The FairTax is a tax reform bill sponsored by Rep. John Linder (R-GA). He and the 60 co-sponsors to the House bill (HR-25) claim that this bill will dramatically simplify the federal tax system by replacing the Internal Revenue Service (IRS) and all federal income taxes (including AMT), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a federal retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly tax rebate to households of citizens and legal resident aliens, to "untax" purchases up to the poverty level. The sales tax contained in the bill, intended to be revenue neutral, is 23% of the final amount paid (referred to as tax-inclusive to easily compare to current income tax rates — 23¢ of every $1), or 30% of the pre-tax retail price (referred to as tax-exclusive, the typical method of calculating sales tax — 30¢ on top of every $1).
The typically regressive nature of a consumption tax, due to the greater proportion of income spent by the poor on necessities as compared to the rich, is addressed by the "prebate" feature of the bill. Every month, every household would receive a check for the amount of tax that would be paid on poverty-level spending, the level where by definition all spending is on necessities. This level of spending varies by number of household members and is already required to be calculated annually by the Department of Health & Human Services.
It is important to note that the title "FairTax" should not be interpreted as an impartial evaluation of the bill, but rather recognized as the name chosen. The plan was created by Americans For Fair Taxation, an advocacy group formed for tax reform. The group developed the plan and the name "Fair Tax" with economists based on interviews, polls, and groups of the general public. Although typically seen as a republican proposal, the bill enjoys bi-partisan support and has not received universal endorsement from the republican leadership. The primary motivation for the FairTax is the need for fundamental tax reform rather than continual tinkering with our existing monster of a tax code.
It is currently impossible to accurately determine an individual's or household's tax liability. The IRS routinely miscalculates due to the labyrinthine regulations of today's income tax code. The FairTax requires no complex calculations, and no returns at all from the actual tax payer.
The cost of paying federal income tax must include more than just the money actually rendered to the federal government. The cost must include the time and effort spent to remain in obedience to the regulations, any money spent to hire a tax professional to assist in the process, and any business opportunities missed due to tax considerations. All the inefficiencies in the system cost us an estimated $265.1 billion in 2005. The old adage tells us that "time is money," but this isn't money anyone gets to spend. A good tax system should have all of its costs reflected in the amount actually given to Congress, the amount actually used to provide for the needs of the state and the services it provides. The FairTax, by eliminating a massive bureaucracy and the confusing complexities of the current system, will more efficiently transfer money from the tax payer to the government, potentially either increasing federal funding at no cost to the tax payer or reducing the tax burden at no cost to federal funding.
The FairTax bill's proponents argue that due to the elimination of legislative inefficiencies from the economy, the size of the economy would grow more rapidly than currently. Without compliance costs businesses could afford to hire more people, decreasing unemployment.
Greater Take-home PayEdit
Tax withholding will be eliminated, allowing workers to take home their entire paycheck.
Elimination of Embedded TaxesEdit
One reason the FairTax has not been widely embraced by democrats is its elimination of corporate income tax. Corporate income tax has always been an easy way to increase funding without angering the general populace; most people think that companies make more than enough money and should have to pay a greater share of the tax burden. What is commonly forgotten is that corporations are not people and so never actually pay taxes. Corporations, when taxed, cannot forego spending on luxuries or entertainment as they have no non-business spending. As such, any money they must remit to the government must come out of their business operations. This creates costs that ultimately must be shouldered by individuals. These costs can take the form of increased prices on goods or services, decreased supplies of goods or services, or decreased wages paid for labor. These costs are considered embedded taxes, and their removal is expected to offset some of the increase in prices due to the new sales tax.
23 cents out of every dollar that you spend on new goods or services will go to the government in the form of a sales tax; which will be very visible. What is not made so visible is that even though one has paid the income tax on savings, under the current system, when you spend that money on goods or services about 20% of the price paid, on average, is due to the income tax system. Under the current income tax system, businesses pay corporate income taxes and employer payroll taxes. These are part of their cost of doing business. Businesses must charge prices for the good/services they sell that cover their cost of doing business. Research has shown that taxes business pay (including the income taxes and payroll taxes withheld/deducted from their workers paychecks) amount to about 20%, on average, of prices. The FairTax repeals the individual income tax (unincorporated businesses pay tax on their business profits via the individual income tax), corporate income tax, and the employer payroll tax among others. When these taxes are repealed, businesses’ “cost of doing business” will come down enabling them to drop their prices by a like amount. The decrease in costs will vary from business to business so the price drop will also vary by business; and will also be affected by local market conditions.
The FairTax eliminates the most regressive current tax, the payroll tax. Payroll taxes suppress income at low to moderate income levels, as they are only paid on the first $90,000 made. Since the FairTax eliminates all tax withholding, it provides another way of funding Social Security and Medicare/Medicaid. These government services are instead paid out of the general fund, rather than their own separate fund. This allows us to stop worrying about Social Security "going bankrupt" and instead discuss what level of national resources should be devoted to it. The FairTax makes it no easier to damage or eliminate Social Security than it currently is.
Because the FairTax is intended to be revenue neutral it must be remembered that every cent it would collect is currently collected. In fact, because of the compliance costs, the overall tax burden would decrease. Any rise in prices would therefore have to be accompanied by counteracting changes elsewhere, such as employment or pay rates. The most important effect of the FairTax is that it would allow us to see, every time we buy something, how much tax the government is actually taking. Since the FairTax is not a spending bill, it instead will allow us to evaluate whether we are getting our money's worth from the federal government and allow for a better informed national debate on federal spending and services.
Feel free to add questions either here or on the talk page, they will get answered by one of the regular readers of this page.
- Wouldn't people just go around the Fair Tax by buying used items, and buying off the black market?
- Yes many people would work their way around the Fair Tax by buying used items, and off the black market, much like many people today get around the income tax, by working "under the table," doing illegal jobs, etc. And while many people would buy used items, it would likely not be more in the current system, and there would still be a huge demand for new products as well.
- No, used good will contain a portion of the embedded cost of the Fair Tax from the initial retail purchase. The value of used goods are determined by the supply and demand in relation to new goods. So there will not be a large tax advantage (relative to the Fair Tax) with buying used goods. According to the National Bureau of Economic Research, GDP would increase almost 10.5% in the year after the FairTax goes into effect. Real investments could increase by as much as 76% initially and remain 15% above present levels. In addition, the incentive to work would increase by as much as 20%, the economy’s capital stock would increase by 42%, labor supply by 4%, output by 12%, and real wage rate by 8%. Laurence Kotlikoff of Boston University finds that the shift to the FairTax would raise marginal labor productivity and real wages over the course of the century by 18.9% and long-run output by 10.6%. These are not the economic numbers of a country decreasing production and evading taxes buying used goods and off the black market. As far as black markets, the overwhelming majority of purchases occur in major retail outlets, which are very unlikely to evade the Fair Tax and risk losing their business licenses. Economic figures show that 47% of all retail sales are made by just 688 businesses ("Big-Box" retailers). 87% of retail sales are made by 193,000 businesses, which is 3.7% of U.S. businesses. The FairTax would reduce the number of tax filers by about 80% (from 145 million to 25 million) and reduce the filing complexity to a simplified state sales tax form. The government would be able to concentrate its entire tax enforcement efforts on a single tax — the FairTax. Retailers and state government would receive 1/4 of 1% as compensation for compliance and administration costs. Additionally, the FairTax legislation has several fines and penalties for non-compliance and authorizes a mechanism for reporting tax cheats and obtaining a reward. Any black markets will be small and irrelevant.
- Have any other countries tried implementing a "Fair Tax" system? How has it worked out?
- No, no modern nation has ever repealed its income tax and replaced it with a federal retail sales tax. However, Florida and Texas, two of the largest economies in the world, rely almost solely on a sales tax, in addition most of our states (45 plus DC) current utilize a sales tax to suplement other forms of taxation. The United States has a large infrastructure for taxing sales that many countries do not have.
- Isn't calling the tax 23% dishonest and deceptive, shouldn't it be around 30%?
- No, with the Fairtax, we are trying to replace the income tax, since the income tax is also inclusive, we use an inclusive number to describe the Fairtax. This means that should you get paid $100 under a 23% income tax, you owe $23 of that to the government, similarly if you pay $100 dollars under a 23% inclusive sales tax, $23 of that goes to the government. Current sales taxes however don't work this way, they are exclusive, meaning if you pay $77 dollars under a 30% exclusive sales tax, you owe the government an additional $23 in taxes still paying $100.
- It is an option that the tax will be implemented as inclusive, like European sales taxes. So a good priced at $100 contains $23 of taxes that are presented on the reciept at sale.
Current Presidential Candidates who support the Fair TaxEdit
- ↑ The Case for the 'FairTax', Kotlikoff, Laurence, The Wall Street Journal, 2005-03-07
- ↑ Just how fair is the FairTax?, Regnier, Pat ;Money Magazine, 2005-09-07
- ↑ Al, Ose; 2002, America's Best Kept Secret Fairtax: Give Yourself a 25% Raise, Paperback, Authorhouse, ISBN 1-4033-9189-0