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A Solution to The American Tax Debate: The Fair Tax

March 25, 2011

How would you like to keep your entire paycheck, surrendering nothing to the federal government?  How would you like a tax system that does not penalize you for making more money by increasing your income tax percentage? How would you like a federal tax that was fair to everyone, regardless of how rich or poor you are?  That is exactly what the Fair Tax does.  And as always, Wikipedia does a good job summarizing it too if you want to learn more. 

The fair tax is a bill proposed by non-partisan legislatures to eliminate the current federal income tax system and replace it with a sales tax on all goods and services.  The number proposed would be 23%.  So yes, you will be paying 23% more for everything you buy; however, the federal government would take NOTHING out of your paychecks, ever.  What the fair tax would do is tax you based on your consumption, or what you buy, rather than the money you  make.  I believe this is the fairest tax system for the country.  If you have a lot of money and buy a lot of things, then you will pay more taxes than someone who is poor and buys less things.  Thus, nobody is paying an unproportional amount of taxes compared to others in the country. 

What the fair tax would do…

1. Eliminate the IRS completely thus reducing the size of our national government.

2. Encourage foreign businesses to expand their operations to the U.S. because, under the fair tax system, corporations would not have to pay the corporate taxes we currently have.

3. Force those who avoid paying taxes, like illegal immigrants, to pay taxes.  There is no way to avoid paying federal taxes if the taxes are included in the price of everything they buy at the store.

4. Reimburse citizens living in poverty every month with a check so that they can afford the increased tax on living essentials like food. 

For these reasons, I believe that the fair tax is the best answer to America’s tax debate.  Estimates conclude that the federal government will get the same amount of money from the fair tax as it does from the current system.    It will help the economy grow by freeing businesses from the current corporate income taxes.  It will drastically even the playing field for American tax payers because everyone will be paying the same percentage of taxes on what they buy, rather than the gradual income tax percentages on increasing salaries we currently have.  It will be fair to all Americans, thus the name. 

This nonpartisan legislation (HR 25/S 1025) 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 IRS is disbanded and defunded. 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.

-Fairtax.org

15 Comments
  1. lernerm permalink
    March 26, 2011 11:08 AM

    Jeremy, this does sound like an attractive system – however I see four problems with this idea.

    Firstly, the IRS does not just deal with income tax. In fact, only half of their collections come from income tax filings. Your post ignores many of the other functions of the IRS. The IRS does not only collect income taxes, but collects employment taxes, corporate income taxes, excise taxes, estate taxes, and gift taxesRather, the IRS would have to shift around its personnel currently tasked with other tax collections to help with the increased burden on VAT collection. It is possible that the IRS may shrink a little bit, but we’re not getting rid of the IRS any time soon.

    Second, by establishing yet another bureaucracy to support the poor through the rise in prices, you may end up contributing to the expansion of government more than the IRS ever has. Now, that is not necessarily a bad thing, but what I understand from the tone of your post, you believe that smaller government is better government.

    Thirdly, it is a major mistake to take all of the government’s revenues out of consumer products. The “Fair Tax” only taxes private consumers and completely leaves out corporate expenditures. How can a Value-Added Tax be possibly applied to a deal on Wall Street? Since these companies do not trade in a physical good, it would a difficult case to make, probably requiring a decision in the courts. Also, how can a VAT be applied to services? Our economy is made up of a mix of goods and services and it would be a mistake to only tax some of it.

    Lastly, taxing consumer goods would depress our economy and depress the consumption of goods, and as a result our economy. Much of America’s strength today comes from the immensely high level of economic productivity of this nation’s citizens. If the government clamps down on end-user consumption, it would not only hurt the consumer. The companies that produce those products would have to shrink, not just in America, but also all over the world, creating a cascading effect and slowing down global economic activity to a crawl.

    The “Fair Tax” is a mistake. It does not get rid of the IRS, may lead to larger government, ignores other sectors of the economy, and would deal a severe blow to the state of the world economy on the whole.

    But it’s not really worth getting too worried over. The income tax is an Amendment to the Constitution, and would require a two-thirds majority of states to repeal it. Can you imagine getting 34 state legislatures to agree over such a contentious issue? I can’t.

    • Jeremy Kucera permalink
      March 31, 2011 4:06 AM

      Lernerm,
      Sorry if I failed to mention this in my post, but it is mentioned on the fairtax website: The proposed fair tax would eliminate the taxes you mentioned, (collects employment taxes, corporate income taxes, excise taxes, estate taxes, and gift taxes) so yes the IRS would pretty much be useless and we wouldn’t need it.

      Secondly, you said that it would create another bureaucracy; however this is not correct. From my understanding of the fairtax website and other sources, the fair tax would be collected and processed though local and state agencies already in place to collect State taxes. They then would pass it to the national government. So, the fair tax would not be creating or expanding the national governemnt by any means, it would drastically reduce it. And yes you are right, smaller government is something about the fair tax that appeals to me and some supporters.

      Thirdly, businesses would be taxed because there would be the built in sales tax on anything they buy. Businesses still have to buy things before they can then pass them along to consumers. Now the taxes may total up to less than what they are paying now, but isn’t that a good thing? Businesses will stop leaving America because of our huge tax rates, one of the highest in the world. It may even attract international businesses to expand here because we offer lower taxes.

      Fourth, sorry if I didn’t mention this again, but yes services would be taxed. Just like goods are taxed, services would be taxed. It states this on their website. So no, we would not be taxing “some things and not others” as you put it.

      Lastly, your claim about the fair tax depressing the economy is just speculation. It is hard to argue against that becasue that is your opinion, and I have mine. I doubt it will slow the economy to a craw. People will be able to afford the higher sales taxes on goods because they won’t be taxed on their incomes, thus they will take home their entire paycheck and give nothing to the federal governemnt. People will have more money in their pocket to afford the higher sales tax. That is the entire point of the fairtax. People are going to pay the same amount of taxes generally, it is just how you want to collect them. The way the fair tax would collect taxes I believe hardly has this huge, negative affect on the economy like you suggest. But that’s your opinion, and I have mine.

  2. Nicholas Steiner permalink
    March 26, 2011 6:27 PM

    Jeremy,
    I could not agree more with your post. Income tax filings cost Americans millions of dollars per year, not to mention the time that is needed to fill out the forms. This tax seems to be the most fair; charging people taxes based on how much they consume and not how much they make. Not only would this benefit those who pay more then the average American for the same governmental services, but like you mentioned, it encourages business growth in the United States. This tax would solve many of the problems that are holding our nation back. Great post!

    • Zack Orsini permalink
      March 26, 2011 8:22 PM

      Nicholas,

      Why do you say this: “Not only would this [Fair Tax] benefit those who pay more then the average American for the same governmental services, but. . . .it encourages business growth in the United States”?

      Businesses in the United States that have to sell their items at an extra 23% (due to the “fair tax”) will be undercut by businesses outside of the United States who are not affected by the 23% price increase. People within the United States will buy from a foreign source (whenever possible) in order to avoid the 23% tax. If this “fair tax” is imposed on the U.S., many domestic businesses will be strangled to death.

      Tourism in the United States would also become more expensive. If you live in Japan, for example, and you are considering going on a vacation to Hawaii or California, you may be deterred from doing so due to the ridiculous 23% tax on EVERYTHING YOU BUY.

      To me, the mere fact that the “fair tax” needs to be called the “FAIR” tax points to the fact that it really isn’t fair at all. If it really was fair, it wouldn’t need to have a name like that to cover up what it really is. Why not call it the “23 Tax”?

      • Nick Steiner permalink
        March 28, 2011 11:47 AM

        Zack,

        I understand what you are getting at but we also have to consider which one is the lesser of the two evils here. Would you rather promote domestic businesses and take a hit on tourism, or keep our sales tax low and continue to constrain the companies that employ and hire U.S. workers? Personally, I would rather pay high taxes on the goods I consume and keep more of the money I earn from my job. This also encourages people to look for jobs and move away from unemployment benefits if they have to surrender less of their paycheck to the government.

        Referring to your question about how the fair tax would benefit those who pay more than the average American, people in higher tax brackets would not pay more, based on their income, then those in lower brackets. The amount of tax you would pay would be based on your consumption and not your income. There would obviously have to be some exceptions to this tax on food and other life essentials towards people who are in the lower class, however.

        In summary, I believe that the hit our tourism industry would take would be minuscule in comparison to the gains in the time and money saved filling out income tax forms, the reduction in unemployment benefits, increase in domestic employment, and the increased motivation of businesses to expand if they do not have to pay more of their hard-earned money to the government. Remember, the savings that would result from people putting their money away today, will benefit the investment and economic expansion in the future. This is obviously a touchy subject but I think this is the best path for the U.S. to take for the future in order to stay competitive in what we specialize in in the U.S.

      • Jeremy Kucera permalink
        March 31, 2011 4:19 AM

        I’m sorry if it wasn’t clear for you, but the point of the fair tax is that people will be able to afford the higher sales tax because they will be able to keep their entire paycheck because there wouldn’t be an income tax. They will literally be keeping all of the money they earn, so they can afford the sales tax. The idea that businesses would be “strangled to death” is a bit extreme. It is not like the fair tax is making people pay more in taxes at all. People will generally be paying the same amount of taxes. The way in which they are collected is the difference, not the amount. I could use your logic about the fair tax to argue that our current income tax is hurting our economy and “strangling businesses.” People are taxed on what they make, thus they have less money in their pocket to spend, thus people will buy less and it would hurt businesses. See, your logic works both ways. If the fair tax would hurt the economy, then the current income tax we have now is already hurting our economy (which I don’t totally agree with, but I’m just using your own logic.)

      • Doug permalink
        June 27, 2011 9:01 AM

        Zack,
        I think you misunderstand. The taxes paid for *all* goods and services in the US would be 23%. Key words here: Paid for in the US. It doesn’t matter if the goods were made in India, China or Nebraska, the 23% tax rate is the same. How does this give a company from overseas an advantage? It is actually a disadvantage to them, because they have to ship the goods from overseas to the US and consumers still pay 23%. The drug dealer down the street who has untaxed income for his illegal business… now pays 23% taxes on that income like everyone else. The illegal migrant worker who works for cash under the table… pays 23% for all goods and services he consumes while in the US.

  3. emjaffe permalink
    March 27, 2011 7:04 AM

    I agree with Zack about tourism. For example, when traveling to Scandinavia a few years ago, my grandparents and I were hesitant to buy much because everything we bought was taxed very high. Although overall, this high taxing works for the people in Scandinavia- it is hard for me to see Americans continue to be high consumers. From my understanding of stores like Wal-Mart, K-Mart, Meijer, Target and fast food chains, Americans like products cheap. So, with taxes at 23% (other reports online suggest that Congress talk about it realistically having to be at 30% or 34%), consumerism in the USA would drop (1). Although this may be a good thing to get many Americans out of debt and could HELP our economy in the long run- it may not be great for the economy if we are speaking short term. But, I think that one is a toss up.

    1. http://geekpolitics.com/10-pros-and-cons-of-the-fair-tax/

    • Doug permalink
      June 27, 2011 9:10 AM

      emjaffe,
      Think about all of the layers of taxes that are applied to goods and services in the US now. If I buy widgets to build megawidgets, I pay taxes on the widgets, I pay employment taxes for my workers and the goods are taxed again for the consumer as sales tax. The retailer and the employees who transport, market and sell my megawidgets are all paying taxes for their wages. The Fair Tax removes all of these other layers of taxation, thus reducing the final cost of the product. Make no mistake, when taxes go up for businesses, consumers pay those taxes through higher prices already. The businesses still have to turn a profit, so they aren’t going to lose out no matter what, but this system levels the playing field for all businesses local and overseas, except where overseas companies pay taxes in the country of origin and shipping costs… so local businesses gain an advantage, but every good is still only taxed at the Fair Tax rate of 23% using the existing sales tax infrastructure (not the IRS) in almost all states. We would have to add that infrastructure in the states without sales tax, but that is nothing compared to the cost of administering the IRS or the cost to the taxpayer in tax preparation fees and in our most valuable asset, time.

  4. Anthony Sinishtaj permalink
    March 28, 2011 2:11 PM

    I could not disagree more with a tax system. This tax system relies on people actually consuming goods and services. And at times when the economy is bad, such as now, it would spiral into an even deeper hole, as people will want to save money as opposed to risk spending money. This tax system would hurt both imports and exports in the name of free trade. And to bring up Kant, I believe this is a prime example of American immaturity in its citizens being brought up to distrust the government. This kind of tax system is basically what a Stimulus Package is; giving money to consumers in order to facilitate spending. However, many people who would be pro-“Fair Tax” would also be anti-Stimulus, the only difference being that in the stimulus, the “evil” government is giving away tax money to help facilitate private spending.

    • Jeremy Kucera permalink
      March 28, 2011 5:21 PM

      Anthony, you say that the Fair Tax relies on people actually buying goods and services, and it bad economic times people buy less goods and services. This is correct; however, if you look at our current tax system, it relies on people being employed and having an income to actually tax. In bad economic times the umemployment is higher, thus more people are unemployed, and the government is getting less tax dollars. Both the current tax system and the Fair tax system would suffer when the economy is bad. Any tax system would suffer when people are making less money, regardless of the taxes are coming from income or consumption. Thus, I don’t see the validity in that aspect of your argument.

      Secondly, the fair tax is not at all a stimulus package. I cannot see how you can compare them. The Fair Tax is a new tax system which allows you to have more disposable income, so you can afford the consumption tax which would replace the income tax. The stimulus is not a tax system, it may use tax dollars, but the two are very different.

      Finally, your assertion that the supporters of the Fair Tax distrust the governemnt is misguided. Some supporters of the Fair Tax may be drawn to it because it reduces the size of government yes, but they don’t mistrust it. They are advocating to CHANGE the tax system. It might result in a smaller government, but they are still supporting a tax system where the federal government can collect taxes, it is just new and different from the current system. The Fair Tax is hardly advocating for taking away all power the federal government has to collect taxes because supporters don’t trust the them.

    • Nicholas Steiner permalink
      March 28, 2011 7:08 PM

      Anthony,

      I support a tax reform, particularly the fair tax, yet I trust in the government 100%. It is an economic principle that saving today allows for economic growth in the future. Although it might seem like a big jump to go to a sales tax in the 20 or 30 percent level, it would not be much different then what employed people are paying today. The fair tax would also virtually eliminate the possibility of tax evasion, which could actually save the government money. Between time and money spent on filling out income tax forms, the savings from tax evasion being eliminated, and the increase in savings, this tax has potential to be very helpful to the US economy. It is not a distrust issue, at least not for me.

      • lernerm permalink
        March 28, 2011 8:57 PM

        Nicholas, your post ignores the fact that VAT taxes on consumer goods is only one part of the economy. Would the rest of the economy continue to have the same tax structure from before, or, as you seem to suggest, would Wall Street be left completely untaxed? What about corporation to corporation transactions?

        And Anthony’s comparison of the “Fair Tax” plan to the stimulus package seems fair to me. Just as one of the goals of the “Fair Tax” is to “encourage business growth in the United States,” the goals of the stimulus is to facilitate business growth by creating jobs and helping the unemployed get back to work.

        I would also be interested to hear your opinions on my points in the first post in this thread.

      • Nicholas Steiner permalink
        March 29, 2011 8:59 AM

        Lernerm,

        There are many different variations of VAT tax systems that are posible. The main point is that it taxes the people and/or companies that add value to the product are taxed, but those taxes are usually passed on to the end buyer. As far as corporation to corporation transactions, a VAT would require them to tax each other (on the added value) but they would then pass those taxes on to the consumer. There would be no income taxes under the Fair Tax. As far as the Wall Street transactions go, capital gains will not be taxed under the Fair Tax.

        This is just one possibility to tax reform that I feel should happen in the near future. There is obviously a reason why I am a student and the people considering tax reform are top economists and politicians; they’re a lot smarter then me. I have trust that they will research and consider what will be best for the American people. From what I do know, I believe that some form of the Fair Tax would be the most stimulating for our economy.

        Here is a link to some information about the Fair Tax. Keep in mind much of the stuff on the internet is slanted on way or another but I think this provides some basic facts.

        http://www.fairtax.org/site/PageServer?pagename=about_main

        Thanks for the comment!

      • Jeremy Kucera permalink
        March 31, 2011 4:26 AM

        Lernerm,

        The stimulus you are referring to and the fair tax have nothing in common in my eyes. The stimulus was something that created a bunch of short term projects to employ people in the short term in a time of economic hardship using the governments money, which added to the debt. The fair tax is simply changing the tax system. It doesn’t spend any money. It doesn’t add to the debt. Yes it encourages private businesses to come and grow in the U.S. because it eliminates some corporate taxes. Of course businesses are going to want to expand and create jobs in a country that offers low taxes. It has long term benefits for PRIVATE companies to come here and stay here, unlike the stimulus which is short term and many jobs that are created or saved are government jobs using our tax dollars.

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