What about the Fair Tax?

Have you heard of it? Probably not. It’s a proposal to reform the federal tax system. I know, I know, another tax reform proposal. You’re thinking tax issues are boring and difficult to understand. I agree and would not have looked into it had it not been for Tammy’s brother Jason who asked my opinion on it, so I thought I would do a little research.

I can’t go into a lot of detail here, but from everything I’ve read, I believe it would be the single greatest improvement to the lifestyle of every American since the industrial revolution. Now that’s a bold statement, so here’s what I’ve discovered.

The Fair Tax would change the manner in which the Federal government receives its revenues. At present, all the money the government receives comes from one source. All the money to pay for wars, social security, Medicare, pork barrel projects and all the government waste, all of it, comes from the income tax on 150 million American citizens who fork it over every year on April 15. That total amounts to about $2.2 trillion dollars.

The Fair Tax would replace that annual $2.2 Trillion dollars with a retail sales tax on all new goods and services purchased at the retail level. Used goods are excluded, only new items would be taxed. There would be a 30% markup on everything new you buy at the retail level. A product that cost $100 today would cost $130 after the Fair Tax. Everything would be taxed! Yikes!. That’s right, everything you buy would have a federal tax. That would be in addition to any State or local taxes. Who would want that? Well, keep reading.

Since all of the Federal revenues would come from the retail sales tax, there would be no income tax. So there would be no need to withhold federal, social security and Medicare taxes from your paycheck. You would receive the full value of your earnings. So the money you receive by not having to pay federal, social security, and Medicare taxes would help you pay for the retail sales tax. Instead of paying the government through income, you would pay it through a sales tax. A sales tax instead of an income tax.

But what about the poor? They can’t afford a 30% increase in the cost of retail goods. That’s true, and the Fair Tax compensates for this by paying a “prebate” to every American citizen for the tax on the necessities of life. This would be a monthly payment based on the number of members in the household. A poor single mother with 4 kids who doesn’t work would receive a monthly check of about $680. This is in addition to her current social security payments, food stamps, or other government programs. She would get $680 in addition to all other money currently received from the federal government. This will compensate for the new retail sales tax.

What about the rich? Well, most rich people don’t pay income taxes anyway. If they do, it’s only on a portion of their income. They have other forms of income that isn’t earned through a paycheck. Real estate rentals, dividend income, etc. But rich people like to spend money don’t they? They buy houses, expensive cars, yachts, jewelry, you name it. Under the Fair Tax, they would pay taxes on all that stuff.

What about illegals? The current estimate is that there are 20 million illegals working in the US. Many of these pay no income taxes. Some do pay, most do not. But all of them have to have a place to live. They have to buy food, clothing, etc. Under the Fair Tax, when they buy food, clothes, pay rent, etc, they would contribute to the federal tax revenue. However, only US citizens would receive the monthly prebate, so illegals would be out of luck for that benefit. Seems fair, after all they are ILLEGAL!

What about the elderly? They too would receive the monthly prebate. Also, the social security, pension, and Medicare payments they receive would not have a federal tax. They would benefit.

Under the Fair Tax system, the economy would grow tremendously because corporations would no longer need to make business decisions based on the tax ramifications. It is estimated that nearly $11 trillion dollars is held by US corporations in foreign countries to avoid paying taxes. With income taxes removed, most of those companies would return operations to the US. Most of that $11 trillion would return to the US to help the economy.

There are those that say there would not be enough revenue from the Fair Tax to equal the loss of income tax and there would be a deficit. That deficit would need to be made up by the US income taxpayer. That simply isn’t true and if you think about it, there would actually be more revenue for the US. Instead of federal revenue coming from 150 million taxpayers, it would come from 300 million Americans when they buy something. Think of the underground economy based on illegal activity. The drug dealers, porn industry, illegal gambling, not to mention the 50 million foreign visitors to this country every year. Right now, none of these people produce income for the federal government.

But drug dealers like expensive cars don’t they? They buy clothes, food, etc. So do porn stars and the rest of their industry. Foreign visitors have to have a place to stay, buy food, souvenirs, etc. All of these folks would contribute to the federal purse when they buy retail goods. The tax base would expand tremendously from the 150 million of us that actually pay income taxes, to everyone who buys something, EVERYONE. Under the Fair Tax, the government wouldn’t care where you got your money. Illegal or legal, it doesn’t matter. Everyone would pay the tax when they buy retail.

There is much more to this, such as the fact that the cost of retail goods would eventually decrease because wholesale cost would be reduced when corporate taxes are eliminated. All through the supply chain, corporate taxes would be eliminated leading to a reduction in the cost of retail products.

This just touches on the highlights of the plan. Right now there is legislation in Washington. House Bill HR 25 and Senate Bill S.25 would make the Fair Tax into law.

It would eliminate the IRS by repealing the 16^th Amendment. Think of it. No more IRS. Businesses currently pay $450 billion annually to comply with the IRS tax codes and they spend money to formulate strategies to avoid paying tax. Individuals pay $250 billion in tax preparation, tax software, tax lawyers. All of that would be saved. That’s a total of $700 billion in savings. That’s an amount equal to 32% of the total income tax revenue!

Read more about it in the link below. There will be strong opposition in Washington by those who profit from the current system. But if enough of us speak up, it could happen one day. And a glorious day it would be!

The Fair Tax