There is seemingly no end to calls for tax reform in the United States. This is not without cause, as the current income tax system could be considered as broken. The Internal Revenue Code is over 71,000 pages long, or over 24 megabytes. There are over 800 IRS forms. The tax industry is one roughly the size of Wal-Mart in terms of revenues. Some have called for simplification of the code, others trumpet a value added tax (VAT). Still others have called for a national sales tax. One recent proposal that has been introduced in Congress is the Fair Tax.
The basic component of the Fair Tax is a national sales tax, calling for a rate of 23%. The proposal taxes some items that are not presently subject to sales taxes. The Fair Tax would tax purchases of new homes, rent, food, medications, doctor bills, interest on loans, utilities, gasoline, and legal fees. One’s first reaction to this is that the Fair Tax would be an extreme burden on those in the lower income brackets with taxes paid on virtually every consumer purchase. Proponents claim this is not true. Here is where the innovative aspect of the Fair Tax comes into play.
All valid Social Security cardholders who are United States residents would receive a monthly check from the government, referred to as a “prebate.” This prebate is touted as being roughly equivalent to the amount of Fair Tax paid on essential goods and services. For example, a single adult with no dependents would get a monthly check of $208. A couple with two dependent children would receive $559. This feature removes the Fair Tax from the realm of flat taxes, as it becomes a progressive tax with higher income citizens paying a higher percentage of their income in taxes.
The Fair Tax would completely abolish the federal income tax for individuals and corporations. In addition, estate, gift, Social Security, and Medicare taxes would also be eliminated. Of course, with no income tax, the IRS would also be abolished. Social security and Medicare programs would be unaffected, just financed in another manner.
According to the proponents of the Fair Tax, it is revenue neutral, meaning that it would collect the same amount of tax as is currently being collected. There are those who disagree with this, saying that a rate of 30-34% would be necessary to make it truly revenue neutral. In all likelihood, the truth lies somewhere in between. One factor that must be considered is that the Fair Tax would probably reduce the tax gap, as opportunities to evade the Fair Tax would probably be fewer than under the present system. However, one should not discount the fact that with a sales tax of 23 -34% there will be a strong incentive for a black market to develop in which people attempt to evade paying the tax. So the tax gap would remain, but hopefully it would be less.
The Fair Tax would be transparent, meaning that people would realize the extent of their tax burden rather than having it “obscured” as under the current system. There would be no loopholes, special exemptions, payroll taxes, embedded costs, or other factors that contribute to hide the true amount of our tax burden.
Sounds pretty good, so far. However, the Fair Tax has some other negatives associated with it. First among these is that the price of new goods and services would increase. A $150,000 house becomes a $195,000 house. Gasoline would increase $1 per gallon at present prices. Proponents argue that prices would not really increase, just the visible cost would change. Another thought is that since companies are not paying income, payroll, or other taxes, they would lower the price of their goods. Nonetheless, prices are likely to increase. This “sticker shock” of higher prices could have a negative effect on the economy.
Critical to the success of the Fair Tax is the repeal of the Sixteenth Amendment. Unless this occurs, there is nothing to stop a future Congress from reinstating the income tax in some form, leaving us with the Fair Tax and an income tax. Having both would be a disaster to our economic freedom.
Another negative factor is that people who have paid into social security or other savings plans would be taxed on these funds when they purchase goods and services after already paying income tax under the current system.
Some have observed that it would give the government the power to discourage the purchase of certain goods or services by raising the rate on that product. For example, if the government determined that tobacco products were undesirable, they could be subject to a higher rate to discourage consumption.
There are both positive and negative aspects of the Fair Tax proposal. As with any change in our tax system, there will be elements of unfairness. Such a change will also create displacements, as much of the present tax industry would cease to exist. There is no doubt that our tax system needs reforming. Is this the best way to go about it? I think not. I still favor an income tax. To tax individuals and companies on their earnings seems more equitable than taxing consumption.
Related Articles
3 users responded in this post
You left out the part where “everyone”, even travelers, visitors, exchange students, illegals, drug smugglers and Prostitutes would also be paying in. Does the black market no longer exist, in the current tax system? Are not people avoiding paying taxes now, through various means? Isn’t the current system inequitable? You figures may be right if it were only those now paying taxes in the count. This way rich and poor alike all pay the same. The more you buy the more you pay. If the poor chose to grow their own food, they then only pay for what they buy. I beleive that this is a much fairer way to pay taxes and it will eliminate the IRS, a costly Government operation.
I’m glad to see that a CPA is looking into the FairTax. I would be interested in your analysis after you’ve digged a little deeper.
You should know that of the published studies on the required rate under the FairTax, none of them found that a 23% rate would be revenue neutral. William Gale of the Brookings Institution found that the rate would need to be between 44%-65% (depending of the level of non-compliance.) John Diamond and George Zodrow of Rice University found that the required rate would need to be 39% (assuming full compliance). And the Beacon Hill Institute (which was hired by the group pushing the FairTax) found that the required rate would need to be 31.25% (also assuming full compliance.) Those are “tax-exclusive” numbers, or equivalent to a standard sales tax. And, of course, since the FairTax is a federal tax, you would need to add state and local sales taxes to the FairTax rate to get the full sales tax that would be added to the price of a good or service. (And, since the FairTax taxes state and local governments, state and local sales taxes would necessarily increase.)
The end result is that the combined sales taxes would be extraordinarily high, comperable to high customs tariffs that many third world countries used to impose (and maybe still do) on imported goods which, as you point out, leads to a huge black market.
But under the FairTax, there would also be many legal means to avoid taxation. For example, one could simply buy an existing home instead of buying a new home and save $100,000+ in taxes. Same with used cars, etc. Or purchase more goods and services abroad, which would be free of the FairTax. Or set up your own LLC and buy goods and services tax-free as “business expenses.” Or simply consume less stuff. The bottom line is that (in my opinion at least) there will be so many opportunities to avoid paying the FairTax that it would be completely unenforceable. I’d be interested in your opinion on the subject.
I know more about Fairtax that every sucker cult member goof ball in Georgia. I know it because I took the time to read the fine print.
Sure it sounds great, no duh. But it’s not, not not, not, not, not, did I mention NOT a retail sales tax to replace all other taxes.
Thats the hustle. But that’s not in the legislation. In fact, I am so sure it’s NOT in their legislation I offer 50,000 dollars, cash, no gimmich, no double talk, if anyone can show me the part of HR25 that proves its a retail consumption tax to replace all those other taxes.
Fairtax DOES have a retail tax in it. So what? My car has a radio in it. Does that make my car a radio?
Fairtax has DRASTICALLY more taxes than the retail sales tax. See the sworn testimony to Ways Means Committee in June of 2011, which shows 3/4 of the tax revenue in this goofy hustle have nothing to do with retail taxes! NOTHING!
Most of Fairtax is a tax on city county and state government. And much of that — in advance!! Read the fine print! Oh sure, the hustle sound great.
But the hustle is meaningless drivel. The hustle is not the legislation.
This hustle was exposed from the get go, by the way, by President Bush Tax Advisory Panel, who know how to read the fine print. The double talk did not confuse them. William Gale, PhD from Stanford, and some wiz kid at Brookings, spotted the hustle and exposed it. He found the fine print tricks. Yeah, that’s all Fairtax is, a fine print trick. To make their math add up, they include massive taxes on city county and state operational costs!!! All wages, pensions, benefits paid by any government (including the military) is TAXED!! No, the employee does not pay it, the employer is classified (in the fine print) as a “certain”taxpayer, who must send in the taxes on “compensation” expenditures.
And there is no dispute to this. Fairtax complains about his report, but only because “He does not use our tax base”. No kidding. Fairtx “tax base” included all government expenditures! So to “use that tax base” would be to pretend the government can pay itself 75% of their revenue”.
Yes, its THAT goofy.
Leave A Reply