All over the country including in the halls of Congress, Americans are beginning to see the Income Tax as a failed system that cries out for fundamental reform. The question is no longer, how can the Income Tax be improved, but rather how can we reduce collecting revenue to its simplest, fairest form? In 2005, then President, Bush, convened a panel to answer that question. His charge to them included the requirement that whatever they came up with must encourage economic growth. As with most attempts to deal with the problem in Congress the panel failed miserably at meaningful reform. Why they failed has to do with politics as usual, but we’ll save that discussion for another time.
It becomes apparent that Congress as presently constituted will never voluntarily give us relief. Therefore the solution will have to be imposed from the grassroots. The FairTax offers that grassroots input and the off year election experience in 2010 shows that making it a campaign issue can be very successful. 84% of candidates who actively supported the FairTax, won their races.
FairTax supporters face a litany of objections. Some are genuine, some are contrived, but all are based on misperceptions of the actual provisions of the FairTax as spelled out in the proposal before Congress, HR25. Let’s take them one at a time:
- The FairTax will be a 23% sales tax on everything you buy. The implication is that this will be an additional tax. We saw this tactic used as early as 2006 in campaigns against incumbents who were cosponsors at that time. As we all know, the fact is the FairTax is a replacement for all federal taxes with the exception of excise taxes. No more Income Tax, no more Payroll Tax, no more Corporate Income, no more Capital Gains, no more AMT, and no more Estate Taxes. If you think 23% is a big number, just remember that is what it costs us to operate the Federal Government today. By the way, the amount of revenue raised by federal excise taxes is inconsequential.
- It’s not really 23%, but 30% Critics of the FairTax love to beat us up about the exclusive rate being 30%. The problem here is one of comparing apples to oranges. There are two ways to express taxes, inclusive and exclusive. The inclusive tax is figured as an integral part of the sticker or shelf price and that’s the way we express the FairTax rate of 23%. The other way, the exclusive tax, is what we are all familiar with when we pay state sales taxes. It is added on to the sticker price. While it is true that the FairTax is 30% figured exclusively, it amounts to exactly the same in dollars and cents to 23% inclusive. The critics are using two different measures. Has anyone ever figured out what the exclusive rate is for the income tax? The answer is yes. Beacon Hill Institute published in 2007 in a paper entitled What Rate Really Works, that the exclusive rate of the current income tax would be 48.22%. 30% or 48%, your choice………… http://www.beaconhill.org/FairTax2007/BHI-AEI-What-rate-works-2-28-...
- The FairTax unfairly targets the poor. This argument would have had legitimacy in the earliest days of the proposal. But when the FairTax went to DC, cosponsors were added in bipartisan teams, one Republican and one Democrat. The original Democrat cosponsors, perhaps most notable among them, Colin Peterson of Minnesota, pointed out the flaw. The result of that negotiation was something called the “prebate”. The prebate untaxes expenditures for necessities such as food, clothing and medical expenses up to the poverty income level as determined by the HHS each year. In 2012 the prebate for a family of four is $580 each month. Just to be clear, the prebate is available to all Social Security card holders regardless of income.
- The FairTax is regressive. This criticism is not to be taken lightly. We have come to expect that for any system of taxes in this country that the rich will pay more in relative terms (percentage) than the poor. Indeed we have come to expect that the poor will be exempted from income taxes altogether. . Under today’s system we tolerate two very regressive taxes without thinking. The first is the Payroll Tax which is levied against all citizens without regard for income. That makes the Payroll Tax regressive by definition. The other, even more regressive tax we pay without thinking, is something called embedded tax. At each stage of manufacture tax costs are added to the product and are compounded as it makes its way up the supply ladder on its way to the retail counter. It is estimated at least 12.5% of today’s retail costs will be removed by the FairTax. Taken together, the prebate, the removal of the Payroll Tax, and the removal of embedded taxes at retail, the FairTax comes out even more progressive than the Income Tax.
- We should pass the Flat Tax instead. There are things to like about the Flat Tax, known as the Burgess Act, HR1040. It certainly makes filing taxes simpler for most of us. But if your goal is to fundamentally reform the Income Tax, the Flat Tax is not the answer. It retains the IRS, and it retains the regressive Payroll Tax. 80% of Americans with incomes between 30K and 50K pay more in payroll taxes than they pay in income taxes. In a way Congress has already decided which plan is superior. HR1040 has 10 cosponsors. HR25 has 68.
- Retirees will be taxed a second time. The dollars and cents answer is that the first $21K for a retired couple would not be taxed at all under the FairTax. The average SS benefit for retired couples is $24K, a difference of $3K. When embedded taxes are removed from retail prices, retirees would break even. The FairTax repeals the taxation of IRA disbursements and guarantees the COLA for adjusting the rebate. There will be no estate planning needed or tax on gifts. The FairTax helps insure your grandchildren have the same opportunity you had.
- Unfair to Renters On average today’s renter pays about 23% of their disposable income on rent. Under the FairTax the renters take home pay will go up and they will be receiving the prebate. The new rent would amount to 24% of their new disposable income. They will hardly notice the difference.
- We will have an income tax and a sales tax at the same time From the text of the bill: TITLE I—REPEAL OF THE INCOME TAX, PAYROLL TAXES, AND ESTATE AND GIFT TAXES
Sec. 101. Income taxes repealed.
Sec. 102. Payroll taxes repealed.
Sec. 103. Estate and gift taxes repealed
To ensure Congress cannot enact simultaneous taxes in the future, a sunset provision . was added which says that if the 16th Amendment is not repealed within 7 years, the
FairTax Act becomes null and void.
- Where has the idea been tried before? The implication is that the FairTax is an unproven concept, and therefore to be avoided. This is a shameful attitude, in a country which has a deserved world-wide reputation for innovation. Prior to the Declaration of Independence and the Constitution, representational government was an unproven concept, too. Consider the pioneers. Taking risks is what made this country great. How about the risk we face by not fixing the tax system? Computer modeling indicates that 13,000,000 more Americans would be working today if the FairTax had been passed when it was first introduced into Congress in 1999.
Here’s a set of questions you might want to ask yourselves:
How would you like to get your entire paycheck, for an immediate 10% raise, maybe more?
How would you like to never have to file another income tax form for the rest of your life?
How would you like an automatic check the first of every month to “pay ahead” that month’s taxes on food, housing and medical costs? $580 for a family of four.
How would you like to see a number for the cost of running the federal government on every cash register receipt?
How would you like to see trillions of dollars returned to the U.S. from Switzerland, Cayman Islands, Hong Kong, etc. to jump start the economy and restore “Made in America”? The FairTax is the best jobs bill pending in Congress today, and the best part is that it would all be private investment, instead of taxpayers having to foot the bill.
How would you like to see all the new jobs that would come from expanding the GDP by 10%?
How would you like to take control from DC and eliminate tax favors for the special few who can afford to play the lobby game?
How would you like to see the IRS shuttered forever?
Business people and economists are rightly concerned about today’s punishing tax and regulatory environment. These problems must be addressed, but economic recovery requires another major component to be successful, which is demand. The FairTax puts more discretionary income in peoples’ pockets right away. No other tax reform can say that.