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Thread: Approx. 20-min Video re: the FAIR tax

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    Default Approx. 20-min Video re: the FAIR tax

    Just click on the "watch online video" link at this site,

    http://www.ntu.org/main/page.php?PageID=93

    I don't quite understand the "prebate" yet, but I've not read any of their PDFs yet either, only watched the video. Sounds interesting, although I'm not sure how the current meltdown with ARMs might affect such a change in tax policy.
    Last edited by PhaedrusZ; 08-05-2007 at 10:32 AM. Reason: added material

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    Default Re: Approx. 20-min Video re: the FAIR tax

    this is another case of taking what is in theory a good idea and twisting it into something entirely different.

    This is how I understand the differences between the current tax plan and this proposed 'fair' tax plan ...

    As things are now, every employee regardless of income level pays a 7.6% SSI/medicare tax ... with their employer also paying the same 7.6% on behalf of the employee ... and with self-employed persons like dancers paying 15.3% = both the employer's plus employee's share of SSI/medicare taxes.

    In terms of federal income taxes, under the present system people earning up to about $30k a year pay zero actual income taxes thanks to various tax credits. Income tax rates then go up progressively, with people earning 50k a year paying maybe 10%, people earning 100k a year paying maybe 20%, people earning 200k a year paying maybe 30%.

    There is also the issue of capital gains taxes, which are assessed at 15% regardless of the level of income or capital gains which are involved. Thus rich people have a strong incentive under the present system to draw a small salary (which would be subject to income tax of potentially 30%+) and instead to get "paid" in stock options, stock grants etc. which are only taxed at 15%

    What the 'Fair Tax' system proposes to do is entirely abandon federal income taxes and federal capital gains taxes. In place of the income tax and cap gains tax, the 'Fair Tax' system would impose a 23% federal sales tax. Since sales tax revenues would be collected whenever persons of any income level buy anything, poor people who currently pay an 8% SSI tax plus effectively zero income tax would have to pay 23% under the 'Fair Tax' plan in the absence of some remedial measure. The remedial measure proposed under the 'Fair Tax' plan is the federal gov't handing poor people a big fat check equal to 23% of all of the money they would spend in a year on taxable items = probably $5,000 per year for people who earn less than $30,000. This big fat check is called a 'pre-bate' under the 'Fair Tax' program, but in the final analysis it is still a big fat check from the gov't ... for which the low income recipients of those fat gov't checks will be expected to express their thanks at the ballot box !

    For people earning over $200k a year, the 23% national sales tax rate might actually be lower than their current effective income tax rate under the present income tax brackets. But for people earning over $200k a year who have substantial investments in stocks, bonds, real estate etc., the present 15% tax on capital gains from these investments would drop to zero. Thus for people earning over $200k a year who derive much of their total "income" from passive investments, and especially those who receive a good portion of their total earnings in the form of stock options or stock grants (which are subject to 15% cap gains tax rates which will drop to zero under the Fair Tax plan) their total tax burden could drop significantly.

    However, for people earning between $50k and $200k a year, arguably the 23% national sales tax rate is higher than their current effective federal tax rate under present income tax brackets. People in this income range would benefit to some degree from the abolishment of capital gains taxes on their homes, stocks, bonds etc. but to a much lesser degree than the $200k a year plus rich people would benefit. This is because people in this 'middle class' income range usually derive the vast majority of their incomes from paychecks vs passive income, and wind up spending a much larger percentage of their income vs reinvesting it.

    Now for some curve balls ....

    Under the current income tax system, state and local income taxes, property taxes etc. are deductible against federal income tax liabilities, which essentially reduces the overall tax rate for people living in high tax states like NY and CA. With the federal income tax abolished these tax deductions would be abolished as well, thus NY'ers and CA'ians would wind up paying the full 23% national sales tax on virtually everything they purchase in addition to still paying state and local income taxes and property taxes.

    Also under the 'Fair Tax' plan, many business taxes would be abolished. The authors of the 'Fair Tax' plan assume that this tax savings would trickle down to lower retail prices (to offset the de-facto 23% increase in retail prices as a result of the federal sales tax) but there is no guarantee that this will happen versus those businesses simply pocketing the additional profits.

    There is also a huge loophole in the 'Fair Tax' plan where the rich are concerned. Only the sales of brand new items will be subject to the 23% national sales tax. Thus if one can afford to, say, take a trip to Europe, buy a new $100,000 car from a European dealer, drive it around while on vacation in Europe for 1000 miles, then stick their now 'used' car on a ship to the USA while they fly home from vacation, they essentially avoid having to pay $23,000 in national sales tax. The same principle would apply to boats / yachts, private planes, $10,000 watches etc. This "unintended" consequence was already proven during a recent attempt to enact a US 'luxury tax' that resulted in the almost total death of the US boatbuilding industry, as the rich simply bought boats from foreign manufacturers to avoid paying the US 'luxury tax' (in most cases saving more money than it cost them for the boats to be shipped / sailed back to the USA).

    In summary, the 'Fair Tax' appears to offer financial advantage for the 'poor' and for the 'very rich', with the difference being made up for by increasing the relative tax burden on the 'middle class'. Additionally, the current situation which exists vis a vis federal tax rates being effectively reduced by additional federal tax deductions for people who must pay high state tax rates would cease to exist, subjecting 'middle class' people living in high tax rate states to an even higher de-facto total tax burden.

    IMHO the 'Fair Tax' proposal creates a huge moral hazard for Americans currently earning less than $30k per year (or whatever dollar level of income will be considered as the 'poverty level' under the Fair Tax 'pre-bate' program). Besides the already existing moral hazard of losing eligibility for welfare / medicaid / subsidized utilities etc. by working harder and earning 'too much' money, loss of eligibility for large gov't pre-bate checks because of earning 'too much money' will now be added to the list.

    ~
    Last edited by Melonie; 08-05-2007 at 06:51 PM.

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