Fair Tax Nation

Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

On Implementation of Fair Tax - Taxed Twice on Savings?

OK, so I have money that has already been taxed in savings or wherever.  Say $1,000.  On implementation of the Fair Tax, I now need to spend 23% more for a product using money that I've already paid taxes on.  I've read both books and can't figure out how this is addressed.  Effectively, I would be paying taxes on my saved money again.

 

The day before the Fair Tax is implemented, a product costs $1.00.  The day the Fair Tax is implemented, I now have to pay $1.23.  Which is fine, if there is no longer an Income Tax on my paycheck.

 

Wouldn't a Pre-bate on all my current cash / assets need to be made in order NOT to lose 23% purchasing power on money I've already paid taxes on?

 

Am I missing something?

 

Thanks!

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It looks like you have missed the embeded (hidden) taxes. When you make a purchase -- let's say visit your doctor -- where does he get the funds to pay his taxes? From you of course. If he owns his own practice he must pay the "employer" portion of the Social Security taxes. He also must pay the embeded (hidden) taxes in the materials he must purchase. Add to all this the compliance costs he must pay just to file his taxes -- lawyers, accountants, bookkeepers, etc.

Under the FairTax people will understand the "free lunch" myth of taxation will be gone forever. Plus the freedom issue is huge. The FairTax is the largest transfer of power from the government to the people since our founding.

Freedom -- priceless


Marilyn
I understand the price reduction of goods/services following implementation due to the reduction of the embedded taxes (assuming someone 'blinks' and lowers their rate spurring competition).

That is not the issue.

Let me try to explain it another way.

Prior to the Fair Tax, in order to have $100 in my bank account, I would have had to earn $142 (assuming a 30% income tax bracket). I could use that $100 to purchase a $100 item today. Once the Fair Tax is implemented, I'd have to spend $123. Which means I've been taxed TWICE - once for the intial earning I had and then again to pay the Fair Tax.

And even if retail/service prices drop, that still would resolve the issue.

Assuming the $100 price would drop down to $77, a person who earns money after implementation of the Fair Tax would need to earn only $94.71 ($77 * 1.23). Whereas in order for me to have that $94.71 to make the purchase, I would have had to earn $135.30 in order to have the $94.71 in my bank account.

The implementation would double tax everyone's savings and this is HUGE for retirees that no longer have income.

See what I mean?
You have to realize that we are looking at a paradigm change. There will be some double taxation at first, but as the change moves forward and the old system is replace by the new, that will end. We have more double taxation now than will occur under the FairTax, even during the transition. Further, there will no longer be tax on the interest on savings, or earnings on investments. I think it's a worthwhile trade.
Understood, Cary. There is a tradeoff... I agree.

However, lets consider a relative of mine that worked for a company for years and when the company he worked for was purchased, his stocks/options were sold. At the age when it occured, he was close enough to retirement that he decided to do just that.

Let's say he received $1,000,000 and then paid 34% income tax on that, leaving him with $660,000 that needs to last him the rest of his life through retirement and he's planned accordingly. No additional income (other than Social Security).

As soon as the Fair Tax is implemented, he will be taxed again when he spends that $660,000 and therefore takes a 23% hit on his savings. That's HUGE. There needs to be something to help those that have money already. If we all started out with zero in our bank accounts, then it's a non-issue... But imagine taking a 23% hit on any previously taxed cash you have in hand?

Without a way to solve this, it's a show stopper. A pre-bate for 23% of my current cash/stock values would make sense. But how could that be enforced or qualified without giving the gov't my account numbers at my financial institutions. Someone had to have thought about this and just telling everyone with cash on hand to 'bite the bullet' isn't a solution.

And for those that don't put their millions in cash in the bank, well, they won't be getting a prebate. ;)

Love the Fair Tax... Don't love the 23% hit on my current cash.
Currently your relative will have to pay taxes on the interest he earns on the $660,000 he has for retirement when he takes the money out of the bank. Then he will have to pay the embedded income tax costs for all the businesses and retail outlets he deals with. He is currently paying income tax costs three times! Do you prefer this system? He will also pay the income tax on all used items he buys.

Under the FairTax, the only (future) tax that is paid is on new goods and serrvices at the retail level.
All legal residents of the USA will be able to receive the Prebate, if they apply for it. It does not matter how much cash they have in the bank or buried in the back yard.
Just think, if your friend would sell his business under the FairTax, he would receive the entire $1-million. He could invest this money and pay no tax on the earnings from this investment. He would pay no embedded taxes and compliance cost currently hidden in everything we buy. Assuming he is married, he would also receive a $415.00 monthly prebate. Under which tax system would he benefit more from the sale of his business?
Thanks Steve, however, let's say he already SOLD his business today and already PAID his income taxes on the sale.

Let's take it further...

Let's say you sell your business for $1,000,000 the day BEFORE the Fair Tax goes into effect and have to write a check for $333,000 to the IRS. So he has $666,666 of purchasing power.



Your buddy sells his business for $1,000,000 the day AFTER the Fair Tax goes into effect and doesn't have to pay any income tax on it and is left with $1,000,000. You have $1,000,000 in purchasing power.

Regardless of any reduction in retail prices or prebates, etc., when you buy something after the Fair Tax kicks in, you'll be taxed again on taxed dollars. Your buddy will be paying tax the first time.

I hope this illustrates the point better...

Thanks Steve!
This is a scenario that will never occur because no business owner would make a mistake like that, knowing that the transaction would be tax free the next day, however it is a valid point. I don't think there will be many large business transactions between the day the President signs the FairTax and the Day it is implemented, but that will be a very busy day for every business. Nobody ever said the FairTax was perfect, but it is several trillion times better than the current income tax system.
I agree that the FT is MUCH MUCH MUCH better than anything else (VAT/Flat Income)... And you're correct that it wouldn't be wise to sell the business before the FT was implemented. It was for illustration only with regards to the computation.

What if one sold their business last year, has enough money to retire, paid $700,000 in income tax, and wants to use the rest to retire on.

The bottom line, from what I am hearing, is that it's inherent in the design of the T and unfortunately, anyone that has money saved will effectively have had their income taxed twice when they spend that money after the FT goes into effect.
Please understand what's already been said: They are already being taxed twice under the current system because of the hidden taxes on their vendors that are built into the purchase price of everything they buy. In addition there are heavy compliance costs in the form of accountants, IRS agents, tax lawyers, clerks, etc. None of these costs add to the wealth of the nation.

In the fair tax, the tax is visible. In the current system, the tax is invisible.

If the fair tax were implemented, would a loaf of bread or a new car plus the tax cost more or less that they cost today with all of the hidden taxes? I have no way of figuring that out. But I suspect that the difference would be negligible.

I'm an old mostly retired guy and I would be happy to go to the FT - yesterday!
Please don't mistake me bringing up this point as a deal breaker for me with regards to supporting the Fair Tax... I am all for it and would take it in a heartbeat.

Do I want the Fair Tax? Yes. Do I know all the benefits as described? Yes.

I just hadn't seen this issue addressed anywhere and it just seems like an issue that should have been. By the sheer number of posts here, some get it, and some don't... The one's that do get it realize that it hasn't been addressed for the individual, but was addressed for businesses via the one time credit based on inventory value at time of implementation of the Fair Tax. Where's the individual version of this on our post-tax 'inventory'?
You do not have a post-tax inventory. You have your savings, investments etc on hand. The business has an inventory. Consumers do not. What ever you have "in the bank or as assets" is what you can spend. It does not matter if you paid income tax or did not pay income tax on that money. When you go to the store and want to spend money, you are currently paying the business taxes, tax compliance costs as well as the business owner's income taxes (yes you will be paying those increased taxes on the wealthy). This applies to all goods (new or used) and all services. Under the Fair Tax, you will only pay Fair Tax on new goods and retail services. There will be no tax on used goods. This is where the consumers get their credit from taxes.

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