The Unfair Fair Tax
OK I am going to refine my argument that the "Fair Tax" is unfair to the Middle Class. I attempted this once before, however my math left a little to be desired, (frankly, it might even accurately have been described as bullshit) so I am going to post new figures along with an explanation.
Now, here are my assumptions. (See here) where Marty at Speckblog puts forth that the average American Family is a family of four and earns $43K a year. I am going to use Marty's figures because Marty and I are having a little cross blog debate about this.
I am going to assume that this family is renting a home or apartment, since this seems to be important to Lethal Poison even though I think this is rather unreasonable. But only using the standard deduction does simplify things, so I will stick with that.
I am going to assume this "average" family is a married couple, with two children still in school. This seems to be a rather reasonable assumption.
I am going to use a 2005 1040A along with 2005 tax tables to compute current tax liability for this average family.
I am going to assume this family of four has to spend 100% of their after tax income to meet daily living expenses and they are unable to save a dime. This is not an unreasonable assumption, since $43K ain't a whole lot of money. Also, if this family is saving anything, it probably is going into a 401K or something, since there the employee would qualify for the employer match. Savings such as this would not be subject to tax (at least not yet) under the current tax system anyway... so our average family spends every dime to meet daily expenses. (If they are REALLY average, they're probably running up their charge cards anyway - grin.)
OK, federal tax liability for this family according to a 1040A is $2,304 - $2K child tax credit = $304 federal income tax. $43K times 7.65% (employee share of Social Security Tax) = $3,290. 304 + 3,290 = $3,594 in total taxes under current system.
Under fair tax: 43K Gross income - 3,594 (taxes under old system) = $39,406. $39,406 times 30% (amount of increase in daily expenses due to fair tax) = $11,822. $11,822 - prebate of $6,072 = $5,750.
Fair tax $5,750 - current tax $3,594 = $2,156 increase in taxes for this "average American" family.
Marty on Speckblog will argue that these figures do not allow for the employer possibly immediately increasing the employee's wages by the employer's share of Social Security taxes. However, this is far from being automatic. If you look at those in favor of the Fair Tax, there is a large overlap amongst them with those who argue against any increase in the minimum wage. The argument goes: "Employers can not afford an increase." OK, well these guys can not have their cake and eat it too. If employers can not afford an increase in the minimum wage, they can not afford to give the employee the money they save from not having to pay the payroll tax.
Now, here are my assumptions. (See here) where Marty at Speckblog puts forth that the average American Family is a family of four and earns $43K a year. I am going to use Marty's figures because Marty and I are having a little cross blog debate about this.
I am going to assume that this family is renting a home or apartment, since this seems to be important to Lethal Poison even though I think this is rather unreasonable. But only using the standard deduction does simplify things, so I will stick with that.
I am going to assume this "average" family is a married couple, with two children still in school. This seems to be a rather reasonable assumption.
I am going to use a 2005 1040A along with 2005 tax tables to compute current tax liability for this average family.
I am going to assume this family of four has to spend 100% of their after tax income to meet daily living expenses and they are unable to save a dime. This is not an unreasonable assumption, since $43K ain't a whole lot of money. Also, if this family is saving anything, it probably is going into a 401K or something, since there the employee would qualify for the employer match. Savings such as this would not be subject to tax (at least not yet) under the current tax system anyway... so our average family spends every dime to meet daily expenses. (If they are REALLY average, they're probably running up their charge cards anyway - grin.)
OK, federal tax liability for this family according to a 1040A is $2,304 - $2K child tax credit = $304 federal income tax. $43K times 7.65% (employee share of Social Security Tax) = $3,290. 304 + 3,290 = $3,594 in total taxes under current system.
Under fair tax: 43K Gross income - 3,594 (taxes under old system) = $39,406. $39,406 times 30% (amount of increase in daily expenses due to fair tax) = $11,822. $11,822 - prebate of $6,072 = $5,750.
Fair tax $5,750 - current tax $3,594 = $2,156 increase in taxes for this "average American" family.
Marty on Speckblog will argue that these figures do not allow for the employer possibly immediately increasing the employee's wages by the employer's share of Social Security taxes. However, this is far from being automatic. If you look at those in favor of the Fair Tax, there is a large overlap amongst them with those who argue against any increase in the minimum wage. The argument goes: "Employers can not afford an increase." OK, well these guys can not have their cake and eat it too. If employers can not afford an increase in the minimum wage, they can not afford to give the employee the money they save from not having to pay the payroll tax.
posted by Little David at 10/21/2006 09:42:00 AM
7 Comments:
Im going to have to disagree with your picture of the average American family.
In reality, there are few families with 2 children making 43k a year. They tend to be VERY poor (which probably will amount to zero tax), or somewhat affluent.
The median US household income (that is all households by the way), makes over 44k. Funny thing is, over half of all households, are not conventional ones, as reported recently http://www.nytimes.com/2006/10/15/us/15census.html?ei=5090&en=e788ed47b459cd7f&ex=1318564800&partner=rssuserland&emc=rss&pagewanted=print.
As a matter of fact, Id think it was outright wrong to assume that people making 43k with 2 kids is anything other then the minority. Most of the "households" making under 43k are single, single head of households, or married without kids, and I will bet my life on that.
Next issue I take up with is your hypocritical tax views. You think its wrong for a "fair tax", because its "unfair". Disecting your logic, the only reason you believe its "unfair" is because you get all your various tax benefits taken away under that system.
So, its unfair for Bill Gates to pay a little less, because he doesnt even remotely consume as much as his income tax is, but its perfectly fair that "Joe American Dream", is getting interest tax deductions for his house, preferred filing status for being married, and tax credits for their 2.1 children, even though a poor single person isnt getting any of the above, and frequently ends up paying more in gross then a "Joe American Dream", making twice as much as he is in gross income.
So, bottom line, why is it not fair to hit Bill Gates with a "regressive" tax, but at the same time, its plenty fair to hit those under yourself who end up paying more as a percentage of income with a "regressive" tax of sorts because of your boatload of deductions/credits/refunds etc, that they dont get?
The final issue I have to take up is the fact you are assuming that an individual HAS to spend every dime they make. That has been an assumption you keep making from the beginning.
Do you realize that the average American loses over 20% of their check before they even see it? So in reality, most people are already living on 80% of their actual income over the course of the year. Yet you assume, a person who is now living on 80% of 43k, is suddenly going to need to spend 100 of it when they are no longer subject to withholdings.
Now, if you assume that the family in you picture SAVES that 20%, instead of shelling it out in taxes on gross income,
43k-26400=16,600-(16,600*.2)=13280*1.3=17264-13280= $3984, which would be around a $400 dollar increase, and thats even after the rediculous child tax credits, which by the way, are regressive on childless individuals, but thats ok of course, because those credits benefit you at the expense of someone else.
Any argument against fair tax is completely hypocritical, as its completely based in how much the current tax system wont hand its opponents back in deductions, credits or refunds.
Guess what, all those credits, deductions, and refunds, are NOT part of a progressive income tax system. They are porkbarreled, politiked riders that politicians have weazled into the current tax code to get a few votes. A true progressive income tax does not hand out tax credits and tax deductions, and from the viewpoint of that, there is NOBODY except those who spend frivolously who would suffer from the Fair Tax as compared to the income tax.
You didn't examine my math very closely. If you notice, I deducted the amount Joe Average pays in federal taxes before I multiplied the remainder by the 30% increase in daily living expenses. Earlier I did not do this, but I corrected for this in the above post.
I'm a hypocrite? You think Cesar Chavez, Mr Socialist, is a hero but think someone who insists on a progressive tax system for our nation is a hypocrite? I like to put this one on the "who's a bigger hypocrite" scales.
Actually, I am not completely against a national sales tax. If a tax was implemented at a lesser rate then the 23%/30% rate and then income tax was continued for anyone making over say, $150k for an individual and $300k for a married couple, I could live with that. But that is not what is being proposed, it is all or nothing. By the way, Alan Greenspan said that if the federal tax code was replaced 100% with a consumption tax it would be bad for the economy. However I would argue with Mr Greenspan that the elimination of taxes on American Businesses would make them more competitive in the global economy, which should be good for the economy.
As for married couples getting some kind of advantage, have you never heard of the marriage penalty? Efforts have been made to lessen or eliminate this penalty, however improvements made were not enacted permanently as I recall.
As for my taking advantage of tax deductions, I only take advantage of the deductions that are offered. The ones that are offered for things most Americans value, like raising kids, paying college tuition, home ownership etc. Many, I'll even say most, of these deductions are offered in an effort to motivate individuals to do the things society thinks is good for society.
1. I'm a hypocrite? You think Cesar Chavez, Mr Socialist, is a hero but think someone who insists on a progressive tax system for our nation is a hypocrite? I like to put this one on the "who's a bigger hypocrite" scales.
Reply- You DONT insist on a progressive tax system. You insist on a system that will benefit you. You care not that, for many individuals, the current tax system is regressive, penalizing people for being single, not having kids,not having property, and not assuming any income from capital gains. You are only concerned that Bill Gates might get a break, and youll lose your tax advantages.
2. Actually, I am not completely against a national sales tax. If a tax was implemented at a lesser rate then the 23%/30% rate and then income tax was continued for anyone making over say, $150k for an individual and $300k for a married couple, I could live with that.
Reply- Im not opposed to this either, as a matter of fact, I prefer this modification to the straight consumption tax. The income tax on the higher incomes could also help out with lowering the sales tax rate.
3. However I would argue with Mr Greenspan that the elimination of taxes on American Businesses would make them more competitive in the global economy, which should be good for the economy.
Reply- This is false. The only place this is true is in Economics class. In reality, the added income simply filters to the shareholders, it doesnt go to the workers, or to capital investments. I recently got a book called "Perfectly Legal" by David Cay Johnston, which is terrific and highlights research on how tax cuts for businesses and the wealthy do not fuel the economy as the Economics 101 book would have you believe.
4. As for married couples getting some kind of advantage, have you never heard of the marriage penalty?
Reply- I have, but this is only applicable in some situations, primarily, higher income families.
For instance, in my wife and my situation, well save about $772.50 over filing single, by filing jointly, in the 2006 tax year.
5. As for my taking advantage of tax deductions, I only take advantage of the deductions that are offered. The ones that are offered for things most Americans value, like raising kids, paying college tuition, home ownership etc. Many, I'll even say most, of these deductions are offered in an effort to motivate individuals to do the things society thinks is good for society.
Reply- Im not saying you are doing anything wrong by taking advantage of the offered deductions, my comment is that you are essentially saying, you could care less that those deductions act as a regressive taxing on people who do not qualify for the deductions with lower incomes then you, but you are up in arms that Bill Gates taxes might go down, and yours may go up if a system that gets rid of everything regressive is implemented.
I am in favor of a progressive tax code. Why would I say I could live with a tax system that would increase my taxes by MANY thousands of dollars as long as it is progressive?
What am I talking about? Didn't I say I could live with a "fair tax" that was implemented at a lower rate then the proposed 23/30% and which also included an income tax on higher income levels? Under such a system, I will pay THOUSANDS more in taxes each year, however I could live with such a system because it would be progressive and fair to the majority.
You however are only in favor of a tax system that would benefit you.
Ooops, I forgot to add:
I would argue that eliminating all taxes from businesses would lead to fewer businesses relocating their manufacturing to overseas locations because if they leave them here the enterprises would not be subjected to the burden of taxation. Profits removed from the corporation would be subjected to the tax, but as long as the money was left invested in the business, no taxes would have to be paid.
Sure, some businesses that are forced to keep their facilities here would also benefit and only result in increased profits filtering down to investors. However when the investors sought to cash in their profits, they would be subjected to taxes.
By the way, some method would have to be devised to fairly subject profits for foreign investors to taxes. Foreign investors would not be paying the "fair tax" so they would not be granted the $150K/$300K exemption.
Another problem would be in how such a new tax code would adversely impact property values. This might not be true of commercial properties, but removing the tax benefits for residential properties should at least lead to slightly less demand for such properties. If this happened without educating the public that this was expected it could lead to an unwarranted overcorrective collapse of such values (people would panic). If the public was warned to expect such a decrease in demand it should then lead to softening in values without a collapse.
Alan Greenspan is invited to join the discussion!
1. You however are only in favor of a tax system that would benefit you.
Reply- No, I am in favor of a tax system that treats everyone fairly, and one which no part of it is regressive. It just so happens that, I, having no property, and no itemized deductions, would benefit from such a system, because I am currently bearing a huge brunt of the regressive taxes applied in America.
One day, Im sure Ill have a house, or some kids, maybe even some sort of business that will start qualifying me for endless deductions, and I can tell you that I will still be in favor of a tax that is not regressive in any way.
I am not for myself at all, I just happen to be a member of the class of people that I AM primarily for. Unlike yourself, I didnt mention what "Id" be losing once. Yeah ok, sorry, you might get your 200 deductions yanked or drastically reduced, but many more poorer people will be benefitting at the expense of a few people claiming 200 deductions and spendthrifts in the solid-upper middle class.
Lower middle class people who own no property are dumped on from all sides in this country. They are the ONLY class of people who are forced to bear the complete burden of assigned federal taxes. Everyone else is either too poor to pay, or has enough money to obtain the tax shields afforded to landowners and the affluent.
2. I would argue that eliminating all taxes from businesses would lead to fewer businesses relocating their manufacturing to overseas locations because if they leave them here the enterprises would not be subjected to the burden of taxation. Profits removed from the corporation would be subjected to the tax, but as long as the money was left invested in the business, no taxes would have to be paid
Reply- Do you have any clue how little money corporations pay in taxes currently? There are unlimited ways to escape taxes, from convoluted pay schemes, to backwards accruals, all the way up to simply locating your corporate headquarters in Bermuda.
The reason corporations are going overseas is not "taxes" as the right wing continuously spews forth. Its the reduction in before tax COGS, overhead and wages, and the lack of, or even promotion of (NAFTA and the such),the reduction of barriers to importing these cheaply made products.
3. Another problem would be in how such a new tax code would adversely impact property values. This might not be true of commercial properties, but removing the tax benefits for residential properties should at least lead to slightly less demand for such properties. If this happened without educating the public that this was expected it could lead to an unwarranted overcorrective collapse of such values (people would panic). If the public was warned to expect such a decrease in demand it should then lead to softening in values without a collapse.
Reply- Any negative affect of the loss in tax benefits would be offset by the reduced cost of borrowing. Financial institutions would pay no tax whatsoever, and therefore, would be able to lend at insanely low rates.
Furthermore, prices would likely fall, as people could afford less house, which would raise demand for houses.
I am going to write a new article where I address the impact of the Fair Tax on the American Dream of home ownership for the middle class.
I have decided I am against the so called "Fair Tax" unless so many changes are made to it that I doubt the proponents of the plan would then be in favor of it.
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