Threats to Wealth Creation

[TheShiznit]

Think of all the tax revenue it would generate from all the illegals that don't pay taxes but have no problem filling up our school systems and E.R.s.

 

Illegals pay more tax than you purport.

[muck]

I don't know, I'm not really a "Fair Tax" guru, though I know a thing or two about sales tax. I do know if it also replaces gift taxes and death taxes, but if it did, I'd be for it that much more. The marketable securities question is a very good one that I hadn't thought of, and that could have major ramifications.

 

There is no way that buying/selling 100 shares of XYZ Corp at $10 / share would incur a 23% sales tax. Especially if there is a loss...

 

Imagine buying a stock at $10 and selling it for $5 and then paying a 23% tax for your trouble? No way that goes through...

[yo mama]

I don't know, I'm not really a "Fair Tax" guru, though I know a thing or two about sales tax. I do know if it also replaces gift taxes and death taxes, but if it did, I'd be for it that much more. The marketable securities question is a very good one that I hadn't thought of, and that could have major ramifications.

Actually, a flat 23% on all assets transfered by gift or bequest would be pretty fair and easy to administer for larger estates. Trying to pry it out of a family whose only asset is the family home, however, would cause hugh problems. So either the Fair Tax does not get rid of estate and/or gift taxes, or when evaluating its "tax neutralness" we'd have to look at whether it generates enough revenue to replace all three taxes: not just the income tax.

 

heady stuff guys.

[westvirginia]

My only point is that it's not clear at all to me that the "fair tax" is actually "fair". (And when someone goes out of their way to appropriate the use of the word "fair" like this, you should be very skeptical. Why don't they just call it a "consumption tax"? (because that is what it really is).) The BS definition of progressive vs. regressive is a clear indication that something funny is going on here.

 

I also am very skeptical that it will operate anywhere near as smoothly and without loopholes as its advocates suggest. I'm sure when somebody first brought up the idea of an income tax, it seemed like it would be very easy to implement as well.

 

From what I read at the website provided, it seems that the "fair tax" provides no exemptions for necessities. This implies that if somebody gets really sick, they will end up paying more in taxes than a healthy person. Does that seem "fair" to you?

 

It also seems that housing will be taxed. Or at least you will have to pay taxes if you buy a new home, but apparently not if you buy an existing home. This would cause the price of existing homes to increase resulting in a wealth distribution in favor of people who already own homes and away from people who don't yet own homes. Is this "fair"? (Additionally, it seems that renters would have to pay taxes on the rent they pay. But if someone already owns their home, they won't have to pay such a tax--even though both people are consuming housing. Does this seem 'fair"?)

 

I REALLY can't believe this is coming from you. OK, so do we impute taxes on you cleaning the house in your french maid's outfit? Washing your car or your clothes. Hey, the government is losing income tax revenue from the people you could be paying to do that now. Why don't they impute the income tax on the services you perform for yourself so you don't have to pay someone else to do it?

 

Oh, and it isn't really fair that you paid taxes on your income for the last however many years and some 23-y/o budding economist doesn't have to now, is it?

 

Maybe you don't like the terminology, but I know John Linder, and he wanted to differentiate it from a VAT tax, which the euopeans are enamored of in addition to an income tax.

[westvirginia]

Actually, a flat 23% on all assets transfered by gift or bequest would be pretty fair and easy to administer for larger estates. Trying to pry it out of a family whose only asset is the family home, however, would cause hugh problems. So either the Fair Tax does not get rid of estate and/or gift taxes, or when evaluating its "tax neutralness" we'd have to look at whether it generates enough revenue to replace all three taxes: not just the income tax.

 

heady stuff guys.

 

Actually it would replace the death tax, and since the gift tax is actually part of the income tax, then I'd suppose it would replace that as well, but I don't know for sure.

[yo mama]

There is no way that buying/selling 100 shares of XYZ Corp at $10 / share would incur a 23% sales tax. Especially if there is a loss...

 

Imagine buying a stock at $10 and selling it for $5 and then paying a 23% tax for your trouble? No way that goes through...

But if we're getting rid of the income tax, which includes taxation on capital gains realization events, then we'd have to tax the purchase of marketable securities or they'd escape taxation all together. (Excluding estate and gift tax issues for the moment). No?

[TheShiznit]

But if we're getting rid of the income tax, which includes taxation on capital gains realization events, then we'd have to tax the purchase of marketable securities or they'd escape taxation all together. (Excluding estate and gift tax issues for the moment). No?

 

In that scenario Yo...it would seem to me that the tax would be on the purchase and not on the sale of the stock. In regard to your estate tax problem, actually this would be easy. Since assets have to be titled, every time an asset is retitled, it would be taxed. In effect, all securities accounts would be taxed to the new owner(buyer/consumer) at death. This is the only way that the fair tax would make sense in this particular arena.

[muck]

I'm just thinking that if my clients take a 23% haircut simply for buying or selling something, regardless of the profit generated, there would be NO liquidity in the stock or bond market (or any market of publicly traded securities).

 

And, when I say "NO", I mean none. Zilch.

 

...................

 

Today:

Buy stock at $9.90

Sell stock at $10.00

Realize a $0.10 profit

Pay (say) 30% of that profit in taxes

Net gain of $0.07

 

Fair Tax:

Buy stock at $9.90

Sell stock at $10.00

Realize a $0.10 profit

Pay $2.30 in tax (23% of $10.00)

Net loss of $2.20

 

...................

 

All capital allocation decisions are made for the long (i.e, VERY long term), and there is a dearth of short-term profit activities.

Edited April 16, 2008 by muck

[yo mama]

1. In that scenario Yo...it would seem to me that the tax would be on the purchase and not on the sale of the stock.

 

2. In regard to your estate tax problem, actually this would be easy. Since assets have to be titled, every time an asset is retitled, it would be taxed. In effect, all securities accounts would be taxed to the new owner(buyer/consumer) at death. This is the only way that the fair tax would make sense in this particular arena.

1. Well, that's what I was asking earlier: would the Fair Tax apply to the purchase of marketable securities (or partnership units, or LLC interests, or fractional interests in oil, gas, and mineral rights, etc)?

 

2. No, they don't. Dynasty and other lifetime trusts are common planning tools that let assets rest with the same "owner" for generations while income producing assets just kick back and generate cash/appreciation. Once you got one of those puppies set up it could generate vast amounts of wealth over many generations without producing a significant amount of Fair Tax. (Not that my clients would mind). We also use partnerships and LLCs to hold brokerage accounts so that you can transfer the interests in the entity among family members without having to retitle the brokerage account or underlying investments. So either death itself would have to be treated as a "purchase" even if no assets changed hands, or the Fair tax would have to collect more sales tax from individual consumers to offset against the lost estate tax the Fair Tax wouldn't collect. On the one hand, we'd be effectively shifting the current economic responsibility for the estate tax to buyers of consumer goods. On the other, the Fair Tax wouldn't be getting rid of either the gift or estate tax at all.

 

Also worth considering is that *if* the Fair Tax would affect the purchase or transfer of closely held entities (for which there is no public exchange) then there is a 100% certainty that the IRS (or whatever it would be called) would have to be auditing individuals: there would be no other way to discover when such intra-family transfers are made. With real property, there are frequently deeds that you could use to track these transactions down, assuming deeds were even filed. But there is still no retailer involved who would be responsible for collecting and remitting taxes in connection with in intra-family transfers, and there are tens of thousands of those that go on every year. If such transfers were subject to the Fair Tax, you'd need a fairly invasive enforcement system akin to current IRS audits otherwise you'd never find out about them. Heck, if you hold your interests in a revocable living trust most states don't even require the probate of the trust instrument at someone's death, so many such transfers occur without the probate court even being aware of them.

 

I don't think either of these points break the Fair Tax conceptually, but I do think they reveal how a seemingly simple form of taxation would probably end up being a lot more complex than most of its proponents might assume.

Edited April 16, 2008 by yo mama

[yo mama]

I'm just thinking that if my clients take a 23% haircut simply for buying or selling something, regardless of the profit generated, there would be NO liquidity in the stock or bond market (or any market of publicly traded securities).

 

And, when I say "NO", I mean none. Zilch.

And therein lies a countervailing consideration that might be more important than tax "fairness." Who the heck cares about fair taxation if the capital markets are effectively frozen? I'm not saying they would be, but a 23% surcharge on all financial instruments would certainly have a chilling effect. Either that, or we'd be merely be shifting the responsibility for taxes previously associated solely with those financial instruments to society at large. Because that'd be "fair." :oldrolleyes:

 

I dunno. The more I think about it, how the Fair Tax (or any consumption tax) addressed this issue might end up being the deal maker/breaker in my mind.

[AtomicCEO]

death taxes

death tax

 

Puppets.

 

Doublespeak.

 

"Estate Tax"

The people who have been ripping you off for 8 years want you to call it the death tax, but it's got a real name.

 

Personally I think we should call the Iraq war "Operation Republican Moneyburn". I'm going to start using that term because it suits my political purposes, and is catchy. Who's with me?

[westvirginia]

I don't know the answer to the question about securities. I've been looking but haven't been able to come up with it.

 

I do know that estates are passed tax free under that plan.

[yo mama]

I just noticed how the 23% Fair Tax rate is predicated on 100% compliance, which most proponents argue will include illegal immigrants and criminals. Countervailing research indicated that if there was a noncompliance/evasion rate comparable to what there is now the effective rate of the Fair Tax would have to be more like 34% for everyone who did comply. For those who spend most or all of their income, that's a big difference.

 

No estate or gift tax (so those who wouldn't normally be subject to those taxes would be subsidizing those who are currently).

 

Probably need to repeal the 16th Amendment, because Fair Tax supporters don't trust the Fed to impose income taxes on top of Fair Tax. (Though, I can't say I blame them on that one).

 

No capital gains taxes. So either we're taxing capital investments upon purchase, regardless of performance, or we're not taxing financial instruments at all (once again, those who wouldn't normally be subject to those taxes would be subsidizing those who are currently).

 

Yes, we'd be reducing CPA and attorney fees, but those are significant expenses for a fairly narrow segment of the individual taxpayer population (typically $300 a year for normal returns): those filing their own returns would get no benefit at all. And even those that do get the benefit would still have to prepare and file state income tax returns in those states that have them.

 

Poor people still pay no tax due to prebates. (Wouldn't that take most of the illegals out of the tax base?)

 

No deduction for mortgage interest or charitable contributions.

 

So the poor are no worse off. The rich are WAY better off. The IRS isn't going away (and even if it were, it only costs about $11 billion to administer annually, compared to the $12 billion PER MONTH we spend on the Iraq war). Where is all the lost tax revenue coming from again? Its either the middle class (or what's left of it), or this thing doesn't work as advertised. The fact that its "advertised rate" is predicated on 100% compliance says a lot to me.

Edited April 17, 2008 by yo mama

[Clubfoothead]

I don't know much about threats to wealth creation but I know there are two things that are preventing me from wealth creation:

 

1 - student loan debt

2 - $hitty health insurance

 

#2 moreso than #1.

[dmarc117]

it has been said before, rich people acquire wealth while poor people acquire things.

[AtomicCEO]

it has been said before, rich people acquire wealth while poor people acquire things.

 

Rich people acquire both.

[dmarc117]

Rich people acquire both.

 

true

[muck]

And therein lies a countervailing consideration that might be more important than tax "fairness." Who the heck cares about fair taxation if the capital markets are effectively frozen? I'm not saying they would be, but a 23% surcharge on all financial instruments would certainly have a chilling effect. Either that, or we'd be merely be shifting the responsibility for taxes previously associated solely with those financial instruments to society at large. Because that'd be "fair." :oldrolleyes:

 

I dunno. The more I think about it, how the Fair Tax (or any consumption tax) addressed this issue might end up being the deal maker/breaker in my mind.

 

So, I both started and ended this thread?

[wiegie]

Do rich people buy Mercedes Benz cars?

 

So your stupid example is they are going to become part 'owners' of Benz instead of just paying some stupid sales tax?

Actually, I think your idea could work. Mercedes Benz could probably pretty easily set up some sort of program in which people could buy, say $60,000 worth of the the company. Then this owner could be entitled to receive a car valued at up to $60,000. If the person exercised the option to receive the car, then the value of their share of the company could fall by the amount that the car was worth. The person wouldn't have to pay any taxes because they simply chose to keep part of the company's output for himself rather than selling it to the general public (like the farmer choosing to eat his own corn in the very simplistic example I used earlier).

 

Somebody please explain to me how the "fair tax" would prevent people from avoiding paying taxes this way?

[wiegie]

To clear up a few points: under the "fair tax" the estate tax would be eliminated completely.

 

There would also be no taxes charged on the purchase or sale of assets. I'm not sure if things like financial derivatives would incur the tax--since derivatives are typically provide the "service" of hedging, it seems like they should be taxed--that could get ugly.

 

The same is true for banks--they would have to charge their customers 23% for the services they provide. Where it gets really ugly is trying to figure out the value of the service. (I know this is a problem because a few years ago I interviewed with the BEA and they were interested in having the person they hired try to correctly calculate the output of the banking sector.) One way that you could back out how much services the banks were providing is by looking at the banks' profits. Whatever profits banks earn must have come from the services they provided to their clients and hence should be taxed. But it is more complicated than that, because the banks' profits represent only a lower bound on the actual services provided to the banks' clients and the actual services provided are likely much higher than the profits would indicate (since part of the banks' revenue would be eaten up by expenses).

 

In any case, muck would have to charge his clients 23% on whatever he earns from them, since he is providing his clients with a service which they are consuming.

[TheShiznit]

1. Well, that's what I was asking earlier: would the Fair Tax apply to the purchase of marketable securities (or partnership units, or LLC interests, or fractional interests in oil, gas, and mineral rights, etc)?

 

2. No, they don't. Dynasty and other lifetime trusts are common planning tools that let assets rest with the same "owner" for generations while income producing assets just kick back and generate cash/appreciation. Once you got one of those puppies set up it could generate vast amounts of wealth over many generations without producing a significant amount of Fair Tax. (Not that my clients would mind). We also use partnerships and LLCs to hold brokerage accounts so that you can transfer the interests in the entity among family members without having to retitle the brokerage account or underlying investments. So either death itself would have to be treated as a "purchase" even if no assets changed hands, or the Fair tax would have to collect more sales tax from individual consumers to offset against the lost estate tax the Fair Tax wouldn't collect. On the one hand, we'd be effectively shifting the current economic responsibility for the estate tax to buyers of consumer goods. On the other, the Fair Tax wouldn't be getting rid of either the gift or estate tax at all.

 

Also worth considering is that *if* the Fair Tax would affect the purchase or transfer of closely held entities (for which there is no public exchange) then there is a 100% certainty that the IRS (or whatever it would be called) would have to be auditing individuals: there would be no other way to discover when such intra-family transfers are made. With real property, there are frequently deeds that you could use to track these transactions down, assuming deeds were even filed. But there is still no retailer involved who would be responsible for collecting and remitting taxes in connection with in intra-family transfers, and there are tens of thousands of those that go on every year. If such transfers were subject to the Fair Tax, you'd need a fairly invasive enforcement system akin to current IRS audits otherwise you'd never find out about them. Heck, if you hold your interests in a revocable living trust most states don't even require the probate of the trust instrument at someone's death, so many such transfers occur without the probate court even being aware of them.

 

I don't think either of these points break the Fair Tax conceptually, but I do think they reveal how a seemingly simple form of taxation would probably end up being a lot more complex than most of its proponents might assume.

 

I understand the trust aspect....I am a planner....but I was making a simple statement that when the asset is retitled...it would be taxed as a consumption. Now if it is owned perpetually by a trust...then there is no tax on distributions forever....which is not the case now. I am merely stating how I would think the fair tax would work....I think it would definitely shift the burden based on just a rudimentary review.

[TheShiznit]

Actually, I think your idea could work. Mercedes Benz could probably pretty easily set up some sort of program in which people could buy, say $60,000 worth of the the company. Then this owner could be entitled to receive a car valued at up to $60,000. If the person exercised the option to receive the car, then the value of their share of the company could fall by the amount that the car was worth. The person wouldn't have to pay any taxes because they simply chose to keep part of the company's output for himself rather than selling it to the general public (like the farmer choosing to eat his own corn in the very simplistic example I used earlier).

 

Somebody please explain to me how the "fair tax" would prevent people from avoiding paying taxes this way?

 

However Wiegie.....the conundrum is whether the purchase to own some of Mercedes is actually taxable in and of itself? If not...then what you say is true.

[H8tank]

Actually, I think your idea could work. Mercedes Benz could probably pretty easily set up some sort of program in which people could buy, say $60,000 worth of the the company. Then this owner could be entitled to receive a car valued at up to $60,000. If the person exercised the option to receive the car, then the value of their share of the company could fall by the amount that the car was worth. The person wouldn't have to pay any taxes because they simply chose to keep part of the company's output for himself rather than selling it to the general public (like the farmer choosing to eat his own corn in the very simplistic example I used earlier).

 

Somebody please explain to me how the "fair tax" would prevent people from avoiding paying taxes this way?

 

 

I know a life long educator with very little real knowledge of the world probably doesn't know many things.... but the taxes on your benz are paid when you register it. If you bought your car at the dealer, they collect it and send it in for you.

 

If you buy a car from me, you'll pay the tax when you get it tagged.

[dmarc117]

in chicago they have a transfer tax for real estate....$10 per $1000

 

i believe the buyer pays the majority of it.

[AtomicCEO]

I know a life long educator with very little real knowledge of the world probably doesn't know many things.... but the taxes on your benz are paid when you register it. If you bought your car at the dealer, they collect it and send it in for you.

 

If you buy a car from me, you'll pay the tax when you get it tagged.

 

I know you really want to believe in this little scam, and it is a shame you waste so much of your time trying to figure out ways to be a cheat and dishonest.

 

That's a state tax, Shabadoo.

 

Wiegie was talking about a Federal tax.

 

EDIT: How did your post change to remove the last line without leaving an "edit" tag at the bottom?

 

EDIT2: Mine leaves an edit tag.

Edited April 17, 2008 by AtomicCEO