Tax return money: How will you spend it?

[evilbau]

Warren Buffet pays 15% now, but under the Fairtax he'll be paying 23%.

First of all, he pays 15% on his long term cap gains, not his income. He pays the max tax rate on his income. His occupation, of course, means that a lot of it is going to come from cap gains but keep in mind he invested that money to begin with, so it is not straight up income like most people who trade their time and expertise for income. His investments earned money when he sells them, so he deserves to pay the cap gains rate. Under the FairTax he actually would pay nothing since it seeks to abolish cap gains. And if you know anything about Warren Buffett, he actually does not spend a lot compared to most billionaires. He is looking to give it away and none of that money will be taxed.

Picking Warren Buffett is a very poor example. Not only for the above reasons, but because he himself believes he pays too little in taxes and has no problem paying as much as he does.

[aurik]

It's a basic economic fact that the average propensity to spend goes down as income goes up.

Why do rich people have bigger houses? Yachts? More cars or more expensive cars?

You clearly don't understand the concept of "average propensity to spend", which makes you at best a poor advocate for tax change.

[Toralyn]

New PC and monitor. Finally.

[SwampdonkeyPLD]

I don't think I explained it very well. So you are saying there won't be embedded taxes. My product, the widget needs 2 raw products, wid and get. I buy them from whatever companies (the companies are profitable). First of all, since they are intermediate products, and you previously said there are no VATs, they are not getting taxed at all. They sell no retail goods. If you are okay with that, no problem. I buy the wids and gets and produce widgets, at a profit. Normally I would be paying more money for my raw materials because my (profitable) suppliers would be paying coporate income tax. This is part of the 'embedded taxes' and I don't know why I am explaining this to you as you should understand it. The retail tax on the widget, the final product, is supposed to replace all those taxes that would normally be attached to everything along the supply chain.

Well, instead of paying the retail tax, I only pay the income tax to Canada for my Canadian division to sell there. I can assure you that it would not be equal to the US retail tax of 23%. So do i boost prices in Canada to avoid U.S. people from buying there? Why should I? Realistically, I would sell in Canada for maybe more than the U.S. price (without the tax, but still cheaper than final product with the tax) and cheaper than any Canadian domestic widgets or substitute goods, and enjoy the competitive advantage. This is the effect I am talking about.

I guess I don't see the problem that you're pointing out.

My point is that retail sales will be recategorized as 'used' goods by many, many people.

The only way for them to do that is if the Fairtax has already payed on a good. The government already tracks what business's sell in a way so it would essentially be doing a job it already does.

As far as the mortgage argument, people would buy homes the same way they did before the deduction. I don't think people need any government encouragement to own a home.

First of all, he pays 15% on his long term cap gains, not his income. He pays the max tax rate on his income.

His income is his cap gains, thus he pays 15%. He stated that in a speech when he was complaining he secretary pays 30% while he only pays 15%. Maybe it was a bad example, but he still spends more money than your average person and would pay more taxes under the Fairtax.

You clearly don't understand the concept of "average propensity to spend", which makes you at best a poor advocate for tax change.

Now I do, I googled it and found "The Complete Idiot's Guide to Economics." And I like to think I'm a decent advocate. It seems with each post the criticisms have decreased. Maybe its because your getting tired of debating the subject, but I like to think I'm clearing up those criticisms. Regardless heres how I understand it now. Let's say someone has an income $20,000, and let's also say there salary increases by $10,000 every year until they retire. The "average propensity to spend" means they will save more of that additional $10,000 every year than they will spend of it. That doesn't mean however they consume less, it just means each year they consume less of that additional $10,000, not consume less of their entire income.

Edit: I found who came up with the data on the 23%, but not the data itself. I will find it though.

[Ushallbeasgods]

Its just too bad no one is going to use the money the way Bush wants them to... spending more and building up more debt.

[evilbau]

My criticisms are lessening because I don't like to repeat myself and you aren't getting it. Its like, the FairTax people say A, I respond with B and you rehash A with no new argument. Then you bring up horrible examples like Warren Buffett who is like the FairTax worst case scenario. Most of his money is cap gains = no taxes from that. He spends less than probably the rest of the top 10 billionaires so hes not getting taxed there. AND he wants to raise taxes on himself. You are just spouting random drivel after being taken in by the FairTax. I'm done with being polite and respectful, you need to read more. Get a brain.

Edit: and cap gains is not his income. He famously earns 100k a year working at Berkshire Hathaway. Of course that isn't all his income, everything from endorsements to paid talking engagements, being chairman of various boards all are considered income. Cap gains only comes from his trading with his BH holdings. Don't talk authoritatively on subjects you don't know about, and can be easily proven wrong in about 10 sec of searching.

[evilbau]

I found who came up with the data on the 23%, but not the data itself. I will find it though.

Since I'm in a generous mood I'll link a peer reviewed paper by Kotlikoff which supports the 23%. This will give you more ammo for your future FairTax arguments, although not with me, because i'm done with you.

Kotlikoff Research Paper:
http://people.bu.edu/kotlikof/BHI-LK%20 ... 0FINAL.pdf

[Sirenia]

Probably saving most of it so I can pay for college.

[SwampdonkeyPLD]

My criticisms are lessening because I don't like to repeat myself and you aren't getting it. Its like, the FairTax people say A, I respond with B and you rehash A with no new argument. Then you bring up horrible examples like Warren Buffett who is like the FairTax worst case scenario. Most of his money is cap gains = no taxes from that. He spends less than probably the rest of the top 10 billionaires so hes not getting taxed there. AND he wants to raise taxes on himself. You are just spouting random drivel after being taken in by the FairTax. I'm done with being polite and respectful, you need to read more. Get a brain.

Edit: and cap gains is not his income. He famously earns 100k a year working at Berkshire Hathaway. Of course that isn't all his income, everything from endorsements to paid talking engagements, being chairman of various boards all are considered income. Cap gains only comes from his trading with his BH holdings. Don't talk authoritatively on subjects you don't know about, and can be easily proven wrong in about 10 sec of searching.

The only thing I'm not getting is your Canada example. And one bad example means everything else is wrong.

Also, I don't recall ever stooping to personal insults with you, so I don't see the need for you to. Maybe you need to read more as well, the Fairtax isn't perfect, but the consequences of our current tax system are for worse than anything under the Fairtax. Guess it doesn't matter though since you're done.

[Pamelita]

Mine will be dumped in my "Let's go to Mexico for my cousin's Quince!" fund.

[evilbau]

I'm all for reforming our current tax system. I agree there are problems with it. Most notably, there are consequences to not having a relation between taxes paid and voting rights. I am not advocating those who pay more to get more votes, but it is the bottom 50% who contribute 3% of our tax revenue. They are the ones who consume the most government programs, and I'm fine with that. But it is the politicians who pander to this large group by promising more government programs to get their votes. This disconnect is divisive which is not healthy for our nation. It creates resentment on both sides. I could think of dozens of examples of how our current system has flaws. This has nothing to do with the viability of the FairTax.

I am merely debunking the FairTax, not defending our current system as is. The fact that I believe our current tax system needs some serious help and it still compares favorably to the FairTax should tell you something. Just because something is broken does not mean any alternative is better. I am saying you need to read more because you don't even understand your own position. You should understand the consequences of what you are advocating and you clearly don't.

[SwampdonkeyPLD]

Well then educate me, I understand retired people getting taxed twice. I don't understand your Canada example, or the consequences evidently. The consequences to me would be the same ones we had before the tax system we have now.

[evilbau]

Well then educate me, I understand retired people getting taxed twice. I don't understand your Canada example.

Current System
1. My company buys Wids and Gets from a profitable company, and their prices reflect corporate income tax, payroll taxes, etc.
2. I manufacture Widgets and sell them here in the U.S. and Canada. U.S. taxes my profit here and Canada taxes my Canadian division and when that money comes back to the U.S., I get taxed there too. Price of Widgets reflect these costs. Extra costs and the weak dollar mean comparatively speaking the U.S. Widget is probably cheaper than its Canadian counterpart.

FairTax.
1. My company buys Wids and Gets but since they are an intermediary good, they are not subject to a retail tax.
2. I manufacture Widgets and sell them here in the U.S. and Canada. U.S. Widgets get a 30% retail tax on a lowered price (to reflect tax savings both from Wid and Get manufacturers, as well as my own company's). I pay Canadian taxes to sell there, no U.S. taxes when the money is repatriated.

As I said, you get the best of both worlds because here I am enjoying the benefits of a retail tax (removing of embedded taxes, whose effect I still find rather dubious), while evading the retail tax by selling my product abroad (for the Canadian Widgets). This is not a bad thing for U.S. exports but if you live on the border, you will go with whatever price is cheaper. It will most likely be the Canadian price unless the dollar has truly weakened even further With the Internet, it is not necessary for you to be on the border, and it won't only apply to Canada.

Saying that Internet Sales will be taxed with certainty is naive. Some German company has no incentive to comply with the U.S. mandate and it will be the responsibility of the U.S. resident. You will probably need whatever enforcement agency that is created (i.e. the newly destroyed IRS) for tax evaders to track these people down. No tax evasion is extremely unrealistic (FairTax literature has no tax evasion as one of its assumptions).

/sigh its too easy to draw me back into this but i fell for it

[aurik]

You clearly don't understand the concept of "average propensity to spend", which makes you at best a poor advocate for tax change.

Now I do, I googled it and found "The Complete Idiot's Guide to Economics." And I like to think I'm a decent advocate.

You just spent a page arguing against a concept that you didn't understand (at the time). I'm glad that you've now learned something, but next time understand the subject matter first!

Let's say someone has an income $20,000, and let's also say there salary increases by $10,000 every year until they retire. The "average propensity to spend" means they will save more of that additional $10,000 every year than they will spend of it. That doesn't mean however they consume less, it just means each year they consume less of that additional $10,000, not consume less of their entire income.

Right, I never said they consume less, but they consume proportionally less in comparison to their total income. As I pointed out before, that leads to a de facto higher tax burden on the lower-middle class, making it harder (not easier) for them to generate wealth.

[evilbau]

Maybe it was a bad example, but he still spends more money than your average person and would pay more taxes under the Fairtax.

Also, this is simply not true. His billions wouldn't be taxed and the couple hundred thousand (if that) that he spends each year would be. Quite different than him 'pay[ing] more taxes under the Fairtax.'

[SwampdonkeyPLD]

Right, I never said they consume less, but they consume proportionally less in comparison to their total income. As I pointed out before, that leads to a de facto higher tax burden on the lower-middle class, making it harder (not easier) for them to generate wealth.

While I now understand the concept, I don't understand what it has to do with the Fairtax. "APS" happens regardless of it. Well, wait I think your saying that "APS" is another obstacle to obtaining wealth?

Evil, it was a bad example I admit it, but I still don't understand your Canada example or the consequences. I think I have shown quite clearly in this thread that I'm will to try and understand your arguments as well.

[aurik]

Right, I never said they consume less, but they consume proportionally less in comparison to their total income. As I pointed out before, that leads to a de facto higher tax burden on the lower-middle class, making it harder (not easier) for them to generate wealth.

While I now understand the concept, I don't understand what it has to do with the Fairtax.

It was your main objection to my scenario above, which I will now repeat.

It's basic economics that for each extra dollar a person earns, the amount of that dollar they spend decreases monotonically. So while a middle-class worker may spend 80% of his income, and thereby endures an effective consumption tax rate of .23 * .8 = .184, a wealthy worker may spend 40% of his income, and thereby endures an effective consumption tax rate of .23 * .4 = .092. Thus, the middle-class worker spends 98.4% of his income after tax, while the wealthy worker spends 49.2%. Compare this to a bracketed income-tax system, where the middle-class worker would be paying maybe 15% tax, allowing him to save 5%, and the wealthy worker 20%, allowing the wealthy worker to save 40% of his income.

So how then does a flat consumption tax that make it easier for the non-rich become rich than bracketed income tax?

Note that if you give the middle-class example a 50k income and the wealthy example a 150k income, this also results in a net tax revenue decrease of about 33% under the actual-consumption tax. So in addition to unfairly burdening the middle-class worker, there is also much less money available for the government to fund social programs and public services.

[evilbau]

Right, I never said they consume less, but they consume proportionally less in comparison to their total income. As I pointed out before, that leads to a de facto higher tax burden on the lower-middle class, making it harder (not easier) for them to generate wealth.

While I now understand the concept, I don't understand what it has to do with the Fairtax. "APS" happens regardless of it. Well, wait I think your saying that "APS" is another obstacle to obtaining wealth?

Evil, it was a bad example I admit it, but I still don't understand your Canada example or the consequences. I think I have shown quite clearly in this thread that I'm will to try and understand your arguments as well.

The example basically boils down to tax evasion and the desirability of U.S. products within the U.S. Aurik is saying that the rich won't be taxed as much because they don't spend most of their income, which is true. Instead of paying 30+% of income they will be paying 30% on their expenditures which is a subset of their wealth.

Lower class - spends all income but gets it all prebated (up to poverty line which I don't know anyone who can live on that)
Lower middle class - spends all (or most) income, but enjoys better living conditions, hit hard by consumption tax, effectively taxed at 30%
middle class - spends most of income, will be hit hardest by a consumption tax
upper middle/upper class - spends a good amount of income, will most likely be a wash due to removal of AMT, etc.
uber rich - spends a fraction of their income, vacations outside of U.S. year round to avoid taxes haha

[SwampdonkeyPLD]

Right, I never said they consume less, but they consume proportionally less in comparison to their total income. As I pointed out before, that leads to a de facto higher tax burden on the lower-middle class, making it harder (not easier) for them to generate wealth.

While I now understand the concept, I don't understand what it has to do with the Fairtax. "APS" happens regardless of it. Well, wait I think your saying that "APS" is another obstacle to obtaining wealth?

Evil, it was a bad example I admit it, but I still don't understand your Canada example or the consequences. I think I have shown quite clearly in this thread that I'm will to try and understand your arguments as well.

The example basically boils down to tax evasion and the desirability of U.S. products within the U.S. Aurik is saying that the rich won't be taxed as much because they don't spend most of their income, which is true. Instead of paying 30+% of income they will be paying 30% on their expenditures which is a subset of their wealth.

So your saying desirability of U.S. products will go down even though prices will generally stay the same? Why would that be? Also, its 23%, not 30%. I don't want to get into what I think your getting into unless you really want to so I'll leave it at that. It also seems your saying the 23% isn't high enough?

You also bring up tax evasion. If a business were caught evading taxes, they would lose their business license. They can't be worth it to them. Also, if your talking about people evading the Fairtax, if prices are essentially the same, why would they suddenly start buying elsewhere if they aren't already?

Lower class - spends all income but gets it all prebated (up to poverty line which I don't know anyone who can live on that)
Lower middle class - spends all (or most) income, but enjoys better living conditions, hit hard by consumption tax, effectively taxed at 30%
middle class - spends most of income, will be hit hardest by a consumption tax
upper middle/upper class - spends a good amount of income, will most likely be a wash due to removal of AMT, etc.
uber rich - spends a fraction of their income, vacations outside of U.S. year round to avoid taxes haha

Lower Class- I guess we agree they don't have a tax burden, and my girlfriend lives on it.
Lower middle class- How are they "hit hard" by the consumption tax? They keep 100% of their paycheck and prices are essentially the same.
Upper middle/Upper class- Not sure what the problem is here.
Uber rich- Not sure what the problem is here as well.

Again, it seems your saying the 23% isn't high enough?

[aurik]

Hasn't read carefully enough

Lower-middle class people actually pay MORE taxes because:

-currently they are taxed at ~15% on 100% of their income.
-after fairtax, they will be taxed at ~23% on their consumption, which is 100% of their income.