Wednesday, November 07, 2007
What is the fair tax? If you haven't been following the arguments, some basic understandings or at the following websites:
I need help understanding whether the fair tax is revenue neutral with regard to the rich. Since they pay all the taxes today, this is a critical question. What happens to the wealth of the rich while they own it and when they pass it on to their heirs? I need your help your.
What concerns me about the fair tax is whether the advocates of fair tax’s argument on revenue neutrality for the rich who can pass on their wealth to their children is real?
The following is a give-and-take between a doubter named Graetz and the fair tax expert Dr. Kotlikoff.
Graetz misstatement: “Tax reform should not reduce taxes on the very well off.” He contends “that it is hard to do that [tax the wealthy] without keeping some tax on income.”
FairTax rebuttal: Graetz does not acknowledge that a tax on consumption taxes not only current income when it is spent but also accumulated wealth when it is spent. The FairTax, as a consumption tax, is the only tax reform plan that taxes accumulated wealth.
According to Dr. Kotlikoff, “Taxing consumption is effectively the same as taxing wages
plus taxing wealth. The logic is simple if you consider the most straightforward way of taxing consumption, namely via a retail sales tax. In this case, when people spend their wages or their assets on goods and services, they pay sales taxes, meaning they end up with less to consume. This is no different from having the wages and wealth directly taxed, but facing no sales tax. But what about saving one's wages and wealth and spending these funds plus accumulated interest in the future? Doesn't this avoid the consumption tax? No. You end up paying consumption taxes not just on the original sums, but also on the accumulated interest. The same holds if you save your wages and wealth and give it to your kids. When they spend it, they pay consumption taxes on both P&I [principal and interest].” Source: “The Case for the ‘FairTax,’” by Laurence J.
Kotlikoff, Ph.D., The Wall Street Journal, March 7, 2005.
I understand Dr. Kotlikoff’s argument on how accumulated wealth ends up in future consumption. But his answer does not adequately address all the revenue neutral issues related to wealth. Since the rich and the very rich pay all the taxes under the current system the fair tax system needs to capture 23% of the money accumulated by the rich and the very rich to be revenue neutral.
The fair tax assumption is that accumulated wealth will be spent on taxable consumption. The rich spend only a small percentage of their annual income and consumption. They invest the rest. The fair tax system does not tax this investment. When this wealth is passed on to their children the fair tax assumption is that it will be spent on consumption. There is no argument for this assumption. The children could behave like a parent and spend only a fraction of the accumulated wealth.
Also the fair tax system does not tax consumption of used products. What the fair tax website does not address is buying a “used” company. Typical behavior of the wealthy.
If you remove this enormous amount of wealth that is currently taxed, but would not be taxed under the fair tax system, I have difficulty understanding how the fair tax system will be revenue neutral?
Liberty or Death
Prices after FairTax passage would look similar to prices before FairTax - not "30% higher" as opponents contend - competition would see to it. So, the FairTax rate (figured as an income-tax-rate-non-comparative, sales tax) on new items would be 29.85% (on the new, reduced cost of items because business isn't taxed under FairTax - thus lowering retail prices by 20% to 30%), or 23% of the "tax inclusive" price tag - this is the way INCOME TAX is figured (parts of the total dollar).
The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of HHS poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.'s Kotlikoff and Rapson (10/06) concluded,
"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.
"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."
Further, per Jokischa and Kotlikoff (circa 2006?) ...
"...once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent."
It's well past time to scrap the tax code and pay for government the way that America's working men and women are paid - when something is sold.
(Permission is granted to reproduce in whole or part. - Ian)
You have neither defined “rich” nor apparently realized that the propaganda you see in the progressive tax tables is a lie. The current system has been heavily gamed by the wealthy specifically to make you believe they pay their fair share.
When you hear someone make the claim that the top 2% of income earners pay 90% of the income tax in this country (the numbers change every time someone says it) they are misleading you. They are intentionally excluding payroll taxes, which are 7.5% and apply only to the first $97,400 and apply only on wages earned through labor. They are intentionally excluding revenue from corporate taxes that are passed on in a very regressive manor to those who must or choose to consume products produced by the taxed corporations. They are intentionally allowing you to believe the fiction that what the IRS calls “income” in any way correlates to the amount of money accumulated by the wealthy.
You cannot simply make the claim that the wealthy in this country spend only a fraction of what they make. I would venture to say that many upper income Americans spend more in a year than they have told the government they made. The tax burden today rests heaviest on the honest taxpayer—whether honest by choice or forced to be honest by their employers. Practically every honest taxpayer will see their burden shift downward under the FairTax.
Finally, why do we feel the need to heavily tax someone simply because he earns a great deal in a given year? Under today’s system, a person can work hard for many years to grow a business at which he makes very little personal income, sell that business and in one year make more than he has made in 20 years. That will put him in the top tax bracket without the benefit of accumulated tax breaks available to the truly wealthy. We should not want a tax system that punishes this person for his hard work. No matter how much a person makes, if he lives frugally with the intent to increase his position in life, he should be encouraged for doing so and be allowed to keep as much as possible. The FairTax is collected at the time of consumption precisely because it is at the point of consumption where someone is enjoying the benefits of his wealth.
I am a strong supporter of the fair tax and I desperately wanted to work. For the most part I think it will but my question in my post still stands that is:
If you remove this enormous amount of wealth that is currently taxed, but would not be taxed under the fair tax system, I have difficulty understanding how the fair tax system will be revenue neutral? The paragraphs above this last paragraph support my concern. Do you have any thoughts on this issue?
You brought up some interesting points and I agree with you that what I said used generalizations. But to say that the IRS, the Census Bureau and all the other well named think tanks are all wrong and are propaganda requires some proof by you. Do you know of any sources that have completely different numbers? Or in what way do you back up your statement that the numbers they provide are propaganda?
“A small percentage” was poorly said. The percentage used for consumption is a sliding scale, from those who make 200, 000, the new lower limit for rich to those who make millions, changes significantly. But the question you have to ask yourself even for those who make 200,000 is who is buying all the stock and otherwise making investments. I make well less than 100, 000, but I still buy stock. What percentage do you think millionaires put into investments? I would say considerable. Under the current system you pay tax on the profits from all investments. Under free tax you pay nothing. That creates a pool of money that needs to be considered when calculating “revenue neutral.”
Additionally the wealth of individuals is also determinable: in 2001 the total wealth in the US was 42 trillion. The breakdown was 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the total wealth.
That number is a lot higher today than 2001 but 42 trillion will do. It is this wealth that concerns me the most. The income on wealth is taxed under the current system but not under the fair tax system. A conservative 7% of 42 trillion is 2.9 trillion. You've seen the fair tax argument on how this 2.9 trillion eventually gets taxed. My concern is the word eventually. I believe that the majority of the 2.9 trillion does not end up in consumption nor does it end up in consumption and passed on to heirs. The word majority could be wrong. But the number is not zero, but a big number. In the first year of the fair tax system all of that 2.9 trillion would be eliminated from the fair tax taxable pool. My question to you is how do you make up the missing tax?
In the long haul I agree with the fair tax experts this wealth will eventually end up in consumption. My concern is a near-term particular year one. Don't get me wrong, I am a strong supporter of the fair tax and I want it to really work. I would just like the experts to make sure that they've calculated everything with regard to revenue neutral.