Thursday, January 3, 2008

SENIOR MOMENTS

This FairTax volunteer clarifies a lot for us:

There are some responses to the criticism that the Fair Tax taxes consumption of income that has already paid tax. Most retirement savings, $16 trillion, are in "qualified plans" such as IRA's and 401K's. These tax-advantaged plans deferred taxes going in, as well as the income accumulating on the contributions.

Seniors withdrawing from these plans pay tax when the money comes out, and presumably when the seniors are in a lower tax bracket. Under the Fair Tax, money comes out of qualified plans income-tax-free, thus rewarding those seniors who had the forsight and discipline to save. Those seniors will enjoy a double benefit offset only by slightly higher prices.

Second, money coming out of tax-advantaged funds can push your social security benefits into a taxable status today. Your social security contributions were double-taxed going in, yes, payroll-taxed and income-taxed, each on 1005 of the same income. Under the Fair Tax there is no payroll or income tax on the money going in, nor is there income tax on the money coming out.

Pension income is untaxed under the Fair Tax. True, people who go into the corpus of savings or trust funds will be slightly disadvantaged. In that sense, the Fair Tax is a wealth tax. Many seniors think it is important that they can sell homes without paying capital gains tax and pass their estates on to their offspring without paying gift tax, estate tax and generation-skipping tax. The Fair Tax has an appeal to those groups.

People who are working and have not yet become seniors can save more rapidly for retirement under the Fair Tax without resort to IRA's and 401k's and other qualified plans.

I hope this has given you some ammunition. Best regards and Happy New Year,~Jim

1 comment:

Dutchman3 said...

Bobbie,

Well, Jim certainly has his rose colored glasses on, so here is another point of view from a real senior.

Under the Fairtax, prices will rise higher than the increase in my take home pay (pensions) after income tax withholding is eliminated.(I dont have any payroll tax withholding as a retiree). My effective tax rate will be greater, and my purchasing power lower under the Fairtax. My savings will be double taxed. I will be forced to resume paying into the SS Trust funds with my sales tax dollars. Meanwhile, an estimated 30 million workers may pay no net federal tax due to the prebate, yet will still receive their full SS retirement and health care benefits. Finally, my state and local taxes may have to be increased by 25% to pay for the federal sales tax costs. Not a pretty picture?!

Jim says that those whose savings are in 401k's /IRA's used great foresight and discipline. I'd suggest it was more a case of pure dumb luck! And for every winner, there is a loser who have after tax savings including the very popular Roth IRA, which would be double taxed under the Fairtax plan.

As for estate and gift taxes, you aren't doing the average retiree any favors. A married couple can already gift $10K each to any and all grandchildren, and we have an estate exemption of over $1.2million. Gift and estate taxes are a non issue for most.

As for saving more rapidly, I wonder just how that is possible? Take home pay goes up, but prices go up a matching amount, and your standard of living is relatively unchanged. So, where is the extra cash for savings? And, Jim seems to be saying that under the Fairtax, 401K's will disappear? He may well be right if the company matching can no longer be expensed. But if that should happen, everyone would lose the most advantageous savings plan ever devised. A little clarification from Jim might be useful here?

Fairtaxers are left with an appeal to seniors for their support based on the forecast of a better world for their grandchildren. And, maybe that will suffice. Or maybe, self interest will override any such public virtue arguments? Stay tuned.