The end of Social Security as we know it?

As the rhetoric around our upcoming Presidential primaries heats up, it is important to pay close attention when candidates start talking about the Fair Tax proposal. While the simplification of the tax laws is very beguiling, there are major shortcomings in the Fair Tax proposal that can affect anyone nearing retirement, or currently retired.

Those nearing or enjoying retirement will find that the Fair Tax proposal implements a Federal sales tax of approximately 30% sales tax on the purchase of any new home, utilities, insurance, rent, medical expenses and more.

What is the Fair Tax? - The Fair Tax would replace all Federal income taxes related to corporate, business, estate, gift, and personal income, and the Payroll Tax (Medicare and Social Security) with a Federal retail sales tax of 30% on the sale of all services and new goods to provide the funding to run the US Government. Businesses do not pay the 30% Federal sales tax, but Federal, State, and local governments will have to pay the tax.

The proponents say the cost of new products and services in the US has embedded costs totaling approximately 23% of the sales price for administering and paying the appropriate business income taxes and employee payroll taxes, .i.e. a product selling for $100 has $23 of embedded costs.

In addition, they assume that businesses will reduce the prices of goods and services by the amount of their embedded taxes (up to 23%); substantially offsetting the 30% Federal sales tax applied to new purchases and all services, and may provide salary increases to their employees.

Unfortunately, the providers of goods and services will have no legal requirement to reduce prices and there are no procedures to determine what, if any, reductions are actually made.

It is also very difficult to arrive at the embedded costs for many products and businesses will be quick to say their pricing and costing process is a trade secret. Many items, such as oil, are substantially extracted or manufactured, and processed outside the United States with minimal distribution costs subject to the Fair Tax in the US.

To help offset the impact of the 30% Federal sales tax for low income families, the program will offer a prebate in the form of monthly checks to single people ($196), married couples ($391), and dependent children ($67). The Fair Tax will also eliminate all current tax credits such as the Earned Income Credit, Credit for child and dependent care expenses, Foreign tax credit, elderly or disabled, etc..

Will the Fair Tax Result in Reduced Prices for Products and Services? – The track record for reduced prices brought about by substantive changes in tax policy, free trade policies, technology, manufacturing, productivity improvements, and the global economy is a mixed record.

Pharmaceuticals -The US pharmaceutical industry has manufacturing facilities around the world, including Europe, Ireland, India, and China. Federal law prohibits Americans from purchasing those same prescription medications made by US corporations in foreign countries from the foreign country that ships them back to the US pharmaceutical companies, providing substantial protection from foreign pharmaceutical distributors.

The result of this “free trade” and “global economy” experiment, along with a healthy dose of Federal protection, has given Americans the highest prescription drug costs in the world and made the US pharmaceutical industry spectacularly profitable.

Technology Products and Jobs - The savings and increased profits gained from moving millions of manufacturing, service, and technical jobs that began in the early 1990s to low-cost sweat shops in Asia, China, India, and Mexico, cutting millions of US jobs, and dropping Federal Corporate taxes on overseas entities to 5% to bring back money deliberately left offshore went directly to the executives and investors and no one else.

When US technology corporations need more technology personnel, including engineering and IT professionals in US locations, they tell the US Government that they can’t find the skills in the US labor force and petition and receive H-1B visas to bring in computer technology and engineering specialists from foreign countries (primarily India and China).

The offshore employees are given temporary work visas, and paid less than comparable US employees (employees unhappy with their salary are well aware that they can be easily be replaced if they should ask a salary deemed inappropriate by the employer).

Health Care - The (free market) Medicare Advantage HMOs convinced the Government to give them approximately 12% (at a cost to Medicare of $7 – $9 Billion dollars) more per beneficiary) than Medicare spends on beneficiaries who opted for standard Medicare Part A and Part B coverage. The excess funding goes to marketing costs, administrative overhead, executive perks, bonuses, and retirement for the HMO executives, such as the $620 Million Dollars in various perks taken by the CEO of UnitedHealth on his retirement.

It appears to be intuitively obvious to the casual observer that most of tax savings, reduced costs and increased profits resulting from the elimination of the estimated 23% embedded cost will flow to the bottom line and be passed onto executives and investors, not the customers or employees.

Impact on Retirees - The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees now beginning to retire.

The Fair Tax elimination of the payroll tax (Social Security and Medicare) and Federal personal income tax also eliminates the very reliable cost-efficient system used to report earnings to calculate Social Security benefit and provides no way to conduct of audits of businesses or individuals that are violating the Fair Tax policies.

The Fair Tax requires retirees, most of whom have a Federal Tax obligation of less than 10% of their gross income and no payroll tax, to pay a sales tax of 30% on all their purchases of services and new products on all retirement income, including pensions, IRAs, 401-k, Social Security income (see note below), and Roth-IRA (currently tax free).

Note: Social Security is currently tax free for many retired individuals and couples, and only partially taxed for the rest.

Since the Fair Tax replaces the payroll tax and all Federal income taxes (corporate, personal, business, estate, etc.), the Fair Tax proponents will tell us that with Social Security and Medicare being paid out of the General Revenues from the Fair Tax collections, the Social Security Trust Fund with $1.8 Trillion Dollars of US Government bonds is no longer required. I doubt that they have plans to return of the Trillions of Dollars borrowed over the last twenty years and spent on non-Medicare expenses from the working Americans who provided the funds via the payroll taxes they paid.

Observations -The Fair Tax program is in essence a reverse “Robin Hood scheme”. It shifts the raising of tax revenues to finance the US Government operations from the business community (reduced to zero) and higher income Americans to the Middle Class and retirees. All Americans (children, working, and retired) will be paying a 30% tax rate on services and new products from the hospital bill from their birth to their casket when they die.

Do you really want to pay a 30% sales tax on your next new car, house or boat, or your insurance expenses? Do you think the cost of utilities, heating oil, or fuel (or anything) will go down by 23% of the current costs for these items? How will you or your family handle a 30% sales tax on all dental care, medical care and health insurance? How will you feel about selling a house, car, RV, or boat you purchased new and were advised that the resale value did not include the 30% Federal sales tax you paid?

Do you really think the large US and International corporations will be willing to reduce their prices by the amount of savings incurred by eliminating their (23%) embedded costs? These are the same corporations that threaten to move the corporate headquarters and tax home to Bermuda, Dubai, or the Cayman Islands when too many questions are asked.

The business community is very excited about the implementation of the Fair Tax because of the savings and increased profit they see coming that will be passed directly to executives, investors, and the bottom line. They support the Fair Tax because they expect not paying any business-related Federal Sales Taxes along with the elimination of payroll tax and corporate and business income taxes to provide a significant increase in profits that will not be shared with consumers via lower prices or employees via pay increases.

Far too many Members of Congress, the White House, and global corporations headquartered in the United States have watched and encouraged the transfer of millions of US jobs to Mexico, India, and Asia, participated in the decimation of defined benefit pension plans and retiree health plans, and ignored the increase in the Federal deficit from approximately 5 $Trillion Dollars to well over 9 $Trillion Dollars in the name of Fair Trade and the Global Economy. They are now looking to the Fair Tax proposal as a way to extricate themselves (but not us) from this mess and tax people from cradle to grave.

We recommend all Americans carefully listen to what all Presidential candidates say about where tax revenues will come from and how they propose to protect the integrity and security of all jobs and retirement income sources (Social Security, private and public pension plans, 401-k, and IRAs) to determine just who the candidate will actually representing and if they will represent your needs.