FairTax Editorial written by Congressman John Linder, sponsor of the FairTax Bill

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Is it time for the FairTax?


When they see a problem – immigration, energy, or a collapse of the credit markets – politicians step forward and announce, “We must do SOMETHING!”

That part is a given. What is not a given is what SOMETHING is. And, alas, it comes down to whatever the majority party in the House and in the Senate decides it will be. It will generally be a combination of taxes and spending, and in the current trillion dollar “stimulus” package the spending portion is pork and the tax portion is welfare.

To get people back to work you must make the future more rewarding and predictable so small business owners find it in their own interest to hire more people. That would argue for business tax cuts and extending the preferential treatment for capital gains and dividends to attract investment. Not this week. Much of the “tax” portion of this bill is the refundable tax credit. Government checks will go to those who pay nothing in income taxes or payroll taxes. In fact, this bill increases the number of Americans who get a check from the government in excess of all of the Federal taxes they paid from 15 million to 22 million.

There is a proposal that would fix many of the problems we face with no additional government spending. It is called the FairTax. The FairTax eliminates all taxes on income of any kind. No more personal or corporate income tax. No capital gains, dividend, estate or gift tax. No alternative minimum tax. No payroll tax. All would be replaced with a national sales tax. Instead of giving the government 33 cents out of every dollar you earn you will give the government 23 cents out of every dollar you spend. The proposal will raise the same revenue as the current code, but you will choose when to pay taxes and how much to pay by how you choose to spend.

By eliminating tax withholding, the average income earner would get an immediate 50% increase in take-home-pay. How’s that for a spending stimulus?

There are four major economic issues already driving us to a consumption tax such as the FairTax. Perhaps we should consider it now before we commit to an additional trillion dollars in debt on future generations.

1. A Harvard professor’s study showed that, on average, 22 cents out of every dollar you spend today represents the embedded cost of the current tax system. You are paying the income taxes, payroll taxes and accountants and attorneys to avoid the taxes of each of the many companies it takes to get a loaf of bread to your table.

2. A Tax Foundation study says that we will spend $350 billion simply to comply with the income tax in 2009. We spend billions more each year calculating the tax implications of business decisions. That isn’t just inefficient. That is stupid. Eliminating this would give us the equivalent of a $4 trillion tax cut over 10 years without any impact on the budget.

3. There is today in the underground economy in excess of $2 trillion not paying its share. As the tax code gets more complicated it is easier to go underground. Under the FairTax, these dollars would be taxed every time they bought a loaf of bread.

4. There is, in offshore financial centers in dollar denominated deposits, more than $13 trillion looking for an opportunity to get into our markets. Some of that money represents corporate profits from foreign sales that—because they will be taxed at 35% if repatriated—will likely be invested offshore. Under the FairTax we will be the world’s largest and most stable tax haven. That increase in liquidity would make what we have done – and will do – with taxpayers funds look trifling.

Those four circumstances will be addressed by the FairTax. None will be altered if the income tax and the IRS are left in place. If we are serious about getting more cash into our system and leaving more money in the pockets of workers for them to spend, we will look seriously at fixing a broken tax system that even Jimmy Carter called a disgrace.

If our goal is just to spend $1 trillion on new entitlements and favored Democrat constituencies and thus burdening future generations with increased taxes and a diminished standard of living, the Obama proposal is the right prescription. If our goal is to free American markets and the American entrepreneur to innovate, prescribe the FairTax.