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Old 10-05-2011, 11:32 AM   #41
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To elaborate on harley's answer a bit (assuming I understand this correctly), The 1031 exchange goes away because Capital Gains tax goes away. That means 0% tax on the sale, not 9%. The 1031 becomes obsolete, it doesn't shift the income back anywhere - it's not income anymore.



There might be some 'sticker shock' to the 9% adder - but there is an offset to that, people's paychecks will be bigger by the elimination of the FICA and Medicare payroll taxes ( 6.2 +1.45%). We might (debatable) see some salary increases since companies will not be paying their side of those taxes, and we might (debatable) see lower prices from companies not needing to pay all the tax compliance costs. Yes, debatable, but I'll assume we will see at least some (maybe very small) portion of that in consumers pockets. It does offset things, it's not the full 9% hit that it might seem.

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Consider the possibility ...that everything could be recharacterized as "income" including proceeds from the sale of real estate. I suppose I took it literally when "they" said, 9% tax on all income. We might get to deduct the basis, but I bet appreciation would be considered "income". Particularly, if cap gains tax goes away. Seems to me, the definition of "income" might have to change.
This is interesting. Had not really thought about some of this stuff until this thread.
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Old 10-05-2011, 11:53 AM   #42
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Old 10-05-2011, 12:02 PM   #43
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Consider the possibility ...that everything could be recharacterized as "income" including proceeds from the sale of real estate. I suppose I took it literally when "they" said, 9% tax on all income. We might get to deduct the basis, but I bet appreciation would be considered "income". Particularly, if cap gains tax goes away. Seems to me, the definition of "income" might have to change.
This is interesting. Had not really thought about some of this stuff until this thread.
Profit from the sale of a home is cap gains now, I don't know why we'd assume that changes under Cain's proposal. From an ER perspective, that would make it less of a hit to sell the house and downsize. Cha-ching.

I wonder if any implementing legislation for this or other total revamp to the tax system could preclude a re-growth of complexity. If the govt needs more/less money, the only thing that can be changed is the tax rates. Any additional carve outs/deductions/credits would require a supermajority. I'd love to vaccinate ourselves against a regrowth of the kudzu vine that is our present tax code. We know how it happens, let's prevent it.
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Old 10-05-2011, 12:09 PM   #44
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Good point, that would be a big personal plus. But with a down side: It will greatly reduce the awareness of the US public to the pain of taxes, and make it easier to extract more. The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer (I'd prefer that we eliminate withholding for the same reason--paying taxes should hurt). If it's all done by deduction and at the cash register it's too easy for us to lose sight of the costs.

On balance, I guess I'd choose to do without the pain . . . But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.
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The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer

But everyone should be sent an email each year showing what they paid and pictures of beautiful things they could have bought with that money.

Everyone gets an annual statement in the UK showing their income and the taxes, but not pictures - that would be a great idea, I can just see it - This year you paid $x, that's the equivalent of 12,000 Mars bars.

Well, I was going to say that is the way they do it in the UK... but Alan said you get a statement (I never did, but was only there for two tax years).....

But, the VAT is buried in the price... you don't see it.... (I remember seeing some people who posted receipts showing it on another thread, but I did not see it when I was there 12 years ago)...

Heck, the good thing was that the price shown was the price you paid... no sales tax to add in your head....


But, I agree... I would like to get rid of all corporate taxes and make all citizens pay a higher tax so we KNOW how much we are paying... right now a lot of what I pay in taxes are buried in the price of the things I buy... corporate income tax and excise tax....

Does the plan get rid of excise taxes Probably not....
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Old 10-05-2011, 01:07 PM   #45
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Id sure like to see the data behind this. A simplified tax system is a powerful thing, very alluring. Because total tax composition would shift from mostly income based to income and consumption, it would conceptually affect older and retired people favorably just because we consume less and have less income.

Using the tax system to further interests that are important to society (like saving for retirement) is something of value that we would lose with flat tax. In addition, collectability is critical. How much consumption is done in cash or carried out with very small businesses that are more difficult to audit?

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It will greatly reduce the awareness of the US public to the pain of taxes, and make it easier to extract more. The annual "challenge" of completing the 1040 is one of the things that contributes to the wonderful crabbiness of the American taxpayer (I'd prefer that we eliminate withholding for the same reason--paying taxes should hurt). If it's all done by deduction and at the cash register it's too easy for us to lose sight of the costs..
As another one of those members with working and tax experience in multiple countries, everyone everywhere dislikes paying taxes, and the VAT on every invoice is a neverending reminder. There is no less painful way and most people are aware of how much they pay regardless of how it is done.
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Old 10-05-2011, 01:15 PM   #46
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... saving for retirement ... is something of value that we would lose with flat tax.
I'm not following - why is that?

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In addition, collectability is critical. How much consumption is done in cash or carried out with very small businesses that are more difficult to audit?
The fairtax site has some sections on this.

Americans For Fair Taxation: Frequently Asked Questions Answers

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The FairTax reduces rather than increases the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system induces more compliance. The roughly 90-percent reduction in filers enables tax administrators more narrowly and effectively to address noncompliance and increases the likelihood of tax evasion discovery. The relative simplicity of the FairTax promotes compliance. Businesses need answer only one question to determine the tax due: How much was sold to consumers? Finally, because tax rates decrease, tax evasion is less profitable; and because of the dramatic reduction in the number of tax filers, tax evaders are more easily monitored and caught under the FairTax system.
Considering the source, I wouldn't take that as Gospel, but it makes some sense to me. Somewhere else I think they mention that something like 80% of sales are from a small number of retailers (WalMart, etc). It just seems to make sense that the number of businesses they need to audit would be far less than the number of individuals plus businesses.


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Old 10-05-2011, 01:26 PM   #47
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It's no different than a state's mix of sales, income and property taxes -- whether or not it's "good" for any individual (retired or not) depends on their own situation. Someone with a high income and doesn't buy much "stuff" would do well on Cain's plan. Someone with a more modest income who spends most of it? Not so much.

In reality, though, this plan would also make Roth IRA contributions at today's income tax rates a pretty terrible deal, especially if one contributed to it instead of a traditional IRA or 401K.
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Old 10-05-2011, 01:33 PM   #48
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Thanks for the link. I'll look at it when I have more than a couple of minutes.

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Originally Posted by ERD50 View Post
Somewhere else I think they mention that something like 80% of sales are from a small number of retailers (WalMart, etc). It just seems to make sense that the number of businesses they need to audit would be far less than the number of individuals plus businesses.
80% is big number for retain sales. That would certainly be a solid base to start.
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It just seems to make sense that the number of businesses they need to audit would be far less than the number of individuals plus businesses.
More data would be needed before reaching this conclusion. Individual tax returns are more easily automated. The IRS is very secretive so we probably won't know how they really allocate their resources. It would be safe to say, however, that the IRS should need fewer resources overall under this type of tax scheme.

As for your first question, I didn't say "saving for retirement" would be lost, I did say using the tax system to promote interests important to society would be lost, and then used retirement as one example. A flat tax does not allow deductions or exemptions, which is how the tax system is used to promote specific interests.
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Old 10-05-2011, 01:40 PM   #49
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Using the tax system to further interests that are important to society (like saving for retirement) is something of value that we would lose with flat tax.
I think a lot of folks would disagree strongly regarding the value of government using the tax code to reward and punish (retirement savings or other goals), but since this is treading on thin ice I'll leave it alone.

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In addition, collectability is critical.
Yep, I agree that collectability is important. On the retail tax side, there are clearly fewer points to monitor than we have today with the FIT. But the other issues are compliance costs and compliance monitoring. As Texas Proud points out, most of the collections on the FIT side would be via automatic deduction, with no (cheat-prone) tax return required. The opportunity to cheat is severely reduced compared to today's system. And at a marginal rate of 9%, the whole incentive to cheat is significantly reduced. How much does it benefit ER folks (and everyone else) if everyone actually pays the taxes they owe?
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Old 10-05-2011, 01:52 PM   #50
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It seems many peoples' definition of a tax system are:

  1. a bad tax system is one where they have to pay
  2. a good one is where they have to pay less
  3. and a great one is where they do not have to pay at all.

For some reason... no matter what the collection mechanism is (i.e., what we have today or something new)... I think we will all wind up with definition # 1.
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Old 10-05-2011, 01:54 PM   #51
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It seems many peoples' definition of a tax system are:
  1. a bad tax system is one where they have to pay
  2. a good one is where they have to pay less
  3. and a great one is where they do not have to pay at all.
Yep -- people can talk about balancing the budget with tax hikes and spending cuts until the cows come home. But ONLY if they raise everyone else's taxes and don't touch spending that benefits me. Otherwise I scream bloody murder...
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Old 10-05-2011, 02:07 PM   #52
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[/LIST] Yep -- people can talk about balancing the budget with tax hikes and spending cuts until the cows come home. But ONLY if they raise everyone else's taxes and don't touch spending that benefits me. Otherwise I scream bloody murder...
For sure. Yet, looking back over various discussion topics on this board, folks of most political stripes voiced support for the Simpson-Boles plan. Nobody loved it, but most thought it good enough. That was either because it was (of necessity) short on specifics, but also likely because it was all-encompassing enough that everyone could see that everyone would be making some sacrifices. This 9-9-9 thing might be the same, though I think there will have to be a "sweetener" to offset some of the pain at lower income levels.
Idea: If we want to spend money on the poor, maybe just do the straightforward thing and spend it rather than give benefits via tax exemptions, etc. This makes clear that everyone has an obligation to support the government. Likewise with supporting various initiatives, businesses, social causes, etc. It's simpler, more honest, and (as we now see from our tax code, compliance costs, drag on businesses, etc) less expensive to just spend the money than to complicate the tax code with this cr*p. I don't know how that would affect ERs, it probably depends a lot on income level.

Sometimes a big change is actually easier to do than a small one. Or hundreds of small ones.
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Old 10-05-2011, 02:08 PM   #53
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It seems many peoples' definition of a tax system are:

  1. a bad tax system is one where they have to pay
  2. a good one is where they have to pay less
  3. and a great one is where they do not have to pay at all.

For some reason... no matter what the collection mechanism is (i.e., what we have today or something new)... I think we will all wind up with definition # 1.
Right

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Yep -- people can talk about balancing the budget with tax hikes and spending cuts until the cows come home. But ONLY if they raise everyone else's taxes and don't touch spending that benefits me. Otherwise I scream bloody murder...
Right again.
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Old 10-05-2011, 07:58 PM   #54
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Reading through all the posts, I saw it mentioned quite a few times about "us seniors" consuming less as we get older. Y'all haven't met my wife. I said before that she has taken it on as her personal responsibility to bring this country out of the recession. She's not been doing a very good job, but she continues to work on it.
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Old 10-05-2011, 08:22 PM   #55
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I'm questioning the 9% sales tax component. It seems like an opportunity for numerous cash transactions going on below the table and avoiding the tax. The one thing about the VAT (although not my favorite form of tax) is that since it's being added to at each step it gives incentive to pass it on to the next level. I'm not sure how easy it would be to avoid the tax with cash when buying products, but a huge opportunity exists to avoid it when paying for services. Which also would effect the 9% income tax. Assuming services would be taxed as sales.
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Old 10-05-2011, 08:41 PM   #56
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I'm not sure how easy it would be to avoid the tax with cash when buying products, but a huge opportunity exists to avoid it when paying for services.
I'm sure there would be some of that. The 9% rate isn't much different from the sales tax rate already in existence in some localities, so there may already be good data on expected noncompliance rate at this level. My guess is that the problem would be biggest with very small businesses.
Maybe offer a reward program for customers who report those who don't collect the tax? I don't know how you find merchants who collect the tax but don't forward it to the govt.
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Old 10-05-2011, 08:44 PM   #57
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I'm sure there would be some of that. The 9% rate isn't much different from the sales tax rate already in existence in some localities, so there may already be good data on expected noncompliance rate at this level.
Except that in this case, noncompliance wouldn't be trying to avoid (say) only an 8% state sales tax. It would be trying to avoid a combined 17% sales tax. You may not jump through hoops or risk potential tax evasion charges for 8%, but you might start getting tempted at 17%.

We may know how many people would try to circumvent an 8% sales tax, but the amount who would do it for 17% is certainly higher. How much higher? It's uncharted territory, at least here; you might have to look at places that charge a VAT in that vicinity.
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Old 10-05-2011, 08:56 PM   #58
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I'm sure there would be some of that. The 9% rate isn't much different from the sales tax rate already in existence in some localities, so there may already be good data on expected noncompliance rate at this level. My guess is that the problem would be biggest with very small businesses.
Maybe offer a reward program for customers who report those who don't collect the tax? I don't know how you find merchants who collect the tax but don't forward it to the govt.
That's what we need, a tax revenue system based on narc'ing. I hope there's a better way. The VAT format would work, but I'm not sure how you make sure it comes out to 9% at the final step. I'm sure somebody smarter than me can find a solution, though. Maybe send the army of unnecessary IRS agents out doing spot checking. Secret police is still a step up from citizens reporting on each other.
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Old 10-05-2011, 09:07 PM   #59
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Except that in this case, noncompliance wouldn't be trying to avoid (say) only an 8% state sales tax. It would be trying to avoid a combined 17% sales tax. You may not jump through hoops or risk potential tax evasion charges for 8%, but you might start getting tempted at 17%.
Which brings up the issue of the knock-on effect to state and local taxes. Most states now have an income tax. If something like Cain's plan were to pass, most people wouldn't need to file a federal tax return. I'm guessing the states would be under tremendous pressure to modify their own systems so a return wasn't required--probably they'd just add their own 3-4% income tax and let the same collection mechanisms do the work as for the federal taxes. Regarding state sales tax rates--would they decline? Seems likely, if they decide to shadow the federal sales tax system as they do now with income taxes. Cain's plan taxes all purchases of services and new items (incl food, medicine, tuition, rent, etc--all the "we can't tax that!" items). If states broadened their tax base in this way, their tax rates could come down a lot with no loss of revenue. And, given that the income tax would be so easy to collect (very little paperwork, etc), states might choose to shift some to that form of taxation. All the same applies to localities. So, maybe another 4-5% state/local tax tacked on to the federal sales tax? It doesn't sound like a deal breaker.
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Old 10-05-2011, 09:10 PM   #60
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Secret police is still a step up from citizens reporting on each other.
There's always somebody trying to squash the little folks who are just trying to make a buck and do their civic duty!
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