The Fair Tax

24 10 2008

It’s been a while, hasn’t it? I actually half wrote a bunch of stuff but then I got distracted by shiny objects and never got back to them. Most of them are slightly out of date now so I just moved on. I have a smidgen of time right now so I figured I’d give this a shot again. I guess this really shows how a 30 day challenge can really push you to excel. I might have to reissue my challenge so I can get back to writing more frequently.

What I wanted to talk about today has to do with our current economic situation. Anyone with a house or an IRA can tell you that things aren’t going so well. Credit is still scarce and investors are taking their money out of corporate investments. The jobless rate is climbing as companies cut costs to stay afloat through these times. Heck, even Arnold Schwarzenegger had to ask for money because California is doing so bad. Not to sound all Barack Obama-y on you, but it’s obvious that we need change. Not just throwing money at the problem like we’ve seen in these “bailouts” (I think it’s funny that they use the word bailout. That’s what people do to try to save a sinking ship.), but real, drastic change to the way we do things. These kinds of changes should be well thought out and have the goal of not just helping us tread water for a few years, but bring our economy back to productivity. If only someone locked the country’s top economists in a room and told them to come up with a great new plan to expand our economy.   Oh, that’s right, they did.

The Fair Tax is a plan to completely revamp how the government collects taxes from its citizens. The current tax code is wasteful and complicated. As of 2006, the tax code contains more then 16,000 pages and is nearly 7 times larger then the Bible. You can actually order all 20 volumes for a mere $974. The tax code was “simplified” in the mid 1980s and there have since been thousands upon thousands of revisions and addendums.  The Fair Tax takes all of that tax code and uses it as a paper weight.

Right now, each person who has a job pays taxes on their income. You pay 3 main taxes at the federal level. There is the Federal income tax, the Social Security tax, and the Medicare tax. The government takes all of this from you before you ever get your check. You don’t PAY taxes. You have them taken from you. This makes no sense because we are taxing productivity. We are, as a nation, saying that if you are successful and productive (and thus make more money) that you should pay more taxes. What’s the incentive to push yourself further if the government is going to take more of your money?  The Fair Tax will remove all taxes on your income and you will receive 100% of the money that you earn each week in your paycheck. I’ll bet that since the government takes your money before you get it, you probably don’t even know how much you make a week. You just know what the government lets you take home (that sounds absurd, doesn’t it?) A nice side effect of removing this income tax is that you will not have to file an income tax return and there will be no need for the IRS, so you can never get audited and you won’t need your accountant to figure out your taxes for you. April 15th will just be another beautiful Spring day. Sounds like a perfect world right?

I’m sure you’re wondering how the government will be collecting money from you. First of all, let’s point out that the Fair Tax will NOT change the amount of government takes in in revenue, it will simply change the method of collecting it. The tax will be placed on the goods you purchase instead of the money you make. (This is referred to as a consumption tax) Why is this more fair? Simple. You now have the CHOICE of paying the tax. If you don’t want to pay the tax, don’t buy the merchandise. The tax rate will be 23% and will be a tax on all new goods and services. (Don’t have a heart attack. I’ll explain in a bit why the 23% isn’t going to change anything) This means that you will not be taxed on any goods that are sold used (like stuff on Ebay or even a house that isn’t brand new.) You will also be taxed on services like going to the doctor. The Fair tax doesn’t give anyone, even doctors, special treatment or exemption. Even the government itself has to pay the tax on new goods or services that it purchases.

It must be noted that there are two figures floating around.  Some people use 23% while others use 30%, but these are really different measures of the same thing.  The 23% that we’re using is called the inclusive method where we say that a $1 purchase has 23 cents of tax and 77 cents of production charges.  The 30% is an exclusive charge which means that they’re saying that we start with 77 cents and to get to a dollar, we have to add a 30% tax onto that (which is about 23 cents).  Either way, it’s a dollar.

Let’s look at an example of how a consumption tax would work and why it’s better then what we’re doing now:

Tomorrow, we decide to move to the Fair Tax. This means right away that at the end of my work week, instead of getting about $625, I’ll now be receiving about $1000. That’s an additional $375 per week that I can use to purchase goods and services. Also, the cost of most goods will go DOWN. Yes, I said that right.  DOWN. How are costs going DOWN if we’re adding this huge tax to them? Well, you don’t know it, but about 20% to 25% of the cost of all the goods you already buy are actually taxes because corporations have to pay taxes as well (which will be removed under a Fair Tax) and they pass along those taxes to you in the cost of their goods. As we remove the taxes on corporations (currently the second highest in the world) their costs will go down and they will pass that along to you. I’m sure you’re now thinking “Those greedy corporations will just pocket the extra money as profit and the cost won’t come down.” What will end up happening is that one corporation will see the tax removal as a chance to gain a market edge over the competition and they will lower their prices slightly. Everyone else will follow suit and this will continue until it would not make sense to continue because there would be too little profit left on the product.

So you now have all of this extra money and costs will go down by about 23 cents for every dollar you spend. The government will then tack the consumption tax of 23% onto your purchase will bring it right back to where it is today. So you have extra money and you still pay what you’re paying today for goods and services. Let me be quite clear about this. There will be a 23% tax on all new goods and services but you will NOT PAY ANY MORE then you are paying now because the embedded corporate taxes and the new consumption tax will virtually cancel each other out.  As a couple of quick notes, you will probably end up paying more for services like the doctor, but we’ll get to how that will be taken care of.

Here’s what it looks like:

Today: You buy a pack of gum for $1 = $.77 of actual corporate charges and profits + $.23 of embedded corporate taxes that you don’t realize you’re spending

After the Fair Tax: You buy a pack of gum $1 = $.77 of actual corporate charges and profits + $.23 of consumption (aka Fair) tax that will be written right on your receipt.

So where will all the extra money come from?

Think about all the rich people that have tax havens for all of their money. Think of all of the gangs that don’t pay taxes on all of their illegal drug sales. Think of all of the off the books illegal immigrants in the country that don’t pay a dime of taxes. All of these people will be paying their fair share. All of these people need to buy goods and services, so there’s no way around it.  The Fair Tax is fair because it makes EVERYONE pay their taxes.  When these people dodge their tax burden, it doesn’t just not get paid, YOU pay for it in your taxes.

The Fair tax is, as its name implies, pretty fair. It’s authors believe that you should not be taxed on any goods or services that are essential to your survival. Thus, you will also get a check every month called a prebate that will be equal to 23% of the current income level that is designated as the poverty line for your family. It will be as low as a few hundred dollars for a single person to a few thousand dollars for a large family. I’ll state this again. You’ll get this check EVERY MONTH. This is basically a government refund for all of the goods that you purchased that were essential for your survival. Why don’t they just remove these taxes on “essential” goods? Again, the idea is to treat everyone equally. It gets around the need to deem certain goods or services as “essential” and give them special tags. I mean, what really is essential?  This is the fairest way so that no particular industry gets special treatment.

So quick summary: Under the Fair Tax, you’ll get your entire pay check, you pay the same amount you are now for goods and services, and you get a check at the beginning of every month. How else can it help?

Corporations currently pay a 35% tax in this country. It’s way higher then other places around the world, which is why all of our corporations are moving their base of operation overseas. Why pay 35% tax when you could be paying 10%. If we remove the corporate tax completely, the big corporations that have fled for lower taxes will come back and set up operations in this country because we’ll have 0% tax and that’s a significant savings. This means more jobs for our economy, which means more wealth in this country, which means people will purchase more goods and the government can collect even more taxes. The Fair Tax can get us out of this slump and back towards growth and expansion. Many economists believe that the impact will be significant.

So why hasn’t a system as good as this been enacted? Two words: Lies and Lobbyists. There are literally thousands of poweful lobbyists in Washington whose sole job is to represent companies and large interest groups in order to get them special privileged status under our current tax system. All of these highly influential people will be out of a job. They like their jobs, so they are trying to keep the status quo. They are telling both politicians and their constituents that the consumption tax is IN ADDITION to the current cost of goods, which we’ve already seen is untrue. They also argue that the tax is an unfair burden on the poor because they will be paying taxes when they are not receiving much income. (Under the current system they pay no income tax). These lobbyists fail to mention the prebate which will give EVERYONE (not just the poor) back the taxes that they paid on goods and services up to the poverty line.

Politicians also like their jobs. They don’t like to make waves because anything radical like this can upset people. This is where you and I come in. There is currently a bill in the US Congress called HR25, the Fair Tax bill, that will do just what I’ve described here. It has never made it to a vote because right now it won’t pass. These lies about prices rising and the poor losing out are making politicians hesitant about voting for it, even as hoards of top economists are touting it’s benefit to our economy. If there was ever a time to do this, it’s now, when our economy is in need of a jolt.

Call your congressional representatives and tell them that you support the Fair Tax. The more people that let them know, the more likely they will be to support it. Also, visit www.fairtax.org which helps to educate the masses about the bill’s progress and the concept itself. Finally, pick up a copy of the book The Fair Tax by Neil Boortz. It was a very educational read about this kind of tax system and explains it in much more detail. It’s also a short read at about 130 pages.

You want change? Don’t rely on the next president to do it for you. Make a quick call or write a short email and take that change into your own hands.

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4 responses

24 10 2008
Offshore Services » Blog Archive » The Fair Tax

[…] See the rest here:  The Fair Tax […]

29 10 2008
Eric Jordan

Nice. I had never heard of the Fair Tax system before, and you wrote a pretty convincing summary of it. It’s clear that it wouldn’t thin my pockets out any more than the current system, and I’d love to see it enacted. We could change back in a chunk of years if we wanted to.

We’ll have to figure out what to do with people living off of our government’s inefficiency before we can get it in, though.

A question (for others to think about; I can look it up myself): Has a similar system been used anywhere else, and how’d it go?

4 11 2008
Rebecca

So when are you running for Prez? You’ve got my vote! This was the best breakdown of the Fair Tax I’ve been able to find, and it really helped me understand why it’s a great idea.

21 11 2008
Consumption Tax

Great insight into the economic solutions that may be needed to resolve this crisis that we are in. The fair tax does look to be an actual solution.

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