First, there are a few points that have to be made:
1. Only individuals own wealth. Corporations are owned, either directly or via stocks, by individuals. Only individuals performing labor, creating products, or using their knowledge create wealth.
2. Currently, we all pay hidden taxes. When you buy a loaf of bread, you pay sales tax. You also pay the tax the baker paid (payroll, property, etc.). And the taxes of the trucking firm who delivered the flour. And the taxes of the farmer who grew the wheat. These embedded taxes are currently hidden to us. Nor are they levied evenly; tax loopholes vary the amount depending on the industry and even the individual company. On average, for everything you buy, 23% of it is the taxes of the companies who make it and their suppliers. This 23% is the rate that currently funds our government.
3. The poverty rate everywhere in the country is a well established figure, measured and kept on a per-county basis. This number is the amount of dollars a year total spent on necessities, including food, transportation, medical, housing, etc.
The problems with our current situation:
1. The loopholes. Do I really need to explain this? K Street lobbyists earn hundreds of thousands getting tax breaks for their industries. Sometimes their individual companies. Crony capitalism, this method of using government's force to skew a market in your favor, is what caused the recession our friends in the financial industry have foisted on us, thanks to their bought and paid for assistants in government.
2. The cost. Tax preparation costs companies and individuals big bucks. When was the last time you filed your own taxes, on paper? Or did you pay H&R Block? That small payment adds up to billions in loss. Not only that, but companies make decisions based on tax advantage rather than smart business. How much does that lose?
3. The income base. Those of us paying taxes are becoming fewer and fewer. Those under the poverty line get credits. Those making the most can afford lawyers and accountants to find (or buy) loopholes or move their money overseas.
4. Government invasiveness. The less I say about this the better, lest you tune me out as a tinfoil hat enthusiast. But privacy is underrated these days, and our own government is one of the worst offenders. Also, do you know how much tax you paid last year? You know your take home, and you know how much you paid at the end (or got back) when you filed. But you have to calculate the actual amount you pay. It isn't on any of the forms. Do you really think this isn't on purpose?
5. Constitutionality. The income tax required a Constitutional amendment to enact it. It was illegal to do without it. I'm guessing that the founding fathers though it was a bad idea? "Sin Taxes" show us that taxing something lowers the desire for it. So we tax working and creating wealth?
The Fairtax solution:
The Fairtax is a national retail sales tax. It repeals all payroll taxes, corporate taxes, and quite a few special taxes. Every worker will receive 100% of their paycheck. Companies will no longer be taxed or file a tax form on April 15. They will not pay taxes on wholesale purchases used to provide a product or service. Instead, they will collect and submit a 23% National Retail Sales Tax on all new products or services sold to a consumer.
OK, wait! Put on the brakes! What? No corporate taxes? 23% new sales tax? How is this supposed to help? That's easy. The 23% embedded taxes described above? Gone. It's been proven that when taxes are removed from a product, the price goes down almost immediately. Thus, all products companies buy are 23% cheaper... as are the products they sell. All it does is take the hidden back end taxes and load them to the front end, on the receipt just like local sales tax. You know how much you're paying. And you have 100% of your paycheck to do it with.
I am a small business owner, and regardless of what opposition to the Fairtax says, collecting and paying sales tax is a walk in the park compared to payroll tax. Virtually effortless since it's already done automatically at the register.
So what are we gaining? We close the loopholes. No exceptions to be lobbied for. EVERY good and service pays. (But wait, you say... Yes, we'll get to that next). No cost for tax preparation (provision in the bill allows 2% to be kept by the company to pay for collection). Businesses can focus on business instead of gaming tax stats. The income base grows. Now everybody pays, including illegals, drug dealers, foreign tourists, and virtually every American citizen. (Yes, here's the part where the Fairtax gets good).
"But what about the poor people?" is what most of you have been holding in during most of that paragraph. "Where is the part where the rich pay and the poor don't?" What makes the Fairtax different than a flat consumption tax? Or you're saying "Great, but how do we get the liberals to go for it?"
Here's how: the prebate. Remember, the poverty rate, county by county, is a number that has been computed and trusted bipartisanly since the 70's. So, every household gets a check or debit card "pre-bate" for all taxes paid monthly up to the poverty level. If the poverty level is $12k a year, $1k a month, your check comes or card is credited for $230 at the beginning of the month. It's your money. Get a good bargain (Note that used goods, including houses and cars, are not taxed again, only once when they are new) and you've saved money. Don't spend on anything but necessities, and you may pay no taxes at all. Investments (both education and stock/mutual) are not taxed either. Save it? No taxes on interest.
"Shouldn't we exempt food or medicine or blahblahblah..." No. Exemptions are the reason for the existence of loopholes. And these loopholes create the crony system that's causing the problem. There's a reason it's called the FAIR tax. No loopholes. We don't need them anyway. The poverty rate value already takes into account spending on necessities. Food, medicine, housing, everything; it's already computed by the government anyway.
If enacted, the Fairtax makes the US the world's largest tax haven. 80% of foreign companies polled have said that they will move their headquarters to the US and/or build their next facilities there if the Fairtax is enacted. Billions in offshore accounts, both business and individual, banked outside our byzantine and draconian wealth confiscation culture comes into the US as those laws are rendered inert, providing massive amounts of investment capital.
Multiple independent projections show that: (paraphrased directly from the Fairtax page)
- Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25.
- Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.
- The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be.
- Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.
- The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.
- By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.
- Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system.
- Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively.
- Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax.
- Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20.
- On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base.
- The FairTax reduces the true cost of buying a home by 19 percent.
So who opposes it? IRS officials? No. Nor tax preparers and accountants. Not the economists and legislators who sponsor it. No, the only real opponent is the vast army of lobbyists whose sole income derives from gaming the current tax system and virtually buys and sells our government officeholders to win unfair advantage over their competitors or the market. Do we really want them to be in charge of our increasingly skewed economy?
For more information, visit http://www.fairtax.org. Start with the FAQ and check the papers and "Ask the Expert" section for more specific details. All of the details listed above come from there and are given with reference notes. The text of the bill, The FairTax Act (HR 25, S 296), is also available. There's also a calculator tool that lets you compute your own exact tax situation, and how you would benefit.
As a taxpayer, small business owner, and libertarian, there is no reason I can find that make me favor any other tax reform over the Fairtax.
Well said, Nate! This proposal merits MUCH more attention from the media and politicians than it has received.
ReplyDeleteThanks, Nate! I agree with JustAnotherGuy. We should be seeing far more public debate on FairTax.
ReplyDeleteOn face i agree with most things in the article. I do my own taxes as soon as i get my w-2, i make a day of it. I actually rather enjoy it(yes i am an accountant).Here is a major problem large ticket items(houses, cars and boats) Here is the senerio, you want to buy a 200k home. You walk into a bank how much you need to borrow? Thats right you need 246K. No bank will loan more than the value of the house at 5%. You would have to have a unsecured loan for the 46k, which normally rates run 10-15%. How do you suggest to handle this? The other issue is constitutional. We have admendment to collect income tax. Does it cover a sales tax too? or do we need a new admendment? What about imports? technically those items are purchased over seas and taxes are paid in the that country. Keep in mind every corporation has a team of accounts and lawyers to find loopholes, that is what we do.
ReplyDeleteFirst, a house that costs 200k will cost only 154k under the Fairtax. The 46k in embedded taxes from every board, window, gallon of gas the contractor uses, and payroll of every builder is gone.
ReplyDeleteAll products will be 23% CHEAPER before the fairtax is applied. So a house that costs 200k today will still cost 200k (154k materials/labor + 46k tax) after the Fairtax.
This is proven and explained well in The Fairtax Book and you can find the analysis at fairtax.org.
Sales tax is one of the methods of taxation specifically allowed by the Constitution. It and tariffs on imports were the primary taxation methods used early in our history.
Imports are subject to the Fairtax, which makes domestic products much more attractive as they are only taxed once.
Read the Research Paper at fairtax.org. It covers specific questions like this in detail.
You forgot one important thing profit! even if you take away payroll taxes. what about the tax on lumber and materials? even if you are correct okay you have a house 154k market value. where do you get the 35k into pay the taxes. I know VP in tax Dept, and tax specialist at the big 4. We have discussed this you still have these problems. If this were true what about the houses already sold. This would cause a drop in the housing market. I am not saying its a bad idea , but its not as simple as people make it out to be. Every time you do something there are unintended consquences to financial markets. What do you do about companies fixed assets? they have depreciation left to deduct on these assets. this would affects companies investments PP &E, they would lose the captialized interest and amortization on these items.
ReplyDeleteYou're going to have to research it, I don't recall it offhand.
ReplyDeleteI know that the transition will have special rules, like whether or not taxes have already been paid on inventory already owned by a company. I think it's in the form of a credit against future taxes for the tax value of current inventory.
Are depreciation benefits more important than a complete removal of corporate taxes? Seems to me the answer is no. Likewise, a disruption in housing prices (and no tax on used goods) that favors reuse, recycling, and husbanding of our goods sounds better to me than a system that throttles our ability and desire to invest, save, and produce.