Replace All Federal Taxes on Income with the Fair Tax Act , HR 25
Implementation of Fair Tax
I am 72 years old, an ex-CPA and totally agree with the concept of the Fair Tax. My problem is, however, that I do not believe that it can not be implemented fairly without continuing oversight by the government. I am new to this site and hope that it is open to constructive questions regarding possible problems with its implementation.
My tax situation is a good example of the problem. I have planned for retirement very carefully and have about $300,000 in savings which I have already paid Federal income tax on. My wife and I hope that this savings plus Social Security will last us through our remaining days.
We are friends with a couple of our age who have $370,000 in savings in a pension plan which they will have to pay tax on as they withdraw their savings. It is likely that under the current tax code we will have about the same money to spend as they do after they pay income tax on their withdrawals.
If the Fair Tax is passed, however, they will never have to pay tax on the withdrawals, but both of us will have to pay the same consumption tax. They will end up with $70,000 more during their remaining lifetimes, which will allow them a much better life style than us.
Theproblem is not theirs. Theoretically, they will break even during their lifetimes; we will pay $70,000 more than we budgeted for future years.
Governmental accounting for this inequity presents a huge nightmare. It is probable that the only way to correct this inequity would be to grant us an exemption on the first $300,000 of our consumption. This, however, would require huge beauacratic effort to determine what has or has not been already taxed. How would they determine what has already been taxed for everyone in the nation? How would they ascertain what has been taxed on people who have amassed millions of dollars, etc.?
Replies to This Discussion
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Permalink Reply by David Webber on
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I don't think you are factoring in the prebate to the calculations here. This ensures that families can meet their basic needs each month before sending 1 cent to the government in taxes. Plus you have to look at the positive impact of the FairTax in the economy in encouraging lower prices, removing the hidden costs to business of the IRS today. Overall your $300,000 should have more spending power. Plus if you are like me and my wife - Mr and Mrs Frugal - I like the idea of being able to spend my money how I see makes sense - not having the government already take its pound of flesh - and then trying to mitigate that afterward. That does not reward me for making good choices - instead it punishes me for having money in the first place. To me this is the compelling part of the FairTax - getting rid of the ridiculously inequitable current system - dealing with that especially as you get older - that's the last thing I want - instead letting people make their own choices with their money.
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David, I replied to another message by Dave Boone but want to make sure you receive the message. Larry
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Permalink Reply by Dave Boone on -
Larry, you bring up something which has always been a "sticky wicket" for me as I pondered the FairTax. In the interest of full disclosure I have advocated hard for the FairTax for about 9 years now, currently acting as District Director in Minnesota's 1st Congressional District. How to deal with Roth IRAs? The only fair solution I have ever come up with is to do a settlement with each Roth account holder as they qualify and adjust the rate of the tax accordingly. That would spread the government's obligation over a sufficient time to make it doable, not merely in dollars and cents, but also in terms of bookkeeping and logistics. I have never run the numbers, but I'm guessing the rate adjustment required would not be prohibitive. One thing we don't talk much about in the FT community, is the dynamic effect on the economy/federal revenues. As time goes on under the FairTax, a Roth adjustment would be more affordable.
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Dave, you have addressed my exact problem. I also have savings (as a Roth IRA holder does) which have already been taxed. The $300,000 along with my Social Security checks will, under the current tax code, provide us, hopefully, for the rest of our lives. But if Fair Tax is passed I will have to pay again. The Wikipedia site has a full historical and analytical discussion of the pros and cons of the Fair Tax. Using the data gleaned from that site, my future if the Fair Tax became law is pretty glum. My effective tax rate (after the prebate, etc) would be 17.2%. If we live 10 years and spend $55,000 per year we will pay over $100,000 in Fair Taxes. This would effectively lower my yearly living budget to $45,000. On the other hand, under the current IRS Code we will pay zero taxes over the next 10 years. This is because exemptions and the standard deduction would offset any interest earned on the $300,000. Additionally I have a huge capital loss carry forward, insuring no taxes.
I believe that the transition period from the current system to the Fair Tax would be nearly impossible to accomplish in an equitable manner and that it could pose problems to our economy similar to Obama Care: To much, to fast. I did not become a member of Fair Tax Nation to be a naysayer, but after studying the potential ramifications I am not at ease with the Fair Tax.
In my opinion the most positive result of the Fair Tax would be the attraction of world trade to our borders. Our high Corporate Tax is very detremental to our nation. At the same time, capital gain and dividend breaks to mostly high income individuals are the most egregious legal tax loopholes under the current code. Why not just take one step at a time and over a period of time eliminate both the corporate tax and the outrageous tax breaks for investors? This would accomplish the most important part of the Fair Tax goals.
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Larry, I think I see a simple way forward on this. When you withdraw finds from your ROTH IRA that could easily trigger extra payments into your monthly prebate to offset the current fairtax on that amount since you cannot be double taxed. This could be a little bit of a windfall, since the assumption is you will be using the entire amount to purchase new goods and services, rather than used. However in the bigger scheme of things that I would say is an 'administrative overhead' or what retail calls "shrinkage" - since clearly you were not plotting to do that its just happenstance - and I suspect the bulk will go on new expenditures anyway. And more importantly, it gets you back to the zero level status in terms of your planned savings use and expectancy.
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Permalink Reply by Dave Boone on
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Larry, according to the 2013 prebate tables the consumption allowance for a couple would be $22,980, so you would pay tax on $32,020. At 23% your tax would be $7,365, giving you an effective rate of 13.4%. It takes a little of the sting out compared to 17.2%. As to the larger picture, you are still out the taxes you prepaid before they move the goalpost via the FairTax. We have a long way to go in moving the FairTax to law, since it has been tied up in the House Ways and Means Committee since it was first introduced in 1999. I have always stubbornly refused to countenance any change in the language, since it is a very well reasoned and thought out proposal as written. I would make an exception in the case of Roth IRAs.
I guess I would ask if you have grandchildren. If the FairTax act could not be amended to make your personal situation more equitable, would you be willing to take one for the team so that they would never have to deal with an income tax during their lifetimes, and the nation could see an immediate 10% boost to GDP?
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Dave, no need for people to 'take one for the team', once FairTax HR25 gets to committee stage - this would be an easy line amendment to cover Roth IRAs. And in fact would be required - because double taxation is illegal - internationally and internally.
What I see though is we need to as expeditiously as possible just pass HR25. That is the level set and baseline. As with anything, once it is in operation and the fundamentals established, there will be some fine tuning as real world experience dictates. Seems to me giving people some extra prebate is a simple fix for this temporary issue, since obviously once the HR25 passes Roth IRAs become irrelevant going forward, no new ones being created.
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Dave,
Given the size of the team effort that I would have to give for such a risky bet, I will pass. Your tax change just isn't doable. Thank you for your input, but I am out of here.
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