Fair Tax – Best Solution to Tax Problems?

Generally speaking, I’ve been a big fan of the Fair Tax idea for quite a while now. If you haven’t heard of it or are not as familiar, check out Fairtax.org: Americans For Fair Taxation. It’s a very organized and well supported initiative. In my opinion, our current tax system can be unfair in many situations.

  • I don’t agree with capital gains taxes and I don’t like the idea that you can be taxed 15%, 25% or 35% on your income based on how much money you earn per year.
  • I don’t like the fact that you can theoretically get a “raise” at your job, and end up making only a tad bit more money (sometimes less) because of the increased tax bracket.
  • I don’t like the fact that illegal immigrants are able to work here and not pay taxes the way I have to.

Ideally, everyone should be able to share an equal tax burden. It seems unfair to heavily tax the wealthy and allow loopholes to prevent illegal immigrants from paying at all. The FairTax program would tax 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. The things I like about Fair Tax are:

  • Retail prices could fall. Fair Tax supporters say 20% of all prices today represent the hidden income and payroll taxes embedded in the price of everything we buy.
  • There would be a flat 23% tax on everything we buy, which would even out the taxable playing field for everyone in our country, regardless of their citizenship status. Also, you would be able to keep all of your paychecks to utilize it how you desire.
  • Liminating corporate income taxes and capital-gains taxes would make the United States a more desirable place to do business. Cut transaction costs, and you encourage more people to get into the game.
  • There would be reduced losses of tax revenue from the underground economy.
  • Illegal immigrants, many of whom do not report income or pay taxes, would be forced to pay their share of the Fair Tax. So would the 40 million foreign tourists who visit the U.S. each year.
  • Fair Tax would eliminate the IRS as we know it. However, it would not cease to exist. Instead of enforcing payment of income tax by citizens, it would enforce the payment of sales taxes by businesses and owners.

The things I’m not sure I like or would need more answers about would be:

  • How much must pretax prices go down before you’re comfortable paying an additional 30% on your home purchase, kid’s tuition and doctor appointments? Increasing the cost of buying a home by 30% would not stimulate the housing market. On a house currently selling for $200,000, a 30% tax means you have to borrow $60,000 more just to get in the door. That doesn’t make a lot of sense.
  • Arguments that the Fair Tax would eliminate the underground economy are less than persuasive. Add a 30% federal hit to a 6% state sales tax, and you have created a golden opportunity for smuggling. Black Market may explode, but profits made from it would still eventually be paid in taxes, since you can’t smuggle everything.

    What do you think? Check out fairtax.org or this article for more information on the subject.

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1 reply

  1. Mrpace7,

    I think your concerns are well placed. There is much wrong with the Fairtax scheme, and it isn’t going anywhere, imho. Some comments on your post:

    (1) Moving up to a higher tax bracket can never result in you getting less money unless the move changes your eligibility for refundable tax credits such as the EITC and Additional Child Care credit. The brackets alone are never responsible because only the increased pay placing you in a higher bracket gets taxed at the higher rate. All else remains the same.

    (2) While AFFT claims there is $23 million in research, there are no studies regarding the impact of the Fairtax on retail prices. Here is one simple way to estimate what will happen. In 2007, retail sales were $9.5 trillion. 2007 revenue data shows that businesses paid $291 billion in income taxes or 3% of sales; businesses paid $435 billion as their share of FICA or 4.5% of sales; and business compliance costs were $265 billion or 2.5% of sales. Add them up and you can see that business tax related expenses averaged 10% of sales in 2007.

    Reduce business costs by 10% and add the 30% sales tax and retail prices have to increase by 17% on average. (1.00 x .9 x 1.30 = 1.17) Simple math. Of course, this analysis assumes that you will take home 100% of your gross pay. That added pay plus the prebate should offset the higher retail prices for many families.

    By the way, your comment about housing prices is interesting. I have been trying to learn if banks will finance that sales tax cost. So far no luck, but if they won’t, coming up with a high down payment may be tough for many families trying to purchase a new home.

    (3)Legal tax avoidance and illegal tax evasion are two major concerns I have about the Fairtax. Will that 17% higher retail price cause families to change their buying habits? And, there are many studies that show that sales taxes over 10% result in higher rates of illegal evasion. You are right to share my concerns!

    Like

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