Friday, February 1, 2008

Taxes (FairTax Part 1)

In its present form, the tax code penalizes success. The more a person succeeds financially, the more the government taxes him. This practice takes funds out of the hands of people who have shown they know how to use them. It also pits one group against another through envy, making prosperity unpopular. Leaving funds in the hands of individuals promotes success because it allows them to use them as they want. The United States still stands as a bastion of individual freedom and opportunity. Tax reduction gives individuals back greater freedom (and responsibility) for choosing how they live their lives. Tax cuts represent an increase in the standard of living, and they stimulate the economy through increased spending, investing, and saving. Individuals built and rebuilt this nation time and again. The more the government raises taxes to build government programs to solve problems, the less money individuals have to implement plans privately. Program after program created in the private sector have outperformed government programs designed to achieve the same thing. Our government has grown too large, and the only way to downsize government is to cut its resources.

The Fair Tax represents the best idea of how to put more dollars back into the hands of consumers. It is not, as some critics assume, just a new tax. It is a tax to replace all forms of federal income and payroll taxes. To quote the website:

"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 1025) 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."

I want to cover a few points of why this tax is not bad for the poor, and what some of the language means.

1) As it states, this tax is "progressive", which means it taxes the wealthy more than the poor (a regressive tax taxes the poor more). How is it progressive? By giving "prebates" to all citizens, only those who use up their prebate actually pay taxes.

2) What is a prebate? The government will issue checks to every individual or family based on family size that will be enough to cover taxes up to the level of poverty (as determined by the government). Those funds reimburse everyone before the funds are actually spent - thus the term PREbate. Once those funds have been spent, then any spending on new goods will be taxed. Yes, the Fair Tax is only paid on new items (just like state sales tax), so those who want to avoid the tax can buy used goods.

3) By eliminating all other government taxes, individuals have their entire paycheck to spend, giving them more choices in where their money goes.

4) The 23% tax rate sounds high, but after corporations cease paying taxes (often 40-50% of income) prices will drop more than enough to compensate for the tax.

5) Eliminating the current tax code will remove $265 billion in costs to maintain the current tax code. Since sales taxes are already handled by state agencies, a much smaller cost will be involved in implementing the new federal tax.

6) The Fair Tax legislation involves repealing the 16th Amendment which allows a federal income tax, so (despite what critics say) without a new amendment being passed to replace it, the federal government could not simply put back in the income tax.

Anyone interested in a program that would provide more funding, remove more government waste, and return more individual freedom, please read up on the Fair Tax at The "About'>">About the Fair Tax" link is a good place to start, especially the FairTax Five towards the bottom of that page.

This tax does not necessarily eliminate government spending, because it better funds the government. Still, that makes it a wonderful idea for both parties to get behind - it helps the poor and wealthy alike, funds all the programs that both sides are so fond of, and spurs the economy to new heights. By giving the money back to the people, the country can see just how strong the power of one is.

-- Robert


Crisanja said...

Ellie and I were talking about this the other night. Ever since I was a kid, I thought an equal tax amount would even things out, and while it might scare those in the poverty level, it is actually better for all.

At the moment I am one of those who lives in poverty. I don't see the FairTax proposal threatening at all. I rarely buy new, and by helping people save money on buying used goods, we promote reusing, which is one of the best ways to protect our environment. (I'm sure this is rambling, but bear with me) We'd become more conscientus consumers, thinking twice before buying that brand new $100 designer shirt, when we can get the same thing cheaper, and not taxed.

I remember being about ten years old, thinking that different tax brackets for different income levels was ridiculous, and that if everyone was taxed the same, that things would even out. I really do believe that the fairtax act would be beneficial to all walks of life.

Robert said...

The FairTax absolutely would be better for the poor, and you are right about the environmental interests (another reasons a bipartisan effort could get this passed - it meets a lot of issues on both sides of the political aisle). The other reason it is better for the poor is that the cost of all goods should drop from removing corporate taxes - which have no logical reason to exist in the first place (I'll be blogging on that subject soon, I'm sure).

Thanks for the great comment.

le35 said...

With the Fair Tax, we would also get to tax a larger base of people, so the people are currenly paying taxes would pay less. We would get the taxes from people who are getting paid under the table, drug dealers, and illegal immigrants. Also, because of the prebate, no one would be taxed on their basic necessities. That way, any person who is only buying their food, clothing, and paying minimal rent or house payments is paid upfront for those. If they choose to spend their money on things that are not necessary, then they're choosing to get taxes.

Robert said...

Yet another advantage of the FairTax is that it taxes more fairly (yes, such is the name). It spreads the tax to those who presently evade taxes. As they point out on the site, enforcement of this tax will be made far easier because the instances of evasion will be reduced since only retailers will be involved in collection and remittance. Individual citizens will no longer have the concern of audits. Since most states already have the infrastructure to collect and oversee sales tax, there will be very little new money spent to help with collection and oversight. The cost of having the tax will be dramatically lower than our present system.

By prebating everyone, no one will be forced to wait for a tax refund - as so many do now - to actually spend their own funds. No one will be unjustly taxed because they will only pay taxes by choice on new items they purchase. Those who spend wisely will actually be receiving a form of government assistance if they buy used items for some of their necessities and don't buy anything new they don't have to.

There are a lot of interest groups that are fighting this tax. They are afraid of anything new, or they have some reason to keep the current system. But the current system is broken, and the FairTax would go a long way to fixing the problems with what we have now.

I look forward to more comments - even from critics.

melissa said...

The current system is broken, agreed.

And the FairTax proposal does have a lot of merit. I agree with most of it's provisions.

The problem I have with it is that I don't see companies reducing their prices to reflect their reduced costs. Why should they, when it so much easier to blame the price increase on the government. And most people won't remember that they have stopped paying an income tax, since most people have it "painlessly" taken from their paychecks and don't have to write an additional check to the government. They'll just be annoyed that things cost more. Yes, people can be that dumb.

Glad you started the political discussions. You're able to conduct the debate without being unreasonable.

Believe me, I am SOOO interested in tax reform. I will give you even odds that my family will hit the AMT this year. It's part of the reason that a full time position is not feasible for me. Next year won't be so bad, since my husband is on salary, not commissions anymore, but we'll have to be careful from now on.

Robert said...

As a business person, and a student of economics, I can tell you very simply why businesses won't keep their prices high. If the cost to bring a good to market drops dramatically, the smart seller passes on at least some of that savings to the customer in the form of lower prices. Competition sets in and the prices drop. I'll grant it might not happen overnight, but I suspect it would be very rapid.

As to people forgetting they're not paying income tax anymore, you honestly believe people wouldn't notice a sudden 30-40% increase in their take home pay? Without anything being deducted from paychecks anymore, suddenly the dollar amount a person agreed to work for when they took a job is the dollar amount they could expect to take home - minus any state income taxes, which in our case is only 6%. So if a person was making $50,000 a year, they'd be taking home $44,000 a year plus getting a prebate based on family size (the charts for those amounts are available on the FairTax site, I believe). The average person would definitely notice an increase in their discretionary cash flow - meaning the amount of money they have control over spending.

I started to write a much longer response here, but I digressed greatly from the subject. I want to put my response in its own blog post because I think it is important to make it more easily seen by others. Watch for a post on corporations in the coming days.

Robert said...

I need to correct my math on the last comment: the take home would be $47,000. Compare that to more like $35,000 likely take home after payroll taxes and withholdings and before any refunds have set in. Obviously, more money is in the hands of the consumer.