Less Can Be More - An Easier Tax System

I'm not sure how many people have heard of the Fairtax.  Here is how it is described at www.fairtax.org:

The FairTax 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.

The FairTax Act (HR 25, S 296) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax  administered primarily by existing state sales tax authorities.

The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

Why else is it needed, compliance will be easier to manage.  More than 80% of all tax returns are eliminated under the FairTax--every individual filing. What remains are retail outlets collecting the FairTax. Of these, 80 percent of all retail sales now occur at large retail chains like Wal-Mart. The point is oversight will still reside under the Treasury Department but the government's responsibility will be over a far smaller "universe" of tax collection points making compliance oversight far less costly and far more effective than the current system which costs $265 billion a year in compliance costs and still comes up $350 billion a year short of what is owed.

Also, The FairTax rate of 23% (when calculated inclusively like income tax rates) has been thoroughly researched to provide all the revenues now collected under both the income tax system and through FICA payroll taxes.

The FairTax actually eliminates and reimburses all federal taxes for those below the poverty line. This is accomplished through the universal prebate and by eliminating the highly regressive FICA payroll tax. Today, low and moderate income Americans pay far more in FICA taxes than income taxes. Those spending at twice the poverty level pay a FairTax of only 11.5 percent -- a rate much lower than the income and payroll tax burden they bear today. Meanwhile, the wealthy pay the 23 percent retail sales tax on their retail purchases.

Imagine not having the "threat" of the IRS.  No tax returns.  Individual control of the money you earn. A system that has $22 million of dollars invested in research.  A system that ensures that ill gotten gains are taxed (as people who make money want to buy things and thus will cause tax to be paid.) Where would companies based outside the US want to base their operation when the corporate income tax rate in the U.S. was 0%?  The U.S. of course.

And there are so many economists (many at universities) who have vetted and support the plan.  

The downside?  Simplified taxation means less need for tax attorneys.  Less need for tax accountants. Further, there aren't any "tax breaks" any more that politicians can use to earn votes.  Further, people have total independence.  They "own" their earnings.  Government folks don't like losing control over people.  Maybe that's a way to keep them "honest"!

Comments

[Hank Van Gieson]

How about considering some real downside issues? First, the Fairtax proposes that the federal government tax it's own consumption which is idiotic in the extreme, and proposes to tax State and Local consumption which is unconstitutional. Next, the Fairtax prebate is in fact a $600 billion annual entitlement coming at a time when entitlements are squeezing out discretionary spending in the federal budget. We don't need or want any more huge entitlements such as this one.

As a retiree, having paid into the Social Security Trust Funds for 45 years or so,and now enjoying my pension and health care benefits, how is it fair to force me to resume paying for my benefits with my sales tax dollars?

Having save a substantial "nest egg" over my lifetime of after tax dollars, why is it fair to essentially double tax those savings when spent under the Fairtax?

Why is it fair to tax both investment and debt instruments? Read HR25, Section 801 to learn about the implicit tax, a tax that would reduce earnings on investments by 30% and increase the payments on debt instruments such as mortgages and credit cards.

Do you understand that retail prices will rise by at least 17%? Using 2007 actual data, business tax costs averaged 10% of retail sales. Remove 10% and add the 30% sales tax and retail prices will go up by 17%. Simple math!

Does a "cold turkey" transition make any sense? No other country in the world has ever funded their central government with a national sales tax. The risk of destroying our economy is too great for an overnight transition.

There is much else wrong with the Fairtax scheme, but you need to read other studies to really get educated about the Fairtax. reading a couple of comic books written by a radio talk show host and an obscure Georgia Congressman doesn't qualify anyone as a Fairtax expert.

[newbrew]

Hank, your comments are welcomed. But, in fact perhaps you are reading the comic books, those produced by the left wing, tax and spend liberals.

- First, the FairTax proposes that any purchase at the retail level is taxed. It does not matter who the buyer of goods is. It doesn't matter whether you are a person or a company. I'd say that's fair. Now to your point about this being idiotic. The FairTax puts all consumption on an equal footing. Remember, today, the government and it's employees are subject to payroll taxes. Under the FairTax, those are eliminated. Failing to tax government consumption, while taxing only private consumption, would make government consumption expenditures artificially cheap in comparison with private consumption expenditures.

- Second, I can appreciate that you have paid into Social Security for 45 years. I have paid into it for 30. However, the Social Security system is not a pension system. You were paying in for the people who were enjoying then. The money you receive now is coming from those paying in right now. However, if you are relying solely on your SS benefits, you will receive the "pre-bate" essentially ensuring you do not pay taxes. Thus, you are covered. Anyway, there is taxation today on SS benefits. Under the FairTax, there is none. It's a wash for you. And, given that you no longer have to file tax returns, you will never be subjected again to the harsh IRS tactics that seem to target the elderly. Have an IRA or 401(k) your waiting to open? No worries. Now they won't be taxed. A huge win for you (since you received a tax break in the past for them.)
- Third, the FairTax would be included on services purchased from financial institutions. For example, If I pay fees for services (brokerage, loan orgination), there would be a tax on those services. Remember though, those financial services firms no longer pay an income tax and thus have the ability to lower their fees and still have the same profit margin. Further, they do not pay consumption taxes (business to business transactions are exempt from the FairTax.) Yes, there is too a tax on interest rate spread. That is, the rate on a loan minus a treasury rate. Thus, 30 percent of interest is subjected to the FairTax. But remember, individuals and businesses no longer pay income taxes of any kind. So, the individual or business has no other burden and neither does the lending institution.
- Fourth, in fact the cost of existing taxation on businesses, on average is 23%. That goes away. Here's some math. I'm a business and have a product on the shelf for $100. Today, the cost of taxes and the cost to manage those taxes is 23% and is embedded in that $100 price. Those taxes and the costs of those taxes go away. I can now sell that product for $77 dollars and make the same profit. However, now I have to give the Feds 23% sales tax. Now I have to price the product at $100 to make the same profit. So, in fact, if the tax plans are switched, the new price of my product on the shelf is $100, the Feds get the whole 23% (versus less as in the past I had to spend a lot to manage the calculation and compliance with taxation), and the net $77 I get is NOT subject to an income tax. The consumer still gets the good for $100 paid for in untaxed dollars.
- Nobody expects our government to leave itself without the monies to pay it's bills. But, as you know, it seems to be doing that very well thanks to our current administration and the debt being incurred by borrowing money from China. Even if we went cold turkey and all hell broke loose, our government won't go without.
- The FairTax is a concept which has had a best selling book written about it. That book is not a comic book. My kids would not want to read it. That book was written by talk show host Neal Boortz and Georgia congressman John Linder. Neal Boortz is not just a talk show host. He was a lawyer in the past. He has run a jewelry business. He's a pretty smart guy. John Linder is not obscure. He is a former dentist and businessman. He has been in congress since '92. He also has been on the House Ways and Means Committee, the group that has jurisdiction over tax, tariff and trade laws, health care, Social Security and Medicare. Given the buzz in Congress today, that's not an obscure place to be. These two men have championed the FairTax and even written a best selling book about it. But, they are not the originators.

In 1994 three Houston businessmen were meeting together for lunch. Part of their discussion concerned the difficulties of dealing with the current federal income tax system. But, at this lunch, hey decided to do something about it and each pledged $1.5 Million as seed money to hire the best tax experts in the country to identify the faults with the current system, to determine what American citizens would like to see in tax reform, and then to design the best system of taxation. With their initial infusion of $4.5 Million, the three went on to raise an additional $17 Million. That money funded focus groups with citizens around the country as well as studies with nationally prominent experts in tax policy. The market research also included telephone surveys, targeted advertising, and measuring website hits from that advertising. All the research was extensive and distinguishes the FairTax from every other tax reform proposal ever put forward. The FairTax is a thoroughly and professionally researched response to the question: "What do the American people want in their tax system?"

Some of the experts funded include:
- Professors David Burton and Dan Mastromarco, University of Maryland and The Argus Group
- Professor Larry Kotlikoff, Boston University
- Stephen Moore, The Cato Institute
- Professor Dale Jorgenson, Harvard University
- Bill Beach, The Heritage Foundation
- Jim Poterba, The National Bureau of Economic Research
- Professor George Zodrow, Rice University and the Baker Institute for Public Policy
- Professor Joseph Kahn, Massachusetts Institute of Technology

The final result became a bi-partisan bill sponsored by John Linder (R-GA) and Collin Peterson (D-MN). Originally submitted to the House of Representatives as HR 2525, “The Fair Tax of 1999,” it was recently resubmitted in the 110th Congress as the “Fair Tax Act of 2007.” In January of 2006 an additional $2 million was spent in research to make sure the FairTax legislation was still the best tax replacement solution for our nation's current economic situation. The results showed that it is! These studies make the FairTax the most well-researched tax plan ever.

Hope this help you a bit more understand the system and how it can help you, me, businesses and the country.