I am sorry you don't have the "time nor desire" to address my "incorrect assumptions," you are the one who brought this up and I have taken the time to address yours. Not the least of which is that you are under the misguided assumption that our current Tax Code is regressive! Our graduated income tax is progressive, and as I have repeatedly pointed out the "Fair Tax" is regressive.
OK, fair enough. My wife has been in hospital this past week and I’ve been a little preoccupied with personal matters lately. Now that I have a little time to do so, I’ll address some of your incorrect assumptions.
Under the so-called "Fair Tax" the tax payer doesn't control the amount of tax they pay, unless you assume that all spending is optional. If that were the case, very few people would pay any tax and the government would not be able to function.
Incorrect Assumption #1: All spending may not be “optional” but there are discretionary items such as entertainment, dining out, cable television, cell phones, etc., that most people seem to have disposable income for, even the so-called “poor”.
…you don't seem concerned that burgleries and theft woudl increase dramatically. The criminals you say would begin paying tax on their toys assumes they would buy these items new... fact is they are criminals and they would steal them - and have even a new source of revenue on the black market. The increase cost of crime on society would be huge.... higher insurance prices for all of us, and higher prices on all goods to make up for losses caused by theft.
Well, that is a novel argument, but it leads us to Incorrect Assumption #2: we already have tax evaders and there’s already a Black Market for such things. A system very similar to the FairTax is already in place in states such as Texas and Florida. You don’t see a massive Black Market in those states because retailers get a piece of that tax revenue to cover their costs. Denmark has a Value-Added Tax of 25% and there’s not much of a Black Market there, either. The idea that the FairTax will create a larger than current Black Market is laughable when you take into account that finding those who “cheat” the system will be easier than under the current IRS system. 45 states currently have systems in place that collect sales tax and they have been proven effective year after year.
…the fact that only "new items" would be subject to the tax is just another reason why a national sales tax would not work. To take a look at an industry already stuggling, the auto industry, your plan would make our current economic situation even worse. The government is already trying to provide tax credits for purchasing automobiles. If only new autos are taxes under your plan, who would not opt to buy a used car when the savings would be 30% MORE?
Incorrect Assumption #3: you honestly believe that people aren’t motivated by ego, social status or other factors which cause them to opt for the newest, latest and most modern cars, houses, televisions, computers or whatever? Fact is, when people have money, they like to spend it and they want other people to know about it. If what you say was true, we’d be like Cuba, where you can’t find a car newer than about the 1950 model year. And your auto industry analogy is flawed because only the US auto industry appears to be struggling, mostly due to overinflated labor and legacy costs. Sales of foreign makes may be slow right now, but they’re still trouncing the domestic manufacturers and I have yet to see Toyota or Nissan begging for federal bailout money.
The "micro managing" you speak of is a necessary part of our economy. For example, allowing deductions for mortgage interest encourages home ownership, deductions for employer paid health care encourages employers to offer health insurance, tax-free contributions to retirement plans encourages people to save for their retirement, and education tax credits encourage people to get an education. You may not agree with policy reasons behind the various Tax Code provisions, but for the most part they are good for our country.
So, now we’ve arrived at Incorrect Assumption #4: Government’s micro-managing of the economy is “necessary” only if you believe that people are too stupid to be free to decide for themselves what is in their own best interest. The Internal Revenue Code has turned the federal government into a sort of “parental leviathan” which rewards us for “good” behavior (buying a home, getting a college education, etc.) and punishes us for what it deems “bad” behavior (saving and investing, earning capital gains). The current system also encourages favoritism and influence-peddling by politicians and lobbyists. That is the very antithesis of what the Framers envisioned.
A progressive tax taxes those with more disposable income at a higher rate. Under a regressive tax the tax rate decreases as the amount subject to taxation increases. Basically, a regressive tax places a higher burden on the poor than the rich.
There’s Incorrect Assumption #5: I appreciate your attempt at clarification, but I already know the Wikipedia definitions of progressive and regressive taxes. I call our current system regressive because it punishes achievement and rewards poverty. What’s so progressive about a system that demands that you pay tax at a higher rate than me because you worked your tail off and made more money than I did?
The current Tax Code is progressive in several ways. First, there is the basic graduated rates. Those with less taxable income pay at various lower rates which gradually increases with the level of income. Second, there are many deductions for necessities which work to make sure that those with less money don't pay income tax on the money they must spend on things like medical care and child care. Third, there are tax credits for the poorest of our citizens. Fourth, although it has its problems, the Alternative Minimum Tax prevents the problem that you keep mentioning, the rich get too many deductions and don't pay their fair share.
Incorrect Assumption #6: I didn’t say the rich don’t pay their fair share. If anything, the so-called “wealthy” bear a disproportionate share of the tax burden. In 2005, for example, the top 10% of income earners paid 70% of all federal income tax revenue. You call that progressive? Personally, I think lower income people should pay more in taxes given the fact that they tend to be the ones who access more government services. Maybe if we started taxing poverty, there would be less of an incentive to stay poor.
Now, as I have pointed out several times, the "Fair Tax" is regressive because the taxpayers lose the benefit of the graduated tax rates. Those rates start at 10%... then 15%, 25%, 28%, 33%, and 35%. Under the "Fair Tax" everyone pays 30% starting with the first dollar they spend. Since most of those in the middle class spend all of their income, they would pay 30% on all of their income and it would only be offset by the $500/mo rebate that you say a family of 4 would get.
Incorrect Assumption #7: I don’t know how you arrive at the 30% figure, (it’s actually somewhere around 23%), but OK, I’ll give you that one. You conveniently leave out the fact that the FairTax plan would not only eliminate all corporate taxes but also the $350 billion that corporations spend annually in compliance costs, thereby causing prices to fall. You also fail to mention that under the FairTax plan, there would be no deductions for payroll tax or FICA, which means that wage earners would keep 100% of their paychecks (although state and local taxes would still be deducted). Besides, on an annual basis, a "prebate" check of $500 per month works out to $6,000.00 per year. Now, if you don’t think that’s a lot of money to anyone who’s trying to raise a family, then you are sorely out of touch with reality, my friend.
...your explanation of the effect on those with Roth IRAs is not really an answer. The fact is that these people paid the income tax on that money already and they would be paying a 30% tax on that money again when they draw the money out to spend it. That doesn't seem very fair for something called the "Fair Tax." Sure, they would pay some taxes anyway... but nothing near the 30% you want to charge them.
Incorrect Assumption #8: you erroneously assume that those who invest in Roth IRAs will never again pay tax on their invested money under the current system. In reality, they are paying corporate income tax, employee payroll taxes and all the costs associated with tax code compliance whenever they make a retail purchase. Under the FairTax, those embedded costs are eliminated, and they can determine how much tax they pay based on the choices they make.
There would certainly have to be exceptions for major purchases like homes - can you imagine what a 30% tax would do the housing market?
Incorrect Assumption #9: Since the FairTax is revenue-neutral, it simply changes where the money comes from, not the overall amount. Under the FairTax, not only would new home prices drop proportionately with the elimination of the “embedded” costs outlined above, but mortgage interest rates would drop about 1.25% because of a proportionate reduction in lender overhead. For example: homebuyer borrowing $150,000.00 for 30 years at 7% will pay $999.12 per month in principal & interest. That same loan at 5.25% would cost $830.01 per month, resulting in a savings of $60,879.00 over the life of the loan. And since neither savings nor interest would be subject to tax, it would be easier to save for a down-payment.
I’m sure you’re still skeptical, which I really don’t mind, but that’s about all I have time for now. I'll look forward to your re-re-re-rebuttal.
Regards,
Scott Perry
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