FairTax Act-Is it a viable solution?

Obviously this is a pragmatic consideration with substance as we can see that same thing with income tax returns. A person overpays all year long and then receives a single payment as a return. Few individuals have any of that refund payment left even 30 days after they receive it. Pragmatic problems can easily be resolved with pragmatic solutions. This doesn't address the concept but instead addresses a matter of pragmatic concern that can be resolved.

 

A retirement plan that starts when an individual is 20 years old has 45 years of investing so it is a "long term plan" and while the specific ROI for a specific month 10, 20 or 40 years down the road cannot be guarenteed an overall return on investment can be projected based upon historical data. Such predictions are highly accurate so long as the investment portfolio is: 1) diversified, and; 2) age-adjusted. These are the two keys to successful long-term retirement investing and are supported by every financial advisor. The prediction that a person would have five times as much retirement income by using the identical dollars currently going to a welfare program if they had diversified investments that are age-adjusted is not wild speculation as it is supported historically with no exceptions ever being noted.

The reason individuals are extending their working careers predominately is based upon the fact that they did not start a regular investment program when they were 20 that was diversified and age-adjusted. Personally I retired in 2004 but went back to work not because I couldn't afford retirement but because I determined that I love the work I do and that "retirement" was an acknowledgement of impending death. I'm not quite ready do die and won't accept that so long as I can work which I enjoy doing. So I'm a bit of an exception in this regard.

I'm sure that everyone would like to see the "average" Social Security retirement benefit of $2500/mo which is double today's average benefit but this does not address the nature of the beast. Social Security is not an investment program, it's a welfare program, so it doesn't generate a return on investment. It did in the past related to a small surplus in revenue but there is no surplus today and it's projected that in the future SS will only be able to fund 75% of current benefits based upon revenue. Instead of $2500/mo we're faced with the reality of $800/mo average payments in today's dollars based upon the current dedicated FICA taxes that support Social Security. To meet that $2400/mo "goal" in today's dollars would require tripling the FICA/Payroll taxes and that is not realistic.

At the same time privatization holds forth a viable solution for using the same dollars and while providing over $5000/mo in average retirement benefits because it would be a vested investment account as opposed to a welfare program. Additionally, because it's a vested retirement investment account of a person dies before or after retirement age the funds in the investment account go to the heirs of the estate. Today Social Security provides virtually nothing to the heirs of an estate when the person dies.

We need to tie this back to a consumption tax as compared to an income tax. Currently I'm in a 20% income tax bracket and I do invest in retirement funds. Under a consumption tax my income would not be taxed. Today, for every $100 I receive in wages that I could invest the government takes $20 only leaving me with $80 to invest. Under a consumption tax I would be able to invest 25% more than I can invest today without any change in income. That 25% increase in investment capital would greatly increase the actual retirement assets and retirement benefits I would have beyond just the projected 5-times retirement income that privatization offers.

Yes, I can defer the 20% in taxes by using tax deferred investments (up to a limited amount) but then I face potentially a very high tax burden which is why most investment experts advise against tax deferred investments. It's better to pay the tax now when working than later when retired because of inflation. It ultimately costs the individual less which is somewhat hard to believe but true from all I've read.

 

About the only way to resolve it is to not allow windfalls and attach it to their current pay-check periods so that it is distributed over the course of the entire year. However, depending on their spending, the pay-check amounts may not offset the taxation on current consumption. I suspect lots of people will arrange their consumption around their prebate distributions.

This, just like SS, and any other issue regarding money, is average people are not good money managers. Give them windfalls and they spend it! It might be easier to just not tax retail food sales, or whatever other essentials which make up the prebate amount, and skip the prebate accounting...

 

Let's see if I can address these issues in a quick summary.

Food is a necessity but not all food is a necessity. For example lobster and porterhouse steaks cannot be considered a necessity. Some people have a distorted understanding of what a necessity is verses what a luxury is. I haven't done an actual analysis but I would believe that a person could live on $5/day and could eat out and get more than enough food for $10 a day (hit the local lunch buffet and its "all-you-can-eat" for $9). I personally spend about $600/mo at the market and it would be silly for me not to pay taxes on that because I live like a king when it comes to eating. Food can be a luxury and the costs for the "necessity" of food are included in the prebate. A poor person might decide to grow some food, even when living in an apartment, and could "pocket" that prebate money to spend on other things.

The government cannot invest related to Social Security for two reasons.

First of all it doesn't have any funds to invest. Currently both Social Security and Medicare have more expendatures than revenue. They are still able to make payments because they have obligations from the general revenue based upon loans made from the Social Security Trust fund but those will run out sooner than projected. The FICA/Payroll taxes that support Social Security/Medicare are already draconian and I don't even see Republicans or Democrats making any move to increase the tax even to cover current and future revenue shortfalls.

Next is there couldn't be a worse investment entity. It would introduce political corruption into the free market that would be staggering. Many viable investments would be prohibited simply for political reasons. As an example I could see any investments in corporations engaged in stem cell research being prohibited. Additionally I could see bad investments motivated by politics such as a stock purchases in corporations like Solyndra that was facing bankruptcy and the US government still loaned it over $500 million. A simple look at the US government's debt to income ratio which is over 1000% reflects the incompetence of the US government related to financial affairs. Our government couldn't even do simple addition when it redefined our "lawful" money in the Gold Bullion Coin Act of 1985 considering that a $10 American Eagle contains 1/4 ounce of gold while a $50 Gold Eagle, which should have five times as much gold as a $10 gold coin, only has 1 oz of gold. A $10 American Eagle should have 1/5th and not 1/4th of an ounce of gold content.

Diversified and age adjusted personal retirement accounts don't have many investments in stocks as a person nears retirement age. For example, I'm 62 and I only have 20% of my investments in stocks. When the recession hit is 2008 I actually made a lot of money "on paper" because of my gold and silver assets. The 2008 recession was severe though and for the average 401K plan they took a hit "on paper" in both 2008 and 2009 but by 2010 they had recovered and reflected an average 10-year return on investment of over 8%. Of course someone still 10 or 20 years from retirement wouldn't even notice the 2008 recession.

BTW I've used the $5000/mo projected ROI for privatization of Social Security because it uses the most conservative of estimates. With any optimism at all that $5000/mo quickly becomes $15,000/mo in retirement income. It only takes a few more dollars and/or a couple of percentage points in average ROI over 45 years for a dramatic difference in income. A person could invest more than just mandated contributions. For example, a 5% employee and 5% employer for a total 10% annual investment 401K type privatized investment plan could be supplemented by an additional 5% by the employee. This creates a 15% investment annually and the ROI difference is literally staggering. Try running the numbers on investment calculators to see the difference.

Dsiposable income does increase if for no other reason than FICA taxes, which are very draconian for low income individuals, are not withheld. For middle income workers and high income households no income taxes are withheld or owed as well. A person earning $20/hr actually receives a payroll check for $800 at the end of the week for 40 hours worked. They're not receiving that now.

In a very hypothetical sense the Prebate does reflect "income distribution" because as a percentage of gross income it is greater for the poor than for the wealthy but everyone gets the same prebate. While everyone pays the identical tax rate the taxes are offset to a greater degree for the poor than for the wealthy but everyone is treated identically. Of course the top 5% of income earners will pay a lot more in dollars with consumption taxes than the poor because they consume a lot more but they will only receive 5% of the prebate dollars. Some could call that wealth redistribution because the prebate is per household but spending is not the same for all households. Because the prebate for households and the tax rate are the same it is fair for everyone and really can't be considered as wealth redistribution.

 

The original proposal by ATR is a viable solution. The revised versions are mediocre.