Excellent post, and not out of a can. I appreciate that very much.

A couple of corrections. First, not all citizens will have lower effective tax rates under the Fairtax. My comparative study shows many senior retirees will actually have higher effective rates under the Fairtax. But, all of them will be gone (including myself) in ten to twenty years, so maybe it doesn’t really matter? Except that while we are around, we tend to vote! Might have been better to have some sort of sales tax credit for seniors to reflect their prior payments into the trust fund? Kind of unfair to force the retirees to resume paying for their own pensions.

Also, Kotlikoff wrote that discretionary spending, other than Social Security, might be cut by that 2.7% in order to achieve exactly 23%. Why he dragged that red herring across the path is beyond me. What is magic about 23%?

Cheers!

Yes, the effective income tax rate paid is widely variable based on Congressionally-determined income level, marriage status, family size, eligible deductions, credits, shelters, and any other income-affecting provisions buried somewhere in many thousands of pages of the tax code.

The effective FairTax rate is variable based on family-initiated spending (and, for citizen-families only, credits of 12 monthly poverty-level-spending tax rebates, correlated to family size, received for the year).

However, there is a reason to educate 300 million Americans about the FairTax as an inclusive rate – at least until transition – because, since birth, they have thought about taxes in terms of an inclusive tax rate bracket under which they usually fall. (Wage-earners are also conditioned to think of their earnings as the gross, which suits the Congressional establishment, that syphons off a bounty from wage-earner paychecks, just fine.)

(In fact, FairTaxers are so busy trying to deal with oppositional types who like to compare exclusive FairTax rates to inclusive income tax rates, that they forget to mention – in the same breath – that U.S. citizens will, in actuality, pay a lesser effective FairTax rate due to the prebate. Critics also occasionally forget this when they carte-blanchely state that citizens will pay 30% on everything!)

Your critique of some FairTax features is not without some merit. I learned recently that Kotlikoff concedes Social Security benefits will need to be rolled back a bit (his calculations brought the rate to 23.8%, and he also mentioned that states with sales tax would experience something of a shortfall that could be made up by applying their state tax rate to the “FairTaxed” price – basically including FairTax into the base for state tax purposes). As for the other “over-reaching” you allude to, I interpret it as an attempt to simplify – to clean up, the complexity. With every year, after the transition, the system will begin to right itself (provided, of course, that citizens do their part to act on the basis of new tax load visibility, and protest any efforts to raise the FTR absent successes in paring the shocking waste from the system.) Heck, even estates will turn money into consumption when inheritors spend it. And, money that is saved, is money that is available to lend, and grow the economy without excessive Treasury bond sales to communist countries! (They’ve become so leery of our currency that they’re now buying billions of capital stock in our major financial houses, and other businesses.)

Yes, the education exemption causes the rate to be higher to support the levels of educational financial assistance that are being provided. However, post FairTax – with every year out, in a propitious economic growth environnment – citizens will likely find it easier to accumulate capital, and thus bring relief to the government’s financial aid outlays. (However, even larger families may be possible which might offset savings this somewhat. But this gets into educational reform which is also badly needed.)

Excellent post, sir! I’m going to take your response as meaning that the 23% Fairtax rate can’t really be directly compared to any income tax marginal rate. So, there really is no need to try to reeducate 300 million Americans that sales taxes should be stated in inclusive terms, is there? Except for the obvious reason that 23% sounds better than 30%!! Could that be the real reason for adopting such a convoluted definition of the sales tax in HR25?

I completely agree with your assessment of the economic disaster coming down the track, although I don’t hear the same Fairtax roar that you seem to hear. Perhaps I’m getting deaf in my old age?

I support a consumption tax to replace the income tax. But I don’t agree that the Fairtax is the best way to get there. I’ll close by quoting from a letter I sent to the Chairman of AFFT a while ago where I suggested a Fairtax alternative I call Fairtax-Lite.

“In my opinion, your group that put HR25 together badly overreached. You taxed governments at all levels in order to reduce the sales tax rate and reduce government competition with the private sector, but incurred the strong possibility that that portion of the legislation will be found to be unconstitutional under the doctrine of intergovernmental tax immunity. State and local taxes will have to be increased significantly in order to pay the federal sales tax. You added payroll taxes to the mix and created a large class of an estimated 30 million Social Security net non-contributers, all of whom will still qualify for full pension and health care benefits. You treated all current retirees very unfairly by forcing them to resume paying into the trust funds with their sales tax dollars. You completely untaxed businesses, a major political mistake even though quite sensible. You added gift and death taxes to the mix, and left yourself open to political criticisms that you are unfairly reducing the tax burden on the wealthy. You adopted a prebate, the largest cash grant entitlement in the history of the country at a time when entitlements are squeezing out discretionary spending, including critical Defense spending. You adopted an inventory tax credit which will contribute to a very large federal budget deficit in the first year of Fairtax implementation. You excluded education tuition, thus allowing the “camel’s nose under the tent flap”. That precedent would certainly encourage future politicians to try to exclude such things as medical expenses, home ownership or anything else they might consider equally important to education tuition. And finally, you chose a “cold turkey” implementation schedule. The Congress is basically conservative and far prefers evolutionary change to revolutions such as the Fairtax.

Fairtax-Lite is a broad based 15% national sales tax with (1) no exclusions, (2) a targeted prebate, (3) no government taxation, (4) leaves payroll taxes for phase 2, (5) no inventory tax credits, and (6) implements the plan over five to ten years. If you are really serious about getting rid of the income tax and the IRS, I suggest that Fairtax-Lite has a far better chance of gaining Congressional approval than HR25.”

Dennis, stay flexible. There may be a way to get rid of the hated IRS, but we need to make haste slowly.

Nice work with your calculator to express inclusive income tax rates in exclusive terms. But it doesn’t answer my question. You can’t compare a sales tax percent to an income marginal tax bracket no matter whether both are expressed in inclusive or exclusive terms. It makes no sense.

The only valid comparison that can be made is to calculate your effective tax rate for both tax systems and see which one is more favorable to your personal situation. And in general, retirees will have lower effective tax rates under current law. They no longer pay payroll taxes.

Using the lower, inclusive rate makes your new tax seem lower, but how can you really tell yourself that it is the most “honest?”

Since it is most directly comparable to current sales taxes, we should use the same exclusive way of expressing it that they do. In Pennsylvania, I pay a 6% sales tax and it is always expressed exclusively. I don’t just insist on using the 30% for scare-tactic reasons, but because it lets people really know what they would be getting into with this tax.

Under FairTax, prices would fall, due to removal of embedded business tax-related costs. Concurrently, wages may rise due to a mix of factors, including reversion of withheld pay (or some portion thereof) to employees, advancement opportunities due to business expansion resulting from retained earnings, and/or increased demand for labor accompanying increased competition (from that expansion). Where profits (or wages) appear lucrative, competition will move into the market space, driving out excesses (immediately present after FairTax is enacted), arriving at new “market-adjusted” prices.

For FairTax to constitute 23% of new transaction cost (i.e., “market-adjusted” price plus FairTax), a mark-up of 29.9% (tax exclusive rate) on the new “market-adjusted” price is necessary. (Before balking, consider what we’re paying now if income tax rates are converted to tax-exclusive sales tax rates on net income instead of percentage of gross income. The following figures can be compared to the 29.9% FairTax mark-up: Fifteen pct bracket = 17.6%, twenty-five pct bracket = 33.3%, twenty-eight pct bracket = 38.9% (! really), and thirty-five pct bracket = 53.8% (! that’s how bad it is).

In order to make FairTax a progressive consumption tax (such as that recently called for by Warren Buffett), all citizen-families are simply sent a monthly consumption [tax] allowance, called a “prebate.” This prebate is intended to reimburse taxes on necessities for every citizen family without need for record-keeping or reporting. Moreover, the direct payment bypasses the creation of a tax code specifying exempted products and services around which a lobbyist industry could grow. The amount is variable, based on family size, and is equal to the FairTax rate on poverty-level spending, as defined by the Dept. of Commerce. At present, a family of one would receive ~$200/month, a family of four, ~$500/month. Thus, the “effective” FairTax rate paid by citizens, will *never* equal the full 23%. Of course, U.S. visitors (legal, and illegal) will pay the full FairTax when they purchase anything new, at retail (used are not taxed again). Under FairTax, working families will have their whole paychecks (minus any state or local income tax withholding) plus their monthly family prebate.

Additionally, citizens will no longer have to spend the average 50 hours per year preparing their federal tax returns. Having more monthly income may result in using credit less, and saving more. Larger savings will make it easier to purchase a home, at a lower interest rate and monthly payment. (Thus, mortgage deductions are no longer applicable when income is not the basis for taxation).

But is FairTax actually “fairer”? To provide substantive answers, Prof.’s Kotlikoff and Rapson (10/06) have concluded,

“…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”

Further, per Jokischa and Kotlikoff (2005) …

“…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”

The current income-based tax system is also more expensive to run, because of the manner in which the tax code is gamed by politicians and lobbyists. Politicians realize great power, and attract constituencies for support, by granting tax favors (i.e., credits, deductions, exemptions) through lobbyists. Fully, fifty-three percent of Washington lobbyists are there because of the tax code! The tax code is continually changing, making it more complex – more difficult to understand. And, the salaries and costs of tax lawyers and lobbyists end up in higher prices of the products and services we buy. Additionally, the time and money required to keep records, file returns, report for audits, retain accounting and legal help, pay IRS penalties and interest, is time and money lost for other productive, or recreational, activities. Depriving us of the use of withheld wages increases our expenses through zero-interest withholding, inflation, return preparation time, and interest paid on credit cards and loans that otherwise may not have been necessary. Summed up, the cost of tax compliance, nationally, has been estimated to range anywhere from $265 billion to twice that amount, depending on the extent to which tax-avoidance consultation is sought and utilized. These expenses constitute a substantial hidden tax which is incomprehensible to the average working American. And the FairTax gets rid of all of it for most Americans, and most of it for business owners.

We, as FairTax advocates, believe that government should serve We, the People, with a fair tax system that will not enable politicians to pit poor against rich (creating barriers to achieve wealth, adding tax penalty to the sacrifices made for personal success). Nor do we want politicians to continue using business as a tool to hide taxes from consumers, often villifying business, which discourages entrepreneuship, personal achievement, economic growth. Liberty and happiness depends on restoring the fruits of labor to those who produce them. We believe that the tax function should align with economic growth, not against it, that government should be paid for in the same manner as working Americans – when, and because, something is sold!

As things stand at present, the system primarily benefits politicans who cater to special interests through lobbyists who game the tax code. The politician seeks to capture them as constituent voting blocks, dependent on continued syphoning of taxpayer dollars to their members’ benefit. This is increasingly repugnant to the average working American who often finds it difficult to meet the needs of his, or her, own family in an environment where federal and state business income taxes substantially contribute to trade inequities resulting in the loss of American jobs! Thus, the Sovereign are continually degraded by features of Congress’s income tax policy. The most rapidly-growing needs-based “special interest” group has become the Citizens! You see? Congress has nearly all the power; and We, the People, have become We, the Serfs, robbed and enslaved. Getting the federal government’s hands out of our family paychecks is the single most important reason to replace the income tax with a consumption tax, the FairTax.

Many of us have joined FairTax.org in order to build a national movement to free ourselves, our family pocketbooks, and our businesses from confiscation of income, and punishment of productivity. And this we say to our federal representatives,

“Either scrap the code and enact the FairTax, or we intend on replacing you with someone who will.”

(May reproduce in whole or part. – Ian)

I don’t particularly support the Fairtax, although I do favor a consumption tax rather than an income tax. And I certainly agree that no matter if the tax is expressed as 23% of each dollar spent or as 30% sales tax, the amount of tasx is the same.

However, you write that the inclusive rate is the one most useful to make direct comparisons to the income tax? I’ve asked the following question repeatedly on other blogs and have never received an answer. I’ll give you the Fairtax 23%. How do I compare that directly to the current income tax? What is the comparable income tax rate?

Thank you.

or visit my website http://www.fairtaxsummerville.com

Please check it out, I think you will find it very interesting.