Fred Thompson's Tax Proposal

[Martha]

Um, SamClem was talking about a tax plan that is a flat tax plan, not a national sales tax. Somehow we got off track. But anyway, as other posters have mentioned, we have talked about a national sales tax in detail before. The discussions were pretty thoughtful. This one, not so much.

Some thoughts on the "fairness" of the fair tax: the money has to come from somewhere. I have not seen a satisfactory explanation why the "fair" tax would be more fair than our progressive income tax system. Equal does not mean fair. What I see is that people who have greater necessities will pay greater taxes and complexity will rise significantly for those of little income.

For example, under the national sales tax proposals, services would be taxed. So, if you have high medical costs, you will pay tax on those services. The same amount of tax that would be paid if you decided to buy a yacht.

So changes may be made to make the fair tax more fair. For example, if you taxed all services, educational expenses would be taxed. However, most proposals appear to exclude education expenses.

So, we are back to deciding what to tax, what not to tax, and should the rates differ.

Just a taste of the issues.

SamClem, nice summary on Thompson's plan.

 

[retire@40]

Tell me what you think it won't cure, and I'll be happy to respond. I've already given you reasons why to advocate for FairTax (I wouldn't term my comments as "snake oil" - that would presuppose that I'm talking to some simple folk here. I never make such an assumption - although, I might consider revising that opinion of you based on your little Q./A. strategy.)

By not stating that you think it is fair to everyone, we can only infer that you do not think it is fair to everyone. It would be just as easy to have said that from the beginning. That's OK, most people here and around the country think it is not fair to everyone either. That's probably why it has not and will not get any traction and is only used as a political tool around voting season to bring in some fringe votes.

If you do a search on this forum, you will find that not only have I stated what I think about this "fairtax" in fine detail, but I've also countered a couple other "fairtax" evangelicals like you. So please consider reading all those posts before you label me as "simple folk."

 

[ih2005]

I think we beat the fair tax thing pretty well already, but it seems to me that the summary was that its merits are irrelevant since it'd never get passed.

Yes, that's the American, "can do" spirit. I'm honored to be among such an intelligent group that figures that if something's worth doing, but "it'd never get passed," its merits are irrelevant.

I'll be on my way, now.

 

[REWahoo]

Bye bye.

 

[cute fuzzy bunny]

Oh dear...I'd say something like "its not feasible to pass the 'law' because its got holes so big you can drive a truck through them and anyone thats taken a 'fair' look at it could see that", but how about...

Dont let the fair screen door hit ya on the way out.

 

[ih2005]

Some thoughts on the "fairness" of the fair tax: the money has to come from somewhere. I have not seen a satisfactory explanation why the "fair" tax would be more fair than our progressive income tax system.

Prices after FairTax passage would look similar to prices before FairTax - not "30% higher" as opponents contend - competition would see to it. So, the FairTax rate (figured as an income-tax-rate-non-comparative, sales tax) on new items would be 29.85% (on the new, reduced cost of items because business isn't taxed under FairTax - thus lowering retail prices by 20% to 30%), or 23% of the "tax inclusive" price tag - this is the way INCOME TAX is figured (parts of the total dollar).

The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of Commerce poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.'s Kotlikoff and Rapson (10/06) concluded,

"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."

Further, per Jokischa and Kotlikoff (circa 2006?) ...

"...once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent."

 

[Rustic23]

I believe it was the Republicans, Rep Archer, and I think Delay, that were going to do away with the Income Tax when they got control of the House and Senate..... didn't they get control? The Democrats aren't even talking about it, and they have control. I still have huge doubts the major changes to the Income Tax will come about in my or my children's lifespan!

 

[REWahoo]

I still have huge doubts the major changes to the Income Tax will come about in my or my children's lifespan!

Compared to my outlook on the possibility of serious tax reform, I'd classify you as an optimist!

 

[retire@40]

Yawn

 

[cute fuzzy bunny]

I hate that when someone says they're leaving and then they keep talking.

I mean, what the hell happened to commitment?

 

[ih2005]

I hate that when someone says they're leaving and then they keep talking. I mean, what the hell happened to commitment?

Okay, okay, I confess weakness!

 

[cute fuzzy bunny]

Then with a stiff upper lip, may I suggest that you round out your community participation a bit, and if you'd like to discuss the "fair tax" some more, put your comments into an existing thread on the subject or start a new one if you feel like the existing threads just werent "getting it"?

Just a little friendly advice. One-note wonders who drag discussions off-topic often are perceived as being some sort of self-serving tool. Especially when its a political topic.

 

[ih2005]

Then with a stiff upper lip, may I suggest that you round out your community participation a bit, and if you'd like to discuss the "fair tax" some more, put your comments into an existing thread on the subject or start a new one if you feel like the existing threads just werent "getting it"?

Better keep that lip stiff, we wouldn't want any more leakage. (My first post was in response to a comment on the "flat tax" - the present thread evolved from there.)

 

[cute fuzzy bunny]

You arent the fastest person to make it to my ignore list, nor will you be the only one that I'm never tempted to click 'view post' on to see if you've come up with something interesting.

So in other words, a fairly ordinary nuisance.

 

[ih2005]

You arent the fastest person to make it to my ignore list, nor will you be the only one that I'm never tempted to click 'view post' on to see if you've come up with something interesting.

So in other words, a fairly ordinary nuisance.

Betcha clicked on this one! lol

 

[growing_older]

Actually, I had some questions about the flat tax in Fred Thompson's proposal. Which is the topic of this thread, not the "Fair Tax" so please don't derail this into other tax topics that start with F. (Thanks)

If no one knows, then I can understand there might be no response to my questions. But if everyone ends up discussing other tax topics, then I don't know if my question is unanswerable, or just lost in the noise.

Does anyone know how Fred Thompson's optional flat tax proposal treats IRA, 401k, Roth and similar tax deferred or tax exempt accounts. If the income generated inside these accounts suddenly becomes taxable, then the optional flat tax part of the proposal seems a lot less useful to folks who have invested in these kinds of accounts.

 

[samclem]

growing older,

I've been thinking about this since you asked the question earlier (before the derailment). I haven't found an answer yet, the info at Thompson's campaign web site is not much more specific than my original post. Based on the "no other deductions" wording, I would guess that if a taxpayer elected to go with the flat rate, he could not deduct contributions to a (traditional) IRA or 401k. It is a little less clear whether the interest these accounts (as well as that earned by Roth IRAs and Roth 401Ks) earn each year would be tax-free (since it's non-reportable income, not technically a deduction, right?).

Again--Fred promised "simpler," but if you have to compute your taxes two different ways (three counting the AMT), it's not "simpler' at all.

 

[Martha]

The WSJ said that there was a lack of details regarding Thompson's plan, so there might not be info about how retirement accounts are treated.

 

[growing_older]

Thanks, Samclem. I suspected that may be the kind of detail that a proposal hadn't worked out yet, but appreciate you trying to run it down.

 

[Lakewood90712]

IMHO , makes no never mind . The real problem is control of spending. Our federal (and my state CA) gov. is in the LBYM mode. that is, living BEYOND your means.

 

[samclem]

Warning: Info below primarily of interest to political and tax reform junkies
************************
I've continued to search for details on Thompson's tax proposal. The main question I (as well as Growing Older) and probably other folks have is: How would assets now in tax free (e.g. Roths) and tax deferred (e.g. TIRAs and 401Ks) be affected.

I haven't found specific answers, but found some clues/indicators.

First: Recall that Thompson's plan offers all filers the option of continuing to file using the present system of deductions/exemptions/credits, etc. Filing using the flat tax computation is strictly optional. So, at least nobody would end up worse off under the proposed plan.

Regarding the flat-tax computation: As mentioned above, I have not found any specific discussion concerning treatment of Roth (IRA or 401K), 401K, or TIRA by Thompson's campaign. Here's a link to his web site with info on the plan, but there aren't many details.
Thompson Plan for Tax Relief and New Economic Growth

His site does mention that his plan is based on a House of Reps Republican Study Committee (RSC) proposal. Here's a link to "details" of that plan:
http://www.house.gov/hensarling/rsc/doc/tpcactdetailedsummary.pdf
(The link also compares the tax burden by income quintile between the present tax system and the proposed plan. I'd take that chart with a big grain of salt--people do modify their behavior in unpredictable ways in response to tax code changes)

The RSC plan does not address retirement accounts, but does say that Taxable Income = gross income - standard deduction ($25K for joint filers) - individual exemption ($3500 per person). I think that means that gains from tax-favored accounts are lumped into gross income and treated just like any other taxable gains.

Thompson's plan also taxes cap gains at a rate of 15%

What I think Thompson's plan should do:
- Keep the option to file using the regular system of deductions/etc. Nobody loses, no promises are broken.
- Flat Rate Computation: You get the benefit of the larger standard deduction and personal exemption. After that, the money you deposited into a Roth IRA, Roth 401K or a non-deductible TIRA can be withdrawn without being taxed (since you've already payed tax on it and it isn't new income). Gains from these accounts should be taxed at either your income rate or the 15% cap gains rate, whichever is lower (so, filers earning less than 100K pay 10%, those in the higher 25% bracket would pay 15%). Distributions of deposited principal from a deductible TIRA or 401K would be taxed at the individual's income tax rate, and gains would be taxed at the income rate or the cap gains rate, whichever is less.

I now like Thompson's plan (at least what I can tell/guess of it). The purist in me prefers a national retail sales tax, but the press (including the conservative press) has been savaging the "fair tax," and it's evident they haven't read the details of it. It is just too hard to explain/sell, and the special interests intent of preserving their piece of the pie will not let it live. Plus, the candidate pushing it (Huckabee) comes with some negatives (from my perspective) that I just can't ignore.

Thompson's plan does significantly reduce the destructive tendency of the government to meddle with investment flows, which will enhance efficient use of these funds by the private sector.

By allowing filers to keep computing their taxes as they do now, Thompson's plan becomes politically viable. If it were enacted in a form similar to its present one, I think most folks would file under the new flat tax computation. That would be okay at first, then I think political pressure would gradually build over the years for scrapping the deduction/special credit/BS laden system as it would be seen increasingly as a tool used by those with sharp pencils to avoid paying their share.

Or, the flat system could just start piling on special bells/whistles/loopholes/gimmies like the old code did, and my faith in humanity will be lost.