I was asked this question the other day and thought this would be a good time to answer it. As you know, both owner-occupied and renter-occupied housing is taxable under the FairTax. With owner-occupied housing (new), the tax is collected up front at time of sale. With renter-occupied housing (new or used) the monthly rent is taxed as it is collected by the landlord.
Renter-occupied housing under the present Income tax is paid with after-tax dollars.
Renter-occupied housing under the FairTax is paid with pre-tax dollars, plus there will be a pre-bate added to the renters income to stretch his/her dollar further.
Since investment property is not taxed under the FairTax, but the rents are taxed, the rental property will not be subject to double taxation.
An example in the FairTax Research information compared the Income Tax structure with the FairTax structure using $500 in monthly rents. With a 15% income tax bracket, the renter would have to earn $647 in order to pay his income taxes and payroll taxes and have $500 left to pay his rent.
Under the FairTax structure, the $500 rent plus the 23% sales tax amounts to $649, $2 more than the income tax in order to cover his rent. HOWEVER, in comes the pre-bate to the rescue! And that renter has only had to use $2 of his monthly pre-bate to pay his rent, leaving the remainder to pay the taxes on his medical bills, dental bills, groceries, etc.
I hope that answers your question. If not, go to FairTax.org for more information. I don’t know how to make charts in this blog so you will have to rely on the FairTax website for visual proof.
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Bobbie,
Let's try one more time to compare prices under the Fairtax to the income tax, in this case using rent as an example rather than autos.
Under the income tax it depends on what your effective tax rate is--you can't use marginal tax brackets for this calculation! In order for me to rent that $500 unit, my effective tax rate is an inclusive 11% or exclusive around 12.36%, so I'd need to have earnings/pension income of $562.(500 x 1.1236 = 561.8). (As a cross check, now apply my 11% inclusive rate to the $562 and I will have after tax cash of around $500 to pay the rent).
Under the Fairtax, the landlords pretax costs will most likely be reduced by 10% by eliminating his income tax costs, and the after tax price will be $585. (500 x .9 x 1.3 = 585). You cannot just multiply the price by 23% and get anything useful. The Fairtax rate that is tacked on to the landlords cost plus profit is 30%.
So, the bottom line is that the rent will be $23 higher under the Fairtax, but you are correct-the prebate can be used to offset the higher price.
Now, my example was for a retiree with an effective tax rate of 11%. But, if you stop and think about it, almost half of Americans pay no net income tax, so their effective tax rate is the 7.65% payroll tax for workers. In which case, they will need even more of the prebate to make up a larger difference.
Basically, low income and retired folks would pay less for rent under current law, and that's more than half of us.
Play around with this and see if it starts to make sense.
Regards, Van
The $500 a month rent calculation is great if you live in the Midwest or the South. But what about in a place like New York City where rent is 4x that? FairTax appears to use a national average in its prebate calculations.
The prebate schedule indicates an annual consumption allowance of a little over $20,000. My rent alone exceeds that amount and my wife and I are NOT living lavishly by any means. Maybe I'm missing something, but this sounds like a very raw deal for those of us living in high cost-of-living areas.
Alex, thanks for your input. I'm sure the FairTax website is using the national average. They have to use something for their examples. You can go to the wesite and figure your costs of rents under the FairTax, which it sounds like you have already done.
I think you people with higher incomes are counting too much on the prebate to pay all of your extra expenses. This is not what it is meant to do. It is meant to relieve "poor people" from having to pay taxes.
If your rents are 4X the national average, there is no way you can expect the prebate to make up the difference. However, I'll bet you also make 4X the salary as those who are paying only $500.
The FairTax is not a lower tax to all. It is a Tax replacement, which means if you are paying taxes now, you will be paying taxes with the FairTax. The only difference is you will decide how and when you will pay them, you will get a little help from the prebate and a lot of help from receiving 100% of your income.
The FairTax is progressive: the more you make, the more you spend, the more you get taxed. The poor are the only ones who get a free ride.
Bobbie,
Thanks for the reply. I understand that the FairTax would not mean lower taxes for all. But your assumption that I make lots of money just because I live in New York City is far from correct. And while we're not poor, we're certainly not rich. Rent already consumes a huge portion of our salaries.
My wife and I happen to work in arts related fields (which is why we live and work where we do). People in our field simply do not bring home big bucks. Also, think of teachers, police officers, and firemen, and other civil servants. None of them are brining home 4x the national average salary.
According to the US Census, the medium family income in NYC in 2004 was $45,343. The medium family income in the US that year: $44,334. Not quite 4x, now is it?
My point is this: The assumption that just because you live in a high cost-of-living area means that you make more money is erroneous. And policy that would apply to each and every person in the country needs to be based on real world implications, not on erroneous assumptions.
I like many aspects of the FairTax. I think there are aspects of it that have merit. That's how I stumbled across your blog, by trying to find out more about it because it piqued my interest. But I take issue with applying the tax to things like rent and health care. I think it could be a great system, but it definitely needs some hashing through yet.
That's my two cents. Thanks for reading!
Hi Alex,
I stand corrected. I should not have assumed you made 4X the average salary. But I also cannot understand why people work in such high priced areas. I guess I have been tucked away in Oregon all my life and don't understand why other people live in such high rent districts when they can live here.
What field of the Arts are you in? My husband Gary has taken up art again in his retirement. I have his website on my blog links. You might check it out sometime.
Don't give up on the FairTax. There are so many good points to it and I really do think it will save our economy, if Congress ever quits thinking about themselves and their lobbyists.
Not to turn this into a private email exchange, but I think this is a good conversation to have...
My wife works in the classical music business while I work in Television, film, and media. So to answer your question about why we choose to live here, it's because our jobs brought us here. We love what we do and the most opportunities lie in places like New York. Additionally, we just love it here. We love the culture, the vibrancy, the diversity. We get enough out of living here to make the cost worth while.
I've always been concerned about New York becoming a rich person's city. The city would not be what it is without its diversity of people, and I fear that, as prices continue to rise, many of the low and middle income people will continue to be driven out. So any time I see something that might exasperate that situation, I get passionate!
I think shifting some of the FairTax away from things like rent and healthcare over to investment would bring me on board. But one thing we can definitely agree on is that there needs to be change and that Congress does need to shift their priorities. Thanks so much for the info and input!
FairTax will not be fair, the term is misleading.
Underfair tax, you got prebate, new goods vs. used good, housig and health care trreatment differentials, soon enough the tax code will become as complicated as the current one.
So why bother using a new mess to replace an old one.
We people should just focus on keeping the government from growing too big, so that everybody pay less tax.
dutchman3:
Why would a landlord's pretax cost most likely be reduced by 10% by eliminating his income tax costs?
My landlord enjoys a writeoff for "depreciation" on an appreciating asset, and therefore enjoys a paper tax "loss" which amounts to a NEGATIVE income tax cost.
In other words, my landlord's cost would go UP, not DOWN.
Another thing, when comparing a renter and a homeowner with equal income, the FairTax flunks the horizontal equity test.
Another thing...I'm currently paying an effective tax rate around 11 percent - not 15 percent. So I'd have to earn more under the FairTax to pay my rent.
Does anyone notice the problem with saying "Well you get to keep your whole paycheck!"
They say this when you say your rent will go up. They say this when your medical bills go WAY up. They say this when the cost of new care goes way up.
How many times will they use this? I know people whose RENT would take up all their "savings" from Fairtax - and they still have to buy food, get medical help, get gas -- a thousand other things.
So Fairtax seesm to keep paying out this "savings" over and over.
Not only that -- Fairtax says the PRICE of things will go down. Because of lower taxes on the workers. Hello!! The workers will need to KEEP their taxes -not give them back to the owner of the business.
The fallacies in Fairtax are just amazing.
The FairTax is NOT progressive because it taxes rent (paid by lower-income people) while it does not tax the purchase of an existing home.
A typical lifetime renter will pay about 5 times as much FairTax on his lifetime housing consumption than a homeowner will pay for equal housing.
If A buys an existing home, there is no FairTax.
If B rents the same existing home, he will pay FairTax indefinitely.
How is this Fair?
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