Fair Tax

[rameumptom]

Not sure I agree:

1. We already know that a sales tax is regressive. Subsidizing the poor only makes the tax less regressive to those below the poverty line and ignores all other levels of regression

Ram: the prebate makes it non-regressive. It actually saves the poor, because products will be cheaper for companies to sell, as they will not have the hidden costs of dealing with IRS law to the tune of $400 billion per year. Is it perfect? Of course not, but it is preferable to the system today, where Warren Buffet pays a smaller percentage in taxes than his secretary. Which one is more regressive?

2. No corporate or business tax? Already owning a business is the best and most effective tax shelter for the rich – or anyone else for that matter. Most wealthy use businesses to purchase everything from a dinner out to a new car to a luxury trip to an exotic vacation spot. If anyone is employed in a service industry – your job and salary is already directly connected to this input to your industry.

Ram: one thing you learn in economics is there is only one type of tax: taxation of the individual consumer. Any corporation or business tax gets passed down to the consumer. Owning a business is a tax shelter because of all loop holes in the current system. Yet it costs American companies $400 billion/year to make decisions based upon the current tax code. If there is no business tax, then there are no loop holes for them to take advantage of. When a company buys lunch or a business trip, it doesn't get a tax credit. It just becomes an expense of doing business. The company just doesn't have to make additional decisions to ensure their business expenses generate tax credits via loopholes.

3. The thought that the rich buy more things is misplaced – many rich are rich because they do not consume as much – especially in relationship to disposable income. As pointed out in #2 – the rich can afford very smart accountants to find loopholes. Historically the rich are the least likely to pay taxes. I was raised in a very wealthy family. We raised most of our own food, we canned a great deal, and we also hunted. Very little was store bought. My mother made most of our clothing, the house we lived in was bought for $7,000 and we repaired it and rebuilt it to over 3 times its original size. My first car was a Junker I was expected to fix before I could drive it. I could go on but hopefully the reader gets the point but I will add this. My father said that what makes someone wealthy is their willingness to work and the difference between what they earn and what they spend. According to him there were no other relevant factors.

Ram: Let's see, I live in a house worth $90K. Bill Gates lives in a house worth $100M. I own two used cars. Jay Leno owns dozens of new and "used" cars worth millions. If the rich buy a new car, a home, a television, etc., they will be paying taxes on it. Since I buy used cars, I would be taxed on my purchases, while Jay Leno would be taxed when he buys that 2010 Escalade. Sounds like it works to me.

4. I have never read anything in economics that indicate that the costs of goods and services have anything at all to do with the propensity to save.

Ram: I agree that there isn't always a direct correlation. However, studies have shown that if you tax something hard enough, fewer people will buy it (such as tobacco). Since all taxes will be through consumption/purchases, it will make people think carefully concerning each purchase.

It is interesting to me that our founding fathers intended that the federal government not have direct control over raising funds. The intent was that each state be assessed their “fare share” according to official census. It was up to the states to raise the cash by their own means. Under this system the states and citizens of states seemed to be much more interested in what the Federal government had to spend. I am thinking that we should return to such a system.

Ram: I agree that such would be the preferential form of taxation. However, as much as I would love to be an idealist, the real world has taught me to be a pragmatist. The big federal government is not going away any time soon, unless there is a big collapse. That said, let's make it more efficient and effective, and get the IRS off the backs of the average person. Let's get the huge tax code off the backs of businesses, so they can do America's business.

The Traveler

The Rameumptom

[Just_A_Guy]

I'd be interested to see the numbers here, Rameumptom; because my own experiences as a small business owner don't match up with that. Granted, I "sell" legal services, so I don't have much inventory to worry about. Still: my entire tax preparation fee was about thirty bucks (bought Tax Act and did my taxes myself). There are programs that will track your inventory and do your books that can be purchased for under a thousand dollars; and if you go to a CPA to do your taxes in March/April that's maybe another thousand or two. So if I do high-end tax planning and have inventory to manage, I've spent maybe three thousand dollars out of tax considerations. Unless my gross revenue is under $12,000, that isn't 25% (or 23%, or whatever) of the cost of each item.

Plus, how many small businesses are so sophisticated with their tax planning that "Every decision they make has to include a consideration for additional taxes, tax loop-holes, tax breaks, or tax penalties"? Mine isn't; nor are those of the lawyers, CPAs, and even a financial planning firm I share office space with. Mostly we just do our thing, and once a year put a few hours into trying to minimize our liability on our 1040s.

There may be numbers backing up your (apparent) assertion that 23% of what we pay for goods and services now goes to taxes, but it seems to fly in the face of common sense. Even if you factor in the tax burden on the people who produce those goods and services--if I'm selling a widget for $10.00 now, and tomorrow the fair tax comes into play so I know I'm not going to be taxed on my revenue--as a business owner, am I really going to immediately reduce the pre-tax price to $7.50? Nope. Maybe over the long run, as competitors nudge their prices down; but in the short term (which is where my concern lies) I'm going to keep the price as high as the market will pay and line my pockets with the windfall Uncle Sam has provided.

Edited March 4, 2010 by Just_A_Guy

[rameumptom]

JAG,

You have little in software, yes. However, imagine if you had a manufacturing company, like Ford. Everytime you outsource to buy parts or raw materials, you pay a tax under the current system. In the Fair Tax, only final products to consumers are taxed. There are also inventory taxes for any parts not sold every year.

So Ford spends $100,000 for aluminum to build exhaust pipes. They pay tax on it now. They won't later, allowing them a bigger profit to pass back to the customer or to hire new workers.

The Ford dealer, meanwhile, has to pay taxes on every car on his lot that was not sold in the calendar year. If he still has a 2008 new auto on his lot, he's paid inventory tax on it twice now. This is how the Fair Tax can save a lot of money. And when they save, it means they can pass the savings onto you - so you save also.

[Dravin]

In the Fair Tax, only final products to consumers are taxed.

Widget #1334A7B is a final product produced by X company and sold to the consumer Ford. Or are you trying to say if Ford manufactures the widget themselves (as a company) they save money? Isn't that already the case?

[john doe]

JAG,

You have little in software, yes. However, imagine if you had a manufacturing company, like Ford. Everytime you outsource to buy parts or raw materials, you pay a tax under the current system. In the Fair Tax, only final products to consumers are taxed. There are also inventory taxes for any parts not sold every year.

So Ford spends $100,000 for aluminum to build exhaust pipes. They pay tax on it now. They won't later, allowing them a bigger profit to pass back to the customer or to hire new workers.

The Ford dealer, meanwhile, has to pay taxes on every car on his lot that was not sold in the calendar year. If he still has a 2008 new auto on his lot, he's paid inventory tax on it twice now. This is how the Fair Tax can save a lot of money. And when they save, it means they can pass the savings onto you - so you save also.

I'm not so sure about this. It is my understanding that taxes are not paid on wholesale products until they hit the end retail user. For example, when an auto parts store sells parts to a repair shop, the repair shop does not pay taxes on the parts. However, when the shop installs the parts on the car, the shop collects taxes on the final sales price to the customer.

I don't believe Ford pays taxes on materials used for the manufacturing of vehicles for wholesale sales to dealers. Taxes are collected when the retail customer buys the car. But I could be wrong about that.

[Still_Small_Voice]

Its only a matter of time and taxes will go up....stay tuned...

Taxes will go up sky high if free universal healthcare gets through Congress. I cannot believe the amount of money Washington has been spending and it is because the checks and balances of power the Constitution had in place are being set aside for what many deem as the greater good.

[Guest]

Widget #1334A7B is a final product produced by X company and sold to the consumer Ford. Or are you trying to say if Ford manufactures the widget themselves (as a company) they save money? Isn't that already the case?

If a company buys a widget as part of their manufacturing process they do not pay tax on that widget under Fair Tax.

If Widget company do not sell widgets to anybody else except manufacturing companies, then they do not need to bother their pretty heads on sending money to uncle sam.

[Guest]

I'd be interested to see the numbers here, Rameumptom; because my own experiences as a small business owner don't match up with that.

Go to Fairtax.org or get the books. They have official studies worth millions of dollars that resulted in those conclusions and "magic numbers". 23% was not a number pulled out of a magic hat and neither is $400 billion.

Even if you factor in the tax burden on the people who produce those goods and services--if I'm selling a widget for $10.00 now, and tomorrow the fair tax comes into play so I know I'm not going to be taxed on my revenue--as a business owner, am I really going to immediately reduce the pre-tax price to $7.50? Nope. Maybe over the long run, as competitors nudge their prices down; but in the short term (which is where my concern lies) I'm going to keep the price as high as the market will pay and line my pockets with the windfall Uncle Sam has provided.

It doesn't matter if you lower the price now or not. The fact remains that I, as a consumer, will get 100% of my gross income the day the Fair Tax comes into play (no State Tax in Florida). I take complete control of how much tax I want to pay. So, if your widget remains at $10.00 after the Fair Tax comes into play, I would gladly pay it if I feel that 23% tax is worth it because instead of taking home $1,000 a month, I now have $1,200 a month (assuming I paid 20% income tax before). Then I can buy lesser brand new stuff and just go with used stuff for now until some eeny-weeny-teensy company comes up with the same widget for $7.00 - then I'll buy it. I have the power!

Edited March 6, 2010 by anatess

[Dravin]

If a company buys a widget as part of their manufacturing process they do not pay tax on that widget under Fair Tax.

If Widget company do not sell widgets to anybody else except manufacturing companies, then they do not need to bother their pretty heads on sending money to uncle sam.

Does one have to be a dedicated supplier? If I own a contracting business can I pick things up from Home Depot tax free? As lumber is simply part of my house manufacturing business? Can I get the gas the powers my trucks and generators tax free, they're part of my process of building a house? If a Ford plant had a natural gas power plant on site, would the natural gas be tax free?

Sounds like it has to potential to be a tax shelter. Uhm... the alcohol is part of my processes of ensuring future sales!

[rameumptom]

Thanks to Anatess and John Doe for clarifying my earlier explanation. Only retail has a tax, not items that are used to finish another product. Ford buys a part from Delco for their Mustang - no tax. The finished Mustang is sold to Rameumptom, Ram pays 23% tax.

And as Anatess noted, you start out with your entire paycheck, not paycheck minus Federal tax, Medicare, and Social Security. Social Security alone is almost 15% (partially paid by the employer, but still part of your salary).

As a house contractor, you would be able to get tax free the items that go directly into the house (lumber, conduits, etc). Gas and oil for the vehicles you drive are indirect, and I think are subject to tax. Business lunches are taxed as well.

[Moksha]

Such a flat tax would really be a windfall for the wealthy are corporations. Have any of you though about the wonders of a regressive tax? That is where the more income you have, the smaller percentage you pay?

[mrmarklin]

I've been reading lately about this "Fair Tax" idea and it seems to make sense. I definitely support it and wonder what people's oppositions to it are, if any. What do we need to do to get this passed into law?

This is not a good tax system because as a percentage of income it falls mostly on the poor, who need to spend almost all their income just to live..

God's way is the best, a % of gross that falls in equal percentages on rich and poor alike. The rich pay more in absolute $$ because they have more.

[Traveler]

There are many people and political forces that do not believe the poor can or should contribute to the good of this or any other country. A true citizen will be involved in any and all governments for the people. A slave or someone sold away to slavery; is that part of the people that must be “cared” for and cannot – by station or desire – care for or see to their own needs.

Taxing one person to care for another is just another way of creating a cast system putting one class to dislike and hate the other. When we eliminate love from the care of others the only possible result will be hate.

The Traveler

[Choseph]

This is not a good tax system because as a percentage of income it falls mostly on the poor, who need to spend almost all their income just to live..

God's way is the best, a % of gross that falls in equal percentages on rich and poor alike. The rich pay more in absolute $$ because they have more.

The Fair Tax is not a flat tax as someone has said. Also, it is not trying to oppress the poor. Please see previous posts and pay careful attention to the tax prebate. (also see Americans For Fair Taxation: Americans For Fair Taxation) I don't understand why treating everyone the same is a bad thing. What do you mean by "God's way"?

[Guest]

The Fair Tax is not a flat tax as someone has said. Also, it is not trying to oppress the poor. Please see previous posts and pay careful attention to the tax prebate. (also see Americans For Fair Taxation: Americans For Fair Taxation) I don't understand why treating everyone the same is a bad thing. What do you mean by "God's way"?

He meant tithing system. 10% on increase, for everybody.

Which is fine and good for the Kingdom of God who live under God's law.

Unfortunately, we don't live under God's law - not yet anyway. So, the flat tax on income, although, better than the current tax in my opinion, is still sadly inferior to the Fair Tax. The reason is - taxation when not thought of as tithe - is prohibitive. This was made tradition since the time of... tarrifs?... and is more so blatant now with cigarettes sales taxed to the roof. So now, tax is considered a "fine" for bad behavior.

So, when you tax income you "fine" productivity. With the current progressive tax - higher income have higher tax percentage - it tells you the more productive you are the worse off you're gonna be. Because the rate of return for that productivity becomes lesser and lesser the more successful you become. So, it is really a hindrance to progress.

Consumption tax is more superior because our laws are not God's laws. People are not working to build the Kingdom of God. Therefore, taxing on what is spent promotes progress because productivity is unhindered. Now, in a free market - the amount of consumption affects productivity (you're not gonna make 100 widgets if only 10 are getting sold), so there is still a limit to production. But, the main thought of the Fair Tax is that people who have money are going to spend it somehow.

[rameumptom]

Other problems with taxing income:

1. A person who normally gets $20K/year gets a windfall $100K/year. They are taxed at the $100K rate, just because they are once in a higher tax bracket. Also, their next year's income tax will initially be based on that higher amount.

2. Two people make $50K/year. One has $20K in the bank, while the other has $750K in the bank. Who is wealthier, and should they both be taxed the same amount, simply because their income is the same?

With the Fair Tax, everyone gets a prebate check once a month for the basic cost of taxes paid on poverty-level. So there is no regressive taxation. Next, all pay on new items only, not on previously owned (many poor shop Goodwill and buy used cars, which would be tax-free, giving them an extra benefit). Rich people tend to buy more expensive things and in larger quantities. They will pay higher taxes on all purchases of new items. Even items purchased overseas would incur the Fair Tax, so there still is incentive to buy American.

Corporations and small businesses will not pay any taxes on items directly tied to their business. These taxes would be passed down to consumers anyway. We avoid the middle man, and the hidden taxes, as well as the hidden cost of companies having to make decisions in light of regulation/taxation. This lowers the price of finished items sold, even while taxes are ~23%.

Since companies can now make things for less, they are more competitive on the world market. You would see many companies return to manufacturing things in the USA, because it financially makes good sense. More business at home means more jobs to employ Americans.

Edited March 15, 2010 by rameumptom

[Just_A_Guy]

Other problems with taxing income:

1. A person who normally gets $20K/year gets a windfall $100K/year. They are taxed at the $100K rate, just because they are once in a higher tax bracket.

Well, technically--no, they aren't. Most people think that the $100,000 bracket means all of the income is going to be taxed at 31%. This is incorrect. What happens is that income within a particular bracket range is always taxed at that rate no matter how much you ultimately earn. Example:

The "brackets" for a single filer are as follows (as per Section 1 of the Internal Revenue Code):

Up to $22,100: 15%

$22,101 - $53,500: 28%

$53,501 - $115,000: 31%

So, if you made $100,000, you'll be taxed as follows:

First $22,100: 15%, or $3,315

Next $31,400: 28%, or $8,792

Last $46,500: 31% or $14,415.

Total tax liability is $26,522 (as opposed to the $31,000 that would arise if you just applied the top bracket to all of the income--which is what most people thinks happens, but doesn't really).

Now, if next year you make $116,000, you're in the next bracket (36%). Using the common (wrong) method, most people would compute their tax liability at $41,760.

BUT: income below $115,000 is still taxed at the same levels.

So: first $22,100: 15%, or $3,315

Next $31,400: 28%, or $8,792.

Next $46,500: 31%, or $14,415.

Next $15,000: 31%, or $4,650

Next $1,000: 36%, or $360

So really your total tax liability is $31,532. This is one feature of our tax code that--if you think about it--actually makes sense (assuming that we want to stick with an income-based tax).

Also, their next year's income tax will initially be based on that higher amount.

That may be the case for the amount temporarily withheld from your paycheck, but it won't affect your ultimate tax liability. If the withholding issue really bugs you, you can file a new W-4 with your employer claiming more exemptions (i.e. household members--even more than you actually have, if necessary) to get the withholding down into the right ballpark.

Edited March 15, 2010 by Just_A_Guy

[Finrock]

Fair Tax without a Constitutional Amendment forbidding an income tax would be a horrendous mistake.

Regards,

Finrock

[Guest]

Fair Tax without a Constitutional Amendment forbidding an income tax would be a horrendous mistake.

Regards,

Finrock

If you look at the Fair Tax Bill that is in the congress right now, it removes Amendment 16 from the Constitution and has porivisions that there will not be any other tax levied outside of the consumer sales tax (with all the requirements for what constitutes a taxed consumer product).