The Fair Tax and The Elderly
By Adam Graham (12/31/07)
Does the Fair Tax cause undo harm to the elderly? This was recently a topic on a popular conservative Internet discussion board.
The theory is laid out by the first commenter: “Who are the people who get screwed by the National Sales Tax? Older people, who already paid taxes over the years on what they made, and under the National Sales Tax get to be taxed again on the same money they already made.”
So is this the case or is there more than meets the eye? Let’s take a look.
First of all,so we know what we're talking about, the Fair Tax eliminates the payroll tax, personal and corporate income taxes, gift taxes, estate taxes, and capital gains taxes and places a tax-inclusive rate of 23% on all new goods and services purchased in the United States in their place.
So what about the elderly who have paid taxes all their lives and are going to taxed again?
First, we must remember a key concept called embedded taxes. Taxes on Corporate Income, the employer portion of Payroll Taxes, costs of complying with the tax code, etc. are business expenses. These expenses are passed on to the consumer. Many modern products go through multiple corporations and each corporation passes on some of their tax burden to consumers. It’s estimated that on average, 22% of the price of goods and services in the United States are made up of embedded taxes and senior citizens pay for that. So, if the Fair Tax gets rid of the 22% embedded tax, the 23% Fair Tax will not greatly increase the costs of goods and services.
Second, at the start of each month, every American household will receive a prebate equal to the amount of money needed to pay for spending up to the poverty level in order to insure that the tax does not stop people from being able to purchase the basic necessities of life. So, thus a senior citizen will see prices rise moderately, but they’ll also have prebate that will, in most cases, more than make up for the higher prices. Now, many people have issues with the prebate, but let’s save that for a separate column.
The third issue here is the assumption that the elderly are done paying taxes. If your income comes entirely from sources such as Social Security or some other tax-free arrangement, then that's correct, but if that’s the case, your monthly prebate will most likely take care of your taxes.
However for those who have saved for retirement or have a pension, this is almost certainly not true. Unless they saved with post-tax dollars, retirees will pay taxes on their benefits. Most pensions are taxed. IRAs and 401(k)s are not tax-free ways to save for retirement, they are tax deferred, which means that when you take the money out, you pay taxes. If you saved outside of a retirement account in a normal savings account or brokerage account, you still have to pay Capital Gains tax when stocks are sold, a tax on dividends from corporations in which you own stock, and a tax on the interest you earn on savings.
Under the Fair Tax, there’d be no taxes on distributions, no taxes on interest, dividends, or capital gains. Thus, people would not pay taxes on their retirement accounts until they actually choose to spend the money on taxable goods.
Finally, remember that under the Fair Tax, you and I get a choice as to when we get taxed. If we choose to save our money or buy a used item instead of a new one, there is no tax. If you buy a less expensive item, it has a lower amount of tax. Buying used clothing, used cars, used furniture, etc. can help the elderly avoid taxes in many instances as well. Many already make such frugal choices as it is and the fair tax would reward that.
Ultimately, due to embedded taxes and the prebate, you'll have to strain to find seniors who will be hit hard by a Fair Tax. While the Fair Tax will not benefit them as much as younger workers, that is no reason to continue with a system that harms our economy, robs us of time with our families, and invades our privacy.
Adam Graham
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