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  • FairTax Discussion Thread

    www.fairtax.org

    I thought I should start a FairTax Discussion thread after there was a spark of interest in the How to tax the rich thread.

    Thanks to USN_Squid for bringing it to our attention!


    Okay, so I had replied in the other thread that the middle class might not receive much "relief" the the FairTax proposal is enacted into law.

    I did some rudimentary math based on the fact that the proposal would get rid of income tax for all, no taxes whatsoever for those below the "poverty line", taxes interest earned on "savings" accounts, and a sales tax of 23% on all future good and services that falls under "consumer consumption".

    Here's what I found:

    Under FairTax

    Gross Income:
    + $25,000

    Consumer Expenditure (fixed at 70% of gross income):
    + $12,000

    23% Tax on CE:
    + $2,760

    Calculations:
    + $25,000 - $12,000 - $2,760 = $10,240 (remainder)

    Under Current System

    Gross Income:
    + $25,000

    21% Tax on Income:
    + $5,250

    Consumer Expenditure (fixed at 70% of gross income):
    + $12,000

    9% Tax on CE:
    + $1,080

    Calculations:
    + $25,000 - $5,250 - $12,000 - $1,080 = $6,670 (remainder)

    Difference Calculations:
    + $10,240 (FairTax) - $6,670 (Current) = $3,570 (difference)
    + $3,570 / $25,000 (gross income) x 100 = 14.28% "savings" with FairTax over our current system given the above assumptions.

    Now after such simple calculations and taken such assumptions as the above, I have to say that we might indeed see a nice savings. Of course these "savings" will varying from family to family and class to class since different households earning varying amounts of income and spend such income varyingly over the course of a lifetime (or years).
    |TG-18th| Acreo Aeneas
    TG World of Tanks Clan Executive Officer
    Former 9th & 13th

    Pronounciation: Eh-Cree-Oh Ah-Nay-Ess
    Still can't say it? Call me Acorn then. -.-





    SSDs I Own: Kingston HyperX 3K (240 GB), Samsung 840 Pro (256 GB), Samsung 840 EVO (250 GB), Samsung 840 x 2 (120 GB), Plextor M5S (120 GB), OCZ Vertex (30 GB)

    TG Primer and Rules

  • #2
    Re: FairTax Discussion Thread

    Fairtax is meant to be revenue neutral. That is to say, for each dollar the government recieves in taxes which the plan does away with, a dollar will be received from the retail tax. So, while some classes may see some reduction in taxes, that reduction must be made up somewhere else. Most agree that the ones who will see savings are those making less than $15,000-20,000 (because of the prebate) and those making more than $200,000 (because they spend a lower percentage of their income on consumables and services). The middle class makes up the difference.

    Also, that 23% is inclusive, so you did the calculation incorrectly. It is close to 30% exclusive. The difference is as follows:

    Suppose an item costs $100.
    23% of $100 inclusive is $30. That is to say, $30 is 23% of $130.
    Most people in the US normally calculate percentages in the way you did of course.

    Further, I'm not quite sure how you calculated the consumer expenditure. You say that it's 70% of the gross income, yet you use $12,000 as your figure. That's 48% of your gross income figure at $25,000.

    Additionally, I don't know where you get the 9% tax on Consumer Expenditure from. If you're going to calculate in state and regional taxes, then you had better calculate those in under the fairtax plan too, since those will be levied on top of the 23% inclusive.

    Comment


    • #3
      Re: FairTax Discussion Thread

      Ah whoops, sorry, I just thought up some figure last night before bed. I was originally thinking 70% of the gross income would be consumer expenditure.

      Hmm, so I didn't understand the proposal then for consumer expenditure. I'm still not understanding the you come up with the figure of $30 out of $100 is exclusive. How does inclusive and exclusive taxing differ?

      And, you said that state and regional taxes would calculated in purchases on top of the 23% tax? So that would mean that the middle class wouldn't get much benefit if any at all.
      |TG-18th| Acreo Aeneas
      TG World of Tanks Clan Executive Officer
      Former 9th & 13th

      Pronounciation: Eh-Cree-Oh Ah-Nay-Ess
      Still can't say it? Call me Acorn then. -.-





      SSDs I Own: Kingston HyperX 3K (240 GB), Samsung 840 Pro (256 GB), Samsung 840 EVO (250 GB), Samsung 840 x 2 (120 GB), Plextor M5S (120 GB), OCZ Vertex (30 GB)

      TG Primer and Rules

      Comment


      • #4
        Re: FairTax Discussion Thread

        Originally posted by Acreo Aeneas View Post
        Hmm, so I didn't understand the proposal then for consumer expenditure. I'm still not understanding the you come up with the figure of $30 out of $100 is exclusive. How does inclusive and exclusive taxing differ?
        Lets see if I can be helpful.

        An Inclusive tax of 23% says that of every dollar you spend, 23 cents goes to the government, while the business keeps the other 77 cents. You are out 1 dollar.

        An Exclusive tax of 23% says that for every dollar you spend, you have to add an extra 23 cents on top for the tax. So the government still gets 23 cents, but this time the business gets a whole dollar, and you are out $1.23

        Note that even though both of those taxes are 23%, they actually take a very different portion of your money. To take the same portion of your money, an Exclusive tax has to charge a significantly higher % rate.

        When people talk about Income tax rates, they are nearly always talking about Inclusive % rates. When people talk about Sales taxes, they nearly always talk about Exclusive % rates. The Fair tax proposal gets sneaky and talks about a Sales tax using Inclusive % rates, because they don't expect you to know the difference and the Inclusive % rates look lower, even though the end result is the same.

        So that would mean that the middle class wouldn't get much benefit if any at all.
        Exactly. In order for one class to pay less, another class has to pay more, and the Middle class seems to be the one stuck paying more.

        Comment


        • #5
          Re: FairTax Discussion Thread

          I have a question for anybody that knows.

          Is interest on all consumer loans taxed at the 30%? Including home loans?

          I think it is but can't really tell.


          Another question.

          Since prices are, for the most part, set buy the marketplace won't prices increase if people have more money to spend? Companies don't charge as little as they can, they charge as much as they can.

          The 30% exclusive tax will keep this in check some I guess.

          And a final question for those that support this. Is one of the goals of this tax plan to, ultimately, decrease tax rates? I seems it would be an effective tactic. People don't really notice the taxes taken out of their pay. But they would notice it on every purchase. And after it is adopted you could easily switch from saying "23% inclusive" to "30% exclusive" to further this goal.

          Could work.
          Iím not racists, I have republican friends. Radio show host.
          - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
          - "A foolish consistency is the hobgoblin of little minds" - Emerson
          - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
          - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
          - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
          - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

          Comment


          • #6
            Re: FairTax Discussion Thread

            Hmm, great and I was about hyped up about a nice "fair" proposal that benefits the poor class and middle class. I now see it benefits the poor some, but the rich far more, while we get the short end of both sticks. So much for calling it the "FairTax".
            |TG-18th| Acreo Aeneas
            TG World of Tanks Clan Executive Officer
            Former 9th & 13th

            Pronounciation: Eh-Cree-Oh Ah-Nay-Ess
            Still can't say it? Call me Acorn then. -.-





            SSDs I Own: Kingston HyperX 3K (240 GB), Samsung 840 Pro (256 GB), Samsung 840 EVO (250 GB), Samsung 840 x 2 (120 GB), Plextor M5S (120 GB), OCZ Vertex (30 GB)

            TG Primer and Rules

            Comment


            • #7
              Re: FairTax Discussion Thread

              The discussion of inclusive and exclusive is hardly "sneaky" from the Fairtax people. This from a link in their featured articles section on their front page:

              As the FairTax gains more national attention, questions have again arisen about whether the FairTax rate is 23 percent or 30 percent. In the toxic environment that often accompanies public policy debates, FairTax.org has even been accused by some of misleading the public, even though full descriptions of "tax-inclusive" and "tax-exclusive" calculations abound on our Web site. We hope the following explanation puts all such questions to rest -- at last.

              Let’s use an example to illustrate the difference between tax-inclusive and tax-exclusive tax rates.

              Assume there is a worker named Joe who earns $125 and spends all of his earnings. Let’s further assume that the government requires him to pay $25 in taxes.

              If the government put a tax on Joe’s income, he would earn $125 before tax and would have $100 after tax to spend at the General Store. Thus, Joe has to earn $125 to have $100 to spend. Joe would also have to file an income tax return.

              If the government put a tax on what Joe spends, he would earn $125 and would have $125 to spend at the store. Of the $125 paid by Joe to the storekeeper, $100 would be for the goods he bought at the store and $25 would be taxes that the storekeeper would send to the government. Joe would not have to file a tax return, as the storekeeper sends the tax in to the government.

              Either way, Joe pays $25 in taxes and the government gets $25 in taxes. With a tax on income, Joe pays the $25 directly to the government, and with the tax on spending (sales tax), he pays the $25 in taxes indirectly when he buys something from the General Store. The General Store sends the tax that Joe paid to the government.

              We may report the tax rate as $25/$125 = 20 percent, which is the tax-inclusive rate (meaning that the tax is included in the base). Alternately, we may think of the tax rate as $25/$100 = 25 percent, which is the tax-exclusive rate (meaning the tax is excluded from the base). The 23 percent FairTax rate set out in HR 25/S 1025 is a tax-inclusive rate, as is the current personal income tax, whereas most state-level sales taxes are quoted on a tax-exclusive basis. For ease of comparison, FairTax.org gives the tax rate both ways. Both rates are relevant, since the FairTax is replacing an income tax system, and 23 percent correctly represents the tax burden compared to the current system.
              New to TG?

              Comment


              • #8
                Re: FairTax Discussion Thread

                Originally posted by El_Gringo_Grande
                I have a question for anybody that knows. Is interest on all consumer loans taxed at the 30%? Including home loans?

                I think it is but can't really tell.
                I wish I knew how to make a table for you, but instead I'll point you toward page 10 of this document. The bottom line is a 19.4% savings in housing cost.

                Originally posted by El_Gringo_Grande View Post
                Another question.

                Since prices are, for the most part, set buy the marketplace won't prices increase if people have more money to spend? Companies don't charge as little as they can, they charge as much as they can.
                You're assuming there's no competition? Vendors always charge as much as they can, yes, but always in competition with other vendors.

                Originally posted by El_Gringo_Grande View Post
                The 30% exclusive tax will keep this in check some I guess.

                And a final question for those that support this. Is one of the goals of this tax plan to, ultimately, decrease tax rates? I seems it would be an effective tactic. People don't really notice the taxes taken out of their pay. But they would notice it on every purchase. And after it is adopted you could easily switch from saying "23% inclusive" to "30% exclusive" to further this goal.

                Could work.
                This is a good point, and probably the best argument against the fair tax I've heard. Right now the Government has very smartly devised a system where if you see your tax burden, it's at a glance once or twice a month and then you get the "refund" every year...at least most people do. For me, doing my taxes each year is a anesthesia free colonoscopy with a giant check written each year to the government. Even if I paid the same amount under the fair tax, I would love to pass on the colonoscopy.
                Last edited by USN_Squid; 07-24-2007, 11:56 PM.
                New to TG?

                Comment


                • #9
                  Re: FairTax Discussion Thread

                  I just did my rough numbers and it would kill me.

                  Right now because of the number of deductions, saving into tax differed plans and a big mortgage payment my effective tax rate is pretty low.

                  And once your income gets over like 80k you don't pay social security any longer so there is a sweet spot of earnings where total taxes are not that bad with the proper investments.

                  So my tax rate looks like it would go up like 7-8%. Maybe higher if consumer loans are also taxed like I fear.

                  And some more questins. Would my insurance be taxed? It is a "service" so I think so. My god, increasing my insurance is scary since it is such a huge chunk of my income.

                  I agree with Acreo Aeneas. Not looking good for this plan.
                  Iím not racists, I have republican friends. Radio show host.
                  - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
                  - "A foolish consistency is the hobgoblin of little minds" - Emerson
                  - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
                  - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
                  - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
                  - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

                  Comment


                  • #10
                    Re: FairTax Discussion Thread

                    Originally posted by USN_Squid View Post
                    (my formatting skills suck obviously)

                    Home purchase price $230,000 $230,000
                    Mortgage interest rate 6.6% 4.95%
                    Interest at rate above for 30 years $298,806 $211,962
                    Federal taxes $104,854 $69,000
                    Income taxes on principal $64,400 $0
                    Payroll taxes on principal $17,595 $0
                    Income taxes on interest $0 $0
                    Payroll taxes on interest $22,859 $0
                    FairTax on home purchase price $0 $69,000
                    Total housing cost including taxes $633,660 $510,962
                    Difference in total housing costs -19.4%

                    In contrast, the FairTax does not tax earnings, and instead taxes consumption – in this case the purchase of the new home. Thus, our homebuyer only has to earn $510,962 to completely pay off the loan – an amount over 19 percent less than he/she does today. This
                    results from two factors: First, the entire mortgage payment is made with untaxed dollars; and second, economics studies project mortgage interest rates to drop by 25 percent.
                    Wouldn't the 69,000 sales tax be included in the amount borrowed? Which would bring the total payments up to 576,360.

                    And PMI (another 1%) would also be on the total amount of the loan, right?

                    And the insurance would have to cover the entire amount of the loan, right? That increases as well then. (And if insurance is taxed increase is magnified.)

                    And since if you sold your house, and used good are not taxed, how do you recoup the sales tax? The houses value is not increased by 69,000 dollars.
                    Iím not racists, I have republican friends. Radio show host.
                    - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
                    - "A foolish consistency is the hobgoblin of little minds" - Emerson
                    - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
                    - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
                    - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
                    - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

                    Comment


                    • #11
                      Re: FairTax Discussion Thread

                      Originally posted by El_Gringo_Grande View Post
                      I just did my rough numbers and it would kill me.

                      Right now because of the number of deductions, saving into tax differed plans and a big mortgage payment my effective tax rate is pretty low.

                      And once your income gets over like 80k you don't pay social security any longer so there is a sweet spot of earnings where total taxes are not that bad with the proper investments.

                      So my tax rate looks like it would go up like 7-8%. Maybe higher if consumer loans are also taxed like I fear.

                      And some more questins. Would my insurance be taxed? It is a "service" so I think so. My god, increasing my insurance is scary since it is such a huge chunk of my income.

                      I agree with Acreo Aeneas. Not looking good for this plan.
                      Check page 4 of the document I linked above. Your Average Remaining Federal Lifetime Tax Rate under the current system is 22% and under the fairtax its 15%. (Married 30yr old making 70k).
                      New to TG?

                      Comment


                      • #12
                        Re: FairTax Discussion Thread

                        The link is broken.

                        http://www.fairtax.org/PDF/FairTax-F...cts-070122.pdf

                        is the right one.
                        Iím not racists, I have republican friends. Radio show host.
                        - "The essence of tyranny is the denial of complexity". -Jacob Burkhardt
                        - "A foolish consistency is the hobgoblin of little minds" - Emerson
                        - "People should not be afraid of it's government, government should be afraid of it's People." - Line from V for Vendetta
                        - If software were as unreliable as economic theory, there wouldn't be a plane made of anything other than paper that could get off the ground. Jim Fawcette
                        - "Let me now state what seems to me the decisive objection to any conservatism which deserves to be called such. It is that by its very nature it cannot offer an alternative to the direction in which we are moving." -Friedrich Hayek
                        - "Don't waist your time on me your already the voice inside my head." Blink 182 to my wife

                        Comment


                        • #13
                          Re: FairTax Discussion Thread

                          Hmm, I'm going to see if I can calculate what sort of "savings" I can get out of this in terms of my parents.

                          I should have used the phrase: "too good to be true".
                          |TG-18th| Acreo Aeneas
                          TG World of Tanks Clan Executive Officer
                          Former 9th & 13th

                          Pronounciation: Eh-Cree-Oh Ah-Nay-Ess
                          Still can't say it? Call me Acorn then. -.-





                          SSDs I Own: Kingston HyperX 3K (240 GB), Samsung 840 Pro (256 GB), Samsung 840 EVO (250 GB), Samsung 840 x 2 (120 GB), Plextor M5S (120 GB), OCZ Vertex (30 GB)

                          TG Primer and Rules

                          Comment


                          • #14
                            Re: FairTax Discussion Thread

                            Originally posted by El_Gringo_Grande
                            Wouldn't the 69,000 sales tax be included in the amount borrowed? Which would bring the total payments up to 576,360
                            No, the purchase price of $230,000 includes the tax under the assumption that embedded upstream tax savings of manufacturing are included. They link to a study showing how this works. The most effective argument for this logic is that new homes would cost 23% more than existing if those savings weren't passed along. Not many new homes would sell would they?

                            Edit:
                            Research paper on the effect on Housing.
                            New to TG?

                            Comment


                            • #15
                              Re: FairTax Discussion Thread

                              Originally posted by El_Gringo_Grande View Post
                              The link is broken.

                              http://www.fairtax.org/PDF/FairTax-F...cts-070122.pdf

                              is the right one.
                              Thanks, you guys are replying faster than I can do your research ;)
                              New to TG?

                              Comment

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