Huckabee would penalize savers; why is that "fair"?

Many of us baby boomers spent decades saving a little extra for our golden years.  "Save your money; this is the only chance you'll have to put away a little extra for your retirement years," my dad always told me.  So I did just that: after the government took its cut from my income, I socked away a small, planned percentage of what was left over—and after several decades, it added up to a comfortable sum, just as my dad said it would. 

But now the government-according-to-Huckabee wants another cut.  With Huckabee's so-called Fair Tax, the federal government would take an additional 23% of it away from me as soon as I spent it. 

Why is that fair? 

Would someone please ask Mr. Huckabee that question soon?  Plenty of us baby boomers will be listening intently to his answer.  And, if he chooses not to answer, he will be speaking just as loudly to us. 

=============
End note:
This article in Friday's Washington Post mentioned the so-called Fair Tax, but not my main objection to it.

Comments

[Max]

The government can only get money from people who have money. They can get votes from anyone. That dynamic works against savers.

The Boomers are caught out again. They have been cash cows for decades. When their cash flow to the government stops at their retirement then they will be hamburger just like any cow that runs dry.

Don't trust anyone under thirty.

[Ironman]

It would actually be a 30% tax. There's a running point of confusion given how the "fair tax" people try to sell the plan.

Here's how it works: Let's say that with the fair tax applied to a $1.00 item, you will be paying $1.30 for that item out of your pocket. The fair tax folks say that since that additional 30 cents is 23% of the total $1.30 that you're paying, 23% is the amount of your tax.

Here's where that's wrong. The fair tax is nothing more or less than a national sales tax. Like every other sales tax, it's a percentage of the price of the item against which it's levied. The additional 30 cents you pay is 30% of the $1.00 price of the item, so you're really paying a tax of 30%.

Now, there's a compelling argument that can be made favoring a general consumption tax over a general income tax (see here: http://tinyurl.com/yo6ldl), that's only true if and only if things like the savings situation that you've described in your post has been addressed.

Without the taxed savings issue being addressed, the fair tax belongs in the "neat, but not really serious" idea file.

[Kevin]

Maybe he'll reply that each of us should pay a different sales tax rate based on how old we are. After all, he's on record as eagerly supporting any plan to have infinitely varying tax rates on food based on how fat you are.

So maybe he'll give baby boomers a break on the sales tax -- unless they're fat.

[Kevin]

Ironman -- great catch on the misleading tax rate. I haven't followed the FairTax close enough to notice (since it will never in fact be policy) but they do indeed lie about the sales tax rates. Here is their clumsy rationalization for lying:
http://tinyurl.com/2lnadx

[Adam]

I think the main point of proponents of the Fair Tax is that we should tax consumption rather than income, since the former promotes efficiency while the latter reduces productivity incentives (whether that's true or not is an entirely different topic).

The sticking point, as Steve correctly points out, is that to move from an income tax-based system to one of consumption tax penalizes those who have earned the income but not yet spent it (except if they spend it on education, internationally, etc.). The real question is really whether it's worth it to make such a transition transition from income-based to consumption-based, and if so, how to proceed in a way that softens the blow to any particular group of people. For example, what would happen if, for every increase in federal sales tax, there was a corresponding decrease in federal income tax? I'd be curious.

Not to sound too much like a Fair Tax apologist (since it does have its flaws), but any discussion of a "tax on savings" should not overlook the fact that the Fair Tax eliminates taxes on capital gains, so individuals whose savings are based primarily on unrealized capital gains might even benefit more than they would in the current system. Just some food for thought...

[Aaron]

I am a big saver myself so I was very appreciative when you noted this problem last time.

But didn't I solve this problem for you, Steve, when I said we could simply introduce a new currency at the same time as the tax and offer 1.23 (or 1.30) "new dollars" for any old dollars you have? I mean, if we are going to introduce a complicated new tax system that features pre-bates, then what's a new currency thrown in?

But seriously, maybe a better way would be to gradually phase in a VAT tax by 1% per year over 23 years. Or somehow offer tax relief on all savings, etc.

So, when a city or state increases their sales tax, essentially the same things happens, too?

Frankly, I think implementing a very basic flat income tax would be easier and also have a lot of rewards without this problem.

[Ron Hardin]

Right, you can't move the point of tax collection to later in the earn - spend cycle without taxing something twice.

[Tom Hanna]

Unless that money is all in a Roth IRA, you're going to be paying income taxes, unless your investments don't earn an income.

This pretty well covers it.

http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#16

[Bob]

Oh, brother.

1. Huckabee doesn't have a prayer (no pun intended )of becoming POTUS, so chill out.

2. What the FT zealots are doing is so disingenuous that their credibility is at risk. Anyone who knows the difference between mark-up and gross margin catches this fraud.

3. Chances of eliminating the IRS?

None. Too many votes at stakes.

Chances of Congress giving up their power to tax or not tax certain groups, individuals or businesses?

Are you kidding me?

[markg]

Steve,
I thought your position on taxes was one of fostering economic growth - not about fairness. It may not be fair for you, but if we get greater economic growth will it be better for everyone else?
My wife is self employed. Her income is added to mine, so she pays 28% federal income tax plus 15% in SS and medicare taxes. Wow, 43% compared to a hedge fund manager with $millions of income paying 15% federal income tax and no SS or medicare. How fair is that? Of course if taxes were higher on the wealthy maybe she would have no job at all due to the negative impact on the economy of higher taxes.
The tax code will always screw some. The question is will it benefit most.

[Chris]

Tom Hanna --

Not quite -- if it's in a taxable account, then the amount earned every year is taxed, but the accumulation is never taxed again.

Max --
As for the Baby Boomer whining, remember that you're the generation that's going to bankrupt Medicare and Social Security. That's a huge wealth transfer from younger generations, largely enabled by Congresses you elected. As a result, I pay 7.65% of my salary into a black hole.

[Steve]

markg:

You're right, this is about growth. Double taxation isn't growth friendly. But the main point is that the so-called Fair Tax crowd has chosen the word "fair" to describe their tax system. All I want them to do is an explain why they think double taxation of after-tax savings is "fair." They chose the word; I presume they are prepared to defend it(?).

Come to think of it, the word "fair" is hardly ever defined by those who like to use it. Why is that?

[Andrew]

Max - What's with the under 30 bashing? I'm under 30, and I resent the fact that even though I'm paying into a system that I will never benefit from, I still somehow get flack for it. Should we just sign over our hard earned paychecks to our parents because they didn't have the foresight to save for themselves? My friends and I started our retirement accounts when we were 19... we, at least, aren't expecting to live like vampires off the young.

[Steve]

Andrew and Chris:

Social security will be in good shape if productivity continues to drive growth (..and it will, barring a negative black swan event). And the root problem is not "whining boomers"; it is a system that was sold in using the strong implication that each worker's "contribution" to the system was a retirement safety net for the individual making the "contribution" -- as opposed to a "tax" going into a relief system. If it hadn't been sold that way, it wouldn't have sold. In any case, SS probably won't be a problem.

Medicare is the big question; many in Congress are saying the recent big boost in benefits was a big mistake. My big question: why don't they fix the law? If it will eventually require fixing, why not do it now? (After all, bad news only gets worse.)

[Chris]

Steve --

It was far more than an implication -- that was FDR's main point. The bigger problem, though, was the periodic increases in social security benefits that occurred in the 60's to the 80's, mainly from congresses trying to stay on the good side of older voters.

And, therein lies the answer to your question: why don't they fix the law? Because it will hurt the chances of today's Congress. Whichever side proposes cutting Medicare spending will be pilloried by the other side as "wanting senior citizens to die in the streets."

Unfortunately, the existence of Medicare has supplanted many other alternatives -- about 15 years ago, my then-employer dropped much of its retiree medical benefits because "that's what Medicare is for." Reducing Medicare benefits to current retirees (or to those nearing retirement) would effectively pull the rug out from under them.

[markg]

Steve,
When it comes to medicare, the baby boomers are going to require medical care in the future. Pre-funding the system will not ensure the medical care will be available in the future. You can have trillions of dollars in a trust fund, but if you do not have enough hospitals, doctors, nurses, medical equipment, etc. what good is the money?
Remember Star Trek. One doctor. He waved a wand over the patient, his hand held device gave the diagnoses, and this thing that looked like a needle and made a wooshing sound provided the cure. Okay, that's far fetched, but it makes the point that productivity gains are the answers to Social Security and Medicare (not trust funds). Providing the greatest amount of goods and services with the least amount labor and materials. And Andrew, the best thing the baby boomers can do for you is not to save money for thier own retirement. It is to pass along to you a public and private infrastructure that results in a highly productive work force.

[Tom Hanna]

Chris - I understand that, but the income that your taxable account earns every year is subject to income tax. Remember the power of compounding? Well, the power of compounding is such that every year your income and with it your income tax should increase. With a tax deferred account, of course, the whole tax bill comes on withdrawal. But ultimately my point is just that the Fair Tax or any other reform doesn't exist in a vacuum. To say that you'll be double taxed with the Fair Tax (which includes some provisions specifically to avoid that) ignores the fact that you are potentially taxed THREE times under the current system. (When you earn the money, when the invested money earns interest and when you die.)

[Drew McDowell]

I'm taking it that no one here buys the 'embedded tax' argument?

[Pitt]

>>> we could simply introduce a new
>>> currency at the same time as the
>>> tax and offer 1.23 (or 1.30)
>>> "new dollars" for any old dollars

Doesn't work.

If new$ can be used to pay debt in old$, everyone just borrows a hojillion $ 1 second before the changeover, exchanges it 2 seconds later, and makes a 30% profit, resulting in an instantaneous 30% inflationary hit.

If new$ can't be used to pay debt in old$, some exchange rate will have to be devised (otherwise nobody will be able to pay their mortgages/credit cards/etc.). Preventing the above inflation requires that old$1 of debt = new$1.30 of debt, but then millions will be instantly crushed under 30% higher debt burdens, and billions in savings - invested in things other than cash or debt - won't be properly compensated for the changeover.

Introducing a new currency doesn't change anything other than who gets hurt.

Which is hardly surprising; "FairTax" advocates do very little beyond waving their hands and insisting everyone will come out ahead with their scheme, even though it's revenue-neutral. If you're told that it's the same people paying, and everybody pays less, yet the sum of all payments is still the same, that should be your first clue that there's a problem with the math.

If you're truly interested in evaluating the proposal, then here (http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf) is data on household income and total federal tax burden and here (http://www.census.gov/hhes/www/poverty/threshld/thresh04.html) is data on poverty levels. If you crunch the numbers, you'll find an awful lot of middle-class households will be paying substantially more tax under "FairTax". Taking the middle quintile as an example, their federal tax burden will go up from 14.1% to 17.4% of their income (assuming 2.6 people per household, as is the average), and that's not even including the raises to state taxes that would be required for them to pay the "FairTax" being levied on them by the federal government (p.676 of http://www.beaconhill.org/FairTax2006/TaxingSalesundertheFairTaxWhatRateWorks061005.pdf).

"FairTax" shifts a great deal of the tax burden onto the middle class. Run the numbers for yourself and you'll see I'm right.

[LB]

>>I'm taking it that no one here buys the 'embedded tax' argument?<<

I don't think that any of the other commenters are aware of it.

They also don't understand that the tax is not added onto the total like the current sales tax. It's part of the price of the item, just as the embedded taxes, which would be eliminated, are today.

[Jim Glass]

The Fair Tax is as impossible as a flying pig, because retail sales tax systems collapse at rates over 10% due to tax cheating -- none exist anywhere in the world.

That's why countries with high-rate consumption taxes use the Value Added Tax, which has a self-enforcing mechanism -- but also requires an agency like the IRS, the killing of which is the main goal of many Fair Tax supporters.

Morever, even the VAT can't tax services, but only hard goods, so VATs reach only about 1/3rd of an economy. Sales taxes on services are near totally unenforceable -- most jurisdictions don't even pretent to try to tax them, and services are the bulk of the private sector.

Thus, the Fair Tax retail sales tax idea is simply impossible -- you can tell its supporters that they'll see a unicorn race in the Kentucky Derby by before they see it.

Beyond that, the Fair Tax wouldn't work because it also has to cover the cost of government -- the FT supporters have a fantasy that the federal gov will somehow tax itself to pay for itself to keep the tax rate at their 23% -- and states must pay sales tax to the feds on everything too, which pushes the sales tax rate up to around 45% depending on how you count it.

Then it also never would be passed because it really is *very* regressive, with BIG tax cuts to the rich and corresponding increases on the poorer. The FT people prepare their "tax distribution" tables showing otherwise by using the bogus assumption that everybody pays tax on all their income. But people with low incomes (the young and retirees) consume MORE than 100% of their income (through college and home loans, consuming savings etc.) and would pay tax on it all, while the rich consume much less than their total income.

Then there is the savings issue ... and other problems too that there's no need to go into. The whole thing is basically a populist political scam.

Here's the most comprehensive recent professional summary of all the things wrong with it:

http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf

[Steve]

Thanks Jim,

Excellent synopsis, as usual. And thanks for the link to Bartlett's article. I'll read it today, and may have more to say about Huckabee's tax ideas soon; sounds like he swallowed the hook on the national sales tax.

[Aaron]

>

No, because your debts would also be increased by the same amount. If you borrowed $100 in old dollars, you'd have to pay back $ 130 in new dollars.

Every dollar in the old system would have to be converted...not just assets. I wasn't clear on that.

Anyways I don't support the fair tax, though I think a VAT has its advantages. I think a flat tax on income would be better.

[Dan]

Wouldn't the price of goods go down by the "23%" (since businesses producing them would not be paying taxes anymore) and then back up "23%" at the point of sale? Thus, the actual cost to the consumer would be roughly similar to what it is now. The difference for our economy would be that exports would go down in price considerably, so American companies would have another tremendous advantage on the world stage (selling un-taxed goods). Wouldn't that drive economic growth here (and abroad, I suppose)?

I'm not for sure the fair tax is "fair", but the system we have now is hopelessly "unfair" - there must be a better way.

Flax tax or fair tax - let's get something done.

[LB]

Anyone who thinks that you have to "convert" dollars doesn't understand the proposal.

[consumption tax rules]

cmon now the readers and author of this blog are smarter than this.

you're totally neglecting the secondary effects of eliminating the productivity taxes. how prices would re-equilibrate (companies competing with the windfall of no income taxes)...the massive influx of PROFIT-SEEKING (again, competitive) capital...and the elimination of the wasteful tax industry.

saying fair tax (i agree, bad name) raises prices by 23/30% is just dishonest. net result is a massive decline in prices, that widens every year. tanstaafl, guys.

[Steve]

Recommendation to all, on both sides of this issue as well as the undecided: Please take 25 minutes to read tax expert Bruce Bartlett's paper, which Jim Glass pointed us to.

Print it out and read it over a cup of coffee. Here's the link again:
http://tinyurl.com/22um5w