Huckabee Supports The Fair Tax
When the Fair Tax, which is essentially a high federal sales tax with exemptions for lower income earners, was first introduced a few years ago I didn’t really give it much consideration. I read about it and I understood it but I never thought that it would ever happen because it was so radical and so “out there” that people would be hesitant to change to it. Governments and societies are like big battleships, you can get them to change direction a degree every few miles but have them turn on a dime? Forget it. Well, it looks like the battleship is turning a little with Huckabee winning the Iowa primary and him being one of the more visible supporters of a Fair Tax. So, before passing judgment on whether the Fair Tax is a good idea, let’s look at the mechanics.
Ten Second Primer on Fair Tax
CNN had a good recap of the gist of the Fair Tax. First, you’d abolish the IRS in its current state, all the taxes it collects in income taxes, Medicare, Social Security, etc. and replace it with a flat sales tax on practically everything you buy. To combat the regressive nature of a flat sales tax, the government would send a check to each family based on their income - so those earning less would get a bigger check. This takes away the regressive nature of a sales tax.
My Concerns
The economy will surely suffer. When you levy a 30% tax on everything, even if you stop taxing people’s incomes, it will have an effect on the economy because people will spend less. (I’m not an economist, though I play one online, but I’m pretty confident in this even though my only academic support is an undergraduate degree in economics.) People think of their salaries in terms of their gross income - “I make $50,000 a year” or “I make $7 an hour.” We don’t think of it in terms of after-tax income because we probably don’t know what our after-tax income is after all the deductions and credits. However, with our purchasing we do understand it in after-tax values. A $15 dress shirt is $15 in after-tax income. Jack that baby up to $19.50 and we start buying fewer shirts because they’re 30% more expensive. If we can change the way we fundamentally think about income and expenses, perhaps this could work. (There are more complicated and compelling reasons why the economy will suffer but I’ll let the experts discuss those).
I think the people who have fallen in love with this idea have fallen in love with the idea of a simpler tax structure and an abolishment of the IRS, they haven’t really analyzed the details and seen the true impact of a flat tax system like this. However, since the IRS is one of the only profitable organizations in the government, I’m inclined not to demand their abolishment so quickly. 
Lastly, I’m not particularly familiar with how the value added taxes (VAT) work, perhaps a topic for the future or a guest post by UK-based Plonkee, but those appear to work relatively well in the countries that implement them.
What are your thoughts on the flat tax?
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49 Comments - Share Your Thoughts
As a lifetime rent slave, it has not escaped my attention that the FairTax imposes a staggering tax penalty on renters. No thanks!
I’m still unsure how I feel about this tax, as I don’t know all the details, and even the details I know still haven’t convinced me one way or the other. Changing the way people fundamentally think about income and expenses is not going to be an easy task. We are definitely a creature of habit, and a change of mindset of this magnitude will take a long time for many, many people. Look at the way the US has (not) adopted the Metric System. Look at the way people freak out when they lose power for a day. Look at the road rage caused by rush hour traffic. People freak out when things are different than they are used to, or different from what they expect they should be.
That being said, encouraging people to do a little more saving wouldn’t necessarily be a bad thing.
There have been lots of well-funded studies that have shown that the economy won’t “suffer,” that is that the tax would be revenue-neutral.
It just isn’t true that Fair Tax “jacks up” prices for two reasons. First, your earnings increase. Even if you abolished payroll taxes alone, you would make more money. Second, taxes alrady have what Fair Tax people call an “invisible” effect on prices. This just makes it more transparant.
I wrote up a chart about how good Fair Tax is for the frugal.
Minimum Wage (Rent Slave) — Your rent is already taxed as ordinary income to your landlord which is passed down to you. Fair Tax just does it on the other end, that is you can actually see how much your rent is taxed.
Minimum Wage (Rent Slave) — Your rent is already taxed as ordinary income to your landlord which is passed down to you. Fair Tax just does it on the other end, that is you can actually see how much your rent is taxed.
My rent is already taxed, but my landlord enjoys a tax reduction by owning rental property. (e.g. depreciation writeoff allows a paper loss for tax purposes while enjoying positive cash flow.)
With the FairTax, my landlord loses that tax break, so I don’t expect any rent reduction, which means my expenses will not fall by 20-25 percent as many FairTax supporters predict.
Also, since the Fair Tax does not tax my next door neighbor’s homeownership, how is is Fair?
In the long tun, since rent is half my income, I expect that the FairTax would represent the difference for me between enjoying a modest retirement and never being able to retire at all.
Fair Tax may or may not tax house payment principal payments. Some plans only exempt interest, and your next door neighbor already has that break. Oh, and your landlord can only depreciate IMPROVEMENTS and write off repairs and such. If your building is depreciating, you have bigger problems that taxes.
Even if your rent did increase, your income would increase, 15% on Social Security ALONE. Payroll taxes are the most invisible (half paid by employer) and regressive of all.
By the way, HUGE error in this article: “To combat the regressive nature of a flat sales tax, the government would send a check to each family based on their income - so those earning less would get a bigger check.” Actually, everyone gets the same poverty-level spending rebate, which varies on the size of family NOT income.
I haven’t completely joined the Fair Tax crowd, but I really like the idea of it. On of the benefits touted by the proponents are that the current costs on goods and services include the taxes companies have to pay. So once they drop those, the cost to them, and thus the price, will drop. They estimate the drop will be 22% which somewhat matches the 23% increase from the Fair Tax. I don’t know how quickly that will happen, but it affects what you were saying about tacking on an extra 30% to current prices. If their account is correct, prices will go up less than 2% (and you still have your whole paycheck, which is the part of the math where I get stuck - it seems to good to be true).
Also, I think everybody gets the same amount on the “Prebate” checks. It’s just a larger relative amount to lower income people. It would be equal to the amount of taxes paid at the poverty level. So a person at the poverty level pays the same prices as everyone else but the prebate check means they effectively paid no taxes.
One of my favorite aspects of the Fair Tax is that people will know how much tax they pay. It’s simply 23% of everything they’ve spent that year. It is no longer hidden in corporate taxes passed on in prices to customers, or withholding that workers never really see or think about, or payroll taxes that worker never even get.
So I hope the fair tax gets a very public debate. I’d love to hear the explanations for the questions that real economists would know to ask.
Landlords are entitled to a PAPER tax writeoff for DEPRECIATION on a house or apartment (IMPROVEMENTS include all dwellings, not just the “home improvement” kind of add-on).
Which means my landlord is currently enjoying a big tax break which he will lose under the FairTax, so I don’t expect any rent reduction. Even if my landlord’s costs decreased, anyone who suggests rents will fall is dreaming, deluded, or dishonest. There is NO evidence ANYWHERE AT ANY TIME that ANY of the historic huge property tax cuts have EVER led to lower rents, so why would anyone expect the FairTax to cause rents to fall?
EXISTING homes are not taxed when you buy them, so my neighbor won’t pay any tax on his principal, while I will have to pay tax on every dollar of my rent. I’m renting an existing home, why shouldn’t my rent be exempt from tax? And why should prop taxes embedded in my rent be taxed, while my neighbor’s prop taxes paid directly are not taxed?
I don’t know that it is realistic to say people don’t view their after tax income, sure you would say you make $50k a year or $7 an hour. But when you make your budget, you don’t budget $50k a year, you budget what you actually take home. So although people would still say they make $50k a year, their personal budgets would go up. Which would more then compensate for the increased sales tax.
I say more then compensate becuase now everyone will be paying this tax when they buy normal goods, when during an income tax there are a large group of people who dodge income tax (ie drug dealers, people getting paid under the table, waiters who don’t claim their tips…). So the question should be, would the illegal market for selling goods be larger then the illegal market for labor? I don’t think it would, it slightly eaiser to track the sale of goods (since they were once produced by a company that tracks them) then it is to track humans doing things and not telling anyone.
It’s not simply 23% of everything they’ve spent. When you buy an existing home, your principal is not taxed.
Which means a renter will pay much more tax than a homeowner when their housing consumption is equal. And that’s not Fair.
How are you going to collect tax on rents? Every landlord will have to register with the tax collector? WHat if a homeowner rents out spare bedrooms in his home? You gonna tax that? How are you even going to enforce that?
The Fair tax is horrible.
It is incredibly regressive. Why? Because instead of increasing the tax burden on those who make more money, the poor pay more in taxes. How? Because if you don’t make enough money to save anything, if you HAVE to spend all your money on consumption (and there are many who do, no matter how frugal you are), you are getting taxed on your entire income.
However, if you make more income, that income is tax free, then you can invest it, and make even more income that will be tax free, and more and more income.
The rich will become incredibly richer and the poor will become incredibly poorer. The poor will be paying more in taxes and will literally not have a way out while the rich will become exponentially richer.
“Because instead of increasing the tax burden on those who make more money, the poor pay more in taxes.”
I’m not a supporter of the fair tax but I’m not following your argument. Due to the annual rebate check the poor shouldn’t be paying *any* taxes.
There IS a “prebate” which offsets the tax on a poverty-level income.
Minimum wage (rent slave, anonymous):
I must rant. If you spent as much time developing your skills and looking for new opportunities as you did on blogs writing posts that wreak of a whining 12 year old, you might find yourself in a much better financial situation.
I have seen your posts on countless blogs, whining about how your college degree did not pay off for you, how you don’t like this, you don’t like that, whah, whah, whah.
Everyone chooses their own direction, you have chosen yours, I have chosen mine. Live with it. If you don’t like what you are doing on a daily basis, find a way better yourself and look for better opportunites. Invest the time you spend whining online developing a better future for yourself.
There are plenty of people in the US who sit around like you, whining all day, and we support their lazy asses with subsidies, welfare, free health care, etc.
If you are not part of the solution, then YOU ARE THE PROBLEM.
Pardon my rant, I am just saying what I know a lot of people in the online financial blogging community are most likely thinking.
wanzman:
two thumbs up… I am so tired of the “gimme gimme” attitude going on in our country today.
I believe Romania among several other countries adopted this type of tax structure a few years ago. I wonder at this point how it has ultimately affected their economy.
Also remember that the Fair Tax will tax those that partake in illegal activities and cash under the table transactions. They still have to buy goods, so in fact the Fair Tax would increase the tax base.
Wanzman: Thank you! The entitlement attitude of so many people in this country is what is ruining the United States.
hah. Nice Manzman. I think Minimum Wage is a troll or just a bitter person who was babied for too long and can’t handle life.
I honestly don’t know enough about current tax codes and the Fair Tax. But if they set it up so that it kept the current tax revenue the same and didn’t shift the burden onto the poor I am cool with it. I think people seeing how much they are taxed in raw value would be helpful. Maybe it’ll get them involved with politics and stop wasteful spending. If only they could get a year end report some how on the total they paid in sales tax, since at least half of people won’t keep track of it anyway.
My main concern is this - if a NAtional Sales Tax, or Consumption Tax happens, it will only be a matter of time (and not much) that they will bring back in income taxes too.
Europeans have 20%+ VAT on most things, and it disn’t kill their income taxes.
Feels like a fools paradise!
You bring up an interesting point with:
“A $15 dress shirt is $15 in after-tax income. Jack that baby up to $19.50 and we start buying fewer shirts because they’re 30% more expensive. If we can change the way we fundamentally think about income and expenses, perhaps this could work.”
I think that people would adapt to the new way of thinking, but just like anything else it may take a while and maybe a few tough years on the economy…
A bunch of things:
Be careful when calling it “the flat tax.” Don’t get me wrong, it IS a flat tax, but that has a different implication in the political circle of today. A flat income tax (like Ron Paul’s proposal) is what is currently referred to as “the flat tax” today. Also, for reference, Mike Gravel supports FairTax, too–Huckabee isn’t the only one running in the primaries who does, Gravel just has little weight in the process (is he even still IN the Democratic primary?) and so isn’t getting it the face time Huckabee is.
Don’t be fooled–while it is called the FairTax, this (like any taxing system) is an intentional system to shift the weight of the taxes onto a particular group of people. In this case, that group is “consumers” and that is why it is considered fair. You are taxed on what you choose to buy–whether you are poor or rich. The idea is to put the burden on those who are consuming more than necessities–attempting to force people to purchase rationally. If you think that new car is still worth it after the 30% tax or whatever it will end up being at the register, then by all means buy it. Like all economics, it is all in what you choose. FairTax has implicit values of saving, homeownership and frugality. It is designed to MAKE you want to save, to give the frugal a break (also to save themselves headaches–what tax collecter wants to go around to yard sales trying to collect tax revenue?) when they choose that used book, to encourage people to buy homes instead of renting. No, not everyone will think this is good. After all, it forces people to confront the choices they make to have the things they “can’t afford.” Those attempting to keep up with the Joneses by buying more car or building a big new house or taking vacations that eat into the money that perhaps should be spent on groceries–but they chose to spend it on that Xbox. Those who don’t make enough money to live in an expensive city–but they chose to move there and/or stay there.
Yeah, that last one pissed you off. FairTax is NOT a fix for everything. Those truly poor who cannot afford to move (have you looked at the price or rental trucks lately?) and who can’t get jobs in the towns they can afford on the monthly prebate (not a yearly refund people, paid at the beginning of the month to cover the costs to each person that would be accrued on average living in any town in the US for that month) are still screwed, just like they were before. Perhaps most are the elderly and small families living in those big expensive cities–after all, the per person prebate is to cover housing, too, and apartments only get so small. There isn’t any consideration taken into the different costs of living in each city so a prebate that would make you money in the middle of nowhere small town midwest would lose you money in big cities on the coasts.
To keep FairTax from being regressive to the poor who ARE living frugally and still can’t get ahead, it would need to be implemented with programs that would actually FIX the problem of lower classes trapped in high cost cities with no way to get out. Better federal housing programs to assist those lower class people in getting the homes FairTax wants them to live in. Federal assistance for relocation. The market would help to–lower wage workers who can’t afford the rent move out with that government assistance, causing there to be a decrease in the supply of menial workers and thus increasing the wage of the menial worker in that city. But that takes time.
Oh–if it worked the way it is intended, it would hurt consumption in the economy (measured by GDP or sometimes GNP). But GDP = C + I + G + NX, and this decrease in consumption (C) is offset by an increase in investment (I). [If that was all gibberish to you, look up Gross Domestic Product on wikipedia.] After all, if you aren’t spending it, you’re saving it. Luxury goods production would probably take a hit, as would other industries–which, that would depend on the American consumer. But according to economics this is still efficient. That would be offset by the increase in jobs to financial services and housing–frankly right where our economy needs the boost right now. Housing prices that were pumped artificially high by people buying houses not because they needed them but because they could make money off of them would see an adjustment in the value back up to those high prices. The difference is this high price would actually be capturing its intrinsic worth as demand for houses increased when those renters who are sick of paying a premium decide to buy. Though really, this all depends on how much of used houses’ sales and any houses’ property taxes are federal. State and local taxes on houses probably won’t change, since states already CAN do only sales taxes.
That was a lot of babbling, sorry. Economics gets me excited.
Ouch–that could have used a lot more re-reading and editing, too. It is practically impossible to read. Again, I’m sorry guys!
@Becca
Ron Paul fully supports the FairTax, not a flat income tax.
If any of you are on the fence with this, I would highly suggest doing some more reading:
website: http://www.fairtax.org
book: http://www.amazon.com/FairTax-Book-Neal-Boortz/dp/0060875410
One of the best things about the FairTax is the elimination of payroll taxes that business would have to pay, not to mention the fact that businesses spend BILLIONS each year on time and effort spent preparing for and planning for taxes. Take away all of that overhead, and all of the sudden the America starts to become much more attractive for international companies to do business. Hello return of American manufacturing.
There are obviously some drawbacks, to be sure, but the benefits to the economy as a whole would be incredible, and that ranges from the poor up through the middle class and the wealthy.
Please, if you have any interest at all, buy the FairTax book and you will be fully convinced.
There are plenty of people in the US who sit around like you, whining all day, and we support their lazy asses with subsidies, welfare, free health care, etc.
Ah, but I go out and WORK for a living.
I’ve done the math and I pay a higher effective tax rate than a lot of families with $50K-$100K income.
those complaining about the taxes they pay: if you are paying more, you are probably earning more. if this is not the case, then you are not taking advantage of the tax breaks that you are afforded. choose what situation you want to be in. you cant change it so work with it.
the fair tax does work, a similiar version works in europe and it would work here. the poor are not taxed more as every family is given a “prebate” to offset the higher tax on goods. in the end, it is SUPPOSED to work out that the rich pay more on luxury goods such as yachts, highend cars, etc.
if nothing else, it will change american consumption habits, encourage people to save or invest, and shut people up that the IRS is stealing from them.
good day
Also remember that the Fair Tax will tax those that partake in illegal activities and cash under the table transactions. They still have to buy goods, so in fact the Fair Tax would increase the tax base.
Under the FairTax, landlords will have to register with the tax collector (e.g. get a sales tax license like retailers do now) and this will open the door to excessive regulation of rental properties. I’m cool with regulation of rental properties as long as owner-occupied homes are subject to the same regulations, but homeowners are never willing to accept the same regs on THEIR homes that they impose on rental properties.
hah. Nice Manzman. I think Minimum Wage is a troll or just a bitter person who was babied for too long and can’t handle life.
Who babied me? I have WORKED for a living my whole life, except for a year with an extended illness and hospitalization and limited mobility. I started working when I was ten and saved up the equivalent (in today’s dollars) of $20K by the time I graduated high school.
Oh, and I had a dysfunctional family and left home at 17.
And what guarantee is there that net pay goes up 15 percent under the FairTax when payroll taxes are eliminated?
Yes, the hamburger flipper WILL get the 7.65 “employee contribution” part of his payroll taxes. But the employer can do whatever it wants with the “employer contribution” and minimum wage employers have plenty of other uses to which it could put that money. Increasing dividends…increasing management compensation…cutting prices…you don’t seriously think the hamburger flipper will get it, do you?
The FairTax is filled with wishful thinking. It is not going to remove politics from taxes. It is not not going collect taxes that are not collected. It is not going to simplify that which can’t be simplified. It is easily evadable and unworkable as written. Changing it to a VAT tax would make it workable, but not nearly as simple. The pre/rebate is so low, it will remain highly regressive. The real effect will be to change asset values. In the end, nothing really changes, but in the transition, big winners and big losers.
Boston Burbs–
Thank you! You’re completely right–I was going off of something I had thought I’d read, but I double checked it after you mentioned that to see if I’d just had old information and I can’t find it. I should have done that BEFORE I said it above. Ron Paul supporting FairTax is much more sensible, anyway–after all, it would abolish the IRS and thus (hopefully) reduce some of the inefficiency of bureaucracy.
OKAY:
So, if we were to move on to a different tax system, what happens to all of us who have who have worked hard and put pre tax $$ into 401(k)s and IRAs, not to mention post tax $$ Roth IRAs?
And, with this system, what happens to the tax structurre of individual states, where some states don’t have income taxes already and other states don’t have sales taxes?
Of course, before something like this is done, I would like to see the earnings cap taken off the SS income taxes - so that people earning XYZ dollars continue to pay into the system. These individuals will likely not need their social security $ or medicare health insurance in their later years - however, why they should stop paying into the system?
The 30% is only enough to replace Federal taxes. States would have to decide what to do for themselves. People with assets have generally already paid income tax to acquire them and would be taxed again when they consume them. Tax deferred accounts would be fine as no tax has been paid on them. The Roth however would be double taxed since income taxes have already been paid on it. Real estate is both investment and consumption so logically one should tax the structure but not the land, but nothing I have read made this distinction. Smuggling would be quite profitable. So would working here and retiring abroad, traveling abroad to consume, foreign vacations, medical tourism, international waters, etc. Living on or across the border would highly profitable.
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At issue - it allows the government to increase taxes at their whim - just like today…. start at say 30% - oops, not enough - 34% etc.
You need to pass the bill in congress that states a supermajority of congress can only change the % taxed….
sorry, I am a government pessimist. You simply CANNOT trust government with your $$$
I am more of a proponent of a simple flat tax on income - with the appropriate super-majority protections of course….
*NEVER* trust Government with your $$
Individuals and businesses in this country spend on the balance of BILLIONS of dollars each and every year simply to comply to a complicated and completely politicized tax code. And I’m not talking about the actual taxes paid, I’m talking about the amount of money spent to simply comply.
It’s ridiculous and broken.
And to say that the FairTax is more evadable than the current income tax system is really missing the boat. Are people going to all of the sudden assume legal risk by buying their goods on the black market to save a mere 20%? Not happening. And I wonder how that small amount of fraud compares to the wholesale and systematic fraud that occurs today - particularly by the people and companies that have the lobbyists on K Street to open up those loopholes.
Regressive? Absolutely not.
The problem with the current tax system is it has grown too confusing. This is due to the fact that the government tries to control our behavior with tax policy. I don’t see this changing with a sales tax. The government will start taxing certain products at different rates. Booze, fast food, and certainly cigarettes will see much higher taxes - a regressive tax. This system would still be open to government control.
Better solutions would be a flat tax on all income regardless of how it is earned (capital gains, earned income, dividends, interest, etc.). Or, the Value Added Tax is fair as well. Both systems would severely limit the IRS, which is a positive in my view.
I am not sure what I think about the FairTax.
But one thing that does puzzle me is this — I’ve seen figures floating around that our economy is something like 60-65% based on the rates of consumption. Basically, that the largest thing keeping the economy afloat is that we all do our part as good little consumers. All those companies out there are actually counting on the little consumer to consume their goods and services.
So, if we adopt the FairTax, which is meant to discourage consumption, are we also intending to change this paradigm? Meaning, is the policy going to be that we actually expect something else to replace the overweighted emphasis on consuming that’s currently built into the system?
I know that the philosophy behind the FairTax itself is to encourage saving — that’s not my question. My question is how will we reconcile that with the greater economic environment that is dependent on our high rate of consumerism?
The Fair Tax will never work for a myriad of reason including the following.
1. It will reward good behavior (saving) while punishing bad. The culture in this country is to reward bad behavior and punish good.
2. The tax and waste Democrats, who own both houses of Congress, will never let it happen. They like things complicated and adding new taxes “for the children” each year.
3. With more money in the average Joe’s pocket the State Democrats will see new opportunities to raise State taxes. The Republicans will turn a blind eye to Big Corporations jacking their service fees dipping their hands into the extra cash.
4. The suits in Washington do not like change as if it fails they lose their job. Case in point the excellent idea of getting rid of the failed social security program and replacing it with a similar private plan that the fat cat politicians benefit from. It made complete logical sense and would benefit the nation but they smeared it and shot it down due to AARP pressure and Democrat special interest. They don’t like change folks and could care less about your future only their own.
So yes this would be great and would make me rich but no it will never happen.
Cheapster Bob
@Minimum Wage:
IF you are really working at minimum wage, I guarantee you are not paying a higher relative tax rate to others with higher paying jobs. I pay more than 25% of my income in taxes every year, and I’m blocked out of a lot of deductions that people with a lower income / are married / have children can take. The amount of TAXES I pay every year are on a par with a year’s salary for a minimum wage worker.
I’ve made minimum wage at one point in my life. I know what my taxes were like then, and my tax burden is much more significant now.
You really need to take some personal responsibility for yourself — I’ve asked you before — if you are really this bad off, how do you afford a computer on which to comment on blogs and whine about your miserable life? (and if you are computing from a library then good for you! but don’t forget I paid for your computer and your internet time with my tax dollars.)
If you are really this bad off, shouldn’t you put that energy into fixing your situation? Nobody else is going to do it for you.
Huck is definitely not my cup of tea (about as opposite from my politics as can be and still be a Republican), but something like the Fair Tax could make many things simpler and cleaner. Here’s an interesting compromise by an economist.
The first $20,000 in income for a single individual and $40,000 in income for a couple should be income tax free, Allow a $5000 allowance for a couple’s first two children and $3000 for the next two. Single individuals would get one $5000 allowance and one $3000 allowance. No allowances per dependant after that. Adjust the number for for inflation each year.
The tax rate is 15% on everything over that to $100,000 in earnings. It should be 26% from $100,000 to $1 million and it goes to 38% over $1 million.
A national sales tax of 3.8% on all products, no exceptions. Services would be exempt from the tax.
Finally, add a national Lottery system, that splits its money 50% with the states where the tickets were purchased.
Lower the social security tax to 5% and apply it to all income. If we are going to have a socialist program, treat it like socialism.
Add a Heath Care fund that will be taxed at 2% of all income.
None of the tax rates can ever be raised or lowered.
Automatically sign workers up for 401k’s etc. for a minimum of 3% of their income with the stipulation that it must be used to purchase anything but their own company’s stock. Anything the employee adds on top of the 3% can be used to purchase company stock.
The only deduction (other than for dependant children) allowed in any income tax is for donation to charity, and it should be a dollar for dollar deduction up to a 10% of their income. They would not get money back from the government if their donation was more than their tax burden.
Eliminate taxes on business, they don’t pay them now, so stop forcing individuals to pay them through lower salaries and higher prices. It is the quickest way to bring jobs back to this country.
Charge a 10% estate tax on estates from $3 million to $5 million and a 15% tax on estates over the $5 million mark.
That should be plenty of money to fund this government and take care of it’s people.
So take a typical family of 4 making $42,000 a year. The family would pay $2,940 in social security and health care tax. They would pay $0 in income tax. The would automatically have a minimum of $1,260 put into a retirement fund (that money would be counted toward their current taxed income now and it and all future earnings would be tax free upon retirement). So their take home assuming they don’t make a charitable donation would be $37,800.
Let’s say they spent $20,000 on products in one year. Their additional tax burden would be $760. So in total a family of four making $42,000 a year would pay $760 in federal income tax. Based on current tax law, the same family of four would pay $1386 this past year.
This plan roughly amounts to a 45% tax cut for the middle class. They would still have state and local taxes to deal with, but on a federal level this is the best way to go. It doesn’t punish people for achieving and it doesn’t put the tax burden of America on the middle class.
IF you are really working at minimum wage, I guarantee you are not paying a higher relative tax rate to others with higher paying jobs. I pay more than 25% of my income in taxes every year, and I’m blocked out of a lot of deductions that people with a lower income / are married / have children can take. The amount of TAXES I pay every year are on a par with a year’s salary for a minimum wage worker.
I’m including all the tax breaks out there that most middle class people take for granted. So I’m including untaxed fringe benefits in the “income” calculation - compensation that middle class Americans enjoy without paying tax on it. I’m referring to EFFECTIVE tax rates, which requires inclusion of all income, deductions, and exemptions.
I made $15K last year, my state has a higher minimum wage. Someone earning an $11K minimum wage obviously not paying as much in taxes as I am.
It sounds like you are a victim of what I call stealth taxation - the loss or phaseout of deductions above a certain income ($100K - $150K in most cases). It is a dishonest way to tax higher incomes, transparent taxation while retaining deductions would require higher nominal rates (and invite more flak) which is what Congress is avoiding.
Most rational people will come to conclusion that a single, all inclusive source of tax revenue is not the best approach. Nearly (I can’t think of any exceptions off the top of my head) all developed nations fund their tax system in variety of ways: income tax, sales tax, estate tax, capital gains tax, and so on. Politicians will not resist the urge to add more streams of revenue to the tax system just because we have a high sales tax. IF (huge ‘if’) we do make a drastic change, it will only be a few years before new taxes start getting tacked-on and the complexity of the system returns. Also, a single source of collection increases the incentive to avoid the system and create a thriving black market. If we tax a little bit at every angle the system gets harder to avoid completely. Right now, no matter how good your tax accountant you still pay somewhere, somehow (maybe just not your entire ‘fair share’). The right approach to taxation is to decide what services need to be provided and then decide how to equitably pay for them, rather than our current system where legislators tack-on spending for political gain rather than to serve the people. Lets provide for life, liberty, and pursuit of happiness and forget about bridges to no-where and check-every-month subsidies for able bodied people.
The Fed would have to keep real interest rates negative to keep the economy from stalling.
The FairTax appeals to savers who see it as the way to wealth. Since it doesn’t tax capital, it does allow greater savings. However, it would cause the even more rapid appreciation of the assets they would buy with it, driving prices up and future returns down. Present owners, the rich, would be handsomely rewarded, but these wannabes would find themselves priced out of the market, paying more for less. In the end, they would find wealth to be a receding target.
The FairTax is an interesting plan; what would be even more interesting is if Congress actually passed it after having passed a Constitutional amendment to repeal Congress’ power to tax income.
The idea of taxing use/sales versus income is that it would tax wealth, not income. Most “rich” people get themselves off of the payroll as soon as they can, and so are usually not affected by income taxation.
Nevertheless, I believe that the real appeal of proposed systems like the FairTax is not so much wanting the concept of completely untaxing income (which would, by definition, get the Federal government out of the business of intruding into our personal lives — after all, if it’s going to tax income, it must know what income you’ve received and whether or not your employment matches the level of your lifestyle!). Rather, it is the simplicity of it all.
Personally, I would love to see the US head towards the concept of a choice in taxation. That is, keep the current system as it is, but provide citizens with the option of going towards a flatter income tax. If you can get enough people to agree with this concept, it might be a bit easier to then convert over to a use tax.
Regarding a VAT: This is nothing more than embedded taxation, whereby each business-to-business transaction is taxed at each level of production, through to the point of final consumption.
@Minimum Wage —
No, I’m making considerably less than $100-150K. I’m at the high end of the 25% tax bracket. And yet — my taxes are closer to your salary than to a true minimum wagers.
But, I don’t think all those deductions are really all they are cracked up to be. And I think you are suffering from deduction-envy.
@Minimum Wage –
And — btw, I’m single — that 25% tax bracket stops for single people at $77K of taxable income. Then we get bumped up to the 28% tax bracket, which is where I’ll be in 2009 if not 2008.
Since so many of the products we buy are produced overseas, usually in asia, how would prices for goods fall?
The vast difference in labor cost will still see more and more of our production move into these countries.
What is their motive to decrease the cost of their product, since their competition is usually overseas also.
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