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REPLACING TODAY’S TAX SYSTEM

REPLACING TODAY’S TAX SYSTEM. The “ Fair Tax ”. 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. H. R. 25.

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REPLACING TODAY’S TAX SYSTEM

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  1. REPLACING TODAY’STAX SYSTEM Stephen C. Eldridge

  2. The “FairTax” • 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. Stephen C. Eldridge

  3. H. 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 Stephen C. Eldridge

  4. The 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% Stephen C. Eldridge

  5. The 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% Stephen C. Eldridge

  6. The H. R. 25 Sales Tax RATE • Price BEFORE Sales Tax $ 100,000 • H.R. 25 Sales Tax (no dispute) 30,000 • Total Purchase Price $ 130,000 • H.R. 25 TAX RATE: • Most of us: 30/100 = 30% • H.R. 25: 30/130 = ONLY 23% Stephen C. Eldridge

  7. H.R. 25 SALES RECEIPT • Price BEFORE Tax $ 100 • H.R. 25 TAX 30 • Total $ 130 • H.R. 25 Tax RATE 23% of3. • State sales tax RATE(e.g.) 10% of 1. • State sales tax $ 10 • Grand Total (3. + 6.) $ 140 Stephen C. Eldridge

  8. 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 Stephen C. Eldridge

  9. The PREBATE Monthly checks to every household Stephen C. Eldridge

  10. The 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 Stephen C. Eldridge

  11. The PREBATE - 2012 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 Stephen C. Eldridge

  12. The PREBATE - 2012 Smiths + 0Jones + 6 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 Stephen C. Eldridge

  13. JONESES PREBATE - 2012 $10,603 Stephen C. Eldridge

  14. The PREBATE - 2012 Smiths + 0Jones + 6 Spend, pre-tax $ 100,000 $ 10,000 HR 25 tax @ 30% 30,000 3,000 Less: “Prebate 5,138 10,603 HR 25 - NET $ 24,862 Stephen C. Eldridge

  15. The PREBATE - 2012 Smiths + 0Jones + 6 Spend, pre-tax $ 100,000 $ 10,000 HR 25 Tax @ 30% 30,000 3,000 Less: “Prebate” 5,138 10,603 H.R. 25 tax - NET $ 24,862 $ 7,603* * Maybe up to $10,603, if no H.R. 25 tax paid Stephen C. Eldridge

  16. Joneses PREBATE - 2012 • Hepays ZERO, WE pay him $7,603 -$10,603 • PLUS, RAISEfor CPI inflation, every year. • PLUS, SS & Medicare benefits – FREE • PLUS, SPECIALBONUS! • $911 FOR EACH NEW KID, every year • Plus, inflation on the $911 • Plus, more food stamps • Plus more of other fed/State welfare programs Stephen C. Eldridge

  17. PREBATE 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 Stephen C. Eldridge

  18. PREBATE • 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 Stephen C. Eldridge

  19. Prebatevs 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 MOREfrom Prebate Stephen C. Eldridge

  20. Expandingthe Welfare State • Smith receives RTCs today because he WORKS • Prebate paid to ALL even if they DON’T WORK • Prebateadds new class of welfare recipients – the NON-working poor Stephen C. Eldridge

  21. U S Treasury • 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) Stephen C. Eldridge

  22. House Ways & Means CommitteeH.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” Stephen C. Eldridge

  23. ECONOMICS • 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 Stephen C. Eldridge

  24. BASIC EARLY PREMISE Retail Prices Don’t Change TodayH.R. 25 • Retailers’ cost - excluding taxes $ 100 $ 100 • Retailers’ embedded taxes 30 HR 25 Tax 30 • Total Retail Price $ 130 $ 130 Stephen C. Eldridge

  25. PRICES 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% Stephen C. Eldridge

  26. H.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 Stephen C. Eldridge

  27. Sticker-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. Stephen C. Eldridge

  28. Hidden 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 Stephen C. Eldridge

  29. Social Security COLA Prior Q Current Q Pre-HR25 HR 25 Prices $ 100 $ 130 HR 25 sales tax - assume - - 30 Prices w/o HR 25 Tax 100 100 IF current Q uses $100, then: Add: HR 25 Tax- Title III, § 303 __-_ 30 Compare for COLA $ 100 $ 130 Stephen C. Eldridge

  30. BUY A NEW HOUSE Price $ 500,000 State Sales Tax (e.g., 10%) 50,000 Subtotal $ 550,000 H.R. 25 Sales Tax (e.g.) 50% 275,000 * Total Cost to you $ 825,000 * Assumes cascading Stephen C. Eldridge

  31. MORTGAGE DOWN PAYMENT NEED Base Price $ 500,000 x 20% $ 100,000 Sales Taxes $ 325,000 x 100% $ 325,000 Down Payment Needed $ 425,000 Stephen C. Eldridge

  32. 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 Stephen C. Eldridge

  33. 30% vs 23% Income Tax H.R. 25 Earnings $ 100,000 Purchases $ 100,000 Income Tax 25,000 H.R. 25 tax 23,000 Tax Rates 25% “all-inclusive” 23% Stephen C. Eldridge

  34. 30% vs 23% H.R. 25 H.R. 25 Purchases $ 100,000 $ 80,000 H.R. 25 tax $ 23,000 $ 18,400 “all-inclusive” Tax Rates: - On Purchases 23% 23% - On Earnings - $100,000 23% 18.4% Stephen C. Eldridge

  35. 30% vs 23% H.R. 25 H.R. 25 Purchases $ 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 Stephen C. Eldridge

  36. TAX in TN – MINIMUM ? Pre-tax Price $ 100 TN Sales Tax - 10% (rounded) 10 Subtotal 110 H. R. 25 Tax - use 35.1% 38.61 * Total $ 148.61 ROUNDED- Combined Sales Tax Rate 50% * Tax may not compound Stephen C. Eldridge

  37. JONES’ TAX & PREBATE Jones ‘ Prebate $ 10,603 Add: earnings – gross 13,000 Available 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 $ 5,174 If ALL spent illegally, he pays H.R. 25 tax -0- - If he pays -0-, his net Prebate is $ 10,603 Stephen C. Eldridge

  38. GROSS-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 Stephen C. Eldridge

  39. GROSS-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 Stephen C. Eldridge

  40. FUNDING PAYROLL TAXES • IF Jones pays 3 in total, he NETS 7.6 • H.R. 25 artificially allocates that 3, as follows: SSOtherTotal Assumed tax paid 1 2 3 Prebate0 10.6 10.6 NET1 8.6 7.6 OR, reallocate Prebate 0 7.6 7.6 Stephen C. Eldridge

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