Posted: 13 May 2008 03:23 pm
Post Subject: Re: The 'UN' FAIR TAX - Still unfair Read Article
Bill wrote:
Here is an example: Suppose a married retired couple living on their fixed income of 2000 per month and paying 600.00 a month for rent, 300.00 a month for food, 300.00 a month for utilities, a 100.00 a month for gas, 75.00 a month for car insurance, 75.00 for other insurance (fire & theft), 100.00 medicine 75.00 for clothes, etc. Let's say because older people are more cautous in there spending that they manage to put aside 100.00 thus spending 1900.00 to live on. Their costs would go up 6,840 per year and they would receive credits of 4,200 per year. Now remember, you are asking them to pay social security taxes again when they have already paid them.
Bill, you have made several errors in this example (not all in your argument’s favor). 1. Your listed expenses add up to $1625 not $1900. As I refigure your example, I am going to assume they spend every dime on new goods and services because at some point anything they save will be spent (and taxed) by this couple or by their heirs. 2. You’ve failed to calculate how much they are currently paying in taxes on their $2000 per month income (is it all untaxed SSI, or is some part time job, interest income or capital gains?). I’m a FairTax expert, not an expert on the current system. I’ll let you address their current tax liability. 3. You’ve completely denied there will be ANY drop in prices due to the end of embedded taxes and costs. You are correct that this is an unknown variable. The most recent studies assume around 11%-13% drop in pretax prices. I will figure it at 8%, 11%, 13%, and the 22% some FTers predict. 4. You’ve credited them the entire prebate without figuring they will be taxed on it when they spend it. I will add it in before calculating the tax. 5. You’ve used the exclusive rate where you should have used the inclusive rate. You are correct that a widget with a pretax cost of $100 will be $130 at the register. However, if you walk into the store with $100, you can spend only $77 on “stuff” because you have to have enough to pay the 23% (inclusive) tax. 6. It will be helpful if we stick to either monthly or annual figures and not go back and forth. I will do monthly only. 7. The fact that the Federal Government has been lying to them for decades about the nature of the social security tax not being blended with the general revenue is not a fault of the FairTax proposal.
$2,000 monthly income $399 monthly prebate $2,399 available to spend $552 taxes as they spend all available money $1,847 pretax amount of "stuff" they can purchase
$2,000 Current cost of "stuff" they can buy
$1,840 Pretax cost if we assume 8% savings $2,392 Adjusted price including 23% inclusive sales tax $7 How much better off this couple is under FairTax
$1,780 Pretax cost if we assume 11% savings $2,314 Adjusted price including 23% inclusive sales tax $85 How much better off this couple is under FairTax
$1,740 Pretax cost if we assume 13% savings $2,262 Adjusted price including 23% inclusive sales tax $137 How much better off this couple is under FairTax
$1,560 Pretax cost if we assume 22% savings $2,028 Adjusted price including 23% inclusive sales tax $371 How much better off this couple is under FairTax
You are correct that this demographic is helped the least by the FairTax, but you are incorrect in your assumption that they will be hurt.
Posted: 13 May 2008 10:04 pm
Post Subject: Re: The 'UN' FAIR TAX - Still unfair
David - According to the Social Security administration, the average couple on Social Security receives 1,761.00 or $21,132 per year. The median income of retirees is $52,000 leaving income of 30,868.
Assuming the 30,868 comes out of an Ira or 401k, their tax situation would be 30,868 plus 1/2 of the Social security income for a total of $41,434. They could take a standard deduction of 10,700 and personal exemptions of 3,400 each for a total of 17,500. If both retirees are over 65 their standard deduction raises to 12,800 or an additional 2100.00
Their taxable income is (over 65) $41,434 - 19,600 for a taxable income of 21,834. Their tax would be 2,491.00. Their take home for the year would be 49,509 but then they would also pay 2,304 for their medicare part B. Now their spendable income is 49,509. This is 4125 per month.
Under the fair tax they would save the 208 per month income tax (2491/12) and would receive the prebate of the 339.00 you quoted in your letter. Now their money available to spend is $4,125 plus 339.00 plus 208 for a total of 4672.
If they spend the total 4672 it would break down like this: 4672.00 - 1074(23% of gross) = goods bought of 3,597. This is considerable less than the 4125.00 they had before. You will argue that prices will go down 22% thus they could buy the 4125 goods for 3218.
This is where I disagree. The corporate tax of 35% only applies to profit and the savings to the corporation on payroll taxes is only 7.65%. There is nothing in Senate bill s1025 or the house bill that mandates that any savings is passed on.
Just look at gas prices. Isn't it strange that gas does not vary by more than 1 or 2 cents per gallon, station to station.
We know what we have now but after your fair tax is enacted you will be at the mercy of your employer to pass all savings on to you and to business in general to pass on savings. Trickle down didn't work; this won't either.
When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax.
Neal Boortz, author of the fair tax wrote the above in the paperback version of the book.
I know on the surface the FAIR TAX sounds good but please read the bill itself and look at the opposing arguements with an open mind.
Posted: 14 May 2008 11:41 am
Post Subject: Re: The 'UN' FAIR TAX - Still unfair
Bill,
Thanks for replying. You recommend I read the bill itself and listen to arguments with an open mind. I assure you I have done both. I've studied the bill for years and scoured the Internet for logical arguments against it—most of which fall flat. I appreciate that you are taking the time to study this issue and will gladly have a rational dialog with you about it.
You’ve changed the example from one post to the next and we need to deal with each separately. In your first example, the couple made only $2000 a month or $24K annually. Now we are talking about a couple that makes $53K annually. These are very different demographics and I want to handle each of them separately.
You erroneously assume I will make the argument that 22% is going to drop out of prices. When Laurence Kotlikoff first came up with that number, his model assumed employers would change employee paychecks to “net” and all the savings on both sides would go to the company and they would be able to lower prices by 22%. All economists, including Kotlikoff, studying the proposal now agree the 22% number was flawed. It is unfortunate that so many FairTax advocates didn’t get that memo and keep repeating that line of persuasion, but you can’t condemn the proposal itself because some advocates use misguided information when talking about it. As I stated in the last post, the latest studies assume the drop in prices will be somewhere between 11% and 13%.
I assume you concur with my math that the absolute worst-case scenario—if prices don’t drop at all and they spend every dime on new goods and services—for couple one is $153 dollars a month out of their $2000 for a 7.65% tax rate. I demonstrated that all it will take for the first couple to break even is an 8% drop in prices. I firmly believe that is considerably lower than what will happen, but as you say that is an unknown variable.
I will respond to couple number two in the next post.
Posted: 14 May 2008 04:45 pm
Post Subject: Re: The 'UN' FAIR TAX - Still unfair
Bill wrote:
The median income of retirees is $52,000 leaving income of 30,868 . . . Their taxable income is (over 65) $41,434 - 19,600 for a taxable income of 21,834. Their tax would be 2,491.00. Their take home for the year would be 49,509 but then they would also pay 2,304 for their medicare part B. Now their spendable income is 49,509. This is 4125 per month.
I don’t dispute your numbers here at all. I admit I’ve never taken Medicare part B into consideration though and don’t know how that will affect purchasing power. According to you, couple number 2 pays $208/month tax now and has 4125 after-tax purchasing power to buy “stuff”.
Under the fair tax they would save the 208 per month income tax (2491/12) and would receive the prebate of the 339.00 you quoted in your letter. Now their money available to spend is $4,125 plus 339.00 plus 208 for a total of 4672.
If they spend the total 4672 it would break down like this: 4672.00 - 1074(23% of gross) = goods bought of 3,597. This is considerable less than the 4125.00 they had before.
My only dispute on your numbers here is the prebate is $399 for two adults not $339. They have $4732 to spend of which $1088 will be taxes. If we assume worst-case scenario—if prices don’t drop at all and they spend every dime on new goods and services—the tax for couple number two is $1088 dollars a month on their $4333 income for a 22.69% tax rate and purchasing power decline of $481.
As I did last time, I will calculate it with average price drops of 8%, 11%, and 13% (not 22% as this seems to be one of your main sticking points) in prices.
$3,644 cost of "stuff" they can buy under FairTax (4732 - 1088)
$3,352 Pretax cost if we assume 8% savings (3644 * .92) $4,358 Adjusted price including 23% inclusive sales tax $ -233 Additional monthly contribution to society by couple #2
$3,243 Pretax cost if we assume 11% savings (3644 * .89) $4,216 Adjusted price including 23% inclusive sales tax $ -91 Additional monthly contribution to society by couple #2
$3,170 Pretax cost if we assume 13% savings (3644 * .87) $4,121 Adjusted price including 23% inclusive sales tax $ 4 Amount this couple will save monthly under FairTax
Bill, I lean a little to the left on most issues. I believe we have a system today that steals from the poor and the young to give to the rich and the old. The fact that the latter are far more likely to go to the polls on Election Day is not lost on politicians. Couple number two has quite a tax advantage under our current system, but that doesn’t mean it is fair that it be so.
In an earlier post I wrote something to which you have not responded:
No American discontinues receiving the benefits of the government as long as they live. Somewhere along the way though, we decided that once a person stops earning or accumulating wealth, no matter how much they continue to consume, they are no longer asked to contribute. I don’t remember voting for that. Why should a retiree who can afford to take a cruise not be asked to contribute 23% to the Coast Guard who keep the ports safe? Why should a retiree who can afford a luxury sedan not pay 23% for the upkeep of the roads upon which she drives? I don’t look at the transition to the FairTax as double taxation as much as continued payment for continued services rendered.
Because this couple is living at just over two and a half times the poverty rate I do not in any way consider them to be “poor”. Can you explain why a couple consuming $1000 a week of “stuff” shouldn’t be expected to contribute to the wellbeing of society? Before you answer, consider the provisions of S1025 give them tax-free enough of a Social Security payment to cover their basic necessities of living.
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