Fair Tax is Progressive, Payroll Tax is Regressive
Rebuttal to:
The Fair Tax: Magic or illusion?
BILL HIRSCH at Ocala.com
http://www.ocala.com/apps/pbcs.dll/article?AID=/20051127/OPINION/51126005/1183/news08
Bill Hirsh's Article on the Fair Tax does his own disservice to the facts as he is very selective and superficial in his choice of data used to create a negative view of the Fair Tax and to support his contention that it is a Regressive tax.
What he fails to include after his cursory read Of Neal Boortz and John Linder's Book " The FairTax Book" is any mention of the elimination of the most regressive tax on the working poor the PAYROLL Tax. There is no Progressivity to the current payroll taxes of 7.65% taken out of everyone's paycheck each and every week. In fact, it is the rich who stop paying the payroll tax after the first $90,000 in income.
Under the Fair Tax when the wealthy spend $90,000 on a fancy car or $900,000 on a new mini-mansion, they will pay their fair share of 23% on those purchases. The wealthy will be contributing a larger portion toward supporting Social Security and Medicare than they did before under the archaic income and payroll tax scheme the IRS currently uses.
The Fair Tax uses the Prebate system to make this replacement plan Progressive. That means that the working poor pay a smaller percentage of their income in taxes than the Middle class and the Middle class pay a smaller percentage than the Rich. That is exactly true with the Fair Tax and the Prebate system.
Where does Mr. Hirsch get these impossible numbers of the bottom 20% of earners making $8,201 in pretax income but they all spend $10,000 more than that for an average of $18,492?? Do all of these people have large savings accounts that they can spend $10,000 more than they earn?? Are these College students that get an additional $10,000 a year from Mom and Dad?? With only $8,201 in income are credit card companies giving these people credit cards with $10,000 limits?? I think not. I believe he has selectively picked incorrect data. If he can make these unbelievable numbers work, he must explain how. He has obviously left something out.
Even so, the issue of Tax fairness in the Fair Tax package ( HR25/S25) is that every family gets the Prebate to be fair. Whether you are a maid or a millionaire their is no exception. For a family of 3, they receive their monthly check of $429.33 ($5,152/12). This is to cover the tax on food and essentials up to the poverty line of spending as set by Health and Human Services ( HHS) for a family of 3 that is $22,400. Even if you only make and spend $8,201 or $18,492. The Fair Tax will treat every one equally and still send that family $5,152 as if you had $22,400 to spend. That is a negative net tax rate if you make less than $22,400 and a net tax rate of ZERO if you earn at the poverty line of $22,400.
Let's follow the math correctly. Lets assume a family of 3 making the poverty line HHS income of $22,400. Under the income tax and payroll tax system we currently have, they would be in a 15% income tax bracket and a 7.65% payroll tax bracket. Lets assume that this working poor family uses standard deductions and the Earned Income tax credit to reduce their income tax to Zero. That only leaves the payroll tax of 7.65% for a net take home pay after income tax refunds of $20,686. For this example, lets assume they spend all of that on essentials for their family during the year. That means they bought $20,686 worth of Goods and services under the current income tax system.
The following year the Fair Tax is enacted and lets assume they buy the same goods and services they bought the year before.
The question is what happens to their purchasing power and true spendable income.
Under the Fair Tax, our family of 3 will first take home 100% of their paycheck. Not only the 7.65% regressive payroll tax but also the income tax that was normally withdrawn as well. Remember under the old system they had to wait until April 15th of the following year to apply for the EIT and the refund. So now they take home a paycheck each week that is larger than before.
When they go to buy those same products and services that they bought under the old income tax system, they will see that prices have dropped. This is because under the Fair Tax legislative package corporate taxes and the other 7.65% of payroll taxes that employers pay is eliminated. Once these costs to business are eliminated than those are reflected in lower prices of Goods and Services. Studies estimate the price drop at 22% for products and 25% for Services. Even if the price drop was only 10% this family would still be ahead.
For our math example let's be conservative and estimate an average price drop of only 20% for our family's purchases. If they spent $20, 686 last year than what will it cost them this year to buy the same as they did last year? 20% less on average. Therefore $20,686 will lower to $16,548 to buy those same products. Now we add on the Fair Tax sales tax of 23% inclusive or 30% exclusive. National Sales tax on $16,548 would be $4,965 for a total of $21,513.
Their true take home is $22,400 and they bought the same products and services as they did last year. $22,400 minus $21,513 equals $887. This family has an extra $887 dollars to spend. BUT WAIT, we haven't added in the Prebate yet!! This family will receive an additional $429 per month or $5,152 a year. In total they now have $27,552 in purchasing power. The working poor have more purchasing power under the Fair Tax and a net tax rate including payroll taxes that is actually negative. They have more spending and purchasing power under the Fair Tax.
Under this Tax reform and replacement package this family bought the same products and services that they bought before, paid all of the national sales tax and have an extra $6,039 (27,552 - 21,513) in purchasing power left over to pay for Health Insurance, save for retirement, pay for college, or save for a home.
This family has an extra $6,039 over what they bought the year before. That is a 26.9% increase after all taxes are paid!! ( 6,039/22400) The Fair Tax is not regressive to the poor at all, in fact if you really want to help working families and the working poor you should take an honest look at these numbers and be a supporter of the Fair Tax.
Even if the price drop was Zero or took 6 months to work into the system this working poor family is still ahead. Lets assume no price drop and this family just wants to buy the same things as last year. They spend the same net (after income tax refunds) of $20,686; then add on the National Sales tax and their new total is $26,892.
Under the Fair Tax they take home $22,400 plus the Prebate of $5,152 for a take home total of $27,552. That leaves them ahead by $660. So even in the worst case scenario with no price drop this working poor family has a true net tax rate of less than zero.
The current Income and payroll tax system leaves a truly regressive tax on the working poor with the 7.65% in payroll tax paid by the employee and a wage suppressor of 7.65% in payroll tax paid by the employer. Many economists agree that the payroll tax suppresses wages on the working poor. By passing the Fair Tax we eliminate this regressive tax and we will see wages increase for many working American Families.
Mr. Hirsch and Ocala.com readers should be able to see that the Fair Tax Legislative package is better for American working families and better for the American Economy.
The Fair Tax: Magic or illusion?
BILL HIRSCH at Ocala.com
http://www.ocala.com/apps/pbcs.dll/article?AID=/20051127/OPINION/51126005/1183/news08
Bill Hirsh's Article on the Fair Tax does his own disservice to the facts as he is very selective and superficial in his choice of data used to create a negative view of the Fair Tax and to support his contention that it is a Regressive tax.
What he fails to include after his cursory read Of Neal Boortz and John Linder's Book " The FairTax Book" is any mention of the elimination of the most regressive tax on the working poor the PAYROLL Tax. There is no Progressivity to the current payroll taxes of 7.65% taken out of everyone's paycheck each and every week. In fact, it is the rich who stop paying the payroll tax after the first $90,000 in income.
Under the Fair Tax when the wealthy spend $90,000 on a fancy car or $900,000 on a new mini-mansion, they will pay their fair share of 23% on those purchases. The wealthy will be contributing a larger portion toward supporting Social Security and Medicare than they did before under the archaic income and payroll tax scheme the IRS currently uses.
The Fair Tax uses the Prebate system to make this replacement plan Progressive. That means that the working poor pay a smaller percentage of their income in taxes than the Middle class and the Middle class pay a smaller percentage than the Rich. That is exactly true with the Fair Tax and the Prebate system.
Where does Mr. Hirsch get these impossible numbers of the bottom 20% of earners making $8,201 in pretax income but they all spend $10,000 more than that for an average of $18,492?? Do all of these people have large savings accounts that they can spend $10,000 more than they earn?? Are these College students that get an additional $10,000 a year from Mom and Dad?? With only $8,201 in income are credit card companies giving these people credit cards with $10,000 limits?? I think not. I believe he has selectively picked incorrect data. If he can make these unbelievable numbers work, he must explain how. He has obviously left something out.
Even so, the issue of Tax fairness in the Fair Tax package ( HR25/S25) is that every family gets the Prebate to be fair. Whether you are a maid or a millionaire their is no exception. For a family of 3, they receive their monthly check of $429.33 ($5,152/12). This is to cover the tax on food and essentials up to the poverty line of spending as set by Health and Human Services ( HHS) for a family of 3 that is $22,400. Even if you only make and spend $8,201 or $18,492. The Fair Tax will treat every one equally and still send that family $5,152 as if you had $22,400 to spend. That is a negative net tax rate if you make less than $22,400 and a net tax rate of ZERO if you earn at the poverty line of $22,400.
Let's follow the math correctly. Lets assume a family of 3 making the poverty line HHS income of $22,400. Under the income tax and payroll tax system we currently have, they would be in a 15% income tax bracket and a 7.65% payroll tax bracket. Lets assume that this working poor family uses standard deductions and the Earned Income tax credit to reduce their income tax to Zero. That only leaves the payroll tax of 7.65% for a net take home pay after income tax refunds of $20,686. For this example, lets assume they spend all of that on essentials for their family during the year. That means they bought $20,686 worth of Goods and services under the current income tax system.
The following year the Fair Tax is enacted and lets assume they buy the same goods and services they bought the year before.
The question is what happens to their purchasing power and true spendable income.
Under the Fair Tax, our family of 3 will first take home 100% of their paycheck. Not only the 7.65% regressive payroll tax but also the income tax that was normally withdrawn as well. Remember under the old system they had to wait until April 15th of the following year to apply for the EIT and the refund. So now they take home a paycheck each week that is larger than before.
When they go to buy those same products and services that they bought under the old income tax system, they will see that prices have dropped. This is because under the Fair Tax legislative package corporate taxes and the other 7.65% of payroll taxes that employers pay is eliminated. Once these costs to business are eliminated than those are reflected in lower prices of Goods and Services. Studies estimate the price drop at 22% for products and 25% for Services. Even if the price drop was only 10% this family would still be ahead.
For our math example let's be conservative and estimate an average price drop of only 20% for our family's purchases. If they spent $20, 686 last year than what will it cost them this year to buy the same as they did last year? 20% less on average. Therefore $20,686 will lower to $16,548 to buy those same products. Now we add on the Fair Tax sales tax of 23% inclusive or 30% exclusive. National Sales tax on $16,548 would be $4,965 for a total of $21,513.
Their true take home is $22,400 and they bought the same products and services as they did last year. $22,400 minus $21,513 equals $887. This family has an extra $887 dollars to spend. BUT WAIT, we haven't added in the Prebate yet!! This family will receive an additional $429 per month or $5,152 a year. In total they now have $27,552 in purchasing power. The working poor have more purchasing power under the Fair Tax and a net tax rate including payroll taxes that is actually negative. They have more spending and purchasing power under the Fair Tax.
Under this Tax reform and replacement package this family bought the same products and services that they bought before, paid all of the national sales tax and have an extra $6,039 (27,552 - 21,513) in purchasing power left over to pay for Health Insurance, save for retirement, pay for college, or save for a home.
This family has an extra $6,039 over what they bought the year before. That is a 26.9% increase after all taxes are paid!! ( 6,039/22400) The Fair Tax is not regressive to the poor at all, in fact if you really want to help working families and the working poor you should take an honest look at these numbers and be a supporter of the Fair Tax.
Even if the price drop was Zero or took 6 months to work into the system this working poor family is still ahead. Lets assume no price drop and this family just wants to buy the same things as last year. They spend the same net (after income tax refunds) of $20,686; then add on the National Sales tax and their new total is $26,892.
Under the Fair Tax they take home $22,400 plus the Prebate of $5,152 for a take home total of $27,552. That leaves them ahead by $660. So even in the worst case scenario with no price drop this working poor family has a true net tax rate of less than zero.
The current Income and payroll tax system leaves a truly regressive tax on the working poor with the 7.65% in payroll tax paid by the employee and a wage suppressor of 7.65% in payroll tax paid by the employer. Many economists agree that the payroll tax suppresses wages on the working poor. By passing the Fair Tax we eliminate this regressive tax and we will see wages increase for many working American Families.
Mr. Hirsch and Ocala.com readers should be able to see that the Fair Tax Legislative package is better for American working families and better for the American Economy.
posted by Merrill Bender | 9:44 AM
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