FairTax, Great Start
By: BJ Lawson
Note: I have reconsidered my support for the FairTax in our inflationary environment. When wages are stagnant and prices are rising, a national sales tax provides a tax hike with every increase in your grocery or gas bill. The FairTax might be a great start in an environment of stable prices, but we can’t afford the FairTax with UnfairMoney. There is simply no substitute for reducing the size and cost of our federal government. Read more here.
If you want less of something, tax it. If you want more of something, don’t tax it.
When you consider that simple rule, the foolishness of our federal income tax system is immediately apparent. In an increasingly competitive global economy, do we want more productivity, income for our families, and better jobs being created? Absolutely. So why do we tax our productivity with obscenely complicated income, capital gains, and estate taxes?
If we want to restore our economic freedom as Americans, we need to start saving, investing, and producing — and not just run up our credit card bills through consumer spending. So since we want more productivity, income for our families, and new jobs, we need to stop taxing our income. But how do we fund government? Simple — let’s tax spending, instead of income.
It just so happens that there is an excellent, well-researched plan in Congress right now that will eliminate the IRS and make our nation much more competitive. It’s called the FairTax, and it taxes consumption of new goods and services at a uniform rate of 23% “of the gross payments for the taxable property or service”. That equates to a 30% rate as most Americans understand sales tax (see discussion below). Here are the high points:
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.
The FairTax:
- Enables workers to keep their entire paycheck
- Enables retirees to keep their entire pension
- Reimburses the tax on purchases of basic necessities
- Allows American products to compete fairly
- Brings transparency and accountability to tax policy
- Ensures Social Security and Medicare funding
- Closes all loopholes and brings fairness to taxation
- Abolishes the IRS
A key element of the FairTax is its concept of a “prebate”. Using estimates of poverty-line income for households of different sizes, the FairTax offers Americans the opportunity to receive a “prebate” (so-called because it comes at the beginning of each month, in preparation for expenses you will have) to cover the cost of the consumption tax for the folks at or below the poverty line. Everyone is eligible to receive the prebate if you register, and it does not depend on income — only the size of your household. Obviously, if you are spending more, the prebate won’t mean as much to you — but if you are just getting started to build a financial future, the prebate will eliminate the burden of federal taxation entirely.
So what’s not to love? Well, as a great as the FairTax is, it’s not a panacea. It still requires that you sign a government form to certify your household’s size if you desire the prebate. That’s somewhat invasive, but not nearly as invasive as reporting your income and experiencing the misery of payroll deductions every paycheck. Just think — keeping all your paycheck! Not reporting your tips! Starting a business without needing to worry about payroll deductions!
The bigger limitation is that the FairTax doesn’t address the bigger problem of federal government spending. Having a better tax system that’s “revenue neutral” is great, but when the current revenue levels still leave us adding to a $9.1 trillion national debt every year, we still have deeper problems. In 2006, income taxes brought in about $2.2 trillion in revenue. But that didn’t stop our federal government from spending over $3 trillion. Try that a few times in your own household — you won’t like the results.
As Americans, we must realize that it’s up to us to create value, and that we can’t depend on the federal government, or even employment by paternalistic corporations, for the illusion of “financial security”. We must eliminate the wasteful subsidies and corporate welfare that give politically-connected corporations huge advantages over new entrepreneurial ventures and family businesses. In doing so, we will create a nation with more owners, instead of just employees, and the explosion in small businesses creating good jobs will reduce the need for federally-funded social services.
That powerful, positive combination will reduce the size and scope of the federal government, allowing us to reduce the FairTax’s rate from the 23% required to replace our current tax revenue. While a 23% FairTax could have replaced 2006’s $2.2 trillion tax revenue, if we could just scale our federal spending back to the $2 trillion required in 2000, we wouldn’t even need all 23%.
In the final analysis, what’s most important is our nation’s economic direction, not our position. Even though we’re in a bad position right now, we can start moving in a better direction, and quickly, by implementing the FairTax. That’s why I strongly support it, and I encourage every other American citizen to learn more about it and do the same.
December 3rd, 2007 at 7:01 pm
Another alternative is the flat tax. It offers a similar “prebate”, but that prebate is offered to every tax-payer: you don’t have to apply for it. The last I checked there were no definite numbers, but it is widely accepted that the first $28,000 would be exempt (for a family of four). Then earned income would be taxed at 15 - 17% (again, exact rate is still to be finalized). That’s it. So, if I make $50,000 or $50,000,000 the first $28,000 would be exempt and then I would owe 15% on the remainder. Now that sounds like a fair tax. The more I make, the more I owe. There are too many possibilities for loopholes in the FairTax plan. The biggest opening would be what would be taxed. Would only my iPod or my clothing be taxed? How about my savings? Does offering a plan to save at my local bank constitute a service? Would I have to pay a tax to deposit money in my retirement fund? I can see Congress expanding the list of taxable items to make it where we won’t be any better off than before. With the flat tax, you know ahead of time exactly how much income tax you would owe each year. And, the net rate can’t change by way of some hidden deduction. The rate would have to be changed and then even those who don’t pay attention would see a difference in their paycheck. Taxes would still be deducted from my paycheck, but the math is simple enough that most of us would be able to be able to tell if the amount changes. Local municipalities would still control the sales tax to fund their governments and then the citizens of those communities would be able to dictate how much sales tax is charged, not the federal government. I think we can agree we certainly need to reduce if not remove the power the IRS holds over the citizens of the United States, but I think a flat tax is the most fair tax.
December 3rd, 2007 at 10:50 pm
Kyle, you make some good points about the flat tax. But the fundamental problem is that we can no longer afford to tax productivity. There is nothing more invasive, or painful, than the government assessing and taxing how much you “earned”… flat or not, taxing income is taxing the wrong thing.
We’re already collecting sales taxes at the state level, and in reviewing the FairTax legislation (HR 25), I’m fairly impressed by its federalist take on resolving ambiguities: “Construe any ambiguities in this Act in favor of reserving powers to the States respectively, or to the people.”
I have concerns, however, and am still actively exploring the impact of the FairTax on microfinance/microcapitalism. Specifically, I am convinced that the best way for poor and disenfranchised folks to start empowering themselves financially is to “decriminalize” healthy profit-seeking behavior. If I want to trim hair in my apartment, that should be cool. If I want to sell handwoven baskets at a spontaneous sidewalk market, that should be cool.
Is there any way local enforcement and collection of sales taxes can allow, and encourage, such individuals to get started creating value, and not turn these folks trying to get ahead into unindicted criminals? More to come on this critical issue, because we need more “owners” at *every* level of the economic food chain… not just among newly-minted MBA graduates. At what point does someone cross the line into a business that is accountable for keeping accurate books, and subject to fines and prosecution?
December 5th, 2007 at 1:23 pm
I couldn’t agree with you more Barry. Changing our ethos from consumption-oriented to production-oriented is the bottom line. I don’t mean production in the sense of churning out a widget, but in the sense of generating inherrent value. As humans, we are built with a desire to create, to do things that matter. A mechanism for funding the basic responsibilities of government that is aligned with this would be a big step forward.
December 6th, 2007 at 4:40 am
I’ve been touting the benefits of the FairTax system since I first heard of it, back when Steve Forbes was running for president. It was one of his campaign promises to make the FairTax a reality. I wasn’t really all that excited about Steve Forbes, but I couldn’t hear enough about the FairTax. Next thing you know, Steve Forbes is out of the race, and the FairTax is swept under the rug, rarely to hear of after.
I can’t believe you’ve only had two comments on this post so far. What does it take to get Americans excited about such a great piece of legislation? You would think the downfall of the IRS alone would have people lining up around the block to hear (or in this case read) about it. I would love to see the FairTax become a reality. Who wouldn’t? Wake up America and smell the opportunities and possibilities. Just imagine, a world where drug dealer, pimps and hoes pay their “fair” share of taxes. You gotta love that. I know I do.
Now, back to your regularly scheduled blog already in progress.
December 7th, 2007 at 8:00 am
The FairTax sounds great at first glance, but Jews for the Preservation of Firearms Ownership has a very interesting article on the downfalls of a Fair Tax:
http://www.jpfo.org/filegen-a-m/fairtax.htm
Some of the many points they make:
1.) Things that the government didn’t want you to have would be taxed at huge, huge rates. First on the list, of course, would be guns, which is why JPFO is against it.
2.) It says the IRS will be abolished and replaced with another collection bureau– how do we know that isn’t just another IRS-style bureacracy in the making?
3.) Huge black markets will develop of expensive goods, for which people will not want to pay the national sales tax.
4.) It creates a new type of welfare for every American– the monthly rebate check you would get from the government. Even though technically you’re getting your own money back, just as with other forms of welfare, people won’t see it that way and will come to depend on their monthly check– which every American will get, even Bill Gates.
5.) We could end up with both a national sales tax and an “emergency income tax” like the one we have now.
December 7th, 2007 at 1:02 pm
Libertarian Girl, you make some excellent points. While HR 25 is technically dead, as we look to pursue a better tax system using the FairTax, we do need to be careful and address those concerns.
The tax absolutely must be a flat sales tax, without any discriminatory/punitive rates (which will only encourage black markets).
We also must put the power of collection squarely in the hands of the state (not federal) government. Since the state is also dependent on sales tax for revenues, the enforcement naturally belongs at the state level. It also provides better accountability, since state revenue departments are more accessible to the citizenry than some distant federal bureaucracy.
The black market concerns are real, and must be addressed through shrinking the size of the federal government. With a Constitutional federal government, we won’t need a rate of 23%… and could again explore uniform (non-protectionist) tariffs as a primary means of financing government as we did before 1913. When less tax is required, the incentive to avoid it will be reduced. Additionally, as the rate decreases, the necessary monthly “prebate” will also decrease.
I disagree with your assessment of the prebate as a “welfare check”. Most/all of the prebate will circulate back to government as consumption tax revenue, unless, of course, the recipient engages in black market transactions.
We also need to repeal the 16th Amendment and follow the Constitution to take the federal income tax off the table.
December 7th, 2007 at 2:53 pm
I agree, repealing the 16th Amendment would really help. It was actually the JPFO who thought the monthly rebate check would constitute welfare, and I thought it was an interesting point. I agree with the Fairtax in theory, but mostly I agree with decreasing the size of the federal government so that there wouldn’t be a 23% tax on everything. The JPFO has many more arguments that are very interesting in their essay. The tax is actually a 30% tax but is calculated to make it seem that it is a 23% tax. For something that costs $1.00, the tax would be .30, which most people would think of as a 30% tax.
December 19th, 2007 at 11:50 am
I just want to take a moment to dispel the myth that the 23% tax figure is somehow misleading. While $.30 tax on an item costing $1.00 does represent 30% of the base cost of the item, it is in fact 23% of the final cost of $1.30. Either way of presenting the cost of a tax is accurate, as a percent of the untaxed-base cost, or as a percent of the final cost. However, the tax rates which everyone hears today, including those used for our current state and federal income tax rates, are always quoted using the final-cost tax computation approach. This is likely because it does sound like they are taking less of our money than they really are, but as long as they use that method then the Fair Tax should use the same one so that we are truly comparing apples to apples.
December 22nd, 2007 at 10:39 am
It’s not a “myth” that the 23% sales tax figure is misleading. It IS misleading because it’s an inclusive sales tax, and everyone in the country who pays sales tax pays it exclusively, not inclusively.
I think the Fair Tax is a step in the right direction because it would encourage savings, which we need a lot more of in this country. But we don’t need the Fair Tax or the Income Tax. We need to stop spending so much money.
But if you’re going to implement an inclusive Fair Tax, my main concern is that we would lose transparency in the taxing process. This might seem silly at first, especially compared to the current tax structure (yikes!) but at least with the current system we see an actual number of how much we’re giving up to the government in taxes. Since the Fair Tax will be included in everything we buy, as opposed to being taken out of every paycheck, or paid at the end of the year, it will be tough to keep track of how much we’re paying in taxes. An inclusive sales tax makes it too easy and tempting for the government to raise taxes because even though people may hear about a tax raise in the news and know it’s happening, they won’t really see how much more money they’re giving the government in their day-to-day lives (unless they’re like me and track expenditures religiously) and there will be that much less resistance to tax increases. This is a bad thing.
A similar effect occurs when people pay for everything with credit cards instead of cash. They may “know” how much they’re spending when they use credit cards, but when people make all their transactions in cold, hard cash, they usually spend less because it’s easier for them to see how much they’re really spending. The Fair Tax is like a credit card — it makes it too easy to ignore how much money you’re actually giving to the Federal Government, because it’s already baked-in to everything you buy. On the other hand, the Income Tax isn’t good either because its progressive nature discourages people from earning more money. The solution: decrease government spending by 40% to 50% and stop directly taxing the citizens.
January 13th, 2008 at 6:06 pm
Patrick,
I would submit that the current system of tax witholding is far worse than an inclusive sales tax from the standpoint of people’s awareness of what they’re paying. How many people do you know that celebrate when they get a tax refund, without considering that what they’re getting back is money they earned that the they lent to the government without interest?
-jcr
January 17th, 2008 at 2:21 am
Debating a flat income tax versus FairTax versus a progressive income tax versus any other system of taxation, is merely picking which shade of lipstick with which to decorate the pig.
Unless we stop the insane level of federal spending, the federal budget will remain a pig.
The FairTax is legislation, not a Constitutional amendment. Until we repeal the 16th Amendment, it would be very dangerous to create a new federal tax. Even if the income tax were stopped with passage of the FairTax, Congress would still have the Constitutional authority to impose a new income tax. Just a “temporary” income tax, for an “emergency”, perhaps only on the “richest 1% of Americans”… sound familiar?
Every state that has passed a “temporary” additional tax (sales, income, or property) has soon found that tax has become permanent. Not just permanent, but continually expanding and growing right alongside the other statewide taxes.
The total federal take from income taxes is less than the amount the budget has grown over the last 10 years. Roll the budget back to just 10 years ago –never mind all the way back to its Constitutional limits– and we can eliminate the income tax while replacing it with nothing.
That’s my idea of real reform!
January 20th, 2008 at 8:21 pm
Proponents of the fair tax need to explain this to me. As someone with actual savings under the present system (probably the minority now in America), how is it ‘fair’ that my hard earned, already taxed money will be taxed again when I decide to spend it?
January 20th, 2008 at 9:16 pm
Brandon — Consider that in the world of a consumption tax your savings would immediately be growing tax-free. So your existing savings would be compounding tax-free, which is a vast improvement over the current system where interest income, dividends, and capital gains are all taxed.
You have less money to spend today, not because you’re paying sales tax, but because capital gains and income taxes are taking a bite out of your savings. So while you might be at a relative disadvantage if you spend your savings, you will be at a distinct advantage when you invest your savings.
February 20th, 2008 at 6:16 pm
Fairtax can only work if math doesn’t matter.
Fairtax depends on taxing the federal government 500 billion dollars, to pay the federal government.
Neal Boorz wrote “(Under the fairtax)…. the federal government ITSELF would become a MAJOR taxpayer” (Page 148).
Oh really? Well the federal government can write all the checks to itself that it wants, but it can’t get any revenue from itself, its just an absurdity, a farce.
Fairtax also depends on nursing home patients, cancer patients, Alzehimers patients — all patients - paying 460 billion in sales taxes. Thats a sales tax on cancer surgery, sales tax on nursing home care, sales tax on the parents of a leukemia patient. Many of those people simply wont have the 20,000– 70,000 dollars such a “sales tax” would levy.
There would be a lot of very surprised people if fairtax passed. SOme would pay far less taxes — some would pay 100, even 1000 times more. Cancer patients would probably be taxed 1000 times more, as would heart patients, and nursing home patients.
Renters would have huge taxes to pay — and probably have no idea that fairtaxers are working very hard to put a tax on their rent.
People who pay insurance premiums — health insurance, car insurance, homeowners insurance — would be taxed on all premiums.
A person could wake up one morning, a month after fairtax passes, and get 50,000 bill for sales tax - on their knee operation, their surgery, their rent, their utilties, their insurance premiums.
Fairtax would be far different for many people than the theory would let us believe.
February 20th, 2008 at 6:18 pm
Fairtax isnt voluntary — not if you have cancer and need 150,000 in medical care to stay alive
Not if you had a stroke and live in a nursing home
Not if your child has leukemia.
Not if you need a back operation, or have a brain tumor.
Fairtax would (supposedly) have a huge tax on all medical cost.
Its also a tax on all rent.
And all insurance premiums.
Yes –
February 20th, 2008 at 6:20 pm
By: BJ Lawson
If you want less of something, tax it. If you want more of something, don’t tax it.
Thats right — Mr Lawson. And if you tax new homes, sir, with a high sales tax, you will get a decimated new home industry.
If you tax new cars with a high sales tax — you will get a decimated new car industry.
Better look real close at the fairtax. Its more like those magic beans they told everyone would let you use water in your gas tank.
February 20th, 2008 at 9:24 pm
MarkDC — Math always matters. Before we can start this conversation, we as a nation need to first admit that we have a problem:
http://www.fairtax.org/PDF/IsTheUSBankrupt-03-13-07.pdf
The problem is that our current system, like it or not, is unsustainable. We simply cannot keep moving on our current trajectory of massive long-term entitlements that cannot be met, and a tax code whose compliance costs are estimated at $250 to $450 billion dollars per year, and falls most severely on the small- and medium-sized businesses that we need the most:
http://www.fairtax.org/PDF/WhatTheFederalTaxSystemIsCostingYou.pdf
http://www.fairtax.org/PDF/TaxAdminCollectionCosts071025.pdf
The compliance costs are embedded in the costs of the goods and services you buy today. As businesses’ cost of compliance go down, so will the prices they need to charge to maintain consistent profitability. The cost of the existing income tax system is simply waste — just like heat thrown off by an engine. Our current tax system with over 67,000 pages of regulation is pure inefficiency that must be eliminated if we want to survive economically.
Your points about taxation of new homes, new cars, and so forth ignore this simple fact. The actual price increase seen with a uniform (and thus simple) consumption tax will be less than the rate of taxation since the embedded costs of compliance with the current tax code will be eliminated.
With respect to the housing market, the current tax system introduces a number of other distortions that will be eliminated:
http://www.fairtax.org/PDF/PromotingHomeOwnership.pdf
With respect to insurance premiums and other services like healthcare, the embedded inefficiency argument also applies. Finally, you’re keeping your entire paycheck — so you have more money to spend. In the final analysis, would you rather pay 30% tax on all your income, or just that percentage of your income that you choose to spend?
Finally, please don’t rest your objections on healthcare. Healthcare is a special case, since the market for healthcare is already ridiculously distorted. Eliminating those 67,000 pages of income tax code and regulations would simplify the healthcare market significantly, and move towards a more transparent and rational system:
http://www.fairtax.org/PDF/TheImpactOfTheFairTaxOnHealthCare.pdf
Misinformation about the FairTax abounds, and I’d advise you to check out this section of the FairTax Web site for some rebuttals:
http://www.fairtax.org/site/PageServer?pagename=news_myths
As I state above, the FairTax (or a consumption tax in general) is not a panacea. We desperately need to address spending, and long-term entitlements. I also think the proposed tax rate is too high, and that black market/tax avoidance with a tax rate of 30% will be an issue. That challenge simply reflects the obscene size of our federal government.
Right now, the government is taxing your wages, savings, capital gains, and estate. Even that’s not enough, so we’re printing and borrowing money at a rate of $1-3 billion per day — thus further confiscating your wealth through inflation. What has your grocery bill done over the past five years, and has your salary kept up? Compliance costs render our economy defenseless in a competitive global economy.
Are you really satisfied with the status quo?
April 16th, 2008 at 10:17 am
The local District 04 Fairtax.org membership base is growing by leaps and bounds. As the District Director for our organization, I support BJ Lawson not simply because he supports the FairTax, but because he has the courage and leadership to realize that “We The People” must take back the power we gave to the Federal goverment when we gave them the power to control our lives with the 16th. amemdment. BJ Lawson sees the “BIG PICTURE” of things wrong with the direction our elected representatives are taking. I’d vote for and campaign for BJ even if he weren’t in favor of the FairTax. BJ is right; The FairTax will NOT solve all our problems. The FairTax is a START. As someone else out there on the campaign trail says: “It’s time for a change”, and it IS time for a change. BJ Lawson represents the change that I fully believe the NC 4th congressional district needs. To all that read this, I ask for your support of the FairTax, but I PLEAD for you to support BJ Lawson!