Wednesday, September 29, 2004

Family Consumption Allowance

When you speak of the impact of taxes you tend to talk about whether they are progressive or regressive. Progressive taxes tend to tax the rich more than the poor, regressive taxes tend to tax the poor more than the rich. Sales taxes are usually seen as regressive because the poor must spend a greater percentage of their income on necessities than the rich, and thus have a greater portion of their income subject to taxation. In the past state governments have tried to overcome the regressivity of sales taxes by exempting necessities (like food). This inevidibly has led to market distortions and political manuevering for businesses to get their goods in a 'necessity' category. The FairTax takes a different approach to eliminating the regressivity of a sales tax.

The FairTax introduces a Family Consumption Allowance (FCA). The FCA is a check sent each month to each household registering to receive it (registration is voluntary) to reimburse the amount of sales taxes paid if that household spent up to the poverty level as specified by the department of Health and Human Services. This is how the FairTax 'exempts' necessities. It presumes that every household must spend up to the poverty line in order to purchase necessities and then refunds that portion of tax. The FCA would be administered by the Social Security Administration, which is quite proficient at sending out monthly checks. Complete details on the FCA can be found in the bill HR25 Chapter 3.

Below is a table showing how the FCA would work for household of various sizes:

2004 Rebate Calculations
Family sizeHHS annual poverty levelFairTax annual consumption allowance (single person)Annual rebate (single person)Monthly rebate (single person)FairTax annual consumption allowance (married couple)Annual rebate (married couple)Monthly rebate (married couple)
2 $12,490 $12,490 $2,873 $239 $18,620$4,283 $357
3 $15,670 $15,670 $3,604 $300 $21,800 $5,014 $418
4 $18,850 $18,850 $4,336 $361 $24,980 $5,745 $479
5 $22,030 $22,030 $5,067 $422 $28,160 $6,477 $540
6 $25,210 $25,210 $5,798 $483 $31,340 $7,208 $601
7 $28,390 $28,390 $6,530 $544 $34,520 $7,940 $662
8 $31,570 $31,570 $7,261 $605 $37,700 $8,671 $723


At 9:51 PM, Blogger catforNRST said...

Excellent Blog:

Has anyone computed the amount of the Family Consumption Allowance total that would not be recovered by families whose income is below the poverty level?

At 8:59 AM, Blogger quadrupole said...


I'm not entirely sure what you mean. All households receive the Prebate, independent of income. So a family of 4 earning below the poverty level receives the same prebate as a family of 4 earning $50,000 a year.

At 4:18 PM, Blogger Mark said...

I agree, the prebate has to go to at least those who are near or below poverty line.

But one question -- will it be cashable? Can you cash the check and spend it, as you see fit? OR do you have to apply it to sales tax, perhaps in form of a debit card that would only be used for that.

If such a check was cashable -- its troubling, since some could use the cash for drugs, stolen TVs, booze, whatever.

But even if its not cashable -- it will still help these folks pay their sales tax, but they could sell those products for cash and buy the drugs, stolen TV, anyway.

Either way, this frees up money for the less scrupulous. I dont think its the magic answer.

At 4:17 PM, Blogger jay ell said...

Our taxes will increase by 5 to 10 fold under the proposed fair tax.

We make $45-50,000 per year in dividends, capital gains, interest, retirement, and social security, depending on how the economy does each year.

In 2007 our adjusted gross was about $35,500 (only about 5000 of the social security was taxable) and after the standard deduction and exemptions ( 2 in our case) our taxable income was about $16,500, and we paid the IRA about $1,200.

Our taxes have been very similar to this for the past 5 years

We spend about $50,000 to $55,000 per year, taking money out of our savings to compensate.

Under the Fair Tax Proposal we will pay 23% of this $45,000 or $55,000 in taxes. This is about $11,500 or $12,650. This would be almost 10 times what we pay now.

There is a chart out that says a "Prebate" for a family of two filing Jointly and earning about $45,000 would receive a "prebate" of about $8,000. We would still be paying five times more than we do now.

There are also a couple of "Fair tax Calculators" on the internet, and besides being very ambiguous with their questioning, both are different in their approach, and both still indicate that we would pay from five to ten times more, depending on how much we "save", and how much "used" goods we purchase.

Before any of you out there who have a situation similar to ours believe all you read about the fair tax, I challenge you to to do what we just did. Look at your returns for the past 5 years, and look at how much you actually spend each year that would be taxed at 23%.

The figures you need are:
Adjusted Gross Income
Standard or Itemized Deduction
Taxable Income
Taxes Paid
Amount you Spent in Each Year

Then get your hand held calculator out and see how much you will really pay under this system and then post your findings on this site and as many others as you can find.

This Tax will Not be Fair to me, and I will bet that any family in our situation................

Age 68 and 70, retirement in the $15,000 range, social security in the $25,000 range, dividends, interest and captal gains about $10,000, and you spend about $50,000 to $60,000 each year....I will bet that you find the same thing that I did.......

You will end up paying far more taxes than you have been paying for the past five years.

Do it, and let me know

And if yours is the same as ours, write your senators and representators.

At 5:25 PM, Blogger quadrupole said...

jay ell said:

We spend about $50,000 to $55,000 per year, taking money out of our savings to compensate.

Under the Fair Tax Proposal we will pay 23% of this $45,000 or $55,000 in taxes. This is about $11,500 or $12,650. This would be almost 10 times what we pay now.

Your calculations are almost certainly wrong here (though I'd have to know your family size and marital status to be certain). Presuming you spend $50k a year and are a married family of two in 2004 you would have received a family consumption allowance of $18620 (which you can read from the table above). If you were to go look up the numbers for 2007 you'd have a family consumption allowance of $20420 (twice the individual poverty line, due to the anti-marriage penalty clause in the FairTax bill).

So you'd be left with a FairTaxable consumption of $29580. At 23% you'd pay a FairTax of $6803.

But... there's more... you see you are in a particularly untaxed group, senior citizens receiving social security, this severely drives down your effective tax rate (trust me, $1200 of $50k of income (or about 2.4%) is *not* what most people earning $50k are paying in effective tax rate).

If you go look at HR25 (the FairTax Act of 2007) you will see that HR25 Sec 303 (SALES TAX INCLUSIVE SOCIAL SECURITY BENEFITS INDEXATION.) you will find that your $25k in social security income gets 'indexed' to any increase in the price level due to the FairTax. Which is to say that if prices do not decline due to the FairTax at all, your social security income gets adjusted up to account for the FairTax you end up paying. So if something costs $1 today, and after the FairTax it still costs $1 (not including the FairTax), then you will get your social security payment increased to cover the addition of the FairTax to that price. Now if something costs $1 today, and after the FairTax it declines in price to $0.90, your social security payment would only roll up far enough to make up for the difference between what you pay now for the good and what it would cost you out of pocket with the FairTax.

The basic point though is: you pay no FairTax on your social security payment. So for *you* (as someone who is receiving $25k in social security income in a married family of 2 and consumes $50k) you'd have $4580 of your consumption effectively subject to the FairTax ($50k-$20480 FCA - 25000 social security income). 23% of $4580 = $1053.40 (an effective tax rate of 2.1%).

So as you can see, the drafters of the FairTax *did* take senior citizens into account, and you *don't* end up paying more in your situation in FairTax than you do under the current regime.

It's important when making these comparisons to compare against what the FairTax actually *says* (although I will completely give you that the FairTax's treatment of seniors is a more obscure part of the act, and I understand why you were not aware of it).

At 5:27 PM, Blogger quadrupole said...


The prebate is cashable, and it does go to everyone. Think of it simply as a rebate for money spent up to the poverty line. Will some people behave unwisely with the money: unquestionably. Is it better than having an army of bureaucrats deciding what should or should not be a tax able item and at what rate: unquestionably.

At 7:32 PM, Blogger Mark said...

Family Consumption allowance?

Dont worry about it. The shock to millions wouldnt be the prebate, or 23 vs 35%.

The shock would be the huge sales tax on cancer surery, chemo, hospital stays, doctor bills.

Nursing home patients -- second opinions -- lab tests -- hip replacements, radiation - ER visits - dental work -- rehab - all subject to very high "sales" tax.

The parents of a child leukemia vicitim could easily have 40,000 in sales taxes. A nursing hope patient in private room could have 25,000 dollars a year - in sales taxes.

Insurance wont pay for these taxes. Insurance caps out, or only pays a certain amount. In fact, insurance premiums themselves will be taxed ( a little known fact).

SO if a cancer patients gets their insurance to pay 100,000 dollars, the 23,000 would be the copay.

And its not like the hospital or doctor CAN waive this fee. Its not the doctor fee. Its the government tax.

There are other really problematic issues with fair tax. I dont see the numbers even coming close to adding up.

In fact, I think it could be so absurd, it would be almost comic, until the country could change it back.

Yes, we have a terrible horrible income tax system. But the fairtax doesnt add up.

At 8:27 AM, Blogger Mark said...

Imagine you wake up one morning, and the Fairtax is now law.

Imagine your rent just went up 400 dollars, cause fairtax taxes your rent.

Imagine if you heat your house -- cause fairtax taxes your utilities.

Imainge if you need an operation -- cause fairtax taxes people's medical cost.

Imagine if your dad or mom were in a nursing home -- cause they would be taxed on their total cost to stay in nursing care.

Imainge if you pay insurance premiums for cars, your house, or health -- cause fairtax taxes people's insurance premiums

Imaigine if you work in the auto industry -- because people buying new cars will have a 30-50% sales tax.

At 11:51 PM, Blogger SBL BPO said...

good post...keep it up...


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