FairTax Prebate Confusion

The following is a document I found while researching the FairTax Prebate and thought it deserved some recognition. The dates and Bill numbers were outdated, so I updated those to reflect the FairTax Act of 2011 (HR-25/S13). Unfortunately, I don’t know the original author, so if you do please post it in the comments and I will give credit in the post.

In reading some of the comments to the Tax Reform Panel and on the AARP Policy Site, there seems to be some confusion about who receives the prebate under the FairTax legislation HR-25, S13.

The way I understand and read the prebate section of the bill is that every individual with a valid Social Security number will receive a prebate for the sales tax on necessities, up to the poverty level as determined by the Department of Health and Human Services.

It doesn’t matter if the individual earns $1,000 a year or $10,000,000 a year.  The idea is that nobody should pay taxes on the basic necessities of life.  The purpose of the Qualified Family is to determine the poverty level for a group of related individuals.

  • A Qualified Family of one would receive a prebate based on the poverty level of an individual.
  • A Qualified Family of two would receive a prebate based on the poverty level for a couple.
  • A Qualified Family of four would receive a prebate based on the poverty level for a family of four.

There is no determination of the income of those individuals to determine if they should receive the prebate.

Another comment I’ve seen has to do with the burden of having to register every year for the prebate and the administrative cost of issuing the checks or payments.

If you compare these to the current annual filing of IRS forms and their administrative costs, the registration is cheap and easy.

Today many people don’t file their tax return because they don’t have the money to pay their taxes or just don’t want to.  You can be sure that most individuals and families will file their annual registration for the prebate.

I’ve seen the problem stated that people move frequently and change jobs so it will be difficult to keep track of where a Qualified Family might be to send the check.  Lets put some responsibility on our citizens and give them enough credit that they can notify the government as to where to send the check.  There is also mail forwarding and direct deposit.

I read a new comment today that was interesting.  All people who worked hard to put some money away for their retirement in 401Ks and IRAs should pay an income tax on the money they saved and then pay the FairTax sales tax when they spend the money.  Talk about double taxation.  I don’t think the writer understands that the average amount most families have in an IRA or 401K is in the thousands to tens of thousands of dollars not hundreds of thousands or millions.  The reason there are tens of billions of dollars in these accounts is because hundreds of millions of Americans have sacrificed to save.  If they had spent the money instead of saving they would have paid income taxes on it.  If they spend it after the FairTax is enacted they will pay the sales tax.  Don’t punish those that sacrificed to save some money for retirement and tax them twice.  I also think the 11.5 trillion dollar amount stated as being in these accounts may be a little over stated but I’m not sure.

Here are some potential problems I see that should be addressed when HR-25, S13 is debated and passed:

  1. A married couple could file as two individuals using different addresses and say they were separated even if the were living together. Two individual prebates is a larger payment than the prebate for a Qualified Family of a married couple with no children.  I don’t know how to stop this fraud unless the prebate for up to two adults was based on an individual bases and not the poverty level of a Qualified Family size of two.  The poverty level for a Qualified Family size of two is like the marriage penalty in the current income tax, a married couple gets a lower prebate than two individuals living together.  It should be one amount for each adult, up to two, and an additional amount for dependent children.  A married couple with no children should receive the same prebate as two individuals living together and a married couple with children should get an additional prebate for each child using the poverty level for their Qualified Family size.  In essence an unmarried couple that is living together and decides to marry should not pay a tax penalty for getting married.  Gay, Lesbian and unmarried couples living together, all receive 2 individual prebates but a married couple receives a smaller prebate.  Not Fair, lets make the FairTax fair from the start.
  1. Congress could set up enterprise zones with no tax to promote growth in a certain area and dilute the tax base.  This should not be allowed under the FairTax, the broad base is what makes it work.  There should be no exceptions to the FairTax including internet and mail order sales!  If the states piggyback on the federal sales tax this should make them happy.
  1. Congress could continually change the rate of the tax.  A 2/3 vote should be required to change the rate of the FairTax.

I see no problems in the transition to the FairTax.  There is no reason to make the transition complex with all kinds of special provisions, exceptions and exclusions, as congress and lobbyist will undoubtedly try to do

Between the dates HR-25/S13 are passed and December 31, 2012 all states, retail sales outlets and the U.S Treasury put the software in place to collect the sales tax and remit it to the federal government.  The states also determine if they are going to follow the federal sales tax model or devise their own taxation scheme.  I don’t think any special rules should be setup for existing inventory or anything else.  Current inventories will deplete in a short period.  All capital expenses being depreciated are irrelevant because corporate income is no longer taxed.

  1. Within 30 days of passing the FairTax the legislation repealing the 16th amendment is sent to the states for ratification.
  1. All citizens eligible for the FairTax prebate register between the date the legislation is passed and December 1, 2012.
  1. On December 31, 2012 all withholding of payroll and income taxes stops and final quarterly payments are made.
  1. FairTax sales tax collection starts January 1, 2013 and the first prebate checks are mailed.
  1. Final tax returns are due for all filers by April 15, 2013, the last income tax day, for the period ending December 31, 2012.  Companies and corporations with a fiscal year that is not on a calendar year file a return for a partial year through December 31, 2012.

Simple, fair and straight forward, don’t let Congress and Special Interest lobby groups muck it up.

Now I would like to address a couple concerns that the Author had:

1. The prebate for a single person with 0 (zero) children is $209 per month. The prebate for a couple with 0 (zero) children is $417 per month; the difference being $1 (ONE DOLLAR). Does anyone really believe that someone would go to the trouble of doubling their work (one prebate versus two) for a mere dollar? Astronomically unlikely, but even if they did, whoop-de-doo!!

2. The FairTax rate cannot be changed as simply as some might suspect. First, the FairTax Act of 2011 explicitly describes how the FairTax rate is calculated in the year immediately following its imposition and in subsequent years to follow (HR-25, SEC 101). Second, under the FairTax Congress themselves are also considered “taxpayers”, so raising our tax rate is effectively raising their tax rate as well – something that could not be accomplished under the current income tax system. And third, it would be political suicide for any member of Congress to randomly vote to raise the FairTax rate.

Original Document Link: http://govinfo.library.unt.edu/taxreformpanel/comments/_files/FT3Gen.doc

Staunch FairTax Supporter

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Posted in FairTax Act of 2011, HR-25, Prebate, Tax Reform
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