Fair to partly cloudy

Francis W. Porretto explains one reason why we resist overhauling the Tax Code:

This is the heart of the problem faced by the advocates of systems such as the Fair Tax. Smith wants to know what his tax burden will be under such a scheme. He knows what his load is today, but any new scheme comes with a degree of uncertainty: How high will the national sales tax be? What would prevent Congress from changing it arbitrarily, as it currently does the income tax? He can’t be sure of those things, or that he’s seeing all the “fine print.” The uncertainties, and his established reliance on the real-property deductions in the income tax law, predispose him away from such a sweeping change … even if, objectively, the new scheme would be to his advantage once it was in place.

Be it noted that I do in fact take advantage of the real-property deductions in the current income-tax law.

And with that in mind, let’s see what my tax burden might be under the FairTax proposal in its most recent form. Existing obligations — the mortgage and its escrow collections, my restructured debt — would not be subject to the tax; this excludes approximately $18,500 a year. Savings and investments would not be taxed; at the current (lowish) level of same, this would knock out another $2000. The so-called “prebate,” which excludes an income base at the poverty level so as to add a hair of progressivity to the system, excludes another $10,830. State and local taxes presumably would also be dropped off, cutting maybe $2500 more.

What’s left, I assume, is taxable once spent, and the tax on what’s left, based on the proposed 23 percent on the gross — 30 percent on the pre-tax figure — runs about $4000. Since my current Federal tax bite is on the far side of $7000 — approaching $9000 without the aforementioned real-property deductions — I calculate that under this particular set of assumptions, I would come out better under the FairTax in its first year; but even if the tax were enacted exactly as described by its proponents, the tax rate and “prebate” would be adjusted each subsequent year, based on the previous year’s revenues, so that advantage might be reduced or even eliminated.

So Smith has a reason to be concerned. He also, however, has an obligation to do the math.





2 comments

  1. Brian J. »

    3 October 2010 · 10:03 am

    If four in ten people or whatever it is don’t pay any income tax, then any national tax would be a tax increase for them.

    I’m not saying you’re in that category, but any revamping of the tax code is probably going to increase taxes for someone or a lot of someones.

  2. CGHill »

    3 October 2010 · 10:21 am

    Especially if they go to the trouble of making it “revenue-neutral”; it would pretty much have to.

    However, a lot of those people who aren’t paying income tax are paying payroll tax, which would also be supplanted by this Fair thing; some of them might fare fairly well.

    Then again, I’m not pushing this as a cure. I’m merely pointing out that I think I personally would benefit from it, at least early on.

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