REPLACING TODAY’S TAX SYSTEM

REPLACING REPLACING TODAY’STODAY’S

TAX SYSTEMTAX SYSTEM

1Stephen C. Eldridge04/21/23

The The ““FairFair TaxTax””

• The informal name for a bill proposed in Congress for many years, virtually unchanged.

It is currently known as;– H.R. 25, for House of Representatives Bill

No. 25, and as

– S. 13, for Senate Bill No 13.

204/21/23 Stephen C. Eldridge

H. R. 25H. R. 25

• FEDERAL – NOT STATE – TAX

• WOULD REPLACE (2007 figures $):– Individual Income Tax $ 1.100 – Corporate Income tax .300 – SS & Medicare Taxes .875– Estate & Gift Taxes .025• TOTAL $ 2.3 Trillion

04/21/23 Stephen C. Eldridge 3

The Sales Tax RATE - TNThe Sales Tax RATE - TN

• Price - before TN sales tax $ 100.00• TN Sales tax $ 9.75 • Total - including sales tax $ 109.75

• RATE of Sales Tax:–Most say 9.75/100 = 9.75%– HR 25: 9.75/109.75 = ONLY 8.89%


The Sales Tax RATE -SCThe Sales Tax RATE -SC

• Price - before SC sales tax $ 100.00• SC Sales tax $ 8.50 • Total - including sales tax $ 108.50

• RATE of Tax: –Most of us: 8.50/100 = 8.50%–HR 25: 8.50/108.50 = ONLY 7.83%


The H. R. 25 Sales Tax RATEThe H. R. 25 Sales Tax RATE

• Price BEFOREBEFORE Sales Tax $ 100,000• H.R. 25 Sales Tax (no dispute) 30,000• Total Purchase Price $ 130,000• H.R. 25 TAX RATE:TAX RATE:–Most of us: 30/100 = 30%–H.R. 25: 30/130 = ONLY 23%


H.R. 25 SALES RECEIPTH.R. 25 SALES RECEIPT

1. Price BEFORE Tax $ 1002. H.R. 25 TAX 303. Total $ 1304. H.R. 25 Tax RATE 23% of 3.5. State sales tax RATE(e.g.) 10% of 1.6. State sales tax $ 107. Grand Total (3. + 6.) $ 140


CASCADING?CASCADING?

• Price BEFORE any tax $ 100• State Sales Tax – use 10% 10• Subtotal 110• FT - 30% 33• Grand Total 143• W/O cascading 140• Difference 30% x $10 State tax $ 3


The PREBATEThe PREBATEMonthlyMonthly checks to every household checks to every household

904/21/23 Stephen C. EldridgeStephen C. Eldridge

The PREBATE - 2012The PREBATE - 2012

Smiths + 0 • Spend, pre-tax $ 100,000• H.R. 25 tax @ 30% 30,000• Less: “Prebate” (5,138)• H.R. 25 Tax - NET $ 24,862



Smiths + 0 Jones + 6

Spend, pre-tax $ 100,000 $ 10,000

HR 25 @ 30% 30,000 less: “Prebate” (5,138) HR 25 tax – NET $ 24,862




Spend, pre-tax $ 100,000 $ 10,000 HR 25 tax @ 30% 30,000 3,000 Less: “Prebate” 5,138 HR 25 Tax - NET $ 24,862


JONESES PREBATE - 2012JONESES PREBATE - 2012




Spend, pre-tax $ 100,000 $ 10,000HR 25 tax @ 30% 30,000 3,000 Less: “Prebate 5,138 10,603HR 25 - NET $ 24,862




Spend, pre-tax $ 100,000 $ 10,000 HR 25 Tax @ 30% 30,000 3,000Less: “Prebate” 5,138 10,603H.R. 25 tax - NET $ 24,862 $ 7,603*

* Maybe up to $10,603, if no H.R. 25 tax paid


Joneses PREBATE - 2012Joneses PREBATE - 2012

• He pays ZERO, WE pay him $7,603 -$10,603 • PLUS, RAISE for CPI inflation, every year. • PLUS, SS & Medicare benefits – FREEFREE • PLUS, SPECIAL BONUS! – $911 FOR EACH NEW KID, every year – Plus, inflation on the $911– Plus, more food stamps– Plus more of other fed/State welfare programs


PREBATE 2012PREBATE 2012

• Guidelines used by Prebate, defines poverty in terms of annual SPENDING UP TO:– $11,000 per ADULT x 23% = $2,569– $ 4,000 per CHILD X 23% = $911– 2 ADULTS + 6 kids:• “Assumed” to Spend $46,100 x 23% = $10,603


PREBATEPREBATE

• HHS – ASPE issues Poverty Guidelines– Began 50 years ago– Back of the envelope estimates– Merely adjusted for inflation since then – Used by various poverty programs– Guidelines used as “spending” or “income”• PREBATE uses guidelines as “spending”

• Mr. Gordon Fisher 202-690-6143


Prebate vs RTCsPrebate vs RTCs

• Some say Prebate is OK because today Smith receives “Refundable Tax Credits” (“RTC’s”)– It is wrong to continue a wrong– RTCs are welfare - not related to Income Tax– RTCs involve substantial fraud

• Smith will likely get MOREMORE from Prebate


ExpandingExpanding the Welfare Statethe Welfare State

• Smith receives RTCs today because he WORKS

• Prebate paid to ALL ALL even if they DON’T WORK

• Prebate adds new class of welfare recipients – the NON-working poor


U S TreasuryU S Treasury

1. A similar Prebate would create giant new entitlement leaving many dependent on the govt for a major portion of their income.

2. H. R. 25 needs a 57% tax rate, not 30%3. Created its own NRST (narrower base,

exemptions for the poor, 2 rates of tax evasion - needs 150% sales tax rate (@ 30% evasion)


House Ways & Means CommitteeHouse Ways & Means CommitteeH.R. 25 HearingsH.R. 25 Hearings

• July 26, 2011 - video @W & M website

• Former W & M Chmn, Rangel (DEM) choked at the giant new entitlement

• Rep. Pascarel (Dem): it’s a “Fairy Tale”


ECONOMICSECONOMICS

• Extremely broad tax base - unique• “Assumes” NO tax avoidance – absurd– 30% RATE RISES TO MAKE UP LOST REVENUES

• Hidden State & federal taxes - PRICES GO UP• Sticker-shock generates taxpayer revolt• New home loans much more difficult • The “IRS” is more intrusive than ever


BASIC EARLY PREMISEBASIC EARLY PREMISE Retail Prices Don’t Change Retail Prices Don’t Change

Today H.R. 25 • Retailers’ cost - excluding taxes $ 100 $ 100

• Retailers’ embedded taxes 30 HR 25 Tax 30 • Total Retail Price $ 130 $ 130


PRICES GO UPPRICES GO UP

• FT Later Explanation– Large price reduction possible ONLY if people give

up their raises– “That won’t happen”

• Most Economists– “Potential” Price Decline 5-10%– 90% + 30% = 117%– 95% + 30% = 124%


H.R. 25’s Economic AssumptionsH.R. 25’s Economic Assumptions

• Tax base is 80% of all retail sales- No nation has such a broad tax base,

likely with good reason• Tax Avoidance is assumed NOT to occur - “Independents” think the high RATE will

result in lost tax revenues and will have to be made up via an even higher tax rate


Sticker-Shock Tax RebellionSticker-Shock Tax Rebellion

• TAXPAYER REBELLION- at TRANSPARENT federal retail sales tax of (minimum) 30% federal, plus State

• Buy a new car for $50,000- add: $20,000 in H.R.25 + state sales taxes.


Hidden TaxesHidden Taxes

• The federal & State govts would be taxed on all purchase (except teacher salaries)

• Because prices will RISE:– States must raise taxes or borrow -we pay– fed govt can inflate, borrow or tax -we pay

• Large increase in fed’l spending for SS benefits


Social Security COLASocial Security COLAPrior Q Current QPre-HR25 HR 25

Prices $ 100 $ 130HR 25 sales tax - assume - - 30Prices w/o HR 25 Tax 100 100IF current Q uses $100, then:Add: HR 25 Tax- Title III, § 303 __-_ 30Compare for COLA $ 100 $ 130


BUY A NEW HOUSEBUY A NEW HOUSE

Price $ 500,000State Sales Tax (e.g., 10%) 50,000Subtotal $ 550,000H.R. 25 Sales Tax (e.g.) 50% 275,000 *

Total Cost to you $ 825,000

* Assumes cascading


MORTGAGE DOWN PAYMENTMORTGAGE DOWN PAYMENT

NEED

Base Price $ 500,000 x 20% $ 100,000

Sales Taxes $ 325,000 x 100% $ 325,000

Down Payment Needed $ 425,000


The New “IRS” The New “IRS”

The new federal Sales Tax Administration Authority• federal and State auditors• may be more intrusive than old IRS audits • numerous issues to be audited

- see my Paper, SUPPLEMENTS 14-17, at fairtaxblog.com; Fair Tax-Related

Research; Unpublished Papers, Replacing the Income Tax


30% vs 23%30% vs 23%

Income Tax H.R. 25

Earnings $ 100,000 Purchases $ 100,000Income Tax 25,000 H.R. 25 tax 23,000Tax Rates 25% “all-inclusive” 23%


30% vs 23%30% vs 23%

H.R. 25 H.R. 25Purchases $ 100,000 $ 80,000H.R. 25 tax $ 23,000 $ 18,400

“all-inclusive” Tax Rates:- On Purchases 23% 23%- On Earnings - $100,000 23% 18.4%


30% vs 23%30% vs 23%

H.R. 25 H.R. 25Purchases $ 100,000 $ 400,000*H.R. 25 tax $ 23,000 $ 92,000

• “all-inclusive” Tax Rates: - On Purchases 23% 23% - On Earnings -$100,000 23% 92%

*Borrows to buy a house


TAX in TN – MINIMUM ?TAX in TN – MINIMUM ?

Pre-tax Price $ 100TN Sales Tax - 10% (rounded) 10Subtotal 110H. R. 25 Tax - use 35.1% 38.61 *Total $ 148.61

ROUNDED- Combined Sales Tax Rate 50%* Tax may not compound


JONES’ TAX & PREBATEJONES’ TAX & PREBATEJones ‘ Prebate $ 10,603Add: earnings – gross 13,000Available to spend $ 23,603

If ALL spent legally, he pays H.R. 25 tax of $ 5,429- If he pays $5,429, his net Prebate is $ 5,174If ALL spent illegally, he pays H.R. 25 tax -0-- If he pays -0-, his net Prebate is $ 10,603


GROSS-UPGROSS-UP

Jones’ Prebate $ 10,603

Additional H.R. 25 Tax as Jones spends the $10,603 - if you assume ALL spent legally 2,439

Net Prebate $ 8,164


GROSS-UPGROSS-UP

Prebate amount required to make Jones whole - assumes NO tax Avoidance

Grossed-up Prebate amount $13,770

H.R. 25 tax @ 23% 3,167

Net Prebate $ 10,603

H.R. 25 tax on pre-Prebate spending $ 10,603


FUNDING PAYROLL TAXESFUNDING PAYROLL TAXES• IF Jones pays 3 in total, he NETS 7.6• H.R. 25 artificially allocates that 3, as follows:

SS Other TotalAssumed tax paid 1 2 3Prebate 0 10.6 10.6NET 1 8.6 7.6

OR, reallocate Prebate 0 7.6 7.6

40Stephen C. Eldridge

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REPLACING TODAY’S TAX SYSTEM

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