Redstate

should be eliminated.  IT was created in a period of obscenely high interest rates and is no longer needed.  It is helping the speculation in housing prices in certain areas of the country and in general benefits those who need it least (as poorer Americans cannot afford a house that will have interest payments greater than the standard exemptions).  

Tax breaks generally do not help those most in need of help.  As just one example, tuition tax breaks where you deduct the cost of tuition from your taxes are worthless to people who have no tax liability.  Thus school choice is an empty option. I also agree that the mortgage tax exemption fuels speculation, making houses even more unaffordable for the average American.

Because, when I was making $45K a year, the only reason I could afford that mortgage was because of the deduction. I had to sit and do the math for some time. It's especially important early in the loan, when the Rule of 78s is tagging you hard, and you're likely earning less money than you will in a few years.

As someone who recently signed on to his own mortgage for the first time, this is a topic of some interest to me.  Sadly, it seems as though there is no winning situation for taking out a mortgage as far as taxes are concerned, i.e. you can take the deduction and then get hit with the AMT.

On the other topic, I am about halfway through the "Fair Tax Book," and although I am personally sold, I see general skepticism, lack of information, and a lack of will to action as a tremendous obstacle to passing H.R. 25 or any bill like it.

If you've got the book, share it.

discussions I remember reading somewhere that the median wage for Americans is $37000.  If you have a couple of kids, with a salary of around $25000 there  will likely be no tax liability.  In my community, the only way people are buying houses is with interest-only loans and still the monthly payments are too high. For many people in the half below the median, they are, like, "what economic recovery?"

The title of this Diary is misleading.  Nowhere in it is there a description of how the mortgage deduction will be "maximized," just descriptions of how the tax laws will be changed.  The AMT is a straw man--we don't need to go to a sales tax to eliminate or modify the AMT.

Also, the math is wrong.  The writer has included the "payroll" tax as if it would go away as well.  It wouldn't, obviously.  As described, the proposal would de facto result in an immediate jump in price inflation by the amount of the sales tax, but the increase in discretionary incomes wouldn't be enough to offset it for the majority of people.  (Almost 50% of people don't pay any income tax at all now.)

Another big problem I see with the Sales Tax idea is that it really creams people like me.

I'm retired, with a decent pension and good investments.  Some of them are in Roth IRA's, so I've already paid the tax on the income used to by the assets in those Roth IRAs.  I did that to avoid tax on the withdrawals as they occur in a few years.  For the money I'll take out of those Roth IRAs, there will be no income tax, anyway, under today's system.  Yet, I'd get to pay tax on that money again, through a 30% sales tax.  Not good for me.

We have a sizable mortgage.  Of course it would be better for me if I didn't have to pay any interest, but did have to pay tax on more of my income.  Right now, the interest deduction drops me a couple of notches down the tax rate ladder, but of course it can't save me more than 40% of what I'm paying in interest.  But the fact is I DO have to pay the interest, and it won't go away under a national sales tax plan.  Nor is my everyday spending on living expenses likely to go down quickly under the Sales Tax.  In fact, it will immediately go up.

So where does that leave me?  I will still have to pay out the same general amounts.  My income tax goes away, but I will pay 30% additional on everything I buy, which at the present time already consumes my income.  (I assume this is an exaggeration, because I assume some goods and services will be exempt from the 30% sales tax.  That's why it's 30% instead of the 15% to 20% that would be more acceptable.  But would I pay a sales tax each time I buy a stock after selling another?)  The 30% national sales tax will be on top of the 8%-11% state sales tax I already pay.  My taxes would go up significantly.

All the arguments about how we'll have more take-home pay and can therefore afford the higher sales taxes fall flat if you no longer have any take-home pay at all.  And they are not only flat but paper-thin if you already have a long-term deductible expense that won't go away when the deduction goes away.  They become virtually transparent if all of your income goes for living expenses.

There are some definite advantages to a Sales Tax instead of the Income Tax.  A conversion needs to have some way of softening the blow on those of us who would be badly hurt.  Gradual implementation might help.  A true credit equivalent to the present mortgage deduction would help a lot, but would be very hard to devise, and extremely unpopular with Democrats and the press.  It would primarily help the wealthy, you know.  And they will immediately point out that this is a regressive tax.

ps.  Are there any countries that have made this change?  Did they then go back and reinstate their income tax?  England has both.  Are they better off?  I'll check out the links for information.

It has been floated to allow the mortgage IR deduction against the AMT.

However, the 7.65% Americans pay out in payroll tax provides no deductibility or return at all.

The payroll tax is 15.3%. This breaks down to 12.4% for Social Security and 2.9% for Medicare. Each of these are supposed to split into an employer and employee half  -- 6.4% and 1.45% respectively -- but that split is only in bookkeeping. You pay as much of the employer half as you do the employee half.

And the EIC is a refundable tax credit to offset payroll taxes that you can get if you are low on the income ladder (and having kids really bumbs it up).

The rest seems to be this strange argument that since you don't pay income taxes with the sales tax, then the deduction matters more since you get a 100% deduction. Is that right? It's really messed up if so.

The HMI deduction was part of the original 1913 income tax.

I got the same impression as you. This diary entry doesn't seem like an explantion of how the Fair Tax sales tax will make the HMI deduction better, just how the sales tax will work.

The writer has included the "payroll" tax as if it would go away as well.  It wouldn't, obviously.

I think they do. All personal taxes (income, payroll, estate, etc) are repealed as well as corporate income taxes. I think income is still reported though, so SS payments can still be calculated based on that.

As described, the proposal would de facto result in an immediate jump in price inflation by the amount of the sales tax, but the increase in discretionary incomes wouldn't be enough to offset it for the majority of people.

Stictly speaking, this isn't inflation. Inflation is a monetary issue, a fall in value of the dollar. This would be, if it did happen, just a rise in some prices and a fall in others.

However, the effect on comsumer prices seems undeterminable. Personal incomes would rise since you no longer pay income taxes or payroll taxes. Business would no longer have to pay corporate taxes. If the Fair Tax is less economically wasteful, then there has to be gains somewhere.

Another big problem I see with the Sales Tax idea is that it really creams people like me.

But your income rises too. Besides, in almost all consumption tax proposals, there is a large stardard rebate per person exactly so it wouldn't hurt many in your position.

I'm retired, with a decent pension and good investments.  Some of them are in Roth IRA's, so I've already paid the tax on the income used to by the assets in those Roth IRAs.  I did that to avoid tax on the withdrawals as they occur in a few years.  For the money I'll take out of those Roth IRAs, there will be no income tax, anyway, under today's system.  Yet, I'd get to pay tax on that money again, through a 30% sales tax.  Not good for me.

That's not quite untrue. Those taxes have already been paid and nothing is going to bring back that money. It's sunk.

Your problem is that you are no longer a big income generator, so no longer paying income taxes isn't very relevant to you. No longer paying taxes on capital gains for any unsheltered assets will still be a positive (and nobody has everything in their Roth IRA). However, we can't turn down a policy that can pay dividends for generations to come on the chance that some people for a short period of time might be hurt by it more than helped.

Right now, the interest deduction drops me a couple of notches down the tax rate ladder,

A couple brackets?! Exagerating a little maybe? And if you are in the 40% bracket and retired, then you are one of the last person we need to worry about economically.

You have to seriously be misrepresenting your financial position (or you aren't and that basically disqualifies you from any consideration).

Gradual implementation might help.

This is not something that you want. If a sales/VAT were to be phased in as the incomes/profits taxes were being phased out, it would be stopped early and we would be left with both taxes.

I did want to draw your attention and I am sorry if you felt it was misleading.

But since it is a replacement of the Income tax with the Fair Tax Package, than there is no need for a deduction because you are getting 100% of your paycheck. PLUS the Prebate.

It is the equivalent of maximizing your Income tax deduction to include 100% of both your Mortgage Interest and your Mortgage principal.

The Fair Tax is much more than just a National Sales tax.

1. with the elimination of business taxes the embedded costs of what we buy will cost 20 to 30% less.  So for the guy about to retire, his tax deferred retiremnt savings he was planning to pay income tax on will go further and only his limited Roth IRA is aguable going to buy about the same as it did before after the price drop and the fair tax added back in.

If the same gentleman has a mortgage at retirement he will have more take home pay from his pension becasue there are no federal tax withholdings.

2. The Prebate system of the Fair Tax makes it progressive for the poor and is a unique addition to this tax replacemnt package.  Everyone gets the Prebate, young and old , Rich and poor.

Prices don't jump 30 % and the prebate covers the tac on the first $25,660 a married family of 4 spends.

The working poor at the poverty line will have a true net federal tax rate of ZERO %.  No federal income tax and  no payroll tax.

This puts them in a net better position than with the EIT.  They don't have to go to a tax accountant to file once per year to get a refund. Instead they get a larger paycheck going home each week to cover food and other necessities. plus a monthly Prebate check on top of it.

Some families make less than the Povertyline and will still get a full monthly check to help them out.

The Poor are truly untaxed from the most regressive tax the payroll tax that often takes more of their check than the Income tax.

Those that know the facts love the Fair tax

Of all responders, I am probably the least informed on matters of tax policy, mortgages, etc.  I am, however, capable of clarifying the fact that the Fair Tax Plan as presented by Boortz and Linder does call for the elimination of payroll taxes.  Whether or not that actually pans out is honestly well beyond my ability to predict.

always interesting. (^o^)

I have to comment on one or two thngs you wrote.

"SS payments can still be calculated based on that"

Even if they are no longer withheld from paychecks, if they still have to be paid, they have to be saved until collected.  They never become true disposable income to be used for discretionary spending.  If they're suggesting that SS taxes be paid from this 30% sales tax, they will have a seniors revolt on their hands.  That would mean a lot of us would pay for our own current benefits, while we continue to pay for somebody else's benefits.  They can't mean that--can they?

"Stictly speaking, this isn't inflation.  Inflation is...a fall in value of the dollar."

Let's not get into parsing.  If an item which cost $10 (after tax) yesterday costs $13 after tax today, and it's the same item without any improvements, that's inflation.  It takes more dollars to buy the same thing.  The purchasing power (value) of the dollars in your pocket has fallen.

The fact that some people might have more dollars to pay with is irrelevant.  Just ask the Germans who remember the time between the wars.  The only difference is that this inflation will be initiated by higher prices, not by higher demand or by a runaway money supply.  And a proficient monetary analyst might predict an economic slowdown as a result, because the higher prices will reduce demand.  So it could become a case of inflation leading to "stagflation."

"But your income rises too."

Yes, to some extent.  But as I pointed out, my mortgage payment will remain the same, and my other expenses will go up 30% or so.  (Will the interest be taxed at 30% too?)  I don't have any taxes withheld, if that will help you follow this.  I pay quarterly estimates.  (That's irrelevant, too, but there it is.)  Filing will be easier, but I believe I'll have a lot higher tax burden than I do now.  I'm not anywhere near paying even 20%.

"That's not quite untrue.(sic) Those taxes have already been paid and nothing is going to bring back that money. It's sunk."

Yes, I wasn't claiming they would or should.  It's the second set of taxes on the same income that has me pxxxed.  I was taxed as I earned it, and now I'm taxed even more as I spend it.

"Your problem is that you are no longer a big income generator, so no longer paying income taxes isn't very relevant to you."

I think it's just the opposite.  My deductions reduce my taxable income to the point that my taxes are low.  They're considerably lower than they would be if I had to pay 30% tax on all the goods and services I buy.

"However, we can't turn down a policy that can pay dividends for generations to come on the chance that some people for a short period of time might be hurt by it more than helped."

ROTFLMAO.  Aren't you the one who argued that we can't have Personal Retirement Accounts in Social Security because they might be risky for current participants?

"you are one of the last person we need to worry about economically."

"We" may not have to, but I do.  Remember that mortgage?  

I may be wrong about the tax brackets, I haven't done my own taxes in some time (never get involved in a limited partnership).  (That reminds me.  I know the CPA lobby will be out in force against this idea.)  I do know our Gross Income is more than I thought it would be, but our taxable income is less than I expected, primarily because of interest, real estate tax, and medical deductions, and the cap on capital gains.  I won't have the last two this year, so the taxable income will be considerably more, with taxes up as well.

"...that basically disqualifies you from any consideration"

Smile when you say that, pardner.  

There was a line in the Diary that I missed the first time.  

"For Builders their costs to build will drop an average 25%'

So I guess they won't have to pay tax on the materials they buy, nor to the independent contractors they hire.

As I said originally, there are some definite advantages to the plan, not the least of which is that the total tax burden should be spread over more people.  But since it's "revenue neutral," somebody is also going to end up paying a lot more, and I'm guessing I'm one of them.  The main sticking point with me is the effective double taxation, and the fact that the rate is too high.  In fact, it's hard to decide which I hate the most.  It's bad enough having to pay a 10% state sales tax; 40% would be a killer--for the economy.  As I said, I don't believe prices would come down fast enough to offset the increased cost of the tax.

But I also said I'd check the links for more info.

then, gosh, it means all my deductions will now go to 100%.

Of course if there is no income tax, income tax deductions don't exist.  The deductions aren't the point, unless they apply to the new tax.  Taxes paid are the point, and since the plan is designed to be tax-receipt neutral, it just changes WHO PAYS HOW MUCH.

The rest of my objections can be found above, in #6 and #13.

Even if they are no longer withheld from paychecks, if they still have to be paid, they have to be saved until collected.  They never become true disposable income to be used for discretionary spending.  If they're suggesting that SS taxes be paid from this 30% sales tax, they will have a seniors revolt on their hands.  That would mean a lot of us would pay for our own current benefits, while we continue to pay for somebody else's benefits.  They can't mean that--can they?

I think this gets to the same issue that gets repeated in different forms throughout both our posts. Those retired paid taxes when they generated income, and now a comsumption tax would change that to taxing them on spending that saved income. They get hit twice. That does appear to be a problem.

However this problem has two assumptions that might not be true:

(1) Prices will rise significantly. I'm pretty sure that prices will probably rise for many thing. I'm not sure how high though. Under a consumption tax their will no longer be the 35% corporate tax, but contrary to what supporters say, this doesn't mean a 35% reduction since that is only a 35% tax on profits, and no company pays 35%. I think the average is something like 10-15%.

(2) Capital gains taxes will go away so all your tax deferred savings vehicles, such as 401(k)s, and all savings in general will not get taxed. For anybody with a significant savings, this will be huge. Also, eliminating the capgains tax will immediately boost the market by 20% since it makes stock so much more valuable to own.

There also also a number of small benefits such as SS payments not getting taxed plus any dividend income or whatever else. I'm just not convinced that #1 will be worse than #2. I do think that something should be done, if there is any plan to move to a consumtion tax, that effective excludes double paying for SS. This could be done very simply by just boosting SS payments for current retirees only (meaning new retirees wouldn't get the deal or have it prorated) by whatever percent the sales tax is set at.

Aren't you the one who argued that we can't have Personal Retirement Accounts in Social Security because they might be risky for current participants?

Not me. You must have me confused with another poster.

So I guess they won't have to pay tax on the materials they buy, nor to the independent contractors they hire.

Since you are pulling that 25% number from somebody else, I don't know where they got it, and I don't believe it. I think it is a combination of their half of the payroll taxes, the corporate profits tax, and may some other things added, such as fewer accountants. I think this overestimates the savings.

I'm not the biggest Fair Tax fan, so I'm not the person to be looking to for links and info.

Because of the elimination of embedded taxes, which Economists from MIT, Boston U, Harvard and Stanford to name a few have studied and run Computer simulations on.  All coming up with a price drop large enough that when you than add back in a 30% Fair Tax (23% inclusive) you pay about the same.

You take home 100% of your income with no federal withdrawals and pay about the same as before for new products and services with all tax paid.

So For Seniors this is still a net gain.

Go to www.fairtax.org and click on left side

New! Seniors and the FairTax or try link below.

http://www.fairtax.org/pdfs/SeniorCitizens.PDF

I firmly believe this tax replacement Legislation is better for Seniors it is certainly better for your children and Grandchildren and better for America.

visit:

http://www.fairtax.org/pdfs/SeniorCitizens.PDF

to your other points;

1. SS and Medicare come out of a portion of the Fair Tax. YES.  There is no longer a payroll tax deduction, working families - your children and Grandchildren take home a much larger paycheck.
   
2.  You wrote

"If an item which cost $10 (after tax) yesterday costs $13 after tax today, and it's the same item without any improvements, that's inflation."

Not True. Several Economists calcualte a Price drop with the elimination of business taxes embedded in the price of all goods even a $10 item.

Take the $10 item with the Fair Tax signed into Law, the Price of Goods will drop an average 22%.

$10 item to $7.80, now add in the federal retail sales tax(Fair Tax) of 30% exclusive(23% inclusive) and the same item now costs $10.14.

That is only 1.4% higher with working families taking home 30 to 50 % more money with no federal tax withdrawals.

3. You pay your mortgage with no taxes being sent quarterly at a net 20% rate.  Depending on what you spend is how much tax you pay.  You already bought your house your mortgae payment does not go up.

If you save some of your quarterly earnings than you pay no tax.

If you buy antiques, used cars, or a preowned vacation home you pay no tax.

and with price drop example above you pay close to the same for the NEW products; maybe 1 to 2% higher depending on the price drop.

Becasue Consumption is a larger tax base than income, the net rate for everyone is lower.

4. PREBATE- Seniors receive the prebate also

Go to: http://www.fairtaxvolunteer.org/smart/faq-main.html#3

Married Senior Couple receives a Prebate of $367/m or $4,402 for the year.

5. Now look at your spending on new purchases of Goods and Services under the Fair Tax. Take your annual income from all sources; subtract out all Savings and or new investments; subtract out all mortgage payments(principal and Interest and Taxes), subtract out your current car loan payments or RV payments. Subtract any used item purchases you are planning.

How much is left?  This is what you spend your money on that is taxable under the Fair Tax.

Multiply that left over income by a 23% Inclusive rate.  That is your Fair Tax paid.

BUT  subtract form that the Prebate of $4,402 if you are a retired couple and that is your net federal tax paid.

NOW Take that number and divide it by your total Gross income for the year and you now have your net effective rate under the Fair Tax.

Is it not less than the 20% you stated before after all your deductions?

The calculator link above should do the same for you.

5. Correct Builders and business in general do not pay the tax.  Reason is business just passes all taxes to consumers in the price of their goods(embedded taxes).  it is simpler and more visible to add in the tax at the final point of retail purchase.

That is why a new house will cost about the same as it did before.

The mortgage interest deduction is only claimed because you have already paid the taxes on that money.  For example you had to earn $130 to have $100 after taxes to make your payment.  Then IF you can itemize, the government gives you SOME of it back.  You do not get to take a deduction for the portion that went to payroll taxes or to principal.  

Under the FairTax, you have the full $130 to put to your payment.  You don't need a deduction for something you never paid.  Interest is not taxable under the FairTax so in effect 100% of Americans get a "deduction".  

Complaining about the lost of the mortgage INTEREST deduction under the FairTax is like walking into a store where they give you a free loaf of bread and complaining because you didn't get a 25% discount.

However, the effect on comsumer prices seems undeterminable. Personal incomes would rise since you no longer pay income taxes or payroll taxes. Business would no longer have to pay corporate taxes. If the Fair Tax is less economically wasteful, then there has to be gains somewhere

that the Fair Tax proposal seems to suggest that the increase in efficiency, which is questionable, would offset the NUMEROUS revenue sources that would no longer be taxed.  

The Fair Tax proposal also essentially allows the wealthy to get even wealthier and be pretty much immune to taxation.  

There are so many flaws with the Flat Tax proposal that it's not really worth pointing them all out.  But one that I would have thought you would have noticed, jayson, is that they seem to suggest that a Fair Tax is equitiable because the wealthy would pay more in taxes because they would buy more expensive stuff.  This is an incredibly simplistic statement.  While they may pay more in total dollars than the poor that's mainly because they have a LOT MORE money.  

The Fair Taxers have decided that the the Marginal Propensity to Save is either unimportant or bogus because if they understood and accepted it they would realize how flawed their thinking is.

I like the fair tax idea.  I think the current systems which is a patchwork of bought political favors is an abomination.  But where I see the logic of the arguments for the Fair Tax failing is the assumption, based on "studies" and "computer simulations," that the price of goods and services will magically drop once the providers are offered relief from "embedded" and "hidden" taxes.

Poppycock.

My studies of human nature (admittedly not MIT vetted) lead me to believe that prices will decrease marginally if at all.  Since everyone will have more income to pay with, consumers will still be able to afford the goods at their old prices plus new tax so why drop prices?  Why not charge what the market will bear and make MORE PROFIT?  Especially now that the profit will be tax free.  

To expect a provider to say - "gee my costs/taxes have dropped, let me drop prices even though people are used to paying the old price and can afford to pay the old price" seems nuts.  And won't businesses have to pay the fair tax on raw materials, etc.?  This part of the logic falls down for me and I'd love to hear a good explanation.

Frankly, (heresy alert) I don't necessarily feel a need to pay less taxes.  I don't subsribe to the current conventional wisdom that no matter what you pay in taxes you ought to be paying less.

But if I am going to pay taxes; I want to do so in a system that is fair, morally defensible and that bears a rational (though not necessarily mathematical) relation to what I get for my tax dollars.  I also want to know that those tax dollars are being wisely spent - but that's a different thread.

In some way a consumption tax seems the more moral choice.  I don't see anything moral about taxing income. On the other hand anyone who partakes in commerce (voluntarily selling/buying/spending especially non-necessities) is also taking advantage of many benefits provided by our country - all of which cost money to provide:  product safety benefits, food inspections, transportion and distribution infrastructure, our contract law system, criminal justice system, etc.  This list could go on and on.  To tie taxes to your voluntary use of these valuable nationally provided assets, especially in a pro rata way based on your use - seems appropriate and moral.

But I'm open to any solutions.

Good points redstatesoccermom, especially from the perspective of a moral choice between taxing consumption (your choice) and income (government control).

One thing you are missing though on price reductions is that for many small and midsized businesses (most jobs in America), they cannot compete at the prices they must charge today.  Large multinational firms establish overseas factories subject to border adjusted taxes.  They then ship these products back to the US with the tax component removed.  Some quote low labor cost as the main reason for job loss to countries such as China, but American productivity is over 12 times greater than in China.  This, plus concerns with language, stability of government, initial huge capital costs and other factors offsets most of the benefit of lower wages. But if we maintain the current stucture much longer, we won't even continue to enjoy the productivity advantage.  China earlier this year stated they were going to start investing their increased capital in greater productivity.  Another benefit of the FairTax is it makes the US the capital magnet of the world, which is required for increased productivity.  Professor Jorgenson predicted a 76% increase in the first year alone.

A few examples of decisions reflecting how tax costs are considered: 1)India, where a company creating a business presence for export only is giving a 100% reprieve currently for income taxes.  Why do they find that necessary if low labor costs are sufficient? 2) Daimler Chrysler which would have been Chrysler Daimler is not for the fact that Germany had a 25% corporate tax and the US had a 35% corporate tax; 3) Ireland - Since changing their corporate tax rate to 12.5%, Ireland has enjoyed the fastest economic growth of any country in Europe.  Their GDP per capita now is 40% higher than the average in Europe and is second only to Luxembourg (Luxembourg's is somewhat distorted because a large portion of its workforce actually live in neighboring countries. 4) In testimony to the tax panel, Dan Ortellini of Intel testified that it costs Intel $1 billion more to build and operate a chip factory in the US and most of that was due to taxation (his words, not mine).

I believe the OMB testified a couple years ago that small business pays something like $724 in compliance costs for every $100 they pay in taxes under the current system.  The fact that they usually can't pass those costs off by using transfer pricing or other costs reduction strategies to compete often means lower wages, reduced benefits, higher prices or the end of the business.  

The FairTax allows the average small business to compete on a tax and compliance basis with all the international companies.  Their costs will actually be lower...for example than the costs in Germany for Daimler Chrysler (DC) where the tax burden will remain the same.  They will lower prices to compete and be able to maintain the same profit margin.  How would DC compete then?  An informal study by Princeton Economics in 1996 where executives of large companies in Europe and Japan were asked this question gives us the answer.  Eighty percent stated they would build their next factory in the US.  Twenty percent stated they would move their headquarters here.  Jorgenson forecasts a 26% increase in exports the very first year the FairTax is enacted.

Consider for example the citrus industry in Florida which is faced with extinction because they can't compete with prices from Brazil.  Will they use the savings to pocket or will they lower the costs of their citrus so they can compete with Brazil?

Notice how quickly every company jumped on "employee discount pricing" after Chevrolet first offered it?  (Or was it Ford??)

Anyway, you get the point hopefully.  As I mentioned in the mortgage question though, most Americans will find themselves better off even without consideration of price reductions.  

How can the bill raise the same revenue and still leave most Americans better off?  It has a much broader base.  This includes tourist, illegal aliens and some very wealthy Americans who live off their trust funds, foundations and tax emempt investments virually tax free today. Those who heavily game the system for advantage would be net losers.  That does not apply to most Americans.

The hundreds of divisons of Americans through the tax code would be gone.  The cost of government would be clearly visible to all under the bright lights of the cash register, allowing us to hold government more accountable regardless which party is in power.

The prebate effectively untaxes every family at the poverty level and gives you choice and control of your taxation above that level by your buying choices.  

Lower pre-tax prices is just the gravy.

I think we can all agree that if we stop taxing businesses they will become more profitable.

But you haven't explained how the Fair Tax manages to PAY THE BILLS!  

Sure if we get rid of taxes then everyone will enjoy higher net earnings.  But our government will collapse.  Perhaps some of the more radical Libertarians(aka anarchists) like that idea but most of us agree this isn't a desirable effect.

Also let's consider a guy like Bill Gates.  He's worth something like 50 Billion(the actual number doesn't matter for the exercise).  If we assume that most of that wealth is in stocks and other investments and that he will achieve a a 7% rate of return he will DOUBLE his net worth in 10 years.  In another 10 he will be worth approximately 400 BILLION.  

Since the VAST MAJORITY of the wealth will be untaxed.  

Bill's tax burden will likely only be based on a few million dollars he spends annually.

And since business to business transactions are not taxed either he could likely shield much of his spending as a business expense.  

You want to create an aristocracy?  If you do then the Fair Tax is a great way to do it.

I just have to disagree with your assumption here that the super wealthy with existing invested wealth pay much in taxes today...or paid much under President Clinton...or even when the income tax was first established.  The exempt status of foundations and trusts was established in 1909 just before the income tax was passed.

Second, when we are talking about the wealthy, I like to know what we define as wealthy.  Are we talking about a small business owner who earns two or three hundred thousand a year, but provides and keeps jobs here for hundreds or Americans, or are we talking about those with existing wealth...maybe a few hundred million in their trust funds and foundations?  The working "rich" in America are treated much differently today from a tax perspective than the wealthy.  Remember, to the average citizen in China, India or a hundred other countries, you are the super rich.

You have to compare the FairTax with the current system, not perfection because perfection will never exist unless men become angels.

Define taxable income at either the corporate or personal level.  What percentage of Bill Gates's gross income do you think he pays today?  Do you think those with existing wealth actually pay a 35% marginal rate on all income?  Do you think that most of the money he has will be subject to estate taxes even if estate taxes are kept?  (Hint, that is one of the great advantages of family foundations) Do you think most of them have many other ways of characterizing wealth today that doesn't show up as income...at both the corporate and personal level?  What percentage of their wealth is invested in trust funds, their own foundations and tax exempt securities?  How much does Bill Gates pay into Social Security funding?  

All the advantages of wealth allow them the means to effectively avoid a very large percentage of any income tax.  That will remain true under any party and if you get too abusive, they can easily move to another tax jurisdiction and leave fewer middle class Americans to cover the tax burden.  

I'm not against anyone accumulating wealth.  I hope we are all fortunate enough to be there.  But the current system is gamed towards multinationals and those with existing wealth.  The Flat income tax is no better in that invested assets would not be taxed either as income or as consumption.  

The FairTax treats everyone equally.  Every family is untaxed on poverty level spending through the prebate.  Every family pays the sales tax on consumption above that level when buying taxable goods and services.  For the poor, they pay no net taxes including payroll taxes and are given every encouragement to work harder and earn more.  

For the middle class they are untaxed at the poverty level and pay taxes on taxable spending above that level.  Almost everything that is tax deductible for them today is simply not taxable under the FairTax.  For example, mortgage interest - not taxable; Retirement savings - not taxable; charitable giving - not taxable.  Additionally, unlike today where they cannot deduct interest on credit cards and many other items, interest will not be taxable consumption under the FairTax on any purchase.  Today used goods are bought with after tax not taxable dollars.  Inder the FairTax, they can be bought with tax free dollars.  It does not hurt the middle class and upper middle class unless they choose to be big taxable spenders.  Since education expenses are also non taxable, it is much easily for both the poor and middle class to raise the opportunity and standard of living for themselves and their children.

So how does the government raise enough money?  The base is Personal Consumption Expenditures.  While there are some adjustments to that base, that increase it a little over all, it will get you close.  Go look at it.  It's been tracked for a long time.  In fact, if you go here:http://www.economagic.com/em-cgi/data.exe/fedstl/pce+1 you will see the figures kept by the St Louis Fed on PCE.  Notice that from any month to the same month the next year, PCE has never gone backwards regardless what the economic conditions.  It's standard deviation (flucuation around the base) is 1/2 that of an income base providing more stability.

We have done many calculations on the FairTax base including economists from Boston University, Rice, Stanford, Harvard and others.  It is revenue neutral at 23%.  Some have claimed the rate would be higher but they rewrite the bill to suit themselves when they say that.  My understanding is a new study by a very prominent institution will be released soon that will confirm the rate.

It is a wealth tax.  All wealth is spent sometime, either by the current holder or their heirs.  What good does it do for someone to be wealthy if they can't prove it by spending it?  Do you think the're going to live in my house or quit buying property around the world?  Do you think they'll quit staying at $2,000 a night penthouses or having a couple million dollars worth of vehicles in their driveway?  Will they quit buying $5,000 suits or $100,000 Steinway Baby Grande Pianos to put in the entertainment room of every house?

Consider just the Social Security funding.  Today, Mr. Forbes, or Mr.Perot, or Mrs. Kerry pay nothing into Social Security on existing wealth.  Social Security is only funding from wage income and only on earnings up to $90,000.  Under the FairTax, when any of them buy those 5 Steinway Pianos, every dollar of the purchase will help fund Social Security.  It won't be forced from them.  It will be voluntary.  

Any money the rich choose not to spend is either available as capital for investment in the US or as savings, lowering interest rates for the rest of us to borrow.  

Additionally, the base is increased tremendously by spending from tourists, illegal aliens and tax collection on imports at retail.

Before throwing out a lot of objections, why not take some time to really look at the issue and compare it to what we operate under today.

Currently, the deductibility of home interest money artificially elevates the going rate in that market by artificially elevating what many can afford.  Take out that wedge, rates will correct.

Another way of looking at this is to figure that when lenders don't pay income tax on their profit, and don't pay all the associated costs of complying with the income tax, their cost of business will go down en masse- meaning that the market rate to borrow home mortgage money will go down.

What percentage of Bill Gates's gross income do you think he pays today?  Do you think those with existing wealth actually pay a 35% marginal rate on all income?

No idea.  But considering that his salary is only around $150,000 year I'm not really sure it matters.  Bill Gates makes his money from stock options.  These stock options would no longer be taxed.

All the advantages of wealth allow them the means to effectively avoid a very large percentage of any income tax.  That will remain true under any party and if you get too abusive, they can easily move to another tax jurisdiction and leave fewer middle class Americans to cover the tax burden.

Sure.  But they are still paying taxes on that money albeit not as much as they probably should.   In the Fair Tax they don't.   How much Consumption do you think Bill Gates is responsible for annually?  Now compare that to the amoung he pays in taxes currently.

We have done many calculations on the FairTax base including economists from Boston University, Rice, Stanford, Harvard and others.  It is revenue neutral at 23%.  Some have claimed the rate would be higher but they rewrite the bill to suit themselves when they say that.  My understanding is a new study by a very prominent institution will be released soon that will confirm the rate

Well using the PSE numbers you have provided and comparing it to our Federal revenues we would need about a 23% rate.  Of course that assumes perfect collection of taxes and excludes payroll tax costs.  Tack on another 900 billion for those items and you are looking at 31% tax based on the PSE you projected.  And of course I'm not even taking into account the proposed rebate which will be apparently given to every person with a social security card.  That is no small chunk of change.  And of course we are assuming perfect collection of these taxes which is HIGHLY unlikely as a dramatic increase in sales taxes will almost certainly create a significant black market for goods.

Lastly I would like to know what that PSE actually means.

According to this...

http://www.cbo.gov/ftpdocs/66xx/doc6609/08-15-OutlookUpdate.pdf

Wages and corporate profits for 2004 were 6.2 Trillion.  Yet the PSE was 8.7 Trillion.  Where did the other $1.5 Trillion go, not to mention the fact that a lot of that 6.2 Trillion wasn't spent on consumption.

Consider just the Social Security funding.  Today, Mr. Forbes, or Mr.Perot, or Mrs. Kerry pay nothing into Social Security on existing wealth.  Social Security is only funding from wage income and only on earnings up to $90,000.  Under the FairTax, when any of them buy those 5 Steinway Pianos, every dollar of the purchase will help fund Social Security.  It won't be forced from them.  It will be voluntary.

Ok.  But this is a purely philosophical issue.  We could just as easily remove the cap on FICA taxes if we so choose.  What's the difference other than this method makes you feel better?

Before throwing out a lot of objections, why not take some time to really look at the issue and compare it to what we operate under today.

I did look at the proposal and it seems to be almost completely pie in the sky.  The proposal assumes everything to work perfectly which is impossible.  It also assumes that the change itself will only have beneficial effects which is ABSOLUTELY impossible.  

that the Fair Tax proposal seems to suggest that the increase in efficiency, which is questionable, would offset the NUMEROUS revenue sources that would no longer be taxed.

But that's kind of the point of any comsumption tax. Production is no longer taxed, and revenue and income signify production. Instead comsumption is taxed. This actually makes it harder to avoid taxation. Overseas tax shelters and most avoidance strategies become useless since hiding income becomes irrelevant. Then all resources can be focused on the comsumption side. This is why I think VAT supporters have something over sales tax supporters, because VATs are pertty difficuly to avoid.

You no longer tax numerous sources of revenue, but you now tax numerous source of consumption.

The Fair Tax proposal also essentially allows the wealthy to get even wealthier and be pretty much immune to taxation.

There are two very good answers to this.

(1) Who cares? If the wealthy are allowed to grow richer, but the poor also grow richer, then it doesn't matter. No society has been able to pull themselver higher on the economic ladder by taxing the wealthy out of any gains.

(2) Money is not wealth. It can buy wealth though. Imagine a miser who never spends a dime except for when he has to. He makes  a million dollars a year, but lives in a small one room house, drives a beat up car, and owns nothing more expensive than it needs to be. This guy is an economic hero. All his money goes back into the capital stock of the US, increasing productivity, employment, and wealth for everybody. He provides all this economic growth and in return consumes very little of it. Why tax this guy more than any poor person who lives the same way? His money is going to great use. it is the wealth who spend $40,000 on tennis earings that we should care about. When you tax the miser you aren't taking away from his consumption, but instead of investment dollars that benefit everybody. Taxing at the point of consumption instead harms the ostentatious wealthy, and this exactly where you want to be aiming. And it makes it almost impossible to avoid that tax (certainly much harder than the current system).

While they may pay more in total dollars than the poor that's mainly because they have a LOT MORE money.

But it doesn't matter how much they make. The true level of wealth is how much they spend. The miser shouldn't be taxed b/c he is already providing far better than the government could. If you want to level the field, you want to take aim at trying to prevent the wealthy from consuming too much, since there is zero loss in them producing too much (and it is actually a tremendous gain).

The Fair Taxers have decided that the the Marginal Propensity to Save is either unimportant or bogus because if they understood and accepted it they would realize how flawed their thinking is.

Remember that the Fair Tax is only one example of a consumption tax, and while I don't like the Fair Tax proposal, I do generally support taxing consumption over savings or income.

However, I think you are exactly backwards. The Fair Tax, as with all consumption tax, is made so that the propensity to save is greater than the propensity to consume. Right now you take your after tax money and have two choices. You can consume goods, and that doesn't cost you any extra in taxes, or you can save it and have to pay anywhere up to 35% in taxes on any savings it generates. And that doesn't include the chance of loss on a bad investment or the risk of inflation making an real loss actually look like a gain to the IRS where you pay the IRS for losing money. Right now the board is tilted in favor of consuming new production (as a look at our savings rate would show), but a consumption tax could reverse that and tilt it towards saving instead.

I was going to respond to a bunch of points but then I realized that we were talking past each other a bit.

I'm not against a consumption tax per se.  I do think that transitioning to a consumption tax would be EXTREMELY difficult for our country and if done incorrectly, it could have some powerfully negative consequences.  But I don't have an issue with the concept at all.

The Fair Tax proposal, otoh, I really dislike since it is just a glorified sales tax.  

Your comments are fair enough.  I think we've both come close to the same conclusions.

Maybe it was someone else.  I don't get this, though:

"I do think that something should be done, if there is any plan to move to a consumtion tax, that effective excludes double paying for SS."

Why this in particular?  Social Security income is double-taxed now, so that wouldn't be a change.

The links are back in the original diary.

Thanks for the links, too.

I really don't want to do the calculations you suggest, because it ain't gonna happen.

But I will reply to one of your points.

"Take the $10 item with the Fair Tax signed into Law, the Price of Goods will drop an average 22%."

As it stands right now, that's a matter of belief.  I suspect there are several economists who would argue with that prediction.

To begin with, this will supposedly happen overnight.  But inventories will still have cost what they cost.  They won't magically be cheaper.  Only now, when they're sold, they'll have a 30% tax added on.  I agree with the basic theory, I just don't believe the cost of living will suddenly drop by anything close to 22%, and I have my doubts about any drop at all.

Just consider a hypothetical company that provides services only, no products.  They will save their half of the SS withholding tax, but that's it.  They won't have any incentive to reduce their price--they already know you're willing to pay it.  They may face some price competition, but I don't think it will be enough to drop the price 22%.  Additionally, their employees aren't stupid.  They'll say, "Hey, Mr. Employer, you don't have to pay income tax on your profits any more, so we want our share of that tax deletion."  For them to get that share, he HAS to keep charging the same rates.

"small business pays something like $724 in compliance costs for every $100 they pay in taxes under the current system."

If true, taxes are a very small part of their business expense.  So eliminating the $100 in taxes still leaves the $724 in compliance costs.  Plus all the other costs of doing business.  I can't see this company reducing it's prices by 22%.

The concept that stands out in your comment is that we might be better off to just reduce corporate tax rates.

I believe corporate taxes are paid only on profits.  That would mean they don't come in as a "cost" until the company is profitable.

"Under the FairTax, you have the full $130 to put to your payment."

I just want to point out that if one's disposable income comes from liquidating assets, there is no tax on the part related to the cost of the asset, only on the gain.  Tax rates on the gross are far lower than 30%.  If there's no profit at all, one already has the full $130.  And the money that paid for the $130 asset in the first place was taxed when it was earned.

For someone who writes so well, you missed the entire point of my note.  And it was in capital letters, too.

...that would mean the expenses involved in complying with taxes would be dramatically reduced as well- it's not as though companies are going to pay a CPA or a tax advisor to make sure they are in compliance with a tax that no longer applies.

If you look at what it takes to comply with a sales tax and what it takes to comply with the current income tax, there's a substantial difference.  Remember, a 401(k) program (or any other employee benefit) would be substantially simpler to manage without tens of thousands of applicable Internal Revenue code to comply with.

A sales tax requires 4th grade math to comply with, while the current tax system requires a CPA.

Estate and gift taxes are often on total wealth with no basis adjustment.

To me, "complinace costs" meant the cost of complying with any and all government mandates, primarily:  environmental, human resources, and other record keeping.  I didn't restrict it or connect it to income taxes alone.

If they were talking about only income tax related compliance, your reference makes more sense to me.

on gifts over a certain amount per year ($11,000 right now).

Estate taxes are also based on the amount over a minimum which it seems is changing every year right now.

A passable point though, because the tax rate above the minimum is high.  But ALL the money will be double-taxed under a sales tax, not just the amount over the minimum.

The unfairness of both taxes could be corrected by retroactively indexing them against CPI or earnings index, or permanently eliminating them, as the movement against the estate tax is in place to do right now.

I haven't really heard of a great outcry against the  gift tax, though, and I think it IS now indexed.

There are transition provisions for inventory in the Bill.

Price drop is not just a belief but a researched economic body of work that is evidence by producers everyday when they can find either cheaper suppliers or can cost cost in production.

When they reduce costs they reduce price to compete and that is an economic reality seen all the time.

In this case puched further by the public that Know that every companies costs have dropped an average 20 to 30 %, customer demand and supply chain demand will lower prices.

Price drop solves most of that concern.

Yu pay about the same as you did before.

And it also depends what you buy with that Asset.

If you reinvest it in another  Pre-existing property - NO Tax Paid

If you invest in the Market- no Tax

No estate tax - no Gift Tax

Net- Net you are still ahead.

Bill Gates makes his money from stock options.  These stock options would no longer be taxed.

True, under the FairTax, the income event of exercising options and selling the shares would not be a taxable event... but consider: it is not today, either.  Under the current tax system, the most effective way to exercise options is to use them to buy stock at the options' strike price and hold that stock for more than 18 months- at that point it's long-term capital gains instead of income and is taxed at a different rate.  Given that he doesn't need the money right away, I'd be terribly surprised if he paid a cent on income tax from options.

Bill Gates is a guy who spends a ton of money, gives away a ton of money, invests a ton of money.  He's literally an economic hero.  With the money he keeps, he employs people- literally, tens of thousands of them around the world.  With the money he invests, he employs tens of thousands more.  With the money he gives away (he is the world's top philanthropist and donates more money to fight hunger and disease and promote literacy than most countries) he already makes the kind of difference we normally pay the government to make.

If you're so focused on the lost opportunity to tax Bill Gates' income, I think you're missing the point: Bill Gates is responsible for MUCH MORE economic activity than his taxable income represents.  We need more people like Bill Gates, with even more money in their hands, to do the kinds of things with that money that he does.

Respectfully, the concern about missing out on the capital-gains taxes he pays annually just might be like passing up dollars to pick up pennies.

How much Consumption do you think Bill Gates is responsible for annually

He's a conspicuous consumer- his water bill alone is over $1m each year.  His house is worth hundreds of millions of dollars.  He employs tens of thousands of conspicupus consumers, who buy big houses, drive expensive cars, and spend lots of money too.  I would guess that he's responsible for literally billions of dollars worth of consumption each year.

its implied question.

I believe in the power of market forces to push prices down through competition and lower acquistion costs.

I just don't believe the cost savings for very many companies will come close to 20% to 30%, and price reductions will not approach 22%.  Without those savings, the house of cards topples.  But I think I already said that.

Let me add, the major cost for most businesses, as I tried to illustrate, are personnel costs.  There's nothing in this plan that reduces personnel costs a penny.  

Overhead due to already purchased plant and equipment, another significant cost, no reduction.

Other overhead--light, water, heat, insurance--little or no reduction.

Real estate and other property taxes--no reduction.

Business licensing taxes--no reduction.

For many businesses, raw material costs are only a small part of their expenses.  A reduction of even 30% of materials cost only results in a reduction of total costs of 3% if materials are only 10% of the total.

Given an item that now sells for $10.00, that could reduce its price to $9.70.  If the company has a profit margin of 5%, they're now paying tax on $0.50 per unit.  At even 35% tax rate that's $0.175.  So at most the price could go down only $$0.47, to $9.53, not to $7.80 as you claimed earlier.

Add a 30% tax on to $9.53 and the result is $12.39.  So I guess I should have stated the inflation will be an immediate 23.9% for that company's product instead of 30%.  It's still significant.

But I haven't followed the links yet, so what do I know?

Follow the links  see that several economists have studied the numbers in detail and the price drop ranges in those studies from 20 to 30%.

What are the Costs reduced?

1. Employer portion of the payroll tax alone is 7.65% of payroll;  Multiply that through the supply chain. farmer to trucker to foood processor to wholesaler to retailer.
   
2. Fair Tax eliminates Corporate and business income tax.  US Corporate tax rate 35%.  push that thru each level of the supply chain.
   
3. Compliance costs for small business.  That is complying with record keeping, monitoring and complying with tax laws and regs. Costs of tax accountants, tax attorneys and estate planning for farmers and small business owners and more.

This is estimated to be about a $250 Billion dollar savings for business. Others show it could be as high as 400 Billion in annual savings.

These are a few of the items that get you to the 20 to 30% price drop.  Major Economists have studied and confirmed.

It is an honest reality to expect it. Plus you will have an American public who when we switch to the Fair Tax effective January 1st of a new year will be expecting to see it and will be price shopping stores to find it because they know that retailers have saved a ton.

I was going to get to continue paying Social Security tax under this plan, even though I'm now retired.  That would save employers 7.65% on each employee's paycheck up to the $90,000 cap in effect now.  Lovely.  Wait till the AARP sees that.

Oh, yes, there's the prebate.  $5,000 or so, right?  Whoopee.

But I'm keeping an open mind.  And it won't happen this way in our lifetimes.