The FairTax in place of income tax

In summary, the "FairTax" proposes to replace all current federal taxes with a 23% national sales tax, while giving individuals 100% of their paychecks. This plan has been gaining traction as a potential solution to the current economic crisis, and aims to simplify the tax code and eliminate tax evasion. Critics argue that the tax is regressive and could potentially be higher due to state and local sales taxes. Proponents argue that the "prebate" system will offset this, providing a monthly rebate for essential purchases and exempting those living below the poverty level from paying any taxes. The plan also aims to bring power back to the American people by repealing the sixteenth amendment and giving them a choice in how much they contribute to
  • #1
tchitt
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 http://www.fairtax.org" 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.
 
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  • #2


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.
 
  • #3


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!"
 
  • #4


TheStatutoryApe said:
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?

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 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.

21States will have an incentive to conform their state sales tax
base to the FairTax base because H.R. 25 provides that conforming
states are allowed to collect state sales taxes on Internet and
remote sales to residents of their state. Other studies have
estimated this to be a potential revenue gain of between $21.5
billion and $33.7 billion for 2008.

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.
 
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  • #5


tchitt said:
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.
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.


tchitt said:
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.

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.
 
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  • #6


That seems quite complicated. Especially determining just what exactly constitutes necessities.

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.

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.

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:

1. The name of each family member who shares the residence;
2. the Social Security number of each family member;
3. the family member to whom the monthly prebate check should be paid;
4. a sworn statement that all listed family members are lawful residents, that all family
members sharing the common residence are listed, and that no listed family members are
incarcerated;
5. the address of the shared residence; and
6. the signature of all family members 21 years of age and older.

Wouldn't it be quite easy to say that there are persons living in your home that are not in fact living there?

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.

Do you have to have a job? Can a person just live on these "prebates"?

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.
 
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  • #7


"Under the FairTax small businesses enjoy a zero tax rate."

http://www.fairtax.org/PDF/TheImpactOfTheFairTaxOnSmallBusiness.pdf

Gee, I wonder who's behind this whole FairTaxSM "grassroots" movement. http://en.wikipedia.org/wiki/Astroturfing" , anyone?
 
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  • #8


Ah, yes... from the Wikipedia entry on http://en.wikipedia.org/wiki/Americans_For_Fair_Taxation"
Wikipedia said:
AFFT was founded in 1994 by three Houston businessmen, Jack Trotter, Bob McNair, and Leo Linbeck, who each pledged $1.5 million as seed money to hire tax experts to identify what they perceived as faults with the current tax system, to determine what American citizens would like to see in tax reform, and then to design the best system of taxation.

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?
  • http://www.opinionjournal.com/extra/?id=110010523" from the Wall Street Journal (2007)
  • http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/" from Money magazine (2005)
  • And http://www.mises.org/story/1975" from the conservative libertarian group The Ludwig von Mises Institute




 
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  • #9


tchitt said:
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.
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.
 
  • #10


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.
 
  • #11


devil-fire said:
I would think this would encourage a lot of people to buy everything they could as "used" goods from outside the USA.
...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.
 
  • #12


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
 

Related to The FairTax in place of income tax

1. What is the FairTax and how does it differ from income tax?

The FairTax is a proposal for a national sales tax to replace the current income tax system. Under the FairTax, a flat sales tax would be applied to all purchases of new goods and services. This differs from income tax, which is based on an individual's income and can vary based on income level and deductions.

2. How would the FairTax affect the economy?

The FairTax is designed to stimulate economic growth by incentivizing consumers to spend more and save less. It would also eliminate the need for complex tax rules and loopholes, freeing up resources for businesses to use towards growth and innovation.

3. How would the FairTax impact low-income individuals and families?

The FairTax includes a prebate system, which would provide a monthly refund to cover the estimated amount of taxes paid on essential goods and services for individuals and families at or below the poverty level. This would effectively eliminate the sales tax burden for low-income individuals and families.

4. Would the FairTax be revenue-neutral?

Yes, the FairTax is designed to be revenue-neutral, meaning it would generate the same amount of revenue as the current income tax system. However, it may result in a shift in tax burden from higher-income individuals to lower-income individuals due to the elimination of progressive tax rates.

5. How would the FairTax affect businesses?

The FairTax would simplify the tax code for businesses, as they would no longer need to file income tax returns or comply with complex tax regulations. However, businesses would need to adjust their pricing strategies to reflect the sales tax, which could potentially impact consumer demand and profits.

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