The Fair Tax

[Cedars]

That still doesn't necessarily predict behavior on a large scale. I for one would not curtail my spending at all. Part of the reason is the competitor of the company offering the $100 product for $133 would be offering it for $120, so I would buy from them instead.

This doesn't mean everyone would behave as I did, it also doesn't mean they would not.

This also only addresses a national sales tax, and not a flat tax. A flat tax would have no direct effect on the price you pay at the retail level.

 

I wasnt trying to address flat tax in my reply only Nat. Sales tax.

 

I dont believe any competitor will lower the prices and I base that on my perception of GM/Chevy when they moved a significant portion of their production to Mexico after NAFTA. Did you see significant price differences between equal cars produced by Ford, Chrysler, and GM? I didnt.

 

 

That is not the system I was speaking of. That is the Value Added Tax. I am talking about the flat tax used by a number of european countries. I am not claiming it is perfect or doesn't have any problems. However it has far more benifits and fewer problems than the current tax the USA uses.

 

But the Value Added Tax was implemented to compensate for the shortfalls in the flat/sales taxes put in place in these countries. You cant make people buy stuff but you can add new taxes to increase shortfalls in revenue to give the illusion of a fair Nat. Sales tax, Fair Flat tax.

 

I would also add something I remembered last night after I posted. In another place on the net a few years back we were discussing this issue. A woman from one of the n. euro areas was encouraging the US to adopt the same measures and went on to tell us ways we could avoid the taxes like she does. It seems the barter system is alive and well in her region.

 

 

Seriously though, check out the flat tax that uses a post card as your annual tax return form, not the national sales tax. The wiki article has a lot of info on it as does the link I posted earlier. I would be interested in your thoughts on it.

 

I will look into those things later. Its been a busy week.

[Sacri Sankt]

a fair tax isnt a tax where everyone pays the same! you have to consider what different people get out of life, and what proportion of thier work is going towards paying this tax. if youre going for a flat tax, you may as well implement a poll tax. its not for nothing that every single nation with good social justice, welfare and high quality of life runs a progressive tax system.

[Fatstep]

I think there should be only 4 levels.

 

<$20,000 per year

Pays 8% per year and have no sales taxes.

< $100,000 per year

Pays 18% per year and have no sales taxes.

> $100,000 per year

Pays 28% per year and have no sales taxes.

> $500,000 per year

Pays 38% per year and have no sales taxes.

 

This way the poor have more money to save and to buy their essential goods without being taxed, and the next level are directly based on how much you make per year. The richer can afford to pay more taxes and the poorer cannot, so in essence it balances with the same financial burden on everyone.

[HydrogenBond]

Look at the numbers. Say a family grosses $1000 per week and they take home say $700 after fed tax, SS, FICA. With the fair tax they now take home $1000 giving them $300 extra to pay for the sales tax.

 

If they previously spent $500 per week for bills and food, they were able to accumulate $200/week. Now $500 of bills will cost them $630, but now they make a $1000 per week allowing them to save $370 after the same purchases. Any interest they make is now gravy.

 

One assumption that people make is that the fair tax will simply added tax to existing prices. A $2.00 loaf of bread will become $2.50. That $2.00 loaf of break includes all costs plus profit. But with the manufacturer also lowering his tax burden his costs are less. There is less cost to pass on to the consumer and still achieve the same profit margin. Competition will result and the final cost will be less than $2.50.

[Sacri Sankt]

fatstep:

why have levels at all? with modern technology, a smooth gradient is possible, with each extra dollar you earn increasing your tax rate by some tiny fraction. the problem with steps is, you end up punishing people for getting new jobs which pay just above the threshold for a higher tax rate.

[TheBigDog]

People often have a misconception about how the income tax system works. Let me walk through an example...

 

Social Security and Medicare Tax rate for 2006 is 7.65%. This is calculated at 6.2% for SS (with a maximum pay in of $94,000) and 1.45% for Medicare with no cap. This is taken from gross pay, so no deductions apply.

 

This is essentially already a flat tax. The exception being that income above $1,516,129 is not subject to the Social Security tax.

 

The federal income tax is as follows for a single person...

 

If their gross income was under $8450.00 they are not required to file income tax returns. If they had federal income tax withheld form their pay they will want to see if they overpaid and are due a refund.

 

    $0 	$7,550 	        10% of the amount over $0
$7,550 	$30,650 	$755 plus 15% of the amount over 7,550
$30,650 	$74,200 	$4,220.00 plus 25% of the amount over 30,650
$74,200 	$154,800 	$15,107.50 plus 28% of the amount over 74,200
$154,800 	$336,550 	$37,675.50 plus 33% of the amount over 154,800
$336,550 	no limit 	$97,653.00 plus 35% of the amount over 336,550

 

A single person who grossed $25,000 would have payed $1912.50 into SS and Medicare. They would qualify for the standard deduction of $5150.00 even if they had no qualifying itemized deductions. So they would owe income tax on $19850.00, or $2600.00. They would have payed a total federal tax of $4512.50, or 18.05%.

 

A single person who grossed $50,000 would have payed $3825.00 into SS and Medicare. They would qualify for the standard deduction of $5150.00 even if they had no qualifying itemized deductions. So they would owe income tax on

$44850.00, or $7,770.00. They would have payed a total federal tax of $11,595.00, or 24.19%.

 

The deductions that are available to all taxpayers are generally designed toward social engineering and investment. Deductions are reduced from the gross income to reduce the amount of income that is exposed to taxation. One method that this happens is to invest in a 401K retirement program. I have one through work, but I think these are available to individuals as well. You can have up to 16% of your income invested in a 401K program pretax, this means that the money invested in a 401K is not taxed. There are rules for when and how you can access that money, with substantial penalties for withdrawals before retirement. So in the cases listed above the person who made 25,000 could have invested $4000.00 pretax into a 401K and reduced the amount of taxes they payed by $600.00.

 

Another common deduction is mortgage interest. If the person making $50,000/year is paying $750/month in rent, they are not getting any tax advantage for this money that they are paying. If they purchase a home with a $80,000 mortgage at 6% they would have a mortgage payment of $480/month with $270 available per month for property taxes (deductible from federal income) and insurance. If the insurance were $500/year, that would leave $2740 for property taxes, and would keep the same payment of $750/month. The difference is that the home owner gets to deduct the property taxes, and the mortgage interest from their income in calculating their taxes. The renter would still use the standard deduction of $5150, while the homeowner could itemize and take a deduction of as much as $7513 saving them 590.75/year in taxes.

 

Every person can count themselves as a dependent as long as nobody else can count them as a dependent. When my oldest son moves out he will no longer be my dependent. I will go from claiming 6 dependents to 5. I claim my wife as a dependent because we file a joint return. Because we file a joint return we get twice the standard deduction of a . . .

 

What the hell is wrong with me!! I am doing hypothetical taxes!! I need freaking help.

 

Bill

[Fatstep]

If you were to have a gradient then the tax filing process would be made exponentially harder.

[CraigD]

If you were to have a gradient then the tax filing process would be made exponentially harder.

I disagree.

 

Unless the Alternative Minimum Tax applies, one calculates one’s tax when completing a typical federal tax return (Form 1040) by consulting a printed tax table. This step would be made in no way harder if the rules used to create this table were different than the current 6-bracket scheme. Only the effort required to creation the table would be changed. Compared to the total effort spent by the IRS in authoring, approving, and publishing its hundreds of tax forms and documents, this change in effort would be trivial.

 

The perception that more finely graduated progressive (or, in principle, regressive) tax rates place a burden on taxpayers or their tax preparers is due in part, I think, to the publicity campaign pursued by 40th US President Ronald Regan’s administration and supportive legislators’ successful efforts to “flatten” the federal income tax table (reducing the maximum tax rate from 50% for both individuals and corporations to 28% for individuals and 35% for corporations, and the minimum rate for individuals from 14% to 11%). Because the changed tax code also had fewer tax brackets, it was often referred to by proponents as “tax simplification”, and claimed that it would reduced the amount of effort spent in all areas of tax accounting, although neither my personal experience nor any statistical evidence of which I’m aware suggests that it actually did.

 

Genuine reduction in the effort spent on tax accounting would require more profound changes to the tax code than changing the tax table, such as eliminating all exemptions and deductions. Given that the average time required to complete a tax return is less than 31 minutes, I don’t think efforts to reduce this time are worth the effort.

[Fatstep]

I disagree.

 

 

 

Genuine reduction in the effort spent on tax accounting would require more profound changes to the tax code than changing the tax table, such as eliminating all exemptions and deductions. Given that the average time required to complete a tax return is less than 31 minutes, I don’t think efforts to reduce this time are worth the effort.

 

Well of course, if exemptions and deductions are eliminated then it will be far easier. Think about how it is today, so many deductions and exemptions to go through, by the end of your filing it may be that you were charged in a high level, that is what I mean by harder.

[TheBigDog]

Well of course, if exemptions and deductions are eliminated then it will be far easier. Think about how it is today, so many deductions and exemptions to go through, by the end of your filing it may be that you were charged in a high level, that is what I mean by harder.

The average employee doesn't benefit much from tax simplification. People who draw a salary as their primary income and not much else take almost no time to do their taxes. It is small business owners and people with multiple investment incomes that require professional help to insure that they are filing properly. The more complicated your income, the more complicated the tax process.

 

Billions of dollars are spent annually on professional tax preparation because of the complexity of the system. This is totally non value added to any individual having to pay for that process.

 

Bill

[Fatstep]

I have just always thought of it as a hard process. My father owns his own anethesiology practice and he has ALWAYS had to have a professional come in and for a week do his taxes and exemptions and write-offs etc. I guess it isn't that hard for everyone.

[CraigD]

Billions of dollars are spent annually on professional tax preparation because of the complexity of the system.

True. A bit of unverified research (consisting entirely of this NAMC article reveals that the entire accounting industry grosses about $60B/year, of which about $27B is due to tax preparation and accounting.

It is small business owners and people with multiple investment incomes that require professional help to insure that they are filing properly.

Disturbingly, this common sense claim may not be altogether accurate. According to this Brookings Institution paper, about $1.75B in 1999 tax service costs was paid by the lowest-income segment of the population, who’s returns are among the simplest to prepare. Much of this cost is in the form of very high interest “refund loans”, this appeal to (and, some say, prey upon) those least able to afford unnecessary expenses

This is totally non value added to any individual having to pay for that process.

Although this seems true for modest-income users of tax preparation services (who are, one might say paying a “stupidity tax”), I doubt that it is of true of many small and large businesses. Most of the small business owners I know compare the return prepared by their accountant with one they prepare themselves. If the accountant doesn’t save them more money than he costs, next year they either find a new accountant, or prepare their own return.

 

Otherwise, the tax preparer has increased the business’s profits, much as any good accountant or consultant should.

 

A more dubious praise of the tax preparation industry is that, at over $27B/year, it provides hundreds of thousands of moderate to high paying jobs. The sudden elimination of their jobs would add significantly to the about 7,000,000 current US unemployed.

[TheBigDog]

Most of the small business owners I know compare the return prepared by their accountant with one they prepare themselves. If the accountant doesn’t save them more money than he costs, next year they either find a new accountant, or prepare their own return.

 

Otherwise, the tax preparer has increased the business’s profits, much as any good accountant or consultant should.

 

A more dubious praise of the tax preparation industry is that, at over $27B/year, it provides hundreds of thousands of moderate to high paying jobs. The sudden elimination of their jobs would add significantly to the about 7,000,000 current US unemployed.

The increased profits are an illusion created by the complexity of the tax system. If the system were simple the accountant would not find extra savings hidden in the complexity of the code. The owner would get the maximum return without the marginal cost of the accountant.

 

In the business world the accountants also do audit, which would continue to provide profitability and jobs even with a highly simplified tax code. If the cost could be reduced by a third, putting 9 of the 27 billion back into profits, which would be used as income and investment, the job loss at the accountant level would be offset by hirings due to improved business conditions. Maybe not in complete balance, but they would be productive jobs, not leaches.

 

Bill

[Cedars]

Seriously though, check out the flat tax that uses a post card as your annual tax return form, not the national sales tax. The wiki article has a lot of info on it as does the link I posted earlier. I would be interested in your thoughts on it.

 

OK Z; I said I would get back to you on this. I am skeptical of this to begin with so I am presenting from this base PoV.

 

On the surface, it would seem to be an easier for some system by reading that website.

 

The website heritage.org glosses over the fine points. Here are a couple of websites where you can look up what the real taxes paid are in these individual countries promoted by the heritage.org site. When you add it all up there is wide variety on who pays what % of income to the government but it is hidden in VATs and other places*. Social Security is a seperate tax, based on income in these places also and appears to be higher in most of these spots. And you cant tell me they (the countries exampled by heritage) inflicted these "VATs" for any reason other than it was needed to suppliment the governments income to provide services that were needed. What would be different here?

 

Paying Taxes in Russia - Explore Topics - Doing Business - The World Bank Group

 

Russia Taxes Income Tax and Economy.

 

I agree there should be some changes in capital gains taxes, both the tax paid and exemptions/tiered tax paid, maybe based on an individuals base income. I also agree that the estate tax needs to be revamped and have a higher base exemption. I also would like to see some kind of deferment on estate tax for things such as family farms and small businesses that are inheritated. I cant feel much for someone who inherits stocks/bonds/rental units and feels ripped off because they have to pay a tax on them. They are a gift to the children and have income value. The deceased can leave it to the neighbors if they want to and the neighbor will have to pay a tax. Its still a gift that enhances income. The deceased can leave it all to the humane society/university/etc. if they choose too, but those places qualify for exemptions. Any rich person that doesnt set up a non-profit to leave their estate to and have the kids listed as the board is not thinking right anyways (or maybe they are and I just assume they think their kids should get it all) :)

 

Corporations/big companies are too protected from paying taxes and I would like to see them held to a more equal standard as the little guys in the business world. That can be done by getting rid of exemptions. Getting rid of exemptions gets rid of forms.

 

Additionally there are other things in there (such as the Russian no tax on real estate sold after being held for 3 years). As I understand it (though I havent been involved in a real estate transaction for many years) is if I re-invest the money into a higher value place, I dont pay taxes on that sale.

 

What I am saying is for every seeming benefit in these other countries methods of taxation, there is an similar counterpart in our system. The problem is accessablity for the average person.

 

There is alot of things that could be done in this country on the fed level to decrease the tax burden on the individual, no doubt. But with that you will have to agree to a reduction in services. Unless the flat tax actually increases government revenue.

 

Finally, the first thing that needs to be done in this system is to re-evaluate the threshold that poverty really is. Heres a good website that touches on why the poor/lower income persons are being so unfairly afffected by taxes:

 

How We Measure Poverty

 

*This falls back to an earlier post where it shows how Nat.Sales.Tax actually means poor people pay higher % of income in taxes because basic needs are the same. The deduction is the same whether the person makes 15K or 150K.

 

But you wont see a change in this calculation because it will increase the number of persons below the poverty line significantly. Its not good politics to have the number of poor people go up on your watch. But you really cant begin to calculate what the absolutes for a 'flat tax' would require without figuring out these numbers first. As I see it, the flat tax (as proposed in the link) will only benefit the rich and upper incomes and impact the poor and lower incomes even more severely.

[C1ay]

Finally, the first thing that needs to be done in this system is to re-evaluate the threshold that poverty really is. Heres a good website that touches on why the poor/lower income persons are being so unfairly afffected by taxes:

 

How We Measure Poverty

 

*This falls back to an earlier post where it shows how Nat.Sales.Tax actually means poor people pay higher % of income in taxes because basic needs are the same. The deduction is the same whether the person makes 15K or 150K.

 

But you wont see a change in this calculation because it will increase the number of persons below the poverty line significantly. Its not good politics to have the number of poor people go up on your watch. But you really cant begin to calculate what the absolutes for a 'flat tax' would require without figuring out these numbers first. As I see it, the flat tax (as proposed in the link) will only benefit the rich and upper incomes and impact the poor and lower incomes even more severely.

 

This is not true in regards to the current Fair Tax bill introduced in the House of Congress which contains a Family Consumption Allowance. This allowance allows for a full rebate of the sales tax imposed up to the monthly poverty level, this level being one twelfth of the annual poverty level determined by the Department of Health and Human Services poverty guidelines. It further states that families which include a married couple will also have their poverty level increased by an additional amount that is equal to twice the poverty level for a family of one minus the poverty level for a family of two. For a married couple alone this means they would qualify for an additional $6730 annually in addition to the $13,690 they qualify for as a family of two. This couple would receive a full tax rebate on their first $1700 of expenses. If that's all they make and they spend all of it they'll effectively pay zero taxes, not a higher percentage as Fair Tax opponents claim.

 

I suggest everyone actually read this bill since it's only about 130 pages long compared to the 50,000 plus pages in the current tax code. If more people really read and understood what's being proposed I think more people would be in favor of it. The sponsor of the bill, John Linder, reports that:

 

The FairTax Act:

 

[*] Repeals all corporate and individual income taxes, payroll taxes, self-employment taxes, capital gains taxes, estate taxes and gift taxes.

[*] Imposes a revenue-neutral personal consumption tax on all new goods and services at the point of final purchase. Business-to-business transactions and used products (which have already been taxed) are not subject to the sales tax.

[*] Rebates the sales tax on all spending up to the poverty level.

 

Results of the FairTax:

• 
   
  
• Dramatically reduce the costs of goods and services by 20 to 30 percent.
  
• Allows you to keep 100 percent of your paycheck, pension, and Social Security payments.
  
• Gross Domestic Product will increase by almost 10.5 percent in the first year after enactment.
  
• Compliance costs would decrease by 90 percent.
  
• Real investment would initially increase by 76 percent relative to the investment that would be made under present law. While this increase would gradually decline, it remains 15 percent higher than under the existing tax structure.
  
• Exports would increase by 26 percent initially and would remain more than 13 percent above the level under the current tax system.
  
• Real wages will increase.
  
• Increases incentives to work by as much as 20 percent in many households, leading to higher economic growth and efficiency.
  
• Interest rates will fall 25 to 35 percent.

 

Can anyone provide any real negatives with real research to support them?

[Fatstep]

[*] Increases incentives to work by as much as 20 percent in many households, leading to higher economic growth and efficiency.

[*] Interest rates will fall 25 to 35 percent.

 

Actually, when people start working more then they start earning more money, which in turn leads to inflation. One of the main ways to kill inflation is to raise the discount rate(s) banks receive which leads to higher interest rates.

[Lancaster]

To Tormod:

What are your feelings on Norway's tax system? I hear that the income tax is quite high, but that Norway has one of the highest incomes in the world.