Friday, January 11, 2008

A FairTax Would Be "UnFair" To Me

As the 2008 Presidential election gets closer, I am taking a greater interest in the candidates' positions. A proposal that is getting support by some candidates is the FairTax (correctly spelled with no space between the two words.) The FairTax would replace all federal income taxes (including corporate and estate taxes) and payroll taxes (Social Security and Medicare) with a national sales tax of 23% (or 30% depending on how the percentage is calculated). The FairTax would also eliminate the IRS as it now exists.

Initially, the FairTax concepts appealed to me. It would eliminate the burdensome task of filing tax forms, reduce income tax evasion, and tax purchases. It would reward saving by not taxing money until it was spent. However, with some additional research, I am no longer a supporter of the FairTax. I believe that enacting a FairTax proposal would actually penalize people like me, who are have been lifetime savers and are now retired. Here are the reasons that I believe make the FairTax would be unfair to me:

  • After-tax savings would be taxed again. All my savings in taxable accounts would be taxed again when spent under a FairTax. Not only did I pay income taxes on the savings, when earned, but I will pay another 23% tax when I spend the money.

    To note, FairTax proponents acknowledge this, but claim there is already a 22% embedded tax in today's purchases. Therefore, proponents advocate, savers won't feel the pain of the national sales tax, since the prices will remain the same.

    As a someone who is pretty good at math, I don't agree with their argument. To me, while the purchase may cost the same, the value of each dollar spent is greater for the saver, since the saver would have needed to earn 25 to 35% additional money, which was paid as taxes at an earlier date.

  • Roth IRAs will be taxed. To me, it seems Roth IRAs would no longer have any tax benefit since distributions would FairTaxed when spent. Readers have commented before that future tax law changes may eliminate some to the Roth IRA benefits, which lead them to contribute to deductible IRAs.

  • The possibility of an income tax is not eliminated. The 16th Amendment to the Constitution gives Congress the power to impose an income tax. The FairTax would not repeal the 16th Amendment. Thus, a FairTax could co-exist with a federal income tax. This situation already happens in many European countries, i.e. income tax co-existing with a VAT (Value Added Tax) on purchases.

  • To note, I may get some benefits from a FairTax as a saver, if the current federal income taxes are eliminated. As I understand it, distributions from tax deferred accounts, e.g. IRAs, pensions and 401Ks, will no longer pay income taxes under a FairTax. The benefit could be a significant. However, with respect to taxes, I am generally a pessimist. As long as the 16th Amendment is in force, I don't have confidence that the U.S. government would ever permanently eliminate the income tax system. Therefore, I currently won't support any Presidential candidate that is advocating FairTax as a part of their platform.

    For more on Reaping the Rewards , check back every Friday for a new segment.

    Photo Credit:, Steven L. Berg

    This is not financial or tax advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC


    living off dividends said...

    VAT is more like sales tax that we already have.

    Abolishing the IRS will leave a million unemployed IRS workers and accountants who have no transferrable skill. Infact the IRS guys might never find a job again!!!!! ;-)

    Kris said...

    One of the best parts of the FairTax is that All investment accounts will now be tax sheltered!

    We will no longer be penalized for investing for the future. No more taxes on dividend income, capital gains, or interest from savings. Everything that you save will have tax free growth and remain tax free right up to the day you spend it.