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Under the proposed Fair Tax, we would no longer have an income tax and instead move to a federal sales tax. On an ongoing basis this results in approximately the same tax revenue, in theory of course.

If we would sign the Fair Tax into law, to start on January 1st of 2015 for example, what would stop the average American (with the capacity to do so) from going out in December of 2014 and buying/building the biggest house that they could afford? By buying/building a house before the Fair Tax goes into effect they avoid sales tax on the purchase, but the following month the tax on the income used to pay the mortgage goes away, so they have effectively purchased the house tax free. This could apply to other large purchases as well, like cars, but it seems like homes would outstrip the contribution of everything else.

Is this a major concern with implementation of the Fair Tax, or is it assumed to be too small a loss to worry about and just a cost of the switchover? If the former, what proposals are there to deal with it?

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This is a hypothetical question about a proposed change to U.S. tax law and its impact on government revenues. It is not a practical question about personal finance. This may be a better fit at politics.stackexchange.com. –  Chris W. Rea Aug 8 at 12:48
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@ChrisW.Rea - even so, I answered, and if the question is about to be closed, I'll migrate to the other board. I think there's room for brief Q&A that are a bit outside the scope, but once they turn political, they need reigning in. I stayed away from politics. –  JoeTaxpayer Aug 8 at 13:30
    
My apologies; I did not mean to be political at all. I was just trying to understand the proposal in question and thought this would be the place for it. Though I can see now how it may not be the right fit here. –  Nicholas Aug 8 at 13:54
    
The implementation hump is a constant problem with legislation, particularly taxes. Sort of like the flurry of drunken parties on the last New Year's Eve before the Volstead Act (Prohibition) became effective. –  NL7 Aug 8 at 14:56

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Your question can be generalized to address any significant changes in the tax code. The recent series of changes to the estate tax, for example, offered a year in which dying produced an unlimited exemption for your estate. 2010 will be remembered by tax geeks at "a good year to die."

To the exact point you mention, home purchases. This isn't as simple a purchase as say, the big TV. If my desired $2000 big TV purchase will save me a 23% tax in December vs January, there will be a brief acceleration of such purchases near year end. The house, not so simple. The average American with the ability to buy a house right now is not average. He/She is either a high earner looking for the second home/ vacation home, or looking for the home anyway. To be clear, the number of people for whom the purchase wasn't planned, and both the desire and means to accelerate the purchase into December of this year is insignificant compared to the natural sales that will occur.

The churn of existing homes might rise a bit, but new home construction is a much longer cycle. My own house was 6 months from breaking ground to occupancy.

The brief answer becomes "nothing." A small number of incremental sales will happen, but it's not likely that congress would pass any rule that made the tax retroactive to an earlier year to discourage this avoidance. (Note, my edit to your question title, 'evasion' is illegal. 'avoidance' is encouraged.)

Last - In my opinion (as a numbers guy, the true chance is probably 10% or so) , there is zero chance of this plan passing. It's an interesting proposal, but there's too much opposition for it to have even a small chance of becoming the new tax code.

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Thank you. I did not realize this was off topic and appreciate your answering. I guess my question was more geared towards what the current plans proposed to do about such a situation, and I think you answered that. –  Nicholas Aug 8 at 13:53
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The "23%" number often cited by proponents would actually be considered "30%" by the normal reckoning of retail sales taxes. The difference comes from counting inclusively versus exclusively. Most people think of a sales tax as "the extra 7% I pay on my purchases" but they purposely frame it as "the portion of my purchase price that goes to taxes." It makes the number sound deceptively smaller, probably because most US jurisdictions start seeing significant retail sales tax dodging past 10%. –  NL7 Aug 8 at 14:58

Short answer: Yes, if the Fair Tax was passed, this would create an incentive for people to make purchases before the new tax went into effect. And, I might add, to defer income until after it went into effect. Like at my job we typically get a Christmas bonus on December 31 each year. If the Fair Tax was going into effect on January 1 and so the income tax also being eliminated as of that date, I think all the employees would be asking the boss to delay our Christmas bonus by a day or two to avoid the income tax.

As JoeTaxpayer says, houses are something of a special case as you don't just decide to buy a house, run out to the "house store", and pick one up. I think most people take months of looking at houses, negotiating with the seller, and going through all the paper work with the realtor and the bank.

Note that under the current Fair Tax proposal, purchase of an existing home, as opposed to a new home, is not taxed. The Fair Tax only taxes sale of new items, not resale of used items. There is no Fair Tax on used cars, yard sales, Goodwill, etc., and that includes houses. (I just checked fairtax.org on this point.) So for people buying an existing home, it would make no difference.

I WOULD certainly expect there would be a surge in sales of other big ticket items -- cars and televisions and furniture and the like -- in the couple of months before the new tax went into effect.

Any change in tax laws creates this kind of situation: incentives for people who will pay higher taxes under the new law to do something sooner, and for people who will pay lower taxes to do something later. A drastic tax change like this would create bigger issues than most tax law changes. One could argue that there should be some sort of transitional period where the old system is phased out and the new system is phased in. I think the people behind the Fair Tax are generally opposed to such a plan, though.

RE JoeTaxpayer's comment that there is zero chance of it passing ... It would be a dramatic change, and getting a dramatic change made is difficult. But big changes have been made in our laws in the past. Creating the income tax was a huge change, and yet it was done. Prohibition was passed and repealed, no reason why the income tax couldn't be passed and repealed. I don't see the impetus to get a law like this passed in the next few months or anything like that. But if, say, our next president was for it, the situation could change dramatically.

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I wasn't able to find the reference to only new houses getting taxed this way. If you can add a link, it would be much appreciated. It would seem this type of tax would put pressure on builders and on the relative pricing of new vs existing houses. An unintended consequence that would have to be considered when the time comes. –  JoeTaxpayer Aug 8 at 15:21
    
With a VAT, it would only apply to new purchases. I'm not sure what all the rules would be for improvements if you are finishing your basement yourself instead of hiring a builder. In any case, if it wasn't a tax on value added, then each person would have to spend an additional 30% to move from one house to another unless they implemented trade-in rules similar to cars. If the tax did only apply to new homes, then it would boost the value of existing homes until new construction could be competitive. –  Nathan L Aug 8 at 16:11
    
@Jay "Note that under the current Fair Tax proposal, purchase of an existing home, as opposed to a new home, is not taxed." This would be a perfect answer to the question. Could you link to where you saw this? I understand that houses aren't easy purchases, but I disagree that many people couldn't do so if it meant they essentially added 20% onto their income for the next 30 years. –  Nicholas Aug 8 at 17:26
    
@JoeTaxpayer See 162.144.59.223/~fairtaxorg/wp-content/uploads/2014/07/…. Search for the paragraph beginning "Finally, the sales of existing homes ..." And yes, that would presumably have an impact on the relative desirability of new versus existing homes. Supporters of the Fair Tax have discussed that at length. Personally I haven't examined their arguments or otherwise studied the subject to have much of an opinion. –  Jay Aug 8 at 19:56
    
@NathanL I don't claim to be an expert on the Fair Tax, but as I understand it: If you remodeled your basement, you would have to pay tax on any materials you purchased, and on the services of any contractors you hired. But once you've paid that tax, the work becomes "existing" and not subject to any additional tax when you re-sell the house. The idea is that every item is only taxed once: At the time it is first sold to a consumer. Sales of used merchandise are not taxed. –  Jay Aug 8 at 19:59

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