Dismiss Notice
Join Physics Forums Today!
The friendliest, high quality science and math community on the planet! Everyone who loves science is here!

The FairTax in place of income tax

  1. Dec 6, 2008 #1
    The "FairTax" in place of income tax

    First of all; I'm not interested in any sort of partisan quibbles as they often degenerate into arguments that go nowhere. People will subscribe to what they subscribe to... I'm just putting this out there to get your thoughts and perhaps to make you aware of something that you might previously have not known about.

    Another topic I was posting in got me thinking... and it's rare to find a forum with such a high volume of consistently thoughtful and intelligent members so I thought I'd pick your collective brain on an issue that's somewhat important to me. In today's tumultuous economic times everyone is looking for a fix for what looks like the walls coming down around us in the United States... and many proponents of the FairTax are starting to feel like it might finally have a fighting chance.

    The full explanation can be found on the website, (it's a fairly simple idea, unlike our current hopelessly convoluted tax code) but I'll try to explain it here to the best of my ability just in case you don't feel like doing your homework... or you've got too much of it already.

    It is a fairly radical plan and a lot of people are initially taken aback by it's deviation from the long established status quo. Basically, it would completely eliminate all federal, corporate, estate, gift, capital gains, medicare, social security... see where I'm going with this? Everything that's deducted from your paycheck, everything you currently pay taxes on... that's gone. All of it replaced with a 23% national sales tax, offset by the fact that you get to keep 100% of your paycheck. If your wage is $15 per hour, you take $15 for every hour that you worked to the bank on payday.

    A lot of people are quick to assume that a 23% sales tax is regressive and relieves the wealthy of their current tax burden, pushing more of it onto the middle class. However the lifetime tax liability of a person making $20,000 a year is around 2%... while a family bringing in $500,000 yearly would carry a lifetime tax burden of 20% or more. All while maintaining the current tax revenues generated in the current system. People on Social Security would receive a monthly rebate check (paid in advance) to account for spending on essentials of living up to the poverty level.

    This would be one of the largest transference of power from the hands of the federal government back into the hands of the American people. The sixteenth amendment would be repealed and people would have a conscious choice of how much money they're willing to hand over to the government in the form of the choice whether or not to spend their income on new products and services.

    I know this is getting long so I'll just make a few quick points.

    - Cases of tax evasion would drop dramatically, due to the simplicity of the new system.
    - It would improve the economy by removing capital gains taxes, giving corporations no incentive to move overseas in order to escape the highest corporate tax rate in the world, and creating a huge incentive for them to come back creating jobs, and therefore wealth.
    -"Used" items would not be taxed in any way whatsoever... only new cars and new homes promoting ownership.

    I could go on forever (obviously), and I'm starting to think this might be reading like a sales pitch and if it is I apologize. Anyone with the fortitude to read through this, and the literature scattered over the internet... I'd appreciate your input. Opponents of this measure, especially. I've never learned anything from someone who agreed with everything I said.
  2. jcsd
  3. Dec 7, 2008 #2
    Re: The "FairTax" in place of income tax

    People who make under a certain amount of money don't have to pay federal income taxes because they can not afford it. By this plan they are taxed anyway regardless of their ability to afford it are they not?

    Also in someplaces that 23% will be closer to 33% due to state and city sales taxes. Then there are the plethora of other taxs specific to certain types of products that could make it even higher yet.

    I am sorry I don't have time at the moment to read from your link. I figured I could just ask you these questions and it may get the discussion rolling.
  4. Dec 7, 2008 #3
    Re: The "FairTax" in place of income tax

    I propose that we come up with a definition of war called "FairWar" that covers exactly all of the situations under which the United States has engaged in war. Then we can say things like "The United States only engages in FairWar!" and "Get out of Georgia, Russians, that's not FairWar!"
  5. Dec 7, 2008 #4
    Re: The "FairTax" in place of income tax

    Not at all, that's where the (pre)bate comes in. In my earlier post I only mentioned social security as a way of illustrating that it doesn't put undue pressure on the poor or elderly on fixed incomes. Each month EVERY household receives a rebate that basically "pays you back" for the essentials that you need to buy, such as food. It sounds needlessly complicated but if they were to simply exempt necessities from the tax then the tax would have to be 19-20% higher to maintain revenue neutrality. An application process determines the size of the monthly rebate based on the number of dependents living in any given household. Noone living under the poverty level pays any taxes whatsoever as the prebate pays back everything spent up to the poverty level. If you're at all interested I suggest you take a look at http://www.fairtax.org/PDF/FairTaxPrebateExplained2007.pdf and other resources available the website when you find the time as it explains in detail the ins and outs of the entire plan and I couldn't hope to condense it all here.

    Also, it's believed that if the FairTax is put into effect the price of consumer goods will fall because businesses will no longer be taxed at all... only people. The employer payroll tax is thought to be the main culprit for wage reductions, as well as an increase in the cost of goods. Economists agree that the loss of revenue created by the fall of the prices of goods, and the lack of a payroll tax will make state conformance to the FairTax base the best course of action. Again I'm trying to condense it and I worry that I'm oversimplifying. I'd be happy to try to answer any specific questions to the best of my ability though... it's getting late and I've been up for a while so I'm feeling a little disorganized.
  6. Dec 7, 2008 #5
    Re: The "FairTax" in place of income tax

    That seems quite complicated. Especially determining just what exactly constitutes necessities. And does a person have to prove that they spend money on these necessities? Quite complicated in that case. I think processing all of these "prebate" requests and determining whether or not they are valid will likely only swell the ranks of the IRS. Do you have to have a job? Can a person just live on these "prebates"? Wouldn't it be quite easy to say that there are persons living in your home that are not in fact living there?

    I'll have to read the material you've linked later. I'm sure you may not be up to answering all of these questions, I'm just pointing out where it seems to me that this system would really only complicate things further although it seems the oposite on the surface.

    In my state, CA, we have extremely high taxes and the government keeps looking for more ways to tax us every year yet still can't seem to balance our budget. I doubt this state will ever give up its taxes, no matter what.
  7. Dec 7, 2008 #6
    Re: The "FairTax" in place of income tax

    That's been thought of. It's exactly the reason why they don't simply exempt food and medicine from the tax, and use the prebates. What's to stop someone from running to Washington whining that hairspray is a necessity? In this way the plan becomes immune to lobbyists and special interest groups... To make clothing exempt to the tax opens the door for the wealthy to get exemptions on designer italian clothing while the poor get exemptions on wal-mart clothing. Therefore you're reimbursed all the money that you "will spend" up to the poverty level.

    That just means you get 23% of the HHS set poverty level every month which you will, in turn, use to buy your necessities. It's a set amount and not as complicated as I realize I made it sound.

    The processing of the prebate requests would come in one wave, and like I said it's relatively simple. Any transition is difficult, and indeed such a radical transition would probably create a temporary morning after effect... however, the IRS currently has to go through the tax returns of each and every american filing every year and it's getting to the point where they just don't have the resources anymore. The number of fraudulent refunds in 2007 cost the government millions in revenue. Under the FairTax the tax returns would only come from the businesses that collect the tax... reducing the number of returns dramatically and therefore downsizing the IRS and the maintenance costs associated with its operation.

    The application for the prebate would be infinitely more simple than an income tax return:

    This is basically a non-issue. If you're going to claim a family of 15 you'd need to submit 15 social security numbers. That's really nothing new, the government uses social security numbers for plenty of other programs in the same way. If you rip off your neighbor John's social security number and somehow claim him as a member of your household there's going to be a problem when he tries to claim himself.

    I can tell you that the prebates wouldn't be large enough for anyone to adequately live on, but I suppose it could be possible assuming they don't have any expenses... like someone else is paying their rent or letting them squat. But that would mean they were a member of the household and figured into that household's prebate. I'm not sure how it would be handled for people whose closest thing to an address is a park bench in Central Park or the backseat of their Pinto...

    As for California, I've heard about the financial problems and it sounds pretty serious from what I've heard. I really don't even have a basic knowledge of what's going on there, but I understand that the situation is dire. That being said I can't really speculate on how the FairTax would affect that situation either way.
    Last edited: Dec 7, 2008
  8. Dec 7, 2008 #7
  9. Dec 7, 2008 #8
    Re: The "FairTax" in place of income tax

    Ah, yes... from the Wikipedia entry on Americans For Fair Taxation, the group behind FairTaxSM, cited as coming from the book America's Best Kept Secret Fairtax: Give Yourself a 25% Raise, ISBN 1-4033-9189-0
    What a surprise that an organization founded by a group of millionaires would decide that what America really needs is to wipe out all corporate taxes! Who would have thought?

  10. Dec 7, 2008 #9


    User Avatar

    Staff: Mentor

    Re: The "FairTax" in place of income tax

    Still progressive, but it looks less progressive than the current system. FICA and medicare are 15% on their own and the lowest income tax bracket is 10%. Add in the 6% people already pay for sales tax and the 1% most pay for local taxes and you get 32% as the bare minimum that anyone without massive deductions (ie, people on the low end) pay today. I'm upper middle class (4th quintile) and my average regular income tax rate was about 20% last year, making my total tax burden roughly 42%.

    The biggest loophole I see in the current system is taxing stocks and stock options. That's how people on the very high end get around income taxes. But of course, the "Fair Tax" wouldn't hit them because once you have 10 plasma TVs and 4 Porsches, you stop spending and start investing. So the fair tax starts progressive, but then gets regressive at the upper end, just like our current systems.
  11. Dec 7, 2008 #10
    Re: The "FairTax" in place of income tax

    I would think this would encourage a lot of people to buy everything they could as "used" goods from outside the USA. I mean why would someone want to buy something new and get taxed a huge amount on it, or by something used domestically when it would have a market value related to the tax burdened 'new' goods when they could just pay for shipping and get a 23% (or whatever the amount of the tax is) discount on it?

    I could imagine an exporter in Canada with a $200,000 piece of farm equipment whack it with a hammer and say "I'm still getting $200,000 for this thing but someone in the USA just saved $56,000 for that scratched paint."

    I would also think any amount of inflation or market uncertainty would be particularly volatile. If Americans saw difficult economic times ahead they would start spending less and that would be much more of a economic contraction than it already is.
  12. Dec 7, 2008 #11


    User Avatar

    Staff: Mentor

    Re: The "FairTax" in place of income tax

    ....or delay buying new products. Good point. A lot of the reason that the car companies are in trouble isn't just the past 3 months of down sales, it's the past few years of people keeping their cars longer and buying more used cars. A tax that encourages keeping products longer and buying more used products could have a significant negative impact on the economy.

    Not sure if you could really get around this via imports, though: they could always just tax imports separately.
  13. Dec 7, 2008 #12
    Re: The "FairTax" in place of income tax

    treating all imports as "new" and thus taxable would swing from buying a lot of imports to buying vary little imports.

    the problem with putting a tariff on imports is the it makes an economy uncompetitive and encourages stagnation
Know someone interested in this topic? Share this thread via Reddit, Google+, Twitter, or Facebook

Have something to add?

Similar Discussions: The FairTax in place of income tax
  1. Income tax is illegal (Replies: 4)

  2. US Income tax rate (Replies: 17)

  3. US Income Tax (Replies: 137)

  4. Negative Income Tax (Replies: 7)