The FairTax legislation totally repeals the current income tax on Social Security benefits. The bill also adjusts the Social Security benefits indexing formula,commonly known as the cost of living adjustment or COLA, so that benefits increase to the extent, if any, that the federal sales tax results in higher costs to seniors. The FairTax ends all record keeping and income tax filings of any kind for seniors, totally insulating them from the high costs and abusive tactics of tax preparers.
Seniors (and their heirs) no longer need to keep tax records of any kind. Planning needs (and costs) are minimal and simple. There are no income tax filings of any kind. With this change, seniors no longer need assistance with complex forms, nor are subject to the devious and unethical tactics and expense of tax preparers. Nor are seniors the deliberate target of IRS audits – there is nothing to audit! Because income tax, payroll tax, and compliance costs are so high, manufacturers,service companies, and retailers pass them on by raising retail prices. If competition does not allow this, these companies reduce payroll costs, putting working seniors out of jobs. And the last place these companies can pay for the high cost of the income tax system is by reducing profits to shareholders, which hurts pension plans.The FairTax delivers a tax holiday on IRAs and other tax-deferred plans. The income tax imposed on investment income and pension benefits or IRA withdrawals is repealed. No form of savings or investment is taxed. Pension funds, IRAs, and 401(k) plans had assets of over $11 trillion in 2003.9 An income tax deduction was taken for contributions to most of these plans. All beneficiaries and owners of these plans expected to pay income tax on them upon withdrawal, but are not required to do so once the income tax is repealed. Roth IRA owners and post-tax retirement savers break even.
The FairTax ends gift and estate taxes, along with all of the unfairness to heirs and complex planning for those who earned the money.
Under the FairTax, gift and estate taxes are repealed. The need for small businesses and farmers to engage in expensive estate planning involving attorneys, complex estate freeze transactions, and expensive life insurance plans in anticipation of future estate and gift tax liability disappears. Heirs no longer need to sell the business or farm out of the family or borrow heavily, putting the business at risk, in order to pay the estate tax.
Repeal of the corporate and individual income tax, and the estate and gift tax has a substantial positive impact on the stock market.11 Those seniors who own stocks either directly or through mutual funds, individual retirement accounts, 401(k) plans or otherwise, experience significant gains. In 2001, one-fifth of seniors owned stock and/or mutual funds.12 In addition, unrealized capital gains that would have been subject to the income tax when realized are no longer taxed.The FairTax allows seniors to sell their homes and pay no capital gains taxes. The FairTax plan imposes a sales tax on newly constructed homes but exempts existing homes and other used property from any sales tax. Currently, equity payments on homes must be paid from after-income tax earnings (i.e., principal payments are not deductible). The purchase of existing housing is thus subject to the income tax. All owners of existing homes experience large capital gains due to the repeal of the income tax and implementation of the FairTax. Seniors have dramatically higher home ownership rates than other age groups (80.5 percent for seniors compared to 68.3 percent on average in 2003).13 Homes are often a family’s largest asset. Gains, which are not taxed, are likely to be in the 20 percent range.
