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Kurb

Lets talk about the Fair Tax...

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(Continued from Page 3)

Not all consumers will be effected equally by these changes. We'll next look at who will win under a national sales tax and who will lose. Changes in government policy never effects everybody equally. Americans for Fair Taxation estimates that the typical American family will be over 10 percent better off than they would be under the income tax. Even if you believe these claims, not all individuals and families are typical, so some will benefit more and some will benefit less.

Who might lose under a national sales tax?

Seniors. People do not earn income at a steady rate during their lifetime. The bulk of most people's earnings occur before the age of 65. People over the age of 65 have vastly reduced incomes and live off the savings they earned while employed. A switch to a sales tax will be in effect taxing them twice. They've already paid a lifetime of income taxes and now they have the opportunity to live off of their savings and consume, they'll be taxed on that consumption. Unless special consideration is given to the current generation of seniors, they will end up paying a disproportionate share of taxes.

The Poor Generally the working poor pay very little (if any) income tax. However everybody needs to consume to survive. The poor get hit twice under such a scheme. Currently the poor pay little tax, where now they'll have to pay taxes on their consumption, so their total tax bill will rise dramatically. The poor also spend a larger proportion of their income on consumption goods to survive, so they'll pay a larger percentage of their income in taxes than wealthier individuals. The FairTax advocates realize this, so their plan includes sending each American family a rebate or "pre-bate" check each month to cover the necessities of life. The size of the checks will be designed so that a family right at the poverty line would not pay a cent in taxes. Of course, the higher the allowance made for the poor, the higher the tax rate everyone else will pay in order to cover federal spending.

Economist William G. Gale at the Brookings Institute has determined that most low income families will pay more taxes. "Under the Americans for Fair Taxation proposal, taxes would rise for households in the bottom 90 percent of the income distribution, while households in the top 1 percent would receive an average tax cut of over $75,000."

Families Currently the income tax has all sorts of deductions for small families such as earned income credits and child care credits. These would disappear with the elimination of the income tax. A sales tax, other than for purposes of the rebate, would not distinguish between families and individuals. Gale states that the "enactment of a broad-based, flat-rate consumption tax like the sales tax ... would hurt families with incomes less than $200,000, because of the loss of tax preferences, but would help families with income above $200,000, due to the dramatic reduction in the top tax rate." Given that the rebates are given based on the poverty line, and the poverty line does not dramatically increase between a one-person and two-person family, this is not surprising.

IRS Employees and Income Tax Lawyers Part of the appeal of the proposal is that it will make the IRS irrelevant.

Next we'll look at who wins under a change to a national sales tax.

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Who might win under a national sales tax?

People who are inclined to save A consumption tax can be avoided by not consuming. So it makes sense that people who do not consume a lot will benefit from the plan. Gale admits that there are savings for a large portion of the population, stating "If households are classified by consumption level, a somewhat different pattern emerges. Households in the bottom two-thirds of the distribution would pay less than currently, households in the top third would pay more. Still households at the very top would pay much less, again receiving a tax cut of about $75,000".

People who can shop in other countriesThis includes people who take a lot of overseas vacations and Americans living near either the Canadian or Mexican border who can do their shopping in those countries to avoid taxes.

People who own businessesThe sales tax will only be charged on goods bought by individuals and not by firms. Owning a business gives you an advantage as you can buy some goods for personal use and claim that they are for business use.

The wealthiest one percentAs stated they will see an average tax cut of $75,000 per person.

The ability to get such a tax plan implemented will depend on the political power these different groups hold. It also may not be political feasible because of some flaws in the proposal. There are a few basic flaws with the FairTax proposal:

The 23 percent tax rate quoted is a tax-inclusive rate. However tax rates are normally quoted as a tax-exclusive rate. The FairTax plan has a tax-exclusive rate of over 30 percent, which may be difficult to sell to voters.

The ease of tax-avoidance and tax-evasion Since consumers can either make their purchases in another country, or claim their purchases as business expenses, the tax may not generate the necessary amount of revenue.

The desire for exemptions Many desirable goods would be subject to the FairTax. Health insurance is one such good. It is likely that various political interests would suggest that certain goods not be taxed. It is likely that some of these appeals would be successful. If they are successful however, the tax rate would have to be raised even higher, or large deficits would occur.

The possibility of having both an income tax and a sales tax The national sales tax is desirable because it replaces income taxation. However there is nothing restricting the government from having both a nation sales tax and an income tax. Repeal of the 16th amendment would make income taxes illegal, but repeal seems incredibly unlikely. If the government was able to tax income, they probably would.

Like the flat tax before it, FairTax is an interesting proposal which is unlikely to ever be implemented. While implementation of the FairTax would have several positive (and a few negative) consequences for the economy, groups that lose under the system would make their opposition felt. The constant need of government to offer rebates and refunds to segments of the population would cause the rate to rise to levels which are politically unfeasible. It is, however, an interesting idea worth discussing.

sorry about the formatting

http://economics.about.com/cs/taxpolicy/a/fairtax.htm

e:just click the link instead

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how would this affect the revenue stream?

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how would this affect the revenue stream?

From my understanding it is "revenue neutral" same amount of cash flows into the Government as before.

Such I find hard to believe. I know HOPE I for one would have a good bit more cash in pocket if a consumption tax was in place.

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Sadly, having something simple would mean less of a need for Congress and therefore, they would never allow it.

They buy votes now with their policies and spending and will never resort to a campaign of just philosophical issues where the voters have to engage and be informed.

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sorry about the formatting

http://economics.abo...y/a/fairtax.htm

e:just click the link instead

Some good points.

I disagree that lower incomes would suffer so greatly. Honestly it "SHOULD" promote smart spending and money saving more in that bracket of society. Being they could almost live for free, provided the prebate covers all food/medication needs. Obviously cars/homes/clothes would have a big part of the consumption tax, but again smart spending would help a ton here IMO.

I am a 100% a novice on this tho, so I could be assuming too much here.

One of my biggest issues is how the top earners will receive a large tax break. I think that is partially true.

1) Those with more money typically are smarter with money.

2) What is to stop the "rich" from just purchasing tax-able items outside the border?

Things like uber homes, beach homes, 30 cars, etc would still provide revenue, but I see a ton of loopholes where this could be over looked.

Never said FairTax was perfect, but in concept its a solid start.

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Sadly, having something simple would mean less of a need for Congress and therefore, they would never allow it.

They buy votes now with their policies and spending and will never resort to a campaign of just philosophical issues where the voters have to engage and be informed.

This is 100% the biggest obstacle.

It strips congress of a major power, cant have that! :(

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I just don't see how it would ever get passed barring some major calamity/economic/gov't collapse...

There's too much corruption in the current system and too many people and elected officials making money off the current system.

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From my understanding it is "revenue neutral" same amount of cash flows into the Government as before.

Such I find hard to believe. I know HOPE I for one would have a good bit more cash in pocket if a consumption tax was in place.

I don't understand how it can be an improvement in current tax structure (by conservative standards,) be revenue neutral and NOT shift the tax burden more onto the middle class. Looks like a "pick two" situation.

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I've heard pundits claim this would broaden the base. if so, it would shift tax burden, no?

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i think we see term limits before we see a fair tax. man that sounds awesome. term limits. ahhh

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Definition of "Fair Tax": where I pay less and someone else pays more.

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i buy, you pay. i love that.

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