Please explain how you think the flat tax works because to me the flat tax is the silliest of the three options.
Their full income? Somehow I don’t see companies letting employees getting away with a 20%-30% pay increase without making some pay cuts because they know employees were surviving at the previous levels. Either this or inflation dilutes the value.
I don’t pretend to know the real answer, but I do have to laugh at the notion that companies are suddenly going to stop passing their tax burden down to their employees.
That’s primarily because of the Bush Tax Cuts For the Rich Acts of 2001 and 2003. Buffett makes most of his money in the form of capital gais and qualified dividends. Buffett would be paying a MUCH lower tax rate than his secretary with the FAIRTAX. I know that FAIRTAX proponents want to change the paradigm and eliminate income as the measuring stick to determine whether or not a tax is proggressive or regressive. The problem is that it doesn’t really comport with notions of equity. Progressivity is bound in notions of equity and those notions of equity compel us to measure progressivity by wealth or income not consumption. Income is defined as consumption plus accretions (or minus reductions of) wealth.
What does the congressional budget ofice say, they are usually pretty reliable.
Without the cost savings, it is hard to jsutify the FAIRTAX. Most people have effective tax rates below 20%. I assume that social security and medicare is not addressed by the FAIRTAX.
In the end I don’t that we can survive for very long under a system (no matter how simple) where the hedge fund manager making $100 million/year pays a lower percentage of his income in taxes than the average school teacher (although we are perilously close to that situation right now).
Because I believe that to be typical. I’m surprised you think otherwise.
It takes a fairly large mortgage to create deductions significantly larger than the standard deduction. Medical expenses? There is no way the typical median family has deductable medical expenses (they must exceed 2% of gross income to be deductable).Pre-tax health insurance? A minor item. There is very little that lowers a median family’s tax obligation nowadays.
Under the FT, it is simple to lower your taxes - buy used. People with median incomes or below are better off financially anyway buying used cars and other significant purchases. With FT, they save taxes too.
I’m not sure what you’re talking about here. I haven’t suggested, nor anyone else that I know of, that anyone’s gross pay would increase. Employers would stop taking out withholding, that’s all. The income tax withholding has always been the employee’s money and that would not change.
And under the FT, most people would ALSO have effective tax rates below 20%. Look upthread for a basic calculation of median family’s taxes before and after FT using assumptions very favorable to the status quo.
You would assume wrong.
What I mean is that this would effectively result in a 20%-30% increase in take-home pay. I know you understand this because you’ve been trumpeting it as extra money that those fortunate poor folk would have.
So what then, would prevent a company from ‘rightsizing’ your gross salary so that your take-home pay is the same as what it previously was? Can you not see the company saying “Due to the increase in corporate sales-tax we’re having to pay, we’re reducing your gross wage so that your take-home is effectively the same as what it was under the previous tax system. We know you won’t mind because you were surviving just fine with that same amount of take-home pay before.”
- The customer, at retail, pays the FT, not the manufacturer.
- According to FT opponents, prices will be higher, therefore it makes no sense to tell people they’ve been surviving just fine so therefore can continue with the same take-home pay. If, as FT proponents say (though not me), prices will fall nearly as much as the added tax, then your scenario may very well occur. I’m not sure why that’s an argument against the FT though.
- Same reason your employer doesn’t cut your pay right now. You know (s)he’d love to, don’t you? Competition and free markets set both prices and wages. There would definitely be adjustments to both under the FT, but it wouldn’t be arbitrary.
The problem is that damn near everyone making under $100,000 has an effective federal tax burden of significantly less than 20%. See table 1. Even when payroll and excise taxes are taken into account, your average American with 1.8 children and 3.9 limbs pays about 15% of their income to Uncle Sam. And as far as upper-income earners go, you need to be making more than $150,000 to pay a 20% tax rate – and if a fair tax were instituted, you simply cannot deny that the tax burden for these high earners would go down because they tend to invest more of their income and their consumption, as a figure of income, is less.
This brings us back to the economic axiom, there’s no such thing as a free lunch. If upper income brackets are going to pay less in taxes, and you claim that lower and middle incomes will pay less in taxes, the system cannot be revenue neutral. Or, let us turn this around: if you claim that lower income people will pay less in taxes, who is going to pay more?
I’ve already shown that a median income family would be better off under the FT. This should include most of the folks in the middle that would be of concern. However, if the goal is that nobody should pay more or less tax than they do now, this debate is pointless since that means no change from the status quo. Under the FT, some people, in ALL income brackets will pay more and some will pay less. It’s very difficult to determine specifics on that in advance. I think the power of very rich people to avoid taxes is very great under almost any ordinary tax system and I have certainly seen much discussion, on this board and elsewhere, that the rich get away with paying very little under the current system. I’m not convinced they would be better off under the FT. I don’t even know if I would be better off. What I DO know is that the FT transfers power from politicians and bureaucrats to people and that is more important in the long run than trying to itemize winners and losers. I don’t think it’s a free lunch and I think it’s possible that some rich people will pay less in taxes and some poor people will pay more, but I also think the tyranny of the IRS would come to an end and congressmen will have a much more difficult time buying votes with our money. I also think this change would give us more global competitiveness, higher growth, more and better paying jobs, and more fairness overall in how our federal government is funded.
No, you haven’t shown that people’s income would remain stable. You keep claiming it would, and at the same time wholesale prices would drop (presumably because FT advocates say that wholesale prices are inflated because of “hidden taxation,” if I remember the term right.)
This really isn’t rocket science. Very simply put, right now there is an equilibrium between wages, burden of taxation, and cost of production. If you change any of those factors, it will effect the others. If a change in the burden of taxation (eg, elimination of the “hidden tax” allows prices to change, wages also have to change. If ConGlomCo is selling a widget at $10 today, and a change in tax laws allows competitors to produce the same item at the same quality at $7, and ConGlomCo has to match that price to remain competitive, it is indisputable that wages will have to change. The math cannot work any other way.
But fair tax advocates are claiming a free lunch: they say wages will not change but wholesale prices will drop. How are businesses supposed to receive less revenue in sales (because of decreased prices) and maintain wages at the current rate? It just doesn’t add up.
Fair tax advocates want to have it both ways: on one hand, they say that businesses are charging more for goods in order to compensate employees better to take account for Federal taxes. Well, that’s true. On the other hand, they claim that the price of goods will be lowered at the wholesale level, but that people’s wages will remain stable. But if businesses shed the current tax costs through a change in the tax system and they lower prices on goods, that has to mean that the employees will not receive the additional wages that they are paid to account for the taxes that they pay which constitute the “hidden tax” on retail goods. So, choose the effect of the system: will wages be reduced, or will retail prices remain stable?
I like the idea of these proposals…but there are huge flaws. This is one of the biggest.
Who actually believes that employees would see ANY INCREASE AT ALL in their pay? Most, I suspect, would have the same income…but now have to pay the consumption tax of ? 30% ? The companies would keep the savings.
Now, you may argue that companies won’t keep it ALL…but you’re a complete fool if you think they will pass it on 100% to the employees. Heck, I would think you’re a complete fool if you think even half would be passed through to the employees.
I’m in this category. I just did my taxes, and I don’t remember exactly what my final rate was, but 20% sounds about right. I have a relatively small mortgage, but it is plenty for me to not take a standard deduction. Unless college costs were considered to be taxable (and what would that do to higher education affordability) I’d pay a lot less under a fair tax system. People making real money might pay a smaller percentage of their income now, but absolutely it is a lot of money (not enough.) They’d make out better than I. So I agree with you.
If house transfers were taxed 30%, we’d see an even worse decline in the market than we do now. If not, the loss of the mortgage deduction still makes owning less affordable.
Notice how he is assuming that present behavior will continue? Those consuming more than average, which he thinks will make the program revenue neutral, will have a major incentive to cut consumption. I don’t think people with a small credit will have a major incentive to increase consumption to make up for it. Consumption goes down, the economy declines, and the only way the government would be able to deal with it is by decreasing the tax rate (a big deficit) printing money to encourage consumption, or by the moral equivalent of a progressive system from increasing the rebate for lower income people and increasing the tax rate in general (screwing the middle class once again.) This replaces the scalpel of economic policy with a broadsword, decreasing the number of ways in which the economy can be tuned.
There might be an increase because of withholding, but then a decline in raises. In the long term, I think you’re right, though. Notice how the tax breaks for businesses somehow didn’t wind up in the pockets of the employees.
I totally gaffed this. I was think SS taxes and not Fed income tax…my bad.
Consumption tax is based on a flawed model of economics that says ‘consumption’ is bad and ‘savings’ are good and fuel growth. The thinking is that by not spending, people leave money that will be used to build factories and such things (ie, it will be ‘invested’) which increases the total capacity for production. The problem is that no company will have the incentive to build factories if no one is buying the goods, and what you’ll actually get is stagnation. Fact is that the USA, which emphasizes consumption and hates saving, has managed to build itself the most powerful economy in the world.
Income tax is neutral with regard to spending-vs-saving: it taxes both equally.
Ideally, I’d say the main tax should be from income, with a small consumption and/or saving tax that could be adjusted by the Federal Reserve to steer the economy. (Right now, the Fed has only one economy-manipulation tool: printing and burning money. This is crude and severly limits the Fed’s effectiveness.)
As for a tax at every money exchange: That would be interesting. It’d discourage idle speculation and place a general friction on all activities (some more than others). This might have some good results, but it’d also have many bad ones. In general, frictions in the economy are bad. However, the frictions that cause real problems are FAR worse and more insiduous than losing a tiny bit of money on each exchange. Anyway, it’d be very interesting to know what the actual percent would have to be. Also, I can’t decide if enforcing such a system would be very difficult or very easy. With our modern electronic money, it might be so trivial we could abolish the IRS.
The mean family income is 48K, the median family income is about 60K.
http://www.census.gov/hhes/www/income/income.html
The standard deduction (before any deductions for dependents) $10,700
Your taxable federal income is not only reduced by your sandard deduction but also by payroll taxes.
My main criticism of the FairTax is that if the size of the bill doesn’t change, then all you can do is allocate the burden among the members of society. The FairTax shifts much of the burden from the very poor and very rich towards the middle.
The reason my employer doesn’t cut my pay right now is that I’d walk out because I need my full salary. If I suddenly had to pay no more income tax, they would know I am taking home more money than I was before, therefore they can cut it. Or to look at it another way, people a little more desperate than me would suddenly be able as well as willing to take the job for less money. You can call it competition, you can call it free markets, you can call it whatever you want. Either way, it undercuts your repeated assertion that people will be taking home more money than they presently do. It will be either through wage competition for lower wages, or through inflation from people having all that extra liquidity to throw around, but the combination of those things is going to leave people right back where they were under the existing tax code.
The wealthy (as a group) would be much better off under a consumption tax (than under a pre-Bush tax cut income tax).
I wish there was some way I could place a bet on this. I would seriously bet everything I own that all sorts of tax breaks work their way into the FairTax over time (into ANY tax system over time).
Well,the FairTaxdoes eliminate the corporate income tax (at the cost of higher taxes to the middle class) but we could do that with an income tax system. You have NO chance of passing the FairTax if you can’t even eliminate the corporate income tax. The FairTax is a less equitable way of funding the government, no amount of claiming fairness will make it so. We aren’t losing jobs because corporations are taxed too much, we are losing jobs because our cost of labor is about ten times the cost of labor in China and India.
Your link did not appear to take me directly to any actual numbers, just more links, but I find it extremely difficult to believe that the median income is higher than the mean. I’m not sure what your point is anyway.
Your taxable federal income is most certainly NOT reduced by payroll taxes.