Fair Tax Nation

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

Fair Total Government

Dear Fellow Fair Tax Leaders,

We have had difficulty getting the Fair Tax passed as you all know.

I discussed Saturday morning with Marilyn Rickert a possible solution to this issue. And said I "might" post something about it here. So, here goes...

The Fair Tax is already a partial solution to government welfare and other wealth redistribution programs (through the prebate). The Fair Tax has a SPENDING SIDE. So, let's go all the way with that solution, applying Fair(ness) to this aspect of government, not just taxation.

My proposal to Marilyn (which she said she will mention to some in Houston next week) was to:

1) Modify the prebate to cover ALL (not just the 23% taxes portion) of the expected cost of living at the poverty level.

2) By this, replace all government welfare and other income redistribution schemes, including unsustainable Ponzi schemes Social Security and Medicare which are going bankrupt and have vastly larger unfunded liabilities than decades of "on budget" federal expenditures.

What are the details?

Consider a few numbers of amounts available.

The Fair Tax is intended to be revenue neutral. The debt clock http://www.usdebtclock.org/ gives that total "US Federal Tax Revenue" rate at around 2.761 Trillion today.

Proposed 2012 FairTax Prebate Schedule[32]

One adult household

Two adult household

Family
Size

Annual
Consumption
Allowance

Annual
Prebate

Monthly
Prebate

Family
Size

Annual
Consumption
Allowance

Annual
Prebate

Monthly
Prebate

1 person

$11,170

$2,569

$214

couple

$22,340

$5,138

$428

and 1 child

$15,130

$3,480

$290

and 1 child

$26,300

$6,049

$504

and 2 children

$19,090

$4,391

$366

and 2 children

$30,260

$6,960

$580

and 3 children

$23,050

$5,302

$442

and 3 children

$34,220

$7,871

$656

and 4 children

$27,010

$6,212

$518

and 4 children

$38,180

$8,781

$732

and 5 children

$30,970

$7,123

$594

and 5 children

$42,140

$9,692

$808

and 6 children

$34,930

$8,034

$699

and 6 children

$46,100

$10,603

$884

and 7 children

$38,890

$8,945

$745

and 7 children

$50,060

$11,514

$959

The 2012 prebate schedule from http://en.wikipedia.org/wiki/FairTax is:

 

For each additional child above 7, add $3,960 to the annual consumption allowance, $911 to the annual rebate, and $76 to the monthly rebate amount.

Suppose we conservatively estimate that we actually need the individual rate for every man, woman and child in the nation (the rate for a family of divided by four is actually sufficient in all probability). That single rate consumption allowance is $11,170 per person, $2568 of which is a 23% (of that amount) prebate. The additional needed from taxes to do a full poverty level (not just taxes) prebate is $11,170 - $2568 = $8,602 per person in the USA.

Our population is 313.9 Million people (2012). See https://www.google.com/search?hl=en&as_q=&as_epq=US+Population&as_oq=&as_eq=&as_nlo=&as_nhi=&lr=&cr=&as_qdr=all&as_sitesearch=&as_occt=any&safe=images&tbs=&as_filetype=&as_rights=  

Therefore to pay all citizens $8602 per year more than already proposed for the prebate requires “finding” that amount of money. The amount is $8602 x 313.9 Million = $2.700 Trillion. This seems like a lot and could be difficult to justify at first glance.

But let’s start by observing that the Social Security and Medicare “budgets” (really expenditures) http://www.usdebtclock.org/ are 852 Billion and $806 Billion respectively. My first thought was to replace both these Ponzi schemes (based on FICA tax that will be replaced by the Fair Tax) that will go bankrupt anyway with the income we just said would come from the prebate. Social Security is in fact mainly “safety net” in nature, and most people, especially intelligent, wealthy folks really expect to receive good invested returns they have been forced to pay down that rat hole often raided for additional spending by politicians. So, let’s eliminate the Social Security payments and unfunded obligations through the prebate. That $852 Billion per year can help fund the prebate. We will here assume Medicare and Medicad (with their much larger shortfall in obligations) must be solved another way.

But we can also eliminate the $349 Billion allocation to “income security” given also on the debt clock site http://www.usdebtclock.org/.

We are down to needing $2.7 Trillion - $806 Billion – 349 Billion or $1545 Billion. Some of this can come from shutting down food stamp, free cell phone, and other “safety net” functions since that function is done much more Fairly and with more personal liberty, less paperwork and red tape, by the Fair Tax prebate. Others can figure out how much all this is, but I am not counting those additional reductions that can fund a much more sensible prebate than those antiquated programs driven by (cell phone company) etc. campaign contributions to public officials to spend taxpayer money on their pet products.

Now consider foreign trade and growth of the American tax base. An advantage of the Fair Tax is that it taxes consumption, not production (labor and capital inputs to GDP output). We will here consider only increase of US production for export, not (the additionally true) increase of US based production sold to American consumers due to suddenly having a tax of foreign goods we did not previously have, dispensing with that disadvantage domestic producers presently have due to the punitively high US tax rates (highest in the world corporate rates for example).

US exports are presently $565.8 Billion per quarter (See http://www.census.gov/foreign-trade/data/index.html) or a rate of $2263 Billion annually. The Fair Tax will totally unburden US firms from the embedded tax costs including business taxation and labor costs. The estimate of this is 23% of the cost of goods and services they sell, including exports abroad. The profit margin of a typical business is say about 10% (net). This 23% reduction in cost for American exporters will reverse the huge disadvantage they presently have to a benefit from lower tax costs than the average abroad. We should actually consider the price elasticity of the “average” good and service, but for most products it is very elastic and getting more so with global shopping available on the internet, etc. Let’s suppose that this cost basis from lower taxes on US production cause exports to increase by the ratio of the 23% cost reduction to the 10% net profit of typical businesses. Then our exports of $2263 Billion would increase by (23 / 10) x $2263 Billion or $5.205 Trillion ($5205 Billion). Much of this will be in the form of wages, some as return on capital, perhaps most of that capital held by Americans. If most of that additional GDP component we export gets spent on goods and services in the US, it will increase tax revenue by about 23% of $5205 Billion or $1197 Billion. Subtracting this from the $1545 Billion previous shortfall reduces the gap to around $1545 Billion - $1197 Billion = $348 Billion.

I am not presently sure how to get this additional amount, but $348 Billion left when I already identified reductions of $2352 Billion within a day or two seems like we might we able to figure out the rest. And likely that could be “merely” from conservative estimates made in this analysis. For example, if the “average” household size is 4 (half adults, half children), then the $6960 prebate for a family of four divided by 4 ($30260 / 4 = $7565 per person, substantially less than the assumed $11,170 per person for the poverty level proposed prebate income). This difference per person is $11,170 - $7565 = $3605 per person. Oh, this difference times the 313.9 Million people in the US is $1131 Billion, more than a Trillion and over the needed shortfall in the estimate before by $1131 Billion - $348 Billion or $783 Billion to the good.

Perhaps this $783 Billion can be used to pay the $256 Billion annual interest on the debt http://www.usdebtclock.org/, plus twice that toward the principal, and pay that sucker down. After doing so, we estimate $15 Billion left over after all these changes.

What do you all think?

Please comment.

Best regards,

Adrian

Adrian B Early, PhD, MBA, CFP®

Views: 169

Replies to This Discussion

The Social Security annual expenditure rate is $806 Billion, not $852 Billion (that of Medicare and Medicaid). I corrected this in most of the treatment above (and the final value is correct I believe), but missed it in one place. I hope the confusion is modest and helped by this additional correction posting.

May the best tax (and government) win.

Adrian

Oh, there is another margin of safety and conservatism in these numbers. It is that, of the additional payments to Americans (difference between total poverty level expected living expenses - 23% of these already in the Fair Tax legislation), much of this will be spent on consumption. Whatever increase IS spent on consumption additionally contributes 23% of that to more tax revenue. It is much more effective than money filtered through government bureaucracy though some of that would be spent also (by the bureaucrats). And some of government direct payments (Social Security, "income security" tax (I think on employers to pay unemployed people), some value of food stamps paid by government to grocery stores that ends up in pockets of workers and shareholders of those stores, etc.). This is why I did not include these values (difficult to estimate and calculate, but better efficiency of this seems beyond reasonable doubt).

If the amounts were much more efficient than the alternatives, we might have up to as much as ($30,260 / 4) new average payment per person - ($6960 / 4) the old prebate times (x) the 23% consumption tax rate, times (x) the 313.9 Million population . This is as much as $5,825 x 0.23 x 313.9 Million or $1339.75 x 313.9 Million = $420.5 Billion. Of course, as already mentioned not all this will be improvement over the previous system. but there is a clear large margin of safety in this additional likely tax receipts I chose not to include before.

So, even though there might be some question (for example) if the "average" person in the US is "half adult, half child", and there may be more adults (so larger prebate and needing a larger additional payment than I assumed above, this not including the additional consumption tax revenue just from paying out a larger prebate is not included in the previous analysis and represents a robust margin of safety that we will not make the budget situation worse with these public policy changes here proposed.

Adrian

Note that this proposal does not "touch" Medicare and Medicaid, partly because it is viable without doing so. But note that these programs (Medicare passed in 1965, started in 1966 http://wiki.answers.com/Q/Where_does_Medicare_originate During the Lyndon B Johnson http://en.wikipedia.org/wiki/Lyndon_B._Johnson "Great Society" "War on Poverty" era. Medicaid, Medicare, and the Prescription Drug unfunded liabilities have, during that time ballooned to just under $109 Trillion http://www.usdebtclock.org/. This is about $328,837 for every man woman and child in America (dividing among 313.9 Million people).

So, though the (pay as you go) "guaranteed poverty level minimum income" here proposed does not yet or necessarily replace Medicare, Medicaid, and Prescription drug "plan" and obligations that will not be fulfilled, perhaps we should add enough "poverty level income" for Americans to buy health insurance from private (competing, so with service and alternatives) suppliers of those products. There seems to be room, though sharp pencils and calculators might be needed for a few days to figure out the details.

Since government is above the law, politicians are apparently "allowed" to promise programs and then not deliver. Today's (as of 1965) "Great Society" "War on Poverty" is the "Greatest" Bernie - Madoff - like Ponzi Scheme so far, and turns out to be a great impoverishing measure for all Americans in the third millennium. $108 Trillion of value destroyed in a mere 48 years (averaging $2.25 Trillion per year). Will Obamacare save the day? Perhaps we should propose sanity and sustainability by letting people choose their medical and other safety net services out of income and prebate, since government cannot be trusted to not defraud the American people.

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