Its proponents may call it a Consumption Tax, if they wish, but I can think of two reasons that it should not be called a "Fair Tax."
- First, a personal one -- a significant portion of my income comprises my contributions to company pension, on which I have already paid Federal Income taxes. That income is reported, but not taxed a second time. If a consumption tax were implemented, I would be paying consumption tax on money that was already subjected to the income tax.
- Second, it appears to me that a consumption tax unfairly benefits high wage earners over lower wage earners.
To illustrate the second point look at two simple examples: one a laborer who earns $50,000 per year; the second an executive who earns $5,000,000 per year.
- The laborer now pays 15% of his earnings ($7,500) in income taxes. If he is frugal, he saves about 10% of the after tax money and spends the rest, $38,500 to live on. Under the so-called "Fair Tax," the laborer will still put $4,250 into savings. He will spend the remaining on goods taxed at a 23% rate ($37,195 in goods and services, $8,555 in federal tax). That means his tax bill has gone up from $7,500 to $8,555)
- The executive now pays about 24% of his earnings ($1,200,000) in Federal income tax, invests about $2,800,000 in savings, and spends the last 1,000,000 to live on. Under the so-called "Fair Tax," the executive will still live on 1,000,000 worth of goods and services, on which he will pay $230,000 in Federal Consumption tax, and he will invest the remaining $3,770,000 in savings, which will earn him even more money next year. His taxes decrease by $970,000. [Now, you rich guys can explain to me that you just can't get by on a measely $1,000,000 per year. But even if you significantly change the spending to investment ratio, the taxes still go down. Moreover, the laborer does not have the latitude to make that kind of adjustment.]
So the Consumption Tax is NOT a fair tax! It benefits the wealthy at the expense of the poor. Most tax laws are written this way because they are written by wealthy people. Then they present the tax in such a way that it appears to be "fair."
Most people will agree that any tax on a person who earns less than "the poverty level" is not really fair. Many will agree that at some point one's earnings are such that he can live comfortably, build his savings, and still have a LOT of money "left over." Just ask Bill Gates or Warren Buffet.
A flat tax on income, or a somewhat progressive variant thereof, is probably the only way to approach fairness in taxation. The variation I suggest is a tax on ALL personal income (regardless of source, no deductions, no adjustments, no credits) -- approximately the first $33,000 of income to be tax-free; from $33,001 to $200,000 of income to be taxed at 12%, and from $200,000 up be taxed at 25%. The break points should be adjusted annualy for inflation. The actual rates can be calculated to make sure that the structural change is "revenue neutral."
A few notes: (1) I said personal income. Taxes on corporations are never paid by the corporations; they are passed on to the consumers in the form of higher prices. (2) The highest rate of 25% may seem low to some ultra-liberals, but remember it applies to ALL income (i.e. no more 15% rate for capital gains). (3) ALL income may be hard to determine, because some people receive many types of income and do not report portions of it that are not salary, wages, or interest. (4) The consumption tax is even more cruel to the poorest of wage earners who now pay no income tax. Suddenly, they will see their buying power decrease by 23%.
I know this is all overly-simplified. The discussion is meant to be conceptual, as opposed to specific. But one of the keys to solving the tax problem is to simplify it. One important concept is that taxation should be used to fund the operations of government, not to control people's behavior. A typical governmental abuse of "consumption" taxes is to increase the consumption tax on "undesirable" products and services. A tax that is simply based on total personal income avoids that kind of abuse.
9 comments:
Poochie, I think the following in-depth look addresses your two primary objections. First off, there is no reasonable equity of distribution under the current INCOME tax system. What's more, the Tax Code has become a "tinkerer's paradise" for 53% of the lobbyists who game it in Washington DC. It's a lucrative business, and the U.S. TAXPAYER pays for ALL of it in higher prices (i.e., a hidden tax which is incomprehensible to the average working person).
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 Commerce 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.
(Pass it on! Permission granted to reproduce in whole or part. - Ian)
I'm sorry, Ian, I still don't buy in.
First, with such things as "prebates" and assumed price reductions, the so-called "fair tax" is just as vulnerable to tinkering as other forms of tax.
Second,your quote of Professors Koltikoff and Rapson confirms the intention to "double tax" my pension contributions even though I am far from wealthy "...By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households..."
Third, the so-called "pre-bate," determined by some government hacks, will decide how much of a person's spending is for necessities. I don't really believe everyone will receive a monthly or yearly check from the government to "refund" taxes not yet paid on the arbitrarily defined amount of necessities.
Third, there is an assumption that, immediatedly upon implementation, those wealthy companies will drop the prices on their products by the full amount of the taxes that they no longer have to pay.
Fourth, there is the obfuscation that the consumption tax is not 15% or 23%, but actually 29% of every dollar spent.
Fifth, the consumption tax still does not appear to account for the fact that the wealthiest 1% of our taxpayers do not consume in proportion to their total wealth; they re-invest, and store their wealth, often in offshore ventures and accounts.
Income, NOT consumption, is the true measure of wealth. The consumption tax still appears to benefit the poor laborer, but instead benefits the super-wealthy at the expense of the middle class.
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Ian is probably looking for his second comment on this topic, but I rejected it. It contained interesting projections of spendable income based on the very assumptions about the so-called fair tax that I dispute, i.e. the reality and feasibility of the "prebates," and the likelyhood of merchants lowering their prices. Nor did he address the issue that the relationship between consumption and income is not linear. And he rejects my contention that I should not have to pay a consumption tax on money that I previously paid income tax on and saved. Then he asserts that anyone who manages to save (income taxed) dollars over a life time is by definition rich, and should now pay a consumption tax on those dollars. No matter how attractive the computations may seem, I have no interest in them when the underlying assumptions are invalid. The fact is, it's only fair if it works.
So, why were you afraid to post it?? You sure did spend enough time telling us all about it. (That's the problem with Moderation, Moderators get ascared that their dearly beloved opinions may come under irresistable pressure and so become censors to protect their beliefs - no matter how irrational.)
Very well, if you won't post mine, try this new paper from Dr. Kotlikoff on for size.
Convinced yet?
I am not AFRAID, Ian, just OPPOSED. I disagree on the basic assumptions, and will not support or publish conclusions based on them. People and find those on your page. I am not any more chained to my opinions than you are to yours, but I am open to dialog on the basic assumptions, which I have outlined twice, and which you have ignored twice.
I have read Prof. Kotlikof's paper, and he makes some good points. However, I do not support the taxation through consumption of earnings that have already been taxed. I also believe that many wealthy people report "zero taxable income," even though their gross income before adjustments, credits, and deductions is significant. And I still maintain that much of the gross income will never be spent, but instead will be invested, thus avoiding a consumption based tax. I plan to read the paper again, and to do some more studying, as well.
Thanks, Poochie. Dr. Kotlikoff pretty well makes the case that society has been split by lawmakers choosing winners and losers. The winners were those with sufficient financial resources who could accumulate investing gains tax-free (Roth IRAs) by being able to put away after-tax dollars. The losers? Those who could not muster the resources.
At the same time, by taxing business - and burying the cost of same in higher prices - the politicians get additional hidden taxes from all of us.
Finally, by grafting paycheck withholding (held at -0- interest), those at the bottom are hurt more than those who can live off of "dividend rate" income. That's because those at the bottom resort to "credit card" deficit fillers and so end up paying a monthly bounty to the bankers - yet an additional hidden tax.
FairTax removes all of these distortions, eliminates winners and losers, gets the Man's hands off our paychecks, pays for government the way American wage-earners are paid, when/because something is sold, and subordinates government tax payments to the meeting of personal and family consumption above basic sustenance levels. In the process of all of the foregoing, it eliminates wasteful tax-code gaming, 35,000 lobbyists, and prospective employment for politicians after they've left the national Legislature.
What could be better?
What could be better?
A system where the lower 50% of wage earners pay something more than 3% of the federal tax.
A system where the wealthiest 1% of wage earners actually pay their fair share of the federal tax burden.
A system that ensures that when a man receives $1 million in a year, he pays taxes on the whole $1 million, not on just the relatively small portion he spends on food, housing and luxuries.
A system where an individual is not punished for sacrificing some of his current pleasures for savings by having that savings taxed twice.
A system that does not pretend to be able to predict its impact on prices--that is not based on the assumption that businessmen whose taxes are reduced will immediately pass all of that savings on to his customers.
A system that is not riddled with rebates, exemptions, deductions, credits, and arbritrary decisions on how much an individual should spend on necessitites, all decided by rich bureaucrats.
A system that is simple, has few parameters, and is therefore both transparent and tinker-proof.
A system that recognizes that the purpose of tax should be to fund the operation of the government, NOT to influence personal behavior, whether it be smoking, drinking, fuel consumption, or personal financial choices.
The "Fair Tax" addresses the first of those characteristics. And it recognizises the fact that a tax on business is not paid by the business. But nothing I have read convinces me it embraces the others.
I'm closing the comments on this one--it's time to move on.
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