I have had the opportunity to debate GyroTyro (GT)over the last week about the FairTax and how it treats different generations. Some interesting revelations came of this debate.

1. 1.       It is very clear that those in/near retirement have real concerns about double-taxation
2. 2.       No generation wants to feel as though it is being taken advantage of

As much is our debate teetered beyond civil in some cases, I appreciate GT’s perspective and I appreciate his concerns. If I were in my twilight years after having paid taxes out of my earnings all of my working years and then I were faced with the proposition of having to be taxed again I wouldn’t be happy about it either. Let’s break things down though to determine whether retired folks will be better off, worse off, or about the same with a change to the FairTax.

First-off, it is worth mentioning that the first $10,400 per adult ($20,800 per married couple) of taxable consumption go completely untaxed with the FairTax. Let’s set this aside for now but it is a key provision that puts families’ and individuals’ survival first ahead of government needs.

Pricing of products/services:

Under the FairTax, anything 100% provided by U.S. Labor will be largely a wash (give or take 2-3 %). Embedded taxes that make their way into the pricing of U.S-made products and services via payroll tax, corporate tax, and tax compliance burdens on corporations (estimated 22%) get stripped away from the productivity side but then added back at the point of business-to-consumer sale at 23-cents-on-the-dollar. Net effect? A $100 pair of U.S.-made boots might cost $102 at the register. A $100 medical procedure might cost $98.00 with the FairTax. In effect, it is basically a wash.

What about imported items which is a concern of GTs? Well, if manufacturing is still roughly 30% of the ultimate cost of goods sold (as it was when I studied in Business School), than 70% of the price of an imported item (say for a $100 pair of loafers) would involve U.S. marketing, distribution, admin, and profit of 70% ($70) which would have 22% embedded tax stripped away ($15.40). Adding the FairTax in on an $84.60 item gives us an after-FairTax price of $110. 

Now a 10% increase over what it would cost at the register preFairTax for imported items is not attractive if it is considered in a vacuum but remember, we are only talking about imported items & how many individuals buy 100% imported goods and no domestically provided services? Is a 50/50 split reasonable? That would be a 5% overall increase in price. How about a 30/70 split which would result in an approximate 3% after-FairTax increase in price? 

Still, we are trying to prove that the FairTax, at worst, will be a lateral move for seniors so even 3% is unacceptable.

But does this hypothetical retired person have any income (social security, interest income, dividends, capital gains, rental income, etc.)? No more filing income tax returns… no more paying the CPA to generate tax returns… No taxable income? Well, we could argue that he/she has no business buying expensive imported items. In fact, we this person could be thrifty and maximize consumption of second-hand items (even imported second-hand items if desired) completely tax free since used goods are not taxable items under the FairTax.

Okay, so given the above, most seniors are better off under the FairTax than with the current system but if we aren’t quite there yet for some… let’s go ahead and add the FairTax prebate in ($200 per adult per month in 2008 figures).

Am I good with this realizing that I have a mother and father approaching their 70s with plenty of kick left in the years ahead? Absolutely. 

Under the FairTax we have much more control over our lives which is a great thing. I hope folks can see it.

Finally, it is worth mentioning for my friend GT’s sake that fairness across generations works both ways. As a 44 year-old, I have been paying into Social Security and Medicare for over 25 years. I will continue to pay until either the FairTax gets implemented (at which time Social Security and Medicare will be funded out of the general fund) or until it goes bankrupt. I have no illusion that I will receive dime #1 back from these programs under the current tax structure. So where you (GT) may be concerned about paying during your income-earning years and then paying again via consumption in your twilight years (but receiving Social Security and Medicare Benefits), I have a concern about paying all along the way and receiving no Social Security/Medicare Benefits. The generational argument cuts both ways.

This has been a good exercise for me. I hope others get some benefit as well.

Cheers,

YK