The Fair Tax

I have read three books on The Fair Tax, two pro and one con. For the life of me, I cannot imagine why the entire nation doesn’t stand up and yell, “Switch us to the Fair Tax, NOW!” I’m pretty sure that nearly everyone (except some politicians, but more on that later) who has actually read the books and understands the Fair Tax will agree with me.

One of the things that makes the Fair Tax unique is that it was developed by economists, not politicians and lobbyists – what a concept! This is a truly bi-partisan issue. Everyone benefits. The pending legislation has many sponsors from both sides of the aisle. In fact, it is one of the few bi-partisan issues out there – it gives the politicians something to agree on for a change. The Fair Tax addresses how we collect the taxes necessary to run our government. Naturally, how those taxes are spent is and always will be a partisan issue.

This is not a Flat Tax which is simply another form of income tax. The Fair Tax replaces income tax.

The Fair Tax

Here’s how it works. First, abolish all federal individual and corporate income, payroll, capital gains, estate, alternative minimum, social security, medicare, interest, and dividend taxes, as well as any other taxes on income. While you’re at it, abolish the IRS. Those notions alone ought to have you cheering.

There would be no tax forms, filing, deductions, adjustments, or loopholes. No one files.

Now institute The Fair Tax (legislation is pending), a 23% national retail sales tax on everything - everything – goods and services, taxed once and only once, at the retail level. If you buy a new car, you pay the 23% national sales tax on the purchase amount. If, as the years go by, five other folks buy the same car down the line, they do not pay the national sales tax. The tax is only applied once, the first time the product is sold at the retail level – future sales are not taxed. The tax applies to services as well as goods. If a plumber comes to your house, a lawyer prepares your will, or a doctor stitches you up, his/her bill includes 23% on both materials and time. The States collect the taxes, just as most of them now collect sales taxes.

Since you no longer pay income or payroll taxes, the only deductions from your paycheck will be for insurance and 401k or any other voluntary deductions. You get an immediate raise equal to the amount of income and payroll (FICA) tax that is now deducted from your pay.

All federal government agencies and services (except the IRS) remain the same.

Remember that, at least at this point, the proposed legislation applies to federal taxes only. All state and local taxes would remain the same, although many economists feel that state and local governments might very well follow suit.

Sacred Cows

At this point, there are several issues that immediately come to mind.

Is the tax progressive? Of course it is. The more income people have, the more new stuff they buy, and the more services they use, so the more tax they will pay. Remember that the Fair Tax does not apply to used stuff, and you do not pay any Fair Tax on used stuff or work you are able to do for yourself.

What about poor people? The proposed Fair Tax legislation includes a rebate for every tax paying family or person. The size of the rebate will depend on the size of the family and would equal the amount of Fair Tax due on the poverty level income for that family size. For example, if the poverty level income for a family of two is $20,000, that family would receive 23% of $20,000, or $4,600. The rebate would go to all taxpayer families or individuals, regardless of their actual income. Since poverty level folks actually earn the poverty level income or less, they would get a 100% refund of all of the Fair Tax they pay. Therefore, they pay no tax. Currently, such folks do not pay income tax, but they do pay payroll (FICA) tax, so they clearly will be better off.

What about Charities? Will people stop giving to charities? People are glad to get a deduction for the money they give to churches and other charities, but they do not give the money because of the deduction. Want proof? Ok, try this. Currently, if you’re in the 25% income bracket and you make a charitable donation of $1,000, you will get a tax refund of 25% of $1,000, or $250. I can easily beat that deal. If you give me the $1,000 instead, I’ll give you $500 back, a 100% improvement. Naturally, none of you will give me the $1,000, because I don’t deserve it. Folks give money to charities because they deserve the money, not because of the deduction.

What about the cherished mortgage deduction? Under the Fair Tax, you pay no income tax, so there is nothing to deduct from. Besides, you get to keep your whole paycheck, so you have more money available anyway. Which would you rather have – all of the income and FICA tax you currently pay or 25% (or whatever bracket you’re in) of your mortgage payment.

Ancillary Benefits

Here are just a few of the other, somewhat delightful, benefits of the Fair Tax.

• Everybody pays. Tourists from other countries, illegal immigrants, diplomats, DRUG DEALERS, and even the greedy scion who somehow manages never to pay any income tax in spite of his massive wealth – everybody who buys anything new or hires any service providers pays to support our government.

• Corporations will return to America. Many corporations have established overseas headquarters in order to avoid paying the 41% corporate income tax rate in the U.S. (the second highest in the world - only Japan is higher). Surveys of executives of such companies indicate an overwhelming desire to return, if the corporate taxes were not so abusive. Check out The Irish Miracle on the internet.

• Each of us is in charge of how much tax we pay. If you wish to pay less tax, you can simply buy only used stuff and do things yourself instead of hiring someone.

• Since we will not charge Fair Tax on good sold overseas (those countries will charge their own taxes on our goods), American goods will be more competitive and sell better. However, we will charge Fair Tax on new foreign items sold here.

• Here’s one of the best benefits: many lobbyists will be out of a job, provided the Fair Tax legislation insists (as it currently does) that there are absolutely no exceptions to which goods or services are subject to the Fair Tax. Every new purchase and every service is subject the the Fair Tax, no exceptions. As soon as you allow one exception, the lobbyists will be back in business trying to get their clients’ goods or services excepted.

Opponents

Some of our less scrupulous politicians are the primary opponents of the Fair Tax because it replaces the income tax, and they use income tax issues to attract (bribe) potential voters and donors. For example, “If you vote for me, I’ll decrease your taxes and increase the other guy’s taxes”, or, “If you donate to my campaign, I’ll introduce loophole legislation that will decrease your taxes.” How many times have you heard that stuff? (The fact that these politicians are against it is proof enough for me that it is a good idea.)

The associations that represent service trades and professions are also sometimes initially opposed. Lawyers, plumbers, doctors, carpenters, engineers, electricians, accountants, – none of them want to be required to increase their fees by 23%. However, once they understand how the Fair Tax works, their opposition usually fades. The reality is that their current fees already include the income taxes paid by all the workers who produced the equipment and supplies they use, and their current fees also include the income tax they themselves pay. These are called “imbedded costs”, and, on average, they are equal to the 23%. So, trades-people and professionals will not be increasing their fees at all. They will simply be replacing the 23% imbedded costs with the 23% Fair Tax. The other complaint often voiced by service folks is that they do not want to be burdened by calculating, collecting, and paying the Fair Tax. Actually, this effort will be much easier for them than the current system. The service folks will simply add 23% to each invoice, and then send 23% of their total revenues to the government – way easier than figuring out corporate income tax, their personal income tax, and their employees’ withholding, FICA, etc. Again, details are available at fairtax.org or in the Fair Tax books.

Conclusion

Ok, that’s enough for now. The details can become complex and even tedious, but it's well worth the effort to learn and understand the Fair Tax. If you want more detail, go to www.fairtax.org. (note that it is .org, not .com.) Alternatively, you can read The Fair Tax Book, Linder and Boortz, and/or Fair Tax: The Truth, Linder and Boortz.

Someone out there must disagree with me, and we will all learn more if a debate ensues, so post your comments below.