THE FAIR TAX

27 12 2011

It is called a Fair Tax, so how could it not be fair?  It is also a “fairly” good idea with a few caveats.  Taxing what you spend rather than what you earn, simplifying the idiotic maze of taxes and codes that currently exist, and making taxes more transparent and easier to understand are all obviously good things.  I am in favor of the Fair Tax, but there are as always a few obvious bugs in the system.  On the other hand, almost any change in our tax system would be an improvement on our current tax system.

The Fair Tax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.  Here is where my first major concern comes into play – repealing the 16th Amendment.  I highly recommend that if this information interests you; take some time to read about the history of the 16th Amendment.  I will not bore you with details, but the Civil War history of this Amendment to the Constitution alone is worth reading.

The Fair Tax taxes us only on what we choose to spend on new goods or services, not on what we earn. The  Fair Tax  is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.  Proponents of the Fair Tax will highlight the following positives of the plan:

  • Enables workers to keep their entire paychecks
  • Enables retirees to keep their entire pensions
  • Refunds in advance the tax on purchases of basic necessities
  • Allows American products to compete fairly
  • Brings transparency and accountability to tax policy
  • Ensures Social Security and Medicare funding
  • Closes all loopholes and brings fairness to taxation
  • Abolishes the IRS

As you can imagine, the Fair Tax really is more complicated than it looks.  No complex forms to fill out every April, no need to wade through piles of old receipts to maximize your return, and no (or a greatly reduced in size) IRS!  It sounds like a dream, right?

One of its problems is a simple basic business formula that is an odd anomaly, but is something business people deal with on a daily basis: The Fair Tax rate would need to be higher than claimed to generate enough income.  Proponents of the Fair Tax maintain that the tax rate of 23% they tout will be adequate to (more than) generate the current level of income from all the taxes it would replace (not only the income tax, but corporate taxes, Social Security Taxes, estate taxes, etc.).  That number is tax inclusive, meaning it incorporates the amount of tax in the total from which the percentage is calculated.  If you read it as a normal sales tax (which is tax exclusive), it would be 30%.  A $100 item (before Fair Tax) would have a $30 Fair Tax added; $30/$130 gives us the 23% result we are trying to achieve – therefore the cost will be higher than originally anticipated.

My next concern is simply how foreign nations will react to the Fair Tax.  The Fair Tax website makes quite a few claims about how the Fair Tax will boost US competitiveness in the global market; it’ll make US exports cheaper to other countries, foreign imports will become more expensive (since the Fair Tax will add on top of the taxes the foreign manufacturer paid in their own country), and jobs and investment money will flow into the United States.  The EU becomes a competitive dynamo; their exports are cheaper in our stores, our products are more expensive over there, and businesses start to uproot to relocate in Europe, taking jobs with them.  Initially this was supposed to be a concern for the American Economy, but with the turn of events in the economic realities of the EU, this might actually be a boon and a means of helping the EU back on the road to economic recovery.  This is way above my area of expertise and will probably require decades of study (at which point it will be moot).  Without having some idea of how the other major countries of the world will react, it’s impossible to say whether switching to the Fair Tax will be a net benefit to the country.

The final issue I keep running into from opponents of this new system is that we would devastate the tax preparation market, as well as the IRS.  At the risk of opening myself up to horrible audits, as well as aggravating my accountants, my simple answer is: to hell with them.  We need change – if they can’t find a means of survival, they probably had no reason to exist in the first place.

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