Author Topic: What Do You Think of the Fair Tax (not flat tax)?  (Read 309 times)

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Offline Truth OT

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What Do You Think of the Fair Tax (not flat tax)?
« on: November 11, 2013, 06:11:45 PM »
Been discussing the budget and taxation with some colleauges and we began discussing the best ways to handle taxating or not taxing the public. For years I had errantly equated the Fair Tax with a form of a Flat Tax. After going into the weeds a bit I must say that the Fair Tax, at least on the surface doesn't seem impractical.

Online jaimehlers

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #1 on: November 11, 2013, 06:20:19 PM »
Can you give us the cliffs notes version, for those of us who haven't read up on it?

Offline Nick

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #2 on: November 11, 2013, 07:30:38 PM »
As long as corporations and the 1% control this country any tax reform may be made to look fair but you can bet it will favor the rich.
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Offline shnozzola

Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #3 on: November 11, 2013, 07:34:53 PM »
I was reading a bit about it while my wife was (ironically) shopping.  It's been her anyway for years saying it would be a better tax than a flat income tax. The web site -

http://www.fairtax.org/site/PageServer?pagename=HowFairTaxWorks

 - does a good job of answering a list of questions.  A federal 23% tax on everything we buy, with no income tax taken off the pay check, but a prebate given back based on essentials.   I'd like to see what the economists behind it would most fear - there has to be some what ifs.  Maybe people would stop buying much more than predicted, but I guess then they could reduce the "prebate" they talk about.

It would be interesting to see how the republican/democrat interplay would work out, as it reduces government size.  Probably if President Obama or Hillary suggest the program, republicans hate it, and if President Christie suggests the very same program, democrats hate it.  The US could make it work, IMO, but not in the current climate.
« Last Edit: November 11, 2013, 07:36:26 PM by shnozzola »
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Offline Willie

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #4 on: November 12, 2013, 12:17:07 AM »
This is a spectacularly bad idea.

The problem with a flat income tax (yes, I know this isn't a flat tax, nor even an income tax, please bear with me) is that it produces regressive taxation overall, meaning that those with lower incomes pay proportionally more than those with higher incomes. This is because income tax is not the only tax, and nearly all other taxes are regressive. Sales tax, gasoline tax, toll roads, license fees, and building permits are all examples of regressive taxes. The rich will generally spend more on these kinds of tax-bearing expenditures, but such spending does not scale proportionally with income. A CEO who makes 200 times my salary will not drive 200 times as many miles on the tollway, for example.

Property taxes are also mostly regressive. Poorer cities usually have a higher property tax rate than more affluent ones. Because their property values are lower, these cities MUST tax those properties at a higher percentage rate to meet their expenses. It's easy to have both a low tax rate and adequate revenue when you're taxing million dollar properties. The rich pay more in absolute dollars, but the middle class and poor pay a larger percentage of their income.

Social Security tax is flat up to about $113K, then becomes sharply regressive because income above that threshold is not taxed at all. Medicare tax is flat up to $200K, then drops to a lower flat rate above that.

This "Fair Tax" has the potential to be even more regressive than a flat income tax. It proposes replacing all income taxes, including capital gains and corporate income taxes, with sales taxes, but with a mechanism that they call "prebates" that would compensate for the regressiveness at lower incomes, thus producing an effectively progressive tax up to about 233K, then nearly flat from there to infinity. That is based on their own chart. However, that chart is rather deceptive because it shows the tax rate based on spending, not income. Because the wealthy tend to use much more of their income for savings and investment, taxable spending will not scale in proportion to income, making this tax regressive at higher incomes.

Looking through their faq, it appears that the expected benefit of this is the standard right-wing "faith based" economics, in which the the economy will supposedly boom if only we can reduce the tax burden on the job creators.

Don't be fooled. This scheme heavily favors corporations and the rich, and will only accelerate the rise in income disparity and shrinkage of the middle class.
« Last Edit: November 12, 2013, 12:22:41 AM by Willie »

Offline Truth OT

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #5 on: November 12, 2013, 11:12:10 AM »
This is a spectacularly bad idea.

The problem with a flat income tax (yes, I know this isn't a flat tax, nor even an income tax, please bear with me) is that it produces regressive taxation overall, meaning that those with lower incomes pay proportionally more than those with higher incomes.

This "Fair Tax" has the potential to be even more regressive than a flat income tax.

All sales taxes are regressive, that is a fact that will always exist as long as income disparity does, but what has that to do with the Fair Tax being a bad idea?If I read correctly, the Fair Tax will not affect those earning at or below the poverty level AT ALL and it only pertains to the purchase of new goods and services.


It proposes replacing all income taxes, including capital gains and corporate income taxes, with sales taxes, but with a mechanism that they call "prebates" that would compensate for the regressiveness at lower incomes, thus producing an effectively progressive tax up to about 233K, then nearly flat from there to infinity. That is based on their own chart. However, that chart is rather deceptive because it shows the tax rate based on spending, not income. Because the wealthy tend to use much more of their income for savings and investment, taxable spending will not scale in proportion to income, making this tax regressive at higher incomes.

This tax is not an income tax, so why focus on income at all? It is a spending tax that only affects the purchase price of new goods so focusing on the income tax aspect seems irrelevant since it is not an income tax on anyone.

Looking through their faq, it appears that the expected benefit of this is the standard right-wing "faith based" economics, in which the the economy will supposedly boom if only we can reduce the tax burden on the job creators.

My concern about it has to do with what I call assumed priors. These rely on there being more spending, more saving, and more corporations wanting to do business within our borders due to a more business friendly environment. In a nutshell, my question is how can we be reasonably certain this "Fair Tax" will generate the revenue needed to run the government. If it can generate the needed revenue, then my lingering concerns are very small and have to do with the jobs that would be lost by IRS workers, CPAs and tax preparers, as well as tax attorneys. The nearly $500,000,000,000 estimated dollars a year spent by businesses and the public on managing the the income tax no longer being spent would affect those that make a living in the tax business.

Don't be fooled. This scheme heavily favors corporations and the rich, and will only accelerate the rise in income disparity and shrinkage of the middle class.

How does this idea adversely affect the poor and middle class?









Offline Truth OT

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #6 on: November 12, 2013, 11:28:52 AM »
Can you give us the cliffs notes version, for those of us who haven't read up on it?

Quote
The FairTax® Plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (H.R. 25 / S. 122) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax – administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn.
http://www.fairtax.org/PDF/FairTaxOverview.pdf
http://www.fairtax.org/site/PageServer



Online jaimehlers

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #7 on: November 12, 2013, 11:44:10 AM »
The thing is, there is nothing particularly wrong with the way income taxes currently work in the USA.  The problem isn't normal income taxes - it's the fact that the Social Security and Medicare payroll taxes don't even come close to covering the costs of Social Security and Medicare, combined with the outlays for military operations in Afghanistan and Iraq.

In FY 2012, the Social Security and Medicare payroll taxes, combined, took in $841 billion.  The mandatory costs for the SSA and DHHS?  More than $1.6 trillion (or, $1600 billion).  That's about 3/4 of the deficit right there.  I'll bet that if we did something to account for the Social Security and Medicare shortfalls, and ended the active military operations, we would either have a balanced budget, or be fairly close.  At that point, we could have a much more reasonable discussion about how to deal with the remaining problems.

Offline Truth OT

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #8 on: November 12, 2013, 12:17:15 PM »
The thing is, there is nothing particularly wrong with the way income taxes currently work in the USA.  The problem isn't normal income taxes - it's the fact that the Social Security and Medicare payroll taxes don't even come close to covering the costs of Social Security and Medicare, combined with the outlays for military operations in Afghanistan and Iraq.

I'd disagree to a point with their being nothing particularly wrong with our current income tax structure. The reasons I disagree are because FICA and social security taxes ARE regressive and they adversely affect the poor and because our current system inadvertantly gives a tax break to criminal activity because criminals do not report income from their activities. The concept of a Fair Tax would not force the poorest among us to pay FICA and social security taxes from their income and it would generate revenue from criminals for the purchases they make with the dollars they generate. 

As you stated, we spend and promise to spend more on Medicare, Medicaid, Social Security, and "Defense" than we can count on being able to bring in. That, along with the ever increasing interest payment on our debt creates a disparity that we will not be able to account for in the coming years. We've got to find ways to not only reduce our average medical costs but also reduce medical cost inflation. Additionally if we are to sustain social security, we may need to increase the retirement age, especially considering the fact that the population is living longer.

Online jaimehlers

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #9 on: November 12, 2013, 12:26:03 PM »
Thus my point.  The problem is the way that the payroll taxes work and the fact that they don't even come close to covering the expenses they're supposed to pay, not the way normal income taxes work.  That means that the government has to cover these expenses by other means, and it simply doesn't work that well.

Leaving that aside, I have to admit that I am very concerned about the government being able to match its current expenditures with a national sales tax, when it can't do so with the various income taxes.  Do the Fair Tax people have any reasonable estimates about the amount of money that would come in from this sales tax?  It won't do us any good to switch from an income tax to a sales tax if it won't cover the $3.5 trillion in federal expenditures.

As you stated, we spend and promise to spend more on Medicare, Medicaid, Social Security, and "Defense" than we can count on being able to bring in. That, along with the ever increasing interest payment on our debt creates a disparity that we will not be able to account for in the coming years. We've got to find ways to not only reduce our average medical costs but also reduce medical cost inflation. Additionally if we are to sustain social security, we may need to increase the retirement age, especially considering the fact that the population is living longer.
Agreed.  The problem is actually doing it.

Offline Truth OT

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #10 on: November 12, 2013, 12:56:51 PM »
Leaving that aside, I have to admit that I am very concerned about the government being able to match its current expenditures with a national sales tax, when it can't do so with the various income taxes. Do the Fair Tax people have any reasonable estimates about the amount of money that would come in from this sales tax? It won't do us any good to switch from an income tax to a sales tax if it won't cover the $3.5 trillion in federal expenditures.

My understanding is that the Fair Tax does nothing to help the government meet its current expenditures that the current system does not do. From what I've read, the Fair Tax is only designed to be able to replicate the amount of revenue collected in the current tax system. They have put forth the idea that this plan will have as a long term effect, keeping interest rates naturally low which they believe will work to maintain low levels of inflation across the board.

-----
I'm with you in that going to another system and not finding answers to our income vs. expediture problem is ultimately an exercise in futility. Such a change needs to accompany additional changes that serves to provide relief as it pertains to federal obligations. We could start by looking at SS Disability and what is being paid out to people that may are not truly disabled. Additionally, we need to make it so that the retirement insurance portion of social security becomes semi-privatized. At this point SS is taken out at about a 6.2% clip from paychecks. We could consider having that amount increased to 10% for all individuals earning above the poverty level and at 5% for those earning at or below the poverty level. Have the accumulated values become liquid and/or portable at age 60 or once a person fully retires. Exceptions could be due to death, disability, to prevent eviction/forclosure of a primary residence, certain medical expenses, or tuition expenses.

Offline Truth OT

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The Privatization of Social Security
« Reply #11 on: November 12, 2013, 03:52:48 PM »
I wanted to restate what I said above about social security.

We need to make it so that the retirement insurance portion of social security becomes semi-privatized. At this point SS is taken out at about a 6.2% clip from paychecks. We could consider having that amount increased to 10% for all individuals earning above the poverty level and at 5% for those earning at or below the poverty level. Have the accumulated values become liquid and/or portable at age 60 or once a person retires from full time employment (the later of the 2). Exceptions could be due to death, disability, to prevent eviction/forclosure of a primary residence, certain medical expenses, or tuition expenses.

Under this scenario a person that works for 35 years and has averaged $51,800/yr over that span that retires at age 60 will be guaranteed an annual income from this 10% plan of $29,696 for life with no taxes withheld from the $2,500 monthly income (as this proposal is designed to accompany the Fair Tax being enacted). Under the current SS model the lifetime income is less than $2,000/mo.

The above numbers are based on a person's contributions being guaranteed to to compounded at a 6% annual rate through age 60 and a 5% rate in the post 60 years. This 6% annual rate is more conservative than the rates most state pensions credit at now. In the Calsters plan, the 2012-2013 rate was 7.5%. I believe crediting a rate above 6% is wishful thinking and could lead to a shortfall so I would only offer 6%.

Additionally, because these funds are semi-privitized, the person would be able to name a beneficiary and upon the person's demise, the bene will be entitled to a portion of the remaining balance (if it has not been depleted) of the individual's social security account (spousal benes get 80% and non spousal benes get 40%) and what remains gets reinvested into the system.

Offline Graybeard

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #12 on: November 12, 2013, 07:04:16 PM »
It seems an attractive idea but, having read as much as I could, I am still not clear on 2 points:

1. How does the prebate work? Do get the prebate in cash? Who distributes it? Is the system open to abuse?
2. I buy a chair and an electric drill for my home -> I pay 23% tax. My brother buys a chair and an electric drill for his business... he pays no tax. How does he get the tax back?
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Online jaimehlers

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #13 on: November 12, 2013, 07:19:10 PM »
Honestly, taxing all income (for Social Security/FICA) at the same rate would go a long way towards helping fix those problems.

Offline Truth OT

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #14 on: November 13, 2013, 10:54:24 AM »
It seems an attractive idea but, having read as much as I could, I am still not clear on 2 points:

1. How does the prebate work? Do get the prebate in cash? Who distributes it? Is the system open to abuse?

As I understand it, the proposal is for the prebate to be either paid in monthly installments or at (fiscal) years end as a refund.

2. I buy a chair and an electric drill for my home -> I pay 23% tax. My brother buys a chair and an electric drill for his business... he pays no tax. How does he get the tax back?

My understanding is that as long as the ideas are new and not resale items, both the business owner as well as the individual would be paying the 23% sales tax.

Offline Azdgari

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #15 on: November 13, 2013, 05:46:45 PM »
How is the spending information for this prebate supposed to be collected, anyway?  Income is tracked by the government and is inherently tied to the person earning it, but for this...is every little transaction you make supposed to be tracked and traced directly back to you, such that your prebate can be calculated?
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Offline shnozzola

Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #16 on: November 13, 2013, 07:12:05 PM »
Prebates (From wiki):

Quote
Under the FairTax, family households of lawful U.S. residents would be eligible to receive a "Family Consumption Allowance" (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on poverty level spending according to the poverty guidelines published by the U.S. Department of Health and Human Services.[1] The FCA is a tax rebate (known as a "prebate" as it would be an advance) paid in twelve monthly installments, adjusted for inflation.

The rebate is meant to eliminate the taxation of household necessities and make the plan progressive.[4] Households would register once a year with their sales tax administering authority, providing the names and social security numbers of each household member.[1] The Social Security Administration would disburse the monthly rebate payments in the form of a paper check via U.S. Mail, an electronic funds transfer to a bank account, or a "smartcard" that can be used like a debit card.[1]

Opponents of the plan criticize this tax rebate due to its costs. Economists at the Beacon Hill Institute estimated the overall rebate cost to be $489 billion (assuming 100% participation).[33] In addition, economist Bruce Bartlett has argued that the rebate would create a large opportunity for fraud,[34] treats children disparately, and would constitute a welfare payment regardless of need.

http://en.wikipedia.org/wiki/FairTax

http://www.fairtax.org/PDF/PrebateExplained.pdf
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Offline Azdgari

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Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #17 on: November 13, 2013, 07:20:10 PM »
... Households would register once a year with their sales tax administering authority, providing the names and social security numbers of each household member. ...

But how would this do anything to tie purchases to purchasers?
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Offline shnozzola

Re: What Do You Think of the Fair Tax (not flat tax)?
« Reply #18 on: November 13, 2013, 07:41:50 PM »




It sounds to me this rate would be based on an amount that is considered a base essential for monthly needs, not tied to the rest of the fairtax system purchases or purchasers.  When you see the small print with the marriage penalty rules, the whole system sounds bit by bit more convoluted.  Hmmm.  The Federal Register?
« Last Edit: November 13, 2013, 07:50:58 PM by shnozzola »
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