But you'd probably agree that to be fair, money spent from a ROTH IRA should be exempt from the 'fair' tax.
I think that you could do it that way but only on the contribution that you made to the Roth and not the growth. Or when you pull out any "contribution" part of that Roth, your pre-bate check goes up by a certain percentage.
But why not the growth also since this was the original promise. Also, traditional IRAs have been growing tax free until withdrawn. Let's be fair now.
This is not a perfect analogy - but assume you invested $4500 in 'forever' stamps because you anticipated mailing a lot of letters in the future. Maybe you paid 45 cents apiece for them. What if several years later the postal service changed the way they did things by doing away with stamps and charging a 65 cent 'delivery fee' that the sender pays after the letter is deliver. Wouldn't this be unfair to those who had bought the forever stamps unless the stamps were honored?
Another analogy - say you had a contract with a landlord to pay your $1000 monthly rent annually upfront at $12000 every January. Say in July the landlord wanted to raise your rent to $1500 a month because times were good and new renters were required to pay this. Would it be fair for him to make you pay the increase when your contract said you could use the property until the end of the year with no additional charge?
I'm not sure on the specifics but a way has to be come up with that equalizes IRA's and Roths. So either the contributions on the IRA need to be taxed when they come out (probably not popular) or contributions on Roth's need to be reimbursed (probably will be a popular idea).
So with the stamp analogy, which is a great one by the way, the cost of the stamps would be reimbursed like the Roth but not the difference between the .45 (the contribution) and .65 (.20 would be the growth).
I'm not sure on the rent analogy, which were you trying to tie it to, Roth or IRA.
I could be wrong but taxing or not taxing the growth doesn't really affect equalizing the history of the two which I think is the problem. I would say not taxing the growth on both would be the most popular idea in order to get people on board with the concept.
Roth money contributions were taxed already with the promise that all future earning will be untaxed.
The money contributed was taxed in the year it was contributed and should not be taxed again by the FairTax. Contribution money therefore should receive a credit at the prevailing FairTax rate upon withdrawal.
Since the earnings from a Roth are forever tax free, earnings should not be taxed by the FairTax. Earnings therefore should receive a credit at the prevailing FairTax rate upon withdrawal.
Put together, all money pulled out of a Roth has already been fully taxed according to the laws prevalent at the time of initial investment and must not be taxed again.
How would this work? Let's assume I have $4000 to invest in my retirement. Today I have a choice. I could invest $4000 in a Traditional IRA, or I could pay $1000 in income tax at a rate of 25% and invest $3000 in a Roth. Over the years the Roth grows to $10,000 for an increase of 333%. The Traditional IRA, being invested in the same funds, grows $4000 * 333% = $13,320. For the same initial investment the Traditional IRA grew $3,320 more than the Roth. Under the FairTax system it is not fair that one retirement savings plan can be so significantly advantaged over another plan. This must be equalized.
The best solution I can think of is to provide all Roth withdrawals with a credit equivalent to the prevailing FairTax rate. Having reached retirement age with $10,000 in my Roth account I choose to do a full withdraw. I will receive a check for $10,000 (minus fees) from my brokerage account. I will also receive a check from the Federal Government for $3000, assuming a 30% FairTax imposed sales tax rate. I would have made $320 more by investing in a Traditional IRA, but that is way better then loosing $3320 for having invested in a Roth.
But wait, it isn't fair for the Federal Government to write checks to people removing retirement money from a Roth account but not a Traditional IRA or 401k! or is it? When I go to spend my nest egg on a new $10,000 mountain bike I pay $10,000 for the bike and $3000 in tax. It doesn't take long for the government quickly gets the money back in taxes. The whole process is revenue neutral while keeping the promise to the Roth investor.
For those who blather on about the great savings not being accounted for in the FairTax economy and the Roth investors will be fine, I defy them to explain how $10,000 in Roth money will have the same buying power as a $13,320 Traditional IRA money in a FairTax economy.
If we are ever going to pass the FairTax, shouldn't the tax be fair?