This Grassroots Corner continues a series on dealing with hostile questions and comments that people may raise about the FAIRtax. Many of these suggested responses will be good comebacks for you to have in your pocket when you need them. Some of these suggested responses can be too long to insert into an actual conversation. You may want to boil them down to where they'll be more useful when you're talking face-to-face with someone attacking the FAIRtax.
This week, we take on the criticism that “I paid taxes on my income all my life. Now you are asking me to pay tax in retirement on consumption with my after-tax dollars.”
We hear this complaint from mature citizens who invested heavily in Roth IRAs. Roth IRAs are savings accounts funded with after-tax dollars, i.e., dollars on which you have already paid income tax. Investment returns earned on a Roth IRA are not taxable, and since it was funded with after-tax dollars, there is no tax on withdrawals of the contributions.
So, the argument goes that the money invested in a Roth IRA was taxed when it was earned and now the FAIRtax is going to tax it again when it’s withdrawn and spent. That’s double taxation and that’s not fair.
First question: “Do you really think there will never be an income tax on Roth IRA withdrawals? Think again!” In 1936 the government sold us Social Security with a promise that Social Security benefits would never be taxed. In 1983, as Social Security was going broke, the law changed. Now Social Security benefits are taxable up to 50 percent for single taxpayers with incomes over $25,000 and jointly-filing taxpayers with incomes over $32,000. Don’t forget that the contributions into Social Security during the earning years were made with after-tax dollars.
So, if the Federal Government broke its promise for Social Security benefits, what makes you think it will keep its promise for Roth IRAs? After all, Uncle Sam is going broke and is constantly on the hunt for new sources of revenue.
Most seniors have made their big-ticket purchases by the time they retire. For the most part, their houses and cars are paid for. Seniors consume less in retirement, giving the FAIRtax less of a bite.
For a senior couple, consumption up to arguably $80,000 per year (which in much of the country is a comfortable level) will bring little or no change to their lifestyle under the FAIRtax. Why? First, the prebate completely un-taxes their spending up to the poverty level.
Then the FAIRtax adjusts Social Security benefits to cover any increase in the cost of living due to the FAIRtax.
Much “consumption” under the FAIRtax involves no tax. Under the FAIRtax, there is no tax on the purchase of used goods. There is no tax on savings deposits, charitable contributions, local tax payments, tuition (yes, seniors do go back to school), and loan repayments.
The FAIRtax eliminates the embedded costs of the income tax system that are hidden in the prices of everything we buy. The competitive pressures in a free-market economy will ensure that these savings get passed on to consumers.
Even in retirement, most seniors today still have to pay income tax. Many have pensions, 401(k)’s, investment income and of course Social Security. The income tax potentially hits all of that income. Replacing the income tax on that income with the FAIRtax is fair.
Under the FAIRtax, seniors can pass their estates to family members tax-free. The Biden Administration is about to raise the estate tax rate, lower the exemption amount, and remove the “stepped-up basis.” Under those provisions, some Americans will have to sell their farms and businesses to pay the estate tax. The FAIRtax eliminates the estate tax and lets heirs keep their inheritance.
The FAIRtax eliminates the capital gains tax. This means that seniors who sell their houses in order to downsize can keep 100% of the profit from the sale of their houses—which can be substantial for houses that have been appreciating in value for decades.
Under the FAIRtax, seniors who invested for their retirement will see faster increases in their portfolio values as companies start to replace tax decisions with business decisions.
And fellow Social Justice Warriors, let’s be blunt. Today’s seniors profited from decades of wanton deficit spending by Uncle Sam. When the bill comes due, today’s seniors will not be around to pay it. Their children and grandchildren will pick up the tab. Professor Laurence Kotlikoff has called this singularity “inter-generational child abuse.” As long as the FAIRtax does not hurt seniors (it doesn’t), it is fair to ask our seniors to pay something for today’s government costs.
As the current crop of seniors passes on under the FAIRtax, the first-blush allure of this criticism shrinks. The FAIRtax is fair for everyone, including seniors.
I would love to hear from you about how to squeeze this explanation into a soundbite.
Happy Flag Day!
AFFT Grassroots Coordinator & Secretary
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🇺🇸 CPAC Finally, save the dates: February 24-27, 2022 (probably), for either Orlando, Florida, or Washington, D.C. (National Harbor, Maryland). Plan to be at the CPAC (“Conservative Political Action Conference) annual convention. The FAIRtax Guys were there this year and say next year we need to turn out in numbers. You don’t need to be a conservative to attend and help the FAIRtax.