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[Editor’s Note: I received this by email, and am posting it here with the author’s permission]
I just came across your blog on the Progressive Democrats’ Sales Tax. One of our supporters found it and posted it to one of our state yahoo group boards so you may in fact receive other responses from supporters. You did a very good job of describing the bill. Now let me confess up front that I am an avid supporter of the FairTax that has been involved in the movement since the mid 1990s.
It has always amazed many of us why more democrats don’t jump in support of the FairTax. It accomplishes most all items in their own tax priorities. You made some great points. Here are a few you can add:
1)It is a tax on existing wealth. While many believe the current system is progressive, it is only progressive in the rate schedule. In practice, those with existing wealth are taxed much less than the middle class and much more favorably than those with income from labor. In many cases they aren’t taxed at all because of the use of tax exempt securities, family foundations, trusts and other vehicles. Meanwhile, the marginal effective tax rate on the poor is often higher than that paid by Bill Gates (see point 4). All wealth is eventually spent and under the FairTax it will be taxed as it is used.
2) It secures Social Security without privatization, raising rates or cutting benefits. This is because the FairTax base is twice as broad as the current system and is also twice as stable. The base is derived from Personal Consumption Expenditures (PCE). I’ll attach a link at the end to the figures on PCE from the St. Louis Federal Reserve which tracks it back to 1959. [ link ] You can see that starting with any month of any year and looking 12 months out, PCE has never gone backwards, inspite of wars, Presidential assasinations, oil embargoes, market crashes, natural disasters, etc.
3) Under the FairTax, the wealthy will be paying much more to help support social security and medicare. As you know, the current system has a ceiling on contributions to Social Security set at $94,000 in earnings. Income from investments are not subject to social security or medicare taxes so those with tremendous existing wealth don’t contribute to these systems at all. Under the FairTax, the wealthy will contribute to both with every dollar of their spending regardless the source of their income. Will the wealthy quit spending? Hardly. What good will it do to be wealthy if you can’t live the lifestyle?
This means when Steve Forbes, Ross Perot or Theresa Heinz Kerry buy a Steinway baby grande piano for one of their homes at a cost of over $100,000, every penny of that purchase will be suject to the tax that helps fund social security and medicare regardless the source of the income.
4) The FairTax encourages work and savings, ending the tremendously high marginal effective rates on low wage earners. Currently, those workers drawing the EITC have a marginal effective tax rate above 40% in many cases as they begin to lose the EITC benefits and pay payroll taxes on extra earnings giving them very little benefit for working harder. Under the FairTax, every dollar of extra earnings goes in their pockets and they can decide their tax burden at that point by their buying decisions.
5) It makes college more affordable. Currently education institutes have tax compliance costs as many other businesses do. This comes in the form of paperwork and payroll taxes. Of course, employee wages are taxed as well. Under the FairTax, they will no longer be subject to these taxes. Additionally, education is not considered consumption under the FairTax so tuition expenses will not be taxed. Since they is no taxes on savings and investment, families will be able to save for college expenses quicker and will interest rates projected to be 25% lower under the FairTax, loans will be more affordable as well.
6) It makes home ownership more affordable to low income Americans. Today Americans pay taxes on their income. Thirty-four percent of Americans then PARTIALLY deduct taxes on INTEREST only. The principal portion of the house payment is paid with aftertax non-deductible dollars. Since itemization means the loss of the standard deduction ($10,300 in 2006), only those with itemized expense above that amount would benefit from itemizing. That means if home interest is your only itemized expense, it must exceed $850 a month. Otherwise, your interest expense was not deductible. Few Americans at the median income level get this benefit at all. Even for those who do, interest expense is only deductible for income taxes, not payroll taxes. Under the FairTax, neither your income nor the base interest expense is subject to the tax. In other words, 100% of Americans will pay that interest with tax free dollars, not just those able to afford bigger homes. Additionally, since savings aren’t taxed, they will be better able to save for a down payment. Since interest rates are lower they will be better able to afford the payments.
7) It goes a long way to solving our border security issue. In addition to giving American workers an advantage over illegal immigrants by the prebate, we could also redirect 100,000 IRS employees to INS where they could chase illegal aliens and potential terrorists instead of American workers. Since the bill is revenue neutral, the $10 billion in wages and benefits we pay these employees is still available so this would cost the Treasury nothing. The FairTax still results in $265 billion a year in complaince cost savings. Sometimes people have a difficult time conceptually with that figure so I use two examples to explain it. First, if you started a business today and lost $1 million a day 365 days a year, how long would it take you to lose $265 billion? It would take 726 years! Second; there are 100,000 employees of the IRS. If we paid everyone of them $1 million a year to go home and leave Americans alone, we’d still have a net savings of $165 billion a year.
8) It untaxes social security benefits. Currently someone who draws social security benefits retirement benefits before normal retirement loses $1 in benefits for every $2 in other earnings. After normal retirement age, their benefits become taxed if their total earnings…including half of their social security benefits excedd $25,000 (single) or $32,000 (married filing jointly). Both of these provisions discourage seniors from working after Social Security age. Not only does the FairTax include the prebate for seniors, but it changes the CPI index calculation on social security benefits to an after tax basis. This means that if the cost of living goes up on an after FairTax basis, their social security benefits are increased…guaranteeing the use of those benefits are not taxed.
9) It is a “super tariff”. It removes the cost of government from our exports and applies the tax to retail imports. This is similar to the way other countries tax imports/exports and puts American production on an even playing field instead of encouraging businesses and capital to flee the country. In fact, as one of the safest economies and the largest consumer base in the world, it attracts businesses and capital back to our shores.
10) It allows Americans to hold Government accountable regardless which political party is in power. One of the first requirements of responsible Government is that it be visible. Our current tax system divides us into hundreds of competing groups while hiding the cost and benefits of political action behind complex definitions and regulations of the tax code. The FairTax is simple to understand and equally visible to all. Every expenditure of Government can be equated to a portion of the tax rate that applies equally to all retail consumption. As a nation, we can be united in understanding the cost of all proposed legislation and weigh that against its benefits. There will be no more reason for lobbyists to walk the halls of Congress in search of tax benefits for their clients with the main purpose of justifying their (the lobbying firm’s) existence.
While I am only a volunteer, I have given many presentations to various groups. There in fact are many democrats that are supportive of the FairTax, but most of those are at the grass roots level or local political level…not national leadership. While there are some democratic members of Congress that have privately indicated they would support it in a vote on the floor, they are not currently willing to publically step forward.
The bottom line is that this needs to happen at the grass roots level across party lines. It is up to average Americans to understand this issue, to get active and let their associations and political leadership know they want them to support it as well. There is perhaps no other proposal of any nature before Congress taht will do more to benefit average Americans in this country.
If you’d like to keep up with our progress, or be a bigger part of the effort, we have state groups on yahoo for all 50 states. We use this groups to keep key supporters up to date on progress, congressional action, state and local efforts, local meetings, etc. To find your state group, visit “http://groups.yahoo.com/group/xxfairtax” where “xx” is the two group identifier for your state. Just click on the “Join This Group” button at the top.
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