REPLACING TODAY’S TAX SYSTEM 1Stephen C. Eldridge8/28/2015

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 /28/2015Stephen C. Eldridge

H. R. 25 FEDERAL – NOT STATE – TAX WOULD REPLACE (2007 figures $): – Individual Income Tax$ – Corporate Income tax.300 – SS & Medicare Taxes.875 – Estate & Gift Taxes.025 TOTAL $ 2.3 Trillion 8/28/2015Stephen C. Eldridge3

The Sales Tax RATE - TN Price - before TN sales tax $ TN Sales tax $ 9.75 Total - including sales tax $ RATE of Sales Tax: – Most say 9.75/100 = 9.75% – HR 25: 9.75/ = ONLY 8.89% 48/28/2015Stephen C. Eldridge

The Sales Tax RATE -SC Price - before SC sales tax $ SC Sales tax $ 8.50 Total - including sales tax $ RATE of Tax: – Most of us: 8.50/100 = 8.50% – HR 25: 8.50/ = ONLY 7.83% 58/28/2015Stephen C. Eldridge

The H. R. 25 Sales Tax RATE BEFORE Price BEFORE Sales Tax$ 100,000 H.R. 25 Sales Tax (no dispute) 30,000 Total Purchase Price$ 130,000 TAX RATE: H.R. 25 TAX RATE: – Most of us: 30/100 = 30% – H.R. 25: 30/130 = ONLY 23% 68/28/2015Stephen C. Eldridge

H.R. 25 SALES RECEIPT 1.Price BEFORE Tax$ H.R. 25 TAX 30 3.Total$ H.R. 25 Tax RATE 23% of 3. 5.State sales tax RATE(e.g.) 10% of 1. 6.State sales tax $ 10 7.Grand Total( ) $ 140 8/28/2015Stephen C. Eldridge7

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 8/28/2015Stephen C. Eldridge8

The PREBATE Monthly checks to every household 98/28/2015 Stephen C. Eldridge

The PREBATE Smiths + 0 Spend, pre-tax $ 100,000 H.R % 30,000 Less: “Prebate” (5,138) H.R. 25 Tax - NET $ 24, /28/2015Stephen C. Eldridge

The PREBATE Smiths + 0 Jones + 6 Spend, pre-tax $ 100,000 $ 10,000 HR 30% 30,000 less: “Prebate” (5,138) HR 25 tax – NET $ 24, /28/2015Stephen C. Eldridge

The PREBATE Smiths + 0 Jones + 6 Spend, pre-tax $ 100,000 $ 10,000 HR 25 30% 30,000 3,000 Less: “Prebate” 5,138 HR 25 Tax - NET $ 24, /28/2015Stephen C. Eldridge

JONESES PREBATE $10, /28/2015Stephen C. Eldridge

The PREBATE Smiths + 0 Jones + 6 Spend, pre-tax $ 100,000 $ 10,000 HR 25 30% 30,000 3,000 Less: “Prebate 5,138 10,603 HR 25 - NET $ 24, /28/2015Stephen C. Eldridge

The PREBATE Smiths + 0 Jones + 6 Spend, pre-tax $ 100,000 $ 10,000 HR 25 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 158/28/2015Stephen C. Eldridge

Joneses PREBATE He pays ZERO, WE pay him $7,603 -$10,603 PLUS, RAISE for CPI inflation, every year. FREE PLUS, SS & Medicare benefits – FREE PLUS, SPECIAL BONUS! – $911 FOR EACH NEW KID, every year – Plus, inflation on the $911 – Plus, more food stamps – Plus more of other fed/State welfare programs 168/28/2015Stephen C. Eldridge

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 8/28/2015Stephen C. Eldridge17

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 /28/2015Stephen C. Eldridge18

Prebate vs 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 MORE Smith will likely get MORE from Prebate 198/28/2015Stephen C. Eldridge

Expandingthe Welfare State Expanding the Welfare State Smith receives RTCs today because he WORKS ALL Prebate paid to ALL even if they DON’T WORK Prebate adds new class of welfare recipients – the NON-working poor 208/28/2015Stephen C. Eldridge

U S Treasury 1.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) 218/28/2015Stephen C. Eldridge

House Ways & Means Committee H.R. 25 Hearings July 26, & M website Former W & M Chmn, Rangel (DEM) choked at the giant new entitlement Rep. Pascarel (Dem): it’s a “Fairy Tale” 228/28/2015Stephen C. Eldridge

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 238/28/2015Stephen C. Eldridge

BASIC EARLY PREMISE Retail Prices Don’t Change Today H.R. 25 Retailers’ cost - excluding taxes $ 100 $ 100 Retailers’ embedded taxes 30 HR 25 Tax 30 Total Retail Price $ 130 $ /28/2015Stephen C. Eldridge

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% 8/28/2015Stephen C. Eldridge25

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 268/28/2015Stephen C. Eldridge

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. 278/28/2015Stephen C. Eldridge

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 288/28/2015Stephen C. Eldridge

Social Security COLA Prior QCurrent Q Pre-HR25 HR 25 Prices $ 100 $ 130 HR 25 sales tax - assume Prices w/o HR 25 Tax IF current Q uses $100, then: Add: HR 25 Tax- Title III, § 303 __-_ 30 Compare for COLA $ 100 $ /28/2015Stephen C. Eldridge

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 308/28/2015Stephen C. Eldridge

MORTGAGE DOWN PAYMENT NEED Base Price $ 500,000 x 20%$ 100,000 Sales Taxes $ 325,000 x 100% $ 325,000 Down Payment Needed$ 425, /28/2015Stephen C. Eldridge

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 328/28/2015Stephen C. Eldridge

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% 338/28/2015Stephen C. Eldridge

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% 348/28/2015Stephen C. Eldridge

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 358/28/2015Stephen C. Eldridge

TAX in TN – MINIMUM ? Pre-tax Price$ 100 TN Sales Tax - 10% (rounded) 10 Subtotal 110 H. R. 25 Tax - use 35.1% * Total $ ROUNDED- Combined Sales Tax Rate 50% * Tax may not compound 368/28/2015Stephen C. Eldridge

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 If he pays -0-, his net Prebate is $ 10, /28/2015Stephen C. Eldridge

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, /28/2015Stephen C. Eldridge

GROSS-UP Prebate amount required to make Jones whole - assumes NO tax Avoidance Grossed-up Prebate amount $13,770 H.R % 3,167 Net Prebate $ 10,603 H.R. 25 tax on pre-Prebate spending $ 10, /28/2015Stephen C. Eldridge

FUNDING PAYROLL TAXES IF Jones pays 3 in total, he NETS 7.6 H.R. 25 artificially allocates that 3, as follows: SSOther Total Assumed tax paid Prebate NET OR, reallocate Prebate Stephen C. Eldridge