Tax Fairness

not sure wrote:

quite simple, the more you earn, the lower the percentage of your income goes toward taxes.

assuming all people buy the same basic amount of stuff (obviously not totally true), people who accumulate large amounts of wealth aren't paying tax at the same rate as those who must spend their entire checks each week.

This explanation excludes two major items:

Generally, a (generous) basic exemption exists under these plans that maintains the proportion of the population (50%) that pays no taxes.

The "rich" buy more cars, yachts, diamonds, and homes, thus delivering more money to the Treasury.

The link below is a more thorough explanation from the website.

Basically, all new consumer goods and services would be taxed at 23% (based on current government spending). If you want to take your entire paycheck home and hide it under your bed, you don't pay any taxes, but every time you buy something, you're taxed for it. Obviously, the more you spend, the more you're taxed, so rich people who buy more expensive luxury items end up being taxed more.

You're given relief for taxes below poverty level spending (based on the number of people in your household), so if you're poor and you only buy inexpensive food and clothing for your family, you won't have any tax burden. If you choose to buy more expensive things, you'll know you're also choosing to pay the tax. Theoretically, this will lead to more personal savings and the organization also claims that it will lead to offshore banking and production coming back to America (no longer able to exploit loopholes in the current taxation system). It also keeps people from tax evasion and hiding earnings, particularly criminal earnings, since criminals spend money just like everyone else.

[quote]doesnt work for the IRS wrote:

Could elaborate on how this [consumption tax] would work? [quote]

Think: federal sales tax--with exemptions and rebates.

If savings/investments are untaxed (because they do not go toward consumption), then the system would encourage a higher US savings rate.

I question whether your example is realistic then. The person making 50 grand pays the same, and the people in the current 35% marginal tax bracket pay less. Who pays more? Or does this new system result in less tax revenue for the government?

OK, I did some research on the effective income tax rates paid by the different income groups. Unfortunately the most recent data I could find was published by the Congressional Budget Office in 1999.

http://www.cbo.gov/ftpdoc.cfm?index=1545&type=0&sequence=0

According to this, the super rich only pay 18.7% to 23.4% of their income in income taxes. There may be a 35% marginal rate but the rich can hire accountants to avoid paying anywhere near that. Interestingly, the guy earning $50,000 in 1999 would have had an effective rate of about 8%.

Granted this data is pre-Bush Tax cut, but it appears that with a flat 25% tax rate the $50,000 earner does better than the rich guy. Theoretically, the rich would actually have to pay a little more - but he'll hire an account who will figure out a way to keep his burden around 20%.

So will the middle class have to make up for less tax receipts from the rich? No the rich will still being paying roughly the same that they've always paid, possibly more.

I love the idea of replacing the income tax and payroll taxes with a consumption tax. However, it takes away too much power from Congress so I don't think it will ever get passed.

Blowing Rock Master wrote:

I love the idea of replacing the income tax and payroll taxes with a consumption tax. However, it takes away too much power from Congress so I don't think it will ever get passed.

Isn't the knock on this that a consumption tax would basically make it impossible for anyone to buy a house and a LOT more expensive to buy a car?

There are probably consumption tax proposals that get around these problems in some way.

It seems like pretty much every tax system is a game to reward certain groups and punish others. "Fairness" is completely arbitrary.

Blowing Rock Master wrote:

I love the idea of replacing the income tax and payroll taxes with a consumption tax. However, it takes away too much power from Congress so I don't think it will ever get passed.

i'm completely with you on eliminating the payroll tax, i think i'm onboard with a consumption tax, though i'd probably retain an income tax for income above a high threshold, like say, $200,000 per year, with a rate of something like 10%-15%.

on your previous post, you assert that rich folks limit their tax liability through the use of clever accountants. i don't think that's generally true. there is certainly some of that going on, but i think it's less common than you think. the biggest difference is that the wealthiest people make most of their money through capital gains. capital gains are generally taxed at a 15% rate, with no medicare or social security taxes tacked on. so if you make $1 million in a year and $900,000 is taxed at the 15% capital gains rate and the remaining $100,000 is taxed at the rate for someone who makes $100,000, your effective tax rate will be around 16% or 17%. much better than someone who earns $100,000 in wage income alone. (granted the $1 million example pays more in total tax).

The fairtax proposal only taxes new goods, so a used house or car would not be subject to the tax. I have no idea how many people would still find it worthwhile to buy completely new houses but I'm sure that housing companies would find a way to make it appealing enough.

Excellent point. I didn't think of that.

I also know that many of the rich incorporate themselves. This allows them to turn many of their living expenses into business expenses thus reducing their taxable income (and reducing their personal liability).

In general, and not necessarily a response to the OP: Be careful what you ask for - you may get it. Who defines who is "rich"?

This is simply class envy - and is likely a smoke screen. Recent legislation has been passed to make it easier for companies to do business offshore - aka a multinational company - and your government has made it real easy for them to not pay taxes, so you and I get stuck with the bill.

The working poor make out like bandits.

Head of House making $12,000 with 2 kids gets a refund over $4000. Sweet little govt. handout called Earned Income Credit.

up all night wrote:

The working poor make out like bandits.

Head of House making $12,000 with 2 kids gets a refund over $4000. Sweet little govt. handout called Earned Income Credit.

Sweet deal indeed. Who wouldn't want to run a household on 16,000 a year? Man, the poor get all the breaks.

masters of the obvious wrote:

Or does this new system result in less tax revenue for the government?

I believe that in theory revenue will be the same due to the elimination of existing tax deductions and loopholes.

The rich should not pay any more tax than the poor.

Provided one is taking home enough for a living wage, everyone should pay the same in taxes.

Why?

Because despite the populist myth that all of the 'rich' are living off inherited wealth, the vast majority are simply smarter or harder working than the middle class and poor. Thus, they deserve more rewards and certainly do not deserve any more burden. Through creating jobs, investing, consumption, and innovation the rich are a keystone of our economy.

The initial article is right, this is just more uninformed middle class complaining.

http://www.freedomworks.org/informed/key_template.php?issue_it=17

"The new data shows that the top-earning 25% of taxpayers (AGI over $62,068) earned 67.5% of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86%). The top 1% of taxpayers (AGI over $364,657) earned approximately 21.2% of the nation's income (as defined by AGI), yet paid 39.4% of all federal income taxes."

It's hard to believe that to be in the top-earning 25%, you only need to be making $62,000. Where I live, that's well off, no problem buying anything you need. But it's hardly rich. I definitely don't see myself as upper class.

This is not what the Bush tax cuts did. You can keep believing stupid talk show hosts if you want but you might want to look at actual data before you do that.

Say taxes collected or the meal cost $100. Then were reduced to $80. Your example the richest guy would pay a higher tax burden. That is not what happened under Bush's cuts.

Most people would say the tax cuts should be spread evenly in percentage terms. That may be what you were trying to say but your example is not what happened.

What happened was the rich got a higher percentage cut as well as a higher dollar cut. A higher percentage of the tax burden was pushed to the middle class.

Even more nonsense is the line that the tax cuts stimulated the economy. Yes, they did. But cutting taxes on the middle class or those who have less disposible income would have stimulated the economy a lot more than giving a higher percetage tax cut on the wealthy. People with less disposible income getting a tax cut will spend the tax savings on consuption and that will grow the economy much quicker.

Taxes are not progressive because of some assumption that the rich are living off of inherited wealth. What does inherited wealth have to do with personal income tax rates? If people did inherit money, then estate taxes will address that issue.

People with higher income are taxed at higher rates because they are more able to pay a higher percentage of their income in taxes. They have more disposable income. Is this "fair"? I'm not going to argue it is, but who said life is fair? Even taxed at higher rates, these people will get by just fine. They are already awarded for their efforts. The top tax rate is 35% -- not 50% or something ridiculous.

Despite your idea of what is fair, consider what harm would occur to this country if you suddenly shifted the "excess" tax burden on the rich to the low and middle classes. Do you think that a family of four with an income of $50,000 that's currently paying close to zero in income taxes (due to standard deductions and personal exemptions) could suddenly afford to pay an extra $5,000 in taxes? That would simply break a lot of families. Maybe you don't care, but I think that's bad for the country. These people need some incentive, and maybe help, to better their lives. Under your idea of fairness, I think we'd have millions more in poverty or even homeless.

A higher percentage of the tax burden was pushed to the middle class? That is equivalent to saying 60% of the population is more than 5%. Why wouldn't the largest burden go to the most people?

The problem is growing the economy. Giving people tax cuts so they can continually live outside their means is not growing the economy. Let's give everyone a home loan so the economy is growing, then we they all default the rest of us can pick up the tab.