Fair Tax

[jpg7n16]

Hey guys,

So I've been hearing more about this whole fair tax thing - and it's always proposed as a good thing, so I've done some mathematical investigating and would like to see what you guys think. Am I onto something here?

Now bear with me as I don't know all the intricacies of the Fair Tax - but I think my point is clear enough regardless.

The fair tax is mainly touted as a remedy for the distribution of taxation. That those who spend the most, should pay the most tax. And thus if we are all taxed on our purchases, then those who spend the most will be taxed the most. Correct? Therefore this should be "fair" right? (According to the fair tax website - here - the proposed sales tax rate is 23%)


But something seems fishy about all that. Mainly because of this idea I had: "well won't that mean that those who spend a higher proportion of their income will taxed on a higher proportion??" I mean if you're borderline poverty, you're living on 100% of your income - so when you spend 100% of your income, 100% of your income will get taxed. But if you're making serious money - say $500,000 - and live off only say 1/2 that - so 250k, you'll only be taxed on half your income. Who is the fair tax "fair" for?

So I created a spreadsheet to calculate some things. I took the marginal tax bracket chart from about.com - 2010 Tax Rate Schedules: Marginal Ordinary Income Tax Brackets for Year 2010 - and knowing what I know about taxation, created a spreadsheet to see just how much tax various incomes will be taxed at under current tax law - and based on some arbitrary proportions of spending, under the new fair tax law. I think they're all very reasonable assumptions.

I used 5 incomes (net of SSI) - which are the averages of the single filing tax brackets. And created a spreadsheet that is apparantly too large to attach to this thread. It accounts for adding back social security. It only uses the standard deduction and personal exemptions. No scenario was evaluated for having kids - but since you get dependency exemptions, and kids cost a lot - there's no doubt that the tax burden would be proportionate higher under fair tax. Here are the results.

Spending under $29k-40k ish is 2 times the poverty line for most scenarios (2009 Federal Poverty Guidelines and What are Poverty Thresholds and Poverty Guidelines? ), and is thus taxed at 11.5% not 23% (Americans For Fair Taxation:)

Income 1: 21,188 (spends 97%) - taxed at 11.5%
Income 2: 58,200 (spends 85%)
Income 3: 127,125 (spends 75%)
Income 4: 272,750 (spends 65%)
Income 5: 500,000 (spends 55%)

Net Savings from Switching Tax Systems
Single
Income 1: 552.74............17.76%
Income 2: 894.24............ 6.77%
Income 3: 11,467.39......... 32.96%
Income 4: 38,159.33......... 47.61%
Income 5: 93,204.46......... 59.18%

Married Filing Jointly
Income 1: (555.39)........Loss
Income 2: (2,412.01)........Loss
Income 3: 4,249.89..........15.41%
Income 4: 27,738.08.........39.78%
Income 5: 82,596.21.........56.24%

Since these are the tax savings - a negative number means negative savings - so the tax liability would actually be higher for these individuals under the fair tax system, than it currently is.

So it seems as though this system is very fair - for the high income people who don't spend much of their income. And seems to have the worst effect on the lower income married families. Which the data I used happens to be around the median income in America, so hmmm.


My opinion is that one of the worst scenarios would be if you were a married couple with 2 children and made around $50k combined. Sound like anyone you know?



Now I get these numbers may be slightly off because of some fact about the fair tax that I don't know, and maybe you know this one guy who makes a lot and spends a lot - but there is an obvious trend in the data that the people who benefit most from the fair tax are those with really high incomes.

Something to think about.

[jIM_Ohio]

Any tax reform will ALWAYS benefit the rich more. Even the current system benefits the rich over the poor (when taxes get cut). Did you ever see the post about if we pay for dinner in the same way we pay taxes?

I found it on this blog
ECON #120: What taxes and splitting the dinner tab have in common | On Startups, Venture Capital and Technology by Joseph Ansanelli

The last few sentences got cut off the blog post- there is something in the first one I read where the rich man does not show up and the men don't have enough for dinner.

Fair tax probably would remove kid exemptions and other tax credits (child tax credits) because the tax is levied at point of sale (right?).

One issue with fair tax is if sales tax was 23% and its assessed on small businesses they go out of business fast.


Lets say I buy a $100 item like a computer (it now costs me $123 because of tax). Let's say I configure it and make it user friendly, then sell it for $200 ($77 profit) and someone buys it for $246 ($46 sales tax). If the entity which bought it adds more products to it (installs more software or similar) and then charges $500 for it (charging $115 sales tax) for a final bill of $615, there is a problem.

Of the final $615 purchase price, $23+$46+$115 of that price ($184) is sales tax at point of sale.

That is a high amount (IMO),

$123 purchase had a 23% tax
$246 purchase had $23+$46 tax 69/246=28% tax
$615 purchase had $184 tax (30% tax)

the more value which is added to the product, the more tax it gets (its not 23%).

So any reform which uses the fair tax needs 2 other key components

1) a way to exempt the poor from paying taxes on necessities
2) a way to only tax the VALUE added to something, and not just levy a blanket 23% tax on all purchases

The current tax system has exemptions in it to prevent the poor from paying too much (earned income credit and child tax credits as examples).

The current tax system has an indirect way of recouping the taxes paid as you add value to products. We file tax returns and use accounting methods for this.


I do read up on various tax systems on occasion (like fair tax, value added tax, flat tax) and am generally of the opinion our current tax system is inefficient, but when compared to the others, its not as bad as it looks.

My #1 tax pet peeve is the brackets go from 10 to 15 to 25 to 28 to 33 to 35 percent
the jump from 15 to 25 is quite cruel (that is a 60% increase). If it were me it would be something like 10-15-18-24-36-48 so as you move up, the increments increase more severely.

[Debt Vigilante]

You have to remember who you're dealing with. In the last few years the federal government could take a piece of crap and tell the people it was gold and they would believe it. Our country is becoming less educated and informed, and relies solely on the biased information that is presented to them on the T.V. If the president says it's a good idea it must be - whether that means a war in Iraq, or passing a health care bill that was never read and nobody knows how we will pay for.

[maat55]

Your leaving out the prebate. Everyone recieves a deposit each month to cover the taxes that would be paid up to the poverty level. Also, you recieve your entire paycheck and do not have to spend it all.

[maat55]

I can't imagine a more fairer tax. You get your whole paycheck+ the prebate. You go to the store and the price you see is what you pay(tax is included in the price. And, you know exactly how much tax you are paying. You file no tax return saving that money and time.

I challenge anyone to claim that what we have is even close to as fair and reflectant of an free society.

[maat55]

[QUOTE]

Fair tax probably would remove kid exemptions and other tax credits (child tax credits) because the tax is levied at point of sale (right?).

It eliminates all deductions.

One issue with fair tax is if sales tax was 23% and its assessed on small businesses they go out of business fast.

Businesses are assessed nothing. The tax is charged to the user and buyrer at retail only. Nothing is taxed on used or during the production process of products.

Lets say I buy a $100 item like a computer (it now costs me $123 because of tax). Let's say I configure it and make it user friendly, then sell it for $200 ($77 profit) and someone buys it for $246 ($46 sales tax). If the entity which bought it adds more products to it (installs more software or similar) and then charges $500 for it (charging $115 sales tax) for a final bill of $615, there is a problem.

Used products are not taxed. The only taxation on the product will be the additions of service or added retail products. The computor is taxed only once.

$123 purchase had a 23% tax
$246 purchase had $23+$46 tax 69/246=28% tax
$615 purchase had $184 tax (30% tax)

the more value which is added to the product, the more tax it gets (its not 23%).

So any reform which uses the fair tax needs 2 other key components

Your figures are meaningless. And tax is not added on top of the price it is in the original price only.

The current tax system has an indirect way of recouping the taxes paid as you add value to products. We file tax returns and use accounting methods for this.

This waste is eliminated.

I do read up on various tax systems on occasion (like fair tax, value added tax, flat tax) and am generally of the opinion our current tax system is inefficient, but when compared to the others, its not as bad as it looks.

I think you need to better read the fair tax book or website.

[jIM_Ohio]

[QUOTE=maat55;264786]

It eliminates all deductions.



Businesses are assessed nothing. The tax is charged to the user and buyrer at retail only. Nothing is taxed on used or during the production process of products.




Used products are not taxed. The only taxation on the product will be the additions of service or added retail products. The computor is taxed only once.







Your figures are meaningless. And tax is not added on top of the price it is in the original price only.





This waste is eliminated.




I think you need to better read the fair tax book or website.

maat- so I can I claim to be a small business, go to the store, and have the "fair tax" removed from all my purchases?

Here are some examples:

I coach soccer and get paid to do it.

I buy soccer balls, and I do not buy them direct from the manufacturer. I buy them, put my club logo on them (usually in the discount bins at end of season), then add a logo onto them. I also buy shin guards and socks all at various retailers. I then sell them all to my players with a minor step up for my efforts. How would that get taxed- how would retailer know I am a business and not a person.

If I buy gatorade and then redistribute (whether at a tournament or something else) how would the point of contact retailer know I am purchasing on behalf of a business or myself?

The current way to do that is I file a tax return or submit receipts to business and get reimbursed for the expense. Is it the same system for fair tax? Based on your reply, I believe this system changes, and punishes small business ventures like this.

[maat55]

[QUOTE]

maat- so I can I claim to be a small business, go to the store, and have the "fair tax" removed from all my purchases?

This is from the website.

What is taxed?

The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed. A rebate makes the effective rate progressive.

[jIM_Ohio]

[QUOTE=maat55;264790]

This is from the website.

What is taxed?

The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed. A rebate makes the effective rate progressive.

How is a retailer like Dick's going to know I am a one person soccer club and not just a dad buying soccer balls for my kids?

Dick's is a retailer
to some small businesses they are also a supplier

[jpg7n16]

I can't imagine a more fairer tax. You get your whole paycheck+ the prebate. You go to the store and the price you see is what you pay(tax is included in the price. And, you know exactly how much tax you are paying. You file no tax return saving that money and time.

I challenge anyone to claim that what we have is even close to as fair and reflectant of an free society.

Ok I'll bite - here's an argument based on Warren Buffett's explanation of his approval of the estate tax system.

He feels that in this society, people are rewarded for certain things more than they would be in other societies. Warren can allocate capital efficiently. But in a 3rd world country, that ability wouldn't come in handy often. He'd likely have been forced into the trade of his fathers and would never have become the man he is today.

More specifically for purposes of this debate, he wouldn't have earned the income he earns today.

We live in a society that rewards people who can spot undervalued businesses (investment bankers), or who are good at interpreting legal jargon (lawyers), and doctors. But we don't reward teachers, servicemen, and many other professions with the same degree of wealth.

If you can throw a football 60 yards to another man in stride, this society will pay you a lot for that. If you can change a kids entire life, you don't receive the same reward.


The difference in argument is that - if your large income is largely based on the society that uniquely rewards what you do, isn't it fair for society to have a claim to some higher percent of that uniquely high income? Without this society you would have made much less. (Current system: This is taxing on the income side - society's claim on the wealth bestowed to you)

But you (and other fair tax proponents) would argue that taxing on consumption is more fair than taxing on the wealth transferred to you by society (fair tax is taxation on the "consumption" side).

Society could then give you a very large investment account. It could transfer substantial amounts to you and your heirs, and receive nothing in exchange... Unless you want to tax the purchase of investments similarly to other consumption.


So which is more fair? Should society benefit from you on all that it allows you have (income side)? Or only when you make certain consumption purchases (consumption side)?

[maat55]

[QUOTE]

The difference in argument is that - if your large income is largely based on the society that uniquely rewards what you do, isn't it fair for society to have a claim to some higher percent of that uniquely high income? Without this society you would have made much less. (Current system: This is taxing on the income side - society's claim on the wealth bestowed to you)

The only thing you are biting on here is class envy. Wealth is not bestowed, it is created.

But you (and other fair tax proponents) would argue that taxing on consumption is more fair than taxing on the wealth transferred to you by society (fair tax is taxation on the "consumption" side).

As I've mentioned above, everyone recieves the prebate to cover taxes up to the poverty level. The rich spend much more money and therefore would pay much more tax. Your inclination is to punish achievement. This government has punished achievement and rewarded poor achievement and poor financial decisions, for far too long.

Society could then give you a very large investment account. It could transfer substantial amounts to you and your heirs, and receive nothing in exchange... Unless you want to tax the purchase of investments similarly to other consumption.

Transfer of wealth is not forced. Many here have learned how to reverse much of that process through better personal financial decisions. Again, you are of an class envy mindset.

So which is more fair? Should society benefit from you on all that it allows you have (income side)? Or only when you make certain consumption purchases (consumption side)?

Taxing consumption while not taxing production creates more savings and jobs. Government redistributes extremely inefficiently making it harder for lower wage earners to retain funds for investing. If you want to lay blame, blame the socialistic government not the Fair Tax.

[maat55]

How is a retailer like Dick's going to know I am a one person soccer club and not just a dad buying soccer balls for my kids?

Dick's is a retailer
to some small businesses they are also a supplier

My guess is that there will be wholesalers and you will have to prove your ability to purchase. For those things bought at retail outlets, i'm sure you will have to have some form of business identification.

Americans For Fair Taxation: Frequently Asked Questions

[cptacek]

Ok I'll bite - here's an argument based on Warren Buffett's explanation of his approval of the estate tax system.

If Warren Buffet thinks the government deserves your money after you die, why isn't he just giving all his money to the government instead of giving it to charity?

http://www.savingadvice.com/forums/investing-banking/54142-warren-buffet-giving-charity.html

And if he thinks that taxes should be higher on high incomes, why doesn't he just pay more in taxes? He could send in as much as he wants. They accept donations, you know.

[jpg7n16]

If Warren Buffet thinks the government deserves your money after you die, why isn't he just giving all his money to the government instead of giving it to charity?

http://www.savingadvice.com/forums/investing-banking/54142-warren-buffet-giving-charity.html

And if he thinks that taxes should be higher on high incomes, why doesn't he just pay more in taxes? He could send in as much as he wants. They accept donations, you know.

According to him, from what I understand - he believes society is entitled to a substantial portion of all it has allowed him to have. Thus he is giving back a substantial portion to society.

Which is then not taxed, because it goes directly to the needs of society.

If taxation is used to meet the needs of the society, and so is his charitable giving- it could be argued that he actually is sending in as much as he wants. And will have left substantially more to society as a whole than to his heirs.

[jpg7n16]

[QUOTE=maat55;264812]

The only thing you are biting on here is class envy. Wealth is not bestowed, it is created.

Hmmm yes it is created, but how did you ignore all that this society has done to help you create your wealth?

Were you working in a building that was required to meet safety codes?
Were you free to focus on your job because your family was well protected at home?
Did you or your customers drive on streets to get to your job?
Were you in a society that rewards the specific type of work you do, more than another society would?
Does your society allow people to keep the majority of their incomes, which allows them to purchase your businesses products?

Then how is it you feel you have done all this by yourself? You made all that income right? What about the society that allowed you to be safe and free while you made it?

As I've mentioned above, everyone recieves the prebate to cover taxes up to the poverty level. The rich spend much more money and therefore would pay much more tax. Your inclination is to punish achievement. This government has punished achievement and rewarded poor achievement and poor financial decisions, for far too long.

Oh so you'd rather just punish people for spending. Got it. That will stimulate the economy for sure. "You know that computer you wanted to buy? Yeah, the price just went up 23%" ... "oh, well I'll just get this cheaper one instead"

If you view tax as a punishment, taxing consumption is no different than taxing income. Except that the priviledged few with incomes much higher than their needs will be allowed to build wealth for themselves and their heirs, with a large amount of tax free money.

You wanted an argument for how it's fair - so I gave you one. I feel it is fair to tax on income. You feel it is more fair to tax on consumption only.

Transfer of wealth is not forced. Many here have learned how to reverse much of that process through better personal financial decisions. Again, you are of an class envy mindset.

Obviously it's not forced - but if this society is a large reason for why the income is so large, society has a right to some of that.

And I disagree that it's a "class envy" mindset. I think you are ignoring the special situations this society has that allow certain individuals to generate large incomes they would not have been able to make in other societies.

And for those special situations, I feel it is fair for society to have a claim on earnings.

Taxing consumption while not taxing production creates more savings and jobs. Government redistributes extremely inefficiently making it harder for lower wage earners to retain funds for investing. If you want to lay blame, blame the socialistic government not the Fair Tax.

For high income earners, yes it does create more savings. Much more. But for the middle class small family it actually would cost more than the current system (see original post above). I fail to see how higher net taxes allows lower wage earners to retain funds for investing. Now high wage earners on the other hand - stand to benefit greatly from the fair tax.

But for the special circumstances of this society that allow them to be high wage earners, society gets nothing.

I never said our government was as efficient as it could be - but I am saying that for the freedom and protection our government provides, it is allowed to claim a portion of the wealth we earn (not spend). And I'm not blaming anyone. Please show me a quote where you felt like I was.