I have to answer shiney, then maybe I can quit....
Shiney, if the fair tax passes it is obvious that nobody would invest
new money in a ROTH. Why would they when all investments
would grow tax free until spent?
The question is what about existing ROTHs and taxable accounts.
The fair tax people estimate that the interest rates on taxable
bonds would go down about 25% . Vanguard's Intermediate Term
bond index has a duration of 5.9 years and an average coupon
of 6.1%. A drop of 25% on 6.1% results in a 1.53% drop in
interest rate or a one time capital gain of 5.9 x 1.53 = 9.07%
Dividend paying stocks would also see a one time gain .... let's
guess 5%. Thus for a 50/50 port, the windfall gain would
be about 7%.
Let's assume a ROTH of $100k before fair tax which goes to $107K
afterward. At a 7% annual return, the gain in income would be
$490. If we assume the ROTH holder spends the income, he
would be spending $7.000 before fair tax. Assuming a 15% reduction
in price, the $7000 basket costs $5950 plus 30% fair tax for a
total of $7735 vs the $7000 before . But remember, he has $490
in extra income plus the $2838 prebate already discussed.
Thus the ROTH or taxable account holder has $3328 to cover the
extra $735 he spends on the basket of goods.
Obviously the higher the value of the ROTH/taxable account the
less favorable the comparison. For a $1 million account, the
extra income is $4900 per year. Assuming only 4% is spent, the
annual spending before fair tax would be $40,000 and would
be $44,200 after a price reduction of 15% and a fair tax of 30%
The $4900 extra income plus the $2838 prebate still more than
covers the $4200 extra cost of goods. Thus the fair tax
is still "fair" to the $1meg ROTH or taxable account holder.
The devil (or angel) is in the details. You need to do the
numbers for your own situation before you throw this baby
out because of a knee-jerk emotional or politically biased
reaction.
Fire when ready!
Cheers,
Charlie