Alright folks, here's the big moment you've been waiting for. I've already explained how the FairTax will allow you to keep 100% of your paycheck (did you look at your pay stub and see how much the government has taken from you already this year?). I've also explained how the FairTax will eliminate all Federal taxes and allow businesses to lower their prices by an average of about 23%. Finally, in my last FairTax Friday post I gave you an overview of how the FairTax would eliminate the burdensome compliance costs that exist under our current tax code (currently around $400 billion per year). Now you're going to get the meat of the FairTax, the reasons why it's "fair" and the reasons why it's infinitely better than our current system.
It is important to remember that the FairTax does not add additional taxes to our system. It first repeals the 16th Amendment (the one that allows for an income tax) and then eliminates all Federal taxes. This includes income taxes, Social Security withholding, the death tax, capital gains tax etc. etc. etc. We have layers upon layers of taxes and the FairTax eliminates all of them at the Federal level. The FairTax replaces these taxes with a national retail sales tax. "What is a national retail sales tax?" Well, I'm glad you asked.
A national retail sales tax is easy.... every time you buy a new product at the retail level and ONLY when you buy a new product at the retail level, you will pay the tax. It's very similar to the 6, 7, 8% or whatever state sales tax you currently pay at the register. The beauty of it is that you pay taxes ONLY WHEN YOU SPEND MONEY! You choose to pay taxes rather than have your money seized from your paycheck. If you don't want to pay taxes, don't buy anything. That's why it's fair. If a rich guy wants to buy a $23,000,000 yacht, he pays taxes on it. If a middle class individual chooses to save money and not buy a new car, she also saves on taxes.
If this doesn't sound reasonable enough to you already, hear this. The FairTax also includes something called the Prebate. The prebate reimburses every family in the United States for the basic necessities of life. The Federal government sets the poverty level ever year. For purposes of easy math, let's say the level for a family of four is $24,000 per year. Every month, under the FairTax, the family would get a check from the government for $2,000. This $2,000 is given to the family for basic necessities like food, water and shelter. Everyone gets it. Therefore, everyone is put on the same level playing field. If you don't want to pay any taxes at all then don't spend more than your prebate. Just save everything and become a millionare. Oh, and don't forget that under the FairTax you are now receiving 100% of your paycheck! Not only do you only pay taxes when you choose to, you've got more money to spend!
How much is the national retail sales tax called the FairTax? It's 23%. "23%!!! That's SO MUCH MORE than we currently pay!" Actually, it's not. Current income tax rates range from 10-35%. On top of that you also pay the embedded taxes for corporations, capital gains taxes, death taxes, taxes, taxes and more taxes. You think that probably adds up to more than 23% for most people? Probably.
The FairTax is also an embedded tax. This means that it's not added on at the register. It's already factored into the price. So, if you see a camera at Best Buy that you want, and it costs $100, you will pay $100 at the register. $23 of that will go to the Federal Government and the rest goes to the company. Another thing to consider is that prices under the FairTax will fall, on average, 23%. So, in real dollar amounts you will not end up forking over more cash under the FairTax than you would under the current system. Again, you get to keep 100% of your paycheck, so you'll actually have more money. Think about it, if prices fall 23% because the embedded corporate taxes are eliminated and the FairTax replaces it, a $100 item still costs $100.
Millions of dollars have gone into researching this system, folks. It will work, and it will do more for the American economy than you could ever imagine. Business will thrive, individuals with thrive and the government will be able to fund its operations just like it does today. The difference here is that the people would have the power to choose whether or not to be taxed. It wouldn't be some Washington bureaucrat politician deciding for you. It's a great expression of freedom, and it stands firm on the foundation upon which this country was built.
*** Corrections/Clarifications ***
6/26: In an effort to be concise I merged the repeal of the 16th Amendment with the FairTax bill. Please note that the FairTax bill does not repeal the 16th Amendment. The 16th Amendment must be repealed separately, prior to the passage of the FairTax Bill. The two definitely go hand in hand, but their individual passage is accomplished separately. This is a tough task, but it can be done.
Additionally, I explained the Prebate incorrectly. It's been a while since I reviewed the Prebate, and I got the facts wrong. This will not happen again. Here are the facts: The Prebate reimburses families for the taxes that they would have paid on the basic necessities of life. In 2008, the poverty level for a family of four was set at $28,000. The monthly prebate would be $537, and the annual prebate would amount to $6,440. It still sets everyone on a level playing field, because you are only taxed if you choose to be.
I apologize for the mistakes. They will not happen again with the FairTax, because I have all of the information at my fingertips and will double-check it in the future.
Friday, June 26, 2009
Subscribe to:
Post Comments (Atom)
5 comments:
Sounds reasonable, but would this not just lead to people purchasing goods in other countries where they wouldn't have to pay high taxes?
You don't really understand the Fairtax. do you? (1) The Fairtax does not repeal the 16th Amendment. That would take a much more difficult path than simply passing HR25, the Fairtax. And the fact that all 50 State Governors oppose the Fairtax will make it very difficult to ever repeal the 16th. (2) If the poverty level for a family of four is $24,000, then each month that family would receive a government check for $460, not $2000 as you wrote. The $460 represents the tax on poverty level spending spread over twelve months. (3) Those embedded taxes that you believe would disappear consist of employee payroll and income tax deductions as well as business taxes and compliance costs. 60% of the embedded costs can be attributed to employees, and those costs aren't going to go away for fairness and contractual reasons. The best we can hope for is a 10% reduction in business costs, and a 17% rise in retail prices after adding the 30% sales tax. (1.00 x .9 x 1.30 = 1.17)
I might also add that it would be inappropriate, if not unconstitutional, for the federal government to tax state and local consumption as proposed in HR25. The Fairtax rate will have to be increased by 4-5%. As a retiree, I also object to having to resume paying for my SS pension after paying into the Trust Funds for 45 years. Very unfair!
The Fairtax taxes wealth, which means that all my accumulated after tax savings would be taxed again when spent. Also, younger families who use borrowed wealth (credit cards) to support their standard of living will be hurt badly by the Fairtax.
A national consumption tax might be better for the national economy, but the Fairtax isn't the way to get there!
Glad to see your corrections. But you avoided perhaps the most important issue--retail prices. You can't on the one hand state that everyone would receive 100% of their pay, and then claim that prices would remain unchanged. That is the much discredited "free lunch" claim that even Boortz now admits won't happen. If you want to believe that everyone will willingly give their payroll and income tax withholding amounts to their employer, then business costs might fall by 22%. Even that reduction in costs is unlikely because businesses have many other uses for cost savings, including business expansion, increased shareholder payments, debt retirement, increased profit margins, payraises, etc. etc. Competition may force price decreases, but it's not a sure thing. Prices are very "sticky downward" according to most economists.
The good news is that everyone will most likely be getting a takehome pay increase so purchasing power should remain relatively unchanged. Less so for retirees because they don't currently withhold payroll taxes from their pensions.
Dutchman3, I absolutely do understand the FairTax. I just made a couple of mistakes. If you're going to use numbers to back up your claims, show me where you got the data. For all I know you're just making them up. I didn't correct anything about the embedded taxes, because I haven't verified your claim. I would hope that you would appreciate that type of due diligence on my part. I'm not just going to automatically agree with anyone who disagrees with the FairTax and cites numbers without citing sources.
The FairTax isn't perfect, but it's a heck of a lot better than the current system.
Murph, glad you asked. Remember, there never have been any price impact studies done by AFFT, or their so called expert economists. But it isn't rocket science as you will see.
Using the Kotlikoff/BHI 2006 Fairtax study data, businesses paid $291 billion in income taxes in 2007, the business share of payroll taxes was $435 billion, and the 2007 estimate for compliance costs according to the Boortz bible was $265 billion. Retail sales, including durables, non durables and all services were $9.5 trillion for that year. Therefore, on average for the 20 million businesses, income taxes were 3%, payroll contributions were 4.5%, and compliance costs were 2.7% of retail sales. These business tax costs totaled 10.2% of sales and are embedded costs which could be removed if the income tax was replaced by the Fairtax.
Removing 10% of costs and adding the 30% sales tax results in a 17% increase in retail prices on average. Simple math!
I would agree with you that a consumption tax might be better for our country than the income tax, but the Fairtax is not! Try looking at it through my old retiree eyes and try to understand that taxing wealth is most unfair to not only all retirees but younger families that use "borrowed wealth" to pay their bills. For example, a retired couple, living on $25,000 from two SS pensions plus $8,000 in income from their $200,000 nest egg invested at 4% interest, would pay zero income tax and, of course, make no payroll contributions under current law. Under the Fairtax, they would pay $7590 in sales taxes, offset by $4784 from the prebate (2008), a net increase in taxes of $2800 under the Fairtax. Why on earth would they support such a scheme? The same result might apply to younger families who use maxed out credit cards to balance their budget, a not unusual situation.
Do your due diligence, but please understand that reading two marketing comic books by a radio talk show host and an obscure Georgia Congressman doesn't make anyone a Fairtax expert. Why don't you come on over to fairtaxblog.com, and check out the research section. Lots of studies by economic experts that don't have an axe to grind. And plenty of civil discussion about the details of HR25 by both advocates and opponents of the Fairtax.
Cheers!
Post a Comment