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Comment by icegreentea | Hacker News Reader

You know that Herman Cain was widely ridiculed for exactly this line of thought? The tax code is certainly too complicated, but why should it be simple? It should be complicated to reflect the complications and nuances of our societies. Enough of us obviously think that there should be special cases for certain situations that special cases will arise. And democracy will see to that. Which I guess is why you'd have to be King to make it stick. But even then

And why set the threshold to 3rd graders? They aren't the ones filling out taxes. Maybe high school seniors would be a more nonsensical threshold.

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"You know that Herman Cain was widely ridiculed for exactly this line of thought?"

What's your point? The current system is widely ridiculed, too. Hey, I'm ridiculing it now.

"It should be complicated to reflect the complications and nuances of our societies. Enough of us obviously think that there should be special cases for certain situations that special cases will arise."

I agree, special cases will arise. But I think we have to aggressively limit the number of those. I'm suggesting a way. If there is a hard limit on the length of the tax code, there will come a point when to add Special Case X, you have to delete Special Case Y.

Law is like code; indeed, it's called a legal code. One of the best predictors of how many bugs your code will have is simply how much code there is. Our legal code is massive bloatware, and it's buggy as heck.

Want a working tax code? Make it short.

I thought Cain was ridiculed largely because his tax plan a) would substantially shift the burden of taxation to the poor and b) sounded like something that came out of SimCity. The idea of a simplified tax code in itself doesn't get ridiculed, only ridiculous ideas for how.

The FairTax actually does the opposite. It taxes the wealthy at just under 23% without deductions and the poor at zero or negative. http://i.imgur.com/hAJ8G.jpg shows the tax rates based for a married couple based on the number of children. All rates approach 23% as income/consumption rises. It also taxes income/spending earned from dividends and interest the same as if they were earned from an employer which is how people like Warren Buffet pay less % of tax than I do.

Herman Cain's failure was not adding the prebate into his 999 plan (which was just a stepping stone to the FairTax). Without the prebate, yes much of the tax regression is gone, and the poor end up paying nearly the same rate as the rich until the FairTax is fully implemented. With that adjustment, it could make sense.

It doesn't tax the wealthy at just under 23%. It taxes consumption at 23% and offers a rebate. Wealthy individuals would end up being taxed substantially less than people whose income is labor based, unless they spend every cent of their incomes every year.

Please give me an example. As above, focusing on the $ spent, it is a more regressive tax system than today. Our current system encourages the wealthy to put their money in tax shelters and use interest and dividends to consume getting about a 20% tax savings. Good luck earning 20% in the market year after year. Low earners do not have this luxury and tend to pay higher rates rel. to true wages.

With the FairTax, if you are using ($tax spent / $wage earned). Then yes, this could be low for a high earner. Ex. a 200k earner saving 75% of their income would be paying an effective tax rate of 12% of consumption or 3% of wages vs 20% if they spent everything. Seems like a nice incentive to invest doesn't it? But eventually all savings get spent. If it's spent by their kids as an inheritance, then they will pay a higher effective rate of consumption than to their labor wage reversing the difference. Now if it's spent by the couple in retirement, the tax to wage calculation makes absolutely no sense because it is INFINITE % taxes to (zero) wages. Whereas focusing on consumption would be 10% tax rate if they keep the same lifestyle under the FairTax. See why focusing on the percent of consumption is important? Either way, the earned dollar will eventually be taxed.

One caveat... There is a disincentive to consume primary goods or first run items and buy used. This IMO is a good thing frankly as our natural resources continue to decline with no end in sight. For the wealthy, marginal increases are low but effective tax is high. So there is a much greater incentive to consume than to save for high earners than they have today (increasing market velocity) and a greater incentive to save for low earners. This will also shift investment power from richest of the rich to be more democratic as more small investors enter the market.

According to that graphic, the FairTax taxes consumption, not income. A broad consumption tax is regressive pretty much by design, since poor people spend far more of their income, percentage-wise, on taxed goods than rich people do. I don't see the prebate making a significant dent in this. Yes, it will help to an extent, but you'll still have middle-class people paying far more taxes, as a percentage of their income, than wealthy people.

Cain's failure was basing so much of his plan on sales tax, which is basically impossible to make progressive.

The prebate absolutely makes a dent in the regression. And greater the prebate, the less regressive. The FairTax currently uses the prebate based on poverty rate. A simple change (or compromise) of changing this to say double the poverty rate, and to remain tax neutral the 23% might need to go to 24-25%. This would change the graphic to look even more regressive. How about triple the poverty rate? Whatever this number is, below it, one receives more prebate $ than they spend in federal taxes. As i mentioned below, looking at the % (tax paid / wages) in the FairTax system doesn't make sense. You must focus on the consumption.

Studies have shown, most wealthy people will pay more tax in $ than they do today under the FairTax, and the poor will pay less tax $ than they do today. This is essentially the definition of a more regressive tax system. Not to even mention the other benefits like the time value of money and the international labor competition.

You appear to be using the word "regressive" to indicate both tax regimes where the poor pay more, proportionally, than the rich (which is what the word means in this context) and tax regimes where the poor pay less than the rich (which is called progressive). This is making it extremely difficult to understand what you're trying to say.

Why doesn't looking at tax / wages make sense in this system? The correct metric used to evaluate the fairness of a system doesn't depend on the system. It makes little sense to me that I would get net money from the government if I made $10 million in a year but managed to only spend $2,000 of it on taxable items (perhaps while spending the rest on non-taxed items like used houses and such).

Sorry for making the mistake, I would edit if I could.

You can metric the system however you want. It is just out of context under the FairTax to focus on labor wages. Warren Buffet only makes like 600k in "wages" and just pays the capital gains taxes on everything else he cashes out (or consumes). That's why is tax/earnings is so low. But calling the FairTax progressive by saying the rich who save/invest will be paying less is short-sighted. One can just as easily do this exact same thing with tax-deferred accounts or other complicated financial engineering today.

Yes, even if you make $10MM labor wages in a year, you will still get the prebate. Adding X,000 to your $10MM income will barely make a dent, but all citizens over 18? (I believe) will receive the prebate, similar to a social security check, and this can have significantly positive effect on the lower income bracket--especially coupled with the lack of withholding.

By the way, to say one can only spend 2,000 on taxable items is impossible. Even if you simply look at the "essentials"... food, clothes, utilities, insurance, & transportation, you will easily top $2k in taxable spending but that isn't the point.

If you spend all your discretionary income buying used homes, that is certainly your prerogative and would owe zero upfront tax on that purchase. You could just as easily put the money in a 401k type investment or any other tax-deferred account today and get the same effect. The current system uses a tax deduction and then the net income is what is used to calculate your tax. The difference though, is when you cash out that investment, you will pay the standard rate on the principle, but only 15% on the capital gains. Does that make sense? In the FairTax you will pay the standard rate on both the principle and the capital gains. The complexities would be gone. I think the bill itself is only around 100 pages. The high-priced tax accountants and lawyers won't be able to finagle P&L statements, establish irrelevant corporations to funnel money through, and lobby for special deductions.

I'm not focusing on labor wages. I'm focusing on "income", which is, as you state, not the same thing.

I'm not trying to compare the FairTax to the current system. I'm simply stating what the FairTax proposal does. I don't understand how it's short-sighted to say that rich people who save/invest will pay less. It's a simple fact. One of the problems with regressive taxation is that wealth tends to snowball and this can be bad when the tax system perpetuates that effect. Why should a poor person pay X% on half his income because he has to spend half his income on taxed necessities, while a rich person pays 0% on most of his income which he spends buying up rental properties to rent to people like the aforementioned poor person? I'm not trying to say that investment like that is inherently bad, simply that this particular arrangement makes it very difficult for the poor person to get ahead, and much easier for the rich person to get even richer.

I'm not actually attempting to compare this system to the current one at all, so your continued criticism of the current system is off-base. I'm simply stating that the FairTax is fairly regressive, a feature inherent is essentially any system based heavily on sales tax, and this makes it deeply unattractive to me and a lot of other people.

I use the current tax system, because that's what I have to compare it to. The only other significant alternative is the Flat Tax, which is more regressive than the current system. Also, you say it is unattractive, but offer no alternative or rebuttal.

Yes, the top wage earners could pay less % in tax to their income than they do today, because there are more tax-deferred investment opportunities available. But again, tax-deferred investments, are simply that... deferred. The rental income would be spent unless it is re-invested, but again, no one saves into infinity and you have that same opportunity today if you really wanted to. Now, I haven't seen evidence of a income snowballing effect as you say though, but I would like to see it. In fact there is little debate on the overall economic impact, like one study that showed a 10% increase in GDP, real wages, and total employment plus a doubling of domestic investment after 5 years.

Again I ask for examples and data to discuss and look at. Studies using the Gini coefficient for example which is the most popular statistic of progressivity, show the FairTax as highly progressive. That number also rises even more if you raise the prebate base. We can certainly debate the merits of such a progressive system, but calling the FairTax "fairly" regressive because you believe it so based on your impression of sales tax systems shows that you are not well informed. There is study after study that shows that it is the most progressive tax system proposal.

BTW, an influx in rental home speculation will only drive rental prices down as more rental supply enters the market. Which is good for the lower income brackets.

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