A Modified FairTax

[AggregateDemand]

Someone talked to me about this plan to modify it.

- Keep capital gains tax and make it more progressive. This would crack down on true inequality
- Keep payroll taxes at a lower rate to keep those afloat
- Keep estate tax worth over $1,000,000
- Lower the national sales tax accordingly to lessen the blow of it

What should I tell my friend? As we all know I'm not an economic expert so I don't want to say something stupid!

The government keeps the payroll tax, capital gains tax, and estate tax. Gains national sales tax.

No.

[AggregateDemand]

5.The guest promoted his 'prebates' but left out that lower income people already pay little to no income taxes and that even a great deal of payroll taxes are paid back to low and lower middle income earners through the EITC.

7.The guest said that a paying sales taxes are a 'choice'.  This, is, of course, for everybody but the 'back to earthers' ridiculous.  He also said that the effective rate on the 'flat tax' goes 'up and up.'  This is simply not true.  Many of the wealthiest save or invest a great deal of their income rather than spend it.  None of that would be taxed. It is most likely that the middle class, or the slightly upper middle class would end up paying the highest percent of their income in 'fair taxes.'

The EITC doesn't come close to refunding taxes. A single person earning $5,000 per year pays roughly $750 in payroll tax. The maximum EITC is $496. The numbers are more robust for people with children, but the benefit still doesn't cover all of the imputed payroll taxes and corporate income taxes in the products we buy.

You have to think of the fair tax in terms of marginal purchasing power. Who gains the most purchasing power from eliminating payroll taxes and income taxes? It's not the wealthiest Americans. Their recognized income is only a fraction of their total wealth. Laborers are in the opposite situation. Their recognized income is often a large percentage of their net worth.

[AggregateDemand]

Check out the chart on page nine of this PDF released by the CBO.

The lowest quintile has an average individual income tax rate of -9.2% and a payroll tax rate of 8.4%, so tax credits like the EITC generally do provide a full payroll tax refund for that group. The lowest quintile's total effective federal tax rate (which includes the impact of corporate income tax and excise taxes) is only 1.5%. Amusingly, given this quintile's average income is $24,100, their average tax liability is almost exactly $1.00 per day ($361.50 per year).

Compare this to the top quintile: total effective tax rate of 24.0% on a pretax income of $239,100, which is $57,384 in taxes per year.

How would the Fairtax change things? Let's use the BLS Consumer expenditures report to find out!

The lowest quintile spends $22,393 on stuff per year while the highest quintile spends $99,237, which suggests an annual FairTax burden of $4074.90 (16.9% rate) for the former group and $27,128 (11.3% rate) for the latter once you subtract the individual prebate of $2,643.

You said to think of the FairTax in terms of marginal purchasing power. So let's do that:

The average member of the poorest quintile would see their total tax rate increase tenfold, from 1.5% to 16.9% of pre-tax income.
The average member of the wealthiest quintile would see their total tax rate cut in half, from 24.0% to 11.3% of pre-tax income.

This is little more than back-of-the-envelope arithmetic so it might not be entirely exact, but I believe it adequately demonstrates whose purchasing power the Fairtax would change and how. I might be underestimating the impact of the prebate- larger and poorer families would get larger prebates and wouldn't see much of a tax increase at all. Still, though, that's pretty insignificant compared to the wealthy having their tax bills cut in half.

Did you read the prebate report? They provided information about the effective tax rates.

I have no idea how you're calculating 11% effective income tax rate, and a casual glance at your model indicates that you've assumed an ungodly savings quotient for the upper quintile. Use the data included in the Fair Tax prebate report.