I am re-running an earlier posting to put some perspective on the plight of Senior Citizens when the FairTax is enacted. Some think they will be paying more in sales taxes than they should have to, since they had to pay taxes on all that money they earned all these years previously.
I am getting tired of the distorted views on the 23% vs. 30%, the poor Seniors being double taxed, uncorroborated statistics, etc. without looking at the whole picture. Prices will go down.
For those of you who prefer the present income tax situation, know that you are being taxed over and over and over (embedded taxes are a fact). Compliance costs are astronomical, no matter what the figure.
Following is a copy of my earlier blog:
I am going to begin today with “The impact of the FairTax on Seniors”, a “white paper” from www.fairtax.org. I will just give you a feeling for what is in this document and if you wish to learn more, go into their website and poke on the “research button” to find the various “white papers”.
The FairTax will ensure that the Social Security and Medicare programs that are so important to Seniors become stable again, no longer a threat to “go broke” in a few years if taxes are not raised.
The FairTax rebate zeros the retail taxation of necessities, up to the poverty-level, for Seniors. Some Seniors don’t even spend over the poverty level, since they have accumulated “things” over a lifetime. Other Seniors will welcome the extra money that a prebate would bring them.
The FairTax does not tax used goods, which gives Seniors a choice of whether they wish to buy new goods and be taxed or used goods with no tax added. (We all will have this choice)
The FairTax ends all record keeping and income tax filings, which means no more large bills from Tax Preparers or Accountants. (These people will be happy to find other jobs helping you invest and grow your extra dollars saved by the FairTax)
The FairTax will reduce manufacturers’, services’, and retailers’ costs, (remember the embedded taxes?) allowing them to lower costs to seniors (and the rest of us).
Seniors will pay no more taxes on IRAs and other tax-deferred plans.
The FairTax ends gift and estate taxes so Seniors will have the satisfaction of knowing their hard-earned money will go to their heirs instead of the IRS. Wheeee!
With the FairTax, Seniors can sell their homes and pay no capital gains taxes.
The FairTax will generate an economic boom, easing future budget pressure on Seniors’ entitlements.
The FairTax ensures your grandchildren will be able to keep 100% of their income and they can decide when to spend it and what to spend it on. They will not have the IRS looking over their shoulder at every step of their careers, taking money here and grabbing money there.
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4 comments:
Bobbie,
You wrote: "Prices will go down". I've tried my best to show you that the most likely outcome is that business costs will go down 10% and retail prices will rise by 17%. You seem not to agree. So, how about explaining to us just why you think prices will go down!
Thank you!
My best explanation comes from years of study and research by accredited people and institutes.
Your best explanation comes from flawed figuring and/or manipulation of such.
You love the 17% figure and use it whenever it strikes you.
You don't seem to understand that embedded taxes are in corporate taxes as well as payroll taxes and refuse to take this into consideration.
The FairTax Benefits for Seniors, available at FairTax.org states:
"A retired couple living solely on Social Security and receiving the average annual benefits for a husband and spouse of approximately $18,776 receives a cash prebate of $4,697 per year. If they spent all of their Social Security benefits on taxable goods and services, the prebate would result in a negative tax rate of -2.0 percent. The prebate exceeds the national sales tax on that amount of spending".
For every hundred dollars in spending, the prebate provides $23 to cover taxes. This is calculated on a tax inclusive basis ($100 x 23% = $23). However, according to the FairTax bill summary, 30% will be applied on a tax exclusive basis ($100 price x 30% FairTax = $30). For that reason, a decline in retail prices is critical to maintaining the purchasing power of anyone with only the income and/or resources to spend at or near the poverty level.
The prebate described in the quote exceeds the national sales tax on the couples spending because it's calculated to provide 23% of poverty level spending of $20,420 per year. This couple has $18,776 to spend so the prebate equals 25%, not 23%, of their spending. That's what the -2% tax rate difference is (23% - 25% = -2%). Their spending is about 8% below the poverty level rate.
Spending "all of their Social Security benefits on taxable goods and services" doesn't mean spending all $18,776. That would result in taxes of over $5,600 - 20% above the prebate received. It means spending what their income is worth today. Their Social Security income is calculated to be worth about $14,645 due to the estimated 22% embedded taxes they currently pay. For a -2.0 FairTax rate to occur, retail prices must be at a level close to that current worth. If it happens, they'll have about $20 more pretax dollars to spend per month. A couple with current spending at the poverty level rate would need to see an immediate price decline of 5% to keep their existing purchasing power.
Bottom line: retail prices would be important to everyone in a FairTax world. Those on fixed or limited incomes (seniors or disabled under 65) would be particularly vulnerable. They might have accummulated most of the "things" they'll need in life; but, their health care costs are often their largest and most unpredictable expense. Something I haven't seen mentioned anywhere is how those receiving Social Security now will feel about paying FairTax taxes into the Social Security fund. I think about 14-15% of FairTax revenues will be dedicated to Social Security benefits. Quite a new way of thinking: you've paid FICA taxes on wages during your entire working life, then you retire and discover you have to pay more FICA taxes when you spend your Social Security benefits. Isn't that a kick in the head, said Grandpa.
What Does the Fair Tax Really Do for You?
The Fair Tax is getting a lot of press these days, but relatively little information about the impact on American families is being distributed. The implementation of the Fair Tax is predicated upon several assumptions:
Assumption #1 - All active businesses entities in the US, including US corporations, sub-chapter S corporations, limited liability corporations, sole proprietorships, trusts, and partnerships have embedded costs that average 23% and prices for all services and new products will decline by 23% if the Fair Tax is implemented.
Assumption #2 – A Federal sales tax of 30% will be imposed on all consumers, Federal, State, and Local governments, and non-profit organizations on the purchase of all services, such as medical, legal, loan interest, and insurance, and all new products (including houses, food, and prescription drugs).
Note: Business entities and investors will be exempted from paying the Federal Sales Tax on any new products or services constituting part of the business activity.
Assumption #3 - The Fair Tax proposal is defined as being "revenue neutral" in that it is expected take in the same approximate amount of Federal sales tax revenues as comes in from the existing Federal business income taxes, FICA payroll taxes and Federal personal income taxes.
Assumption #4 - The Fair Tax proposal assumes that the IRS will be replaced with 45 individual state sales tax collection agencies and a U.S. Treasury sales tax collection agency to represent the states that don’t have a sales tax or don’t want to be responsible for collecting the 30% Federal sales tax and forwarding it to the U.S. Treasury.
Assumption #5 - The Fair Tax program does provide a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67) to help offset the impact of the 30% Federal sales tax for low income families. This will require well in excess of 100 million monthly checks from the U.S. Treasury to be distributed to individuals and families.
The Fair Tax assumptions have major shortcomings which will adversely affect all Americans, including children, working persons, and retired persons who are not in the top 5% of the income brackets as shown below.
(1) THERE IS NO GUARANTY OF PRICE REDUCTIONS: It appears obvious that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors and not to the customers or employees.
There is no legal requirement for businesses to reduce prices by the amount of any embedded cost elimination savings and no way to measure what they actually do.
Examples of windfall profits by US corporations in the past have a dismal track record. Look at the deregulation of the electric power generation and distribution industry that generated record profits and obscene long-term price increases to consumers; and Healthcare industry advocates stating that the "free market" healthcare HMOs were more efficient but required a 12% bonus (or more) to offer Medicare Part C over and above what Medicare currently pays the healthcare industry and providers for beneficiaries using Medicare Parts A and B.
The US pharmaceutical industry manufactures prescription medications around the globe, is given Federal government protection from allowing people to purchase prescription drugs outside the US, and gives Americans the highest prescription drug prices in the world.
Most of the profits resulting from savings for any purpose (elimination of “embedded costs”, moving jobs off shore, reducing employee wages and benefits, and importing manufactured products) went straight to executive perks (bonuses and salaries, stock option plans, and executive retirement programs) and investors with very little to none to employee salaries or reduced customer prices for products or services.
Anyone who seriously thinks a 23% reduction in costs will not disappear long before it hits the consumer prices or employee wages doesn't understand the current implementation of capitalism, business organization and tax regulations, and corporate protectionism existing in the US.
(2) IMPACT ON MOST AMERICANS: The Fair Tax program is a reverse “Robin Hood scheme” that shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans (who spend a lower percentage of their gross income on services and new goods) to the working Middle Class, retirees, and children not in the top 5% income bracket.
While proponents are quick to mention the “prebate” program mentioned above, they neglect to mention that the Fair Tax eliminates all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Child Tax Credit and Additional Child Tax Credit, Foreign tax credit, elderly or disabled, etc. which currently provide substantial help to eligible people. The Fair Tax proponents provide no comparison as to which program (current IRS or Fair Tax prebates) offers the most dollars to assist low income individuals and families currently receiving these tax benefits.
(3) IMPACT ON RETIREES - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.
The Fair Tax proposal elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable system used to report earnings and calculate Social Security benefits.
The Fair Tax proposal requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax to now pay a sales tax of 30% on all their purchases of services and new products. The 30% tax rate will apply to purchases of services and new products made with Roth-IRA income which was supposed to be tax free, and a 30% tax on services and new products made with Social Security income.
Note: Social Security is currently tax free for many retired individuals and couples, and partially taxed for the rest.
With no defined commitment to maintaining the Social Security and Medicare programs and no way to calculate individual Social Security benefits, the door will be wide open for politicians looking to “reduce taxes” to simply declare that the Social Security and Medicare programs are “wasteful” and “no longer required”. In its place, they will most likely propose a means-tested charity program.
(4) WHAT IF PRICES DO NOT DROP BY 23%? If the average cost of ALL new products and services does not decline by 23%, then the 30% Federal sales tax on the allegedly reduced prices from elimination of embedded taxes will increase the costs/prices of new goods and services over and above the current costs/prices for new goods and services.
Americans purchase many products that are manufactured in foreign countries, and shipped directly to the selling location. The cost of a Lexus made in Canada or a Hyundai made in South Korea have zero embedded costs in the vehicle wholesale price. The additional distribution costs and profits probably keep any embedded costs at less than 3-5% of the retail price, not 23%.
The Fair Tax proponents allege that it will raise the same amount of Federal Revenue as the current tax code. This means that the revenue from Federal business income and payroll taxes currently paid by business entities will have to be paid by individuals and State and Local governments under the Fair Tax. Since individuals are the only ones paying taxes, by default, individuals will pay more in taxes over their lifetime under the Fair Tax, not less.
Also, the Fair Tax will result in everyone (children, everyone in the work force, and retirees) paying the 30% Federal sales tax on every service and new product they buy from “cradle to grave” with a small offset for any prebate. Since everyone except those in the top 5% of income brackets spends just about all their available lifetime income on goods and services subject to the Fair Tax, the effective tax rate for most Americans will be close to 30%.
(6) ELIMINATING THE IRS DOES NOT SAVE ANY MONEY - It is also important to realize that the proponents of the Fair Tax have already conceded the costs of collecting the proposed 30% Federal sales tax is expected to remain the same as the current expenditures for the IRS to collect and process Federal tax revenues. While the Fair Tax eliminates the IRS, it does not reduce the costs for Federal tax revenue collection expenses.
Other impacts of the Fair Tax mean that nationwide or regional businesses will be dealing with up to 45 separate tax collection agencies (the states currently collecting sales taxes) depending on the number of states they operate in as well as a new Federal tax collection organization that the Fair Tax proposes to establish to monitor and collect the new Federal sales taxes.
Each of the individual states sales tax collection agencies has different organizations, business processes, and penalty determination and assessment policies. Businesses operating on a nationwide basis or large regional basis could find a large increase in the cost of tax compliance activity as a result of having to report to up to at 46 agencies on a monthly basis based on the number of states where they conduct business.
If you think the IRS can be heavy-handed, you don't realize that state sales tax penalties can start at 25% for being one day late, and quickly climb to 100% penalties. Many state sales tax agencies can come directly into a business to monitor the business and revenue activity and seize cash if they suspect the business of not paying all taxes due.
CONCLUSIONS: Great for business (taxes go to zero), great for high income earners (top 5%) who do not spend the bulk of their income and disastrous for the remaining 95% of Americans. It will be onerous for Federal, State, and Local Governments; and non-profit entities (now exempt from all sales taxes), and an administrative nightmare to deal with dozens of individual state sales tax collection agencies regarding collection of the 30% Federal sales taxes.
Note: Although many smaller businesses will appreciate not paying Federal business taxes and FICA. They may quickly conclude making monthly payments to a combination of State and Federal bureaucracies is substantially more onerous than the current reporting requirements.
In addition, State and Local governments will increase taxes to offset the Federal Sales taxes they pay, and non-profit entities will most likely reduce services since they will have less income available to provide services.
Pay particular attention when any candidate or politician talks about “Means-Testing” or “Entitlement Reform”. These are generally buzz words that really mean reducing health or retirement benefits while leaving the potential beneficiary with the responsibility and requirement to continue paying for them.
In closing, I have reservations that any savings achieved by corporations from not paying the business portion of the Federal payroll taxes and business Federal income taxes will result in reduced prices for the products and services they sell or wage increases to their employees.
I am also concerned about the high potential for rampant avoidance and cheating by consumers (under the table cash payments, etc.) and businesses failing to remit the collected 30% Federal sales taxes to the appropriate state and Federal agencies.
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