Fair Tax

[geojen]

I'd be interested in hearing what you all think about the Fair Tax?

[sweeps]

Re: Fair Tax

It's an intriguing idea but it comes with a lot of problems.

One major problem is that it is highly regressive. Poor people spend 100% (or more than 100% by acquiring debt) of their income. Rich people spend a relatively small portion of their income. This makes the tax not so fair for the poor. Some people argue there will be deductions or credits or some other mechanism to balance this out, but the Fair Tax proponents want to eliminate the IRS -- so who will enforce these deductions.

Another major problem is that consumption would drop significantly. That's a good thing in some aspects, but would be very detrimental to our economy. The tax rate would have to be jacked up to compensate for this, which would lower consumption even more. Also many transactions would go under the table to avoid the steep consumption tax. This again would require that the tax rates go up to compensate.

There are other issues, but that's a start.

[greedy4chips]

Re: Fair Tax

Neal Boortz talks about Fair Tax all the time on his radio show.

From what I understand about fair tax is that you shouldn't see a change in prices at the retail level since there is so much imbedded tax in each item for sale now. Studies believe there is around a 20% imbedded tax that would (should) be removed if we went to a fair tax system.

Example $10 item has $2.00 in imbedded taxes or $8.00 real cost. Add in a 25% fair tax and your total is $10.00 or a break even.

The biggest difference is in your take home amount since you pay no federal taxes (state taxes still apply).

There is also a poverty level plan that would give each household a prebate of the expected amount of taxes you would pay on necessity items up to the poverty level. Not exactly sure how this works, but it is there to help out the poorer people.

[geojen]

Re: Fair Tax

Yes, there is a prebate plan that virtually elimates poor families paying any taxes at all. Each family would recieve a prebate each month to elimate the amount of taxes you pay on food and other necessities according to where you are in relation to the official poverty line. The fair tax NOT regressive--the current income tax system is far more regressive than the Fair Tax. The Fair is progressive in that it elimates are forms of double taxation ( i.e. capital gains tax) and virtually eliminates taxation of the poor.

The Fair Tax is not a tax cut, though. It simply REPLACES the income tax. The figure of 23% was arrived at as the percentage that would not alter the current prices of products, but also replace the amount of revenue that the federal government now takes in. In fact, the prices of products would probably go down, as competition in the market place heats up.

[sweeps]

Re: Fair Tax

Ok, so there's a prebate up to the poverty line. First, who's going to do all the checking to find out who deserves prebates and how much each person should get?

Second, what about the people just above the poverty line -- or the entire middle class for that matter. These people spend a much larger percentage of their income for consumables than the rich do. Therefore these people will owe more taxes as a percentage of their income than the rich will. How is that not regressive?

[MonkeyMama]

Re: Fair Tax

Overall I am with Sweeps - I think there are a lot of problems - he points out the ones I worry about. The poor pay virtually no income tax so they would have to get a pretty big rebate to make this fair at all. & our economy relies so heavily on heavy consumption. Just reminds me when our last governor wanted to raise the auto tax here and everyone FLIPPED OUT - and he did get recalled. We decided it was better to issue billions in long-term bonds to balance the budget than pay a measly tax - it is ridiculous. The auto makers were crapping their pants though at this little tax because it would affect their sales. For this reason I can't imagine a fair tax system is going to get very far with this mindset.

I can't say I am totally unbiased in my feelings, how much my fear of change factors in this (my job relies heavily on the complexity of the tax code).

But all the same we make about $60k a year income-tax free due to tax breaks. For now there are big tax perks to owning a home and having kids. If those are removed for one I know it would affect real estate BIG TIME in California and other high COL areas. How do people afford these insane prices? They rely a lot on tax breaks for the HIGH property taxes and mortgages.

Plus if the IRS is thrown out will the states conform? LOL. I just say that because California is notorious for not conforming to the federal tax code. Just the thought makes me cringe - hehe. I am sure they eventually would conform, being a little tongue in cheek, but something to think about.

On the flip side I think the current tax system is pretty ridiculous and out of control. So I believe in tax reform overall, but the fair tax overall I don't believe is the solution.

[geojen]

Re: Fair Tax

Ok, so there's a prebate up to the poverty line. First, who's going to do all the checking to find out who deserves prebates and how much each person should get?

Second, what about the people just above the poverty line -- or the entire middle class for that matter. These people spend a much larger percentage of their income for consumables than the rich do. Therefore these people will owe more taxes as a percentage of their income than the rich will. How is that not regressive?

I think you need to visit the Fairtax.org website to read up on this issue. EVERYONE will get a prebate on taxes for necessities such as food according to their income. This is no different than being taxed at a certain tax bracket according to your income. Wealthy people spend much more on unprepared food and other necessities than do middle class and poor people. Thus, they will pay a higher percentage of their income towards the tax.

No disrespect intended, but your responses indicate that you haven't read the Fair Tax bill itself. You can find it on the fairtax.org website.

[sweeps]

Re: Fair Tax

No offense taken. I stand corrected on the prebate issue. But honestly it doesn't matter if everyone gets a prebate.

If you look at fairtax.org's Effective FairTax Rate table, there is one bogus assumption there that many people may overlook: Annual income = Annual spending. That may be true for lower classes, but for the rich that's certainly not true. Someone earning $1 million a year can easily get by with spending, say, $250,000. Only the $250K is taxed, not the $1 million. So this person's tax rate will be less than 6%. Compare that with the family making $40,000 and must spend most if not all of their income. Their tax rate will effectively be 18% or more -- AFTER prebate.

Not to mention the prebate issue is pretty minor compared to fairtax.org's very rosy assumption that 23% is a high enough rate to make a consumption tax revenue neutral. According to the Brookings Institution, it should be more like 31%. And that assumes there are no tax breaks given to things such as health care or education.

[smartatmoney]

Re: Fair Tax

Wouldn't a flat tax be easier to maintain and administer?

[geojen]

Re: Fair Tax

[QUOTE=MonkeyMama]
But all the same we make about $60k a year income-tax free due to tax breaks. For now there are big tax perks to owning a home and having kids. If those are removed for one I know it would affect real estate BIG TIME in California and other high COL areas. How do people afford these insane prices? They rely a lot on tax breaks for the HIGH property taxes and mortgages.

QUOTE]

That's just the thing though--why should people with mortgages get tax breaks while people who rent do not? Why should people get a tax break because they have kid? That's the rub with the Fair Tax, people are going to have to give up their little tax breaks that aren't available to everyone.

[sweeps]

Re: Fair Tax

That's just the thing though--why should people with mortgages get tax breaks while people who rent do not? Why should people get a tax break because they have kid? That's the rub with the Fair Tax, people are going to have to give up their little tax breaks that aren't available to everyone.

But similarly there are many unfair situations caused by the Fair Tax. For example, someone buying a new house would have to pay sales tax. Someone buying a previously owned house would owe no taxes at all. Why should someone buying an older house get a tax break while someone buying a new house does not? Same thing with new cars versus old cars. Many more examples here

Not trying to pick on you, geojen. I'll be the first in line to argue for major simplification of the tax code. But no matter what is proposed there will be big winners and big losers. Deciding who wins and who loses is not easy.

[vsjhoc]

Re: Fair Tax

But no matter what is proposed there will be big winners and big losers. Deciding who wins and who loses is not easy.

The current Administration didn't seem to have too much trouble deciding.

[geojen]

Re: Fair Tax

You are right, there will be winners and losers, just like there are now. People will cheat, just like they do now. People will avoid paying taxes. Just like they do now. No matter what tax system we use, this will happen. It is a fact of life that there are honest people and deceitful people. No system will be perfect, because humans are not perfect. It is unrealistic to expect any new system to be perfect and to pass all litmus tests in order for people to accept it.

[RealLearning]

Re: Fair Tax

Fair tax. Total oxymoron.

Trying to make a tax that affects the destitute and affluent in the same way is impossible. The only way to keep taxes from affecting the poor at all is to abandon all pretext of making a tax applicable to everyone, and simply go about redistributing wealth in a forthright manner. Or, move towards a system of user fees for all governmental services. Yes, there will be plenty of folks that can't pay the user fees--but then just look at what happens when there's a tragic need made apparent in our country. After every tragedy, there is an outpouring of incredible amounts of private funds, from lower-bracket working class to the comparatively "rich". If people aren't spending 23% of their income on taxes, only a tiny proportion of which actually benefits those in poverty, they could choose how much they contribute to charitable organizations. Heck, more "work-fare" programs would probably appear, trying to help those who want to help themselves once they realize how lousy it really is to not have food or running water or electricity (which heretofore had been provided for free through welfare).

America used to be filled with associations and clubs which actually benefitted their communities--in my little town it was the "Women's Improvement Club". By the time I was in high school, the club was filled by grey-haired grandmothers, and my mom and one of her friends. They had planted trees along main street, held benefits for needy children, had a scholarship fund, and did a lot in our small town in decades past. But by the time I had the opportunity to attend a few meetings, it was clear that the community's need for the Women's Improvement Club was gone. Every function that the club had provided in the past was now filled by government or state agencies, and paid for by tax dollars. The only surviving organizations were the Elk's Club and a couple of others dominated by men--whose purposes were mostly to get together and drink.

I guess this is a long rant--I just had a rare opportunity to see a little of how things used to be, and wish that so many functions of our modern and bloated bureaucracy could be returned to the private sector, and reduce the astronomical need for excessive taxation. And now, back to your regularly-scheduled programming . . . .

[geojen]

Re: Fair Tax

Real Learning-
I agree that the government is large and bloated. I am sick and tired of politcians spending money on stupid pet projects the only serve to get them reelected. However, I think our current incomprehensible tax code only enable politicians to manipulate the tax code to serve their own political ends. A more coherent and transparent tax system would do much to end this practice.