FairTax Prebate Fraud

Economics Economics Questions
1

After reading Bruce Bartlett’s newest critique of the FairTax, I decided to test the claim of the FairTax that the prebate will exempt all expenditures up to the poverty level. According to the FAQ, “All valid Social Security cardholders who are U.S. residents receive a monthly prebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures.” According to the table, the poverty level for a single person is $10,400 and the prebate is calculated at 23% of that number for $2,392.

At first, I thought that was the end of it. If you made and spent $10,400, then you would pay $2,392 in sales taxes on $8,008 in purchases. But no worry, because you’d get a prebate check to reimburse that $2,392, giving you an effective tax rate of 0%. Right?

Wrong. I realized that the extra $2,392 in prebate check is not the full amount given back to the taxpayer. Why? Because that $2,392 is also taxed when spent. $550.16 is taxed from the prebate. So what is the rate if you made the poverty level wage?

5.29% is the rate. This is found by adding your income and prebate together and multiplying that by 77% to get your take-home pay ($10,400+$2,392 = $12,792 * 77% = $9,849.84). Divide take-home pay by your wage and subtract that from 1 and you get the effective tax rate (1 - $9,849.84 / $10,400 = 5.29%)

So the claim that the prebate set by the FairTax formula will exempt poverty level expenditures is a flat-out fraud. What is the actual rate to exempt poverty-level expenditures? It is the tax-exclusive rate of 29.87%. The new prebate level using this rate is $3,106.49 ($10,400 * 29.87%), which added to $10,400 gives you $13,506.49 in before tax pay and after tax pay will be $10,400. So just set the rate higher and the problem is fixed, right?

Wrong! Why is this? Because, if you didn’t notice, spending on prebates will go up (it will increase 29.87% to be exact). To get the same level of government “services,” you will have to increase the tax rate to compensate for the increased prebate. So the rate will increase, but since the prebate is set by the rate, it will also increase, and then the rate would have to increase again, so on and so on, ad infinitum.

So it is impossible to exempt the poverty level expenditures from tax using the FairTax formula. The FairTaxers will just have to admit that the effective tax rate on poverty-level expenditures at the established amounts is 5.29%, and that it can never be 0%.

2

any tax is fraud;).

3

Exactly, I find it tragic that Americans are offering the Federal Government a way to directly tax them on consumption. Not all Americans realize that the Income Tax has no legal basis and the revenue collected by the IRS isn’t even redistributed to society but worse , used as interest for borrowing new money so govt can keep on spending. Given that fact, its absurd that we would merely replace one horrible tax with another.

4

No, most of it is spent on programs. http://docs.law.gwu.edu/facweb/jsiegel/Personal/taxes/debt.htm
Its legal basis is the 16. ammendment and the Internal Revenue Code.

5

Well, it could be, if you refunded 23% of 10,400 ($2,392) plus 23% of $2,392 (550.16) plus 23% of 550.16 (126.54) plus 23% of 126.54 (29.10) . . . . .

.23+.23^2+.23^3+.23^4+.23^5+.23^6+.23^7 . . . . .

Which equals just about 30% of 10,400, or $3120

6

what do youall recomend if not the fair tax? it seems to be the least worst option.

7

Scineram, way to go. Love your link to that statist abomination. Don’t have the time now but even a non-law major like me can show that that so-called lawyer should just change his career if he claims to know law, especially constitutional law.

8

If your going to have a tax at all. It would have to be a restructed income tax.

My proposal would be a 15% flat rate on $0.00 to infinite. However, each individual would have a $25,000 deduction. There would be no other deductions, credits or exemptions in the system. Each individual would file individually, marriage would be irrelevent, there would be no filing status’s. Each spouse would file separately.

So anybody making from $0.00 to $25,000 would pay no tax. From $25,001 to $50,000 they would pay 15% on that portion over $25,000. Starting at $50,001 to $75,000 the personal exemption would phase out at a rate of $1.00 for every dollar over $50,000. From $75,001 and up you would pay a flat 15% on your whole income.

Income would be defined as earned income and tips, capital gains, bonuses and lottery winnings. Interest, dividends, gifts, inheritances and estates would not be taxable.

Under my system, a husband and wife could theoretically make $25,000 each, for a total of $50,000 and pay absolutely zero tax.

Just take the damned poor people off the tax rolls already. Their contributions are insignificant anyway, plus we won’t have to listen to them bitch about the rich and taxes anymore. :slight_smile:

Yes, taxation sucks in any form, but hell, this proposal is much better than the so called “Fair” tax.

9

I would replace the income tax with nothing. Regardless if the income tax pays for the interest on fiat money, or if there are actually projects it goes to, it’s not the governments role to run and or pay for all those services.

10

After I wrote that, I realized later that this was the case. The new prebate would have to calculated using the tax-exclusive rate of 29.87% (.23/.77) instead of the tax-inclusive rate of 23%. But with the increased prebate going into effect, this would present a two-fold problem for the FairTaxers.

In the first scenario, since prebate spending went up X dollars, to maintain the same level of non-prebate government spending, revenue would have to increase… Revenue+X = (Prebate+X) + Spending. But for revenue to increase, the rate has to increase, and if the rate increases, the prebate would also increase. This process has no end, so it would mean that the FairTaxers would have to admit defeat and say that at current government spending levels, the households living at the poverty level would have a tax rate of 5.29% and the non-taxable portion would be 77% of the poverty level for that particular household, which would be $8,008 for a single person and $21,560 for a family of four (instead of $28,000).

The second scenario is more pleasant but less plausible because it is not revenue-neutral in the way that politicians like it. If prebate spending goes up, the equation can be modified to look like this: Revenue = (Prebate+X) + (Spending - X). Thus, the FairTaxers can say that they can fix the prebate problem as long as spending goes down an equal amount. We all know that this is a joke. At the very least, any tax reform that has a chance in Washington must be revenue-neutral to -positive. The FairTaxers derived their rate to be revenue-neutral so as to be politically possible.

So, to sum up, the FairTaxers will have to present their proposal before Congress and tell them to either accept substantially taxing those living in poverty (given that the federal poverty levels are probably understated, especially for urban dwellers, the tax rate is probably higher than 5.29% for a lot of people), or to immediately cut spending. Not a chance that this will pass muster in DC. And they claim that other tax reforms were political duds!

11

Way to go, man. Calling me out on statist abomination while referring to legality and constitutional law.

Please do.

12

The problem is that anyone who (1) isn’t taxed, and (2) can vote, is automatically a supporter of the leviathan state. The demand for “free” services is always infinite. There’s no good answer as long as we take government itself as a given, but I’d argue that a flat tax down to $0 income at least makes everyone a stakeholder, and minimizes the discincentive to produce.

–Len.