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FIRE Easier If VAT Replaced Income Tax?
Old 11-13-2007, 12:50 AM   #1
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FIRE Easier If VAT Replaced Income Tax?

I think I might be a big fan of a "value added tax" or perhaps a "Fair Tax".

Do away with the IRS income tax code, all umpty-ump volumes of it. Abolish the income tax completely. Replace it with a value added tax assessed and collected at each stage of production (or performance of services).

How much easier would it be for folks to achieve FI and then RE. A lot I think.
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Old 11-13-2007, 06:28 AM   #2
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Most European countries with VAT also have income tax.
The change in taxing in the USA being discussed is the Fair Tax.
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Old 11-13-2007, 07:19 AM   #3
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Why in the world would our politicians agree to give up so much power, defined as control the flow of money, just to make it fairer to the citizens of this country? Taxation based on consumption is probably the fairest system in play.

The majority of the people on this board would make out like bandits with their LBYM mind set if this Fair Tax plan replaced, ENTIRELY, the income tax. But you can take this to the bank: it will never happen.
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Old 11-13-2007, 07:28 AM   #4
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Of course "fair" is an entirely subjective concept, but I think the fair tax proposal would make it much easier to achieve FI.

I also think its odds of being enacted are infinitesimally small.
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Old 11-13-2007, 08:05 AM   #5
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...I think the fair tax proposal would make it much easier to achieve FI.
Unless you are a tax accountant
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Old 11-13-2007, 08:06 AM   #6
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Originally Posted by RetireeRobert View Post
I think I might be a big fan of a "value added tax" or perhaps a "Fair Tax".

Do away with the IRS income tax code, all umpty-ump volumes of it. Abolish the income tax completely. Replace it with a value added tax assessed and collected at each stage of production (or performance of services).

How much easier would it be for folks to achieve FI and then RE. A lot I think.

First, it will never happen. This topic has been discusses ad nauseum on this forum, so it's probably in the FAQ by now. I even put forth a theoretical national real estate tax proposal that I think would work better than any other tax system, even though I know that also would never pass.

Second, as some FIREd people already stated in other posts, it would not benefit them to have paid tax on their incomes while they were saving only to be hit with a 20% VAT or sales tax now that they are spending their previously taxed incomes. This is the last crowd that wants a national sales tax.
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Old 11-13-2007, 08:10 AM   #7
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USA - Never happen. Politicians (would NEVER let it happen) at all levels (City: Some charge Income Tax (Example Dublin OH 2% of all "earned/W2" Income earned in the City). Counties: RE Taxes the largest. States: Some/Most have income Taxes. Federal: Income Taxes are the biggest on the "rank and file". Then there are all of the "little" taxes everyone pays but seldom notices. Any "fair" tax has the possibility to become "just another tax". Been paying US taxes for about 52 years now; and they only increase despite the "we will lower taxes" Politicians of every party and all of the tax schemes/revisions.
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Old 11-13-2007, 08:24 AM   #8
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Originally Posted by tightasadrum View Post
Why in the world would our politicians agree to give up so much power, defined as control the flow of money, just to make it fairer to the citizens of this country?
I think they would only do it if their elections depended upon it. It would take a lot of people demanding it in a politically effective way. The organization now doing this (http://fairtaxgroups.com/) is making quite a bit of progress, given the heavy special interest pushes against it. The respective bills in the House and Senate have more co-sponsors than ever before. Some are Democrats, some are Republican (most are Republican).

Republican candidate Mike Huckabee is a big supporter of the plan, and his campaign is giving it a lot of publicity. Good.

It would bring a lot of jobs and industry back to the US. Many businesses could be competitive again if the embedded payroll taxes and income taxes were removed from the cost of labor. Plus, the elimination of corporate income taxes would increase te amount of money available for investments in productivity improvements (making us more competitive) and increase the size of dividend checks (any stockholders here opposed to that?) Elimination of these embedded costs is why the cost of most goods and services (before taxes) would decrease, largely offsetting the tax in many cases.

Yes, think most folks could retire earlier under this system. What I like best about it is the simplicity and the transparency of it. Supporters do tend to gloss over a few issues, but they can be easily addressed and are minor compared to the mess we have now.

There's quite a bit of opposition to the idea from folks in the ER community. Many look at the taxes they've paid on their IRAs and want credit for that--they want te tax-free money they were promised. Okay, so you'll have to pay taxes on what you buy with that money--but everyone seems to believe they are somehow "making out" under the present system (mortgage deduction, shady business expenses, etc).

On a pragmatic, month-to-month basis I think most ER types would do very well. The "pre-bate" is a nice-size check that goes to everyone (the poor pay no federal taxes under this plan--just like today, because of the prebate), and there's no tax on used goods. Most of us who are not big consumers would do well.

But I agree with anyone who says it will be an uphill battle.

This topic as been discussed here a few times before. Search under "Fair Tax" or "NRST" for more.
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Old 11-13-2007, 08:54 AM   #9
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Unless you are a tax accountant
LOL!
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Old 11-13-2007, 09:03 AM   #10
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Interesting thought re "fair tax" ... imagine its a few years hence and they implement this, say 2011 or 2012 ... you just took advantage of the 2010 waiver of the Roth conversion income limit (like I plan to do). You converted 500-750k worth of traditional IRA accounts, and paid 225-350k worth of taxes, only to find out it that money WONT be tax free when you retire, at least not if you spend any of it....
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Old 11-13-2007, 09:47 AM   #11
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Interesting thought re "fair tax" ... imagine its a few years hence and they implement this, say 2011 or 2012 ... you just took advantage of the 2010 waiver of the Roth conversion income limit (like I plan to do). You converted 500-750k worth of traditional IRA accounts, and paid 225-350k worth of taxes, only to find out it that money WONT be tax free when you retire, at least not if you spend any of it....
Ahhhh, a forward thinker.
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Old 11-13-2007, 09:52 AM   #12
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We've just uncovered why I'm not converting any of my Roths to regular IRA's. I'm contributing all new money to a Roth and in 20 years we'll have roughly equal amounts in both. But I think I'll pass on the conversions...I'm quite sure that 20 years from now we'll have less income tax and more 'other' taxes plus fees.
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Old 11-13-2007, 11:07 AM   #13
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One thing about a VAT or Fair Tax is what people wouldn't have to deal with that they do with income tax.

Imagine making equity transactions purely on investment basis with income tax implications out of the picture. Imagine selling homes or real estate investments based purely on investment of personal considerations with income tax out of the picture. Imagine not having to file an income tax return each year (maybe the best argument right there!). Imagine compliance rate for the government in collecting taxes in the "correct" amounts. Imagine the IRS mostly gone. Imagine indivuals all playing by the same transparent understandable set of rules.

Imagine accumulating savings all on a tax deferred basis just by the act of putting it aside in bank/investment accounts. And then coming out of thoses accounts whnever/however you want with no income tax due.

In my utopia, life looks good, especially for my children.
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Old 11-13-2007, 12:16 PM   #14
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Most states/counties/cities already use a sort a value added tax in addition to the income taxes and property taxes they also levy. It's called a sales tax but really, at the consumer level, it's not much different from a VAT. And where I live it's already 8% on everything you buy, food included. That does not include surtaxes on things like alcohol, tobacco and gas. At the federal level I see no incentive for the tax code to be reformed. Heck, they already debate whether or not they should reform the AMT! I wouldn't be surprised if they decided in the end to ADD a federal sales tax to the current income tax system...
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Old 11-13-2007, 12:30 PM   #15
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I support a flat tax. A really flat tax. Like 0.


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Old 11-13-2007, 08:56 PM   #16
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Sounds like a real sucker play - "hmmm...now that labor force participation is way down and salaries are being squeezed lower by outsourcing and immigrants...let's move the taxation system so that even unemployed people have to pay".

The big problem with VAT, national sales tax, etc. is that it would be IN ADDITION TO, not INSTEAD OF, taxes on income. Look to Europe if you have any questions.
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Old 11-13-2007, 11:43 PM   #17
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Most of my money has already been taxed in taxable accounts or ROTH IRA. I have planned for years based on tax laws. Totally unfair to tax my income twice. Besides it would get very complicated very quickly so you would need to check the taxabilty of each transaction.
Getting the sellers to pay the taxes in is another problem. If someone is making something and selling it the government might never catch them.
We have a 8.9% sales tax and when you add a 20% federal sales tax it would be tempting to not report the sales even if you collected the tax from customers. Offer the customers you trust 15% off to pay in cash then don't record the sale.
Look at the companies that don't have a system now to collect taxes like in OR and AK they would need to start collecting and reporting sales, and those of us that do would have a third set of laws to comply with since our City and State B & O taxes have different laws and the federal would top.
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Old 11-14-2007, 07:45 AM   #18
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I don't think the ROTH IRA fairness issue is insurmountable.

Govt could allow $X/year to be withdrawn from a Roth. Set up your withdrawals on a monthly basis, and the govt would add the NST amount to your monthly 'pre-bate' .

Maybe the allowed $X amount would be a fixed amount, a % of the account, or some amortization schedule like a 72T. Whatever it is, it would be many, many times simpler than the current tax code mess.

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Old 11-14-2007, 12:09 PM   #19
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Getting the sellers to pay the taxes in is another problem. If someone is making something and selling it the government might never catch them.
No nearly the problem getting earners to pay the "correct" amount of income tax! How much underground economy goes untaxed now with the library of IRS income tax regulations whcih some people just totally evade?
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Sales tax collection
Old 11-14-2007, 12:21 PM   #20
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Sales tax collection

makes income tax collection look like a breeze. The tax code is complex not due to collection but as a way to not pay. Any single tax is a lost cause as people work around it. Only by taxing everything making it pointless to shift taxes can they collect.
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