Posted on 11/02/2005 10:09:04 AM PST by Eaglewatcher
Sorry I'm so late to the party. This thread slipped by me.
Are you too steamed to discuss further, or will you play along with some numbers with me ?
I am curious about the overall effects of the FairTax on a nestegg as you describe. I expect have slightly less than $2M, but I don't think the tax percentages will be much different. (Personally, I think one of two things would be fairer than the FairTax as written -- either your plan to spend via PTS from already-taxed savings, or applying a flat-tax to withdrawals from the tax-deferred accounts that are out there and using the revenue to lower the FairTax rate.)
If you'll play along, I'd like to look at the following:
1) What is the total nestegg amount ?
2) What is the portion in tax-deferred accounts ?
3) What is the portion in rental real-estate and how long will it have been held before selling to fund retirement ?
4) What is the portion in after-tax accounts ?
5) What portion is in tax-free bonds ?
6) What "real" rate of return are you expecting in retirement on each portion of the nestegg ?
7) What amount do you expect to consume each year during retirement ?
8) What is the size of the household ? (Not that the prebate amount sounds like it will be important to you.)
Let's reduce the rate of return by inflation to get the "real" rate and hold the consumption amount constant.
It is not enough to look at just one aspect -- the extra FairTax on the money spent from after-tax savings -- because you will lose there. (Sorry Pigdog.)
With the above information, we can see what would happen in the overall picture and compare it to what would happen with the existing system.
If you end up with less retirement buying power under the FairTax, then we'll see how much prices would need to drop to offset that. Then we can talk about whether that is a reasonable expectation or not.
I didn't come to this Fair Tax thread as a "pro" or "con". I came to look at an idea and to give it a fair shake.
A earlier poster brought up the point that the truly wealthy (such as parasites like John Kerry and Teresa Heinz who earned only a minuscule amount of the $500 million they now live on while paying negligible taxes......while calling me "The Rich".......) would finally be forced to pay a meaningful amount of tax. That is something that I would very much like to see.
On the other hand, the thrifty "worker bees" who get stung in the current tax system will get stung twice in the case of the savings they have already paid tax on.
The way I see it, there has to be reasonableness built into any transition and it is not unreasonable to ask that the money earned for X number or years of work not be taxed once with an income tax before being saved and the taxed yet again with a sales tax when it is spent.
As far as assurances from pigdog that it will be a wash because prices will magically drop 28%, sorry, I don't believe in the Easter Bunny.
In regards to my finances, I have always followed a "Millionaire Next Door" lifestyle even though I am a high earner. Even though I am of Baby Boomer age, the fact that I was a Cuban refugee at age 6 in the early 1960's and the fact that everyone in my extended family lost everything the family had ever had and we had to build their fortunes once again from scratch makes me psychologically akin to the Depression era/World War II generation.
With that mindset, once my medical career emerged out of the poverty and hell of pre-med, medical school and post-graduate specialty training, my goals in life were to never have myself or my children financially insecure again and to have zero debt.
Once the money started coming in, my first priority was to pay off the house we live in now and the house I owned as a resident.
After those two goals were accomplished, concentrated on building the nest egg. Medicine is a hellish lifestyle and, after 25 years of it, a retirement at age 55 is something I am looking forward to.
It really does not matter what my particular situation is because not everybody is like me.
Some individuals will swear by real estate and have every last penny in it. I see my overall portfolio as different sacrifices I made in my life or different breaks I got in my life.
My SEP accounts, etc., are breaks. They were places to save untaxed money and, if that money is taxed in the future, that is the way it should be.
My real estate is where I will live until I die (one house on Puget Sound) and what spits out $1,4000 moth in rental income (one house in San Diego, CA). After I am gone, they will belong to my two kids.
The money I have saved outside of retirement accounts and outside of real estate is the money I am most protective of. That is the money I had to save at the cost of conflict with a spoiled-rotten California Baby Boomer wife who believes that Daddy or her husband prints unlimited amounts of money in the basement so she can spend as much as she pleases. (Daddy doesn't have much savings to show for his life's work.)
In an era when the savings rate of most Americans is at rock-bottom, that is the portion of my net worth triad that will dwarf my retirement accounts.
Everybody's case will be different which is exactly why everybody can't be crammed into a one-size-fits-all formula.
My bottom line is that the money that I saved and has already been taxed once ( at the rate of what the gigolo John Kerry calls "the richest 1%" ) not be taxed again when I spend it at retirement at a rate of 28%.
I proposed a simple method of dealing with the double taxation issue.
I see no reason why it can't be adopted by the Fair Tax advocates.
I appreciate your approaching the FairTax with an open mind. I've run across too many that have closed their minds entirely and I don't post as much as I would like because of all the sniping I see here.
Sounds like you've worked hard and sacrificed a lot to retire while you're still young enough to enjoy it. I applaud your planning and success that will allow you to do that.
"That is the money I had to save at the cost of conflict with a spoiled-rotten California Baby Boomer wife who believes that Daddy or her husband prints unlimited amounts of money in the basement so she can spend as much as she pleases."
Just FYI, they made more than one of her ;-)
It also sounds like you are opposed to taxing the already-taxed savings on general principle, even if you get a break elsewhere. I can certainly understand that. I honestly don't know where the excercise I suggested was going to come out. It is very dependent on the mix of investments.
You may have gathered my reason for asking about rental property was because of the depreciation aspect and the effect on the existing income tax. That is an example of something people looking at the FairTax often overlook. They may have puchased $1M in rentals, held them for 20 years, depreciating $600K of their value, and forgotten they'll have to pay capital gains taxes on the depreciated amount in addition to the real estate appeciation they typically think of.
Other times, people forget they'll be paying ordinary income tax rates on tax-deferred acounts. They think it will be the lower capital gains rate because they held it more than a year. Or they forget about the 10% penalty for withdrawals from deferred accounts before they hit 59 1/2.
So you are exactly right. Everybody's situation is different. My point is just that you can't ignore the savings you will see on income taxes and focus solely on the extra taxes paid on purchases.
Personally, I don't believe the 22% embedded tax figure anymore. But it also is not zero. Corporations paid $200B in income taxes, and small businesses like yours paid more income taxes that are counted under "individual", plus the $360B payroll taxes paid by employers, plus any compliance figure you want to use ($200B is the low estimate and $800B the high). So there is something over $800B in taxes paid and compliance costs incurred by businesses that would go away under the FairTax. So even if there were no other "economic drag" costs due to bad business decisions, there would be roughly 8% of costs removed from American business. If you believe in free markets, you would expect some of that to show up in lower prices.
I understand you are not in a free market, but other businesses certainly are. It sounds like your field -- limited by insurers setting your prices -- will not see a large cost reduction. Other industries will, however. Take a look at the income statement from major public corporations, like Bank of America, and it is easy to find ~14% tax component without even considering what their vendors would do to compete for their business when their own costs dropped.
Pigdog likes to work from the bottom up in showing how costs grow through levels of production. That is speculative, as you've pointed out. He might be right. My numbers above are more top-down. They are easy to account for and are more of a bare minimum that prices COULD fall -- if market competition forces that fall.
Tomorrow I'll answer my own questions just to show an example of a nestegg used for retirement income.
" I proposed a simple method of dealing with the double taxation issue.
I see no reason why it can't be adopted by the Fair Tax advocates."
Sorry, I meant to address this. I think this would be workable, since I think the national income numbers support the revenue needed without including the spending of already-taxed money.
But in the interest of fairness, what if price-drop anticipators are right ? Wouldn't the PTS accounts be getting favorable treatment in that event ? Should the FairTax exemption for PTS money be reduced by the benefit of any price drop ? How would you account for that ? If milk drop from $3/gal to $2.50/gal, surely the PTS moeny shouldn't completely exclude the FairTax amount ?
"I didn't say I thought "everyone sells the same product at the same price." "
???Really??? Then perhaps you could tell us what this (from your post #693) means ...
"And why, exactly, would someone buy from you if your price was higher than the market price? Answer: they wouldn't. So you would lower your price until it matched the market price. "
It means there is a market price for whatever Principled is selling, even if he is selling something nobody else is. You can't charge $1,200 for your widget if people only think it's worth $1,000 - regardless of how unique it is.
You really might want to go to the bookstore and pick up a good, basic economics book.
"... you would lower your price until it matched the market price ... "
... doesn't mean you would lower your price until it matched the market price (e.g., sell at the same price)?? So you'd sell it at a different price despite the fact you saw fit to "... lower your price until it matched the market price ..."???
Sounds like you're saying exactly what you claim to not be saying - that you'd sell at the same price. And contradicting yourself to boot. The discussion wasn't about different products at all.
And thanx for the tip to your favorite book. You might also like this one:
Complete Idiot's Guide to Economics (The Complete Idiot's Guide).
I'll be following your discussion with Kellis91789 with interest.
Just one correction, though:
I have NEVER said "... prices will magically drop 28% ..." nor even that they would drop 28% if NOT magically.
Just wanted to set the record straight ...
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In the meantime, the tax-deferred acount will have grown from $1M to $1,276,282. Now I am over 59 1/2 so I use up all of this tax-deferred money. |
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Then I switch back to the after-tax account and pull $228K/year from it. While I was draining the tax-deferred acounts, this account rose back up to $3,450,000. |
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So that's what I would expect to happen under the existing Income Tax code. My $4M lasted until I was 95 year old while I spent $190K/year and that was the end of it. What about the FairTax ? Well, Out of my $190K/year spending, there is $20K that is "poverty level spending" for the wife and I. And there is $40K that is spent on education, used goods and travel outside the country. So I'll be paying FairTax on $130K/year, which is $39K. So my total withdrawals from my accounts will need to be $229K. |
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The calculator I'm using only goes out to 30 years, but you can see I have over $2M still in my account. So let's plug that in and see how long it lasts. |
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So it looks like I make it another 12 years -- to age 97 rather than the 95 under the existing tax system. I didn't need to have any price drop at all, but I still came out slightly ahead under the FairTax. |
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doesn't mean you would lower your price until it matched the market price (e.g., sell at the same price)?? So you'd sell it at a different price despite the fact you saw fit to "... lower your price until it matched the market price ..."??? Sounds like you're saying exactly what you claim to not be saying - that you'd sell at the same price. And contradicting yourself to boot. The discussion wasn't about different products at all.Huh? This makes no sense at all. You're rambling again. Up your meds.
Naw, Nightie ... up yours ...
Sorry, I meant to address this. I think this would be workable, since I think the national income numbers support the revenue needed without including the spending of already-taxed money. But in the interest of fairness, what if price-drop anticipators are right ? Wouldn't the PTS accounts be getting favorable treatment in that event ? Should the FairTax exemption for PTS money be reduced by the benefit of any price drop ? How would you account for that ? If milk drop from $3/gal to $2.50/gal, surely the PTS moeny shouldn't completely exclude the FairTax amount ?
First of all, I would like to thank you for bringing the issue back to reality. The elimination of corporate taxes has the potential of reducing prices but it certainly will NOT reduce prices to the point where the price decrease offsets the Fair Tax to make the whole matter a wash when the issue is using saved money that has already been taxed under the income tax system.
Whether we are talking about the 23% tax that I first assumed or the 28% that others have claimed is an irrelevant distraction. The bottom line is that prices are not going to drop either 23% nor 28%.
The backbone of the American economy is not the giant corporations but the millions of small business owners with Sole Proprietorships and S Corporations that pay no corporate taxes.
The keyboard that I am typing on says "Made in China" on the back as does the screen I am now looking at. The elimination of whatever corporate tax DELL paid to be the middleman will not cancel out a 23% or 28% sales tax to make it a wash if I buy them with already taxed money.
"In the interests of fairness" is the key issue.
The basic principle is that a citizen's money not be UNFAIRLY taxed.
If money has been taxed once as income tax and is saved, prices fall, say, 5% under the Fair Tax and the money is then taxed as 23% or 28% ( or whatever it really is) as a sales tax, then that is a definite injustice.
That is unfair double taxation pure and simple.
Do I assert that the once-taxed money is sacred and must never be taxed again?
No, not all all.
All you have to do is treat the issue with common sense instead of treating it like religious dogma.
IF the price-drop anticipators are correct to some extent, then, since I proposed using a special PTS Debit Card, it is a very simple thing to program the PTS Debit Card computers to charge whatever percentage of tax has been mathematically determined by the Government bean-counters to ensure that the entire process is zero sum for both the Government and the citizen.
It's as simple as that.
If the price-drop anticipators are correct in their predictions, then I pay the exact amount of extra tax (as determined by the bean-counters in charge of the PTS Debit Card computers) to ensure that I have paid my fair share of taxes.
If the price-drop anticipators are not correct, then my life savings are not ravaged by unfair double taxation.
It may be that different businesses have different tax rates programmed in to the PTS Debit Card computers just as different businesses now pay different State Excise Tax rates on their gross. If a high volume, low profit margin retailer paid the same excise tax rate on their gross that I pay on my service business gross, they would be bankrupt in two months. That is why State Excise Tax forms have so many different excise tax rates asigned by each type of business.
In the age of computers and electronic finances, we have no need to risk devastating peoples savings in a crap shoot based on opinions and claims and counter-claims.
With modern technology, we have the ability to define our core value.......no citizen's post-tax savings buying power will be hurt or enriched by the system change.......and the Government bean-counters and the computer geeks can take it from there and proceed to adjust the PTS Debit Card computers as required each moth to achieve that goal.
As I said, it might be workable on the PTS accounts. Adjusting for the price drop industry by industry or even item by item sounds cumbersome to me, and I wonder how anyone would know if they were being charged correctly if the amount exempted due to a PTS card fluctuated that way.
How about the future earnings on the PTS money ? Would that not be allowed to accumulate in the PTS account but be immediately transferred to a non-PTS account ? That sounds cumbersome, too. If I have 1000 shares of a stock in my PTS account and those shares are valued at $25K at cutover, then I sell 500 shares five years later for $18K, would we be leaving $12.5K in the PTS account and automatically transfering the other $5.5K to a non-PTS account ? Sounds like a lot of work for my broker, but technically possible. What about losses ?
It almost sounds like you'd have to perpetuate the Income Tax for those PTS accounts, plus some additional complicated rules.
As my example shows, it doesn't seem necessary to do all that to maintain fairness.
Actually, I guess the value of investments within the PTS accounts at cutover would be the cost basis when they were purchased, rather than their present day value. Otherwise you'd be exempting from FairTax more than the already-taxed money in the PTS.
Say I paid $10K of after-tax money for some stocks and have never realized any gains, so I've never paid any income tax on the gains. Those shares are now worth $30K, but the PTS exempt value should only be $10K, right ?
Complicated if there are losses to account for as well. Maybe a one-time credit into the Prebate account for the FairTax rate would be easier. But then you get into the whole issue of whether the PTS money would actually all be spent on items subject to the FairTax.
As my example above shows, it isn't unreasonable to expect only 2/3 of retirement spending to be on FairTaxable items. That makes the FairTax rate an almost identical replacement for the effective income taxe rate on future earnings of the nestegg.
You haven't commented on my example. Is there something about it that you have questions on ? I kept it simple.
How would they know for sure?
They wouldn't.
Who would slpit hairs about being off by 2% or 3% when the alternative is at least a 23% body blow?
Perfection is the enemy of the good.
Yes, it is cumbersome and it might take 100 or 200 U.S. Government bean-counters working year-round to keep it all straight (more or less) using U.S. Government monthly cost of living data.
Being very generous, if we pay each of those 200 U.S. Government bean-counters $70,000 per year to do that "cumbersome" work, it will cost the United States of America $14 million to protect the hundreds of billions of dollars of already-taxed savings that American citizens have saved.
How about the future earnings on the PTS money ?
Very simple.
Your PTS Debit Card would be worth exactly the amount that you had in post-tax savings the second before the Fair Tax took effect. Period.
What about future earnings?
Those were earned during the Fair Tax era and they would fall under the Fair Tax rules. If you wish, you could withdraw the amount to spend as you would any other Fair Tax money. However, that money will not add a penny to your PTS Debit Card amount that was fixed the second before the Fair Tax era began.
The PTS Debit Card amount is carved in stone the minute the Fair Tax takes effect.
There is nothing "cumbersome" about it.
If your PTS Debit Card account started out at $1 million the day the Fair tax took effect, the amount in your PTS Debit Card is $1 million. It will go down as you spend it but it can never go up by a single penny.
Once your PTS Debit Cards amount hits zero, that's it. It's gone and you are now living 100% in the Fair Tax era.
But what if your investment doubled your money in a year.
Good for you. The $1 million in your PTS Debit Card does not get a single penny added to it. The other $1 million is under the Fair Tax rules.......No income tax but you pay the Fair Tax when you spend it.
What about if you make a foolish investment? What if you had $1 million on your PTS Debit Card to start out but you blew half of it and only have $500,000 left in your account?
Too bad. So sad.
Once your PTS account goes to zero, your PTS Debit Card goes "Poof". Sorry. All your post-tax money is gone. Shoulda been more careful with it.
As my example shows, it doesn't seem necessary to do all that to maintain fairness.
As we said before, every person will have a different portfolio. "Close enough for Government work" might mean a few hundred dollars for one person or hundreds of thousands of dollars for another.
In my souvenir collection, I have an uncashed check from my Navy warship (with the ship's name on it) dated 1981 for..........17 cents.
The U.S. Navy would round out your pay to the nearest dollar every pay period. However, at the end of the fiscal year, if you had been short changed, even by 17 cents, the Navy would cut you a check. All the human programmer has to do is give it the instructions.
When you have spent decades of your life during the income tax era sacrificing to build your savings, you don't want a "good enough for Government work" treatment of it.
You want it done correctly or a near imitation thereof.
Maybe getting it down to the last 17 cents is being way too anal-retentive but "give or take 23% to 28%" is definitely not acceptable.
"Your PTS Debit Card would be worth exactly the amount that you had in post-tax savings the second before the Fair Tax took effect. Period."
Don't you actually mean whatever your cost basis was on your holdings ? Suppose the total after-tax money was just $200K of that $1M. The rest is unrealized capital gains. So $800K has never been taxed. Obviously it wouldn't be fair to get a skip on paying taxes on that $800K, right ? The PTS credit would be just $200K.
Tracking down the cost basis would be a pain, but at least it would be a one-time excercise rather than every year as I currently do. Liquidating certain stocks, options, bonds, futures contracts, and real estate to fund the PTS account might not be very easy or convenient, though. And it might be disruptive to the economy.
Don't you actually mean whatever your cost basis was on your holdings ? Suppose the total after-tax money was just $200K of that $1M. The rest is unrealized capital gains. So $800K has never been taxed. Obviously it wouldn't be fair to get a skip on paying taxes on that $800K, right ? The PTS credit would be just $200K.
I don't mean "paper profits". I don't mean "investments". I don't mean the $100,000 stray puppy that I bought with my two $50,000 stray cats.
I mean "savings".
I mean after-tax cold hard cash you have under your matress or in a bank account or in a CD.
Right now, my total portfolio is more or less equally divided between real estate, stocks and cash invested in short term CD's.
Once you start trying to put an "after-tax" value on what your $100,000 worth of Can't-Possibly-Go-Wrong.com that you still hold should be worth, you are simply trying to count your money in the middle of the poker game.
[I mean "savings".
I mean after-tax cold hard cash you have under your matress or in a bank account or in a CD.]
Then that seems pretty cut and dried. By definition, you'd have no unrealized gains to owe income taxes on for that kind of account.
I think other people who had chosen to put all their money in other types of investments would say they were being penalized for their choices, though. They would want to get a credit for their cost basis.
Even so, it still seems workable to me. And in the spirit of the FairTax where everything is taxed once, but only once.
Now on to those pesky tax-deferred accounts...
There is $12T sitting in accounts that have never had any income taxes paid on the earnings. The FairTax, as written, gives the holders of those accounts a massive windfall compared to the already-taxed accounts we've been discussing.
If that $12T had to be transferred to regular accounts over a five year period, and a 15% tax applied to it, a revenue stream of roughly $300B/year would result. That means the FairTax would need to raise only $1.5T to be revenue neutral rather than the full $1.8T, and the FairTax rate could be 19.5% instead of 23%.
This seems fair to me in the same spirit as your PTS accounts. What do you think ?
The so-called "Individual Retirement Accounts" had post-tax money put into them and the theory was that the money taken out would be allowed to be withdrawn tax-free. Those accounts will take a hit with the Federal Sales Tax but it is such a minor part of my portfolio that I don't pay much attention to it.
However, SEP's had pre-tax money put in that would be theoretically taxed upon withdrawl.
As it turns out, the effect under Fair Tax would be as if this money had been under Fair Tax all along. It would be earned without income tax (as under the Fair Tax), it would realize gains without tax (as under the Fair Tax), it would be withdrawn without tax (as under the Fair Tax) and then it would be charged a Federal Sales Tax when spent (as under the Fair Tax).
So, it seems that the way to deal with SEP's is to treat SEP money as if it had been Fair Tax era money all along.
"The so-called "Individual Retirement Accounts" had post-tax money put into them and the theory was that the money taken out would be allowed to be withdrawn tax-free. Those accounts will take a hit with the Federal Sales Tax but it is such a minor part of my portfolio that I don't pay much attention to it."
That describes Roth IRA accounts, which is not part of the $12T. The $12T is in traditional IRA accounts, 401k accounts, pensions, etc. That money did not have any income tax paid on it.
I disagree that treating it as though it had been earned under the FairTax would be appropriate. I think it would represent a shifting of tax burden from rich to poor and will fuel a class warfare argument against the FairTax. I'd rather sidestep that landmine and use the revenue to lower the FairTax rate.
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