Time for a FairTax

Tax time is upon us and there is no more fitting time to discuss tax reform.  For nearly 100 years our country has suffered under the yoke of an oppressive tax structure that has affected both individuals and businesses alike.  Initially intended to apply only to the top one half of one percent of wage earners it now reaches down deep into the middle class and even manages to ensnare the poorest workers who don’t even bear any tax liability.  High corporate taxes have provided an impetus for American companies to relocate overseas in more favorable tax climates – taking American jobs with them.  Those who stay place themselves at a competitive disadvantage to many overseas manufacturers due to the embedded cost of corporate taxes in the U.S. that are passed on to the consumers.  There is a better way to raise revenue for our government and it is called the FairTax.

This is an introductory post on the FairTax.  It is intended to be the first of a series of posts that will cover why we need to implement the FairTax.  In subsequent posts I will lay out the case for why we need to make a change.  I’ll cover the drawbacks of the income tax as we know it and contrast it with how the FairTax addresses those problems.  I’ll cover how the FairTax will energize the American economy and turn our country into a tax haven.  Frequently asked questions will be addressed.  Eventually, all of these posts will be consolidated onto a static page so that you may use them as a reference.

So, just what is the FairTax?  It is a bill that has been introduced in both houses of Congress that would replace all forms of federal income tax with a single rate sales tax on all new goods and services.  No products or services are excluded and the tax is only applied once on the retail level (no multiple taxation).

It is a revenue neutral tax, which means that it will raise the same amount of money for the federal government as the income taxes it replaces.  The revenue neutrality is key for two reasons: it means that no programs will lose funding because of the tax change and it specifies the tax rate.  The tax rate under the FairTax is 23% (depending on the calculation method, read on).  If it sounds high, then you should keep in mind that it is simply the true rate of taxation you are already subject to.  All of the income taxes that the FairTax will replace (personal income, corporate income, gift, estate, alternative minimum, capital gains, Social Security, and Medicare taxes) hide the true amount of taxes that are eventually passed down to you and me.  I like to call it death by a thousand cuts.

The tax rate is something of a sticking point for some people and detractors try to use the rate as a weapon, so I like to be forthright.  The people who came up with the FairTax decided to advertise the tax rate on an “inclusive” basis.  This means that the taxes are included in the price you pay.  Sales taxes as we know them are calculated on an “exclusive” basis, which means the tax is added on top of the sales price.  Supposedly it was decided to use the inclusive tax rate of 23% because it makes for a direct comparison to income tax rates since the income tax rates are given inclusively.  It also has the positive side effect of being a smaller number than the exclusive value (something I’m sure the designers of the income tax knew all too well).  When calculated as a traditional sales tax the rate is about 30%.

For example, let’s say you purchase an MP3 player and lay $100 on the counter to pay for it.  Under the FairTax $23 of the $100 you paid (23%) goes to Uncle Sam.  If the FairTax was collected like a traditional sales tax the sales price for the MP3 player would be $77 and you would pay a 30% sales tax of $23, which would add up to $100.  Whether you say 23% inclusive or 30% exclusive you are talking about the exact same amount of taxes paid on a given item.  And keep in mind, you’re already paying that tax rate – you just didn’t know it.

Sales taxes typically take the greatest toll on the poorest citizens, but the FairTax is a progressive tax.  How, you ask?  Well, under the FairTax every legal person and family would receive a monthly “prebate” (a rebate ahead of time) for the amount of federal sales tax that person or family would pay if they earned the poverty level income and spent every penny on taxable goods and services.  For a couple with two children the current poverty level income is $27,380.  If all of that money was spent on taxable items then the tax paid under the FairTax would come out to $525 per month.  That is the amount of money that every two adult, two child family will receive each month to offset the taxes paid on the necessities of life.  Families who scrimp and save and maybe purchase some items used could see their tax rate in the low single digits or even below zero.  Those who live a champagne and caviar lifestyle could see their tax rate approach 23%.

There are too many benefits of the FairTax to list them all in an introductory post.  They include increased transparency and personal financial freedom.  The FairTax is part lobbying reform because lobbyists will no longer be able to have pliable legislators manipulate the income tax code to favor their clients.  Every person and company is treated equally under the FairTax.  You’ll get your whole paycheck without any federal withholding.  That means that you won’t pay your taxes (or rather have your taxes taken from you) months in advance anymore.  The FairTax broadens the tax base by roping in people who earn their incomes through illegal activities, but still spend their illicitly earned money at retail establishments.  There are many more, but I’ll address them later for the sake of brevity.

The FairTax is a real plan that can easily become a reality.  It has been introduced in the House by Rep. John Linder (R-GA) and has 57 cosponsors, including Jo Bonner and Spencer Bachus of Alabama.  It has also been introduced in the Senate by Saxby Chambliss (R-GA) and has three cosponsors there.

Stay tuned as I continue this series.  It may take days or weeks, but I will get it done.  As always, I encourage my readers to feel free to ask questions and/or offer constructive criticism.