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Patricia Johnson: Wealth through Taxation

Wealth through Taxation

By Patricia Johnson

J. Dennis Hastert is the current U.S. Speaker of the House of Representatives and third in the line of succession to the presidency. His book ''Speaker: Lessons From Forty Years In Coaching And Politics'' was released August 4 and promotes the elimination of the current U.S. tax system in favor of a flat tax, value added tax (VAT) or national sales tax. (click here) quotes Hastert as saying “ he expects the bold move [replacing the current income tax system] to be the centerpiece of President Bush's domestic agenda if he is elected to a second term.”

Without a doubt, something needs to be done about the U.S. income tax system as can be determined by the following chart indicating decreased IRS collections each of the three years that George W. Bush has been in office.

Click for big version

Source: IRS Data Book, FY 2003, Publication 55b.

A breakdown of taxes collected follows – in thousands of dollars.

*2002 includes revised totals.
Detail may not add to totals due to rounding.
Source: IRS Data Book, FY 2003, Publication 55b.

Let’s review at least one of the tax categories – we’ll use Gift Taxes.

The amount of gift taxes collected by the IRS has basically been cut in half under this administration from the period of 2001 through 2003.

Click for big version

Source: IRS Data Book, FY 2003, Publication 55b

How did this happen? Why did Gift Tax collections decrease by almost two billion dollars within a two year period?

While you were waiting for your $300 “advance” tax rebate in the mail, the rich and famous were getting all the benefits of table 5 (follows). The annual exclusion for gift taxes increased to $11,000. The lifetime Gift Tax exemption increased from $675,000 to $1,000,000 while the tax rate percentage decreased, and is scheduled to continually decrease each year through 2010.

Table 5. Estate and Gift Tax Rates and Unified Credit Exemption Amount
Source: Summary of Provisions Contained in Tax Conference Agreement
For H.R. 1836

For those of us that aren’t familiar with the Gift Tax, here’s an example from the IRS.

Example 3.

In 2002, you give $25,000 to your 25-year-old daughter. The first $11,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $14,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $14,000. However, you do have to file a gift tax return. (click here)

Don’t let the fact that you “might” have to pay taxes on the $14,000 scare you away. If you’re married you can each give your daughter $11,000 and only have to pay taxes on the $3,000.00 remainder. Have more than one child? Not a problem, give $22,000 to each one.

Annual exclusion. A separate annual exclusion applies to each person to whom you make a gift. For 2002, the annual exclusion is $11,000. Therefore, you generally can give up to $11,000 each to any number of people in 2002 and none of the gifts will be taxable.
If you are married, both you and your spouse can separately give up to $11,000 to the same person in 2002 without making a taxable gift. If one of you gives more than $11,000 to a person in 2002, see Gift Splitting, later. (click here)

Strangely enough I don’t recall any mention of the increased Gift Tax exemptions, exclusions, or decreased rates. I remember hearing daily reports about the $300.00 rebate – except they forgot to mention it wasn’t exactly a ‘rebate’ on paid taxes, but an advance on the refund you would normally receive after filing your tax return for the following year.

Hastert’s comment that the centerpiece of Bush’s domestic agenda, if elected to a second term, will be replacing the current income tax system is probably more fact than fiction. Sooner or later people will begin to see that the tax cuts put in place by this administration did very little to help the poor and middle class, while providing tremendous benefits to the wealthy.

Right now there are two identical bills in Congress calling for the abolishment of all federal personal income taxes, corporate income taxes, payroll taxes, self-employment taxes, capital gains taxes, and gift and estate taxes. If passed, these taxes would be replaced with a national consumption tax of 23% [for calendar year 2005] on the retail sales of all new goods and services.

For calendar year 2006 and beyond the tax rate would be the combined Federal tax rate percentage, which is the general revenue rate [currently indicated at 14.91%], plus old-age, survivors and disability insurance rate [currently 6.2%] and hospital insurance rate [currently 1.45%] or a total of 22.56%.

S. 1493 – Fair Tax Act of 2003 (click here) was introduced in the Senate by Senator Saxby Chambliss (R-GA), with one cosponsor.

H.R. 25 – Fair Tax Act of 2003 (click here) was introduced in the House by Representative John Linder (R-GA), and now has 54 cosponsors, including House Majority Leader Tom DeLay (R-TX).

Will these bills pass? DeLay is flaunting FairTax as the right thing to do to generate economic growth, and help create new jobs as well as being the answer to the deficit and entitlement crisis.

If FairTax is passed, all taxes listed would be repealed, the IRS would be discontinued and you would never have to file another tax return.

Each month, in advance, you would receive an amount equal to the Department of Human Services’ poverty level [$9,310 for 2004 + $9,310 if married, +$3,180 for each additional person in the household] multiplied by the tax rate [23%], divided by 12.

For example – a married couple with two children would have an annual consumption allowance of $24,980 and receive an annual rebate of $5,745 paid in advance, in equal monthly installments of $478.75. They would then pay a 23% consumption tax on all retail sales of new goods and services, which would be collected by the individual states for the federal government.

There are basically three different types of taxing systems. A progressive tax is a tax that takes a larger percentage of income from high-income groups than low-income groups. Our current income tax system falls into this category [when you exclude deductions].

A proportional tax is a tax that takes the same percentage of income from all income groups. FairTax could be considered both a proportional tax, and a regressive tax.

A regressive tax is a tax that takes a larger percentage of income from low-income groups than from high-income groups. Social Security and Medicare taxes as well as property taxes are considered regressive taxes.

What FairTax does not include on the list of taxes to be abolished is the Excise Tax, which could also be considered a regressive tax. Excise taxes are the taxes on alcohol, tobacco, gasoline, diesel, tires, firearms, fishing equipment, telephones, and transportation by air, airfreight, wagers, and numerous other items. These items are all taxed at different rates. The excise tax for alcohol and tobacco is not collected by the IRS, instead they are collected by the Alcohol and Tobacco Tax and Trade Bureau and the Customs Service (on imports).

If FairTax is passed an Excise Tax Bureau will be set up within the Department of the Treasury to administer excise taxes on items not covered by the Bureau of Alcohol, Tobacco and Firearms.

Proponents claim the amount of taxes paid under FairTax is dependent upon the lifestyle chosen by the individual taxpayer. The more you spend, the more you would pay in taxes.

Individuals that will be hurt by FairTax are those that have the most to lose, seniors, the disabled, and the poor. Those that don’t pay taxes now, due to low incomes, will be forced to pay high consumption taxes for basic necessities, including food, housing, medical care, and prescription drugs. Spending money on maintenance drugs is not a ‘lifestyle” choice, when your life is on the line.

We’ve seen the results of two tax plans put into place by this administration that were labeled “fair”. Will the poor and middle class be able to survive another “fair” tax plan designed to put them deeper in debt?

FairTax may turn out to be just another bill that sits in Congress and gathers dust, or it may be the one that’s pushed through to change the entire income tax system in this country.


IRS Collections,,id=97168,00.html

Summary of Provisions Contained in Tax Conference Agreement H.R. 1836

© 2004 Patricia Johnson

Patricia Johnson is a freelance writer and CEO of Articles and Answers. Visit us online at

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