It’s been my custom to save interesting articles from the Chronicle editorial page. A few years ago, a well-written letter by John F. Morse of Beverly Hills caught my eye. His point was correct; under Fair Tax, retirees living on Social Security and savings don’t get the same treatment as younger people do. They must now spend money which has already been taxed, and like everyone else, pay a 23% embedded federal sales tax on all new goods and services.
Let’s look a bit deeper into his criticism using the figures Mr. Morse suggested. Under Fair Tax, a retiree’s $26,000 from Social Security and $13,000 from a 401K is all tax free. Now consider the Fair Tax provision whereby all spending up to poverty level is tax free for everyone with a valid Social Security number. Poverty level for one person is about $10,000; but when he spends that first $10,000 on new goods and services (used items are tax free), he pays $2,300 in taxes. Under the “prebate” provision, Treasury rebates all that money to him in 12 monthly payments. So far his taxes are still zero. Now look at the other $29,000.
Recall how we eliminated not only the IRS and income taxes on individuals but also all business and corporate income taxes as well. These embedded business taxes are passed on to consumers as higher prices. The average is about 22% on everything we buy. Eliminating these taxes means a $100 product costs $78 now. At this point, retirees are paying a 23% sales tax on products costing 22% less. It’s not perfect but pretty close to a wash. There’s another plus for seniors and everyone else. When the U.S. no longer taxes income but only what we buy, the trillions sheltered in offshore financial centers to avoid income taxes can return. Economists estimate a healthy growth in investments.
Take note: The first $10,000 spent is buying goods originally marked at $12,750.
Joseph P. Ryan