To be fair to VAT advocates (of which, I most definitely am not), you would pay no tax on withdrawal because the VAT would replace income taxes.
What I want to know is how we transition to such? Would all tax-deferred savings now simply become tax free? Sounds like a massive windfall for the rich.
Last I knew the VAT in Germany was 19% and the country has an income tax.
How long would we have no income tax?
Every ounce of it is a massive windfall for the rich. That is why it is an idea.
That’s currently true for any sales tax in the US.
Presumably, without income tax people would have more money to spend so more control over how their individual choices for tax contributions.
Obviously the pool of deferred tax savings would need some special rules about how to tax the withdrawals. Maybe leave income tax rules in place but only for that income?
People earning $7.25 before taxes currently would have roughly $6.25. With this idea of possibly 30% instead they would have $5.00 a bit of change.
People earning $15 currently about $12 after taxes instead would be at $10.50 roughly.
People earning $200000 and spending on colleges for their children? No sales tax. Retirement funds to sock away no taxes. But if they spent $90k some 27k would be VAT. Quite the good deal.
Regressive taxes are bad for the economy. You will see higher inflation. You will see slower economic growth that typifies all supply side econ ideas. We would see factories leave for Vietnam and India.
So with that in mind the couple making $200k might expect layoffs, inflation, much poorer job prospects, a harder time for their kids to get a job, higher interest rates, a rough retirement with fewer funds…back to if he or she is 55 lay them off.
As I said with anything supply side econ you need to factor in the failure rate to the US economy much more seriously. Meaning we would add a lot to the national debt load.
Yeah it could work…on another planet.
That is not really that simple. You pay taxes on money you did not put in those accounts. That can be a considerable amount of tax money. Your income all comes to or from the same earned pool of funds. It is taxed. You just get a break on some of it when using those accounts.
That can be a practical impediment to change. During the '30s FDR wanted to implement income tax withholding instead of people writing a check once a year. However, the first year of such a system would mean that people would pay double, a check for the previous year plus withholding for the current year. To get around that, the Feds declared an income tax holiday and checks were not required during the transition year.
DB2
How do we transition?
Much more importantly why at all would this be good for the US economy?
If you can state one valid reason it would be good for our economy please by all means?
I know I can knock down that idea. I know I can dump a lot of reasons it would be a horror for the US economy.
Listen the track record for supply side economics is so bad no one ever wants to mention it. Mentioning it is a kiss of death for those still trying to screw it all up for the country to give a gift to the rich. The rich dont want this. They need a thriving economy. Most of them know the difference.
It’s bad to “burden” the rich. Jamie Dimon struggles to live on $80M/year. It is wrong to make him pay more tax than a burger flipper at Micky D’s, unless he wants to pay more tax by buying more expensive stuff.
Steve
Except this “sales tax” is meant to replace income tax.
The real life impact on retirees would be economically crushing.
Pay ordinary income tax rates on your RMD and then turn around and spend 30% sales tax on everything you need to spend money on.
While technically it may not be double taxation, in reality that’s exactly what it is.
And if you say let the retirees take RMDs without paying income tax, then the Roth folks will be screaming bloody murder. And rightly so.
This plan is ill conceived and disastrous for poor and middle-class retirees, those close to retirement, and the economy in general.
It is worse for the wealthy. The nation’s relationship economically with the wealthy is as customers and savers at banks. It destroys that relationship. The rich do not have to be rich without the rest of us chipping in.
If there is no income tax, would there be income tax on RMDs? I’m thinking not. Additionally, old phartz tend to buy less, because they already have everything they need or want. That scheme would be a huge handout to people who have a big retirement account, and big investment income, and only buy a minimal amount of things like cars, clothing, and furniture…which is probably a major part of the plan.
Shift the costs of running the country onto the working middle class that is trying to set up a household: cars, furniture, nice clothes for work, clothes/school supplies for the spawn.
Steve
Steve, most seniors have to spend every dime of income they have in a given month.
College grads with student loans would be really hit.
BTW the 30% does not pay the government bills. The government would default immediately on the debt…or within six months depending on the timing.
So the income tax immediately comes back…
Great! Now my IRA has been converted to a Roth IRA. I can take it out tax free and just pay taxes on what I spend. Thank you.
If you’ve already invested in a Roth, sorry sucker. You already paid the taxes and now you have less money to spend then I do. I think the 10+ million Roth account owners might be pretty upset. They already paid taxes on the money before putting it in a Roth and now they have to pay a 30% tax on spending it.
This tax proposal has not been properly thought out.
It would drive millions into poverty and negatively impact corporate revenue.
Hate to break this to you…but it has been very well thought out. It just does not suit you.
And would bankrupt many people.
It would also have us default on the national debt. A kind of goal dont ya think?
That thought crossed my mind. For years, I have regretted not converting to a Roth when that option first became available. Now, the stack is a lot bigger, and the taxman would bite me whether I convert to a Roth now, or keep taking modest distributions from the conventional IRA, as I have for a few years.
Steve
Yes indeed. Obvious who it favors: those with a lot of surplus income, those with a lot of cap gain and investment income.
I bet the people who work for wages still see FICA tax taken out.
Steve
Spend on what? They have furniture. They have appliances. Many don’t drive as many miles as they did when working, so their car lasts longer. My elderly aunt put 1,000 miles/year on her car.
What would the elderly spend on, that would be subject to a sales tax? Would apartment rent be taxable? Utility bills aren’t that steep, especially in an apartment. Food? Meds? Don’t need nice clothes to wear to work.
I’m retired, and spend about $15K/year, mostly food, fuel, utilities, condo fees and property tax.
Steve
A VAT is not a sales tax. It is right there in the acronym, “value added.” Every time something has value added to it, it is taxed - so even if you are not personally subjected to a tax, you may still pay for it based on up-stream taxes.
Nearly everything you spend money on would have cost added. Your insurance? VAT (actually IPT), Food? VAT. Utilities? VAT, Rent? Depends*.
*One such example:
Do You Charge VAT On Rent? | Commercial & Residential Property | UWM.
FICA…ouch!
$7.25 minus FICA is about $6.25…minus just over $2…leaves them with $4.2 an hour. So generous. Such wonderful human beings.
From what I see, it is not a VAT. Remember the narrative that has been propagated in Shiny-land for 40 years “must not burden the JCs”. It would be a burden for the “JCs” to track VAT. Much easier to give the price to the end user a 30% bump.
An independent analysis of a similar national sales tax in 2011 “found that, on average, most income groups would pay more tax than they did under the federal tax system at the time — except the top 5 percent of earners who would see a tax cut.”
https://news.yahoo.com/kevin-mccarthy-disavows-30-percent-071657725.html