Sunday, August 21, 2005

Comparing Tax Systems: Reconsidering Refundable Credits

When looking at the previous post comparing the effective tax rates of current system to the Fairtax system, you may have noted that there are a few examples for large 'single/head of household' very low income households where the difference between the Current System Effective Tax rate and the FairTax Effective Tax rate is negative, indicating that such households would be better off under the current system than the FairTax.

If you took the time to look closely, you would notice that in all such cases, the reason is that some combination of the current system refundable tax credits ( earned income tax credit, or additional child tax credit) were leading to a large negative income tax for that household. A refundable tax credit is a credit against taxes paid, such that if a household owes no taxes, the remaining credit will be refunded to them.

So if a household only owes $1000 in taxes, but is eligible for a $2000 refundable tax credit, the IRS would send them a check for $1000. Effectively, they would have paid -$1,000 in income taxes.

Refundable tax credits are basically anti-poverty programs. The Congressional Budget Office (CBO) even classifies them as such in their outlays for mandatory programs table. They note for the 'Income Security' category: 'Includes unemployment compensation, Supplemental Security Income, the refundable portion of the earned income and child tax credits, Food Stamps, family support, child nutrition, and foster care.' This is an important point. The refundable part of these tax credits are budgeted as outlays. If we move to the FairTax, the budget for them as outlays remains. Since the FairTax is revenue neutral, the revenue for them remains (to the degree it's there now). So if we wish to spend those moneys on anti-poverty programs we are free to do so without abusing the tax system to accomplish that end.

Because of this, I felt it might be useful to see how the FairTax compares to the current system, in the absence of refundable credits. Please note, whether you believe the money currently budgeted for refundable tax credits will be spent on equivalent anti-poverty programs or not is up to you. If you don't then continue to refer to the previous comparison tables. But if you believe they will be, then the outcome for the poor looks much rosier under the FairTax than under the current system in all cases, as shown in the tables below, where the refundability of tax credits has been disabled (in other words, no one pays less that $0 income tax):


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17 Comments:

At 6:28 AM, Blogger Sunnye T said...

Quadrupole,

You need to get in touch with Karen at FairTax headquarters to get the correct numbers for your tables. Her email is kwalby@aol.com and she's the FairTax economist.

Sunnye T.
KS District 3 Director for FairTax

 
At 6:29 AM, Blogger Sunnye T said...

By the way, if you'll email me I'll tell you how to block advertising and still get comments for your blog.

Sunnye

 
At 2:53 AM, Blogger Greg said...

This comment has been removed by a blog administrator.

 
At 10:03 PM, Blogger catforNRST said...

Excellent Blog.

Do you know where I can find a discussion of the Constitutional basis for the NRST? As I remember from the old days the basis was the excise tax section but it has changed enough that I am no longer sure.

 
At 12:28 PM, Blogger catforNRST said...

This comment has been removed by a blog administrator.

 
At 8:13 AM, Blogger d.a.n said...

The FairTax.org's 30% Sales Tax is REGRESSIVE after the prebate runs out.
The prebate ($2400 for a single person, $5902 for a family of 4) only untaxes the lowest income levels. That's all.
It's not that complicated.
After all, using the data from the FairTax.org's 30% Sale Tax own web-site, and adding the income column on the left and the TAPOGI column on the right, it isn't difficult to show how the FairTax.org 30% Sales Tax is REGRESSIVE after the prebate runs out.
Do you know why the FairTax.org's 30% Sales Tax has that strange curve (see below)?
Because it is a REGRESSIVE tax after the prebate runs out ($2400 for a singe person, $5902 for a family of 4).
Do you know why the FairTax.org's 30% Sales tax chart omitted the income column (far left) and TAPOGI column (far right) which I added below?

Married with 2 children
Poverty Level = $25,660
Prebate = $5902
POPL = Percent of Poverty Level
TAPOGI = Tax As Percent Of Gross Income

Income _ POPL _ Spending _FairTax__ Rebate _NetTax__EffectiveRate__TAPOGI
$8K ___ 25% __ $6,415 ___ $1,475 ___ $5,902 _ ($4,427) _ -69.0% ___ 0%
$15K __ 50% __ $12,830 __ $2,951 ___ $5,902 _ ($2,951) _ -23.0% ___ 0%
$30K __ 100% _ $25,660 __ $5,902 ___ $5,902 _ ($0.00) ____ 0.0% ___ 0%
$45K __ 150% _ $38,490 __ $8,853 ___ $5,902 _ $2,951 _____ 7.7% ___ 22.64%
$60K __ 200% _ $51,320 __ $11,804 __ $5,902 _ $5,902 ____ 11.5% ___ 21.82%
$90K __ 300% _ $76,980 __ $17,705 __ $5,902 _ $11,803 ___ 15.3% ___ 21.05%
$150K _ 400% _ $102,640 _ $23,607 __ $5,902 _ $17,705 ___ 17.2% ___ 16.38%
$1.03M_4000%_ $505,902 _$116,357 __ $5,902 _$110,455 ___ ??.?% ___ 10.72%

Because they do NOT want people to understand that tax as a percentage of income is REGRESSIVE.
So, when someone can explain away that strange curve (see below), and how when the prebate runs out, the FairTax.org's 30% Sales tax is REGRESSIVE again, then you might have an arguement.
But that ain't gonna happen, because it is a mathematical impossibility.

And the truth is:
[] the FairTax.org's 30% Sales Tax is a REGRESSIVE tax.
[] After the prebate runs out, it is a REGRESSIVE tax.
[] That's a fact that can not be disproved. The numbers and graphs above prove it.
[] All sales taxes are REGRESSIVE, and the prebate only shelters the income at the lowest level. After the prebate runs out, it is a REGRESSIVE tax.
[] All sales taxes are REGRESSIVE unless everyone spends all of their income.

For those that do not entirely understand the math, here is the most simple thing to understand:
[] people that spend a larger percentage of their income on necessities will pay a larger percentage of their income to sales taxes.
[] The prebate ($2400 for a single person, or $5902 for a family of 4) only untaxes the first $8K to $19.7K (respectively).
[] Under the FairTax.org's 30% Sales Tax, the rich have much MORE disposable income to invest, and all of those investments would be tax free since the income tax would be eliminated.
[] After the prebate runs out, it is a flat sales tax. All sales taxes are REGRESSIVE.
[] Ask yourself this question: Why will the rich love this FairTax.org's 30% Sales Tax ?
[] After the first $8K (for a single person) to $19.7K (for a family of 4), every dollar spent is taxed at a whopping 30% !
That's why the FairTax.org's 30% Sales Tax has that strange bump (see X line below). That's why the graph suddenly starts to decrease again after that bump; because the tax rate relative to income starts decreasing as income increases. That is a REGRESSIVE tax.
___________LEGEND:____________
[] = income tax above 1st $8K (i.e. untaxed due to $2400 prebate or not taxing the first $8K)
X = income tax on gross
____(REGRESSIVE) 30% SALES TAX:____
30% []
27% _[]
24% _ _ []
21% _ _ _ []
18% _ _ _ _ _ []
15% _ _X_X _ _ _[]
12% _X _ _ _ X_ _ _ _[]
09% _ _ _ _ _ _ _ X_ _ _ _[]
06% _ _ _ _ _ _ _ _ _ _ _X_ _ _ _ []
03% _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _X_ _ _ _ _[]
00% X_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ X[]
_$10K $18K 36K 54K 72K 90K 108K 126K 144K 162K 180K $198K

So, here's the challenge for any FairTax.org 30% Sales Tax supporter:
After the prebate ($2400 for a single preson, $5902 for a family of four) runs out, how is a 30% Sales Tax NOT REGRESSIVE ? ?

Good luck trying to prove it, because it is a mathematical impossibility.
The prebate would have to be HUGE to not be REGRESSIVE.
Wherever the prebate runs out, the tax is REGRESSIVE.
That is the clever fraud of the FairTax.org's 30% Sale Tax system.
The ONLY place it is a PROGRESSIVE tax is at the very bottom of the income scale.

Ask yourself: Who will love this tax system the most, and why?

Here is a better 17% Tax System, with no taxes on the income below the poverty level.
See the PROs/CONs of each.

 
At 7:44 AM, Blogger LC David said...

Excellent blog post, Great "Comparing Tax Systems: Reconsidering Refundable Credits"

 
At 7:44 AM, Blogger LC David said...

Excellent blog post, Great "Comparing Tax Systems: Reconsidering Refundable Credits"
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At 10:46 PM, Blogger Margaret Bado said...

There is a HUGE wealth gap from the top 2% to the 3% and this information is misinformed and ignorant. The entire working class of America receives around 3% of the wealth, while ONE RICH family receives MORE THAN 30% OF AMERICAS WEALTH! Corporations like GE DIDN'T PAY ANY TAXES ON OVER $100 BILLION! That's more tax than the working class creates. Centralized banking is the problem, which is why our forefathers who created this country had WAR on centralized banking. This country went to shit 2013 tax brackets.

 
At 9:58 AM, Blogger Maxima Regino said...

Your figures are in error. The taxes for both Clinton and Bush were calculated using the maximum rate for that selected income. For instance the Clinton 1999 tax rate on 30K was 28%, which is what they used to get the 8400 figure. However taxes are not calculated that way. The first 25K of income would have been 2013 tax brackets at the lower 15% bracket first, thus yielding a much lower figure than what you show.I am not arguing that Bush doesn't have lower taxes. He certainly does. Of course he obtained his lower tax brackets by using deficit spending and increasing the national debt. Add back in the interest payments we'll be making and I bet Bush actually cost taxpayers far more than Clinton ever did.

 
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