Editore"s Note
Tilting at Windmills

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January 16, 2008
By: Kevin Drum

RETIREES AND THE FAIRTAX....Matt Yglesias reprints a chart showing that Mike Huckabee's 30% national sales tax would be good for the rich and bad for the middle class, and then adds this:

Of course, the elderly in particular get hammered here which I assume makes this a non-starters in real world politics.

A big national sales tax is such a loopy idea that I feel like my IQ drops every time I even acknowledge it as something worth discussing. Still, like it or not, the idea is out there and it's worth unpacking Matt's comment a bit just to demonstrate one of the nonobvious ways in which this really, truly is a complete political nonstarter.

The issue isn't so much Social Security benefits, which are currently tax-free for nearly all retirees but would end up being subject to a sales tax. The "prebate" feature of the FairTax proposal would, in theory, take care of most of that. Rather, it's retirement savings, which would end up getting taxed twice. Say you earn $1000 at age 64, pay taxes on it, and then stick the remaining $800 in the bank. The next year you turn 65. Under current law, that retirement money is yours free and clear because you've already paid taxes on it. But if a sales tax is suddenly legislated into existence, that $800 isn't worth $800. It's only worth about $600. Surprise! All that money you've saved for retirement is suddenly worth a whole lot less than you thought it was. Better not plan on taking any of those Caribbean cruises you've been dreaming about.

This is, of course, patently unfair. And you may rest assured that AARP is well aware of all this. It's hardly the only reason a 30% sales tax is loopy (see here for more), but it's one that most people don't figure out until you tell them. People in their 50s who are carefully totting up their retirement savings might be a little less enthusiastic about Mike Huckabee if they knew this.

UPDATE: Megan McArdle says that this problem with the FairTax is only "transitionally true." Yes, of course. I've slightly modified the post to make that clearer. The transition period, however, is 30 or 40 years long, and, contra Megan, there's really no good way to fix it. It's patently unfair to anyone nearing retirement, and clearly a political killer.

Kevin Drum 1:54 PM Permalink | Trackbacks | Comments (88)

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Comments

what's the first thing that would happen if Congress enacted a Fair Tax system? Congress adds fifteen volumes of loopholes, exceptions, grandfather-clauses, sunsets, and carve-outs. and we're back to needing accountants to figure out WTF to do every April.

Posted by: cleek on January 16, 2008 at 1:57 PM | PERMALINK

Aren't all these "flat tax" and "fair tax" nostrums just populist fluff? Nobody likes taxes, and even if they accept the necessity, they think (probably correctly) that the system is rigged against them. So, blow some BS about how you're going to "scrap the system" and replace it with something "fair," and people think you're on their side.

Posted by: bleh on January 16, 2008 at 2:01 PM | PERMALINK

Bleh, it's all about making sure the rich don't have to shoulder their share of the burden, ever. It's regressive as all hell.

Posted by: Phoenix Woman on January 16, 2008 at 2:05 PM | PERMALINK

But crack dealers would have to pay taxes, so it is progressive!

Posted by: Gore/Edwards 08 on January 16, 2008 at 2:06 PM | PERMALINK

Cleek - you said exactly what I was going to say.

Pages(Current Tax Code) = pages(Fair Tax Code + 5 Years)

It's invevitable.

Posted by: RobertSeattle on January 16, 2008 at 2:10 PM | PERMALINK

Maybe I'm overestimating things, but aren't most people's main non-SS sources of retirement income 401(k) accounts, IRAs, pensions, etc., which weren't taxed going in?

Posted by: Joe on January 16, 2008 at 2:11 PM | PERMALINK

In theory (leaving aside the rather enormous collection problems) a National Sales Tax is no crazier than a VAT.

Both of them tax consumption, rather than income, so yes, they tax the elderly more than the current system. But IRA's and 401(K)'s would be neutral. (Withdrawals are taxed now as income.) If you have significant retirement savings in non-retirement accounts, you aren't in the majority of the elderly.

Posted by: SamChevre on January 16, 2008 at 2:12 PM | PERMALINK

I am so sick of the rich complaining about paying taxes. It seems to me that if you are in the income bracket that controls 90% of the assets in this country, you should pay 90% of the taxes. This bull about everyone paying the same rate doesn't take into account the power associated with ownership.

Posted by: Singularity on January 16, 2008 at 2:13 PM | PERMALINK

Not to put too fine a point on it: in fact every dollar ever saved after taxes in your life time is suddenly taxed again. Unless you don't spend it. Jack Benny economics!

Posted by: Sparko on January 16, 2008 at 2:15 PM | PERMALINK

Since Huckleberry thinks that the Constitution should conform to God's law, perhaps the real question we should ask is, 'WWJT' - Whom Would Jesus Tax?

Posted by: rnato on January 16, 2008 at 2:17 PM | PERMALINK

http://www.talkingpointsmemo.com/

Of course people who don't want to think so deeply about economic proposals can just turn to Grandpa Huckleberry for advice on how to survive the coming economic disaster by fryin up a mess o squirrel in the popcorn popper. Yum yum!

Posted by: emerald on January 16, 2008 at 2:18 PM | PERMALINK

I certainly understand the regressiveness of sales taxes, and the point that reducing the progressiveness of the tax code is a perpetual objective of the wealthy, but my point is, aren't these schemes SO outlandish that they have no chance of ever actually being passed and thus are merely "taxes bad" window dressing?

There are already many small ways in which the progressiveness of the tax code is undermined -- and that's where the wealthy REALLY get their payoff -- but the implications of any restructuring nearly as massive as a "flat tax" or a VAT would be instantly obvious, would be widely and frequently communicated by the media bobbleheads and the large-scale interest groups like AARP, and would quickly generate an avalanche of objections that would (rightly) bury it.

IOW, the benefits would be so enormous and one-sided that they could never get it through, Trojan Horse style, like they did the Reagan and Bush Jr. tax cuts for the wealthy. Ergo, it's just a talking point, not a real proposal.

Posted by: bleh on January 16, 2008 at 2:18 PM | PERMALINK

You could phase the thing in over, say, 20 years if you really wanted to do this. But why?

Posted by: Preston on January 16, 2008 at 2:19 PM | PERMALINK

This topic is so much fun because not only is it purely recreational (there's no chance in hell anything like this passes), it's a hoot to think up another way that your basic old, paranoid Repub is going to have an aneurysm from the impacts.

If you think the federal government is intrusive now, wait until it's got its finger in every damn transaction you make. An enormous sales tax like this is going to cause almost universal tax evasion, with everyone paying as much as they can under the table. The feds will have to counter this with a huge sales tax enforcement arm. Audits for everybody all year round!

Also, there will be exceptions. No way they're going to tax home sales, stock transactions, fine art, and that kind of thing. Cars, probably. How about RVs? Only if it's your primary residence? How long does it need to be your primary residence? One day? A year? Wait until the lobbyists get involved. You might be pining for the good ol' days of the relatively simple Internal Revenue Code.

Posted by: ericblair on January 16, 2008 at 2:20 PM | PERMALINK

At age 64, no one buys IRAs, so Kevin's example is appropriate. In fact the only reason to buy an IRA when you are in your 50s is to defer the tax bill on the money to a year when you are paying a lower rate. The "Fair Tax" would destroy that rationale. In fact the "Fair Tax would destroy the IRA, since no tax advantage would ever be gained.

Posted by: Mudge on January 16, 2008 at 2:21 PM | PERMALINK

Money saved is only taxed if it's spent, so if this is ever instituted, I will retire to Costa Rica. Suck on that, fair tax idiots!

Posted by: Crusty Dem on January 16, 2008 at 2:22 PM | PERMALINK

SamChevre: In theory (leaving aside the rather enormous collection problems) a National Sales Tax is no crazier than a VAT.

So who's in favor of completely replacing income tax with a VAT? Nobody in their right mind.

Both of them tax consumption, rather than income, so yes, they tax the elderly more than the current system.

Just a teeny problem there, huh?

But IRA's and 401(K)'s would be neutral. (Withdrawals are taxed now as income.)

First, withdrawals from Roth IRA's are not taxed as income. Second, income tax can be progressive, so it's hardly neutral.

Here's a better idea: let's have a head tax instead (fixed amount per person). That was Maggie "there is no society" Thatcher's downfall, and an important reason for Shay's Rebellion. Maybe it can even lead to a new Constitutional Convention, which used to be a wingnut wet dream (and would fit in with Huckleberry's desire to "Christianize" it).

Posted by: alex on January 16, 2008 at 2:22 PM | PERMALINK

so if this is ever instituted, I will retire to Costa Rica. Suck on that, fair tax idiots!

maybe that's the plan: get all the retirees out the the US, and off Medicare. instant surplus!

Posted by: cleek on January 16, 2008 at 2:28 PM | PERMALINK

The 'fair tax' would kill Roth 401(k)s. They're funded with after-tax contributions and supposed to be tax free at the time of withdrawal.

So, under Huck's plan I, for example, would pay about 30% in SS, Medicare, & income taxes on the front end...then pay another 30% on the back end. Even with 'the magic of compound interest' I don't see how one comes out far ahead on that deal.

Posted by: Joe Bob on January 16, 2008 at 2:29 PM | PERMALINK

cleek, that's not a bad plan. If you eliminated all benefits for non-residents, it could be a net gain, although you'd have to get a hell of a lot of retirees to leave, if you just get the richest 5%, it would be an enormous net loss.

We could also outsource all retiree care, by providing medicare and housing benefits to retirees if they move to Calcutta, that'd slash costs. I've always assumed this would be step 1 in "The Romney Retirement Plan".

Posted by: Crusty Dem on January 16, 2008 at 2:35 PM | PERMALINK

I believe that the 30 percent sails tacks is just
wot our countree kneeds.

Ah mean, since the earth is only 6ooo years old, and the Constitution ain't ritten like god intended, why not have a perfectly insane tax idea
to kick about?

But then again, too many folks believe in lottery tickets and in their astrological charts.

On a day when inflation is the worse it's been in 17 years, kicking around the Huckatax seems positively unreal.

Posted by: Tom Nicholson on January 16, 2008 at 2:41 PM | PERMALINK

Oh yeah. Reminds me of when all the big corporations starting 'converting' traditional pensions to 'cash balance' plans.

Once you scratched the surface you realized what the corporations were really saying. They were saying "Listen, you older worker, remember when you were young and we said you accrued no pension at the start but if you kept with us you would get your payback later? Well, now it is later and we need to attract younger workers so we aren't actually going to give you the payoff. Thanks for sacrificing your younger and older years.

Posted by: Tripp on January 16, 2008 at 2:42 PM | PERMALINK

Look, Huckabee's not serious about this. He raised taxes a number of times when he was governor and this is a possible problem for him among Republican voters. His way of dealing with it is to propose a whole new tax system, thus changing the subject.

Posted by: Jose Padilla on January 16, 2008 at 2:48 PM | PERMALINK

It's clear that those of you who disparage the Fair Tax haven't taken the time to learn about it. How many of you have visited www.fairtax.org, which contains abundant documentation that, if read and understood, will allay your concerns.

You are failing to take into account the growth that will be spurred by the Fair Tax, as well as the reduction in prices that will be achieved as the costs of complying with the present income tax code no longer need to be built into products. There will be no increase in final prices as a result of the Fair Tax, so that the value of savings will not exhibit a loss.

Not only will the Fair Tax streamline and simplify the tax system, resulting in increased economic growth and prosperity for all, it will eliminate disease, provide sources of abundant, clean-burning oil that do not contribute to greenhouse gases, and usher in an era of low-cost space travel, allowing for the average family to vacation on Mars if they desire.

But you are so wedded to the present tax system that you can't see the truth in front of you!

Posted by: Mike Toreno on January 16, 2008 at 2:50 PM | PERMALINK

Not only will the Fair Tax streamline and simplify the tax system, resulting in increased economic growth and prosperity for all, it will eliminate disease, provide sources of abundant, clean-burning oil that do not contribute to greenhouse gases, and usher in an era of low-cost space travel, allowing for the average family to vacation on Mars if they desire.

Excellent! Though I think you left out that part about the Fair Tax making everyone incredibly sexy.

Posted by: RSA on January 16, 2008 at 2:54 PM | PERMALINK

"A big national sales tax is such a loopy idea that I feel like my IQ drops every time I even acknowledge it as something worth discussing."

Don't worry. It's not possible for your IQ to drop any further.

Wow! Injecting pompous condescension into policy discussion is FUN.

Posted by: JO on January 16, 2008 at 3:02 PM | PERMALINK

Speaking of God's Law and the Constitution, I vastly prefer Huey Long's version of faith-based government, which focused more on economics. This is from T. Harry Williams's Pulitzer-winning bio of Long (titles, natch, "Huey Long"):

[W]hat struck him particularly were the commandments [in Leviticus] that every seven years there should be a release of debts and that every fiftieth year, the "Jubilee" year, there would be a return of possessions to every man.... This was not the first time he had heard the question raised.... But now it was brought before him in a peculiarly authoritative and institutional way..... It was ironic that he should have learned the lesson at such a citadel of conservatism as Tulane University.

I wonder how that would go over this year?

Posted by: darrelplant on January 16, 2008 at 3:03 PM | PERMALINK

Folks, this tax ain't going anywhere.

Bush couldn't even get a Republician congress to have a single hearing on his Social security proposal and this tax is much worse. It is extrememly unlikely that Huckaby would bring it up if by some chance he was elected.

Posted by: BigRed on January 16, 2008 at 3:05 PM | PERMALINK

darrelplant: I wonder how that would go over this year?

Woo, hoo! I'm a convert to Biblical government. I can stop wearing blended fabrics and quit eating pork. I don't like to work on Saturdays anyway, and am a heterosexual, so no problem there. In return I can tell the bank to shove the mortgage where the sun don't shine. Hey, it's worth it!

Posted by: alex on January 16, 2008 at 3:09 PM | PERMALINK

Mike Toreno -- big props. You had me for a minute there.

Posted by: The Fabulous Mr. Toad on January 16, 2008 at 3:10 PM | PERMALINK

You are failing to take into account the growth that will be spurred by the Fair Tax, as well as the reduction in prices that will be achieved as the costs of complying with the present income tax code no longer need to be built into products.

The FairTax is also guaranteed to make your erections last five times longer.

On a more serious note, it's a good job that only primary elections happen around tax season. If people were filing in November, they'd probably lap this shit up.

Posted by: ahem on January 16, 2008 at 3:14 PM | PERMALINK

It's clear that those of you who disparage the Fair Tax haven't taken the time to learn about it.

Or have learned about it and found the arguments wholly unconvincing...

Anyway, I've read Boot's book -- also unconvincing to anyone who can add, of course. Good enough for you?

You are failing to take into account the growth that will be spurred by the Fair Tax

Or dismissing the claims as unconvincing...

as well as the reduction in prices that will be achieved as the costs of complying with the present income tax code no longer need to be built into products.

No, but the costs of paying the so-called "FairTax" on purchases, as well as the costs of the increased government monitoring of business, will likely exceed the current amount. And that's even assuming that business manganimously decides to pass all those savings on the the customer instead of pocketing them as profits!

There will be no increase in final prices as a result of the Fair Tax, so that the value of savings will not exhibit a loss.

These claims are not convincing.

Not only will the Fair Tax streamline and simplify the tax system

You mean with the massively intrusive bureaucracy required to implement the so-called "prebate"?

And as others have pointed out, if you don't think that the system will be immune from the same kinds of carve-outs, incentives and exemptions that complicate our current system, I want some of what you're smoking.

resulting in increased economic growth and prosperity for all

Claims of increased growth and prosperity as a result of a massive tax increase on the middle class -- which will see their mortgage deduction traded in for a 30% tax on the cost of their new homes -- are not convincing. Aw, who am I kidding - they're laughably absurd.

it will eliminate disease, provide sources of abundant, clean-burning oil that do not contribute to greenhouse gases, and usher in an era of low-cost space travel, allowing for the average family to vacation on Mars if they desire.

Wha....? I can't believe you forgot the pony!

But you are so wedded to the present tax system that you can't see the truth in front of you!

Max Boot's book, I'll grant you, is a pretty good polemic against the current tax system. But saying "the current tax system sucks" != "the FairTax is the right answer!" That bit of rehetorical sleight-of-hand hardly enhances your credibility.

And I haven't even mentioned the suspiciously demogaugic name, "FairTax"! Sorry, but after years of Republican "Clear Skies Initiatives" and "Patriot Acts", the fact that y'all picked such a name stinks on ice.

The fact that proponents respond with nothing but straw men -- "You haven't read our newsletter!" "You're wedded to the current system!" and never seem to address the substantive criticism with anything other than bland reassurances of ponies galore is really just the final nail in the coffin.

Posted by: Gregory on January 16, 2008 at 3:16 PM | PERMALINK

Aw, heck, I got pwnzed. Well played, Mike Toreno.

Posted by: Gregory on January 16, 2008 at 3:17 PM | PERMALINK

BigRed: Folks, this tax ain't going anywhere.

Maybe so, but shouldn't we judge candidates by their proposals? Kucinich is called a wild eyed radical because he proposes universal Medicare (you know, the kind of approach that destroyed our Northern neighbors). Meanwhile, a mainstream Republican candidate, and supposed populist, proposes the most un-populist regressive tax possible. Yet he gets a pass.

Posted by: alex on January 16, 2008 at 3:19 PM | PERMALINK

I believe that the 30 percent sails tacks is just wot our countree kneeds.

Pluuus, a sqirl in evra corn poppa.

Posted by: Econobuzz on January 16, 2008 at 3:20 PM | PERMALINK

But it has "Fair" in its name! It can't be unfair! I'm shocked by this development.

Posted by: ThatGuy on January 16, 2008 at 3:20 PM | PERMALINK

Wait a second (I can feel my IQ dropping)... under the so-called FairTax, why would the $1000 be taxed down to $800? I haven't spent any of it yet.

Posted by: Lucia on January 16, 2008 at 3:21 PM | PERMALINK

This is a really good point, which raises a different point.
Does everyone who pre-paid their income tax (via Roth IRAs) get a refund?
If not, do we sue the Feds on the grounds that this was a "taking"?
Or do we just spread the word to the world (which, those who read the papers might notice, is presently bailing out the US financial industry) that financial interacts with the Federal govt are not worth a pail of warm s*it because the terms will be rewritten when the Fed feels like it wants to do so?

Posted by: Maynard Handley on January 16, 2008 at 3:22 PM | PERMALINK

Fair Tax. Only for the "fair" sex.

This just in.... Huckabee is a sexist by promoting a tax on the fair sex.

Tell me again which one is the "fair" sex?

Boy, you can get in a lot of politically correct hot water with this one.

Fairy Tax Tale?

I wasn't talkin about fairies dammit.

Where's my metamucil?

Race? Where'd that come from?

One for all and fair taxes for all!

blllp!

Posted by: Tom Nicholson on January 16, 2008 at 3:28 PM | PERMALINK

Here's another quandary: under the Fair Tax, if an American converts U.S. currency into another currency, who's going to collect the sales tax on what that money buys in other countries? I can assure you that merchants in England or Taiwan are not going to be sending money to the U.S. government.

With the internet making this extremely easy to do, the Fair Tax will bleed this country dry. We'll be sending all our money abroad. It'll be the best thing we could ever do for the economies of China, India, and [insert country name here].

This probably falls under the very broad umbrella of "tax avoidance" caused by the "fair" tax.

Posted by: BFranklin on January 16, 2008 at 3:34 PM | PERMALINK

1) In case of all-out war like World War II, a flat tax/fair tax/consumption tax scheme would hardly fund it, especially if rationing was necessary in fighting the all-out war. (Which is why Bush, Republicans and some conservative "Democrats" calling for tax cuts, tax cuts, tax cuts while we are in the "War on Terror," which has driven up enormous deficits, makes these tax cuts (primarily for the wealthiest U.S. citizens) that much more obscene.

2) The flat/fair tax proponents claim that everyone will benefit from the tax scheme. Okay, if they are so certain about this, then any bill establishing the tax scheme should have provisions with hefty penalties included upon passage saying that after three years, if not everyone is benefiting, then we go back to the old progressive tax system, with the ones behind this fair/flat tax scheme paying double the income tax rate they paid previously. In other words, if they're so certain everyone will benefit (and not just the wealthiest) then they'll put their money where their mouth is and agree to this little provision, just in case some people in Congress and the White House are stupid enough to fall for this economic con job.

Posted by: The Oracle on January 16, 2008 at 3:39 PM | PERMALINK

I'm not in favor of a flat tax, but I don't like Kevin's rationale for rejecting it. The problem he notes is really a transitional problem-- people who have been using the old system all their lives are going to suffer when we transition to a new system. But isn't this true of most large-scale changes? Change hurts-- is that to be expected? Sometimes you still need to do it if it's a good idea in the long term. Again, I don't endorse a flat tax, but if we did it, we'd just have to find ways to compensate for transitional costs.

Posted by: Elginb on January 16, 2008 at 3:40 PM | PERMALINK

I'm pretty sure IQ is taxed under the FairTax.

It would explain a lot.

Posted by: uri on January 16, 2008 at 3:43 PM | PERMALINK

I'm not in favor of a flat tax, but I don't like Kevin's rationale for rejecting it. The problem he notes is really a transitional problem-- people who have been using the old system all their lives are going to suffer when we transition to a new system. But isn't this true of most large-scale changes?

Maybe, but the fact that the "everything and a pony!" promises of the flat tax crowd don't even address the issue is one more reason not to take them seriously.

Being able to add is another.

Posted by: Gregory on January 16, 2008 at 3:43 PM | PERMALINK

Damnit Kevin, you and your loopy ideas.

Yes, Huckabee's plan may be unworkable, but as a reality based community we should not just be casting away plans willy nilly by just claiming them to be loopy.

When his flat tax was discussed last week, there were some really insightful comments about why it was broken that could teach us all alot about why we tax what we do.

And also, there was a great comment comparing a Sales Tax with a much more interesting VAT, and it seems that while the Sales Tax seems dumb, after an analysis, that a VAT seems quite reasonable.

I'm still not sure what your accounting or economics background is Kevin, but I think you are often a victim of groupthink, and I respect you enough that I expect better from you than that.

Posted by: jerry on January 16, 2008 at 3:47 PM | PERMALINK

jerry: Yes, Huckabee's plan may be unworkable, but as a reality based community we should not just be casting away plans willy nilly by just claiming them to be loopy.

No problem, unless you missed the part where Kevin explained why he thinks it's loopy, and provided two links to additional explanations.

Sure, we could debate whether the earth is round or flat, but after a while it's a real time saver just to say that flat earthers are loopy.

Posted by: alex on January 16, 2008 at 3:53 PM | PERMALINK

Wipe out 30% of your savings? Haha...only if you spend it! If you don't spend it, you can pass it on tax free to your heirs!

Posted by: lutton on January 16, 2008 at 3:56 PM | PERMALINK

Lucia,

It doesn't GO down to $800 -- it already WENT down to $800 because you paid income tax on it. And then its purchasing power goes down to $600 because you now have to pay FairTax(tm) on all your purchases.

Posted by: The Fabulous Mr. Toad on January 16, 2008 at 4:18 PM | PERMALINK

"Say you earn $1000 at age 64, pay taxes on it, and then stick the remaining $800 in the bank. The next year you turn 65. Under current law, that retirement money is yours free and clear because you've already paid taxes on it."

I'm sorry Kevin, but did I miss the announcement that interest on bank savings accounts was now going to be tax fee? Unless you're talking about a Roth IRA, interest earned on deposits--which is the only reason to stick your $800 in the bank in the first place instead of spending it--is taxable.

I'm not a big fan of Huckabee's sales tax plan, but I fail to see why it matters that retirees would be taxed on their purchases just like everybody else. Virtually every person who is subject to income tax withholding makes purchases out of income remaining after tax.

Posted by: Former Tax Man on January 16, 2008 at 4:19 PM | PERMALINK

The fair tax is not only nutty and regressive, but would have unintended(?) consequences. What will prevent wealthier individuals from traveling outside the USA to make expensive purchases. I can see job losses to all our border states retail outlets. Perhaps even a large increase in day flights to Bermuda etc.

Posted by: Richard MacCormack on January 16, 2008 at 4:20 PM | PERMALINK

Wipe out 30% of your savings? Haha...only if you spend it! If you don't spend it, you can pass it on tax free to your heirs!

who will pay 30% to spend it... the (so-called) death tax reappears!

Posted by: pv on January 16, 2008 at 4:20 PM | PERMALINK

elginb,

Change hurts-- is that to be expected?

Ummmm, no, that is to be avoided. Like, say, I bought a new HD TV. Did that hurt? I don't think so, cause I'm gonna watch Green Bay this weekend.

Since life is full of changes are you saying your life is full of hurt? Pity you.

Regarding avoiding the sales tax by not buying anything - that is like avoiding the payroll tax by not working. I wonder why everybody doesn't do it?

Posted by: Tripp on January 16, 2008 at 4:23 PM | PERMALINK

Sales taxes already exist, so if you spend that $800 savings, you'll be spending some of it on sales taxes. So at least on this score it doesn't look to me like the "fair tax" is introducing, or trying to hide, some new kind of way of taking your money. It's just haggling about the price, as it were.

I mean, I too think this scheme is idiotic and has no chance of going anywhere, but this particular point seems a little overblown to me.

Posted by: well on January 16, 2008 at 4:25 PM | PERMALINK

What will prevent wealthier individuals from traveling outside the USA to make expensive purchases?

Customs and increased duties, I suppose. I know that many Europeans take a flight to Minneapolis, shop at the Mall of America, and fly home. For them and the weak dollar, even with paying their 18% value added tax in customs it is worth it.

Posted by: Tripp on January 16, 2008 at 4:27 PM | PERMALINK

well,

I mean, I too think this scheme is idiotic and has no chance of going anywhere, but this particular point seems a little overblown to me.

Oh, right. Adding to my state tax (which in socialistic MN is 6% and exempts food, clothing, and housing to be less regressive) with a whopping Federal tax five times as big is a mere trifle. Any problem with it would be quibbling. Yeah.

Posted by: Tripp on January 16, 2008 at 4:31 PM | PERMALINK

How would Internet purchases be taxed?

Would folks really like to pay 30% more for gas?

The problem with such a tax is how to federalize it.

Ya can't.

Therefore it's a moot point.

The effect of such a tax would be rampant evasion; barter would rule.

Posted by: Tom Nicholson on January 16, 2008 at 4:34 PM | PERMALINK

I gather the way they plan to get rid of the IRS is to have the states collect the sales tax along with their own (bringing the tax rate up to about 35% most places, if it isn't really 55%).

I don't think this is Constitutional, however. That is, the feds can't make the states do it, and the states won't want to have any part of it.

Posted by: David in NY on January 16, 2008 at 4:42 PM | PERMALINK

Former Tax Man,

The centerpiece of Huck's plan is that it eliminates the IRS and the whole federal income tax system. This is really basic. It's on his website and stuff.

The reason seniors are different (specifically retired seniors, but also those close to retirement to a lesser degree) is that they paid income tax their whole lives, and get no benefit from eliminating that system. But now, when they want to spend their after-tax dollars, they get hit with a 30% federal sales tax on their expenditures. Others have to pay that, too, but anyone who's still in the workforce pays it out of pre-tax dollars. So retirees get hit harder.

Those who think this is just a transitional problem: you're probably right, but if we give the seniors a subsidy then either (1) there would be a revenue deficit, or (2) we'd all pay even more than 30% to pay for the seniors' subsidy, right when the baby-boomers are retiring. Given that polls show support for a national sales tax drops off sharply as the rate exceeds 23%, I think this is probably fatal.

Posted by: The Fabulous Mr. Toad on January 16, 2008 at 4:59 PM | PERMALINK

Bush's tax cuts were really just a tax shift.

Whatever people saved on taxes they lost because the dollar devalued some 60% since 2000.

Inflation, at a 26 year high, also took a healthy chunk out of everyones pockets.

Since 1913, the creation of the FED, the dollars buying power has decreased 95%

So why do people keep listening to the same tired lower taxes political canard every 4 years??

Posted by: Ya Know.... on January 16, 2008 at 4:59 PM | PERMALINK

The Laffer curve suggests that if we lower the fair tax from 30% to 20%, tax revenue will go up because the people will have more money to spend, so we'll buy more.

Posted by: AJ on January 16, 2008 at 5:31 PM | PERMALINK

Of course, as Adam Smith knew, the fairest and most efficient tax is a tax levied on land value.

Posted by: liberal on January 16, 2008 at 5:32 PM | PERMALINK

Kevin, not to quibble, since I agree that this "FairTax" proposal is so stupid it makes my teeth grind, but your facts aren't entirely accurate. Your assertion about the $800 being "free and clear" under "current law" is not true. Only money in a Roth IRA can be withdrawn tax-free and that withdrawal can actually occur at age 59 1/2, not 65. Money withdrawn from a conventional IRA or from a SEP or 401(k) is taxed at whatever your marginal rate is for that tax year. It is NOT tax-free.

Anyway, Huckleberry's proposal would also create the largest welfare administration bureaucracy in human history, with this "prebate" nonsense. Can you imagine the difficulty in loading, tracking, paying and administering payouts to several tens of millions of people? The cost of setting up and managing such a system would be enormous, not to mention the potential for fraud and abuse. Further, why should the average person want to pay more in taxes, so that someone who is wealthy can pay less? THAT is insane....

Posted by: The Conservative Deflator on January 16, 2008 at 6:54 PM | PERMALINK

I'm votin' for the Huckster! I'm a computer programmer specializing in wholesale and retail sales, and I'm betting that a big VAT and/or sales tax will create some programming projects for me. This is really neat. I never guessed that any of the candidates would see us programmers as a deserving special interest. Go Huck!

Posted by: Cold Coder on January 16, 2008 at 7:10 PM | PERMALINK

Generally, I'm skeptical of a fair tax because (a) enforcement issues feel like they would be pretty tough and (b) it would presumably be _much_ less progressive than the current system.

On the other hand, if it attenuates the impact the federal government's wealth transfer from everyone else to the geriatric set, maybe it's not all bad?

Posted by: kaplan37 on January 16, 2008 at 7:14 PM | PERMALINK

In other tax news, the House passed a $700 billion defense bill to protect us from Iranians in speedboats. At over $2000 for every man, woman and child in the country, we'd better start collecting those taxes.

Posted by: AJ on January 16, 2008 at 7:22 PM | PERMALINK

This just in.... Huckabee is a sexist by promoting a tax on the fair sex. - Tom Nicholson

Yeah, just wait until they get wind of how much shoes are going to cost now...

Posted by: Doc at the Radar Station on January 16, 2008 at 7:24 PM | PERMALINK

Kevin Drum wrote: “. . . Social Security benefits, which are currently tax-free for nearly all retirees. . . .”

Social Security benefits are subject to taxes on 85% of their value for many retirees. For example, a married couple filing jointly, with $44,000 income other than Social Security, and $10,000 in Social Security benefit, and no adjustments to income on the front of Form 1040, would find that 85% of their $10,000 Social Security income, or $8,500, counts as taxable income. Incomes at this level or higher are not unusual for retired couples, one or both of whom receive Social Security benefits.

The tax on Social Security benefits is a big deal among retirees, and it is a mistake to minimize or gloss over this issue.

Posted by: Joel Rubinstein on January 16, 2008 at 7:36 PM | PERMALINK
In theory (leaving aside the rather enormous collection problems) a National Sales Tax is no crazier than a VAT.
Compliance is a huge aspect of those collection problems. My understanding is that a VAT is much harder to cheat on than a sales tax, that a national sales tax is a tax cheat's dream, and a nightmare for those of us who are not tax cheats, because we have to make up the revenue with higher tax rates. I haven't seen any refutation of this. Posted by: Bill Arnold on January 16, 2008 at 8:35 PM | PERMALINK

The fact that a consumption tax is also a wealth tax is well know and one of the reasons consumption taxes are attractive, indeed it turns out often the main reason is numerical economic models. Yes, somebody who managed to save $600,000 out of the same income as somebody who manged to save less is going to do less well under this system, but so what? Why is this any more unfair that somebody who earned $600,000 more because they worked harder and is less well off under an income tax system? Consumption and income taxes both take more from the more virtuous - higher savers or harder workers -- and more from those who have more, either more wealth or higher paid abilities, because they were lucky.

The good thing about a consumption tax is that it taxes wealth and there is nothing those with wealth now can do about it now. If you think that wealth taxes are unfair to the less well off, then just raise Social Security payments.

So what is the objection here? Yes, taxes are 'unfair', but there's nothing special about consumption taxes here.

Posted by: stefan on January 16, 2008 at 9:15 PM | PERMALINK

It seems to me that it should be possible to "tax" the ecconomy by simply printing more money and using that to pay the government's bills. You just accept that it is a bit inflationary and go with it. It's already done to some extent, why not be overt about it so it can be debated and used effectively? No one can cheat on that system. Shove some cash to those most hurt by inflation like fixed income folk until the ecconomy adjusts to it.

Posted by: nameless bob on January 16, 2008 at 9:15 PM | PERMALINK

There may be things wrong with a national sales tax or a VAT, but that fact that transition on is a proportional tax on wealth shouldn't be viewed by progressives as a problem. Taxing wealth without disincentives for work or saving, what horror...

Posted by: stefan on January 16, 2008 at 9:27 PM | PERMALINK

Joel Rubinstein is dead right - I did some calculations before seeing his comment. By the time you have enough income to actually live comfortably if frugally, SS payments are taxed at about the full rate. And by the way, you are probably in the 25% bracket so incremental income is taxed nearly as much as the highest brackets. There is very little progressivity in marginal tax rates above the poverty level.

Posted by: skeptonomist on January 16, 2008 at 9:32 PM | PERMALINK

Your assertion about the $800 being "free and clear" under "current law" is not true. Only money in a Roth IRA can be withdrawn tax-free and that withdrawal can actually occur at age 59 1/2, not 65. - Conservative Deflator.

Actually the assertion is true. I just withdrew money from my bank account yesterday, and wasn't taxed on it. Try it. Put some money in the bank. Then take it out. Surprise: no tax!

Former tax man confuses tax on the interest with tax on the principal. If the money is in an account that does not pay interest, the entire $800 can be drawn tax free. If the account pays interest, the interest is taxable, whether withdrawn or not, but the $800 can still be withdrawn 100% tax free.

This not only affects retirees. Anyone with savings which has already been taxed at the Federal level will see those savings taxed again when the money is spent under a "Fair Tax." If you have an existing investment with a small basis, your savings on the capital gains tax will partially cancel out the fair tax (assuming 15% long term rate). If you sell an investment made with after tax dollars, which has a small gain or no gain, and spend the money, you will find yourself subject to Federal tax on top of the Federal tax you already paid before you invested the funds.

This is not just an issue for retirees. If you have considerable savings either in non-IRA accounts or in Roth IRA accounts [i.e. savings already reduced by federal tax] and they instantly lose 30% (or 23%) of their value, it's no consolation that it's only a transitional problem. You've still lost the money.

The fair tax is also a massive wealth transfer from those who have saved to those who haven't. Fair tax rates are kept lower by taxing savings that have already been taxed. A good strategy for anyone to prior to implementation would be to go massively into debt prior to transition buying as much durable "stuff" as they reasonably can. Then pay off the debt with untaxed income while also avoiding the fair tax on the consumption. To the extent that this strategy is implemented, the user escapes tax-free from both income and fair tax. The idiot saver, on the other hand, will both taxes on any savings carried thorugh the transition.

Assuming rational actors, the fair tax sounds like a great way of producing a consumer spending boom, with corresponding soaring prices for consumer goods, prior to transition, and a tremendous crash following the transition.

Posted by: KeithOK on January 16, 2008 at 10:16 PM | PERMALINK

Joel Rubinstein is dead right - I did some calculations before seeing his comment. By the time you have enough income to actually live comfortably if frugally, SS payments are taxed at about the full rate.

There is the problem with the assumption here, that people are living entirely off SS and taxable income. What about savings? While your calculation might hold for someone receiving just SS and a taxable pension, it won't hold for someone who is paying a significant part of their expenses through existing savings. They can live frugally, or perhaps even comfortably, on SS and savings without having their SS taxed at the full rate. If they're pulling enough of these savings from a Roth IRA they won't pay any tax at all on the SS. Since it's the people with significant savings that are most affected by this fair tax transition, you can't really ignore savings in the calculation.

Also, wouldn't the incremental tax rate in the 25% bracket would be 25%. The effective rate would considerably less. The bracket is designated by the marginal rate, i.e. 25%, not the effective rate.

Posted by: KeithOK on January 16, 2008 at 10:43 PM | PERMALINK

I searched for "stupid" and "ignorant" and found neither here applied to the Huck. He is both in great degree and, therefore, like the present incumbent, able to apply "solutions" to problems that are down right dangerous to the health of citizens and the nation without any idea of or care about the damage he is doing.

For once the WSJ was willing to call an idiot a spade. Maybe they and the rest of the ignorant lazy media could make this a habit? Sure would be refreshing.

Posted by: notthere on January 16, 2008 at 11:30 PM | PERMALINK

It is amazing to read all these comments form people that obviously havent read the FairTax book or taken the time to read the bill HR25. Why do you make such wacko comments about something you obviously know nothing about? There will never be a perfect tax system but anyone that reads the FairTax book can see it is the most researched system every created. The FairTax is so superior to anything we have now.

Posted by: FairTax on January 17, 2008 at 2:21 AM | PERMALINK

The "fair" tax also screws children. Instead of paying zero income tax on allowances, gifts from Grandma and lawn mowing, kids would get to pay 30% more for everything, too.

I want to see a 13-year-old girl with braces ask Mike Huckabee why he wants to tax the babysitter. Or better yet...let Tim Russert do it!

Posted by: Jalmari on January 17, 2008 at 2:24 AM | PERMALINK

Just for fun I spent some time browsing the www.fairtax.org site.

First, I watched them magically transform their 30% tax into a 23% tax. The purchase price is $100. The "fair" tax is $30. So the fair taxers want to quote you a 23% rate by dividing 30/(100+30) instead of the normal 30/100. Sneaky.

Second, I found out that the "fair" tax applies to mortgage interest and rent payments. They don't advertise that little gem, but it's necessary to make 23% (which is really 30%) revenue neutral. You have to click through the "learn more" links and delve into their economists' assumptions to find this out. Double sneaky.

Third, I read how great it would be to finally eliminate the underground economy. So drug dealers and illegal immigrants would finally have to pay up. Not so much about taxing children, the elderly, the sick or the disabled. Pandering.

Fourth, there's lots of talk about eliminating complexity and reducing tax evasion, but they don't even try to estimate the costs of bartering, bootlegging and offering "discounts" for cash under the table. Incomplete.

So yes I read the web site. They can't even describe their own plan honestly. It couldn't be more mainstream Republican in this regard, and I still think it's a nutty idea.

Posted by: Jalmari on January 17, 2008 at 4:18 AM | PERMALINK

A fun question to always ask about proposals like this is cui bono—why is it being proposed, and who stands to gain? It comes as no suprise that it's the same class of ultra-rich who most benefited from the Bush tax cuts pushed by plutocracy advocates like Norquist and the Club for Growth.

And while this has no chance of passing, that's not the point. Putting forth notions like this accomplishes a bunch of objectives for the plutocrats:

- A "fair" tax proposal frames the current system as "unfair," which, like calling inheritance taxes the "death tax," buys some agreement from fair-minded working people

- It counters, or preempts, any discussion about increasing progressivity by, say, restoring tax rates on the wealthy to pre-Bush levels, and thus keeps the anti-tax (i.e., anti-progressive tax) discussion going, and going...

- It exploits people's natural loathing for income taxes in order to eliminate any remnants of progressivity in our tax system.

The Gooper plutocrats' ideal isn't found in any modern industrial democracy, only in banana republics (think "Brazil" circa 1994). The mission is accomplished when income taxes reach zero but there's a 60% tax on a box of laundry soap (does anyone really believe that the sales tax rate would, or could, remain at 30% for long?).

Posted by: R. Porrofatto on January 17, 2008 at 6:31 AM | PERMALINK

I am a retiree who was able to defer income while working. My company decided to pay it all to me in one lump sum, which was taxed at 35%. If the goods I buy with that money are taxed at 30%, rather than a 7% sales tax, I will pay an extra 23% on the 65% of the lump sum remaining (which is ca. 15% of the original amount). Thus, in toto, I will have paid 50% of the money which I intended to use to allow me to keep my home and pay medical bills to the government. FAIR?, not to me.

Posted by: RandyMacon on January 17, 2008 at 10:19 AM | PERMALINK

Here's some words that will kill the FairTax deader than a week-old fish:
FairTax: just like the Socialist European Value-Added Tax.
It's close enough to true to work in a political campaign and the S word will bleed all over Huckabee

Posted by: Stewart Dean on January 17, 2008 at 11:22 AM | PERMALINK

Stefan,

The fact that a consumption tax is also a wealth tax is well know(sic)

You can't be the real Stefan, because he would never say something this false and stupid.

A 'consumption' tax is NOT a 'wealth' tax, and anyone who claims otherwise is a fool.

Bill Gates has a billion times my assets. Do you think he spends a billion times for food? What about clothes? Do you think he owns two billion cars?! Even his stupid 'smart' house is not worth a billion of mine.

That is why a consumption tax is regressive unless you start to complicate matters by exempting essential goods and having huge taxes on luxury goods.

But I know very few ultra-rich people who want a 'luxury' tax. They want taxes on food, for which they pay very little.

Posted by: Tripp on January 17, 2008 at 11:49 AM | PERMALINK

Liberal wrote, "Of course, as Adam Smith knew, the fairest and most efficient tax is a tax levied on land value."

He wrote that back in the day when the average person wasn't a landowner. Most people were tenants and paid rents to landlords. The point being that the land earned money for its owner and as such the owner could pay taxes out of that income. Similarly, one can imagine that farmland earns income for its owner.

(NB: this "land tax" is no different from the property tax.)

However, today the average small landowner (read: homeowner) simply uses that land as a place to live. The value of the land appreciates over time but the homeowner doesn't benefit from that appreciation until the land is sold.

So consider the case of a homeowner who buys a home at age 35 and retires at 65 with a paid-off mortgage. The home and land value of course has appreciated over that 30 years so at retirement, the homeowner is sitting on a lot of value. The bad news is that with lower income, the property tax becomes difficult to pay. Since the homeowner can't access the cash value of the home without either selling it or taking out a mortgage, a property tax in this case is remarkably unfair.

BTW: if the bank holds a mortgage to your property, do you truly "own" it for taxation purposes? Should you not be taxed only on your equity in the home and not its assessed value? Of course this runs right into the scenario above, as the mortgage-free retiree has all of the equity in the property and as such would be taxed on its full value.

-a

Posted by: Andy in Tucson on January 17, 2008 at 1:52 PM | PERMALINK
Under current law, that retirement money is yours free and clear because you've already paid taxes on it.

The "because" here is, IIRC, overgeneralized at best, as many retirement savings vehicles are tax-free at both ends, provided you don't withdraw them early. This is part of the larger government tendency to use tax policy to subsidize those who have surplus income at the expense of those who do not.

Posted by: cmdicely on January 17, 2008 at 2:26 PM | PERMALINK
There may be things wrong with a national sales tax or a VAT, but that fact that transition on is a proportional tax on wealth shouldn't be viewed by progressives as a problem.

A VAT is a tax on spending, not on wealth. Mean propensity to spend would seem intuitively to be inversely related to wealth, so its not even roughly similar to a tax on wealth at any level.

Posted by: cmdicely on January 17, 2008 at 2:29 PM | PERMALINK

I want to see a 13-year-old girl with braces ask Mike Huckabee why he wants to tax the babysitter.

And then you'd see Malkin checking out her family's countertops....

Posted by: Gregory on January 17, 2008 at 3:27 PM | PERMALINK

I am amazed at the ignorance of economics displayed here.

Have any of you heard of Arthur Laffer or Stephen Moore? If not you need to get educated before blasting the FairTax that you obviously do not understand. They are advocates of the FairTax. http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf

The vast majority of you would be economically better off under the FairTax than the present system.

Posted by: Qanh Xi on January 25, 2008 at 2:22 PM | PERMALINK

I'm 12 days late so I guess this won't be read, but, I'm looking at a 1099 from Social Security and I sure as hell have to pay taxes on it. Will those of you who don't let me know how it's done?

Posted by: John on January 28, 2008 at 2:57 PM | PERMALINK




 

 

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