This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Thursday, September 13, 2007

A simple tax is a Fair Tax.

Posted by Matt

Dear government bean counters:

Thank you for the Roth IRA, 401ks, 529 education savings plans, mortgage interest tax deductions, deductions for charitable donations, dependent care flexible spending accounts and all the other things you have done to ease our tax burden. But it seems to me that these things all add up to a TREMENDOUS amount of paper-shuffling for everyone (me, my employer, my accountant, the IRS, etc.) and my loophole list above is probably only the tip of the iceberg.

I understand the value of providing incentives for Americans to do the right things with their money, but we need to go about it more efficiently. How much of my tax money is spent to help the IRS gather tax money? They are not a small organization, to put it mildly.

Here's an idea (and I only wish I could get the credit for this): let's just skip the income tax altogether and have a flat national sales tax on spending. A great group of people have already done the legwork to put together a plan for us; check it out at http://www.FairTax.org.

[Readers: if you want a more efficient government, check out FairTax for yourselves and show your support to Congress!]

1 comment:

Ian said...

There is no reasonable equity of distribution under the current INCOME tax system. What's more, the Tax Code has become a "tinkerer's paradise" for 53% of the lobbyists who game it in Washington DC. It's a lucrative business, and the U.S. TAXPAYER pays for ALL of it in higher prices (i.e., a hidden tax which is incomprehensible to the average working person).

Prices after FairTax passage would look similar to prices before FairTax - not "30% higher" as opponents contend - competition would see to it. So, the FairTax rate (figured as an income-tax-rate-non-comparative, sales tax) on new items would be 29.85% (on the new, reduced cost of items because business isn't taxed under FairTax - thus lowering retail prices by 20% to 30%), or 23% of the "tax inclusive" price tag - this is the way INCOME TAX is figured (parts of the total dollar).

The effective percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against all likely spending that citizen families (1-member and greater, Dept. of HHS poverty-level data) are likely to spend. (A single person would receive ~$200/mo. A family of four ~$500 - in addition to working members no longer having tax withholding confiscated from the fruits of their labor every two weeks.) Prof.'s Kotlikoff and Rapson (10/06) 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 (circa 2006?) ...

"...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."