping and reforming the capital gains and estate taxes to a highly progressive scale. The capital market transaction tax can be rebated on an investors captial gain tax up to a certain limit to untax the small investor.
The income tax has become corrupted away from it’s ententions and from the letter of the law. The income tax was never intended to be a tax on all income from all Americans, that is not even possible under the constitution. Income from private sector wages/salaries were not required to be reported until the IRC reporting rules changes and withholding began after WWII. The income tax is not a tax on income at all, the way the law is written and how it gets around the constitutional prohibition against direct taxation, was to make it an excise tax. The way the income tax law is structured is the tax is an excise tax levied on profits generated by specific activities by specific groups. Excise taxes are priviledge taxes by definition and therefore must be limited to groups that receive the priviledge. The income tax can be maintained if it were to only apply to activities and individuals that the actually applies and excluding all others from being trapped.
Hayden,
Here is the link to the Cato blog post commenting on the study. The study isn’t, however, directly studying progressive income taxes. It’s titled “Reforming the Tax System in Japan to Promote Fiscal Sustainability and Economic Growth”. The highlight of what is admitted with regards to progressivity is “The weak degree of progressivity in the personal income tax system thus has a positive impact on both labour inputs and on human capital and labour productivity. Maintaining the relatively low degree of progressivity, or even reducing it further subject to the fiscal constraints, would be beneficial for Japan’s growth potential”.
Hayden, health insurance as a basic necessity of life? I’d say that many don’t need such coverage and could do better with a low cost high deductible plan. The rest is political propaganda - health care as a “right”. So you have the government handing it out anyway, particularly to those at or below the poverty level. As for the $1000 a month apartment, I doubt that would be poverty level spending... perhaps in California. Likely half that, anything else is not a “basic necessity”. Food, clothing, transportation expenses, utilities, etc... again, what is the “basic necessity” for each of these, not the whole. Not all food is need, not all clothing is need, etc. Your entire argument on this point is a bunch of overstated assumptions.
I wouldn’t call studies not funded by AFFT as “independent”. They’re usually funded by the opposition with a vested interest in the opposing point of view and the current income tax system.
Rick,
I am in complete agreement with your assessment of the Fairtax. AFFT tried to do too much, too quickly. This might be an appropriate time to mention (again) my proposal called Fairtax-Lite. Fiartax-Lite draws on the perceived problems with HR25, and is simply a 12% national sales tax which would replace the income tax over five years. No inventory tax credits, no prebate, retains the payroll contributions and the gift/estate taxes, and leaves in force the EITC/Child Care credits. I’m interested in your proposals for a tax on capital and commodity market transactions, and wonder if the Fairtax-Lite rate could be reduced to 10% by adding those taxes to the mix? Can you estimate how much revenue might be involved?
As for your views on the income tax, tilting with windmills is a waste of time, imho. My information source is the 1913 law, and it clearly refutes most of your claims. For instance: “There shall be levied upon the entire income from all sources to every citizen of the US a tax of 1% per annum.”
“the net income of a taxable person shall include salaries, wages, or compensation for personal service of whatever kind and in whatever form paid.”
The law is quite clear it seems to me. Congress intended to tax income. Period!
Hey Morph — I was wondering when you were going to weigh in here.
To your first point, even though I know it goes against your libertarian tendancie, I have to say that, yes, I certainly believe that health insurance is a basic necessity of life. (That doesn’t mean that the government should provide it for free, but that’s another argument.) So the tax on health insurance under the FairTax is a very important factor in the cost of the FairTax to the average family. If they don’t have health insurance, then their health care expenses will be taxed directly. If they get cancer and have a $200,000 bill for treatment, they’ll need to fork over an additional $60,000. (If, on the other hand, they don’t have any money and the state pays for it, the state will need to fork over the $60,000 to the federal government.)
The reason I emphasize health insurance, is this is one of the issues the FairTax advocates gloss over, if not ignore completely. The FairTax advocates like to claim that the pre-bate “untaxes the basic necessities of life,” and imply that if you don’t want to pay taxes under the FairTax, you just need to live frugally. Alternatively, if you lose your job, just cut back on your spending and you wont’ need to pay any net taxes. By ignoring the tremendous cost that the FairTax will impose on health insurance for the average family (both through the elimination of the employer’s tax deduction and the taxation of health insurance costs), FairTax advocates disguise the true cost of the FairTax on the average American family.
And, yes, when you add health insurance costs and rent into the equation, there is simply no way that one could honestly say that the prebate would come close to paying for the tax on “the basic necessities of life.” Thus, if you are a middle class family and you lose your job, under the FairTax you are completely screwed, because you will still need to pay for health insurance out of your own pocket, your rent, food, clothing, etc., all of which will be taxed under the FairTax.
Hayden, a tax burden removed from one thing is ultimately placed somewhere else. It is likely that the average American family is paying those taxes in one way or another anyway, either through higher income / payroll taxes or higher prices through corporate taxation. Political smoke and mirrors - if we want to subsidize health insurance, we should just come out and do it and forget the tax shell game that hides what their doing.
I’ll also reiterate the difference between average costs and the cost for the “basic necessities” of each. Don’t take the average family cost and treat it like a poverty level plan if your going to argue that the prebate doesn’t offset it. A low cost high deductible plan would cover the cancer situations you describe. Health insurance, as we often use it, is not insurance in my opinion, but an overused, overpriced, health care plan.
What it seems you take issue with is the formula definition of poverty level in America. I don’t think DHHS includes heath insurance in their poverty level formula, but those defined as poor in the U.S. are reported to have a higher standard of living than average families of other countries. The Heritage Foundation states that the average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. It’s also worth noting that poverty rate numbers do not take into account food stamps, housing subsidies, the Earned Income Tax Credit, Medicaid, and other benefits.
Morph — I actually agree with you that high-deductible health insurance plans makes a lot more economic sense that low-deductible health insurance. (Although, alas, we both know that some people won’t do routine preventitive care for themselves or their children if they need to pay for it “out of pocket.”)
And I agree that its true that the chronically poor in this country receive government assisted health care, housing and food stamps (all of which would be taxed to the states and local governments under the FairTax, if not directly taxable to the recipients), but, frankly, I don’t think most FairTax supporters really give a damn about the chronically poor. (Boortz certainly doesn’t.) Rather, they think that the FairTax will lower their OWN tax burdens since everyone natrually believes that he or she is frugal. “(It won’t be me paying the FairTax; it’ll be my no-good spendthrift brother-in-law.”)
For some reason, most middle class FairTax supporters don’t realize that it is simply mathematically impossible to eliminate taxes on the poor and slash taxes on the rich without increasing taxes on the middle class. This is partly because they they refuse to accept the proposition that the tax rate will almost certainly need to be far higher than AFFT claims it will be, but also because they believe they can simply minimize their tax burdens by buying less “stuff.” Thus, I think it’s pretty important to point out that much of what is going to be taxed under the FairTax is stuff that a middle class family simply cannot do without — health insurance being the most obvious, and expensive, example.
Hank,
I don’t think I am confused about the nature of the prebate. Are you saying that HR 25 does not provide money to a family based on the number of family members? And that that money is not based on poverty level? And that amount is computed to be the amount of taxes they would pay if they spent the defined poverty level income on new goods and services? I understand referring to it as an income supplement if you want. Isn’t that sort of what the purpose of the prebate is anyway. To provide more money for the poor by offsetting their tax burden? And yes, they will be taxed if they spend their prebate on new goods and services, but that’s because they have already purchased goods and services tax free (essentially) up to the poverty level. I don’t like entitlements any more than the next guy (okay less than the next guy), but is there a better/simplier way to offset taxes paid by the poor?
I believe it’s very difficult to define what is fair (especially when it comes to taxation). I certainly can see a flat tax as being fair....everyone pays the same rate. However, I can see how such a system is considered unfair to those in the lower income range. And is it really fair to tax the wealthy more because they can afford it? So I liked the aspect of the Fair Tax of providing a prebate which will be significant to a poor person, but provide it also to everyone.....so everyone is treated the same way. It does seem inefficient to collect taxes and turn around and send a portion of it back. So would it be better to issue everyone a card to with a credit associated with their family size (essentially their tax credit). They submit the card when purchasing goods/services, and the tax is not paid until the tax credit is used up? Would that still show up as entitlement?
The prebate may not be refund of actual taxes paid....as I understand it the intent is to remove the tax burden from of those at or below poverty....in essence make the system more progressive. I don’t care if it’s callled a prebate, credit, rebate or entitlement. I don’t see how it doesn’t offset taxes paid.
As to the family of 4 example....not to help your argument, but isn’t the child tax credit $1000 per child (therefore $2000, not 1750).
Regarding SS....I believe it was Morph who recently indicated that SS payments based on the increased price of goods...thus you would have no change in purchasing power from your SS payments. And while you may not be being taxed on your income, you do still pay taxes indirectly in the items you purchase.
Every dollar spent using a credit card is already being taxed. And policies that encourage the working poor (or anyone else for the matter) to stop spending beyonds their means get my attention. I’ve been there and worked hard to get off that ride.
My family is pretty well off in spite of the current law and it’s is not my desire to throw anyone under the bus.
John
Hayden,
Re #16 - I don’t think it’s fair to use average cost of health insurance premiums in reference to poverty level individuals. I doubt many at that level of income pay (or have paid by their employer) $12,700 per year. You may believe health care is or should be considered a basic necessity of life, and you are certainly entitled to your opinion. One does need food and shelter, but health insurance? If your position is that you need health insurance because without it, you would not be able to get medical care, I understand the logic...but disagree. Having health insurance might allow one to have a better quality of life and even prolong one’s life. The poor can already get emergency care without health insurance. So I do not agree that it’s a basic necessity.
Regarding your response to Andrew in the same post.....yes, the payroll tax was added long ago (as Andrew mentioned in 1935). Isn’t it possible that the reason it didn’t exactly hurt our growth rate is because the SS tax rate was quite low initially (2% when implemented) and was not applied to all wage earners. The rate increased to 6% by 1960; 10.6% by 1970 and 12.3% by 1980. Over those years more and more individuals were brought into being required to contribute. How about going back to the way it was originally layed out....then see how the country’s growth rate reacts. Oh, and I didn’t even include Medicare and Medicaid which I think came into being sometime in the 60’s.
John
I would have to say I prefer a progressive tax to the fair tax. From what I have read and understand about it, the economy would have to boom for at least two years to be able to switch. Spending would also have to be drastically decreased. Which obviously isn’t. The economy isn’t stable enough to support the transition, especially w/the 31% drop in revenues and the massive increase in our budget.
Under a progressive system that burden is shifted to the top brackets where the lower brackets usually make money at tax time. Under the fair tax system those who typically pay nothing or get money back at tax time would see a big increase in how much they pay out.
I would rather we fix the problems w/the current system and cut our spending.
Wendy,
Actually, releaving the strangle hold of income taxes on productivity would create a boom in the economy. The current income tax shifts the tax burden downward onto the wage earning employee off of the higher income business owners. The middle class is being crushed. Personally I don’t think the current version of the Fair Tax is a good idea because it places all the burden on retail consumption. However, if the burden could be spread to include the capital and commodity markets as well the retail tax rate would be much lower. Keeping and reforming the income tax, capital gains tax, and estate tax could lower the rate even farther.
Morph and John –
Well, I guess I know where you guys stand on the current health insurance debate. Boortz doesn’t agree with me on that one either.
health care might be construed as a right based on the “right to life, liberty, and the pursuit of property (now happiness).”
but, health care is NOT heath insurance.
as noted above, for most, our current HI system is little more than a health care payment installment plan.
i have an HSA (high deductible, low premium) plan for which i pay $21 a month. my employer picks up the rest, but the grand total of the premiums is well under $2000 a year. that is basic health care insurance coverage, and if we want to call that a necessity, the prebate will easily cover the FT on the entirety of that premium.
if i want to have a ‘normal’ insurance plan (low deductible, high premium), that’s certainly available. i’ll spend about $150 a month on it, and my employer will foot the rest of the $5000 bill. that’s well beyond the basic necessity (if we chose to consider it as such), and is correctly NOT covered by the prebate.
BTW....i’m in the “HC/HI is NOT a right under federal law” camp. The Constitution is the supreme law of the land, not the Declaration of Independence.
Health insurance is definitely not a necessity. Health care (depending on how broadly you define it) isn’t even a necessity, unless, of course, your sick (and even then many times you don’t need healthcare because your body will take care of it).
Food and water are necessities. Clothing/shelter are right up there. 45 million Americans are without health insurance (maybe more now) at any given time. Many by choice. That doesn’t sound like a necessity.
I’m not saying that I don’t think health insurance is a good thing to have or even quite important if something non-emergency goes wrong and you either need the insurance because of a lack of resources to pay for your bills or you want to protect losing all your assets in order to pay the bills. That doesn’t make it a necessity. And there is definitely not a right to healthcare. Nor is there a right to food, shelter,etc. Maybe there is a moral imperative. But there is nothing moral about one party forcibly taking something from someone else.
Well, in that case, maybe the FairTax proponents should slightly change their explanation of the prebate:
The prebate will pay for the tax on those families that live in poverty and rely on government assistance to provide for their medical care, housing and food. (The cost of such medical care, housing, and food will be borne by state and local governments, as will the FairTax associated with such benefits.)
If an ambitions poor person strives to pull its family out of poverty, however, by gaining employment, becoming self-sufficient and weaning his family off of government assistance, he or she will find that not only will his family have to bear the cost of health insurance, housing and food, but it will now be burdened with paying the FairTax on such items, which will not be covered by the prebate.
So, poor family, you have a choice. Remain in poverty and live tax free, or try to pull yourself out of poverty and be hit with the full burden of the FairTax.
Gee, I wonder what most people will do?
“try to pull yourself out of poverty and be hit with the full burden of the FairTax.” No. The only people hit with the full burden of the fairtax (23%) are those that do not recieve the prebate. Everyone else will approach 23% based on spending more money, but no one will ever reach it.
The full burden for each dollar spent approximately over poverty. Yes. Just like we have to pay now in embedded taxes for everything we buy (of course offset for poorer people by the current benefits they recieve now from the government).
“So, poor family, you have a choice. Remain in poverty and live tax free, or try to pull yourself out of poverty and be hit with the full burden of the FairTax.
Gee, I wonder what most people will do?”
....as opposed to the current situation which goes a little something like this:
So, poor family, you have a choice. Remain in poverty and live tax free, or try to pull yourself out of poverty and be hit with the full burden of the Social Security Tax, and the Medicare Tax, and (if you make enough) the Income Tax, and (if you make more) the Capital Gains Tax, and (if you make a lot) the Estate Tax, and (if you make ‘too much’) a Successfulness Punishment Tax.
Gee, I wonder why some people see welfare as a haven?
Come on Hayden, your smartered than that. The current system traps people in poverty much easier than the Fair Tax would. The current system is all based upon income so millions are forced to work under the table because if they reported their income they would not be able to supply food or shelter to their families. Withholding captures 25% or more of my paycheck and eventhough some of that does come back to me when I file next year, I don’t have that money to deal with my immeadiate needs. This is even a bigger problem with the working poor. It holds them down in poverty.
Justin — I agree with you, at least in part. Everyone, no matter how small their income, should pay at least something in taxes if for no other reason so they’ll get just as pissed off at government waste as the rest of us.
Obviously, if someone doesn’t have any income or savings at all, they would not be able to pay anything towards taxes, but they could be required to do at least some community service in exchange for benefits.
But, I know I’m just dreaming . . .
John,
The reason I thought you might be confused about the nature of the prebate is your attempt to treat the prebate the same as a rebate in #12. The two are quite different. A rebate simply impacts the retail price, while the prebate does not impact prices, just total income. You only have to look in your checkbook each month to see the income supplement called the prebate. AFFT would prefer you to think about the prebate as a tax refund, which leads many otherwise educated folks to deny that the prebate is a cash grant entitlement. Sorry, but an entitlement is exactly what it is.
We have discussed various ways to implement the prebate without calling it an entitlement, but nothing seemed to make sense. The prebate would be the largest single entitlement if implemented, and it would have serious federal budget consequences.
You asked if there was a simpler way to protect the poor, and my answer is still that a targeted prebate or simply retaining the EITC would reduce the overall prebate cost from $600 billion to $59 billion, an order of magnitude! It would also reduce the Fairtax sales tax rate by 3-4%. Where on earth is it written that everyone in the US should be able to purchase “essentials” tax free? Makes no sense to me!
As for the Child Care tax credit, the spouse of the house, a ten year veteran AARP volunteer tax preparer, informs me that that credit is not refundable, but is one of several credits that could be used to reduce your tax burden to zero. So my family budget numbers were in error. The $2000 child tax credit would offset the $250 tax liability, but it wouldn’t add any net income. Sorry about that!
While Morphh is correct that Social Security payments to retirees would be protected from inflation, I haven’t seen any numbers which might give us some idea of the cost of a 17% inflation factor? And it isn’t just SS payments, but any and all government retirees including military. They are all interlocked. Huge cost, imho, and I don’t believe the 23% rate included that cost?
Hank,
You are defining the term ‘entitlement’ too broadly. Under your definition any payment received from the federal goverment would be an entitlement. A tax credit is not ussually considered an entiltlement by most. The prebate is a tax credit paid before the fact instead of after, it’s not an entitlement. I know that’s the retoric used by those who want to stiffle debate (which I do not think you are trying to do), but it’s not valid.
Rick,
I thought you knew better. We discussed this issue at length some time ago, but here is a repeat for your benefit.
From WIKI, “Federal entitlements are any federal payments to groups or individuals that is mandatory/legally obligated by the government according to certain criteria. Examples of this include Medicare/Medicaid and Social Security”. The “big 3″ entitlements are Social Security, Medicare, and Medicaid. The prebate as obligated by HR25 certainly fits this definition.
Other federal entitlements include the military and civil service retirement systems, unemployment insurance, income programs for the blind and disabled, school breakfasts and lunches, housing subsidies, child care support, nutrition for the elderly, vocational training, disaster relief, flood insurance, farm subsidies, and various special benefits for handicapped persons, American Indians, pregnant women, displaced defense workers, tobacco farmers, and graduate students.
I’m hard pressed to name any federal payment that isn’t an entitlement. Perhaps you can name some?
The prebate is not a tax credit! If it was, don’t you think it would be tied to taxes paid? But it isn’t. It is tied only to family size. The notion that the prebate is a tax credit is a Fairtax myth of long standing. Believe what you will, the OMB will score the prebate as an entitlement. Period.
Yes, all federal payroll including the active military is paid exactly the same as all the “entitlement” programs mentioned but are obviously not entitlements. The checks come from the same place, they even look exactly the same as social welfare payments and federal payroll would also fit under your overly broad Wiki definition. Again, the prebate is not a social welfare payment no matter how it’s spun. I know the detractors would love to make the connection but it’s just not valid. I’m sorry I missed the original discussion but that does not change the basic logical error in your arguement. A mandated federal payment is not necessarily an entitlement.
Ladies and Gentlemen:
I think I have come up with a credible articulation of a standard against which to measure any tax, and I invite you to demonstrate that I’m wrong. To serve its country and its people well, a tax must be:
1. Simple
2. Efficient
3. Friendly to Economic Growth, and
4. Fair.
These four points indeed capture the entire universe of discussion about a tax system.
A tax that is perfectly fair, but flunks Tests 1, 2 and 3, does not serve its country and people well. Fred’s Post 1 talked about only Test 3, and Hayden’s Post 2 talked only about Test 4. Neither addressed Tests 1 and 2 and therefore were incomplete analyses.
If we apply all four tests to the current income tax system and the FairTax, the FairTax wins hands down. Nobody will dispute that the FairTax is simpler. The FairTax is more efficient because it captures a greater percentage of its tax base at less cost to the government. The FairTax is friendlier to economic growth because it unburdens the economy from its tax system. Finally, the FairTax is fair, and even fairer to low-income people than the current tax system, despite the self-serving claim of the current system to being progressive.
~Jim Bennett
Summit, NJ
Rick,
If you can’t see the difference between an entitlement such as the “prebate”and a government paycheck for services rendered, then this discussion is at an end. But bet your small change that you are right, because you aren’t! There are really only three “buckets” in the federal budget–interest on the national debt, discretionary including defense discretionary, and entitlements. Surely you understand that government payroll is in the second bucket?
I’m not the one who placed the entitlement tag on the Fairtax prebate. That was done back in 2005 by two savvy Senators who co-chaired the Presidents Tax Reform Commission. If Breaux and Mack didn’t understand just what an entitlement was, no one did.
Jim,
Your proposed “standard” may be credible in your eyes, but certainly not in mine. But, even if the Fairtax was superior in all of your measurement standards, you can’t get there from here. Rudy G once said that if we had it to do over again, we might have chosen a consumption tax over the income tax. But we didn’t, so we have to work from where we are. Jim Sexton, while chair of the JCT, noted that Congress is institutionally conservative and prefers evolutionary change to revolutions. After 12 years of effort by Linder, the Fairtax is in no better shape–in fact probably worse under the current administration. And you are going to owe me $10 when you are unable to match the number of co sponsors you had in the 110th Congress!
I’ll let Hayden and Fred defend their positions, but let me tell you where I disagree with your analysis. Not your standards, but your application to the Fairtax. First, the current tab for the IRS is around $10 billion. If your standard is reduced government cost, your Fairtax fails badly. The 1/2 of 1% fee paid to business and State collectors would be $12.5 billion, and that would be on top of any costs of the new system over and above the fee.
More importantly, you need to look at the fairness standard through the eyes of both young folks and us retirees. Is it fair for me to have to resume paying for my SS pension with my sales tax dollars after paying into the trust funds for 45 years? And is it fair to double tax my meager savings when spent. Or is it fair to heavily tax the “borrowed wealth” of young families just getting started. The prebate does not protect young or old from paying higher taxes under the Fairtax. The income tax is much fairer to these groups!
From my knot hole, the Fairtax is neither fair nor effecient. I’m sure others might disagree, but AARP, with their 37 million voting members, doesn’t support the Fairtax. And neither do the governors of the 50 states. And I haven’t seen a huge wave of support from the 20 million business owners that should be leading this charge. Just who are the Fairtax supporters, Jim?
Hank,
You accepted my scoring method, though not my way of applying it. Fair enough. That being said, your comments addressed only two of my four tests, and one of them incompletely. You did not address Test One at all. The the FairTax is simpler than today’s tax. I don’t see how you can dispute that.
As to Test Two, you brought up numbers to show that the direct costs of administering the FairTax exceed the IRS budget by about $2 Billion, but you did not say how much of the tax base the FairTax captures. If the FairTax costs more, but captures more of its tax base, then it’s still more efficient. You also did not address the compliance costs of the FairTax as contrasted with the Income Tax. Compliance costs under the FairTax are far lower.
For Test Three, I didn’t see economic growth considerations in your comments.
Your fairness argument for retirees goes only to Test Four. It is one you have stated often in the past, and I am familiar with it. For many reasons, the particular detriment to retirees you cite can be overstated. To the extent seniors depend on social security, the benefits are indexed under the FairTax.
While I can be more sympathetic to retirees, the other class you mention, young people, are generally better able to manage their circumstances to adapt to change.
~Jim
Jim — Since you are well aware of my position on the FairTax, I doubt if you really want to hear my answers, but here goes:
1. Simpler? Yes.
2. More Efficient? Yes, in that it will be cheaper to administer and comply with. It might “capture a greater percentage of the tax base,” but that’s mainly because the expenditures of retirees and children (including, most significantly, their health care costs) will now be taxed.
No, in that there will be more opportunities for “leakage,” that is, where people avoid paying the FairTax by buying used goods, making overseas purchases, etc. You will probably see an increase in untraceable (and untaxed) cash transactions and untaxed purchases for “business or investment” purposes.
3. Friendlier to economic growth? Yes, if the rate is low. Because of lower administrative costs (the efficiency factor), there should be less waste to the economy. And because of increased savings (since people will presumably be purchasing less), there will theoretically be more capital available for investment (though, of course, that capital can be invested anywhere, not just in the US). Export oriented undustries that utilize US labor and inputs would benefit the most.
No, in that certain industries that cater to the US consumer will clearly suffer due to the increase in the domestic cost of their products under the FairTax. Auto industry, housing industry, retail stores, restaurants, domestic travel.
4. More fair? No. As I said in my initial post, you can’t slash taxes on the wealthy (by ending taxes on inheritances, capital gains, interest and dividends) and the high-income (by elminating the income tax), without increasing taxes on the middle class and especially , as Hank points out, middle class retireees. It’s simply mathematically impossible. So, unless your definition of fair includes increasing the tax burden on the middle class, the FairTax is a clear loser here.
Final score:
One “yes.”
Two “it depends.”
One “no.”
Now that’s a proper answer!
~Jim
Jim,
Let’s start with the “simpler” standard, #1. Simpler for who? There are roughly half of Americans who pay no income tax, so am I to believe that filling out the Family Consumption Allowance annually is simpler than sending a short form to the IRS? Take another look at the FCA requirements and then tell me it is simpler? I don’t think so!
Simpler for the retail merchants? Review the proposed sales receipt and then tell me where the State/Local taxation fits? Read about all the weekly reports that are required and tell me it’s simpler. Consider the bonding requirements and tell me it’s a piece of cake. No, the retail merchants, who would still have to comply with the SEC requirements if publicly held, won’t find the Fairtax simpler. (Maybe they have already figured that out–their silence is deafening?)
Simpler for the State? Not hardly! Read all about the add on functions that HR25 requires, and ask yourself if the States really want to become the Federal tax collector? It’s not simpler for them, and it isn’t going to happen, imho.
And finally, do you really think it would be simpler for the Secretary of the Treasury and his staff? Think about what will happen when the States tell
Treasury to take a hike, as they probably will. Setting up sales tax collection agencies in all 50 States would not be so simple.
Jim, it may seem simpler through your eyes, but that doesn’t make it so for many others.
As for Standard 2, your definition of efficient seems a bit odd. Collecting the same amount of revenue at higher cost doesn’t seem more efficient to me? Why is broadening the base more efficient?
How much of the mythical $11 trillion in offshore funds that are supposed to come rushing home did you include in your economic growth projections? None of the economic forecasts I’ve seen make a credible case for growth, but only time will tell. Did any of the studies begin by admitting that the GDP would shrink by 10% in year one? I don’t think so.
Raising my SS pension (and maybe my military pension?) to account for inflation would be nice, but where in the various studies are the funds to pay for the raise to be found? And, for the young families, up to their neck in debt, and spending much more than they earn, how do you propose they “manage their circumstances to adapt to change”? They are going to be hurt badly by the Fairtax, and I don’t see any escape for them. The current economy is built on debt, and if you get less of something when it gets taxed, then we will get less consumption and less revenue for the federal government. Don’t try to tell me that you have never shuffled several credit cards from month to month to attain a certain lifestyle in your younger years. Very few modern families conform to the pay as you go philosophy as near as I can tell.
I have no objection to your proposed standards although there are numerous other such lists, put together by supposed economic experts. But when it comes to your report card, we will certainly have to disagree.
Hank,
Yes, I do know there is a difference between federal payroll and social welfare payments. My point was that they both can be included in the Wiki definition of entitlements and therefore the definition is too broad. A federally madated payment with certain criteria can decribe federal payroll as well. Therefore, it does not logically follow that all federally mandated payments are entitlements. Your argument is not valid.
Hank, I just went to look at the sources for the Wiki definition (as I was just curious) and did not find it on Wikipedia, which is what I thought you were referring to. Alas, I found it on WikiAnswers, which is nothing more than one person answering another persons question like Yahoo answers. It’s like asking someone off the street and then using that definition as the basis of the argument.
The Wikipedia article describes it as:
Princeton University WordNet state it as:
Merriam Webster
I guess we could debate the definition (rights, access to benefits, etc) but I don’t see that it really matters. Much of it depends on the intent of the law - this is part of the tax code meant to reduce the taxes paid by low income families and make the plan progressive on spending. You can play semantics to demagogue it, but I don’t really see the point.
Hank,
I never had a credit card until I was nearly 30! I recall being much happier.
~Jim
so, i can’t get a break on my taxes by continuing to spend my income responsibly because other 30 somethings are up to their eyeballs in debt from buying things they don’t need and/or can’t afford
strawman argument. you guys can do better than that.
Forbs-sorry it’s taken so long to reply.
You’ve stated that it would cost the economy to boom.However, can u gurantee that this boom will be at the levels are spending requires? I don’t believe so.
Secondly, as to your statement that the shift of the burden has shifted lower, that would be incorrect. The burden has actually risen for the top brackets while it has lowered for the bottom.
I fully support revamping some of the tax laws but I’d rather approach laws that will make a difference. For example, classifying hedge fund managers salaries under wages vs gains. I also believe we need to fix the AMT or find a replacement or remove it. Like I said earlier, the top brackets are paying for the burden of our budget, under the fair tax idea the lower brackets pay more and the top brackets pay less. I’m not for taxing the rich I’m find w/the 35% top now but if we lower it to 23% we’re losing a lot of revenue.
sorry, didn’t proof and that is embarrassing.
I posted this in a previous thread:
The Congressional Budget Office
defines an entitlement as:
The government would be legally obligate to make a payment, the “prebate,” to any family (a group of people) that meet the eligibility criteria set in law and no budget authority would be provided in advance to pay the “prebate” - the spending would be controlled by the eligibility criteria.
There is no question the “prebate” would be an entitlement. It’s semantics to call it a made-up word like “prebate” to imply it’s an advance rebate of taxes paid when it’s not.
Thank you, Fred,
Crystal clear and not debatable. And, as my grandmother used to say, the more people you can get out on the limb with you, the closer your feet are to the ground?
For the vast majority of folks, the only reason their tax position is improved over current law is the prebate. What puzzles me is that most of the advocates on this blog appear to favor limited government, self sufficiency, etc. Why on earth they support a huge government welfare program such as the prebate escapes me. At a projected annual cost of $600 billion and rising, that would be the largest single entitlement and would place an unacceptable percentage of the federal budget on “auto pilot”. Fairtax advocates need to seriously consider a targeted prebate or simply retaining the EITC, both of which are estimated to cost $59 billion, ten times less than the Fairtax prebate. Where is it written that everyone should be able to purchase essentials tax free? That is a bunch of nonsense, imho! If you really want to protect the poor, target the prebate, but don’t spend $600 billion on the Bill Gates of the world!
Wendy,
The current income tax system and more specifically payroll withholding already removes immediate purchasing power from most Americans (25% to 30% each payday for me). The average added burden of the deferred costs of federal income/payroll taxes and compliance embedded in the price of every product/service increases the price around 15%. Millions are forced to work under the table and remain in poverty because the loss of immediate income from withholding creates a barrier to upward mobility. Replacing the federal payroll withholding taxes with a 10% retail consumption tax (less than the already embedded costs of the replaced taxes) and increasing the capital markets transaction tax from the current .004% to .5% would generate sufficient revenues for the federal government and increase purchasing power by at least 25% for most Americans. What do you think will happen if most people suddenly had at least 25% more income?
Hank and Fred,
Your new definition changes nothing. Your conclusion still does not necessarily follow, payments made as a credit against taxes to be paid can not be considered a benefit any more than a rebate for taxes already overpaid. Just because the payment is prepaid does not make it an entitlement even under your own definitions.
Forbes,
You are forgetting that 40% of Americans don’t pay income taxes. Again, The top 50% pays roughly 95% of the taxes. They pay well over 35% if you calculate payroll taxes. Therefore, again, if you lower the amount the top brackets who actually pay the tax burden you are taking in less money. You then causing the 40% (lower brackets) who pay roughly 9% (6.2%SS 1.3% Medicare) you are increasing their tax burden roughly 11%. That will crush spending, therefore cripple the idea of raising enough revenue for our budget.
Nobody is forced to work under the table. They choose to.
I believe your numbers trying to find the 25% more income convoluted. Once you add in the taxes on your home, your utilities your necessities you’ve reached that prebate threshold. Mortgage costs alone just about wipe the prebate amount out.
Rick,
If you don’t understand the difference between a rebate and the prebate, we are all lost. Look, my friend, the test of a prebate is if your gross income increases, it’s a cash grant entitlement known by the non-word “prebate”. With a rebate you are simply getting your own money back. There would be no increase in gross income. When the government sends you a prebate check, your gross income goes up. Just look in your checkbook if you are confused about the difference.
Wendy, the economist Larry Kotlikoff states that the FairTax gets its revenue from wealth taxation. You’re switching from a system that taxes workers (wages) to a system that taxes wealth. The distribution is passed across a larger base, reducing special interests, therefore, the system can have lower rates across the board. So this argument that reducing taxes on higher income earners has to be offset by an increase to the lower or middle class is not accurate. It would be true that it could be shifted to someone with a lower income, if they spend a large portion of wealth.
This is not just a bizarre hypothetical example. It reflects what is happening (on average) at the low end of the income distribution: there are a number of people who report negligible incomes yet are spending very substantial amounts. Some of these people may have suffered capital losses; or be farmers who had a bad year. But it is hard to argue that these people are, by dint of low reported incomes, necessarily poor in any fundamental sense. Income is surprisingly poorly correlated with expenditure. The main explanation is that income is more volatile than expenditure - we try to maintain our spending even if our income takes a temporary hit.
Wendy
Income tax is only 40% of federal revenues, FICA payroll taxes are just a couple points less. The top 10% income earners receive 90% of the total income leaving 90% of the population with 10% to live on. Most of the 40% that don’t pay income tax are still having the taxes withheld and do not have the earnings to live on, getting it back when they file their return after december. The working poor pay FICA payroll taxes on the first dollar they earn and the millionaire hedge fund manager contributes a maximum of 3.5% of $91,000 on AGI of his first $102,000. Some of those that pay no income tax are also in the top 10% because they have no earnings/salaries, instead their money is working for them. They pay a flat 15% capital gains tax.
You are ignoring that every product or service, including basic needs like food and shelter has the price inflated by about 15% by the embedded costs of federal income/payroll taxes. Those costs would go away, to be replaced by a 10% retail consumption tax under my plan.
I did not even mention the prebate, but you miss the point on it as well. The prebate is not even close to how you describe it. The consumption tax is levied on consumption above normal consumption for a household above the poverty level. The prebate untaxes non-taxable consumption. That’s it.
First, the “prebate” is not a credit against taxes to be paid. You get the prebate whether you pay the prebate level of FairTax or not. Second, isn’t the EITC a credit against taxes to be paid - it was designed to offset payroll taxes on earned income? Isn’t it an entitlement?
No, the earned income tax credit is not an entitlement it’s a tax credit. The Fair Tax like the current income tax are both revenue programs not benefit programs. Payments made to offset taxes are tax credits, they are not benefits. The Fair Tax is a consumption tax levied on consumption above an arbitrary amount. The prebate is the mechanism to untax consumption below that point, it’s a tax credit.
It’s a refundable tax credit. You get the amount of the credit whether you pay that much in taxes or not - just like the “prebate.” It’s no different than the government sending out cash - just like the “prebate.” The EITC is an entitlement - just like the “prebate.”
Fred,
The term entitlement describes payments for social welfare benefits programs. The term tax credit applies to payments for revenue programs. Using the word “entitlement” to decribe a payment for a revenue program is a misuse of the word. The EITC is an earned income TAX CREDIT!!!!
Morph,
I’m not even sure where to start. In regards to the hopes your rates can change, congress can also increase those rates at any time. I’ve not seen anything that suggests we’d be able to go below the rates they’ve projected. I’ve only seen reasons for them to rise.
Again, you guys seem to be avoiding the fact that those people who are in the wealthiest part pay the most in federal income and payroll taxes. You’re not doing anything but lowering their burden.
If you believe that the rise in consumption tax is going to increase the wealthy’s spending habits that also fails to be seen. Considering they are paying the most in revenues raised (income tax) why would people assume their spending would bring in more money? There is nothing to suggest they’d spend more.
If the lower brackets pay nothing in federal income tax now and you now make them pay 23% or 31% tax on items, you are absolutely increasing their burden.
Your example of people reporting minimal incomes as if they are hiding wealth, is few and far between. We haven’t even touched on the black market fuel this type of tax would have. You will have dodgers in any tax system. At lest in the progressive there is a way to audit and track it.
Forbes,
That 40% is a huge chunk of the other taxes and revenues we raise and about the largest way we raise our revenue. The top 10% hold the wealth but that has nothing to do w/what they spend. It’s been proven the largest consumers are middle America. The top 10% pays just over 25% of the revenues raise w/the top 50% raising the over 90% of our budget. (the top 50% is not middle America.)
There is nothing saying any of those low income wage earners have to pay income tax through the year. IF they are getting a refund they obviously dont need to pay in and mainly those people are getting the EIC or CTC. In any event if you were to talk to those people they prefer that bulk of money in the beginning of the year. They’d pay throughout the year under the fair tax and hope they can spread the prebate out through the year. Most wont.
You have no evidence that those in the top pay no income tax. Even if they are paying a gains rate they are still paying income tax, it just isn’t the amount YOU would like them to pay.
Where do you think the poverty level is for a family of four?
Maybe you should look up the word “credit.” And remember, it’s a refundable credit. Like I said, it’s no different than the government sending out cash.
And entitlements are not limited to social welfare programs. An entitlement is “a legal obligation of the federal government to make payments to a person, group of people, business, unit of government, or similar entity that meets the eligibility criteria set in law and for which the budget authority is not provided in advance in an appropriation act.”
Wendy,
You are absolutely right, one of the major causes of our current economic meltdown is the concentration of wealth at the top. They cannot spend enough to keep the economy healthy. America needs a large and vibrant middle class to drive the economic engine. Relieving the tax burden on wage earners would be a major step in the right direction. In the current system the wage earner, no matter where they fall on the economic scale is getting over taxed. They pay some of the highest income tax rates on their earnings and pay the additional 15% of embedded costs of federal taxes included in the price of every product/service they purchase deferred by all business. Since, there is no real way to stop business from deferring their tax liability to their customers and wage earners have no way to defer their tax liability, then it only makes sense to reduce wage earners income tax liability. In fact, the original income tax laws did not include the common wage earner. In 1920 only 3% of American households were required to file income taxes, by 1936 that number more than doubled to 6.5%. It wasn’t until withholding and the IRS intiated new reporting rules after WWII, when most then required to file income tax. Reinstating these original income tax ideals would return health to the middle class and to our economy once again.
I didn’t say that some of the top 10%er’s don’t pay income tax, I said many don’t pay income tax on wages/salaries which have higher rates than most of the income taxes they do pay. You don’t give the working poor credit for paying withholding, payroll. or the embedded costs of federal taxes deferred onto them, so I was levelling the field. If you limit the definition of income tax paid to only the progressive part of the income tax, we should do it for all the groups. Isn’t that only fair?
Fred
Appropriation does not equal revenue, they are the opposite sides of the ledger. Using terms that decribe payments made on the appropriation side to decribe payments on the revenue side is just not valid. A refundable tax credit is not the same thing as a social welfare benefit. No matter how much you insist, it’s an improper use of the word both logically and by definition.
Forbes,
“In the current system the wage earner, no matter where they fall on the economic scale is getting over taxed. ”
Not true at all. Again, if they are getting a refund their burden is zero. If you want to add payroll taxes fine, 6.2%SS + 1.45 medicare=roughly 8% tax burden. You want to increase their burden to 28% or whatever the current est. is. Sorry that’s just not common sense. If you’re going to suggest adding in the sales taxes, that will not go away.
I’m also not sure why u are comparing 1920 income tax filings to current day. obviously the wages and brackets have changed since then. Why? Our over spending. Cut ur spending and u can reduce ur taxes.
As far as ur top 10% income comment. Not all those in that bracket are taxed the gains rate and again, even IF they are taxed at that gains rate they are STILL paying more in that the bottom 50% of Americans. I would fully support changing the classification of hedge fund managers. If people are making their income off investments, no, keep the gains rate alone.
Wendy, why don’t you give this study a read, which I hope will explain it much better than short argumentative posts.
Morph I stopped reading your study here, “Given the level of their federal marginal tax bracket, their loss, at the margin, of the Earned Income Tax Credit from earning extra income, and their exposure to marginal FICA taxation, their current total marginal effective tax on earning an extra dollar is 47.6 percent!”
Sorry that’s on a couple making 30,000. Their burden is not 47.6%. Again in the example they give the couple EIC (so they have kids at that dollar amt to get it) Again. They make money at tax time, they dont pay.their fica total is roughly 8% (16 for both) So they still pay in less than the example. That is the problem w/the fair tax proponents, they don’t seem to be able to approach it fairly.
I suggest studying this link, http://www.fairtax.org/PDF/ResponseToFactCheck-UnspinningTheFairTax.pdf
it gives an objective look at the arguments and shed some light on the truth of tax underneath the hoopla.
Wendy, They are not saying the burden is 47.6%... you’re misreading or misunderstanding it.
Wendy,
You must be a fan of Rush, you continually misquote and overstate my points or deflect to irrelivent arguments. This is not an argument about federal spending. This is an argument about who is really paying federal taxes. Do you agree or deny, the costs of income/payroll taxes are deferred by businessrs onto their customers? If business owners are deferring the cost of these taxes can they truly assume the credit for payment? If the customer purchases the businesses product/service inflated be the cost of these taxes, where does the real burden go? Who is really paying the taxes?
Historically, the income tax did not fall upon the common wage earners but instead was designed to affect only the most successful business owners. The reason being the U.S. Constitution allows only indirect taxation, taxes that can be avoided or deferred upon others. Wage earners cannot defer their tax liablity and therefore they must be excluded. However, business owners not only can defer their tax liability but they have no choice, they must do so. By withholding wage earners earnings the burden of income/payroll taxes is shifted almost entirely upon the wage earner. It makes no difference how little or how much is refunded after the fact, when it’s wrong in the first place under the spirit and the letter of the law.
Forbes,
You dont need to be insulting, I don’t listen to Rush nor can I stand him. Why? Is Boortz ur Messiah? Do you not question his logic or just take it as gospel? I’ve addressed your points and countered them, not my fault you dont or cant refute them.
You state,”Do you agree or deny, the costs of income/payroll taxes are deferred by businessrs onto their customers? ”
Why would income taxes be passed on to the consumer when the empoyer doesn’t pay them.
I think you are confusing that w/fica/futa. So I dont believe u have a firm grip on what is passed on in the costs. Do you think that they will not have to employ auditors to check the business? Who will pay for that cost and who will bear the burden? Things to think about. Not just what boortz tells you.
Historically we had no income tax except for in a time of war. Like I’ve said earlier and will repeat again, we were NEVER meant to stick w/the income tax. We never found a way to support our budget w/out it. Please do not try to get into the zomg income tax not legal arguement, you will be promptly handed ur ass. We used the income tax to fund our Civil war, yes taxes are legal, do some research that goes beyond the 20’s. Read the constitution for yourself.
And yes, how much they pay in is ABSOLUTELY important. Especially when u are trying to incorrectly claim the burden of taxes is on the middle class. I’ve shown you repeatedly you are wrong. You cant say they pay in 43% when they get 20% refunded. Again, the middle income wage earners make up 6% of the taxes raised. Prove they pay 43%. W/out insults if possible.
Morph I’ve NEVER claimed they saved 43% of anything. Perhaps re-read slower?
Wendy,
Sorry, I wasn’t trying to insult you, just trying to get you to stay on point. I don’t believe you understand my points at all, because you assume that I am a supporter of the Fair Tax, which is not true. Nor, do I support the current corrupted income tax system. What I’ve been suggesting all along is a middle path that would keep the most sound elements of both revenue systems. Withholding has been a disaster for the middle class and is a major roadblock for upward mobility. In order to have a strong economy, America needs a large vibrant middle class. Concentrating too much wealth with too few creates a sick economy. Replacing the federal withholding taxes with a small retail consumption tax would go along way to bring back the middle class. This would be possible if capital, bond, and commodity markets were also required to participate. A 10% retail rate could easily be maintained if the current capital markets transaction tax was raised from the current .004% to around .5%. That’s definately NOT anything close to the Fair Tax.
As far as the other errors your last post contains, it will have to wait. My wife wants to out on saturaday night... Got to go.
Forbes,
Telling someone they must listen to Rush is not exactly on topic now is it? So don’t pretend you were trying to stay there.
Secondly, i’ve addressed your points, as I’ve stated before, you just dont like the answer.
I really don’t care whether u are supportive or not of the Fair tax, I was correcting where you were wrong. Including saying people’s tax burden is higher than in reality for the sake of argument. Saying they have a 43% burden when they have no burden is intellectually dishonest. Again only 6% in the lower 50% bracket pays taxes.
I’m not sure if you’re saying you support the VAT but that is a bad idea on top of current system. I do not support such an idea.
Wanting to equal out the wealth has nothing to do w/tax burdens. You need to concentrate that effort on raising the wage, which of course u know, just gets passed on to the consumer. I do not support redistribution of wealth either.
Just a side not of interest. While the wealth is more concentrated in the top (which always has) the burden has shifted and become greater for the top brackets vs. the burden becoming smaller for the lower brackets. Our economy is built on the middle class.
As to ur remark you’ll correct my mistakes later, you haven’t done so in the past 5 replies, i wont hold my breath that you’ll acknowledge any of it since you havent.
Wendy,
I never claimed that you claimed that they saved 43% of anything.. what the heck are you talking about?
You said:
And I said:
It seems to me that you’re confusing the technical terms used to explain tax rates (different terms explain different things - i.e. statutory, average, marginal, effective, effective average, and effective marginal). This is not a calculation for the average effective tax rate for that family. They show that the average effective lifetime tax rate for such a family would be 15.3%.
What they are describing is the change in the marginal effective tax rate on the next dollar earned after loss of the EITC, which is why making more than 30,000 decreases the 47.6% rate. This is not their average tax rate, and neither is 43% (though I don’t know where you got that number). You’re misunderstanding what they are trying to explain based on your statements “Sorry that’s on a couple making 30,000. Their burden is not 47.6%.” and “You cant say they pay in 43% when they get 20% refunded.”, as that is not what the research is claiming or measuring in that statement.
Wendy, in regard to embedded tax costs, I think what RMForbes was describing was corporate income taxes and employer share of payroll, which is often added in some way to calculate an overall burden on the citizen, as the tax incidence is largely placed on consumers and employees. This excludes the personal income taxes and employee share of payroll.
Morph,
I mistated the percentage amount, considering it’s a few points off, it’s easy to draw that conclusion w/some thought.
“their current total marginal effective tax on earning an extra dollar is 47.6 percent!” ” <- from the “source,”. That is a misleading and inaccurate statement. why they say the loss occurs at 30,000 is bothersome to say the least. Why they also assume their earning could INCREASE their taxes to that amount is also misleading and bothersome.
Who are you claiming would have a lifetime rate of 15%? The fair tax rate? Are we assuming the family wont make more money? Or that Congress would never raise the rate? If you’re going to speak in terms of lifetime rates, then the gov assumes you wont make it out of that wage bracket. I thought people were trying to increase the top brackets not make them stagnate.
If Forbes was talking about corporate taxes he shouldn’t have introduced them into a income tax discussion. They have nothing to do w/each other. Even for a corporation they dont pay the income tax for their employees or other shareholders. So I’m not sure what that would change even if u thought u were clarifying.
Wendy, it is a corporate income tax under the same section of the internal revenue code as the personal income tax. It is certainly relevant to the current taxes you pay, as the FairTax replaces this form of taxation. So you have to include it in an equal comparison. We generally estimate this places approximately a 10% tax burden on the citizens today (7.65% being employer half of payroll), which is passed down to consumers as higher prices or as lower wages for employees.
As for the 15%, that is what the study states for the current system, not the FairTax, and I don’t believe they assume a single bracket. The information is not misleading or inaccurate if you understand the economic terminology. Perhaps if you would have read the entire study you would understand these aspects better. It’s like misunderstanding the difference between a profit and a profit margin or debt and a deficit. The terminology is just fine if you know what they’re trying to explain.
Wendy,
In the referenced study by Kotlikoff and Rapson that you stopped reading, they go on to disuss some of the details about lifetime tax liability. I found it worthwhile to read as it certainly helped me better understand the topic.
John
Morph,
Please tell me which statutue you are referring to in regards to the income tax and corporate tax being the same. Again, you are ASSUMING that is the “amount” of cost passed off to consumers. You have no idea.
In any event, you now make that business pay sales tax, a much HIGHER cost on all those items they will need for their products...that cost wont be passed on?
I asked a simple question about the Lifetime rate you could explain it yourself if you so understand. Just sayin...
Wendy,
How can businesses avoid passing the costs of income/payroll taxes off on their customers? What does sales tax have to do with federal taxes?
Wendy, The corporate income tax and the personal income tax are both income taxes imposed under Subtitle A of the Internal Revenue Code. The estate and gift taxes are “transfer” taxes (taxes on some, but not all, transfers of ownership of property), and are imposed under Subtitle B. Payroll taxes are considered an “employment tax” imposed under Subtitle C. I was saying that they are both income taxes, which are replaced by the FairTax. Businesses also contribute an identical amount to your employee payroll taxes, which is also replaced.
I’m not assuming it is always passed off to the consumers - I just stated above that it can also passed in the form of lower wages to employees. The point is that the tax cost fall onto the citizens in some way. A business has to pay taxes out of their source of income, which is the selling of goods or services. The price of goods and services include all the cost of doing business, including tax expenditures.
Will the FairTax be passed on? Passed to who, it’s not a tax on business hidden from the consumer. It’s a transparent sales tax applied to the consumer - it’s not hidden in a cost of business to be “passed on”. The lack of transparency of the current business taxes is what’s makes it difficult to understand the burden. Businesses don’t pay taxes, people do. Employer payroll taxes is an easy one to factor, they have to make and equal contribution of 7.65%. They have to pay for this through their means of revenue (goods and services).
Just saying... you can read about lifetime rates yourself (at a quick glance, I think pg 16-17). What you looked at earlier was the marginal incentive to work for the next dollar, not an average tax rate. The last page gives a table of the average remaining lifetime tax rate comparison.
Forbes and Morph,
I said that the business will now have to pay tax on the goods they purchase to conduct their business.
Your position is that the payroll taxes are passed onto consumer so what makes you think the new tax they pay on the materials they are purchasing wont be passed on to the consumer? At a higher rate I might add.
At any rate, it doesn’t quite matter what you believe to be embedded or not. If currently we are paying say 1 billion in embedded costs the fair tax rate will be high enough to collect 1 billion in sales tax from us. While you think u might be getting rid of costs ur only shifting and perhaps increasing that cost to us.
If I find the marginal rate incorrect seeing as they phased out the EIC at the wrong amount, I will not waste the time on sifting throught 16-17 pages. Feel free to explain why they used that amount to phase out the EIC and perhaps i will continue on the source. Otherwise, I find it misleading.
The FairTax is revenue-neutral. That means that for every tax dollar collected under the current system, the FairTax has to collect a dollar. If the FairTax exactly equaled embedded taxes, then it could not possibly be revenue-neutral, since embedded taxes do not take into account personal income or estate taxes. The FairTax rate would have to be high enough to replace embedded taxes plus income and estate taxes.
Chris Edwards, the Cato Institute’s director of tax policy studies, points out that prices do not really matter; corporate, payroll, income and estate taxes currently generate approximately $2.4 trillion, and a revenue-neutral FairTax would still require that taxpayers pony up $2.4 trillion. Nor is it clear that the 22 percent embedded tax figure is particularly meaningful. David Burton, chief economist of the Americans for Fair Taxation, calls it “simplistic” to think that the entire cost of corporate taxes is borne by consumers. Cato’s Edwards suggests that while consumers do pay at least part of the costs, producers also bear some of the burden. That is, employees pay part of the costs of hidden taxes (in the form of lower wages), and corporate shareholders pay another portion (in the form of lower returns on their investments).
Wendy,
I’m sorry I’m so late to this discussion, but in your recent posts you seem to believe that businesses will pay the tax when they purchase goods necessary for their business. Not true. Get used to seeing BTB which means business to business, transactions that are not taxed. Only the retail sale is taxed provided it is not a “used” good, (there are no “used” services).
Please forgive me if I have misunderstood your position.
Wendy,
We never said it wouldn’t be replaced by the consumption tax. It would just make it transparent, instead of a hidden embedded cost. The issue that I have with the Fair Tax is they also replace the capital gains and estates taxes with the retail consumption tax which places over 80% of federal revenues upon retail markets. That’s a problem.
Wendy, I agree with #90. These hidden taxes get passed around in several ways but they fall onto the citizens in some way, as I stated above. However, where the costs are supposedly distributed today doesn’t imply that’s where they would go if removed. They’re unlikely to give you a pay raise or give your 401k a windfall with their business tax savings. They’ll likely use a large portion of that reduction to lower costs and compete (if not, they would raise their prices today - profit maximization is not price maximization). Those costs will be removed from the supply chain and be replaced with the FairTax on the final consumption. It only matters as it relates to a comparison of the current system, you have to take these taxes into account as part of the replacement and the current tax burden.
Hank is correct on the B2B. The tax is only applied on the final retail sale.
As for the EITC, you have to look at the stylized households and the age bracket. If they were going purely on a single year, it would be as you described and every age would be the same, but they took a look at the larger picture.
Wendy I stopped reading your posts here,
“Again, if they are getting a refund their burden is zero.”
Last year, I had $4000 withheld for income taxes, and I had an income tax bill of $3000.
I got a $1000 dollar refund, yet my burden was not zero.
If you can’t understand that simple concept of the current system, I’m not sure how much you can add to this comparison.
Wendy,
I’ll still read your posts. I love to argue with you.