another issue I am learning more about. I have been a self-employed single parent for over a decade and my income level hasn't changed much...and its not because I don't work hard! How would FairTax affect me?
Quite a large group of Congresspeople from both sides of the isle have put together an idea for revamping the tax system in the US. Check out FairTax.org.
I understand so little about the whole economic system, that I wouldn't even want to attempt to explain it to you. Hence the reason for this forum thread.
I was hoping others that know more would help me get some perspective.
It is a consumption tax. Pay no taxes except at the cash register. Think they use it in socialist Europe. Would probably pay like 30 cents on every dollar. Same rate for everybody. No IRS tax. No deductions. So seems to me if you spend most or all of your income at the cash register, food, gas, clothes, etc., you will pay taxes of 30%, which is a little less than what the rich pay now. However if you are rich, and only buy about the same as the poor to live, then taxes could be as little as, less the one percent, meaning they would have a
choice, as to how much they would pay. There would be offsets for the poor, but that seems to me to be the basic formula.
It doesn't sound like it will ever fly, especially with a Democrat in the White House and a majority in Congress. It would be a very radical change which would bring a certain amount of uncertainty and disruption. Also, despite some of the claims, it would be a regressive tax, bearing more heavily on middle and lower income taxpayers.
But it would be a nice big change, and could be tweeked for greater benefit to all.
But couldn't it become something better that what we have now...with so much waste and expenditure on pushing paper, red tape, bureaucratic time wasting, etc...?
I like gradual change...and big ones... if the pieces have been sorted out before hand and planned on to the best degree possible to cover potential problems that could come up.
I hate the fact that my taxes goes to pay for things I am morally and ethically against...because part of my spiritual beliefs, which have greater authority than man's government, have more authority than man's. I would like more equality...as above, so below. To at least have my choice and rights as a citizen.
I personally think that this would be a good idea. It would put the indiviual back into the decision wether or not to pay taxes. This would also stimulate savings growth. Those individuals that spend and spend like theres no tomorrow would stimulate economy. Either way it puts power/money back into the hands of the people to decide what to do with it.
FairTax is in fact a 30% flat rate, but if you're going to compare it to our current system to get side-by-side numbers we can discuss it works out to be about 23%, tax-inclusive, after all... it's not as if we're going to be spending every cent of our income at 30% on stuff. So for all intensive purposes, 23% works well for now. The numbers work out, and calculations abound as to why this is so, but I'll stick to the basics here.
So let's assume we have a fair tax situation, and every worker now has whatever% more income than they previously had. But the downside to this is that everything is now going to be 23% more expensive. The worker is in no way better off than when he started.
Now 23% taxes sounds like an incredibly reasonable rate, yes? But that's because we don't all understand what taxes truly are, and your true tax rate is probably well under this. What I call a "true" tax, i.e. government revenue, is oftentimes BELOW 23%. What you see in your paycheck is not true tax, but a combination of taxes, deductions for medical, etc. The payroll deductions are not true tax, as they are supposedly for use in an account, benefits to be drawn from it later. Your true tax rate (2007 figures) is 10% up to 7,824, 15% from 7,824 to 31,849, and 25% from 31,850 to 77,100. This means if you make $50,000 a year you pay $8,924 in taxes, or roughly 17.8%. FairTax just screwed you, pardon the language. In fact, anyone who is making under $120,000 a year gets screwed in this way (at which, by our current tax bracket for 2007, the overall rate would be 23%.)
I know that FairTax wants to get a policy so up to the poverty level you don't have to pay the sales tax, but the unfortunate thing about this is in the end the middle class bears the burden. In a FairTax system the wealthy don't get to pay their 33% tax bracket on their upper-levels of income, and the lower class doesn't pay taxes at the register. Where is this revenue going to be generated? You guessed it. Anyone who earns less than $120,000 a year.
Now we've lost a good deal of our income to more expensive goods. The middle class is supporting the lower and upper classes. And so we begin to save. We don't spend, we don't buy what we don't need, and we squirrel away our money. Economic contraction is imminent, and with that we get a recession because recessions are based on consumer confidence. If we see signs of ecnomic contraction we pull out of markets and IRA's and 401(k)'s and go into cash. Or banks, with a measly 2% return. Either way, no one's happy.
Another assumption is that wages would remain the same. Sure, they're not going to knock you down a notch from your current rate of pay. But it's been relatively proven that employers pay more to their employees to compensate for after-tax income being less due to the fact that consumers think of their income as cash post-tax (Dahl and Ransom, 2002; etc.) Employers would hire people on at lower levels, because they no longer need to adjust the gross income to match post-tax levels.
Also, a price change is always eventually balanced out by wages, and vice versa. It would seem at first that FairTax would equal out, but a closer examination would tend to show that as prices increase (by 23%, for simplicity sake) and wages would now increase (by 23%) it all balances out. But as is shown earlier, no one pays 23% in the taxes FairTax is targeting in this country unless they make $120,000 or more. If prices increase by 23%, and you earn $50,000 a year and your wage increase by 17.8% you begin to see the discrepancy. Your wages, essentially, fell.
Wow, I rambled on a bit, I just wanted to add a couple points, but I wrote a mini-thesis. I also wanted to get into the Federal Reserve and how their monetary policies would affect everything, etc. etc. etc. If anyone is still interested, I can add more to this topic, and perhaps publish it all in a Hub.
But please, feedback is always welcome.
Thanks for your time,
Jarrod Haze, M.P.P. 2007, Economic Policy and Quantitative Analysis
Irving B. Harris Graduate School of Public Policy
University of Chicago
Also, for a discussion of immigrant taxes and how we're benefiting currently, please:
And I used Juan as the immigrant, and John as the American. Please do NOT send me nasty e-mails calling me a racist, I've received so many of them so far. Keep comments and e-mails about the subject matter. I always appreciated feedback or critiques, after all, that is the only scholarly way to reach better conclusions.
Thank you Jarrod for your input. More would be good.
With all the economic minds out there, and the desire for most (I hope, I am not too nieve) to do the best for everyone of every income bracket, why haven't we come up with a plan that will work to do said?
What needs to be said and done to change things? Is the middle class going to have to stand up and yell to be heard?
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