Distribution of the FairTax burden
From Wikipedia, the free encyclopedia
The FairTax (H.R.25/S.1025) is a proposal for changing United States tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including AMT), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes and inheritance taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly tax rebate to households of citizens and legal resident aliens, to "untax" purchases up to the poverty level.[1] The impact of the FairTax on the distribution of the tax burden is a point of dispute. The plan's supporters argue that it would decrease tax burdens,[2] broaden the tax base, be progressive, increase purchasing power,[3] and tax wealth,[1] while opponents argue that a national sales tax would be inherently regressive and would decrease tax burdens paid by high-income individuals.[4]
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[edit] Tax rate and rebate
- For more details on this topic, see FairTax.
The FairTax legislation would apply a 23% federal retail sales tax on the total transaction value of new retail goods and services purchases; in other words, consumers pay to the government 23 cents of every dollar spent (sometimes called tax-inclusive — as income taxes are calculated). The assessed tax rate is 30% if the FairTax is added to the pre-tax price of a good like traditional U.S. sales taxes (sometimes called tax-exclusive).[4] The effective tax rate for any household would be variable due to the fixed monthly tax rebates. The rebates would have the greatest impact at low spending levels, where they could lower a household's effective rate to zero or a negative rate. At higher spending levels, the rebate has less impact, and a household's effective tax rate would approach 23% of total spending.[5][6] For example, a household of three spending $30,000 a year on taxable items would devote about 6% of total spending to the FairTax after the rebate. A household spending $125,000 on taxable items would spend around 19% on the FairTax.[4] The rebate would be paid in twelve monthly installments equal to 23% of poverty level spending for each household size and is meant to eliminate the taxation of necessities and make the plan progressive.[4]
[edit] Tax burden impact
- See also: Tax incidence
In a Congressional committee hearing, Congressman John Linder stated that "the President's Advisory Panel for Federal Tax Reform, with the help of the Treasury Department, concluded that the FairTax is the only reform proposal that completely untaxes the poor."[7] However, that bipartisan panel's final report to the President rejected a National Sales Tax.[8] The panel's evaluated hybrid plan differed from the FairTax legislation in several areas with the Chairman of the Panel, former U.S. Senator Connie Mack, stating that "the panel did not score H.R. 25” (the FairTax).[9] The panel was not allowed to consider reforming regressive payroll taxes and they reduced the tax base by adding large exclusions.[10][11] Americans For Fair Taxation state that the Tax Panel's rate and tax burden analysis is not an estimate of the FairTax legislation.[10] (It should also be noted that the Treasury Department refuses to make public for peer-review detailed figures and scoring methodology used in their analysis.)[10] However, the Panel reported that with the rebate, the overall tax burden on middle-income Americans would increase while the tax burden on the very rich would drop. According to the report, the percent of federal taxes paid by those earning from $15-$50,000 would rise from 3.6% to 6.7%, while the burden on those earning more than $200,000 would fall from 53.5% to 45.9%.[8]
The report states, "Families with the top 10 percent of cash incomes would benefit substantially from the retail sales tax. Their tax burden would fall by 5.3 percentage points – from 70.8 percent to 65.5 percent. Middle-income Americans, however, would bear more of the federal tax burden. A typical married couple at the bottom 25th percentile of the income distribution earns $39,300 per year and would pay $5,625 dollars in federal taxes in 2006. Under the retail sales tax with a Prebate, the same family would pay $7,997 in net federal taxes after the Prebate of $6,694, resulting in a tax increase of $2,372, or 42 percent."'[8] The Tax Panel also did not consider the embedded tax cost associated with corporate income taxes that affect the personal tax burden under current law (see Supporting theories of effect). Comparatively, the retail sales tax burden presented has the corporate tax cost included.[8] Proponents charge that the Presidential Tax Panel was motivated to maintain the "status quo" and thus modify the tax base from the proposed legislation to achieve higher rates,[12] and conclude that since opponents could not kill the FairTax proposal based on merits or lack thereof; they create their own plan with an exaggerated rate to make it politically not feasible.[10][13]
FairTax supporters argue that the tax burden would shift to those who do not pay taxes under the current system and those with wealth.[1] The FairTax would dramatically broaden the tax base to include all 300 million Americans and an estimated 30 million to 40 million foreign tourists and visitors. This would more than double the federal government's tax base ($8.638 trillion compared with $4.202 trillion of taxable income).[14] For this reason, the average marginal rate under the FairTax would be, by definition, significantly lower than current law.[15] Proponents contend that since the FairTax base would be twice the size of taxable income, a revenue-neutral FairTax rate would be almost half the size of income and payroll taxes. Proponents argue that if the rate appears too high, it brings to light the true cost of the federal government and the hidden taxes Congress has imposed on the American taxpayer.[15] A study on marginal and average tax rates found that the FairTax would reduce most households’ average lifetime tax rates and, often, by a lot.[16] Economists at Boston University found that the FairTax rewards low-income households with 26.7% more purchasing power, middle-income households with 10.9% more purchasing power, and high-income households with 4.7% more purchasing power.[3]
Dr. Carl Milsted, senior editor of the Free Liberal, suggested that the FairTax would be a significant tax break for high net-worth individuals, so it should be combined with a wealth tax. He claims that such a system would allow a lower tax rate on consumption, while maintaining current levels of taxation on high net-worth individuals.[17] Economist Laurence Kotlikoff of Boston University states that the FairTax would be a tax on wealth unlike the current system that taxes income.[1] Further, research by Arduan, Lapher & Moore Econometrics shows that consumption would increase by 2.4% in the first year of the FairTax. The increase in consumption would be fueled by the 1.7% increase in disposable (after-tax) personal income that occurs once the FairTax was enacted. By the 10th year, disposable income would increase by 11.8% resulting in a corresponding increase in consumption of 11.7% over what it would be if the current tax system remained in place, and these results are based on the assumption that businesses use only the tax savings achieved from no longer having to pay the employer share of payroll taxes (for more details, see Promotion of economic growth).[18]
[edit] Progressive / Regressive debate
- See also: Progressive tax and Regressive tax
Economist William G. Gale at the Brookings Institution writes: "Under the AFT proposal, taxes would rise for households in the bottom 90% of the income distribution, while households in the top 1% would receive an average tax cut of over $75,000." Gale continues, "If households are classified by consumption level, a somewhat different pattern emerges. Households in the bottom two-thirds of the distribution would pay less than currently, households in the top third would pay more."[19] While Gale's analysis differed from the FairTax legislation, he is referring to absolute tax dollars—ranked by income, households at the lower end of the distribution will tend to pay more in absolute taxes, while households at the higher end will tend to pay less in absolute taxes. Ranked by spending or consumption, households that currently spend less on consumption would pay less total taxes, while households that currently spend more would pay more. A low-income family may spend $25,000 on goods and services consuming 100% of their income. A higher income family making $100,000 may spend $80,000 on goods and services and save $20,000. The higher income family is consuming only 80% of their income on taxable goods and services. When presented with an estimated effective tax rate, the low-income family above would pay a tax rate of 0% on the 100% of consumption and the higher income family would pay a tax rate of 15% on the 80% of consumption.
These conclusions are contradictory according to Gale. The FairTax proposal is regressive on income (using a cross-section time frame) and progressive on sales. Classical economic analysis indicates that the marginal propensity to consume (MPC) decreases as income increases. Households at the lower end of the income scale spend almost all their income, while households at the higher end are more likely to devote a portion of income to saving. However, MPC and income elasticity of demand tend to increase as wealth increases. These facts explain the apparent contradiction in the data; households at the extreme high end of consumption often finance their purchases out of savings, not income.[19] This savings would be taxed when it becomes a purchase. Income earned and saved would not be taxed immediately under the proposal. In other words, savings would be spent at some point in the future and taxed according to that consumption. FairTax advocates state that this would improve the taxing of wealth. Laurence Kotlikoff stated that the FairTax could make the tax system much more progressive and generationally equitable.[1] "Their view that taxing sales is regressive is just plain wrong. Taxing consumption is effectively the same as taxing wages plus taxing wealth." Kotlikoff continues, "But what about saving one's wages and wealth and spending these funds plus accumulated interest in the future? Doesn't this avoid the consumption tax? No. You end up paying consumption taxes not just on the original sums, but also on the accumulated interest."[1] The payroll tax system is regressive on income with no standard deduction or personal exemptions taxing only the first $97,500 ($94,200 for the year 2006) from gross wages, and none earned from capital investments or interest. The Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more in payroll taxes than they do in income taxes.[20] Under the FairTax, it would be eliminated.
[edit] Current system vs. the FairTax
[edit] Average remaining federal lifetime tax rates
| Average Remaining Federal Lifetime Tax Rates | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Single Households | Married Households | ||||||||||||
| Total Household Income |
Young Adult (Age 30) |
Middle Aged (Age 45) |
Senior (Age 60) |
Total Household Income |
Young Adult (Age 30) |
Middle Aged (Age 45) |
Senior (Age 60) |
||||||
| Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | ||
| $10,000 | -12.3% | -17.6% | 6.2% | -13.5% | 6.5% | -27.1% | $20,000 | 3.1% | 1.3% | 11.0% | 1.5% | 7.2% | -11.0% |
| $15,000 | -4.0% | -5.0% | 11.3% | -10.0% | 9.8% | -28.0% | $30,000 | 12.5% | 7.8% | 15.3% | 3.4% | 10.1% | -10.5% |
| $25,000 | 10.2% | 5.6% | 17.7% | 4.7% | 14.1% | -6.2% | $50,000 | 19.1% | 13.4% | 19.6% | 11.1% | 14.2% | 1.4% |
| $35,000 | 18.5% | 10.1% | 20.7% | 5.4% | 16.7% | -5.9% | $70,000 | 21.1% | 15.6% | 21.3% | 11.6% | 17.0% | 2.2% |
| $50,000 | 21.1% | 13.5% | 23.5% | 11.4% | 21.5% | 3.9% | $100,000 | 23.2% | 17.4% | 24.0% | 14.7% | 22.4% | 7.9% |
| $100,000 | 27.5% | 17.8% | 30.3% | 14.7% | 32.1% | 9.2% | $200,000 | 27.2% | 19.7% | 29.0% | 17.0% | 32.2% | 12.3% |
| $250,000 | 27.9% | 20.8% | 33.6% | 19.7% | 40.8% | 18.2% | $500,000 | 30.6% | 21.6% | 35.6% | 20.5% | 41.5% | 19.3% |
| Source: Chart using data presented in Kotlikoff and Rapson, "Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation", October, 2006.[2] |
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[edit] Marginal effective federal tax rates on saving
| Marginal Effective Federal Tax Rates on Saving | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Single Households | Married Households | ||||||||||||
| Total Household Income |
Young Adult (Age 30) |
Middle Aged (Age 45) |
Senior (Age 60) |
Total Household Income |
Young Adult (Age 30) |
Middle Aged (Age 45) |
Senior (Age 60) |
||||||
| Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | ||
| $10,000 | 24.6% | 0% | 25.2% | 0% | 24.8% | 0% | $20,000 | 26.5% | 0% | 27.2% | 0% | 22.6% | 0% |
| $15,000 | 24.6% | 0% | 26.2% | 0% | 23.1% | 0% | $30,000 | 26.6% | 0% | 27.1% | 0% | 23.6% | 0% |
| $25,000 | 24.7% | 0% | 27.2% | 0% | 23.2% | 0% | $50,000 | 29.0% | 0% | 27.5% | 0% | 23.6% | 0% |
| $35,000 | 25.2% | 0% | 27.3% | 0% | 26.4% | 0% | $70,000 | 28.9% | 0% | 30.5% | 0% | 32.2% | 0% |
| $50,000 | 25.3% | 0% | 31.3% | 0% | 32.4% | 0% | $100,000 | 33.4% | 0% | 33.8% | 0% | 36.4% | 0% |
| $100,000 | 30.2% | 0% | 34.8% | 0% | 39.2% | 0% | $200,000 | 37.3% | 0% | 39.4% | 0% | 35.2% | 0% |
| $250,000 | 36.0% | 0% | 43.0% | 0% | 37.2% | 0% | $500,000 | 54.2% | 0% | 50.7% | 0% | 38.2% | 0% |
| Source: Chart using data presented in Kotlikoff and Rapson, "Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation", October, 2006.[2] |
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[edit] Marginal effective federal tax rates on working
| Marginal Effective Federal Tax Rates on Working *Note the difference between marginal rates (the rate of tax paid in the last dollar spent) and actual average rates. Under the FairTax, no taxpayer in this chart pays any FairTax until they spend above the poverty level, whereas the first dollar spent above the poverty level has a marginal rate of 23%. |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Single Households | Married Households | ||||||||||||
| Total Household Income |
Young Adult (Age 30) |
Middle Aged (Age 45) |
Senior (Age 60) |
Total Household Income |
Young Adult (Age 30) |
Middle Aged (Age 45) |
Senior (Age 60) |
||||||
| Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | Current | FairTax | ||
| $10,000 | -23.1% | 23.0% | -23.2% | 23.0% | 29.8% | 23.0% | $20,000 | 33.8% | 23.0% | 41.4% | 23.0% | 23.5% | 23.0% |
| $15,000 | 33.3% | 23.0% | 33.8% | 23.0% | 22.4% | 23.0% | $30,000 | 33.7% | 23.0% | 47.6% | 23.0% | 28.2% | 23.0% |
| $25,000 | 34.2% | 23.0% | 47.7% | 23.0% | 26.2% | 23.0% | $50,000 | 28.0% | 23.0% | 28.2% | 23.0% | 28.2% | 23.0% |
| $35,000 | 50.2% | 23.0% | 28.3% | 23.0% | 29.0% | 23.0% | $70,000 | 28.3% | 23.0% | 28.2% | 23.0% | 32.7% | 23.0% |
| $50,000 | 28.2% | 23.0% | 22.4% | 23.0% | 36.5% | 23.0% | $100,000 | 33.5% | 23.0% | 33.7% | 23.0% | 34.3% | 23.0% |
| $100,000 | 27.6% | 23.0% | 27.5% | 23.0% | 28.6% | 23.0% | $200,000 | 35.3% | 23.0% | 31.2% | 23.0% | 37.5% | 23.0% |
| $250,000 | 41.5% | 23.0% | 37.2% | 23.0% | 35.5% | 23.0% | $500,000 | 38.4% | 23.0% | 38.4% | 23.0% | 37.2% | 23.0% |
| Source: Chart using data presented in Kotlikoff and Rapson, "Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation", October, 2006.[2] |
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[edit] See also
[edit] Notes
- ^ a b c d e f Kotlikoff, Laurence (2005-03-07). The Case for the 'FairTax'. The Wall Street Journal. Retrieved on July 23, 2006.
- ^ a b c d Kotlikoff, Laurence; Rapson, David (2006-11). Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation. Boston University. Retrieved on November 4, 2006.
- ^ a b Kotlikoff, Laurence; Jokisch, Sabine (2006-09). Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax. National Bureau of Economic Research & Centre for European Economic Research. Retrieved on October 31, 2006.
- ^ a b c d Regnier, Pat (2005-09-07). Just how fair is the FairTax?. Money Magazine. Retrieved on July 20, 2006.
- ^ The FairTax Calculator. National Retail Sales Tax Alliance. Retrieved on July 23, 2006.
- ^ FairTax Effective Tax Rates. Americans For Fair Taxation (2000). Retrieved on July 23, 2006.
- ^ Linder, John (2005-07-25). Testimony Before the Subcommittee on Select Revenue Measures. House Committee on Ways and Means. Retrieved on July 23, 2006.
- ^ a b c d National Retail Sales Tax. President's Advisory Panel for Federal Tax Reform (2005-11-01). Retrieved on July 23, 2006.
- ^ Burns, Max; Barrow, John (2006-10). Atlanta Press Club Debate 2006
. WSAV. Retrieved on November 5, 2006. - ^ a b c d Rebuttal to the tax panel report and recommendations. Americans for Fair Taxation (2006-11). Retrieved on November 2, 2006.
- ^ Kotlikoff, Laurence (2006-04). Grading the President’s Tax Reform Panel’s Plan. The Berkeley Electronic Press. Retrieved on July 23, 2006.
- ^ Linbeck, Leo. Tax Reform Group Blasts Presidential Tax Panel. Foster Friess. Retrieved on July 23, 2006.
- ^ Burton, David. A response to Institute on Taxation and Economic Policy. The Argus Group. Americans For Fair Taxation. Retrieved on October 26, 2006.
- ^ Chambliss, Saxby; Linder, John; King, Steve; Brady, Kevin (2005-09-27). Revise the tax law. The Washington Times. Retrieved on July 23, 2006.
- ^ a b Evans, M. (2007-01-10). They Said What?!. Retrieved on January 18, 2007.
- ^ Kotlikoff, Laurence; Rapson, David (2005-12). Would the FairTax Raise or Lower Marginal and Average Tax Rates. National Bureau of Economic Research. Retrieved on October 10, 2006.
- ^ Milsted, Carl (2005-05-15). Towards a Truly Progressive Tax System. The Free Liberal. Retrieved on July 23, 2006.
- ^ A Macroeconomic Analysis of the FairTax Proposal. Arduin, Laffer & Moore Econometrics (2006-02). Retrieved on November 7, 2006.
- ^ a b Gale, William (1998-03). Don't Buy the Sales Tax. The Brookings Institution. Retrieved on July 23, 2006.
- ^ Kamin, David; Shapiro, Isaac (2004-09-13). Studies Shed New Light on Effects of Administration's Tax Cuts. Center on Budget and Policy Priorities. Retrieved on July 23, 2006.
[edit] References
- Boortz, Neal; Linder, John (2006). The Fair Tax Book, Paperback, Regan Books. ISBN 0-06-087549-6.
- Ose, Al (2002). America's Best Kept Secret Fairtax: Give Yourself a 25% Raise, Paperback, Authorhouse. ISBN 1-4033-9189-0.
- Kotlikoff, Laurence; Burns, Scott (2004). The Coming Generational Storm: What You Need to Know about America's Economic Future. MIT Press. ISBN 0-262-11286-8.
- McCaffery, Edward, J. (2002). Fair Not Flat : How to Make the Tax System Better and Simpler, Hardcover, University Of Chicago Press. ISBN 0-226-55560-7.
- De Vlieghere, Martin; Vreymans, Paul (2006-09-11). Path to Sustainable Growth. Lessons From 20 Years Growth Differentials In Europe (4.9Mb pdf). WorkForAll. Retrieved on October 14, 2006.
[edit] External links
- FairTax.org - Americans For Fair Taxation
Legislation
-
- H.R.25: Fair Tax Act of 2007 - Text of House bill H.R.25
- S.1025: Fair Tax Act of 2007 - Text of Senate bill S.1025
